CONTENTS Brenckman, Frederick, Washington representative, National Grange_ Busby, Hon. Jeff (Representative). Copeland, Morris A., professor of economics, University of Michigan, 294 Mills, Frederick C., professor of economics, Columbia University- Meyer, Hon. Eugene, governor of the Federal Reserve Board, Wash- 161 Stern, J. David, Philadelphia, Pa.. Strong, Hon. James G. (Representative) RESTORING AND MAINTAINING THE AVERAGE THURSDAY, MAY 12, 1932 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The committee met, pursuant to call, at 10 o'clock a. m., in the hearing room of the Committee on Banking and Currency, Senate Office Building, Senator Peter Norbeck presiding. Present: Senator Norbeck (chairman), Goldsborough, Townsend, Walcott, Carey, Couzens, Fletcher, Wagner, Gore, and Hull. The CHAIRMAN. This hearing is on H. R. 11499, the Goldsborough bill, which has passed the House; also on Senator Fletcher's bill, S. 4429, being an identical bill, except that it has one additional section; section 3 not being in the House bill as it comes over to us. I ask that the Goldsborough bill and the Fletcher bill be printed in the record at this point. (H. R. 11499 is here printed in full as follows:) [H. R. 11499, Seventy-second Congress, first session] AN ACT For restoring and maintaining the purchasing power of the dollar Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the Federal reserve act is amended by adding at the end thereof a new section to read as follows: "SEC. 31. It is hereby declared to be the policy of the United States that the average purchasing power of the dollar as ascertained by the Department of Labor in the wholesale commodity markets for the period covering the years 1921 to 1929, inclusive, shall be restored and maintained by the control of the volume of credit and currency." SEC. 2. The Federal Reserve Board, the Federal reserve banks, and the Secretary of the Treasury are hereby charged with the duty of making effective this policy. SEC. 3. Acts and parts of acts inconsistent with the terms of this Act are hereby repealed. Passed the House of Representatives May 2, 1932. (S. 4429 is here printed in full as follows:) SOUTH TRIMBLE, Clerk. [S. 4429, Seventy-second Congress, first session] A BILL To restore and maintain the average purchasing power of the dollar by the expansion and contraction of credits and currency, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That it is hereby declared to be the policy of the United States that the average purchasing power of the dollar as ascertained by the Department of Labor in the wholesale commodity markets 1 52 5455 3341 12/98 31150-176 P for the year 1926 shall be restored and maintained by the expansion and contraction of credits and currency through the powers of the United States and its agencies. SEC. 2. The Federal Reserve Board, the Federal reserve banks, and the Secretary of the Treasury are hereby charged with the duty of making effective this policy. SEC. 3. To enable the Federal reserve banks to achieve this end they are hereby given the right to receive, and the Federal reserve agents are directed to deliver, Federal reserve notes at par for United States obligations deposited as security therefor. The CHAIRMAN. In view of the fact that the House has held extensive hearings and has gone into this matter very fully, it does not seem necessary for this committee to go over the whole ground. I think the whole matter might be simplified by printing in the record the report made by the House as a summary of the matter; and if there is no objection, that will be done. (The report by Representative Goldsborough, from the Committee on Banking and Currency of the House of Representatives, is here printed in full as follows:) [House Report No. 1103, Seventy-second Congress, first session] RESTORING AND MAINTAINING THE PURCHASING POWER OF THE DOLLAR The Committee on Banking and Currency, to whom was referred the bill (H. R. 11499) to amend the Federal reserve act by adding at the end thereof a new section, and for other purposes, having considered the same, report favorably therein with recommendation that the bill do pass without amendment. Within the scope of a committee report it is not possible to discuss in detail the technical economic principles involved in H. R. 11499, but it is possible to determine the anticipated workings of the action of the principle if it is crystallized into legislation. The bill has two features; an emergency feature and a permanent feature. The emergency feature contemplates a rise in the general commodity price level to the average existing between 1921 and 1929, inclusive, and the substantial maintenance of that price level. As to the emergency feature all authorities agree, first, that it is impossible for the debts of the country to be paid at the present price level, and that unless the price level is raised the business of the country is headed for inevitable bankruptcy; and, second, that the present price level is unjust to debtors. Speaking roughly, but with substantial accuracy, the dollar will purchase about $1.60 more of commodities than in the 1921-1929 period, and about $1.56 more of commodities than it would purchase between the period of 1918-1931 and the first quarter of 1932, inclusive. It would purchase now what it would have taken $1.25 to purchase about a year ago, which means that the producer-that is, the debtor-is being confronted with an ever-increasing burden. His debts, principal and interest, remain fixed. The commodities he sells and which would have purchased a given number of dollars when he borrowed them have decreased in their purchasing power. To go one step further, unemployment is constantly increasing, because on a constantly declining market business can not go on. It is impossible to produce below the cost of production. The Committee on Banking and Currency, after a most painstaking and careful investigation by a subcommittee, reached two conclusions: First, that the average price level from 1921 to 1929 would reestablish substantial justice between debtor and creditor; and, second, that a rise to the price level of 1921-1929 would make lower standards of living unnecessary, would justify salaries and wages at the pre-depression level; in short, would make unnecessary the process of painful economic readjustment, which will have to be consummated if the price level is not raised. The committee also reached the conclusion that unless the price level were raised substantially to the point above indicated, the burden of debt would not only seriously hamper production and destroy the producing class as now constituted, but that the creditor class, being unable to collect their fixed obligations, would also go down in the crash. Then the question arose as to what could be done. The Federal reserve system under the leadership of Benjamin Strong, former governor of the Federal Reserve Bank of New York, measurably stabilized for several years, the price level by open market operations, and by adjustment of the rediscount rates of the Federal reserve banks. The Federal reserve system has been accumulating gold at the average rate of $200,000,000 a year for about six years, and is now in a much stronger position than it was at the time of the open market operations just referred to. It is in a position to put into the market $4,000,000,000 in Federal reserve notes, and still maintain its 40 per cent reserve requirements. By utilizing its power to lower reserve requirements of the Federal reserve banks the system could put into the market nearly $9,000,000,000 of Federal reserve notes. Either sum, if the country knew that because of a congressional mandate, the Federal reserve system was going to raise the price level to the point indicated, would be much more than sufficient to raise it, because as soon as the country understood what the policy of the Federal reserve system, as provided by law, was, confidence among the banks and business men would be restored, bank loans would expand, the retailer would buy from the wholesaler, the wholesaler would buy from the manufacturer, the manufacturer from the producer of raw materials, and the masses of the people would find employment, so that through buying of securities by the Federal reserve banks and through the restoration of confidence as above indicated, the normal business activity of the country would very speedily be reestablished. Even more important than its emergency feature the committee deems the stabilizing feature of the bill. It would be the duty of the Federal reserve system under the bill, if enacted into legislation, to control the credit and currency of the country in a manner to satisfy the legitimate needs of business, and prevent unwholesome and unjustified expansion. If unjustified and unwholesome expansion were controlled, periods of inflation and depression would also be controlled, because periods of deflation and depression always follow periods of unwholesome overexpansion and speculation. In conformity with section 2a of Rule XIII of the House, there is herewith printed in italics the proposed new section (sec. 31) to be added as an amendment to the Federal reserve act: "SEC. 31. It is hereby declared to be the policy of the United States that the average purchasing power of the dollar as ascertained by the Department of Labor in the wholesale commodity markets for the period covering the years 1921 to 1929, inclusive, shall be restored and maintained by the control of the volume of credit and currency. "SEC. 2. The Federal Reserve Board, the Federal reserve banks, and the Secretary of the Treasury are hereby charged with the duty of making effective this policy. SEC. 3. Acts and parts of acts inconsistent with the terms of this act are hereby repealed." The CHAIRMAN. The first witness will be Representative Goldsborough, who has assured us that he wants only 5 or 10 minutes. We have a large number of witnesses, and we are going to try to hold them down pretty close as to the time allotted. STATEMENT OF HON. T. ALAN GOLDSBOROUGH, A REPRESENTATIVE IN CONGRESS FROM THE FIRST DISTRICT OF MARYLAND Representative GOLDSBOROUGH. Mr. Chairman and gentlemen of the committee, I am going to take only a few minutes, and shall rely upon the witnesses who are not Members of Congress. This measure does not grow out of the emergency situation. The principle involved in the bill was first introduced into the House in 1922, in the Sixty-seventh Congress, and afterwards in the Sixtyeighth Congress. We had very extensive hearings. Also, extensive hearings in the Sixty-ninth Congress and the Seventieth Congress on the Strong bill, which embodied the same principle. We have also held very extensive hearings, both pro and con, during the |