Senator BULKLEY. We have talked quite a little bit about deflation. I should like to inquire if you intend to imply that deflation is a bad thing in itself?

Mr. POPE. Well, sir, it depends upon when you apply deflation as to whether it is good or bad.

Senator BULKLEY. Very well. just what you do mean?

Will you elaborate a little to show

Mr. POPE. I mean that I think deflation is bad as we see it to-day because it is excessive and has brought commodity, real estate, and security values to a point probably and in the opinion of myself far below intrinsic values. And when the spirit of the people gets to the point of thinking in terms of deflation, which means pessimism, the only thing to be said is that deflation in such cases is certainly bad. And a certain measure of inflation to stop the deflation appears from the standpoint of economics to be essential.

Senator BULKLEY. When you say that prices are below intrinsic values, what is your measure of intrinsic values?

Mr. POPE. There is no measure. The measure of intrinsic values is a question of judgment, which always makes it difficult.

Senator BULKLEY. When we say that prices are below intrinsic values we can only guess about them?

Mr. POPE. Yes, based on facts.

Senator BULKLEY. What would be your measure, then?
Mr. POPE. Applying the facts to the future.

Senator BULKLEY. Can you tell us just what you mean? How would you apply the facts to the future?

Mr. POPE. The value of anything is what to-morrow it can be sold for presumably. The only measure you have are the facts concerning values to-day. You have to guess what the result will be on those facts to-morrow.

Senator BULKLEY. You said something about intrinsic values, which I take it are distinguishable from market values.

Mr. POPE. Yes, sir.

Senator BULKLEY. And I was trying to get what you meant by intrinsic values.

Mr. POPE. For example, they are based upon this situation. The stock of a corporation might be selling at 10, we will say. The actual liquidating value of that corporation if completely wiped out and liquidated might be 20. Certainly the basis of intrinsic value then would be rather on the basis of liquidating value than on the basis of the market.

Senator BULKLEY. Liquidating value based upon present market for its shares, do you mean?

Mr. POPE. Well, based on your judgment as to what those assets could be sold for; yes, sir, if they are salable assets. It might be

cash.

Senator BULKLEY. So that your measure of intrinsic value is the present market value of the sum of all the assets minus whatever liabilities the corporation has.

Mr. POPE. I do not quite follow you there. But I will say

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Senator BULKLEY (interposing). I am trying to trace out what intrinsic value means. I am trying to get your statement fairly into our record.

Mr. POPE. Perhaps I can explain it in this way: Intrinsic value to me means the real value, and not the value based on the market for securities.

Senator BULKLEY. Well then, I will have to ask you: What is the test of real value?

Mr. POPE. It is the real value, rather, based on the facts, which can be determined to prove the value in terms of to-day. If it is cash value it would be exactly the amount of cash.

Senator BULKLEY. Well, if it is something else you have to guess what real value is.

Mr. POPE. After all you might not have to guess because you might have a bid for the assets.

Senator BULKLEY. How is it as distinguished from market value? Mr. POPE. Market value is entirely based upon the judgment of the public or other folks concerning the market, effected by such as pressure for sale of too great an amount of that security on the market, and other factors.

Senator BULKLEY. Well, Mr. Pope, I am very frank to say that you have not entirely satisfied me as to the distinction between intrinsic or real value and market value. But if we can not arrive at it any better than that I am ready to go on to the next question.

Senator GORE. You admit that there is such a thing as intrinsic value from an economic sense, do you not?

Mr. POPE. I would not dare say what economists would say in regard to that. But it is an expression frequently used and which means something to me.

Senator BARKLEY. If any individual is confronted with a proposition to buy anything at its market value or at its intrinsic value he buys it at the cheaper price, does he not?

Mr. POPE. If a man has information that the intrinsic value is greater than the market value he would presumably be interested in the security at the market value.

Senator BARKLEY. And he would go out and buy it on the market. But he would not pay more for it if he could get it for less. Mr. POPE. No, sir.

Senator BARKLEY. So that really intrinsic value vanishes in the mind of the man going out to purchase?

Mr. POPE. It vanishes in the mind of the man who is thinking in terms of stock but not of the real value of the property represented by the stock.

Senator BARKLEY. I understand, but when he can get the same thing at two different prices, according to your theory, he is going to buy it at the cheaper price.

Mr. POPE. Intrinsic value has a very definite bearing upon the price of a stock, but it does not control it.

Senator BARKLEY. It probably ought to but it does not always do it, is that it?

Mr. POPE. No, sir.

Senator BULKLEY. Will you please define deflation in the sense that you used the word this morning!

Mr. POPE. Deflation is a pretty broad question to ask me for an answer at the moment.

Senator BULKLEY. I understand, but if you will explain it we will understand your testimony better.

Mr. POPE. It means to me a situation brought about by the selling of commodities, real estate, and securities in excess of demand, so much in excess of demand that it has recently brought about a very drastic drop in all such values.

Senator GLASS. With respect to what commodities? Do you mean a drop not in intrinsic values but a drop from the peak to which these various things were extended or inflated?

Mr. POPE. Any reduction in values I think would be deflation whether it came from a peak or anywhere else. That would be the degree of deflation.

Senator GLASS. Of course it has decreased in the matter of open market value. What I am trying to arrive at is the cause of the deflation. What do you mean by deflation at the present time? Whether it is deflation from the peak of the inflation, from the point of the exaggerated prices induced by the fever of gambling, or do you mean deflation from the more or less stable and normal prices of commodities and securities over a series of years?

Mr. POPE. I mean just in general, and I am not prepared to say that my answer is very carefully thought out. But my impression would be, or rather I mean when prices of things are below the cost of production, that then you have serious deflation. I am not referring to the drop from peak prices.

Senator GLASS. Is that true of anything except commodities? Mr. POPE. I am not sure that it is, but by being true of commodities it affects all bonds practically.

Senator GLASS. Mr. Chairman, at this point I would ask leave to place in the record a table prepared by one of the outstanding business authorities of this country, whose name I am not right now at liberty to give, but he is associated with one of the greatest business corporations in the country and which statement (if accurate as I have no doubt the figures are) indicates that there has been no deflation whatsoever, but an advance in security prices, that there is to-day an advance over the years 1920 and 1921, and a very material advance, and that credit facilities are, relatively speaking, far greater now than then.

The CHAIRMAN. If there is no objection on the part of the committee, it will be printed in the record.

Some aspects of growth of United States banking and business, 1920, 1921.

Senator BROOKHART. In that connection I will say that I have similar information to what Senator Glass has just offered. I should like to insert some tables to show that commodity values are much below what they were.

Senator GLASS. This table shows that.

Senator BROOK HART. It shows commodities and securities, both of them.

Senator GLASS. Not commodities separately, but the commodity level is shown as 28 minus now as compared with 1920-21. Senator BROOKHART. But securities are higher. Senator GLASS. Very much.

Senator BROOKHART. Commodities are much lower and securities are much higher. On that proposition I should like to ask Mr. Pope this question: If that is true shouldn't there be some further deflation of these deflated securities? Doesn't that indicate that they are still enormously inflated?

Mr. POPE. No, sir. The cause of the difference is unquestionably due to the fact that in 1921 money was extremely tight and to-day it is extremely easy, and the difference is represented in the value of securities then and now.

The CHAIRMAN. And isn't the commodity market influenced by them?

Mr. POPE. Yes, sir. But the difference between these two prices can to a very large extent be accounted for, if not practically entirely, by the difference in the value of money to-day and then.

The CHAIRMAN. Do you mean that the value of money does not affect securities and commodities alike?

Mr. POPE. To a degree it does, but it is certainly more in the case of securities.

Senator BROOKHART. That is because securities are inflated and have been put on a false basis.

Mr. POPE. No, sir. It is because securities represent investment money, and money is invested according to demand and supply.

Senator BROOKHART. Yes; but let us get back to intrinsic values a little further. As long as there is a demand for a commodity its value is not at the intrinsic value.

Mr. POPE. It might not be.

Senator BROOK HART. Even though there is a demand for its use. Mr. POPE. Yes, sir.

Senator BROOK HART. It might not have any value at all.

Mr. POPE. It might not.

Senator BROOKHART. Although I can not conceive of that.

Mr. POPE. I can not either, as a matter of judgment, but it is a fact.

Senator BROOKHART. The real intrinsic value that you hinted at a moment ago is cost of production and you would say plus a reasonable profit, or at least you would figure a reasonable profit in the cost of production.

Mr. POPE. I did not say that.

Senator BROOKHART. I know that you did not say that, but you mentioned cost of production in connection with the matter of values a moment ago.

Mr. POPE. I do not recall that, but I may have done it..

Senator BROOKHART. Wouldn't that be as near as you could figure out just the intrinsic value of things?

Mr. POPE. That is a pretty hard thing to say, because you are asking me, we will say, the intrinsic value of potatoes and the question of the value of potatoes is usually based on the question of price. Now, what is the intrinsic value of an article that is to be eaten?

Senator BROOKHART. You drew the distinction yourself between price and intrinsic value, and I think rightly.

Mr. POPE. When I am talking of intrinsic value I mean value not of a commodity but of an industrial concern, or a concern in which there are various parts which are tangible and which have a reason for value.

Senator BROOKHART. You would not call the inflated values of stocks and bonds in 1929 intrinsic values, would you?

Mr. POPE. Will you repeat that question?

Senator BROOK HART. You would not call the high prices, the inflated prices of 1929, before the panic, the intrinsic value of securities, would you?

Mr. POPE. I would say undoubtedly no in view of the results. But I think many people thought they had.

Senator BROOKHART. The fact of the matter is that the way our stock and bond markets are run now these values are just gambling values, what you can get somebody to gamble on, rather than intrinsic value?

Mr. POPE. No, sir; I think in the investment market there is very little gambling. You are confusing it with the trading market, and I am an investment banker.

Senator BROOKHART. Then you think the stock exchanges are mostly for gambling, and the investment bankers are mostly actual investors?