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(Approximately 2:30 p.m, EST,
Monday, January 30, 1967)

International Responsibilities of the Federal Reserve

Remarks of Wm


Martin, Jr .

Chairman, Board of Governors of the Federal Reserve System..

at the
Annual Dinner
The Overseas Bankers Club,
London, England

January 30? 1967

International Responsibilities of the Federal Reserve

It is indeed a pleasure for me to be here tonight.


is the more so because it gives me the privilege, as head of our
American central banking system, of acknowledging the heritage

that is ours from British banking, from British economic and
financial genius, and, in particular, from the mother of central
banking —


Bank of England. Without this heritage, the Federal

Reserve System would be far less well equipped to do its part in
meeting the complex problems that confront us today.
The position the United States occupies as a world trader,
investor, and banker obliges the Federal Reserve, just as it does
our Government as a whole, to consider carefully the effects of our
policy actions both on the economic health of other countries and on
the international position of the dollar.

Internationally, our

objective is to foster progress towards payments equilibrium, to
sustain continued confidence in the dollar, and to do what monetary
policy can to promote the orderly expansion of world commerce.
Multilateral, nondiscriminatory trade and convertibility of currencies,
free of exchange controls, is our ultimate goal,


In recent years, these objectives have led us, first, to seek
ways of helping to correct our own payments deficit without retarding
the needed growth of our domestic economy; and second, to take our
part in fostering the international cooperation of central banks and
governments in order to improve the working of the international payments mechanism.
Growth without inflation
The most important contribution of United States monetary
policy in the past 15 years toward solving the U. S. payments problem
has been the effort to resist inflationary forces without sacrificing
economic growth.

The founding father of the "new" economics, the

late Lord Keynes, was a supporter of efforts of that kind.

Twice I had

the privilege of discussing with him the problem of postwar monetary
policy, first during and then immediately after World War II.
In our first discussion, he maintained that the central postwar monetary problem would be the task of avertingdeflation—


ship all too frequent in the history of transition from war to peace.
In our second discussion, he agreed that the prospect following World
War II was different; that the main danger would not be deflation but
rather inflation and that the Western World would succeed in attaining
steadily rising standards of living only to the extent that it could cope
effectively and consistently with this danger.



Both followers and opponents of the "new" economics do
Keynes a grave injustice when they attribute to him an inflationary

Keynes was far too wise, and far too conscious of the realities

of economic and financial life, to underestimate the pernicious
influence of inflation on what in modern times have been universal
goals of economic and financial policy: optimal output, employment,
and economic growth.
Sometimes I think that the harm of inflation is less easily
understood by people in my own country than it is here in Britain,
where international trade is, and always has been, so important for
economic life.

The courageous actions of the British people this past

year are ample proof that such an understanding does exist here.
Developments in the sixties
In the first half of the sixties, the United States enjoyed an
unusually long period of uninterrupted growth and rising employment
domestically, due, I believe, to the absence until 1965 of the kinds of
internal imbalances that are associated with inflationary pressures
and that eventually generate a downturn if they are not corrected in

During those same years, however, the United States continued

to experience large deficits in its international payments, one reason
for which was an unusual expansion in foreign lending and investment,


In that period our primary domestic need was to attain a
fuller utilization of our manpower and capital resources, and this
need made it desirable for us to permit such an increase in the
supply of credit as would help us to keep moving toward this goal.
To cope with the problem of our balance of payments deficit at the
same time that our general policies were conducive to monetary
expansion, our Government found it necessary to take various
special measures to reserve more credit for domestic use.
Since autumn of 1965, in contrast to the preceding period,
the U. S. domestic economy has experienced substantially full
utilization of resources.

But the excessively rapid increase in

business capital expenditures, and the abrupt and large rise in
Government expenditures associated with hostilities in Vietnam outpaced our capacity to provide the labor and machinery needed to meet
all demands: the consequences were, as usual, a surge of inflationary
In this situation, the domestic objectives of Federal Reserve
policy converged more closely with our continuing objectives with
regard to the payments balance and the international standing of the

Accordingly, the main stress of Federal Reserve policy was

redirected from monetary ease toward putting a brake on the expansion
of bank credit to both domestic and foreign borrowers.


In the absence of greater fiscal restraint, monetary policyhad to bear the brunt of the task of checking the inflationary pressures
emerging in an economy operating at full capacity.

Interest rates,

responding to the force of intensive credit demand and increasing
monetary restraint, rose sharply, to the highest levels in postwar

Necessarily, this created difficulties, internationally as well

as domestically.

For example, when American banks pulled funds

from the Euro-dollar market on a big scale last summer, that flow
undoubtedly added to the pressures then developing on sterling,
contrary to our wishes.
Towards the end of last year, even though the inflationary
updrift in costs and prices had not completely subsided, a lessening
of aggregate demand pressures became increasingly evident.


became possible and desirable to relieve the tautness of domestic
money market conditions so that bank credit expansion might resume,
and the Federal Reserve didso— not unmindful of the potentials this
might hold for international as well as domestic flows of funds.


monetary policy once more showed its ability to adapt flexibly to
developments in the economy as they occur. As is so often the case,
uncertainties attend the economic future.

And in these circumstances,

given the budget projections just released, the President's request for
a tax increase is a prudent proposal, and it has my full support.


International monetary cooperation
As I mentioned earlier, a second way in which the Federal
Reserve has been recognizing our economy's role in world commerce
has been through efforts to further international monetary cooperation.
I am glad to say that there is no longer any need to stress either the
importance or the fruitfulness of such cooperation in making for "good
neighbor" policies in monetary matters.
In the continuous expansion of international commerce there
are always risks of imbalances developing in international payments.
Such imbalances, sometimes aggravated by disturbing political and
economic events, can create serious temporary difficulties in foreign
exchange and in international money, credit, and capital markets.
In coping with problems of these kinds, my colleagues and
I at the Federal Reserve, like our counterparts in the Bank of England,
are continuously engaged in cooperative study and discussion with
other central banks on problems of world concern.

One result of this

cooperative endeavor has been the development of a network of
reciprocal currency arrangements.

The purpose of this network is to

keep exchange markets orderly by preventing those temporary,


speculative flows of funds

causing unnecessary and psychologically harmful fluctuations in exchange
rates or in monetary reserves.

We are especially happy that these


reciprocal arrangements have been useful to the Bank of England in
repelling speculative attacks on sterling.
The short-term character of drawings under the arrangements makes it impossible for them to be regarded or used as alternatives to drawing facilities at the International Monetary Fund on more
than a temporary basis, or as alternatives to new methods of
providing international liquidity.

Hence, our reciprocal currency

arrangements were never intended to replace, but merely to complement more general international monetary arrangements.


as I hardly need say, the existence of this network does not in any way
lessen the need for restoring and maintaining reasonable payments
equilibrium internationally.

On the contrary, we know that the net-

work can go on working smoothly only if the participating nations make
solid progress toward that goal.
International payments reform
The present international payments system, like all human
institutions, has itsweaknes es—


it also has great strength.


hear much about the alleged lack of balance of payments discipline and
about uncertainties concerning the role of gold.

But occasional sick-

ness makes more interesting news than long stretches of good health.
And the weaknesses of the present system may be attributable in part
to the intrinsic nature of international financial relations rather than
to particular forms of international financial organization.


Balance of payments discipline. --It is sometimes asserted
that the present international payments system makes it possible for
the United States to avoid, or at least to postpone indefinitely, the
correction of its large and persistent payments deficit.

While I

disagree with this assertion, I do fully agree that the United States
balance of payments deficit has been too large and has persisted too

Significant progress has been made in reducing that deficit,

but much remains to be done.
It would be a mistake, however, to think that the United
States has not been subject to balance of payments discipline in recent

It is a strikingfact—


not widely realized as yet--

that over the past 3-1/2 years as a whole our payments deficit has
practically all been financed by the reduction of our reserves: that is,
through sales of gold and drawings on the International Monetary
Fund —


differently in substance from the way any other country

might finance its deficit.
The international role of the dollar, --In contrast to the
leveling off of foreign official dollar reserves in recent years, foreign
private holdings of dollars have continued to rise.

This fact encourages

me to offer some observations about the international role of reserve
currencies—though for reasons of brevity and convenience I shall confine
my references to the dollar, profoundly aware though I am of the
seniority of sterling.


Outside the United States, the dollar has long been widely
used by traders and bankers in settlement of international transactions
and by monetary authorities as a vehicle currency and a reserve asset.
In consequence, the dollar is actively traded in exchange markets
throughout the world.

Monetary authorities in most countries main-

tain the exchange market values of their currencies by buying or selling

A country in balance of payments surplus inevitably finds its

dollar holdings increasing; conversely, the monetary authorities of
countries in deficit sell dollars in their exchange markets to support
their exchange rates.
These are practical facts of life.

They are firmly built

into behavior patterns and institutional arrangements in the international monetary sphere, and it is difficult to believe that they will
change, whatever innovations may be introduced into the international
monetary system.
Accordingly, it should be expected that many countries
around the world will continue to find it useful and profitable to hold
a substantial part of their reserves in the form of dollar balances.
We in the United States believe that it is a matter for individual
countries to decide whether or not to hold dollars in their reserves at
all, and whether or not to accumulate dollars when their reserves

But we are naturally sensitive about proposed innovations

-10in the international monetary system that would place obstacles in the
way of their doing so, or would actually give countries a positive
incentive to switch their reserves out of dollars.
The role of gold. --This does not mean, however, that we
expect gold no longer to play a role in international commerce and

On the contrary, we expect gold to continue serving the inter-

national payments system as a reserve asset and also to continue
serving commerce as a useful commodity.
Sometimes gold is held as a speculative investment,

A part

of this hoarding possibly reflects anticipations that the holder's own
particular national currency might depreciate, but a part undoubtedly
reflects anticipations that an increase might occur in the price of gold
in dollars and other currencies,
Gold, as we all know, is a scarce metal and there are those
who say that its scarcity could be remedied by increasing its official

They often point to the unchanged price of gold since the thirties

in support of an increase. But they are viewing gold as a commodity
rather than as a measure of monetary value and a monetary reserve

The price ofgold—


the price of a currency convertible into

gold —need no more move with the commodity price level than any other
standard or unit of measure needs to move over time just because the
objects to be measured get larger.

Those most vocal about gold as a

monetary asset should stop thinking of gold as a commodity whose price
must move with the general price level,


I would like to state categorically that, in my opinion, an
increase in the price of gold is completely unacceptable.


position is shared, with strong conviction, not only by the U. S.
Government but also, I believe, by almost all governments and
central banks throughout the world.
A supplement to world monetary reserves. --The world
can no longer count on growth in monetary reserves in the form of
foreign exchange, as in the paste

And the gap can hardly be filled

with the newly mined gold left after meeting private demand for
industrial use, even if private demand for hoarding should recede

Consequently, most experts on international

monetary organization agree that steps should now be taken to avert
the risk of future inadequacy of international monetary reserves.
What is required is a way through international agreement
to supplement or reinforce gold and reserve currencies in meeting
monetary reserve needs.

The difficulties may be great, but surely

they are not insurmountable,

By removing present uncertainties,

an agreement on new international arrangements for the growth in
monetary reserves can be expected greatly to enhance the prospects
for healthy expansion of world trade and finance.
Essentials of international monetary reform. --In spite of
all its real or alleged weaknesses, our international payments system
has proved able to perform creditably during a period of unparalleled
economic well-being and yet of change and stress.


The past successes of our international payments system
show, in my judgment, that our efforts to improve it can, and should,
be based on this experience,
existinginsti utions—


We should make maximum use of

at the established price, and the Inter-

national Monetary Fund as the source of supplementary reserves.
The International Monetary Fund is an enduring monument
to the representatives of many countries who labored at Bretton
Woods nearly 23 years ago,

Whatever form our international monetary

system may take, the Fund will, and must, remain its pivot.


conviction has been one point on which all members of the Group of
Ten seem to have reached a consensus in the recent report of their
Deputies, and with which every single nation outside of the Group is
likely to agree,
It seems to me only natural, therefore, to entrust to the
Fund the provision of any new reserve supplement that might be
needed in the future. I hope that the studies and discussions now
under way among the Fund Executive Directors and the Group of Ten
will result in positive and constructive action without undue delay.
Transition and adaptation
Our international monetary system appears today to be in
a stage of transition and adaptation to the many changes that have
occurred in the past two decades.

One major change since Bretton


Woods is that Western Europe has recovered and has redeveloped
great economic strength.

The resurgent prosperity of Western

Europe is a phenomenon that we Americans have admired and have
welcomed heartily.

One of its results is a lesser dependence on the

United States, and this too we welcome.

It is only natural that the

monetary authorities of Western Europe should seek to modify the
international monetary system so that the strength of their economies
will be reflected in a corresponding influence on international
monetary affairs.

Their greater strength can well enable them to

assume greater responsibility for world payments stability,
A second striking change is the emergence into political
independence of many countries that at the time of Bretton Woods
lacked independent monetary status. These countries have now
achieved autonomy in financial and economic matters, and it is understandable that they, along with other developing countries, are
insistent on having a proper share in the working of the international
monetary system.
These fundamental changes help to explain, I believe, the
ferment that is so evident in international monetary matters. I
welcome this ferment.

But I would like to enter a word of caution.

In our zeal to correct any deficiencies in the international monetary
system or to adapt it to changing circumstances, we must not overcorrect or overadapt.


The Federal Reserve System is based on the proposition
that "money will not manage itself, " and that responsible men-mindful that they serve as trustees for the currency of a nation-can and will manage it soundly,

The many recent proposals for

adaptation of the international monetary system may reflect a
growing belief that the same proposition may be applicable internationally,
The world, we all recognize, is made up of a great
diversity of nations.

Countries differ profoundly in their size, in

their industrial and financial structure, in their degree of dependence
on foreign transactions, in the speed of reaction of their policymaking machinery, and in many other ways.

The international

monetary system must be adaptable enough to accommodate the
various and changing characteristics of its members.
As a central banker, I believe that the principles of good
monetary management can be soundly applied on an international

As an adviser to our representatives in the Fund, I know how

well the Fund has played its role in postwar years.


I am

convinced that a reform of our international payments system based
on the Fund will be most likely to contribute to the orderly growth of
world commerce and thus to a steady advance in the standards of life
in all countries.


That is the goal that all of us seek.

It will be attained only

if in each country there is the resolve to so conduct the affairs of the
nation as tosustain—


well asstimulate—


in our domestic

economies, and to restore and maintain balance in our international

Without this, our best efforts to improve the international

payments system, to enhance the usefulness of the Fund, and even
to supplement existing reserve assets in case of need, will have been
in vain.

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