increased reserve requirements because checks still have to be drawn to make settlements.

Our committee felt that the additional reserves required at the time when loans for account of others reached such large proportions, would have exerted a strong influence to check the inflationary and speculative movement long before the time when it came to a head. Mr. GOLDSBOROUGH. That is exceedingly interesting. Will you explain?

Governor MEYER. I think it is an important factor in the whole situation, and I would be very glad to furnish this committee copies of the report which was made by the committee on reserves. We have some copies of it here with us. It is quite comprehensive and I think it is important for this committee that the question of bank reserves should be thoroughly understood.

Mr. GOLDSBOROUGH. What I had in mind right at that point was just how the expansion of the reserves would restrain loans for account of others?

Governor MEYER. What I intended to say was that even loans for account of others, which, of course, would not be reflected in deposits, therefore not under present law in additional reserves, would still be reflected in the velocity of the turnover which under the proposed splan would require an increase in the reserve. The studies of the committee on the velocity of the turnover in relation to loans for account of others indicate that a very substantial increase in the reserves would have been made necessary, entirely apart from increased deposits, because the requirement would be 5 per cent on the deposit with the balance related to the turnover. turnover is there whether the loans are made for account of banks or for account of others.

That

Now, on the broader subject, it is true, of course, that the volume of money and credit in circulation is an important factor in the price level, but some of the other things that seem to me to be vital in connection with a study of the problem are conditions which I believe it is difficult for the Federal Reserve Board, or any other human agency that exists or that could be called into existence, to control.

If we look back at the history of the last 10 or 12 years with the abnormal conditions at home and abroad in production and consumption, at the currency standards in various countries, at the political as well as the financial relations within and between nations, we can see factors which it seems to me, while subject to influence, nevertheless can not be definitely controlled by any one country or by any one group of men or any institution in any one country. I am one of those who agrees that the United States, with its large population, with its great productive and consuming capacity, is the greatest single economic factor in the economic world. There are nevertheless many others, and the changing conditions in many of our relations, both national and international, are striking, whether we analyze them by a chronological process or whether we analyze them in view of the fluctuation of price, or of the volume of business or of international financial movements. Everywhere we have difficulties to meet and adjustments to make, dependent on the behavior of human beings in large groups; and if we go back to the 1921 situation for a moment, where we had what looked at that time like a most acute depression we find that we came out of that depression

through a series of constructive developments in world relations, particularly with respect to our own country.

We came out of the war and the temporary postwar inflation, first and foremost, as the one country where the world felt that its capital invested or its money deposited was safer than in any other country. That led to a tremendous movement of liquid capital and investment money toward the United States, which resulted in a tremendous amount of gold being imported into the country, representing foreign bank balances and individual deposits and investments. That hap pened to combine with rather extraordinarily favorable conditions at home from the point of view of the possibility of money affecting industry, and the particular feature to which I want to call your attention in that connection is expressed in this diagram.

This is a graphic representation of the per capita value of building permits of 50 cities. From 1913 when business was slow there accumulated during the war period of 1917-18 until 1922 a de ficiency in the construction of housing and other plants such as office buildings, which left a very large construction program nee essary and sound. As soon as the money market began to ease after the 1919-1921 tight-money period, money began to flow inte residential building-both apartments and private dwellings-and into business office construction all over the country. I am sure from your study of economics that you know that there is no singe activity which produces a greater employment of labor and a greater purchase of material than the building industry. It employs a at good wages gives it buying power. It puts traffic on the ra roads and expands the employment of labor and material there, and finds its way more thoroughly into the general volume of business activity, I think from my observation over 35 years, than any other one activity.

When this activity began, we began to have an improvement in our general level of prosperity, because like many other good things, it began on a sound basis to fill a legitimate need. Population had increased and housing and business plant had not. Therefore, a need existed. The business began by filling a legitimate need, with the demand large and the profits substantial, but it developed more and more, and cumulatively on a geometric ratio, into a tremendous spec lative activity.

In this period a very important financial development occurred which was the means by which the construction activity passed fr the legitimate stage into the speculative stage and to some extent, the dangerous stage. That was the development of a new channel to large amounts of capital through the real-estate bond market. Rea estate bonds had been known previously on a small scale, locally But in this period of rapid development and profitable activity there was found a way to large amounts of the savings of the country. through the real-estate bond market, on a scale which had never existed before.

That led to two things: To some extent, to speculative building where the business was carried on for the profit of the people who were doing it rather than to meet a legitimate need; and to overbuilding in certain localities.

Now, it is generally assumed I think, from the present condition of the real-estate and construction industries that there is no building

need to be filled at present. There is, but with the breakdown due to over-speculative building in certain areas in the recent past and the consequent injury to banking, the credit of the construction industry is greatly impaired. So that to-day, when we find that we have the lowest building volume that we have ever seen in peace times we also find, I think, one of the most significant factors in the present depression and deflation of price levels.

These things I mention because I think they are so large in their importance that they balk us in achieving results which, under more normal conditions, might be possible. I had a feeling last year, when an easy money market prevailed for several months, that there might be an opportunity for stimulating a little greater activity in housing development in localities where there was a need for housing. In some places there might be more activity even now, if money were available in the mortgage market on an adequate scale.

As you know, cotton or wheat have a world market, and if there is surplus anywhere there is a surplus everywhere; but housing is different, and even last year there was considerable housing construction done in suburbs of large cities where new highways and automobiles and buses are taking people out of the crowded sections into the suburbs. That is a possibility that I think will be developed in the future, and I think that there is a long time trend in that direction where you will see results when conditions are a little more stabilized. But I also think that the recent overexpansion in building is one of the major factors in the present economic depression.

Abroad last year we saw a major financial crisis in two of the four great economic powers of the world. The German situation first came to a critical climax, following difficulties in the Balkan States and in Austria and Hungary. At the end of a long period of reparations payments and heavy borrowings, the German situation came to a standstill, resulting in the so-called standstill agreement. I know it might be argued that if the price level had been maintained perhaps that would not have happened, but I doubt very much whether the maintenance of any price level could have prevented what happened in Germany where there was borrowing on short-time obligations to pay debts which could not be liquidated in any short period of time. The English situation followed not long afterwards, and if you analyze that situation you will find that the English had large amounts of foreign deposits payable on demand, and that they had been making large amounts of loans abroad on less liquid and longer terms, so that when the strain was put upon them through withdrawal of their short-time obligations they were unable in the circumstances to continue to meet their payments on a gold basis. There has always been a difference of opinion with regard to the English situation. The pound had been maintained close to the gold basis during the war through artificial methods, largely by borrowing in this country and the sale of investments. In February, 1920, I remember that the pound got down to $3.18 at the low point. That resulted in wage increases in England which could not be sustained, I think, after the English had restabilized at the old gold basis. They were unable to modify the wage scale and they became unable to compete with other countries where labor was cheaper, or where plants were more efficient. The result was that the whole economic basis on which pre-war England had been developed was undermined in an important respect.

Developments during the war also changed the world mark: situation. I recently looked up what happened in the textile industry in the Far East during the years of the war and immediately afterwards. Spindles in India and Japan and China grew from 10,415,000, in 1915, to 18,161,000, in 1922, and looms in about the same proportion. In other words, in the war period, when England's capacity for export production was interrupted, other countries which previously had depended on England or other European countries for supplies were forced to build up a production which continued to exist after the war. As a result Lancashire has been enormousi handicapped by these developments in other countries to meet the demands which formerly had been supplied by England.

England's banking power, which was based on the fact that the pound was the almost universal medium of exchange in trade relations with foreign countries in pre-war days, became less dominant after the war. Less banking went to England and more came to this and other countries. The American interest in foreign trade went up by large amounts. Substantially, in that period when all Europe was engaged in war, America was called upon to take the place of many countries which were put out of the business of supplying industrial markets, and these figures indicate some of the fundamental changes that or curred in world economic relations which can not be ignored when you approach the problem of how to achieve stability. I will give you the figures: From 1913 to 1929, the share of the American market in goods imported into South America grew in Argentina from 15 per cent of the total to 26 per cent. In Brazil, from 16 per cent to s per cent; in Chile from 17 per cent to 32 per cent; in Columbia from 27 per cent to 46 per cent; in Peru from 29 to 42 per cent; and it Venezuela, from 39 to 55 per cent.

In Asia, Africa, and the Oceanic Islands, our share in goods imported into British India grew from 3 per cent to 7 per cent; into Chins, fre 6 per cent to 18 per cent; into Japan, from 17 per cent to 30 per cent into Australia, from 14 per cent to 25 per cent; into New Zeala from 10 per cent to 19 per cent; into South Africa, from 10 to ly per cent.

That means that the United States developed the capacity to supply the needs of a market which was temporarily deprived of t normal sources of supplies, and after that productive capacity bac been duplicated in the United States it came into competition with the other productive capacities. Certainly maladjustments in bus ness conditions and competitive conditions and price levels must fes from such a major development as that.

Let me just say that, in the light of these major difficulties in the European economic structure, which were inherent in the situati as a result of the war, we have had to struggle in the world w maladjustments proceeding from the passions of war which did no end with the so-called peace; and national animosities as well as international economic and financial instability have been vital factors our home situation.

I think that it was the large construction needed in the United States, which was in good condition, that enabled us, in spite of the disturbed conditions of the world to develop what appeared to be an independent prosperity which we were able to maintain for a period of years.

Total building contracts rose from $2,756,000,000 in 1921 to $6,381,000,000 in 1926, went down to $3,093,000,000 in 1931, and are on a still lower level at present. With the revival in building and the resultant activity that flowed into all the channels of trade, the purchasing power of the United States developed in a large way. But at the same time, with the tremendous expansion in the volume of industry, American industry, with more highly developed mechanization and larger production units, was able to make goods at low prices and to invade foreign industrial markets with manufactured goods, so that for a while it looked as though something impossible was going on and could go on. It went on longer than seemed possible. What I mean is that we were a large creditor annually in the world's balance of trade through exports of raw materials and manufactured goods, and at the same time we were collecting interest on debts and investments on a large scale.

It is interesting at this point to call to your attention that, in the period from 1922 up to the present moment there has been no great expansion of exports of crude materials, including raw materials and foodstuffs. From $1,447,000,000 in 1922, the export of crude materials reached a peak in 1925 of $1,740,000,000, and then declined. Exports of manufactured goods rose from $2,318,000,000 in 1922 to $3,745,000,000 in 1929. I think that that is a measure of the ability of the American manufacturer to sell in world markets at a competitive price, which is interesting and important; but, at the same time, it seems to me to be extremely difficult for foreign countries to buy raw materials to compete with an industrial country which can expand its market for manufactured goods on a competitive price level notwithstanding high labor costs. That is what the United States achieved for a certain period and to a certain extent for the first time in the world's economic history.

Mr. GOLDSBOROUGH. You are not making a very good Republican high tariff speech this morning.

Governor MEYER. Mr. Chairman, I am not making any tariff speech. Mr. STRONG. I might interject that the Democrats made a stronger tariff argument when they brought in their bill and did not change the tariff rates.

Governor MEYER. I believe in the tariff for protection of American industry and agriculture. I think it is more important to protect the domestic market than it is to invade foreign markets; but what I want to say is that, during this extraordinary period, we appeared to be able to do both. And it is not possible to do both. I think the future may show that the United States can not continue to operate on the basis of exporting raw materials and manufactured goods at the same time, in the volume that prevailed in that period. Mr. GOLDSBOROUGH. All political economy teaches that, does it

not?

Governor MEYER. Yes. But it went on for so long it appeared to be possible.

Mr. GOLDSBOROUGH. That is the way the world over, is it not? Governor MEYER. To some extent. Of course, there were so many apparently constructive developments in this period from 1922 to 1929 that the world was lulled into a sense of security. There were periods of acute and critical difficulties like the invasion of the Ruhr in 1923, and the debacle of the mark; there was the degeneration of the