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F o r r e l e a s e on delivery Statement of William McChesney Martin, J r . C h a i r m a n , Board of G o v e r n o r s of the F e d e r a l R e s e r v e System before the Subcommittee on Economic Stabilization of the Joint Economic Committee D e c e m b e r 11, 1956 On behalf of my a s s o c i a t e s of the F e d e r a l R e s e r v e S y s t e m I want to e x p r e s s our a p p r e c i a t i o n for these periodic opportunities to appear before c o m m i t t e e s of the C o n g r e s s . The C o n g r e s s has placed a g r e a t r e s p o n s i b i l i t y upon the F e d e r a l R e s e r v e S y s t e m - - a t r u s t e e s h i p , as I conceive of it, over money. The R e s e r v e System has always benefited from thoughtful inquiry. These h e a r i n g s a r e not m e r e l y a public f o r u m - - a n d that is all to the good. They provide a m e a n s of keeping the m o n e t a r y m a c h i n e r y of the country a b r e a s t of the t i m e s . The F e d e r a l R e s e r v e Act p r o v i d e s that we shall r e p o r t d i r e c t l y to C o n g r e s s and t h u s , through it, to the country. The task of the F e d e r a l R e s e r v e S y s t e m , under t o d a y ' s conditions, is to d e t e r m i n e the volume of c r e d i t that needs to be made available in o r d e r to keep the economy running in high g e a r - - b u t without o v e r - s t r a i n . on p r i c e s . Too much c r e d i t would intensify upward p r e s s u r e s Too little could n e e d l e s s l y s t a r v e some a c t i v i t i e s . have to rely on human judgments in this d e t e r m i n a t i o n . bound to be differences in j u d g m e n t - - s i n c e r e d i f f e r e n c e s . We There are We do not undertake - - a n d I do not see how it could be o t h e r w i s e , short of some form of d i c t a t o r s h i p - - t o say how a given supply of c r e d i t shall be allocated. E x p e r i e n c e would s e e m to d e m o n s t r a t e that allocations of c r e d i t d e t e r m i n e d through the m a r k e t p r o c e s s a r e to be p r e f e r r e d to -2- judgments — or g u e s s e s — of public a u t h o r i t i e s , however wellintentioned. I was told r e c e n t l y of a t o n g u e - i n - c h e e k sign that hung in a Washington office some y e a r s ago. It read: "Our guess is always best. " It may be that collective judgments e x p r e s s e d through the m a r k e t p r o c e s s a r e not always best, but that p r o c e s s is c o n s i s t e n t with our h e r i t a g e and our institutions under which d i r e c t governmental intervention in economic affairs is confined l a r g e l y to b r o a d , general policies n e c e s s a r y to p r o t e c t and promote the public i n t e r e s t . At any given time the economy is capable of producing a volume of goods and s e r v i c e s limited by c u r r e n t l y available r e s o u r c e s , human and m a t e r i a l . The difficulty throughout this y e a r has been the attempt to croud too much into a given time period — demand, in brief, • has been p r e s s i n g strongly against the supply of labor and m a t e r i a l s . C r e a t i n g m o r e money won't produce m o r e things when the economy is running at peak l e v e l s . A choice has to be m a d e - - a n d the public in the end has to make the choice of whether we shall have m o r e of this and l e s s of that. We can have, in a given p e r i o d , just so many h o u s e s , a u t o m o b i l e s , household a p p l i a n c e s , s c h o o l s , manufacturing plants, and a m y r i a d other things, including ships, p l a n e s , subm a r i n e s , and other e s s e n t i a l s of defense. Under p r e s e n t conditions, something has to be given up at l e a s t for a t i m e , Throughout this year the combined demand for funds—for c r e d i t - - c o m i n g from virtually all s e c t o r s of the economy has been at an all time high. It -3- has outrun the available supply. C o n t r a r y to some i m p r e s s i o n s , the R e s e r v e System has not reduced the money supply; in fact the money supply has continued to i n c r e a s e this y e a r though at a l e s s e r r a t e than in 1955. M o r e o v e r , the t u r n o v e r - - t h e velocity — of the existing money supply has g r e a t l y i n c r e a s e d . Although the s o - c a l l e d " t i g h t n e s s " of c r e d i t is often attributed to an insufficient supply of money, the fact is that the tightness r e s u l t s from the volume and intensity of demand. The g r e a t bulk of loanable funds r e p r e s e n t s savings of the community made available to borrowers- d i r e c t l y or through financial institutions other than c o m m e r c i a l banks, such as mutual savings b a n k s , i n s u r a n c e c o m p a n i e s , savings and loan a s s o c i a t i o n s , p r i v a t e and public pension funds, finance c o m p a n i e s , c o r p o r a t i o n s , and individuals. It is often forgotten that when the c o m m e r c i a l bank- ing s y s t e m expands its loans and i n v e s t m e n t s , it g e n e r a t e s new money. When, as has been the c a s e this y e a r , a g g r e g a t e demands for c r e d i t have exceeded s a v i n g s , the only way to finance thern all would be by an even g r e a t e r expansion of bank c r e d i t - - t h a t i s , by g e n e r a t i n g still m o r e money, And as I have e m p h a s i z e d , c r e a t i n g m o r e money will not c r e a t e m o r e goods. It can only intensify d e m a n d s for the c u r r e n t supply of labor and m a t e r i a l s . That is outright inflation. The R e s e r v e S y s t e m - - a n d it is a nationwide s y s t e m of 12 F e d e r a l R e s e r v e Banks with 24 b r a n c h e s having all told some 260 -4- d i r e c t o r s r e p r e s e n t i n g varied walks of life — is united in the conviction that the b e s t c o u r s e is to do what the System can do, to r e s t r a i n e x c e s s e s a r i s i n g from m o n e t a r y c a u s e s . It has been e s t i m a t e d that a r i s e of only one point in the c o n s u m e r p r i c e index (BLS) would cost the A m e r i c a n public two and a half billion d o l l a r s a y e a r . The F e d e r a l R e s e r v e S y s t e m has been devoting its efforts, through varying t i m e s and c i r c u m s t a n c e s , to a s s u r i n g m o n e t a r y and c r e d i t conditions that would help to foster high l e v e l s of b u s i n e s s and employment, maintain the stability of the c u r r e n c y , and p r o m o t e s u s tainable growth in the economy. The System has sought to keep constantly a l e r t to changes in economic and financial conditions, and to adapt its o p e r a t i o n s a c c o r d i n g l y - - l e a n i n g against the b r e e z e s of inflation and deflation alike, as I have put it a number of t i m e s . Thus, when the economy had a downturn in 1953, the R e s e r v e System acted p r o m p t l y to stimulate c r e d i t expansion to help halt the decline and foster the r e c o v e r y that began in 1954 and c a r r i e d through into 1955. As we moved from r e c o v e r y to boom in 1955 and on through 1956, and as the economy in g e n e r a l p r e s s e d a g a i n s t the l i m i t s of i m m e d i a t e capacity, the System took steps to keep expansion of c r e d i t within the l i m i t s of the growth in r e s o u r c e s so as to d i s courage e x c e s s e s that would inevitably produce higher p r i c e s and s e v e r e economic m a l a d j u s t m e n t s . -5- F o c u s s i n g m o r e closely on the events of 1956, it was apparent t h e r e were positive inflationary d a n g e r s i n h e r e n t in s u p e r imposing a m a s s i v e i n c r e a s e in b u s i n e s s i n v e s t m e n t on an economy a l r e a d y featuring high utilization of r e s o u r c e s and upward p r i c e pressures. In this situation., to supply on easy t e r m s all of the c r e d i t d e s i r e d by p r o s p e c t i v e i n v e s t o r s would have i n c r e a s e d inflationa r y bidding for available r e s o u r c e s , e s p e c i a l l y in the s e c t o r s of capital equipment and c o n s t r u c t i o n . It also would have involved a r i s e in the volume of outstanding c r e d i t , and in c o m m e r c i a l bank c r e d i t and demand deposits in p a r t i c u l a r , that would compound the t h r e a t to economic stability and sustained growth, Despite the r e s t r a i n t on c r e d i t growth and spending capabilities imposed by m o n e t a r y policy, demands in many s e c t o r s have r i s e n m o r e rapidly than was consistent with p r i c e stability. The p r i c e advances that began in 1955, after s e v e r a l y e a r s of stability, continued during 1956, as output in a n u m b e r of key a r e a s p r e s s e d against the l i m i t s of capacity. P r i c e i n c r e a s e s have been p a r t i c u l a r l y m a r k e d in s e c t o r s affected by i n v e s t m e n t e x p e n d i t u r e s , in m a c h i n e r y and c o n s t r u c t i o n lines and, affected in p a r t by t h e m , in m e t a l s and metal products. These a r e the a r e a s in which the r e s t r a i n t imposed upon c u r r e n t e x p e n d i t u r e s by m o n e t a r y policy w a s , quite possibly, the heaviest. It is in these s e c t o r s that such additional demand as would have r e s u l t e d from e a s i e r c r e d i t would have been c o n c e n t r a t e d . -6- Despite the strength of c r e d i t d e m a n d s , growth in total c o m m e r c i a l bank c r e d i t was limited to a m o d e r a t e r a t e , below the a v e r a g e of the postwar period and somewhat lower than in the c o r r e s ponding period in 1955, Thus, the i n c r e a s e in total loans and i n v e s t - m e n t s of c o m m e r c i a l banks in the 12 months ending with October was held to 2 per cent, and growth in the p r i v a t e l y held money s u p p l y - demand deposits and c u r r e n c y - - t o about 1-1/2 per cent. R e s t r a i n t on expansion in bank c r e d i t and the money supply this y e a r c o n t r a s t s with the rapid i n c r e a s e that o c c u r r e d from m i d 1953 through 1954, even though loan demands then w e r e generally l e s s active. During that p e r i o d , policy was directed toward a s s u r i n g ready availability of c r e d i t in the economy g e n e r a l l y , and toward c r e a t i n g liquidity conditions favorable to revival and expansion. In p a r t the developments since 1954 should be i n t e r p r e t e d as a t r a n s i t i o n from a time of ready availability of r e s o u r c e s , reduced demands for c r e d i t , and a m o n e t a r y policy of active e a s e to a time of intense utilization of r e s o u r c e s , very strong c r e d i t d e m a n d s , and a m o n e t a r y policy directed to r e s t r a i n t of inflationary f o r c e s . Just now, the y e a r is coming to a close with d e m a n d s still out-pacing s a v i n g s , with p e r s o n a l income at a new high annual r a t e of over 332 billion d o l l a r s in O c t o b e r - - 2 1 billion d o l l a r s above the r a t e a year a g o - - a n d international d i s t u r b a n c e s that could add to further o v e r s t r a i n i n g of our r e s o u r c e s . It is a situation that c a l l s for -7~ a l e r t n e s s , as well as prudence and r e s t r a i n t , on the p a r t of G o v e r n m e n t , b u s i n e s s , finance, l a b o r , and a g r i c u l t u r e . B a s i c a l l y , the p r o b l e m confronting us n o w - - i n c o n t r a s t to that of the e a r l y 1930 f s--is. not one of c r e a t i n g millions of jobs overnight to c u r e m a s s unemployment, but one of sustaining the millions of jobs we have today and fostering new job opportunities for an expanding working force t o m o r r o w . Meeting that p r o b l e m r e q u i r e s that the efforts of all of us be directed to p r e s e r v i n g the stability of the economy, and the stability of the dollar that u n d e r l i e s it, so that we may move steadily along the road to a higher standard of living for all.
@FedFRASER