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i consequence of liquidation of debts.

luuary 1 or July 1, and the income account relates to a period of tall, even if the quantity of goods sold remains the same. The Willar's worth of receipts tends to contract with the contraction of te price level, but the expenses will not contract so fast, because

ment, on a lease, for a period of years, such as salaries fixed for e custom, or fear of labor unions. Therefore the business man's

inal years, and such even as Wages, which are fixed by contract, as Dan's Review, and the Journal of Commerce, and I

be is a contraction of profits and an increase of losses absolutely

So there is a contraction of net worth, an increase of bankruptcies, was too few commodities; but I can not get it out promptly Yery good critic who thinks mine is the best index; yet I

Fatessor FISHER. I would like, if this second chart goes in, to But I would say, undoubtedly, on the whole, the best index in Isye e into the record with it this statement, that I think the rela zistence today is that of the United States Bureau of Labor Statistics. up could have been made better, truer, and more fully in agree I have traced three steps, liquidation, contraction of the currency, Denne with the other chart in some of the details if he had used und falling prices. Liquidation, when the liquidation is in banks, as mon charting for both elements and had put it on the "ratio I almost always is, implies contraction of the currency, and contrac

es this first one has been done. He has two arithmetical an of the currency implies falling prices. sies so they differ, which fact throws some of the comparisions The fourth step is an implication of reduction in net worth and an

mirease of bankruptcies, because in the capital account of any When prices are falling, the dollar is rising. It is the same thing business concern, when there is a falling of the price level, i. e., an

y at the general level of prices has been cut in two as to say Dezease in the purchasing power of the dollar, due to contraction of the she purehasing power of the dollar has been doubled, and vice curteney, it affects the valuation of every item in a man's assets. TEN. S. we ean shift from the terminology of prices into the It does not correspondingly decrease his liabilities, because they are anunciogy of purchasing power and, talking in terms of the change Ered by contract in dollars. Consequently, as the assets shrink in

gular, we will be less likely to be confused than when we talk in syupathy with the shrinkage in the price level, while the liabilities Sons of prices. People forget the money element, notwithstanding do not, the difference between assets and liabilities, that is net worth, ac muner is used so universally in everything that they think they til shrink faster. That means that people who are already on the su sve it out. They talk about the price of wheat, and they saged edge who have not much net worth to start with become him that they are talking about wheat only, but the price of wheat bankrupt. So there is a fourth consequence. The overindebtedness,

maar dolars and cents, and the dollars are just as important in Then it leads to liquidation, is a contraction of net worth and an mes the wheat is, and the dollar is applied not only to whest

messe in bankruptcies. Materything

If any of these points are not clear, I wish you would interrupt me EVT. I do not need to talk about what an index number is, bet, rather than wait to ask questions at the end, because I want to È that I have written a book on the Making of Index Num Take these nine steps absolutely clear. para wh has gone into that fully, and I think it is demonstrated Now, I want to call your attention to this, that this shrinkage is

shat sa index number is a valuable, and, under proper conditions, se to the fall of the price level. I started out by saying that over* une instrument of measure. This is now universally recog ndebtedness started the whole thing; but suppose some counteracting DR r more than several years ago. In fact, it is used now to ase, such as the Federal reserve policy, had compensated for this TERELT Very often the wrong kind of an index number is used tendency to fall and had prevented the fall of prices coming as a In denause people have now got faith

in index numbers that they did sequence of overindebtedness and liquidation. Then this fourth Et bare

sequence would not have happened, and that applies to all of the Nr. Pall. What, in your opinion, Doctor, is the best inder Best of these nine steps, as you will see. They are consequences not

dosedly of the overindebtedness, but consequences of the fall of Power Fisher. I would say that the index number of the popes which the overindebtedness was permitted to cause. I miei States Bureau of Labor, their index number of wholesale Now, the fifth step is a corresponding fall in profits. There are price is probably the best. I would say

that the index numbers of to great sets of accounts in business, the capital account and the inwholesale prices are more accurately worked out than index numbers se account

. The capital account relates to a point of time, such of retail prices or of stocks and bonds or anything else. The tech pique of working out index numbers of wholesale prices has developed es such as a year or a month. Now, the same principle applies to rought twe generations, until now it is a very accurately measured bol

. When the price level falls

, profits will fall still faster, as profits shing I think that, if I were to criticize the United States Bureau of at the difference between receipts and expenses. The receipts Raider Statisties index at all, I would say that

it has too many rather apresent the value of the goods sold, and if prices fall the receipts at e few commodities. It had been criticized for giving too zemetesh waght to farm products and food, but when they tried to meet eft fact that the price of the goods is reduced

means that the number schet matem, they should have met it partly by taking some things pate uher then simply

putting in 200 more commodities, because now shey have so many commodities, some of which represent prices kases are largely fixed by contract

, such as interest on debt, such have my own Index Number, published weekly. It was the

de published weekly. It has 120 commodities wholesale.

I do not collect the figures myself, but get them from the

But I would say, undoubtedly, on the whole, the best index in existence today is that of the United States Bureau of Labor Statistics.

I have traced three steps, liquidation, contraction of the currency, and falling prices. Liquidation, when the liquidation is in banks, as it almost always is, implies contraction of the currency, and contraction of the currency implies falling prices.

The fourth step is an implication of reduction in net worth and an increase of bankruptcies, because in the capital account of any business concern, when there is a falling of the price level, i. e., an increase in the purchasing power of the dollar, due to contraction of currency, it affects the valuation of every item in a man's assets. It does not correspondingly decrease his liabilities, because they are fixed by contract in dollars. Consequently, as the assets shrink in sympathy with the shrinkage in the price level, while the liabilities do not, the difference between assets and liabilities, that is net worth, will shrink faster. That means that people who are already on the ragged edge who have not much net worth to start with become bankrupt. So there is a fourth consequence. The overindebtedness, when it leads to liquidation, is a contraction of net worth and an increase in bankruptcies.

If any of these points are not clear, I wish you would interrupt me here, rather than wait to ask questions at the end, because I want to make these nine steps absolutely clear.

Now, I want to call your attention to this, that this shrinkage is due to the fall of the price level. I started out by saying that overindebtedness started the whole thing; but suppose some counteracting cause, such as the Federal reserve policy, had compensated for this tendency to fall and had prevented the fall of prices coming as a consequence of overindebtedness and liquidation. Then this fourth consequence would not have happened, and that applies to all of the rest of these nine steps, as you will see. They are consequences not directly of the overindebtedness, but consequences of the fall of prices which the overindebtedness was permitted to cause.

Now, the fifth step is a corresponding fall in profits. There are two great sets of accounts in business, the capital account and the income account. The capital account relates to a point of time, such as January 1 or July 1, and the income account relates to a period of time, such as a year or a month. Now, the same principle applies to both. When the price level falls, profits will fall still faster, as profits are the difference between receipts and expenses. The receipts represent the value of the goods sold, and if prices fall the receipts will fall

, even if the quantity of goods sold remains the same. The mere fact that the price of the goods is reduced means that the number of dollar's worth of receipts tends to contract with the contraction of the price level, but the expenses will not contract so fast, because expenses are largely fixed by contract, such as interest on debt, such as rent, on a lease, for a period of years, such as salaries fixed for several years, and such even as wages, which are fixed by contract, or custom, or fear of labor unions. Therefore the business man's profits will be decreased.

So there is a contraction of net worth, an increase of bankruptcies, there is a contraction of profits and an increase of losses absolutely coming out of falling prices, if you assume the falling of prices to come as a consequence of liquidation of debts.

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Ymple we demanding it, they have to pull in and get money from other

Fluctuations in the purchasing power of gold are indisputably a caused

That is from a report on unemployment and monetary fluctuations, published in the May and June issues of the International Labor

So I think you can take that for granted. There is no question

Mr. PRALL. If these producers and manufacturers, during the if they were to use that during the poor years, then the situation would good years, the profitable years, were to lay a surplus aside, and

saculation of money. You have two sets of figures to show that, the

luding figures, which are really inferential figures, that are probably Professor FISHER. No; it would help that specific trouble of un

bere or less dependable, and the other the figures of Carl Snyder, of employment, and would mitigate the evils of the depression, but it would not go far to keep a stable price level and general prosperity.

besits in the United States. Those are probably what Mr. King

Federal Reserve Bank of New York, on the turn-over in bank Now, the seventh consequence is pessimism and distress, psychological consequences, because when you have business men being bankrupted, and profits turning into losses, and the working men

las consequence of this hoarding comes bank failures, because banks moods will turn from sunshine to gloom; not only emotional pesunemployed, it does not require any demonstration that the human

mot keep 100 per cent of their deposits in money. If they did,

s vould not make any money. They have to lend it out. So they simism, but intellectual distress as they see concerns going to the

sy rep a small fraction, maybe 10 per cent, or maybe 5 per cent in

al cash. The till money 18 apt to be small in amount, and when

Now, the sixth consequence is shutdown in industry, for in & capi

The eighth consequence, when people have this distress and pessitalistic civilization it is the profit taker who decides whether to shut

zim, is hoarding. If people are afraid of their banks, or afraid to down or open up, and capitalistic civilization really means a profit

a test their money in an enterprise because they see that everything civilization—that is all it means. It means that the leadership and is going to be bad, they think the only safe thing is putting the money the decision is in the hands of the profit taker, and when the profit nder the mattress

. What amounts to the same thing, the velocity taker finds he does not have profits, and that the more he runs his d circulation of bank deposits is decreased. Hoarding is merely business the more he loses, he will shut down. That means unem nducing the velocity of circulation, holding money a longer time ployment, it means a reduction in production, it means a reduction than usual. in trade and a reduction in employment.

I calculated that, on the average, money, either so-called money in This is not theory, either, altogether; it has been demonstrated by te banks or actual physical money, ordinarily turns over about once careful studies. I am sorry that I can not lay my hands on a study in two weeks. made by the International Labor Office at Geneva, in which some 40 Mr. Busby. Do you refer to the present time? nations were studied in reference to this, and it was found practically Professor Fisher. No; I mean normally, something like twentyuniversal that during falling prices there was more unemployment, and that during rising prices there was less unemployment. It is Mr. Busby. I noticed a statement in the Honest Money pamphlet, good theory; it is good fact.

published by the farm organizations, that the velocity of bank credit Here is what I found myself, one of the studies that I made some TL, in turnover, probably about two and a half times per month now years ago. It is not up to date; it ends in 1926, but here is a chart

se against about five and three-quarters times in 1929. that shows--and this relates to bankruptcies, not unemployment. Professor Fisher. Yes. The turnover differs enormously in differ

Here is another study in which I have shown that the volume of at cities. trade fluctuates with changes in the price level, and here I have a Mr. Busby. Of course, New York City carried the ordinary outlevel. There is a good deal that might be said in further explanation

ping city to a higher average than if New York City should have been

at out of consideration. about that price level change, if there were time, but it is all fully Professor Fisher. Yes. I found when I made a study of this that explained in the article, if anybody wants to examine it

. I do not Da big city like New York the turnover would be sometimes over ask to have it in the record, unless you want that especially but there se bundred times a year, whereas the turnover in a small city like can absolutely be no question, and I do not think there is an authority

New Haven would be fifteen times a year. in statistics or economics in the world who will deny, that there is a Mr. Bussy. I believe Doctor King touched on 140 cities and then very strong relationship between falling prices and unemployment

, as the one city of New York, and he related the rapid turn-over there and it comes right out of the theories, as I have said.

amount of business that was done for the entire country Here is a quotation from the International Labor Office. This will

in the New York Stock Exchange. perhaps sum up the whole thing.

Professor Fisher. Yes. In Santa Barbara, a small town at that

se, I think in 1911, I had a banker tell me that his turn-over was .

s than once a year. There are enormous differences, and so Mr. apetit

, who was secretary of the Bank of France, made a study of the hak deposits in Europe, and he found enormous differences between the larger and smaller communities. Doubtless this is because in the leger cities the people are closer together and things can go from person to person much faster, while in the country people will bold Ser money for months before they go to town to spend it. So far as a depression is concerned, it slows up the velocity of the es veganized to rely upon people leaving their money there. They

The eighth consequence, when people have this distress and pessimism, is hoarding. If people are afraid of their banks, or afraid to invest their money in an enterprise because they see that everything is going to be bad, they think the only safe thing is putting the money under the mattress. What amounts to the same thing, the velocity of circulation of bank deposits is decreased. Hoarding is merely reducing the velocity of circulation, holding money a longer time than usual.

I calculated that, on the average, money, either so-called money in the banks or actual physical money, ordinarily turns over about once in two weeks.

Mr. Busby. Do you refer to the present time?

Professor FISHER. No; I mean normally, something like twentyfive times a year.

Mr. Busby. I noticed a statement in the Honest Money pamphlet, published by the farm organizations, that the velocity of bank credit was, in turnover, probably about two and a half times per month now as against about five and three-quarters times in 1929.

Professor FISHER. Yes. The turnover differs enormously in different cities.

Mr. Busby. Of course, New York City carried the ordinary outlying city to a higher average than if New York City should have been left out of consideration.

Professor FISHER. Yes. I found when I made a study of this that in a big city like New York the turnover would be sometimes over one hundred times a year, whereas the turnover in a small city like New Haven would be fifteen times a year.

Mr. Busby. I believe Doctor King touched on 140 cities and then on the one city of New York, and he related the rapid turn-over there and the big amount of business that was done for the entire country on the New York Stock Exchange.

Professor FISHER. Yes. In Santa Barbara, a small town at that time, I think in 1911, I had a banker tell me that his turn-over was less than once a year. There are enormous differences, and so Mr. Aupetit, who was secretary of the Bank of France, made a study of the bank deposits in Europe, and he found enormous differences between the larger and smaller communities. Doubtless this is because in the bigger cities the people are closer together and things can go from person to person much faster, while in the country people will hold their money for months before they go to town to spend it.

So far as a depression is concerned, it slows up the velocity of the circulation of money. You have two sets of figures to show that, the hoarding figures, which are really inferential figures, that are probably more or less dependable, and the other the figures of Carl Snyder, of the Federal Reserve Bank of New York, on the turn-over in bank deposits in the United States. Those are probably what Mr. King was referring to.

As a consequence of this hoarding comes bank failures, because banks are organized to rely upon people leaving their money there. They can not keep 100 per cent of their deposits in money. If they did, they would not make any money. They have to lend it out. So they only keep a small fraction, maybe 10 per cent, or maybe 5 per cent in actual cash. The till money is apt to be small in amount, and when people are demanding it, they have to pull in and get money from other

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tad Italked with them. We found that, in terms of dollars, the prices

As long as you allow the dollar to be tampered with in this way, and you do not compensate and keep it stable, the very effort of paying debts, by precipitating a contraction of the currency, a falling of prices and an enlargement of the dollar, may enlarge your debt

Mr. Bussy. Enlarges your debt in relation to commodity prices? commodity. It is not an accident that during a depression people Professor FISHER. Yes; in terms of wheat, cotton, or any other

mean the people that we met in the stores, the average citizens, all find their debts hard to pay. It is a consequence of the very effort to pay them. The more the millions try to pay, the more they find

shelligent people, and there is a higher level of intelligence i

wanity perhaps than in any other, we only found 2 people out of that that they owe in terms of wheat and cotton, and the more they try to get out of debt, the more they put themselves in debt. It is like an attempt to escape from a burning theater. Everybody

was. One of those was a German-American who had looked at it

nderstood perfectly well-who had any inkling that the mark had presses toward the door on the theory that he is more likely to get out by pressing in that direction, but the fact that everybody else in the

8. The other was an accountant, who was accustomed to looking theater is doing the same thing jams them all in all the tighter. If

such things, with a high degree of intelligence. But the other 23 they could be marshaled out one at a time in an orderly way, they could get out faster. You can not blame the individual who is trying to get out of a burning theater to save himself, or his wife and chil

The kept a shop in a little suburb outside of Berlin. Professor Roman

I remember spending an hour talking with two intelligent women dren; you can not pin the fault on the individual, but the crowd itself

banks, or get people to pay their loans, and so it goes on and every

ss mass is defeating its own aim. So in this effort to get out of debt, dollar hoarded means, in the end, embarrassment of about $10 to

though, of course, is not voluntary-it is forced by the creditors. to the banks' deposits.

If the creditors did not force people to pay their debts during falling So, this eighth factor, of hoarding, reenforces the second, of con prices, they would not lose so much money. If they would give traction. It is in fact the same thing from another point of view.

montoriums, the price level would not fall, the dollar would not Then, the ninth point is change in the rate of interest. The rate of mlarge so much, and the possibility of payment would be much interest during a depression is nominally low, but that is again one of

prester those tricks due to the money illusion. You will always get tricked

There is a conflict here between the individual and the mass, just as if you think in terms of money. You can not think in terms of money

in the competition in international armaments. If every other without getting fooled, and many a person thinks the rate of interest

nation is arming—at least, this is my view—we have to get into the is low when it is really high, because the fall in prices adds to the game and compete; one nation can not lag behind, or it will be overburden of interest. Take a farmer who thinks in terms of whest.

whelmed some day; and yet it is perfectly true that the very efforts If he pays 5 per cent, and prices are falling 4 per cent per annum, he is

to defend themselves against each other that make the danger of war really paying 9 per cent; sometimes during the depression the real all the greater. So you either have to compete with the rest of rate of interest is over 50 per cent, but people do not know it.

the world in armaments, or combine with the rest of the world in

tsarmament. Now, I have given you nine consequences of overindebtedness and the effort to get out of debt, starting with liquidation: (1) liquids

Gentlemen, there has been no liquidation since 1929. We are tion, (2) contraction, (3) deflation, 4) bankruptcies, (5) losses, (6)

more in debt now than we were then. That is the mystery of the unemployment, (7) pessimism, (8) hoarding, (9) high"real" interest.

depression. People think that they are getting out of debt, and they wonder why this depression should go on because there has

upparently been some liquidation. However, there has not been any, MONEY DEBTS AND REAL DEBTS

because we have allowed the dollar to swell

, and it is all because of this But if you think in terms of commodities instead of in terms of thinking in terms of a dollar, and assuming that a dollar is a dollar, money, if you think in terms of real things instead of simply the that it is the same thing from one time to another; it is that same old money symbols, you will find that the liquidation does not liquidate. winey illusion, and that is so important that I would like to dwell When liquidation causes a fall of prices, or rather is allowed to cause e it a little bit with respect to inflation, just as I have dealt with it

respect to deflation. I have written a book under the title, Money $1,000, and the consequence of millions of people like you paying their Lusion

, in which I tried to present this whole subject of stabilization debts, trying to pay them, is to enlarge the dollar, then at the end of a year, if you have paid off $300, and owe $700, each dollar of that In 1921, I think it was, I visited Germany to see whether they had $700 is not the original dollar; it has become a bigger dollar now. It the money illusion; at least that was one of my main objects, because is $900, or $1,000, or $1,100 in terms of the original dollars.

that was a case when the mark was falling very fast and when everyIt may even be that the very effort to pay debts will actually body in the United States knew it; even school boys knew that the enlarge the debts, because it enlarges the dollar.

Baek was falling, but the Germans did not know it, because they were

Mr. GOLDSBorough. They thought the prices were rising.
Professor Fisher. They simply thought in terms of commodities.

Prices were rising, the prices of wheat, sugar, and everything else, itself, and that is what has happened!

nad they sought the cause in the wheat, or the sugar, or in everything Professor Roman and I interrogated some 25 people in Germany; I

course, we did not count the professors of economics; they id not have any such idea.

that

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