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I would go into, but I believe that the two I have mentioned, overindebtedness and deflation of the price level, will explain almost & that has happened in the last three years.

I did not realize that until I began the study but I feel very certain of it now.

Let us see what the state of debts was when the stock market crest cate There were enormous war debts and there were enormou sin debts due to the war and there were enormous industrial debts dae largely to speculation in new inventions and in the prospective urers of Europe from war.

Most of our investments abroad, especially in Germany, were og She theory that there was going to be unusually rapid progress in Trivrery, due to the fact that Europe was in a deep hole after the war and in getting back to normal would naturally go upward at a seper pace than it would progress under normal conditions, and tha: it was a golden opportunity for Americans to invest.

In the same way, our inventions here led people to invest: fr instance in the airplane business. That was regarded by many as mething quite equivalent to the railroad development in the Freuries, and there were the radio and sound pictures, the chemica. dustries, the development of the automobile, the Patent Office si

ose with inventions. Inventions had suddenly become the vopse The use of scientific men in industry had become general and much in isvor. When I was a boy, the college-bred man was rather loked Con upon by business men as impractical and unutilizable.

I can remember perfectly well a very successful business mani Chicagn saying he never would employ a college graduate.

Well, that has all changed. They not only employ college grad. lates to-day, but they compete for the academic professor. Tha: came out largely through realizing what Germany was doing in the lines We realized that German efficiency in the war was partly due to that fact. Then, the high cost of living (our unstable dollar!) during and after the war made it impossible for many college professors who were dependent upon their salaries, to live upon their salaries and thes sought positions outside where they could get more, particularly in the chemical industries. Industry began to establish or to further develop great laboratories. To-day the greatest laboratories in this country are not the university laboratories, as they used to be, but laboratories of industrial concerns, like the American Telephone & Telegraph Co., which spends millions of dollars a year in investigations

You used to hear over the radio about the House of Magic ai Schenectady, General Electric. Now inventions have become almost s matter of mass production. They are assembling all the brains that they can hire. Edison in his younger days was not appreciated Inventors were regarded as cranks. But when he died, he was the Greatest hero in the whole world.

So, when Langley tried to invent the airplane here in Washington. the fact that it caught on a hook on the boat, and went over into the Potomac, was a subject of newspaper ridicule and he was so humiliated that it hastened his death. Anyone who thought of a flying machine in those days was regarded as a crank. Now we have Langley Field and we honor his memory, and all that. But there was none of that premium on inventions then that there is to-day.

Mr. Goldsb Professor F Mr. GOLDS w I do not ght. But lor and hes les matbe five Åst stocks mung an op est would chi rald be inte

Professor F to The Stock

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Then suddenly came the period during and especially after the war when there were enormous developments in inventions technological improvements, they were called. There was a tremendous investment in these, a tremendous speculation. That led to a great deal of debt, because when a man can see, that he can make, not the ordinary interest on his money of 6 per cent or something of that sort, but that if he gets in on the ground floor on something new, a wonderful invention, he can make a hundred or a thousand per cent.

If he can go to the banker and put up some collateral or in any way get a loan at 6 per cent, thinking he is going to make a thousand per cent on his investment, he is very much tempted to do so. And it is perfectly all right, but when millions of people try to do that then they boost the price of stocks and then a little later when they get to counting on the rise in value itself instead of the prospective profits and dividends, they are on very dangerous ground. Gradually we accumulated that situation until it broke in 1929.

Mr. GOLDSBOROUGH. May I interrupt you there for a moment? Professor FISHER. Certainly.

Mr. GOLDSBOROUGH. I want you to make a connected statement and I do not want any question of mine to interrupt your line of thought. But I wanted to ask you this: After the collapse of 1929, I saw and heard you on the screen when you said-you only spoke for maybe five or six minutes—that the difficulty was not so much that stocks were too high. Of course, you may have been simply making an optimistic statement, but if you can say anything now that would clarify your position then, I think it would be helpful; it would be interesting.

Professor FISHER. I shall be very glad to. I have written a book on The Stock Market Crash. I would say that the conditions during the few years immediately preceding the stock market crash, except for excessive debt, were not the exaggerated false prosperity that people now think; that that condition was more nearly normal then than the present condition. There was, as I have just explained, a lunatic fringe in speculation; people who went into the market just to get out of it in a short time, not to stay with it and wait for the development of the airplane, or whatever. They made the most dangerous element and added greatly to the debts.

Now, I may be wrong. I know that I am in the minority, expressing my opinion in answer to your question. Nevertheless, it is my opinion that what we called the new era then, and which now is laughed at as absurd, was nearer normal than the present era. This last is a "new era," which is to my mind extremely abnormal. I do not mean to say that there was not any exaggeration in 1929.

In fact, I have just been trying to make it clear that there was and that it led to this over-indebtedness by the American public. But if you could set up a standard or normal and say that values were far above that normal in 1929, that excess above normal was, I think, far less than the present deficiency below normal.' The normal of course, is somewhere between, but not midway between, 1929 and 1932. Ít is much nearer 1929. That is my opinion. That is the best answer I can make to your question. Moreover, as I shall show later, the crash and depression, could have been mostly prevented in spite of the debt disease of 1929 if we had, as we could, prevented the dollar disease from following.

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the facts, as they necessarily must if you assume other things equal indebtedness are and see if the consequences do not correspond with and just follow what must happen. It seems to me they correspond Is the first place, as soon as there is anything to awake people to the danger, somebody begins to sell in order to get out of things. He Talizes that his margin is too small, he is in debt too far. It is all, of

se, an individual matter. When I speak of overindebtedness, s tad taught the public that common stocks

I mean overindebtedness of John Smith and millions of John Smiths. As matter of fact, two hundred billions of debt, if it were equally would not be perhaps an overindebtedness. But the overindebtedness

tribed all through the United States, or in proportion to wealth, made it even worse, because then the individual

resists in the fact that those who are in debt are in debt too far

of the situation was one which I had not suffie Then, bank loans and discounts of member banks increased between
that time, because we did not have the statistics 182 and 1929, from eighteen billions to twenty-six billions; and for

begin statistics on brokers' loans. If we had all banks from about twenty-seven and a half billions in 1922 to
ng back a long way and had had full statistics forty-two billions in 1929.
might have been different.

Brokers

' loans increased from 1928, six and a third billions to nine oks on the business cycle comparatively little and a half billions in 1929. We had no figures back of that to know

hink that is one reason why they have not got meally whether there had been too rapid an increase or not. se explanations, these elaborate monographs that Installment buying and loans, you know, were very popular; we she explanation of business cycles.

tried to finance the consumer. Professor Seligman of Columbia wrote kinds of explanations: Overproduction and two volumes on installment buying, at the instance of General Motors vestment and under consumption--all sorts of and they, and then other automobile concerns, and many others got

anch there probably is a grain of truth. But acceptance corporations to help the small consumer buy his car, his

sis of this depression, which I suspect applies ndio, his washing machine, or whatever it was, on installments, Trave not studied the others so intensively-it which was really going into debt, and at a high rate of interest. e is the important thing, and what we need The figures on those are not well worked out, but they apparently ents in the future. If we watch that particular increased from several years before the crash until the time of the sikely to get caught as we were then.

msh, from five to eight billions.

The total loans in this country according to Carl Snyder of the SS DEBT DISEASE OF 1929

federal Reserve Bank of New York, leaving out international debts, mous war debts. First there were the repark

Intergovernmental debts, and governmental debts, but merely from Teised originally at astronomical figures which people to people in the United States, according to him, amounted to

sie ure to the attitude of France, and to some into a hundred and twenty billion to a hundred and fifty billion dollars. at sen to-day, even though they have been

Doctor Edie reckons that a hundred and twenty billion dollars the amount to twenty-seven and a half billion mapresents the very minimum of long-term debts in the United States,

s But this is a misleading figure unless other than bank credit. Three to twelve months installments and mesasenable rate of interest, in which case you

terything inside of a year he calls "short term.” As to long-term ut $2.000,000,000 in present value. Even this

debits he reckons they amount to over a hundred and twenty billions

and probably over a hundred and fifty billions. e intergovernmental debts: The United States Now

, if we would add all the varieties of debts it is, I think, unquesSESSORE ST0,000,000,000; that is, the Government. tunable that if we had the figures we would find that the indebteddiscounted at 4% per cent is about $7,000,000

tess of the United States to-day is over $200,000,000,000.
e Federal debt is now about $18,000,000,000,

NINE CONSEQUENCES OF THE DEBT DISEASE
sebue debts are now about $15,000,000,000. Ten
100.000,000. You can see the great growth

Suppose you just reason as to what the consequences of over-
ISOS
ste debts owing to the United States, for
de shroad, increased from $8,000,000,000 be-
$15.000,000,000 in 1931.

sed from about $3,000,000,000 in 1910 to alion dollars in 1928. na tare inereased comparatively little, because

pulation, instead of corporations going into

on seeks instead of bonds. But that did not ge part of its espital structure in the form of debt

, get the common stock and then went

into debt et scount or collateral loans, or whatever. He

Then, bank loans and discounts of member banks increased between 1922 and 1929, from eighteen billions to twenty-six billions; and for all banks from about twenty-seven and a half billions in 1922 to forty-two billions in 1929.

Brokers' loans increased from 1928, six and a third billions to nine and a half billions in 1929. We had no figures back of that to know really whether there had been too rapid an increase or not.

Installment buying and loans, you know, were very popular; we tried to finance the consumer. Professor Seligman of Columbia wrote two volumes on installment buying, at the instance of General Motors and they, and then other automobile concerns, and many others got acceptance corporations to help the small consumer buy his car, his radio, his washing machine, or whatever it was, on installments, which was really going into debt, and at a high rate of interest.

The figures on those are not well worked out, but they apparently increased from several years before the crash until the time of the crash, from five to eight billions.

The total loans in this country according to Carl Snyder of the Federal Reserve Bank of New York, leaving out international debts, intergovernmental debts, and governmental debts, but merely from people to people in the United States, according to him, amounted to from a hundred and twenty billion to a hundred and fifty billion dollars.

Doctor Edie reckons that a hundred and twenty billion dollars represents the very minimum of long-term debts in the United States, other than bank credit. Three to twelve months installments and everything inside of a year he calls “short term." As to long-term debts he reckons they amount to over a hundred and twenty billions and probably over a hundred and fifty billions.

Now, if we would add all the varieties of debts it is, I think, unquestionable that if we had the figures we would find that the indebtedness of the United States to-day is over $200,000,000,000.

NINE CONSEQUENCES OF THE DEBT DISEASE

Suppose you just reason as to what the consequences of overindebtedness are and see if the consequences do not correspond with the facts, as they necessarily must if you assume other things equal and just follow what must happen. It seems to me they correspond extremely well.

In the first place, as soon as there is anything to awake people to the danger, somebody begins to sell in order to get out of things. He realizes that his margin is too small, he is in debt too far. It is all, of course, an individual matter. When I speak of overindebtedness, I mean overindebtedness of John Smith and millions of John Smiths.

As a matter of fact, two hundred billions of debt, if it were equally divided all through the United States, or in proportion to wealth, would not be perhaps an overindebtedness. But the overindebtedness consists in the fact that those who are in debt are in debt too far individually.

[graphic]

dhe currency in relation to trend-you get curves that agree in

If one of you pays me a debt which you owe me of a thousand dollars, that $1,000 is still in circulation. You have parted with it, but I have gained it and the country as a whole has just the same thousand dollars. But if, instead of owing me, you owe a commercial against your deposit account in that bank or elsewhere, that $1,000 has entirely disappeared. It no longer exists. Its only existence

hat you have got to take into account in inaking this comparison the consisted in a book entry. It is book credit. You have it on the

purth of the country. You have to take that into account and then stub of your check book. You say that your bank balance is "money

getting the commodity prices on one curve and the currency in rein the bank.” The bank keeps its books parallel to yours and they

un to its trend on another curve--not the absolute currency, credit you with that. That does not mean that the bank has got

When that is discovered by a few people and they attempt to that in a safe-deposit box in physical money, gold or Federal reserve extricate themselves, they find themselves, as the men in Wal

totes or greenbacks or silver certificates, or anything of the sort. Street say, out on a limb. They try to extricate themselves by selling-It merely means that the bank agrees to recognize your checks up to liquidation. I am going to trace eight steps. The first is liquide

that amount. tion. As soon as they attempt to liquidate, they find that they are Mr.GOLDBOROUGH: If you will excuse me, it really means that the under the pressure of distress selling. Distress selling is a highly bank acknowledges an indebtedness of itself to you. abnormal thing and itself portends a crash or a crisis or a depression Professor Fisher. That is it. The bank owes you and the banks or something out of the ordinary. Normal selling is induced by high use you what they call deposits, because you owe them what they prices. Ordinarily, in normal times, when a man is not in debt, is not call loans. It is just a swapping of loans. Your loan is not and could forced by his creditors, or is not forced by his fears to sell

, he will hold not be circulated. You could not pass it on to somebody else in off until he thinks he can get near the top of the market. He will

place of money. You could not make out a debt or note on a piece hold his real estate or his stocks or anything else and will only be

il paper and say that it shall be legal tender, so people should accept tempted to sell by a high price. That is the normal situation

.

1. But the bank can give you a deposit credit and it will circulate High price is the inducement to sell. But under distress selling, it

ad can be turned over from one person to another by check. is low price that induces him to sell.

Most people find that a very mysterious thought, but when these In the stock market crash, as soon as prices began to go down, two debts, one against the other, telescope and both disappear, you because some people began to sell, almost everybody else wanted to

bure wiped out that much circulating medium. sell; not because the prices were high enough to suit them, but

So there is a contraction of currency and that has gone on at a because they were so low that the debtors were fearful of their sol

nite in the last few weeks of more than 25 per cent per annum. When yency; because the broker called them up and said, “Prices are now you have a contraction of currency through this process, you will down. We are carrying you on a margin of 10 per cent, we want 30 decessarily have a deflation of the price level, because the price level per cent. If you do not let us have the margin, we will sell you out."

depends so much upon the quantity of this circulating medium in So here, because of the pressure of the creditor or because of their own fears, they sell. That is distress selling induced by a low price In normal times, while you are paying your debt to the bank, and not a high price.

somebody else is going into debt to the bank and normally, the two When you get that distress selling, induced by low prices, falling till about offset each other. In fact, in a progressive state, as we prices, it makes matters worse, because the more the debtors sel

,

hare in this country generally, more people will go into debt at a the more the prices go down and as they go down, the greater the bank than will get out of debt, as the population grows. So that it is pressure to sell. It is all because of overindebtedness, because people normal for deposits to banks to grow 4 or 5 or 6 per cent per annum. are trying to save their solvency and price is no object.

But when you have many people all trying to get out of debt at the And it is not simply because of distress selling that we have such

he time or being forced by their creditors to get out of debt, then in the price level is the contraction of the currency that comes

about

de riping out of deposit currency goes on much faster than its redebts to a commercial bank faster than new debts are created in the

so that there is a net contraction of the currency. That results in commercial bank. That is a point very few people realize, but it is the key to the whole situation,

I would like to call your attention to the fact that this is not only
Deory

, but that the relation between the deposit currency and the me level has been demonstrated by a number of studies and most el by those of Carl Snyder

, the statistician and economist in the I have here a chart which is not quite up to date. I have seen him au public lecture

in Chicago bring it a little bit further down. To unind it is one of the most satisfying things that has been done in statisties

. The reason the relationship has often not been seen is

Federal Reserve

Bank of New York.

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