stocks, and other things, which is right. But that is a monetary phenomenon. It is solely because of the amount of money expended for those things each day that the prices fall. You get back to my central thesis, that this is fundamentally and exclusively a monetary phenomenon, and the cure, therefore, must come primarily through monetary measures. In this country, that necessarily means measures looking toward the utilization of the available bank credit, which has been available all this time.

In connection with this war suggestion, people have said to me repeatedly, "Where is the money for these public works?" I reply, "It is precisely where the money is that would be used if we had war to-morrow. There would not be any more to-morrow than there is to-day. You have it there if you want to use it."

Senator FLETCHER. You mean you would increase the circulation of money and increase the money, as well as the credits?

Mr. FOSTER. I would increase, primarily, the utilization of bank credit under our present system, and the currency would automatically increase in proportion to the need for currency, as it always does.

Senator FLETCHER. How would you compel the banks to use what they have?

Mr. FOSTER. There is no way that I know of to compel the banks to utilize what they have, except the Federal Government, through such measures as this bill provides, taking the initiative and getting into circulation adequate money, at the point of wages, to start the price level of commodities up, whereupon you immediately change the state of confidence. The attitude of the business world will not change until there is a sufficient increase in consumer demand to start a rise in prices. Then you do not have to beg the banks to use anything, because they are eager to lend money.

Senator FLETCHER. Do you think it is a question of overproduction at all?

Mr. FOSTER. Overproduction in the sense of a deficient consumerpurchasing power, but in no other sense.

Senator GLASS. The New York Journal of Commerce to-day calls attention to the fact that since the operation of the Reconstruction Finance Corporation began, and since these extraordinary openmarket activities of the Federal reserve banks, which have now accumulated, I think, in excess of one and one-half billions in United States bonds, all commodity prices have been reduced instead of lifted.

Mr. FOSTER. Did you wish me to comment on that?
Senator GLASS. Yes.

Mr. FOSTER. It appears to me that to a considerable extent the available funds have been utilized to safeguard the banks and other institutions. It is entirely appropriate that they should be protected from insolvency. It does not do us any good to have them fail. On the other hand, your measures have been utilized to a large extent to save them rather than to save business. The money has not as yet flowed out at the point of wages, where it must flow if it is going to affect commodity prices.

125985-32-5

Senator GLASS. But the money and credits are in the banks now, even at the most exigent moment of this depression, and the banks had available eight and one-half billions of dollars of credits. I mean the member banks of the Federal reserve system. They had available eight and one-half billions of dollars of credits, and they were utilizing an inappreciable fragment of that.

66

Mr. FOSTER. May I, in conclusion, Mr. Chairman, refer to the first book Senator Wagner mentioned, the book on "money," published 10 years ago? The main thesis of that book on money was that we have substituted a Federal reserve system under which the expansion and contraction of bank credit, upon which we depend for prosperity, is entirely a matter of private initiative, and that under this system bank credit automatically-and I want to stress thatbank credit automatically expands most easily and completely precisely when it is most dangerous to general business for it to expand, as in 1928; and it contracts automatically, under private initiative, or lack of private initiative, precisely when business most needs it to expand.

Senator GLASS. The whole theory of the Federal reserve system was that credits and currency would automatically expand in the activities of business and automatically be retired when these business transactions were consummated?

Mr. FOSTER. Yes. The theory is entirely inadequate to explain what has actually taken place.

Senator GLASS. The theory is all right, but the Federal reserve system has been so mismanaged that it has been transformed by the open market operations of the Federal reserve banks into an investment banking system, instead of an industrial and commercial banking system.

Mr. FOSTER. The fact is that you have a situation where the bank credit which has been available all the time, and every single day of this depression, will not be be utilized unless you have a force outside the profit system, which comes in to put it into circulation; and the only agency-whether you like it or not-that can do that is the Federal Government, and this particular bill is a very effective means of doing it.

Senator GORE. Do you not think the source of these cycles is that men buy on a rising market, instead of a falling market?

Mr. FOSTER. They naturally do. You can not prevent them from doing that.

(Thereafter the witness submitted the following statement for the record:)

Hon. PETER NORBECK,

UNITED STATES SENATE, Washington, D. C., June 14, 1932.

Senate Office Building, Washington, D. C. MY DEAR SENATOR: Dr. William T. Foster, who appeared before the Committee on Banking and Currency, has asked that the be made part of the record of the hearing on S. 4755. done?

Very sincerely yours,

inclosed statement may May I ask that that be

ROBERT F. WAGNER.

STATEMENT OF WILLIAM TRUFANT FOSTER BEFORE THE COMMITTEE ON BANKING AND CURRENCY OF THE UNITED STATES SENATE, WITH REFERENCE TO SENATE BILL 4755, INTRODUCED BY SENATOR WAGNER AND OTHERS, JUNE 2, 1932

This major depression of business started in the United States. It is wholly monetary. It is chiefly the product of the mismanagement of our bank resources. Restoration of an adequate flow of bank credit in the right channels would end the depression within a month. The flow of bank credit is, and always has been, wholly subject to human control. It is not governed by "natural law." It is not a visitation of Providence.

All we have lacked in this country for the past two years-all we lack now— is the courage to do, with what we have at hand, the obviously necessary thing. We can hardly blame Europe for that.

So

Industry fails to employ more men and produce more goods, solely because it can not sell the goods. It can not sell the goods, considered as a whole, at the going price level (this, of course, does not apply to every commodity) solely because the consumers who want the goods, lack the currency and credit wherewith to buy the goods. They lack the currency and credit mainly because it has been driven out of circulation. The driving campaign has been deliberately carried out, with the "liquidation" hounds all the while barking at the heels of frightened business. So far as the United States had any private banking policy in 1930 and in 1931, it was a policy of deflation. far as the United States had any official public policy, during those years, it was a policy of deflation. Until recently, the leadership of the banks was mainly leadership backwards. Business was forced to retreat in disorder, supplied all the while with enough man-power and munitions and equipment to win the war. Those in command piously accepted defeat, convinced apparently that the suffering was good for us, and that, in any event, it was foreordained and nothing could be done about it. They fervently believed in "the economics of original sin."

All

Yet every day since the stock-market crash of 1929 the United Statesregardless of events in any other part of the world-possessed every material requisite for sustaining prices, production, profits and employment. We had no productive powers in 1929 that we did not have in 1930 and in 1931. we lacked at any time was the sense to use our available powers. These powers can not function without the use of adequate bank credit. But adequate bank credit does not come into being automatically. It is not a product of laissezfaire. Once a depression is well under way, the needed credit does not come to the rescue of business, as long as business relies on "rugged individualism"; for each rugged individual-each, bank, each corporation, each consumerin pursuit of self-interest, does precisely what makes the situation worse for business as a whole. It is folly to turn the job over to the "lazy fairies." The goal is clear and the path is clear. By collective action, which necessarily means Federal action, we should put into use enough bank credit to restore the price level of 1926-1928. This course would inevitably put most of the unemployed back to work. This would relieve charity of the load which evidently charity will not carry. Any so-called economy program which renders this course impossible is false economy. The immediate program should involve an increase of national debt, but no increase of taxes. added debt of several billion dollars would not interfere with prosperity. proved that in the years from 1923 to 1928. And once we have restored prosperity, we can retire the national debt at the rate of nearly a billion a year without hurting business. We have also proved that.

An

We

The objection to increased expenditures for public works on the ground that such expenditures would unbalance the Budget is not a valid objection. Only the interest and amortization expenditures are properly included in the Budget. Credit inflation carried merely to the extent of undoing the deflation of the past three years, would automatically relieve all debtors-all farmers and householders struggling hopelessly under mortgage indebtedness, and all corporations equally hopeless under bonded indebtedness-of the unjust and intolerable debt burdens, now fully eighty billions, which have been heaped upon them by price deflation. Such a course, moreover, would avert labor troubles by automatically reducing real wages, without reducing dollar wages. It would bring money out of hoarding, without the ballyhoo campaigns which, as any psychologist might have predicted, have done more harm than good. It would restore the values of bank assets and thereby virtually put a stop, for the time being, to bank failures. It would increase the volume of production to the

value of at least twenty billions a year, thus providing the real wealth out of which all debts and all taxes are paid, in so far as they ever are paid. On the other hand, without counterdeflation, we face the certainty of widespread repudiation of debts, with incalculable resultant losses, material and moral. We face, in addition, the possibility of some kind of destructive, radical action. The stand patters are the best friends of bolshevism.

The only valid objection to the proposed course of action is that it might get out of control. But should we be afraid to create enough purchasing power to put men back to work, solely for fear of creating too much? There

is danger of overeating, but no physician ever advocated malnutrition solely for fear that a patient who ate enough might possibly eat too much. For over two years, the United States has been suffering from monetary malnutrition. The Senate bill (S. 4755), is, in every particular, a sound counterdeflation

measure.

STATEMENT OF DAMERON H. WILLIAMS ON BEHALF OF AMERICAN COTTON SHIPPERS ASSOCIATION, GASTONIA, N. C.

The CHAIRMAN. Give your name and address, and your business connections.

Mr. WILLIAMS. My name is Dameron H. Williams; I live in Gastonia, N. C. I am a member of the American Cotton Shippers Association, and speak as a representative of that body.

The CHAIRMAN. Having reference to a particular section in the Wagner bill?

Mr. WILLIAMS. Yes.

The CHAIRMAN. What section?

Mr. WILLIAMS. I appear before you gentlemen to oppose section 2-b of this bill, on page 5; and I oppose this section

The CHAIRMAN. May I suggest that that whole section be printed in the record at this point? You are addressing yourself to section 2-b?

(The section referred to is as follows:)

(b) The Reconstruction Finance Corporation is authorized and directed to advance to the Secretary of Agriculture, in addition to the amounts allocated and made available to him by section 2 of the Reconstruction Finance Corporation act, not to exceed $40,000,000, of the amounts made available under section 3 of this act, for the purpose of financing sales of agricultural products in the markets of foreign countries in which such sales can not be financed in the normal course of commerce, but no such sales shall be financed by the Secretary of Agriculture if, in his judgment, such sales will affect adversely the world markets for such products.

Mr. WILLIAMS. I oppose this section, gentlemen, in the interest of agriculture. I happen to be largely interested in cotton farming myself. I can not speak for other commodities, but I am familiar to a certain extent with cotton.

Under the provisions of this particular section, there is allocated to the Secretary of Agriculture by the Reconstruction Finance Corporation the sum of $40,000,000, with which amount the Secretary of Agriculture is supposed to finance sales of agricultural products, which will include cotton, in foreign markets. The provision here is that he shall do this if such sales can not be financed in the normal course of commerce, and also if the sales do not affect adversely the world markets for such products.

Gentlemen, I can state as a fact that there is no market; there is no place under the sun that you can dispose of our present surpluses

of cotton, unless such a disposal adversely affects the stocks of cotton normally to be handled in the channels of commerce.

The only possible method that I know of by which you could dispose of this amount of cotton without an adverse effect upon the cotton farmers would be to give it away in the form of clothing to those people who, under no circumstances, could buy cotton goods. Senator FLETCHER. Is it possible, Mr. Williams, to help out financing operations in foreign markets so as to dispose of our surplus there, without affecting adversely the home markets? Would it not improve the home market if you could dispose of your surplus abroad? What you need to do that is a system of credits, not so much the bank credits, but credits extending over a period of months, 6 to 8 or 9 months. If we could do that, would not that help the market?

Mr. WILLIAMS. Senator, I beg to differ with you. The trouble in cotton to-day is not the lack of ability to finance the purchase of cotton, and the subsequent conversion of that cotton into clothing. It is due to lack of buying power on the part of the consumer of cotton goods. You know yourself, sir, that in view of the conditions abroad with respect to mills and risks, a sale of cotton abroad on a credit basis would simply amount to giving away that much cotton. Senator FLETCHER. I do not understand it. If you sell your cotton abroad and give them time enough to manufacture that cotton into goods, then they are in a position to sell the goods and pay you for your cotton.

Mr. WILLIAMS. I think the first result would be to discourage the buyer of cotton for cash; and your second result would be to transfer the holdings in the United States to some mill abroad. You would simply transfer the manufacture from possibly a solvent mill, which could pay for it, to an insolvent mill which could not pay for it.

I wish to reiterate, sir, that the trouble is not a question of financing cotton during conversion. It is a question of selling cotton goods to people who have not the money to buy them.

Senator FLETCHER. Suppose they can sell the goods in foreign countries. Suppose they have a market there for a certain kind of goods, and a certain amount of goods. They have no money to buy the raw material. If you could sell them the raw material on such a basis as can be financed by the Government, so that you can get your money for the cotton, and give them time to manufacture the goods and sell their own people those goods, you will accomplish a sale that you can not get now, it seems to me. would still have enough to supply your domestic factories.

You

Mr. WILLIAMS. Senator, it seems to me, sir, that with our experience over the last 12 years with foreign debts, I would hesitate to add further to those foreign debts with the expectation of getting paid any time soon.

Senator FLETCHER. Of course, you would have to have bankable paper-that is, paper indorsed and guaranteed by their bank. Take the Bank of France, or the principal bank of Germany, for instance. If they were on the paper, you would get it.

Mr. WILLIAMS. These mills are buying cotton to-day, and they are selling it to their people for cash. We think they could afford to pay cash for cotton purchases. Senator, when you go ahead and