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For release at 6: 30 p. m. ,
Central Daylight Time,
Thursday, July 30, 1964.

Our American Economy and the Federal Reserve System

Remarks of Wm. McC. Martin, Jr. ,
Chairman, Board of Governors of the Federal Reserve System,

Arkansas Workshop on Economic Education,
University of Arkansas Medical Center,
Little Rock, Arkansas.

July 30, 1964

No activity is more important than education, and no part
of education is more essential than that you are seeking to foster:
understanding of the world of business and the nature of the economic
process--the process by which people make their living.

Those of you

who have participated in the vital undertaking of this workshop on
Economic Education deserve the commendation--and the admiration-of us all.
In large part, I have come here to learn, to learn about
you and the work upon which you are engaged. I am grateful to you
for that opportunity.

In my turn, I should like to contribute something

to your undertaking, if I can, by making some observations about our
economy and the role played in it by the Federal Reserve System,
which this year is observing the 50th anniversary of the beginning of
its operations.
It is not my intent tonight to engage in predicting economic

My concern, instead, is with how to get the most and the best

out of the American economy, But I would like to note that, in
appraisals of the basic strength and potential of our economic system,
there seems to me to have been a decided tendency for many years to
underestimate rather than to overestimate.


I think it no exaggeration to say that the most important
single economic and financial development of recent times has been
the entry of the world into a new era of vigorous international
This is not a new fact, of course: it has been in the making
for years as, with a generous assist from us, the countries of Europe
cleared away the ruins of war, got their finances in order, developed
an industrial base unprecedented in size and efficiency, expanded their
foreign trade, moved from debtors to creditors, and opened the way
for a freer international flow of funds by restoring the convertibility
of their currencies.
In a parallel development, the United States balance of
payments with the rest of the world dropped from a surplus to a deficit
position, reflecting the fact that the United States was spending, lending,
and investing more abroad than foreign countries were spending, lending,
and investing here.

The deficits began showing up more than a dozen

years ago, and, save for one exceptional year, have continued since.
This constitutes a problem we dare not overlook and cannot ignore.
Increasingly we are all coming to understand that in indus¬
try, commerce, and finance alike Americans are in competition not
only with each other but also with the world; in competition not only for
goods and services but also for capital funds; in competition not only in


design, quality, promotion, and credit terms but also in prices; in
competition not only as sellers and lenders but also as buyers and
All this brings strains, but it also brings opportunities.
An increased international flow of goods, services, and capital is
mutually advantageous to all participants, and expanding that flow can
benefit us as well as the rest of the world: with Europe more pros¬
perous, and with Latin America, Asia, and the old and the new
countries of Africa striving for better standards of living, opportuni¬
ties for us to market our goods also are broadening.
To meet the competition of the world, which we are feeling
with mounting intensity even in our domestic markets, we need the
traditional American virtues of initiative, imagination, inventiveness,
enterprise, and managerial skill in order to come up with the right
goods and services, in the right places, at the right times, and at the
right prices.
But we also need a quality for which we have not always
distinguished ourselves--and that is the quality of self-discipline.


that I mean self-discipline in our private and in our governmental
processes alike.
We simply cannot afford to be priced out of the market by
the wage-price spiral: in our private enterprise, employers must

-4realize that they are competing with other employers around the
world for sales and profits, and employees must remember they are
competing with other workers around the world for jobs as well as
Neither can we afford to be priced out of the market by
currency inflation: in our governmental operations we must earnestly
avoid budgetary and monetary practices that can undermine the value
of the dollar, and so undermine our competitive position as both
sellers and buyers of goods and services throughout the world.
In short, there is mutual need of an urgent nature for
labor, management, and government each to measure up to its
separate responsibilities, and at the same time to refrain from
behavior that makes it harder for the others to measure up to theirs.
Now I should like to give you my views on where the
Federal Reserve fits into the picture I have been trying to sketch, even
though I don't think I can add anything new to what I have said on other
In our free society, the responsibility of government, as
I understand it, is not to order the lives of people for them but to pro¬
vide them a climate of opportunity that will encourage them to apply
their energy, enterprise, and ingenuity to bettering the lot of them¬
selves, their families, and their communities, and thus to promote
the welfare of the country as a whole.


That general responsibility is one in which the Federal
Reserve System shares.

The direct responsibility of the System, at

all times, is to provide monetary and credit conditions that will
encourage business and employment, safeguard the value of our dollar
at home and its strength in international markets, and promote sus¬
tainable growth in the American economy. By so doing, the Federal
Reserve can make an important contribution to improving the living
standards of our people as a whole--though it cannot alone achieve that
result because its powers are limited to credit matters, and business
and employment do not live on credit alone.
Clearly, the framers of the Federal Reserve Act were
aware that monetary policy would inevitably require an element of

For they took what seem to me some very wise precautions

to see that the required judgments would be, in so far as human
capacities permit, nonpartisan, impartial, informed, and in the
interest of the country as a whole.
Accordingly, when Congress entrusted the power of money
management to the Federal Reserve System during President Wilson's
administration a half century ago, great care was taken to safeguard
that power from becoming a device that could be controlled either by
private interests, on the one hand, or political interests on the other.
The framework of the System was designed to reflect in the best
American tradition a blending of the public interest and private


enterprise, and also to accord recognition to the wide areas of the
United States and the local and regional problems that arise out of
peculiarly American conditions.
Thus, we have in the Federal Reserve System something
different from the Bank of England or European central banks, where
authority is highly centralized.

Instead, we have under the Federal

Reserve Act a regional system that is now made up of 12 great
regional banks with 24 branches, and some 260 directors.

In addition,

for supervision and for coordination of policy, we have the Board of
Governors in Washington, consisting of seven men appointed by the
President with the advice and consent of the Senate.
Because I share the view of Benjamin Disraeli that
"individuals may form communities, but it is institutions alone that
can create a nation, " I should like to expand a bit on the institutional
aspect of the System.
I think of the Federal Reserve as having a "trusteeship, "
created by Congress in the exercise of its constitutional powers, for
the money of this country and of its people.

That is a trusteeship

that we take very seriously indeed, recognizing as we do that money
and monetary policy cannot be considered in purely material or
economic terms, for the simple reason that the ultimate purpose of
both is to meet human needs,


Money performs a great many services for mankind, but
none more important than in providing a degree of freedom that man
could not attain if money did not exist.

The bonds of serfdom that

bound the mass of men for life to their native plot of soil and their
native status in society were broken when payment in produce was
supplanted by payment in cash.
Money gave men freedom of movement and leisure.


gave them the ability to change the nature and locality of their
possessions and earnings at will.

It gave them freedom to do as they

please with the product of their labors—to eat it or drink it, to give
it to a church or charity, to spend it on learning, to save its value
against some unforeseen event, to use it to lift their living standards,
or to put it aside to fortify their independence when they wished to
assert it.
In short, money can be an instrument of freedom--if only
we permit it to function in that role.

But the power over money can

also be an instrument of tyranny--witness the coin clipping by kings,
a form of tyranny known at first hand by many of those who settled
early in America.

That is one of the reasons why there has been so

much concern over monetary policy and monetary actions throughout
our history.
When the First Bank of the United States was established
under government charter, great effort was put into preventing the


government, or political authority, from having any say over the bank
and thus having a chance to indulge in coin clipping.
Gradually, as time went on, apprehension arose about too
much private control over money.

When the Second Bank of the United

States was formed, there was some recognition that the public interest
should be represented in the bank's set-up.

So, the Congress made

provision for public representation when it granted that bank's charter.
But to Andrew Jackson, and many others as well, it
seemed that the public representation permitted was not enough.


was not that Jackson opposed the idea of any central bank, for he said
in his veto message that such an institution n is in many respects con¬
venient for the government and useful to the people. " What he objected
to was that this particular bank, as it was set up, provided private
interests with what was, in the words of his veto message, "a monopolyan exclusive privilege of banking, , , granted at the expense of the
public. n In consequence, Jackson destroyed the bank.
The enactment of the Federal Reserve Act, as part of
Woodrow Wilson's "New Freedom,


marked the beginning of what we

might call modern times with respect to the role of government in
monetary affairs.

Jackson's complaint had been answered: there

would not be private domination of money--nor political domination


Thus the Federal Reserve System was established as a
nonprofit, public service institution that serves as I have said in a
trustee's relationship with the people, which I think is something
our people understand, partly out of their experience with the
occasional necessity of having to ask someone else to look after their
funds or property or members of their family.

If the people don't

want us in that relationship--well, the Federal Reserve System is a
part of a democracy and they can change it.

But that is the relation¬

ship we hold, and it can be dissolved only by due process of law.
In the discharge of its trusteeship, the System is concerned
primarily with making money as useful as it can be as a mechanism
for helping men freely to make their own decisions and choices in
the marketplaces that serve as the cornerstone of our competitive,
private enterprise economy.

Making money useful in that sense

necessarily requires maintaining confidence in the dollar itself as
well as in the integrity and efficiency of the banking system.
Because we are the custodians of the greater part of the
reserves the commercial banks are required to maintain, and because
we can alter the volume of both total and required reserves, we can
exert considerable influence over the readiness with which the banks
will extend credit.

The soundness of bank credit, as well as the

efficient functioning of our market system, depends to a large extent
on the Federal Reserve's decisions with respect to what it should do
about the reserve position of the banking system from time to time.


For the most part, these decisions involve Federal
Reserve purchase or sale of government securities.

If we buy, we

add to bank reserves, in effect substituting Federal Reserve credit
for private credit that had been extended to the government, and
freeing private funds for other purposes, thereby making credit
easier to obtain.

If we sell, the opposite effect is produced.

This arrangement has worked because our credit is good.
If we continually made a practice of extending credit to the government
solely to provide the Treasury with a cheap source of funds, we would
ultimately neglect our responsibility for maintaining the value of the
dollar and confidence in the banking system.

And surely, in the end,

the credit we extended would become worthless, even to the Treasury.
It was to guard against this result that the Congress
endowed the Federal Reserve System with a considerable degree of

Independence of the System, to me, means simply that

our decisions regarding extension of Federal Reserve credit must be
made in the light of their long-range impact on the value of the dollar
and the soundness of the credit structure on which our market system
depends, and not out of solicitude for the momentary financing needs
of the government.

Independence does not mean that the Federal Reserve

can establish goals in conflict with those of the President or the

We should, and do, use our limited powers to produce a

monetary climate in which the economy can flourish, adding its


strength to the attainment of whatever goals Americans may seek.
The Federal Reserve cannot overcome all the maladjustments that
keep some Americans from sharing in the general prosperity any
more than we can guarantee perpetual continuance of that prosperity.
The Federal Reserve cannot make the policy decisions that determine
ultimately whether this country's international transactions will come
again into balance or its gold will flow abroad.

What we can do, and

all we can do, is to make credit decisions as soundly as our ability
permits, so that transactions in international markets may proceed
with a minimum of interference from speculative forays against the
dollar, and so that domestic markets, in performing their task of
bringing together those who seek goods and services and those who
can supply them, may have the benefit of a reasonably stable price

If this kind of credit climate is to be maintained, the decisions

on which it depends should be made by an institution devoted solely to
that end and responsible for its achievement.

This is my conception

of what Congress did in setting up the Federal Reserve System.


independence of judgment strengthens the formulation of the govern¬
ment's over-all economic policy, and the achievement of our national
economic goals, as well as strengthening the credit structure on which
the government must rely to accomplish its objectives.
Now let me note briefly what the Federal Reserve has been
doing in recent times to keep credit conditions attuned to the needs of
a nation confronted with both domestic and international problems.


On the domestic front, to help bring about sustained growth
in production and employment, the Federal Reserve has been operating
to make sure that the banking system can meet every reasonable
borrowing need.
On the international front, to help hold down the outflow of
capital and gold prompted by the continuing balance of payments deficit,
the Federal Reserve has been operating to see that the outflow is not
aggravated by the pull of international differentials in interest rates.
It is not my purpose either to apologize for or boast about
the Federal Reserve's operations, on either of these fronts. What I
really feel is that the System has made an earnest effort, and I believe
a constructive one, to do its part fully in helping our country to deal
with problems of diverse character.

But I would not want to deceive

you, or myself, by claiming victories that have not yet been won in a
struggle that, by its nature, can never cease.
We do not claim the System is perfect or infallible.
a human institution, it is neither.


It has made mistakes, and un-

doubtedly it will make more of them, for the mind of man has not yet
managed to devise any means of excluding error.

In its half-century

of existence, encompassing the ordeal of two world-embracing wars
and between them the anguish of boom, crash, and depression, the
System has experienced failures as well as successes.

But it has also


learned from experience, and I believe we can find considerable
satisfaction in the extent to which the System over the years has
accomplished the objectives set for it by Congress,
In any event, I can assure you that the Federal Reserve
System today is wholly dedicated to contributing--to the maximum
extent that monetary policy can contribute--to the achievement of
maximum sustained employment, stable values, and a rising standard
of living for all Americans.
In the last analysis, whether an institution renders good
or bad public service will always depend more upon the character of
the human beings engaged in its operations than upon its organiza¬
tional form and structure.

The solution of difficult and complex

problems depends upon the ability of conscientious men to reconcile
differences of opinion and come to a meeting of the minds on what
best serves the public *s good rather than upon the forms of
institutional organization.
In his first inaugural address as President, Woodrow
Wilson, in whose administration the Federal Reserve Act was passed,
gave us some counsel about dealing with our economic system that
I believe applies as well to the Federal Reserve itself.

These are

his words, as they are inscribed in part below his plaque in the
Federal Reserve Building in Washington:



We shall deal with our economic system as it is
and as it may be modified, not as it might be if we had a
clean sheet of paper to write upon; and step by step we
shall make it what it should be, in the spirit of those who
question their own wisdom and seek counsel and knowledge,
not shallow self-satisfaction or the excitement of
excursions whither they cannot tell. l!

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102