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For release at 12:30 P.M.
Eastern Standard Time
Wednesday, Dec. 11, 1957

Remarks by
WnuMcC. Martin, Jr.
Chairman, Board of Governors of the Federal Reserve System

at the Annual Meeting of the
Life Insurance Association of America
New York City
December 11, 1957

Time passes swiftly.

It is now nearly seven years since the

Treasury-Federal Reserve Accord.

The insurance industry was most

helpful in the effectuation of that Accord--notably through its par¬
ticipation in the exchange operation of the long-term 2-1/2s for the
2-3/4 per cent convertibles.

This is my first opportunity to express

to you my personal appreciation for that public-spirited action, for,
without the cooperation of your industry, the successful achievement
of the first steps under the Accord could not have been accomplished.
Anyone seriously interested in learning about our economic and
financial processes can benefit greatly by meeting with the members
of this Association. It is an especial privilege for me to meet with
you, for the longer I am in this field the more I find I have to learn
about it.
Perhaps all of us need to know more about it, and therefore my
theme today is going to be the importance of basic economic research.
But, first, I wish to make a few comments about the current scene,
and the Federal Reserve's place in it.
Over the last month, the Boards of Directors of the twelve Federal
Reserve Banks, with the approval of the Board of Governors, have
reduced their discount rates from 3-1/2 per cent to 3 per cent,
restoring the level that prevailed before the middle of last August.


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A few days ago the Chairman of one of those Boards of Directors-who is a very good businessman--told me someone had asked him,
"What caused the Federal Reserve to reduce its discount rate?"
He added that he had been able to give a complete reply in just four

"The economy.

It changed, "

If I were to talk about it for hours--which you will be relieved to
know I am NOT going to do--I doubt if I could tell it any better, and
certainly I could not explain it any more clearly or truthfully than that.
Indeed, it has seemed to me all along that the initial rate reduction
action, announced by the Reserve Board on November 14, constituted
a straightforward, clear signal that, in our judgment, inflationary
pressures were abating, at least for the moment.

The action

recognized primarily a decline in the demand for bank credit which
began to appear most clearly in the early part of September, and has
more or less continued to the present time.

This represented an

important shift from the overwhelming demand for credit--tantamount
to a California gold rush, as I frequently described it--which had
occurred with amazing persistence over the past two years.
In accord with a flexible policy designed to lean against the wind
whenever it is clear in which direction the wind is blowing, the rate
reduction appeared to us as appropriate and imperative in the execution
of a continuing policy directed toward fostering economic balance.


a continuing policy evolves over time and depends essentially on basic

- 3business conditions.

These conditions may be influenced but certainly

cannot be made by money or credit policy.

The signal to which I have

referred should not be interpreted outside of this context, nor should
future actions be predicated upon it.

It is not my purpose today to

forecast in any way what future action will or will not be taken.
The purpose of Federal Reserve actions should always be to adapt our
operations in the most effective way we can devise to promote growth
and stability in the economy.

Adjustments must be made constantly to

attune these actions to business conditions as they develop and progress.
So much for our current situation.

And the evaluation and judgment of

these business developments leads me to want to discuss with you this
morning, in brief fashion, basic research and the financial processes,
A major liaison between your industry and the Federal Reserve
System has been your Association's research program.

Your program

seven years ago was in its pioneering stages; now it has reached full

Your leaders showed the greatest foresight in establishing

that program, and they are to be warmly commended for its initiation.
As I have watched it develop, I have been particularly impressed
by the wisdom shown in providing that it should comprise an appropriate
blend of applied research and basic research--that is to say, of research
obviously calculated to serve the managerial and administrative interests
of the industry and research concerned with fundamental financial
processes whose objective is merely to add to the sum total of
knowledge about these processes.


4 -

There were some of your industry, I am sure, who viewed with
misgivings the first major piece of basic research which you
authorized--namely, the study of the meaning and measurements of
savings from a national point of view.

The only purpose to be served

by the inquiry from the industry's point of view was to broaden the
public1 s perspective on, and deepen its understanding of, the savings

Little was it suspected at the time that the work was initiated

that economy's major financial problem within a decade would become
an insufficiency of savings in relationship to financing demands. Few
of you realized that the development of constructive lines of public and
private action for meeting this problem would require the results of
this study as a primary source of background information and insight.
Many of you are informed that the Federal Reserve System has
been requested by the Bureau of the Budget to prepare new estimates
of national savings in the light of the findings of this research and to
provide such estimates quarterly.

This work is now going forward

under a special staff and, by another year, the developmental work
should be completed and comprehensive savings estimates under
Federal Reserve auspices should become regularly available as public
It is gratifying to note, from Dr. O'Leary's research report, that
the monumental inquiry into national savings was only the beginning of
your sponsorship of basic financial research.

Your succeeding projects


5 -

namely, the studies of Capital Formation and Financing and of the
Postwar Capital Markets, look highly promising and the new knowledge
gained from them will be helpful to the public generally as well as to
the financial community which you represent.

As these undertakings

are completed, I, for one, hope that the industry will see its way
clear to support still others, and that you will vigilantly guard
against evolution of your research program towards the strictly
Experience under your own research program demonstrates how
knowledge derived from research on fundamental subjects prepares the
way for applied or utilitarian research.

Your current studies of costs

in mortgage lending operations and of life insurance mortgage commit¬
ments were originally undertaken as projects to ascertain whether this
sort of information could be compiled on an industry basis and what
the showing would be if it were compiled.

It was an effort to test the

limits of the unknowable, which proved its worth and, therefore, is
continued for its applied benefits.

The Federal Reserve System has

found this knowledge particularly helpful and it is appropriate here to
express our appreciation to your industry for making it available.
Within the Federal Reserve System, over the years, we have tried
to keep alert to a responsibility for basic or fundamental research
appropriate to the System's interests.

In our research administration

we have endeavored, as a goal, to combine necessary day-to-day


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observational work on current economic conditions and trends--that i s ,
our applied research—with research activities directed to inquiry
whose outcome will merely add to the sum total of knowledge.


activities help to enlarge the minds of those who serve the System and
to give them the illumination and insight essential for meeting flexibly
and imaginatively the new financial situations which monetary manage¬
ment is constantly encountering.
In the past, these research undertakings have sometimes taken the
form of relatively individual inquiries, such as the identification and
measurement of factors affecting the money supply and bank reserves;
the determination of forces of supply and demand in credit markets;
the etching out of patterns of interest rates, in central markets and
between different markets; the identification of seasonal forces and
patterns in various activities; the measurement of physical production
in diverse areas of output by means of index numbers; the sources of
cyclical instability in particular fields and in the economy generally;
and the nature and measurement of forces of economic growth.
In other instances, the research has assumed a considerable size
and involved a coordinated team of workers over a period of time.
Illustrations of these larger undertakings in recent years are the
System's compilation of a comprehensive historical record for our
whole banking system; its development of a system of social accounts
to depict the flow of credit and money; its application of the national


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survey technique to obtain information about coconsumerfinancial
positions and about credit purchasers of automobiles; and its more
recent endeavor to apply the survey approach to the assembly of
information that will show the financial situation of small business,
particularly unincorporated business.
We in the Federal Reserve today can take no credit for the tradition
of basic research that features the System's program of economic

The origins of the tradition trace to the climate of en¬

lightenment associated with the System's formative period.

We do,

however, appreciate its values and we also do what we can to keep the
tradition strong and vital.

We believe that the dissemination of

knowledge gained through research of a fundamental character con¬
ducted under Federal Reserve auspices helps to widen the public!s
understanding of financial processes and, thereby, public understanding
of the "systematic reason" of Federal Reserve policies.

We further

believe that public awareness of the value we place on such knowledge
as necessary background for meeting practical problems

is a source

of public confidence in the System and gives moral strength to System
The Committee for Economic Development has recently announced
its sponsorship of a national Commission on Money and Credit to conduct
a broad three-year inquiry into the public and private monetary and
credit policies of the United States.

We in the Federal Reserve System

- 8 welcome the undertaking of a new commission, and expect to cooperate
fully in furnishing information for its use.
With the changes that have taken place in our financial system over
the past five decades, notably in the direction of increasing complexity,
there is much unknown that needs to be discovered.

One of the major

tasks of the new Commission, therefore, will be to develop fresh

Basic research will be one of its primary tools.

The time

schedule for the Commission will unfortunately limit the research that
can be undertaken under its auspices,

and the blueprint which it

drafts for a desirable monetary and credit organization in the modern
setting will inevitably be deficient by virtue of the still unknown. The
Commission, however, can perform an extremely useful public service
by recognizing these gaps in knowledge, and indeed by providing an
inventory of them. Such an inventory will give fruitful direction to the
fundamental financial research undertaken in the future.
In discussion, thus far, I have made a distinction between basic
or fundamental research and applied research, and I have illustrated
from your research program and from that of the Federal Reserve System
what I have in mind by basic research.

The implications of fundamental

research are subtle and far-reaching, and so are the reasons why it
should be valued so highly.
Basic or fundamental research, as I view it, is pursuit of the
unknown and the consequent enlargement of the sphere of the known.


Its end is the creative mind, charged with intellectual power to perceive
new relations, interactions, and combinations--in short, a mind capable
of generating new ideas.
It is out of the cumulative discoveries of fundamental inquiry, some¬
times far-fetched or inconsistent with accepted beliefs and often random
in the timing of their revelation, that usable knowledge in the end

But the stream of usable knowledge in the shape of tested

hypothesis and demonstrated principle cannot be expected to flow in
steadily expanding volume unless the springs of useless or dis¬
interested knowledge are constantly feeding the stream at its source.
Thus, it may be said that knowledge sought as an end in itself by the
free-ranging human intellect, without care for its immediate utility, is
incomparably the most useful of humanity's resources.
Basic research in the current climate is too often thought of as a
way of gaining knowledge that is uniquely appropriate to the natural
sciences; indeed, as a monopoly or quasi-monopoly of these sciences.
This limited way of viewing basic research impresses me as being
decidedly out of focus.

At least, in my conception, it is as applicable

to social, political, economic, and financial phenomena as to those of
the physical and biological world.

And society itself is certainly as

delicate a mechanism as a man-made moon, an ICBM, or a biological

- 10 -

To understand the whole of this modern world, we need to view it
as a whole.

The struggle between the free nations and Russia is only

partly military.

It is, most importantly, a contest for man's mind,

aspirations, and needs, and thus of economic, social, and political

We must be prepared to meet the challenge on all fronts,

not just on the front of the sciences contributing most directly to
military might.
A pertinent question to ask about basic research relates to the
elements that make it flourish.

An answer to this question will differ,

no doubt, from one person to another, and certainly each will answer
it according to his experience and education.

In all humility, I offer

you the points that have struck me as elements as I have pondered the
matter against the background of a long experience in coping with
research administrators and research budgets in private activity and
in Government.
As first and foremost of the elements, I would list disinterestedness
of support.

Creative minds, informed by self-generating intellectual

drives, are required for fundamental inquiry.

Experience suggests

that such minds, to have full scope for functioning, must be free from
the limitations of particular ends, and must feel that they are not
"kept" merely for utilitarian purposes,
As a second essential element,

basic research would seem to me

to be neither empirical primarily nor predominantly abstract in

- 11 character.

Rather, in its most fruitful form, it combines empirical

observation with abstract analysis, so that, on the one hand, observation
is imaginatively related to other accumulated knowledge, firmly
established or tentatively accepted as a first approximation, and, on
the other hand, analysis is disciplined by facts observed from reality.
Thirdly, as an element, and particularly in the social science
fields which embrace finance, I would emphasize the role of static
and historical description of institutions and processes.

The identifica¬

tion and comprehension of institutional functions is as basic an
intellectual requirement as there is for these fields, and historical
perspective on institutional arrangements and interrelations is clearly
compelling for the assessment of institutional change, adaptation, or
As a fourth element, I would stress the ampleness of resources for
the support of basic research so that exigent pressures that result in
premature findings are kept to a minimum.

Premature conclusion of

the research inquiry impresses me as a particular bane of social
science inquiry.

Such inquiry is uniquely tinctured with public interest

and we may properly expect its product to work its way eventually into
the general stream of knowledge about society.

But the product needs to

be cultivated to full scholarly maturity for the work to be productively
done, and too frequently the product falls short of such maturity.
Finally, there must be the element of dignity for the endeavor and

- 12 -

for the scholar or scholars engaging in the research.

We have not

given the social science scholar either the emoluments or the honors
which are consistent with the importance of his role and which are
necessary for attracting to these fields of knowledge the talent that
they merit.
Basic research, then, is a far-reaching concept.
to me, two major aspects.

It has, it seems

First, the pursuit of knowledge for its own

sake seems to be the condition indispensable in enabling the human mind
continually to extend its own reach.

Second, fundamental inquiry opens

the way to applied knowledge and technology, and the practical benefits
gained will be in proportion to the width and depth of that opening.


is particularly gratifying that the insurance industry has recognized
the vital importance of such research in the area of financial processes
and has sponsored a long-range program consistent with the elements
which are requisite to a fruitful contribution.