Mr. WHITE. For that reason we are to conclude that the volume of currency in circulation has no effect on the price level?

Dr. BECKHART. I think that has been demonstrated since 1933. Mr. WHITE. Have you observed that when banks demand payment on notes and loans in time of financial stress, they are not interested in accepting further obligations, no matter what the security may be, but demand cash, and when the borrower has no sources from which to get cash, he must sacrifice his assets to obtain cash, which operates to lower prices? Do you subscribe to that?

Dr. BECKHART. No. Loans are not ordinarily repaid in currency. You have proceeded, Mr. White, from a discussion of the relationship of currency to prices to a discussion of bank credit and its relationship to prices.

The CHAIRMAN. I do not think we are getting anywhere with this discussion.

Mr. WHITE. The gentleman came here to give an exposition of his knowledge of money and credits, and if we cannot determine factual information as to the direct operation of the banks in supplying cash to business, and its effect on business, our time is being wasted.

The CHAIRMAN. I think this witness has completely revealed his position in regard to those questions. Those other questions are proper ones to ask, but they are not necessary, because we know the views of the gentleman, and that is all we want.

Mr. SHEPPARD. I make the point of order that it is now 12 o'clock, and the time of the witness is up.

The CHAIRMAN. The gentleman makes the point of order that it is 12 o'clock and the time limit placed upon the questioner is up.

Mr. WHITE. I should like to ask a few more questions, if you will permit me to do so.

The CHAIRMAN. The time of the gentleman has expired. We have to hear another witness this morning.

Mr. SMITH. May I ask two questions?

The CHAIRMAN. You may do so by unanimous consent.

Mr. SMITH. I ask unanimous consent to ask two questions.

The CHAIRMAN. Go ahead.

Mr. SMITH. I would like to have you explain the difference in the set-up of the stabilization fund of the United States and the equalization funds of Great Britain.

Dr. BECKHART. I would be glad to do that.

There is a very real difference as regards the origins and purposes of the two funds the British Exchange Equalization Account and the American Exchange Stabilization Fund. I think I can illustrate that best by putting a hypothetical balance sheet on the blackboard representing the British fund and a balance sheet representing the American fund.

The British fund was established in the middle of 1932. It was initially given the right by the British Government to issue Treasury bills, i. e., obligations of the British Government, up to £175,000,000. The British fund was not created out of a gold "profit," as was the American fund; it was a credit fund and was given the borrowing powers indicated. It could make treasury bills initially, as I have said, to the extent of £175,000,000. These were its assets; the off-setting liability was the capital of the fund that belongs to the

British Government. Borrowing powers were later indicated in the following table:

The exchange equalization account

raised as

NOTE. The original appropriation consisted of £150,000,000 of Treasury bills and £25,000,000 which remained in the old dollar exchange reserve. On the request of the Chancellor of the Exchequer, in May 1933, Parliament gave the account an additional £200,000,000 of Treasury bills. A similar increase of £200,000,000 of Treasury bills was authorized on June 28, 1937. The transfer of gold from the Bank of England to the account on Jan. 6, 1939, did not increase the account, but merely changed part of its assets from short-term Treasury obligations to gold. The first figures concerning the account's gold holdings were published in July 1937 and gave the holdings as of March 31 of that year. Publication of the account's gold holdings is now made twice a year. There is always a period of 3 months between the date of the report and its publication.

Source: The Economist, May 13, 1933; May 12, 1934; July 3, 1937; Jan. 7, 1939.

Dr. BECKHART. The British Fund sells the Treasury bills in the market, largely to the commercial banks. You will recall that this fund had the right, initially, to issue Treasury bills up to £175,000,000. Mr. WHITE. Backed by what security?

Dr. BECKHART. They were obligations of the British Government. Mr. WHITE. Were they backed by the general taxing power of the Government?

Dr. BECKHART. Yes. These obligations were sold in order to obtain deposit credits that were then used to prevent sterling exchange from rising inordinately high on the basis of the inflow of refuge capital to England. This was accomplished by using the pound deposits to buy francs or dollars.

Let us assume that the pound deposits were used to buy French francs, i. e., that the initial amount of £175,000,000 was converted. into francs. The fund, under this assumption, has a deposit credit in Paris instead of in London and the fact that the fund-bought francs would prevent the pound from rising. The fund would next convert the franc deposits into gold in France, with the result that it now. has £175,000,000 in gold.

Mr. WHITE. In purchasing francs, was there not danger that the fund would suffer a loss in the event of quick devaluation?

Mr. SMITH. I wish to get this matter clearly in mind; therefore, 1 suggest that the gentleman be not interrupted.

Dr. BECKHART. The fund was, as I have said, a credit fund. It was given originally the right to issue £175,000,000 of Treasury bills based upon the credit of England. These were sold, and a pound deposit to the credit of the fund was set up on the books of the British bank. It then purchased francs in order to meet the refugee demand for pounds, which otherwise would have caused a sharp rise in the price of pound sterling. This meant that the Frenchmen had pounds

and the fund had francs, which the fund converted immediately into gold at the Bank of France.

There was the danger to which Mr. White has referred, but it was a minor one, because the francs were converted each day into gold.

By virtue of the continued flow of refuge capital to England, the right of the fund to issue Treasury bills was finally increased to £575,000,000, as shown in the above table, or to about $2,700,000,000, and at one time practically all of that represented gold holdings.

This past year, beginning before the Czechslovakian crisis, but becoming accentuated thereafter, a flight of refugee capital to this country of unprecedented proportions took place. To prevent the pound from falling too rapidly, the fund released gold and through 1938 lost something like £200,000,000. England was willing to lose that much gold to protect the pound and the pound declined, one must conclude rather slightly during that crisis, considering all circumstances.

This [indicating] represents the rise of the pound when we devalued the dollar. This [indicating] represents the decline of the pound at the time of the Czech crisis.

The American fund, Dr. Smith, was a gold fund resulting from an allocation of the so-called gold profits. Gold profits amounted to about $2,800,000,000, and we allocated $2,000,000,000 of that amount to the stabilization fund, of which only $200,000,000 has been used. This was used by placing gold certificates to that amount with the Federal Reserve banks, which gave the fund an equivalent amount of deposit credits.

To summarize, the British fund was used to offset the effort of short-term capital movements in pound sterling and to prevent the accompanying gold inflow and outflow from affecting the cash basis of the domestic credit structure.

Our fund was not a credit fund, but a gold fund. We have made use of $200,000,000, as I have said, and this has been used to protect the pound sterling and the French franc when necessary from overnight declines. The next day the pounds or francs were converted into gold in London or Paris. It has not been used and could not be used to off-set gold imports as the British fund. It could be used to meet gold exports, but these have not and are not likely to take place.

Our fund could be eliminated, and I have suggested that we do so. The Federal Reserve banks could perform the same functions as the fund performs, buying sterling in the afternoon and converting it the next day into gold in London. The unused gold profits, $1,800,000,000, belonging to the fund, should be impounded.

The device we had in this country, which was comparable to the operation of the British fund, was the sterilization technique followed by the Treasury from December 1936 to April 1938. We should not compare the British fund with the American fund, but rather the British fund with our sterilization technique. (The matter referred to is as follows:)

It was on December 21, 1936, that the Secretary of the Treasury announced that the Treasury "proposes, whenever it is deemed advisable and in the public interest to do so, to take appropriate action with respect to net additional acquisitions or releases of gold by the Treasury Department. This will be accomplished by the sale of additional public debt obligations, the proceeds of

which will be used for the purchase of gold, and by the purchase or redemption of outstanding obligations in the case of movements in the reverse direction.

The amount held in the inactive account of the Treasury at monthly intervals during the period when increases in the gold stock were being sterilized is shown in the following table:

It will be noted that the inactive-gold fund reached a peak on August 31, 1937. On April 14, 1938, the inactive fund was eliminated and the process of desterilizing the sterilized gold was begun.

Mr. SMITH. What is the effect of the abrogation of the gold clause in contracts and the inability to write a value clause in a contract? Dr. BECKHART. My personal opinion is that it was very destructive of confidence. The fact that we devalued and eliminated the gold clause in contracts caused a great loss of confidence. Of course, one cannot write a gold clause in contracts now.

It is for that reason that I suggest we go back to gold coinage and gold convertibility as a means of regaining confidence.

Mr. WHITE. Referring to the repeal of the gold clause, which you say impaired confidence, when that took place did not business interests and the Government, with obligations to be paid in vast quantities of gold, when there was no gold to be had, find themselves in the position of a man who had signed a note, had it come due, and did not have the money with which to pay it?

Dr. BECKHART. There was no valid reason for the abandonment of the gold standard when we did so in 1933. We had lost but a small amount of gold externally through the banking-holiday period. The American people at that time had not lost confidence in the gold standard but rather had lost confidence in the banking system. The amount of gold exported in the early part of 1933 was but a minor fraction of our total gold reserves. We could have remained on the gold

standard.

Mr. LUCE. If those of us who believe as you do had the power and could return to the gold standard tomorrow, would you return to gold at the price it is now, $35 an ounce, or go back to $20.67?

Dr. BECKHART. That is a very difficult question to answer.

Mr. LUCE. I feel strongly that there was no need for devaluation in 1933-34-no need to leave the gold standard; but inasmuch as we have done so, and inasmuch as we have established a new dollar, I would make the best of a bad situation and perpetuate the present

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dollar, introducing gold coinage and gold convertibility. To lower the price of gold, except for a fraction, requires congressional authority. The President has the power to effect a substantial increase in the price of gold. The leeway is all in one direction, and I would eliminate that leeway.

Furthermore, I think it highly important that section 8 of the Gold Reserve Act be eliminated or reconciled with the remainder of the act. That is the section that permits the Secretary of the Treasury to pay any price for gold, irrespective of the weight of the gold dollar. With the whole world using an irredeemable currency, when will the smash come?

Dr. BECKHART. That is very difficult to prophesy.

Mr. LUCE. It will come, though, will it not?

Dr. BECKHART. It will come some time unless we can restore international trade and international capital movements, which, in turn, will bring about a redistribution of the gold stock and a return to gold as a general international monetary medium.

Mr. LUCE. Is it possible to restore gold?

Dr. BECKHART. Assuming a return to economic internationalism, even today gold still performs its function as an international standard over a considerable part of the world in that it is used to settle international balances. International trade, of course, is far from being in a satisfactory condition. We are substituting regional trading areas for genuine international trade and there are all sorts of restrictions on international trade, such as quota restrictions, sanitary requirements, milling requirements, and a thousand and one other restrictions.

Mr. WHITE. Do those restrictions go to the shortage of gold?

Mr. BECKHART. No. Despite such restrictions gold is still used as an international standard and it still is generally accepted, which is not true of silver.

As I said in my prepared statement, our situation with respect to gold imports is not a happy one. We will surely continue to receive large quantities of gold from Europe representing refugee capital.

We have no alternative than to accept this gold unless we are willing to make large loans to Europe. Unless we do that we must accept gold. When we return to the economic internationalism of pre-1914, we will find that gold is again used generally as an international money.

Mr. SHEPPARD. Am I wrong in assuming from the gentleman's last statement that our international relationships are so closely intertied that we in this Nation have to consider the picture in its entirety and not that as it might pertain to this Nation exclusively?

Dr. BECKHART. That is correct.

Mr. SHEPPARD. If that is correct, the gentleman stated that, in his opinion, gold was still the dominating factor and

Dr. BECKHART. Gold is still used to settle international balances. Mr. SHEPPARD. Does the gentleman say that gold is the dominating, basic factor in both our international and domestic background, so far as our money is concerned? Is that feasible or not, as we are? Dr. BECKHART. Will you please state that again?

Mr. SHEPPARD. Does the gentleman concede that the gold standard, as it is being operated, is the basis upon which all international credit and domestic credit are predicated; is it a true background?