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William McChesney Martin, Jr., Chairman
Board of Governors of the Federal Reserve System

People may choose different words to define inflation, but
basically the thing we all have in mind is a decline in the value of
our money.

This is, of course, the same thing as a general increase

in prices. Most of us can recall periods in our lifetime when prices
increased quite rapidly in the United States And when they have skyrocketed in other countries.
Rapid or runaway inflation has generally been associated
with major wars.

During World War I, prices in the United States

doubled, or conversely, the purchasing power of money was cut in
half. As many readers will remember, the German mark became worthless
after the war and the French franc declined to a small fraction of its
prewar value. From the beginning of World War II to mid-1948, prices
in this country increased about three-fourths. They moved up again
rapidly, but for a comparatively brief period, when fighting broke
out in Korea in 1950. The thing that concerns us all is that for
almost 10 years the trend of prices has been generally upward even
though we have not been engaged in any major conflict. This recent
experience has led some people to the erroneous conclusion that
inflation is inevitable, even in peacetime.
Fundamentally, the maintenance of a sound dollar depends
on our ability to live within our means, as a nation.

This does

not mean that each individual, each company or even the Government

itself must always have a balanced budget. It means that some

-2people in the community must be saving as much as others are borrowing.
Young families and growing new business enterprises, for example, will
typically spend more than their current income, while other groups will
spend less and add to their savings. Such saving and borrowing is a
part of the process by which a free enterprise economy grows and
increases its capacity to produce the goods and services that go to
make up a higher standard of living.
If we add money created by bank credit expansion to the
stream of real savings, this produces inflationary pressures. In
a depression these pressures may be offset by other forces of a
deflationary character and the net effect may be to ease the severity
of the decline. But in prosperous times bank credit expansion adds
to total spending without causing a comparable increase in output
and the inevitable result is increased prices and a decline in the
value of our dollars.
Perhaps a special word needs to be said on Government
spending and particularly spending by the Federal Government. In
terms of its inflationary impact, Government spending is not
essentially different from any other spending. The main reason
that it gives us so much concern is that the amounts involved are
so large.

The Federal budget runs in the neighborhood of $80 billion

and in the fiscal year 1959 we had a deficit of over $12 billion.
Even in a country as large and as rich as ours, if the Government
is a substantial borrower, at the same time that demands for funds
are strong from both consumers and businesses, it adds considerably

to the pressures which push up the rate of interest for a l l borrowers
and make i t d i f f i c u l t to prevent the over-rapid expansion of money
and credit.

For this reason i t i s important that in prosperous times

the Federal Government operate with a balanced budget, and preferably
some surplus. I t does not follow from this that we should not carry
forward any particular program or programs, whether they are directed
toward social welfare or some other worthwhile objective.

We simply

must not indulge i n self-deception as to the cost involved and we
must be prepared to finance a l l of our expenditures in a sound way.
Few people would contend that inflation in a good thing.
The i n j u s t i c e s to savers and those who have comparatively fixed
incomes are too obvious.

Some argue, however, that a l i t t l e i n f l a t i o n

is not so bad and that i t may, in f a c t , help us grow and speed up the
accomplishment of social goals that they regard as desirable.


important fact that these people overlook is that our growth as a
nation and, in fact, our progress in the very areas they often have
in mind, such as housing, schools, and highways, depends basically
on saving.
Anything we do which cheats savers by depreciating the
value of the money they have saved is not only unfair to them but
w i l l cause people to be less willing to save in the future. In
this way inflation operates to reduce the amount of money that is
availablo to build all the things that add to the p r o d u c t i v i t y of
our economy and our standard of living.

The fact that we have exercised some restraint during the
past year, in our expenditure programs and in our monetary policy,
enhances the chances that 1960 will be a year in which neither the
fact nor the expectation of inflation will be a major national
problem. Certainly no one could hope for such a development more
sincerely than the Board of Governors of the Federal Reserve System.
But while we can all bo hopeful we must also be realistic, for this
is not an abstract issue but a real, practical problem. To ignore
the potential threat of inflation in 1960 would be as foolhardy as
to pretend that Soviet Russia did not exist.
Any presumed benefits that flow from inflation are based
on self-deception. We will certainly grow faster and stronger if
we do not pretend that we can enrich ourselves depreciating our
currency. Stable prices and a sound currency that both we and
the rest of the world can rely upon is the only goal that is
morally and economically defensible. To strive for anything less
would be to admit that we do not have the courage as a nation to
face our financial problems honestly and dea1 with them realistically•

October 12, 1959