We were at first resisting expansion. It then became necessary to encourage the banks to extend credit to those who needed it, in order to meet the difficulties of overburdened inventories, to which I referred, due to this backing up of goods, and in order to enable them to fulfill existing obligations and engagements that they had entered into, not only in connection with the greater volume of business in the expansion period, but in connection with the greater volume of business at a much higher level of prices. The strain upon credit then was the most difficult thing we had to meet, because then the question of goodness of credit for the first time entered into our problem.

Senator LENROOT. Might I ask you before you go into that, Governor, to go back just a moment. I would like to ask you just this question, as to what were the results of the efforts of the Federal Reserve Board or your bank to resist expansion?

Gov. STRONG. Well, sir, it would be necessary for me to tell you. what would have happened if we had not done it, and that is a very difficult thing for me to do. It is just a belief.

Senator LENROOT. It was effectual, in other words?

Gov. STRONG. It was effectual in many directions, but in many directions we were like prophets crying in the wilderness. We could not stop that rage of speculation by any means at our command, at least so it appeared at that time.

Senator LENROOT. So that result occurred beginning with the action of the raise of the discount rate in December. Was that what produced the marked effect?

Gov. STRONG. I was going to discuss that later, but let me inject here, that through all of that period our policy was necessarily affected by the necessities of the Treasury, but on the other hand, I believed then, and I believe now, that the basis, the fundamental basis of restraint upon speculation rests upon the cost of credit, and that the policy of raising our rates was necessary and justified, and without the adoption of that policy this expansion which took place would have gone to unparalleled levels.

Senator LENROOT. Then leaving out of the question for the moment the necessities of the Treasury, if this action had been taken directly following the armistice we would have been much better off? Or I may put it this way: As soon as it was apparent that this wave of speculation was on, following the armistice, if this action had been taken we would have been much better off?

Gov. STRONG. Well, sir, I wish I might answer that question directly and categorically, but it is an exceedingly difficult one to answer, Senator.

Senator LENROOT. Well, if it had the effect in December, 1919, that you say, would it not have had the same effect earlier without reaching these high levels?

Gov. STRONG. Yes; but it might have had very much more unfortunate effects in other directions.

Senator LENROOT. I was leaving out of consideration the Treasury for the moment.

Gov. STRONG. If you leave out of consideration the Treasuryand that is, of course, a most exceedingly important consideration, affecting the welfare of the country

Senator LENROOT. Yes

Gov. STRONG (continuing). I should say that an increase in discount rates at the period when the decline was suffered, from January to March of 1919, to which I have referred

Senator LENROOT (interposing). Yes; that is what I mean

Gov. STRONG (Continuing). Would have been as close to an ideal 100 per cent policy of perfection as could have been adopted.

Senator LENROOT. Then, looking back-and hindsight is always better than foresight-would it not have been better to have paid higher rate on our Treasury obligations and put in that policy back in 1919?

Gov. STRONG. Well, now, sir, you are leading me to a discussion of Treasury policies.

Senator LENROOT. Well, I do not want you to do that.

GOV. STRONG. And before answering, permit me to say this: The Federal reserve act contains, I think, three lines establishing the relations of the Treasury to the Federal reserve banks, and they are very significant. It is all there is in the act on that subject. It says that the Secretary of the Treasury may require the Federal reserve banks to act as fiscal agents of the United States and may deposit the general fund in them. That is the sole authority which the Federal reserve system has had for conducting this enormous business for the Treasury. I am glad there was no more law on the subject. It gave us freedom of action which we needed. But we are the fiscal agents for the Treasury and I hope you will understand, Senator, that desiring, as I do, to give every scrap of information to the commission that is possible in the discussion of Treasury policies, I feel that I, or the bank at least, was their agent and servant in those matters, and that those are matters that should be discussed by our principals.

Senator LENROOT. Yes; I was not asking the question in any spirit of criticism of the Treasury; I was simply asking for your judgment as to what would have happened if a different course had been followed.

Gov. STRONG. Yes. Well, I do not want to indicate to you, Senator, or to the commission, a criticism. They were confronted with difficulties of the first magnitude, and the policies arrived at, as they affect the reserve bank, were those that were arrived at by mutual understanding at the time.

The CHAIRMAN. Well, is there not still at this time the question of the effect of the flotation of the Victory loan at a higher interest rate, upon the value of not only existing industrial securities, but upon the value of the Government bonds already issued? Was there not a question of the necessity, perhaps, of refunding of the prior issues of bonds upon the higher rate if the higher rate was upheld?

Gov. STRONG. Well, of course, Mr. Chairman, I think the members of this commission must be aware, as I was made aware of the fact, that at this period when the important decision was before the Treasury as to the terms of the Victory loan, there was a very strong outcry in Congress for the protection of the interests of holders of the previous loans, Liberty loans, which had suffered a decline in the market; and without discussing the wisdom or unwisdom of any such policy, I think there was possibly a sentiment which might be regarded as crystallizing, that might have forced

a refunding of the entire war debt, which would have been a very difficult, an almost impossible task, and possibly one of great danger to the country.

That is so far afield from my own responsibilities in the matter that I hestitate to discuss it in much detail.

Representative TEN EYCK. Well, would not the public practically have demanded that, if the rate of interest had been in

creased?

Gov. STRONG. Well, I think that is a question of judgment. My own belief is that there would have been a very strong outcry. There was a very strong outcry. But I have a feeling-possibly because I do not live in the atmosphere of Washington-that it could have been resisted. I hestitate even to express it so strongly as that.

Let me inject one remark, however, about rates and prices of securities. It is not the rate fixed by act of Congress that determines the rate the security bears in the market. That is fixed by supply and demand. And I want to confess to my own misapprehension in the early period of Government borrowings on that score. The fact is that the rate of interest return which any obligation produces that is traded in in the market is fixed by natural laws of supply and demand, of credit, of investment securities, of the amount of free capital, and so on, and the competition between the issues of the United States Government and other securities in the market arises just the same, no matter at what rate originally issued.

If the interest rate allowed on a Government bond is too low from a market point of view, why the value depreciates, and the interest return adjusts itself by change in market value. So that whatever may be said for or against a policy of issuing low rate securities, it must be said that those matters are taken care of by natural laws, and neither by Congress nor by Secretaries of the Treasury.

Representative TEN EYCK. Well, from what you have previously stated here, Governor, about the rates of interest that were charged, I deducted that early in the war it assisted the Government in placing bonds at a low rate of interest.

Gov. STRONG. Yes, sir; they did.

Senator LENROOT. I understand your conclusion, then, Governor, is that in view of the needs of the Treasury and the policy of the Treasury the discount rate could not have been raised before it was raised, even though it had resulted, if it could have done so, in a checking of expansion earlier?

Gov. STRONG. I did not catch that, Senator.

Senator LENROOT. Then perhaps I could repeat it. In view of the needs of the Treasury and the policy of the Treasury it is your judgment that the discount rate could not have been raised earlier than it was raised?

Gov. STRONG. Not without a modification of the policies of the Treasury.

Senator LENROOT. That is what I say, in view of the policies of the Treasury.

Gov. STRONG. Yes, sir. I believe not. Boiled down to the simplest language, and rather roughly stated, in the matter of interest rate policy it really would come to a determination, in the last analysis, as to whether the Treasury's policy was determined by the Secretary

of the Treasury or by the Federal reserve system, because they were so interdependent.

Representative MILLS. I do not want to get into this discussion too much, because I know how much time we can waste on it, but you have not touched on the question of the short-time certificates at all during this period and their effect on expansion.

Gov. STRONG. No; I have not yet, but I am going to.

I am just now outlining, as I stated, the characteristics of the various periods and our policies, and later on I hope to take up the various transactions and methods and influences, and matters that had to be dealt with in the light of these periods that I am describing. During this fourth period, of decline, as I say, it was our policy to encourage extensions of credit where required and necessary, but also to insure at the same time, by judicious increases in our rates, that the orderly liquidation of those stocks of backed-up goods should continue unabated. Absolute failure to liquidate inventories under such conditions, in my opinion, would have brought about disastrous results. All of this, I believe, will be disclosed in the statements that I will submit from the records of the bank.

Representative MILLS. May I ask a question here? Concerning this period that you have just described, did your rediscounts increase, let us say, from August to December?

Gov. STRONG. We have a chart showing that, Congressman. I will show that to you. (See p. 506.)

Representative MILLS. Do you want to show that now, or do you want to show that later?

Gov. STRONG. I think we had better show that now, Mr. Mills; while you have that in mind. I think the peak of our loan account in the Federal reserve bank of New York was reached some time in February, 1920. It got up to a very high level in the fall of 1920, but the pinnacle, so to speak, as I recall, was in February, 1920, so far as weekly figures are concerned. On one day in the fall, however, the figures actually exceeded the February weekly maximum.

Now, the fifth and last period can be described as the debt-paying period, and the period when the readjustment of prices is taking place to a new stabilized level. It is in this period that inventories have been and are being reduced, the inventories of high-priced goods that I referred to. Debts are being paid. New goods are being produced at lower cost by reason of the reduced cost of raw material and of labor. These cheaper goods are taking the place of the old highpriced stocks in the hands of distributors that have been sold or reduced, and they are competing with the remains of the old stocks of high-priced goods that are still on hand. That is what establishes a new price level. And as a result of this competition between the new and cheap priced goods coming into the market we will have in time, and we are now establishing, a new level of prices in this country and of world prices, that is more in accordance with new world conditions of consumption and production and credit. That is the process that I referred to of readjustment of prices and of recovery. So also it is with credit. And I want especially to draw the commission's attention to the marked similarity in the readjustment of the price level to the readjustment in the cost of credit.

Using the New York reserve bank to illustrate my point; during the period of greatest pressure for credit we found it necessary,

as you know, to advance our discount rates ultimately to the high level of 7 per cent; that is, 7 per cent for commercial paper. At that time nearly all of the member banks in New York City, and a very large number of banks in our district outside of New York City, were borrowing from us continuously in very large amounts-a very small number of them occasionally. When a bank is borrowing from the reserve bank, say, at 7 per cent, if as the result of a day's transactions it has a surplus of reserve on deposit at the reserve bank, naturally it applies that reserve to paying off what it owes. It is the same as making a 7 per cent investment of its surplus funds. On the other

EARNING ASSETS, NOTE CIRCULATION, AND MEMBER BANK RESERVE DEPOSITS, FEDERAL RESERVE BANK OF NEW YORK.

Figures plotted on last report date of each month.

Source of information: Annual reports and weekly press statements of the Federal reserve bank of New York.

hand, if it has a deficient reserve as the result of its day's business, it borrows more from us to make its reserve good.

But in this period, by gradual stages, with inventories being liquidated and debts being paid, gradually one after another of our member banks have paid off all that they owe us. They would, in fact, pay off a 7 per cent discount at the reserve bank, and especially those that were borrowing heavily, in preference to going into the market to make some other investment even at a more attractive return. That is partly due to the fact that banks do not like to owe