Speech

"Good Money Is Coined Freedom" Guest of Honor and Speaker THE HONORABLE WILLIAM MCCHESNEY MARTIN, JR. Washington, D. C. Chairman Board of Governors Federal Reserve System Detroit Branch Federal Reserve Bank 50 th Anniversary Address BEFORE THE ECONOMIC CLUB OF DETROIT March 18, 1968 Cobo Hall Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis (The meeting was opened by President L. S. Bork, who presented Raymond T. Perring, Chairman of the Board, The Detroit Bank and Trust Company, as Presiding Officer.) RAYMOND T. PERRING: Thank you, General Bork. Reverend Estes, members and guests of The Economic Club; Many illustrious speakers from all parts of Presiding Officer the world have graced this platform in the 34- year life of the Club. But never in my esti- RAYMOND T. PERRING mation have the members been more favored Chairman of the Board than they arc today. I am sorry that it was the The Detroit Bank and Trust Company inability of my friend Guy Peppiatt to be here that put me in this position, but I consider it a rare privilege to be able to present The Honorable William McChesney Martin, Jr. to you. L. S. BORK In my capacity as a lowly member of the President Federal Reserve family and as a participant in several international monetary conferences and The Economic Club other meetings in which Mr. Martin has played of Detroit an important role, I have had an opportunity to see him at work and to witness the universally high regard in which he is held. He is every inch a pro, in the finest sense of the word. Everyone — even a flinty-eyed banker — has a hero, and my hero for years has been Chairman Martin. The Economic Club of Detroit has long had a reputation for uncanny timing . . . (Laughter) for bringing up a particular guest speaker or topic at just the right moment. Considering the events of the past few days, I would say that in setting the stage for this meeting, all previous records were broken. In fact, some may feel we've gone a little too far. (Laughter) The Club wishes to disclaim any responsibility for closing the gold markets last Friday: that's purely a coincidence. And we had nothing to do with the fog this morning that produced such a dramatic delayed entrance by the Chair- man. 1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Now it's both easy and difficult to introduce him full circle back home to the Federal Reserve. a man like Chairman Martin. Because of his As a Treasury official, he helped work out the remarkable career and impressive accomplish- historic Treasury-Fed accord of 1951, which ments, a wealth of material is available for a freed the Fed from its wartime shackles and per- Presiding Officer to draw upon. There is a mitted it to apply its own policies instead of temptation to pull out all stops and to give full merely supporting those of the Treasury. expression to one's feelings about his consider- President Truman entrusted the carrying out able talents and the vast contribution he has made to the security and well being of the na- of the reorganization to Mr. Martin by appoint- tional economy. ing him Governor and Chairman of the Board of the Federal Reserve System. Since then, three At the same time, one is reminded that the other Presidents have had the good judgment greater a man is, the briefer and simpler should to reappoint him, so he will continue in office be his introduction. Such a man's accomplish- until 1970. ments speak for themselves and his prestige needs He began at once rebuilding the Fed, quickly no embellishing. So I shall restrain myself and turning monetary policy from a passive into an touch on just a few things that I think are im- active tool. Under his leadership the Fed has portant before presenting him. As usual, a quite attained a stature at home and abroad unmatch- complete biographical summary and personal ed in the central bank's 53-year history. comments on the speaker are included in the printed announcement. Soft-spoken, but firm, he is the arch enemy of inflation and a stubborn fighter for the Fed's William McChesney Martin has starred in a independence. Not, as he says, the Fed's inde- number of fields, but his most vital contri- pendence of the Government, but its independ- bution has been as Chairman of the Federal ence within the government structure. There's Reserve Board. In a sense he was born into the quite a difference between the two things. Federal Reserve System as his father worked in Liberals in and out of government have fre- drafting the Federal Reserve Act and served as quently been pained by him, charging that his the first president of the Federal Reserve Bank policies are too conservative. Actually he is of St. Louis. William himself worked in the more of a moderate than a conservative, if I bank examination department of that insti- understand definitions, because of his innovative tution for about a year after graduating from Yale. and imaginative approach to problems. He is a symbol of orthodox money management to Then the brokerage business called him and businessmen and bankers in the United States he became a member of the New York Stock and overseas, but he is certainly no slave to Exchange before reaching his 25th birthday. orthodoxy. He is a sound money man, but has At the ripe age of 31, he was elected the first said be wants interest rates as low as possible, paid President of the Exchange, and charged without having inflation. with cleaning up the mess that was left by his Economics is far from an exact science and predecessor. He succeeded in transforming the there's much room for difference of opinion and Exchange from a sort of a private club to the dispute. In his 17 years as Chairman, Mr. Mar- great public enterprise it now is. tin has weathered some monumental storms and bis colors have continued to fly high through After a brilliant tour of duty in the Army all of it. during World War II, he headed the Export- Import Bank for about four years and then Some unnamed writer once said that he was accepted appointment as Assistant Secretary of a good man to have around in a crisis. With the the Treasury. It was the latter post that brought mighty U. S. dollar undergoing the most mas- 2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis sive speculative attack it has had since the de- Now I want to go back and relate this as an valuation of 1933, it is certainly comforting to anniversary meeting to the heritage of our have a man of his stature and integrity tending Federal Reserve System, which is part of the the store. Gentlemen, I am very proud to pre- economic heritage of this country. We are a sent to you The Honorable William McChesney republic, a constitutional democracy, in which Martin, Jr., Chairman of the Board of Gover- the national welfare is expressed in political pro- nors of the Federal Reserve System. cedures, political forms and institutions. As (Applause) Disraeli said many years ago — and I consider WILLIAM MCCHESNEY MARTIN, JR.: Mr. him one of the great statesmen of the world — Chairman, Reverend Mr. Estes, officers and di- "individuals may form communities, but it is rectors of the Federal Reserve System attending institutions alone that make a nation." One of this 50th Anniversary meeting of the arm of the the institutions that has been forged and de- Federal Reserve in Detroit today: veloped through the evolution of this great country of ours is the Federal Reserve System. It's a very real privilege for me to be here. General Bork has made efforts to get me on a The thing that our forefathers were seeking number of other occasions and I wasn't always — and I think this is clearly apparent to stu- sure that I had anything to say — and I don't dents of the Federalist Papers, or of the Ameri- like to speak when I have nothing to say. I can Revolution — more than anything else was think I have something to say today, but I will freedom — liberty. They knew what tyranny speak informally, rather than present a paper was and they knew what the tyranny of clip- because I think there is nothing duller than ping the coin was. Therefore, in the early reading papers. stages of the development of this country, hav- ing had experience with the Continental Con- I want to start today by making a few general gress where the phrase "not worth a Contin- observations, and these really have to do with ental" had developed, they were extremely care- the timing of the meeting that we're attending. ful about the handling of money. And under I think all of us know about the gold crisis that the Constitution Congress has the power over has occurred, and the thing that it emphasizes clearly is something that I have stated a number money, as it rightly should. Americans have of times before the Congress: that markets don't been very careful and for many years preferred wait for Kings, or Presidents, or Prime Minis- to risk possible misuse of the money power by ters, or Secretaries of the Treasury, or Chairmen private interests than put it into the hands of of the Federal Reserve Board; there arc inexora- the state at that juncture. This was their basic ble forces that may be controlled for limited philosophy and this was essentially the back- periods of time, but—no matter how many ground of the Federal Reserve System that I'm economists may try to make fun of it—the dealing with in a broad way today. law of supply and demand still operates. And The first Bank of the United States, the you may change the nature of supply and alter second Bank of the United States, were both the composition of demand, but at some point banks where the public was represented only these forces come together in an inexorable way in a limited way. And Andrew Jackson de- and have to be dealt with. And I hope that the stroyed the second Bank of the United States period we're going through may gradually bring because he felt there was not enough public to bear upon people's minds an understanding representation on the board of that bank, of the fact that "papering over" —"gadgetry" although he recognized the convenience and use- --"gimmicks"—do not solve problems. That fulness of the bank as a financial instrumen- it is fundamentals, not symptoms, that have to tality. But succeeding money panics laid the be dealt with. groundwork for our taking the plunge into a I 5 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis managed currency and in 1913, following the we're doing. Economics — as was hinted in our panic of 1907, we evolved a new instrument — introduction — can never be a precisely analyti- a central bank fitted to our special needs, as cal science because it deals with human resources other maturing and developing countries have and human nature. And you cannot put these done, before and since. on a computer and you cannot put them into a machine and get precise answers. But we were very careful that this bank should be set up in a way that merged both I think this is where we have fallen short at public and private interests so that neither pri- times, and what I'm trying to suggest today is vate interests nor political interests would have that we have to see the workings of this market the dominant voice. And therefore we have in process and we have to come to grips with prob- the Federal Reserve System today, as you all lems that we have been trying to push aside and know, 12 banks, 24 branches, a Federal Ad- under the table for the last few years. visory Council, a Board of Governors in Wash- Having given you this background, I want ington. And this is the 50th Anniversary of to go to the period that we are in now. There one arm of that system — and the emphasis are really four parts to economic policy: You should always be on that word "system". have the budgetary side of it; you have the Our foreign friends have frequently said to fiscal and debt management side; you have the me: "We don't really understand how you can wagc-cost-price side; and you have the monetary operate with all these divisions and all these side. And these are all related in terms of this directors. Isn't this a facade that impedes rather economic heritage that I've described. than helps in preserving the currency?" And I What we're confronted with today is a bud- think the answer is that although it's difficult getary problem that's been getting progressively at times to make it work, the System docs touch worse. I have said this repeatedly, and I'm sure the grass roots of the country; and that this is some of you will have tired of hearing me say our purpose; and that this is the relationship it: what we are moving toward gradually is not with the economic heritage of this country. deficit finance for a temporary period, but per- petual deficit. This is a very sad progression Now I talked about markets at the start. toward undermining the currency. Ours is a market economy; not a completely free market economy because there have been You start out with the recognition that under some necessary changes made in that concept. certain circumstances deficit finance can be But I find great difficulties in talking to school properly used, but it should be used only for children or others in relating the market process the purpose of attaining a balance at some point. to this basic heritage of freedom in the Republic And when you have an economy that's over- and our Constitution. Everyone responds to heating, and you still do not want to bring freedom of speech, freedom of enterprise, free- things into balance, you inevitably move in dom of the press, freedom of religion, freedom the direction of perpetual deficit. What happens of the right to assemble and to petition. Every is that "surplus" gradually comes to be a bad schoolboy and schoolgirl, regardless of age, has word and "deficit" becomes a good word. And an emotional response to those; but relatively this, I believe, has been happening in this coun- few of them relate this to the economic process try over the last decade. by which we conduct our affairs. And too Several of you have heard me repeat my many of them think that this is a totally un- favorite story of South America, where one of related activity. my associates down there—when I was talking I believe that it's becoming more apparent to him about price stability—said to me: "You than ever that we have to have a basis for what don't see how things operate down here. When 6 7 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis prices rise 40%, we fight inflation. When they On the fiscal and debt management side, it's rise 20%, we fight deflation." (Laughter) It perfectly obvious that we have to get the doesn't take long to see how this gradually puts Government's budgetary deficit into more man- a country in a way that not necessarily causes ageable proportions. The pressure of the Federal it to collapse—because South America continues Government on the money market continues to to operate—but it has reached a stage of per- grow in such a way that there is no real oppor- petual deficit. tunity to moderate interest rates as such because the pressures keep growing on and on. Actually The heart of our budgetary problem—and I we arc finding out once again that in this coun- have no hesitation in saying this—is that this try if you want to have moderate interest rates country today is overextended and overcommit- and low interest rates without inflation, there ted. There is no incident that dramatizes this must bo sound fiscal and budgetary and debt more clearly to my mind than the Pueblo inci- management policy. The surest way to get high dent. We have commitments in Vietnam, we interest rates — which everyone agrees they're have commitments in South Korea, we have against — is to have unsound fiscal and bud- commitments in the Middle East. And if I may getary policy. This is the way to get 12, 14 say so, the commitments in the Middle East may and 20 per cent interest rates before it is over. be the most difficult of all to fill. I am not sure we realize the way the Russians have re- Now, we come to another point that is crucial placed the equipment that was lost by the Arabs, in my judgment and this is the matter of the and the fact that they have put technicians and wage-cost-price push. The real problem in military leadership into the Middle East in a Canada and the United States focuses on this way that is really quite frightening. That point, and this is probably a result of the fact doesn't mean that I'm predicting that anything that we have not faced up to being in a wartime is going to happen there; I'm just saying that economy, in part: and everybody's been ignor- to an observer, the potential seems obvious. ing the basic facts. Then, we have these military forces stationed What we are really up against on the wage- in Western Europe. I don't want to reopen the cost-price front is productivity gains in the question of whether they should be moved or neighborhood of three per cent or less, and wage not—this is not my field. But I do want to settlements of six, seven, eight and nine per cent; say that we are overcommitted. We are over- and in Canada productivity gains of not much extended. And this has gradually come to be better than that, and wage settlements in some recognized by most of our friends abroad and instances of 12 and 15 per cent. This is a gap by a great many people in this country. or a gulf that at some point has to be filled. And while I'm not suggesting how it must be I say flatly that it's time that we stopped filled, or how eliminated, I doubt very much talking about "guns and butter," it's time that whether it is possible continuously to pump up we stopped assuming that this is just a "little the economy so that we can avoid all suffering, war" in Vietnam, and face up to the fact that all pain, all adjustments, or ignore completely we are in a wartime economy. Certainly it's no the fact that in times of prosperity and active "little war" for the men on the fighting lines. business we still have waste and extravagance And when the suggestion is made that we can and incompetence and inefficiency — the human fulfill all these other commitments and at the nature attributes that I mentioned earlier. That same time not in any way change our way of isn't suggesting that I want deflation or that I life at home, I think we're doing a disservice like deflation or that I think deflation is the to everyone. And I think we've just got to face only way to handle the problem. But I say these up to this fact. arc wage-cost-price developments that we have (Applause) to face up to. 8 9 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis On the monetary front, which is the fourth was substantial disintermediation and a lot of factor that I mentioned, I think it's perfectly other financial repercussions; and if we had obvious to any thoughtful individual that when ignored these dangers and followed the pure you have substantial levels of unemployment, money supply theorists, I think we could have and when you have efficient, unutilized plant had 12, 14 and 15 per cent interest rates in and equipment — and I stress the word "ef- 1966. But don't forget, whether you liked or ficient" because this is an age of technological disliked the "money crunch," so-called, it did revolution when things become obsolete in six bring things to a halt in 1966 and it can bring months or a year and need to be replaced; and them to a halt again. Whether it is the right I'm not talking about inefficient production— way to bring it about or not is another question. that the central bank under these circumstances But the power is there. And everyone squeals can create money (if you like the phrase better: and says, "Well, you shouldn't discriminate "print it") without doing too much damage against this industry or the other industry." to the credit machinery. No, you shouldn't; but if monetary restraint is to be effective, someone must feel it. But that has not been our problem. We have been experiencing levels of full employment, Now these, then, essentially are the facts of almost over-full employment—I'm not going life in our economic body politic and I think to argue about whether it's four per cent or what we have to face up to as a country is what 4.3% or 3.5%; but you know what's really was being brought home to us in these meetings involved here. There may be a million and a about gold. Let me point out to you that I half of frictional unemployment, and I'm sorry happen to believe that the dollar is stronger to say there is a lot of unemployment among than gold. I happen to believe that the dollar those, as I think all of us recognize with great rests on the productive capacity and the in- sympathy for the individuals concerned, who genuity and the resources of the United States— are unemployable without being retrained or not on gold per se. I don't think there is any without being given some new understanding real question about that on the part of any and a different perspective to their way of life. thoughtful individual. You don't, in my judgment, do these people George Bernard Shaw, who is always stimu- any service by giving them a temporary make- lating and provocative but in my judgment not work job of raking leaves. This is a funda- always too profound, used to say that if it was mental problem that has to be dealt with. a choice between trusting gold or governments, If under the circumstances I've described, with he would take gold any day. (Laughter) I have full employment and with no unutilized plant frequently sympathized with him, but I say that and equipment that is efficient—this is where in the long run that won't work; it is a govern- these figures sometimes can be misleading if ment that has to be relied upon. You may have we don't face up to this problem of efficiency— to change governments, you may have to do the central bank prints money, there's only one whatever is necessary: but basically you cannot answer: rising prices and continuing deficit. rely just on a metal for solvency. And this is where I think the monetary system Now what has been happening recently? I has a responsibility at least to bring this to the was involved a week ago and again this past attention of people. week end with the central banks of the Western In 1966 the Federal Reserve was blamed for World. We have been evaluating this problem a so-called "money crunch" because — having of gold. There has not been any great flight delayed too long to raise the discount rate in from the dollar, but since the devaluation of 1965, when we were arguing over the level of the pound—where the British people were not defense expenditures—after we did raise it, there willing to face up to these budgetary implica- 10 11 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis tions — there has been a tendency for people to keep this problem in perspective and recognize assume that the United States was going to go that in the long run there will not be enough blindly on its way in the same direction. The gold in the world for use as the basis for cur- result is that, whether we like it or not, the rencies. All of our foreign friends realize and world no longer has the confidence in the dollar accept that, including the French. But what that it once did. It does no good to say that it the French are saying to us — and here we must should. The fact remains that the world does not attack the French — is that their diagnosis not have the same degree of confidence for there is that we arc not showing any capacity for are people today who arc doubtful about leadership; that we're not showing any capacity whether we have the capacity as a nation to to handle our own affairs. handle our affairs. If I may bring this down to what I think We are beset with two very serious deficits: is a common sense approach, I think we have to a balance of payments deficit and a domestic face up to the fact that the balance of payments budgetary deficit—both of which have run too program, however necessary—and it's certainly far and too long. In the balance of payments that—is only a stopgap. The program that we deficit we have been driven or forced by neces- have we must make good on, and we must sity to the route of temporary expediencies. recognize that it is a step backward from freer Whether it was the Interest Equalization tax as world trade and free commerce, that is compli- the first step, or whether it was the program cated by the fact that we are in a wartime announced by the President on January 1, we economy and that what we're trying to do here arc turning our back on multilateral nondis- is to avoid our responsibilities to tax ourselves criminatory trade which was the basis, the for things we need; to cut our expenditures into underpinning, of the whole Bretton Woods con- a pattern fitted to the cloth of our receipts. cept. We arc turning our back on it as a means We're trying to avoid the necessity of doing this, of getting us surcease. and as long as we try to avoid it, the problem becomes more difficult—not less difficult. And along with that has come to the com- munity a feeling that there must be some way If I can just briefly put together what my to get out of this bind of balancing your ac- own thinking is on this, as if I were an outsider counts. There are some of my friends-—and looking at our country today: Here is a country good friends — who say the answer is to raise that prides itself on being a free society; the the price of gold, because if we raise the price great free society of the world today. And this of gold we can avoid—at least for a few is what we are, and this is what we hope to con- months — the problem of putting our balance tinue to be. But we find ourselves saying that of payments in order. I think the time has come because of our tourist deficit and our direct in- when we've got to forget this business of just vestment deficit and our foreign exchange defi- trying to buy a little time for a few months. cit and all of our commitments abroad, we Raising the price of gold is not going to solve simply cannot afford to be free. We simply the balance of payments problem. Raising the can't afford it. This is what we are saying in price of gold is not going to make our budget essence. more manageable. It's just another gadget, if At the same time that we have aspirations that's the course we follow. for the Great Society — and I share President I don't know what the price of gold is, or Johnson's desire for the Great Society, and I would be, as a commodity. I'm well aware of think most of you do, too — we don't have the the mystique and the fetish of gold in the world self-discipline, we don't have the capacity to and I have no thought of demonetizing it govern ourselves in such a way that we can be tomorrow. All I'm saying is that you have to great. We can't afford to be free and we don't 12 13 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis have the self-discipline to be great. And this France, if you really want France to be the is what is causing the world to be concerned power that you think it ought to be, I tell you even though it does not underestimate our re- that you can't do it without a sound currency." sources. Let's not forget that we have over And it was only a few months later that Jacques $50 billion more in assets invested throughout Rueff or someone else persuaded the General, the world than the world has over here; so who I doubt very much (and I'm speaking there's no real doubt about the underpinning quite openly about this) is really a student of of the dollar, except in the short run. We all money, that this was the road to go. A sub- know how direct investment returns flow to stantial devaluation of the French franc follow- this country, and how valuable this is to all of ed and since then they have been trying to re- us; but you don't liquidate short-term claims turn to the old-fashioned gold standard. with real estate. You can't liquidate a factory overnight. The world is not going to return to the old- fashioned gold standard, France notwithstand- The U. S. is banker to the world and in ing. But the world is going to be compelled, light of that I was quite interested when some whether it likes it or not, to balance its ac- Senator announced that this meeting in Wash- counts and to face up to the fact that there is ington was a terrible thing. "We should pay no a time when each country's accounts have to attention to these central bankers coming over be put into balance. here. They had no right to criticize us in any way, shape or form," he said. That might be Now, a final remark. You will in the next very good for a propaganda line, but the fact few weeks be reading in the press—particularly is that most of these people are depositors over if things should settle down for a few days, and here today. (Laughter) And if you're a banker, I don't know whether they will or they won't you don't kick your depositors in the teeth. — but you will be reading that, after all, this was just a "created" crisis, that there's really I want to close these brief and informal re- nothing to worry about here — we can spend marks by emphasizing again that a strong cur- our way into almost any position that we want. rency is a basic ingredient of a free and a strong I'm sure that you will see a lot of articles to society. I was very much impressed not long this effect. But the message that I'm trying to ago at a little fair in Lausanne in Switzerland bring to you today, as strongly as I can, is that when I went in to see an exhibit of money. The if we take that line, this country is going to go exhibit was not particularly spectacular, it the same way that Athens went. There was a wasn't interesting me very much, until I got to time in the world when the Athenian currency the end and there they had a placard on the was exported all over the world, and stood as wall, which had written on it, in French, Ger- a more important asset than gold or silver or man and Italian (and in parenthesis in Eng- anything else. And yet in Athens' final days lish) : "Good Money is Coined Freedom." I'm of glory, its currency began to be dispersed not sure that we have fully appreciated that around the world in such a way that people no over here. longer had confidence in it, or in Athens itself. Per Jacobsson, who was one of the people I Now I'm not a pessimist. I'm only here enjoyed working with most in this area and I to say to you that this country has all the re- think one of the really competent monetary sources that it needs; but the time has come economists and students, liked to tell before for us to stop pussyfooting about responsibility he died — and I'm sure some of you here have and to face up to the necessity of getting our heard him tell this story — about how he spent accounts in order. four hours with General de Gaulle. He said to him, "General, if you really want to establish (Applause) 14 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis we're going to have too long. I think that we're RAYMOND T. PERRING: We have a rather going to do something about it and I was en- sizeable accumulation of questions here. We'll couraged by the President's comments to a group peel off a few of these, Bill, while you have of businessmen on Saturday. I've had the time and energy left. privilege of talking to the President several (Reading Question) "WHAT IS THE LONDON times recently and I think he is recognizing the GOLD POOL AND WHO ARE THE MEMBERS? essence of this problem. IS FRANCE ONE? IF NOT, WHY NOT?" But there is no question, as I said earlier, WILLIAM MCCHESNEY MARTIN, JR.: The London Gold Pool was organized in November, this is an age of gimmickry and gadgets. We've 1961, under entirely different circumstances been trying to paper over things for too long. than today, with the idea that we could keep The fundamentals that we're dealing with now a one-price system for gold and that this would are how we handle the two deficits that—re- be a desirable means of dealing with the fluctua- gardless of those who say they don't make any tions that were being engendered by speculation. difference — are gradually overpowering our ca- It consisted of the countries that you read about pacity as a nation. yesterday that had the meeting — and France. RAYMOND T. PERRING: (Reading Question) France withdrew from the Gold Pool in the "DO YOU THINK IT IS IMPORTANT FOR summer of last year. I think it was very nice, CITIZENS TO URGE CONGRESS TO HOLD and I hope that this is a gesture of cooperation, SPENDING IN FISCAL 1969 TO THE LEVEL that Minister Debre in commenting on the fact OF FISCAL 19(58 (ON NONESSENTIAL ITEMS)?" that some of the press said they were excluded (Laughter) from this meeting in Washington, pointed out that France had no right to be miffed; they had WILLIAM MCCHESNEY MARTIN, JR.: I do withdrawn from the Pool last summer; and indeed, if you will define nonessential items. that Sweden, Japan and Canada, who were I think you all know the problem on expendi- members of the Group of Ten, but not partici- tures, and it's harder sometimes, I think, to pants in the Pool, were likewise not invited. handle in a democracy than in a totalitarian We invited only the participants in the Pool. country. I've had the privilege of appearing Circumstances have changed and I think you before a number of appropriations committees have to face up to the fact that at the moment and I go away feeling that they arc absolutely there has been a type of hysteria in the foreign convinced that something ought to be done, and exchange markets. And I believe that there has then they start looking at the specifics a few days been a growing distrust of all currencies—not later. And then they say, "No, this affects this just the dollar; and that this is the situation area: or this affects this Congressman: or this that has to be dealt with. affects this thing." And then you add to this hodgepodge the fact that the mail is running RAYMOND T. PERRING: There are three or 10 to 1 against! four questions here that I think we can boil into one. I just think that at some point we've got to (Reading Question) "HOW MUCH TIME DO get leadership. I regret very much that the mail YOU THINK WE'VE BOUGHT WITH YESTER- in this country runs heavily against a tax in- DAY'S AGREEMENT WITH THE INTERNA- TIONAL BANKING COMMUNITY?' crease— and I speak from a personal dissatis- faction on this because I just don't think people WILLIAM MCCHESNEY MARTIN. JR.: I understand the necessity for it. I came out in wouldn't want to answer a question like this June for a reduction in expenditures and an in- on the time element. If we do nothing about crease in taxes to deal with what I considered our budgetary problem, if we do nothing about to be a wartime situation and my mail ran 15 our balance of payments deficit, I don't think 17 16 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis to 1 from people saying: "We thought you cost front and some economic readjustment. Not were an intelligent person. Do you know how a collapse in the economy, but a readjustment. much taxes I pay? Do you know the problem And under those circumstances you will have a in my county?" I just hope that somehow we budget deficit which now looks like $22 billion can achieve more enlightenment than that. to $23 billion for 1968 that could easily be- come $50 billion, just like that! Now, this is RAYMOND T. PERRING: (Reading Question) the danger that we have to deal with and I think "WHAT DO YOU THINK WILL BE DONE it's vital that we understand it. WITH THE NATIONAL DEBT WHEN IT REACHES THE MAGNITUDE THAT ITS RAYMOND T. PERRING: We've had three or INTEREST REQUIREMENTS ARE DEEMED four questions of this sort. We'll boil them PROHIBITIVE?" down to one. (Laughter) (Reading Question) "WOULDN'T THE PAY- WILLIAM MCCHESNEY MARTIN, JR.: I sus- MENT OF OBLIGATIONS TO US BY OTHER COUNTRIES SUBSTANTIALLY RELIEVE OUR pect it's pretty close to that now. Let me just PRESENT SITUATION? IF SO, WHY AREN'T give you my own thinking on the debt. I WE DOING SOMETHING ABOUT IT?" haven't changed on this since my early days in WILLIAM MCCHESNEY MARTIN, JR.: We the Stock Exchange. I'm not an enthusiast for have been doing something about the payment deficit finance, and I don't like debt in that of debts to us. On the French debt since World sense: I've already commented on the word War II, they've given us prepayments. They're "surplus" and the word "deficit." But I have way ahead of their obligations. Now this never really gotten too disturbed about the size doesn't mean that their World War I debts are of our debt — regardless of its total — when its not still possibly collectible. But the framework ratio diminishes in relation to the Gross Na- you have to put this in is that there was a general tional Product. agreement, not only with respect to France but Where I get really concerned is when I sec a with other European countries. And suddenly trend developing, as has been developing recent- to concentrate on France with respect to World ly, where this tendency for the debt to diminish War I debts and not concentrate on Britain, in terms of the Gross National Product begins which owes us a great deal more than anyone to look as though it may reverse itself. We else, would put us in the position of discrimi- have a budget deficit of $21.7 billion projected nating against one country. And also we might for 1968 — and I have no idea whether the even get into arguments about whether we ever President is going to escalate or de-escalate in repaid France the American Revolutionary War Vietnam; that's not my problem; but from past debts that we owe them. experience I know every time they've told us (Laughter) defense expenditures are levelling off, they've levelled off for a little while and then they've I do not think that this is an answer, but gone up. The point I'm making here is that I think it is a valid consideration. I can assure in a period when we've had four years of re- you that Secretary Fowler, a good corporation markably good business, the deficit has been lawyer, has worked hard on this, and whatever can be done to collect our debts is being done. getting progressively worse. Consequently, un- But this is only one minor aspect of a broad less you believe that some device has been found problem. I come back and just want to hammer where we can eliminate the business cycle com- it home to you to the best of my ability: we pletely and turn our back on all these human don't have to worry about the dollar at all, if nature elements that I've been talking about, we manage our affairs correctly. there may come a time when there will be just a normal closing of that gulf on the wage-price- If you'll just forgive me for going back, I 18 10 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis looked through my notes recently and saw that aid — not less. I'm in favor of some of the I had addressed The Economic Club of Detroit poverty programs; not necessarily the way on April 13, 1953. The subject of my address, they're administered. But I think we ought to which was a formal one as distinct from the do something about a lot of other social prob- extemporaneous talk I'm making today, was lems that we have too. We might have to do "The Transition to Free Markets." We had it in a different way. We can have better come out of the period of the pegged Govern- administration of them, though I'm not being ment securities market. And I closed that critical of any of them for that's not the thesis address with a phrase that I think is apropos that I'm here to talk about. I'm simply saying 15 years later. I closed that formal address by that we ought to be strong enough to increase saying: "If we handle our fiscal, monetary and our foreign aid, to do more in terms of anti- debt management problems wisely, we will not poverty programs and helping our cities. But have to worry very much about the value of we have to do it on a sound base of a sound the dollar." And I think that's just as good economy. And once the world sees that we have today as it was then. this sound economy and sound base, they'll no longer worry about the dollar and our gold. (Applause) (Applause) RAYMOND T. PERRING: (Reading Question) "IN YOUR COMMENTS ON GUNS AND RAYMOND T. PERRING: (Reading Question) BUTTER, DID YOU MEAN THAT OUR COUN- TRY'S GREAT WEALTH SHOULD NOT BE "SINCE THE $35 PRICE IS NOT A MARKET MASSIVELY APPLIED TO OUR OWN IN- PRICE UNDER THE TWO TIER SYSTEM, AND TERNAL CRISIS? DO YOU SUGGEST THAT SINCE THE TYPES OF TRANSACTIONS WILL THE WAR ON POVERTY BE ABANDONED?" BE LIMITED AT THAT PRICE, HASN'T THE DOLLAR BEEN DEVALUED DE FACTO IN TERMS OF GOLD? IS THE TWO-TIER SYS- WILLIAM MCCHESNEY MARTIN, JR.: Not TEM A FORM OF MONETARY GADGETRY?" in the slightest. I think if you want to put it bluntly that we may need a better distribution, WILLIAM MCCHESNEY MARTIN, JR.: In the a better handling of the resources that we have. sense that it will not solve our fundamental de- This is really out of my area—in a sense I'm ficits problems, yes, it's a form of monetary getting into politics here, and I don't intend to gatgetry. I don't think the dollar has been de- get into politics, but to impress upon you the valuated in terms of gold. I think that's an over- seriousness of the budgetary deficit. I'm not simplification of what has happened. It may sure that this country isn't overcommitted and be on the road to being devalued in terms of overextended abroad, and perhaps undercommit- gold, depending on whether we have the will ted in some directions at home. I think what to correct these two deficits I mentioned. This we have to do is to pinpoint in terms of priorities is what we must deal with. This gold problem, the things that we need to do. And I think I think, comes back to what I said earlier. I we've been very lax in facing up to that. I don't know what the price of gold should be as haven't the slightest doubt in my mind that a commodity. It has become a standard of value, what we need here is to come to grips with the a measure. This is the evolution of gold and distribution of our resources because we're trying the basis of our credit machinery, as it developed to do too much too fast. historically from a system of barter. Don't for- get that the only time that the dollar was de- Whenever you try to do too much too fast, valued in terms of gold in this country was in you have a redoubling of your problem. And it seems to me that this is clearly what our basic 1914 when President Roosevelt was struggling with a price deflation of such magnitude that problem has been and that we now have to look he was willing to try anything to start prices at priorities. And I, for one, happen to be in favor of foreign aid. I'd like to see more foreign moving up again. Today we do not have a 21 20 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis price deflation in this country or around the world. The thing that we're most fortunate about in this particular crisis—and I think it is a crisis—is the fact that it has come in a period of business expansion and not in a period of business deflation. Therefore, we do have the time and the ability to put this thing in order. And I believe that the results of the central bank meeting just finished will help. Yet you're going to read about a lot of people making a glib answer and saying, "Well, we've already devalued the dollar." Some people said we already devalued it when we instituted the Interest Equalization tax. Some people said we devalued it when the balance of payments pro- gram was drastically tightened on January 1st. And I have accepted all these as gadgets. But we have not. in fact, devalued the dollar in terms of gold and I, for one, am going to stick in here as long as I can, fighting to keep it from being devalued. I think the dollar is something we ought to be proud of. (Applause) RAYMOND T. PERRING: This is the last question we're going to ask Chairman Martin and it's a quite practical one. I imagine it's quite important to the person who wrote this. (Reading Question) "I AM GOING TO EU- ROPE THIS SUMMER AS A STUDENT. SHOULD I BUY MY FRANCS NOW, OR SHOULD I WAIT UNTIL SUMMER WHEN I LEAVE?" (Laughter) WILLIAM MCCHESNEY MARTIN, JR.: I would suggest he wait till the summer. (Laughter and Applause) L. S. BORK: I'm very grateful, as we all are, Mr. Martin, for this very, very erudite talk, and to you, Ray Perring, for presiding. The meeting is adjourned. ADJOURNMENT 22 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

William McChesney Martin, Jr. (1968, March 17). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19680318_jr.

@misc{wtfs_speech_19680318_jr.,
  author = {William McChesney Martin, Jr.},
  title = {Speech},
  year = {1968},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19680318_jr.},
  note = {Retrieved via When the Fed Speaks corpus}
}