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Mr. ALDRICH. That is a fact. These are the foreign security issues as we get the figures. In addition to that there are all kinds of credits granted that are not in there. The credits by an American manufacturer to a foreign buyer. The volume of credit is probably very much greater than is shown there.

Senator GORE. Does this undertake to include short-time loans as well as long-time loans, or is this limited to long-time loans?

Mr. ALDRICH. It is long time chiefly. Mr. Anderson can answer that.

Mr. ANDERSON. It is the Commercial and Financial Chronicle's record of new foreign securities. There is some short stuff in there, but chiefly long stuff.

The CHAIRMAN. Mr. Aldrich, you will notice there that about the same proportion of imports to exports continues from 1922 down to 1932. In other words, last year the exports were $1,618,000,000 and our imports were $1,323,000,000. In other words, as our imports decreased so did our exports decrease.

Mr. ALDRICH. That is correct. The whole volume of foreign trade has been diminishing.

The CHAIRMAN. The whole volume. The world trade has shrunk, I suppose, in just exactly the same proportion as here?

Senator ALDRICH. Yes.

The CHAIRMAN. Not only, as shown in this report, that between America and Europe, but that of every other country in the world?

Mr. ALDRICH. Yes; that is correct. The barriers to trade are having their effect in a worldwide way, not only in this country, but generally,

Senator King. As barriers were raised and new impediments and barriers were erected the export trade and the import trade diminished.

Mr. ALDRICH. That is right. Senator King. In this and the other countries. Mr. ALDRICH. That is true in a worldwide way. The CHAIRMAN. And that is true in every country in the world. Mr. ALDRICH. I think that is true. The CHAIRMAN. Their trade does not amount to what it was before. Mr. ALDRICH. Yes; that is correct. Senator King. I think you might modify that by saying that China's export trade, because of her low purchasing power, because she is on the silver basis, has not suffered the diminution that other nations have suffered.

The CHAIRMAN. Well, she has had so little in the past.

Mr. ALDRICH. I will take up that question about China in connection with the silver discussion.

The CHAIRMAN. Very well. You may proceed, then.

Mr. ALDRICH. Fifth. In these three factors, then, (a) intergovernmental debts, (b) high protective tariffs and other trade barriers, increasing in severity throughout the commercial world, including high protective tariffs on the part of our own great country, which had suddenly become creditor on a great scale, and (c) six years of cheap money and rapid bank expansions, we have the main explanation of the unprecedented financial boom, the unprecedented financial break, and the unprecedented severity of the depression.

The CHAIRMAN. I think we would have felt it more, would we not, had we allowed further importations here do displace the goods that were manufactured in this country? Supposing the imports had in

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creased $1,000,000,000 in 1932, making them $2,323,000,000, what would we have done with our exports?

Mr. ALDRICH. The thesis that I am making here, Senator, is this, that the present situation is a matter of lack of balance, fundamentally between the producers of farm products and other raw materials which enter into our export trade and are governed by world prices, and the production of manufactured goods by our industries.

The CHAIRMAN. In other words, if we had imported a billion dollars more of manufactured goods it would have

Mr. ALDRICH. It would have increased our exports. That is what would have happened.

The CHAIRMAN. You think it would?
Mr. ALDRICH. Yes.

The CHAIRMAN. What would become of the employees in the industries that make the goods?

Mr. ALDRICH. It would make the purchasing power of these farmers and producers of raw materials increase to such an extent that the employees of manufacturing concerns would have been sustained on a much higher level than now. That is the thesis of this discussion.

The CHAIRMAN. I judge so up to the present time.
Senator Gore. Those imports, Mr. Aldrich, would have been paid

, for with our exports, and those exports would have given employment to American labor just the same as if they had produced the stuff that was imported?

Mr. ALDRICH. That is the point exactly. The increased purchasing power of the farmer and the producer of raw materials would have gone directly to the benefit of the producer of manufactured goods and would have increased our total trade above exports and imports.

The CHAIRMAN. In other words, if we could have made goods cheaper then of course we could have exported more goods.

Mr. ALDRICH. Well, we would have increaseci our domestic niarket at the same time.

Senator GORE. We would have had a comparative advantage in production.

The CHAIRMAN. Of course I would rather have our local market than rely upon a foreign market.

Mr. ALDRICH. Well, the thesis of this discussion on my part is that the local market is improved as you improve the condition of the farmer and the producer of raw materials to a point which more than counterbalances anything that may come in from abroad, and that our foreign trade is a unit; that the export and import sides must come together, and these totals show that they do come together.

Senator King. You would not disagree with the statement made by Mr. Hoover when he was running for the presidency four years ago, when he said in his speech in New Jersey that our exports furnished employment directly to more than four and one-half million of laborers, and employment indirectly to more than two and one-half million more? And the statement of Mr. Chapin a few months ago in his report as Secretary of Commerce that even now more than 18 per cent of those gainfully employed in the United States were employed in furnishing exports to foreign countries?

Mr. ALDRICH. I should think that those statements were unquestionably true. But I have not examined the figures as to employment in that connection.

Senator King. If we were projecting the tariff discussion into this we would be ready to discuss that now. That is not necessary.

The CHAIRMAN. No, not necessary; but now that you have brought it up, I would rather look after the 82 per cent than the 18 per cent.

Senator King. In looking after the 82 per cent you have to look after all.

Mr. ALDRICH. Senator, I have got here a discussion of the meaning of this statement that has been made-I think it is on the authority of the Department of Commerce—that 10 per cent of our trade is foreign trade. And I expect to give you some figures here that will show that that is probably erroneous in itself and completely misleading when you come to consider the effect on the country. Not from the point of view of employment, but from the point of view of the commodities involved and the percentage of those commodities in foreign trade, and the distribution of those commodities in production over the country.

Senator GORE. It certainly is misleading, because over half our cotton goes abroad and a third of the country depends on cotton, and the rest of the country depends indirectly upon the prosperity of the cotton States. But I am getting ahead of you; you have that farther on in your paper.

Mr. Aldrich. You are anticipating exactly what I am going to say.

Senator GORE. Yes. I believe it would br a good idea to let you finish your paper, as far as I am concerned.

Mr. ALDRICH. The next point, Sixth, is articfiial price maintenance.

An important secondary factor was growing interference with natural competitive markets in the period preceding 1929, partly governmental and partly by private organizations. The efforts to valorize wheat by holding movements went on on a great scale from 1926 to 1929. Through the activities of the Canadian grain pool and holding movements under government auspices in Hungary and elsewhere, the world's visible supply of wheat was nearly doubled between the summer of 1926 and the summer of 1929. In the autumn of 1929 our own Farm Board stepped in. The net effect of these efforts to maintain the price of wheat was merely to defer the facing of facts. Production held up more than it would otherwise have held up, consumption was checked, and surplus was accumulated. A similar policy, with a similar result, appeared in the case of copper, though the business interests responsible for the policy were quicker to recognize their mistake and quicker to change their policy than was our Government in the case of wheat.

Seventh. The cheap money policy of the United States was part of a policy of cooperation between the Bank of England and the Federal Reserve Bank of New York. The British believed that cheap money and expansion of bank credit was all that was necessary to get good business going again, and that it could be used as a substitute for industrial readjustments, including the scaling down of prices and costs.

Senator GORE. That was the English theory, wasn't it?
Mr. ALDRICH. Yes, sir. They have gone very far with that.
Senator GORE. Yes. The managed-currency school of philosophy.
Mr. ALDRICH. Yes.

Without the strength in gold which we had in the United States, they tried to force the policy through anyhow. They failed to get good business by this policy, but they did succeed in getting credit so overexpanded that when the acute pressure came in the summer of 1931 they found themselves in a frozen position and without adequate geld reserves, and abandoned the fold standard.

The last chance the world had to call a halt on the overexpansion of credit and on the speculation based on the overexpansion of credit without an unmanageable reaction was in 1927. I am informed that the Bank of France and the Reichsbank in Germany did try to tighten up then, Paris warning London that it was having to buy too much sterling, that easy money in London was financing speculation in the French franc and that the Bank of France, though reluctant to pull gold out of the London nioney market, would have to convert sterling into gold unless the process stopped.

The conference of governors of the central banks held in New York in the summer of 1927 had a very momentous decision to make. Represented there were the Bank of England, the Bank of France, the German Reichsbank and the Federal Reserve Bank of New York. The representatives of the Reichsbank and of the Bank of France are understood not to have made any commitment regarding policy at this conference except al promise to cominunicate their intentions with respect to taking gold from London and New York in the future. They left the country before the governor of the Bank of England did. Following this conference in the early autumn of 1927, a renewal and an intensification of the cheap-money policy of the Federal reserve system came. The rediscount rate was first reduced by the Kansas City Federal Reserve Bank, followed shortly by most of the others. Several hundred millions of Government securities were purchased by the Federal reserve system. Bank expansion moved rapidly, and almost all of it went into the securities market, either in the form of bank investments in bonds or in the formi of collateral loans against securities. Shortly following this began a very intense speculation in securities, with rising security prices, which ran through 1928 and into the late autumn of 1929.

Senator GORE. Right there, Mr. Aldrich, one question. Was not the rediscount rate made lower than the market rate for money in 1927? Mr. ALDRICH. All through that year.

Senator GORE. Becoming acute in the Chicago controversies, as to whether it ought to be reduced that low or not. I suppose that meant that the banks could get money at the Federal reserve banks at one rate and could lend it in the markets at a higher rate.

Mr. ALDRICH. Yes. And of course the open-market policy was forcing credits into the banks.

Senator GORE. Yes; anyway.

Mr. ALDRICH. Which they naturally attempted to use in the most remunerative way, at the most remunerative rate that they could, and they got the highest rates in the security market.

Senator GORE. And one of the points in that was to help England from going off the gold standard.

Mr. ALDRICH. Yes.
Mr. ANDERSON. Keep on the gold standard.
Mr. ALDRICH. Yes.

Senator GORE. And they accumulated gold to stay on it.
Mr. ALDRICH. Yes. Point 8 is the gold exchange standard.

Beginning in the middle of 1926, there came an extraordinary development in the substitution of balances in foreign banks, for actual gold in the central banks, as reserve money. The so-called gold exchange standard, as distinguished from the strict gold standard, and in the two years that followed this went very far. In particular, dollars borrowed in the United States through the flotation of bonds was used by foreign central banks as a substitute for gold

Senator ĠORE. Repeat that last sentence.

Mr. ALDRICH. In particular, dollars borrowed in the United States through the flotation of bonds was used by foreign central banks as a substitute for gold, and funds borrowed in London in the form of sterling balances in British banks were similarly used as the reserves of continental banks.

You see, they had a bank credit in this country in dollars, and this country being on the gold basis they used that foreign exchange in dollars as gold reserve in lieu of actual gold reserve.

Senator GORE. Yes.

Senator King. Of course that foreign exchange was available for the purpose of drawing gold from the banks.

Mr. ALDRICH. Yes.
Senator King. So it was just a matter of bookkeeping.

Mr. ALDRICH. No; because it had the effect of increasing the expansion of credit in this country, because the gold remained there.

Senator GORE. They thought that some things were gold in those countries that did not glitter.

Mr. ALDRICH. Yes. You see, they were borrowing money and getting a bank balance in this country which they were using as part of their own gold reserve.

Senator GORE. Yes, which would have been all right if the dream had continued and had not turned into a nightmare, possibly.

Mr. ALDRICH. Yes, possibly. I doubt even that.

This permitted the credit expansion at home and abroad to go much further than if each bank had carried its own gold. It created a very dangerous situation, the extent of which we realized in the winter of 1931 and the spring of 1932.

Events began to move very rapidly in 1931. First, Austria was pulled down, then Germany, though repaying gigantic sums to her creditors, was finally obliged to ask for moratorium and stand still, and then the run on England's gold reserve began. The gold exchange standard on a great scale is only a fair-weather proposition. When doubt arises regarding the goodness of balances in foreign markets, and different countries seek to convert their balances into gold and bring them home, a very difficult situation is created. England and Germany were unable to meet this situation. We ourselves were so strong in gold that we did meet it. But the liquidation in 1931 and 1932 of the gold exchange standard, which had been built up by the overexpansion in 1926–1928, was one of the big factors in intensifying the present depression and making it as severe as it is. never let international short-term credit relations get overextended to this extent in the future.

Senator GORE. I would like to interject right there, Mr. Chairman: I was reading in an old Economist of a long time ago an article written

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