Appendix

As central bankers, of course, charged with re sponsibility for our monetary and credit policies, we have the question of gold under more or less constant surveillance. Most of the time, in recent years, we have been under attack from two sides because of our attitude toward gold. Those interested primarily or initially in the price of gold, and in what they call a free gold market, have fired from one side. Those interested primarily and eternally in gold coin convertibility-in a full and automatic gold standard domestically and internationally-have fired from the other. J\fore recently, we have had a brief respite from attack while these two groups fired at each other, each group arrogating to itself responsibility for the only true gospel according to St. Midas. What I have to say will probably bring that brief respite to an end. The fire will again be concentrated on the mone tary authorities., for whom I cannot presume to speak except as one individual engaged in the practice of central banking, but who will, no doubt, be blamed for my views.

Let me take account of each of these two groups separately; those who concentrate, at least initially, on a free gold market, and those who will have none of this heresy, but who want a fixed and immutable 228 THE TRIUMPH OF GOLD gold price and convertibility of currency-and there fore of bank deposits-into gold coin. The first group, which includes the gold miners, makes its argument on several grounds, trying to combine economics and psychology with self-interest. Let me paraphrase their principal arguments as pTe sented at hearings on bills to permit free trading in gold in the United States and its territories. In this way I may avoid the fact as well as the appearance of building straw opponents. T1?e arguments most frequently presented in favor of these bills were: r1ill ;If l' :' · 1. In the face of rising production costs and fixed selling prices, the gold mining industry has been forced to curtail its operations, and to the extent that it has operated, its profits have been reduced. The higher gold prices which would presumably prevail in a free market would correct this situation. This is the "do something for the gold miners" argument at its baldest.

When this argument is embroidered a little, it is claimed that since the prices of all goods and services have increased so substantially during the past ten or fifteen years, it is. necessary to open the way for an increase in the price of gold so as to be sure there will be enough gold to carry on the country's business; to bring the price of gold into adjustment with the prices of everything else. 2. A second group of arguments expresses concern over the unsettling effects of the "premium" prices 229 THE TRIUMPH OF GOLD which are paid for gold abroad, and claims that a free gold market in the United States, with no gold export restrictions, would cause these premium markets abroad to disappear, with beneficial effects upon world trade and international relations. 3. Third, there is an argument in equity-that gold miners should be allowed to sell their product at the best price they can obtain, as do producers of other products; and that American citizens" like the citizens of most other countries, should be free to hold or to buy and sell gold.

4. Finally, there were those who viewed and fa vored a free gold market as a first step in the direction of a full gold coin standard, and who held that even a free market '\vould act as a "fever chart" of the economy and lead to reform of extravagant Govern ment fiscal policies, remove inflationary tendencies fostered by a managed currency, and lead to sounder conditions, generally. To take these arguments up in order, it should be pointed out right away that it is quite possible that a free market for gold in the United States would not result in a rise in the price of gold, if for no other reason than that the Secretary of the Treasury is required, by law, to maintain all forms of United States money at parity with the gold dollar which contains 1/35th of an ounce of fine gold. This means that the Treasury should maintain the price of gold at $35 a fine ounce in legal gold markets in the United States. To do this, if there were a legal free 230 T·HE TRIUMPH OF GOLD market for fine gold, the Treasury should sell gold to the extent necessary to maintain the market price at $35 a fine ounce. We might, therefore, get what would be in effect gold convertibility by way of a free market, but not a rise in the price of gold. Aside from this possible outcome of the establishment of a free market for gold, what is it we are being asked to do? In effect we are being asked to do something to benefit the gold mining industry, to encourage a shift of productive resources, in this and other coun tries, into gold production, in order to provide gold for hoarding. This, I submit, would be a witless proceeding, in terms of the welfare of the whole economy, matched only by our bonanza provisions for the special benefit of the miners of silver.

As for the economic embroidery of this request for aid to the gold mining industry, there is no lack of monetary means of carrying on the business of the country, nor is there likely to be. It is the economics of perpetual inflation to argue that a rise in the commodity price level should be followed by an arbitrary increase in the price of gold and hence in the reserve base, thus permitting and, perhaps, pro moting additional deposit expansion and a further upward movement of prices. Even on the basis of statistics, which are not always reliable or comparable, it is interesting to note that the increase in the price of gold in the United States, in 1934, raised the price of gold by 69 per cent, whereas wholesale prices in the United States are now only 60 per cent above 281 THE TRIUMPH OF GOLD the 1927-29 level. We have been plagued, if anything, with an oversupply of money in recent years, and the United States gold stock, at the present price, is large enough to support whatever further growth in the money supply may be needed for years ahead.

The second group of arguments has to do with the desirability of knocking out of business the pre mium markets in gold which have existed and still exist in various foreign countries. I share the general dislike of these markets because they are parasites on the world's monetary system and help to siphon into gold hoards the resources of people who need food and clothing and equipment-and who wouldn't need so much help from us if they didn't use scarce foreign exchange to buy gold for private hoards. But I don't think the soundness nor the stability of the United States dollar is actually brought into question by these premium markets. At our official purchase price for gold-$35 a fine ounce-the United States has been offered and has acquired more gold than the total world production (excepting the U.S.S.R. for which reliable data on gold production, as on everything else, are not available), since 1934, the year of our devaluation. During those years-1934 to 1948 inclusive-estimated world gold production, valued at United States prices, was about $13.5 billion and United States gold stocks increased $16 billion.

Most of the producers and holders of gold have been quite willing to sell us gold for $35 a fine ounce despite the quotations of $45 and $55 and so on up 2B2 THE TRIUMPH OF GOLD in the premium markets. The fact is that these pre mium markets represent insignificant speculative ad ventures around the fringe of the world supply and demand for gold. They reflect mainly the urgent and often illegal demands of a small group of hoarders, together with some private demand for gold to be used in relatively backward areas, or areas where the forms of civilized government have broken down, and where the metal serves the needs of exchange -or hoarding-better than a paper note. I do not think there would be any appreciable stimulus to United States gold production, if we opened the doors of this largely clandestine trade to our domestic gold miners. But, by legalizing it, we might well create what weare trying to destroy-uncertainty about the stability of the dollar and our own intentions with respect to its gold content.

The third argument-that the miners of gold should be free to sell their prQduct at the best price they can get-is probably the giveaway. It is the argu ment that gold should be treated as a commodity when you think you can get a higher price for it, and as a monetary metal and an international medium of exchange when you want a floor placed under its price. I would say that you can't have it both ways. If you want the protection of an assured market at a fixed price, because gold is the monetary metal of the country, you should not ask permission to en danger the stability of the monetary standard by selling gold at fluctuating prices (the gold producers 233 THE TRIUMPH OF GOLD hope higher prices) in a fringe free market. Under present conditions, the only real price for gold is the price the United States Treasury is prepared to pay for it. So long as that is the case, there is no sense in a "make believe" free gold market, in which pos sible temporary or short-run deviations from the fixed price of the Treasury might have disturbing conseq uences.

Nor is the argument that citizens of the United States should have the same privileges as the citizens of other countries, when it comes to holding or trad ing in gold, at all convincing to me. It is true that in a number of foreign countries the holding of gold by private citizens is legal, and in some foreign coun tries strictly internal free trading in gold is permitted. In many cases, however, this merely represents the shifting around of a certain amount of gold which is already being hoarded in the country, since in practically all of these countries the export and im port of gold on private account is either prohibited or 'subject to license. And, in many countries where gold is produced, some percentage, if not all, of the newly mined gold must be sold to the monetary authorities, a requirement which further limits the amounts available for trading and hoarding. These restricted and circumscribed privileges in other coun tries are no reflection of a loss of inalienable rights by our people. They are attempts by these foreign countries to adjust their rules with respect to gold to their own self-interest and, so far as possible, to 234 THE TRIUMPH OF GOLD the habits of their people, all under the sheltering umbrella of a world gold market and a world gold price maintained by the Treasury of the United States. We have deemed it wise to maintain such a fixed point of reference, in a disordered world. We have decided by democratic processes and by Con gressional action, that this policy requires, among other things, that gold should not be available for private use in this country, other than for legitimate industrial, professional, or artistic purposes. We have decided that the place for gold is in the monetary reserves of ,the country, as a backing for our money supply (currency and demand deposits of banks), and as a means of adjusting internationai balances, not in the pockets or the hoards of the people. If we want to reverse that decision, the means of reversal are at hand, but it should be a clear cut and a clean cut reversal, restoring convertibility. Providing a de pendent free gold market, in which gold miners and a little gold group of speculative traders or frightened gold hoarders (such as those who now take advantage of a provision in the regulations to buy and sell "gold in the natural state") could carry on their business is not the way to meet the problem.

I do not propose to get in the cross fire of those who claim that a free gold market would be a step toward convertibility, and those who claim that a free gold market, without free coinage at a fixed price, would cause us to lose whatever modicum of a gold standard we now have and lead to monetary 235 THE TRIUMPH OF GOLD chaos. That is one of those doctrinal arguments in which the subject abounds. I will merely say here that I think authorization of a free gold market in this country, with no change in the present responsi bility of the Secretary of the Treasury to maintain all forms of money coined or issued by the United States at parity with the "gold dollar", would proba bly lead indirectly to convertibility. The desirability of doing this is another matter, which I shall now try to discuss briefly and dispassionately. This is a hazard ous attempt because there is no subject in the field of money and banking which so arouses the passions, and which so readily defies brief analysis.

Two groups of arguments for the reestablishment of a gold coin standard may, perhaps, be distinguished in the writings and speeches of those who propose it, one group relating primarily to the domestic econ omy and one to the probable effects on international trade and finance. In the first group the arguments run about as follows: 1. Replacement of our "dishonest", inconvertible currency with an "honest" money having in trinsic value would promote confidence in the currency, and encourage savings, investment, long-time commitments, and production. 2. Irredeemable paper money leads to inflation, whereas the upper limits imposed upon cur rency and credit expansion by a thoroughgoing 236 THE TRIUMPH OF GOLD gold standard serve as a restraining influence on irresponsible politicians and over-optimistic businessmen. 3. Present Government taxing and spending poli cies are wrong, and dangerous. The gold stand ard would put a brake on public spending.

4. As a corollary of the preceding argument, since the gold standard would hinder further exten sion of Government control "and planning, it is a necessary implement of human liberty. The second group of arguments, relating to the international advantages of a gold coin standard, gen erally make no distinction between the effects of a unilateral adoption of such a standard by the United States, and the multilateral establishment of an un restricted gold standard by many countries, and of exchange rates fixed by such a standard. The argu ments run somewhat as follows: 1. The existence of premium markets in gold' abroad and the lack of gold convertibility at home creates-and is representative of-lack of confidence in the gold value of the-dollar. In" the absence of a" thoroughgoing gold coin stand ard we cannot convince anyone that we may not devalue the dollar. 2S7 THE TRIUMPH OF GOLD 2. Restoration of "normal" patterns of interna tional trade is being retarded by the inconverti bility of currencies in terms of gold and, there fore, one with another. This inconvertibility has led to tariffs, quotas, exchange controls, and to general bilateralism.

3. Under a. managed paper currency system there is always the temptation to solve national prob lems by devices which lead to international dis equilibrium. This, in turn, has led to domestic devices restrictive of foreign trade. The inter national gold standard, by eliminating the need for restrictive commercial policy, would increase the physical volume of international trade, re sulting in an improved division of labor and higher standards of living for everyone. First, let me say that I perceive no moral problem involved in this question of gold convertibility. Money is a convenience devised by man to facilitate his economic life. It is a standard of value and a medium of exchange. Almost anything will serve as money so long as it is generally acceptable. Many things have served as money over the centuries, gold perhaps longest of all because of its relative scarcity and its intrinsic beauty. In this country we still retain some attachment to gold domestically, and more in ternationally, but to carry on our internal business we use a paper money (and bank deposit accounts) 238 THE TRIUMPH OF GOLD which has the supreme attribute of general accepta bility. There is no widespread fear of the soundness of the dollar in this country, no widespread flight from money into things. The constant cry of wolf by a few has aroused no great public response. Sav ings, investment, long-term commitments, and the production and exchange of goods have gone forward at record levels.

Much of the nostalgia for gold convertibility is based, I believe, on fragrant memories of a state of affairs which was a special historical case; a state of affairs which no longer exists. This great period of gold convertibility in the world was from 1819 to 1914. It drew its support from the position which Great Britain occupied, during most of the 19th century and the early part of the 20th century, in the field of international production, trade, and finance. The gold coin standard flourished because the organization of world trade under British leader ship provided the conditions in which it could, with a few notable aberrations, work reasonably well. The ability of the British to sustain, to provide a focal point for this system has been declining for many years, however, and the decline was hastened by two world wars which sapped the resources of the British people. The heir apparent of Great Britain, of course, was the United States, but up to now we have not been '-able to assume the throne and play the role. And until some way has been found to eliminate the lack of balance between our economy 239 THE TRIUMPH OF GOLD and that of the rest of the world, other than by gifts and grants in aid, we won't be able to do so. This is a problem of unravelling and correcting the in fluences, in international trade and finance, which have compelled worldwide suspension of gold con vertibility, not vice versa. The job before us now is to attack the problems o[ trade and finance directly.

We should not deceive ourselves by thinking that gold convertibility, in some indefinable but inexora ble way, could solve these underlying problems for us. Nor is it true, of course, that gold convertibility prevented wide swings in the purchasing power of the dollar, even when we had convertibility. \Vithin my own experience and yours, while we still had a gold coin standard, we had tremendous movements in commodity prices, up and down, which were the other side of changes in the purchasing power of the dollar. 'Vhat happened to us in 1920-21 and 1931 33 under a gold coin standard should prevent a too easy acceptance of that standard as the answer to the problem of a money with stable purchasing power. When you boil it all down, however, and try to eliminate mythology from the discussion, the prin cipal argument for restoring the circulation of gold coin in this country seems to he distrust of the money managers and of the fiscal policies of Government.

The impelling desire is for something automatic and impersonal which will curb Government spending and throw the money managers out of the temple, as 240 THE TRIUMPH OF GOLD were the money changers before them. To overcome the inherent weakness of human beings confronted with the necessity of making hard decisions, the gold coin standard is offered as an impersonal and auto matic solution. Through this mechanism the public is to regain control over Government spending and bank credit expansion. It is claimed that whenever the public sensed dangerous developments, the re action of many individuals would be to demand gold in exchange for their currency or their bank deposits. With the monetary reserve being depleted in this way, the Government would be restrained from defi cit financing through drawing upon new bank credit; banks would become reluctant to expand credit to their customers because of the drain on their reserves; and the Federal Reserve System would be given a signal to exert a restraining influence upon the money supply. In this way, Congress, the Treasury, and the Federal Reserve System would be forced by indirection to accept policies which they would not otherwise adopt.

In effect, under a gold coin standa~d, therefore, the initiative for overall monetary control would through the device of free public withdrawal of gold from the monetary reserve, be lodged in the instinctive or specu lative reactions of the people. No doubt some people would take advantage of their ability to get gold. There would be many reasons f.or their doing so. Conscientious resistance to large Government spend ing, or fear of inflation, might well be among· these 241 THE TRIUMPH OF GOLD reasons. But speculative motives, a desire for hoards (however motivated), and such panic reactions as are generated by unsettled international conditions or temporary fright concerning the business outlook or one's individual security-all of these, and more -would be among the reasons for gold withdrawals. The gold coin mechanism does not distinguish among motives. Whenever, for any reason, there was a de mand for gold, the reserve base of the monetary system would be reduced. Moreover, if only the United States dollar were convertible into gold while practically all other currencies were not, hoarding demands from all over the world would tend to con verge upon this country's monetary reserves. Circum vention of the exchange controls of other countries would be stimulated, and dollar supplies which those countries badly need for essential supplies or for de velopment purposes would be diverted to the selfish interests of hoarders.

Even if a particular reduction in the reserve base did occur for useful "disciplinary" reasons, the impact of such gold withdrawals upon the credit mechanism is likely to be crude and harsh. Since the present ratio between gold reserves and the money supply is about one-to-five, and since some such ratio will be in effect so long as this country retains a fractional reserve banking system, a withdrawal of gold coins (once any free gold is exhausted) will tend to be multiplied many times in its contractive effect on bank credit and the money supply. In a business recession, the 242 THE TRIUMPH OF GOLD Reserve System might undertake to offset this effect as it does now in the case of gold exports but, if the gold withdrawals attained sufficient volume, _the shrinking reserve position of the Federal Reserve Banks-would eventually prevent them from coming to the rescue. It was, in part, to offset such arbitrary and extreme influences upon the volume of credit, and to make up for the inflexibility of a money supply based on gold coins (in responding to the fluctuating seasonal, regional, and growth requirements of the economy) , that the Federal Reserve System was initially estab lished. During the first two decades of its existence, the System devoted much of its attention to offsetting the capricious or exaggerated effects of the gold move ments associated with continuance of a gold coin standard. We had an embarrassing practical experi ence with gold coin convertibility as recently as 1933, when lines of people finally stormed the Federal Re serve Banks seeking gold, and our whole banking mechanism came to a dead stop. The gold coin stand ard was abandoned, an international gold bullion standard adopted, because repeated experience has shown that internal convertibility of the currency, at best, was no longer exerting a stabilizing influence on the economy and, at worst, was perverse in its effects.

Discipline is necessary in these matters but it should be the discipline of competent and responsible men; not the automatic discipline of a harsh and perverse mechanism. If you ·are not willing to trust men with 243 THE TRIUMPH OF GOLD the management of money, history has proved that you will not get protection from a mechanical con trol. Ignorant, weak, or irresponsible men will per vert that which is already perverse. Here, I would emphasize my view that the integrity of our money does not depend on domestic gold convertibility. It depends upon the great productive power of the American economy and the competence with which we manage our fiscal and monetary affairs. I suggest that anyone who is worried about the dollar concentrate on the correction of those tendencies in our economic and political life which have brought us a deficit of several billion dollars in our Federal budget, at a time when taxes are high and produc tion, employment, and income are near record levels.

I suggest that, going beyond the immediate situation, they address themselves to the difficult problem of the size of the budget, whether in deficit or surplus or balance. At some point the mere size of the budget, in relation to national product, can destroy incentives throughout the whole community, a dilemma which is even now forcing curtailment of Government expenditures by the Labor government in Great Britain. These are problems gold coin convertibility cannot solve under present economic and social con ditions. Gold has a useful purpose to serve, chiefly as a medium for balancing international accounts among nations and as a guide to necessary disciplines in international trade and finance. It has no useful purpose to serve in the pockets or hoards of the 244 THE TRIUMPH OF GOLD people. To expose our gold reserves to the drains of speculative and. hoarding demands at home and abroad strikes me as both unwise and improvident.

Perhaps before I let go of this subject, which has held me and you overlong, I should say a word about merely raising the price of gold, without doing any thing about a free gold market or gold coin converti bility of the currency. This is something which has intrigued Europeans and others who are "short of dollars", has interested some of our own people, and has become· a Sou th African war cry. An increase in the price the United States pays for gold would have two major results. It would provide the gold pro ducing countries (and domestic producers) , and the countries which have sizable gold reserves or private hoards, with additional windfall dollars with which to purchase American goods. And it would provide the basis for a manifold expansion of credit in this country which might be highly inflationary. We have been engaged in an unprecedented pro gram of foreign aid for the past four years. The Con gress has authorized this aid at such times and in such amounts as were deemed to be, in the interest of the United States. This is much to be preferred, I suggest, to the haphazard aid which would be granted by an increase in the price of gold, which must be on the basis of a more or less accidental distribution of existing gold stocks and gold producing capacity. If we raised the price of gold, every country which holds gold would automatically receive an increase in the 245 THE TRIUMPH OF GOLD number of dollars available to it. The largest increas~ would go to the largest holders which are the Soviet Union, Switzerland, and the United Kingdom. Every country which produces gold would automatically receive an annual increase in its dollar supply, and its gold mining industry would be stimulated to greater productive effort. The largest increases would go to the largest producers which are South Africa, Canada, and probably the Soviet Union. That would be an indiscriminate way to extend our aid to foreign countries, both as to direction and as to timing.

The domestic results of an increase in the price of gold would be no less haphazard. This country, as I have said, is not now suffering from a shortage of money and it has large gold reserves, which could form the basis of an additional money supply if we needed it. An increase in the dollar price of gold would increase the dollar value of our existing gold reserves in direct proportion to the change in price. There would be an immediate "profit" to the Treas ury. The "profit" could be spent by Congressional direction or Treasury discretion. This would provide the basis for a multiple expansion of bank credit which, unless offset by appropriate Federal Reserve action, would expose our economy to the threat of an excessive expansion of the domestic money supply. The arbitrary creation of more dollars in this way would certainly be inappropriate under inflationary conditions, and would be an ineffective method of combating a deflationary situation.

246 THE TRIUMPH OF GOLD At the moment, also, we should have in mind that there has just been an almost worldwide devaluation of currencies. Using the fixed dollar as a fulcrum~ individual foreign countries have taken action de signed to improve their competitive position vis-a.-vis the United States, and to maintain their competitive position vis-a.-vis one another. An increase in the dollar price of gold, which is devaluation of the dollar by another name, would undo the possible benefits of a venture in improved currency relationships which already has its doubtful aspects. For all of these reasons it is encouraging to know that the Secretary of the Treasury has recently re iterated· that the gold policy of the Uni ted States is directed primarily toward maintaining a stable re lationship between gold and the dollar, and that for all practical purposes only the Congress can change that relationship. We have maintained an interna tional gold bullion standard by buying and selling gold freely at a fixed price of $35 a fine ounce in transactions with foreign governments and central banks for all legitimate monetary purposes. This has been one fixed point in a world of shifting gold and currency relationships. We should keep it that way as another contribution to international recovery and domestic stability.

This whole discussion of gold has been a long wind-up for what maY·now seem to you like a ~mall pitch. I want to end my remarks with a few words about the Federal Reserve System and the relations 247 THE TRIUMPH OF GOLD of your organization and yOll, as bankers and citizens, with that System. In my gold discussion I tried to emphasize what seems to me to be a fundamental proposition in the case of a country with the domestic and international strength of the United States. We can't have, or we don't want, both an automatic gold coin standard and discretionary control of the reserve base by a monetary authority. The existence of two independ ent and frequently incompatible types of control over the reserves of our banking system is undesirable.· In the light of that finding we abandoned the gold coin standard as a control over the domestic money supply, and placed our reliance in monetary manage ment by the Federal Reserve System. I think it has become established American policy that a principal means of Government intervention in the economic processes of the country is the administration of broad credit powers by the System. In this way a pervasive influence may be brought to bear on our economy, without intrusion upon specific transactions between individuals, which is likely to be the conse quence of more detailed physical controls, and which would spell the end of democratic capitalism as we have known it.

I have thought it reasonable to assume that the' public in general, and· bankers in particular, clearly recognized the special place of the System in our economy. The fact that the development of a national monetary and credit policy is the responsibility of 248 THE TRIUMPH OF GOLD the Federal Reserve System should fix its place be yond question. This is not a function which can be split up and passed around. Many of the activities of other Government agencies engaged in making or guaranteeing loans, or conducting bank exami nations, or insuring bank deposits, have a bearing on the way monetary policy works, but monetary policy, as such, is one and indivisible. It is only the super visory and service functions performed by the Federal Reserve System which are comparaple to the oper ations of these other Government agencies. The dis tribution of these incidental duties among such agencies can be largely determined by administrative convenience, historical precedent, and economy of operation, so long as there are arrangements for con sultation to avoid unnecessary differences in policy and practice. But overall responsibility for holding the reserves of the banking system, and influencing the creation of credit by varying the cost and avail ability of those reserves, can only reside in the one agency designated by Congress as the national mone tary authority. The Federal Reserve System is not just one of a number of Federal agencies having to do with banking. Its duties and responsibilities are unique; they range over the whole of our economy and touch the lives of all our people.

I was somewhat dismayed, therefore, by recent re ports that the American Bankers Association seemed to hold a different or opposite view. It is reported to have recommended to the Congress the maintenance 249 t'HE TRIUMpH OF GOLD of parity of compensation of the three Federal bank supervisory agencies (Board of Governors of the Federal Reserve System, Board of Directors of the Federal Deposit Insurance Corporation, and the Comptroller of the Currency), on the theory of equal pay for equal work; equal pay for sharing equally heavy responsibilities. I mean no disrespect of the Office of the Comptroller of the Currency, nor of the Federal Deposit Insurance Corporation, when I say there is and can be no such equality of responsibility. The bank supervisory duties of the Federal Reserve System are a distinctly minor part of its work. There is no desire to increase or add to those duties against the wishes of the banks or the best interests of the public. To represent the Federal Reserve System as just another bank supervisory agency, in the name of maintaining proper checks and balances in Federal bank supervision, seems to· me to miss, and to mis represent, the main reason for our being.

I mention this small but significant item first, because it cuts across the whole concept of the Federal Reserve System and, therefore, cuts across the whole range of our relationships with you. There are other points of apparent difference where we seem to be at odds, or not pulling together effectively, because of mistrust, or lack of proper consultation, or inade quate study of the broad aspects of the questions with which we are mutually concerned. I shall touch on a few of them. Concentration-of Power-The picture of a Federal 250 THE TRIUMPH OF GOLD Reserve System trying to arrogate power to itself, which at times you have painted, obscures the real picture. The real· picture would show a Federal Re serve System trying hard to keep its powers in work ing order so that it can discharge its responsibilities as a monetary authority, with a measure of inde pendence from the pressures of partisan political aims and the exigencies of managing a Federal debt which totals about 255 billion dollars and, unfortunately, is growing. To lump the Federal Reserve System with the other bank supervisory agencies at Wash ington, and to play one against the other, is not an attack on the real concentration of power; it is giving aid and comfort to those who would seize upon the failure of monetary and credit controls as a pretext for fastening more direct controls upon our economy.

Organization of the Federal Reserve System-I have been at one with many of you in my opposition to undue centralization of control of the Federal Re serve System by the Board of Governors at Washing ton. In testimony before Congressional committees and in public statements, I have affirmed my belief that we can have in the Federal Reserve System a wise blend of national authority and regional re sponsibility, of Government control and private par ticipation. I think we shall do well to retain and to improve the regional characteristics of the System, both in matters of decentralized operation and, more important, in matters of national credit policy. I should like to see the bankers of the country, and this 251 THE TRIUMPH OF GOLD organization of bankers, give some more thought to this problem, and I should like them to offer some constructive suggestions concerning it. The climate may be right for its calm consideration.

Reserve Requirements-The Federal Reserve Sys tem is charged with the responsibility of formulating and administering national credit policy. It does this chiefly through its influence upon the cost and avail ability of bank reserves. This is a proper exercise of Federal power, and its point of incidence is upon the commercial banks of the country because only they, among all of our financial institutions, have the ability to add to or subtract from the money supply of the nation. I question whether there is good and sufficient reason for exempting any commercial banks from a minimum participation in this national under taking. It only requires a moderately sharp pencil and a grammar school knowledge of arithmetic to figure out how you can save money by not being a member of the Federal Reserve System, as things now stand. But I don't think this country really likes "free riders," and nonmember banks, in that sense, are "free riders". I know the objections to compulsory membership in the Federal Reserve System, I recog nize some of its dangers, and I think it is probably politically impossible. But it should not be beyond our ingenuity to devise appropriate powers of fixing reserve requirements, to be exercised within statu tory limits by an appropriate body within the Federal Reserve System; reserve requirements which would 252 THE TRIUMPH OF GOLD be adequate for our national purpose" and which would apply to member and nonmember banks alike.

Here is another instance, I believe, where your theory of check and balance runs the danger of being all check and no balance. And let it be clear that this is no attack on the dual banking system. State member banks have lived within the Federal Reserve System for years, and submitted to its reserve requirements, without loss of identity. We welcome this continued relationship. Nor am I .frightened by the existence of a fringe of nonmembers, and the ability of State banks to move from one group to the other. A mass exodus of State member banks from the Federal Reserve System seems to me to be so unlikely as to be outside the range of practical con sideration. But I do think that all commercial banks have a common obligation and a common responsi bility in this matter of reserve requirements, and that they should assume the obligation and share the responsibility. Correspondent Bank Relationships-Somehow there has grown up a feeling in some places that we in the Federal Reserve System are out to undermine the network of correspondent bank relationships which you have built up over the years. Every time we sug gest some change in the method of assessing reserve requirements, or make some minor improvement in our check collection system, or in our methods of providing coin and currency, or in some other detail of our operations, the question seems to be raised. I 258 l'HE TRIUMPH OF GOLD can assure you that these things are suggested or done in an effort to improve the efficiency and economy of our operations in terms of the whole banking sys tem, the business community, and the general public.

There is no hidden purpose. We recognize that there are some things which correspondent banks can do better than we can, and we are glad to have them perform these services. At the same time we would caution them against competition in providing serv ices which really do not pay their way, and remind them that there are some things which, perhaps, the Federal Reserve System can do better than they. Surely here is an area, if our motives be reasonably pure on both sides, where there is no need for friction between us. Selective Credit Controls-We have differed on the matter of selective credit controls or, more specifi cally, on the matter of control of consumer instal ment credit. I have advocated the continuance of the control which the Federal Reserve System exercised, briefly, over consumer instalment credit. I would be concerned over the dangers of any further significant extension of selective controls, whether over the credit used in commodity markets, in real estate transactions, in inventory financing, or in other forms of business lending. Requests for further powers should meet two tests-is the power really needed and will its use still leave an effectively functioning private economy? I have argued and still believe that control of consumer instalment credit meets these 254 THE TRIUMPH OF GOLD testS. Your official position has been opposed to this view. I would ask you, however, whether you are happy about the way things are now going in this field of finance. I am not. I suggest that we might sit down together and reexamine the problem to our mutual advantage and to the advantage of the public which we both serve.

These are some of the matters which I think de serve your constructive attention. A negative ap proach has been and will continue to be effective in stopping the passage of individual pieces of legisla tion, which you happen to dislike, but it won't check the progress of the idea of Government controls and intervention, if you have little constructive to offer in the face of difficult economic problems. Over the years you will win a lot of battles but you will lose the war. I recognize and share your dislike for Government controls and your distrust of too much centralized power. But I recognize} as ] think you must} that a certain amount of Government intervention is neces sary to the preservation of our political and economic system. The central problem in our country, and in all countries but Russia and its satellites, is how far such Government guidance and control can go with out destroying the effective functioning of a private economy. In this country, with our traditions of indi vidual enterprise, we have preferred to keep such guidance to a practical minimum, and to have it exercised largely through broad and impersonal con..

256 THE TRIUMPH OF GOLD troIs-controls which affect the general environment. One cornerstone of such a philosophy is a competent and adequately powered monetary authority which can administer an effective monetary policy. In making monetary policy work to the limit of its capacity, we have one of the best defenses against control by Government intrusion in our persona] and private affairs. That is why I should like to see the American Bankers Association adopt an affirmative, constructive attitude toward the Federal Reserve System. If you don't like it, as it stands, put some real time and effort into the study of ways to improve it-its per sonnel, its powers, its organization, its functioning. In such an undertaking you will have the coopera tion of all of us who are devoting our lives and our energies to what we believe to be a worthwhile public service. In the struggle o/ideas and ideals which now divides the world this is a minor front. But 'it is a fighting front. It is no place for a neutral.

256 Index Aftalion, 69 Allais, 162, 163 Anderson, Benjamin, 23 Aron, Raymond, 218 Benda, Julien, 38 Berkeley, 94 " Bernstein, Ed., 13, 34 Bevin, Ernest, 100 Blackett, Sir Basil, 123 Burgess, Randolph, 4, 221 Buss.chau, 53, 88, 100, 152 Carre, 117 Cassel, Gustav, 161 Churchill, Winston, 165 Colson, 131 Courtin,68 Edison, 121 Eisenhower, 216, 219 Fisher, Irving, 69 Fouche, 96 Galliani, 128 Gascuel,58 Havenga, 204 Hazlitt, Henry, 4, 42 Herbette, 112 Hoover, Herbert, 218 Jacobson, Per, 33 Johnson, 152 Keynes, Lord, 25, 35, 52, 72,95, 10~ 120, 128, 138,144,145,147, 148, 149, 165,166, 167, 169, 170, 189, 191, 194 Kitchin, 165 Knapp, 138 Labruyere, 107 La Fontaine, 107 Law, John, 2, 97, 98, 107, 117,118,119,120,122, 125, 126, 138, 144, 149, 151, 154, 155, 157, 158, 15~ 16~ 168, 169, 17~ 191 Leith Ross, Sir Frederick, 184 McLeod, 169 McManus, F. T., 10 Malthus, 127 257 Yeats, William Butler, 50 Tooke, 161, 206 Triffin, 7, 33, 34 Voltaire, 189 .Wagner, Richard, 107, 160 Wolf, Robert, 197 Saint-Chamans, 145, 146 Saint-Simon, 117 Say, Jean-Baptiste, 166 Schacht, 147, 171, 173 Schwartz, George, 19 Sedillot, Rene, 60 Slichter, 84 Solvay, Ernest, 127 Simiand, Fran~ois, 120, 125 Sproul, Allan, 2, 3, 6, 9, 10, 11, 19,21 THE TRIUMPH OF GOLD Montague, Samuel, 156 Rothschild, 99 Montesquieu, 97, 191 Nelson, R. W., 10 N ewmarch, 192 Nietzsche, 107 Palyi, Melchior, 20 Phillips, C. A., 10 Pinay, 191, 194,202,216, 219 Poincare, 59, 80, 196 Proudhon, 159 Raschin,69 Reed, Harold R., 12 Ricardo, 69, 128, 142, 161, 166, 199 Robbins, Lord Lionel, 18, 23,26 Robertson, D. H., 11, 13, 18 Roosevelt, President, 92, 110, 117 258