Good Money is Coined Freedom. 50th Anniversary Address before ...

8/3/2019 Good Money is Coined Freedom. 50th Anniversary Address before ...

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"Good MoneyIs Coined Freedom"

Guest of Honor and SpeakerTHE HONORABLE

WILLIAM MCCHESNEY MARTIN, JR.Washington, D. C.

ChairmanBoard of Governors

Federal Reserve System

Detroit BranchFederal Reserve Bank

50 th Anniversary Address

BEFORE THE ECONOMIC CLUB OF DETROITMarch 18, 1968

Cobo Hall


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Presiding OfficerR A Y MO N D T. PERRING

Chairman of the BoardThe Detroit Bank and Trust Company

L. S. BORKPresident

The Economic Clubof Detroit

(The mee t ing was opened by President L. S.Bork, who presented Raymond T. Perring,C ha i rm a n of the Board , The Detro i t Bank andT r u s t C o m p a n y , as Presiding Officer.)

RAYMOND T. PERRING: T h a n k you, GeneralBork. Reverend Estes, members and guests ofThe Ec onom i c C l ub ;Many illustrious speakers from all parts ofthe world have graced this platform in the 34-year life of the C l u b . But never in my esti-mation have the members been more favoredthan they arc today. I am sorry that it was theinabil i ty of my friend Guy Peppia t t to be heretha t put me in this posi t ion, but I consider it

a rare privilege to be able to p r e s e n t TheHonorable Wi l l iam McChesney Mart in , Jr. toyou.In my capacity as a lowly member of theFederal Reserve family and as a part ic ipant inseveral international monetary conferences andother meetings in which Mr. Ma r t i n has playedan important role , I have had an oppor t un i t yto see him at work and to witness the universallyhigh regard in which he is held. He is everyinch a pro, in the finest sense of the word .Everyone even a fl inty-eyed banker ha s ahero, and my hero for years has been Chairman

Ma r t i n .The Economic Club of Detro i t has long hada reputat ion for uncanny t iming . . . (Laughter)for bringing up a particular guest speaker ortopic at just the right mo men t. Co nsideringthe events of the past few days, I would saythat in setting the stage for this meeting, allprevious records were broken. In fact, somemay feel we've gone a little too far. (Laughter)The Club wishes to disclaim any responsibilityfor closing the gold markets last Friday: that 'spurely a coincidence. And we had no t h i ng todo wi th the fog this morning that producedsuch a dramatic delayed entrance by the Chai r-man.

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Now it's both easy and difficult to introducea man like Chairman M artin. Because of hisremarkable career and impressive accomplish-ments, a wealth of material is available for aPresiding Officer to draw u pon . Th ere is atemptation to pull out all stops and to give fullexpression to one's feelings about his consider-able talents and the vast contribution he hasmade to the security and well being of the na-tional economy.

At the same time, one is reminded that thegreater a man is, the briefer and simpler shouldbe his introduction . Such a man's accomplish-ments speak for themselves and his prestige needsno embellishing. So I shall restrain myself andtouch on just a few things that I think are im-po rtan t before presenting him. As usual, a quitecomplete biographical summary and personalcomments on the speaker are included in theprinted announcement.

William McChesney Martin has starred in anumber of fields, but his most vital contri-bution has been as Chairman of the FederalReserve Board. In a sense he was born int o theFederal Reserve System as his father worked indrafting the Federal Reserve Act and served asthe first president of the Federal Reserve Bankof St. Louis. William himself worked in thebank examination department of t h a t insti-tution for about a year after graduating fromYale.Then the brokerage business called him andhe became a member of the New York StockExchange before reaching his 25th birthday.At the ripe age of 31, he was elected the firstpaid President of the Exchange, and chargedwith cleaning up the mess that was left by hispredecessor. He succeeded in transform ing theExchange from a sort of a private club to thegreat public enterprise it now is.After a brilliant tour of duty in the Armyduring World War II, he headed the Export-Import Bank for about four years and thenaccepted appointment as Assistant Secretary ofthe Treasury . It was the latter post that broug ht

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him full circle back home to the Federal Reserve.As a Treasury official, he helped work out thehistoric Treasury-Fed accord of 1951, whichfreed the Fed from its wartime shackles and per-mitted it to apply its own policies instead ofmerely supporting those of the Treasury.President Truman entrusted the carrying outof the reorganization to Mr. Martin by appoint-ing him Governor and Chairman of the Boardof the Federal Reserve System. Since then, threeother Presidents have had the good judgmentto reappoint him, so he will continue in officeuntil 1970.

He began at once rebuilding the Fed, quicklyturning monetary policy from a passive into anactive tool. Un der his leadership the Fed hasattained a stature at home and abroad unmatch-ed in the central bank's 53-year history.Soft-spoken, but firm, he is the arch enemyof inflation and a stubborn fighter for the Fed'sindependence. No t, as he says, the Fed 's inde-pendence of the Government, but its independ-ence within the government structure. Th ere 'squite a difference b e t w e e n the two things.Liberals in and out of government have fre-quently been pained by him, charging that hispolicies are too conservative. Ac tually he ismore of a moderate than a conservative, if Iunderstand definitions, because of his innovativeand imaginative approach to problems. He isa symbol of orthodox money management to

businessmen and bankers in the United Statesand overseas, but he is certainly no slave toorthod oxy . He is a sound money m an, but hassaid be wants interest rates as low as possible,without having inflation.Economics is far from an exact science andthere's much room for difference of opinion anddispute. In his 17 years as Chairma n, Mr . M ar-tin has weathered some monumental storms andbis colors have continued to fly high throughall of it.Some unnamed writer once said that he wasa good man to have around in a crisis. W ith themighty U. S. dollar undergoing the most mas-


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sive speculative attack it has had since the de-valuation of 193 3, it is certainly comforting tohave a man of his stature and integrity tendingthe store. Gentlemen, I am very proud to pre-sent to you The Honorable William McChesneyMartin, Jr., Chairman of the Board of Gover-nors of the Federal Reserve System.

(Applause)W I L L I A M M C C H E S N E Y M A R T I N , J R . : M r.Chairman, Reverend Mr. Estes, officers and di-rectors of the Federal Reserve System attendingthis 50th Anniversary meeting of the arm of theFederal Reserve in Detroit today:It's a very real privilege for me to be here .General Bork has made efforts to get me on anumber of other occasions and I wasn't alwayssure that I had anythin g to say and I do n'tlike to speak when I have no thin g to say. I

think I have something to say today, but I willspeak informally, rather than present a paperbecause I think there is nothing duller thanreading papers.I want to start today by making a few generalobservations, and these really have to do withthe timing of the meeting that we're attending.I think all of us know about the gold crisis thathas occurred, and the thing that it emphasizesclearly is something that I have stated a numberof times before the Congress: that markets don'twait for Kings, or Presidents, or Prime Minis-ters, or Secretaries of the Treasury, or Chairmen

of the Federal Reserve Board; there arc inexora-ble forces that may be controlled for limitedperiods of time, b u t n o matter how manyeconomists may try to make fun of it th elaw of supply and demand still operates. Andyou may change the nature of supply and alterthe composition of demand, but at some pointthese forces come together in an inexorable wayand have to be dealt wi th. And I hope that theperiod we're going through may gradually bringto bear upon people's minds an understandingof the fact that "papering over" "gadgetry"--"gi mm icks " do not solve problems. Th atit is fundamentals, not symptoms, that have tobe dealt with. I

Now I want to go back and relate this as ananniversary meeting to the h e r i t a g e of ourFederal Reserve System, which is part of theeconomic heritage of this coun try. We are arepublic, a constitutional democracy, in whichthe national welfare is expressed in political pro-cedures, political forms and institutions. AsDisraeli said man y years ago and I considerhim one of the great statesmen of the world "individuals may form communities, but it isinstitutions alone that make a nation ." One ofthe institutions that has been forged and de-veloped through the evolution of this greatcountry of ours is the Federal Reserve System.The thing that our forefathers were seeking and I think this is clearly ap parent to stu-dents of the Federalist Papers, or of the Ameri-can R evolution more than any thing else wasfreedom liberty. T hey knew wh at tyrann ywas and they knew what the tyranny of clip-ping the coin was. Therefore, in the earlystages of the development of this country, hav-ing had experience with the Continental Con-gress where the phrase "not worth a Contin-ental" had developed, they were extremely care-ful about the handling of money. And underthe Constitution Congress has the power overmoney, as it rightly should. Americans havebeen very careful and for many years preferredto risk possible misuse of the money power byprivate interests than put it into the hands of

the state at that junc ture. Th is w as their basicphilosophy and this was essentially the back-ground of the Federal Reserve System that I'mdealing with in a broad way today.The first Bank of the United States, thesecond Bank of the United States, were bothbanks where the public was represented onlyin a limited way. And A ndrew Jackson de-stroyed the second Bank of the United Statesbecause he felt there was not enough publicrepresentation on the board of that bank,although he recognized the convenience and use-fulness of the bank as a financial instrumen-

tality. But succeeding money panics laid thegroundwork for our taking the plunge into a5


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managed currency and in 1913, following thepanic of 1907, we evolved a new instrument a central bank fitted to our special needs, asother maturing and developing countries havedone, before and since.But we were very careful that this bankshould be set up in a way that merged bothpublic and private interests so that neither pri-vate interests nor political interests would havethe dominant voice. And therefore we have inthe Federal Reserve System today, as you allknow, 12 banks, 24 branches, a Federal Ad-visory Council, a Board of Governors in Wash-ingto n. An d this is the 50th Anniversary ofone arm of tha t system and the em phasisshould always be on that word "system".

Our foreign friends have frequently said tome: "We don't really understand how you canoperate with all these divisions and all thesedirectors. Isn't this a facade that impedes ratherthan helps in preserving the currenc y?" And Ithink the answer is that although it's difficultat times to make it work, the System docs touchthe grass roots of the country; and that this isour purpose; and that this is the relationshipwith the economic heritage of this country.

Now I talked about markets at the start.Ours is a market economy; not a completelyfree market economy because there have beensome necessary changes made in that concept.But I find great difficulties in talking to schoolchildren or others in relating the market processto this basic heritage of freedom in the Republicand our Co nstit utio n. Everyone responds tofreedom of speech, freedom of enterprise, free-dom of the press, freedom of religion, freedomof the right to assemble and to petition . Everyschoolboy and schoolgirl, regardless of age, hasan emotional response to those; but relativelyfew of them relate this to the economic processby which we conduct our affairs. And toomany of them think that this is a totally un-related activity.

I believe that it's becoming more apparentthan ever that we have to have a basis for what6

we're doing. Economics as was hinted in ourintroduction can never be a precisely analyti-cal science because it deals with human resourcesand human nature. And you cannot put theseon a computer and you cannot p ut them intoa machine and get precise answers.I think this is where we have fallen short attimes, and what I'm trying to suggest today isthat we have to see the workings of this marketprocess and we have to come to grips with prob-lems that we have been trying to push aside andunder the table for the last few years.Having given you this background, I wantto go to the period that we are in no w. Ther eare really four parts to economic policy: Youhave the budgetary side of it; you have thefiscal and debt management side; you have the

wagc-cost-price side; and you have the monetaryside. An d these are all related in terms of thiseconomic heritage that I've described.W hat we're confronted wi th today is a bud -getary problem that's been getting progressivelyworse. I have said this repeatedly, and I'm suresome of you will have tired of hearing me sayit: what we are moving toward gradually is notdeficit finance for a temporary period, but per-petual deficit. T hi s is a very sad progressiontoward undermining the currency.You start out with the recognition that undercertain circumstances deficit finance can be

properly used, but it should be used only forthe purpose of attaining a balance at some point.And when you have an economy that's over-heating, and you still do not want to bringthings into balance, you inevitably move inthe direction of perpetual deficit. W hat happensis that "surplus" gradually comes to be a badword and "d eficit" becomes a good word. Andthis, I believe, has been happening in this coun-try over the last decade.Several of you have heard me repeat myfavorite story of South America, where one ofmy associates down therewhen I was talking

to him about price stabilitysaid to me: "Youdon't see how things operate down here. When7


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prices rise 4 0 % , we fight infla t ion. W he n theyrise 2 0 % , we fight defla t ion." (Laughter) Itdoesn't take long to see how this gradually putsa country in a way that not necessarily causesit to collapsebecause South America continuesto operatebut it has reached a stage of per-petual deficit.

The hea r t of our budge ta ry problemand Ihave no hesi ta t ion in saying thisis that thiscoun try toda y is overextended and overcommit-ted. Th ere is no incident that dram atizes thismore clearly to my mind than the Pueblo inci-dent . We have commitments in Vietnam, wehave commitments in South Korea, we havecomm itments in the Middle East . A nd if I maysay so, the commitments in the Middle East maybe the mo st difficult of all to fill. I am no tsure we realize the way the Russians have re-placed the equipment that was lost by the Arabs,and the fact that they have put technicians andmilitary leadership into the Middle East in awa y t ha t is r e a l l y qu it e f r igh t en i ng . Th a tdoesn't mean that I 'm predict ing that anythingis going to hap pen there; I 'm j ust say ing thatto an observer, the potential seems obvious.

Then, we have these military forces stationedin Western Europ e. I do n't w ant to reopen thequestion of whether they should be moved orno t this is not my fie ld. But I do wa nt tosay tha t we are overco mm itted. W e are over-extended. And this has gradually come to berecognized by most of our friends abroad andby a great many people in this country.I say flatly that it 's time that we stoppedtalking about "guns and butter," i t 's t ime thatwe stopped as sum ing tha t this is just a "l ittlewar" in Vietnam, and face up to the fact thatwe are in a wa rtim e econo my . Certainly it 's no"little war" for the men on the fighting lines.And when the suggestion is made that we canfulfill all these other commitments and at thesame time not in any way change our way oflife at home, I think we're doing a disserviceto everyone. And I think we've just got to faceup to this fact.

(Applause)8

On the fiscal and debt management side, it 'sper fe ct ly o b v i o u s t ha t we ha ve t o get t heGovernment 's budgetary defic i t into more man-ageable propo rtion s. T h e pressure of the FederalGovernment on the money market continues togrow in such a way that there is no real oppor-tunity to moderate interest rates as such becausethe pressures keep gro win g on and on. Ac tuallywe arc finding out once again that in this coun-try if you want to have moderate interest ratesand low interest ra tes without infla t ion, theremust bo sound fiscal and budgetary and debtmanag emen t policy. T he surest wa y to get highinterest rates which everyone agrees they'reagainst is to have unso und fiscal and bu d-getary policy. T hi s is the way to get 12, 14and 20 per cent interest rates before it is over.

Now, we come to another point that is crucialin my judgment and this is the matter of thewa ge-cost -p r ic e pus h . T he r ea l p r o b l e m i nCanada and the United States focuses on thispoint, and this is probably a result of the factthat we have not faced up to being in a wartimeeconomy, in part : and everybody's been ignor-ing the basic facts.

What we are really up against on the wage-cost -pr ice f ront i s produc t iv i ty g a i n s in theneighborhood of three per cent or less, and wagesettlements of six, seven, eight and nine per cent;and in Canada productivi ty gains of not muchbetter than that, and wage settlements in someinstances of 12 and 15 per cent. T hi s is a gapor a gulf that at some point has to be filled.And while I 'm not suggest ing how i t must befilled, or how eliminated, I doubt very muchwhe ther i t is possible continuou sly to pum p upthe economy so that we can avoid all suffering,all pain, all adjustments, or ignore completelythe fact that in times of prosperity and activebusiness we still have waste and extravaganceand incompetence and inefficiency the humannature a t t ribute s that I mentioned earlier. T h atisn't suggesting that I want deflation or that Ilike deflation or that I think deflation is theonl y way to handle the prob lem . Bu t I say thesearc wage-cost-price developments that we haveto face up to.

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On the monetary front, which is the fourthfactor that I mentioned, I think it's perfectlyobvious to any thoughtful individual that whenyou have substantial levels of unemployment,and when you have efficient, unutilized plantand equipment and I stress the word "ef-ficient" because this is an age of technologicalrevolution when things become obsolete in sixmonths or a year and need to be replaced; andI'm not talking about inefficient productionthat the central bank under these circumstancescan create money (if you like the phrase better :"print it") without doing too much damageto the credit machinery.

But that has no t been our problem. We havebeen experiencing levels of full employment,almost over-full employ ment I'm not goingto argue about whether it's four per cent or4 . 3 % or 3.5%; but you know what's reallyinvolved here. Ther e may be a million and ahalf of frictional unemployment, and I'm sorryto say there is a lot of unemployment amongthose, as I think all of us recognize with greatsympathy for the individuals concerned, whoare unemployable without being retrained orwithout being given some new understandingand a different perspective to their way of life.You don't, in my judgment, do these peopleany service by giving them a temporary make-work job of raking leaves. Th is is a funda-mental problem that has to be dealt with.

If under the circumstances I've described, withfull employment and with no unutilized plantand equipment that is efficientthis is wherethese figures sometimes can be misleading ifwe don't face up to this problem of efficiencythe central bank prints money, there's only oneanswer: r i s i n g prices and continuing deficit.And this is where I think the monetary systemhas a responsibility at least to bring this to theattention of people.

In 1966 the Federal Reserve was blamed fora so-called "mo ney crunch " because havingdelayed too long to raise the discount rate in1965, when we were arguing over the level ofdefense expendituresafter we did raise it, there10

was substantial disintermediation and a lot ofother financial repercussions; and if we hadignored these d a n g e r s and followed the puremoney supply theorists, I think we could havehad 12, 14 and 15 per cent interest rates in1966. But don't forget, whether you liked ordisliked the "money crunch," so-called, it didbring things to a halt in 1966 and it can bringthem to a halt again. Wh ether it is the rightway to bring it about or not is another question.Bu t the pow er is there. And everyone squealsand says, "Well, you shouldn't discriminateagainst this industry or the other industry."N o, you shouldn't; but if monetary restraintis to be effective, someone must feel it.Now these, then, essentially are the facts oflife in our economic body politic and I thinkwhat we have to face up to as a country is whatwas being brought home to us in these meetings

about gold. Let me point out to you th at Ihappen to believe that the dollar is strongerthan gold. I happen to believe that the dollarrests on the productive capacity and the in-genuity and the resources of the United Statesnot on gold per se. I don't think there is anyreal question about that on the part of anythoughtful individual.George Bernard Shaw, who is always stimu-lating and provocative but in my judgment notalways too profound, used to say that if it wasa choice between trusting gold or governments,he would take gold any day. (Laughter) I have

frequently sympathized with him, but I say thatin the long run that won't work; it is a govern-ment tha t has to be relied upon. You may haveto change governments, you may have to dowhatever is necessary: but basically you cannotrely just on a metal for solvency.Now wh at has been happening recently? Iwas involved a week ago and again this pastweek end with the central banks of the WesternWo rld. We have been evaluating this problemof gold. Th ere has no t been any great flightfrom the dollar, but since the devaluation ofthe poundwhere the British people were not

willing to face up to these budgetary implica-11


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tions there has been a tend ency for peop le toassume that the United States was going to goblindly on its way in the same direction. T h eresult is that, whether we like it or not, theworld no longer has the confidence in the dollartha t it once did. It does no good t o say that itshould. The fact remains that the world doesnot have the same degree of confidence for thereare p e o p l e t oda y wh o arc doub tfu l a bou twhether we have the capacity as a nation tohandle our affairs.We are beset with two very serious deficits:a balance of payments deficit and a domesticbudgetary defic i tboth of which have run toofar and too long. In the balance of paymentsdeficit we have been driven or forced by neces-sity to the route of temporary expediencies.Whether i t was the Interest Equalizat ion tax as

the first step, or whether it was the programannounced by the President on January 1, wearc turning our back on multilateral nondis-c r imina tory t rade w h i c h was the basi s, theunderpinning, of the whole Bret ton Woods con-cept. We arc turning our back on it as a meansof getting us surcease.And along with that has come to the com-mu nit y a feeling th at there must be some wayto get out of this bind of balancing your ac-counts . Ther e are some of my friend s- andgood friends wh o say th e an sw er is to raisethe price of gold, because if we raise the price

of g o l d we can av oi d at least for a fewmon ths the problem of pu tt ing our balanceof paym ents in order. I thin k the time has comewhen we've got to forget this business of justtrying to buy a little time for a few months.Raising the price of gold is not going to solvethe balance of pay me nts problem. Raising theprice of gold is not going to make our budgetmore manag eable. It 's just another gadget, ifthat 's the course we follow.I don't know what the price of gold is, orwou ld be, as a com mo dity . I'm well aware ofthe mystique and the fetish of gold in the world

and I have no thought of demonetiz ing i ttom orrow . All I 'm saying is that you have to12

keep this problem in perspective and recognizethat in the long run there will not be enoughgold in the world for use as the basis for cur-rencies. All of our foreign friends realize andaccept tha t, including the Fren ch. But wh atthe French are saying to us and here we mu stnot a ttack the French is that their diagnosisis th at we arc not sh ow ing any capacity forleadership; that we're not showing any capacityto handle our own affairs .If I may bring this do wn to wh at I th inkis a common sense approach, I think we have toface up to the fact that the balance of paymentsprogram, however necessaryand i t 's certa inlytha t is only a s topgap. Th e program tha t wehave we must make good on, and we mustrecognize th at it is a step back wa rd from freerworld trade and free commerce, that is compli-

cated by the fact that we are in a wartimeeconomy and that what we 're t rying to do hereis to avoid our responsibilities to tax ourselvesfor things we need; to cut our expenditures intoa patt ern fitted to the cloth of our receipts.We're trying to avoid the necessity of doing this,and as long as we try to avoid it, the problembecomes more d i f f icu l tnot less difficult.If I can just briefly put together wh at m yown thinking is on this, as if I were an outsiderlooking at our country today: Here is a countrythat prides itself on being a free society; thegreat free society of the wo rld toda y. A nd this

is what we are, and this is what we hope to con-tinue to be. B ut we find ourselves saying tha tbecause of our tourist deficit and our direct in-vestment deficit and our foreign exchange defi-cit and all of our commitments abroad, wesim ply canno t afford to be free. We simplycan't afford it. T hi s is w ha t we are saying inessence.At the same time that we have aspirationsfor the Great Society and I share Presid entJohnson's desire for the Great Society, and Ithink most of you do, too we don 't have theself-discipline, we don't have the capacity to

govern ourselves in such a way that we can begreat. We can't afford to be free and we don't13


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have the self-discipline to be great. And thisis what is causing the world to be concernedeven though it does not underestimate our re-sources. Let's no t forget t ha t we have over$50 billion more in assets invested throughoutthe world than the world has over here; sothere's no real doubt about the underpinningof the dollar, except in the short run . We allknow how direct investment returns flow tothis country, and how valuable this is to all ofus ; but you don't liquidate short-term claimswith real estate. You can't liquida te a factoryovernight.

The U. S. is b a n k e r to the world and inlight of that I was quite interested when someSenator announced that this meeting in Wash-ington was a terrible thing. "W e should pay noattention to these central bankers coming overhere. They had no right to criticize us in anyway, shape or form," he said. T ha t m ight bevery good for a propaganda line, but the factis that most of these people are depositors overhere today. (Laughter) And if you're a banker,you don't kick your depositors in the teeth.

I want to close these brief and informal re-marks by emphasizing again that a strong cur-rency is a basic ingredient of a free and a strongsociety. I was very much impressed not longago at a little fair in Lausanne in Switzerlandwhen I went in to see an exhibit of money. Th ee x h i b i t was not particularly spectacular, itwasn't interesting me very much, until I got tothe end and there they had a placard on thewall, which had written on it, in French, Ger-man and Italian (and in parenthesis in Eng-lish) : "Good Money is Coined Freedom." I'mnot sure that we have fully appreciated thatover here.

Per Jacobsson, who was one of the people Ienjoyed working with most in this area and Ithink one of the really competent monetaryeconomists and students, liked to tell beforehe died and I'm sure some of you here haveheard him tell this story about how he spentfour hours with G eneral de Gaulle. He said tohim, "General, if you really want to establish14

France, if you really want France to be thepower that you think it ought to be, I tell youthat you can't do it without a sound currency."And it was only a few months later that JacquesRueff or someone else persuaded the General,who I doubt very much (and I'm speakingquite openly ab out this) is really a student ofmoney , that this was the road to go. A sub-stantial devaluation of the French franc follow-ed and since then they have been trying to re-turn to the old-fashioned gold standard.

The world is not going to return to the old-fashioned gold standard, France notwithstand-ing. Bu t the world is going to be compelled,whether it likes it or not, to balance its ac-counts and to face up to the fact that there isa time when each country's accounts have tobe put into balance.Now , a final remark. You will in the nextfew weeks be reading in the pressparticularlyif things should settle down for a few days, andI don't know whether they will or they won't but you w ill be reading tha t, after all, thiswas just a "created" crisis, that there's reallynoth ing to wo rry about here we can spendour way into almost any position that we want.I'm sure that you will see a lot of articles tothis effect. Bu t the message tha t I'm tr yin g tobring to you today, as strongly as I can, is thatif we take that line, this country is going to gothe same way that Athe ns went. Ther e was a

time in the world when the Athenian currencywas exported all over the world, and stood asa more important asset than gold or silver oranything else. And yet in Athens' final daysof glory, its currency began to be dispersedaround the world in such a way that people nolonger had confidence in it, or in Athens itself.No w I'm not a pessimist. I'm only hereto say to you that this country has all the re-sources that it needs; but the time has comefor us to stop pussyfooting about responsibilityand to face up to the necessity of getting ouraccounts in order.

(Applause)


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RAYMOND T . P E R R I N G : We have a rathersizeable accumulation of questions here. W e'llpeel off a few of these, Bill, while you havetime and energy left.(Reading Question) "WHAT IS THE LONDONGOLD POOL AND WHO ARE THE MEMBERS?IS FRANCE ONE? IF NOT, WHY NOT?"

W I L L I A M M C C H E S N E Y M A R T I N , J R . : T h eLondon Gold Pool was organized in November,1961, u n d e r entirely different circumstancesthan today, with the idea that we could keepa one-price system for gold and that this wouldbe a desirable means of dealing with the fluctua-tions that were being engendered by speculation.It consisted of the countries that you read aboutyesterday th at had the meeting and France.France withdrew from the Gold Pool in thesummer of last year. I thin k it was very nice,and I hope that this is a gesture of cooperation,that Minister Debre in commenting on the factthat some of the press said they were excludedfrom this meeting in Washington, pointed outthat France had no righ t to be miffed; they hadwithdrawn from the Pool last summer; andthat Sweden, Japan and Canada, who weremembers of the Group of Ten, but not partici-pants in the Pool, were likewise not invited.We invited only the participants in the Pool.Circumstances have changed and I think youhave to face up to the fact that at the momentthere has been a type of hysteria in the foreignexchange mark ets. And I believe that there hasbeen a growing distrust of all currenciesnotjust the dollar; and that this is the situationthat has to be dealt with.

RAYMOND T. PERRING: T he re are three orfour questions here that I think we can boilinto one.(Reading Question) "HOW MUCH TIME DOYOU THINK WE'VE BOUGHT WITH YESTER-DA Y'S AGREEMENT WITH THE INTERNA-TIONAL BANKING COMMUNITY?'

W I L L I A M M C C H E S N E Y M A R T I N . J R . : Iwouldn't want to answer a question like thison the time element. If we do no thing abou tour budgetary problem, if we do nothing aboutour balance of payments deficit, I don't think16

we're going to have too long. I think that we'regoing to do something about it and I was en-couraged by the President's comments to a groupof b u s i n e s s m e n on Saturday. I 've had theprivilege of talking to the President severaltimes recently and I think he is recognizing theessence of this problem.But there is no question, as I said earlier,this is an age of gimm ickry and gadgets. We 'vebeen trying to paper over things for too long.The fundamentals that we're dealing with noware how we handle the two deficits th a t r e -gardless of those who say they don't make anydifference are gradually overpowering our ca-pacity as a nation.R A Y M O N D T . P E R R I N G : (Reading Question)"DO YOU THINK IT IS IMPORTANT FORCITIZENS TO URGE CONGRESS TO HOLDSPENDING IN FISCAL 1969 TO THE LEVELOF FISCAL 19(58 (ON N O N E S S E N T I A LITEMS)?" (Laughter)

W I L L I A M M C C H E S N E Y M A R T I N , J R . : I d oindeed, if you will define nonessential items.I think you all know the problem on expendi-tures, and it's harder sometimes, I think, tohandle in a democracy than in a totalitariancou ntry . I've had the privilege of appearingbefore a number of appropriations committeesand I go away feeling that they arc absolutelyconvinced that something ought to be done, andthen they start looking at the specifics a few dayslater. And then they say, "N o, this affects thisarea: or this affects this Congressman: or thisaffects this thin g. " And then you add to thishodgepodge the fact that the mail is running10 to 1 against!

I just think that at some point we've got toget leadersh ip. I regret very much tha t the mailin this country runs heavily against a tax in-crea se and I speak from a personal dissatis-faction on this because I just don't think peopleunders tand the necessity for it. I came out inJune for a reduction in expenditures and an in-crease in taxes to deal with what I consideredto be a wartime situation and my mail ran 15

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to 1 from people saying: "W e thou ght youwere an intelligent person. Do you know howmuch taxes I pay? Do you kno w the problemin my county?" I just hope that somehow wecan achieve more enlightenment than that.RAYMOND T . P E R R I N G : (Reading Question)"WHAT DO YOU THINK WILL BE DONEWITH THE N A T I O N A L DEBT WHEN ITR E A C H E S THE MAGNITUDE THAT ITSINTEREST REQUIREMENTS ARE D E E M E DPROHIBITIVE?"

(Laughter)W I L L I A M M C C H E S N E Y M A R T I N , J R . : I s us-pect it's pretty close to that now . Let me justgive you my own thinking on the debt. Ihaven't changed on this since my early days inthe Stock Exchang e. I'm no t an enthusiast fordeficit finance, and I don't like debt in thatsense: I 've a l r e a d y commented on the word"surplus" and the word "deficit." But I havenever really gotten too disturbed about the sizeof our debt regardless of its to tal whe n itsratio diminishes in relation to the Gross Na-tional Product.W here I get really concerned is when I sec atrend developing, as has been developing recent-ly, where this tendency for the debt to diminishin terms of the Gross National Product beginsto look as though it may reverse itself. W ehave a budget deficit of $21.7 billion projectedfor 1968 and I have n o idea whether the

President is going to escalate or de-escalate inVietnam; that's not my problem; but from pastexperience I know every time they've told usdefense expen ditures are levelling off, they'v elevelled off for a little while and then they'vegone up. The point I'm making here is thatin a period when we've had four years of re-markably good business, the deficit has beengetting progressively worse. Consequently, un-less you believe that some device has been foundwhere we can eliminate the business cycle com-pletely and turn our back on all these humannature elements that I've been talking about,there may come a time when there will be justa normal closing of that gulf on the wage-price-18

cost front and some economic readjustment. No ta collapse in the economy, but a readjustment.And under those circumstances you will have abudget deficit which now looks like $22 billionto $23 billion for 1968 that could easily be-come $50 billion, just like that! Now, this isthe danger that we have to deal with and I thinkit's vital that we understand it.R A Y M O N D T . P E R R I N G : We've had three orfour questions of this sort. W e'll boil themdown to one.(Reading Question) "WOULDN'T THE PAY-MENT OF OBLIGATIONS TO US BY OTHERCOUNTRIES SUBSTANTIALLY RELIEVE OURPRESENT SITUATION? IF SO, WHY AREN'TWE DOING SOMETHING ABOUT IT?"

W I L L I A M M C C H E S N E Y M A R T I N , J R . : W ehave been doing something about the paymentof debts to us. On the French debt since WorldW ar II, they've given us prepaymen ts. Th ey 'reway a h e a d of their obligations. Now thisdoesn't mean that their World War I debts arenot still possibly collectible. Bu t the framew orkyou have to put this in is that there was a generalagreement, not only with respect to France butwith other European countries. And suddenlyto concentrate on France with respect to WorldWar I debts and not concentrate on Britain,which owes us a great deal more than anyoneelse, would put us in the position of discrimi-nating against one coun try. And also we mighteven get into arguments about whether we everrepaid France the American Revolutionary Wardebts that we owe them.

(Laughter)I do not think that this is an answer, butI thin k it is a valid consid eration . I can assureyou tha t Secretary Fow ler, a good corporationlawyer, has worked hard on this, and whatevercan be done to collect our debts is being done.But this is only one minor aspect of a broadproblem. I come back and just want to hammerit home to you to the best of my ability: wedon't have to worry about the dollar at all, ifwe manage our affairs correctly.If you'll just forgive me for going back, I

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looked through my notes recently and saw thatI had addressed The Economic Club of Detroi ton Apri l 13, 1953. The subject of my address,which was a formal one as distinct from theextemporaneous ta lk I 'm making today, was"The Trans i t ion to Free Marke ts . " We hadcome out of the period of the pegged Govern-ment securi ti es marke t . An d I c l o s e d tha taddress with a phrase that I think is apropos15 years later. I closed th at form al address bysayin g: "If w e han dle our fiscal, mo netar y an ddebt management problems wisely, we wil l nothave to worry very much about the value ofthe dollar." An d I thin k th at 's just as goodtoday as it was then.

(Applause)RAYMOND T . PERRING: (Rea ding Qu estio n)"IN YOUR COMMENTS ON GUNS ANDBUTTER, DID YOU MEAN THAT OUR COUN-TRY'S GREAT WEALTH SHOULD NOT BEMASSIVELY APPLIED TO OUR OWN IN-TERNAL CRISIS? DO YOU SUGGEST THATTHE WAR ON POVERTY BE ABANDONED?"

W I L L I A M M C C H E S N E Y M A R T I N , J R . : N otin the slightest. I th ink if you wa nt to pu t itbluntly that we may need a bet ter distribution,a better handling of the resources that we have.This is really out of my areain a sense I'mgetting into politics here, and I don't intend toget into politics, but to impress upon you theseriousness of the bud getar y deficit. I 'm notsure that this country isn 't overcommitted andoverextended abro ad, and perhap s undercommit-ted in some directions at hom e. I thi nk w hatwe have to do is to pinpoint in terms of prioritiesthe things that we need to do. And I thinkwe've been very lax in facing up to that. Ihaven't the sl ightest doubt in my mind thatwhat we need here is to come to grips with thedistribution of our resources because we're tryingto do too much too fast.

Whenever you try to do too much too fast,you have a redoubling of your problem. An dit seems to me that this is clearly what our basicproblem has been and that we now have to lookat priorities. An d I, for one, happen to be infavor of foreign aid . I'd like to see more foreign20

aid no t less. I'm in favor of some of t hep o v e r t y p rog ra m s ; no t nec es sa ri ly t he wa ythey're administered. But I thin k we ough t todo something about a lot of other social prob-lems tha t we have too. W e mig ht have to doit in a different wa y. W e can have b etteradministra t ion of them, though I 'm not beingcritical of any of them for that 's not the thesisthat I 'm here to ta lk about . I 'm simply sayingthat we oug ht to be stron g enou gh to increaseour foreign aid, to do more in terms of anti-poverty prog rams and helping our ci ties. Bu twe have to do it on a sound base of a soundeconomy. An d once the world sees that we havethis sound economy and sound base, they'l l nolonger worry about the dollar and our gold.

(Applause)RAYMOND T . PERRING: (R eadin g Qu estio n)"SINCE THE $35 PRICE IS NOT A MARKETPRICE UNDER THE TWO TIER SYSTEM, ANDSINCE THE TYPES OF TRANSACTIONS WILLBE LIMITED AT THAT PRICE, HASN'T THEDOLLAR BEEN DEVALUED DE FACTO INTERMS OF GOLD? IS THE TWO-TIER SY S-TEM A FORM OF MONETARY GADGETRY?"

W I L L I A M M C CH ES NE Y M A R T I N , J R . : I n t hesense that it will not solve our fundamental de-ficits problems, yes, it 's a form of monetarygatgetry. I do n' t thi nk the dollar has been de-valuated in terms of gold. I thi nk tha t 's an over-simplification of w ha t has happe ned. It ma ybe on the road to being devalued in terms ofgold, depending on whether we have the wil lto correct these tw o deficits I me ntione d. T h isis wh at we must deal wit h. T hi s gold prob lem,I think , comes back to w ha t I said earlier. Idon't know what the price of gold should be asa com mo dity. It has become a standard of value,a measure. This is the evolution of gold andthe basis of our credit machinery, as it developedhistorica lly from a system of barter. D on 't for-get that the only time that the dollar was de-valued in terms of gold in this country was in1914 when President Roosevelt was strugglingwi th a price deflation of such mag nitu de tha t

he was willing to try anything to start pricesmoving up again. To da y we do not have a21


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price deflation in this country or around theworld. The thing that we're most fortunateabout in this particular crisisand I think itis a crisisis the fact that it has come in a periodof business expansion and not in a period ofbusiness deflation. Therefore, we do have thetime and the ability to put this thing in order.And I believe that the results of the central bankmeeting just finished will help.

Yet you're going to read about a lot of peoplemaking a glib answer and saying, "Well, we'vealready devalued the do lla r." Some people saidwe already devalued it when we instituted theInterest Equalization tax. Some people said wedevalued it when the balance of payments pro-gram was drastically tightened on January 1st.An d I have accepted all these as gadgets. Bu twe have not. in fact, devalued the dollar in termsof gold and I, for one, am going to stick inhere as long as I can, fighting to keep it frombeing devalued. I think the dollar is somethingwe ought to be proud of.

(Applause)RAYMOND T . PERRING: Th is is the lastquestion we're going to ask Chairman Martinand it's a quite practical one. I imagine it's quiteimportant to the person who wrote this.(Reading Question) "I AM GOING TO EU-ROPE THIS SU M M E R AS A STUDENT.SHOULD I BUY MY FRANCS NOW, ORSHOULD I WAIT UNTIL SUMMER WHEN ILEAVE?"

(Laughter)W I L L I A M M C C H E S N E Y M A R T I N , J R . : Iwould 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. Th emeeting is adjourned.

A D J O U R N M E N T

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