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President, International Bank for Reconstruction and Development



are of equal interest to the Bank and the Fund.
For that reason, this afternoon's informal meeting
is being held under the\uspices of both institutions.
Now, these two fields are intimately linked, and
both of them fall within the responsibility of our
Governors. They affect the daily life of the people
of every country. They affect their growth prospects
and the rate at which this growth takes place.
Whether these prospects are called development
or expansion—in other words, whether we con¬
sider countries which are underdeveloped
tries which are economically advanced—we must
be struck by the similarity of some of the issues
which confront all governments in the field of mone¬
tary andfiscalpolicy.

While the conventional mechanisms may be the
same,the environment may well differ greatly.
Some nations are poorer, and some are richer.
The expressibris that they give to their ambitions
and to their concerns are not the same. Social re¬
actions to particular financial measures vary from
country to country.
In order to give us a picture of the problems in¬
volved, I think wearefortunate to have a panel here
of outstanding personalities: Mr, William McChesney
Martin, Chairman of the Board of the Federal Re¬
serve System of the United States; Mr. H. V. R.
Iengar, Governor of the Reserve Bank of India;
Mr. Juani Pardo, Minister of Finance and Commerce
of Peru; and Sir Dennis Robertson, Professor of
Political Economy at Cambridge University.

Chairman of the Board of Governors of the Federal Reserve System and Aadviserto the
United States Delegation to the Twelfth Annual Meeting

how happy I am to
be here. This is the twelfth meeting at which I
have had the privilege of visiting with all of you.
As each year comes, I enjoy these meetings more.
I count it a great privilege to have served under
President Black as the United States Executive
Director of the International Bank, and so I feel
right at home in these meetings.
I want to open my comments with a word of
apology. I know that isn't good form, but when I




accepted this assignment I did not realize that I was
going to testify some twenty days in the United
States Congress this summer and that most of you
would have read almost every idea or thought that
I had on the subject in one form or another. How¬
ever, I did not run out on the assignment, as the
result of that, because I welcome the opportunity
to visit with you and to express again the same
views that I have been expressing in one form or
another for the past several months.

With my fellow panelists, and I want to say how
privileged I am to be on the panel with the Gover¬
nor of the Central Bank of India and the Finance
Minister of Peru and our distinguished economist
friend, Sir Dennis Robertson, I sat down to plan
this panel, and it was decided that I would be the
first speaker. This having been decided, I wondered
how I should open this discussion today. We went
almost immediately from our meeting to the Pan
American Union, where the reception was being
held for the delegations attending this meeting, and
as I walked into the room a gentleman whom I did
not recognize but who seemed to know me came
over and grabbed my hand. He said, "I want to
shake hands with you, Mr. Martin. I approve of the
policies of the Federal Reserve System. I think they
are fine, and a year ago I thought they were just
terrible. I want to shake hands with you."
Well, I was pleased. I thought that there was
a sinner who had been converted, and I wanted to
stop and shake hands with this gentleman. But I
couldn't get away from him. He kept pulling my
elbow, and so I stepped aside for a minute and he
said, "Have you seen what happened to the stock
market today?"
I said, "Yes, it went down a little bit."
"Well," he says, "I just want to tell you you have
been right so far, but if you don't ease money
pretty quickly it will be too late and we will all be
in the soup."
Well, I didn't make any comment. I just quietly
faded away. I think all of you recognize that that
incident illustrates pretty fairly some of our cur¬
rent problems on monetary and fiscal policy.
Also, in reviewing some of my correspondence
today, I found a letter inviting me to address a
group in the South. In it the writer says that he
would like to have me talk for about 20 minutes
and that I could choose my own subject, but they
would like me to cover either inflation or deflation.
Well, I think that too is a pretty fair commentary
on the problem that we are dealing with and I think
it is important that we bear in mind these general
notions some people have that there is a power of

magic in monetary and fiscal policy, an ability to
pull levers and gadgets and order the economic
course at will.
I want at this juncture to state my credo, be¬
cause when you are talking about problems in this
field, in which debate has been going on in the
last several years, it seems to me people ought to
have a chance to appreciate what your point of view
is, what your objectives and your purposes are, and
what your general philosophy is.
In this room we have gathered the responsible
financial officials of most of the governments of the
world, and starting with the address of the President
of the United States there has been more or less—
not entirely, but more or less—general agreement
that the problem we have been dealing with in re¬
cent years has been a tendency for inflationary,
pervasive inflationary pressure to develop and to
expand. I would say that the agreement has been
general; that the situation has been characterized,
on the one hand, generally speaking, by prosperity,
great activity, and great vitality, and on the other
by pervasive inflationary pressures.
There are some who say that these two aspects
of the current scene are not only related to each
other but they are indissolubly linked; that we can¬
not enjoy the blessings of vital and active economic
progress without incurring in some degree the
ravages of inflation; that progressive erosion of the
value of our savings is a necessary price—and they
go on to say a not unreasonable price—that must be
paid for economic progress.
To this point of view I want to enter a very firm
dissent. I don't believe it. I don't believe that either
the jobs or the internal growth and development
purchased by inflation afford a firm basis for either
sustained employment or development. I refuse to
adopt what I consider the defeatist position that
inflation is the alternative to unemployment or to
take refuge in what I consider to be the cynical
rationalization that the pursuit of sound fiscal and
monetary policies is impossible in a democracy,
impossible in a free society.
There are some people who point out that there

are many novel features in today's generalized in¬
flationary pressures. Most of us are now ex¬
periencing pressures that stem from unduly heavy
defense expenditures, from growth in population,
from demands for higher wages, from widespread
resort to so-called escalator clauses in collective
bargaining contracts, and from the prevalence in
the modern world of cost-plus contracts which act
to accelerate operations of the inflationary spiral.
It is true that many of these factors complicate
our problem, but that fact merely states, in my
judgment, the dimensions of the problem. It in no
way diminishes our duty, as the responsible financial
officers of our respective governments, to devise
and apply financial policies adequate to provide for
sustainable expansion and growth and improved
standards of living without inflation.
It is fundamental—and this I think, is the major
point—that growth must be financed out of saving.
It is fundamental in times like these that those of
us who are responsible for the fiscal policies of our
respective governments see to it that public finance
does not dissipate the savings of the community,
but rather contributes to them and fosters their con¬
tinued growth. It is equally fundamental that those
of us who are responsible for the formulation and
execution of monetary policies see to it that created
money does not substitute for savings in such a way
as to contribute to an erosion of the purchasing
power of the people.
That is my credo. I think it represents the think¬
ing of the Federal Reserve System today, and I
believe it is in consonance with the points of view
that have been expressed by our President and by
our Secretary of the Treasury.
I want to comment a little bit on the basic con¬
First, I want to make the comment that from
time to time people in smaller countries, less de¬
veloped countries, are prone to say, "In a country
like the United States you can't possibly know
what our problems are; you can't possibly have a
problem of inflation; you can't possibly worry,
really, about the depreciation of your currency."

I want to point out that this is not so. We have
had inflation in this country and in the last couple
of years, the last 18 months, inflation has gotten a
little bit ahead of us in this country.
Inflation is a cancer that strikes the rich and the
poor. Inflation is a process which, once it gets
under way, is very difficult to handle, because it
envelops and develops and propels itself.
Think of these meetings and go back to 1946.
At the end of the war, when we were meeting to¬
gether, first at Savannah, and in the meetings that
followed, there was general recognition of the prob¬
lem of stimulating employment. Our feeling then was
a worry about deflation, and all of us understand
that inflation and deflation today are directly con¬
I remember very vividly hearing quite a dis¬
cussion on the basis of the Employment Act of
1946, which is the law of the land in this country
and to the objectives of which I fully subscribe.
At that particular time the worry was partly about
the fact that from the time of the great depression
on, we had had persistent difficulty and had not
succeeded in really restoring the employment that
we thought the world required. And with soldiers
coming out of uniform on all hands, we were told
that this problem was a problem that was right on
our doorstep. So both parties in the United States
joined in adopting our Employment Act.
The objectives of the Employment Act are ob¬
jectives to which all countries subscribe. They are
as sound as virtue itself. The problem lies in attain¬
ing those objectives.
Actually the problem of the last ten years, with
the technological development, with the growth in
population, with the widening horizons of people,
the aspirations of all the peoples for a higher stand¬
ard of living—the problem has not been one of
creating jobs; the problem has been one of restrain¬
ing inflation and seeing to it that the stability of
existing jobs is not undermined in such a way that
when the inevitable adjustments come from excesses
there will not be two people unemployed whereas
there would have been only one person unemployed

if it had not been for the preceding inflation. I think
in substance that has been the problem of the last
decade in most of the world. And I think that the
world is coming to recognize that the resistance to
inflation is really the battle against deflation.
Certainly in this country we have been confronted
with the fact that inflation got a little bit ahead of
us, for when you lose from one year to the next
more than 10 billion dollars of your gross national
product in an increase in prices without any addi¬
tional goods and services being supplied to the
people, I think any thinking person recognizes that
you have a problem on your hands which requires
some adjustment.
One of the most difficult problems we in the
Federal Reserve are confronted with is this charge
that we seek a recession, or that we are using our
policies as a means of stifling growth, that we are
not recognizing the legitimate necessity for growth
and development, and that we are endeavoring to
punish people for their misdeeds.
Nothing, of course, as you gentlemen know,
could be further from the truth. I have testified
repeatedly, and I reiterate it, that I don't want any
recession, I don't want any decline in business. But
at the same time that I say that, having pointed
out the excesses that have already occurred, well—
unless the world changes, if imprudence and im¬
providence are engaged in, then there will be some
adjustment and some losses, just the same as if a
child puts his hand into the fire, he will be burned.
Our economies are loss economies as well as profit
economies, and I think we have to face up to that
fact, and not assume that monetary policy or fiscal
policy can be so ordered or so calculated or so
planned that improvidence and imprudence can be
eliminated and that we will find a way to develop the
fountain of perpetual youth or pie in the sky.

If we are going to use this very sound concept of
full employment—to which all of us subscribe—as
a justification for continuous and persistent inflation,
then it seems to me that it is our duty as responsi¬
ble financial officers to point out that not only will
we fail to achieve the growth and the higher stand¬
ard of living of the peoples of the world which we
are seeking, but also that we will, unquestionably,
undermine some of the existing stability and growth
in the world and actually retard our progress and
our development. I don't think it is necessary that
this happen. I think that with a little judicious
common sense we can handle these problems.
In the United States we are doing what we can
to face up to this problem. Practically everyone
today recognizes that inflation is a problem. But
there are some people who say the answer to in¬
flation is to print more money and thereby reduce
interest rates. I merely want to point out that I
think all of us will realize as financial officers—re¬
gardless of whether we are charged with being in¬
dividuals who support a doctrine of scarcity rather
than a program of abundance and a rising standard
of living—that if we permit ourselves to follow the
siren song of printing more money and reducing
interest rates in disregard of supply and demand
factors, such a policy will do nothing except con¬
tribute to the erosion of our currency and under¬
mine the saving and investment progress of all of
us—undermine really the basis of our society. We
will find at the end of the road not what we are
promising the people and what we have within our
power, in my judgement, to achieve for the people
—a higher and a better standard of living—but
we will find a lower standard of living and a good
deal of misery and suffering that could have been
avoided with a little prudence and common sense
at the financial level.

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