Dr. BECKHART. I do not propose to defend the monetary policy of Republican administrations from 1921-33. They made mistakes in their cheap-money policies, just as the Roosevelt administration has erred. The difference in degree, however, has been so great as to make for a difference in kind.

Mr. WHITE. Was money cheap during the Hoover administration? Dr. BECKHART. Money market rates fell during that administration. We reached a low point in 1932.

Mr. WHITE. Is it not axiomatic that low interest rates indicate a shortage of money in business?

Dr. BECKHART. No; not at all. Low interest rates correlate directly with the excess reserves held by the banking system.

Mr. WHITE. If money is easy to obtain and prices are satisfactory, and people can make money in business, they not so much interested in a low interest rate. They are willing to pay a liberal interest rate if they can make a profit; but if money is scarce and hard to obtain, and there is no profit in business, and prices are falling, nobody can afford to borrow at even 1 percent, because he is going to lose in the operation.

Is it not plain to any observer that a low interest rate is indicative of prostration in the money supply of the country?

Dr. BECKHART. It seems to me that you have brought up an entirely different point.

Mr. WHITE. I do not want to go into that.

Mr. ANDRESEN. Let him answer the question. I am interested in any answer he may make.

Dr. BECKHART. What you are discussing now is an entirely different point. It relates to the activating effect of a low interest rate on business. That is something entirely different from the point we were discussing.

We have been discussing why rates of interest were low in the money market, not what effect those low rates might have on business activity. In other words, we have been discussing why the Government can sell its securities at such low interest yields, as low as fifty one-hundredths of 1 percent and less.

The answer is that the monetary policy of the administration, in raising the price of gold from $20 to $35 an ounce, which has been accompanied by huge gold purchases, plus the silver-purchase program, has brought about a situation in which member banks have huge excess reserves. Those excess reserves now amount to $3,440,000,000 and are likely to increase higher this year by virtue of continuing gold imports and also by virtue of the fact that the Government is expending its balances held with the Federal Reserve banks.

Mr. WHITE. You do not think you are overlooking the chief factor?

Dr. BECKHART. What is it?

Mr. WHITE. The absorption of all investment money in the country by tax-exempt securities, which prevents people from putting their money into constructive enterprises. The people are putting their money where they think it will be safe and tax exempt; and that induces a low interest rate, because there is no use, or little use,

for money, because very little money is going into constructive enterprise. It is all being absorbed by tax-exempt securities. That is a controlling factor, is it not?

Dr. BECKHART. I myself deplore the existence of tax-exempt securities of all kinds, but you now have begun to discuss forces of demand. I have been talking about forces of supply. They have to do with the present volume of excess reserves. The demand side of the equation has to do with the desire or the lack of desire on the part of a business community to borrow.

Mr. WHITE. The demand side is the controlling factor in the issuance of currency and credit, is it not? If there is no demand, money does not exist, because the banks do not create it.

Dr. BECKHART. In any problem we necessarily have to consider the forces of supply and demand and

Mr. WHITE. Your contention is, I believe, that we have an ample supply of currency and credit, but we are short of demand therefor. Is that right?

Dr. BECKHART. We must take cognizance of the present low volume of business borrowing and

Mr. WHITE. "A low volume of business borrowing" is another definition for a shortage of demand, is it not?

Dr. BECKHART. One has to consider all elements in the demand for loanable funds. You have considered only one element, namely, business demand for credit. If businessmen had confidence in regard to the future of economic conditions they, of course, would borrow from the banks, inasmuch as business activity would be higher.

There is another element in demand that we have not considered, and that is the Government demand for credit, which corresponds roughly to the fiscal deficits. A large volume of the public debt has been placed with the commercial banks.

Incidentally, I might add that I have figures on the proportionate amount of the public debt held by the banking system. I believe it was Mr. Sheppard who asked for data relative to the proportionate amount of the Government debt held by the banking system of this country and the proportionate amount of the debt held by the banking system in England.

In Great Britain, as of March 31, 1938, 14 percent of the central Government debt was held by the banking system. In this country, considering only commercial banks, not mutual savings banks, 39 percent of the public debt on June 30, 1938, was held by the banking system. In other words, England had a ratio of 14 percent and this country had a ratio of 39 percent.

Mr. WHITE. There is a straight fiduciary unsecured issued by the Bank of England amounting to $3,000,000,000, is not that a fact? Dr. BECKHART. No. It is one-half of that, or 300,000,000 pounds. Mr. WHITE. That is not covered by gold. It is only backed by eligible papers, is it not?

Dr. BECKHART. It is backed by Government securities-British Government securities.

Mr. WHITE. That is paper. There is no gold there. All the other British money is fully covered by gold, is it not?

Dr. BECKHART. Bank of England notes above the fiduciary issues are covered entirely by gold.

Mr. WHITE. Government fiduciary issues amounting to, as you say, 300,000,000 pounds are not covered by gold, as I understand.

Dr. BECKHART. The fiduciary issue amounts to 300,000,000 pounds and

Mr. WHITE. That works very successful in England, does it not? Dr. BECKHART. Yes. It must be remembered that in addition to the fiduciary issue there are about 226,000,000 pounds of Bank of England notes fully secured by gold. To the gold holdings of the Bank of England must be added

Mr. WHITE. I wish you would answer a few more questions for me. Now, as a matter of fact, as the law stands, if the Federal Reserve banks operated under normal conditions the Federal Reserve currency would be supported by eligible paper (interest-bearing obligations) with a 40-percent gold coverage, would it not?

Dr. BECKHART. What is your definition of "normal conditions"? Mr. WHITE. That is the only legal requirement, is it not, for the issuance of Federal Reserve currency-that it be supported by eligible paper, interest-bearing obligations, with a 40-percent gold coverage?

Dr. BECKHART. Federal Reserve notes must have a minimum goldcertificate coverage of 40 percent. At the moment gold certificates may or may not be redeemed in gold at the discretion of the Treasury, and may, at the discretion of the President, be redeemed in a smaller quantity of gold.

Mr. WHITE. In comparison with that, a silver certificate is redeemable in a silver dollar and is backed by the total amount of silver purchased by the Government, is it not?

Dr. BECKHART. A silver certificate is backed by the silver placed against the certificate. It is not backed by the silver in a general fund.

We have issued more silver certificates than are required by trade demands. Those figures are very interesting.

Mr. WHITE. You are digressing; but go ahead.

* Dr. BECKHART. "Since the beginning of 1934 we have issued about $1,200,000,000 in silver certificates. That information is taken from the recent annual report of the Federal Reserve Board. In the same period of time, silver certificates in circulation by which we mean outside of the Treasury and Federal Reserve banks, have increased by only $934,000,000. In other words, we have over-issued silver certificates by nearly $300,000,000, which has added to the excess reserves of the member banks.

129157-39--13

At this time I will insert in the record a table showing types of money in circulation. It says:"

Dr. BECKHART. In the same period of time Federal Reserve notes, which are a better form of currency, in my opinion, superior to silver certificates, have

Mr. WHITE. Let us defer consideration of that until later, if you will.

Dr. BECKHART. In the same period of time Federal Reserve notes, a better form of currency, in my opinion, superior in every respect to silver certificates, have increased by about $1,400,000,000. In other words, an increase of $934,000,000 in silver certificates against an increase of $1,400,000,000 in Federal Reserve notes, which cost member banks no more and no less than the silver certificates issued.

Mr. WHITE. With a backing of only 40 percent gold, that is a legal protection, is it not?

Dr. BECKHART. It is the legal minimum requirement. At the present time Federal Reserve notes are backed by more than a 100-percent gold-certificate reserve.

Mr. WHITE. Would you say that this currency-Federal Reserve notes-is sounder than silver certificates redeemable in silver dollars and their backing in the amount of extra silver bullion?

Dr. BECKHART. Federal Reserve notes are sounder and much to be preferred than silver certificates.

Mr. WHITE. It is hard to reconcile your statements with the facts. We know that in case of emergency all we could expect from the Government would be 40 percent in gold and some assets that may have a vanishing value in the redemption of Federal Reserve notes. It is difficult to harmonize or to agree with your statement.

Dr. BECKHART. Not at all. All the bearer of a silver certificate can get from the Treasury in redemption is 1 silver dollar that he can sell at the present time for 32 cents; whereas he has always been able to get, under the gold standard, 100-percent redemption in gold for his Federal Reserve notes.

Mr. WHITE. What could he get for it today?
Dr. BECKHART. At the present time he could get

Mr. WHITE. What could one get for a Federal Reserve note today? Dr. BECKHART. If he were exporting gold, he could get

Mr. WHITE. One has to be a foreigner in order to do that. Let us consider an American citizen. What could he get by way of redemption for a Federal Reserve note today?

* Dr. BECKHART. He could get another piece of paper.

"It must be remembered that at the present time all forms of paper money circulating in this country are interchangeable. One type will purchase just as much as another. It would be silly for anybody to redeem a $5 silver certificate in silver, the market value of which is $1.60, when he could use his silver certificate to purchase $5 worth of copper, rubber, tin, and so forth. A Federal Reserve note will purchase precisely the same. The only time that the holder might desire to redeem his silver certificate in silver would be at a time when the market value of silver went above the monetary value. And at such a time, I dare say, redemption would be stopped by the Treasury Department."

The CHAIRMAN. May I ask a question at this time?

Mr. WHITE. Certainly.

The CHAIRMAN. When we are on a gold standard, and we are not, a Federal Reserve note is better than a silver certificate; but when we are not on a gold standard, a silver certificate is better than a Federal Reserve note, is it not?

* Dr. BECKHART. I do not agree.

"All forms of paper money are interchangeable. All will purchase the same. The lack of contractility on the part of silver certificates, in my opinion, makes them inferior at the present time to Federal Reserve notes. As you may remember, in my prepared statement, I advocated a return to gold coinage and gold convertibility."

Mr. WHITE. What would one get today for a dollar in Federal Reserve currency if he took it to the Treasury?

Dr. BECKHART. All forms of money have a full legal-tender power. Mr. WHITE. It resolves itself into this: For a dollar in Federal Reserve currency, the only thing you could get for it would be another piece of paper or a silver dollar.

Dr. BECKHART. Could you at the moment sell your silver dollar, according to the present monetary rules and regulations?

Mr. WHITE. I agree with the restriction.

Dr. BECKHART. If one were engaged in foreign trade, and if the dollar were depressed in terms of the pound, we could use only gold bullion to settle that adverse balance. We would have to draw on our gold stock in Kentucky. Gold is the only international monetary currency that will settle adverse trade balances.

Mr. WHITE. Have you any assurance that the full amount of Federal Reserve currency would remain in circulation in times of business distress or depreciation, as would silver certificates?

Dr. BECKHART. When you speak of periods of distress, I presume you have in mind the condition we had in the banking holiday of

1933.

Mr. WHITE. I have in mind the contraction and expansion of currency and the contraction of credit.

Dr. BECKHART. The implication of your statement is that the American people would prefer silver certificates over Federal Reserve