trade all over the place was shrinking, and our trade dropped off along with the trade of the rest of the world. Here and there, I think there were particular situations in which we lost sales owing to depreciation of world currencies, but the amount thus lost I would say was not sufficiently great to have been one of the big factors in our situation. If you take, for example, the most conspicuous case, that of Great Britain, you will find that the amount of stimulation to British exports arising out of the departure from gold and the depreciation of the pound was not very great. The British position was something like this: There had been a shrinkage for a number of years before the country abandoned gold, because of the failure of British costs to come down as rapidly as they had been reduced in other countries. Therefore, when the country went finally off gold, the pound at once dropped, roughly, about 25 percent of its previous value. From that time, the pound was held fairly steadily at that point. The equalization fund which was established was used not to depreciate the pound when it was weak, but to support it, and to acquire foreign currencies only at times when the pound was temporarily strong, in order to have foreign currencies to support the pound when it was weak. Generally speaking, I would say the policy followed there was not to use depreciation as a means of stimulating the British export trade, partly for the reason that it was naturally feared, or believed, that further depreciation of the pound brought about by the policy of the British Government would lead to protective measures on the part

of other countries.

Mr. McGUGIN. Recalling a question by Mr. Dies pertaining to debts, I was very much interested in your statement that it would be better for the creditor class to take a reduction in interest, and, possibly, a reduction in principal. We might agree with that proposition, but would it not be one that would be utterly impossible to carry out? It would require the sanction or agreement of the mortgage companies and insurance companies to bring about a reduction in the amount of the principal and interest of mortgages, and, in fact, it would require the cooperation of the entire creditor class, including bank depositors, holders of insurance policies, and so forth, to reduce the amount of deposits and the amount carried in insurance policies. Now, it would be utterly impossible to secure any such concurrence as that, would it not?

Dr. SPRAGUE. I think, taking it as a universal policy, I would quite agree with you, that it would be impossible, and it is largely for that reason that people have been seeking for some monetary means of turning the trick. I do not expect, or think it possible, that it could be made universal, but I think that by a little here and a little there a good deal could be accomplished in that direction that would be helpful. I do not consider that any one means is adequate by itself to meet our present difficulties. I think that a little more could be done in that direction if it were impressed upon all classes in the community that it was desirable. It has been done to a certain extent, both as regards to farm mortgages and as regards urban properties.

Mr. McGUGIN. I have one more question: If we continue as we have been going during the last 5 years, with unbalanced public budgets, particularly in the case of our local government units, with most of them applying to the Federal Government for relief, with the Federal Government and the local government units operating each

year with budgets more and more unbalanced, in the end, is there any possible way to escape inflation in one form or another?

Dr. SPRAGUE. Well, I think, it depends upon whether we are making progress in the right direction, doing a little here and a little there. Mr. McGUGIN. The point is, can there be any progress in legitimate industry, private industry, productive industry, or whatever you call it, so long as Governmental units are absorbing all the credit of the country? It is being absorbed by the Government of the United States, and by every local community. They are issuing bonds every year to take care of their deficits.

Dr. SPRAGUE. Let me illustrate it by a possible case: Suppose we were taking in hand the railroads of the country: Here is a first-rate agency for moving goods, which for one reason or another is being duplicated to a greater or less extent by the use of roads by trucks. I would be disposed to think that a policy regarding transportation which would look at the problem as a whole, and which would be directed toward using the railroads for the class of traffic for which they are best suited, which would examine the structure of the railroad rates with the purpose of discovering whether there are not a good many rates the reduction of which would serve to stimulate traffic and reduce the cost to the consumer of particular products that consumers would want in greater quantities if prices were relatively lower, would be helpful in that one field.

It should be one that would also examine the railroad debt or financial structure, and recognize that in the past probably there have been serious errors made in financing which must be adjusted through wiping some of the obligations off the slate. Some of the trouble we are in seems to me to be due to the fact that following the collapse in 1929 we went forward for a period of 3 or 4 years rather on the assumption that somehow or other things would snap back, and would be where they were before. Now, that does happen in the case of minor recessions. We had a minor recession at the end of 1923, and then things improved in 1925. In 1925 we were doing about the same things that we were doing when business was going on prior to 1923-the same distribution of labor, and about the same proportion of different things being produced.

The same was true after the modest collapse in 1927. But in 1929 we entered a period in which, apparently, very considerable adjustments were necessary, with shifts in labor and shifts in values; and that, upon the whole, we refused to do. We looked for a recovery and a return to the condition of, say, 1928. The general point that I am making is that no one policy, whether it be monetary or nonmonetary, is sufficient to meet the present situation. I feel that the attention that has been given to monetary policies in the last few months in this country has tended to obscure in the minds of most people the necessity for doing a good many things in the financial and nonmonetary sphere in order to bring about the desired trade

recovery.

Mr. ELTSE. Dr. Sprague, as I understand, you believe that the matter of adjustment of debts is largely an individual matter as between debtor and creditor, and that the Government cannot do much to help in that direction. Is that correct?

Dr. SPRAGUE. I think it can do more than it has been doing. It has been doing a good bit in connection with smaller home loans and farm mortgages.

Mr. ELTSE. But, speaking generally, will it not be a case of individual adjustment more than anything else?

Dr. SPRAGUE. Yes.

Mr. ELTSE. Now, with respect to this policy of devaluation as a strengthening of the credit structure of the Nation, if the gold is to be taken in to the Treasury of the United States, and against that these new bonds are to be floated to the extent of several billions of dollars, is that going to help the credit structure at all? Is it going to relieve the strain on the credit structure to any extent?

Dr. SPRAGUE. I should think that the supply of funds available or the supply of credit was and had been adequate. Let me take the situation as it was developing last summer. Last summer we brought out an issue of 8-year bonds, testing the market by a longer term Government issue than had been put out for a number of years, and that was a decided success. At that time there was at least relatively a fair expectation on the part of the public that the Government was not going to resort to extraordinary monetary devices. Then early in October we went a step farther and offered 10- to 12-year bonds, asking suscriptions for 500 millions of new money and venturing to call 2 billions of the Liberty 4%-percent bonds for payment in April, offering the 10- to 12-year bonds to holders of the called bonds; and the response was very satisfactory. Assents were secured to the extent of some 800 million out of the two billions in the course of something like 2 weeks. Then the gold-buying policy was announced, and assents to conversion immediately ceased; that is the position at the present time, and the Government has over a billion dollars to pay out on those called bonds on the 1st of April to people who have not assented.

I still believe that the assents would have been secured for practically the entire amount if we had gone forward on a basis of ordinary governmental financial policy. The supply of credit, the ability of the Federal Reserve to expand credit in response to any demand, is very great. I do not think that we need to revalue now from the point of view of the supply of credit; and I come back to the statement that I made earlier, that if it is stated when we revalue that this is simply one of a series of experiments to be followed by others of an indeterminate and undisclosed sort, then I should be disposed to think that business confidence would be weakened, and also that confidence in the credit of the Government might be so weakened that it would be more difficult to float the additional 2 or 3 billions of bonds over and above the windfall profit than it would have been to float the entire quantity on the basis of complete confidence in the monetary intentions of the Government.

In other words, I feel that revaluation, if it takes place, should be the last of the monetary devices of the Government, aside from the matter that your chairman mentioned a moment ago, of silver, about which I shall have something to say a little later, after we have gone around the table, I suppose.

Mr. ELTSE. As I understand your position, then, underlying all business of the whole Nation, of every individual and group of individuals, is a contract, the terms of which may be performed almost

immediately or may be performed over a period of months or even over a period of years, and until the parties to those contracts can rest assured that conditions will be such at the time of the performance of the contract as they were on the day of the execution of the contract, confidence is not going to be restored, industry will not be speeded up, and the wheels of the factories will not begin to turn again.

Dr. SPRAGUE. I should imagine that I agreed with you about that, although it is one of those general statements upon which we might have differences as to what we meant by them. But for the moment I will agree with you as to that.

Mr. FIESINGER. Professor, does the supply and demand of gold have any effect upon prices of goods and services?

Dr. SPRAGUE. If you give a sufficient long period of time, it does. There are times when the effect is immediate; there are other times when it is not. You may have a situation, for example, in which the metallic reserves required by law underlying the credit structure do not permit any further expansion of credit and currency. If at such a time there is an active demand for more credit and currency, then you may say that an increase in the metallic base would serve immediately to bring about an expansion of credit and currency and probably an increase in prices, or prevent a decline. That, in my judgment, would probably have been the situation of the world in, let us say, 1898, if the Rand Mines in South Africa had not been developed. I am convinced that if those mines had not existed silver would have been added to gold as a part of the metallic base for currency some time between, let us say, 1898 and 1905.

If, however, you take a situation like the present, in which, in the case of all of the important central banks of the world the gold base is largely above gold requirements Germany alone exceptedand a situation in which there is not an active demand for more credit and currency on the part of the business community, I do not think that you get any immediate response through enlargement of the metallic base, whether it be an enlargement through more gold or an enlargement through more silver. If you project your mind over a period of the next 20 years, I should be disposed to think that the addition of a considerable amount of silver to the metallic base would have an effect upon prices, because I presume that in the course of the next 20 years there will be periods in which there will be an active demand for a very much greater quantity of credit and currency than now. But the direct effect of the use of silver in bringing about a trade recovery, in improving conditions in this country and elsewhere next month or in the course of the next 12 months, seems to me to be comparatively slight, and only brought about through such effect as it may have on trade with the Orient.

Mr. FIESINGER. Professor, prices of commodities exchanged in world markets are measured by the value of gold, are they not?

Dr. SPRAGUE. Yes; they are measured by the value of gold; they are measured by the value of sterling; they are measured by the value of anything you like to take.

Mr. FIESINGER. But is not the basis, after all, gold, that they are measured by?

Dr. SPRAGUE. I think I can agree that that is the usual yardstick. Mr. FIESINGER. Well, would you say, then, if all commodities were low in price, and the value of gold was high, that there was anything the matter with gold?

Dr. SPRAGUE. I should have to look into the question as to what brought about that low value of commodities, and if I discovered that it was due to an inability of banks to meet an active demand for credit, because their gold reserves were low, then I should consider that gold had been responsible for the low value of commodities. But I should have to examine each case by itself; and in the particular case that we have at the present time before us, I simply do not believe that a considerably greater amount of gold in the reserves of the central banks of the world during the last 10 years would have made any appreciable difference in the present value of commodities.

Mr. FIESINGER. Did you read, Professor, the brief that was sent over to you by Mr. McIntyre with reference to the plan therein to make possible profits to industry, farming, and commerce?

Dr. SPRAGUE. I am very sure I must have read it, and I am very clear that I did, but I should not be in position to discuss the plan without refreshing my mind. As I recall, it must have been last August that it came along to me.

Mr. FIESINGER. You do not think that there is anything the matter with gold, then, primarily; that the yardstick has been increased in value, and all other commodities thereby decreased?

Dr. SPRAGUE. No. I would say that whatever the yardstick is, it will be affected by all of the operations that take place, financial and otherwise; that in so far as there has been a direct influence exerted by gold, it has come about, as I see it, in this fashion:

As I said before, the French revalued the franc at a point which undervalued it; which was not an equilibrium rate. The British in 1925 valued the pound at the old parity, which overvalued it relative to the trading position and the price position of the country. Numbers of other countries went back upon gold before they were in a strong trading position, borrowing in London and New York in order to provide themselves with an appropriate gold reserve. Then these various nations, with their existing burdens of debt and taxation, and prices not in equilibrium, found themselves in a difficult and uncomfortable situation, some of them tending to lose the gold that they had acquired, because they had acquired it not as a result of their trading operations and of a strong trading position, but through the negotiation of loans on the unfounded supposition that merely reestablishing themselves on the gold standard, however they managed to do it, would of itself serve to place them in equilibrium with the rest of the world. That did not happen, and so you had a maldistribution of gold, not due to a scarcity, taking the world as a whole, but very definite indications of scarcity in the case of particular countries.

I can illustrate the point in this way: After Britain went off gold, there was an eagerness on the part of some people in Great Britain, as well as an eagerness on the part of numbers of people outside, that the country return to gold speedily, but not necessarily at the old parity. But there was no evidence at that time to determine what would be an equilibrium rate for the pound-a rate which it would be quite within the capacity of the country to maintain without extreme difficulty, or a rate which would not be seriously disturbing to other countries and their trading position if it were established. It therefore seemed the wise course to adopt what may be styled a more or less neutral policy-to avoid, if possible, extreme fluctuations of the pound, but to take no action calculated or designed to fix it at a