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sarily decline? Until prices, wages, and rentals fell greatly would there not inevitably be dull business, unemployed labor, and idle factories?

But without tracing these consequences further, let us turn to the possible influence of the Federal Reserve System on business prosperity.

The Federal Reserve System has the power to bring prosperity to an end and to plunge the country--and perhaps the world, since the financial position of the United States is so dominant-into severe depression. Suppose it sells securities on the open market. The buyers of these securities write checks to pay for them. These checks on various banks throughout the country go to the Federal Reserve banks for the securities the latter have sold. The checks must be subtracted from the credit balances of the various member banks with the Federal Reserve banks. In other words, the reserves of the member banks are reduced and they must therefore reduce loans to their customers. If they attempt to increase their credits with the Federal Reserve banks through rediscounting, this can be discouraged by high rates of rediscount charged by the Federal Reserve banks. In practical effect the Federal Reserve banks are then drawing money out of circulation and burying it in their own vaults.

A sufficiently persistent policy of this sort must inevitably decrease the demand for goods and for labor and must bring dullness of trade, falling prices and unemployment. It is ridiculous to deny that a wholesale withdrawal of money and bank credit from the channels of trade would have an effect on business and on prices. Our Federal Reserve System has power to do such things to us. Do those in charge of it acknowledge that they possess such power and that they are responsible for exercising it wisely?

There is considerable evidence that members of the Federal Reserve Board have no real comprehnsion of their relation to the price level and to business. Let me quote here from testimony by Mr. Adolph C. Miller, a member of the Board, before the Committee on Banking and Currency of the House of Rep. resentatives, in May of 1928:

“ The CHAIRMAN. I notice this, Dr. Miller, that following the activities of the Board in the spring of 1923, the wholesale price level went down until, say, September of 1923, to about 97 or 98, which was followed by some irregularity later on in the year and in the early part of 1924, but in midsummer of 1924 the wholesale price level reached the low point of about 95. Was that lowering to that point of 95 the direct result of the activities that were taken by the Federal Reserve Board in the early part of 1923? “Dr. MILLER. I would say emphatically no; emphatically no.

I would say that prices were down at that time primarily because they went up so high in the previous period and that the whole movement of prices in this period was one toward the ascertainment of a new level. The prices themselves were, so to speak, finding their new level.”

Is it necessary to remark that prices are not alive and that they can not find their level as a woodchuck finds its hole? Monetary policies of inflation and deflation, including policies of central banks, do influence prices and do influence general business conditions.

If a majority of the members of the Federal Reserve Board held such opinicns as this, it is not surprising that they followed, in 1929, a depression-producing policy. It is not surprising that they did not heed-perhaps, they did not know of-the warning testimony of Dr. Gustav Cassel, internationally known Swedish economist, in May of 1928, before the same Banking and Currency Committee of the House of Representatives (just two days after Mr. Miller's testimony):

The CHAIRMAN. In connection with the practical situation that confronts us here now, we are in the midst of what has been termed a 'speculative situation.' Yesterday the Federal Reserve Bank of New York raised its rates. Brokers' loans were reported to have increased $150,000,000 in the report that was issued yesterday. Much attention is being directed to the volume of brokers' loans and its effect on the whole monetary situation.

"We would be very glad to have your opinion on that present situation, if you care to express it.

“Dr. CASSEL. Well, Mr. Chairman, I am very glad that you ask me this ques. tion, because it gives me an opportunity to show how the aim of checking this speculation, from the point of view of stabilizing the money of this country, is an cutside interest, involving the monetary policy in great difficulties. If you had not that speculative tendency in the New York Stock Exchange, the Federal Reserve banks here in this country, I understand, would be able to keep a 342 or 4 percent rate of discount. Now, there is this stock speculation, and to meet

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that the Federal reserve bank in New York feels it is obliged to raise the rate of discount to 412 percent. That is, I assume, not at all done for monetary purposes; that is a measure entirely outside of the normal province of the Federal Reserve System, which is to regulate the currency of the country; but there seems to be a popular demand that the Federal Reserve System should mend all difficulties arising in the country and particularly fulfill the function of keeping the speculators in New Ycrk within reasonable limits. I think that is unsound.

" It would be a great benefit to the country if some means could be devised by which it would be possible to limit speculation on the New York Stork Exchange without increasing the Federal Reserve bank's rates, because such increases may be very unwelcome. They may disturb the whole monetary policy, and it may have an effect on the general level of prices that will result in a depression in production in this country, followed by a decrease of employment, all only for the purpose of combating some speculators in New York."

Yet in 1929 the Federal Reserve banks not only sold securities on the open market but charged still higher rediscount rates than those of 1928 which Cassel had criticized, and higher rediscount rates than had been charged at any time since 1921. Were these high rates charged in a desperate attempt to break the stock market? The stock market, indeed, did break but so did business in general. And business has been depressed ever since.

A restriction of credit certainly must make for business depression if prices fall, unless and until production costs, such as wages and rentals, also fall. But credit restriction must bring business depression no less certainly if prices do not fall. For a decrease of means of purchase, imposed on dealers by bankers' restrictions, must certainly decrease the demand for goods. Who will venture to assert, then, that the sharp credit restriction by the Federal Reserve banks in 1929, had no repercussions on business? Will the members of the Federal Board make bold to tell us that sharp credit restriction had and could have no depressive effect on business? If so, why not restrict credit sharply all the time!

However, and regardless of the matter of justification for the high rediscount rates of 1929, a radical and sufficient reversal of policy at the first sign of dull business, before extended depression began to cause widespread failures, might well have brought us quickly back to prosperity. For a sufficient easing of credit and the purchasing of eligible securities in the open market would have increased purchasing power and would have tended to stimulate business

But what reason could we have to hope for a sufficiently radical and courageous reversal of policy from a Federal Reserve Board which does not admit that its policy is at all a controlling influence on the level of prices or on business? Some too slow and inadequate reversal of policy was indeed attempted, but in the first half of 1931, despite widespread depression, we find a tendency for the Federal Reserve banks again to dispose of securities and so to draw money into their vaults.

It is true that in 1932, at long last, the Federal Reserve System did follow for several months, a policy of heavy buying of United States Government securities. And because this did not bring rise of prices and restoration of prosperity, there are some who insist that such a policy is futile. The fact is that by 1932 the accumulating forces of depression were too great to be overcome except by a stronger policy. Dull business and falling prices were causing numerous failures. Farmers, and men in many other business could not pay their obligations to their banks, Banks were failing and, in failing, were thereby wiping out the purchasing power of their depositors. Money was being hoarded by banks as well as by individuals. Business men were afraid to borrow to buy goods. Sound banks which had loanable assets were afraid to lend except on the most unquestionable security. What wonder that all these forces were sufficient to offset, and more than offset, whaterer effects the open-market purchases of 1932 might otherwise have produced! But perhaps without those open-market purchases even worse disasters would have come upon us.

President Hoover had everything to gain by preventing or quickly ending the depression. That he did not insist, through his Secretary of the Treasury and the appointed members of the Federal Reserve Board, on the adoptiot of the necessary measures, can be explained only on the hypothesis that the principles involved were beyond his understanding. And so he has stoot, a


helpless and puzzled figure, amid the spreading devastation, from time to time supporting some inconsequential remedy, and finally seeing himself and his party overwhelmingly repudiated at the polls.

But let not the new administration be overconfident. We have no evidence of a real change of opinion on the part of the Federal Reserve Board. It may continue to follow a deflationary policy or (not much better) a policy which offers no help and lets the accumulating forces of the depression work themselves out to the bitter end. Or it may, after we have enjoyed a few years of renewed activity, again precipitate us into depression. In either case the ascendency of the Democrats will be short lived. For an outraged electorate, however little it may understand the financial causes of depression, will be likely to have little patience with an administration or a political party which cannot find any way out. To increase the volume of money and bank credit circulation in a way which some conservatives are pleased to criticize as “inflation,” may, indeed, bring a very small amount of temporary opposition to the administration's policy. But, as Frank R. Kent points out in his Political Behavior, “Prosperity absorbs all criticism." If a policy of definitely increasing circulating credit and currency leads to restoration of prosperity, the administration responsible for that policy will gain overwhelming popular support. Continued deflation, on the other hand, wil more unemployment, more ruin of debtors, more bank failures, and increasing discontent.

There may, even yet, be a possibility that a really courageous Federal Reserve policy could bring us out of the depression. But in view of the accumulation of depressive influence, definite cooperation from the United States Treasury may now be essential. Fear has become so ubiquitous among the banks that many of them are unwilling not only to lend but even to purchase securities which they would once have regarded as first class. But almost any banker would feel safe in purchasing bonds and notes of the United States. If, therefore, the Government would borrow extensively, i.e., sell bonds and short-term notes to the banks and spend the money and checking accounts so realized, in various public works and otherwise, the volume of purchasing would be increased and recovery would be very greatly promoted.

For the Government to sell its bonds to citizens, if thus it merely secures, for spending, money which the citizens would otherwise themselves spend, would not meet the need, for this would not increase total spending, would not increase the demand for goods, and so would not promote recovery. But to sell Government bonds to the banks and thereby to get, for spending, checking accounts which otherwise would not be in existence, or Federal Reserve notes which would otherwise not be issued at all, or, even money which would otherwise be kept as excess idle bank reserves, would really increase the volume of spending and would definitely stimulate business.

If the above is a correct view, then the constant insistence that the Federal Government balance the Budget (interpreted to mean that it shall not borrow) s altogether mistaken. On the contrary, the Government definitely should jorrow in order to facilitate the putting of new and additional purchasing power into circulation. When Government pays its civil servants or pays for iny sort of public works by funds raised by taxation, the purchasing power of he taxed citizens is reduced by as much as the purchasing power of the Govrnment is increased. In periods of prosperity this is as it should be. But it this time of acute depression it is desirable that Government spending be ncreased without compelling a corresponding decrease of expenditure by axpayers.

To those conservatives who object to such borrowing and spending by Govrnment, it should be pointed out that such borrowing was indulged in during 917, 1918, and 1919 and that business activity was pronounced during nearly ll of that period. If our financial conservatives insist that borrowing was hen done under the pressure of war, let it be replied that we now need to rage war against depression. If Government borrowing and spending stimuated business in the war period, it will also stimulate business now. And, nce we are rescued from the vicious circle of falling prices and business and ank failures, and from our depression psychology, the ordinary borrowing and pending of business, with proper stabilizing control from the Federal reserve ystem, should insure a continuance of prosperity.

But if, through such a policy, the new administration may expect to restore ormal business and to rescue those who are now hopelessly in debt, this expec

tation can be realized only if the Government borrowing policy is not balket by an unsympathetic Federal Reserve Board. For the Federal Reserve System might, if it chose, withdraw circulating medium from the business community into its own vaults, by high rediscount rates and by selling securities on the open market, even faster than it was advancing funds to a borrowing Govern ment. And, in view of the pronouncements and recent policy of the present Federal Reserve Board, there is no security against having any prosperityrestoring policy of the new administration rendered entirely nugatory by the Board, unless the President, through his power of removal, compels a right policy.

Those who have been responsible for Federal Reserve policy since 1929 are in no position to argue that the proposals here made are not “practical." These men obviously have not been able to devise any policy to prevent or to terminate the depression. They may, of course, argue that since they do not know how to prevent such calamities as we have suffered, therefore nobody knows. But, certainly, if control of our credit system has any significant relation to the problem--and there is overwhelming reason to believe it does then it is high time we began to follow a different kind of policy from the kind that the present Federal Reserve Board seems to have considered “ practical."

For the benefit of any who may think that the opinions of our usually conservative leading bankers are of especial weight in this matter or that : successful banker, is, ipso facto, an ideal choice for a position on the Federal Reserve Board, it may be worth while to contrast the requirements of central banking policy with the requirements of policy for the ordinary bank. In truth the requirements are so far different that experience in the successfu. management of the ordinary bank may be a definite disqualification for the management of a central bank or the control of Federal Reserve polics In case of threatened crisis and depression, the ordinary bank must mak its loans with unusual circumspection and must endeavor to get its resources into the most liquid possible form, in order that it may thereby be able to meet demands of its depositors and protect them against loss. But in the case of danger of crisis and depression, the business of a central bank or a central banking system should be to make loans at lower rates and more freely than before, to endeavor to put more money and checking accourt into circulation rather than to draw money into its own vaults, and so to prevent threatened depression from becoming actual and serious depression A prosperous banker, or a student of banking of the old school, might there fore be the one type of person who would be a dismal failure in the manage ment of central banking policy and might bring upon us just the kind calamity that we are now suffering.

And now we come to the sacred cow of American monetary policy, rin the gold standard. For the question is certain to be raised whether a de liberate policy of pumping more purchasing power into circulation and raising the price level will not necessitate going off the gold standard. For in the opinion of our more conservative financial advisors, it seems tha: however widely gold fluctuates in value, however great the ruin this fluent ation imposes on debtors who must pay back money of far more purchasing power than they borrowed, and however greatly insistence on a rapii appreciating gold standard increases unemployment and distress among the masses, nevertheless nothing must be done either to abandon the gold standar or to make it more stable. A proposal to require the Federal Reserve syste! to use its powers so as to restore the predepression price level and thereafte to keep it stable was contemptuously referred to by Mr. Hoover as a paposal for a “rubber dollar.” By implication, the present wildly gyratis: dollar is of constant or stable value, not a rubber dollar at all.

But as a matter of fact we can, if we so desire, bring up the price led restore prosperity and stabilize thereafter at this higher price level, wb yet maintaining the parity of all our money with gold. It is true that a period of rising prices in the United States might tend to a consideraboutflow of gold to foreign countries. Such an outflow of gold might help :promote recovery abroad as well as here. But any such outfiow of an can be stopped by an embargo on gold exports. And such an embargo, it is accompanies a definite increase of the domestic price level, will at er raise the domestic price of any farm crop having an international mark and a world price, such as wheat or cotton.

For when our higher domestic prices cause Americans to look abroad for lower-priced goods of various sorts, they can not pay for these goods through an exportation of gold and must attempt to do so through the purchase of drafts on foreign banking centers. These drafts will inevitably rise in price and thus the price which exporters can secure on the drafts (drawn on foreign purchasers of wheat or corn or cotton) they sell, must rise. Thus, an increase of domestic prices, coupled with prohibition of gold exports, must raise the prices in American dollars of the farmers' products. Perhaps as a long-run policy it would be well to abandon the idea of a fixed weight of gold back of the dollar and adopt a policy of stabilizing the purchasing power of the dollar through open-market purchases and sales of securities and gold.

Credit and currency expansion is the right road to farm relief. Such expansion will remedy unemployment, draw back into the cities at least such surplus agricultural labor as the depression has driven to the farms, and raise the prices of agricultural products. Various marketing costs, such as transportation rates, which have not fallen as much as prices generally have fallen, also will not rise so much, and, therefore, a correspondingly larger part of the price rise will go to farmers.

We have gold enough now to support any reasonable amount of bank credit and to bring back the price level to something like that of the years 192+29, while still maintaining domestically the gold standard. If we are unwilling to leave the gold standard, then a Presidential embargo on gold shipments ought certainly to be possible in any period of appreciation of the value of gold. Otherwise we are at the mercy of the rest of the world in case of any future "World scramble” for gold. For any such condition would, by causing tremendous gold exports, compel us, if we would remain on the gold standard, to restrict our credit sharply in order to maintain redemption, and such credit restriction would again precipitate crisis and severe depression.

But while we ought to have some adequate method of protecting ourselves from deflation and business depression in case of any future “world scramble” for gold, it appears that in the case of this particular “gold scramble we have been not so much sinned against as sinning. For years, after the Great War, our financial position and strength was probably the greatest in the world. The policy of our Federal Reserve System was probably a dominant influence on the level of prices not only in the United States but in other gold-standard countries. The sharp credit restriction by our Federal Reserve banks in 1929 undoubtedly had its repercussions in foreign countries. There was, in 1929 and 1930, a considerable flow of gold to the United States. In a number of the foreign countries the choice seemed to be whether to lose the gold reserves of their central banks, to restrict credit sharply enough and bring prices down enough, with accompanying more acute business depression, so as to prevent loss of these gold reserves, or to go off of the gold standard. For a time, most of them suffered credit restriction and increasing business depression. But, finally, many of them gave up the struggle to maintain the gold standard under such difficulties and ceased to attempt redeeming their money and bank deposits in gold. But is it not a reasonable conclusion that the credit restriction, yusiness depression, and falling prices suffered in Europe since 1929 have been jue, at least in considerable measure, to the wide-spreading influence of our own inept central banking policy? If this conclusion is a right one, then the verturn of the labor cabinet in England, the rise of Hitlerism in Germany, ind perhaps other events of more or less ominous import, may be the unforeseen consequences of, the results of a discontent really engendered by, a policy of our Federal Reserve Board entered upon with not the slightest premonition of its likely political consequences as well as with no apparent comprehension of ts purely economic significance.

Whatever else we do, we must institute such control of our money and anking mechanism that it cannot be used to bring us again to such distresses is we are now suffering. We are literally at the mercy-as to our fortunes, vur jobs, the care and education of our children-of a Federal Reserve Board which has the power to bring on business depression at almost any time, which has shown that it does not know how to prevent such depression, and which has evinced no support for legislation by Congress that would direct he Board to follow a policy of stabilizing instead of a policy of unstabilizing usiness and the general price level. Will the new administration, like the old, ve guided by the advice of men who have approved of the Federal Reserve policy since 1929 and who, if they offer any criticism at all, content themselves

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