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Washington, D.C.

The committee met at 10 o'clock, Hon. Andrew L. Somers (chairman) presiding.

The CHAIRMAN. The committee will please come to order.

Gentlemen, the purpose of calling you here this morning is to hold hearings on the monetary policy of this country. It is to be hoped that in these hearings we shall make a record that is available to the Congress, which will enable all of us to become exact students of the various monetary movements in this country.

To that end, it is the intention of the chairman to call before the committee the foremost experts available. We have this morning asked to appear Professor Sprague, who was professor of banking and finance in the Harvard University School of Business Administration, and at a later date, economic adviser to the Bank of England. At a later period still he was financial assistant to the Secretary of the United States Treasury. He is the author of any number of books on this subject, principally "The History of Crises Under the Banking System", which, you will recall, was prepared for the Aldrich committee.

His experience throughout many years has been such that I feel his testimony will be of great value to us.

Dr. Sprague, while he has not prepared a definite, formal statement to present to us this morning, will endeavor to answer any questions. the members of the committee may have in mind.

If you will permit the chairman to suggest, it might be well for Dr. Sprague to tell us something about the advisability of cutting the gold content of the dollar. That is a technical subject, and we who are not monetary experts may not be aware of the full significance of it in all its phases. So I feel it would aid us a great deal in understanding what condition we would be in if the movement did succeed in this country.

Following Dr. Sprague's preliminary statement, we will have questions by various members of the committee.

I am sure you will realize that Dr. Sprague, although a very energetic individual, is only human, and that we should try to limit our questions as much as possible.

Dr. Sprague, we would like to have you proceed in accordance with my suggestion, and if you would be good enough, discuss the advisability of cutting the gold content of the American dollar at this particular time.

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Dr. SPRAGUE. The subject which your chairman has suggested is one of extreme difficulty, owing to the fact that no country has ever devalued its currency in circumstances quite like those which obtain in the United States at the present time.

There have been many instances of a revaluation or devaluation, but in all instances, so far as I am aware, they have been in the nature of a recognition of a situation that had come about.

Let us take a particular case, that of the revaluation of the French franc in 1927, a lowering of the value of the French franc far greater that that which has been suggested for this country.

It was simply a recognition of the value of the French currency as it had become in 1927. Between 1914 and 1927 France was off the gold standard and prices had advanced to between four and five times the 1914 level. This was the result of the inability of the French to finance the war exclusively by means of taxation and by borrowing limited to current savings, and following the war to heavy expenditure in connection with the restoration of the devastated


Throughout the entire period of 13 years there was an active demand for labor and for materials in France. Consequently prices tended to rise rapidly.

When such conditions had reached a sufficient stage of stability to warrant the return to the gold standard, the franc was revalued at 3.9 cents as contrasted with the old value of 19.3 cents. An endeavor to restore the old value of the franc would have involved an extreme contraction of credit and currency and a catastrophic decline in prices.

The revaluation of the franc was not designed to bring about an increase in prices, but simply as far as one could judge at the time, to maintain something approaching the level that then obtained.

As a matter of fact, the French franc was probably revalued at a slightly lower rate than that which might have been adopted. A rate of, say, 4.5 cents for the franc, would probably have been a little more in line with relative prices in France and in other countries. It was of course a disturbing factor in the situation for the rest of the world that the French franc was revalued at that time a little lower than what was probably an equilibrium rate.

Now, revaluation in our case presents a problem of a very different sort. The level of prices in this country, as compared with prices elsewhere, is not one which supports or provides a basis for a revaluation of the dollar at a third or a half of its former value.

We are revaluating the dollar with the expectation that the revaluation will set in motion forces which will bring about an upward movement of prices. The problem, therefore, before us, is to consider whether a lowering of the value of the dollar preceding a rise in prices, relative to prices in other countries, will bring about a rise in prices. and an accompanying greater activity of business.

The most obvious and certain effect of revaluation is to provide the Government with what may be styled a wind-fall profit. The Government will have some billions of dollars to spend from sources

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other than taxation and borrowings. Will such an expenditure serve to bring about a considerable rise in prices, and a rise in prices that will hold? I should say that depends in every considerable measure upon how that money is expended, and, indeed, upon how the other funds the Government secures are expended, not upon the mere fact that a certain amount of money is secured from sources other than taxation and borrowings.

In all my thinking about these subjects, I am impressed rather more, than a great many others who have given attention to these matters, with the importance of the nonmonetary factors in the bringing about of a movement of prices, and of securing stability at a desired level of prices.

We look toward reaching a situation in which there will be full employment of labor and an active demand for materials, without persistent and continuing special expenditures on the part of the Government, such as those involved in relief expenditure, public works, or special expenditures designed to bring about a much needed forward movement in agricultural prices.

We do not look with satisfaction upon a continuance of public works and civil relief and other similar expenditures. We regard them, and properly, as emergency expenditures.

I insist that whether the expenditure of these wind-fall profits, as well as other expenditures, proves helpful, depends upon the way in which the money is expended, and the effect that the expenditure has upon the whole economic situation of the country.

If the Government expends enough money, it can employ, directly and indirectly, all of the idle labor of the country, and bring a rise in prices, just as happens in time of war. In the case of a great war, a very large number of people are drawn into the training camps, and the Government incurs huge expenditures for materials for war purposes. And when we reach a point at which there is full employment of labor and an active demand for materials, if there is a plentiful supply of credit and currency, prices go up.

But always in the case of a war we recognize that at its close we are to be confronted with a period of difficult readjustment, with the absorption of the men employed in the armies and the men employed in military production into other occupations.

So, in case of public works, civil relief, and so on, we can get a rise in prices if we expend money enough for those purposes to bring about full employment of labor; but the problem still presents itself whether we are employing that labor in such wise and under such conditions that that expenditure will gradually taper off through the absorption of these men in civilian work, or whether we are simply doing something analogous to that which takes place in war, employing them under conditions that subject us to the necessity either of continuing these expenditures indefinitely or making painful adjustments when these expenditures cease. That seems to me to be the essential problem before us.

If, for example, the wage policy and the price policy as regards materials employed in public works are such as to establish relatively higher prices for that kind of work and for that kind of material, then you check the absorption of that labor and the use of such materials in private industry. That seems to me to be the most serious question that can be raised as regards our entire recovery program.

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