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in 1893, when this gold exchange standard was just in the offing, and the writer said that these countries were contemplating the establishment of a phantom gold standard in the name of a gold exchange standard. And that is what it turned out to be, did it not?

Mr. ALDRICH. Yes. If confidence is absolutely unaffected it looks all right.

Senator GORE. A glass ship will stand fair weather; it won't stand a storm.

Mr. ALDRICH. Yes, that is it.

INTERNATIONAL COOPERATION OF CENTRAL BANKS

This leads me to an observation regarding proposals that there be international central bank cooperation designed to regulate commodity prices or designed to keep cheap money throughout the world in ordinary times, with a view to making world prosperity. The experimence of recent years surely justifies grave reservations on this point. Our efforts to cooperate with England from 1924 on, and especially in 1927, was very largely responsible for the excess of cheap money which has made us so much trouble, and, incidentally, created a world situation which meant a breakdown of central bank cooperation in 1931 and 1932, when the central banks of the continent tried, unsuccessfully, to withdraw their balances from the Bank of England, and did successfully withdraw their balances from us. I firmly believe that the best policy is for each central bank, including the Federal reserve bank, to look after their own money markets in ordinary times and to reserve international cooperation for special limited purposes, and for times of emergency.

I might say paranthetically that what I have in mind when I say special limited purposes is in the case where a country is about to return to the gold standard, where cooperation is needed to make them feel the confidence that is necessary during the period of time to do that. But ordinarily I believe that the central banks should look after their own affairs and not try to cooperate with each other in some artificial way.

This was the rule in pre-war days, and it was a good rule. Any country, in pre-war days, which was expanding credit too rapidly, was very likely to find its expansion checked as other money markets pursuing a more prudent policy began to take some gold away from it. Booms did not go so far, and setbacks were not so violent.

Ninth. The international scare in the autumn of 1931 and the spring of 1932 regarding the standard of value itself, the fear lest we and other countries should abandon the gold standard, precipitated the severest of all the troubles. No other fear so terrible as this. The countries of Europe which had had, during and following the war, such cruel experiences with depreciating and fluctuating currency, reacted to it in an extreme way. Our own people very generally trusted the American dollar, in view of our unbroken record since the end of 1878 in keeping the dollar good as gold, but even they could not escape the pall of fear which pulled down the volume of business in this country by almost one-third from the middle of 1931 to the middle of 1932, which brought the greatest percentage decline of all in security values, and which pulled railroad traffic from the levels at which the railroads' credit was good to levels at which the railroads' credit has been gravely shaken, and which intensified the problem of unemployment to an appalling degree. I shall refer again to this point in discussing "inflation" as a possible remedy for the present trouble.

X. BROKEN EQUILIBRIUM Business life goes on well when different kinds of production are in good balance, different types of goods being produced in right proportions, so that the sale of one kind of commodity produces income which can be used to purchase other commodities, so that goods can clear the markets of one another. The gravest effect of the breakdown of international trade, in the United States as in many other countries, is to throw out of balance the different kinds of production. At the present time nearly every country is geared up to do more export business than it can do under existing conditions, and has an undue percentage of its labor and resources directed toward foreign markets.

Every country is faced with the necessity of a radical shift in its activites, reducing its activities for export and increasing its activities for internal consumption, unless the trade barriers can be reduced and the foreign markets restored. In the United States, this means especially that agriculture and other raw-material production are greatly overexpanded in relation to manufacturing, which has meant so great a break in the prices of agricultural and raw-material commodities that the producers of these things can not buy even the relatively scant present output of the factories at prevailing prices. The balance among industries must be restored, and the only quick and sure way to do this is to restore the export market.

The importance of foreign trade in our economic life has been questioned on the basis of certain estimates by the Department of Commerce, which made foreign trade 9.9 per cent of the production of movable goods in 1927, and 9.8 per cent in 1929.

I must say first, that these figures of the Department of Commerce do not seem to me quite correct. In figuring the total of movable goods they have taken account of agricultural products, mining products, and value added by manufacture, which is right, and then they have added to the totals railway freight receipts, which I think is wrong when we are seeking a total to compare with exports. If we are going to consider freight receipts at all they should be divided between export business and domestic business and allowance should be made for the longer haul in the export trade. Further, the department should consider shipping and other items. But I think the simplest and best way is to consider merely goods produced and goods exported. When this is done the percentages rise somewhat, standing at 11.2 per cent in 1925, 11 per cent in 1927, and 10.8 per cent in 1929. I have before me the table which I shall put into the record, without reading, using the Department of Commerce figures but eliminating the freight receipts.

The table is as follows:)

Production of movable goods and proportion erported (freight receipts eliminated)

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Source: Foreign Trade of the United States-Department of Commerce, 1931, p. 11.

Mr. ALDRICH. But I do not rest the argument on this percentage. 11 per cent of our total business is a big percentage, but the percentage of many highly important individual products is enormously greater. The following table shows the percentage of various important exports exported in 1929: Per

Per cent

cent Cotton. 55 Gasoline

14 Tobacco.. 41 Typewriters.

40 Lard. 33 Printing machinery

29 Wheat 18 Sewing machines.

28 Copper 36 Agricultural machinery

23 Kerosene 35 Locomotives

21 Lubricating oils 31 Passenger automobiles.

14 (Source: Moulton & Pasvolsky's “War Debts and World Prosperity,” p. 409.)

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Senator Gore. Some of those commodities represent whole industries too.

Mr. ALDRICH. Yes. I was about to say, not even these percentages, however, tell the whole story. For important great areas, the dependence on foreign markets is even greater. Bright tobacco in

. Virginia, and cotton in Texas, are cases in point. You can prostrate a whole State when the foreign market for its principal crop is cut off. No percentages can take adequate account of the organic interdependence of foreign and domestic business.

Senator GORE. I think there is one step further. Take this tobacco industry in Virginia. All the creditors of Virginia in New York and other markets are all directly affected by this shrinkage of the tobacco business in Virginia. Take the creditors of Texas, the bankers, the merchants, and the manufacturers in Texas that sell to the cotton farmers. They are all directly involved in this. There is a direct reaction.

Mr. ALDRICH. I agree with you.
Senator GORE. So with the wheat farmers and the copper producers.

Mr. ALDRICH. The whole country is an economic entity and a community, and if large sections of the country are in a condition where they have lost their purchasing power and can not pay their debts, obviously the country as a whole is very seriously affected, including the producers of manufactured goods.

159450—33—PT 5-2

Senator GORE. I think old Gregory King about 1680 figured out that one-tenth increase in supply would cause a fall in price of threetenths. You see those ratios are not even. The fall in price is out of proportion to the increase in surplus.

Mr. ALDRICH. There is no doubt at all but what the prostration of these large sections of the country by reason of the loss of their export markets has an effect which it is impossible to exaggerate in the economy of the country as a whole.

REMEDIES

I think that the foregoing analysis of the major causes of the present situation will justify my proposals as to remedies. Some of them I shall list briefly.

I. Prompt settlement of the interallied debts.

II. Prompt reciprocal reduction of tariffs and the moderation of other trade barriers.

The CHAIRMAN. In your remedies you say, first, prompt settlement of the interallied debt. Have you any idea that you would like to express to the committee as to how those settlements should be made?

Mr. ALDRICH. I have ideas about it, but I do not think it is appropriate to express them just at the moment when the whole thing is going into negotiation. 'I would say this, Senator, that I do not want to put any emphasis on these things by reason of the numerical way that I list them.

The CHAIRMAN. Well, I did not take it as such.
Mr. ALDRICH. They are all part of one problem.

These two things are basic to the restoration of our export trade, which, in turn, is basic to the restoration of balance in our own economic life, so that our farmers and other producers of raw materials, receiving good prices for their products, may be able to buy the products of our factories in adequate volume, restoring activity and employment in the cities and restoring an adequate volume of traffic for the railroads.

III. While these basic measures for restoration of normal activity are being put through, I would continue a policy of emergency credit relief, making use of the Reconstruction Finance Corporation. We must face the fact, however, that not all of the existing fabric of capital debt can be maintained in full. There are important cases where the capital structure is top-heavy, and where it is desirable to scale it down to conform to the existing facts. The Reconstruction Finance Corporation should not be called upon to validate capital structures which can not be maintained even when we get a moderate business revival. Instead, we should scale down fixed charges in a good many important cases. It is good credit policy to tide over in emergencies solvent institutions whose total assets exceed their total liabilities, but it is not good policy to undertake to validate the really inadequate assets of insolvent institutions.

Senator GORE. That is binding up the wound that is gangrenous, is it not?

Mr. ALDRICH. Absolutely. We must face the fact. We have lived too long in a state of illusion.

To facilitate reorganizations, the new bankruptcy legislation, that relating to corporations as well as that relating to individuals, should be enacted as soon as possible.

IV. I would extend emergency credit relief to the farm-mortgage situation, and also to certain city-mortgage situations when, in the judgment of the Reconstruction Finance Corporation-I mention that because it seems to be the instrumentality which is handling the matter--a general financial interest is involved. In connection with farm-mortgage relief--and in fact any credit relief-I would make every effort to deal with intelligent discrimination with individual cases, seeking to bring debtors and creditors into agreement with one another, seeking to limit the Government's financial commitments to what is necessary to persuade creditors to make the necessary adjustments but still doing the thing in a big enough way to make sure that an honest and competent farmer doesn't lose his farm. It is to the interests of the country and to the interests of the creditors, by and large, that that farmer, who, with his family, knows the farm, knows its potentialities, knows his local markets and has the home lover's interest in the farm, should be able to stay upon it and to control it.

I think that also applies to the home owner generally, I think we ought to avoid sweeping legislation making a general rule for every farmer. There are some farm mortgages which are perfectly good, where the farm debtor is able to pay interest and amortization, where he needs no relief, and there is no reason why the contract should be altered. There are other cases where he needs a great deal of relief. The same thing is true in connection with city mortgages and other debts.

Senator Gore. Right there I want to get this in the record. I had a letter from a prominent insurance company the other day in which they said that only 15 per cent of the farm mortgages were really distress cases.

Mr. ALDRICH. I was talking to a banker the other day from the Middle West, and he gave me these figures, which he gave me from memory, and I have not got a memorandum of them, but I have great confidence in the gentleman and I think they are probably approximately accurate. He said that the farms owned by individuals are encumbered in the State which has the highest average of that kind to the extent of about 59 per cent in number of the farms. That is in the highest State, which would be in Iowa or some State like that. Senator GORE. Yes, Iowa is the worst. That is the plague spot.

Mr. ALDRICH. Yes.' That the average is less that that. That it is something over 50 per cent. That is to say that of the farmer-owned farms, 59 per cent is the highest percentage in any State of farms that are mortgaged. That of that 59 per cent, not over 50 per cent are in difficulties. Even in the worst States. That the average is somewhat lower. He would put the average of farm mortgages in difficulty as between 25 and 27 per cent.

Senator GORE. That is of the toal farm mortgages. The figures I had I believe related to all farms. Fifteen per cent of all farms represented distressed mortgagors. Mr. ALDRICH. Yes.

Senator GORE. Which would make it work out about the same as yours.

Mr. ALDRICH. Yes. It would work out about that, yes. An he also pointed out that of the mortgages that were in distress a large

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