Essor FISHER. I would like, if this second chart goes in, to ave to the record with it this statement, that I think the rela west buld have been made better, truer, and more fully in agreement with the other chart in some of the details if he had used a charting for both elements and had put it on the "ratio as this first one has been done. He has two arithmetica! and they differ, which fact throws some of the comparisions at säter.

When prices are falling, the dollar is rising. It is the same thing at the general level of prices has been cut in two as to say the purchasing power of the dollar has been doubled, and vice

So we can shift from the terminology of prices into the Lommelegy of purchasing power and, talking in terms of the change fols. we will be less likely to be confused than when we talk in ens z prices. People forget the money element, notwithstanding es money is used so universally in everything that they think they a ese out. They talk about the price of wheat, and they is that they are talking about wheat only, but the price of wheat sso nazy dollars and cents, and the dollars are just as important in ess the wheat is, and the dollar is applied not only to wheat Mar 30 everything.

Y course. I do not need to talk about what an index number is, who that. I have written a book on the Making of Index Num

which has gone into that fully, and I think it is demonstrated Here at an index number is a valuable, and, under proper conditions, Stavese instrument of measure. This is now universally recog 1.60 37 20 so than several years ago. In fact, it is used now too vas. y. Very often the wrong kind of an index number is used, past tense people have now got faith in index numbers that they did nec 18e to have.

1. Pretz. Whst, in your opinion, Doctor, is the best index sumber

Pressor FISHER. I would say that the index number of the United States Bureau of Labor, their index number of wholesale prices is probably the best. I would say that the index numbers of wholesale prices are more accurately worked out than index numbers of retail prices or of stocks and bonds or anything else. The techwe of working out index numbers of wholesale prices has developed ugh we generations, until now it is a very accurately measured

I think that, if I were to criticize the United States Bureau of Statistics index at all, I would say that it has too many rather Ser too few commodities. It had been criticized for giving too weight to farm products and food, but when they tried to meet rism, they should have met it partly by taking some things Ser than simply putting in 200 more commodities, because now have so many commodities, some of which represent prices reve too sluggishly to be of much value.

amy own Index Number, published weekly. It was the blished weekly. It has 120 commodities wholesale. I do not collect the figures myself, but get them from the wess Dun's Review, and the Journal of Commerce, and I by good critic who thinks mine is the best index; yet I

s too few commodities; but I can not get it out promptly * 8 g very many more than that.

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.

Now, the sixth consequence is shutdown in industry, for in a capitalistic civilization it is the profit taker who decides whether to shut down or open up, and capitalistic civilization really means a profit civilization-that is all it means. It means that the leadership and the decision is in the hands of the profit taker, and when the profit taker finds he does not have profits, and that the more he runs his business the more he loses, he will shut down. That means unemployment, it means a reduction in production, it means a reduction in trade and a reduction in employment.

This is not theory, either, altogether; it has been demonstrated by careful studies. I am sorry that I can not lay my hands on a study made by the International Labor Office at Geneva, in which some 40 nations were studied in reference to this, and it was found practically universal that during falling prices there was more unemployment, and that during rising prices there was less unemployment. It is good theory; it is good fact.

Here is what I found myself, one of the studies that I made some years ago. It is not up to date; it ends in 1926, but here is a chart that shows-and this relates to bankruptcies, not unemployment.

Here is another study in which I have shown that the volume of trade fluctuates with changes in the price level, and here I have a chart showing the employment in relation to changes in the price level. There is a good deal that might be said in further explanation about that price level change, if there were time, but it is all fully explained in the article, if anybody wants to examine it. I do not ask to have it in the record, unless you want that especially but there can absolutely be no question, and I do not think there is an authority in statistics or economics in the world who will deny, that there is s very strong relationship between falling prices and unemployment, and it comes right out of the theories, as I have said.

Here is a quotation from the International Labor Office. This will perhaps sum up the whole thing.

Fluctuations in the purchasing power of gold are indisputably a cause of unemployment.

That is from a report on unemployment and monetary fluctuations, published in the May and June issues of the International Labor Review, 1929.

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

Mr. PRALL. If these producers and manufacturers, during the good years, the profitable years, were to lay a surplus aside, and if they were to use that during the poor years, then the situation would not be as frequent, would it?

Professor FISHER. No; it would help that specific trouble of unemployment, and would mitigate the evils of the depression, but it would not go far to keep a stable price level and general prosperity.

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 unemployed, it does not require any demonstration that the human moods will turn from sunshine to gloom; not only emotional pes simism, but intellectual distress as they see concerns going to the wall and they wonder what is going to happen next to them or to somebody else.

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

banks, or get people to pay their loans, and so it goes on and every dollar hoarded means, in the end, embarrassment of about $10 to to the banks' deposits.

So, this eighth factor, of hoarding, reenforces the second, of cou traction. It is in fact the same thing from another point of view. Then, the ninth point is change in the rate of interest. The rate of interest during a depression is nominally low, but that is again one of those tricks due to the money illusion. You will always get tricked if you think in terms of money. You can not think in terms of money without getting fooled, and many a person thinks the rate of interest is low when it is really high, because the fall in prices adds to the burden of interest. Take a farmer who thinks in terms of wheat. If he pays 5 per cent, and prices are falling 4 per cent per annum, he is really paying 9 per cent; sometimes during the depression the real rate of interest is over 50 per cent, but people do not know it.

Now, I have given you nine consequences of overindebtedness and the effort to get out of debt, starting with liquidation: (1) liquidstion, (2) contraction, (3) deflation, (4) bankruptcies, (5) losses, 6 unemployment, (7) pessimism, (8) hoarding, (9) high "real" interest.

MONEY DEBTS AND REAL DEBTS

But if you think in terms of commodities instead of in terms of money, if you think in terms of real things instead of simply the money symbols, you will find that the liquidation does not liquidate. When liquidation causes a fall of prices, or rather is allowed to cause it, it is really causing a swelling of the dollar, and if your debt is $1,000, and the consequence of millions of people like you paying their 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 $700 is not the original dollar; it has become a bigger dollar now. It is $900, or $1,000, or $1,100 in terms of the original dollars.

It may even be that the very effort to pay debts will actually enlarge the debts, because it enlarges the dollar.

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 itself, and that is what has happened!

Mr. BUSBY. Enlarges your debt in relation to commodity prices? Professor FISHER. Yes; in terms of wheat, cotton, or any other commodity. It is not an accident that during a depression people 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 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 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 theater is doing the same thing jams them all in all the tighter. If 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 dren; you can not pin the fault on the individual, but the crowd itself