Mr. HENDERSON. I had assumed that they were.

Mr. SMITH. Therefore there has been added through gold purchases and devaluation purchasing power of $15,927,000,000 since 1934?

Mr. HENDERSON. I have always thought, as I said, that that had been sterilized; and I think that if the amount that was in the stabilization fund had been turned loose, it would have had an effect on the price level.

Mr. SMITH. A small amount of gold bought by the Treasury was sterilized in 1937. This was done by paying for the gold with Government obligations, debentures, instead of paying for it with fiat, as had been the practice. That policy was quickly abandoned, and what gold had been sterilized was desterilized and the former practice of paying for gold with fiat was again resorted to.

Mr. HENDERSON. Maybe we can say it this way: I have not been worried about its effect on the price level.

Mr. SMITH. A bank deposit created through gold purchases is the same as all other deposits. It is an increase of what you term purchasing power. It is available in the banks in the form of deposits, can be checked against and be used the same as all other deposits.

Mr. HENDERSON. That is one of the worries of the Federal Reserve bank and not of the commodity price regulation.

Mr. SMITH. That might be true from the standpoint of the regulatory question. But we are talking now about this: We want to know now what the factors are and where they come from that will have to do with creating this price inflation which this bill is supposed to control. Here we had an increase of $15,927,000,000 since 1934 in the purchasing power of this country resulting from gold purchases and devaluation. Certainly you would say that this must be given great weight in the price-inflation problem we are considering?

Mr. HENDERSON. It has to be given great weight in credit control; but I do not assume for one minute that this bill would give those in charge of the price administration any control over credit.

Mr. SMITH. That is correct. But you think that demands controls

also?

Mr. HENDERSON. I have said several times that I would like to see the Federal Reserve supplied with all the necessary power to prevent inflation through unwarranted credit expansion.

Mr. SMITH. But we have to give it a very important place in our consideration of the factors that produce price inflation?

Mr. HENDERSON. I am interested, but, if I may, without trying to avoid answering questions-and I think my record is fair on thatI would like to say that I would prefer those questions to go to those who are charged by statute with that control. I know they have thought about them; and when I have a problem in that field I them and talk with them.

go to

Mr. SMITH. To be sure, that is a problem of control by the proper authorities. But we are now concerned with determining the factors causing inflation. Isn't that correct?

Mr. HENDERSON. Yes. I hope I have indicated that I think that that is important.

Mr. SMITH. During the 11-year period from 1929 to 1940, all peacetime, and practically no extraordinary defense or military expendi

tures, the Federal debt rose from $16,185,000,000 to $42,976,000,000, which was an increase of $26,790,000,000. Do you consider the increase of the Federal debt during this period as a factor to be reckoned with in considering the question of price inflation, and how much weight would you give it in your formula?

Mr. HENDERSON. I think, Mr. Congressman, I have said that I do not have a formula.

Mr. SMITH. I simply mean in the consideration of the question of prices which you expect to control with this bill.

Mr. HENDERSON. Again I don't want to seem a balky witness, but I have not, in any of the price administration I have undertaken to date, had anything to do with money and credit and the Federal debt.

My job has been one of trying, with the tools available, to keep prices that were in a rapidly rising trend from going up. That was the job which the President assigned to me, and that is the job which I say is comprehended in this bill.

Now, if you want to ask me what my opinion is, I will respond. But you are asking my direct relation to commodity price regulation and I must, I think, give you an honest answer.

Mr. SMITH. I appreciate that. You understand, of course, that we have to consider this bill from every possible angle, and seek out all the possible causes of inflation.

Mr. HENDERSON. I think that the Banking and Currency Committee has to consider all aspects of inflation. Yes, sir.

Mr. SMITH. You have stated that it is necessary for the Federal Reserve to get control of reserves because of the danger of their being used to increase purchasing power and causing price inflation. From June 1929 to the beginning of the defense program, June 30, 1940, there was an increase of direct Government obligations in the commercial banking system from $4,900,000,000 to $13,000,000,000, or an increase of $8,100,000,000, or 165 percent. There was another increase of purchasing power in large volume. You have to give that consideration, do you not?

Mr. HENDERSON. Yes.

Mr. SMITH. Serious consideration?

Mr. HENDERSON. You mean in commodity price regulation?

Mr. SMITH. As a factor that would enter into the production of price rises or inflation of prices-its availability as purchasing power. Mr. HENDERSON. It purchased actual goods, did it not?

Mr. SMITH. Yes. But it was not raised by taxation or by selling securities directly to the public. I think you recognize that a direct Government obligation deposited in a member bank is a purely inflationary process of financing?

Mr. HENDERSON. Oh, yes.

Mr. SMITH. Then it merely becomes in the banks a deposit the same as any other deposit-purchasing power, available as bank check currency. You would regard it as such, would you not?

Mr. HENDERSON. I would regard it as a potential. Yes.

Mr. SMITH. Now, to make this picture a little more clear it should be mentioned that reserves of member banks increased from $2,359,000,000 on June 29, 1929, to $13,723,000,000, or 481 percent, on June 30, 1940. During the same time the excess reserves of member banks

increased from practically nothing to $6,857,000,000. During the same time also demand deposits increased from $24,350,000,000 to $31,960,000,000, or 52 percent.

Would you consider that this picture of excess reserves and the increase of demand deposits are factors of importance to be considered in connection with the problem of price inflation?

Mr. HENDERSON. Yes, sir.

Mr. SMITH. You would give them considerable weight in your consideration?

Mr. HENDERSON. If I were considering the whole problem of price inflation; yes.

Mr. SMITH. The national average annual income of the United States for the 11-year period from 1930 to 1940 was $7,300,000,000 less than it was for the 11-year period from 1919 to 1929. In view of the much greater volume of business done in the 11-year period 1919 to 1929 over the following 11 years, 1930 to 1940, wouldn't it appear to you from the enormous increase of currency and credit during the latter period over the former, that a serious disturbance of the normal correlation between money and credit on the one hand and production on the other had taken place?

Mr. HENDERSON. I could not see that it created a disturbance. It certainly was not reflected in the price level.

Mr. SMITH. That might have been due to a slower turn-over of currency and deposits, and numerous psychological factors.

Mr. HENDERSON. It might have been due to the nature of payments; I mean, how they were spent.

Mr. SMITH. The question I asked you was this: If a certain volume of currency and bank deposits was capable of carrying on a certain volume of business in one 11-year period, and in the next 11-year period there was considerably less business done, while at the same time there was a great increase of currency and bank deposits whether or not that increase of currency and deposits has an important place in the consideration of the question of price inflation.

Mr. HENDERSON. Yes. I have seen certain brochures of Governor Eccles which discuss the reason why we did not get a correlation in that period, and I am sure that you can get a very good discussion with him. But if you ask me again whether or not in connection with my administration up to date and in connection with this bill I have given specific consideration to that, I must again answer no.

Mr. SMITH. We have considered the currency and credit inflation which had actually been produced up to June 30, 1940. Let us now look at another part of the inflation picture, namely, the potential currency and credit inflation which existed as of June 30, 1940.

Already as of June 30, 1940, the supply of excess reserves of $10,730,637,400 of the Federal Reserve banks was sufficient to permit, under the then existing reserve requirements, the expansion of bank deposits in the colossal amount of $183,953,784,000, or, roundly, $184,000,000,000.

Excess reserves of member banks in the Federal Reserve as of June 30, 1940, of $6,857,000,000 were sufficient to permit or support an expansion of deposits six times their size, or $41,142,000,000.

64300-41-pt. 1-51

Or an expansion of bank deposits totaling more than $225,000,000, 000 was possible from the excess reserves of the Federal Reserve and excess member bank reserves.

At this point, Mr. Chairman, I would like to ask permission to insert a tabulation of these figures in the record.

The CHAIRMAN. What is the source of them?

Mr. SMITH. The Federal Reserve.

Mr. PATMAN. Using your theory the expansion could be over $10,000,000,000, couldn't it?

Mr. SMITH. I have used the figure given by the Federal Reserve, which is six times the reserves.

Mr. WILLIAMS. Do you mean credit reserves or excess reserves?

Mr. SMITH. I mean excess reserves of the Federal Reserve and excess reserves of member banks in the Federal Reserve.

Do you consider this situation to be a factor that must be reckoned with in the question of price inflation?

Mr. HENDERSON. Yes.

Mr. SMITH. Do you know of a situation any way comparable to this which has ever taken place in this country before?

Mr. PATMAN. That has not taken place. You are just theorizing on it.

Mr. SMITH. No. I am not theorizing. It exists potentially. It could be made available under certain conditions.

Mr. CRAWFORD. I think you will find that the expansion which has actually occurred within the last few months is not only potential, but has taken place at a rate which has astonished the Federal Reserve Board.

Mr. SMITH. That is right.

You would consider it in connection with the problem before us? Mr. HENDERSON. Taken together with all the other things, I have expressed myself by saying that I believe under the existing problems the Federal Reserve Board operations could not control unwarranted credit expansion, and that I would like to see that power given.

I would not regard it as something disastrous if we could have a real productive expansion corresponding to the use of the reserves. What I have indicated I am worried about is that it would merely be used for bidding up existing goods, real estate, commodities and the like, rather than used by manufacturers or farmers or producers to enlarge the supply. And because of that fear I have several times-I will do so as many times as I am asked-said that I believe the Federal Reserve should be given ample powers to deal with that situation.

Mr. SMITH. You think it is possible to give the Federal Reserve Board power to deal with the situation?

Mr. HENDERSON. Well, the Federal Reserve thinks so.

Mr. SMITH. The tabulation which I asked to have inserted in the record at this point is as follows:

TABLE 52.-Bank deposit expansion possibilities as of June 30, 1940

Total reserves of the Federal Reserve banks_
Total deposits of the Federal Reserve banks_
Federal reserve notes in circulation____

$18, 120, 428, 000

15, 213, 116, 000 5, 163, 000, 000

The sum of 35 percent of deposits and 40 percent of Federal Reserve notes subtracted from total reserves represents excess reserves of the Federal Reserve banks, which would be: $10,730,637,400.

The excess reserves would furnish a reserve of $30,658,964,000, which is obtained by multiplying the excess reserves of $10,730,637,400 by 100/35.

Board of Governors of the Federal Reserve System have estimated that member bank reserves, under present reserve requirements, will support bank deposits of about six times the size of reserves.

Accordingly, the reserve of $30,658,964,000 multiplied by 6 would make possible expansion of bank deposits in the amount of $183,953,784,000.

Excess member-bank reserves, which on June 30, 1940, stood at $6,857,000,000, multiplied by 6, are $41,142,000,000, the possible expansion of bank deposits from this source.

Or Federal Reserve excess reserves and member bank excess reserves together were capable of supporting and making possible expansion of bank deposits of more than $225,000,000,000 on June 30, 1940.

Mr. SMITH. Before June 30, 1940, the gold dollar had been debased by approximately 41 percent; $675,000,000 of the clippings had been used to pay off Government bonds. As of that date the President had full power to clip 2.1 grains more off the gold dollar, which would have brought its weight down to half of what is was originally.

Had he on that date exercised this power, the clippings would have amounted to $3,653,700,000, and this would have provided an additional supply of excess Federal Reserve reserves to permit a further expansion of bank deposits of $62,634,857,142.

Mr. Chairman, I ask permission to insert in the record here a tabulation of these figures.

The CHAIRMAN. All right.

(The tabulation is as follows:)

TABLE 53.—Bank deposit expansion possibilities as of June 30, 1940, from the potential devaluation of the gold dollar

Total monetary gold stock, approximately 570,000,000 ounces_. 570,000,000 ounces by $6.34 (so-called profit per ounce which

would accrue to the Government).

$19,963, 100, 000

13, 613, 800, 000

1 The sum of $3,613,800,000 times 100/35 times 6 or $61,950,600,000, possible expansion of bank deposits from this source.

Mr. SMITH. Do you consider this situation as being a cause of price inflation?

Mr. HENDERSON. I don't consider it a cause, because I cannot see any possibility of its being done. I don't see any need for considering it.

Mr. SMITH. You don't see any possibility of its being done?
Mr. HENDERSON. No.

Mr. SMITH. You realize this, however, Mr. Henderson, that it is being done every day that gold is purchased? Every dollar of gold that is purchased at $35 an ounce you will admit is a debasement of the gold dollar?

Mr. HENDERSON. Maybe I didn't follow you. I must say I don't know.

Mr. SMITH. Was not the whole purpose of the reduction of the content of the gold dollar that of inflation?

Mr. HENDERSON. Whose theory was that?

Mr. SMITH. I understand that it was not yours. We are dealing now with this question of price control. We want to determine the part these various factors must play in inflation.