large sums of money, and it is partly due to the fact that they have been educated in New York to the real purposes of the Federal reserve bank. I think that they understand it pretty well. And when a surplus reserve arises they know that we expect them to repay us and not employ the money in some attractive loan.

When, therefore, a member bank gets out of debt to the reserve bank and it has a surplus reserve balance, it has to seek employment for it, so it goes into the market to lend money, and if a number of them get out of debt at the reserve bank then we have a competition to lend money. They can not get a 7 per cent investment any more by paying us off. That is what introduced the new and cheaper credit into the market that reduced the interest level below the level of our discount rate.

Now I have enlarged upon this a little bit, gentlemen, because after all it is the crux of this whole question that we are searchingthe relation between market rates and the discount rates of the reserve bank, and it is a very important matter.

Representative TEN EYCK. That has an influence on the reserve bank to lower its rates then?

Gov. STRONG. It has.

Representative TEN EYCK. Is it not a fact, Gov. Strong, that a great many of the member banks did not increase their interest to their borrowers over the 6 per cent, even though the reserve bank in New York did increase to 7 per cent?

Gov. STRONG. Well, it was a very spotty development with us. The 7 per cent rate was effective rather soon in reducing the number of borrowers at the reserve bank, but the reduction in the number that went out of debt, was largely occasioned by the repayment of borrowings by the smaller banks in other parts of the district than New York City.

Representative TEN EYCK. Yes; but I mean the member banks in loaning to their customers, all of them did not necessarily increase their rate to their borrowers on commercial paper to 7 per cent?

Gov. STRONG. Oh, no; oh, no; now that is where the element of original competition between the member banks enters in. Even when the member banks are borrowing from us they are still going to take care of their customers and see that they do not go to some other bank. And to illustrate the point, Congressman, which you have in mind; the president of one of the big banks came in to our office one day when our rate was 7 per cent, and told me that they would have to increase their borrowings, I think, about $15,000,000, paying 7 per cent. The reason for the increase was that on that day they had loaned $18,000,000 to some of their railroad customers, which in common with other railroads during that period were having some difficulty in getting funds. As the railroads were old customers of the bank, they had loaned the money at 6 per cent.

I think it is a mistake to say, except for a very short period, possibly, when the rate was advanced, that it had the effect of generally raising interest rates in the district. I should say that the interest level in the district was pretty well raised in all directions before we came up to 7 per cent.

Representative MILLS. What was the date of the going into effect of the 7 per cent rate?

Gov. STRONG. It was June 1, 1920.

In résumé permit me to say that in credits the same process was taking place that took place in goods. Cheaper credit was coming into competition with the more expensive credit obtainable at the Federal reserve bank, and as soon as those conditions developed then we were justified in rate reductions, and I don't think we were justified in rate reductions until then. No different principle of economics applies to the price of credit than applies to the price of goods in this readjustment that I have just described.

Now, during this period, as to the policy of the reserve bank. Commencing possibly some time before December, or around that time, it was the policy of the Federal reserve bank of New York to encourage the member banks to take care of their customers. It was our policy to give a most liberal construction to the rules, to the principles, which apply to the determination of whether paper is good or not.

As you know, eligibility is one thing and goodness is another, under the terms of the reserve act, but when considering eligibility we have got to take into account goodness. We have felt that with the indorsement of the member bank upon the paper which we discount, a member bank which makes the paper good in any event by its indorsement, it would be a mistake to apply severe and technical rules in determining what paper was eligible upon the basis of goodness, at this period of difficulty in taking care of those who were struggling with big inventories. In other words, the rules which we would apply and the tests which we would apply in determining the goodness of commercial paper which were justified in a period of high prices would no longer be justified in a period of low prices.

Representative SUMNERS. Was this policy which you speak of made manifest through any general statement which you gave out, through what you had to say to the patrons of your bank, and what you did?

Gov. STRONG. The policy in regard to goodness and eligibility? Representative SUMNERS. Yes; the general policy that you have been speaking of. You have spoken now several times with regard to the policy of the bank during different periods. I am inquiring as to whether or not that policy was set forth in a general statement or made manifest through the method of doing business?

Gov. STRONG. It has been set forth in a great variety of general statements and in reply to specific inquiries of member banks and at meetings of bankers held at the Federal reserve bank of New York, and I think has been generally understood by the banks in our district since this period developed and this difficulty arose, as the policy of the bank.

Representative SUMNERS. Have you any statement which more or less embodies the general policy of the different periods?

Gov. STRONG. I have quite a number of them here which were concurrent with this period, and which I intend later to introduce. into the record, Congressman.

We endeavored to make clear to member banks individually, and to the public by general statements, that it was now safe to go on and do business, that there was ample credit available for all legitimate business, and that the need for restraints such as had been exercised when prices were rising, had now disappeared. Of course,

you will expect me, and I intend to introduce into the record a long series of quotations from the publications and correspondence of the bank which will make clear by the concurrent evidence of the period just how these policies developed.

Now, we believe that it is dangerous and no part of our function to indulge in prophecies, and yet I feel that a description of this period which I have characterized as readjustment and debt paying and recovery, will be incomplete without referring to the symptoms of recovery, because our policies are developed, to some extent, in anticipation of developments and occurrences, and I want to give you a little bit of the view, at the present time, of the management of the reserve bank, as to what is occurring.

These periods of economic disturbance and recovery, as you know, go through regular cycles which have been studied and are fairly well recognized and described by economists and writers on these subjects. In the cycle to which I am referring I have described the last period as that of recovery.

I would like to outline some of these symptoms of recovery that are beginning to be apparent to us. I am doing it deliberately, in the hope that some of those people who are just now too much influenced by an atmosphere of gloom may be helped, that it may help to dissipate this gloom, because I do not believe it is now justified. One of the first symptoms of recovery is a tendency toward easier rates for money. Now, you will observe the long advance that has been made in that respect. I have tables of rates to introduce here, and they will show graphically what has taken place. (See pp. 564, 565.)

Another symptom of recovery is the immediate influence upon security values. The first to move are high-grade bonds. If you will look over the quotations of the bonds of the Government you will find that they have all recently advanced. If you examine the tables that I will submit showing the costs or market values of the certificates of indebtedness which are now in the market, you will find that every issue that the United States Government has got outstanding is selling at a premium in the market. We find by the reports that we get at the bank that issues of high-grade, first-class bonds are immediately taken by investors when they are offered, and the subscription books are closed as soon as they are opened, with the issues oversubscribed in many cases.

We find in such a period as this that spotty activity develops in various lines of industry, and that it is most likely to develop first in those industries that were first affected by the decline. Let us see what is happening in industry. According to figures prepared by the New York reserve bank, which allow for changes from one season to another, wool consumption, including the activity of woolen mills, in June, was 106 per cent of normal.

The CHAIRMAN. What is the normal on those figures, Governor, 1913 ?

Gov. STRONG. The normal has been arrived at by a statistical process which takes into account experience through many years, allowing for growth and changes from one season to another. The curve of activity in the wool industry shows that the industry has been above normal since last April.

Now, as to cotton. Cotton consumption, including activity of cotton mills, has increased steadily from 55 per cent of normal in January to 73 per cent in June. Cotton and woolen goods producers report an excellent volume of orders for next spring at prices about on a par with those prevailing for the fall season.

I would like to have you understand a little bit about the sources of these statements that I am making-you may think rashly. We get these figures from original sources wherever possible. I think we have 58 or 59 retail establishments that report directly to the bank on the activity of their business, and wholesale establishments, and industries of various kinds. We get figures also from various records of the departments of the Government. I regard our figures as reliable as they can be.

Representative SUMNERS. These retail establishments, Governor. are they distributed over the United States, or chiefly in your district! Gov. STRONG. As to retail establishments, they are in the New York reserve district, but otherwise the figures are for the United States, unless specifically indicated to the contrary.

Now, as to the milling of wheat flour. In June it was 116 per cent of normal, and has been above normal ever since February.

Building in and around New York City appears from the index figures maintained by the New York reserve bank, which allow for price changes and seasonal variation, as 27 per cent higher than in June, 1920.

Representative SUMNERS. Is that in cost of construction or volume of construction?

This

GOV. STRONG. That allows for the changes of price or cost. increase in construction largely results from the increase in residential construction, including hotels and apartment houses.

In June, also, 9 out of 14 groups of industries upon which the Department of Labor reports, showed an increase of employment over May, and 2 of the remaining 5 showed no change. These increases are largely in those industries which were the first to feel the reverse 15 months ago, and are now the first to improve.

I referred earlier in the hearing to the conditions that I have observed in the East as having some bearing upon this statement as to the industries which are first to recover. I received a call recently from an English friend who had seen, just before he sailed, a friend of mine who lives in London and is at the head of one of the largest English banks doing business in the Far East. When I was in London I had brought some account of the conditions of depression which I had observed in the East, starting there before it reached this country. My friend, the London banker, sent word to me that he was glad to say that the symptoms of recovery seemed to be starting in the region where the symptoms of depression first appeared, referring to the trade of India and China especially.

Quite characteristic of this stage in the economic cycle is the relatively low production in the steel and allied industries, which were among the last to decline last year. The index of steel production maintained by the bank was 26 per cent of normal during June. Whether the lower prices that have since been quoted have yet stimulated orders to the point of causing a rise in the index for July, it is still too early to state-our index has not been made upbut general increases in mill operations have been reported very recently.

Also, as to price of basic commodities. These are indicative of an advanced stage in the process of readjustment. An index of prices of 12 basic commodities, maintained at the bank, in the week ending July 20 was less than 4 per cent above the 1913 average of the prices of those basic commodities. It represents a decline of over 57 per cent, more than half, since May 17, 1920, when it reached its highest point. The index is computed from the wholesale prices of such raw commodities as petroleum, pig iron, copper, rubber, cotton, wheat, corn and hogs, and others.

Since last December this index has declined each week at a much slower rate on the whole than in the autumn months of 1920. And

PRICES OF TWELVE BASIC COMMODITIES IN THE UNITED STATES.

Prices of standard specifications each month and the index computed from them by the Federal reserve bank of New York. Average prices in 1913-100 per cent.

Source of information: Various trade journals, trade associations, and dealers.

since the 1st of May it has moved both up and down, showing a tendency towards stabilization.

In the eastern part of the United States the retail trade continues generally at a high level. Allowing for the lower prices now prevailing, the volume of goods now being sold by department stores in the New York district, according to figures received by the New York reserve bank, is slightly higher than at this time in 1920, and about 20 per cent higher than at this time in 1919.

Thus, in the two extremes of domestic business-the production of basic commodities and in retail trade-conditions appear to have passed well into the later stages of readjustment. The retail prices have come down and the volume of sales is increasing.