Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-03-23
BY BENJAMIN NJ. ANDERSON, Jr.,
Phi. D., Economist OF the Chase National
Bank OF the City OF New York.

BY BENJAMIN NJ. ANDERSON. Jr.,
m Bank S0 n ths city 81 q new sS York. s'i0na
The FIRST interim report of the gold
delegation of the Financial Committee
Of the League Of Nations dated June
II, 1880, expresses great apprehension
regarding the adequacy of future gold
production to maintain a, adequate
rate Of credit expansion. The ideal OF
the delegation Is the maintenance OF a
fixed level of commodity prices, and II
expresses the fear that in the not dis
tant future gold production will be in
adequate for this purpose.
Problem Deferred.
The delegation adds: ut would OBJ
viously be paradoxical to rely on a fall
in prices to prevent a shortage of gold,
| when by shortage is meant an amount
| inadequate to support the structure of
credit necessary to maintain a long
term level of prices"
Whether it is paradoXical to rely on
q fall in prices to prevent shortage
of gold as defined by the delegation, it
Is certainly not paradoxical to assert
raw materials, which has already taken
place, and the ensuing decline in prices
of finished goods at wholesale and at
retail, and in wages and rentals, which
is vtsibly under way, have deferred for
q good many years our need for con-
sidering seriously the problems which
the gold delegation raises. If gold was
adequate in 1928 to do the business of
the world on the then existing level of
prices, wages and rentals, gold Is much
more adequate today.
The fact is that the price level of
1923 was abnormally high and definite
~ unstable; that, even with the i'm
mense expansion of credit that had gone
on in the period from 1925 to 1923, the
price level had been. falling, that the
volume of credit in 1923 was altogether
both in commodity prices and in vol
ume Of credit, was desirable. The
liquidation in commodity prices was in
evitable. The liquidation in credit
could be deferred by artificial measures.
The figures given for the United
States make 1t clear that the mechan-
ical quantity theory, namely, that COM
modify prices vary proportionally, di-
rectly with the volume of credit and
inversely with the volume of trade,
finds no justification in the facts of re-
cent years. Commodity prices should
have risen sharply since 1919, instead
of falling as they did, If this theory
were true, and they should have risen
from 1925 to 1927, instead Of falling,
as their old.
Price Levels and Debtors.
The advocates of a fixed level of
commodity prices object to a decline In
commodity prices on the ground of
harm done to debtors thereby. Perhaps
it might be we'll to reflect that the
growth Of credit involves the growth Of
debt; to say that credit Is increasing is,
in fact, merely another way of saving
that debt is increasing, since the assets
of the banks are the debts of the public
to the banks, while the deposits Of the
banks are the debts of the banks to the
public. The question may well be asked
whether price level which can only be
maintained by an extraordinarily rapid
and inordinate increase In debt is worth
saving, even from the standpoint of
debtors. Yet it was precisely on such
a foundation that the unstable price
level of 1928 rested.
I would suggest that one Of the
worlds greatest needs today is economy
in the use of credit, rather than econ
ofny In the use of gold would sug-
gest that higher discount rates, which
the gold delegation seems to fear would
serve admirably as means of effect
ing economy in the use of credit.
A Dangerous Proposal
The delegation proposes a reduction
in the legally required gold reserves Of
the Federal Reserve system and the
central banks of the world, so that
credit may be free to expand without
the restraint which the need for pro-
tecting gold reserves imposes. The
world has just passed through a pro-
longed period OF precisely such credit