The income for 1915 was reported at 36 billions with a purchasing power of the dollar at $1.44; money in circulation, 3.077 billions and gold reserve, $1.718 billions; just half of what it should have been. The people were getting the first effect of the new Federal Reserve scheme of manipulated currency which was manifested by dear money and panic prices.

During 1916 war orders were piling in, purchasing power of the dollar dropped to $1.17; both gold and currency increased about $400 millions but the gold was only 61.4 percent of currency. National income was reported at $45.4 billions with gold only sufficient for $21.95 billions.

In 1917 income was reported at $53.9 billions with only enough gold for $28.23 and a currency supply for $38.40 billions. Business was booming on bank credits; bank deposits had jumped $19.13 in 1915 to $26.35 billions in 1917 and bank loans increased for the same period from $15.7 to $20.52 billions. National income had become grotesquely out of true ratio to deposits, loans, and gold reserve.

The years 1918 and 1919 witnessed further increased inflations in national income compared to gold, circulation, deposits, and debts. National income reported at $60 billions for 1918 was 20.9 times gold reserves, 100 percent inflated and 1919 with $68.3 billions income reported was 24 times gold reserve. The year 1920 was the banner performance for Federal Reserve, with national income reported at $74.6 billions (purchasing power 65), 28.9 times gold reserve, twice as large as total bank deposits and 15 times circulating currency. Imagine the banking and economic absurdity of expecting an income of $74.6 billions in 1 year with a working capital of $2.58 billions of gold. Anyway, the Federal Reserve banks made $149 millions that year and as a consequence the people took a loss of $20 billions in national income the next year. Gold, silver, and merchandise were all being shipped out of the country.

The contraction during the latter part of 1920 reduced the deposit ratio to gold from 14.59 to 11.90 in 1921, and 10.71 in 1922. Bank loans were reduced from their ratio to gold from 11.93 in 1920, to 9.65 in 1921 and 8.2 in 1922. The national income ratio to gold dropped steadily from 28.9 in 1920 to 16.8 in 1924 when it should have been at 10 to 1 during the entire period. After 1924, the national income ratio rose steadily to 20 to 1 during 1929 at the time of the great collapse. Deposit ratio was 13.64 in 1929, the bank loan ratio to gold was 10.4 to 1 instead of a normal of 7.5 and bank investment ratio was 4.12 times total United States gold reserve.

The period under consideration was replete with fundamental mistakes on the part of the bankers in their manipulations of currency and failure to protect bank deposits and national income with adequate gold. Until 1929, the bankers considered that they had been operating a managed currency with marked and signal success, and they were more surprised than the general public, when overtaken with the panic, starting in 1929. It was largely because they considered the ever growing foreign balance due the United States to be sound, and could be accorded full value in determining the economic course of the country.

Referring to the table appearing at the top of page 300 in column (10) are given the "Excess of exports of merchandise, gold and silver;" column (1) contains the values of the monetary gold stock

including gold in circulation; column 11 is the additions of the figures in columns 10 and 1, which represent what the value of the gold stocks would have been if the excess of exports had been paid for with gold.

The ratio of money in circulation in column 4 to the assumed gold values in column 11 represents what the purchasing power would have been if the excess of exports had been paid for each year in gold. Under such circumstances the dollar purchasing power (all commodities) would have been $1.005 in 1915 instead of $1.44 which prevailed at that time and which represented the "hard times" low price level in 1915 and earlier years just preceding the commencement of the European World War.

During 1916 the full effect of the World War was manifested by an increase in the excess of exports over that of 1915 of $1.3 billions with a total for the year of $2.599 billions. The monetary gold stock increased by $487 millions to a total of $2.195 billions for the year 1916. The money in circulation was increased by $336 millions to a total of $3.41 billions for 1916. This condition indicates that the purchasing power of the dollar, if exports had been paid for with gold should have been $1.40 rather than the actual purchasing power which existed for the year at $1.17. During 1917 the excess of exports again increased, monetary gold stock increased and again there was a sharp increase in money in circulation. This condition indicates that the purchasing power of all commodities for 1917, if, again, excess of exports had been paid for, should have been $1.55 instead of the purchasing power which actually existed at 85 cents which created a level of wholesale prices above par at $1.17.

Of course, unusual situations existed during this period. The war orders were of unprecedented magnitude; the capacity of the United States was not equal to the prompt production covering the orders received; therefore, there was certain to be abnormally high prices regardless of the fundamental monetary condition. This abnormal situation continued through 1919 and 1920, but during this latter year the adjusted purchasing power would have been reduced to $1.05 if the export accounts had been valid and collectible ones, in contrast to the low purchasing power actually reached for the period at 65 cents. During 1921, owing to the drastic drop in excess of exports, also in monetary gold stock and money in circulation, the conditions were correct for a purchasing power of only 70 cents, but that reported was $1.02. From 1922 until 1929 the purchasing powers as reported by the Bureau of Labor Statistics and the adjusted ones in column (12) correspond with one another to a very close degree. During this active period of the twenties the bankers continued to assume that foreign accounts were sound and that the excess of exports of merchandise, gold, and silver would be settled in due course. It was this mistake in judgment which caused the United States to operate on a basis of inflated purchasing powers and national incomes.

The Federal Reserve notes are circulating receipts representing theoretical deposits of money in banking institutions. Federal Reserve notes can be increased to the full extent of Federal Reserve deposit liabilities and also to the full extent of Government bonds which now amount to about $40 billions.

The privilege to issue Federal Reserve notes against Government bonds was an emergency measure granted by Congress at the request of the banks in 1932 and extended in 1935. This privilege is supposed

to be limited to bonds which have been already sold by the Treasury Department, but it is merely a matter of one extra bookkeeping transaction to have any issued bonds pass through one of the banks and then taken by another bank to be utilized as an exchange medium for Federal Reserve notes. The banks get interest-bearing Government bonds and the Government gets a deposit credit in the bankbook. Last year 90 percent of all the profits of the Reserve member banks of the United States was derived from the interest paid to them on Government bonds. Federal Reserve member banks held United States Government direct obligations consisting of bonds, Treasury notes, Treasury bills, and obligations fully guaranteed by the United States Government, such as Reconstruction Finance Corporation, Federal Farm Mortgage Corporation, Home Owners' Loan Corporation and other governmental corporations and agencies, in a total sum of $12,342.9 millions which was 40 percent of their total loans and securities. These Government obligations held by the Federal Reserve member banks was one-fourth of the total outstanding Government obligations upon which the average interest rate is approximately 21⁄2 percent, now totaling about $1 billion per year of which the banks received $250 millions. The Government got deposit credits in the Federal Reserve banks in payment for the bonds, and those who cash their Government checks could get Federal Reserve notes, the volume of which constantly expanded or contracted according to calls for currency. Chester C. Davis, one of the Governors of the Federal Reserve Bank, in a formally prepared address before the annual convention of the American Farm Bureau, at New Orleans, December 15, 1938, stated as follows:

Money in the modern sense includes the currency and coin we use and our bank deposits. These constitute our means of payment. Currency is available in whatever quantities the public demands. If circumstances created a demand, currency would flow out tomorrow in almost an unlimited quantity. To illustrate that point, currency in the amount of $9.206 billions was issued by the Federal Reserve System in the 12-month period from July 1, 1937, to June 30, 1938.

It is a mistake to assume that the mere issue of currency has any monetary effect upon the economic structure. The point is not whether the Government pays by currency or otherwise but merely how much the Government spends and how it raises it. If it comes out of taxes, it may or may not diminish some other spending. If it comes out of savings, it may or may not diminish other investments. If it is borrowed from the banks, then it adds to the money supply as well as to the spending stream. If new currency is issued it flows right back into the banks, and only that quantity remains in circulation that needs of business or the whim of hoarders call for. As the currency is deposited with the banks it merely adds to the excess reserves of the banks, which are already very large.

It is evident that Mr. Davis has rapidly acquired the "banker's mentality." He thinks that the money borrowed from the banks is better money than national currency or other forms of real money. Mr. Davis really invites hoarding by his notice to the effect that excess currency is returned to the banks and becomes part of excess reserves, and, therefore, unused money. Under the circumstances, the public could not be expected to hoard Federal Reserve notes. The powers to issue them resemble too much the printing-press methods of Russia and Germany after the war period.

The fact that the Federal Reserve System frankly admits that the so-called excess reserve deposits create for them a problem so serious that they do not know how to cope with it except by restricting gold and silver money, is proof conclusive that their system is not

geared to administer deposits in excess of those represented by their regular reserves. The so-called hoarders mentioned by Governor Davis and other Federal Reserve depositors would vastly improve the banking efficiency and service of this country by transfer of that portion of their bank deposits which now represent so-called excess reserve to nonmember insured banks. They will be able to render increased banking service to the country commensurate with the increased deposits existing as excess reserves, now in a dormant state, insofar as participating in the business and commercial activities of the country is concerned. Unless and until this banking barrier is removed, neither the New Deal nor any other kind of deal has any opportunity to achieve success. The Federal Reserve bankers in their failure properly to utilize the full amount of deposits credited on their books, coupled with the fact of their arbitrary and increasing propaganda against gold and silver money is having the effect of creating curiosity in the minds of the public as to motives. It is unnatural to expect the average citizen to believe that the banks' Federal Reserve notes offer more advantages to this country than gold and silver money. A very general interest is being aroused in this country as to the specific nature of Federal Reserve notes and the comparable value to gold and silver and the various national certificates. The bankers may be forced to realize in the course of time that the truth must prevail as to the weakness of Federal Reserve notes in comparison to the strength of silver certificates, and, when the public does learn the difference, the bankers will have no one to blame but themselves. It is hoped that they will realize this potential situation while the public is willing to continue the use of elastic currency in its proper field-that above the firm currency supply. Continued propaganda for the purpose of replacing the firm supply of currency with Federal Reserve notes, will probably wind up with such a strong reaction that there will be a demand made to abolish them entirely. The warnings conveyed by the Federal Reserve System in their annual report of 1938 concerning the problems which confront them in handling the increasing gold stock will teach the public that bankers really are not against gold and silver money because of their considering it of less value than their elastic notes, but because the metallic moneys offer too much interference in the management of manipulated currencies represented by Federal Reserve notes of their own creation. It must be borne in mind that national notes-such as gold, greenbacks, United States notes, and silver certificates are not subject to increase or decrease by inflationary measures. Silver certificates and United States notes have a redemption value in metal. Secretary Morgenthau testified before the Coinage, Weights, and Measure Committee of the House, on February 28, 1939, that each and every outstanding silver certificate is covered by more than one dollar's worth of actual silver at commercial prices. Silver certificates are worth a full dollar in silver, regardless of the prevailing low world price of the white metal. Also, they have the same indirect relationship to the Treasury gold which Federal Reserve notes have, but that value is indirect and not realizable at this time and cannot become so without new Federal legislation. This condition acts more critically against Federal Reserve notes than it does silver certificates, because the notes have no silver backing whatsoever.

126526-39-pt. 6-6

The privileges granted to the Federal Reserve member banks to have Federal Reserve notes issued to them was to facilitate the availability of temporary additions to currency during busy seasons, such as to facilitate the movement of crops and the like. This expansion and contraction of currency which the Congress and the people had in mind was directed to seasonal and emergency currency necessities without replacing or invading the field of firm currency volume, the currency volume below which contraction never takes place. It was never intended to have these elastic circulating Federal Reserve deposit receipts displace national currency, which are direct obligations of the Government, and covered by gold and silver held in the Treasury for their protection.

The Federal Reserve System has demonstrated that it has neither the requisite public-interest mentality to manage an elastic currency nor the combination of experience and ability in its personnel of governors to justify having reposed in it any such responsibilities. The governors are not satisfied to confine their privileges in respect of currency expansion and contraction above the settled unchanging volume of money in circulation, they have an insatiable desire to replace all national currency with its interest-burdened cancelable issues of Reserve notes. They constantly endeavor by propaganda for legislation to establish a complete monopoly of the entire monetary system, and their principal desire is to keep money a little scarce in order to maintain profitable lending conditions. They have been ruthless in the past in inflating currency by ignoring a maintained ratio of currency to gold. These Federal Reserve notes are constantly crowding out national currency.

The Federal Reserve System has gone beyond the intent of the power granted to them to issue their notes; they now exact from the Secretary of the Treasury gold certificates against deposit of foreignowned gold so that they may accommodate foreign central banks to the extent of having the United States Treasury take care of their gold under conditions which will permit the Federal Reserve to reship such gold abroad. In the meantime, the Reserve banks give credit to the foreign owners of such gold and avoid by this process the natural increase in monetary circulation which would take place if it had been bought and paid for by the Treasury Department in accordance with historic practice.

The following table shows the increase of Federal Reserve notes and silver certificates:

INCREASE OF FEDERAL RESERVE NOTES

The increase of outstanding Federal Reserve notes and silver certificates

The rapid increase of Federal Reserve notes since the enactment of the Silver Purchase Act of 1934 indicates the efforts of the Federal Reserve System to defeat the purposes of the Silver Act by injecting