The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
TRANSCRIPT THIRTY~SIXTH ANNUAL STOCKHOLDERS MEETING FEDERAL RESERVE BANK OF BOSTON October 2 0 , 19*0 MR. MARTIN. Mr. Moderator, Chairman Sprague. President Erlckson, Officers and D i r e c t o r s , Stockholders ami Participants in this Thirty-sixth Annual Stockholders Meeting of the Federal R e s e r v e Bank of Boston. The first thing I want to do is tell you how pleased I am to be here. It is the second time I have been privileged to visit with this group. I went to emphasise that this is in no way a formal address; a report to stockholders in a s y s t e m like our Federal R e s e r v e System can never take the form of a formal md&rm** a s such. All 1 want to do is to make s o m e running comments, 1 think that the inherent nature and strength of our Federal R e s e r v e is in the word System in our title* 1 never l o s e a chance to emphasise that word. JNow the Boston Federal R e s e r v e Bank is the only bank that has a shareholders 1 meeting as such. 1 have tried to encourage other banks to have such a meeting because 1 believe it Is a real tribute to the institutional framework of the S y s t e m , that we keep in mind our endeavor to follow corporate tradition in establishing an organisation such as the R e s e r v e System. 1 think that it is important that we do not get froaen in our adaptation and use of i d e a s , but I a l s o think it is important we do not l o s e sight of what our basic political and economic heritage i s . Every school hoy understands tho guarantees of the F i r s t Amendment to our Constitution. I have boon very much i m p r e s s e d in tho last ton years that no matter what level you are at or how it i s e x p r e s s e d , freedom of religion, freedom of the p r e s s , freedom of speech, freedom in the right to a s s e m b l e and petition, these a r e rights and concepts that emotionally, if not intellectually, are understood by people* V* here you have your big problem i s when you try to relate our to economic heritage wfiii«aia*4«a«|rte**rthrtP*l»this political heritage and then you find an almost total absence of comprehension, of how these two are linked together. Without belaboring this point, I just want to emphasise my feeling that in the Federal R e s e r v e System we do not have a perfect organisation by any m e a n s , far from it. We have a merging of public and private interests which is the strength and vitality of this S y s t e m . When we tamper with it or change it we should understand what we are doing and how we are working. This was brought out very forcefully to me a number of y e a r s ago when I wasn't connected with the S y s t e m . s c i e n c e at Oxford. 1 attended a lecture on political A v e r y distinguished professor said in his Judgment the United States made only two outstanding contributions in the area of political s c i e n c e . I was interested, and perked up m y e a r s . The first one, he said, was the Northwest Ordinance that provided for the emergence from colonial wilderness into statehood. The second was the Federal R e s e r v e System that provided a merger of private and public interest to p r e s e r v e the purchasing power of the currency and the heritage of the nation In a useful dollar. -3- I hold no brief for hie comments but since I now hold this position I have thought about it a good many times and I think, at least in s o far as the Federal R e s e r v e System is concerned, this i s something we must bear in mind, that with all the agencies of government and with all the government that we have, we have only one organisation that is devoting itself full time to this matter of our currency* Now it makes interesting, useful and worthwhile reading in your leisure time to look through the history of the F i r s t Bank of the United States, the Second Bank of the United States, the sub-Treasury System, the money panics of the '80s and the background of the evolution of the System as it is now constituted. It is by no means a perfect organisation. This is something I think we should bear in mind. There may be s o m e structural weaknesses and defects in it but we rely upon you and your understanding and the twelve banks and the directors of the twelve banks and the coordinating body, the Board of Governors in Washington, to pull together* in the public mind, an institutional framework that will safeguard the dollar. I emphasise that today b e c a u s e - - ! am saying this in an open forum** the American dollar is in jeopardy. Now when I say that I want to make it very clear I really believe we can handle the situation that is ahead of u s , if we conduct our affairs properly, s o that dangers to the dollar will be o v e r come. But we cannot do s o if we blink at the facts or refuse to recognise the various forces that make a currency what it is Before developing that aspect of it I want to pause here and say that, reporting to you from your Board of Governors in Washington, I want to express the great appreciation and encouragement that we have had from many people in this locality* but particularly for the dedicated -4* s e r v i c e and work both here in Boston and in the Open Market Committee in Washington, where the Board of Governors c o m e s in direct contact, meeting at three-week intervals* with the President of the Federal R e s e r v e Bank of Boston, Leif Erickeon. devoted service* He has given and is giving That is what really makes the System possible* In his work he r e l i e s heavily of c o u r s e on our d i r e c t o r s . is where the merger c o m e s of public and private interests* This %i have s i x directors that come from the banking and business community and three that are appointed by the Board of Governors at Washington. Without making the divisions you have all heard, of borrower, lender, public official, I think it is perfectly clear whether you look at the banks as quaei-public or quasi-private, that the Board of Governors in Washington i s clearly government and that when we talk about the independence of the System, we a r e talking about independence within the government but not of the government and that the tie-up within our organisation is communication between all a s p e c t s with a recognition of the varying prerogatives. I cannot help but feel that we have made a great deal of p r o g r e s s in the nearly ten years I have been privileged to be with the S y s t e m , not because of my leadership but because of the course of events and because of the cooperative endeavor of a great many people* v e r y critical period. But we are in a One problem, to make clear what I am talking about here essentially, that is why I refer to the early history of our country. Is the credit of the United States, We use the term money and credit. Credit is something we understand* ~5~ When you are talking about the credit of the United States, you have a very important and serious matter. Now over the period of the last ten years (it will be ten years on March 4, 1961), we have had in modern times a flexible monetary policy. This is the period following the Treasury-Federal R e s e r v e Accord which made it possible* Prior to that, during the wartime period, we largely had a pegged government bond market and flexibility in monetary policy was sacrificed as such for the welfare of the community in fighting the war. If we have another war we may revert to such a use of our instruments. But today I want to give you some of my reflections as I go back in my Washington experience, where I have served on the National Advisory Council, on international monetary and financial affairs of our government set up as a part of the Bretton Woods Agreements Act, since its inception. I ana the senior member of that group in point of y e a r s of service* I started with Secretary Vinson. At the time of the Bretton Woods Agreement, when it was signed, I watched this unfolding picture. In thinking back through our various meetings and a l s o of meetings of the Security Council and the V* ar Mobilization and Defense Boards which from time to time I have been privileged to attend that were concerned with the interlacing and intertwining of the relationship of controls during the war and immediately after the war, the thing that struck m e forcibly at all the meetings which I have attended in Washington, has been the fact that people have said at one time or another, there is one thing you must not permit to happen and that is to let interest rates fluctuate. 6~ In the councils of government, pre-Korean war days, nobody thought it would he possible to unpeg the government s e c u r i t i e s market without having disaster to the United States* That is a rather interesting thing to look back on* It i s something worth thinking about. Let me make it clear here, even I on s o m e occasions rather subscribed to that point of view. I am not trying to give the impression I was a i l - s e e i n g in this area, lfc hat I am trying to emphasise here i s the fact that the forces which you have in a strong, growing, dynamic economy are too big for govern* meat controls, unless you want to sacrifice all your freedoms and that one of the few effective devices that the world has in this area, short of complete totalitarianism, i s interest rates* That Is something that s e e m s to be very difficult for a lot of people to comprehend. In wrestling with this problem I attended a great many meetings where people would say, r a i s e r e s e r v e requirements. We found out after raising r e s e r v e requirements it put that much more p r e s s u r e on the government bond market. They would say, put in s e l e c t i v e controls, make them much more drastic than anything you have had before. I won't go through all the arguments, you have all mmmn what we did, in the immediate period of the post-Korean conflict all of these things were tried. Even they were not enough. I suspect that the psychology of that period required all the weapons that there are in any arsenal to try to deal with the inflationary problems that we were confronting. But essentially you came back to the fact, with all due respect to those who say it is outmoded, to the law of supply and demand, which is -?- still in operation* You tnay be able to dam it up for various periods. You may be able to change the nature of the supply and alter the composition of the demand and for various periods of time you can control markets thereby. But the market forces are still at work and at certain points they get too big for government* 1 watched it carefully in the exchange control of the Bank of England in the period immediately after the war, when they thought they had an ironclad exchange control* All of a sudden, when the patriotism of the people began to wane, a s peace came on* a s one official in the Bank of England said to m e , the fish got too big for the net and went through it s o rapidly that it was perfectly obvious there was absolutely no way to control it* That is essentially what we faced when we unpegged the government securities market. The alternative to doing this was unbridled inflation. And despite the threats of dire d i s a s t e r v e r y modest adjustment in interest rates made it possible to reestablish market f o r c e s in such a way a s to get this situation temporarily* at least* under control. I believe by and large that we c a m e through that period with some understanding of what was involved in this but I have been discouraged in recent y e a r s particularly because of the struggle over the 4 * 1 / 4 per cent interest ceiling, in t e r m s of Treasury operations, that by and large the community as such does not understand interest r a t e s , despite all we have gone through* and still has a belief somebody, the Federal R e s e r v e or somebody e l s e , can produce with m i r r o r s or magic a fixed interest rate and maintain it. -aL#et me make c l e a r , as I always do to congressional c o m m i t t e e s , I do not favor high interest rates* I would like to s e e a s low interest rates as it is possible to have without having inflationary p r e s s u r e s but 1 know of no other way of getting equilibrium in things except through this device* Direct controls in my judgment, from m y work, have limited periods when they will work, they won't work over too long a period of time 1 think it is vital that those of us in the business and banking com* munlty get this general thesis a c r o s s . If we do not, we are going to have some unnecessary difficulties * I want to put in perspective the role of monetary policy a s I s e e it. It isn't an all powerful policy at ail. One of the tragedies of the last ten y e a r s , a s I look back on it, is that the Federal R e s e r v e has been asked to do more than>it should, when we tended to rely too much on monetary policy to do things monetary policy simply could not achieve and was n^vmr designed to achieve. Let me list for you, as a result of m y experience over the past 10 y e a r s , in the order of importance in which I place them, the factors which enter into the shape of our economy. I state without reservation monetary policy is in the final analysis the primary bulwark of our free enterprise system. But nevertheless it occupies this role because of its relation to these other i t e m s . In the first place I think budget policy is the m o s t important. believe the American people have come to understand that. I -9~ i think by the middle of 1^5?, with what had happened and with the recognition that in world markets for the first time the dollar was under p r e s s u r e , people looking at our budget saw that we had a budget deficit of 12-IS billion dollars, coming in large part through a decline in b u s i n e s s , people began to appreciate what was involved in budgetary policy. I believe the rank and file of people in this country without being able to put it in p r o f e s s o r ' s terminology, understand what i s involved. I am not one who believes that you have to balance the budget every year. I think it is desirable. I likewise don't think there is any merit in deficit financing as such. But I say that you have to have a tendency to equilibrium over a period of y e a r s in your budget or you are not going to be able to pay your bills. U when times e r e relatively good, you don't provide anything in the way of a surplus, them when times become bad and you are forced to adopt some deficit financing, you a r e in a pretty bad general position* 1 believe that, on the whole, is understood. Now to come to the management of the debt. clearly understood. I don't believe it is I happen to have a v e r y high regard for the present Chairman of the Ways and Weans Committee in our House, Wilbur Mills. I think he is an excellent man and understands his taxes better than 1 do certainly. Me understands what is involved in this budget p r o c e s s . But he would not like me to say this, and he would not like me to say it this way, I still think he is almost helpless when it c o m e s to tax revision and -10- tax reforms because there a r e s o many people who say, don't do it to me, it is all right to do it to somebody else* Even though we have a tax structure all of us recognise as imperfect, they are almost hamstrung in a political s e n s e when it c o m e s to getting a tax program, a tax system that almost everybody r e c o g n i s e s needs revision and needs changes, both in terms of equity in terms of getting revenue, and in terms of keeping our general balance in order. v, e go along year by year hoping at s o m e point we will have sufficient surplus s o that we can give everybody a little bit, here and there and thus avoid political p r e s s u r e s , and thereby improve the tax s y s t e m . To me that is very unsound. The management of the public debt c o m e s into this. at that in terms of a simple portfolio management. ment is not the s a m e as an individual. Let us look I know that the g o v e r n - 1 am not trying to make that sort of analogy* But think of it. We have 195 billion dollars of marketable debt, out of a debt of 290 billion dollars. able debt. I am not including savings bonds in market- This year there is a direct call of 47 billion dollars on the Treasury at a moment's notice from these savings bonds in addition to this marketable debt. After the recent refunding of the Treasury we have 80 billion dollars of that debt coming due in l e s s than one year which means we are on almost a constant merry-go-round of refinancing. We have 68 plus billion due in from one to five y e a r s ; in five to ten years roughly 18 billion plus; in ten to twenty y e a r s , another 18 billion dollars. As to • 11 twenty years and e v e r , after a very difficult Advance refund log achieved through a great deal of hard work and against great political animosity, the Treasury succeeded in moving from $ billion dollare beyond twenty y e a r s to U . I billion dollars beyond twenty y e a r s , I waa asked when I was before the Ways and Means Committee, Mr* Martin, why shouldn't the government finance everything in yl-day bills? That absolutely floored m e . I didn't understand that anyone would think it was a desirable thing, I didn't give the answer then that I gave the next morning when I thought it over but I said to them, let*s put it this way, if the government on its own initiative can finance everything in / I - d a y bills without any problem of its credit, there would be no reaon at all why it should not finance everything in 91-day b i l l s . Certainly that might be the cheapest way to do it if the bill rate U lower than longer term r a t e s . But think of an Individual who has time payments coming due on an automobile, and a television s e t , and whose savings are v e r y limited, whose current income and hie wife's expenditures a r e not sufficient to meet their mxprnntm* and he has a mortgage on hie house but instead of being financed for fifteen, twenty, twenty-five y e a r s , it c o m e s due every 91 days, what sort of position do you think that this individual would be in, in going to the market ? One of the m e m b e r s of the committee gave m e the response I rather hoped to get when he said to m i , My gracious, Mr* Martin, you are not trying to tell me that is the position of the United States government? My response w a s , tell you just that. 1 have been here for s e v e r a l days trying to That is really it. -12* No* thai is the position of our portfolio and the management of our dabt. Relation* between the Treasury and the Federal R e s e r v e members have been good during my tenure of office* I hope they will always be good. We have heard good fencea snake good neighbors but in the matter of monetary policy and debt management, you need a revolving door because both have to go around stubbornly trying to work with this treadmill of 80 billion dollars plus coming due every y e a r , and the dictates of credit policy* I wish we could get that story a c r o a s in a better s e n s e than we have. I don't mean, I hope nobody will leave this room thinking I am trying to give you a s c a r e picture of the finances of the United States. great country here. We can handle these finances. We have a But we have to have s o m e principles to handle it by* I insist we haven't got the sort of portfolio that inspires confidence in the way we have managed this debt. We have been making p r o g r e s s slowly toward it. ^ e haven 9 1 got it yet* The next problem, I place them in this order, i know some of you much more expert than I will quarrel with m e on this, X place in the next position among ail three of these t the wage cost spiral. have a problem of productivity and collective bargaining. Central Bank haa no control over that. Here you Certainly the I don't believe it should have control over it* I think it is a vital factor because it has to do with the last part of what l am going to develop here, which is the problem of federal finance* 13The government must be financed and the balance of payments At $ome point c o m n into any final battla against ths ravages of inflation, whether as a result of law or of conscious government policy. It is in that general area that there is a lot of misunderstanding about what monetary policy can do. But. taking in my order of importance, the budget, fiscal and debt management, and wage cost policy, I come finally to the payoff* which i s our monetary policy. In the last five or s i x y e a r s at one time or another I have constantly been told this in one way or another by responsible people* They say, granted we have an unsound budget policy, granted we have an unsound fiscal and debt management policy a s such, all in varying d e g r e e s , I am not trying to peg it a s black and white. Granted we have an unsound wage cost factor. Now don't you come along and give us a sound monetary policy and complicate these unsound m e a s u r e s we a r e engaged in. I don't believe I am overstating that. What I am trying to get at there is that if at this juncture monetary policy abdicates and just decides to go along on an unsound b a s i s , equally with these other e l e m e n t s , then I believe there i s no reason for the existence of the Federal R e s e r v e and we should be in the Treasury $ an arm of the government, and we should inflate ad infinitum. Now I am convinced, and I state this categorically, no central bank can support a deflationary monetary policy. I personally don't think you should* The idea that by monetary policy you should try to reestablish s o m e predetermined price level lower than where you are just makes no *%n** to me at all. -»- But permitting p r e s s u r e through interest rates to illustrate the unsoundness of these other aspects and by a recognition through modest adjustment of interest rates that wo have s o m e obligation for solvency of the banking s y s t e m in terms of purchasing power and of currency is something I think we have to get a c r o s s to people* I don't believe we have gotten it a c r o s s yet, certainly not a s fully as we must. There are a great many bankers here, a great many businessmen, who know a great deal m o r e about this in an individual s e n s e than I do. Let me just give it to you in m y simple explanation. attended a great many c l a s s e s and c o u r s e s . of supply and demand is outmoded. I have I have heard that the law I have hoard we have labor unions s o big they can control the market* they don't have to be guided by these things« I have heard constantly that interest rates do not make any differ* ence. 1 have had Congressmen tell me no bank really needs capital and surplus, after all we are just dealing in credit. Here, gentlemen, is where we must understand that money which i s a medium of exchange, a standard of value, it must be a standard of value If we are to have the saving and investment p r o c e s s , is a l s o a measure of confidence in credit and without that confidence factor you are not going to get any of the growth and achievement that all these people say and 1 certainly agree,we want and we need. As to the loan ddposit ratio of member b a n k s - - ! am sketching with a broad brush here*-let me Illustrate it by saying I do not know what the -15right ratio ought to be. But you can sec how far you can go on the concept of credit when I eay we have had one on ember bank in the Federal Reeerve System, which has since changed its policy, whose loan deposit ratio reached le6 per cent. When this bank was questioned, one of UM officer*, and he was perfectly sincere, said to me* 'well, what do we have the Federal Reserve System for? ' 1 tried to explain to him of course we ought to have a super Federal Reserve System to bail the present Federal &m*mrvm System out, if we are going to operate that way. On this matter of credit. It is useful. To me it is very much like a rubber band. You can stretch a rubber band Just so far. At some point it breaks. Its usefulness is largely destroyed when this happens. la our handling of credit, whether it is at municipal. State, or Federal government levels * there come* a breaking point. We have to measure credit and try to keep credit within the framework of the market* without breaking it. t insist that the primary purpose of the Central Bank in a period of expansion is to minimise, not eliminate, but minimise, the substitution of bank credit for savings. You cannot get away from savings. Savings are at the heart of the investment process. It is a process on which our whole development and growth has been centered. Let me just say in passing, one of my associates, former associates who visited Moscow last summer, came back after visiting the Oosbank to tell me he thought I was a wide-eyed radical in financing compared to the head of the Go• bank. ~1*>~ He said, after talking ovar there thrmm or four days with the government people, that is why ha was invited there y ha said ha came to the conclusion that far from outgrowing and ignoring the savings p r o c e s s , it was perfectly c l e a r that the principal difference between their system and ours was forced saving and voluntary saving, that when it came to getting capital for financing, it waa a c a s e of appropriating the savings from one area and putting it ovar in another. You cannot ignore the savings p r o c e s s Just because you have a free economy or a totalitarian economy. The principles ara Just the s a m e . Otherwise, we ara lika a ahip at aaa without any mooring or any harbor of destination * Now this eventually affects all of the savings and all of the general accounts of everybody. lem. Whan it gats had enough it becomes a major prob- We have had inflation in foreign countries that illustrated this. There isn't anything like that in the offing to the United States. The United States for the first time is facing a real problem in this area* I don't say for the first time * categorically hut in my r e e d - ing of American history a s such I believe this i s the first time the threat has been s o serious* Whether it is the first time or not wa a r e facad with a difficult balance of payments problem that must be solved. All of this U interlinked with this p r o c a s s . problem of interest r a t e s . This i s part of the Thara may ha other ways of doing it* Those other ways have to be evaluated. I want to try to give this to you simply. Whan 1 was in the Treasury, 1949, 1950, wa had our first serious balance of payments deficit. 3 . 6 billion dollars* I won't go into the mechanics of it. It ran Most of you know it. ~17~ lt was in the Korean Uar, But even in the Korean Var? I took it up with the Secretary, we went actively to work on i t and recognized it as s o m e thing that would have to be corrected. In the period from If 51 to 1957, we got this deficit down to where it was running I billion or I billion plus a year. crisis. In 1957 we had the Suea Vf c had a brief respite, the In 1958 when ^•BasffOT^-factors of demand and supply were at work, in the world economies and the postwar period was reaching a position of growth and development which made world markets different from what they had been for a long time, we had an adverse balance of payments deficit of 3 . 4 billion. In 1959 it was 3-S* In I960, if I were projecting it at the moment, it looks like about 3 billion dollars* It is clear we cannot continue indefinitely a deficit of this magnitude. Where this relates to this whole p r o c e s s of markets, supply and demand factors, controls, i s in the difference between the steel strike in 1956 and the steel strike in 195?; the i n c r e a s e in steel wages to occur December 1, this year, and the previous i n c r e a s e s . In 1956 I had the privilege of talking to a few people in both labor and management. Both sides felt confident that they could pass on to the consumer whatever agreement they came up with. ately. I say that d i s p a s s i o n - I think 1 am right in that analysis* But in 1 359 it was a very competent labor foreman, a member of the Union, who told me that he knew steel could be laid down alongside of his operation at considerably lower p r i c e s than anything they were likely to be able to produce for some time. an entirely different situation. He said to m e , I said, H I think this creates Yes, X think it d o e s . -18Now wa hava the broad foreign aid problem, Ike world requirements of foreign aid, %e a l s o hava this problem of balance of payments. can no longer afford to ignore it* We v. * can no longer believe that these forces are Just going to work themselves out. 1 won't go s o far aa to say t 1 hope you a r e not thinking I am going that far, as to say we have priced o u r s e l v e s out of world markets. don't think s o for a moment. Wa hava an immense future to deal with. In some instances we will have to work with other products* rnumber I In s o m e limited of instances we hava priced ourselves out of world m a r k e t s . We hava come to the end of a cycle in this particular period* Now this matter of gold and the speculative apprehension about the dollar is something we can only handle by a firm and clear understanding that under no circumstances will wa be devaluing the dollar. To devalue the dollar would be a catastrophe of the firat order. The dollar today la a wmBmr^€ currency in a way no other substitute has been. It substitutes for gold in general accounts* The Federal R e s e r v e haa embarked on an e a s i e r money policy. It is doing everything in its power to a s s i s t In adjustments in the economy* The recreation in demand in various a r e a s through new techniques, modernisation of equipment, lower p r i c e s , m o r e active selling, and the like, is always painful* It creates atrial problems. Germany is now running at full capacity* I think it is in part due to eound finances. Germany has absorbed all the refugees from East Germany and atill has overemploy* ment to a marked degree, Its balance is going up steadily. li* Against these lectors it is time we stop shilly-shallying around about this idea that interest rates are something that can he sal and controlled at will. I had a very distinguished individual come to my home not s o long ago, in the midst of tftis controversy, and say to me in e s s e n c e , this country cannot have high interest r a t e s . Mr, Martin, This country must not have them. I know you are well intentioned, you don't want to s e e high interest rates* U you will just tell us what additional powers you need in the Federal Kmmmrvm to restore us to a 2 ~ i / 2 pmt cent - $ per cent interest rate level, 1 will s e e to it that you get it. He was a man of great distinction end capacity and great political knowledge. I cannot quite visualise how we can deal with that type of thing against the fact that the entire world today is struggling for savings and there is a limit to wnich you can substitute bank credit for savings* not know where the limit i s . 1 do I have never said we would try to eliminate all substitution of hank credit for savings. You all know the difference between short - t e r m , self "liquidating credit, and between long-term capital projects, and the n e c e s s i t y of using bank credit in such a way as to maintain checking accounts and general solvency* i do not know wfeat the proper proportion i s . I would not want to try to spell it out, it would be a negation of what we are trying to do, What we have here is a problem to deal with, in which the entire world is seeking savings. problem. You can point to Africa a s the number one If those countries are to develop, they have great potential -20* r e s o u r c e s , they need perhaps as much as 6 billion dollars In capital in the next few y e a r s . That i s a lot of money. Interest rates are not something you can c l o s e off in New York, when everybody is competing for funds. You can make certain controls and do various things but when you are dealing with powerful market forees that Is very difficult. In this little Cuban affair, I have watched s o m e of the flow of money between Florida and Cuba. Suppose I were made a dictator and told to stop this flow, the bringing in of 50-dollar bills* how would I go about it? It is a more fluid problem than you have with big i t e m s . is a more fluid instrument. Money Where do you come out with this interest rate problem? On this problem of financing the government, let me say that In 1959 despite the allegations of tight credit and high interest r a t e s , the United States maintained the lowest Interest rates of any important country in the world, controlled or non-controlled. Central banks sub* ordinate to the Treasury have not succeeded in producing lower interest rales than ours. Our interejt rates have n€^r been high compared to other countries* Yet we financed an expansion of credit, one-third larger than the largest expansion of credit in a peacetime year in the United States, of 60 billion dollars in a non-inflationary way by letting the securities vwhich the banks held and other financial intermediaries flow Into the hands of non-bank investors rather than have them just pumped up by the creation of a s s e t s and liabilities on a balance sheet. I believe if we had not followed that c o u r s e , we would have had an almost intolerable situation at the present time. -21I would like to tell you one incident, it i s of no particular importance, it shows that those people who s a y interest rates make ao difference have perhaps strayed pretty far from the real facts. At the time of the magic 5 * 1 had a woman c o m e to m e with $30, 0 C in c a s h . have it in the bank a*5g0B|£flttSB)V** She did not She heard about the s e c u r i t i e s and thought she would invest. 1 don't suggest there was any great amount like this. But at a certain point people do s e e what is involved in this saving and investment p r o c e s s and they will invest. This i s really at the heart of sound finance. It is in this area that the Federal R e s e r v e has endeavored to operate, We must not be in politics. will think I am naive on t h i s . Let m e emphasise it. Many of you Nevertheless I have persistently indicated that the purchasing power of the dollar i s just a s important to the Republicans and the Democrats alike* There a r e many a r e a s where we can disagree in the spectrum of politics without either party following the route of depreciation of the dollar« My good friends tell m e I am very naive on this, that it has been in politics always and always will be. To some extent that may be true. However, I say that depreciation of the currency will Mvmt solve anything for either party and should be rejected out of hand. The American dollar is a symbol the world over and to impair its integrity is similar to lowering our flag. Whan we talk about our background in the United Nations f our political framework, our problems $ when we talk of our political ideals and the inseparability of politics on the one hand and economic freedom on -22- the other, in t e r m s of a higher standard of living, this i s where you c o m e out. I feel more confident than 1 ever have been before that by and large the American people do understand this. They don't really believe down d e e p - * there may come a time when they w i l l - - t h e y don't really believe down deep yet that there is pie In the sky, that there is a fountain of perpetual youth, that you don't have to pay your b i l l s . Now I want to point out that on this argument of big government or little government, on whether we ought to have more government activity or l e s s activity, you and 1 can have ail the positions we want a s citinens. I have sense convictions about it. They have been weighted somewhat by the fact that a number of people say to m e , M i . Martin, there is no such thing as a decision in the market place which is of benefit to people. decisions a r e devoid of social c o n s c i o u s n e s s : Such They overlook the fact that people buy.out of their private income«* many goods and s e r v i c e s which a r e basic n e c e s s i t i e s . Nevertheless that is their position. 1 say to them, do you mean to tell m e all decisions of government are made in the real s e n s e of social c o n s c i o u s n e s s , in t e r m s of the greatest good for the greatest number ? They do not know what the solution to the farm program i s . We have a 9 billion dollar expenditure in it. we have not solved the farm problem yet. We have a lot of budgetary problems. However, under present conditions it may be we should have more government activities and l e s s private a c t i v i t i e s . with that. I am not going to argue I say there is a point beyond which you cannot take from the income of the people and achieve your g o a l s .
@FedFRASER