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Remarks by G , H . King, Jr.
Member of the Board of Governors
of the
Federal Reserve System
before the
Helena Branch Forum
Helena, Montana
September 23, I960

I am happy to be in Montana again.

I have traveled through

Montana on several occasions, all of which were pleasure trips, so I
welcome the puise of a business trip in order that I might visit here
apa in.
I had heard that this would be the last meeting of the
Helena Forum, but I am happy to find this is not the case.


I shouldn't be sensitive on this point, but I was afraid a disturbing
trend was developing.

In April I addressed the Pacific Northwest Con-

ference on Banking in Pullman, Washington, and was informed thereafter
that the Conference would cease operations after many years of success.
Now this in itself would not be too alarming, but I can also remember
when I was dating the young lady I married.

One of our favorite eat-

ing places was an old building several miles outside Baton Rouge,
Louisiana, named Old Hickory Inn, so named because Andrew Jackson
spent some time there.

Old Hickory Inn was full of wonderful atmos-

phere — checkered tablecloths, candlelight, fireplace, and an old
creaky floor.

In fact, this was the spot at which I placed the engage-

ment ring on my wife's hand.

Shortly after our engagement Old Hickory

was demolished to make way for a new highway.

Then, on our honeymoon

we went to a beautiful spot named Inn by the Sea on the Gulf Coast.
Within a year, the hotel was torn down and replaced by a U.S. Merchant
Marine Academy.

As you might puess, I am gradually coming to think of

- 2 nyself as a similar character to J . Digby O'Dell, the friendly undertaker.
So if any of you has a project which needs termination, you might consider my services.
Perhaps you have heard that purebred beef cattle is one of
my occupations.
fascinates me.

This being so, Montana — and all of the West —
One of your own purebred Hereford breeders moved to

Alabama in 19hh for health reasons.

His name is Lon Chatterton.

though somewhat weatherbeaten, he is a distinguished cowman.


In spite

of the fact that my opportunities to visit with him have been limited,
we have developed a good friendship, notwithstanding the fact that he
is about hO years or more my senior.

He is still interested in good

beef cattle, his life's work, and apparently will be until the end
in the finest traditions of a cattle breeder, a Westerner, and an

His love for Montana has never died.

In fact, he clearly

shows his affection by naming most of the female offspring of his herd
"Miss Montabama 1st," "Miss Montabama 2d," and so on.

People like Lon

Chatterton are valuable assets of our country regardless of where they
hang their hats.
And so it is a pleasure to be here in Montana and reminisce.
Frankly, I would enjoy talking at greater length about Herefords and

But something tells me you are interested in banking, and you

would be surprised — and maybe disappointed — if I didn't talk a few
minutes about a subject related to banking.
I do value this opportunity to meet you bankers, to hear your
views, and to learn from your experiences.

You are continuously in

- 3 contact with the great diversity of industrial and agricultural
enterprise which contributes to the economic progress of our country.
And it is perhaps here in the West that we see most clearly the richness and variety of our country.

Western bankers have an important

role in furthering the progress and expansion of our economy in all
lines of endeavor.
The growth of our econoiny cannot proceed without the continued development of adequate and appropriate credit facilities.
The banking system has a vital role to play in this respect.

It has

expanded in the past — and will no doubt continue to expand in the
future — so as to provide its share of the credit needed for economic
Monetary policy is a day-to-day process in which our Board
continuously reviews and analyzes current tendencies in the banking
system, in credit markets, and in economic activity.

But the mean-

ing we attach to short-run banking and credit developments and our
understanding of them depend to a great extent on our awareness of
longer-term trends and of the basic relationships which underlie and
influence current conditions.
Tonight, I would like to focus attention on some longerterm considerations.

I particularly want to discuss the functioning

of credit markets generally.

It would be presumptuous of me to explain

the role of banks to bankers, and maybe it is only a little less presumptuous to discuss the broad role of credit markets with active participants.

I would like to think, however, that an over-all view of

credit markets provides an interesting perspective for the role of banks.




No one institution can be understood in isolation.


evolution and structure of the banking system cannot be fully understood unless consideration is given to the evolution of other market

Similarly, other market institutions cannot be fully

understood without studying their relation to each other and to the
banking system.

The Board of Governors has been concerned with and

studying these relationships for many years.
Credit market institutions are primarily related to each
other through the forces of competition.

They compete with each

other in providing funds to borrowers and in attracting saving.


a large extent, savers can choose among alternative investment opportunities, such as savings deposits or Government securities, and
lenders can make use of alternative means of financing.

Market insti-

tutions are by and large intermediaries between savers and lenders.
Their continued growth depends on their ability and willingness to
satisfy the evolving needs of ultimate buyers and sellers of credit
in markets.
Because of the character of their liabilities, market
institutions tend to concentrate their lending activities in particular
market segments.

Commercial banks, for example, which have the shortest-

term liabilities, tend to concentrate on shorter-term lending, although
intermediate and longer-term loans have become important components of
bank loans.

Pension funds, on the other hand, have long-term and rela-

tively more predictable liabilities, and their portfolio is made up
more of comparatively long-term assets.

- 5 Between these two extremes there are many gradations, with
some institutions specializing- more than others, some investing in a
wide variety of long-term credit market instruments, and some willing
and able to take greater risks than others.

Differences in the func-

tion and nature of market institutions are not so great, however, as
to limit them to particular groups of borrowers or to set shares of a
particular market.
When mortgage demand rises, for example, banks, insurance
companies, and savings and loan companies all compete for the expanded

Expanded corporate financing demands can also be satisfied by

different institutions in a variety of ways.

Thus, within limits,

market institutions can divert their lendable funds to different uses
and, in doing so, each will compete with the others to some degree.
Market institutions compete not only in lending funds but
also in obtaining funds.

They compete in this way because, again

within limits, savers consider alternative forms of financial investment almost equally suitable to their needs.

As an example, savings

deposits and U.S. Savings Bonds are evidently closely competitive, because they both serve similar saving needs; such deposits and Treasury
bills are also closely competitive, particularly for the liquid funds
of business.
Savings institutions might obtain more funds by raising the
interest rate paid to depositors; t:iis, of course, makes Savings Bonds
or Treasury bills a relatively less attractive investment.

Funds avail-

able for such things as mortgages or bank loans are increased, but at
the same time, completing the circle of effect, the cost of borrowing
to the Government is raised.

The way in which I have brought interest rates into the
discussion may make it appear as if market institutions can increase
the price they pay for funds at will.

Needless to say, they cannot.

Apart from institutional and legal restrictions, an institution cannot permanently pay more for funds than it can obtain on lending them,
after allowing for operating costs and reasonable profits.
The level and pattern of interest rates are by and large a
reflection of market forces.

Broadly speaking, movements of interest

rates express the forces of competition as savers, market institutions,
and ultimate borrowers all cone together in the market, some seeking
to find the most profitable use of their funds and others seeking the
least expensive source of credit.

In this process, the credit market

helps to allocate the country's productive resources to uses that correspond with the inclinations and needs of the people.
We often say, as I have just said, that a smoothly functioning financial market helps allocate the country's productive resources
and, further, that it is essential to continued growth with stability.
But you mipht ask how, in fact, are financial and productive resources
phased together?

This is an easier question to pose than to answer.

As part of the answer, we can look to experience.

As our

economy has prown in complexity, and more poods fulfilling diverse
needs have come to be produced, so have our financial markets broadened
and deepened.

In a free econoi^y this comes about in response to the

expressed need of the people, who find that institutions, as they exist,
are inadequate to the financing requirements of their frowing
ing demands for poods and services.


j chang-

- 7 The rapid expansion of short- and intermediate-term consumer
credit and of consumer mortgage debt during the past fifteen years is a
remarkable example of the adaptation of financial markets to nonfinancial

The amount of such consumer debt outstanding has expanded almost

8 times from its end-of-19U5 level.

By way of contrast, nonfarm business

debt has risen about 3-1/2 times its level at that earlier date and farm
business debt less than 3 times.
This rapid expansion of consumer debt was facilitated by the
readiness of banks to expand their consumer loans or to provide finance
to other market institutions who were, in turn, directly financinp consumer purchases.

It was also fostered by the rapid growth of savings

and loan associations and by development of various other consumer
financing facilities.

The economy's ability to produce more consumer

goods and, what is equally if not more important, the ability of broad
groups in the population to purchase them v/ere enhanced by the expansion of credit markets.
As another part of the answer to the question of how financial
and productive resources are phased

together, I

might also present a

hypothetical situation — and what will appear to be an unreal situation.
But sometimes we can sharpen our understanding by removing ourselves,
briefly, from the world of experience.

In this way, we can often more

clearly see connections that tend to be obscured by concern with the
problems of daily operations.
There are dangers involved in this. We have all heard of
the man who cannot see the forest for the trees.

By the same token,

- 8 the man who cuts down trees in order to obtain a better view of the
forest often finds in the end that he has no forest left to see.


hope to emerge, unharmed by falling trees, somewhere in between these
two extremes.
At any rate, let us visualize for a moment an economy with
no banking institutions, no other financial business, and no credit

Savers in that economy would not easily be able to transmit

their surplus funds to prospective borrowers.

They could transmit

funds only by hand, and this could not be done efficiently or in any
large volume.

Most savers would have to use the funds themselves.

The country's use of its real resources would be limited.
The capacities and inclinations of savers are undoubtedly different
than borrowers.

They may be less inclined to take the risks necessary

to economic growth.

Furthermore, they would be limited because the

funds could only be used for outlays which could be completely financed
out of their own earnings.
growth possibilities.

All this would severely limit the country's

Such a lack of credit facilities would limit

the extent to which people could make their choices effective in the
market place.
Indeed, though in not so extreme a form, a situation similar
to this prevails in many of the less developed countries of the world.
Savers are not able to transmit funds to potential borrowers in their
own country.

Instead, funds are kept in a mattress or invested in

foreign exchange.

The saving, in other words, is not effectively mobi-

lized to meet the country's needs.

That is the function of financial

- 9 By introducing into our hypothetical example an institution
which can attract funds from savers and make them available to borrowers,
the country's use of resources becomes more effective.

Borrowers can

undertake projects which yield their return over a longer period, and
there will be greater investment in such things as factories which accelerate a country's growth.
I am in danger, I see, of leaving the impression that the
proliferation or multiplication of financial institutions leads to
greater growth.

This is obviously not so.

If I leave that impression,

I have chopped down too many trees.
A large variety of financial institutions has no virtue in
and of itself and an increasing variety bears no necessary relation to

Financial institutions expand successfully only if they are

fulfilling economic needs.

These needs are many.

Among them are growth,

but they also include provision for future personal security and a better
distribution of the country's existing productive capacity.
So far I have been discussing why the development of financial markets is important to the country and why they are needed to
transmit funds from savers to borrowers.
the question:

Now I would like to turn to

Who are the borrowers in this country?

As I previously noted, consumers have increased their borrowing the most.

They have also become the largest borrowers in the private

At the end of last year, total consumer debt outstanding was

$190 billion.

This was larger than the debt of corporate business,

which amounted to $l!t0 billion, but corporations also finance themselves
through equity issues as well as by borrowings.

- 10 By way of comparison, the outstanding debt of the Federal
Government held by the public amounted to about $2k0 billion at the
end of last year.

The publicly held Federal debt has fluctuated from

year to year since the end of the Second World War and is now slightly
below the 19hS level.
While some consumers have borrowed to finance their increased
expenditures on homes and durable goods, other consumers have been saving,

Or often, the same person is both borrower and saver.

At the

same time as he goes into debt to buy a home, a consumer may also be
accumulating financial assets.
The total value of financial assets held by consumers at the
end of last year was about $920 billion.

If we exclude the value of

holdings of corporate stocks, financial assets amounted to about $520

The magnitude of these figures makes it clear that we cannot

successfully encourage the transfer of funds from saver to borrower
without assuring the saver that his funds will not be eroded by inflationary conditions or will not be imperiled by severe economic decline
and a disturbed and uncertain financial market.
The encouragement of broad, flexible, and responsive credit
markets helps create conditions for sustainable economic growth.


country cannot grow in response to the aspirations and wishes of the
people unless we have financial institutions and markets which mobilize
saving and channel it into long-run investment purposes — and an environment of monetary stability is essential to the further development
and expansion of credit markets.

Providing monetary stability is a

- 11 challenge to the federal Reserve System.

The farther development of

credit markets is a challenge to our financial system, including that
important segment, the commercial banks, and though these challenges
are simple to view, they will be difficult to meet.
lenges is nothing new to Americans.

But meeting chal-

In fact, our ability to shoulder

responsibility when "the chips are down" is our greatest heritage.
must continue to help build an even greater America — the hope of
freedom in the world.