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One other thing about the gold standard: As I understand it, there are three types of gold standards. First is the one described by Governor Strong the other day, which means that each central bank of the world shall have a separate reserve in its own vaults to pay its liabilities on demand so that its money is immediately convertible into gold; and, furthermore, that there is a world free market of gold, no obstructions placed in the way of gold passing from the country where its purchasing power is low—that is, where prices are high—to another country where its purchasing power is high— that is, where prices are low. That is the free pre-war gold standard.

Now, there has, along with this, been growing up in the last 30 years the gold-exchange standard. This is familiar to you, but the only question I want to bring out is what the differences are and the effect on the world demand for gold.

The gold-exchange standard is a standard in which the country need take no gold at all, like Bolivia or Austria and many of the countries that have come on the gold standard, so called. I t is called with them a gold standard, but it is really a gold-exchange standard, because they require only their own paper money, and they have a running account through bills of exchange on New York or Lon

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This bill, instead of being merely a bill designed to correct business cycles, is designed also to maintain a stable gold standard, and that is particularly cared for on lines 11 to 13, on page 2, where it


Relations and transactions with foreign banks shall not be inconsistent with the purposes expressed in this amendment.

In other words, to give a concrete illustration, arrangements were made with England about 1925 which enabled England to come to the gold standard. In order that she might do that she had to have a loan or, rather a promise of a loan if needed, which was partly arranged for in this country. Her price level was about 10 per cent above the gold price level. She had to retire enough of her paper money and place gold in its stead in order to bring her general price level down about 10 per cent, as was estimated by the Manufacturers' Association in England about that time.

No consideration was given either by those in the Bank of England or by those of our representatives in the reserve bank who took care of this resumption—no attention was paid, or no practical attention was paid, to a resulting or a following fall in the prices of commodities, or, in other words, a rise in the value of gold.

Since England went onto the gold standard in 1925 the price level of England, as well as the price level of America, has gone down something like 10 per cent. Two countries on the same gold standards will have a similar movement in their price level.

Mr. Goldenweiser, you have a chart on that, showing the different price levels.

Mr. GOLDENWEISER. Would you like to have it?

Professor COMMONS. I would like to have that put in as an exhibit.

The CHAIRMAN. Without objection, the chart to be furnished by Mr. Goldenweiser will be placed in the record at this point. I t is identified as Wholesale Prices in United States and England from 1923 to January or February, 1928.

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case, the free gold value of prices, which would indicate the price level.

If you will allow me to refer to this other chart The CHAIRMAN. That represents the wholesale price level covering a range from 1800 to 1928.

Professor COMMONS. This is already in Mr. Goldenweiser's testimony. I have a little different interpretation, Mr. Goldenweiser.

This is the American price level. I do not know why it went up so high at that point.

The CHAIRMAN. What year?

Professor COMMONS. 1816 was the high point of our price level.

The figures were very defective in those early days.

There are two things to notice, that in France there was no paper money. France remained on a silver basis; England went onto a paper-money basis, silver being the standard at that time. So we have the English price level here [indicating on chart], and you can see what the French situation was.

There was a relative scarcity of gold from that time down to the gold discoveries of 1849. We had here in 1836 a paper-money inflation, wild-cat banks in this country, which caused that cycle, but we have a continued trend of a falling price level, owing to the main fact that the mines were not keeping up in their production with the demands of business.

Then began the gold discoveries in 1849, and by the time of 1854, 1855, and 1856 we have a rise of gold prices.

There is no paper money involved in that. Then we have, as a result of the rapidly increasing gold prices, a world-wide depression, and the panic of 1857. Then we went into the war and the greenbacks jumped that level up in America, but if you had the German and British price level you would not it running along something like this [indicating on chart] down to 1879, when we got back to the gold basis. There was the gold basis, so you would have England running along something like this [indicating on chart].

Mr. KING. All that does not mean much in the record.

Professor COMMONS. From the low point in 1860 to the low point in 1896, omitting the American inflation of 1862 to 1879, would be the gold deflation in England and Germany.

Now, notice that there are three circumstances that happened in that decline in America: First, the rapid retirement of our greenbacks, which brought us down to this point, which is 1867. Congress stopped the retirement of greenbacks and has left that heritage of $346,in greenbacks. That caused an inflation, as I interpret it, which ended in the panic of 1873.

Then we have the continuous decline until we reached the gold standard in 1879, and that is the low point indicated. Having reached that standard, we have an expansion, which I would say was a credit expansion, an optimistic expansion of business, owing to this velocity idea, owing to the fact that business was optimistic,

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Mr. KING. AS I will be unable to be here this afternoon, I would like to ask just one question. Taking that indication of where the price level was in 1913, at the time of the adoption of the Federal reserve act, where would the line go so far as agricultural prices are concerned? Where would it run on your chart?

Professor COMMONS. The farmer was getting more than anybody else during that period [indicating on chart].

Mr. KING. I do not mean that period. I mean during the period where the line starts up.

Professor COMMONS. I mean this period from 1896 to 1914.

Mr. KING. I mean from 1914 on.

Mr. GOLDENWEISER. Agricultural prices went up higher than the others.

Mr. KING. Would you indicate it there with a pencil?

Professor COMMONS. There is another chart which Mr. Goldenweiser has here of agricultural prices.

Mr. GOLDENWEISER. I have it, but not that far back. I t begins with 1922, so it would not cover the period that you had in mind; but agricultural prices went up about 10 per cent higher than the others.

Professor COMMONS. Mr. Chairman, if I might close at the point that I started with, the question for the future, then are our prices going to fall again because of a limitation of the future gold supply?

Is the price level going to fall from 150 down to 100? Or will there be such an abundance of gold that the price level may start up again?

That is the question of prophesy as to the future gold supply.

My notion is—and I am just like Mr. Goldenweiser or anybody in this—that the gold production is not going to keep up with the new needs of the population if we go to a full gold standard. If we maintain a managed or gold exchange standard, we can keep prices from falling.

The CHAIRMAN. The committee will adjourn until 2 o'clock this afternoon.

(Whereupon, at 12.20 o'clock p. m., a recess was taken until 2 o'clock p. m.)


The committee reassembled at 2 o'clock p. m., pursuant to recess.

The CHAIRMAN. The committee will come to order. Doctor Commons, you may proceed now.

Professor COMMONS. Mr. Chairman, I want to clear up something that I was speaking about from memory this morning, about the rates of discount from 1917 to 1921. I was intending to give not the rates on commercial paper but the rates on Government collateral.

There were two rates in operation during that period from 1917 to some time in 1921, a low rate on Government collateral and a higher rate on commercial paper. Usually we have been taking the commercial rate, and in my exhibit last year, page 1077, I used the commercial rate. Properly considered, one should use the rate on Government collateral, because I find that during that period of 1919, when we had the greatest inflation, 90 per cent of all the borrowings

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(1) First Liberty loan, 3 1/2s.

(2) Second Liberty loans, 4s, and first Liberty loan, converted, 4s.

(3) First Liberty loan, converted, 4 1/4s; third Liberty loan, 4 1/4s.

(4) First Liberty loan, second converted, 41/4s;fourth Liberty loan, 4 1/4s.

(5) Victory loan, 43/4s;Victory loan, 3 3/4s.

X From May, 1917, to June, 1921, a differential rate was charged for bills discounted secured by Government obligations and for bills discounted secured] by commercial paper and rediscounted paper.

The CHAIRMAN. We will number these charts No. 2 and No. 3.

Without objection, they will be inserted at this point. We will begin with the charts that were inserted this morning and number them 1, 2, and 3. The last two are the ones that Doctor Commons just placed in the record at this point.

(The charts referred to are as follows:) CHART III (1) End of month figures from the Federal Reserve Board.

(2) Includes bills discounted and member banks collateral notes.

15029—28 6

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Professor COMMONS. Corporate bonds, not Government bonds.

Mr. WINGO. When you speak about the bond yield, you mean the corporate bond yield, not the Government bond yield ?

Professor COMMONS. It means the yield which investors expect on corporate bonds. Whenever the commercial rate is higher than the yield that investors expect, I would expect it to cause a deflation of commodity prices. This really goes back to the theory of Wicksel in 1898, and I have tried to apply it. I could go into the reasons for it a little later to show the correlation between the bond yields and the stock yield.

This is also the method used by Colonel Ayres, of the Cleveland Trust Co., with its bearing on the prices of stocks.

The CHAIRMAN. Well, Doctor, in view of what you have said now it would seem to indicate that the present Federal reserve rate is low?

Professor COMMONS. The Federal reserve rate is below the bond yield rate; yes, sir. The rediscount rate at New York, is 4 per cent, and the bond yield has gotten down to a little above 4. So the rediscount rate now is low but the commercial rate is the one I measure by. That indicates easy money, which is just exactly what the situation is—a situation of easy money.

Then I have a curve here of the stock yield, which I will go into later when I compare one other point, the stock market and the commodity market.

To complete my remarks this morning—I am not certain whether I got at this point with this chart The CHAIRMAN. Being the chart of wholesale prices from 1800 to 1928 which was placed in the record yesterday by Mr. Goldenweiser, now being referred to by you ?

Professor COMMONS. Yes. Now, the gold prices have reached 150, where the pre-war level was 100.

Really the practical question before the banking system of the world is whether we are going to have a repetition of what happened during these two long trends, 1816 to 1849 and 1865 to 1897, or whether we can for the future stabilize it at 150. If we don't stabilize it at 150, then the price level will come down in the future owing to the scarcity of gold until—what level it will reach nobody knows—but the tendency would be, barring these credit cycles, the tendency would be to continue the depression until the whole world is on a tree-gold basis.

The CHAIRMAN. I was going to ask you right there, Doctor, in connection with the remarks made by Governor Strong the other day, in which he advocated, of course, a return to the free gold basis throughout the world: Now, suppose that that takes place. What effect would that be apt to have on this wholesale price level?

Would it have a tendency to lower it or hold it stable or a tendency to raise prices ?

Professor COMMONS. I would say that over a period of 10 years or more it would cause it to fall continuously, because the gold production is not keeping up with the increased demands of the world for gold for monetary purposes, that increased demand being due partly to the high prices and partly to increased production and population.

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The CHAIRMAN. Does that mean this, Doctor, that we might return to the basis of 1913, where the price level Professor COMMONS. That is my idea of what the present tendency is.

The CHAIRMAN. And then the only thing that would obstruct that from going back to normalcy which would be influenced by the return to the gold standard would be the management of the operation of the central banks ?

Professor COMMONS. The central banks, of which the United States is now the controlling factor.

Mr. WINGO. Don't both you gentlemen overlook the fact that you are living in an entirely different industrial world now ? Take one factor, the multiplication of machine power and the comparison of machine power to man power relatively, which has been accelerated or, rather, pyramided so rapidly since the war that you know now that you can not have anything like as low a level of production relatively to world population that you had in 1913.

Professor COMMONS. What is your inference from that ?

Mr. WINGO. My inference is that you will not have the same conditions existing, and therefore you need not look for the same level, because—you take one big factor. One big factor is the operation of the increased man power as translated in machine power. It will give you such a great production to the same man power that the volume of production is bound to have some effect on the price level.

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