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Remarks of G. H. King, Jr0
Member of the Board of Governors
of the
Federal Reserve System
at Commerce Day
University of Mississippi
Oxford, Mississippi
May 12, 1961




The purpose of Commerce Day, as I understand it, is to
provide an added channel of communication between students of business and some of its practitioners.

It gives students an opportunity

to hear of the problems and responsibilities assumed by those of us
who are actively engaged in business and government.

Perhaps it

should also be viewed as an opportunity for those of us in the world
of affairs to learn more about your views and problems.

I was a stu-

dent 20 years ago, and I remember that in those days it was difficult
for me to become very interested in serious talk.

I am sure you real-

ize that I have no choice but to talk seriously today.

This being so,

I hope you find some interest in what I say.
If this interchange of views is to be.constructive, we should
concentrate only on critical problems and not on those of only passing

What factors will be critical to you at the important turn-

ing points in your business careers?

These factors will be the "endur-

principles" of our economy and not the ever changing pattern of

Most of you who are students will approach the peak periods

in your careers anywhere from one to three decades from now.
will undoubtedly be greatly changed.

The world

The frequent translation of what

was yesterday's science fiction into the reality of today warns us of
the rapidity of change.

Some of the things you are learning now will

have become obsolete by that time.
after you leave school.

New skills will have to be acquired

But some basic principles will endure,


general purpose will be to tell you how I try to distinguish temporary
elements from enduring principles.




I could discuss this problem in a philosophical wayj but,
instead, let me illustrate my approach to it by a description of some
of the problems I face in the work in which I am engaged.
The Board of Governors of the Federal Reserve System, of
which I am a member, is the central bank of the nation.

It has a

variety of responsibilities, the leading one of which is the management of our monetary system.

The end objectives of this management

are economic stability and growth at a sustainable rate.

One of the

principal ways in which these objectives are serviced is through preserving the value of our monetary unit.

While this seems like a

simple task aimed at simple objectives, the process is a complex one.
Furthermore, it illustrates the question with which I started this

What are enduring economic principles and what are changing


As I hope to illustrate, this is a knotty problem, and

ready-made answers are hard to find.
The Federal Reserve is banker both for the Federal Government and for the banking system.

Although the Federal Reserve's func-

tion as banker for the Federal Government is relatively important, I
shall say little on that subject.

This function includes the many

problems faced by the Treasury Department in servicing our Federal
fiscal system and as manager of our large public debt.

I shall, how-

ever, deal mostly with the Federal Reserve as a banker's bank.


ating bankers themselves need a banker; one that is a source of credit,
an operating depository, a source from which they can restore their
supplies of currency, and a channel through which they can collect
their checks.

The Federal Reserve System fulfills all of these functions.




This list, however, does not include the most important
and critical of all Federal Reserve responsibilities? that responsibility is the management of our monetary system.

Banks, as holders

of deposit funds, are the leading creators of money.

While individual

banks, much as the rest of us, often feel that they have too few funds
at their disposal and could use considerably more, the banking system
is intended to operate in a way that will supply the amount of credit
and money needed by the economy; no more and no less.

Balancing of

restraint and ease in the credit markets must be guided by the economic needs of the nation as a whole.

Put in blunt terms, the expan-

sion of bank credit and money should be checked somewhat when business
booms get too exuberant.

We know that wild booms produce subsequent ,

economic relapses which, in turn, produce many forms of economic misery.
Credit and money, however, can be made more freely available when the
economy is not in danger of inflationary boom.
This managerial problem would be simple if such round
phrases as "the economic needs of the nation" could be readily and
precisely determined.

In fact, however, these needs are never easily

We must weigh what different individuals think they need

and try to balance these various needs in a way that will serve the
general public interest.

At times, very real conflicts develop be-

tween various kinds of needs.

Recent developments furnish an important

example of these difficulties.
As most of you know, our economy suffered a recession throughout the second half of I960 and into the first quarter of 1961.


July I960 and February 1961 the production at factories and mines declined




by about 7 per cent; less than in some other recessions but unmistakably
a serious and significant amount.

Even more sobering was the influence

of this downturn on the employment of plant capacity and manpower;


number of persons unemployed rose well above 5 million and has been at
a level uncomfortably close to 7 per cent of the total labor force.
We should note, moreover, that successive recoveries since World War II
have witnessed successively higher unemployment percentages even during
the upswings.

Some have referred to this as "structural unemployment„'»

Since this phrase seems to mean various things to various
persons, perhaps I should give you my idea on the subject.

No one can

state with absolute certainty what causes this phenomenon.

It seems

reasonable to me, however, that one of the major causes, if not the
main cause, is the fact that wages and salaries have been raised substantially more than commensurate increases in productivity.


I am overlooking some cogent reasoning, but it seems a relatively
simple thing to me that when the price of anything is held up artificially in a market economy, this only provides increased opportunity
for competing items to capture that market.
competing item is machinery.

In the case of labor, the

If the cost of people's efforts is to be

pushed higher and higher in the vain hope that this will promote prosperity, then we are likely to witness an astounding amount of automation
introduced at a rate faster than the displaced workers can be reabsorbed
into other lines of activity0

Automation and increased productivity

are excellent things but we are all losers when we fail to use our manpower resources fully.

However, higher utilization of labor is not

likely to come until we abandon hopeless attempts to better man by

requiring that he be paid more than his work is worth in what is
otherwise a free market econoir^o
Some would challenge what I say as being inhumanitarian,
but I believe it is far more humanitarian to support measures that
keep people at work, especially at a time when unemployment is high0
Our problem is really this simple —

and its solution could be equally

simple; but we Americans have a penchant for trying to make simple
things complicateda
After having digressed into my own philosophy of this persisting problem, I will return to the current problems of the recession which we believe is tapering off.

As is generally true in periods

of recession, consumer purchases of automobiles and other durable goods
have been curtailed.

Unlike earlier recessions, the housing market

did not respond to greater availability of mortgage funds but continues
to be relatively weak.

On the other hand, business plans for capital

spending, while slightly curbed, have been sustained at quite high

This reflects optimism even though there is a growing margin

between the capacity of industry and its utilization.
The normal Federal Reserve action under these circumstances
would have been to ease credit, mainly by purchases of government
securities in open market operations and by reductions of Federal
Reserve bank discount rates,
by all of the usual means,

Credit has been eased in fact, but not

The need for new methods of creating ease

is because of a development of considerable interest to all of uss
the changed position of the United States in the world economy.

In recent years we have been sending more funds abroad than
we take in from the rest of the world.

This is partly the result of

our assistance to foreign nations in the development of their economies.
We have helped them become productive and prosperous because we know
that weak allies are almost as bad as none.

But now that our allies

are strong, our own position in world trade is being challenged by
these same allies.

Speculators are also challenging our position as

reserve banker to the free world.

Added to these longer-run factors

have been some shorter-term ones that caused us to lose some gold.
This threat to our power and prestige has abated at the present time.
We all hope that it has gone away forever.
this and resume business as usual?

But, do we dare assume

I hope not.

The stakes are too

high for such lighthearted irresponsibility.
The effort we have made to restore economic vitality to the
war-torn nations of Western Europe may have left us psychologically
ill-prepared to face the fact that our own international position has
become somewhat strained.

In retrospect, it is quite clear that this

change had been developing over a considerable period; it was not something that had emerged suddenly and without warning.

Except for a

brief and abnormal period around the time of the Suez crisis, the
United States had been running a deficit in its balance of payments
during most of the preceding decade.

However, it was only in the re-

cession of I960 that the smart-money fringe of international finance
started to take serious note of the fact that this deficit was denting
our international monetary reserves.




The deficit in our balance of international payments takes
two formss

the dollars credited to foreigners and the gold they with-

In the summer and fall of i960 an abnormal fraction of foreign-

held dollars was converted into gold.

While our position was not

greatly changed in fundamental terms from what it had been for several
months beforehand, the gold flow was a clear message from the world of
financial opinion that we must exercise financial prudence if we were
to maintain our position of reserve banker to the free world.
The relationship of this international problem to domestic
monetary policy lies in the factors that influence the movements of
short-term funds into and out of the United States.

To a considerable

extent, the liquid funds generated in the process of the international
exchange of goods are managed by foreign central banks and monetary

However, with the lifting of exchange restrictions and

the current convertibility of leading currencies, a sizable volume of
such funds is in private hands.

These funds could conceivably be

attracted to those markets in which they can earn the highest rate
of return.

And it might be expected that the relationships of short-

term money rates in the leading international financial centers would
affect the directions in which such volatile funds flow.

If short-term

interest rates in the United States present too great a disparity from
those in other money markets, we would likely lose such interest-conscious
funds to money markets offering higher rates of return.
At this point we faced a conflict of considerations.


domestic needs for credit ease and lower interest rates conflicted with
our international problem in which low interest rates might have




exaggerated further the outflow of short-term funds.

In other words,

the Federal Reserve was faced with the problem of meeting its domestic
responsibility to provide monetary ease without aggravating the movement
of short-term funds away from the United States,
We undertook to solve this problem by making reserves available
to banks by means which would not drive down short-term interest rates

For example, purchase of short-term securities aggressively

in the open market would have tended to reduce their yield.


the Federal Reserve made credit more available by allowing banks to
count vault cash as part of their reserves.

The authority for doing

this was granted by legislation passed in 1959,

The Federal Reserve

also changed its techniques of operation in the open market.

When the

structure of interest rates could be safely left to the market, the
System had dealt only in extremely short-term obligations.

This oper-

ating rule had advantages both in practice and in principle under the
conditions in which it was applied.

But conditions change.

Now, under

differing circumstances, the maturities of securities purchased by the
System has been extended.

The purpose is to avoid concentrating the

System3s market influence on the short-term end of the market and to
spread it to all sectors of the market.
Now, do these recent monetary experiences have any lessons
for the students and practitioners of commerce?
first conclusion is a rather obvious ones

I think they do.


Our national pre-eminence

cannot endure unless we take the necessary steps to sustain our basic
competitive position.

The confidence with which many of us viewed the

position of the dollar in the early postwar period is somewhat like the




complacency with which some old and established businesses have viewed
their competitive position.

In a world in which change is encouraged,

complacency is a luxury we cannot afford.

As a nation we have allowed

ourselves to become so complacent that we doubt the sanity of anyone
else who isn't complacent.

Courage to face our problems squarely and

take actions that will really solve them is a requisite to maintaining
a free competitive system.
Another lesson flowing from this experience is that conflicts
between objectives may require us to use essentially novel and even
experimental devices in trying to accomplish a major goal without damage
or harm to another objective.
can be changed.
of commerce.

Principles endure; it is techniques that

This is a point of particular importance to the students

Techniques are only a means to an end.

New circumstances

may require new techniques.
A final important lesson to be learned from this experience
is the enormous power of belief.

What other nations believe to be

the position of the dollar is almost as important as the technical
facts about our balance of payments.

Human beings require not just

substance to nourish them, but faith and conviction.

The beliefs

that people hold of ourselves and of our nation are profoundly important, almost as important as the objective facts about us.


and customs may change, as they inevitably do, but the creature that
lies behind these habits and customs ~
centerpiece of our concern.
serves human functions.

man —

remains the enduring

Commerce serves no function unless it

Those of you who go into commerce will fre-

quently be requested to endorse or oppose.certain governmental actions.




Your decision in many cases will hinge on the degree of your faith
in the free market system.

The choice will be yours, and your col-

lective decisions will play a part in shaping our nation's future.
And so I believe we students of economics would be well
advised to speed an understanding with the student of the humanities.
Such an understanding requires no capitulation from either if both
really believe free markets provide an atmosphere conducive to man's
maximum development of his capabilities.

I believe that they do, and

would submit that this is an "enduring principle" —

the principle on

which the greatness of America has been built, and a principle which
can provide a bright tomorrow.
In closing, I would like to quote a distinguished historian
of our day, Bruce Catton, editor of American Heritage, who said, "Man's
problem is not that he was born in the middle of the twentieth century,


that he

^ s born in the middle of the human race."