For four years we have treated the inevitable collapse of our folly as a mere interruption of a dream. We have maintained the boom-time costs of Government and incurred destructive deficits solely on the argument that the dream would come again. No other assumption could justify our policy. We have set every legislative force against the economics of cure. We have used Federal credit in a vain attempt to reconstruct or preserve the ruins of phantom values. We have tried to avoid paying for our folly. We have not yet taken one really constructive step. I doubt if we have even recognized the true evils. And what is now proposed? The farm crisis comes from overproduction. Yet we propose to reward production by a billion-dollar bounty. The only remaining safeguard is the Federal credit. Yet it is slowly being undermined by deficits and recent methods of Federal financing and we are preparing to assault it now by many inventions. There are before the Congress a dozen projects that might involve it in repudiation and ruin, but I know of none that can be relied upon to preserve it.

This is not progress. This is opposition to progress. The single project to aid, and not to oppose, natural cure is to be found in the principles of the LaGuardia bankruptcy bill. It is high time that our affairs should by taking an upward turn, and I believe that we are delaying rather than advancing it.

I hasten to add that I blame nobody. Congress reflects a public opinion which is leaderless, bewildered, and confused. But fundamentals are becoming clearer with experience and it is time to state right principles.

There are many who say that there can be no hope until world distress is cured. There is, of course, an interdependence of nations. But ours is a country of boundless resources and of continental dimensions, extending across half of the temperate zone and providing a unitary market of 125,000,000 people, and the world's most advanced economic development. Surely we have within ourselves the materials for at least a moderate prosperity. The most important retarding influences are within our own control.

There is but a limited human capacity of both time and ability. As we had to do in the war, let us give "priority" to a definite few of the most effective forces at our own command in a limited program and then let us concentrate on that plan, leaving to one side action which depends on agreements with other nations and plans of a longer range. Some of these, like war debts, will intrude in spite of our plans, but let us take them in our stride.

If I were writing such a program it would be: First and foremost, make adequate provision against human suffering; second, put Federal credit beyond peradventure of doubt; third, aids to rapid liquidation of debt; fourth, plans to encourage rapid consumption of commodity surpluses and to control productive capacity; fifth determination of policy on world economics, disarmament and debt.

III. THE CREDIT OF THE UNITED STATES

I wish I could make clear to our millions of sufferers their absolute dependence on the Federal credit. If our people only knew the dangers which our present inertia incurs, there would be a demand for instant action so great that no one could resist it. It takes money to relieve

suffering, and we shall need billions. We think of money as coin and bills. But there are less than six billions of that kind of money in the country. The Federal Government alone has spent more than that in a single year. Most of our money is what the man in the street calls "money in the bank." But the banks do not keep coin and bills to pay their depositors. They keep securities, issued for goods or some other form of wealth, which they can sell to pay depositors. But securities of that kind are growing scarce and doubtful. The only kind of securities in which we have absolute confidence are the obligations of the United States Government. In the Federal reserve and so-called "reporting member banks" alone there are about 17 billion dollars of this "money in the bank," and more than one-third of it is backed by Government securities. These securities have no specific goods or wealth behind them. The only worth they have is the world's belief that this Government, at all times, can and will keep the letter of its promise instantly. If anything happens to shake our confidence in these, the loss will fall immediately on this "money in the bank." The only defenses between this country and ruin are these Government securities.

More than 90 per cent of our business is done, not in coins or bills, but in "money in the bank" (depositors check-book balances). You may own other securities or wheat or land, but when you want to sell these things to pay your taxes or your grocery bill, the buyer will give you this kind of "money in the bank" in the form of a check. But every bit of it depends for its value on the Federal credit because so much of it is backed by the banks' ownership of Government securities. We do not have accurate figures on the total of bank deposits but it is probably about $45,000,000,000. Newspapers recently quoted the Assistant Secretary of the Treasury as saying that all banks owned about ten billion dollars in Government obligations. Every bank, every insurance policy, the solvency and continued operation of every corporation, employing men, the wages of labor, the wherewithal to pay the farmer, and, above all, the resources to feed the hungry and relieve distress, they all hang by a single thread, the credit of the United States.

We have kept that credit above reproach for so long that people think it can stand any abuse. But this is an era of broken precedents. It is too painful to relate all those things which we are accustoned to say "could never happen" but which, unfortunately, are happening before our very eyes. We are witnessing the disintegration of the institutions of an era.

What maintains the credit of any government? It always stands on two supports; its gold reserve, and its power to meet its current obligations through taxes. Of these two, the essential one is the latter. Gold is only a sort of conventional restriction on the temptation of governments to extravagance. The real test of government credit is the same as the test of individual credit. Is it living within its income with something left over to pay its debt? When, as in the Confederacy, or in the revolted American colonies, or in Germany, or Russia, a nation loses both these props, the value of its money and its bonds goes down to absolute zero and nothing can restore it except to recreate one or both of these supports of national credit.

There are intermediate cases, such as that of England. Her gold reserve is so scant that she suspends specie payments, but her revenue

is near enough in balance with her expenses to give a fairly stable, if, considerably reduced, value to the pound. Even without much gold England's credit is maintained by a balanced budget. France was in an intermediate case when she was devaluating the franc. Her gold reserve was not sufficient and she had a large deficit. The value of the franc went from 20 cents to less than two. The French credit stood on half a leg, but both by accumulating gold, and by bringing her budget into balance, France stabilized the franc.

In what category do we fall? We present a unique case because we have the largest deficit and the largest gold reserve in peace-time history. Decidedly, we rely on only one support, our gold reserve. But suppose we should lose that. Because of our monstrous deficit, we would be in a worse case than England and nearly as badly off as Germany or Russia when the basis of the wealth of these countries vanished like a drop of water on a red hot stove. Do we dare continue in such danger? There is one way out, and every day's delay invites sudden consequences which I hesitate even to mention.

Our fiscal circumstances are unpleasantly like those preceding a run on a bank. Our "cash money" is redeemable in gold on demand. Also, the entire pool of "money in the bank" is convertible into money redeemable in gold. The total of potential demands is many times the gold reserve and could exhaust it in 24 hours. If we resolutely balance the budget, there will not be the slightest danger of this and even if it happened we would be in no worse fix than England is to-day. But we now have a deficit of over two billions a year and the suspicion is growing that we do not really intend to balance it.

With the gold reserve gone, this Government would have no recourse except the issue of irredeemable currency, money unsupported by any value, not even by the prospect of revenue. We would not be as strong as many contemporary nations which are off the gold standard because no nation ever dared to incur deficits as large as ours. The demands on our Government for all forms of relief are stupendous. In event of such a collapse, we would be helpless to aid our people at the very moment when the need for aid is greatest. It is the weak who need a solvent government most. The strong are better able to take care of themselves.

Between our present status and the disaster just described, there is only a thin veil of popular complacency and there are projects beyou now which might destroy that slender protection in one day. The most dangerous are the projects to inflate the currency.

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IV. MONETARY INFLATION

There are many people who earnestly believe that we can make commodity prices higher by the simple process of issuing more money. It is a complex question but what does our experience show? In December, 1932, we had outstanding nearly 5.7 billions of money and Dun's Commodity Index stood at 133.9. The highest commodity prices since 1921 were in May, 1928. Dun's price index then stood at 199.2, but the amount of issued money was then only 4.7 billions. Since September, 1930, the amount of money issued has risen about $1,000,000,000 while commodity prices have steadily fallen. There is no such thing as arithmetically relating prices as to the quantity of issued

money.

Quite apart from any figures, the fact that the great bulk of our business is not done in issued money but in "money in the bank" should be enough to suggest that an increase in "cash money" alone could produce no such effect. The fact is that there is no lack of money either of "money in the bank" or "cash money." In other words, all the money of both classes in 1932 would have financed much more business at prices current then, than all the money of both classes in 1928 would have financed at the height of 1928 activity at prices current then. Yet, in spite of all this excess stagnant pool of money in 1932, business activity was about half what it was in 1928. For three years we have conducted a vast but vain experiment in inflation. Not being willing to sacrifice for a balanced budget, we have been selling Uncle Sam's duebills-not to people who have "money in the bank" which already exists and is backed by securities representing economic goods-but mostly to the banks themselves. The Government was saying in effect to a bank: Put this Treasury duebill for $1,000,000 in your vault and write on your books a credit to the Government of $1,000,000. After this transaction, the Government wrote checks for its expenses for that $1,000,000 and, by that process, without anything representing economic wealth having been deposited in that bank, but only a Treasury promise representing a deficit, the Government added $1,000,000 to the sum of all the "money in the bank.

We have coined our deficit to pay our expenses. I can see no fundamental difference between what we have done and the proposal to issue Federal reserve notes or other currency to pay for our deficits, which our inflationists now propose as a sure-fire method of raising prices, except that the inflationists do not propose to go half as far as our Treasury has already gone.

Out of more than five and one-half billions of dollars of deficit which we have piled up during the depression, nearly five billions is represented by increases in the holdings of Government securities by Federal reserve and member banks alone, and, as I read the news reports, the Assistant Secretary of the Treasury thinks total holdings of Government securities by all banks is as much as ten billions of dollars. Be that as it may, Government has added at least five billions and probably the whole deficit to "money in the bank." But it has produced no such beneficent effect on prices as the inflationists think would come from issuing a much lesser amount in Federal reserve notes to pay expenses.

Those notes, if issued, would be "money in the bank" just as quick as the recipients could deposit them in their bank accounts. Both plans come to the same thing in the end, but I fear that we have gone to the limits of prudence already in this method of Federal financing, and I doubt if we can continue to get money in that way. It has clogged our pools of bank credit. It has obscured the whole question of Federal credit by creating an artificial market for Federal securities. It is this method of financing that has lulled the country into complacency on the effects of deficits. Nobody can say with confidence that, in this condition, we can borrow in the ordinary way by selling long-term bonds. The outgoing administration will leave the cash balances at a low point and present us with a dangerous and totally obscure fiscal problem at the very outset. Delay in balancing the Budget is trifling with disaster.

I note that the Secretary of the Treasury said on Saturday:

Ultimately the point might be reached where central bank credit has to be invoked to support the credit of the Government, and when that point is reached we have entered the field of destructive inflation.

You gentlemen know that we long ago reached the point where central bank credit was invoked to support the credit of the Government.

What is the matter with this theory that more money will make prices go up? To answer that you must ask: What is it that makes the prices of things go up? It is the fact that a prospective buyer would rather have the thing than the money. In booms, people prefer things to money because they hope the price of things will go up and they know that the price of money will not. If, at such a time as that, we make credit easy or issue more money, people will borrow to buy. So many people do that at the same time that their buying makes things scarce and sends prices higher. The higher prices go, the more people are able to borrow on the collateral of things, to buy more things and to send prices still higher. At such a time, if the Federal reserve "buys Government bonds" (which is what I think the Secretary of the Treasury means when he speaks about invoking central bank credit), or if the Government issues still more money and does other things to make speculative buying easier, it can precipitate a boom as it did in 1920.

But when nobody has confidence, nobody wants to buy things, which fall in price. Everybody wants to sell things to get money, which does not fall in price. In the scramble to exchange things for money, prices drop and that restricts credit still more because it reduces the collateral of loans. That forces more selling to protect loans and that forced selling sends prices still lower. At such a time, government can not force prices up by issuing more money because nobody will use credit to buy things because nobody wants to buy anything.

In other words, confidence is the basis of higher prices. If there is no confidence, no amount of tinkering with the currency can raise the price level. On the contrary, and this is the very heart of the whole problem of the depression, deficits and the financing of them by "bank money" inflation (or even the mere talk of monetary inflation) impair confidence still more and drive money deeper into hiding.

I am aware of the rejoinder: "If you think inflation will have no effect on prices, why do you object to trying it?" The first answer is one I have just made, that the mere talk about proposals of inflation prevents confidence and bars recovery. That is the essence of our present trouble. It is not lack of money or credit. Men can not go back to work until money goes back to work. Men risk their money in commerce because they expect to get it back with a profit, but nobody will risk dollars which the Government threatens to devaluate. Business moves on faith in promises. Money itself is a promise. Every sale and every employment is a promise to do something and to pay something. Money will not go to work in the presence of any such desperately dangerous fiscal policy as we have pursued and are still pursuing-much less in an atmosphere full of talk of the repudiation of money and debts by both men and governments. That is why I say with such confidence, that until we make the money and the credit of the United States safe beyond peradventure no