Dr. SPRAGUE. I think it could go very far through the maintenance of confidence in the monetary and economic policies of the Government. Let me make this comparison. The British Government's debt is between 35 and 40 billions of dollars, with a population one third that of this country. Of course, their local debt is not as great as our local and our State debt. But I would say that it was quite within the taxpaying capacity of this country over the years, for the United States Government debt to be very much greater than it now is.

The CHAIRMAN. The chairman has just one question, and I think, Doctor, you will be able to answer this yes or no. I am merely asking your opinion. If confidence is shattered by the reflation at this time, do you think it will be more difficult to borrow the three billions still needed than it would have been to borrow the entire sum of our indebtedness without reflation?

Dr. SPRAGUE. Yes, sir.

The CHAIRMAN. I think Mr. Fiesinger has one question and Mr. White has one question, and then the chairman is most anxious to hold a short executive session.

Mr. FIESINGER. I just wanted to ask one further question.

Professor, I have before me a letter from the White House to Congressman Lamneck, acknowledging receipt of a letter of May 24, and an enclosed memorandum on the American plan for the control of gold values. The letter says that the memorandum was sent to Dr. Sprague. Doctor, you recall that document that was delivered to you, I believe you said some time in August of last year? I do not know whether you recall it or not, but that document was asked for by the President of the United States and was sent to you. It purports to give a remedy for some of the things that you have spoken of here this morning as needing a remedy. You say, however, that this document has now been sent on with your papers to Massachusetts and you have not a very distinct recollection of it. I wonder if you could give me, or give the committee, rather, if the chairman will receive it, an answer as to why the proposal therein contained would not work?

Dr. SPRAGUE. I shall be very glad to do that, sir. But it will perhaps facilitate matters if you can provide me with another copy. Mr. FIESINGER. I can provide you with another copy of it here today, if you wish.

Dr. SPRAGUE. Very good.

The CHAIRMAN. Would you care to submit your answer to that in writing to the committee, because I doubt if you would have time to do it now, Doctor.

Dr. SPRAGUE. I think I had better do that.

Mr. FIESINGER. In writing?

Dr. SPRAGUE. Yes. But I do not know just when I will get at my papers, so if you would furnish me with a copy, it will speed action. Mr. FIESINGER. I shall be glad to furnish you with a copy.

Mr. WHITE. Doctor, do you favor discarding the precious metal. base under your managed paper currency system?

Dr. SPRAGUE. Oh, no. I simply insist that a certain amount of management is necessary under any system, more management than we have had, probably, in the past; but that it is decidedly helpful,

human nature being as it is, that we have a metallic base, and that it is desirable that over the years that metallic base be adequate; and that in that connection it may be desirable that some amount of silver be included in the metallic base of central banks around the world.

The CHAIRMAN. Thank you very much, Doctor. Your testimony has been most informing to this committee and we assure you of our appreciation.

The committee is now adjourned.

Dr. SPRAGUE. I understand you will not want me further?
The CHAIRMAN. I think not, Doctor.

Dr. SPRAGUE. Thank you.

(Whereupon the committee adjourned to meet tomorrow, Tuesday, Jan. 16, 1934, at 10 a.m.)

GOLD RESERVE ACT OF 1934

TUESDAY, JANUARY 16, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COINAGE, WEIGHTS, AND MEASURES,

Washington, D.C.

The committee met at 10 a.m., Hon. Andrew L. Somers (chairman) presiding.

The CHAIRMAN. The committee will please come to order.

Gentlemen, this morning we will have the privilege of hearing Mr. Frank A. Vanderlip, formerly Assistant Secretary of the Treasury, at one time president of the National City Bank of New York; later president of the New York Clearing House, and at some period later than that he was chairman of the New York Clearing House.

I know Mr. Vanderlip has given a great many years to the study of monetary systems, and I am quite sure the information he will give to us this morning will be greatly appreciated.

Have you a prepared statement you would like to make to the committee, Mr. Vanderlip?

STATEMENT OF FRANK A. VANDERLIP, NEW YORK, N.Y.

Mr. VANDERLIP. Mr. Chairman, I would prefer to talk face to face with you.

By the action of the President yesterday, I presume we will soon find ourselves with all the monetary gold of the country in the Treasury of the United States. There may be a little surreptitiously hoarded still, but substantially the whole stock will be in the Treasury, with that portion that comes from the Federal Reserve banks represented by gold certificates, if the suggestion made by the President is followed.

The subject then becomes a question of what is to be done from here on. We are off gold; we propose to stabilize gold so that the dollar will represent fewer grains than the old standard, but to go. back on a gold standard. I said "on a gold standard."

Under no circumstances should we go back on the gold standard as it existed prior to last March. Thirty-four nations have gone off the gold standard, and there is an important reason.

If I may take a minute, I would like to define what the gold standard is, and what its functions properly are.

Let us imagine the monetary stock of the country as a block of gold, and you know all the monetary gold in the world would only be about 31 feet square. That block of gold would bear certain burdens. There are just two functions it should bear as a gold standard.

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It is a basis for currency issue. That gives confidence to the currency, a feeling that there is something back of that currency.

As our laws are now set up, it is also to control the amount of

currency.

Taking the Federal Reserve bank notes as an example, they must have 40 percent reserve. Therefore, if we have a block of gold, we can erect Federal Reserve bank notes two and a half times the size of that block, but that is the limit.

The first function of a gold standard I would state as being a basis and a limit to the currency issue.

Then it has another important function. Imagine a pair of balances in which we put all our imports of goods in one balance and all our exports in another. They would be somewhat out of balance.

Then we put in our invisible imports and exports, that is, freights paid to foreign vessels, tourists' expenditures, interest coming in, and so on. They are still out of balance.

We can then tend to balance it by including the money that may be borrowed in a foreign country, which has exactly the same effect as the movement of goods. It will still be somewhat out of balance.

One way to adjust that balance, which must be adjusted, is the shipment of gold, gold being the one thing that is acceptable in every market of the world. So there is a second function of the gold standard, to settle foreign trade balances. First, it is used as a base of paper money and the control over its limit of issue, and, second, for the settlement of foreign trade balances.

During and since the war, there developed some influences that upset what had been an orderly working of the gold standard for a century. There had been interruptions. We went off gold in the Civil War; England went off gold five times during that century, but on the whole, it had worked extremely well.

There developed a large amount of liquid capital, that crossed frontiers, without any reference at all to foreign trade, frightened capital, the owners of which became concerned about conditions in the country where they resided, and wanted to remove their wealth to some other country. There were what we call flights of capital.

There was an astute capital that sought temporary employment and higher interest rates in some countries. A notable example of that was here in 1928 and 1929, when there accumulated 2 billion dollars of bank deposits owned by foreigners, in New York. That inroad of capital came because there were high interest rates. If stimulated an expansion of credit, and was a large influence in causing the grotesque rise of prices that finally resulted in the debacle of 1929. A monetary gold stock, when we return to a gold standard, must be guarded against demands by this flow of liquid capital.

That liquid capital has been augmented in the last 3 years by the English stabilization fund, which is a menace to any other country. I have no fault to find with England for establishing it. It is distinctly in England's interest.

Here is what happened. England went off the gold basis, and Parliament appropriated £150,000,000 to be handled by the Bank of England to stabilize the pound in foreign exchange. It was found that that was insufficient, and Parliament later appropriated 200 million pounds more. That is a billion and three quarters of credit.

And remember, there is only a little over $11,000,000,000 of gold in all the world.

That fund can be thrown across frontiers through the exchange market, without any regard for foreign trade. It may move in quite the opposite direction to the direction gold should be moving when governed by the foreign trade of the country alone.

The whole object of the fund is to manipulate foreign exchanges in the interest of the pound. The movement is utterly secret; nobody knows the position of that fund and what it does.

But I regard that movement of capital across the borders as being as menacing as a flight of military airplanes, and it should be met. Another form of liquid capital is in the international ownership of securities. If a foreigner owns a million dollars' worth of American securities and decides to turn them back on this market, he secures in 24 hours a bank balance which, under the old gold standard, was convertible into currency, which, in turn, was convertible into gold, and that movement of capital had just as much influence on the exchanges and on the international balance of the country as would the export of goods. A cablegram from a financier could mean more than a whole fleet of freighters carrying imports or exports.

Now, I would return to a gold standard, but it would be a limited gold standard, so far as the redemption of currency is concerned.

There is another danger that I should have spoken about first, and that is the danger of domestic hoarding. We have only had two important experiences in my time. At least, in 1896, during the free silver campaign, there was a certain amount of hoarding. And just a year ago there was a very large amount of hoarding. Some $600,000,000 of gold was withdrawn, and a new gold standard, a modernized gold standard, must guard against that.

This is the sort of gold standard which I would advise setting up. I would first make it a bullion standard, not a coin standard. That is, I would melt all the coin and never coin any more, and when there was a redemption of currency, it would be in gold bars, perhaps of a medium size of $5,000.

Now, the paper money would be redeemable, presumably, in a definite number of grains of gold, and if there were a commodity dollar, it would still be redeemable in gold, but in fluctuating credit. So that any one with currency could demand gold and take it out of our monetary stock, which is the base for our currency, and through our currency is the base for our bank deposits.

I might interpolate a thought there. Suppose a country's currency issue was down to the legal limit, that is, that it had just two and a half times as much currency as it had gold. Bank deposits must have a currency reserve. Say the reserve has to be 15 percent, and the bank deposits stood just at that point, at 15 percent of currency reserve.

I want to trace the effect of drawing a million dollars of gold out of that country. You draw out a million dollars. Back on the gold basis, you would have to reduce the currency 21⁄2 million, and by reducing the currency 21⁄2 million you would have reduced the bank deposits $16,660,000. That is not exactly an accurate picture of our position, but it is practically so.

The danger of a movement of gold having no relation to trade, a capital movement of gold, is that it may multiply easily 16 times in