As of the last of December of 1933 the United States had a proximately $5,760,000,000 of cash in circulation, whereas there w in banks deposits totaling about $41,000,000,000, which support t bank-check currency of the country. Therefore if the administr tion proposes to raise the price level and to establish a stable cu rency, using that term in the broadest sense to include bank cred it becomes essential that it give due attention to the banking syste of the country that creates the currency.

The deflation of the last 3 years has been largely in the field bank-check currency. Actually we have in cash in circulation toda more than we had at the height of the prosperity of 1929; but y have deflated the bank-check currency approximately $20,000,000,00 Since that time, due either to failures of banks or to fear of failur on the part of banks, they have maintained an unusual state liquidity.

In controlling bank-check currency it is essential to possess a ce tral bank. I think the framers of the Federal Reserve Act had mind that they were creating a central banking system in the Unit States; whereas as a matter of fact and as has been demonstrat by practice, the Federal Reserve banks have not functioned as central banking system normally functions. The Federal Reser banks are privately owned institutions, 12 in number; and a Feder board was created for the purpose of coordinating their activitie The powers of the board were, however, ill defined, and as a resu there has been a real lack of ability on the part of the board coordinate the activities of the 12 regional banks.

The 12 banks possess much local economy. The Federal Reser Bank of New York City can decide whether or not it will go alo in supporting the financial policy of the Government. The Feder Reserve Bank of Chicago might decide that it will go along with th Government; and the New York Federal Reserve Bank might deci that it will not go along with the Government. There is nothi in the act giving the Federal Reserve Board the power to unify th policies of these two banks or any other of the Federal Reser banks. Therefore in practice we have often seen a situation where the banks appear to be disposed to object to a unification of polic and this is particularly serious during periods of emergency, such the period through which we are now passing.

The essence of a central-bank policy is a speedy decision and qui dispatch after the decision has been made. The Federal Reser System, as such, is so composed at the present time that it cannot gi speedy decisions, because, in order to get a speedy decision, it wou be necessary to call together the governors of the 12 Federal Reser banks who would meet with the Federal Reserve Board, includin the Secretary of the Treasury, and then, if a meeting of minds cou be effected at that particular meeting, it would be necessary for th governors to refer to their boards the matters under discussion f appropriate action. The result is that much time elapses before decision is reached, if a decision is possible.

Let us take the operation of the Bank of England as an illustr tion of how a central bank functions. While it is true that the Bar of England is privately owned, nevertheless, as a very promine official of that bank told me several years ago, they know that they do not cooperate with the Government, the Government wi

take them over; and usually the Bank of England has the wisdom to cooperate with the Chancellor of the Exchequer.

The governors of the Bank of England meet with the heads of the five great banks operating in England, known as the "big five which five banks do most of the commercial banking business there, together with the Chancellor of the Exchequer; and these seven men can make decisions that affect the entire Englishing banking system. In the United States, to get a comparable degree of cooperation, it would be necessary to get together the governors of the 12 Federal Reserve banks, the Federal Reserve Board, the Secretary of the Treasury, the Comptroller of the Currency, the heads of the 48 State banking systems, and some 14,000 presidents of banks. Of course that presents a situation that makes unity of action impossible.

It should be apparent that if the administration's plan to raise the price level is to be carried out, it can only be done with a unified banking system. To start with, that means a unified central banking system or perhaps a central bank created de novo. If it were possible, politically, in the near future to so reorganize the Federal Reserve System that the 12 Federal Reserve banks and the Board could be combined into one Government-controlled central bank, I think that would be a more desirable policy than to create a new central bank or similar institution. I doubt, however, the feasibility of attempting a reorganization of the Federal Reserve System at this particular time. I think that the bill under discussion does provide, however, the machinery by which a similar result may be achieved with much less effort. The monetary authority suggested in the bill would build up what is in effect a central bank. It would create an institution that would have at its heard a board of seven appointed by the President by and with the advice and consent of the Senate, and therefore there would not be the disunity that now exists in the Federal Reserve System. This authority would have the right of note issue, which right is essential to successful central-banking operation and is certainly essential to any program designed for the purpose of raising the price level. Also, it would have the control of bank-credit currency, because it would be a bank of rerediscount. And, even more important at this time, it would have the ability to finance the Government at small cost.

One of the obvious defects of the Federal Reserve System, as it now stands, is the fact that it does not function effectively as the fiscal agency for the United States Government. For a central bank to function efficiently as a fiscal agency of the Government it should at all times be prepared to support, within reasonable limits, Government financing. At the present time the 12 Federal Reserve banks have the right to act as the fiscal agent of the United States Government, but there is nothing in the act to compel the Federal Reserve banks to support the market for Government obligations or to purchase Government obligations from the Government itself. This means that the Government is compelled to finance its undertaking in the private money markets, and this leads frequently to excessive charges in financing our program. It would be possible, if a central bank should act as the fiscal agent for the Government, for the central institution to discount directly the note of the Government at a small charge covering the costs of the operation, certainly not in excess of one half of 1 percent. This central bank would then

set up a credit to the account of the Government and could, if nece sary, issue currency secured by the proper standard as well as by t Government note discounted with it. At the present time under t Federal Reserve System the Government is paying comparative high interest rates for financing its program and then allowi privately owned corporations to issue cash on the security of t Government's obligations. This results in some profits to private owned corprations which could be saved for the benefit of the ta payers of the Nation.

The creation of the authority would remove the control of t currency system from the private bankers, who, in the past, ha been largely dominated by the New York Federal Reserve Ban It would be far easier to control the New York money market, i cluding the securities market, if we had this Government-own central institution. The tragic security inflation of 1927-29 cou have been prevented if we had possessed a well-managed, unifi central banking system; but the inability of the Federal Reser authorities to agree upon a policy, combined with the weakness a the lack of courage of the members of the Federal Reserve Boar made it possible to have the security markets get out of control of t banking authorities. A unified central banking system would less the possibility of a repetition of that debacle.

There is one point that is not quite clear in the bill as I read namely, that referring to the compensation to be paid to the sev members of the board governing the new authority. One of t points that experience has shown to be very importan insofar as t work of the Federal Reserve Board is concerned is the fact that comparatively small salary, as salaries go in the banking world, e courages the retention of either men who by training are incapab of properly functioning s heads of an important central bank or el the placement of so-called "dollar-a-year" men on boards, who, many cases, are influenced by the larger banking interests of th country.

To create machinery that is perfect, if possible, is important, b it is just as important, just as vital, to have men familiar with t technique of operations and who are of the highest character to r that machinery if a system is to be successfully operated. No syste is better than its management, obviously. It would appear to n that the compensation paid the administrators of the money autho ity should be such that we could get high-grade men who would n be under the domination of private bankers and who at the same tin would be technically trained to properly operate this very importa

system.

In view of the importance of bank credit currency as the nation medium of exchange in this country, it is essential, if the admini tration's program is to be successful, in my opinion, that an instit tion such as is suggested in the Glass-Steagall bill should be create as rapidly as possible. That is the only way it will be possible control the value of the dollar, to raise the price level, and, after th price level is raised, to maintain a stable currency.

Many years ago cash was of great importance and gold as th standard upon which the currency of this country was based was greater importance, but with the growing use of bank check currend today cash assumes a position of relative importance and gold is

even less importance. It is in the field of bank-check currency that the controlling of the price level must be undertaken; and it is this control that is essential, in my opinion, to the success of the administration's program.

Raising the price level to its 1926 point is extremely desirable, because that is the media at which most of the debts of the country have been contracted, and a price level at that approximate point would enable the debtors to pay their debts with less difficulty. Moreover, it would benefit the creditors just as much, because today the leading financial institutions, such as banks and insurance companies, occupy the dual position of debtor and creditor. The banks are debtors of their depositors and they are creditors of their borrowers. Therefore, those institutions will benefit just as much from a policy such as is suggested in the bill under discussion as would the group commonly called "the debtor group."

The crux of the present phase of the monetary problem is the solution of the banking problem, namely, the unification of the banking system of this country, which means, in essence, the creation of a new central bank or the reorganization of the Federal Reserve banks and boards so that they may be a central banking institution.

I think that is all I have to say.

Mr. BUSBY. One phase of this bill is missing, in my opinion, and that is adequate machinery for control, both up and down, of what you term bank-check money. I do not see that matter covered in this particular bill.

Dr. HARR. I think the fact that the Federal Reserve banks would still have the right to discount for the member banks is probably a phase that will cause some trouble in the future. In other words, I do not think this bill goes far enough. Personally, I should like to see the 12 Federal Reserve banks and the Board combined, then we would really reorganize our banking system so that the credit would be extended directly to the member banks by this central bank. Under this bill the credit is really extended to the Federal Reserve bank, which may or may not extend it to the member banks. I think that is one of the weaknesses, perhaps, of the bill.

Mr. BUSBY. I appreciate the importance of each provision of the bill. The small banks and the large banks supply loans secured by tangible property, which loans are tantamount to the creation of so much currency, which is accepted in lieu of money, and this in effect in volume really determines the value or buying power of gold and silver, because all money takes a like buying power per unit. What I am interested in is a plan that will prevent the whole banking structure from carrying us into periods of inflation through the issuance of bank-check money at times when we do not need it. On the other hand, I am interested in a provision that will help us from a Government responsibility standpoint to supply this bank-check money at times of falling prices when the banks cannot carry on. That is the provision in which I am interested and which is not in the proposed bill.

Dr. HARR. The bill does have within it certain powers that would enable the authority, if correctly administered, to control the credit available for the Federal Reserve bank, which in turn issues it to the member bank, which also would psychologically control the issuance of credit by the member banks to their borrowers.

To illustrate, if in 1927 we had possessed a courageous Feders Reserve Board that understood central banking technique and had started to raise the discount rate from 5 to 6 percent and upwards until the stock-market boom started, that would have stoppe it without going to the limits it did go. Suppose the rate wer raised to 20 percent, that would of itself startled the banks and they would have concluded they would better get liquid. They can put the brakes on, but, insofar as the other part is concernedsupplying credit-it is more difficult, particularly when we are in period of depression as we are at the present time. I think, how ever, that the accompanying legislation that has been passed at Washington, such as the P.W.A. and the C.W.A., is necessary to us to get the money into the hands of the public for the moment.

Mr. BUSBY. Do you regard the United States Government as ever having undertaken the responsibility of furnishing business an ade quate and dependable media of exchange?

Dr. HARR. No.

Mr. BUSBY. Do you not think that this has been left to a hap hazard banking set-up that refuses to function properly in good times of rising prices and cannot function properly when we have falling price levels? Do you not think that nine tenths of our business currency is the thing that throws us into these distressing times?

Dr. HARR. I think that is right-the lack of control.

Mr. BUSBY. Do you think a mere control of interest and rediscount rates, or even eligibility for rediscount, would control that when a bank may set up with, say, $125,000 capital, undivided profits and surplus, and then lend, say, $3,500,000 of credit deposited by its customers? Do you not think that such is really the tragedy! There is no proper limit placed upon the borrower in the community and the bank agrees with him and passes over to him credits which become checking accounts to create bank currency, and this distorts our business conditions.

Dr. HARR. I think what you say is true. I think, however, that this bill would be a step forward in the modernization of our banking system. It would not, though, solve all bank problems.

Mr. BUSBY. That is the provision in which I am especially interested, and which is not, unfortunately, in the bill.

Dr. HARR. That would require a reorganization of our entire banking system, which I hope may come some day For example, what has the small banker been encouraged to make loans on in the past! Why, on real estate, on securities, then the so-called "commercial paper", ", which, in effect, in most cases, is nothing but commercial paper. One may borrow on a 30-day promissory note, expecting to repay the bank within the next 10 years, but he really never has cash enough to pay at the maturity of the note. Banks have gotten into such regretable habits, and our business men have been borrowing that way so long that it is going to be a difficult problem during the transient period when we are trying to reconstruct our banking system so that it will supply real commercial credit only. Then who will supply the first mortgage and other money?

Mr. BUSBY. Have not commercial banks practically abandoned the commercial field and turned to financing the Federal Govern