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be obliged by more active business or speculation to raise it again the effect would be more discouraging than if we maintained present rate but kept credit thoroughly elastic. Only motive for reducing rate in January would seem to be to deflect natural course of prices or encourage resumption of business. This seems somewhat akin to various schemes proposed in Congress to raise agricultural prices or stimulate exports. Purchasing power in agricultural section is badly damaged but that of wage earners is but little affected yet. People will probably begin buying again when retail prices are substantially reduced. Statistical history of postwar readjustments shows rebounds after acute declines, and though there are no precedents for present worldwide inflation, already many lines of merchandise stocks here are low and inquiries are slightly improving. It may possibly be that at some point a decrease in our rates, if entirely justified by credit conditions, would be just the thing needed to complete the resumption of normal purchasing and production, but at present we think it would be unjustified, premature, and ineffective. Foregoing refers, of course, only to conditions here.

Representative SUMNERS. At some stage of your testimony I would like to get some information, or rather an expression of your judgment on the point as to why it was regarded as inevitable that deflation had to come. At some point of your testimony I. want to get your view on that.

GOV. STRONG. Well, that bears upon this next question. I might go right to that.

Representative SUMNERS. We will wait for the next question, then. GOV. STRONG. I think from the standpoint of the student or economist, if you please, the deflation was bound to come.

Representaive SUMNERS. I do not care to have you discuss it now, if you are going to discuss it later.

GOV. STRONG. I will come to that.

Representative SUMNERS. Then wait until you arrive at it in natural course.

Gov. STRONG. I shall ask the commission to bear in mind that our theory is that our function as a Federal reserve system is to deal with credit and not with prices; that we should consider conditions from the standpoint of credit, resources, loans, and so on, and the general rates which are being paid for credit. Always having that in mind, let me state that I do not think that any policy of the Federal reserve system, even the rate advance, would have been equal to the task of arresting that expansion. Rate advances might have moderated the expansion, but I do not think that they would have controlled it. And the converse of that is true, that once that decline was started, I do not think that any policy adopted by the Federal reserve system could have arrested it until it had worked itself out by natural causes. As illustrating my point, the chart discloses not so well as it might the fact of what actually happened. (See p. 764.) If I had another chart for the Far East, it would show most graphically that the decline started first in other parts of the world, and was more precipitate there. It was more sudden. I think, in fact-referring to statistic countries I think it started first in Japan and extended through other parts of the East and France and Italy next. I think the decline in Italy and France was in anticipation of ours, but the decline in England and the United States started about the same time. Representative SUMNERS. In what sense do you mean that Italy and France's decline was in anticipation of ours?

Gov. STRONG. I mean it started ahead of ours.

Representative SUMNERS. I wondered in what sense you meant in anticipation of ours.

Gov. STRONG. In advance. I should not have used the word "anticipation."

The reason why I think the decline could not have been arrested is because I believe, first, that the stimulation of production and that the increase in facilities of production, which were really very great during the war and subsequently, led the world to a state of production beyond the power of consumption; that prices and quantities had both overtaken the power of the people to buy.

Representaive SUMNERS. Do you speak of the total of production, including the war activity production, or do you have special reference to production in those commodities of which the people ordinarily buy? Gov. STRONG. I mean ordinary production, leaving out war production.

Representative SUMNERS. When the war ended, in addition to the result of war activity production, had we accumulated an abnormal surplus of such commodities as people in their ordinary circumstances use?

Gov. STRONG. My belief is that the process of producing and accumulating goods that people ordinarily consume in time of peace was stimulated during the period commencing, say, in March, 1919, and extending through to the spring of 1920. The capacity to produce had been increased by the war activities, undoubtedly, and that production had been diverted from war uses to things that people ordinarily buy and consume, and the inspiration to economize had been largely removed by the ending of the war and by the removal of those controls that we have discussed.

I do not think there is any difference of opinion among economists, Congressman Sumners, that the situation had become topheavy in quantity of production and prices of things, and that it was bound to topple over. In that connection, let me point out a significant thing that has not been referred to as yet in these hearings. The price decline began the earliest manifestations of itpossibly in February or March.

The CHAIRMAN. 1919?

Gov. STRONG. 1920, the decline. It was at that time that the jewelry stores noticed a sudden cessation in the demand for diamonds, and a little later came silk, and other things in order.

Now, that price decline commenced, in its early symptoms, just when the farmers were planting their crops. And here I am coming to the main point of the discussion of rate reductions.

The farmer could not produce a crop that would sell for cost until the cost of production had been reduced, and he was caught with his land plowed, possibly his seed in the ground, but no crop to sell until the decline in the value of what he was going to produce had been completed. If this decline had started, say, in November or December, and had concluded its course in the planting season, you would not be listening to the complaints of the farmers of the United States about credits. You would be listening to the difficulties, possibly, of the manufacturers of the United States, who would have been a different class of sufferers than the farmers. There, unfortunately, the effect of this development worked distinctly to the disadvantage of that class of our country, which is such a large class, which produces from the soil every year large crops.

Representative TEN EYCK. Of course, the manufacturer's business being more flexible and mobile, could have stopped production immediately.

Gov. STRONG. Yes; the manufacturer could adjust himself more quickly.

Representative TEN EYCK. Whereas the farmer, after the planting season, has to go through the whole year.

Gov. STRONG. Yes, sir.

Representative SUMNERS. And his current crops and prices of carried-over portion of the preceding crop which he counted on selling during the year while he was producing a new one, went down also.

Gov. STRONG. Yes, sir.

Representative SUMNERS. And the things he had to buy stayed up. Gov. STRONG. Yes.

Representative SUMNERS. And then when he got to the harvest time the prices had fallen.

Gov. STRONG. Yes. Now, Mr. Congressman, you are making my argument for me, which is this: While the policy of the Federal reserve system is adopted entirely through studies of credit, and inasmuch as one of the reactions from this policy is prices, we must necessarily give consideration to this matter of prices. All of those charts and studies that I have brought over to submit at these hearings were not prepared especially for these hearings. A few of them were, but most of them were the charts which we have had worked out and prepared in the bank for the purpose of studying conditions.

Just as soon as the decline occurred in raw materials and the first produce of the soil, then I think consideration of policy from the standpoint of prices must necessarily change from consideration of the interest of the producer to the interest of the consumer. And for this reason: Take the case of the farmer himself. I have no doubt that these gentlemen who have appeared before the commission have, every one of them, complained because of the fact that the cost of making this crop did not come down. Implements and labor and every element that goes to make a cheap crop did not come down. Every farmer, just as every other individual, is from an economic standpoint two people. He is interested in getting good prices for what he produces, and he is likewise interested in getting prices down as low as he can for what he must buy.

This cycle of declining prices always begins with raw materials; that is, the things that come out of the earth. After the decline in raw materials had occurred the only relief possible to the farmer was bound to be a reduction in the cost of making his crop. He must go on making his new crop a cheap crop. Now, the control I have described is a very imperfect machine, especially when it acts as I have described, by direct action. Many of these farmers have suffered many serious and almost fatal losses. But their remedies to enable them to work out are two-one is to market the crop that has not yet been sold and reduce their debts, and the other is to be maintained, as producers, at a lower scale of costs. In considering that we have to look at all of those points in our policy, does it not become important that we should consider how prices and wages are coming down, and what effect our policies will have on them?

Representative TEN EYCK. At the beginning of this condition of depression, can you tell us, from. your experience and study of statistics, what first declines, as a rule; is it raw material, is it labor, is it manufactured materials, or is it credit?

Gov. STRONG. As disclosed by the experiences that we have recently had, and confirmed by all the studies that we have made, and those studies go back to the period of the Napoleonic wars, the first decline occurs in raw materials. It is just as I described, Congressman; you hit the blow at the point of the retail distribution, and it is reflected back to the original producers in a price collapse. And it extends through all the stages of production, until it finally results in retail prices coming down, and the last to fall is wages. It is wages that rise last in a period of rising prices, and it is wages that come down last in a period of falling prices.

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WHOLESALE COMMODITY PRICES IN THE UNITED STATES AND ENGLAND, 1790 TO 1920.

Average prices each year in currency. 1913 figures-100 per cent.

Source of information: United States index compiled by Federal reserve bank of New York from indices prepared by A. H. Hansen (1801-1840), C. H. Juergens (1825-1863), R. P. Falkner (1840-1891), and the United States Department of Labor (1891-1920), and computed for England from indices of W. Stanley Jevons (1782-1817) and the Sauerbeck-Statist index (1818-1920).

Representative TEN EYCK. But it starts with raw materials?
Gov. STRONG. It starts with raw materials.

Representative TEN EYCK. And next is manufactured materials? Gov. STRONG. Partly manufactured materials. What we call wholesale goods come in between raw materials and final distribution.

Representative TEN EYCK. And then the retail and labor?
Gov. STRONG. Yes, sir.

Representative TEN EYCK. Where does finance come in? Gov. STRONG. The charts indicate that when that first blow is struck at prices-that is, when materials accumulate, such as iron ore, farm products, oil, and other raw products-you will see by reading the figures that congestion is occurring. I am told-I have not verified this, and have not investigated it myself-but I am told that to-day oil is produced beyond the storage facilities to care

for it. It is being taken out of the ground faster than it can be cared for. The effect upon oil prices is common knowledge. They have come down sharply.

Representative TEN EYCK. But nowhere near to what they were before the war.

Gov. STRONG. It may come yet. But what I am leading up to in this discussion is that if you consider that the responsibility for bank management, from the standpoint of the bank of issue, applies to all the people of the country in all of their capacities and all of their activities, you must admit that the bank has got just as great a responsibility to those people who are consumers as it has to those who are more distinctly producers. That is the only sound fundamental law that we should keep in front of us all the time, I believe.

If we did operate the Federal reserve system-which we do notwith sole regard to prices, instead of resources and reserves and volumes of loans, and so on, what a one-sided operation it would be, and what a thoroughly unwholesome influence it would exert, to say that the only interest we should consider would be the interest of those who produce goods, and that we were going to ignore the wage earners, and the college professors, and clerks, etc., and even Members of Congress, if you please, who are on fixed salaries, and who, though there be rises in prices, have no increase in their incomes.

Now, I do not think that this discussion has brought out that feature of it, that the real remedy which we have always had in mind in dealing with this matter the real remedy-is to get a proper and orderly distribution of surplus stocks into consumption and at the same time enable this readjustment to take place to a lower cost of production and a lower living cost. I am arguing this, as will be clear to you, from the standpoint of those who attack the policies of the system; who claim we should have done something to correct these price disturbances.

Our point is that these price disturbances will correct themselves. Our job is to regulate credits. And I believe one of the most important elements in the interest of the farmer is to see that his cost of production comes down; and to the extent that our credit policy is reflected in the cost of living and production, that policy is defensible, even from the standpoint of price regulation, which we did not attempt.

Representative SUMNERS. I understand that the Federal reserve system is not the whole Government, nor the whole influence affecting prices?

Gov. STRONG. No, sir.

Representative SUMNERS. You have indicated that you have just one certain thing to do-to make some rulings.

Gov. STRONG. Yes.

Representative SUMNERS. But viewing the problem of the agricultural interests as a whole, and in line with your suggestion that marketing is part of the problem, even in this emergency, where the reserve banks serving the South are undertaking to do something to help the cotton situation, which includes with the surplus brought over from last year-I note this in a Dallas paper under date of August 3. The headlines preceding the statement indicate

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