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Speech delivered before the
Ninth Annus I Convention of .the
Chicago, Illinois
fecember 27, 1950.

• /

The subject of this pr per is _s vast as it is interesting and it is
Particularly important in this n tional emergency. I shall approach it
' ®s one who has had some experience with money and credit, .and is being
confronted continuously with basic problems of monetary and credit policy.
^ "wish to tell you of some of these experiences which relate to the "why"
and "wheiefore" of central banking.
I have to meet my policy responsibilities in m y appointed place, so
to s;»eak, and at the proper time, and you will understand that I cannot
talk about matters of current interest as freely as you could. Nor can
I air my personal views on policy decisions that are now pending or that
arise in the near future.
This distinguished audience can aid our monetary and credit authorities in formulating basic solutions of the current problems that I shall
outline. I consider it a great privilege to present this paper
udience so well qualified to discuss the principles of our policy at thii
®ost critical time of our history.

of Aoney and Credit; F j n m c i a l Stability

In any philosophical study of social relations we have to start
i t h the final purpose of man himself. Ve assume that m a n , in order to
fulfill his final purpose, must strive for the moral, intellectual, and
Physical development of the individual, his family, and his entire
community. Economic progress is one of the means that, rightly used,
assists in that development, -n the course of history we m a y one day
e a c h a point where further economic progress may hinder rather than
promote man's advancement because it would encourage, say, excessive
idleness or luxury. At present, however, this danger seems remote. Many
members of our own nation, as well as vast numbers of people all over the
o n d , are still living in extreme poverty, lacking sufficient food,
clothing, and shelter, -as well as sufficient opportunity to devote themselves to the spiritual problems of liie. Crime and vice are at present
'tooie closely associated with extreme poverty than with w e a l t h . As long as
that is the case, economic progress, aimed at reducing extreme poverty as
touch and an rabidly as possible, seems a worthy goal of human'activity.

The use of money and credit has been designed to aid economic progress. In a meeting of professional economists J. need not dv<ell upon the
o l e pi yed by these instruments in our economy, ^oney and credit are
obviously necessary for the best use of the division of labor among individuals, among nations, and even among generations. In particular, they
are obviously necessary for economic progress. They enable the pioneering entrepreneur to make better or cheaper products available to the
economic community, and they enable the consumer to rr. ise his standard of
living by purchasing these new products.



The use of money end credit has, however, a drawback which has alarmed
observers since the times of Aristotle. The very fact that these instruments make possible the exchange of present and future goods and services*
may result in temporary irregularities in the flow of money arid credit,
and these irregularities m a y deeply disturb the economy in general. Hoarding of cash and contraction of credit may bring economic activity to a
virtual standstill while dishoarding of cash and expansion of credit may
produce furious overactivity. The more important the role of money and
credit, the greater the danger and the graver the consequences of those
disturbances, of a constant succession of booms and depressions, ^ot that
money and credit are necessarily the only villains in the piece; an economy
without money and credit would probably also show cyclical fluetuttions, _nj
but it is the influence of variations in money and credit which Tiakes eye-1-10"
fluctuations so violent and often disastrous. Two hundred years ago, an
otherwise forgotten economist, Joseph Harris, wrote: "The greatest effect
of money is in its fluctuations, and this if' it be sudden, will be general^
pernicious in its consequences." These words are still true today.
Monetary fluctuations are not only pernicious, but also fundamentally
unjust. They lead to a violation of individual, commutative justice: a
sudden and violent decline in the purchasing power of money enriches the
debtor at the expense of the creditor; a sudden and violent increase enrich
the creditor at the expense of the debtor. In addition, these fluctuation 5
lead to a violation of social, distributive justice: Ihey deeply affect 111
particular the demand for employment and thus the reward of labor. In ti^ e S
of inflationary booms they promote unproductive specul tion at the expense
of productive work; for example, in postwar Germany prior to the currency
reform of 19-43 a worker had to engage in black market dealings to s u p p l e d
his w a g e s , and a girl could earn substantially more by dancing for half an
hour with an American soldier in return for a package of cigarettes than ^
working the whole week in a factory or a store in return for wages paid
depreciated currency. In times of deflationary depressions these fluctuate
lead to widespread unemployment; they burden many workers not orly with
extreme poverty and the accomp- riying temptations of vice and crime, but als°
with feelings of frustration which destroy their faith in the social order*
For these reasons, the monetary authorities have always considered it
their main duty to stabilise the financial system, so us to cieate — in_t n
words of Father Dempsey —"the conditions in which the citizens can readi^/
recognize and fulfill their obligations in justice." The monetary a u t h o r 1 '
ties a r e , however, confronted with two basic t roblems: first, exactly ^ha ,
kind of stabilization would serve that purposej ind second, what means
bring about the desired stabilization in conformity with the principles
social ethics, and expecially the principles of justice and individual
Types of ^inanci:Vl Stabilization
At first glance, the simplest kind of stabilization would seem to be
that of the total volume of money and crediti . 1 n fact, an economy that
shows little if any change from year to year, may be best served by a
constant leve) of money and credit. In a rapidly progressing economy, however , such a stabilization obviously leads to an ever- growing disparity
between the supply of goods and the supply of money and czedit, and may
hinder growth and progress. It has been proposed to avoid this drawback
by providing for a constant rate of inciease in the volume of money and

credit. I wonder, however, whether v;e could forecast the rate at which
the economy is Likely to expand, and more important, whether we could
expect the economy to expand at a constant rate, even if we eliminate
financial instability. Would not a constant rate of increase in the
volume of money and credit be at times too high 'and at other times too
low, and thus lead to alternating i n f l a t i o n s y end '.deflationary
-pressures rather than to stability?
Let us remember that in this country the volume of currency and
adjusted deposits, apart from seasonal variations, remained virtually
constant in 1943 and 1949. Despite that stability,the economy experienced a distinct inflat. onary pressure in 1948, and a moderate con. :v •
tia ction in 1949. Another example is provided by the German economy in
the period between the fall of 1943 end the spring of 1950, when both
the volume of money and the volume of bemc credit expanded quarter,by
Quarter at a virtually constant rate, but the economy experiences quite
violent fluctuations.
Mrny eminent economists favor stabilization of the price level.
Indeed, if all prices could be stabilized, such a result might remove
individual injustice as between debtors and creditors since neither woulc
be in d;. nger of suffering losses due to the time difference between payment and repayment.. Such stabilization, however, would • Iso eliminate
an esential element of adjustment from our eccromic system. It would be
impossible as well as undesirable in a dynamic economy, to keep aj.1 price?
constantj the goal of proponents of price stabilization is therefore
. stability of some price index.
I wonder, however, about the implications of stabilisation of the
price index. Unless all prices .included in the index are held constant,
a rise in prices of some goods would require a corresponding decline in
prices of some other goods in order to keep the average of all prices
stable. To the extent that lower prices reflect lower costs of production arising, out of improved efficients or reflect diminished demand
for the pi '.ducts affected, declines in some prices would be desirable
and in the public interest. To tiie extent, however, that reductions in
specific prices represent arbitrary actions taken merely for the purpose
of' general price stability, such reductions vould be undesirable because
they would discourage production of wanted goods arid be unjust to the
producers of the goods.
M o r e o v e r , I wonder whether' a. stable price level always implies
economic stability at Large. Is it not possible that under certain
conditions a rise in the price level may be necessary, say, in order
to provide added incentives for investment recuired by economic
stability. Or- that a fall in the price level may be needed in order to
bring prices and wages into a more stable relation? For example, at the
beginning of 1943, our.price level dropped, owing to a recession in
agricultural prices, from their record level reached as the result of
abnormal war and postwar demands. At that time our economy as a whole
was still subject to inflationary tendencies; would it really have been
just or sensible at that time to inject more money into our economy in
order to keep the price level from failing?
All these methods of stabilizing primarily either- the supply of
money end credit, or the price level seem, the?efore, open to serious

objections. The avoidance of violent price iluctuations ir certainly a n
important goal of monetary policies? but is it not preferable while
promoting growth and progress to try to stabilize economic activity as a
whole, rather than any segment? Such a policy conforms to the Employment Act of 194-6, which directs all government agencies to promote
"maximum employment, production, and purchasing power." Does it not also
conform to the principles of individual and social justice, by creating
conditions ec-uitable for all members of the economic community rather th^11
for any special group?
It is true that the level of economic activity as a v,hole is difficult
to define and to calculate; I wonder, however, whether these difficulties
are much greater than those of defining and calculating the rate of expansion of the economy or a serviceable price index. I believe with
that "no plan can possibly be devised \,hich will maintain money at an
absolutely uniform value". The difficulties of exact measurement are,
therefore, not decisive; the concept of stable economic activity remains
fundamentally an "objective and calculable criterion" and thus fulfills,
in the words of Father Dempsey, the "necessary condition to a meaningful
just price of money."
Critics of monetary policy have charged, however, that the generality
and vagueness of the concept of ov-nall economic stability makes possible
essentially arbitrary actions of the monetary authorities.
I am fully
aware of that danger, but I believe that the d> nger is due to the character of economic policy as such rather than to any particular concept.
is true that the members of the community cannot exactly forecast the
measures which the Monetary authorities will take in any particular
situation; but neither can the nonetary authorities exactly forecast w h a t
effects their measures will h ve. Identical measures may have very differ
ent effects even under apparently identical economic circumstances, b e c a u ^
of differences in the psychology of busines, , in expectations, or in poli^ 1
cal conditions. It would, therefore, be a hopeless task, in m y o p i n i o n , t 0
devise immutable rules covering all possible contingencies and combination^
and to force the monetary t uthorities to follow those rules without m y
cretion whatsoever. These rules would become so complicated as to make ou^
entire system of money and credit one huge bureaucracy. As .Long as we do
not choose that way—end 1 shall have more to say about the choice in a
moment—we must concede a large measure of discretion to the monetary
authorities. Central banking in a free economy will always remain a matte 1
of skill and experience, and hence as much an art as an exact science.
Methods of Achieving Financial Stability
The choice of the proper way toward financial stability is, beset by
problems even more difficult than those created by the choice of the goal*
The instruments of monetary policy deeply affect the character of our ecott0^
m y . Ve can use either direct or indirect controls, or both. Direct c o n t i
force the members of the economic community to behave in a certain manner*
Indirect controls influence economic conditions in such a way that the
members of the community are induced to behave in a certain mannei of the* 1
own free w i l l .
0 >

The choice between these two methods, or a combination of both, touched
upon the most burning issue of our d a y , the relation between the State
the Individual. The follower of totalitarian philosophies and the follower

of radical laissez-faire each takes a simple.end •uncompromising stand.
of us v/ho believe th<r t the State is one of t h e institutions
designed to assist man .in his struggle to his Welfare and
fulfill his final purpose, have to void both the dangers of St te
tyranny end of anarchy. 1 wonder, however, whether in our times
the first danger is not the greater," whether it is not more difficult
£nd more urgent to preserve individual liberty than to guard against
an excess of individual license.

There are two traditional means of monetary policy that conform
closely to the principles of individual self-determination in that
they are completely self-enforcing and need neither detection nor
punishment of contraventions. They are changes in the discount rate and
Open A: i.ket operations. In recent years, however, both instruments have
-Lost much of their effectiveness, ana have, therefore, to be supplementet
»y other means.
m o s t

Let as take the case of changes in the discount rate. A change as .
such does not forbid anybody to charge any interest rate he likes. .However, it raises or lowers the costs of any lender who has to borrow fund?
from the central banking system, and therefore makes- it less or more
profitable for him to expand credit. The lender will thus'be compelled
ky his own self-interest to adjust his credit'policies in the manner ' .
envisaged by the nonetary authorities. A change in discount rates also
signalizes a shift in monetary policy and has, therefore, a wide'effect
on bankers' attitudes.
Open Market operations likewise do not force anybody to do anything.
However, by making funds available to the market, or by withdrawing 1
funds from the market, or by refusing to supply .funds through the
purchase of securities, the monetary authorities influence the availability of reserves to lending institutions and make it therefore more
or less easy or advisable for them to expand credit. The lenders will
again be compelled by their own self-interest to adjust their credit
policies in the manner' envisaged by the monetary authorities.
I need hardly tell you that in reality changes in the discount
rate and Open Market operations, at present and in our country, do not
seem to work according to those simple models. Ever since the second
W o r l d W a r , the banks and other financial institutions have been holding
very large amounts of marketable government securities. So long as the
federal Reserve purchases these securities r-t relatively constant prices,
£ll those holders are able to sell them without much penalty and to make
other loans or investments. In paiticular, the banks- are able to
replenish their reserves at w i l l by selling marketable government securities to the Federal Reserve and thus avoid the penalty of borrowing from
the Federal Reserve. Likewise, other holders of marketable government
securities wanting to obtain cash can readily sell them and thus cause
n increase in bank reserves. As long as the Federal Reserve follows
the policy of maintaining relatively stable merket prices of government
securities, it cannot refuse to buy these securities, and cannot withdraw funds flora the market by serlin fe marketable government securities,
if to do so would bring down their price.
The Federal Reserve is, therefore, confronted with a problem, which
has obvious philosophical implic:. tions. Even a small decline in the price

of marketable government bonds, which are primarily held by institutional
investors, might be considered unjust to those holders. On the other hand)
to buy all securities offered by anyone in order to prevent a drop in
prices might permit an inflationary expansion of credit. In that case,
the support of the price of government securities would be unjust to the
holders of money and money claims—including the holders of securities—
and to the recipients of fixed incomes. I do n o t want to enlarge upon
my own ideas as to the solution of that problem and 1 hope instead that
the discussion w i l l acquaint me with the views held by the members of
this distinguished audience.
Since changes in the discount rate and Open Market operations have
become less available for use, two other instruments of monetary policy
have, become more important. One of them is the use of reserve requirement
By raising these requirements, the Federal Reserve can reouire member banks
to deposit a larger part of their funds with the Federal Reserve and therefore prevent them from using that part of their funds for lending operations. Conversely, a lowering of reserve requirements makes funds avail 6 "
ble for lending. When it is used, this instrument restricts the liberty
of action of the banks somewhat more than changes in the discount rate or
Open Market operations. Moreover, it affects all banks in a r^ivon category
and not merely the banks that are expanding credit. The effectiveness of
this instrument is also somewhat blunted as long as the banks can readily
shift government security holdings to the Federal Reserve to meet an
increase in requirements.
Under existing legislation the Federal Reserve can vary the r e t i r e ments only within narrow limits. The problem arises, therefore, whether
it would be advisable to ask for a change in legislation. And if such a
recuest is deemed advisable, the further problem arises what type of
additional reserve requirements should be recommended under present circumstances. We could recommend that banks be permitted to use either cash or
short-term government securities as additional reserves, or we could propo s e
reserve recui.reme.nts dependent upon the volume of certain types of bank
credit., rather than of bank deposits. Or we could recuest that additional
reserve requirements be based upon increments of deposits or credits rathe1*
than upon their absolute volume. Each of these proposals has its advantage
and shortcomings, both from the point of view of efficiency and of justice.

The second tool, which is being, more and. more widely recommended and ^
is that of selective credit controls. At present we have margin recuirements for stock exchange transactions and regulations of down-payments and
maturities for consumers' instalment credits and for home construction
mortgages. These controls affect demand rather than the supply of c r e d i t ;
they often prevent credit transactions which both the lender and the
borrower would be willing to make if left to their own decisions, and thus
approach the character of non-monetary controls such as price or wage fixing a n d rationing. The main difference seems to b e the fact that s e l e c t i v e
credit controls do not directly limit the price or quantity of goods or
properties that might be bought by the parties concerned: these parties
are still at liberty to buy or sell securities, to purchase automobiles or
television sets, or to construct new homes, and they are only limited in
their credit transactions. Many people, however, cannot in fact buy
securities, automobiles, or new homes if their credit facitilies are restricted.


At present, hardly anybody doubt- that selective credit controls
^re necessary in particular areas, especially since the existing controls
. f 9 c t mainly goods which use great quantities of scarce strategic materials and for which demand mist be reduced in any case. The problem
prises, however, whether monetary p o l i c y should, .in the future, lay
greater stress on the extension of selective controls or on wider use of
general monetary and credit policies, such as discount' rates, Open Market
operations and reserve requirements. Some economists would .'scrap general
Policies altogether and rely exclusively on selective controls; in that
case, those controls would presumably have to be extended to. a qualitative regulation of the entire credit and capital market. Selective and
Qualitative credit controls are, however, difficult to administer, and can be applied only in areas in which collateral for credit is directly
related to the purpose of credit and determine its amount. I wonder,
moreover, whether even complete control of all credit transactions would
make general monetary policy unnecessary. Selective credit controls
would promise little success if the total volume of potential credit were
Permitted to grow without limits. Selective and Qualitative controls are
therefore, supplements to, rather than substitutes for, general'monetary
- S o c i a l Stability and Social Justice
My. preceding remarks have been mainly concerned with the relation of
money and credit to the principles cf individual justice and liberty,
monetary policy alone, however, cannot be relied upon to assure economic
stability with growth. It is, therefore, intimately connected with econ
o m i c policy as a whole, and thus with all the problems of social justice,
concerning the role of the State in the economy.
There is a particularly close tie between monetary and fiscal polc y : fiscal policy, by determining the credit needs of the Treasury, is
often the decisive factor that rakes monetary policy effective or ineffective. We have already seen how the problem of price support, the
maintenance of an orderly market in U . S . government securities, affects
°ur Open Market operations. On the other h^nd, the Treasury, as the
country's largest debtor, would be directly affected by any decision of
the monetary authorities that mi^ht lead to a rise in interest rates,
social justice certainly requires that this effect be taken into consideration, but the difficulty of the ;:roblem lies in the application of
this principle to specific measures. I shall be gratified, indeed, if
the discussion sheds some light on that matter, which, as you know, is of
great practical importance.

In ordinary times, monetary and fiscal measures will generally suffice to achieve the goals of economic policy .in the field of finance. In
times of national emergency, when economic ,,ro,;re ;s and economic incentives must give way to the requirements of defense, the use of nonmonetary direct controls, such as price and wage ceilings and rationing,
usually becomes unavoidable. It would be a grave mistake, however, to
oelieve that these direct controls make monetary measures superfluous.
U 3 t as selective credit controls can work only as supplements of general
monetary policies, so non-monetary direct controls can be successfully
applied only .in conjunction with proper monetary and fiscal measures.
^ri.ce and wa^e ceilings and rationing, for instance, can be effectively
administered only as long as total purchasing power is kept within bounds;
n d total purchasing power can be limited only by oolicies affecting the
volume of money incomes and credit expansion. The present emergency, far

from relegating monetary and credit policies into the background, makes
these policies more important than ever.
This problem is not merely a matter of efficiency and administrative
convenience. Even in the present emergency, and in fact, just b e c a u s e oi
this emergency, we must not forget that our economic and non-economic
policies are designed to serve the individual. For this reason alone we
should strive to employ as much as possible those controls that do not
require a vast apparatus of enforcement, of inquiry into the daily l i f e
of the members of our community, of prosecution and punisliment. Ve have
seen that monetary policies Keep those requirements to a minimum, and
they are, therefore, best adapted to the needs of our society.
These remarks lead me back to the starting point of our inquiry.
Even a question, which at first glance seems to be purely practical, such
as the relation of monetary and non-monetary controls, cannot be answered
correctly unless we go the very basis of social philosophy.
this reason, everyone of us, and especially those who — like myself.—
are constantly in danger of being overwhelmed by their daily routine,
must as often as possible taice time out to think of the true significance
of their actions. We shall be able to fulfill the daily duties of our office only if we constantly keep in mind our solemn obligation to conform
to the tenets of justice, to protect the liberty of our Nation, and to
respect the dignity of m e n .
This paper will achieve its purpose if it stimulates a discussion on
the way in which monetary and credit policies can be carried out in conformity with these principles.