Gov. STRONG. I should say, sir, that the first measures were taken as early as August, 1918. That statement relates to the operations of an auxiliary organization conducted by the Federal reserve bank in connection with floating the loans of the Treasury, known as the "money committee," to which you may have seen references made at different times. As I have just stated, our first signal was in August, 1918, when we saw a possibility of speculation in stocks developing and tried to control it.

Senator LENROOT. Then, Governor, do I take it that you expect to develop to the commission that your bank tried, back in 1918, to prevent further expansion?

GOV. STRONG. I do expect to do that, Senator.

Coming to the policies of the Federal reserve bank during this period of speculation and rising prices, I was just about to say, following my notes, that our policy at that time was to endeavor, by every means at our command, to arrest this development. It will be necessary, however, in order to understand our difficulties in doing so, to try to take you back to the atmosphere of those days. You will recall, as soon as the armistice was signed, there developed an insistent demand to restore business to normal conditions and relieve it from the restraints that were found necessary during the war period. The cry was "Business back to normal," and the response to that demand was, in fact, to remove those restraints. The various organizations set up in the different branches of the Government to control advancing prices and to bring about an orderly administration of the various war branches of the Government were, one by one, disbanded. The effect of lifting the restraints was, naturally, one of buoyancy. The people had economized for two and a half years, and they wanted now to enjoy themselves. And the psychology of the people during that period was a very important influence. But from an economic point of view, we must remember that while the war was over in actual combat, in finance it was far from over, because we still had ahead of us a loan which at that time we felt would be about $6,000,000,000-the Victory loan.

Now, the fourth period, into which the third period gradually merged, the period of declining prices and liquidation, marked the greatest decline, I believe, in values of commodities that has ever been witnessed in modern times. (See p. 498.) It commenced with silk and wool, and gradually extended to cotton, rubber, sugar, and other of the basic commodities. At first the decline was gradual, but it became greatly accelerated, until toward the end of 1920 in some commodities the price decline was almost perpendicular. It slowed down in December, and in January and February of this year the decline had been largely arrested; one should not speak too broadly on this subject, but after the turn of the year the decline was greatly arrested.

During this period the policy of the Federal reserve bank of New York was governed by a development with which I believe few people are familiar, and I would like to describe that in some detail.

Representative SUMNERS. In this period, the discussion of which you are about to enter, do you propose to describe what you did to arrest speculation, and what you did to arrest speculation afterwards?

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Gov. STRONG. I am at the present time outlining the periods, and in a few words the policies of the bank, and later I expect to tell you how we exercised those policies.

When the public stopped buying and consuming goods-I am referring to the period of declining prices-as they did in the summer of 1920, it was just like closing the outlet of an elastic pipe, with water being constantly forced in at the other end. The pipe will certainly expand, and it did. When consumption stopped at the point of retail distribution, production at the point of origin still continued. The retail stores largely paid for the goods that

WHOLESALE PRICES OF CERTAIN GROUPS OF COMMODITIES IN the United States.

Source of information: Monthly Labor Review.

they had contracted for, but discontinued orders from the wholesale merchants and manufacturers for new goods. The middlemen or wholesale distributors delivered such goods as they could which they had contracted to sell, but they discontinued buying new goods, and simply took those which they had contracted to buy. It was the same way with the manufacturers and their supplies of raw material; they took the raw materials already contracted for, but they discontinued buying further new supplies of raw material from the original producers.

There were also many cases, as we know, where, probably due to inability to finance deliveries, contracts were canceled right and left. It was a very common thing, under those conditions, that goods which had been contracted for and were in process of manufacture and were not taken by the purchaser, had to be carried. So that during this period goods piled up all along the line. The outlets were closed at one end of the line, but production kept piling up.

Now, what happened as a result of that? I want to describe it, if I may, as a row of blocks standing on end, the block at one end

BANK LOANS AND PRICES IN THE UNITED STATES.

Volume of national bank loans compared with wholesale commodity prices. (Department of Labor index.) Average prices in 1913-100 per cent. Source of information: Reports of the Comptroller of the Currency, Monthly Labor Review. representing consumption, and the block at the other end representing the production of the raw material. What would happen if a blow was struck at the block representing consumption? The blow by the ultimate consumer, at the retail end of the row, was reflected back instantly to the raw material production, and there was an immediate collapse in prices of raw materals. And that is the characteristic of periods of depression, that the first to suffer collapse in prices is the producer of the raw materials.

It was during this period of decline in prices of raw materials and of the backing up of goods when, notwithstanding the declining prices, you will find that the loans of the Federal reserve bank did not decline. (See p. 499.) The price decline was very sharp, as is shown by our charts. The curve of prices dropped quite markedly, but the volume of bank loans, as shown on the charts of the Federal reserve bank, continued to rise for some time before it began to go down; indicating, as I have attempted to describe, that the first result of this curtailment of consumption was a pressure upon the banking system for credit to carry these goods, and a decline of the

EARNING ASSETS AND RATES OF DISCOUNT OF THE FEDERAL RESERVE BANK OF NEW YORK Total loans and investments on the last report date of each month divided into principal types. Rate of discount for different classes of paper are shown on the dates when the rates became effective. Source of information: Annual Reports of the Federal reserve bank of New York, weekly press statements, and circulars.

curve representing bank loans could only be expected when consumption began and debts were paid.

Now, from this chart you will observe the decline of prices. These are the wholesale prices. You notice the decline is very sharp, and the bank loans-these are national banks-the loans were maintained at these levels [indicating]; but the other chart—

Senator LENROOT (interposing). Could you indicate on that chart approximately when the policy of the Federal Reserve Board was fixed with reference to expansion?

Gov. STRONG. Yes; there is another chart which will show that, I think, a little better.

Senator LENROOT. I would like to know with relation to that peak of prices; that is what I am after.

Gov. STRONG. The policy of resistance to expansion, Senator, I should say-of course, it developed gradually as conditions seemed to make it necessary-I should say that the policy of resistance to expansion came in about at this point [indicating on chart], fairly early in 1919.

Senator LENROOT. There was positive action of the Federal Reserve Board in the spring of 1920?

Representative MILLS. In December, 1919.

Gov. STRONG. November, 1919. (This refers to rate increase and the high point of prices.)

Senator LENROOT. Was it December, 1919, the date of the high point?

Representative MILLS. December, 1919, was the date.

Gov. STRONG. No; May, 1920, high point of prices.

Senator LENROOT. Now, where would that be indicated on that chart?

Gov. STRONG. Each of these blocks, Senator, represents a year. That was the year 1920 [indicating].

Senator LENROOT. Yes; I understand.

Gov. STRONG. Now, it is important to bear in mind, however, in examining a chart of this character, that the manifestation of what was going on was different in different sections of the country, and I think it is axiomatic, for some reason which can hardly be exactly known, that the first sense of the community to detect these changes is expressed possibly in the money and the stock market; and, as I shall hope to show, in New York we had our first warning of the possibilities of the speculative development as early as August, 1918, before the war ended. But it takes a long time for that sentiment to develop and go through the various cycles of development until it reaches the apex, as shown on that chart.

Representative TEN EYCK. You are going to submit those charts for the record, are you not, Governor?

Gov. STRONG. Yes, sir; I have quite a collection of charts to submit to the commission.

Now, as to our policy during this period of declining prices. I may say it was the most difficult period that we have experienced in the reserve system, or, at least, in the Federal reserve bank in New York, filled with complications which I could describe ad nauseam to the committee. But our policy was designed to encourage the extension of needed credits-that is, by the member banks. That is where the original policy must be made effectiveat the loan window of the member banks.

Representative MILLS. Now you are talking of the period beginning in August, 1920, are you, Governor ?

Gov. STRONG. No, sir; I am talking about the period of declining prices which began, say, in the summer of 1920, and extended to, say, the early winter of 1920. That is the period of the vertical fall in prices. By gradual stages, of course, as developments justified it, our policy changed.