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F o r R e l e a s e at 7:30 p . m , , E a s t e r n Daylight T i m e , Wednesday, October 19, 1955. A d d r e s s of Wm. M c C . . M a r t i n , J r . C h a i r m a n , B o a r d of G o v e r n o r s of the F e d e r a l R e s e r v e S y s t e m b e f o r e the New York Group of the Investment B a n k e r s A s s o c i a t i o n of A m e r i c a Waldorf A s t o r i a Hotel New York City October 19, 1955 7:30 p . m . , E a s t e r n Daylight T i m e T h e r e ' s an apocryphal s t o r y about a p r o f e s s o r of economics that sums up in a way the theme of what I would like to talk about this evening. In final examinations the p r o f e s s o r always posed the s a m e q u e s t i o n s . When he was asked how his students could p o s s i b l y fail the t e s t , he r e p l i e d s i m p l y , ''Well, i t ' s true that the questions don't change, but the a n s w e r s do. l a r g e m e a s u r e h a r d y p e r e n n i a l s : How do we attain and r e t a i n p r o s p e r i t y ? How do we achieve n o r m a l healthy g r o w t h ? chasing power of our m o n e y ? How do we p r e s e r v e the p u r - The a n s w e r s to these i n t e r r e l a t e d questions in the 1950's thus far differ in i m p o r t a n t r e s p e c t s from those of e a r l i e r decades. My p u r p o s e tonight is to explore with you s o m e of the m a i n c u r r e n t s and u n d e r c u r r e n t s of thought which have c o l o r e d and shaped these differing answers. It i s , of c o u r s e , unorthodox, if not downright poor f o r m , to r e a c h your conclusion in the c o u r s e of your i n t r o d u c t o r y r e m a r k s . But, as a m a t t e r of e m p h a s i s , I would like to s t a t e it now. In the absence of w a r , or s e r i o u s conflict among our people over political or social a i m s , the r o a d to a s u b s t a n t i a l l y higher s t a n d a r d of living l i e s ahead of us as c l e a r and as smooth as our m o d e r n t u r n p i k e s . We have p a s s e d through the t u r n s t i l e s and a r e , in my judgment, out on the -2- open r o a d . This position has been achieved after a good many ups and downs false s t a r t s , adaptations to war and p r e p a r a t i o n s for w a r , false t u r n s , and poor d i r e c t i o n s . F u r t h e r m o r e , the m a c h i n e we a r e driving is adequate and capable of t r a v e r s i n g the g r a d e s , c u r v e s , c r o s s r o a d s , and danger p o i n t s , provided only that the d r i v e r s o b s e r v e the speed l a w s , a r e a l e r t and responsible, and sufficiently t r a i n e d and e x p e r i e n c e d in the a r t of driving to understand the n a t u r e of the p r i n c i p l e s of p r o p u l s i o n , and the goals of the journey they a r e m a k i n g . Our ability to t r a v e l this r o a d safely depends upon a community of d r i v e r s who u n d e r s t a n d and u t i l i z e the t i m e - t e s t e d principles which a r e d e r i v e d from our i n h e r i t a n c e . It s e e m s r a t h e r striking that one of the i d e a s now f i r m l y imbedded in our a r t i c l e s of m a t e r i a l faith, the concept of g o v e r n m e n t a l r e s p o n s i b i l i t y for m o d e r a t i n g economic g y r a t i o n s , is a l m o s t e n t i r e l y a p r o d u c t of our own Twentieth C e n t u r y . This concept, which is steadily being brought into s h a r p e r focus, h a s evolved from g e n e r a l r e a c t i o n to a s u c c e s s i o n of m a t e r i a l c r i s e s heavy in human h a r d s h i p . It g r e w from m a s s d e s p e r a t i o n and demand for p r o t e c t i o n from economic d i s a s t e r s beyond individual c o n t r o l . The F e d e r a l R e s e r v e S y s t e m , which I have the honor to r e p r e s e n t , was our e a r l i e s t institutional r e s p o n s e to such a d e m a n d . It e m e r g e d out of the urgent need to p r e v e n t r e c u r r e n c e s of such d i s a s t e r s as the money panic of 1907, and out of the thought that the G o v e r n m e n t had a definite -3- responsibility to p r e v e n t financial c r i s e s and should utilize all its p o w e r s to do so. Accordingly, 42 y e a r s ago C o n g r e s s e n t r u s t e d to the F e d e r a l R e s e r v e System r e s p o n s i b i l i t y for managing the money supply. and revolutionary s t e p . This was an h i s t o r i c In framing the F e d e r a l R e s e r v e Act g r e a t c a r e was taken to safeguard this money m a n a g e m e n t from i m p r o p e r i n t e r f e r e n c e by either p r i v a t e or political i n t e r e s t s . That is why we talk about the o v e r - riding i m p o r t a n c e of maintaining our independence. Hence we have our system of regional banks headed up by a coordinating B o a r d in Washington intended to have only that d e g r e e of c e n t r a l i z e d a u t h o r i t y r e q u i r e d to d i s c h a r g e effectively a national policy. This c o n s t i t u t e s , as those of you in this audience recognize, a blending of public i n t e r e s t and p r i v a t e e n t e r p r i s e uniquely American in c h a r a c t e r . Too few of us adequately r e c o g n i z e or adequately salute the genius of the f r a m e r s of our c e n t r a l banking s y s t e m in providing this organizational bulwark of p r i v a t e banking and b u s i n e s s . Since the F e d e r a l R e s e r v e S y s t e m c a m e into being, the p r o b l e m s of inelasticity of c u r r e n c y and immobility of bank r e s e r v e s - - w h i c h so often showed up as s h o r t a g e s of c u r r e n c y or c r e d i t in t i m e s of c r i t i c a l n e e d have been e l i m i n a t e d , and money panics have l a r g e l y d i s a p p e a r e d . In this s p e c i a l i z e d r e s p e c t t h e r e can be no doubt that the S y s t e m has made notable p r o g r e s s , but in the m o r e fundamental r o l e of stabilizing the economy the r e c o r d is not so c l e a r . All of us in the S y s t e m a r e bending -4our b e s t efforts to c a p i t a l i z e on the e x p e r i e n c e of the p a s t , and our c u r r e n t knowledge of money, so as to m a k e as l a r g e a contribution as p o s s i b l e in this d i r e c t i o n . But a note should be m a d e h e r e that, while money policy can do a g r e a t deal, it is by no m e a n s all powerful. In other w o r d s , we should not place too heavy a b u r d e n on m o n e t a r y policy. It m u s t be accompanied by a p p r o p r i a t e fiscal and b u d g e t a r y m e a s u r e s if we a r e to achieve our a i m of stable p r o g r e s s . If we a s k too much of m o n e t a r y policy we will not only fail but we will a l s o d i s c r e d i t this useful, and indeed indispensable, tool for shaping our economic d e v e l o p m e n t . The a n s w e r s we sought to the m a s s i v e p r o b l e m s of the 1930's increasingly e m p h a s i z e d an enlarging r o l e for Government in our economic life. That role was g r e a t l y extended again in the 1940's when the e m e r g e n c y of World War II led to d i r e c t c o n t r o l s over w a g e s , p r i c e s , and the d i s t r i b u tion of goods ranging f r o m sugar to s t e e l . That e x p e r i e n c e led to growing c o n c e r n over the effect of a s t r a i t jacket of controls on the e c o n o m y ' s p r o d u c t i v e capacity, and the p r i c e that would be exacted in t e r m s of individual l i b e r t y if the h a r n e s s of w a r t i m e economic c o n t r o l s w e r e c a r r i e d over into the p o s t w a r y e a r s . Such a strait jacketing of the economy is wholly i n c o n s i s t e n t with our political institutions and our p r i v a t e e n t e r p r i s e s y s t e m . The h i s t o r y of despotic r u l e , of a u t h o r i t a r i a n r u l e , not m e r e l y in this c e n t u r y but t h r o u g h out the ages is acutely repugnant to u s . m i s e r y and d e g r a d a t i o n . It has taken a frightful toll in human -5The t r a n s f o r m a t i o n of this country from a w i l d e r n e s s to a highly developed civilization d e m o n s t r a t e s the r e s u l t s that can be obtained through a s y s t e m which is d i r e c t e d toward r e l e a s i n g , not shackling, e n e r g i e s and abilities. The fruits of t h e s e e n e r g i e s and l a b o r s a r e s h a r e d in growing abundance, not by p r i m i t i v e b a r t e r , but by the p r o c e s s e s of the m a r k e t place. The advantages of a s y s t e m w h e r e supply c a p a c i t i e s and demand wants and needs a r e m a t c h e d in open m a r k e t s cannot be m e a s u r e d in economic t e r m s alone. In addition to the advantages of efficiency in the u s e of economic r e s o u r c e s , t h e r e a r e v a s t gains in t e r m s of p e r s o n a l l i b e r t y . P o w e r s of decision a r e d i s p e r s e d among the millions affected instead of being c e n t r a l ized in a few p e r s o n s in a u t h o r i t y . The b a s i c concept of the m a r k e t s y s t e m has r e m a i n e d with us since the founding of the nation. It has r e m a i n e d the c o r n e r s t o n e of our society to this day, although we have done s o m e extensive r e m o d e l i n g of the s t r u c t u r e as a whole from time to t i m e . We have in the p a s t done s o m e r e m o d e l i n g for the a d m i r a b l e p u r p o s e of c o r r e c t i n g s t r u c t u r a l defects and d i s t o r t i o n s . C o m p e t i t i v e , f r e e l y func- tioning m a r k e t s a r e one thing, and rigged m a r k e t s a r e a n o t h e r . Rules and regulations to p r e v e n t rigging a r e n e c e s s a r y and e s s e n t i a l to a sound structure. Other r e m o d e l i n g has come about b e c a u s e the A m e r i c a n people have Refused to accept economic goals as their sole objective. That was t r u e in -6older g e n e r a t i o n s , as well as our own. Our family i n h e r i t a n c e s h a v e , I a m glad to say, usually included the beliefs that m a n cannot live by b r e a d alone, and that in a p r o p e r l y equipped home l i b r a r y the Bible should occupy a m o r e important place than a manual of a r m s or a m a i l o r d e r c a t a l o g u e . Let it be said, to our c r e d i t , that A m e r i c a n economic action has often been d e t e r mined by balancing m a t e r i a l advance against other human o b j e c t i v e s . F o r these r e a s o n s , and p e r h a p s o t h e r s , our m a r k e t s y s t e m has been modified continuously throughout this c o u n t r y ' s h i s t o r y . Ideas of m a r k e t places functioning with no r u l e s or r e g u l a t i o n s except the "law of the jungle" have, quite j u s t l y , gone the way of the g r e a t buffalo h e r d s . When we speak today of "free m a r k e t s " we of c o u r s e m e a n m a r k e t s that a r e only r e l a t i v e l y free, as the freedom of speech we enjoy is itself only a r e l a t i v e f r e e d o m . The e s s e n t i a l c h a r a c t e r i s t i c s of free m a r k e t s have n e v e r t h e l e s s been retained. It is t r u e that in a g r e a t e m e r g e n c y we have been willing to m a k e a departure from our m a r k e t s t r u c t u r e , but our mood h a s been that of the man who has to leave home for the confines of a bomb s h e l t e r . When a war comes on, we a r e willing to put up with all s o r t s of economic c o n t r o l s and dictation of even s m a l l details of our economic life. The dignity of the individual gets s u b m e r g e d in the n e c e s s i t y to win the w a r . The law of supply and demand is suspended t e m p o r a r i l y , but it cannot be p e r m a n e n t l y r e p e a l e d . It is always with us j u s t as is the law of g r a v i t y . -7- When peace is r e s t o r e d we do not continue to ignore it. We cannot substitute the judgment of a few in authority for the f r e e and independent judgments of the c o m m u n i t y as they a r e e x p r e s s e d in the m a r k e t p l a c e . We cannot do s o , that i s , and r e t a i n our concept of freedom in a c o m p e t i t i v e , private e n t e r p r i s e economy. I a m not u n a w a r e that f r e e d o m entails c e r t a i n h a r d s h i p s on the n e r v o u s constitution. of c h o i c e s . It gives us opportunity to c h o o s e , but it a l s o r e q u i r e s the making The p l e a s u r e of having a choice to m a k e is c o u n t e r b a l a n c e d by not only the n e c e s s i t y for making a c h o i c e , but a l s o the r e s p o n s i b i l i t y for accepting the c o n s e q u e n c e s of that c h o i c e , whether good or b a d . we like the consequences only when our choice p r o v e s r i g h t . Naturally T h a t ' s one reason it is e a s i e r to m a k e a m i s t a k e than to a d m i t o n e . It r e q u i r e s no s t r a i n on m y imagination to suppose that t h e r e might be s o m e , even in this audience, who o c c a s i o n a l l y feel a nostalgia for the pegged money m a r k e t that c a m e into e x i s t e n c e during the w a r and continued until the T r e a s u r y - F e d e r a l R e s e r v e a c c o r d of M a r c h 1951 t u r n e d us b a c k in the d i r e c t i o n of a f r e e r m a r k e t . F r e e m a r k e t s , like free e c o n o m i e s , have a way of going down as well as up, and thus r e m i n d i n g us that our s y s t e m is one of profit and l o s s , entailing penalties as well a s r e w a r d s . During the l a s t four and a half years the F e d e r a l R e s e r v e has p u r s u e d a m o n e t a r y policy c h a r a c t e r i z e d by -8- flexibility, or prompt adaptation to the sharply changing needs of a dynamic economy. It has been n e c e s s a r y in this period to combat both the forces of inflation and of deflation. There are some who contend that a little inflation--a creeping inflation--is n e c e s s a r y and desirable in promoting our goal of maximum employment. My able a s s o c i a t e , Allan Sproul, President of the Federal Reserve Bank of New York, put his finger on the fallacy in this contention in testifying before a Congressional committee earlier this year when he said: "Those who would seek to promote 'full employment' by creeping inflation, induced by credit policy, are trying to correct structural maladjustments, which are inevitable in a highly dynamic economy, by debasing the savings of the people. If their advocacy of this course is motivated by concern for the 'little fellow, f they should explain to the holders of savings bonds, savings deposits, building and loan s h a r e s , life insurance policies and pension rights, just how and why a r i s e in p r i c e s of, say, 3 per cent a year is a small price to pay for achieving 'full employment. They should also explain to all of u s - - l i t t l e , big, and just plain ordinary A m e r i c a n s - - w h a t becomes of our whole system of long term contracts, on which so much of our economic activity depends, if it is to be accepted in advance that repayment of long term debt will surely be in badly depreciated coin. " If inflation would in fact make jobs, no reasonable man would be against it. But as I have frequently emphasized, inflation s e e m s to be putting money into our pockets when in fact it is robbing the s a v e r , the pensioner, the retired workman, the a g e d - - t h o s e l e a s t able to defend t h e m s e l v e s . And when the inevitable aftermath of deflation sets in, businessman, banker, worker, all suffer. That doesn't mean jobs. It means just the opposite. -9- T h e r e have been s o m e r a t h e r wide swings in attitudes toward monetary policy during r e c e n t y e a r s , In the d e p r e s s i o n , a g r e a t n u m b e r came to the conclusion that m o n e t a r y policy was ineffective as an i n s t r u m e n t for promoting r e c o v e r y from economic d e c l i n e . Following World War II, some w e r e troubled by the move from d i r e c t c o n t r o l s to r e s t o r a t i o n of the general control involved in m o n e t a r y policy b e c a u s e they feared it could not r e s t r a i n the inflation then p r e v a l e n t - - n o t , that i s , without being so drastically e x e r t e d as to plunge us into a d e v a s t a t i n g d e p r e s s i o n . Nowadays, t h e r e is p e r h a p s a tendency to e x a g g e r a t e the effectiveness of m o n e t a r y policy in both directions. R e c e n t l y , opinion has b e e n voiced that the country' s m a i n danger c o m e s from a r o s e a t e belief that monetary policy, backed by flexible tax and debt m a n a g e m e n t policies and aided by a host of b u i l t - i n s t a b i l i z e r s , has c o m p l e t e l y conquered the problem of m a j o r economic fluctuations and r e l e g a t e d them to ancient history. T h i s , of c o u r s e , is not so b e c a u s e we a r e dealing with human beings and human n a t u r e . While the pendulum swings between too little or too much r e l i a n c e upon c r e d i t and m o n e t a r y policy, t h e r e is an e m e r g i n g r e a l i z a t i o n m o r e and m o r e widely held and e x p r e s s e d by b u s i n e s s , l a b o r and f a r m o r g a n i z a tions that ruinous d e p r e s s i o n s a r e not inevitable, that something can be done about m o d e r a t i n g e x c e s s i v e swings of the b u s i n e s s c y c l e . The idea that the b u s i n e s s cycle can be altogether abolished s e e m s to m e as fanciful -10as the notion that the law of supply and demand can be r e p e a l e d . It is h a r d l y n e c e s s a r y to go that far in o r d e r to a p p r o a c h the p r o b l e m s of healthy economic growth sensibly and c o n s t r u c t i v e l y . L a i s s e z f a i r e c o n c e p t s , the idea that deep d e p r e s s i o n s a r e divinely guided r e t r i b u t i o n for m a n ' s economic follies, the idea that money should be the m a s t e r instead of the s e r v a n t , have b e e n discarded b e c a u s e they a r e no longer valid, if they ever w e r e . Nor does the d i s c a r d i n g of old ideas and the substitution of new ones mean that we a r e throwing b a s i c laws or p r i n c i p l e s o v e r b o a r d . It is the r e t u r n to f i r s t p r i n c i p l e s in m a n y p a r t s of the f r e e world that is the m o s t significant a s p e c t of world-wide r e c o v e r y and p r o g r e s s outside of the i r o n curtain. And that, in t u r n , v a s t l y b r i g h t e n s the hope of lasting p e a c e . By f i r s t p r i n c i p l e s I m e a n t i m e - t e s t e d b a s i c concepts of the m a r k e t place and the development of competitive p r i v a t e e n t e r p r i s e , with only that degree of Government i n t e r f e r e n c e or regulation n e c e s s a r y to p r e v e n t abuses and e x c e s s e s . We see a r e t u r n to t h e s e concepts h e r e and a b r o a d because other concepts have failed, and w h e r e t h e r e has not yet been a revival of these concepts economic t r o u b l e s a r e a c u t e . As I suggested at the outset, the b a s i c p r o b l e m s , the q u e s t i o n s , r e m a i n p r e t t y much the s a m e a l w a y s . The a n s w e r s a r e d i f f e r e n t - - a n d no one would be so r a s h as to say that we have u l t i m a t e solutions for all of our p r o b l e m s . We can say confidently, I think, that we have d i s c a r d e d some wrong a n s w e r s - - t h a t we have r e t u r n e d to s o m e of those fundamental -11principles under which our society, our institutions, have flourished with incomparable benefits, benefits not m e r e l y material. There will always be s o m e , of course, who think we must go through the wringer periodically to purge the economy. There will always be cynics and defeatists, no doubt, who say that because there have always been disastrous depressions and more disastrous w a r s , we must accept these visitations as inevitable. If there are enough hopeless J e r e m i a h s , enough defeatists and cynics, those calamities are indeed inevitable. If we do nothing about it, if we do nothing to prevent inflation and thus avoid the inevitable aftermath of deflation, then of course we are defeated. Today' s generations will accept no such fatalistic philosophy. If we fail to apply the brakes sufficiently and in time, of c o u r s e , we shall go over the cliff. If businessmen, bankers, your contemporaries in the business and financial world, stay on the sidelines, concerned only with making profits, letting the Government bear all of the responsibility and the burden of guidance of the economy, we shall surely fail. I am as weary as you are of pious platitudes and after dinner preachments about leadership and financial statesmanship. But the fact is that the Government isn't something apart and remote from you. It is you~-all of u s . If those responsible for major decisions in b u s i n e s s , finance, labor, agriculture, are irresponsible, Government can't compel you, short of moving in the direction of dictatorship, to be reasonable, or moderate, or prudent. -12- In the field of m o n e t a r y and c r e d i t policy, p r e c a u t i o n a r y action to prevent inflationary e x c e s s e s is bound to have s o m e onerous effects--if it did not it would be ineffective and futile. Those who have the task of making such policy don l t expect you to applaud. The F e d e r a l R e s e r v e , as one w r i t e r put it, after the r e c e n t i n c r e a s e in the discount r a t e , is in the position of the c h a p e r o n e who has o r d e r e d the punch bowl r e m o v e d j u s t when the p a r t y was r e a l l y w a r m i n g u p . But u n l e s s the b u s i n e s s c o m m u n i t y , l e a d e r s in all w a l k s , exhibit moderation, p r u d e n c e , and u n d e r s t a n d i n g , then we will fail and d e s e r v e to fail, I cannot believe we will be so blind. I have a deep and abiding . faith in that undefinable yet meaningful p h r a s e we frequently u s e - "the A m e r i c a n Way of Life,
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