STABILIZATION OF COMMODITY PRICES

I would go into, but I believe that the two I have mentioned, over indebtedness 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 crast came. There were enormous war debts and there were enormous farm debts due to the war and there were enormous industrial debts due largely to speculation in new inventions and in the prospective recovery of Europe from war.

Most of our investments abroad, especially in Germany, were oc the theory that there was going to be unusually rapid progress in recovery, 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 steeper 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: for instance, in the airplane business. That was regarded by many as something quite equivalent to the railroad development in the seventies; and there were the radio and sound pictures, the chemica industries, the development of the automobile, the Patent Office was choked with inventions. Inventions had suddenly become the vege The use of scientific men in industry had become general and much in favor. When I was a boy, the college-bred man was rather looked down upon by business men as impractical and unutilizable.

I can remember perfectly well a very successful business man in Chicago saying he never would employ a college graduate.

Well, that has all changed. They not only employ college grad ustes to-day, but they compete for the academic professor. That came out largely through realizing what Germany was doing in those 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 they 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 st Schenectady, General Electric. Now inventions have become almost a 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.

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.

per

And it is

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 cent on his investment, he is very much tempted to do so. 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. It 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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ne situation was one which I had not suff time, because we did not have the statistics Segun statistics on brokers' loans. If we had back a long way and had had full statistics might have been different.

s on the business cycle comparatively little that is one reason why they have not got pianations, these elaborate monographs that e explanation of business cycles.

nds of explanations: Overproduction and ent and under consumption-all sorts of ich there probably is a grain of truth. But is of this depression, which I suspect applies are not studied the others so intensively-it vs the important thing, and what we need es in the future. If we watch that particular sy to get caught as we were then.

SE JEBT DISEASE OF 1929

swar debts. First there were the reparaized originally at astronomical figures which e to the attitude of France, and to some So-day, even though they have been dermount to twenty-seven and a half billion But this is a misleading figure unless cable rate of interest, in which case you $4.000.000,000 in present value. Even this

ergovernmental debts: The United States $12.0000.000,000; that is, the Government. seunted at 4 per cent is about $7,000,000

Safers! debt is now about $18,000,000,000. ere jects are now about $15,000,000,000. Ten V.200.000. You can see the great growth

e debts owing to the United States, for de abroad, increased from $8,000,000,000 be22 x $15,200,000,000 in 1931.

ed from about $3,000,000,000 in 1910 to on dollars in 1928.

sise increased comparatively little, because

ation, instead of corporations going into ss had taught the public that common stocks se 2 buy and so the corporations financed en stocks instead of bonds. But that did not made is even worse, because then the individual Orend of a corporation borrowing on bonds seof is capital structure in the form of debt, u the common stock and then went into debt 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.

STABILIZATION OF COMMODITY PRICES

When that is discovered by a few people and they attempt to extricate themselves, they find themselves, as the men in Wal Street say, out on a limb. They try to extricate themselves by sellingliquidation. I am going to trace eight steps. The first is liquid tion. As soon as they attempt to liquidate, they find that they are under the pressure of distress selling. Distress selling is a highly abnormal thing and itself portends a crash or a crisis or a depression or something out of the ordinary. Normal selling is induced by high prices. Ordinarily, in normal times, when a man is not in debt, is not forced by his creditors, or is not forced by his fears to sell, he will hold off until he thinks he can get near the top of the market. He will hold his real estate or his stocks or anything else and will only be tempted to sell by a high price. high price. That is the normal situation. High price is the inducement to sell. But under distress selling, it is low price that induces him to sell.

In the stock market crash, as soon as prices began to go down, because some people began to sell, almost everybody else wanted to sell; not because the prices were high enough to suit them, but because they were so low that the debtors were fearful of their sol vency; because the broker called them up and said, "Prices are now down. We are carrying you on a margin of 10 per cent, we want 30 per cent. If you do not let us have the margin, we will sell you out." 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 and not a high price.

When you get that distress selling, induced by low prices, falling prices, it makes matters worse, because the more the debtors sell, the more the prices go down and as they go down, the greater the pressure to sell. It is all because of overindebtedness, because people are trying to save their solvency and price is no object.

And it is not simply because of distress selling that we have such reductions in price. The really most important reason for this fall in the price level is the contraction of the currency that comes about. There is always a contraction of currency when people pay their debts to a commercial bank faster than new debts are created in the commercial bank. That is a point very few people realize, but it is the key to the whole situation.

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 money as if there were not this transaction. There is no loss of $ thousand dollars. But if, instead of owing me, you owe a commercial bank and you pay the commercial bank a thousand dollars by a che k against your deposit account in that bank or elsewhere, that $1,000 has entirely disappeared. It no longer exists. Its only existence consisted in a book entry. It is book credit. You have it on the stub of your check book. You say that your bank balance is "money in the bank." The bank keeps its books parallel to yours and they credit you with that. That does not mean that the bank has got