the power to send us goods, they had no alternative but to send us gold. Here was a product which could be sent in duty-free.

Throughout the three and one-half year period ending January 1924, we had a veritable flood of gold imports. Our gold holdings piled up at an average rate of more than $1,000,000 a day. We became the possessors of one half of the world's supply of monetary gold. Never before had a single country amassed so large a proportion of the world's standard money; such a persistent and one-sided movement of the metal had never been considered within the bounds of possibility. It was as if one half of the contents of the Atlantic Ocean suddenly moved over into the Pacific and remained there, notwithstanding an old-fashioned doctrine about water seeking its own level.

Our tariff legislation of 1921 and 1922 was not, of course, the only factor which caused foreign gold to pile up in this country. There were a number of contributing causes, not the least important of which, as will be seen presently, was our manner of dealing with imported gold after it reached our vaults. But when all of the causes of this phenomenal gold movement have been enumerated and appraised, there is no escaping the conclusion that our goods-exclusion policy, as expressed in post-war tariff legislation, forced us to take vast quantities of gold which need never have come and which now constitute a serious problem to be reckoned with.

III

Had our banking authorities utilized the gold as it came to us, matters would have righted themselves in the course of time in spite of tariff barriers. Gold imports would have set about automatically to create the conditions under which foreign goods could be sold in our

markets. The flood of gold coming to our shores would have cheapened the dollar and, in accordance with the predictions of practically all European students of the question, we should have had an inflation in our prices. On the other side of the picture, the countries which were sending the gold to us would have experienced the opposite effects they would have had a corresponding deflation in their prices. Sooner or later the automatic workings of the gold standard would have created a sufficient differential between our level of prices and that of foreign countries to permit their goods to scale our tariff wall and to create cash balances which they could use to pay their obligations.

Wisely or unwisely, we did not permit the flood of gold to work toward this goal. We astonished the European prophets by temporarily depriving gold of its inflationary power. We deliberately thwarted the intelligent purpose for which it came to us. We delayed the issue.

Putting vast quantities of gold into storage where it could have no stimulating effect upon the volume of credit or the level of prices was an accomplishment without precedent in the world's banking history. We need not delve into the technical structure of Federal Reserve banking which made this accomplishment possible. It is sufficient to note that we happened to be in a position where a gold-storage, or goldsterilization, policy could be carried out, within certain limits, if we wanted to make the attempt. And we wanted earnestly to make it. We had just come through a painful period of deflation, following the inflation of 1919 when a too liberal use had been made of our gold reserves. Having had that memorable experience with the full cycle of inflation and deflation, we were bent on avoiding a repetition of it.

Moreover, the feeling was general among Federal Reserve authorities that we were only trustees for a large part of the gold which was being sent to us, and that when European countries set about restoring their depreciated currencies we should have to part with some of our holdings. In these circumstances it was deemed the part of prudence that the vast gold supply we were accumulating should be so managed that it might be kept available for redistribution, as the occasion arose, without producing any untoward or disturbing effects on our own trade or financial situation.

Some have objected to the statement that we 'sterilized' gold, and a number of other terms have been suggested as more fairly descriptive of our policy. For the present purpose it matters little whether we say that gold was sterilized, valorized, neutralized, buried, warehoused, hoarded, impounded, or conserved. The records show that during the period between August 1920 and January 1924 our net imports of gold amounted to $1,400,000,000, and yet here is the extraordinary factover the period as a whole we had no net expansion in the total volume of credit either at the Federal Reserve banks or at seven hundred of the largest member banks. Whether we sterilized $1,400,000,000 of imported gold or merely conserved it, we did what we could in a financial way, though we must have done it unwittingly, to make the tariff all the more effective in excluding foreign goods.

IV

It is still too early to make a full appraisal of the consequences of our gold-sterilization policy. That there are and will continue to be important consequences of a policy which, whatever its purpose, effectively postponed

the date when foreign debtors could pay us in goods, we can rest assured. Or, to state the case in other terms, we can hardly expect to thwart the intelligent purpose of a large and sustained gold movement over a period of three and one-half years without getting consequences of a far-reaching nature, affecting not only ourselves but our foreign debtors as well. A few of the immediate consequences can be seen already.

One of the direct results of refusing to employ the gold we received was that we continued to get more gold. This result was inevitable. In the face of excessive gold supplies we maintained money rates at a high level, a level too high to make it worth while for business to expand and use up some of our dormant credit. We engaged in a kind of price-fixing programme with respect to gold, arbitrarily fixing the interest price at which gold could be used as a basis for credit. Our object, of course, was to prevent inflation, and in this we were partly successful, but the net result of our efforts was to aggravate the problem of excessive gold supplies in a way that was never contemplated.

We could at any time adopt a similar policy with reference to wheat or any other farm product for the purpose of bringing relief to a depressed agriculture. We could enact a law requiring some federal agency to raise the prices of farm products arbitrarily. We have not taken this drastic step as a remedy for agricultural depression because we have known full well that such a step would be unwise. It would stimulate farmers to produce more wheat when we already have too much, and the supplies would eventually become so large that arbitrary price maintenance would break down of its own accord.

Our price-fixing efforts with respect to gold met exactly that fate. The

vacuum created by our artificially high interest rates caused more and more gold to be thrust upon us. It was a case involving the operation of a simple economic law which states that goods will move to that market where they can be sold to the best advantage. In response to this law, foreign gold continued to move to our markets until they became congested. By the early part of 1924 our gold stocks had become so large that arbitrary control broke down, on gold as it would have on wheat, and all gold which came in thereafter automatically be came the basis for credit expansion.

The automatic relationship between gold imports and credit expansion following the breakdown of control may be seen in the developments which took place over the ensuing three and one-half year period, ending July 1927. During this period we had net imports of gold of approximately $400,000,000, and an expansion in the loans and investments of about seven hundred of our largest banks of more than $4,000,000,000. Thus every dollar of gold coming in during this period multiplied itself in credit operations more than ten times. It was impossible for the Federal Reserve banks to prevent this phenomenal expansion. They had reached the end of their power to sterilize imported gold. Once our rain barrel had been filled to overflowing, we could no longer control the use of the additional water that poured into it. Another consequence of our goldstorage policy and this consequence was felt acutely by our foreign debtors was that we brought on a fall in the world's level of prices. The truth of this statement cannot be demonstrated mathematically, but it stands to reason that the transfer of $1,400,000,000 of the world's gold stock from foreign bank reserves, where it was being used as a basis for credit, to our own vaults,

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where it was held in complete idleness, should artificially raise its value. If we warehoused 15 per cent or more of the world's supply of wheat in the course of a crop year, and kept it warehoused, would not the price of wheat rise? And if we could raise the price of wheat in this manner, would not the storing of 15 per cent of the world's gold supply raise its value also? The evidence seems to be unmistakable that our storage policy raised the value of gold throughout the world. And raising the value or purchasing power of gold is the same thing as reducing the level of prices.

Theory says that our policy should have caused a fall in prices, and the trend of world prices following the termination of our gold-storing activities bears out the theory. Between January 1925 and July 1927 there was a general decline in wholesale prices in all goldstandard countries, ranging from 10 per cent in the United States to 17 per cent in England. So pronounced an appreciation in the purchasing power of gold-that is what a fall in prices means was bound to have an adverse effect upon foreign debtors. Their loans had been contracted when the dollar was cheap; now they had to meet interest charges on cheap loans when the dollar was more valuable. It may safely be said that in creating a condition of gold shortage throughout the world we imposed an additional burden upon our foreign debtors of approximately 10 per cent.

It was impossible for foreign countries to overcome the artificial gold shortage by increasing gold production at the mines or by making new economies in the use of gold. There were, however, certain economies that could be made, and our policy compelled the central banks of foreign countries to economize in every possible way. Strange as it may seem, their principal

means of economy lay in transferring a part of their gold reserves to our own banks. To accomplish this purpose they had only to buy with their own currencies the dollar balances which were being created through the sale of foreign securities in our markets, or they could make direct shipments of gold. Once they had acquired a deposit balance with our banking institutions, they not only had something which would pay them interest, but also, in many cases, something which the laws of their respective countries allowed them to count as part of their required reserves.

It was in this way that foreign banks responded to the artificial gold shortage we created. They sent us gold, which we did not want, in order to make their reserves do double duty. We have no precise means of knowing the extent to which they practised this particular form of gold economy, or how our international account now stands as the result of these operations. However, we have an estimate of the Department of Commerce for the year 1926, which shows that foreigners had deposits and short-time investments in this country of about $2,250,000,000, and that after allowing for the unfunded items they owed us there remained a net credit to foreign account of about $1,150,000,000. There is every reason to believe that our net debt to foreigners on short-time account is far greater now than it was in 1926.

A good deal of concern has been shown about this situation. It has been suggested that at any moment we might be called upon to convert these short-time investments and deposit balances into gold for export, and that the sudden withdrawal of so vast a quantity of gold would put a serious strain on our credit structure. Whether or not the fears on this score are well founded, it is to be noted that we have

here a disturbing problem of our own creation we are reaping the harvest of years of resistance to natural forces which, if allowed to operate, would have compelled us to take foreign goods in payment for the obligations due us.

V

The record of our accomplishment thus far shows that we have succeeded, temporarily at least, in negativing the doctrine of the economists — first, through tariff legislation, and then, indirectly, through the pursuance of an adroit monetary policy. In order to defeat this doctrine we chose to go directly against the tide. In so doing we not only created for ourselves serious problems which have yet to be faced, but, what is also important, we inflicted upon foreign debtors certain injuries which are already plainly visible. First of all, our high-tariff policy excluded their goods at the very time they owed us money. This operated to retard the revival of their trade and the restoration of their currencies. Then our hoarding of gold contributed to the same end, preventing the development of a situation where they could have sent goods to us in spite of the tariff. Finally, our gold-storage policy gave rise to a world shortage of gold which deflated foreign prices and made it more difficult than ever for foreign debtors to pay the interest on highprice debts out of low-price products. In the light of these considerations, is it any wonder that there is a growing gulf between the United States and foreign countries? Have we really played the game?

As for ourselves, it is difficult to see wherein we have accomplished anything of a constructive nature. In the six years since our tariff legislation the problem of getting our payments has come no nearer to being solved. It

has, in fact, been aggravated by our obstructionist tactics. We have become a great creditor nation with known foreign investments of around $14,000,000,000, on which we expect to receive interest of approximately $1,000,000,000 a year. In addition to these investments, which are held privately, we hold a great mass of European war-debt obligations on which we are receiving interest and principal payments of $200,000,000 a year.

As a creditor nation we ought to be receiving these payments in goodswe ought to be importing more than we are exporting. But we are doing exactly the opposite. We are still showing a substantial export balance 'in our favor.' Instead of taking goods in payment for the yearly obligations due us we are taking promissory notes and other pieces of paper on a large scale. During the past year we made loans and investments in foreign countries of $1,500,000,000. This means that we advanced our own money to foreigners on the strength of their promissory notes, and they gave it back to us in payment for goods and past interest accumulations!

Thus far we have fared pretty well on our holdings of foreign bonds. To all outward appearances we have been getting the interest payments on these promissory notes in the normal way. In reality, however, we have been cashing one another's interest coupons. Tom received interest on his 1926 foreign bond because Dick bought one in 1927. Both will get their interest in 1928 if Harry buys one. As time goes on, Tom, Dick, and Harry must all return to the market at intervals and cash their own interest coupons by buying new bonds, or other bond buyers must be found who will cash the interest coupons for them.

As a nation, our position is not unlike that of the merchant who on making

a sale to one of his customers takes the customer's promissory note, bearing interest. At the end of the year the customer offers another promissory note in payment for the accrued interest. He then proceeds to buy more goods for which he pays with more promissory notes, repeating the same operation year after year. The problem is: How long can the merchant continue to give credit in this manner, and how long before the customer is a bankrupt?

When confronted with this perplexing problem, we are inclined to brush it lightly aside. We have been so successful in cashing the interest coupons on foreign bonds over the past six years that we are not much concerned with philosophical speculations on the future status of debtor or creditor countries. We prefer to dismiss the whole problem by agreeing with the optimist who, falling from the roof of a forty-story skyscraper, at length passed an open window on the third floor, where he was heard to remark, ‘Everything's going all right so far.'

With the continued advance in our position as a creditor country, as now seems inevitable, the question arises as to how we are going to get the payments due us if we go on showing resistance to the importation of goods. At the rate our foreign investments have been growing and will probably continue to grow, larger and larger interest payments will be due us each year. We cannot take promissory notes in payment for an indefinite period. There is a limit also to the number of sound promissory notes that can be offered. Suppose we simplify the problem as much as possible by forgetting about such items as interest and principal payments on the war debts, on the assumption that these items may be canceled at some future date by a stroke of the pen. That helps a little.