In the first place, money is a medium of exchange created and controlled by the Government. In the next place, the Government provides machinery in the form of banks to deal in its money and sets up rules and regulations for control and invites the people to make use of same. Then it would seem reasonable that the Government assume full resopnsibility for the proper management and safety of the banks or withdraw from what is so often a mere sham and create drastic laws whereby individual responsibility is held strictly accountable, but this would not eradicate fear from the minds of the depositors, so that is out. Granting, then, that the function is one of Government responsibility, let us proceed to the method. In the first place all banks, State and National, should be required to be members of the Federal Reserve System. In the next place, this systein should be charged with rigid examination of all such member banks and be responsible to the public for solvency. A bank liquidating corporation should be created. This corporation should assist any member bank if for any reason its assets should become temporarily frozen and aid in liquidating such assets so that the funds may be returned. Or if it would appear that the responsibility of the Government through its supervision had allowed a bank to become insolvent with no hope that its trouble may be overcome, let the bank be closed and taken over by the liquidating corporation and the depositors be immediately paid in full and the liquidating corporation take all the time necessary to liquidate the assets so as to avoid the losses involved in present-day hasty liquidation. This, together with stockholder liability, should practically assure the liquidating corporation against loss. To this might be added a capital or deposit tax to be paid to the liquidating corporation by each member bank. The system in itself, properly supervised, should practically protect the liquidating corporation against loss and should make a tax unnecessary, having in mind that the Government might as readily assume deficits in this department of government as well as others, especially in so vital a matter. Something more could be said about a condition that has existed with many banks throughout this depression, i. e., refusal to make loans and the maintaining in some instances of nearly 100 percent liquidity. Authorities could be set up in each Federal Reserve bank district to control this condition, but if the foregoing provisions, relating first to the job and second to the savings, are in effect and fear is thus eradicated from the minds of the people, a condition may never arise causing the banks to also fear and refuse to loan. Also, that we may never again experience an inflation in any line of business such as brought about the crash of the stock market in October 1929, empower the Federal Reserve bank in each district, subject to review by the Federal Reserve Board, to fix a proper proration and diversification of loans with respect to the entire capital, surplus, profits, and deposits, and when any one line of business has absorbed its permitted percentage, loans for that particular division of business to be curtailed or reduced in individual amounts and spread to a greater number of borrowers in the same division. This would permit the interest rate to remain normal. The arbitrary raising of the interest rate to discourage speculation in the stock market was unsound; it did not discourage speculation but it did penalize other legitimate and uninflated lines of business. It is often true in highly competitive business that the fraction of a percent on the interest rate is the difference between profit or loss to the concern. The interests of the people as a whole are once again the dominating issues of government. Expanding this thought of Federal Reserve bank authority I propose that the Federal Reserve bank of each district become the hub of all the banks of the district, the relationship of the member banks being very much akin to that of branch banks. This provision would give banking all the benefits of branch organization devoid of private monopoly. Banking should be operated to serve the people rather than for private profit. I am not an advocate of present-day branch banking. I believe we should not only conserve but encourage individual initiative and effort as the most priceless heritage of our country. I would maintain the unit bank, but if necessary, go so far as to nominate one person in each bank directly responsible to the Federal Reserve bank. The Federal Reserve Board to be the supreme authority and final appeal. These two issues, "the job" and "the savings", must be treated as one problem. The proposals are not impractical theories but sound and scientific principles that can be expanded from present basic standards. We conserve all we have thus far attained and build upon it as a sure foundation for our further progress in our struggle in behalf of the rights of man. The subjects covered are so broad in their general application that the foregoing cannot be considered more than an introductory outline. I make the assertion that my position on these issues cannot be successfully refuted and would welcome the opportunity to appear before your committee for an exhaustive examination of my views. I feel impelled to submit this for your consideration at this time, desiring to be helpful in the solution of some of our difficult problems. In November last I wrote a letter to the President embodying the views I have outlined herein. STATEMENT OF WILLIAM TRUFANT FOSTER, OF NEWTON, Mass. All proposals for the solution of our economic problems should be related to our chief economic aim. Our chief aim is the restoration of our volume of production and employment. Nothing that we can do on paper with statistics of debts, taxes, budgets gold reserves, hours of labor, and the rest, is of much avail, unless the result is an increased annual output of real wealth to the value of at least 30 billion dollars-real wealth which we are now losing solely because we are not using our available productive resources, human and material. The restoration of production and employment requires nothing but an adequate flow of purchasing power to the 90 per cent of our consumers who are eager to buy more, but who lack the buying power. Consumption regulates production. Consumption therefore regulates employment. All that business needs is a buyer. Even in the depths of this depression, abundant credit is available for the production of anything for which there is a market. The beer business, at the moment, is the best-known example. All producers are eager to increase pay rolls and production. They will do so the moment expansion is justified by consumer demand. The necessary flow of consumer purchasing power does not come about as a result of natural law. It does not come about at all, in a period of depres sion, as long as we rely on each rugged individual. For 3 years we have waited, in vain, for private enterprise to put the necessary currency and credit into circulation. When private enterprise fails, public enterprise is our only resources. We can restore consumer purchasing power by collective action, and in no other way. Collective action means, necessarily, action by the Federal Government, for the Federal Government is the only agency which represents all of us, the only agency which is entrusted by the Constitution with the power to regulate the currency, the only agency which has had sufficent power, every day of this depression, to end the depression by placing adequate buying power in consumer's hands. Some ways of distributing this buying power are better than other ways Any way is better than no way. The way which will yield the greatest value, dollar for dollar, is for the Federal Government to make available to the States, sufficient funds to re store education. The present scuttling of the schools-now Nation-wide and daily becoming worse in our hysterical demand for tax cutting at any costwill leave the deepest scar, when this depression is over. We are making our children pay the heaviest penalties for the mistakes of their elders. We are balancing our budgets with unbalanced schools. The damage can never be repaired: no 10-year-old child will ever be 10 years old again. Moreover, for the purpose of sustaining the morale of the Nation, education is more needed than ever before. Closing our schools because there is a depression is like closing our hospitals because there is an epidemic. Another way of getting the needed buying power into pay envelopes is through the construction of needed public works. This method was all but universally favored 5 years ago. It was advocated by Mr. Hoover, Mr. Coolidge, and Mr. Mellon. It was made a plank in the platform of the Democrate Party. It was indorsed by the annual conference of governors and by the American Federation of Labor. It has been approved by most economists for a generation. It is just as sound a policy today as it was before men became hysterical. Still another way of achieving the purpose is through loans for self-liquidating projects. Most valuable to the people of all such projects are the rebuilding of city slums. In pursuing this policy, the Government should be aggressive, not hesitant; and it should make funds available at cost, not insist on 5% percent interest. Its aims should be, not to make money, but to get buying power into circulation quickly in connection with the creation of wealth. Insofar as dwellings, bridges, harbors, roads, power plants-and, for that matter, all public works are created by the use of labor and materials which otherwise would be wasted, they cost the country nothing, no matter what financial figuring has to be done on pieces of paper. A more immediate emergency means of putting men and money to work is through reforestation. This plan has great advantages; it can take idle men promptly out of our congested centers of population; it can provide jobs for which any able-bodied man is equipped; it can take marginal lands out of cultivation; it can prevent floods; and it can become, with the growth of the forests, partly self-liquidating. As another spur to economic recovery we should adopt a policy which gives reasonable expectation of a settlement of foreign debts. The United States has persistently refused either to cancel the foreign debts, or to establish conditions under which the debts can be paid. If the decision is made to try to collect the debts, the United States must buy more abroad or sell less. It must either lower its own tariffs or restrict its own exports. I faver lowering of tariffs. The best course for both creditors and debtors is to make it possible for debtors to meet their obligations. But many persons in this country are loudly crying, "Buy American!" and just as loudly crying, "Collect every dollar of the foreign debt." We can take one of these courses or the other. We cannot take both. The way the foreign-debt question is settled, however, is relatively unimportant. The paramount need is that it should be settled and settled quickly. The national debt should be increased as far as is necessary to restore employment and production. An addition of many billions of dollars of national debt, incurred in achieving that aim, need not be harmful. When we have increased our annual output of real wealth to the value of $30,000,000, we have created the means of paying our debts. All debts and all taxes are paid in real wealth, insofar as they ever are paid. They never will be paid in this country unless the Government boldly puts into circulation enough purchasing power to bring about a sustained rise in the commodity price level and in the volume of production. In the future we must prevent the oversaving and the underspending which are the chief causes of this depression. We can most easily prevent oversaving by higher taxes on large incomes, on profits, and on inheritances, and by the elimination of tax-exempt securities. These measures will tend to sustain consumer buying. They are demanded by arithmetic, no less than by social justice. It is impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad cars; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do-to protect them from the results of their own folly-that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not "soaking the rich"; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not enjoy at the present moment. Still further to sustain consumer buying, and therefore prosperity, we should adopt some form of employment insurance and some form of health insurance. Both must be compulsory, or else fail to reach most of those who are in greatest need of such protection. We should also sustain consumer buying by protecting the savings of consumers. Toward that end, we should bring all banks-including what are now State banks and private banks-under one Federal system, with uniform regulation, inspection, accounting, and reporting; and we should then set up a sufficient fund to guarantee all deposits. To this protection of consumer savings, we should add protection by means of Federal regulation of all security issues and Federal regulation of stock exchanges. We should deny each State the inalienable right of having as many fraudulent issues and as many bank failures as it pleases. Once we have recovered our lost volume of employment and production, and largely restored the values of the assets of banks and insurance companies, in connection with a sustained, steady rise in the commodity price level, we should then make a stable commodity price level the conscious and avowed aim of Government fiscal policy. In pursuit of this aim, and the further aim of maintaining a market at par for all Federal Government securities, the Federal Reserve System and the Treasury Department should cooperate, as they have not cooperated in the past. These aims cannot be achieved, however, without long-range planning of public works, Federal, State, and local. The main purpose of such planning should be to increase public payments to consumers, as soon as indexes of prices and employment show the beginnings of a slump, and to decrease such payments, as soon as prices begin to rise too rapidly. In spite of almost universal approval of this plan, and the definite and repeated commitment of the Hoover administration to it, the plan has never been tried. We have not yet had long range planning of public works. We have had instead longrange planning to plan to plan public works. SOUNDER MONEY AND BETTER BUSINESS (By Benjamin Graham) Herewith is presented a measure designed as a sound and effective means of raising and stabilizing the general price level. Such a development is generally recognized as the most important single requisite for the restoration of pros perity and employment. This plan avoids the chief defects of others, now before the country, in that: 1. It does not involve abandoning the gold standard, devaluing the dollar. coining silver at a high price, or issuing unsecured or bond-secured paper money. 2. It requires no governmental expenditures, borrowing, or guaranties. 3. It imposes no taxes. 4. It involves no changes of any kind in our political or economic system. The propsed measure, on the other hand, will produce numerous and vital benefits. In ascending order of importance they are as follows: 1. It will improve the soundness of our existing currencies. 2. It attacks directly the central paradox of the present depression, namely. poverty from superabundance, by transforming our surplus of commodities from a cause of national disaster into a source of national strength. 3. It will establish a stable average price level for basic commodities and thus contribute signally to the maintenance of stable and prosperous business. 4. It supplies an effective mechanism by which the country's productive capacity can be utilized for its proper purpose, namely, to raise the standard of living of the American people. There is still a fifth important advantage of special character: 5. The plan provides an acceptable method of solving the vexing problem of war debts. The measure is not intended as a panacea, however. It does not guarantee employment for all, a profit for every business, or a satisfactory price for every product. DESCRIPTION OF THE MEASURE Under present law. Federal Reserve notes are issuable against deposit of 40 percent in gold and 60 percent in eligible commercial paper, which may be obligations secured by warehouse receipts representing important commodities (termed "readily marketable staples"). It is proposed that this arrangement be supplemented by introducing the following three modifications: A. In lieu of a single stored commodity, the 60 percent backing shall consist of commodity units of a fixed character, comprising proper relative amounts of all the basic storable commodities dealt in on public exchanges. The makeup of these composite units will be discussed in detail below. Such commodity units shall have a fixed value as a backing for the 60 cents of each dollar not covered by gold. This value will establish the average price level for all basic commodities taken together. The level shall be set at some figure be tween the present low point and the 1923-29 average. It is suggested that a figure be taken about midway between these limits, say at 75 per cent of the predepression average, as recently recommended by Sir Arthur Salter. B. "Federal notes" shall be issued against the direct deposit of 40 per cent in gold and 60 per cent in the fixed commodity units. C. Federal notes shall be redeemable at the holder's option in gold as at present, or in the combined gold and commodity units deposited against them. The nature and operation of this plan will need to be discussed under various headings, as follows: A. ITS BROADER AND MORE FUNDAMENTAL ASPECTS I. The character of the additional currency. II. How the higher price level will be established. III. How the measure will relieve the depression. IV. How the price level will be maintained on a stabilized basis. V. How the measure will raise the national standard of living over the long-term future. B. TECHNICAL CONSIDERATION VI. The relation between a higher price level in this country and the international situation. VII. How the plan may facilitate settlement of the foreign-debt problem. VIII. How the commodities unit is established: Principles governing the selection of the commodities and determination of the amount of each in the unit. IX. Physical aspects of the plan. Storage expense and deterioration. X. Size of the Federal note issue and its effect upon the banking and currency picture. XI. Relation between the stabilized price group and other price groups. XII. The question of overproduction under the plan. I. The currency provided as above will have the following characteristics: It will be redeemable in gold, as is all our present currency. It will have a direct gold backing as large as, or larger than, all of our present currency except god certificates. The present forms of currency and their backing are as follows: Name of currency Gold and gold certificates.. Subsidiary silver and minor coin.. U. S. notes. 100 percent in gold.. Backing 100 percent in silver at $1.30 per ounce (present 100 percent in U.S. Government bonds at par... 40 percent in gold; 60 percent in Government 40 percent in gold; no other deposited security.. Amount outstanding Jan. 1, 1933 $1,069, 000, 000 401, 000, 000 371, 000, 000 823, 000, 000 2,716, 000, 000 295, 000, 000 Total.. 5,675, 000, 000 In view of the large gold backing, there should be no more difficulty in maintaining gold redemption for the Federal notes than for any of the other classes of currency, nos. 2 to 5 above. The part of the Federal notes not covered by gold will have a direct tangible backing consisting of those commodities which are vital to our daily needs and our economic life, in quantities proportionate to their relative importance. Since, in addition to being exchangeable for gold alone, these notes may be converted on presentation into the deposited gold and commodity units, the holders of this currency will have a fixed claim also upon basic goods more useful and hence more valuable than gold. For this reason it is asserted that the plan will improve the soundness of our existing currency. The Federal notes will be created on the basis of "free and unlimited coinage" of gold and commodity units at a fixed rate. This corresponds exactly |