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H

COMMITTEE ON BANKING AND CURRENCY

HOUSE OF REPRESENTATIVES

SEVENTY-SECOND CONGRESS, FIRST SESSION

HENRY B. STEAGALL, Alabama, Chairman

CHARLES H. BRAND, Georgia.
W. F. STEVENSON, South Carolina.
T. ALAN GOLDSBOROUGH, Maryland.
ANNING S. PRALL, New York;
JEFF BUSBY, Mississippi.
MICHAEL K. REILLY, Wisconsin.
FRANK HANCOCK, North Carolina.
CLYDE WILLIAMS, Missouri.
P. H. STEWART, New Jersey.
WESLEY E. DISNEY, Oklahoma.
W. L. TIERNEY, Connecticut.

JEFF BUSBY, Mississippi.
ANNING S. PRALL, New York.

II

LOUIS T. MCFADDEN, Pennsylvania.
JAMES G. STRONG, Kansas.
ROBERT LUCE, Massachusetts.
GUY E. CAMPBELL, Pennsylvania.
CARROLL L. BEEDY, Maine.
JOSEPH L. HOOPER, Michigan.
GODFREY G. GOODWIN, Minnesota.
BENJAMIN M. GOLDER, Pennsylvania
FRANCIS SEIBERLING, Ohio.

SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY ON H. R. 10517

T. ALAN GOLDSBOROUGH, Maryland, Chairman

JAMES G. STRONG, Kansas.
CARROLL L. BEEDY, Maine.

O. K. WEED, Clerk

STABILIZATION OF COMMODITY PRICES

WEDNESDAY, APRIL 13, 1932

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON BANKING AND CURRENCY, Washington, D. C.

The subcommittee met, pursuant to call, at 10.30 o'clock a. m., in the committee room, Capitol Building, Hon. T. Allan Goldsborough, chairman, presiding.

Present: Messrs. Goldsborough (chairman), Busby, Prall, Strong, and Beedy.

Mr. GOLDSBOROUGH. The subcommittee will come to order. We have with us this morning Governor Harrison, of the Federal Reserve Bank of New York, and I am going to ask the governor whether he would like to proceed in the discussion of this measure in his own way and then have the subcommittee ask him any questions they would like to ask after he shall have finished.

STATEMENT OF GOV. GEORGE L. HARRISON, OF THE FEDERAL RESERVE BANK, NEW YORK CITY

Governor HARRISON. Mr. Chairman, I am very glad to come here to discuss this bill with you because I, with you, consider it one of the most important subjects the country now has before it; that is, the problem of dealing in some fashion with the commodity price level. I am not here, however, to speak for the Federal Reserve Bank or for the Federal reserve system, but to give you whatever I can individually of the best of my own personal opinion. I have no prepared statement. The subject is so large that if I endeavored to make a prepared statement, it would take many volumes I am afraid. So I should be glad to discuss whatever features of the bill, or whatever aspects of our operations the committee might be interested in.

Mr. GOLDSBOROUGH. You have a copy of the bill, have you not? Governor HARRISON. Yes, sir; I have the bill. You were good enough to send it to me.

Mr. GOLDSBOROUGH. Do you care to discuss it without questions? Governor HARRISON. I would not object to being interrupted. Mr. GOLDSBOROUGH. Will you proceed in your own way? Governor HARRISON. Mr. Chairman, I think we can best understand the problems we have before us if we consider certain definite periods through which we have been and which demonstrate the relationship between the volume of credit and prices and business

activity. There is no doubt that the quantitative theory of money in its effect upon the price level is a theory which, without interrupt ing factors, will ultimately work. We have charts as you no dotter have, which show that over a period of time the ratio of the volle of credit to the normal expansion of business as a rule fairly w coincides with the general price level. But the volume of credit is one which we can not always rely upon; and it is certainly tr that it is a line you can not rely upon so far as the Federal reserve operations alone are concerned, because whether fortunately or fortunately, our operations do not necessarily have any effect up: the total volume of credit except indirectly, and except as it is s encouragement or incentive to bankers to expand or contract the credit.

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We know that as a rule when we buy securities and reduce the discount rate, the influence is towards ease and expansion of cred:: But we know also when we sell securities and raise discount rate the whole influence is a depressing or restraining one, and back credit as a rule should decline.

We know also as the economists tell us-and I am not one of themthat the volume of bank credit and the activity of its use, which important, have some effect upon the price level. The difficulty that you can not be dogmatic in the application of this principle to any given set of circumstances. There have been certain periods in the past when the purchase of Government securities and the redu tion of the discount rates have been very influential in expanding bank credit, and through the expansion of bank credit, in raising the price level and encouraging business activity.

There have been other periods, however, where we have bought eve more substantially of governments, and where we have been even more rapid in our changing of discount rates where that result has not taken place, and the reason of it is clear: That there are so many factors that come into play that the reserve bank's policy may itse be very quickly defeated by the other factors.

Assume that there are no other extraneous factors. Take the position as it is to-day. We have had a more rapid deflation of bas credit than the country has ever experienced in any comparave period. Concident with that, we have had a very drastic decline of commodity prices-more drastic, indeed, than at any time eve after the war in 1920-1922. The general commodity price levels about one-third less than it was in 1929. We have had a decline in productive activity which is estimated very conservatively by some of the best economists and statisticians, to be approximately 50 per cent from the high point. We have had a decline in security values and we have had a decline in incomes and dividends and wages.

Now, facing a situation like that, what has the system done? We have increased the volume of our Government securities from a low point of $136,000,000 in 1929 to well over $900,000,000.

We have reduced our discount rate from 6 per cent to 1% per cent. During the better part of that period we had huge imports of good. But even so, bank credit did not expand and the price level did not

go up.

Now, there are two principal factors perhaps that defeated the ordinary operation of that economic principle. One-and the

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