Mr. TRAPHAGEN. Yes.

Senator BROOKHART. In 1929 the banks loaned immense sums to brokers for stock speculation, did they not?

Mr. TRAPHAGEN. Not so very much themselves; it was not so much the New York banks, Senator. They handled the loans for other banks, and for individuals and corporations, but they did not lend but a relatively small amount of their own money.

Senator BROOKHART. It reached about eight billion dollars at one time, did it not?

Mr. TRAPHAGEN. I do not believe the New York banks were lending much over a billion dollars. I have forgotten the figures, but I think, about a billion dollars. It may have been less than that. Senator BROOKHART. The big corporations were attracted by the high rates?

Mr. TRAPHAGEN. Yes.

Senator BROOKHART. And the country banks were attracted by the high rates of the New York banks, and that took a vast amount of credit away from legitimate business all over the country, did it not? Mr. TRAPHAGEN. Well, I don't know.

Senator BROOKHART. You think about eight billions is the normal amount of loans

Mr. TRAPHAGEN. We were creating credit very fast at that time. Whether we absorbed enough credit when we were creating it so fast or not, I do not know. I would have to think that out. That is an economic question that I would want to think about pretty carefully before I answered.

Senator BROOKHART. The fact that the bubble burst the way it did was quite conclusive proof that those loans were abnormal and excessive?

Mr. TRAPHAGEN. I do not know that that was it. I think that the market broke because it was up so high, rather than because of the excess of the loans. Those loans were all well secured. The banks were very careful at that time. They were exacting very wide margins.

Senator BROOKHART. The banks did not lose anything, themselves, in the game?

Mr. TRAPHAGEN. They did not lose any substantial amount that I know of.

Senator BROOKHART. But, following the bursting of the bubble, commodity prices burst also?

Mr. TRAPHAGEN. I think commodities began to go down before that. If I am not mistaken, a great many commodities went down before that.

Senator BROOKHART. I know agricultural commodities did, a long time before that, way back in 1920.

Mr. TRAPHAGEN. Real estate started to go down, too, before that. Senator BROOKHART. That is true of farms. I don't know about the tall buildings in New York.

Mr. TRAPHAGEN. I think they were going down. It was overproduction of buildings.

Senator WAGNER. Unemployment had increased before that time? Mr. TRAPHAGEN. Yes. Credit was already beginning to contract before that time. That was the trouble, Senator; credit was beginning to contract.

Senator BROOKHART. Contracting as to everything except stock gambling, but it was expanding normally as to that?

Mr. TRAPHAGEN. It had a certain momentum and it kept going, unfortunately.

Senator BROOKHART. When these commodity prices went down, that is what made your frozen assets in the banks?

Mr. TRAPHAGEN. I think that when commodities went down other things had to go down along with them. As your commodities go down, and as your other forms of wealth go down, the line becomes in greater proportion. The dollar remains constant.

Senator BROOKHART. If you wanted to go in and stabilize commodity prices, that would bring the banks back at once without any loans, would it not?

Mr. TRAPHAGEN. I have never found any way that that could be done. I have seen it tried.

Senator BROOKHART. Your theory is that the only business that the Government can go into successfully is to help banks and railroads!

Mr. TRAPHAGEN. No; I think this. I think that this bill is going to help the depositors, the borrowers of the banks, the business men of this country, more than it is going to help the banks. I do not think you need to look upon this bill as helping the banks. I take the same view that Mr. Traylor does on that. It is going to help the borrowers of the banks, and it is going to enable the business man to carry on business in a normal way.

Senator BROOKHART. It is going to release these frozen asests and pay big profits to the banks?

Mr. TRAPHAGEN. It is going to enable the banks to make more loans.

Senator BROOKHART. So the primary help would be to the banks, would it not?

Mr. TRAPHAGEN. I would say that the effect of this bill is going to be that it will be more beneficial to the borrowers of the banks than to the banks. Some banks do not need this at all.

Senator BROOKHART. If the farmer's prices are so low that he has no security, he can not borrow anything from the bank, however much money they have.

Mr. TRAPHAGEN. Well, the experience has been, and economists I think will agree—I am not an economist, so I do not know, but I think they will all agree that if you expand credit, a rise in price is a perfectly natural result. What has been going on for the last two and a half or three years has been a contraction of credit. It started to contract before the break in the stock market that you mentioned.

Senator BROOKHART. Cominodities usually have reached a price level of just slightly below 1914, according to the Labor Department figures given out in the last few days.

Mr. TRAPHAGEN. 1913, it it not?

Senator BROOKHART. I was using the 1914 level. The price level of commodities generally is just a fraction of a per cent below, for all commodities. Agricultural commodities are back about 35 years.

Mr. TRAPHAGEN. Is not that due to overproduction?

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Senator BROOKHART. Well, I do not think so. In fact, I do not think there is any agricultural surplus now if the people of the country and of the world were fed decently. I think it is underconsumption, distinctly.

Mr. TRAPHAGEN. The best way I know of to have the people of this country fed decently

Senator BROOKHART. They are not fed decently.

Mr. TRAPHAGEN. No; not as decently as we would like to have them

Senator BROOKHART. If the Government would go in and use its credit to feed its people decently and buy farm products at the cost of production and create jobs by public works so that these 7,000,000 people can go to work, you would not need any help from the Gov

ernment.

Mr. TRAPHAGEN. I doubt very much if the Government went in and bought farm commodities if it would greatly increase the price of farm commodities or farm products more than temporarily. That would be my idea. I do not claim to know anything about it.

Senator BROOKHART. As long as it continued to buy, it would increase the price.

Mr. TRAPHAGEN. If they kept on buying them, I suppose.

Senator BROOKHART. Since the exportable surplus is less than 10 per cent, they would only have a little proportion of that on which to

Mr. TRAPHAGEN. Would your idea be, Senator, to buy these farm products and destroy them?

Senator BROOKHART. No. The world has always consumed all the farm products, cotton and all. You can not cite an instance where any of it was ever destroyed. There has always been a world demand if you hold it long enough. Is not that true? Do you know of any case different from that?

Mr. TRAPHAGEN. I do not know what the effect would be on a control basis such as you suggest. I thought that usually when the prices go low enough the farmers stop producing.

Senator BROOKHART. Do you know how the Democrats and Mr. Hoover and Mr. Julius H. Barnes controlled wheat prices after the war? They had a profit of $59,000,000 that they turned into the Treasury of the United States, on wheat alone.

Mr. TRAPHAGEN. I do not know how that worked out. I am not familiar with that, Senator.

Senator BROOKHART. I believe that is all.

Senator FLETCHER. I would like to ask just one question more. In looking around for remedies, one thing you suggested was the extension of credit and the rise in commodity prices. Would that be brought about in a helpful way by increasing the use of silver as money?

Mr. TRAPHAGEN. I do not think it would, Senator. I think that is a very dangerous experiment. I am very doubtful of the beneficial effects of that.

Senator FLETCHER. That is all.

Senator WALCOTT. We are very much obliged to you, and we thank you for coming down.

(Witness excused.)

STATEMENT OF GEORGE ST. JEAN, PRESIDENT FEDERAL INTERNATIONAL CORPORATION, NEW YORK, N. Y.

Senator FLETCHER. Mr. Chairman, with reference to Mr. St. Jean, I want to draw attention to the recommendation of the President in his message. He says, speaking of this Reconstruction Finance Corporation and its purposes, that one of its purposes is to be in position to aid exports by American agencies; and it is in connection with that that Mr. St. Jean appears.

Will you state your name, place of residence, and occupation, sir? Mr. ST. JEAN. George St. Jean; 120 Broadway, New York City. In Washington I frequently make my office with Mr. Frederick Å. Delano, in the Hibbs Building. Mr. Delano is one of the directors of our company. You probably remember him as president of the Wabash Railroad, and later as vice governor of the Federal Reserve Board. I am president of the Federal International Corporation. Senator WALCOTT. What are the functions of that corporation? Mr. ST. JEAN. I was going to explain, if I may.

Senator WALCOTT. Go right ahead in your own way.

Mr. ST. JEAN. Our corporation is a research body specializing in export credits.

At the request of our corporation Senator Fletcher and Representative Ruth Pratt introduced in the last Congress amendments to the Federal reserve act designed to make more salable the debentures issued by corporations organized under section 25 (a), commonly known as the Edge Act-named for Senator Edge, of course. But due to the late hour at which the bills were presented, no hearings were held before your committee. We were intending to ask our friends to reintroduce the bills in this session of Congress, but the message of President Hoover including aid to exporters among the purposes for the formation of the proposed Reconstruction Finance Corporation has caused us to seek your assistance in support of that measure rather than to ask your consideration of independent

measures.

In speaking to you to-day I think I fairly well reflect the opinion, with regard to economic conditions, of the following gentlemen, most of whom are known to you:

Mr. W. W. Nichols, of Allis-Chalmers Manufacturing Co.

Mr. E. M. Herr, of Westinghouse Electric & Manufacturing Co. Mr. J. L. Wood, of Johns-Manville.

Gen. Palmer E. Pierce, of the Standard Oil Co. of New Jersey, and chairman of the committee on inter-American relations.

Mr. John L. Merrill, of the International Telephone & Telegraph Co.

Mr. C. S. Duncan, of Underwood-Elliott-Fisher.

Mr. Wallace Thompson, of McGraw-Hill Publishing Co.

Mr. Robert H. Patchier, of W. R. Grace & Co.

Mr. M. H. Grace, who is the president of the Phosphate Export Association, and many others who have discussed with me the critical conditions in which our export trade has found itself, especially since the announcement of the moratorium plan on June 20, last.

I claim no distinction as a banker, international or otherwise. I am merely a student of economics, and it has been my privilege to be able to study finance and commerce first hand in various countries

and in close association with many men whose guidance has prompted me to inquire into the causes of economic disturbances which are so often obscured by their disastrous effects.

In President Hoover's message to Congress he very correctly said that there are huge sums of idle money in our banks, and that the relief of depression could better be accomplished by putting this idle capital to work than by providing new capital.

The work of money is to distribute wealth. Our Nation is overburdened with undistributed wealth. The products of our farms are rotting in the fields and granaries, while our people starve in their cities. Conversely, the shelves of merchants and the warehouses of manufacturers are loaded with clothes, machinery, and furniture, while the people on farms and in villages are poorly clothed and sheltered.

Never has there been a time when money had more work to do and shrank more timidly from its task. Yet as I read Senate bill No. 1 it seems to be intended to put more money into these banks, the idleness of whose funds has been justly criticized by the President.

What is the cause of the timidity of these dollars of the banker and the depositors?

Credit is needed to distribute our wealth, and while in normal times the cycle of distribution can be completed in the United States in 90 to 120 days, the prolongation of the present depression has slowed down the machinery of consumption, and instilled in producers and distributors alike the fear of being overstocked so that the cycle now requires from 5 to 6 months in our domestic trade, and from 9 to 18 months in our export trade.

These credit requirements are obviously beyond the maturity of commercial paper eligible for discount or purchase by Federal reserve banks, and quite naturally the commercial member bank is timid about granting them. Its deposits are withdrawable on demand or on 60 days' notice, and it can not afford to load up with paper that is not eligible for use in its reserve account.

Nor is the cat to be brought home to the Federal reserve bank. The Federal reserve must be kept liquid at all costs. It does not make the depositor's money any safer if his commercial banker is permitted directly, or through the reconstruction finance corporation, to put into the assets of Federal reserve banks the credits whose illiquidity caused the depositor's dollars to break out in a cold sweat when they were first suggested.

Therefore it is not to be expected that our banks should furnish the kind of credit now needed by both our domestic commerce and our foreign commerce.

Those of our banks, which may not now be liquid, got that way because they undertook to grant credits which were vitally necessary to their customers' business, but which were inherently of a character which required longer than the normal 120-day cycle from production to liquidation. To now use $2,000,000,000 of taxpayers' money to take over these credits from certain banks might conceivably restore the liquidity of those banks, but it would not furnish the basis for new credits of the character needed to finance the distribution of our wealth and restore the normal cycle.

To use a homely analogy, your child has eaten too much ice cream; so you apply the stomach pump and clean him out, then hand him