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

before the
Economic Club of New York
March 12, 1957


In inviting me to address this golden anniversary meeting of
the Economic Club of New York, you are according an honor to the
great American institution I am privileged to serve.

It is deeply

Unless the Federal Reserve System has the interest

and understanding of organizations such as yours, it cannot hope
to fulfill its mission.
In seeking understanding I am not asking approval. It is not
idle flattery to say that this is a highly enlightened audience, one
unusually well-informed in economic affairs. Yet, I dare say, you
are by no means unanimous in your feelings about that misnomer,
so-called "tight money." If it gets any tighter, as one commenta¬
tor has amusingly said, it may be just as hard to get into debt as
it is to get out.
I shall touch on that subject later, but an occasion such as
this Invites a broad look at our economic heritage in order that
we may take some bearings on the course we are pursuing.
One of the determinants of that course over the sweep of
American history has been the position we as a nation have taken,
through our democratic processes, on the role and responsibilities
of the Government in economic affairs.
Fifty years ago the United States was just completing its
transition from a predominantly agricultural country to the leading
manufacturing and industrial nation of the world.




Jefferson!s belief that Government is best when it governs
least was little by little encroached upon. Yet the system we
developed, with its main emphasis on the dignity of man's own
initiative and enterprise, spurred the transformation of this
country from a wilderness to the world's foremost industrial
nation at a speed unprecedented in history.
The system worked,

That was proved by the mighty "surges of

But progress was not smooth or painless.


came only in fits and starts, Exhilarating bursts of expansion
produced in their wake depressing spells of contraction. Men
began to question whether the merriment was worth the misery, es¬
pecially when the misery was worst among millions who had never
gotten in on the merry-making.
Early in the 20th century an event occurred to convert the
public!s increasingly questioning attitude into a conviction that
the Government had a responsibility—a duty—to do something to
protect people from economic disasters that were beyond individual
control. That event was the Money Panic of 1907. It was into that
crisis that the Economic Club of New York was born and out of it that
the Federal Reserve System emerged as an institutional response to
public demand for the protection I cited.
Diagnosing the panic of 1907 is easy for us now. With the
perfect vision of those who look backward in time, we can tonight
readily perceive the panic!s approach, We know now that the wave
of speculative activity that preceded and provoked it was, in fact,


3 -

If the vision of the time was blurred, the reason lay, in
part, in the widespread belief that a panic like that of 1893 or
1873 could never again occur. How could it, asked a magazine of
the day, in view of the "phenomenal increase of our economic
strength, the coordination of American industry since 1899, the
establishment of the gold standard of currency, and, more particu¬
larly, the great and concentrated resources of our banks?"
Certainly most people were caught by surprise when the panic
struck. That is evident in a picture of the time, sketched by
Senator Nelson W. Aldrich in a speech to members of this club two
years later. Senator Aldrich, who headed the National Monetary
Commission that was established to study the causes of the
financial crisis of 1907, told the members of your club, on
November 29, 1909, that "to the great majority of the people of
the country the blow came without warning•" Most of the economic
arises in our history have similarly come—which should teach us
to beware of smugness or complacency,
By the time Woodrow Wilson took office as President in 1913,
financial reform had become a matter of urgent priority.

"It is

absolutely imperative," the new President said in a special
message he delivered before the Congress of June 23, 1913, "that
we should give the businessmen of this country a banking and
currency system by means of which they can make use of freedom
of enterprise and of individual initiative ... "

-4Six months later, Congress responded by passing the Act
creating the Federal Reserve System, entrusting to it responsi¬
bility for managing the money supply of the country.

This was a

revolutionary step, signifying an end to the historic refusal of
the American people to accept the very real hazards of a
managed currency.
It was a careful step, too. In framing the Federal Reserve
Act, great care was taken to safeguard this money management from
improper interference by either private or political interests.
That is the importance of maintaining the System's independence.
Hence, we have a system of regional banks headed by a coordinating
board in Washington intended to have only that degree of centralized
authority required to discharge a national policy effectively.


constitutes, as you know, a blending of public and private interests
so uniquely American in character.
Since the Federal Reserve System came into being, the
country has not suffered from inelasticity of currency and credit,
from immobility of bank reserves, or from the money panics that
haunted the past. However, we learned from the inflationary bubble
following World War I, and the speculative collapse of the late 20's
and early 30's, that elimination of these factors of instability did
not prevent drastic depression. The over-all problem of stability
also involves fiscal, budgetary, and debt management policies as well
as prudent decisions on the part of the business and financial

- 5In the sphere of business and economics, the great challenge
of our times is to prevent the recurrence of the boom and crash
sequence that has imperiled us in the past, and could destroy us in
the future. It is a continuing challenge. Meeting it requires
constant vigilance.
Over the last hundred years the American economy has ex¬
perienced some 2k full turns of the business cycle, an average of
one complete rise-and-fall each four years. As a general rule, the
immediate impetus to expansion of the Government's role in economic
affairs has come from one of these periodic disasters. But some—•
times, it appears, we can be driven as hard by fear of disaster as
by disaster itself. To find an example, we need go back little more
than a decade, to the enactment of the Employment Act of 1946.
In that instance, so great were the psychological scars of
the 1930!s that the fear that mass unemployment would develop in the
wake of World War II was sufficient—though the fear proved ground¬
less—to bring about the Employment Act of 1946, pledging the Federal
Government to do its utmost to keep employment, production, and pur¬
chasing power at consistently high levels.
In 1945, as all of us in this audience will recall, there was
great apprehension that the problem we were going to face, when the
war was over and when millions of men took off their uniforms, would
be unemployment on a huge scale, and on all sides, because private
business would be unequal to providing jobs for these men.

- 6 The same apprehension pervaded Congressional debate on the
Employment Act in 1946. The Act was adopted almost unanimously
amidst a virtual unity of opinion that it would be necessary for
the Government to act to create jobs and to see that the transition
from military to civilian employment would not be attended by un¬
employment on the scale suffered in the depression.
Actually, the history of the period since the war has made
clear that the problem has not been one of creating jobs. The in¬
gredients for growth, the technological advances, the opportunities
for development in the entire Western world, in the period since the
war, have been limitless--and in my judgment still are. The real
problem has been sustaining jobs, and holding back inflation that
would endanger those jobs by undermining stability.
Nearly everyone subscribes to the objectives of the Employment
Act, but it does seem that we need to give more attention to certain
related questions: What is the means of attaining high levels of
employment? What is the means of sustaining jobs and leading us
to a permanently higher standard of living?
In public discussion in connection with the Employment Act,
you find many references to money as a medium of exchange, but almost
none with respect to money as a standard of value. The reason is
that almost all attention was focussed on the problem of deflation,
and almost none on inflation.
In my judgment, the objectives of the Employment Act of 1946,
under present conditions, can be attained only by understanding infla¬
tion and resisting it. The fight against deflation begins with the

- 7 fight against inflation.

If inflation is allowed to pursue its course,

it feeds upon itself in such a way that, when the inevitable correction
finally comes, unemployment will be that much worse.
It should not be difficult to see how inflation leads to un¬

The danger becomes manifest when, as costs go up, it

becomes increasingly hard to pass those costs along to the customer
in the form of price increases, and it becomes increasingly easy to
misjudge or miscalculate the market. Then, the first time volume
dips there is a price-profit squeeze and, at some point, the profit
squeeze leads to a cutback in investment, income and production.
The cutback in production leads to a cutback in employment.
That's the cycle.

It is what follows when people try to spend

more than they have to obtain more goods and services than are cur¬
rently available. The situation can't be cured by additions to the
money supply.

More money only pushes up prices, and speeds the

cyclical effect.
I have less faith in the magic of money and credit than some
people, and more faith in the economy than those same people when it
comes to recognizing the economy's capacity for adjustment.

In the

last ten years we have consistently tended to under-estimate the
vitality and strength of our economy.
Not long ago an economic historian, Robert Heilbroner, declared
that man has found, over the centuries, only three ways of insuring
the execution of the thousands of intertwined tasks—the disagreeable
ones as well as the pleasant ones—that must be done each day to
keep human society from breaking down.

- 8 One way has been to organize society around the forces of
tradition, by handing down the varied and necessary tasks from
generation to generation according to custom and usagej son follows
father, and a pattern is preserved.

Thus, in India, until recently,

certain occupations were traditionally assigned by caste.
The second way, also in use for countless centuries, has been
to use the lash of central authoritarian rule to see that the necessary
tasks get done.

That was the system used to build the pyramids of

ancient Egypt,

It is the system the Soviet government uses today to

get its Five Year Plans carried out.
The third solution to the problem of economic survival is the
market system.

It achieved general acceptance only a couple of cen¬

turies ago, and yet it revolutionized civilization in the Western
A market provides a means of exchanging goods, but a market
system does considerably more. It provides a mechanism for sustain¬
ing and maintaining an entire society.

It constitutes a way of life

that affords freedom that cannot exist in a society run by tradition
or the rule of authority.

For, in the market system, the lure of gain,

not the pull of tradition nor the whip of authority, steers each man
to his task. And yet, although each may go wherever he thinks fortune
beckons, the interplay of one man in competition with another results
in the necessary tasks of society getting done.
Now we know from our experience that the functioning of markets
is not always good. Markets can, in fact, function very badly,

- 9 particularly when they are dominated by monopoly, by speculative
excesses, or by inflationary forces. Those of us who are truly
concerned with utilizing the resources of the market must devote
our energies to the promotion of competition, the restraint of
speculative excess, and the maintenance of the stability of the
It seems obvious that the market system could not function
without money, for money is at the heart and center of a flexible
society. No modern country can have stability and progress without
some basis of sound currency,
central banks.

That is why all modern countries have

That is why the United States has the Federal Reserve

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 once

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.

It 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, or spend it for learning something, to save its value
against some unforeseen event, to use it to lift living standards
for themselves and their families, or to put it aside to fortify
their independence when they wish 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 Govern¬
ment, 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 the bank's charter.
But to Andrew Jackson, and many others as well, it seemed that
the public representation permitted was not enough. It was not that
Jackson opposed the idea of any central bank, for he said in his
veto message that such an institution "is in many respects convenient
for the Government and useful to

the people." What he objected to was

that this particular bank, as it was set up, provided private inter¬
ests with what was, in the words of his veto message, "a monopoly—
an exclusive privilege of banking..granted at the expense of the

In consequence, Jackson destroyed the bank.

- 11 ~

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

Jackson1s complaint had been answered:

there would not

be. private domination of money—nor political domination either.
Let us not, however, be misled into thinking that the entrustment of money management to the Federal Reserve represents a change in
fundamentals or an unawareness of the economic facts of life or a
denial of the ability and courage of individuals as an essential part
of the mechanics by which a higher standard of living is to be achieved.
At the center of our way of life always remains the market
place, tying together individual freedom and material progress.
While concepts may be modified, and should be from time to time,
our basic thinking continues to recognize private property, free
competitive enterprise, and the wage and profit motive, operating
in the open market through the price mechanism, as the most
effective means of developing and sustaining our march toward better
living standards and the elimination of poverty.
Nothing in the background or history of the Federal Reserve Act
indicates any misunderstanding of the law of

supply and demand, or

any belief that a Federal Reserve System could control or successfully
manipulate, for long, supply and demand forces. Certainly the history
of the past 40 years indicates the wisdom of this approach and
demonstrates again that you can change the nature of demand and alter
the composition of supply, but you can no more abolish the law of
supply and demand than you can abolish the law of gravity.

It must



be reckoned with always, sooner or later, and whenever we ignore the
working of the market we do it at our peril and ultimately must pay
the piper.
Six years ago this month a decision to unpeg the Government
securities market was in process of being carried into effect. For a
number of years, efforts had been made to adjust the supply-demand
relationships in Government securities without resorting to the price
It had become quite popular in that period to assume that
neither interest rates nor exchange rates made any difference, and
that notions that they did matter were the fetishes of outmoded
classical economists whose views were completely out of tune with
the modern, postwar world.

Then we saw reality creep up on us, a

seller's market change to a buyer's market, and rates could no longer
be pegged at artificial levels. The devaluations of the 1949 period,
brought to head in September by the readjustment of the British pound
sterling, were casting their shadows before and indicating that it
might not be long before the supply-demand relationship in our Govern¬
ment securities market would have to be faced squarely unless we were
willing to accept the alternative of drastic depreciation of the dollar.
Essentially, the Treasury-Federal Reserve accord returned to the
market some of the influence which had been denied it by conscious
Government policy for a period of more than 10 years. Once Government
securities ceased to be interest-bearing money, and supply-demand
relationships began to be equalized by adjustment in interest ratesj

- i3 the credit mechanism once again began to operate through the market
The Federal Reserve System ceased to be an engine of inflation.
It would still be that if it were to pour out money in the endless
stream that would be necessary to supply reserves in sufficient
volume to meet every demand for credit without an increase in interest
rates, the price of money.
No one should expect the Federal Reserve to do that, for to do
so would be an abandonment of the System's duty to keep the flow of
credit in line with the resources of the economy so that we may
continue in the path of stability and growth. Neither should anyone
fear that credit will become "unavailable at any price."


the so-called "tight money" situation that has evoked so much comment
has not been brought about by a reduction in the money supply. The
money supply has not in fact been reduced.

Actually, the money supply

has increased, and so has its velocity or turnover.

Credit has not

been tightened by an insufficiency of money; rather, the tightening
effect has been produced by the magnitude and intensity of demands
for credit from practically all quarters•

All of the demands could

have been satisfied only by creation of more bank credit—creation of
more money—and that, of course, would be inflationary.
But the problem of achieving a balance is not insoluble. In an
economy as strong as ours, it can be solved in large measure by a
reduction in spending and an increase in saving brought about by
market forces.
The rediscovery of monetary policy in this country and through¬
out the free world dramatically illustrates the traditionally American

recognition of the superiority of judgments arrived at in the market
place to those made by individuals, or groups of individuals, within
either Government or private business. It is my conviction that, by
and large and excepting periods of war, you will get more impersonal,
fairer distribution of our economic production through the process
of the market than you will by leaving the distribution to any group
of men, whether in the Federal Reserve or elsewhere, Furthermore,
the workings of the market will create a greater end product to dis¬
tribute than any other system as yet devised.
The background of the American Revolution is so well known
that every school-boy understands, in an emotional sense if no other,
the guarantees of the First Amendment to our Constitution. Freedom
of religion, freedom of speech, freedom of the press, freedom of the
right to assemble and petition—all of them strike answering chords
in the hearts of most Americans. Yet it has also seemed to me that
the inter-weaving of these concepts in the fabric of our society, in
terms of livelihood, is not so well understood.

That is why I have

spent so much time—perhaps too much—in reviewing our economic
We are a Republic, a constitutional democracy in which the
general welfare is expressed in political procedures, forms, and
institutions. At the base of our structure lie certain principles and
concepts, such as the market system, which are themselves the product
of an evolutionary process.

- 15 -

In discussing these matters with you tonight, I have been
motivated by conviction that the problems we are dealing with today,
and the road we hope to travel tomorrow, must be related to these
principles and concepts if we are to have useful guideposts by which
to keep our course steady in the murk and fog that from time to time
surround us.
I have a deep and an abiding faith that the foundation on
which our American economy rests is firm and sure. Our American
economy is, indeed, the strength of our Republic.