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F o r
R e l e a s e
o n
D e l i v e r y
{Approximately 1:30 p.m.
Saturday, October 2, 1965)
THE LINKS BETWEEN
Remarks by Governor J. Dewey Daane
Member, Board of Governors of the Federal Reserve System
at the Luncheon Meeting of the
Georgetown University Bankers' Forum
Washington, D. C.
on Saturday, October 2, 1965
Remarks by Governor J. Dewey Daane
Member, Board of Governors of the Federal Reserve System
at the Luncheon Meeting of the
Georgetown University Bankers' Forum
Washington, D. C. - Saturday, October 2, 1965
THE LINKS BETWEEN
As I understand it, Matt Szymczak originally had scheduled
Lord Cromer, Governor of the Bank of England, for these luncheon
remarks.
Subsequently, as you all know, he turned to Attorney General
Katzenbach so in effect today I am in the happy position of substi
tuting for a substitute, which I hope leaves me considerable freedom
of talk if not of thought.
Whenever I am called on to substitute for
someone on a program, I remember the time when I was a boy back in
Michigan in the late 1 9 2 0's and my father and mother took me to New
York to the opening of a new Broadway musical entitled "Three Cheers",
scheduled to star the famous acrobatic dancer Fred Stone and his two
equally famous dancing daughters, Dorothy and Paula.
Just two weeks
before the opening of this musical, however, Fred Stone was hurt in
a plane accident and his role was taken by his close personal friend
Will Rogers.
As the curtain went up on the play, Will came in twirling
his rope, parked his gum on the side of the stage, and began by
saying— "Fred Stone was supposed to start by jumping from this b a l c o n y pointing to a balcony at the back of the stage--do a triple somersault,
land on his feet between Dorothy and Paula, and break into a fast
shoe shuffle.
That part of the program will be omitted this evening."
Well this noon I will have t o L o r d
Cromer's accent for the simple
reason I could not hope to^opj^.iet^ AftA, as those of you know who are
aware of my testimony beffore ||:&'iio$sje'ijianking and Currency Subcommittee
U BR ARY
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a few weeks ago, I might find it equally difficult to emulate Attorney
General Katzenbach, or at least to copy his accent with respect to bank
mergers.
Instead, when we discussed my last minute appearance on this
program and what I might say, Matt Szymczak suggested that I try to
link the morning and afternoon discussions.
The subject of links seemed
appropriate for a Saturday discussion and I agreed to attempt to do
so.
So my seemingly ambiguous title is not as esoteric as it sounds.
As I have thought about the matter there seems to me to be
at least one quite obvious link between them.
This morning the general
subject was "Gold and the Monetary Unit" and we were looking outward
to the functioning of the world payments system and more specifically
at the question of reserve creation and its impact and implications
for both the developing and developed countries.
This afternoon the
distinguished speakers will be turning inward and looking more closely
at developments and policies at home.
But without pre-empting their
remarks in any way, it is clear that neither monetary policy nor debt
management in recent years has been oblivious of the world payments
system, nor of the need for adjustment of imbalances in our balance of
payments.
Thus perhaps the first and most obvious link is what I
would label the "Roosa categorical imperative", deriving from the Per
Jacobsson lecture by Mr. Roosa of yesterday afternoon, namely, that on
the one hand monetary policy has to be formulated with full regard for
all other elements of public policies and objectives--and clearly this
includes balance of payments considerations and international reserve
asset creation— while, on the other hand, other appropriate public
policies cannot ignore the elements of monetary discipline essential
to the system.
As far as the implementation of this link in practice
in terms of monetary policy decisions and debt management actions,
I will leave discussion of that to the afternoon speakers.
But I may
add a bit of more to the remarks of the morning speakers--not in any
way in rebuttal but more by way of amplification and perhaps clari
fication.
M y first observation is that it is interesting to find that
under the genaral topic of "Gold and the Monetary Unit" the three speakers
this morning talked mainly about a payments system depending upon
international liquidity embracing a much broader spectrum of assets
than gold alone.
I recall vividly when then Under Secretary Roosa
testified before a Congressional Committee one day and Congresswoman
Griffith asked him point blank, "Why do men want gold anyway, Mr.
Roosa?"
In my long association with Bob Roosa, it was the only time
I ever saw him at a complete loss for words.
After a long silence,
he said in effect that he did not pretend to understand all the
psychological elements determining the mores of people but that he
would simply say that the desire for gold was an inescapable fact of
life in the international payments system.
For my part, I see no
reason to think that this will change in any sudden way over the
years ahead.
At the same time, the historical process by which sub
stitutes for gold evolve and develop--evident in both domestic and
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international mdrletary histdty**-*wiil certainly continue with undiminished
inexorability.
In fact, our international monetary system is not
simply based on gold but on other reserve assets including, most im
portantly, the gold dollar, reflecting the present established price
of gold.
To illustrate this I have always found useful the analogy
made to the Zen-Buddhist garden in Kyoto, Japan, which some of us saw
after last year's Bank-Fund meetings in Tokyo.
That particular garden
has fifteen irregularly shaped rocks strategically placed in a bed of
fine sand, and so placed that at any one time only fourteen rocks are
visible yet the viewer is always conscious of a fifteenth rock.
That
fifteenth rock in our present world payments system is the established
price of gold and the willingness of the United States to maintain
the present value of the gold dollar.
simply a matter of oral declaration.
But that willingness cannot be
It has to be based on the strength
of our economy and on the public policies appropriately blended to
maintain that strength, with price stability of the essence.
So to
my mind the most vital link between the morning and afternoon dis
cussions is the value of the dollar itself.
M y second, closely related, observation is perhaps more what
might be termed a "nonlink" rather than a link between the morning and
afternoon discussions.
In short, it is that there is no international
liquidity escape route from domestic liquidity requirements appropriate
to the maintenance of sustainable expansion and growth.
I have been
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monetary reform, and new forms of liquidity, basically reflects a desire
to constrict the present degree of liquidity and in a way that would,
as they see it, enforce monetary discipline upon the reserve currency
countries.
To be blunt, it is no secret that some European observers
feel that our monetary policies in recent years have not been suffi
ciently restrictive--that our ability to finance external deficits
\tfith the dollar in its role as a reserve currency has exempted us from
monetary discipline.
Here at home, on the other hand, much of the
academic and other clamor for greater international liquidity and for
altering the international monetary system reflects the idea that this
would enable much more expansionary domestic policies, monetary and
other.
In fact, both notions are in my judgment misconceptions.
The
answer to the first charge lies in the continuous and increasingly
comprehensive efforts made to contain the United States balance of
payments deficit, beginning in February, 1961, accelerated in mid-1963,
and broadened in February of 1965--efforts which have not ignored the
monetary area.
In fact, the latest measures have had, and are having,
a very direct and conclusive impact on bank landing abroad.
The United
States current willingness to explore new methods of reserve asset
creation does not, and cannot, reflect any lessened determination to
achieve equilibrium in our balance of payments.
President Johnson
made this very clear in his remarks at the Bank-Fund meetings this past
week.
Liquidity cannot replace dollar viability and dollar viability
rests squarely on the continuance of appropriate domestic policies.
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A third, and similarly related, observation is that in no small
measure international liquidity, and the role of gold in supplying that
liquidity, is a function of attitudes and those attitudes cannot be
divorced from domestic money policies.
As I have said before, I am
frequently tempted to philosophize that liquidity is simply a state of
mind.
For example, in recent years uneasiness abroad regarding U.S.
domestic policies and our balance of payments position has affected
the assumed needs for liquidity and the form of such needs.
As a more
specific illustration it may be noted that, even apart from legal
requirements, attitudes towards the gold tranche as a reserve asset
are importantly determinative of its place in the liquidity spectrum.
But there are other, perhaps no less fundamental,
links
between discussions of the gold and monetary unit and domestic money
management (in which I would include both monetary and debt management
policy).
1)
The problems of determining the adequacy of domestic
money supply--and there are no cut and dried formulae for
doing this--are even more difficult when raised to the
international level.
Just as in the case of the domestic
money supply, there is a clear need for some sort of stan
dards to determine what the aggregate increase in reserves
or other forms of liquidity ought to be as we move ahead
in shaping the international monetary system.
But in the
world of fact there are no such criteria, and an appraisal
of the needs for reserve assets over the years ahead
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remains in the mystical realm just as much as the desire
for gold itself.
On this score I would add that just
as there can, in my judgment, be no simplified rules
devised to equate automatic money supply increases to
domestic needs--that no such rules can be a substitute
for judgment--this same principle, amply demonstrable
in domestic monetary affairs, is true in international
monetary affairs.
No arbitrary link to gold or year-
by-year provision of a fixed amount of gold based
assets would be sufficiently flexible and adaptable to
meet the varying international requirements.
2)
Again as in the case of the domestic monetary
system, there is the question of the closeness of the
relationship of any new international reserve asset
to gold either in its creation or in its use.
Both
in domestic and international finance, as 1 have said,
the historical tendency has been toward the increasing
use of substitutes for gold.
It would appear to
be a retrograde step to establish a new form of
international money rigidly linked to gold and useable
only in conjunction with gold.
But the much more
difficult problem is how to build on and support the
one gold reserve that sustains the entire system
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by assuring gold convertibility at a fixed price.
One
solution put forth in a recent volume by Mr. Roosa
entitled "Monetary Reform for the World Economy" is
that all countries should assume the responsibility
for buying and selling gold at a fixed price.
Whether
or not this is the answer, some answer must be found to
the continuous erosion of the gold supply that forms
the monetary base for the entire world payments system.
3)
As we look backward toward the morning subject of
gold and the monetary unit, and forward to this after
n oons session dealing with our domestic money
problems, it seems to me that there is another link in
the fact that changes in the money supply alone are
not enough either domestically or internationally.
Just as in our domestic monetary system the growth of
credit facilities has proved to be an even more impor
tant part of meeting liquidity requirements, so is this
true of the international monetary system.
Thus the
current increase being implemented in the countries
quotas in the International Monetary Fund is a major
contribution to the functioning of the system.
4)
A final link, ancL^.yery complex and difficult one
to unravel, is l^ana^T^^n^'^lat ionship between
reflecting differing
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domestic requirements, and undesired and disequilibrating
capital flows.
The most obvious solutions, in terms
of changes in internal policy mixes, are not necessarily
consistent with the complexities of the problem in
terms of the supplies and demands for funds here and
abroad, and the various differing stages of capital
markets.
Classical remedies have, in fact, not been
found adequate to cope with this unclassical problem.
In concluding these brief remarks this noon linking the
morning and afternoon parts of the program I would be derelict if I
did not stress the one link that stands out above all others.
That
link, evident in both morning and afternoon sessions today, is the
standard of excellence that has been the hallmark of these Georgetown
University Forums.
I have been privileged, as I know a number of you
have been also, to attend these Forums almost from their inception
and to witness at firsthand the contribution they have made to
stimulating thought and action on the more significant financial
questions confronting us.
For example, in the fall of 1963 I vividly
recall the discussion on international liquidity carried on by Lord
Cromer, Governor of the Bank of England, Dr. Holtrop, President of
the Nederlandsche Bank, and also President of the Bank for International
Settlements, and Dr. Otmar Emminger, Director of the Bundesbank.
In
the two years since then, in all of our discussions of the subject,
both at home and abroad, I have not encountered a more stimulative or
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provocative session.
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Uniquely, the Georgetown Forum discussions have
not been abstruse academic analyses but rather have presented off the
record the views of policy makers responsible for operations in their
respective areas of competence.
Thus, in my judgment,, the Georgetown
University Forum has well fulfilled its hopes expressed in the 1963
program that l!this international meeting of bankers at Georgetown
University hopes to provide a Forum for the free discussion of our
national and international responsibilities in the interest of the
public good.11 In these days and times that interest in, and benefit
from, these kinds of discussions is even more compelling and augurs
well for the future of these Forums and for the continuing need for
this kind of searching exploration of those financial problems of
paramount importance.
And as you all know, in every way the quality
of these Forums is a tribute to the personality and talents of Governor
Matt Szymczak.
So I close with this personal word of thanks to our
former Federal Reserve colleague and long-time friend, Matt Szymczak,
and want him to know that I take great consolation from the fact that
a man can remain so young and vigorous and creative after retiring from
the Federal Reserve Board.
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@FedFRASER