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For Release on Delivery

Remarks of J. L. Robertson, Member of the
Board of Governors of the Federal Reserve System
before the
Bankers Club of Detroit
Statler Hotel, Detroit, Michigan
November 15, 1956

"In Defense o f Monetary Policy1
Nothing could be more inappropriate, I suppose, than to make a
defensive - a negative - speech in this city, which is regarded through»
out the world as 0 » of the two temples dedicated to the twentieth cen­
tury cult of Salesmanship with a big "S". In defiance of all sound and
accepted principles of successful selling, I want to go on the defensive
with you about the justification for the existence of such a thing as
American monetary policy.
On many of the occasions when it has fallen to my lot to explain
or defend American monetary policy and the decisions and actions of the
Federal Reserve System, I have envied the people who sell the product for
which Detroit is world famous. Of course the grass in the other man*s
yard is always greener, but it seems to me that it must be inspiring and
relatively easy to get your audience - and yourself - stirred up about two
solid tons of power and convenience and comfort, wrapped up in chrome and
upholstered in nylon. It is a little more difficult in dealing with a
subject that has not a single appealing "human interest" attribute - it
is abstract, conplex, and vague, and by no stretch of the imagination can
it be said to open up a path to wealth, beauty, prestige, or even a good
night's sleep.
In the crudest terms, monetary and credit policy is simply an ef­
fort to answer the question: How much money should our country have? In
this use, of course, "money" means bank deposits; at least, that is the
bulk of it. One of the clean-cut achievements of the Federal Reserve Act
is a currency system that is practically automatic and foolproof; currency
in circulation goes up and down exactly in response to the needs and de­
mands of business and the public. But the "money" that has the greatest
impact on the American economy - the economic welfare of the American
people - is check money, deposit money.
There have been periods in our lifetime when the economy experi­
enced unnecessarily severe setbacks for lack of money, and other times
«hen many people were injured because there was a plethora with the in­
evitable result of more money being spent without a correspondii% expan­
sion of goods and services - that old devil inflation.
If I were in your place, I might be skeptical about a Washi toncentered operation that purports to know how much money the United States
needs and how that need should be supplied, ttien ve observe the clumsi­
ness and the fumbling that seem to be associated with mush of governmental
activity (although there are some of us who think this fumbling is more
conspicuous in government than in business only because government op«
erates in a fish bowl), we are tempted to believe there is a great deal
of truth in Emerson*« dictum that "the less government we have, the bet­

-2 However, it is about two centuries too late for serious discus­
sion of the ultimate utilitarian worth of the industrial revolution and its fuel, modern finance* Vhether for good or ill, the industrial
pace of the world becomes faster and faster, and any suggestion that it
will go on better if left to itself is a little like suggesting that we
start a nuclear chain reaction and then leave that alone.
Perhaps the notion that the least government is the best govern­
ment was valid in the age of Thomas Jefferson. But the truth and wis­
dom of cne century may be error and folly in another. As mankind uses
new forces, whether mechanical or economic, it must control and direct
those forces. In 1800, or even whan I was a youngster in Broken Bow,
Nebraska, during the early part of this cerrt’
iry, a good horse could be
counted on to carry its rider or to draw its carriage back home with lit­
tle or no guidance. Today, even with power steering and automatic trans­
mission, our automobiles cannot do that - they have to be guided. In the
same way, when money consisted of gold and silver it needed very little
regulation, although by the same token it often did a pretty poor job in
times of crisis. Now we have a money system with enormous flexibility
both to expand and to contract upon demand, but like a jet plane or an
atomic pile, it calls for attentive and intelligent management. "Money
will not manage itself," as a great British economist said almost a cen­
tury ago*
Come to think of it, perhaps it is you and not I who should be
on the defensive about monetary policy. The whole thing started when
some goldsmith, unusually alert and courageous, began to lend other
people* s money. He had learned from experience that the people who de­
posited their gold in his strong box never did call for their hoards
simultaneously, and consequently that he could safely lend some of it
to others, for his own additional profit. He never knew it, but at that
moment he was planting the seed of the modern institution of monetary
policy and of such twentieth century phenomena as the Federal Reserve
The System has almost never lacked for articulate critics - cer­
tainly not during the past year, as to the soundness of current Federal
Reserve policy I prefer to let the record speak for itself. But even
when the record has turned out fairly well, some complaints seem to per­
sist. In large measure, I believe, this is due to an incomplete under­
standing of central banking. While most of this criticism seems to be
directed primarily at us, 1 suspect that when you discourage and even re­
ject some of your loan applications - as I gather you must have been do­
ing recently - some of it, unfortunately, rubs off on you, for we are
inexorably bound up in a partnership.
The allusion to a partnership is not casual rhetoric. The commer­
cial banks of this country, which you represent, and the Federal Reserve

System, with which I am associated, are partners of a sort in the opera­
tion of the monetary system of the United States. Between us we control
the creation and supply of the nation’ money. Other institutions s
mutual savings, building and loan, insurance, and finance companies extend a lot of credit, but they cannot thereby create new money. They
can expand the volume of private debt but not the money supply with which
such debts must ultimately be paid*
A partnership plagued by misunderstanding is a weak one, but one
based on profound trust and complete understanding can provide a founda­
tion for constructive action. Furthermore, what each of us does is of
considerable importance to the other. For example, the quantity of re­
serves we make available has an important bearing on your credit-granting
facilities. Sometimes you probably think us a bit niggardly. We may
seem to get in the way of accommodating the customers you like and value.
And still other times you may feel that the reserves we more willingly
make available tend to drive interest rates down more than you really
like. On the other side, I shall not deny that at times you give us
concern by the way in which you manage your affairs. And so we must be
very careful to keep our line of communication open and working - in both
directions - and thus to avoid misunderstandings.
Let me launch the exchange with a few words, from my end of the
line, about twentieth century monetary policy. It is sometimes described
as an art, but in my view it is actually the most difficult and most sig­
nificant form of applied economic science - not science in the mathemati­
cal and test-tube sense, but the discipline of reaching generally valid
conclusions on the basis of a great mass of information of varying re­
Lika most conscientious artisans, we attempt to bring scientific
methods to bear on our problem. The System has built up a highly compe­
tent and comprehensive economic intelligence service both at the Board of
Governors and at the Reserve Banks. This service not only sifts, analyses,
and interprets the standard published sources of economic information, but
is itself a major compiler of new data. That is why our staff people so
often bother your comptrollers with requests for new and special-purpose
In the end, more than data is needed. The state of economic science
has not yet advanced to the point of giving definitive answers; it can
aaly yield evidence. And to Hiis extremely valuable evidence we - the
policy-making heads - must add another factor: human judgment. And judg­
ment is fallible; that I am sure you will grant, and - having granted it will be merciful when we make our next mistake.
But information and judgment alone are not a sufficient basis for
successful monetary policy. At least two other ingredients - even rarer

- u ingredients - are called for. One is a combination of integrity and de­
tachment, and the second is courage to carry out the decisions dictated
by careful judgment*
The amount of money and credit we supply to the economy is of
vital importance. Perhaps that is a cliché, but it is-very true. Too
little money and credit can inhibit economic growth and even normal
economic functioning} it can prevent full utilization of our resources.
But too much money and credit have the unhealthy effect of stimulating
an unsustainable boom. Some place in the middle there is an amount
that is just about "right". Ascertaining this right amount is a diffi­
cult job and an agonising responsibility.
The difficulty arises because we do not have exact or mechanical
guides - formulas that apply at all times. For generations, economists
have been relating the amount of money and credit to a great many dif­
ferent economic measures, such as income, the volume of trade, and the
amount of nati onal product. Over long periods of time these relation­
ships show a certain amount of consistency. But during some periods
they vary considerably from their long-term averages. And quantitative
monetary policy must be addressed to the existing state of business ac­
tivity, not to long-term averages.
During the past year the amount of money - that is, demand de­
posits and currency - has grown less rapidly than national income or na­
tional product. The credit-restraining policies of the Federal Reserve
doubtless were chiefly responsible for this. If monetary policy had been
focused on a mechanistic formula or relationship, greater credit ease
would have been called for. But the proof of the pudding is in the eat­
ing and not in the recipe, in the jargon of economists, aggregate de­
mand in 1956 has pressed hard against aggregate supply. More money would
not have helped bring more goods into existence; it would only have made
the goods actually produced cost more. The answer given us by a monetary
Univac probably would have led us astray.
One of the perplexities we face in trying to determine the "right"
volume of money for our economy is due to the fact that business develop­
ments are almost never of a uniform nature. Some parts of the country
and some industries may be operating at very high levels while others are
in the doldrums. Consequently, some people urge, with plausible logic,
that monetary and credit policy should be of a selective sort - to be
aimed at curbing the economic activities that exceed sustainable rates of
growth without penalising others that are less active. However, I am sure
you are aware of the difficulties of doing this - of achieving the almost
omniscient wisdom required for the management of such a system. We would
need many supermen, but we do not have even one.
One of the reasons for such unequal business developments is that
we live in a dynamic economy. New industries are constantly arising and




drivii£ a wedge into the market. The business they secure often is at
the expense of established industries. In other words, because we have
a dynamic and deeply competitive system, each industry, as well as each
person and company, must fight to keep its place, and the fights seldom
end in a draw. General prosperity does not insure the prosperity of
every industry or every area. Monetary policy does not and never should
undertake to gear money to the business needs of a single industry, even
of a very great one.
Recent history provides a particularly apt illustration of unequal
rates of development. All of us know the story of agriculture during the
past few years. You most certainly have struggled with the fact that
automotive sales in 1956 did not equal the remarkable level reached in
1955. And housing starts have recently lagged a bit. But, on the other
side of the picture, there has been a very high level of construction
generally. A drive through any of our great cities and its suburbs is
a striking demonstration of this fact. As a result, we have faced nearshortages of some materials. Almost every employable worker has a job.
Some prices have declined but many others have advanced; the net pressure
has been upward. The problem is one of balance. The job of central bank­
ing consists in part of adding up plus and minus nX'sn and "Y's" when we
do not know their exact values but still must arrive at the right answer!
Such great variations in regional and industrial experience doubt­
less account for some of the criticism of the System. And that is under­
standable, for it is a considerable feat of selflessness for the repre­
sentative of a region or of an industry to look beyond his own problems
and to see than in the perspective of the general welfare. But that is
the exact role the Federal Reserve System must play - to serve the inter­
ests of the whole economy, not just a part of it.
Ultimately, the economic evidence, however conflicting, must be
reduced to a farm that provides a foundation for action. When action is
called for, we must decide what kind of action to take. As you know,
Federal Reserve credit action can take any one, or a combination of three
general forms; we can change, within limits, the legal reserve require­
ments for member banks; we can take the initiative in changing the volume
of available reserves through open market operations - that is, the buy­
ing and selling of government securities in the open market; and we can
change the price you must pay for the reserves you borrow from your Re­
serve Bank.
Our power to change reserve requirements has been used rather in­
frequently during recent years. It is a sweeping sort of power; too blunt
for regular use, but still the basic weapon in our arsenal. Open market
operations are the means most frequently used by the Reserve System to
supply or withdraw reserves and thus to keep the volume of reserves ap­
propriate to prevailing circumstances. But such operations affect the




banking system as a «hole and, as you know better than I, individual
banks often have special problems of reserve adjustment. Here is where
discount operations enter the picture. Let me say just a word about
them, with the view of "clearing the line"
Hie discount facilities of the Federal Reserve System were pro­
vided and exist today to give member banks a little time in which to
adjust to the exigencies of the moment - a kind of safety valve or emer­
gency fuel tank. The most significant feature of the rediscount facility
is your use of it, the way in which banks play a part in developing and
executing the policy aspects of monetary action. You have been assured
before, and I can assure you again, that the discount windows of the Fed­
eral Reserve System are always open. But this assurance is a two-sided
matter: it depends on our .belief that as prudent bankers you will use
and not abuse the facility. Those of you uho have studied the revised
form of Regulation A will appreciate what I mean. Much thought and care
were put into that Regulation; it expressed, I believe, a standard by
which you can guide your resort to borrowing.
The discount facility was designed to enable banks to meet tem­
porary and unforeseen needs, not to supplant basic liquidity planning.
In using the discount privilege in order to meet customer demands, you
bankers have a real responsibility - on a par with that of the Federal
Reserve - to utilize this safety valve in a way which will redound to
the public good, not just private profit. For all of us know that when
a boom has reached the point of using almost all of the employable eco­
nomic resources, further credit cannot increase the available goods and
services; it can only push up their prices.
Also, because it has been the basis of misunderstanding in the
past, perhaps the "line" should be "cleared" with respect to our process
of policy formation. The determination of whether action should be taken,
and, if so, which instrument to use, and when, and how much, must be con­
ducted with secrecy. It would be manifestly unfair for us to tip our
hand to privileged persons. Consequently, we have acquired a reputation
for being unduly close-mouthed. That reputation may be justified in some
respects, but we sincerely wish to be as candid as the situation permits,
and to foster universal understanding of the principles by which we op­
erate. This sort of understanding can be achieved through plain speaking,
and a real conviction that occasional bruises to personal feelings are a
small price to pay for the freedom to criticize and the goad of criticism.
But perhaps the largest area for misunderstanding and criticism
lies around the determination of a "satisfactory" level of economic ac­
tivity; the course that will keep us in the safe but narrow channel, away
from the rocks of inflation on one side and of deflation on the other.
One thing of which we can be almost certain is that inflation, at least
in small doses, appeals powerfully to many persons. Despite the lip ser­
vice that most of us pay to the glories of the stable dollar and the

-7year-after-year plateau in the cost-of-living level, most Americans that
I know get a glow of satisfaction from steady increases in their dollar
income. Commodity price indexes may come and go, but anybody knows that
$10,000 a year is a lot more money than $7,0001
I need not tell you that the Federal Reserve System cannot increase
or diminish the supply of money and credit merely by pushing or pulling
a throttle, ary more than we can control public psychology, spending
habits, savings habits, or special pressures from agricultural, industrial
and labor groups that result in price and wage increases and governmental
subsidies of ona sort or another. But it is undeniable that our influ­
ence over the economy is a major one#
In exercising this influence, we would receive relatively little
criticism - except from a few economic eggheads writing for other eggheads if we leaned consistently on the side of what is euphemistically called an
"ample" supply of money. It would certainly help to keep the economy mov­
ing at breakneck speed - for a time; it would certainly put more money in
the pockets of more people - also for a time; and vixen the country reaped
the inevitable whirlwind of such a policy, it is very likely that the
justified accusations against the "money managers" would scarcely be
heard in the terrific clamor. To put it briefly, an easy, open-handed
policy makes everybody "richer1 - provided you do not care how little
your dollars will buy - and makes the wheels of industry spin like mad;
and nobody really dislikes that sort of situation - as long as it lasts.
On the other hand, when a policy of restraint seems appropriate to
us, we know quite well that it will be met with anguished shrieks and
fulminations from some groups that find immediate increases in profits or
wages somewhat inhibited by our action.
From all this you can infer that we have a difficult time hewing to
the line of duty and restraint, and in disregarding the siren voices that
tempt us to make the popular decision, especially‘
when those voices are
supported by a chorus of people in high positions, political and economic,
whose intelligence and judgment we respect. How much more difficult - one
could almost say impossible - it would be to keep to the strait and narrow
path of economic virtue, and to disregard the primrose-bordered bypaths,
if monetary policy were made a function of a political administration, no
matter how devoted to the ultimate welfare of the American peopleI
Consequently, I cannot resist calling your attention to the fact
that in the course of the recent political campaign the candidates were
in agreement on at least one principle concerning which there never should
be aiy misunderstanding - the "independence" of the Federal Reserve Sys­

One does not often hear a suggestion, from responsible sources,
that the Reserve System be subjected to the control of whichever political




administration is in power at the moment. But the occasional re-emer­
gence of such ideas, like the fascinating and somewhat checkered history
of American banking itself, should remind us that, in the long run, the
most effective bulwark against misuse of the great power of a central
bank must lie, not in subjecting it to political control, but in bring­
ing about a widespread understanding of: (1) what the Reserve System
is; (2) how it functions; and (3) how what it does affects the indi­
vidual welfare of every American. Such an understanding is vital to the
continued effective performance of its work.
With that in mind, let me close with a plea and a pledge: A plea
for your help toward increased public understanding of monetary policy,
and a pledge that we in the Federal Reserve System will intensify our
efforts to understand banking's problems and to aid in the achievement
of its public aims - both to the end that monetary policy shall make an
ever more effective contribution to the well-being of the American people.