and in the anxiety of banks to secure something that will bring them an income, when a bond or Government security sale is presented to them it is promptly oversubscribed, not because of the good business condition of the country, but because the banks have a fear of investing in anything except Government bonds and Government obligations, which is the secondary type of money, and which appears to me is not an indication of the strength of our fiscal system when the banks oversubscribe these issues, when they won't make business loans. What do you say in regard to that?

Mr. KING. It seems to me you have stated the matter very accurately, and I don't believe I could improve on it.

Mr. BUSBY. Going back to the other question, I don't believe that any sort of set-up which would permit the issuance of loans by banks, which loans become checking accounts and therefore a type of bank currency and therefore a part of the media of exchange in this country, will prove satisfactory in this bill or in any other legislation, unless there is a very adequate control of the amount of this bank currency that may be put out by the banking set-up of the country.

Mr. KING. You must have adequate control.

Mr. BUSBY. We must very drastically deal with that element, since it is nine tenths of the media of exchange, and that nine tenths can easily absorb the one tenth which is coin and currency and turn that back into the receiver which did not exist prior to the establishment of the Federal Reserve System. Currency once out, prior to that time, remained out much more effectively than it does now.

Mr. KING. You are correct.

Mr. BUSBY. After a bank receives a deposit in the form of currency, if it desires, the bank can send that to the Federal Reserve and take credit on it and receive no profit on the Federal Reserve, because there is nothing that can be done about it in the present day and time.

Mr. KING. That is correct.

Mr. BUSBY. Therefore, I think it is more essential we go to the question of dealing with both the up and down amount of bank money that may be issued so as to control it.

Mr. KING. You can prevent overissuance of this bank-deposit currency, but it is very hard to prevent underissuance of the same thing. As somebody said, you can push on a string but it doesn't produce very good results.

Mr. BUSBY. That is exactly what I have in mind, and I want to see some kind of scheme worked out where we are pushing on the string and you can see some effect on the other end of the string.

Mr. KING. I am inclined to think that in the declining phase of the cycle, we are compelled to substitute Government currency for the declining bank deposits, because we cannot make them expand very much longer.

Mr. BUSBY. The only way they will have much efficiency in the medium of exchange is by the commodity price level in actual business, and that includes the volume and velocity. You get your proper response and share by the action of business and the price level, and when it falls too low by reason of the shrinking up of the bank-deposit currency, then it is the duty of the Government to come

forward and issue currency that will stiffen the situation and ta care of it.

Mr. KING. I agree with you. I might say it is my opinion that this Federal Monetary Authority were established and given powe as specified, and did its duty as could be reasonably expected, the will be no need to use it in such a depression as we have had no because I think its existence and the exercise of those powers wou prevent the development of any such depression as we have hɛ recently; hence these things we have been witnessing would not ha to be considered.

That is my opinion, though I may be wrong.

Mr. CROSS. And with it all, control the stock exchange.

Mr. GOLDSBOROUGH. Have you concluded your statement, Professo King?

Mr. KING. Yes.

Mr. GOLDSBOROUGH. We had the pleasure of hearing you in 192 and again in 1924, and I think you appeared in the hearings also o the Strong bill, and on the Goldsborough bill of 1932. We appr ciate very much your discussion, more than we can tell you.

The hearing will adjourn until 10:30 tomorrow morning. (Adjourned to 10:30 a.m., Feb. 1, 1934.)

TO ESTABLISH THE FEDERAL MONETARY AUTHORITY

THURSDAY, FEBRUARY 1, 1934

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE OF THE COMMITTEE ON

BANKING AND CURRENCY,

Washington, D.C.

The subcommittee met at 10:30 a.m., Mr. Goldsborough, presiding.

Mr. GOLDSBOROUGH. The committee will come to order. We will now hear from Professor Fisher, and will you please come forward and give your name and your connection?

Mr. FISHER. My name is Irving Fisher, professor of economics, Yale University.

Mr. GOLDSBOROUGH. Now, if you will just make such statement as you think is proper, the committee will listen to you, then they will probably want to ask you some questions.

STATEMENT OF IRVING FISHER, PROFESSOR OF ECONOMICS, YALE UNIVERSITY

Mr. FISHER. I will read this statement first, as it is not very long, then answer questions and give some criticism in detail of the bill. The bill drawn largely by Mr. Vanderlip enabling a "Monetary Authority" first to normalize, and then to stabilize the purchasing power of the dollar, seems to me a splendid step toward the goal which President Roosevelt has set before us.

First. Such a Federal Monetary Authority will be far superior to permanently vesting the control of the dollar in the hands of the President or the Secretary of the Treasury. This is said not because of any lack of confidence in either of the present incumbents of these offices. On the contrary, they are better fitted than any other existing officials for this great function, and I rejoice that the bill which became law yesterday temporarily conferred on them and no one else some of the powers needed for such control.

But we need to build for the long run and we cannot expect that all future Presidents and Secretaries of the Treasury will be as fitted for such a special function as are President Roosevelt and Secretary Morgenthau.

Moreover, a managed currency requires the all-time attention of specialists. Even President Roosevelt and Secretary Morgenthau have so many other pressing duties that they will have to delegate this one to subordinates and, in the long run, any ordinary subordinate will be inadequate for such a task. It ought to have, for the best results, functionaries as able as the members of the Supreme

Court and as highly paid as the governor of any Federal Reserve bank.

Second. The act unifies the Federal Reserve System so far as concerns the control of the dollar.

For political reasons 12 regional banks were created in 1913 instead of 1 central bank. Only a loose and ineffective coordination was attempted through the Federal Reserve Board.

The result has been chaos and internal dissension. The late Gorernor Strong of the Federal Reserve Bank of New York tried to remedy this defect by inducing, under his chairmanship, the governors of the four other largest banks to form with him an openmarket committee. At first it functioned well and we enjoyed a stable dollar for several years. But it soon resulted in a fight with the Federal Reserve Board which abolished the self-appointed committee and superseded it with more cumbersome and inefficient machinery.

Had not such fatuous action been taken by the Federal Reserve Board, it is possible-in fact, I believe, probable that this depression would have been a mild one. Its seriousness was due to the mismanagement of the Federal Reserve System. Such mismanagement could not be avoided as long as it was a house divided against itself.

Dissention and vacillation will continue to have such deadly effects as long as the System continues to lack system. It has been tried and found wanting. It will now be lucky if it escapes destruction altogether or absorption by the Government. The bill as introduced by Congressman Goldsborough seems to be the best available com. promise, permitting the System to survive intact so long as the management of the dollar is put in new hands.

Third. Not only does the bill put a stop to the working at cross purposes of the various Federal Reserve banks and the Board, but it avoids the possibility of cross purposes as between the Government and the Federal Reserve System. It is conceivable, even in the immediate future, that the bankers and the President should wage a war. If the bankers should attempt to dump the securities they hold, it would be difficult for the President to counteract the deflationary influence of such action. The bill furnishes the Federal Monetary Authority with all the controls available for its functioning. Just as an automobile chauffeur or an airplane pilot needs levers, steering wheels, brakes, and other controls in order to steer the proper course, so must the Monetary Authority have all the requisite controls ready at hand. There are at least 7 such controls or levers, of which the chief 4 are:

(1) Gold purchases and sales; (2) open market operations, that is, the purchase and sale of Government securities; (3) rediscounting; (4) note issue.

Fourth. Above all, the bill proclaims a definite and permanent policy as to restoring and maintaining a normal purchasing power of the dollar. Such a definition of policy is far more important than the much-clamored-for definition of policy as to the mere weight of the gold dollar. Only the crassly ignorant will be more solicitous about what a dollar weighs than about what it buys.

Sixth. The features of this bill have been through the test of experience both in this country and abroad-especially England and Sweden.

Sweden, in spite of her small size and her dependence on foreign monetary conditions, has been able, since she began in September 1931 to maintain stable its price level as measured by a stated index number, week by week always within 2 percent, and usually within 1 percent, of a chosen par.

Several opponents of President Roosevelt's monetary policy have attempted to discredit Sweden's "experiment ", not by denying its success, for that is undeniable, but by denying its usefulness. In fact, some of them have claimed that it has done actual harm. But only last week came the report that the statistical studies of the League of Nations on the recovery from depression of the various nations of the world had found that little Sweden had outstripped the others.

Mr. CROSS. Now, Doctor, in reference to this bill, there was a suggestion made by Dr. King yesterday that in selecting the boardand I thought it was an excellent suggestion, and I want to see what you think about it.

This bill proceeds to provide that there shall be on the Authority 2 representatives from agriculture, 2 from industry, and 2 from the Federal Reserve banking system. He accepts the Federal Reserve bank representatives, and the banks are to submit 5 names from which are to be selected 2 by the President.

His suggestion was that in the place of taking these other four representing industry and agriculture, that they be selected from the outstanding statisticians' organization and the economic society, I don't remember what he called them, because I wasn't familiar with them. His reason was that this has to do not with the control of agriculture in the sense we generally understand it, or the control of industry but the control of money and the control of capital. What do you thing about it?

Mr. FISHER. I think that might be an improvement. I think, however, it would be better not to have any restrictions as to who was represented, but that they should simply be selected for fitness, and I think the present President could be trusted to select those who were most fitted to perform their functions.

I had assumed, however, that politically it was necessary to have some representative of banking, agriculture, and industry, and if it is I would propose, instead of having a board of 7, to have a board of 5-1 representing banking, 1 representing agriculture, 1 representing industry, and the other 2 at large.

You could appoint them from the association or from anywhere, from bankers, agriculturists, or anywhere.

Mr. CROSS. I appreciate the sociological effect, and you have always got to consider these things in connection with the Members of the House when you say agriculture and industry, because that catches all of the Members, one way or the other. It might have a bad sociological effect to say you are going to take them from the groups that have been referred to, because there is, in spite of logic and reason, a certain kind of thinking that the higher the scientific man the more he lacks common practical judgment.