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United States Senate, Washington, D. C. The committee met, pursuant to adjournment, at 10 o'clock a. m., on Tuesday, February 21, 1933, in room 335, Senate Office Building, Senator Reed Smoot presiding:

Present: Senators Smoot (chairman), Watson, Shortridge, Couzens, Metcalf, Harrison, King, Walsh of Massachusetts, Barkley, and Gore.

The CHAIRMAN. The committee will come to order. We will first hear Mr. Aldrich.


The ChairMAN. Mr. Aldrich, will you give your name to the committee?

Mr. ALDRICH. Winthrop W. Aldrich.
The CHAIRMAN. The position you hold?

Mr. ALDRICH. Chairman of the governing board and president of the Chase National Bank of New York.

The CHAIRMAN. You may proceed, Mr. Aldrich.

Mr. ALDRICH. Mr. Chairman: I am glad to appear before you in response to your invitation, not because I have any panacea to present, but because I think it eminently desirable that there should be frank interchange of opinion between those who are charged with responsibility for government and those who are charged with responsibility for finance and for other phases of the economic life of the country. It is in some ways unfortunate that the political capital and the financial capital of the country should be separated. Misunderstandings between the financial community and the Congress have created many needless difficulties. I feel sure that much of this misunderstanding would pass away and better cooperation would exist if we knew one another better personally and had the opportunity of talking more frequently and frankly with one another.

I understand that you wish me to present my views as to proper remedies for the present economic trouble. In order to do this it is necessary that I should first undertake to diagnose the situation, and I I will ask you to bear with me, therefore, while I present something of the history of the events which led up to the existing situation. This will introduce the presentation of the remedies which I shall venture to propose.


The present depression has, of course, many features of preceding depressions. Any period of intense financial and business activity develops stresses and strains and maladjustments which compel liquidation and reaction. But the unprecedented severity-absolutely unprecedented as far back as good statistical records go—of the present depression, and the slowness with which the automatic restorative forces have worked, must be found in certain unprecedented circumstances which have preceded it. These are, I believe, as follows:

First. The immense shift produced by the war in international debtor and creditor relations, and, very specially, the great shift of the United States from a debtor to a creditor nation.

Before the war we owed Europe a great deal of money, represented largely by American stocks and bonds held abroad. During the war we repurchased most of those and we bought a great many European securities. Finally, following our entrance into the war in 1917, our own Government advanced roughly $10,000,000,000 to our European allies.

Before the war we paid interest and amortization on our debt to Europe by sending out an excess of exports over imports. In general, the normal thing for debtor countries is to have an excess of exports over imports, and for creditor countries to have an excess of imports over exports, or a so-called “unfavorable" balance of trade. England before the war regularly received about a billion dollars more imports than she sent out in exports, the difference being covered by her interest on foreign investments, her shipping services, banking services, and other items. France regularly received about half a billion dollars more a year than she sent out in goods. Germany, the Netherlands, and Switzerland all had import surpluses or unfavorable balances of trade, because the rest of the world, debtor to them, paid them in goods. The logical expectation following the war was that countries formerly creditor and now debtor would send out an excess of exports, and that countries formerly debtor and now creditor would receive an excess of imports.

Second. One of the worst legacies of the war was the existence of the intergovernmental debts, and especially the reparations. These debts involve both a budgetary problem and a transfer problem.

The budgetary problem is the problem of raising the money that has to be paid in the foreign government through taxation or other means in the debtor country, and in the currency of the debtor country. As all the principal debtor countries, very especially Germany, had exceedingly high taxes anyhow, taxes running far beyond anything we have experienced in the United States, the additional pressure on their budgets of raising the money for intergovernmental payments was very severe. This was softened for England, and eliminated for France, so long as Germany paid reparations. In the case of Germany herself, however, the pressure was so great as really to be endurable only in times of very active business, and it was a major contributing factor to the fiscal deficit which was so embarrassing to Germany in late 1928, in 1929, and in subsequent years. The existence of the huge reparation debt, moreover, greatly lessened the credit of the German Government, so that it was unable to make much use of the resource which a great government usually can use in times of depression of borrowing to fill in the gap between its revenues and its expenditures.

The CHAIRMAN. Mr. Aldrich, can you tell us whether France paid England on the amount that she owed England for war debts an amount equal to what England paid us?

Mr. ALDRICH. Doctor Anderson?

Mr. BENJAMIN M. ANDERSON, Jr. (economist of the Chase National Bank). The question is: Did France pay England?

The CHAIRMAN. Yes. Do you know how much France has been paying England on the French debt to the English Government, which was about $4,000,000,000?

Mr. ANDERSON. I have not the exact figures. I would be very sure that it was less than the British paid us.

The CHAIRMAN. It was less than the British paid us?
Mr. ANDERSON. It was less than the British paid us.

The CHAIRMAN. That is as I understand it, but I did not know but that you had the figures.

Mr. ANDERSON. I can get them for you, Senator, if your wish them.
The CHAIRMAN. I wish you would.
Mr. ANDERSON. Yes, sir.

Mr. ALDRICH. The other problem involved in intergovernmental debt payments, as in all international payments, is the transfer problem, the problem of exchanging the domestic currency for the foreign currency in which the debt payments have to be made. A debtor country can make payments in the currency of the creditor country to the extent that it can send out a surplus of exports over imports, or can entertain foreign tourists or can perform shipping services, and so forth, or to the extent that it can borrow foreign currencies, the latter being, of course, not a real solution but merely a deferment of the problem.

If there had been adequate freedom of movement of goods from country to country, the debtor countries could have solved this transfer problem by sending out goods. But the existence of the reparations and other intergovernmental debts was a great factor contributing to international fears regarding the movement of goods, and intensified the widespread policy of tariff's and other trade restrictions which the world has been engaging in on an increasing scale since the war. During the period when bank credit was expanding rapidly and foreign loans were placed easily, transfers were made without difficulty. But when there came a sudden cessation of foreign loans and debtor countries were suddenly called upon to pay, the problem of transition was a grave one. Germany herself did make the transition in 1929, and began to send out more goods than she took in, and some other countries made heroic efforts along these lines. But almost immediately a movement began to stop this by further trade restrictions and when we ourselves raised our tariffs still higher in 1930 there came a very general and widespread intensification of trade restrictions throughout the world. Tariffs are not the only, or even the worst, trade barriers. Quotas, vexatious inspections, exchange controls, and many others can be even more restrictive. The payment of intergovernmental debts became increasingly difficult, although they were continued down into the summer of 1931.

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Third. Our own high protective tariff policy inaugurated in 1922, preceded by some increases in 1921, prevented our foreign debtors from sending us goods in adequate amount to pay interest and amortization on their debts and at the same time buy our exports in accustomed amount. This tariff policy would promptly have checked our export trade but for the extraordinary financial development next listed.

Fourth. The gigantic and unprecedented expansion of commercial bank credit in the United States from the middle of 1922 to early 1928, amounting to fourteen and one-half billion dollars in loans and investments and thirteen and one-half billion dollars in deposits, accompanied by great expansion of bank credit in many parts of the world. This expansion was due (a) to gold coming to us from other countries which were off the gold standard, and (b) to cheap money policies of the Federal reserve banks, both of which operated to create excess reserves in the member banks, with the resultant multiple expansion of member bank credit.

Perspective on the figures for expansion given above is gained by recalling that the expansion of bank credit required to win the war, from early 1917 to the end of 1918, was only 5,800,000,000 in deposits, and 7,000,000,000 in loans and investments.

The vastly greater expansion in the period from 1922 to 1928 was not needed by commerce and was not used by commerce, and went into (1) real estate mortgage loans in banks; (2) installment finance paper in banks; (3) stock and bond collateral loans in banks, including loans against foreign stocks and bonds; and (4) bond purchases by banks, including foreign bonds. The consequences of this great expansion of credit, used in these ways, were, of course, excess construction, including road building, real estate speculation on a great scale, overexpansion of installment buying, and an immense overissue of securities including many ill-considered securities, but including also many others which would have been good if the total overissue had not been so great, the rapid multiplication of bond houses, investment trusts, and other financial machinery and a progressive deterioration in the quality of bank credit. The 25,000 banks of the country were not in a position to prevent this expansion and their managements were inevitably led into many mistakes in policy because of it. The control of the expansion was in the hands of the Federal reserve system.

One very important incident of this expansion was the masking of the difficulties of international debt payments, including interallied debts and reparations, and the maintenance of our export trade despite trade barriers.

Senator KING. You mean by extending credit?
Mr. ALDRICH. By extending foreign credit.

This was particularly true following the Dawes plan in 1924. The Dawes plan was accompanied by an immense government security buying program on the part of the Federal reserve banks. Following this came a tremendous volume of foreign loans which offset the influence of the high protective tariffs upon our export trade. We were able to get out, especially following the summer of 1924, a great volume of farm products and raw materials at good prices which restored, in a precarious fashion, the balance between agricultural and raw material production on the one hand, and manufacturing on the other hand, giving us active business while the foreign loans went on.

The following table, which I shall not read, Mr. Chairman, unless some of you gentlemen would like to have me do so, exhibits the relationship between American exports, foreign loans and agricultural prices. I might say that that table is for the years 1922 to 1932, inclusive, and this shows the trend of it.

In 1922 our exports were $3,832,000,000 and our imports $3,113,000,000. Or an excess of exports of $719,000,000. And the new

$ foreign securities issued in that year were $630,000,000. And the index of agricultural prices at the farm, the yearly average 1910 to 1914 being 100, was in that year, 1922, 124.

In 1924 this increase in new foreign security issues commenced and in that year we floated $1,047,000,000 of new foreign security issues. And for the next five years in each year we floated more than a billion dollars of such securities, and in the year 1927 we floated $1,562,000,000.

In 1928 our exports were $5,128,000,000, imports, $4,091,000,000, or an excess of exports to the extent of $1,037,000,000. And at that time the index of farm prices was 139 as compared with 124 in 1922.

After 1930 the foreign lending dropped down in 1931 to $255,000,000, and in 1932 to $26,000,000.

At the same time the exports dropped down in 1931 to $2,424,000,000 and the imports to $2,091,000,000, or an excess of exports of $333,000,000, and the agricultural price index at that time, in 1931, was 80 as against 136 in the year 1926.

In 1932 our exports were $1,618,000,000 and our imports were $1,323,000,000, an excess of exports of $295,000,000, and the index for agricultural farm prices was 57. (The table is as follows:)

American exports, imports, foreign loans, and agricultural prices

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"Year Book of Agriculture, 1932, p. 902. Crops and Markets, January, 1933, p. 31.

Senator King. Mr. Aldrich, that table does not accurately, does it, represent all of the credit and loans made to foreign countries?

Mr. ALDRICH. No, sir; it does not.

Senator King. Because in some years the loans made to private individuals, to municipalities and to governments in Latin America and in Europe greatly exceeded the maximum figures indicated in your table.

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