I respectfully suggest that the Government should cause to be retired and canceled the stockholdings of the member banks, should abolish the Federal Reserve Board and Advisory Council, and make each district Federal reserve bank a separate and independent bank under local control. The surplus of the system, which, under the terms of the act, belongs to the Government as a franchise tax, is now considerably in excess of its capital stock and it is sufficient for the operation of a legitimate banking system. This system should be operated as a banking system purely, and for all banks, both State and national.

The Congress should immediately ascertain the true volume of money that is now in actual circulation and the volume of money required to restore and maintain the price and wage level of 1920; it should cause such volume of money to be put in circulation as quickly as possible and should take the necessary steps to insure that this volume is kept in circulation and is increased with the increase in population and the needs of the people.

The Treasury estimate of the volume of money in circulation makes no deduction for our money that circulates in other countries and for money lost or destroyed by fire during the last 150 years, except $1,000,000 destroyed by the Chicago fire. The estimated volume in circulation is grossly overstated, and it should be more definitely ascertained.

It cannot be disputed that the general price and wage level in any country depends wholly upon the volume of money in circulation, provided a tariff is levied sufficiently high to protect this level against the cheap products of countries having cheaper moneys. That, as stated by John Stuart Mill, is the " key" to the whole money question, and there can be no understanding of that question without a thorough understanding of the fundamental principle.

INFLATION AND DEFLATION

The 1920 price and wage level is a just one to both creditor and debtor, because the greater part of our bonded and other indebtedness was incurred when the value of the dollar was substantially at that level. We then had what the "money changers" regard as violent inflation; we now admittedly have deflation. The difference between conditions then and now represents the difference between inflation and deflation. There were then no bread lines. no farm problems, no unbalanced budgets, no insolvent debtors, no bank failures, and no overproduction. Indeed, the Federal reserve authorities complained (as shown in their official minutes of the fatal meeting of May 15, 1920) that there was not sufficient production and that it was necessary to bring down values in order to increase production. History records the fact that the greatest advancement in the arts and in our civilization have been during inflationary periods.

Our national wealth in 1919-20 was estimated at about 500 billion dollars. our debts at about 150 billion, and our national income at about 95 billion. I have seen no recent estimate of our national wealth, but on the basis of the present value on the dollar it could not exceed 150 billion. Our national indebtedness is estimated at about 200 billion, our national income at about 35 billion, and our bill for taxes and interest at about the same figure. Our inherent wealth is the same; we have the same land, factories, and transportation facilities that we then had. The difference in the situation is due wholly to the appreciation of the dollar-the yardstick of value.

On the basis of the present value of the dollar we are obviously insolvent as a people and as a nation. It is obvious, too, that the only way we can restore our solvency is by cheapening the dollar-or, stated conversey, by increasing values and prices and wages-and this can only be accomplished by getting more dollars in circulation. There is no other way and no possible substitute.

It is generally conceded that the banks should maintain a minimum cash reserve of 10 percent of their deposits. The 19,000 National and State banks of the United States have an average cash reserve of only about 1 per cent. The last report of the Comptroller of the Currency shows that the deposit lisbilities of all the banks of the United States are about 40 billion dollars and they they have in their vaults of cash and currency of all kinds, including Federal reserve notes, less than 800 million-which is less than 1 per cent. (NOTE. I apologize to the committee for not stating these figures exact. This argument has been prepared at my plantation in Mississippi, and it has been

necessary for me to get it up rather hurriendly in order to reach the clerk in time to be included in the published report of the hearings.)

If all of the depositors of all the banks had called for their money when the banks were recently reopened, every one of them would have had to close again within 3 days; all of them together could have paid only 1 percent. The President and his Secretary of the Treasury struck down the helpless and unfortunate victim and not the designing and guilty culprit-the Federal Reserve System.

The banks that rendered the greatest service to their customers as a rule had the greatest amount of uncollectible paper and the least amount of cash, and many of those banks have not been permitted to reopen-particularly if. they are State banks. Many of these unfortunate bankers sacrificed themselves instead of their customers, with the result that many of them are suicides, or under indictment and in disgrace. Behind them and their bankrupt banks stand a horde of bankrupt customers who have been bankrupted because they, too, have sought to contribute to the production of goods and to the public welfare and have borrowed money for those purposes.

Please permit me to observe that it is not necessary to bring pressure to bear to force the State banks to join the Federal Reserve System if the System is made attractive to the average banker-if it is by law transformed from a tyrannical master to a faithful servant as it was originally intended to be.

FREE THE STATES

The Congress should immediately repeal the 10 percent tax against State bank notes in order that the States may protect themselves against such a catastrophe as we now have. If the Congress provides a sufficient volume of money and continues to perform that duty faithfully and intelligently and with due regard to the interest of the great masses of the people, there will be no occasion for the people of the States to employ this power, but it should nevertheless exist as a protection to them.

We had four State banks with power to issue currency at the time the national constitution was written and this system prevailed up to 1866 when it was stricken down by the 10 percent tax. At that time there were more than 1,200 State banks with power to issue currency, and the national banking system had only recently been adopted. The change was made when the South was prostrate and not represented in the Congress. Nevertheless, the act passed the Lower House of Congress by a majority of only one vote-or rather, there was a tie vote-and the deciding vote was cast by the Speaker. It was sustained by the Supreme Court when there were only 8 members of the Court, and 3 of them dissented in an unanswerable argument.

The history of the State currency system is a creditable one. We had only 2 major depressions comparable to those of 1920 and 1930, and 1 of those resulted from Jackson's veto of the charter of the Second Bank of the United States. With the exception of the banks of three or four States, their currency systems were sound and there were no bank failures of any consequence. There were fewer bank failures during the almost 100 years that we had the State system, than there have been in the last 18 months under our present national system. The repeal of the 10 percent tax tax against State bank notes was one of the original cardinal principles of the Democratic Party even as late as the platform upon which Grover Cleveland was elected the second time.

ALTERNATIVE REMEDIES

If the present situation is the legitimate fruit of capitalism, if capitalism means money princes and kings for the "money changers" and pauperism and slavery for the masses of the people, then it must be destroyed; and almost any substitute is better than present-day capitalism.

I suggest as alternative remedies: That we have a "Jubilee Year" such as the Jews had every 50 years; that the Congress cause to be canceled all mortgaged debts and bonds and thereby give the debtor a new deal" and a new chance in life; that a graduated inheritance tax be imposed upon all gifts and inheritances that will limit the inheritance to $1,000,000. It is my information that the French rate is 99 percent on inheritances of more than $1,000,000. I respectfully suggest that the rate should be 99 percent on inheritances in

excess of $500,000 and that the proceeds of the tax should be divided equitably between the National and State Governments. This is substantially the method that the ancient civilizations of Greece and Rome adopted and the adoption of which prolonged the life of both of these empires.

CONCLUSION

If either of the remedies here proposed is adopted, the problems that now face the President, the Congress, and the people will melt away like thin mist. The Budgets of the National and State Governments will be quickly balanced, • the bread lines will disappear, the crime wave will end, and the buying power and solvency of the people will be restored, and they will be prosperous and happy. There are no other remedies by which these desired ends can be accom plished. There are no other roads out of this terrible morass except revolution. One or the other of these remedies must be adopted cr revolution is inevitable. I say this as a firm believer in our Constitution and in the capitalistic system and as a lifelong Democrat. President Roosevelt is reported to have stated to the farm representatives that he proposed to cause to be put in circulation a sufficient volume of money to give every man a job who desired it. This can be done; and if it is done, he will go down in history as one of our greatest Presidents.

His record to date has been disappointing. Everything that he and the Congress have done has been deflationary. He apparently clings to the gold standard and opposes the remonetization of silver. He has delegated to the Federal Reserve management the power to relieve the very depression that it created. With all of the hullabaloo about increasing the currency, they put in circulation $9,471,000, or 7 cents per capita, in pursuance of the Emergency Act. But they withdrew from circulation during the period between March 15 and 22, $376,460,000, or about $3 per capita.

He has caused to be closed up a large number of banks, because they haven't enough of the small amount of money in circulation to pay their depositors, thereby further deflating credit. The Reconstruction Finance Corporation is aiding in the reorganization of these closed banks on condition that they nationalize. He has been appointed an autocrat to deflate the helpless Government employees and pensioners. He advocates a farm-relief measure that be admits is an experiment, when the farmer is in no condition for further experiments and there is no need for further experimentation.

This is not a "new deal"; it is the same old Hoover deal dressed up differently. It does not help the forgotten man." This is more deflation and not less, and the more deflation we have the worse conditions will become. I repeat, there is and can be no relief without inflation-or "reflation ", if you prefer that word.

THIS DEPRESSION AND HOW TO END IT

(By S. A. Baldus)

PART I. DEPRESSION STREET THE DIAGNOSIS

Let it be understood at the outset that I am not an economist-that is to say, I belong to no school; to no group; to no party. I have no pet theories to expound; no hereditary prejudices to defend; no personal interests to exploit; no propaganda to promote; no axes to grind. I am merely a student of economics; for 30 years it has been my hobby. I am what might be called an independent economic thinker; unorthodox perhaps, but, let us hope, not a heretic. I do my own thinking, my own reflecting, my own reasoning, relentlessly pursuing my ratiocinations wherever they may lead; but always adhering to the fundamental principles; and letting the chips fall where they may.

It is these things that have persuaded me into believing that perhaps the independent analysis I have made, and the conclusions I have arrived at with regard to the present economic and financial situation, may have enough merit in them to earn for them your thoughtful consideration; and I beg leave respectfully to submit them to you today.

I come to you, gentlemen, with a modest plan and some specifications, not for a new system but how to save the old one, which, despite its many excesses and abuses, has served us rather well in past years.

Please hear me to the end with patience and indulgence and without interruptions, and if you do, I'll promise you that you will hear at least a few things you may never have heard before; things that I hope will direct your minds into entirely new channels of thought. I'll be as brief as I can. I will confine myself to the matter immediately before us; and exclude everything not vital or germane to the subject.

THE COUNTRY IS SICK

It is generally admitted that our country is economically and financially sick-gravely ill. On that one point there seems to be universal agreement. But as regards the precise nature of the illness from which the patient is suffering, what caused it, and what can or must be done about it, there seems to be a wide divergence of opinion.

Before we can hope to restore him to complete health, we must endeavor to determine what ails the patient, and what caused his malady, which seems to be not only physical but mental and moral as well.

What you have done in the past few weeks has been very fine, and is very encouraging; but do not deceive yourselves. The patient is still very sick, and will be confined to his bed for some time to come. He has responded splendidly to the change of doctors, and the new nurses, and the so different treatment you are giving him. You have changed his bed linens-sheets and pillows; you have given him a new bedpan. You are giving him daily alcohol rubs. You are allowing him to sit up for a little while each day, propped up with pillows. You've even rolled into the sick room a nice invalid's wheel chair; and you encourage him by pointing to it ever so often, and telling him that he'll soon be able to sit in it, and wheel himself out on the porch and into the sunshine.

Oh, yes. All this and maybe more. But the chart at the foot of his bed tells a different story. The patient is by no means out of danger. He is far from being convalescent; and his ultimate recovery is by no means certain. He has made some progress within recent weeks-but the possibility of a relapse bangs menacingly over him. Let us diagnose his illness. Let us study the history of his case.

WHAT'S WRONG

On August 21, 1932, Roger W. Babson, apostle of optimism, and considered by many as an economic major prophet, in an interview said that "American business is climbing out of the valley of depression and should be back to normal by 1934."

Now, this is too long to wait. We simply can't wait another year or two. Something must be done, and that without delay.

But what?

That's the question I'm going to try to answer, and I hope you will pardon me if I become a trifle pedagogic. The seriousness of the subject, and the gravity of the situation, demand it.

Without any further waste of words-what ails the country? What's happened? What's gone wrong? What has brought the car of commerce to a stop; and why do the transports of trade lie idle? What caused the closing of mills and mines, factories and shops? What brought about the collapse in the stock market-the tremendous drop in stock prices? The shrinkage in real estate values? In farm values? How can we explain the piling up of frozen assets? The thousands of bank failures? The billions of losses to the depositors? The interest defaults on bonds, notes, and mortgages? The tax delinquencies? The bankruptcies, foreclosures, receiverships? The ruination of millions of investors, and speculators alike? What swept away the savings of millions of men and women? What shattered the faith and smashed the confidence of the people?

THE ANSWER

To all these questions there is but one answer. All our present economic troubles and financial difficulties are the cumulative result and necessary culmi

nation of a prolonged orgy of wild and reckless inflation. There is one fundamental cause-primary, immediate, and ultimate-that explains why the nation is economically sick and financially in a critical and deplorable condition. It can be summarized in the one word-" inflation."

For 30 years I've been a student of economics, and all our national problems. For 30 years I've watched the economic and financial developments of our country; and I've written hundreds of editorials and articles, pamphlets, and even a book, exposing the fundamental unsoundness of our system; stressing its underlying fallacies; condemning its abuses and excesses; excoriating the falsity of our logic; pointing out the error of our ways; and warning the country that there is bound to be a day of reckoning-that a debacle is inevitable.

More than 20 years ago I predicted the utter collapse of our economic and financial system. My guess was that it would come around A.D. 1915. But the war intervened, and temporarily retarded the current of events that lead inevitably and calculably to disaster.

The war, furthermore, gave us a new lease on life; and incidentally taught us a few more inflation tricks, which enabled us, by sundry artifices, devices. and deceptions, to postpone the day of reckoning a while longer. And we succeeded in doing this until towards the end of 1928. Then the depression began to make itself felt. The culmination came in October 1929, when the stock market collapsed; and "O, what a fall was there, my countrymen!" Inflation is the root of all our present troubles. Gentlemen, I've written an entire book on and around the subject of inflation. Naturally, I can't tell you all that's in that book in a few minutes and I'll not attempt it. I can't give you all my computations and reasoning on which my conclusions are based. But I'll try to tell you in as few words as possible just what inflation means, and what bearing it has on our present difficulties and problems.

CORPORATE INFLATION

Definitely speaking, this depression did not come suddenly upon us; nor out of a clear sky; it began just 32 years ago, or, to be accurate, it began April 1, 1901, when the United States Steel Corporation was organized, and its promotors dumped into the speculative market an issue of approximately $1,000,000,000 of water stock-$1,000,000,000 of so-called "securities "behind which there were absolutely no assets; created by a stroke of the pen, out of nothing: $1,000,000,000 of fictitious "wealth" and on which nonexisting "wealth" the public has been compelled to pay interest ever since.

The story of the organization of this cormorant corporation is a matter of record, from which I need give only a few data.

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Among the 10 or 12 competing companies consolidated into the U.S. Steel Corporation was the National Tube Co., operating 17 mills. Mr. J. Pierpont Morgan had employed Julian Kennedy, a capable engineer of long experience in' the construction and operation of steel works, both in America and Europe and Asia," to make an estimate of the value of the properties. Mr. Kennedy reported to Mr. Morgan that the actual value of the National Tube Co.'s plants did not exceed $19,000,000. In spite of this fair valuation, Mr. Morgan capitalized these plants at $80,000,000.

(Parenthetically I may say in passing, that Mr. Morgan, for his "valued services," received as compensation securities of this concern aggregating $20,000,000, or one million more than the total value of all the 17 tube plants.) Another concern taken into the combine was the Federal Steel Co., whose actual property was estimated worth $33,000,000. Yet $200,000,000 of securities were issued against it.

Against the properties of the Carnegie Co., whose actual value its owner, Mr. Andrew Carnegie, had sworn did not exceed $75,610,104.06, the United States Steel Corporation issued $492,000,000 of its securities.

For every $100 of actual value of the American Steel and Wire Co. the report shows that $528.20 of securities were issued. And so on.

All other corporations, all consolidations, combines, mergers, etc., during the past 32 years were "put over" precisely in this same fashion. Plant values and actual investment were discarded as a basis for securities issues. The sky was the limit.