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that is, if the old laws still rule, as I think they do, that it is the existence of an unconsumed and unconsumable surplus that makes the price of the whole commodity and I certainly think these charts and others that we have submitted indicate that then the question is to get the surplus productive capacity of this country consumed, is it not?

The CHAIRMAN. Well, if we get France or get Germany or anybody else competing for American dollars, raising the price of American dollars, that would have a reflex in prices, it would have a tendency to increase the prices, and therefore the higher the prices get the more difficult it would be to export. Is not that true?

Gov. STRONG. Well, you have to discuss world prices on one hand and domestic prices on the other. What I am emphasizing first is that the fluctuation in exchange presents a difficulty in itself aside from any question of the application of the money. The fluctuation in exchange has, to some extent-if current reports are to be believed-been caused recently in part, at least, by this accumulation of dollars. Therefore that is one cause of the difficulty.

Using sterling to illustrate it, sterling declined from $4 to $3.53 in a very short period. That is a decline of about 10 per cent, or a little more, and a change in foreign price levels of 10 per cent, as rapidly as that, is hardly to be expected, as you know. Besides that. the poor man in England who bought some American goods on the basis of $3.53 sterling is going to find it difficult when he comes in competition with the man who bought those same goods on the basis of $4 sterling.

Representative MILLS. Well, isn't it a fact that you have a competition for dollars which would tend to raise the price of dollars, that so far as world market is concerned, it would tend to raise the price of American goods so far as the foreigner is concerned? But in so far as the whole market is concerned it would tend to lower the price of goods, because it would diminish the demand and so increase the surplus available. Is there not a twofold effect?

Gov. STRONG. Yes; I think that is true.

Representative MILLS. So you can not discuss it in terms of any one price?

GOV. STRONG. No, sir. What you can discuss, however, is the difficulty of too rapid a change in price, and in more general terms you can discuss the possible effect of the diversion at the present juncture of a certain amount of buying power to paying interest rather than to buying goods.

I think, Mr. Chairman, with that reference, which is necessarily rather brief, I have about concluded what I endeavored to prepare for the commission; but if you will permit me I would like to say a few words that I had not intended to say originally. I am encouraged to say them by the sympathetic attitude, if I may use that expression, of the commission toward the long talk that I have made. I would like to have the members of this commission understand a little bit generally about the Federal reserve system and its problems, from a more personal standpoint.

In the middle of October, 1914, these 24 men who are responsible for the management of each of the reserve banks, that is, the governors and the Federal reserve agents, were literally handed the

Federal reserve act and told to have these banks open for business on the 6th of November. It was a new kind of banking that had never been practiced in the United States since 1836. There wasn't any man living in this country who had had any experience in that kind of banking. It involved a complete revolution, not only of banking methods, but of the methods of conducting the business of the Treasury of the United States. Not only that, but it was at a time when the world was in the midst of the greatest war ever fought, and after two and one-half years these infants, so to speak, were called upon to conduct the business in the field of the Treasury of the United States, which in turn had to finance our own war efforts and a very large part of that of the allied countries.

Now, I know these men.

I have had intimate association with them. They have taken up this work as a matter of public duty. They have not had a great deal of time to organize and get the wrinkles smoothed out, but what they have done is to create an organization of 12,000 people. They have raised more billions for the United States than I can recall. In the bank in New York we have raised $20,000,000,000 in the long and short time loans. They have conducted all this mass of business throughout the war under conditions of unparalleled difficulty and perplexity and strain, and I want to tell you what it has done for this country, in a few words. It was the machine that financed the war. There never has been a day since the Federal reserve banks were opened until the present day when you could not take any piece of paper money in the United States, present it at the counter of those banks and get gold for it, and if it had not been for that, that black line that represents prices in the United States would have gone up there with the rest of them, somewhere or other, and the difficulties that we have encountered in adjusting to this new period are trifling alongside of what we might have encountered in that one thing, namely, such a thing as suspension of specie payment in the United States, which has not happened. The only limitation that was imposed upon specie payment in the United States was the requirement under the trading with the enemy act that gave the President the right to license exports of gold to those which were regarded as to the best interests of the country in the prosecution of the war, and just as soon as it was possible, that limitation was voluntarily relinquished, although I believe it could be in operation to-day if the law was invoked.

Now, I refer to this very briefly for this purpose. We have been through the period of liquidation. We saw it coming. We have been through the period that has been just the reverse of a period of expansion. When you are expanding, prices are going up, profits are big, everybody is happy. There are no big business failures, nobody is to blame for anything, because nothing goes wrong.

Now, the reverse has happened. Nature brought it on. Prices have declined, we have had losses, failure, distress, suffering; and in reviewing these complaints-I won't dignify them by calling them any more than complaints-about the Federal reserve system, never overlook the major thing, what this system has done for the United States. It is a great thing, greater than anybody realizes who has not sat in the middle of it and studied it, and who knows what it is. It protected this country as no other thing has done during the war

from disturbance and breakdown of the worst kind when the day of reckoning did come, as it has.

I think that is about all I want to say, gentlemen, except to express my very great appreciation for the patience and courtesy and consideration that you have shown me during these long talks that I have very much enjoyed.

The CHAIRMAN. Would you care to say anything now, Gov. Strong, with respect to the growth of the Federal reserve system and the volume of business that it does now compared to prior years?

GOV. STRONG. I think it would be more appropriate, Mr. Chairman, to take that up later as we are expecting to do.

The CHAIRMAN. Very well. If there is nothing further, we are very much obliged to you, Gov. Strong, for your interesting and illuminating statement.

INDEX.

A.

Agricultural credits:

Page.
Agricultural and nonagricultural communities, May 4, 1920-April 28, 1921. 650-663
Agricultural paper brought in last to Federal reserve banks by member
banks.....

702

Amount borrowed from Federal reserve banks on farmers' paper not total
amount loaned to farmers..

Ample credit for crop of 1921.

698-699, 734
631, 777

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Conditions affecting industry.

Effect of deflation upon farmers.

Effect of demand for agricultural credit on street loans..

Expansion of bank loans and deposits in agricultural counties..

Farm loan banks....

From Federal reserve banks.

Indication of pressure in agricultural sections.

Interest rates on.

Less credit needed to finance crops when cost is lower.

Loans to farmers...

Need for diffusion of credit for seasonal agricultural needs.

594-595, 629

183, 443

773-774

634

595

694, 695, 789, 791

76, 125, 153, 158, 266, 326, 329, 372

702

306, 308, 354

631

698-703

786

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Statement relating to, by Comptroller of Currency, December 6, 1920..... 294
System of credit suggested to take care of long-time agricultural loans. 790-800
Competition with national banks....

791, 793, 795

Investment funds, rather than deposit funds, to be used for this pur-
pose...

Paper under this system could go through land banks..

792
790-793

Such paper discounted at Federal reserve banks, when nearing ma-
turity.

Tables-

Loans to correspondents located outside second district and loans and
investments of daily reporting banks, as of November 15, 1920.
Deposits of correspondents located outside second district and total
borrowings from Federal reserve banks, as of November 15, 1920....

Telegram from farmers relative to.

790-792, 793, 799

638

639

372

Telegrams of Federal Reserve Board relative to.
Unrelated State banks cause of diffusion of credit.

372, 373

785

American Cotton Association:

Organization of.

Statement to conference with Federal Reserve Board, September 15, 1920,
at Washington.....

Atlanta Federal reserve bank:

Report to conference with Federal Reserve Board, September 15, 1920, at
Washington......

393

411

412

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Atlanta Federal reserve bank-Continued.

Possible disestablishment of..........

Progressive interest rate applied...

Statement of governor (credit conditions as to cotton).

Assets of banks in United States......

Authorities cited or alluded to in Gov. Strong's testimony:
Aldrich Monetary Commission Report..
Aldrich-Vreeland Act.....
American Economic Review..
American Statistical Review.

Annalist..

Annual Reports, Federal reserve bank of New York.

506, 522, 528, 554, 559, 560, 561, 563, 592, 725, 760

Annual Reports, Federal Reserve Board...

Page.

227

163, 173, 315, 316, 318

422

684

541

719

454, 478, 479 note, 490

486 note

803

500,

560, 561, 563

482,

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Discount Policy of the Federal Reserve Banks, O. M. W. Sprague..... 485 note,

Dun's Review..

Economist...

Federal reserve act..

803
741, 764, 775
486 note, 487 note, 488 note
512
463 note, 475 note, 476 note, 559, 561
483,

503, 520, 522, 523, 528, 529, 532, 543, 582, 672, 697, 789, 800, 813
Federal Reserve Board's correspondence..
484 note
Federal Reserve Bulletin...
462 note, 481, 482, 483,

Financial Review...

489, 490, 534, 536, 587, 635, 636, 641, 713, 715, 716, 731–733, 759

Harvard Review of Economic Statistics..

561
522,529

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764
486 note
764

479 note, 513

Lombard Street, Walter Bagehot..

Minutes of meetings of directors, Federal reserve bank of New York. 447, 760–762
Monthly Labor Review....

498, 499, 764, 765

Monthly Review of Business Conditions (Federal reserve bank of New
York)..

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President Wilson's Address to Congress, December 2, 1918.
Proceedings of the Academy of Political Science...

462 note
483

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Balances out-of-town correspondents:
Chart, out-of-town funds with 52 New York City banks.....

644

Tables-

Balances of out-of-town correspondents and street loans placed for
their account, daily reporting banks, New York City, Jan. 3, 1919,
to July 20, 1921..

646

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