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

before the
Subcommittee on Fiscal Policy
of the
Joint Economic Committee

June 14, 1957

Mr. Chairman*
This Committee and the Board of Governors share a common

that the operations of both monetary and fiscal policy be

directed—in the words of a report issued by your Committee in January
1956—to "maintaining a steady and sustainable rate of economic progress.*1
On behalf of the Board of Governors, I should like to outline
some measures which we believe would contribute to the achievement of
this common objective.
Events have moved swiftly since passage of the Employment Act
of 1946. Congressional debate and expert opinion preceding passage of
that Act were in close agreement in pointing to unemployment of men and
machines as the primary threat to the national economy.

The history of

the period since the war, both in this country and abroad, however, has
demonstrated that the primary danger was not one of idle men but was one
of too much money.
Almost everywhere in the world, pressure on resources has been
intense. The necessity of preventing competing claims for scarce resources
from resulting in general price increases has been a major problem.
Deferee needs have been a major claimant.

Other demands on resources have

been bolstered by pressing individual and community needs, on the one
hand, and by large financial assets, strong liquidity positions, and rapidly
rising current incomes on the other. Even so, the opportunities for
vigorous growth and accelerated technological progress resulting in
sharply rising standards of living and increased security, especially for
those in the lower and middle income groups, have been very great. Even

-2greater opportunities lie ahead, ready to be realized if the threat of
international conflict can be reduced and the insidious inroads of infla¬
tion curbed.
Inflation is never harmless, even in its mild or "creeping"
form. Neither is it inevitable. Given appropriate monetary and fiscal
policies, reasonable restraint by consumers and businesses in their
spending decisions, and continuing keen competition, price stability with
a rising standard of living can reasonably be expected. On the other
hand, acceptance of the gradually rising price theory carries with it a
widening expectation of further rise. This leads in turn to financial
overcommitments, speculation, misdirected expansion of capacity, slackened
efficiency, erosion of existing savings and discouragement of new savings,
and an ultimate reaction of a serious nature.
For about two years we have been experiencing an intensified
demand for funds and, although the supply of savings and the volume of
bank credit have both increased, expanding demands have outpaced their
availability to potential users except at rising interest rate. Conse¬
quently, the price of money has risen. If bank credit had been allowed
to increase more rapidly under these circumstances, prices of goods and
services, including those purchased by Federal, State and local govern¬
ments, would have risen further under the stimulus of inflationary credit
pressures. How much further no one can say, but the strength of inflation¬
ary forces has been and is still formidable.
An increase in the volume of savings is the most effective way
to deal with a situation whose inflationary potential would only be
aggravated by an excessive use of credit. As these savings are made avail¬
able to meet demands for more housing, schools, and other public improvements,

-3as well as expansion of new business plant and equipment, they provide the
resources for stable economic growth. To the extent that fiscal policy
results in a budgetary surplus and the Federal debt is reduced, the supply
of savings is increased and the need for monetary restraint lessened.
This is because maintenance of a surplus permits funds to be channeled
through Government debt retirement into the capital markets where they
would be available to meet private demands and demands of State and local
governments for funds to carry through their projects for needed community
A reduction in taxes would bring welcome relief to millions of

Such action, however, without a corresponding curtailment in

Federal expenditures, would reduce or eliminate the budget surplus, and
tend to stimulate increased total spending in the economy. At the same
time the supply of funds made available to the capital markets through
Federal debt retirement would be reduced.
As a number of witnesses who appeared before this Committee have
pointed out, the general economic situation is still one of very active
demands, intensive utilisation of resources and continuing pressure toward
higher prices for goods and services. They have also noted the declines
in residential building and some consumer durable goods, the slight falling
off in total industrial production and the drop in prices of some sensitive
commodities, However, the general economy is still being stretched by
record levels of plant and equipment outlays, rising demands for State and
local government projects, further increases in consumer buying, and con¬
tinued need for large-scale defense spending.

On balance, the situation

-4does not seem to us to reflect a basic weakening that would call for
relaxation in efforts to curb inflationary pressures.
Your Committee has indicated an interest in the consideration
given to current and prospective economic trends in the formation of
Federal Reserve policy. Since Federal Reserve System operations reflect
to some degree all phases of the nation's economic life and have a perva¬
sive influence on it, they must be adjusted on a day-to-day basis to the
ever changing situation. Hence, the System has need for as much current
and background economic information as it can assemble.
Efforts are directed toward bringing together, and combining as
background for our decision-making the best available statistical infor¬
mation and the best informed impressions and judgments that can be obtained
from businessmen, bankers, agricultural experts, labor leaders, and from
others both in and out of government. We also depend on information
collected and compiled by other agencies of the Federal Government. For
this reason it is important to the proper formulation of monetary policy
that the statistical facilities of the Federal Government be well manned.
In our appraisal of economic developments maximum use is made
of the decentralized structure of the Federal Reserve System, Through the
12 Federal Reserve Banks and their 24 branches, in business and financial
centers all over the United States, and especially because of the caliber
and experience of men who serve as the directors and officers of these
institutions, the Federal Reserve is in close touch Tilth current and
prospective developments throughout the country.

In accordance with provisions of the Federal Reserve Act the
Board meets frequently with Presidents of the Federal Reserve Banks, who
serve as members and alternates, on the Federal Open Market Committee.
The Act also provides for quarterly meetings with the Federal Advisory
Council, composed of representatives of the member banks in each district,
These occasions make it possible to study continuously underlying develop¬
ments in all parts of the country and all sectors of the economy.
Much of the statistical data and other information we collect
for our own policy decisions is also made available to the public in
general. We believe this is as important as its internal use, because
it helps to provide a basis for better public understanding and more
accurate appraisal of credit and monetary problems and of policy actions
designed to deal with them.