If there is one single event that is responsible for the dollar's demise, it is the Gold Reserve Act of 1934, which transferred control over the US currency from the Federal Reserve to the US treasury. The Gold Reserve Act of 1934 essentially abolished the Federal Reserve as an effective monetary authority, the results of which can be seen chart below.
Below you will find extracts from the transcript of the hearings about passing the Gold Reserve Act of 1934. Two points to keep in mind when reading these extracts are:
1) The gold reserve act of 1934 discussed in hearings below was passed in its original form. No changes were made to correct its hideous flaws which are discussed.
2) The gold reserve act of 1934 degraded Federal Reserve Bank System into a servile agency of the Treasury Department.
Three interesting points to note when reading the hearings below:
1) The fundamental insanity of putting the nation largest borrower (the treasury) in charge of protecting the value of money.
2) "power to issue currency should be in the hands of the people and not Wall Street" was the main argument used by the Treasury to appropriate the nation's gold and doom the dollar.
3) The Gold Reserve Act Of 1934 was drafted in the Treasury Department.
(emphasis mine) [my comment]
Gold Reserve Act of 1934 (pdf )
Hearings before the Committee on Banking and Currency, United States Senate, on S. 2366, a bill to protect the currency system of the United States, to provide for the better use of the monetary gold stock of the United States, and for other purposes. 73rd Congress, 2nd Session
Author(s): United States. Congress. Senate.
Dates(s): January 19, 1934, January 20, 1934, January 21, 1934, January 22, 1934, January 23, 1934
THE GOLD RESERVE ACT OF 1934
FRIDAY, JANUARY 19, 1934
UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY.
The committee met, pursuant to call, at 2 p.m., in room no. 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Glass, Wagner, Barkley, Bulkley, Gore, Byrnes, Bankhead, Adams, Goldsborough, Townsend, Walcott, Carey, Couzens, Steiwer, and Kean.
STATEMENT OF ROY A. YOUNG, GOVERNOR OF THE FEDERAL RESERVE BANK OF BOSTON,
... [Sorry for the overuse of red highlighting]
Mr. YOUNG. I have read it very hurriedly. I have had no opportunity to consult with counsel about any of the legal phases of it, I was almost tempted to wire you the other day that I would prefer to come a little later to the committee meeting, but realizing that it was urgent I am here to give you the benefit of any experience I may have had with finance.
There are other sections of the bill that commit us permanently to an irredeemable currency. That I am opposed to. I think those sections ought to be of a temporary nature; I mean with a time limit on them.
There are other sections of the bill that give the Secretary of the Treasury almost unlimited powers. Legally it does not nullify section 14 of the Federal Reserve Act in reference to open-market operations, but it does transfer that function to the Secretary of the Treasury on a permanent basis. And so we may find ourselves in the inconsistent position of the Federal Reserve System, through those open-market operations under section 14, of pursuing one policy, and the Treasury pursuing another.
Now, as I say, Senator Fletcher, I have had to analyze this bill very rapidly. I haven't had the time I wished to have. These are my impulsive views of the bill. And with that statement for the present, I shall now be glad to answer any inquiries that I can answer.
The CHAIRMAN. Governor Young, are there any specific amendments you would like to recommend to the committee ?
Mr. YOUNG. It seems to me it is a much easier transaction, and I am informed one in which the constitutionality of the act would not be questioned as much, if the profit or increased value of gold, whichever you want to call it, would go by way of a franchise tax rather than the way it is taken here. That would permit the Federal Reserve banks to retain the gold and still give the Government the profit. And I think it quite essential that the actual gold remain back of the Federal reserves.
Senator BARKLEY. I should like to ask Governor Young this question : He has suggested, independent of any amendments, that this profit could be transferred to the Government without the transfer of the actual gold. I do not know whether this is a fair question or not, Governor Young, but you understand that the primary object of this bill is not to get the profit out of this gold. That is a mere incident.
There may never be any profit [Gold was INSTANTLY devalued after the bill was passed]. There wouldn't be any unless the President issued a proclamation devaluing the dollar. He may do that and he may not do that. If he does not do it there will be no profit. As I understand, the fundamental object of this bill is for the Government to get the actual physical possession of the gold which is the basis of our currency in this country, and then if there is a devaluation later there would grow out of that transaction a profit. But if there is no devaluation there would never be any profit.
Mr. YOUNG. Well, Senator Barkley, I may not be taking the right assumption, but when every action of the administration is toward devaluation; with the embargo of April 18, plus the gold-buying program, plus the terms of this bill, with 2 billions of dollars to purchase certain things, plus the 60-cent limit on it, I have every reason to believe there is going to be a profit in this gold.
Senator BARKLEY. Yes, I think it is reasonable to assume there will be. But the transfer of that profit to the Government from the Federal Reserve banks is not, as I understand it, the primary object of this bill.
Senator CAREY. What is the primary object of the bill, then, Senator Barkley ?
Senator BARKLEY. Well, of course, if the only object of this bill is to get two or three billions of dollars' profit out of this gold, it should not be done, as is suggested by Governor Young and others. But, according to my interpretation of the bill and the negotiations that have been described here and in which, of course, I did not participate, the object is to put in the Treasury and under the control of the Government all the monetary gold in this country permanently, to be used and held as a ba sis for currency. That is what I understand to be the main object of this bill, and the question of profit is incidental.
Mr. YOUNG. Well, then, may I understand if this means a Government central bank and the abolishment of the Federal Reserve System?
Senator BARKLEY. No; I do not understand it is that. And I do not agree, I will say frankly, although probably I am not expert enough on banking and currency to put my opinion against that of many others, but I do not believe it will result in anything of that kind.
Senator KEAN. If you take away all of the powers of the Federal Reserve System—
Senator GORE (interposing). And the gold, too.
Senator KEAN (continuing). And the gold too, where will the Federal Reserve System stand?
Senator GLASS. Isn't it true that those gold certificates practically amount to gold inasmuch as they are redeemable in gold?
Mr. YOUNG. That is right.
Senator GLASS. And when you transfer to the Federal Reserve banks certificates that are meaningless and that are not redeemable in gold, it has no gold, has it?
Senator BARKLEY. They are redeemable in gold so far as may be necessary for the Federal Reserve System to engage in international transactions or to preserve the parity of the currency.
Senator GLASS. But the parity of the currency is preserved on an irredeemable basis.
Senator GOLDSBOROUGH. Governor Young, how about the primary objects of the bill? I direct your attention to section 10a, in which there is set up the sum of 2 billions of dollars to be recovered into the Treasury for the very purpose of stabilizing foreign exchange. Isn't that correct ?
Senator BARKLEY. Of course.
Senator GOLDSBOROUGH. And that is set up out of the profit of taking over the gold?
Mr. YOUNG. AS I understand this 2 billion of dollars, it is not only money to stabilize the exchange, but there is no limit on what the Secretary of the Treasury can do with that money.
Senator GLASS. Well, there wasn't in the bill as originally introduced, but section 10a has been rewritten.
Mr. YOUNG. Well, I notice there is a change in that, Senator Glass. But it reads this way:
To deal in gold and foreign exchange, and such other instruments of credit or security as he may deem necessary to carry out the purpose of this section.
Senator BARKLEY. That is, to stabilize the exchange value of the dollar.
The CHAIRMAN. Yes; the purpose is stated as being with the view of stabilizing the exchange value of the dollar.
Mr. YOUNG. Well, the words "and such other instruments of credit", it seems to me gives him unlimited authority to deal in almost anything. Further down, in section (b) he can support the Government bond market and use the funds for that purpose.
Senator GLASS. And that is what he is going to do, of course, under the bill.
Senator KEAN. NOW, Governor Young, I repeat my question: If you take away from the Federal Reserve banks the gold, and if you take away the powers that are included in this bill and the amendments thereto, what is there left of the Federal Reserve banks?
Mr. YOUNG. Well, that is just exactly the inquiry I made. I think the Federal Reserve banks are centered on pretty much a machine, and that is why I suggested that this be not a permanent law, that there be some time limit on it. I have been with the Federal Reserve System for 17 years and have seen it under many conditions, and I still believe that the regional system is better than a central system, with all its cumbersomeness. With cumbersomeness I am satisfied it has on many occasions excluded the possibility of hasty action on monetary policies. Frankly, gentlemen of the committee, I do not want to see the Federal Reserve System abolished. I want to see it continued, not as a mechanical set-up but as fairly representative of the business and industrial institutions of the country.
Senator BARKLEY. What is there that the Federal Reserve banks can do now that they could not do if this bill were enacted into law?
Mr. YOUNG. We can operate in the open market. This bill gives the Secretary of the Treasury such powers, of a permanent nature, that he could nullify anything we could do.
Senator BARKLEY. The Secretary of the Treasury under this bill could only engage in operations in the open market for the purpose of stabilizing the exchange value of the dollar, which it seems to me is an infinitesimal amount of open-market transactions as compared to domestic operations in all kinds of securities that the banks can now engage in.
Mr. YOUNG. There is very broad language in this bill, and certainly the Secretary of the Treasury could purchase Government bonds to stabilize the Government bond market, and I think there can be no question about that.
Senator BARKLEY. I agree to that.
Senator BYRNES. Would it be conceivable if the Treasury wanted to stabilize the bond market at some time, that the Federal Reserve banks would want to go into the bond market to prevent a stabilisation of the bond market?
Mr. YOUNG. That is possible.
Senator BYRNES. If that be true, don't you think that somewhere the Government should have the power and the opportunity to protect its own securities; I mean in event the Federal Reserve banks should determine to attack those securities?
Mr. YOUNG. That is why you have two different set-ups in this bill, one in the Treasury and one in the Federal Reserve banks.
Senator BYRNES. That is right. But if there is to be a conflict of interest, shouldn't the Government have the power and the opportunity to protect itself? If, as you assume the time may arise when there would be a conflict, when the banks might want to deflate and the Government of the United States might not want to deflate, should the Federal Reserve banks alone have the weapon with which to act?
Mr. YOUNG. It has that power now under the Banking Act of—
Senator BYRNES (interposing). And suppose it would not want to surrender it?
Mr. YOUNG. Under the Banking Act of 1933 it has that power, and in my opinion it always has had that power through the Federal Reserve Board, which is a branch of the Government. Now it is a question whether you are going to transfer this power from the Federal Reserve Board to the Treasury Department.
Senator BYRNES. If it is a branch of the Government, then ordinarily it would be in accord with the policies of the Government. But you have assumed that there might be a conflict between the Treasury and the Federal Reserve Board.
Mr. YOUNG. That is right.
Senator BYRNES. If that conflict should arise, don't you think the Treasury should have the power and the weapon with which to protect itself as against privately owned banks?
Mr. YOUNG. AS an em ergency measure that may be so, but as a permanent thing I say certainly not.
Senator BYRNES. Then if it may be used in an emergency, why not permanently? [Power grab]
Mr. YOUNG. Then the whole theory of the Federal Reserve Act is wrong.
Senator BYRNES. Just because you think it is wrong, but for no other reason?
Senator GLASS. Let me ask you a question. Was the Federal Reserve System set up to protect the Treasury?
Mr. YOUNG. I do not think so, Senator.
Senator GLASS, Was it set up to be used as a football by the Treasury? [Nicely put]
Mr. YOUNG. I do not think so.
Senator BARKLEY. Was it set up to be used to drive down the market price of Government securities?
Senator GLASS. NO; and it has never done that.
Senator BARKLEY. Assuming that.
Senator GLASS. We may assume what the Secretary of the Treasury will do from what the Secretary of the Treasury has done. I call every member of the Banking and Currency Committee here present to witness the accuracy of this statement-certainly those members of the subcommittee that prepared the Banking Act of 1933. When we made an assessment on the member banks of a quarter of a cent we provided that one half of that assessment was to be called within 90 days, and the other half of the assessment was to be subject to call, but it was the universal opinion of every member of the committee that it was more than likely that that second assessment would never be called, and we appeased the protest of member banks throughout the country against that assessment by saying to them that we did not contemplate that it would ever be called. My information is that it has already been called, and that the call has been used, not to pay any depositor in a failed bank, but has been used to stabilize the bond market of the United States, which I conceive to be a perversion of the intent of the law. If it is done so soon now with the fund provided for the insurance of deposits in banks, there is no telling what will be done. [Key point]
Senator BARKLEY. Does not the act authorize the deposit corporation to use this fund, or such other fund as it may have, for investment in suitable securities?
Senator GLASS. Undoubtedly.
Senator BARKLEY. SO that there is no unlawful use of the money.
Senator GLASS. NO; there is no unlawful use of it. There is a perverted use of it, against the intent of the law.
Senator KEAN. Mr. Young, is it not true that in times past the Secretary of the Treasury has had one idea of keeping the market going, and encouraging people to speculate, if you chose to use that term.
Senator BYRNES. YOU would not mean to say, in response to that, that you would expect that just because a man is a member of the Federal Reserve Board he will necessarily be superior in patriotism to the official who happened to be appointed by the President of the United States as Secretary of the Treasury under any given circumstances? The Senator asked whether, if the Treasury goes to encouraging gambling, it could be stopped only by the Federal Reserve Board. Do you believe it necessarily follows that if a man is Secretary of the Treasury he would want to do that, to encourage speculation ?
Mr. YOUNG. Not at all, Senator; but let us look at the mechanics of this, and look at the act of 1933, which is the result of what developed in actual practice in reference to open-market operations. There are 108 directors of the Federal Reserve banks. There are 12 Governors. There are 8 members of the Federal Reserve Board, and open-market operations under the law today require the majority approval of all of them. I say that is far better than depending on any one man. [agreed]
Senator BYRNES. But they are responsible to their member banks, and the Secretary of the Treasury is appointed by the President, who is responsible to 130,000,000 people. Would you not expect just about such desire to do that which was best for the interest of the country from him, or is all virtue in those who happen to be, from time to time, appointed to the Federal Reserve Board?
Mr. YOUNG. NO ; I do not think so.
Senator BARKLEY. SO that, so far the only way in which you feel that this bill may interfere with the Federal Reserve bank is that the Secretary of the Treasury might in some way impinge upon the right of the Federal Reserve banks to deal in open-market transactions in securities?
Mr. YOUNG. Yes. There may be other things.
Senator GLASS. Governor, let us be brutally frank about this matter. Is it not a fact that the Secretary of the Treasury for the last 12 years has practically dominated the policy of the Federal Reserve banks and Board with respect to the purchase of United States bonds? [Very interesting]
Mr. YOUNG. NO, sir.
Senator GLASS. I think he has.
Mr. YOUNG. Well, I do not like to disagree with you, Senator, but I was on the Board for 3 years, and I know that there was a difference of opinion between the Treasury and the Board repeatedly.
Senator GLASS. But the Treasury always predominated.
Mr. YOUNG. NO, sir.
Senator GLASS. HOW did you manage to load the Federal Reserve banks up with 2y2 billions of United States bonds otherwise?
Mr. YOUNG. It was done by a voluntary action of all the Reserve banks in an open-market meeting, considered by all the Governors, some of whom voted for and some of whom voted against. The majority were for it. It went to the Federal Reserve Board. The Federal Reserve Board approved or disapproved it by a majority vote.
Senator GLASS. What was the attitude of the Secretary of the Treasury ?
Mr. YOUNG. In all those purchases?
Senator GLASS. Yes. If you cannot tell me, I can tell you.
Mr. YOUNG. I cannot tell you.
Senator GLASS. He was in favor of it always.
Senator GLASS. Oh, no. Whenever a Federal Reserve bank goes into liquidation or is abolished by the Government, all of its property goes to the Government. [interesting]
Senator KEAN. Yes.
Senator GLASS. And that is an honest way of getting possession of it, if you want to abolish the Federal Reserve bank. [Glass helped create the Fed. he seems at times conflicted about it.]
Senator KEAN. That is true.
Senator COUZENS. Let us do it. [They were a lot more open to abolishing the Fed back then weren't they?]
Senator GLASS. I know you are in favor of doing it, and I am not.
Senator KEAN. What I am trying to get at is this, that if the Federal Reserve bank has bad paper, or anything of that kind, they are t aking away the assets that belong to the people. That is what I am getting at. [Considering the Fed's current toxic balance sheet, this very relevant]
STATEMENT OF HON. ROBERT L. OWEN, FORMERLY A UNITED STATES SENATOR FROM THE STATE OF OKLAHOMA
... [Owen is an die hard inflationist. What is very interesting is the arguments he uses to justify the dollar's destruction]
The CHAIRMAN. Senator, will you give us your view as to the time limit that has been suggested here in certain sections of the bill ? Is there any need for that ?
Mr. OWEN. I think not only is there no need for it, but I think it would be a deplorable thing to say that the Government of the United States should be limited by time in protecting the adequate security of its own money and stabilization of its own money.
The United States is responsible to the people of the United States for the stability of the money. You gentlemen are charged with the duty of devising statutes and the mechanism by which that can be accomplished.
If there is a conflict between the interest of the Government of the United States and the Federal Reserve bank, or a difference of opinion, I think the difference of opinion ought to be resolved in favor of the United States. I think the United States is the proper power to regulate the value of the money, and not the Federal Reserve banks, because, after all-and speaking most respectfully of the Federal Reserve banks, because they are conducted by men of the highest character-they get their view, and they have an atmosphere around them. They are chosen by the big banks, through discreet little campaigns, and they naturally follow the ideals which are portrayed to them as the soundest from a financial point of view.
Senator ADAMS. Senator, may I ask you a question?
Mr. OWEN. I would be glad to have you do so.
Senator ADAMS. YOU said you regarded it as one of the fundamental functions of the Government to maintain the stability of its currency.
Mr. OWEN. Absolutely. That is my opinion.
Senator ADAMS. I am wondering whether or not a reserve is one of the essentials of that, and to what extent redeemability is an essential to a sound currency.
Mr. OWEN. I think the question of redeemability in terms of gold has no particular value whatever. What citizen wants gold in his pocket, when he has a legal tender money with which to pay his debts? He does not want gold. If he wants it for industrial purposes, to make earrings of, he can get it. If he wants it to pay an international trade balance, he will have no difficulty about getting it, and that is the only remaining function of gold. It is to furnish the industrial arts and sciences, and to liquidate international balances that are otherwise not conveniently settled.
Senator ADAMS. HOW would you draw the phraseology of currency of that kind, which was not redeemable in any form of property? [Fiat currency]
Mr. OWEN. Keeping it at a parity with gold is sufficient.
Senator ADAMS. Would you provide any agreement
Mr. OWEN. If it is kept at parity with gold, the United States would have 7,000 tons of gold, and very few persons would want more than a little of it at a time.
Senator ADAMS. I am inquiring for information. Of what service is gold if it is not available at any time or in any way to the holder of currency?
Mr. OWEN. When you ask what service, I answer that the service of legal-tender money is the only service that the citizen has any reason for outside of the industrial arts and paying international balances, and that is provided for in this measure.
The CHAIRMAN. What is your view about leaving this gold in the Federal Reserve banks? Do you think that is important?
Mr. OWEN. I think that the ownership of the gold should be in the United States, but I do not think its deposit makes any difference. I think it is quite all right to leave the physical gold in the Reserve banks. I regard them as perfectly safe.
The CHAIRMAN. YOU mean store it with them?
Mr. OWEN. Yes.
The CHAIRMAN. But have the title vested in the Government?
Mr. OWEN. Certainly.
Senator GLASS. Has that always been your view, Senator?
Mr. OWEN. Well, it is my view now, and that is sufficient.
Senator GLASS. NO. I want to put into the record the view that you once held.
Senator GLASS. YOU and I had the distinction of appearing before a large audience in New York in November 1913 to defend the Federal Reserve Act against the assault of Mr. Frank A. Vanderlip and some other gentleman whose name I have forgotten. Mr. Vanderlip will never let us forget him. On that occasion you reminded the audience that the Government undertook to maintain the parity of all moneys with gold.
Senator GLASS (reading) :
If the Government must maintain the parity of all money emitted in the United States under the law, and that law has been so far prized that it was insisted that it should be redeclared in this very act, and it is in the act as a new declaration, pledging the act of 1900 as the law of the land, why demand that these notes should be the notes of these banks and not the notes of the United States, although the United States—
And I particularly would like you to note this (continuing reading) :
The Government of the United States is compelled to redeem these notes in gold. The citizen who receives one of these notes, from the Atlantic to the Pacific, must be satisfied, without examination, that these notes are as good as gold. He must not stop to examine into the validity of the bank which, emits them any more than he will stop to examine a national-bank note to see whether a national bank is safe and sound. A national bank can go out of existence. A national bank can be proved worthless. A national bank can sign its note, or not sign its note. The signatures of the officers of the bank may be forged to the note, and yet its notes are as good as gold, and are kept on a parity with gold by the laws of the United States.
I thought that was pretty sound doctrine.
Mr. OWEN. I think so now. I approve it. It was excellently well said. [Laughter.] I thank you for having brought it to the attention of the committee, Senator.
Senator GLASS. Yes. I want it to go into the record.
Mr. OWEN. I am glad to have it in the record, and I now make this comment upon it, that we have since that time had the wisdom to do what was denied to me at that time, I believe, with your opposition, and that is to make all notes legal tender. Did you not disapprove that at that time?
Senator GLASS. Oh, no.
Mr. OWEN. I beg your pardon.
Senator GLASS. I did oppose the improvident proposition to make Federal Reserve notes usable for reserves in banks.
Mr. OWEN. Since that time we have made all our money legal tender, with my cordial approval and sympathy. I was glad to see it done. That, therefore, makes gold absolutely unnecessary as money in the pockets of the people, because they have a legal tender with which to pay their debts, pay their interest, and carry on the business of the country. I think that is a sound way. I think that there ought to be only one form of money, issued alone by the Government of the United States, and the Government should have in its hand a sufficient amount of gold-and silver, too-to furnish anybody with gold and silver who wants it for legitimate purposes, without permitting them to conspire against the stability of our currency by artificial contraction.
Senator GLASS. Does the Executive order permit anybody who has gold now to hold it? Anybody who has gold now is characterized* under the Executive order, as a felon and may be fined and put in jail.
Mr. OWEN. For that very reason the gold which has been taken away from the citizen can pass alone to the Government of the United States, and cannot pass to private corporations for the benefit of anybody else. It must go to the Government of the United States.
Senator GLASS. Nobody can get any gold from the Government of the United States or from any bank at all.
Mr. OWEN. Quite right.
Senator BARKLEY. This bill provides that they may get it for industrial purposes and for the arts.
Mr. OWEN. They can get it for every reasonable purpose, and they cannot get it for the purpose of hoarding the gold and interfering with the stability of our currency. I think that is absolutely sound, 100 percent.
Senator GLASS. Nobody has very much gold or anything else to hoard.
Mr. OWEN. I think it takes omniscience to know that.
Senator GLASS. We have conferred omniscience, in this bill, on the Secretary of the Treasury. [Omniscience is the capacity to know everything infinitely]
Mr. OWEN. I would rather he would have it than the bankers of New York.
The CHAIRMAN. Are there any other questions, gentlemen?
Senator GLASS. It is altogether a question of opinion.
Mr. OWEN. I think it better practice to have the Government issue its own money directly than to delegate it to be issued against its own bonds.
Senator KEAN. There is no delegation in issuing money.
Mr. OWEN. NO.
Senator KEAN. That is only paper; that is not money.
Mr. OWEN. Well, you can call it paper if you like, but it is legal tender now.
Senator KEAN. It may be legal tender, but it is not money. It is not sound money. [money = gold]
Mr. OWEN. It is just as good as gold now.
Senator GLASS. Right on that point, Senator, let us get our dates correct so there will be no confusion. I understand that you now answer your speech of 1913.
STATEMENT OF DR. BENJAMIN M. ANDERSON, JR., ECONOMIST OF THE CHASE NATIONAL BANK, RIVERDAIE, N.Y.
Mr. ANDERSON. ... I find evidence in studying this bill that certain passages of it could not have been drawn with an understanding of the actual processes of money credit, money market, and so on. It is with reference to those things that I want to talk to you particularly. There are things in this bill that can do terrible harm, the correction of which can leave it open to the President to accomplish his essential purposes if they can be accomplished.
Senator ADAMS. Of course, my inquiry leads to this point: Can a deposit be a true reserve which cannot be drawn upon?
Mr. ANDERSON. This deposit can be drawn upon.
Senator ADAMS. I am asking you the definition. Can a deposit be a reserve which cannot be drawn upon?
Mr. ANDERSON. A reserve which cannot be drawn upon?
Senator ADAMS. Yes. Is it a reserve or a fund which cannot be drawn upon? Can that be a reserve within the meaning of your term?
Mr. ANDERSON. The meaning of this term is set by Senator Glass and the Congress.
Senator ADAMS. I am asking your opinion. I am trying to get your view of it. The reason I am asking it is because in the bill which we are now considering the term " reserve " is used, and it is provided to create that reserve in gold certificates in such form as the Secretary of the Treasury may determine. Now, if that form is determined to be such that they are not negotiable, that they may not be paid out by the Federal Reserve, could that constitute a reserve ?
Mr. ANDERSON. If that is in the act, I missed it. It is certainly bad if the Federal Reserve banks cannot even get hold of the gold certificates.
Senator ADAMS. They get hold of them. The question is, What may they do with them?
Mr. ANDERSON. What is that?
Senator ADAMS. The question is, What may they do with them when they get them and what are the terms of the gold certificates. You see, the terms are to be fixed by the Secretary of the Treasury. We do not know what the Secretary of the Treasury may put in these gold certificates. He may put in that they are not negotiable. He may put in that they are not redeemable. He may put in that they are a fixed maturity.
Mr. ANDERSON. That would all be vicious. If the Federal Reserve banks cannot freely use these gold certificates as reserve money, we would have a monstrosity, of course. It is bad enough if they cannot keep the gold.
Mr. ANDERSON. ... Now, then, I find in this bill before you gentlemen a provision which will increase member-bank reserves by two billions; and I want to show you how to avoid that and still let the President do what he wants to do. It is the most important defect in the bill. There are many others, but this is absolutely vital. If this bill goes through this way with this provision in it, not even the President can control the ensuing inflation. Nobody can pull it down. Once the credit gets working, once confidence gets back, once speculation gets active, and things get moving, it cannot be controlled.
Let them use the funds they get from the regular sources, from the sale of securities to the banks, and the public from taxes, whatever form they please, in constituting that fund; but let them not take out of the Federal Reserve banks gold or its equivalent in gold certificates and put them to work in this way, because if they do, every time they buy gold abroad, foreign exchange, above all, Government securities, they put additional funds out which come into member bank reserves and feed this already swollen volume of member bank reserves.
Mr. YOUNG. I put it that it would increase it 4 billion. I think your figure is 2 billion. There is approximately 4 billion profit if you devalue 50 cents on the dollar. The Treasury has to borrow money and pay interest. Obviously they are not going to do that very long. They are going to use the gold by depositing gold certificates and thereby creating that much more excess reserve.
Mr. ANDERSON. Yes; but you will agree that it will make an utterly unmanageable increase in member bank reserves, which it is hard to control when once inflation gets going.
Mr. YOUNG. Yes; it is almost unmanageable now.
What I have tried to bring out and what I think Dr. Anderson is trying to bring out is that if this goes through as contemplated in the bill it gives the Treasury, on a 50-cent devalued dollar, approximately 4 billions of dollars that is bound to end up in excess reserves as fast as the Secretary uses it, as he is permitted under the act to use it. The initial book transaction of marking our gold up, marking up the Treasury's balance 400 millions, would have no effect on excess reserves
Senator GORE. I did not catch that.
Mr. YOUNG. The initial transaction of our taking 4 billions of gold into the Reserve System and giving the Secretary of the Treasury credit for it, is nothing but a book entry and would have no effect upon the excess reserves of the member banks in the Federal Reserve System; but as the Secretary of the Treasury proceeded to spend that money, the excess reserves would increase to the extent he spent it, and the extreme possibility, with the 50-cent dollar, is 4 billions of dollars, plus the 900 millions we already have, making very close to 5 billions of excess reserves. If there is a demand for money, and that starts pyramiding, there is no limit to where it can pyramid.
Senator COUZENS. And with the consequent loss of profit to the Federal Reserve and the other banks?
Mr. ANDERSON. Senator, I am not thinking about profits to banks; I am thinking about this country. I am thinking about the President's desire to make effective his policy, if you please. He does not want a situation that he cannot control. Which is the policy that you are going to choose to regulate credit? As I would do and as Senator Glass would do, we would regulate it with respect to the needs of trade, while the President would regulate it with respect to the price level. In any case you want it under control. You do not want to put it so large than when the thing starts you cannot put it down.
The CHAIRMAN. Would control by the Federal Reserve Board of the rediscount rate have any effect?
Mr. ANDERSON. Almost none. Under that situation the rediscount rate is effective only when the banks have rediscounts. The volume of rediscounts on the balance sheet is 103 million dollars.
Senator GLASS. Negligible.
Mr. ANDERSON. Yes; negligible. The possible checks are few as things stand. They might sell Government securities; but would the Secretary of the Treasury let them sell them?
Senator GLASS. What would happen if they should undertake to sell Government securities?
Mr. ANDERSON. I venture to state that political pressure would stop them.
Senator BULKLEY. What would happen to the price of Government securities?
Senator GLASS. Suppose political pressure did not stop them. Suppose they would put them on the market.
Mr. ANDERSON. It would be very bad for the Government securities market. [by the way this is will be very relevant this year as commodities and inflation start spiraling out of control.]
Mr. ANDERSON. I am reluctant to have them do all the things proposed there.
Senator COUZENS, What are you reluctant to have them do?
Mr. ANDERSON. It would seemingly give the Secretary of the Treasury the authority to do a general banking business.
Senator BARKLEY. Any effort to stabilize the dollar, which is an equation in international transactions, must be broad enough to include all transactions that are international; is not that true?
Mr. ANDERSON. It should include those things that are dealt in the exchange markets, bills of exchange, cable transfers, and so forth. There is this to be said about it, by the way: We can get into a lot of trouble in going into foreign markets and buying exchange there or buying gold there and interfering with their policy, as we would dislike very much having foreigners come here and buy. I think we had better have a free gold market of our own, if we are going to do this, and let the Government be the biggest factor in the gold market. I would rather see it done that way, and then foreigners cannot criticise us. A lot of trouble comes when the central bank or Government is playing in foreign exchange. The trouble comes both at home and abroad.
Mr. ANDERSON. NOW, I come to the second main point: The Treasury is not the place for control of money and credit policy because the Treasury is a great borrower. [Great quote] Money policy and credit policy are primarily designed to meet other things than those of the borrowing needs of the Treasury or the desires of the Secretary of the Treasury to get a somewhat lower rate, or things of that kind. According to the sound banking principle, credit control or money control should be with respect to the needs of trade and the quality of credit. It should be tightened up when there is danger of speculation beginning.
The point I make here is a vital point. Whatever be the money policy, it is a policy which will frequently be inconsistent with Treasury policy. If the control is to be in the Government, if you do not want the Federal Reserve banks to control your credit and money any more, still it should not be in the hands of the Secretary of the Treasury. It should be in the hands of an absolutely independent authority responsible to the President, as the Treasury is responsible to the President. But if the President's policy is to regulate money and credit with reference to the level of commodity prices, that policy will often be inconsistent with the Treasury's policy of getting a lot of money to spend.
Senator COUZENS. Have you any other suggestions with reference to amending the bill?
Mr. ANDERSON. I have some suggestions further. This matter of separating the Treasury from the control of the money policy, instead of putting the money policy in the Treasury, seems to me very vital.
After the period of inflation in Germany, that was one of the drastic reforms insisted upon and agreed to. There was action in France of a similar sort, limiting what the Treasury could do. I think all the authorities on this subject agree as to the inconsistency between monetary policy and Treasury policy and the need for having the money policy separate.
Senator STEIWER. Who would have control of the money policy?
Mr. ANDERSON. I would revitalize the Federal Reserve banks and have them do it. I think that is about the best way to do it,— along the lines that the original Federal Reserve Act called for; but if it is better to put it in the Government, still it ought not to be in the Treasury.
Senator GLASS. The existing Federal Reserve Act calls for that too, but they do not assert themselves. [Glass is not happy with the Federal Reserve's performance]
Mr. ANDERSON. Let me call your attention to one further thing, however. What this act does is to divide the control of money and credit. It does not make the Treasury sole controller. It leaves a large volume of existing control with the Federal Reserve System. And there you have a further difficulty—lack of coordination.
Senator GORE. I think we ought to make all possible speed with the hearings, but of course we ought to get all available important information.
Senator WALCOTT. This is the most important bill that has come before the Congress since the Civil War, and being of such great importance to the people of this Nation it ought to be properly considered.
Senator BARKLEY. Why is it the most important bill since the Civil War?
Senator WALCOTT. Well, if you destroy the central bank why isn't it the most important piece of legislation that has been proposed since the Civil War?
Senator BARKLEY. I do not agree with the suggestion that it will destroy anything.
Senator WALCOTT. Well, I think all that you need to do is to consider the terms of the bill pending before us.
STATEMENT OF T. R. PRESTON, PRESIDENT OF THE HAMILTON NATIONAL BANK, CHATTANOOGA, TENN.; REPRESENTING THE UNITED STATES CHAMBER OF COMMERCE
Mr. PRESTON. This is the statement of the board of directors of the Chamber of Commerce of the United States made in support of policies formally given to the chamber by its organization members in favor of a gold basis for American currency. The statement relates to the monetary proposals now before Congress, and was unanimously adopted by the board members in regular session, January 19, 1934.
The chamber has declared that the question of a sound national monetary policy is paramount. It has urged establishment of the currency upon a gold basis, balancing of public budgets, and stabilization of exchange. It has sought avoidance of monetary experimentation, fiat money or price-index currency.
The President's message of January 15, and the monetary bill submitted to Congress, contain proposals of much merit. The suggestions that there be established a gold bullion standard and an equalization fund to steady exchange are in principle to be commended heartily. At the same time there are features of the bill that are open to question and require serious consideration. Taking the main intent of the proposals to be the establishment of the currency firmly upon a gold basis, attention is directed to the following feature of the bill.
First. There is no assurance that, subsequent to the negotiation of international monetary agreements and the establishment of a definite par point for the dollar, a fixed and unvarying number of grains of gold will be designated as our standard measure of monetary value. We suggest the incorportaion of a provision to the effect that a definite number of grains of gold, as the par point of the dollar, shall be fixed by proclamation when suitable international monetary agreements are negotiated, and that thereafter administrative action shall be addressed to the maintenance of all forms of the currency on a parity with such standard dollar but without power to vary its gold content.
Second. The provision barring redemption of currency in gold, except under regulations of the Secretary of the Treasury when approved by the President, apparently fails to impose a definite obligation that gold or gold bullion must be given in redemption of currency when necessary to keep all forms of it upon a parity with the standard gold dollar once established. This needlessly would provide grounds for misgiving or possible alarm as to the value of one or more forms of the currency in circulation after stabilization. Great powers exist to utter currency without any designated gold cover. The assurance that parity will be maintained by the release of gold when necessary for that purpose does not mean that gold need be given upon a mere demand nor that gold will be in large demand. A requirement to maintain the gold parity of all forms of our currency by release of gold when necessary for that purpose, can be surrounded with sufficient statutory safeguards to prevent abuses and avoid dissipation of reserves.
Third. The establishment and maintenance of a gold-bullion standard is not dependent upon the surrender of the title of the gold reserves held by the Keserve banks. The bill provides for such a surrender of title in return for "certificates" which are secured by gold but which do not specifically assure their* exchangeability for gold upon request of Reserve authorities. The material point involved in the current situation is not that the title to the gold be with the Treasury, but that after devaluation of the currency there will be a surrender to the Treasury of such net profit as may result therefrom. The relinquishment of such profit is advisable in the interests of the Reserve System and of the Government. It would provide the Treasury with funds for the stabilization fund and for other purposes.
The surrender of the actual gold, combined with the broad powers the bill proposes to vest in the Treasury, presents the possibility of weakening the Federal Reserve System and impairing its utility. This is not necessary in connection with stabilizing the currency. We recommend that the bill be changed to provide that the Federal Reserve System, in surrendering to the Treasury the so-called "profit" resulting from devaluation, shall retain title to its gold reserves under carefully devised restrictions upon its rights to release such gold.
Fourth. The purposes and methods of operation of the proposed stabilization fund should be more expressly stated, and there should be excluded all power not directly necessary for the stabilization of the dollar in foreign exchange.
Fifth. The chamber has steadily advocated that the Federal Reserve System in its relations to the expansion and contraction of currency and credit should have and should maintain an independent status. The bill should be tested from the point of view of assuring such independence. We further recommend that provisions be placed in the bill which assure that power will be left to the Federal Reserve banks and Board to expand and contract the volume of currency in accordance with the demands of trade and in accordance with provisions of law to be adopted requiring a suitable minimum cover of gold against all forms of Federal Reserve currency.
Sixth. In efforts to secure stability of the currency it is axiomatic that every endeavor must be made to bring the budget of the Government into balance as expeditiously as possible, which in itself will secure protection of the currency and maintain the credit of the Government.
Mr. PRESTON. Under certain conditions they have very great powers, but we contend it ought to be covered by gold to some extent.
Senator BARKLEY. Under the present law, without regard to this bill, they can issue an indefinite amount of money based upon gold certificates, and they need not have any gold at all. And it so happens that they now have about a billion dollars of gold certificates upon which the currency is predicated. They could substitute gold cerficates as a basis for all of their currency if they saw fit to do it. They haven't done it, but that doesn't interfere.
Senator WALCOTT. Governor Black specifically stated that those gold certificates were without redemption, and that you could not exchange them into gold, that they would not form a solid foundation back of any other issues by the Federal Reserve, and therefore public confidence in these new issues would be destroyed.
Senator BARKLEY. Well, it has not been destroyed.
Senator WALCOTT. NO ; because gold certificates today mean gold, but these new certificates would mean nothing.
Mr. PRESTON. That is what our board members thought.
Senator WALCOTT. Governor Black made that quite clear.
Senator WAGNER. AS a matter of fact, outside of international trade what need is there for gold?
Senator WALCOTT. TO have and to leave it there in case of trouble.
Senator WAGNER. Well, don't you have the thing itself in the Treasury? [not in 2009 you don't. It is gone]
Senator BARKLEY. It will be in the Treasury. It is just a technical matter. The title to this gold, as long as we are going to be on the gold standard, is there as a base for all of our money. Don't you think, Mr. Preston, as a matter of fundamental principle the agency that is responsible ultimately for all the currency that we have ought to possess the basis of that currency? [See the argument being used to justify this? "power to issue currency should be in the hands of the people and not Wall Street" was the main argument used to destroy the dollar]
STATEMENT OF FRANK A. VANDERLIP, NO. 1107 FIFTH AVENUE, NEW YORK CITY
Senator GLASS. Did you ever hear of a Government note, since the world was created, that could not be issued except upon the demand of a bank? You know that in the last analysis a Federal Reserve note is a bank note; it is not a Government note, because it cannot be issued except on demand of a bank.
Mr. VANDERLIP. Why, governments all over the world at all times almost, when they ran into sufficient budgetary deficits, have issued notes, not at the command of a bank but to ease their own financial condition. [California for example]
Senator GLASS. NO; I do not think it is. I just want to call your attention to the fact that in 1913, Mr. Vanderlip, you were one of the most vehement advocates of the redemption of any currency in gold that I have ever encountered in all the born days of my life.
Senator MCADOO. Yes, but you are making a restatement of what you have already said. I was confining my remarks to the currency at the moment, because I want to clarify it in may own mind. I always want to be informed, and I am asking for information. If you think there is a distinction between Government bonds and Government notes of circulating quality, payable on demand, would you say there was any distinction if the bond of the Government was used as the basis for the issue of currency, in other words, as security for the currency? Would that make the currency any better? [Today, the bond of the Government IS the basis for the dollar]
Mr. VANDERLIP. That, in the slang of the market, is "pig on pork". It is a man securing his note with another note of his own.
The CHAIRMAN. ... Why should not the Treasury have this authority instead of this board?
Mr. VANDERLIP. Because I happen to know by experience that the Secretary of the Treasury has a good many duties. He is so busy that if you added to those all the duties, all the powers, all the great influence of a central bank, I think he would be quite swamped; and besides, I would rather see those duties discharged by a more permanent board than I would by one man politically appointed.
Senator GORE. Mr. Vanderlip, don't you think this pending bill centers in the hands of the Secretary of the Treasury powers that are more or less antagonistic? Isn't it a good deal like the legislative, executive, and judicial powers, all in one?
Mr. VANDERLIP. I quite agree with that statement, Senator.
Senator GORE. I think that is the fundamental objection to this.
Senator GLASS. I was going to say, Mr. Vanderlip, there is one provision of the bill which causes one or two of us at least very considerable concern. That provision of the bill creates a banker of the Secretary of the Treasury practically.
Mr. VANDERLIP. And he would have a lot of things to do and power to do them that a banker could not do.
Senator GLASS. Yes; and many things that a banker would not do, many improbable things.
STATEMENT OF JAMES P. WARBURG, VICE CHAIRMAN OF THE BOARD OF THE BANK OF MANHATTAN COMPANY, NEW YORK, N.Y.
Mr. WARBURG. ...
First. To all intents and purposes it seems to me that the bill endows the Secretary of the Treasury with most of the powers usually vested in a government note-issuing institution and with several other powers as well. To some extent this is doubtless necessary in an emergency, but I see nothing in the bill to limit it to an emergency. One cannot precisely define what constitutes an emergency. But one can define one's ultimate aim. I believe the bill could be improved if it were made to state that our purpose is to return to a fixed ratio to gold, and that to this end we seek the establishment of an improved international gold standard. (I have set forth a detailed proposal for an improved gold standard in my testimony before the House committee.) If our ultimate aim were so defined, the powers conferred upon the Secretary of the Treasury could then be made to lapse when this ultimate aim is realized.
Second. It seems to me that the bill should state that it is not the intention to take the note-issuing power away from the Reserve System in whole or part. Personally I should like to see the bill amended so as to contain an outright repeal of the " greenback section" of the Thomas amendment, the mere existence of which, to my mind, constitutes a menace to the national credit. It will be difficult enough to keep expenditure within the limits of bearable taxation. The success of our program depends upon not over-straining the Government credit. The best barometer of strain on government credit is the market for government bonds. Suppo rt of this market by a stabilization fund may in moments of extreme emergency be necessary, but it must be recognized that such support is tampering with the barometer. The issuance of Thomas amendment notes would not be tampering with the barometer but smashing it. [The Thomas Amendment stated that whenever the president desired currency expansion, he must first authorize the open market committee of the Federal Reserve to purchase up to $4 billion of federal obligations. Should open market operations prove insufficient the President had several options. He could have the U.S. Treasury issue up to $4 billion in greenbacks, reduce the gold content of the dollar by as much as 50 percent, or accept 100 million dollars in silver at a price not to exceed fifty cents per ounce in payment of World War I debts owned by European nations.]
Senator GLASS. Mr. Warburg, you know, of course, that the Federal Reserve banks are operated by representatives of the public, in large measure; that is to say, of the 9 directors, 3 of them may be officials of banks only; 3 of them must represent commerce, agriculture, and industry, and the remaining 3 may not be bankers at all, but must represent the public. So that the banks are in large measure operated by the public and in the interests of the public?
MONDAY, JANUARY 22, 1934 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY,
STATEMENT OF GEORGE F. WARREN, PROFESSOR OF AGRICULTURAL ECONOMICS, CORNELL UNIVERSITY
Senator BARKLEY. Professor Warren, it has been stated around here, more or less loosely, that you drew this bill, or that you sat in on its preparation. Is that correct?
Mr. WARREN. I did not draw the bill. I saw it before it was presented.
Senator BARKLEY. Who actually drew the bill, if you know?
Mr. WARREN. I don't know.
Senator GORE. Who had it when you saw it, if that is not confidential ; and, of course, I do not want to ask that you make public anything that is confidential.
Mr. WARREN. I saw it in the Treasury Department.
The CHAIRMAN. I think the bill was drawn in the Treasury Department; is that so, Dr. Warren?
Mr. WARREN. I think so.
Senator WALCOTT. That does not mean anything unless we know their names. Who was largely responsible for this bill?
Mr. WARREN. I should say the Treasury Department.
Senator GOLDSBOROUGH. I should like to repeat my question with the consent of the chairman of the committee, and ask who Dr, Warren was in conference with.
Mr. WARREN. At the conference at which I first saw it there were present Secretary Morgenthau, Mr. Oliphant, Mr. Laylin, and Professor Rogers.
Senator GOLDSBOROUGH. Who was Mr. Oliphant and who was Mr. Laylin?
Mr. WARREN. They are employees of the Treasury Department. I do not know their titles.
The CHAIRMAN. Mr. Oliphant was attorney for the Secretary of the Treasury.
[There should be no confusion on where this bill came from]
Senator WALCOTT. I am not suggesting that this bill does it, but is it not a possibility that if the stabilization fund that is proposed should fail—and I personally do not see how it could succeed in competition with the combined forces of Europe—we might be drifting into a period of extreme inflation, willy nilly, of paper currency?
Mr. WARREN. The occasions of extreme inflation, so far as I have been able to find them in history, have been preceded by governmental bankruptcy and usually as the result of revolution or extended war at the time. If we should drift into wild inflation, it would be a very unusual historical occasion, unless we, previous to that, had had a revolution.
Senator MCADOO. YOU mean a violent revolution or an economic revolution?
Mr. WARREN. I mean a violent revolution.
Senator MCADOO. By force?
Mr. WARREN. Yes. Of course there is no danger of that.
Senator GLASS. Doctor, what was the percentage of rise in commodity prices in France in the period of the assignats?
Mr. WARREN. The rise in prices? The assignats finally became substantially valueless, much as the German inflation this time. I cannot tell you offhand what prices became, but they were practically infinite. German prices this time went up to something like a trillion to one. That may not be quite right. The currency was finally revalued at a trillion to one. With such wild inflation prices go to indefinite heights.
Senator GLASS. YOU have the mathematical figures for the picture, have you?
Mr. WARREN. I have the mathematical figures for Germany.
Senator GLASS. I mean for France. They are not understandable, are they?
Mr. WARREN. It is pretty difficult to understand paying a trillion marks for a handkerchief, for example.
Senator GORE. They tried to prevent the advance of prices in France through the guillotine, the death penalty.
Mr. WARREN. Whenever prices start to rise violently the governments begin to try to stop them, but, of course, if they are having wild paper inflation, their trying is of no avail.
Senator GLASS. They first guillotined those who refused to engage in the inflation, and later they guillotined those who started the inflation.
Senator GORE. A sort of retributive justice.
Senator GLASS. Government bonds are not redeemable in gold any longer.
Mr. WARREN. It seems to me it would be very undesirable for us at this time, no matter what we might do in the future, to adopt any policy which would allow all persons and all countries to withdraw gold.
Senator GLASS. Frequently in the course of your testimony you have said " at this time." You realize that this bill is a permanent measure. Would you put a limitation upon the bill?
Mr. WARREN. NO ; I would not.
Senator GLASS. Then you did not simply mean "at this time" but you meant at any time.
Mr. WARREN. Yes; I would have a provision permanently to prevent a run on the gold supply. This bill does not prohibit any man who needs gold for industrial uses from getting it to the extent of his needs. It does not prevent the use of gold to settle foreign balances. It seems to me that when those needs are provided for it is sufficient.
Senator MCADOO. Then, with those exceptions we go, frankly, on a paper basis, don't we?
Senator TOWNSEND. What was the price when we began to buy gold?
Mr. WARREN. The price of gold?
Senator TOWNSEND. Yes; when we started in the market.
Mr. WARREN. The price of gold in the United States—and I have the daily prices since we left the gold standard
Senator TOWNSEND (interposing). I mean last fall when we started to purchase in foreign marke ts, what was the price then?
Mr. WARREN. Our price on the 21st of October was about $29.
Senator TOWNSEND. What is it now?
Mr. WARREN. The world market price
Senator TOWNSEND (interposing). It is $34, isn't it?
Senator BULKLEY. That is in American currency. What I am talking about is whether American bidding for gold affects the world price of gold. Of course, it affects the price in American currency, because that is arbitrarily bid up. What I am trying to find out is whether it has any effect on the world price of gold.
Mr. WARREN. I would say that up to date there is no evidence that
the purchases by the R.F.C, have materially influenced commodity
prices in gold.
Senator WALCOTT. But it is a reaching for gold, and it is that reaching for gold, which you have been describing, which tends to put prices of commodities down, isn't it?
Mr. WAEREN. Not necessarily.
Senator WALCOTT. Why, you just said that.
Mr. WARREN. Gold is all sold in the London market every day, and as to which man gets it does not necessarily strikingly affect commodities exchanged for it. It does affect the number of dollars that gold will be worth, and that was the purpose of it.
Senator KEAN. When you bid for any amount of gold and you stand there and take it all, that naturally fixes the price that anybody can get the gold at. It means that nobody can buy at a price less than you are bidding.
Mr. WARREN. It may fix the price that your dollar will buy.
Senator KEAN. NO; it fixes the price of the gold. [Agreed]
Senator TOWNSEND. Dr. Warren, what is the answer to the question often asked, How do we justify our Government paying thirty four dollars and some cents for gold in a foreign country and taking our own gold at $26 or $27? What is the justification for doing that? I mean a justification that we can offer to our people at home? [None. It was wrong]
Mr. WARREN. Citizens and banks of the United States were required to turn in their gold and get dollars for it.
Senator TOWNSEND. Yes; but what about the price?
Mr. WARREN. Presumably because we did not wish those dollars to represent that amount of gold. But they got the dollars, which was what they were using. That gold then was turned in to the Federal Eeserve System at that price. Of course, if the Federal Reserve System receives as many dollars as it has dollars' worth of gold, it will have received full pay. I think that is all the explanation you need.
Senator TOWNSEND. And that seems just in your mind to our own people, does it?
[This is an interesting explanation of what caused deflation during the Great Depression]
We find no statistical basis in efficiency in the use of gold or in the world supply of gold to call for prices above pre-war in the period from 1914 to 1929. Why then were prices so high? Apparently, the reason for this was low demand for gold. On this point, there is an interesting historical parallel.
When the French Revolution broke out. France drifted into paper inflation. The wild, inflation of this period frequently has been described. The influence on prices in other countries is less well known. Being no longer in demand for monetary uses, both gold and silver lost value and drifted elsewhere. Prices on a metallic basis rose 46 percent from 1790 to 1795 in the United States and rose 34 percent in England. Ultimately a large part of Europe was involved, and prices in the United States and England rose still higher.
The United States was off the metallic standard for a short period during the War of 1812, but the currency returned to par in March 1817. Prices remained more than 50 percent above the level of 1790 until England attempted to return to the gold standard, a process which was completed in 1821. Prices in both countries fell precipitously nearly to the price level of 1790.
In the similar situation this time, the continent of Europe discontinue bidding actively for gold, and prices of commodities in the United States more than doubled. They remained at 40 to 50 percent above pre-war until England, France, and other countries returned to the gold standard.
There is one significant difference. In the Napoleonic war period, Europe used both gold and silver as money, and prices in neutral countries in both gold and silver rose.
In the World War period, only gold-using countries were involved and only gold-using countries had inflation and deflation. Prices in China [the only country in the world on the silver standard] continued their long-time gradual upward course. They showed no indication of the inflation of 1920. They rose rapidly from 1922 to 1931. Since that time, they have fallen nearly to the 1926 level. The writers believe that the major factor in the rise in prices was the reduced demand for monetary gold and that the major factor in the decline in prices was the return of demand.
Merely being off the gold standard does not necessarily mean low demand. Thirty-four countries are off the gold standard now, but most of them are vigorous bidders for gold. Europe was not actively bidding for gold during the war period.
The writers have anticipated that gold would acquire more than its pre-war value with the attempts to return to the gold standard, and for 15 years have been stating the conclusion that prices would return to pre-war or lower. The arguments now being presented to indicate that a given quantity of gold with a given volume of business can support a price level 50 percent higher than the same gold would have supported before the war, are the same arguments that were used to indicate that prices would not fall. We think them equally unsound in both cases.
The conclusion so frequently stated in the past we believe still holds—that provided the former gold-using world returns to the gold standard, prices expressed in any pre-war gold currency will be below pre-war for the next decade or longer, unless unforeseen phenomenal gold discoveries are made.
STATEMENT OF JAMES HARVEY ROGERS, STERLING PROFESSOR OF POLITICAL ECONOMY, YALE UNIVERSITY, AND FELLOW OF PIERSON COLLEGE, PIERSON COLLEGE, NEW HAVEN, CONN.
Senator GLASS. Yes. Well, that being so, do you think it is wise to transfer that authority to the Secretary of the Treasury, who, in this particular instance, if I am correctly informed, has never had any banking experience at all?
Mr. EOGERS. I do not understand the bill to read that we are transferring that authority to the Secretary of the Treasury.
Senator GLASS. Then you are duplicating it, are you not, one or the other, sir?
Mr. EOGERS. There is no question that in this equalization fund, or stabilization fund as it is called, there is a reserve power in the hands of the Treasury, Secretary of the Treasury, with the approval of the President, notice—only with the approval of the President, after the present emergency is over and we cease to need it for a stabilization fund, I mean stabilization for use of foreign exchange.
And that fund is of extreme importance. It has this importance: In the first case, we can impound this gold profit, and it is very important to impound it over the future. Otherwise, if it is grabbed by the Treasury and used to pay bills of the ordinary sort, we might over-expand our price structure. As I understand the bill, this fund is specifically guarded so as to be impounded and to be available, except temporarily, only on the approval of the President.
Senator BULKLEY. Can any use of it be made whatever that does not increase the reserves of Federal banks?
Mr. ROGERS. None whatever.
STATEMENT OF WALTER W. STEWART, MEMBER OF THE FIRM OF CASE, POMEROY & CO., NEW YORK CITY
Mr. STEWART. Fortunately, a good deal of what I would have had to say has been more effectively covered by Mr. Young, and I would like to express my agreement with what he has had to say before the committee.
The most important point to me, as it was with Mr. Young, was to consider whether this can be regarded as a temporary or as a permanent piece of legislation. Unfortunately, and I think undesirably, in reading the bill and its proposals, it seems to me to indicate that it has a permanent character, and it is in that perspective rather than in the technical detail of the bill that I would like to see it considered.
Senator TOWNSEND. Would you mind stating what you think the effect of this bill, if passed as it is now written, would be on the Federal Reserve banks?
Mr. STEWART. It seems to me to shift fundamentally the responsibility from the Federal Reserve System to the Treasury in the only matters in which the control of currency and credit really matter, and that is with reference to the convertibility of the currency into gold or in foreign exchange, and to set up a competing influence in the operation of the stabilization fund that is equivalent to an open-market operation. In those two respects it seems to me to nullify, if not to scrap, the Federal Reserve System.
It not only takes that action, but in looking for some executive officer to place the responsibility upon it finds an executive officer which is bound to be subject to popular pressure from time to time, and of course a single lesson which is part of the management of currency is how frequently one has to do an unpopular thing, and the purpose of having a central bank independent is that it should be free from Government control, but it should have some protection in the management of our currency against the emergency of the moment.
Senator GORE. Didn't have to run for office?
Mr. STEWART. That is right. It not only lodges these powers with the Secretary of the Treasury, or a Secretary of the Treasury, but it increases those powers. The administration of the Federal Reserve System or of any central bank where it is on a gold standard has its actions tested, the wisdom of its actions tested, by the judgment of many men, because the currency is convertible. The moment you remove the convertible features or lodge the decision with someone as to the conditions under which the currency is to be convertible, you are greatly exceeding anything that any monetary system that I am familiar with has ever done, and you have consequently exposed it to that additional risk.
The theory which underlies this bill that the gold should somehow be treated as collateral to notes rather than as a fund of redemption seems to me to completely lose the purpose which gold should have. The function of gold is to test the currency and to test a credit policy. No body of men will ever be wise enough to determine how much credit a country should have. It is a matter of trial and error and experiment, but the test finally comes whether the value of that currency can be maintained by its convertibility either into gold or into a currency of another country.
This bill, as I read it, both in the obscurity of the gold certificate, in the rules and regulations which the Secretary of the Treasury is to define concerning the foreign exchanges, and the vast powers given through the use of the equalization fund makes that test almost impossible.
There is a further fact, in which I think I shall have to say the Secretary of the Treasury, because I am now referring to an existing position. I say it without hesitation, because I do not believe that the theory which underlies this bill can be discussed in the abstract or in a hypothetical fashion. We are already in a situation.
The position is that the terms of this bill are not the only factors in their economic consequence. We have a Budget which requires large financing. We have further powers of an executive character left in the Thomas amendment [legislation giving president the power to inflate the money supply]. If one is to consider the economic consequences of this legislation, one I think must combine those factors.
I should have thought that any executive officer faced with the responsibility of raising $6,000,000,000 in 6 months had a sufficient responsibility, without adding others of a somewhat conflicting character. I say " conflicting " deliberately, because he is under the necessity of raising this money, and under this bill under the necessity of maintaining the soundness of the money that he raises. I believe that in public finance it is just as unwise to put a large borrower in control of the currency as it has been demonstrated to be in private finance, and any view which runs to the contrary not only overlooks the entire experience in other countries in this matter but overlooks our own very recent experience.
Now, there are one or two features that have to do with the operation of the plan which indicate my view of the theory which underlies it. You have already heard from other witnesses the way in which the stabilization fund would work in increasing the member bank reserves and exposing the hazard, the risk, of very large expansion of credit.
It is always difficult to predict what happens or when it happens. The sound thing to do is to keep the position in such shape that it cannot happen. The risk that the utilization of the credit which this act makes possible is far beyond any calculation that anyone that I have heard talk about can make.
Mr. STEWART. ...
In conclusion, whatever the intention of the bill may be, I find it difficult to believe that it is primarily a stabilization or a devaluation bill. It seems to me to be a profit-taking bill.
Senator GORE, A what?
Mr. STEWART. A profit-taking bill—a bill aimed at taking the profit derived from devaluation. This seems to be not an appropriate time to take that profit, and I question the usage to which it is going to be put. I grant the right of the Government to take the profit. It seems to me, however, both unnecessary and unwise to dispossess the Reserve System of its gold and to transfer to the Treasury the responsibility for the credit and currency control of the country.
Senator WALCOTT. Would you be unwilling, Mr. Stewart, to transfer such portion of the gold now in possession of the Federal Reserve as might be covered by devaluation of the dollar when we know what that is, 60 or 50?
Mr. STEWART. I would not be opposed to it, but it would seem to me wiser to transfer the credit that arises than to transfer the actual possession.
Senator WALCOTT. And to leave the gold with the Federal Reserve?
Mr. STEWART. Yes.
The CHAIRMAN. What would be the disadvantage of turning possession of the control and title of the gold into the Treasury.
Mr. STEWART. Because it transfers the authority and control over the currency and credit system of the country, as this bill stands; because it leaves with the Secretary of the Treasury the right to determine the basis of convertibility of the domestic currency, and the final test of the currency is what can it be converted into, not merely the question of its convertibility, but the final test of the currency's position; the limits imposed upon the growth of credit arise from the freedom of convertibility.
Senator WALCOTT. IS it your opinion that, speaking from the side of the Federal Reserve System, this proposed payment of gold certificates is not just compensation?
Mr. STEWART. The provisions in the bill with reference to gold certificates are most obscure. I should agree with Mr. Young that in order to have a currency convertible it must be at the option of the holder of the certificate and not at the option of the holder of the gold.
The CHAIRMAN. DO you see any difficulty in the Reserve bank system operating if this were done, tranfer of the gold to the Treasury?
Mr. STEWART. Yes; I see not only the conflict that it seems to me likely to arise, but apart from the mere shadow of itself a mechanism functioning as a clearing agency which has not any of the authority left for the control of the credit and currency position.
The CHAIRMAN. It can issue currency just the same?
Mr. STEWART. It can stand ready to offer currency to any comer who asks for it in redemption, but the important fact about the Reserve System is not its capacity to issue currency but its capacity to influence the direction and volume of change in the credit of the country, and that I should regard as having been fatally impaired by this legislation.
Senator GLASS. Mr. Stewart, I call your attention to this fact, that the proponents of the Federal Reserve banking system rejected the proposal of a central bank because it was deemed more effective in the interest of business to have regional banks, or you might call them regional central banks, with some degree of familiarity with the credit necessities of their particular territory, and these banks are operated by tested and experienced bankers who know what credit is, who are assumed, at least, to know when credit should be increased, and when it should be decreased, and upon what security it should be granted at all.
Under this bill all of those functions are transferred—well, I wouldn't say transferred—are given to the Secretary of the Treasury, without any facilities for gaining this territorial information as to credits and so forth, and it would utterly, as I conceive, emasculate the fundamental idea of the Federal Reserve banking system.
Mr. STEWART. I agree, Senator. I think that is more important than the actual possession of gold, is the transfer of authority, which is really the essential feature of this bill to my mind, and ultimately I think it will embarrass the man who receives the responsibility. It is a most delicate business to manage the credit and currency of the country. A great many conflicting interests would converge upon the decision of that man. The best protection the community has is that those varied interests would be represented in the decision, which is what the Federal Reserve System provided. Let those conflicting interests converge upon an officer of the Government, unprotected by an understanding which is arrived at when men are consulting with one another, and to achieve the ultimate discretion of them is such a fundamental change that I do not see how the Reserve system in its present set-up has any chance to function side by side with an agency of this kind.
Senator WALCOTT. And may it not be added, isn't it fair to add, that that man's risk is more than doubled because the same man is doing the borrowing and the spending? There is a complete conflict of interest?
Mr. STEWART. There is a complete conflict of interest.
Senator TOWNSEND. Has any country of the world ever attempted an experiment similar to this bill?
Mr. STEWART. Never.
My reaction: As I have stated before, the treasury is the root of the problem with our currency and financial system, not the Federal Reserve.