Professor 6.8. Warren

January 5, 1934- P.expansion of credit in this circumstance must have beneficial effectsin the long run upon the money market, the rate of interest, and thebond market. Here again I think it is fair to draw upon the experienceof Australia  , where in 1931 we faced an appalling budget situationwith a bond market on the verge of collapse. By rigià economy in theordinary budget and a controlled expension of credit for publie works,we soon overcame our difficulties. The rate of interest fell and thebond market was in fliteen month above pax. the government reverueexpanded, and in the budget of October last, we were able to reducetaxation substantially, thus within two years the emergency expenditurebecame self- 11qpidating.

This success woa due in part to the successful currency policypurated by the Commonwealth Benk, with the approval of the government.Our tee 1 gold raised first by our own actlen in January 1931and ieter by the notion of Great Britain   in suspending gold paymentsin September 1931. By December 1931 when the Comionnealth Bank assumedcontrol, our price of gold was the equivalent of about 38,00 dollarsper ounce. I have always felt that this gave us more relief then anyother element of cur economie policy. By holding up prices of primaryproduction, it prevented& disastrous deflation, and ultimately promotdan increase all round in the national incone. Cur natinal income atthe worst stages of the crisis had fallen to four hundred millionpounds sterling from a level of six hundred fifty millions pounds ster-ling. But we zeintained our old gold price, the fall would have beenvery much greater, and we would inevitably have experienced a bunkingand a financial crisis similar to yours. A zise of only ten percentin the prize level brough about my currency of gold policy would addforty millions at once to our natinal Income. nia wae half to thetotal emergency expenditure we indulged in the throuhout the wholecrisis. Similarly in your case, a rise of prices of a small percentageadds much more to the national income than àirect government expendi-ture through pubiie vorke ox other emergency spending. For this reasonI think the gold policy you initiated last October to be essentialto the repid recovery of your internal economy.

The successful pursuit of this policy, however, depends uponthe courage with which the banking or treasury authority controls theprice of gold. In Great Britain and Australia, the legal fiction ofconvertibility of the currency at the old gold par was destroyed. Youmust, I think, destroy it in the United States  . This obligation ofthe treasury to purchase gola at dollars 20.67 to the ounce is a deadletter, but it is a grave hindrance to complete action by a governmenstal authority to control the price of cold. I suggest, therefore, thatyou must amend your legislation, at least to the extent of destroyingthe legal fiction of a gold price of dollars 20,67 to the ounce.

This could be followed, by sathorising the President, throughthe Reconstruction Finance Corporation, or some other authority, to buyand sell gold at rates to be determined by the President. The maximumprice could be fixed in accordinge with president legislation on devaluation at dollars 41,34 to the ounce. In this matter, as in the

ARDIN