I hope no one will think that I regard the Federal Reserve Board as having any intent to do this country any harm; but let us look at what they did in 1937. When Mr. Morgenthau made his Boston deliverance of February 27, 1937, he declared in favor of balancing the budget; he declared in favor of a cessation of relief expenditures; he was going to cut down the expenditures and stop the relief expenditures, and he belittled monetary matters.

He stated the most humane and honorable objectives, but said, in his address, that there was little or no possibility of achieving that; and that was followed up by other declarations, a number of which have already been put in this record by the senior Senator from Oklahoma, showing that the Federal Reserve Board was cooperating with Mr. Morgenthau in his unwise efforts, showing that they were deliberately contracting credit and encouraging the banks to contract credit that therefore, when that doctrine was set up by the highest monetary power in the United States, was it any wonder that men who were merchandising in stocks and money should be advised by their experts to sell their stocks discreetly, which were going down in price, of necessity, and accumulate money, which would increase in purchasing power, in terms of the very stocks they were selling; and they sold the United States Steel at 126, at the beginning of 1937, and before the year was out it was down to 40. Was there Was there any opportunity to make money there? Was there any reason why the stocks which were sold in that way should not be turned into liquid credit and used? What are you going to do about it? You can replace those hoarded deposits with ease, but you can only do it with a Reserve Board that has vision and understanding. I was deeply amazed and shocked to see a report sent in to the Senate of the United States on the bill of M. M. Logan-Senate bill 31-by the Board of Governors of the Federal Reserve, denouncing that bill and any other bill proposing to regulate the value of money, denying the quantitative theory of money, and illustrating it by showing, in a memorandum enclosed, that we had more currency in 1938 than we had in 1929, and yet prices had not gone up, as if such shallow sophistry could deceive the American people.

They know that currency functions as a part of our monetary system. They know that demand bank deposits transact 95 to 97 percent of our monetary system, and they know that while the currency did increase-and it was a very valuable thing that it did— it did help to the extent of expansion-but the argument was merely misleading, and then, to prevent the criticism of those who understood, he was made to say that the demand bank deposits were greater in 1938 than they had been in 1929; but in 1929 there were $10,000,000,000 of time deposits, quickly convertible into demand deposits, and which were immediately converted into demand deposits; and in 1929 the volume of idle demand bank deposits appeared as time deposits because they got interest at that time, but they don't get interest now; and the Reserve Board ignored that distinction and they ignored the fact that the volume of check money in 1929 reached $1,227,000,000,000 and in 1938 it was only $530,000,000,000about 40 percent of what it was in 1929; and we are told that there is no remedy; that Congress cannot remedy the matter.

When I read the Federal Reserve press release of March 13, I was shocked, and in discussing the matter with some of my associates and

friends, they suggested to me that I make an analysis of that press release of the Board of Governors of the Federal Reserve System. Why was it given to the public press? What was the purpose of giving to the press that ostentatious declaration from the highest Federal Reserve authority in this country that the Congress of the United States had no power to regulate the value of money. The Supreme Court of the United States has declared Congress has the exclusive right to create and the direct duty to regulate the value of money.

That Federal Reserve declaration was a contradiction of the principles laid down by the Supreme Court of the United States. A contradiction of the greatest authorities in the world.

I would like to put in the record a quotation from Ricardo and from John Stuart Mill, and from Hume and from others, for the information of the committee if they need information on a thing which is perfectly obvious.

The CHAIRMAN. It will be put in at this point.

Ricardo says: "That commodities rise or fall in proportion to the increase or diminution of money, I assume as a fact that is incontrovertible."

John Locke, one of England's greatest thinkers and economists says: "The lessening of the quantity of money makes an equal quantity of it exchange for a greater quantity of any other commodity."

David Hume says: "It is proportion between the circulating money and the commodities in the market that establishes prices."

John Stuart Mill tells us: "That an increase of the quantity of money raises prices and a diminution lowers them, is the most elementary proposition in the theory of currency, and without it we should have no key to any of the others." Sir William Dampier-Whetham in Lloyds Bank, Ltd., Monthly Review for July 1931, in an article on the connection between business depression, unemployment, commodity price drop and money, says: "If money is scarce, more goods must be given in exchange for it, and prices will fall."

Mr. OWEN. And I want to call your attention, Mr. Chairman, that a committee of five economic professors have been engaged in the last few months in taking a questionnaire of the monetary policies such as were put into this record by Mr. Babson. It is the same.

And I have a letter from Professor Fisher, which I received a day or two ago, in which he said that he had the acquiescence in that program, substantially the principles of that program, of the congressional control of money and regulation of the value thereof, of 210 professors of political economy. I wish you would just consider that the list of names there is there as a present declaration of facts and has been written into the record at this point as an answer to Mr. Eccles. The CHAIRMAN. It will be so considered.

Mr. OWEN. I was so deeply wounded by the press release of the Board of Governors of the Federal Reserve System that I wrote Mr. Eccles a letter with regard to it, and sent a memorandum to him, and if the committee has patience to hear it, I will ask to have it read to the committee.

The CHAIRMAN. Very well.

Mr. OWEN. If the committee does not want it read, I do not want to insist upon it, but I think it would be of interest to read it. The CHAIRMAN. I will read it (reading):

Hon. MARRINER S. ECCLES,

MARCH 27, 1939.

Chairman, Board of Governors of the Federal Reserve System,

Washington, D. C.

MY DEAR MR. CHAIRMAN: In your letter to Hon. Robert F. Wagner, chairman of the Banking and Currency Committee of the Senate, of March 9, 1939, opposing

Senate bill 31, introduced by Hon. M. M. Logan, of Kentucky, proposing a legisIstive mandate to restore the predepression price level and maintain it, you enclosed a memorandum which on March 13 was given to the public press. This memorandum, in effect, denies the quantitative theory of money and denies that Congress, or the Board of Governors and the Federal Reserve banks as the agency of Congress, could regulate the value of money by regulating its volume. A number of Congressmen invited my views on this memorandum. I enclose for your inspection my comments, not in the hope of a reply. but in the hope that the memorandum might possibly be of service to your administration, or to the public. I request you to bring it to the attention of the Board of Governors. If there be any errors of fact in it, I ask that you point them out so that I may correct them before the matter goes further. If my inferences and conclusions seem erroneous to you, I should be glad to have you explain why, as my first desire is to be on the side of right and truth. My wish is to be of service in perfecting the management and development of the Federal Reserve System.

Yours respectfully,

Now, you have this memorandum here.

Mr. OWEN. Yes

ROBERT L. OWEN.

The CHAIRMAN. Suppose we place that in the record at this point following your letter.

Mr. OWEN. All right, sir.

MEMORANDUM ON STATEMENT OF THE BOARD OF GOVERNORS ON PROPOSALS TO MAINTAIN PRICES AT FIXED LEVELS, MARCH 13

On January 10, 1939, Hon. Robert F. Wagner, chairman of the Senate Committee on Banking and Currency, sent to the Board of Governors of the Federal Reserve System a bill introduced by Hon. M. M. Logan of Kentucky (S. 31), proposing to use the powers of the Federal Reserve System to restore the predepression price level, or purchasing power of the dollar, and maintain it at a fixed level.

On March 9, 1939, 2 months later, Chairman Eccles replied:

66

* you are advised that the Board of Governors of the Federal Reserve Reserve System does not favor the enactment of Senate bill No. 31, a bill to amend the Federal Reserve Act, to restore and maintain a stable price level, and for other purposes, or any other legislation of this general character.

"A statement of the reasons for this view is contained in the enclosed memorandum."

The Board of Governors in the memorandum opposes any bill which proposes a stable price level on the ground—

* that prices do not depend primarily on the volume or the cost of money; that the Board's control over the volume of money is not, and cannot be made, complete; and that steady average prices, even if obtainable by official action, would not assure lasting prosperity" (p. 1).

"The Board declares that those who propose a stable price level do so under the impression

that prices can be raised by increasing the supply of money, that prices can be lowered by reducing the supply of money, and that prices can be kept fairly steady by changing the supply of money in the right direction a the right time" (p. 1).

In other words, the Board, in a public statement, denies the quantitative theory of money; and denies that it is possible to either establish or to maintain a dollar of uniform, permanent, debt-paying, purchasing power.

The Board also denies what has already been accomplished by other leading nations and substantially contradicts the testimony of the Chairman of the Board heretofore given by him on various occasions.

Let us consider what he said on February 24, 1933, before the Committee on Finance of the Senate, under Chairman Reed Smoot, of Utah:

* it must be recognized that the break-down of our present economic system is due to the failure of our political and financial leadership to intelligently deal with the money problem. In the real world there is no cause nor reason for the unemployment with its resultant destitution and suffering of fully onethird of our entire population. We have all and more of the material wealth which we had at the peak of our prosperity in the year 1929. Our people need and want everything which our abundant facilities and resources are able to provide for them. The problem of production has been solved, and we need

no further capital accumulation for the present, which could only be utilized in further increasing our productive facilities or extending further foreign credits. We have a complete economic plant able to supply a superabundance of not only all of the necessities of our people, but the comforts and luxuries as well. Our problem, then, becomes one purely of distribution. This can only be brought about by providing purchasing power sufficiently adequate to enable the people to obtain the consumption goods which we, as a Nation, are able to produce The economic system can serve no other purpose and expect to survive.

"If our problem is, then, the result of the failure of our money system to properly function, which today is generally recognized, we then must turn to the consideration of the necessary corrective measures to be brought about in that field" (p. 705)

"The Government controls the gold reserve, the power to issue money and credit, thus largely regulating the price structure" (p. 707.)

Certainly Mr. Eccles was correct in this statement, but it is substantially in contradiction of the present position of the Board. He says now that it cannot be done; that relief cannot be given by the Government, nor by the Federal Reserve System as an agency of the Government. He has conceded many times that the Government can expand and contract money and that no other power has the legal authority under the Constitution. He said as much in his appearance before the Banking and Currency Committee of the House when the Banking Act of 1935 was under consideration. He said:

"Open-market operations are the most important single instrument of control over the volume and the cost of credit in this country. When I say "credit" in this connection I mean money, because by far the largest part of money in use by the people of this country is in the form of bank credit, or bank deposits. When the Federal Reserve banks buy bills or securities in the open market, they increase the volume of the people's money and lower its cost; and when they sell in the open market, they decrease the volume of money and increase its cost. Authority over these operations, which affect the welfare of the people as a whole, must be vested in a body representing the national interest" (p. 181).

The Federal Reserve Board was given the power over open-market operations through which it could expand or contract the money supply, it if chose to do so. It did choose to do this even when its powers were less than under the Banking Act of 1935. On May 18, 1920, in a secret meeting with the class A directors, representing exclusively the banks, and ignoring class B directors, representing industry, commerce, and agriculture, and class C directors, representing the Government, the Board agreed upon a drastic contraction of credit and currency and used its powers over the member banks to put this policy into effect. It declared various important articles of industry nonessential and undeserving of credit, such as, for instance, automobiles. As the result of such drastic action by the Board, the price level fell from 167 in May 1920 to 93 in June 1921. The purchasing power of money rose from 60 to 107.

By the exercise of its powers to extend credit, and to permit credit to be expanded, in the security exchanges, the price of securities rose necessarily beyond the power of the securities to pay dividends on the purchase price. The result of this mismanagement was a violent reaction beginning October 23, 1929, which caused the average of preferred and common stocks listed on the New York Stock Exchange to fall from $81.73 a share to $11.89 a share. This caused universal bankruptcy and caused the dollar to rise from an index of 105 in 1929 to 167 by February 1933.

The powers through which it accomplished this are abundantly set forth in the letter of the Federal Reserve Board of May 25, 1920. An abstract of these powers was made by the Committee on Agriculture of the Senate as follows: "1. Discount rates should be raised.

“2. Member banks should call loans on agricultural products, thus forcing the sale of such products.

"3. Member-bank credits should be restricted.

"4. Existing loans should be liquidated.

"5. Expension of loans should be checked.

"6. That member banks should use their power to limit the volume and character of loans.

"7. The Federal Reserve banks should establish normal discount or credit lines for each member bank and should impose graduated discount rates on loans in excess of the normal line.

"8. Served notice that the Federal Reserve banks have power to refuse to discount any form or class of paper.

"9. Suggested notice to the public that the Federal Reserve banks have the power to control and regulate credit.

"10. Served notice to the public that they must economize, must limit demands for banking credit, and must begin to pay existing debts.

"11. Suggested that the member banks educate and impress the country with notice of the Federal Reserve's announced policy" (S. Rept. 1328, 75th Cong., 3d sess.).

Chairman Eccles, himself, recognizes the powers of the Federal Reserve System, for he said in his memorandum to the Committee on Agriculture and Forestry of the Senate when considering S. 1990, Seventy-fifth Congress, first session: "The Federal Reserve System can regulate within limits the supply of money * * *” (p. 12).

But he insisted that there were other factors that might influence prices, which of course has a minor element of truth in it. But the Federal Reserve System is not responsible for the remedies for these conditions. The effect of unfair practices in commerce and the effect of monopolies must be left to regulation through other branches of the Government for which the Federal Reserve System is not responsible.

There can be no reasonable doubt whatever that the Federal Reserve System ean do exactly what the Honorable Chairman himself has testified to in the hearings on the Banking Act of 1935, when he said:

"Mr. HANCOCK. In effect, Governor, does not this bill undertake to bring back home the sovereign power vested in the Congress to coin money and regulate the value of it?

"Mr. ECCLES. Well, it brings to the Federal Reserve Board the power, and, of course

"Mr. HANCOCK. And through that Board back to Congress? "Mr. ECCLES. That is right * * *" (p. 207).

"Mr. CROSS. Governor, you agree with the proposition that it is the duty of Congress to regulate the value of money, don't you; that is, Congress, acting through its agency which it sets up, shall do it? Of course, Congress itself does not do it.

"Governor ECCLES. I think that is a sovereign power given to Congress. "Mr. CROSS. In the Constitution.

"Governor ECCLES. In the Constitution." (P. 233.)

But now when bills are pending in the Senate and House proposing to exercise the constitutional power, we find the Board of Governors, under the leadership of the chairman, attempting to defeat, through this realease to the public press, the reasonable efforts of Senators and Members of Congress to regulate the value of money.

It is perfectly obvious to students of monetary science where the trouble lies with Chairman Eccles. He has made several serious errors. (1) That the banks are full of money. (2) That the price level is not controlled by the volume of money; which is a denial of the quantitative theory. (3) That stability of prices is not so important as economic stability in industry, commerce and agriculture. Let us examine these statements.

THE BANKS ARE FULL OF MONEY

The argument submitted by the Board is that in 1929 there were $23,000,000,000 of demand bank deposits and the price level was 95, while in 1938, the demand bank deposits were $26,000,000,000 and the price level only 77, and therefore, the volume of the demand deposits did not regulate or greatly influence the price level.

Let us correct the figures. On June 30, 1929, the demand deposits were 22.4 billion dollars for corporations and individuals, excluding interbank deposits and governmental deposi s.

On June 30, 1939, they were 22.8 billion dollars, excluding governmental deposits and interbank deposits, the governmental deposits amounting to over 3.2 billion dollars.

In 1929 the amount of demand deposits not in circulation was comparatively small, inactive accounts being represented by about $10,000,000,000 of time deposits, of which the Federal Reserve Board has taken no notice. During this year the actual use of these 22.4 billion dollars of demand deposits was $1,227,000,000,000. But in 1938, over half of the demand deposits were hoarded and not in circulation. The total amount of checks drawn against the demand deposits which were in circulation amounted to $530,000,000,000, less than half of