broader one which included really the other-is lack of confidence. Lack of confidence of the bankers themselves; lack of confidence of depositors in banks. That resulted in two things. A more conservaNitive policy on the part of the individual banker about making loans or investments, and the "panicky" and really unjustified withdrawal of deposits all over the country in the form of currency. Those withdrawals of deposits which have been termed "hoarding money" have aggregated perhaps $1,300,000,000; although, there are certain causes involved which would make me reduce that amount somewhat, as I believe a lot of that money has been withdrawn, not because of fear, but for other reasons.

Now, the purchases of Government securities were more than off-set as I say, by currency withdrawals. The question might well be raised, and no doubt will be raised, as to why we did not buy even more Government securities. Well, there were various reasons. In the first place, is it a futile thing for the reserve banks to expend their resources for the purchase of Government securities unless the money we put out is going to operate as a basis for expansion of bank credit. The mere purchase of Government securities by the Federal reserve banks, stopping there, has no effect directly upon the volume of bank credit in the country; and therefore, has no direct effect upon the price level which you are all aiming at.

In the first place, what usually happens when we buy Government securities? We go out and purchase $10,000,000 worth of Governments from a banker or individual, perhaps from a dealer in securities, and we give a check for $10,000,000 on the Federal reserve bank. That check is taken by the seller of the securities and deposited in a bank. That bank then finds that its deposits have gone up $10,000,000, just as though they had imported gold in the amount of $10,000,000. The first thing they do is to turn it into the Federal reserve bank. That increases their reserve deposit by that amount. If the bank is indebted to the Federal reserve bank it will no doubt pay off its debt with the excess reserve at once. When that happens and at that stage there has been no increase in Federal reserve credit and no increase in bank credit.

Mr. GOLDSBOROUGH. Prior to the passage of the Glass-Steagall bill?

Governor HARRISON. No.

Mr. STRONG. Of course, if they get nothing but credit on their debt to the Federal reserve bank; but suppose after paying this debt they get additional credit with the Federal reserve bank?

Governor HARRISON. I will get to that. I am trying to state what happened in the first instance. In case the bank which gets the $10,000,000 check is in debt, the chances are it will pay off that debt, because no bank wants to be in debt to the Federal reserve bank, if it can readily avoid it. While at that point it does not expand Federal reserve credit, or expand the volume of bank loans or investments, it does put the bank that much more out of debt, and makes him (the banker) a little more easy minded. To that extent it is a favorable factor; but it is largely psychological, because credits have not been expanded.

Now, take the case of a bank that is not in debt. We go through the same procedure exactly, and the bank then finds that it has

$10,000,000 excess reserve. The question is: What are they going: do with it? They can either make that the basis of new loans or investments at a ratio of 10 to 1, taking the banks as a whole, or, the individual banker will say: I have no use for that money, I will sell to some other bank which is in debt and which needs to pay off its obligations. This is a very common practice, and a very wise and helpful one, though I understand there has been some feeling in Cogress that it ought to be stopped.

Now, if there is no market for Federal reserve funds, no bank in the community, we will say, is in debt, and we give the bank $10,000 of excess reserves, then you have a situation where the bank has $10,000,000 more on deposit with the Federal reserve bank than s required by law. If there is no other bank that wants that $10,000,00 to pay off a debt; if there is no other place they can use it, they keer it as excess reserve, and usually in the past, when conditions were normal, it would be a pressure upon that bank to make loans or invest ments. But that pressure does not work and will not work in a period where you have bank failures, where you have panicky depos tors, where you have a threat of huge foreign withdrawals, and wher you have other disconcerting factors such as you have now in vars sorts of legislative proposals which, however wise, the bankers may not feel to be wise. You then have, in spite of the excess reserve a resistance to its use which the reserve system can not overcome.

Mr. STRONG. Suppose this process had been started before the deflation reached the low point, then what would they have done before this fear had seized upon these bankers and they had $10,000,000 in excess reserves? Would they not have loaned it?

Governor HARRISON. Mr. Congressman, during 1930 and 1931. various periods during those two years, the banks in New York City had an excess reserve ranging from twenty-five to one hundred millon dollars week after week, and they would not use it and did not use it because they did not feel the situation was such as to justify them in doing so. Öthers might differ with them, but even so that was the

fact.

Mr. STRONG. Then I arrive at this conclusion: If a surplus and abundance of money is in the hands of the bankers to loan, that these distressing times can be brought about because they will not lend it. or are afraid to lend it; and if that be true, our banking structure in this country is absolutely on a wrong basis.

Governor HARRISON. Well, I myself am a firm believer that if you have two factors, the excess of reserves plus confidence, the principle will probably work. That is, you will have the expansion of bank loans and investments, and you will have the repercussion in price level, provided no other factors interrupt.

Mr. STRONG. If we build a banking system on the basis of confidence of bankers regardless of money conditions or business conditions, and whenever the banker gets scared this country is going into a panic. then we had better build on some other system.

Governor HARRISON. I do not think that is an entirely fair state

ment.

Mr. STRONG. If the pyschological condition or the mind of the banker is going to produce hard times in spite of the fact that there is plenty of money-well, there is something wrong somewhere.

Governor HARRISON. That presupposes something I would not agree with, that the volume of credit is the only answer to the price

level. I do not think that it is a complete statement, because you have the whole question of overproduction and the rapid falling off in the market for goods all over the world during the last three years, due fundamentally, I think, to the loss of capital throughout Europe and the rest of the world after the war, which was impossible to restore without borrowing.

Mr. STRONG. But you say they are in condition where they can not get money. You say loss of capital brought about this condition. Now, you come to the condition where the banker can pay his debts and feel easy. But because his mind is in such a condition from fear, we can not have a restoration of prosperity.

Governor HARRISON. I want to come back to that because I do not think it is a fair way to leave it in the record.

Mr. STRONG. I will make a list of these things as we go along and ask you about them when we get through. I understood you to say you did not mind the interruption.

Governor HARRISON. No; I do not, except an interruption to an unfinished statement.

Mr. GOLDSBOROUGH. Let us wait until his statement is finished. We do not know until then what Governor's Harrison's completed statement is to be.

Mr. BUSBY. It is my conviction, regardless of how much bank credit the banks may possess, before they make new loans or new investments they must have some reason to believe that there is dependability in commodity prices so that when they go to make a collection on the loan when it matures they will not find the commodity is shrunken in value and that it will not measure up to what they expected when they took the loan. That, to my opinion, causes the lack of confidence in the banks. It is looking to the thing they can reasonably expect in the trend of price levels, and that is shrinkage in price level which they may find insufficient to secure the loans.

Governor HARRISON. I am very much obliged to you for making that statement, because I think it is a fair explanation of what I had hoped to expand a little bit myself.

Mr. BUSBY. I did not mean to interrupt you in the least.

Governor HARRISON. Let us go back to the point where we had bank with excess reserves which does not feel free for one reason or another to use them. There are a great many reasons why they may be wise in not using them as bases for expansion as I just pointed out. If a bank is in a community where price levels are going down very rapidly, where borrowers are in difficult circumstances and in a way perhaps overborrowed at the time, you can not say from the viewpoint of the individual banker that he is unwise to refuse to make loans on commodities which he has a right to feel are going down further. I am talking about the individual banker.

Mr. STRONG. Do you want to add in there whether he had reason to expect or desired that result?

Governor HARRISON. Well, you are going pretty far there. It is very difficult to expect a bank with excess reserves to go out wholesale and buy large amounts of bonds in a period when bond prices are shrinking rapidly, when the fixed charges of corporation, the obligors, are proportionately too heavy on income at present price levels. If you were running the bank and if you were responsible to your depositors and shareholders, you would have great hesitancy if any

one gave you a million dollars excess reserves, to lend it, or invest under such conditions.

Mr. STRONG. But I would have thought about that in 1928 whe they were lending money on shoe strings, backing up the stock mark” all the time. Somebody ought to have thought about it then.

Governor HARRISON. That is another aspect of the situation whic I think is worth a little time to discuss. While it is true that duri that time of expansion, loans in the banks went up, it is also tre that the increase in brokers' loans was not due so much to the banks They went up principally, not because banks were expanding credits. but rather because corporations and others than banks were makin loans to them, wholly beyond any control of the Federal reserve or any banking system. I think that had it been impossible for others tha the banks to make loans to brokers during that period, and had the reserve banks been in position to raise rates as rapidly as some of as would have liked, you would have had a very different picture. Yo can not blame the commercial banks if as a result of the very efforts to restrain speculation rates on brokers' loans go up to a point where you and John Brown and Tom Smith, and A, B, C, or D corporations think that is a pretty profitable place for them to lend their money There was no real control over such loans and has been no contr till the last few months.

Mr. STRONG. But as I think of it, if the mind of the banker st the present time is such that he will say, "Stocks are low now, I will not lend money on stocks that may go lower;" but where were the sa minds of the same bankers when prices were three or four or five times as high as now? Why did they not then say," They are not earning money to pay dividends no these inflated values; I am going to qu lending money on them"?

Governor HARRISON. You will find that banks throughout the country, as those stocks went up, required higher and higher margins. even to 40 and 50 per cent.

Mr. STRONG. Suppose the Federal reserve system instead of sell their bonds in a rather hesitant way, has gone into the market an sold enough hundred billions and put up the discount rate not ge half a point every two or three weeks, by 1, 2, 3, and 4 points in a fes weeks, would not that have stopped the inflation?

Governor HARRISON. What did we do in that period?

Mr. STRONG. You want up so slowly, that the speculators felt tha: "regardless of such action of the Federal reserve system, we think we can make enough money out of the advance in stocks to pay this additional rate.'

Governor HARRISON. We went up slowly in the light of conditions as we now see them. I think we would do differently now. We als sold over $400,000,000 of Government securities, and we lost $500000,000 in gold during that time, which was basis for 10 times tha: amount of credit.

Mr. STRONG. And that had no effect on the market?
Governor HARRISON. I can not say that.

Mr. STRONG. Suppose you had sold a billion dollars' worth of securities?

Governor HARRISON. You are talking about selling now?
Mr. STRONG. And had tried to stop this inflation?

Governor HARRISON. Had we in 1927 or 1928 told you in advance that we were going to sell $400,000,000 of Government securities and

were going to export $500,000,000 of gold which would take the basis for nine billions of credit out of this country, you would have vigorously condemned such action.

Mr. STRONG. Now I feel like legislating you out of existence because you did not do it.

Governor HARRISON. But we sold all but $147,000,000 of the Government's that we had and we liquidated huge amounts of bankers' acceptances in addition to the $500,000,000 of gold we lost. We liquidated in addition over $400,000,000 of bankers' bills. It was a tremendous pressure and I think that that pressure, plus more decisive and courageous and prompt action on the discount rate, would have done much to check the speculation in securities through proper and orthodox means of central bank control. But there were two difficulties: One, that some of us were not authorized to go as high in our rates as we wanted. Second, that the pressure of rates even as high as they were, did not operate on the huge volume of credit which was outside the control of the banking system, which amounted to something like six and one-half billion dollars. That six and a half billion dollars was the factor that increased brokers loans all through the peak period. I think the expansion was due more to these other loans than to the direct loans of New York City member banks, which averaged all during that period only about one billion dollars, which was a very small part of the brokers' loans.

Mr. STRONG. If we have a gambling system in New York that through bringing about higher brokers' loans can bring such a condition on the country, we had better get rid of it.

Governor HARRISON. We never had that condition before. We did not have the machinery to stop it, although the New York banks did raise the price they charged for placing loans for account of "others." But since that time, the New York Clearing House has ruled that they will not place any loans for any lender other than a bank, so that there is not any likelihood of a repetition of that experience.

Furthermore, I understand that one provision in the so-called Glass bill in the Senate prohibits these so-called loans for "others." Mr. STRONG. You have to buy fire apparatus before the fire starts. A man ought to know, but how can we know when the fire is going to break out again? They may again change the rules.

Governor HARRISON. There is no doubt that the New York banks will not place these loans for "others" now. They can not do it under the rules of the Clearing House. In addition to that the stock exchange has recognized the danger of these loans, and have evidenced their desire to make them impossible.

Mr. STRONG. Yes, but where were these brilliant minds when this fire was raging, that they did not pass that rule then?

Governor HARRISON. All our minds are a little more brilliant now than they were then.

Mr. STRONG. I would hate to again let a lot of minds bring about the ruin of the country.

Governor HARRISON. One of those factors was beyond the control of the banking system and what seemed at that time to be reasonable steps to check it. Now, I think they have taken effective steps to stop it.

Mr. GOLDSBOROUGH. Speaking as one member of this committee and all that you are here for and all that we are here for is to try to be