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DISCRETIONARY VERSUS AUTOMATIC STABILIZATION

Some of the members of an influential financial group agree with us that the price level ought to be stabilized. But they prefer to have it done through discretionary control of gold and credit, with the discretion vested in the central banks. Soon after the debacle of 1920-21, Dr. Carl Snyder, economist of the Federal Reserve Board, proposed a variation of the theretofore unacknowledged discretionary practice, in which he provided a guide to be followed in the form of an index number. This amounted to "abandonment of the gold standard," for it made the price level the ultimate standard. His plan is said to have been followed from 1922 to August, 1929, when the price level fell into another "discretionary" tail spin.

Following the present depression, unless Congress acts, there may be a return to the Snyder plan. For some of the influential supporters of stabilization through gold and credit control do not want real price level stability. They want mere prevention of inflation or depression, particularly of inflation. Just why inflation is more to be feared than depression I leave it to them to explain. Compare business conditions during any price level rise with conditions during a period of price level depression.

A great part of the public has been misled into thinking that if the price level is prevented from rising or falling more than 1, 2, or 3 per cent a month, it is stable enough. But an average decline of 14 per cent a month for the past 21⁄2 years has brought us to this. The Snyder plan of control permitted changes greater than this, and the high point in the seven years it is said to have been followed was 11 per cent above the low stage. Is this stability? Give an private-profitearning corporation the power to bring about a price level rise of 1 per cent one month and a price level decline of 1 per cent the next, and it could easily cash in on its "business foresight." Yet most of those who prefer a loose "stability" to real stability would allow a wider margin than 1 per cent a month.

Many of those who declare themselves in favor of "maintaining the gold standard" mean merely that they favor continuance of redemption of our currency in gold. They do not favor allowing an unstable metal to drag our commodity price level down or up with every change in its own market valure. (By "valure" is meant rate of exchangeability for goods, as distinguished from the many other meanings of the ambiguous word "value"). For the valure of gold, like the valure of every other commodity, changes with every change in its supply as compared with the demand for it. The Burtness bill hereinafter described, continues redemption in gold but does not retain a fixed weight of an unstable metal as a standard of stability.

With a fixed weight of gold the standard, gold alone is stable in price. Make the commodity price level the ultimate standard, with the composite goodsdollar as its concrete expression, and the price level will remain stable. Being measured in terms of itself it can not change. The gold unit, though subjected to weight regulation, may still be considered a standard of uniformity, since all forms of our media of exchange are redeemable in it, directly or indirectly. But as a standard of stability it is a discredited makeshift.

THE BILL TO STABILIZE A NORMAL PRICE LEVEL

The Burtness bill (H. R. 20) has gone through four revisions since its first introduction, under a different number, in 1923. At the time of its third revision early in 1929 it seemed likely that a bill would be passed commanding the Federal reserve system to "act with a view to promoting stability of the commodity price level," as directed in the original draft of the Federal reserve act. For this reason, certain features which now appear in H. R. 20 were omitted from H. R. 112, Seventy-first Congress.

The bill has never been fully explained to your committee in the years it has been before you, so I take the liberty of sketching its details by sections.

Section 1 makes the weight of the gold dollar subject to regulation to keep its buying power stable. It also recognizes that the "gold clause" in notes and bonds has outlived its usefulness. Put in to protect creditors from loss by threatened suspension of redemption in gold, at a time when gold was commonly thought Notes drawn in to be stable in valure, it has become a menace to honest debtors. dollars should be payable in dollars, in lawful money and not in any given weight of metal. For buying power and not weight is the essential quality of money. The thought in the minds of both borrower and lender is of what so many dollars will buy at the time, not of the weight of gold represented. Seldom, in fact, do

both lender and borrower even know how many grains of gold are represente by the dollars named.

Section 2: A new division of the Treasury Department handles the stab tion process under strict rules which leave nothing to official discretion. The data and simple calculations in the weekly bulletin can be checked easily f error by any reader while the week's prices are still fresh in mind.

Section 3: Prices are reported by agents in the proper markets and trade data by wholesalers. Only sales in dollars of each commodity are reported by whit salers. The term "wholesale" is made to include more than the sales commonly ranked as wholesale. Through an oversight, the words "sales to exporters were omitted. They should be read into the bill.

Section 4 constructs a scientific gage of price level tendencies to be counter acted before they affect the retail level and the citizen's dollar. Details of ita construction are not necessary to a full grasp of the plan if one knows that prim level tendencies can be measured. Reports of price level changes are publated monthly and the Government now constructs also a weekly index which is ‡‡ an averaging of data collected daily.

Section 5: Eastern markets close three hours before those in the Pacific time zone, so the reports from the eastern and middle sections can be worked over before those from the far West begin to arrive.

Section 6: Metric weights in our mint rate simplify translation of our money units into the moneys of other countries, most of which are in grams. Our sma silver coins are already in grams. The half dollar weighs 12%, the quarter 6%. and the dime 21⁄2 grams.

Par stage of the market gage is unity, 1, so the daily adjustments of the mint rate involve only multiplication of the current mint rate by the new market gage. The gold bullion dollar, adjusted daily, will be the price unit or "provisical standard," and the composite goods-dollar the ultimate valure standard to which the bullion dollar is, by weight adjustments, made to conform. The components of the goods-dollar--the small parcels of goods that go to make up the standard of valure are shown in column 3 of the market gage schedule. The price of the composite goods-dollar, as measured in gold at the current mint rate, serves a the daily price index or market gage.

Section 7: The mint rate is computed and and the mint close and before they reopen. advance information of weight change and seigniorage charge.

announced at night after the markets This bars all risk of speculation on makes unnecessary any disturbing

Section 8: Gold coins and silver dollars are retired. The greater part of the gold in the Treasury is already in bars, and in settlements of foreign trade balances gold passes by weight. Gold sold for use in manufacture and the arts is also in

bars.

Section 9: Federal reserve and national bank notes are not interfered with, but other forms of currency are replaced by Treasury notes.

Section 10: All gold and silver reserves now back of money of Government iss all silver now in silver dollars, and all gold and silver in the general fund are consolidated into one fund for redemption of the new Treasury notes. This gives at the start nearly 100 per cent metallic backing for the Government money actually in circulation, though the par stage of the consolidated fund is but 40 per cent, four-fifths of it gold and one-fifth silver, the silver being reckoned not at any fixed ratio to gold but at its current price, which makes it exactly equivalent to gold. This surplus can be reduced and the fund brought down to par only by a cheapening of gold, which would call for an increase in the weight of the gold bullion dollar; or by a rise in the value of gold, which would call for an increase in the supply of Treasury ontes outstanding

Section 11 provides that the total stock of Government money shall not decrease nor grow less in relation to the bank currency in circulation. Any decrease is made up promptly by issue of more Treasury notes, put out in such a way as to cause no inflation of the currency.

It provides also that whenever the redemption fund is above the par stage and the lowering of the mint rate shows a downward tendency of the price level. additional notes shall be issued to the amount of double the excess of the furd above par. The excess would supply 40 per cent backing for two and a half times its amount, but only double the amount of the excess is issued.

To prevent a too great issue of additional notes at the start, while the redempt: fund is still far above par, the note increase in any one week is limited to 10 per cent. Should the downward tendency of the price level continue, them issues are repeated weekly until the fund is reduced to par stage as compare=: with the notes outstanding against it. Thereafter, should the lowering of the

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mint rate continue, the Treasury notes outstanding are increased only at the rate of 2 per cent a week and put out in such a way as to not disturb the price level; for the issues of notes no more than balance the purchase of gold for the fund.

Should the fund sink below par with the mint rate decreasing, the Treasury buys the bullion needed for backing, issuing Treasury notes against it. All these issues aid the main stabilization process by enlarging the supply of Treasury notes when the mint rate is declining-gold appreciating. They can not cause currency inflation for they are put out only when price level tendencies are downward-when there is a shortage of currency-to help prevent depression. And it must be borne in mind that they increase the supply of Treasury notes only, the issues of Federal reserve notes being controlled by the Federal reserve system. Also that their supply relative to the supply of bank notes will not increase unless the supply of the latter is unduly contracted and fails to meet the needs of business.

Section 12: Purchase of gold is equivalent to free coinage. The gold bought and added to the redemption fund can not cause currency inflation; for the new gold can be used to enlarge the money supply only when the mint rate_is decreasing gold appreciating-in which case it properly aids stabilization. To avoid loss to the Treasury from an overstock of gold when gold is rapidly cheapening, purchases are suspended until the gold fund is reduced to par.

Section 13: Treasury notes are redeemable either in gold or in silver at the option of the applicant. But should the gold in the fund fall much below par, gold withdrawals are limited to give the Treasury time, by purchase, to restore it to par. Meanwhile, redemption in silver at its gold price is unrestricted, and sufficient gold withdrawals allowed to more than supply the needs of manufacture and the arts. These, with the knowledge of the public that the restrictions on gold are but temporary, should fully protect the value of the dollar.

Section 14: The "trial market gage" device prevents any slip at the time of revision of the schedule. Under this plan the commodity price level should remain permanently stable. The commodities listed will change from year to year. New entries will be added and others withdrawn; individual prices will go up and down; but no noticeable change will take place in the average of commodity prices. Why should reconstruction of the schedule, any more than its first construction, disturb the price level?

I have emphasized the fact that the additional Treasury notes put out under the conditions named will not tend to inflate the currency. Inflation would cause undue enlargement of the bullion dollar and tend to cause export of gold. The additional note issues will, however, increase the volume of Treasury notes as compared with bank notes whenever the supply of the latter is insufficient to prevent depression tendencies. The banks of issue can avert this proportional increase of Treasury notes by keeping their own issues adjusted to the needs of business. The amount of Government currency should not be reduced and it would be better if it were increased up to the minimum needs of trade, leaving the banks to supply the flexible part of the currency. Every additional million dollars of these noninterest-bearing notes could be made to replace a million dollars in interest-bearing bonds.

THE MARKET GAGE

Since a gage of the dollar's buying power must be a measure of the prices of goods in actual trade transactions in the quantities actually sold and bought, an ideal index would take its weighting from the day the price-level tendencies of which are to be measured. In the case of a daily index this is impossible. The nearest we can get to it is to use as weighting the relative sales of the various commodities in the 12 months last past, for the sales for a year are but a multiple of the sales for an average day. In order to keep the weightings as nearly up to date as possible, they are revised quarterly. But the average for the past 12 months is taken rather than the average for the preceding quarter, for sales are largely seasonal and relative sales differ more from quarter to quarter than from year to year.

The daily price index, called the market gage, is based on all the commodities on the market, compressed into some 900 entries. For many years the objection was heard that the market gage schedule lists altogether too many price series. One British economist, blind to the fact that the greater the number of price series listed the more nearly correct will be the measurement of price level movements, had told his readers that "a large number of prices is needless and may

both lender and borrower even know how many grains of gold are represented by the dollars named.

Section 2: A new division of the Treasury Department handles the stabilis tion process under strict rules which leave nothing to official discretion. The data and simple calculations in the weekly bulletin can be checked easily for error by any reader while the week's prices are still fresh in mind.

Section 3: Prices are reported by agents in the proper markets and trade data by wholesalers. Only sales in dollars of each commodity are reported by whois salers. The term "wholesale" is made to include more than the sales commonly ranked as wholesale. Through an oversight, the words "sales to exporters were omitted. They should be read into the bill.

Section 4 constructs a scientific gage of price level tendencies to be counteracted before they affect the retail level and the citizen's dollar. Details of its construction are not necessary to a full grasp of the plan if one knows that price level tendencies can be measured. Reports of price level changes are publicted monthly and the Government now constructs also a weekly index which 3 ta an averaging of data collected daily.

Section 5: Eastern markets close three hours before those in the Pacific time zone, so the reports from the eastern and middle sections can be worked over before those from the far West begin to arrive.

Section 6: Metric weights in our mint rate simplify translation of our money units into the moneys of other countries, most of which are in grams. Our smail silver coins are already in grams. The half dollar weighs 122, the quarter 6 and the dime 22 grams.

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Par stage of the market gage is unity, 1, so the daily adjustments of the mint rate involve only multiplication of the current mint rate by the new market gage. The gold bullion dollar, adjusted daily, will be the price unit or "provisional standard, and the composite goods-dollar the ultimate valure standard to which the bullion dollar is, by weight adjustments, made to conform. The components of the goods-dollar-the small parcels of goods that go to make up the standard of valure are shown in column 3 of the market gage schedule. The price of the composite goods-dollar, as measured in gold at the current mint rate, serves aså the daily price index or market gage.

Section 7: The mint rate is computed and and the mint close and before they reopen. advance information of weight change and seigniorage charge.

announced at night after the markets This bars all risk of speculation o makes unnecessary any disturbing

Section 8: Gold coins and silver dollars are retired. The greater part of the gold in the Treasury is already in bars, and in settlements of foreign trade balances gold passes by weight. Gold sold for use in manufacture and the arts is also in bars.

Section 9: Federal reserve and national bank notes are not interfered with, but other forms of currency are replaced by Treasury notes.

Section 10: All gold and silver reserves now back of money of Government issa. all silver now in silver dollars, and all gold and silver in the general fund are consolidated into one fund for redemption of the new Treasury notes. This gives at the start nearly 100 per cent metallic backing for the Government money actually in circulation, though the par stage of the consolidated fund is but 40 per cent, four-fifths of it gold and one-fifth silver, the silver being reckoned not at any fixed ratio to gold but at its current price, which makes it exactly equivalent to gold. This surplus can be reduced and the fund brought down to par only by a cheapening of gold, which would call for an increase in the weight of the gold bullion dollar; or by a rise in the value of gold, which would call for an increase in the supply of Treasury ontes outstanding

Section 11 provides that the total stock of Government money shall not decrease nor grow less in relation to the bank currency in circulation. Any decrease i made up promptly by issue of more Treasury notes, put out in such a way as to cause no inflation of the currency.

It provides also that whenever the redemption fund is above the par stage and the lowering of the mint rate shows a downward tendency of the price level, additional notes shall be issued to the amount of double the excess of the fund above par. The excess would supply 40 per cent backing for two and a half times its amount, but only double the amount of the excess is issued.

To prevent a too great issue of additional notes at the start, while the redemption fund is still far above par, the note increase in any one week is limited to 10 per cent. Should the downward tendency of the price level continue, ther issues are repeated weekly until the fund is reduced to par stage as compared with the notes outstanding against it. Thereafter, should the lowering of the

mint rate continue, the Treasury notes outstanding are increased only at the rate of 2 per cent a week and put out in such a way as to not disturb the price level; for the issues of notes no more than balance the purchase of gold for the fund.

Should the fund sink below par with the mint rate decreasing, the Treasury buys the bullion needed for backing, issuing Treasury notes against it. All these issues aid the main stabilization process by enlarging the supply of Treasury notes when the mint rate is declining-gold appreciating. They can not cause currency inflation for they are put out only when price level tendencies are downward-when there is a shortage of currency-to help prevent depression. And it must be borne in mind that they increase the supply of Treasury notes only, the issues of Federal reserve notes being controlled by the Federal reserve system. Also that their supply relative to the supply of bank notes will not increase unless the supply of the latter is unduly contracted and fails to meet the needs of business.

Section 12: Purchase of gold is equivalent to free coinage. The gold bought and added to the redemption fund can not cause currency inflation; for the new gold can be used to enlarge the money supply only when the mint rate is decreasing gold appreciating-in which case it properly aids stabilization. To avoid loss to the Treasury from an overstock of gold when gold is rapidly cheapening, purchases are suspended until the gold fund is reduced to par.

Section 13: Treasury notes are redeemable either in gold or in silver at the option of the applicant. But should the gold in the fund fall much below par, gold withdrawals are limited to give the Treasury time, by purchase, to restore it to par. Meanwhile, redemption in silver at its gold price is unrestricted, and sufficient gold withdrawals allowed to more than supply the needs of manufacture and the arts. These, with the knowledge of the public that the restrictions on gold are but temporary, should fully protect the value of the dollar.

Section 14: The "trial market gage" device prevents any slip at the time of revision of the schedule. Under this plan the commodity price level should remain permanently stable. The commodities listed will change from year to year. New entries will be added and others withdrawn; individual prices will go up and down; but no noticeable change will take place in the average of commodity prices. Why should reconstruction of the schedule, any more than its first construction, disturb the price level?

I have emphasized the fact that the additional Treasury notes put out under the conditions named will not tend to inflate the currency. Inflation would cause undue enlargement of the bullion dollar and tend to cause export of gold. The additional note issues will, however, increase the volume of Treasury notes as compared with bank notes whenever the supply of the latter is insufficient to prevent depression tendencies. The banks of issue can avert this proportional increase of Treasury notes by keeping their own issues adjusted to the needs of business. The amount of Government currency should not be reduced and it would be better if it were increased up to the minimum needs of trade, leaving the banks to supply the flexible part of the currency. Every additional million dollars of these noninterest-bearing notes could be made to replace a million dollars in interest-bearing bonds.

THE MARKET GAGE

Since a gage of the dollar's buying power must be a measure of the prices of goods in actual trade transactions in the quantities actually sold and bought, an ideal index would take its weighting from the day the price-level tendencies of which are to be measured. In the case of a daily index this is impossible. The nearest we can get to it is to use as weighting the relative sales of the various commodities in the 12 months last past, for the sales for a year are but a multiple of the sales for an average day. In order to keep the weightings as nearly up to date as possible, they are revised quarterly. But the average for the past 12 months is taken rather than the average for the preceding quarter, for sales are largely seasonal and relative sales differ more from quarter to quarter than from year to year.

The daily price index, called the market gage, is based on all the commodities on the market, compressed into some 900 entries. For many years the objection was heard that the market gage schedule lists altogether too many price series. One British economist, blind to the fact that the greater the number of price series listed the more nearly correct will be the measurement of price level movements, had told his readers that "a large number of prices is needless and may

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