Speech

REMARKS BY EUGENE R. BLACK President, International Bank for Reconstruction and Development P ROBLEMS OF MONETARY AND FISCAL POLICY While the conventional mechanisms may be the are of equal interest to the Bank and the Fund. same,the environment may well differ greatly. For that reason, this afternoon's informal meeting Some nations are poorer, and some are richer. is being held under the\uspices of both institutions. The expressibris that they give to their ambitions Now, these two fields are intimately linked, and and to their concerns are not the same. Social re¬ both of them fall within the responsibility of our actions to particular financial measures vary from Governors. They affect the daily life of the people country to country. of every country. They affect their growth prospects In order to give us a picture of the problems in¬ and the rate at which this growth takes place. volved, I think we are fortunate to have a panel here Whether these prospects are called development of outstanding personalities: Mr, William McChesney or expansion—in other words, whether we con¬ Martin, Chairman of the Board of the Federal Re¬ sider countries which are underdeveloped coun¬ serve System of the United States; Mr. H. V. R. tries which are economically advanced—we must Iengar, Governor of the Reserve Bank of India; be struck by the similarity of some of the issues Mr. Juani Pardo, Minister of Finance and Commerce which confront all governments in the field of mone¬ of Peru; and Sir Dennis Robertson, Professor of tary and fiscal policy. Political Economy at Cambridge University. STATEMENT BY THE HON. WILLIAM MCCHESNEY MARTIN, JR. Chairman of the Board of Governors of the Federal Reserve System and A adviser to the United States Delegation to the Twelfth Annual Meeting I WANT TO TELL ALL OF YOU how happy I am to accepted this assignment I did not realize that I was be here. This is the twelfth meeting at which I going to testify some twenty days in the United have had the privilege of visiting with all of you. States Congress this summer and that most of you As each year comes, I enjoy these meetings more. would have read almost every idea or thought that I count it a great privilege to have served under I had on the subject in one form or another. How¬ President Black as the United States Executive ever, I did not run out on the assignment, as the Director of the International Bank, and so I feel result of that, because I welcome the opportunity right at home in these meetings. to visit with you and to express again the same I want to open my comments with a word of views that I have been expressing in one form or apology. I know that isn't good form, but when I another for the past several months. 20 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis With my fellow panelists, and I want to say how magic in monetary and fiscal policy, an ability to privileged I am to be on the panel with the Gover¬ pull levers and gadgets and order the economic nor of the Central Bank of India and the Finance course at will. Minister of Peru and our distinguished economist I want at this juncture to state my credo, be¬ friend, Sir Dennis Robertson, I sat down to plan cause when you are talking about problems in this this panel, and it was decided that I would be the field, in which debate has been going on in the first speaker. This having been decided, I wondered last several years, it seems to me people ought to how I should open this discussion today. We went have a chance to appreciate what your point of view almost immediately from our meeting to the Pan is, what your objectives and your purposes are, and American Union, where the reception was being what your general philosophy is. held for the delegations attending this meeting, and In this room we have gathered the responsible as I walked into the room a gentleman whom I did financial officials of most of the governments of the not recognize but who seemed to know me came world, and starting with the address of the President over and grabbed my hand. He said, "I want to of the United States there has been more or less— shake hands with you, Mr. Martin. I approve of the not entirely, but more or less—general agreement policies of the Federal Reserve System. I think they that the problem we have been dealing with in re¬ are fine, and a year ago I thought they were just cent years has been a tendency for inflationary, terrible. I want to shake hands with you." pervasive inflationary pressure to develop and to Well, I was pleased. I thought that there was expand. I would say that the agreement has been a sinner who had been converted, and I wanted to general; that the situation has been characterized, stop and shake hands with this gentleman. But I on the one hand, generally speaking, by prosperity, couldn't get away from him. He kept pulling my great activity, and great vitality, and on the other elbow, and so I stepped aside for a minute and he by pervasive inflationary pressures. said, "Have you seen what happened to the stock There are some who say that these two aspects market today?" of the current scene are not only related to each I said, "Yes, it went down a little bit." other but they are indissolubly linked; that we can¬ "Well," he says, "I just want to tell you you have not enjoy the blessings of vital and active economic been right so far, but if you don't ease money progress without incurring in some degree the pretty quickly it will be too late and we will all be ravages of inflation; that progressive erosion of the in the soup." value of our savings is a necessary price—and they Well, I didn't make any comment. I just quietly go on to say a not unreasonable price—that must be faded away. I think all of you recognize that that paid for economic progress. incident illustrates pretty fairly some of our cur¬ To this point of view I want to enter a very firm rent problems on monetary and fiscal policy. dissent. I don't believe it. I don't believe that either Also, in reviewing some of my correspondence the jobs or the internal growth and development today, I found a letter inviting me to address a purchased by inflation afford a firm basis for either group in the South. In it the writer says that he sustained employment or development. I refuse to would like to have me talk for about 20 minutes adopt what I consider the defeatist position that and that I could choose my own subject, but they inflation is the alternative to unemployment or to would like me to cover either inflation or deflation. take refuge in what I consider to be the cynical Well, I think that too is a pretty fair commentary rationalization that the pursuit of sound fiscal and on the problem that we are dealing with and I think monetary policies is impossible in a democracy, it is important that we bear in mind these general impossible in a free society. notions some people have that there is a power of There are some people who point out that there Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis are many novel features in today's generalized in¬ I want to point out that this is not so. We have flationary pressures. Most of us are now ex¬ had inflation in this country and in the last couple periencing pressures that stem from unduly heavy of years, the last 18 months, inflation has gotten a defense expenditures, from growth in population, little bit ahead of us in this country. from demands for higher wages, from widespread Inflation is a cancer that strikes the rich and the resort to so-called escalator clauses in collective poor. Inflation is a process which, once it gets bargaining contracts, and from the prevalence in under way, is very difficult to handle, because it the modern world of cost-plus contracts which act envelops and develops and propels itself. to accelerate operations of the inflationary spiral. Think of these meetings and go back to 1946. It is true that many of these factors complicate At the end of the war, when we were meeting to¬ our problem, but that fact merely states, in my gether, first at Savannah, and in the meetings that judgment, the dimensions of the problem. It in no followed, there was general recognition of the prob¬ way diminishes our duty, as the responsible financial lem of stimulating employment. Our feeling then was officers of our respective governments, to devise a worry about deflation, and all of us understand and apply financial policies adequate to provide for that inflation and deflation today are directly con¬ sustainable expansion and growth and improved nected. standards of living without inflation. I remember very vividly hearing quite a dis¬ It is fundamental—and this I think, is the major cussion on the basis of the Employment Act of point—that growth must be financed out of saving. 1946, which is the law of the land in this country It is fundamental in times like these that those of and to the objectives of which I fully subscribe. us who are responsible for the fiscal policies of our At that particular time the worry was partly about respective governments see to it that public finance the fact that from the time of the great depression does not dissipate the savings of the community, on, we had had persistent difficulty and had not but rather contributes to them and fosters their con¬ succeeded in really restoring the employment that tinued growth. It is equally fundamental that those we thought the world required. And with soldiers of us who are responsible for the formulation and coming out of uniform on all hands, we were told execution of monetary policies see to it that created that this problem was a problem that was right on money does not substitute for savings in such a way our doorstep. So both parties in the United States as to contribute to an erosion of the purchasing joined in adopting our Employment Act. power of the people. The objectives of the Employment Act are ob¬ That is my credo. I think it represents the think¬ jectives to which all countries subscribe. They are ing of the Federal Reserve System today, and I as sound as virtue itself. The problem lies in attain¬ believe it is in consonance with the points of view ing those objectives. that have been expressed by our President and by Actually the problem of the last ten years, with our Secretary of the Treasury. the technological development, with the growth in I want to comment a little bit on the basic con¬ population, with the widening horizons of people, cepts. the aspirations of all the peoples for a higher stand¬ First, I want to make the comment that from ard of living—the problem has not been one of time to time people in smaller countries, less de¬ creating jobs; the problem has been one of restrain¬ veloped countries, are prone to say, "In a country ing inflation and seeing to it that the stability of like the United States you can't possibly know existing jobs is not undermined in such a way that what our problems are; you can't possibly have a when the inevitable adjustments come from excesses problem of inflation; you can't possibly worry, there will not be two people unemployed whereas really, about the depreciation of your currency." there would have been only one person unemployed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis if it had not been for the preceding inflation. I think If we are going to use this very sound concept of in substance that has been the problem of the last full employment—to which all of us subscribe—as decade in most of the world. And I think that the a justification for continuous and persistent inflation, world is coming to recognize that the resistance to then it seems to me that it is our duty as responsi¬ inflation is really the battle against deflation. ble financial officers to point out that not only will Certainly in this country we have been confronted we fail to achieve the growth and the higher stand¬ with the fact that inflation got a little bit ahead of ard of living of the peoples of the world which we us, for when you lose from one year to the next are seeking, but also that we will, unquestionably, more than 10 billion dollars of your gross national undermine some of the existing stability and growth product in an increase in prices without any addi¬ in the world and actually retard our progress and tional goods and services being supplied to the our development. I don't think it is necessary that people, I think any thinking person recognizes that this happen. I think that with a little judicious you have a problem on your hands which requires common sense we can handle these problems. some adjustment. In the United States we are doing what we can One of the most difficult problems we in the to face up to this problem. Practically everyone Federal Reserve are confronted with is this charge today recognizes that inflation is a problem. But that we seek a recession, or that we are using our there are some people who say the answer to in¬ policies as a means of stifling growth, that we are flation is to print more money and thereby reduce not recognizing the legitimate necessity for growth interest rates. I merely want to point out that I and development, and that we are endeavoring to think all of us will realize as financial officers—re¬ punish people for their misdeeds. gardless of whether we are charged with being in¬ Nothing, of course, as you gentlemen know, dividuals who support a doctrine of scarcity rather could be further from the truth. I have testified than a program of abundance and a rising standard repeatedly, and I reiterate it, that I don't want any of living—that if we permit ourselves to follow the recession, I don't want any decline in business. But siren song of printing more money and reducing at the same time that I say that, having pointed interest rates in disregard of supply and demand out the excesses that have already occurred, well— factors, such a policy will do nothing except con¬ unless the world changes, if imprudence and im¬ tribute to the erosion of our currency and under¬ providence are engaged in, then there will be some mine the saving and investment progress of all of adjustment and some losses, just the same as if a us—undermine really the basis of our society. We child puts his hand into the fire, he will be burned. will find at the end of the road not what we are Our economies are loss economies as well as profit promising the people and what we have within our economies, and I think we have to face up to that power, in my judgement, to achieve for the people fact, and not assume that monetary policy or fiscal —a higher and a better standard of living—but policy can be so ordered or so calculated or so we will find a lower standard of living and a good planned that improvidence and imprudence can be deal of misery and suffering that could have been eliminated and that we will find a way to develop the avoided with a little prudence and common sense fountain of perpetual youth or pie in the sky. at the financial level. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

William McChesney Martin, Jr. (1957, September 26). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19570927_jr.

@misc{wtfs_speech_19570927_jr.,
  author = {William McChesney Martin, Jr.},
  title = {Speech},
  year = {1957},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19570927_jr.},
  note = {Retrieved via When the Fed Speaks corpus}
}