Governor MEYER. I accept your statement on behalf of yourself, but I must protest against your interpretation of my views, because what I want to say is that the banking and credit structure should serve in the accommodation of business.

Mr. GOLDSBOROUGH. Mr. Prall, you were engaged this morning, and have not had the benefit of Governor Meyer's extremely interesting statement, but you may have some questions that you would like to ask.

Mr. PRALL. I would like to ask Mr. Meyer one question: Assuming that 784 commodities make the standard of value, could the producers of those commodities, by any form of combination, raise the prices to any extent that they might produce fictitious values?

Governor MEYER. Mr. Congressman, I do not want to appear unwilling to answer that, but I can not say that I consider myself an expert on the commodity index basis for currency or the medium or standard of exchange. I would like to have more time to study it. In fact, I have been terribly busy with a lot of administrative questions, and I had to ask the indulgence of the committee in postponing my appearance, and I do not feel that I can properly answer your question with the background of study and thought that I think you are entitled to have, if I make any answer to you at all.

Mr. PRALL. Well, the question was brought up here as to the control of gold, how it might be manipulated, and I wondered if there would be any change in that situation if the producers of these commodities could, by any combination, bring about a similar situation. Governor MEYER. You mean by

Mr. PRALL. By rigging the values.

Governor MEYER. I should not think anybody could rig 780 commodities, or 680, or any such number of commodities. I would not think so. I do not see how it would be possible to do it. Of course, if you are speaking of the value of commodities in terms of some other value, you mean some other measure of value, or some standard of value.

Mr. PRALL. That is all.

Mr. GOLDSBOROUGH. Mr. Strong?

Mr. STRONG. Governor Meyer, I noticed you used the language of the statute, "accommodation of business." That is what the language of the statute is in regard to the use of the rediscount privilege, that it shall be used for the accommodation of business and commerce. In the original act, instead of that language was the word that it should be used for the stabilization of the price level. That language went out in conference and the language "for the accommodation of business and commerce" inserted instead. In my original bill, five or six years ago, I used the words of the original language of the bill, stating that the powers of the Federal reserve system should be used for the stabilization of the price level, and ever since then I have been using the words "for the stabilization of the purchasing power of the dollar," which, of course, you know, means the same thing, but I used this language in order to get rid of the charge of price fixing, which I do not think can be done or should be done in this country. My idea is that the law of supply and demand is a very safe law, upon which we can base most of our activities in commerce and business. If that is true, the regulation of the supply and demand

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of money largely tends to fix its price, and its price is what it is wort: in commodities in general. Therefore, it seems to me with the powers we have given the Federal Reserve Board, to regulate the volume o money and largely the price of money through the rediscount priv leges, the Federal Reserve Board could regulate the volume or suppy and demand of money; and it is on that basis that I have, for the past five or six years, advocated that the Federal Reserve Board should a its powers to stabilize the purchasing power of money, regulating t powers through the amount of speculation.

Now, Governor Strong of the Federal Reserve Board intimated me and this committee that he had used those powers in open-market operations to buy and sell bonds on the rediscount rate quite succes fully for the past two or three years, or up until the time of his dea and he had several others with him, among whom was Govern Harrison, who was here yesterday, who frankly admitted that he be lieved in and was sympathetic with this theory, and he thought the Federal reserve ought to operate along this line, but he objected t us directing the Federal Reserve Board to do so.

I would like to ask you what objection you see in Congress ask the Federal Reserve Board to use its powers for such stabilizatie Why should not the Congress, having given these powers to Federal reserve system, direct the use of them?

Governor MEYER. Well, I think the authorization of pos which Congress obviously intends to be used to accomplish the pzpose within the limits of possibility should be used; but when w give directions to a body to accomplish a result, and give them the means, and make it more or less mandatory that they shall plish the result, which depends on a good many conditions, then t are raising a difficult question. I think probably Governor Harne intended to convey the idea that you were charging the system wit the responsibility for the results as well as for the discharge of function.

I think the Federal reserve system has always endeavored to just exactly what we are talking about, or what you are talking ab within the limits of possibility; but, for instance, let us say that: 1921 and 1922 there were operations conducted with the view increasing the outstanding supply of credit and stimulating its and you come into such a situation as I showed you prevailed at tha time, with the boom in the building of houses and partments and off buildings, plants, and everything else, that money would be unc diately effective in stimulating industry in an extraordinary way The same amount of money put out in the market to-day under present greatly changed conditions would have different effects. my opinion.

Mr. STRONG. Well, I grant you that.

Governor MEYER. I think that is what Governor Harrison ba in mind.

Mr. STRONG. And I realize that perhaps you said the market oper ations and rediscount privileges would not, under our conditions, br about stabilization. I can realize that.

Governor MEYER. Especially if the overuse and overexpansion the period has led to expensive speculative actions, which cause reas tions of a deplorable character.

Mr. STRONG. Of course, my answer to that would be that we did not sell bonds and reduce the amount of money in circulation and put up the discount rate enough to stop that expensive speculation.

Governor MEYER. That gets down to a very fine point; and of course you know it is not only a question of the quantity of bank credit that is available, but also of the velocity of the turnover of that same volume, and the use that is made of it. In other words, you get down to the factor of human judgment. Credit policy does not operate instantaneously, and the effect of an increase in volume of credit to-day does not appear to-day or to-morrow, but after a period of time. A considerable time must elapse before any kind of financial work has its effect.

Now, then, there comes in the element of human judgment, in deciding how much to do, and how far to go, and how fast to keep it up, when to stop, and when to reverse.

Mr. STRONG. But you gentlemen have a pretty good idea now, after these years of operations, of about where to stop, and about when to stop, to reach a certain conclusion, a certain objective point. Governor MEYER. I would like to feel that you are right on that. But I would hesitate to agree with you that any of us has infallible judgment.

Mr. STRONG. You know I have a great deal of confidence in your judgment, and I have always felt that way, ever since our experience in the War Finance Corporation; but I do think, in the operation and use of these powers of the Federal reserve system, which we have used now for these years, that we could give-that in giving any direction, we should give them a measure to follow. For instance, I think, if we should direct them to use their powers toward stabilization of the purchasing power of money, which was the language worked out by Governor Strong, and then say to them to accept as the measure of value of the purchasing power of the dollar the index numbers set up by the Bureau of Labor Statistics, with the large number of commodities that are used in arriving at the index number, that would be a pretty good measure to direct the Reserve Board or System to follow.

Now, as to how long they should proceed, and when they should stop, will be a matter of judgment, which I am willing to trust you on; but it does seem to me that there ought to be some measure of value that they should be directed to follow.

Now, I want to ask you this question: The Reconstruction Finance Corporation and the Glass-Steagall bill have for their purposes the enlargement of the credit structure, so as to bring more credit into use, and in a manner an inflation, or what probably you might term a reflation of the deflation; is not that as practical a thing as if we directed you to use the powers to stabilize the purchasing power of

money?

If money was unstable, credit was unstable and the country was paralyzed; because of such condition we come to the Congress, and as the result of an Executive proposal, we passed the Reconstruction Finance bill and the Glass-Steagall bill, and that was done for the purpose of trying to improve the price level, was it not?

Governor MEYER. As I said this morning, there is the time element, which it is very difficult to regulate. I think those measures have certainly tended to improve the situation, yes; and I think it would

have been worse than it is, if they had not been passed. There has not been any definite upward trend, but I think it has slowed up the decline, and I do not think

Mr. STRONG. Governor Harrison told us yesterday that for the first time in a number of months the decline of bank credits had been brought to a halt.

Governor MEYER. Yes; I think that is significant.

Mr. STRONG. And bringing them to a halt is probably pretty good evidence that they are liable to turn upward.

Governor MEYER. They have to stop going down before they begin going up.

Mr. STRONG. Now, he also told us that they were buying $25,000,000 of bonds each week.

Governor MEYER. Yes; that is published weekly.

Mr. STRONG. That is continuing now, and has stopped the lowering of credit, bank credit. If that condition keeps up, and you keep buying $25,000,000 a week, a turn will probably come, will it not? Governor MEYER. You are getting me in the position of prophe sying. I hope you are right. I personally am in favor of a little stronger policy than you are.

Mr. STRONG. Well, fine. I hope your desire prevails.

Governor MEYER. But you see there are several things that enter into the situation in making a program-what it a suitable amount. whether it is better to keep purchasing moderate amounts over a long period, or to do it all in a short time in larger amounts, in addition to which you have to take into account

Mr. STRONG. The use of it?

Governor MEYER. Yes, the use of it. And furthermore, we have been getting a return flow of currency from hoards since the beginning of February, amounting to about $250,000,000, and aside from a little interruption on April 1 on account of tax assessments, and the flow has continued now for a good many weeks. If the expansion of the program of Government bond purchases, which was referred to by Governor Harrison here yesterday, is continued and the hoarded currency continues to come in, I think we can look forward to inproved conditions. But we still have lots of problems; the penod is difficult in many, many directions, and I wish as much as you do that I knew a simple formula of turning a simple trick that would change economic conditions all over the world.

Mr. STRONG. If you continue to play your cards as you are doing right now the change will come.

Governor MEYER. Well, sir, I am hopeful that the change w come at home and abroad.

Mr. STRONG. Along that line, Governor, you might not want answer this question, but in a speech last night Governor Smith made a proposal that for every hundred million dollars in trade between foreign countries and the United States we remit or credit that country with $25,000,000 on account of their debt to us. Do you think that is a good proposition? Do you think that would stimulate trade?

Governor MEYER. The people who can pay debts are paying them. The people who can buy goods are buying them. I do not knew exactly whose debts should be cancelled for this purpose and whose goods should be sold. Would you want to be chairman of a committee

when somebody's debts are canceled to say whose goods should be

sold for that purpose?

Mr. STRONG. No, I do not think I would.

Governor MEYER. It is one thing to generalize and another thing to get down to business.

Mr. STRONG. And when you have given this bonus or this money that was loaned to Europe and that is exhausted, then what would you do? Lend them some more money so as to give them some more opportunity to have the amount remitted to them?

Governor MEYER. I did not hear the governor's speech. He may have some good ideas.

Mr. STRONG. I would like to ask you what, if you know, caused the recession in bank credits during January? Why did they go down? Governor MEYER. They were going down before that, and it was a continuation of a movement that was in progress and had not been checked. Bank closings in January aggregated 342 in number, and that was not only an intrinsic factor but an important psychological factor. Beginning in February bank closings which were heavy in the beginning of the month slowed up and at the end of the month they were very much smaller. I think in the month of March the resources of banks that opened were as great as those of banks that were closed. I do not mean to say that there will not be more bank failures; but any way they have been less, and January was a bad month from that point of view.

Mr. STRONG. Then if we had commenced along in October and November and bought Government securities, would not we have been apt to have checked those failures that happened in January and prevented the recession in bank credits?

Governor MEYER. There were so many other complications, Mr. Strong; beginning with the suspension of gold payments in England, you have had a series of events which were very complicated. Within a few weeks after September 21, $750,000,000 was withdrawn by foreign countries from their balances here and taken in the form of gold. No country in the history of the world has ever been able to stand that kind of drain of gold. It is true that during that period we also imported some gold but in view of the large drafts on this country by foreigners, chiefly due to repatriation of foreign central bank reserves and, I believe, even some remittances by Americans out of the country from fright, purchase of securities by the reserve banks at that time were impracticable. We could not undertake anything of that character in October without increasing the loss of gold. That is my opinion. You will remember at that time we had to raise the discount rate from 1% to 21⁄2 and 3%1⁄2 per cent. Purchases at that time would not have had a stabilizing effect. They would have tended to neutralize the effect of the advances in the discount rate, which was an important intrinsic and also an important psychological factor at that time.

Mr. STRONG. If Congress should see fit to pass a bill of this kind directing the Federal Reserve Board to use the powers we have given it toward the end that we should have as near as possible the stabilization as to purchasing power of money, what harm could you see coming from it?

Governor MEYER. It is a fact that we understand that it is our duty to prevent inflation to the extent that it is feasible, and to stop the deflationary forces as far as possible through our machinery.