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As fiscal officer of our Federal Treasury, and being charged with the responsibility of maintaining its credit and solvency, I believe it was Mr. Morgenthau's duty to lay before the committee certain facts which should be of the greatest importance to the consideration of House bill 1776.
The Secretary of the Treasury did say, however, that he considered our Treasury as our first line of defense which is what prompted me to request that I be permitted to testify before your committee.
It is my purpose to give to your committee some pertinent facts to House bill 1776 and to compare somewhat the real condition of our own finances and Treasury with that of the United Kingdom.
I have prepared two graphs or charts to aid in the understanding of my statement.
The purpose of chart A is to show the condition of our banking system, which is vital to Federal financing.
Here we have shown figures 5, 6, and 7, the total bank deposits of all the commercial banks from June 30, 1919, to June 30, 1940, and the currency in circulation, figure 8, from 1934 to 1940.
The total amount of deposits in 1919 was $29,000,000,000; in 1934, $35,000,000,000; of currency and deposits in 1940, $58,000,000,000.
Figure 5 shows what I have designated as noninflation deposits, amounting in 1940 to $25,000,000,000. These deposits represent savings and are largely secured by real assets.
Figure 6 represents deposits which result from the practice of the Treasury in depositing direct Government obligations in the banking system, checking against such bond deposits, and the checks finding their way back into the banking system as permanent deposits.
This practice of inflationary financing was resorted to in financing our costs of the World War. At the end of the war the commercial banks held about $5,000,000,000 worth of direct Government obligations.
It has been resorted to on a large scale to finance the deficits since the beginning of the depression. In 1934 the commercial banks held about $10,000,000,000 in direct Government securities. By 1940 the amount had increased to $13,000,000.
We come now to the third category of deposits, figure 7. It is of the utmost importance to a proper understanding of the true condition of our banking system that we know the real nature of these deposits.
They are created in this way: For every dollar's worth of gold that is imported and taken over by the Treasury, a dollar of credit is set
up in the banking system.
The dollar's worth of gold is sent to some Treasury vault. The Treasury prints on a piece of paper a statement which in substance says nothing more than that a dollar's worth of gold is in storage somewhere in the United States. This little slip of paper is called a gold certificate, which is given to the Federal Reserve Bank. Then the Federal Reserve bank enters upon its books a credit of $1 for some foreigner who brought the dollar's worth of gold into this country.
It is supposed these so-called "gold certificates” are security for the credits set up in the banking system. But these little bits of paper called "gold certificates” represent nothing. They cannot be converted into gold by the Federal Reserve banks, unless the gold is for export. The law is specific on this point. Nor can these bits of paper be converted into anything else, except, perhaps, other bits of paper like themselves.
Therefore, the deposit of $1 in the banking system every time the Treasury accumulates a dollar's worth of gold represents nothing whatever but the arbitrary creation of that much inflation of bank deposits, or fiat check currency.
At bottom the process of creating these gold credit deposits is merely a matter of diluting the deposits already in the banking system.
By the amount of these deposits created the remainder of bank deposits are reduced in value.
It figures out that the $13,000,000,000 of these gold inflation deposits now in the banks have depreciated the other deposits by about 25 percent.
Is that not a most serious matter?
We have here revealed also the important fact that the bank depositors carry the full cost of all the gold purchased under the goldpurchase program. It is these people who are paying for all this gold at the high price of $35 per ounce.
Why are bank depositors of the United States being compeled to pay foreigners for billions and billions of dollars' worth of gold at this greatly inflated price?
Why are they compeled to pay for any gold at all? Surely it will not be claimed there is any law compeling them to do this.
Does not the statute in the clearest terms say this gold is to be paid for by the Treasury and charged to all the people of the United States?
Here is the way the law reads:
GOLD RESERVE ACT OF 1934
Sec. 3700. With the approval of the President, the Secretary of the Treasury may purchase gold in any amounts, at home or abroad, with any direct Government obligations, coin, or currency of the United States, authorized by law, or with any funds in the Treasury not otherwise appropriated, at such rates and upon such terms and conditions as he may deem most advantageous to the public interest; * All gold so purchased shall be included as an asset of the general fund of the Treasury.
Where is there anything in this section that even remotely suggests that the bank depositors of the United States be compelled to pay for the gold which the Treasury alone is authorized to purchase? Especially since this gold cannot be claimed by them after they have paid for it?
Either the Treasury pays for the gold or the bank depositors pay for it. There is no other alternative. If the Treasury is paying for the gold, what is it using for money, gold certificates? And how does it get gold certificates? It gets them by just printing them. Are these so-called gold certificates therefore anything but fiat currency?
Where is there anything in the law that gives the Secretary of the Treasury authority to buy gold with fiat currency? There is no such provision.
Of course, the bank depositors are paying for this gold. Every informed banker or other person in the United States knows this is the truth. It will be observed on the chart that of the $58,000,000,000 of deposits and currency in circulation in 1940, only $25,000,000,000, or 43 percent, represented savings; 20.8 billions, comprising the currency in circulation and the gold credit deposits, or 36 percent, are wholly fiat. The remainder, 13,000,000,000 of bond inflation represents whatever value they may have on the market
Can there be any doubt of the gravity of the disorders in our banking system, which this study reveals? Here is our very first line of defense crumbling before we have even started to build our defenses. Is it really thought that we can ignore this situation and not ultimately pay a heavy penalty for so doing?
It was this same financial disorder that caused Russia's break-down in the World War in 1917. The same disorder undermined the AustroHungarian Empire during the World War, so completely as to virtually destroy her fighting ability.
It appears to me that France's recent military collapse can be attributed more to her disordered finances than to anything else.
Since it is hardly likely anyone will contend that the bank depositors should bear the cost of the gold purchased by the Treasury, we must of necessity charge this cost to the United States Government. Hence the cost of the gold which has been purchased must be included in the Federal debt. Likewise, the Federal Reserve notes in circulation, being in the final analysis a direct liability of the Treasury, must also be added to the Federal debt.
The so-called gold certificates held by the Federal Reserve banks approximately equal the gold purchased, plus the Federal Reserve notes in circulation.
Observe on chart B, figure 1, the course of the gross public debt, Federal, State, and local, plus the gold certificate liabilities. This debt stood at $7,000,000,000 in 1916, it rose sharply to $32,000,000,000 in the World War period. From thence it climbed slowly to $34,000,000,000 in 1930, then began its rapid ascent as the result of the heavy deficit financing, reaching $51,000,000,000 in 1934. From this point it continued to climb still more rapidly because of the Treasury's gold purchase policy. It reached $73,500,000,000 by the end of the fiscal year 1939; $80,500,000,000 by the end of the fiscal year 1940; and stands at roundly $85,000,000,000 at the present time. With appropriations and authorizations already made by the Congress, and assuming that the regular operating costs of the Government will be about what they have been in the last year or two, I believe it is safe to predict that the total public debt of the United States will reach $100,000,000,000 by the end of the fiscal year, 1942.
Leaving out State and local debts, figure 2, we find the Federal public debt took a somewhat different course. Starting with $1,200,000,000 in 1916 it rose to $25,000,000,000 during the war period; from whence it dropped to $16,000,000,000 in 1930. From this point it began to climb rapidly to reach the figure of $32,000,000,000 in 1934; $54,000,000,000 in 1939; $61,000,000,000 in 1940 and stands at present at about $65,000,000,000, and will probably reach $80,000,000,000 by 1942.
Now contrast the course of the debt of the United Kingdom, figure 3,' with that of the United States, during this same period. The debt of the United Kingdom is shown on the graph, minus her war debt, to us, which she carries at approximately $3,600,000,000. The subtraction of her war debt to us, however, does not alter the comparison. Note that the course of the United Kingdom debt remained at practically the same level from the postwar period until shortly before the beginning of her present war. From the high point in 1920 it had dropped about 2 billions in 1930. During the next 9 years it rose $3,000,000,000.
A mere glance at these lines shows the difference between the manner in which the British exchequer managed its finances and that of the United States Treasury.
With respect to Federal financing, leaving out State and local debts, we did a better job of financing than the British up to 1930. Their debt dropped 8.6 percent during that period while ours dropped 36 percent. But during the next 9 years the British debt rose only 11 percent while that of the United States rose 237 percent.
1 The average rate of exchange used in converting pounds into dollars is $4. This should have been more nearly $4.30, which would make a slight change in the dollar debt figures shown on the line representing the course of the United Kingdom debt, but would not alter the trend of the debt and hence the comparison of the manner in financing between the United States and the United Kingdom.