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CONDUCT OF NATIONAL SECURITY POLICY

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SUBCOMMITTEE ON NATIONAL SECURITY

GOVERNIVIEN A AND INTERNATIONAL OPERATIONS

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UNITED STATES SENATE

EIGHTY-NINTH CONGRESS

FIRST SESSION

AUGUST 30, 1965

PART 4

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Printed for the use of the Committee on Government Operations

U.S. GOVERNMENT PRINTING OFFICE

48-902 WASHINGTON : 1965

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COMMITTEE ON GOVERNMENT OPERATIONS

JOHN L. McCLELLAN, Arkansas, Chairman

HENRY M. JACKSON, Washington

SAM J. ERVIN, JR., North Carolina

ERNEST GRUENING, Alaska

EDMUND S. MUSKIE, Maine

ABRAHAM RIBICOFF, Connecticut

FRED R. HARRIS, Oklahoma

ROBERT F. KENNEDY, New York

LEE METCALF, Montana

JOSEPH M. MONTOYA, New Mexico

KARL E. MUNDT, South Dakota

CARL T. CURTIS, Nebraska

JACOB K. JAVITS, New York

MILWARD L. SIMPSON, Wyoming

WALTER L. REYNOLDS, Chief Clerk and Staff Director

ARTHUR A. SHARP, Staff Editor

SUBCOMMITTEE ON NATIONAL SECURITY AND INTERNATIONAL OPERATIONS

HENRY M. JACKSON, Washington, Chairman

EDMUND S. MUSKIE, Maine

ABRAHAM RIBICOFF, Connecticut

FRED R. HARRIS, Oklahoma

ROBERT F. KENNEDY, New York

LEE METCALF, Montana

DOROTHY FOSDICK, Staff Director

ROBERT W. TUFTS, Chief Consultant

RICHARD E. NEUSTADT, Special Consultant

JUDITH J. SPAHR, Chief Clerk

LAUREL A. ENGBERG, Minority Consultant

II

KARL E. MUNDT, South Dakota

JACOB K. JAVITS, New York

MILWARD L. SIMPSON, Wyoming
CONTENTS

AUGUST 30, 1965

Page

Opening statement, Senator Henry M. Jackson 189

Testimony of William McChesney Martin, Jr 190

111

CONDUCT OF NATIONAL SECURITY POLICY

MONDAY, AUGUST 30, 1965

U.S. SENATE,

SITBCOMMiiihE ON NATIONAL SECURITY

AND INTERNATIONAL OPERATIONS,

COMMITTEE ON GOVERNMENT OPERATIONS,

ashington,D.0 D.C.

The subcommittee met at 10 a.m., pursuant to notice, in room 3110,

New Senate Office Building, Senator Henry M. Jackson (chairman of

the subcommittee) presiding.

Present: Senators Jackson, Ribicoff, Harris, Metcalf, and Simpson.

Staff members present: Dorothy Fosdick, staff director; Robert W.

Tufts, chief consultant; Judith J. Spahr, chief clerk; and Laurel A.

Engberg, minority consultant.

OPENING STATEMENT OF THE CHAIRMAN

Senator JACKSON. The subcommittee will come to order.

The Subcommittee on National Security and International Operations continues today its hearings on the conduct of national security

policy. During this 1st session of the 89th Congress, the subcommittee

has been laying the foundation for its further work. We have taken

testimony on key questions of national security operations indicated

in the subcommittee's Initial Memorandum. Our witnesses have been

outstanding men of broad experience, with established reputations for

independence of thought and judgment. As the members well know,

our study is being made on a professional, nonpartisan basis.

At our hearing this morning, we will focus on economic and financial

problems affecting 'U.S. security and NATO strength. At times the

American Government has seemed to give disproportionate attention

to rather theoretical problems of alliance organization, such as the nature of a future Atlantic community, or the relation between a hypothetical supranational United States of Western Europe and the

United States of America, when the strength and vitality,of the alliance might be better promoted by attention to the compelling practical

problems facing the individual member governments of the alliance,

such as our balance-of-payments problem, or the economic difficulties

of the British, or the issues that have arisen between ourselves and

France over financial affairs.

At any rate, it is evident that the strength of NATO depends not

only on the military capability of the members but also on their economic health and political strength—and on NATO's ability to assist

the members in dealing with problems of real and urgent concern

to them.

189
190 CONDUCT OF NATIONAL SECURITY POLICY

Our witness today is William McChesney Martin, Jr., who has rendered distinguished service to our Nation under four Presidents.

Member of the New York Stock Exchange in 1931 and president of

the Exchange in 1938 at the age of 31, Mr. Martin was appointed by

President Truman to the Federal Reserve Board and designated as

Chairman. He was reappointed to a 14-year term on the Board by

President Eisenhower in 1956, and has been Board Chairman (which

requires designation by the President every 4 years) since 1951—a

record term for the office.

Mr. Martin, we are indeed honored to have you with us this morning. We are eager to hear your views on what the United States

could and should do to make progress on the practical economic and

financial problems which bear vitally on the security of the United

States and its European allies. You may proceed in your own way.

I believe you have a prepared statement. And we want to extend

to you a real warm welcome this morning, a warm, friendly welcome.

I know you are accustomed to warm welcomes!

STATEMENT OF WILLIAM MeCHESNEY MARTIN, IR., CHAIRMAN,

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

ACCOMPANIED BY RALPH A. YOUNG, DIRECTOR, DIVISION OF

INTERNATIONAL FINANCE, AND GUY E. NOYES, ADVISER TO

THE BOARD

Mr. MARTIN. Mr. Chairman, I am delighted to be here and to be

before this committee. A strong healthy American economy is vital

to our national security—both because it provides the means with

which we defend ourselves and because our influence in international

affairs is inextricably related to our own economic performance.

The Federal Reserve System has a host of duties and responsibilities

related to the supervision of banks the performance of fiscal agency

services for the Treasury, and the efficient functioning of the payments

mechanism in the United States, but far and away its major responsibility is to encourage, as best it can with the tools at its disposal,

financial conditions which will, in turn, contribute to vigorous, sustained growth in output and employment. In other words, our overriding objective is to strengthen the US. economy.

Thus far I have spoken of the strength of the American economy

without making any special reference to the strength of the dollar as

an international currency or to our balance. of payments. I am sure

some of you already know that to me these are part of the same package. We cannot have a strong economy without a strong dollar. In

the long run, equilibrium in our international accounts is just as essential to our domestic prosperity as it is to the dollar's position in

international commerce.

It would be utterly unrealistic to think that we could have lasting

prosperity in this country if we had a weak dollar, and consequently

a deteriorating confidence around the world in the United States and

its economic system.

Let me say just a few words about what the Federal Reserve System can do and what it has been doing to help bring about the kind

of financial climate that is conducive "to maximum production, em-
CONDUCT OF NATIONAL SECURITY POLICY 191

ployment, and purchasing power"—the objectives of Government

economic policy as set forth in the Employment Act of 1946.

Basically, our influence on economic developments stems from .our

authority to specify the amount of reserves that banks are required

to hold and our control over the supply of these reserves. Because

of short-term fluctuations in factors beyond our control, we cannot

determine precisely the amount of reserves that are available to banks

each day, or even each week but we can offset these fluctuations in

the longer run, and it is fair to say that from month to month and year

to year the supply of reserves is determined by the policies of the

Federal Open Market Committee.

We could undertake to regulate the growth of reserves available

to banks in accordance with some set formula. However, as a practical matter, the committee exercises its regulative influence by establishing and maintaining conditions as to the cost and availability of

reserves befitting current economic needs. With this approach, the

growth of bank reserves reflects in part market factors, which depend

in turn on the strength of credit demands within the economy.

Regulation of the supply of reserves available to commercial banks

has an influence on the cost and availability of credit and on the rate

of growth in money and credit, which affects in turn the aggregate

demand for goods and services. But these variables are also influenced by many other factors, and the impact of moderate changes

in monetary policy is often hard to identify, much less quantify.

Even fairly drastic changes in our policies may at times be overshadowed by the sweep of other developments.

Here I want to digress to say that our own staff and many other

economists working independently are laboring continuously—aided

considerably by the advances in recent years in computer technology—

to isolate and measure more exactly the impact of changes in policy

at various stages of this process so that we may think and speak with

more precision about the ultimate effects of policy changes. But in

the meantime, the precise magnitude and timing of these effects are

not subject to exact scientific determination and so remain a matter

of judgment, and one on which judgments may differ.

I am stressing these limits of our knowledge in order to explain

why central banking remains an art rather than a science. And as

an art, it is the art of moderation, or the middle way. At all times,

we must be aware of the risk that the economy might be undermined

by either deflation or inflation.

What the Federal Open Market Committee does in performing its

policymaking functions can be described in infinite detail, but it

can also be summarized accurately, I think, in a very few words.

The Committee issues directives to the Manager of the System's Open

Market Account as to the conditions of reserve availability which, in

its best judgment, will be most conducive to the sound, healthy growth

of the economy.

Most often, over the years, there has been a substantial unanimity

in the Committee as to the directive most likely to contribute to this

end. Occasionally there have been sharp differences of view, but

these have usually come at times when the future course of economic

events was especially hard to divine, and our thinking has tended to

come together again as the situation clarified.
192 CONDUCT OF NATIONAL SECURITY POLICY

Thus far I have described our functions and their relation to what I

understand to be your interests in very general terms. I surmise

from your Initial Memorandum and your previous hearings that it

would be appropriate for me to tell you about our activities in the

international field in a little more detail.

Let me say, first of all, that the Federal Reserve has neither the

authority nor the inclination to make foreign policy of any kind,

including foreign financial policy. As a member of the National

Advisory Council on International Monetary and Financial Problems, I am called upon to advise the President on those problems.

But the United States has, and can have, only one foreign policy.

Any action the Federal Reserve may take in matters connected with

foreign relations, any negotiation or discussion with foreign central

bankers, any participation in international activities, institutions, or

meetings—in short, anything we do or say in this area is carefully

coordinated with those Government agencies to which the President

has delegated authority, and on occasion directly with the White

House.

But within the framework of U.S. foreign financial policy, and

with the full approval and indeed encouragement of the Administration, the Federal Reserve has greatly expanded its international activities in recent years. These activities include three different,

though interconnected, categories: first, participation in international

meetings, discussions, and negotiations in which representatives of

the Federal Reserve form part of a U.S. delegation; second, a wide

range of informational contacts, formal and informal, with foreign

central banks; and third, arrangements with foreign central banks on

foreign exchange operations.

Federal Reserve representatives, acting as members of a U.S. delegation, have played important roles in meetings and negotiations connected with the International Monetary Fund, with the so-called

Group of Ten, and with the Organization for Economic Cooperation

and Development.

Federal Reserve connection with the work of the International

Monetary Fund started even before that organization was established:

members of the Board of Governors and of its staff participated in.

the drafting of the proposals that led to the Bretton Woods Conference of 1944, and in the work of the Conference and the drafting of

the IMF Agreement itself. More recently, they have regularly formed

part of the U.S. delegation at the annual meeting of the IMF, and of

the group of officials that consults every year with the International

Monetary Fund on economic and monetary developments and policies

in the United States.

Federal Reserve officials also play an important role as members

of the various U.S. delegations in the so-called Group of Ten, which

includes the 10 leading member countries of the International Monetary Fund. This is the group of member countries that agreed in

December 1961 "to lend the Fund amounts of their currencies up to

a total of $6 billion, so as to reinforce the Fund's ability to grant drawings to participants in the Arrangements in order to forestall or cope

with an impairment of the international monetary system." 1 By act

1 Annex to the Ministerial Statement of the Group of Ten of Aug. 10, 1964, sec. 16(f).
CONDUCT OF NATIONAL SECURITY POLICY 193

of June 19, 1962, the Congress authorized the United States to participate in an amount up to $2 billion in these Arrangements.

The Ministers and Central Bank Governors of these 10 countries,

together with the Managing Director of the IMF, decided in October

1963 to review the functioning of the international monetary system

and the probable future needs for international liquidity. They instructed their deputies to examine these questions and to report on

the progress of their studies. The Secretary of the Treasury, as the

U.S. member of the ministerial group, appointed the Under Secretary

of the Treasury for Monetary Affairs and a member of the Board of

Governors, Mr. Daane, as his deputies. These U.S. deputies, and

their counterparts from the central banks and finance ministries of

the other countries of the Group of Ten, have been responsible for

constructive work on the international payments problem, especially

for important studies on problems of reserve assets and other matters

of vital importance for any appraisal and reform of the international

monetary system. Staff members of the Federal Reserve have participated, and still are participating, in the studies undertaken by the

working parties of the deputies.

Further, Federal Reserve officials form part of the U.S. delegations

to the meetings of the Economic Policy Committee of the OECD—

the successor to the organization set up to help implement the Marshall

plan—and of its working parties. From the point of view of the

Federal Reserve, the most important of these groups is Working

Party 3, which periodically discusses the balance-of-payments problems and policies of the participating countries.

These discussions in Working Party 3 are valuable as a means of

conveying information and fostering mutual understanding. But

they have acquired particular significance since Working Party 3 has

been charged by the Ministers of the Group of Ten with the task

of providing "a basis for multilateral surveillance of the various

elements of liquidity creation, with a view to avoiding excesses or

shortages in the means of financing existing or anticipated surpluses

and deficits in the balance of payments, and to discussing measures

appropriate for each country in accordance with the general economic

outlook." 2

Working Party 3 has also been charged by the Ministers with the

task of undertaking a thorough study of the measures and instruments best suited for averting large and persistent payments imbalances.

Meetings of Federal Reserve officials with other central bankers

take place periodically within the framework of the Bank for International Settlements and the Center for Latin American Monetary

Studies which is known by the initials of its Spanish title as CEMLA.

The Federal Reserve, in accordance with then prevailing U.S. policies,

declined formal membership in the BIS when it was first established.

But it has more recently, in accordance with contemporary U.S. policies, accepted the invitation of the Bank for International Settlements to send observers to the monthly and annual meetings of the

central bankers that form its Board of Directors. These meetings

do not result in policy decisions but they permit a frank exchange of

2 Annex to the Ministerial Statement of Aug. 10, 1964, sec. 37.

48-902-65—pt. 4 2
194 CONDUCT OF NATIONAL SECURITY POLICY

information and opinions among central banks which are useful in

many ways. One of the members of the Board regularly attends the

annual meeting of the BIS members. At the monthly meetings the

Federal Reserve is usually represented by officials of the Federal Reserve Bank of New York—customarily Mr. Hayes, its President, or

Mr. Coombs, its Vice President in charge of the Foreign Department,

who also acts as Special Manager for System foreign-exchange operations.

Recently, the work of the Bank for International Settlements—

like that of Working Party 3 of the OECD—has been integrated

with that of the Group of Ten, since the Ministers of the Group of

Ten have asked the BIS to combine statistical data "bearing on the

means utilized to finance surpluses or deficits" in the international

accounts of the members of the Group, and to supply them "confidentially to all participants and to Working Party 3 of OECD." 3

The Federal Reserve is closely associated with and provides technical and financial support to CEMLA, which is a research organization established by the central banks of the Western Hemisphere.

Again, our participation is mainly informational but we are also assisting CEMLA in the important task of helping to train central bankers

for Latin American countries.

In addition, the heads of the central banks of the Americas are now

meeting annually for the purpose of discussing common problems.

Participation of the Federal Reserve in these gatherings demonstrates that the United States is interested in close financial collaboration with its American sister republics just as it is interested in cooperating with countries in the Group of Ten.

The day-to-day activities of the Federal Reserve have been most

directly affected by its participation in foreign exchange operations.

Between the early thirties and early sixties the Federal Reserve did

not operate in the foreign exchange market for its own account, although it continued to do so as fiscal agent for the Treasury and

its Stabilization Fund, and as banking correspondent of foreign central banks.

After lengthy deliberation and full consultation with the Treasury,

the Federal Reserve decided in February 1962 to reenter the foreign

exchange market. As set forth in the authorization given by the

Federal Open Market Committee to the Federal Reserve Bank of

New York, the basic purposes of the operations are (1) to help safecruard the value of the dollar in international exchange markets; (2)

to aid in making the international payments system more effective;

(3) to further monetary cooperation with foreign central banks and

the International Monetary Fund; (4) to help moderate temporary

imbalances in international payments; and (5) in the long run, to

make possible growth in international liquidity in accordance with the

needs of an expanding world economy.

The Federal Reserve has conducted its foreign-exchange operations

mainly in the form of mutual arrangements with major foreign central banks and the BIS. It also purchases or sells convertible foreign

currencies outright, in the spot market, or engages in forward operations in such currencies; but the total amount of spot currencies the

3Annex to the Ministerial Statement of Aug. 10, 1964, sec. 37.
CONDUCT OF NATIONAL SECURITY POLICY 195

Special Manager is authorized to hold for System account and the

total amount of forward transactions, as well as the purposes for which

he is permitted to engage in such transactions, are strictly circumscribed in the directives given him by the Federal Open Market Committee. Holdings of foreign currencies through outright spot purchases are limited to an aggregate of $150 million, and forward transactions—excepting forward transactions that are merely designed to

eliminate the exchange risk of spot holdings or forward commitments—are limited to $275 million equivalent.

In contrast to the modest amounts of these market transactions, the

Federal Reserve has concluded with 11 foreign central banks and the

Bank for International Settlements mutual currency agreements, the

so-called swap agreements, under which the Federal Reserve could

draw a total of $2.8 billion in foreign exchange, and its partners a

corresponding amount in dollars. Generally, these agreements are on

a standby basis; in other words, a participating central bank draws on

the arrangements only when, and to the extent that, it needs an amount

in foreign exchange or dollars, respectively.

Cumulatively, from the beginning of the operations to the end of

July 1965, drawings under the swap agreements reached the impressive totals of $2.2 'billion equivalent drawn by the Federal Reserve

and $3.4 billion drawn by foreign central banks.

Of course the amounts outstanding at any one time have been much

smaller. At the end of 1964, for instance, outstanding drawings by

the Federal Reserve System totaled less than $300 million, and outstanding drawings by foreign central banks $200 million leaving a

net debtor position of the System of less than $100 million—which,

incidentally, has since turned into a net creditor position.

Under the swap agreements, both the System and its partners make

drawings only for the purpose of counteracting the effects on exchange

markets and reserve positions of temporary or transitional fluctuations

in payments flows. About half of the drawings made by the System

and most of the drawings made by foreign central banks have been

repaid within 3 months; nearly 90 percent of the recent drawings made

by the System and 100 percent of the drawings made by foreign central

banks have been repaid within 6 months.

In any event, no drawing is permitted to remain outstanding for

more than 12 months. This policy insures that drawings will be made,

either by the System or by a foreign central bank, only for temporary

purposes and not for the purpose of financing a persistent payments

deficit.

In all swap arrangements both parties are fully protected from the

danger of exchange rate fluctuations. If a foreign central bank draws

dollars, its obligation to repay dollars would not be altered if in the

meantime its currency were devalued. Moreover, the drawings are

exchanges of currencies rather than credits. For instance, if, say, the

National Bank of Belgium draws dollars the System receives the

equivalent in Belgian francs; and since the National Bank of Belgium

has to make repayment in dollars, the System is at all times protected

from any possibility of loss. Obviously, the same protection is given

to foreign central banks whenever the System draws a foreign

currency.
196 CONDUCT OF NATIONAL SECURITY POLICY

The interest rates for drawings are identical for both parties.

Hence, until one party disburses the currency drawn, there is no net

interest burden for either party. Amounts drawn and actually disbursed incur an interest cost, needless to say; the interest charge is

generally close to the U.S. Treasury bill rate.

The advantages of these arrangements for the United States, and

for the free world in general, can best be explained by briefly discussing two instances: Federal Reserve actions on the tragic day of President Kennedy's assassination, and at the time of the sterling crisis last

November.

The initial shock of the news of the assassination of the President

temporarily paralyzed the New York exchange market, and there was

imminent danger of panic selling of dollars here and abroad. The

Special Manager of the System foreign-exchange account immediately

offered, in the market, sizable amounts of foreign currencies at the

rates prevailing before the tragedy. As the market realized that the

Federal Reserve, with the cooperation of foreign central banks, was

fully prepared to defend existing exchange rate levels, speculation

subsided. By the end of the day, Federal Reserve intervention plus a

parallel intervention of the Bank of Canada together totaled less than

50 million in all currencies. And no further Federal Reserve intervention was needed on the following days.

Again in November 1964, sterling was hit by large waves of selling,

despite actions taken by the British authorities, including an increase

in Bank Rate to 7 percent and the introduction of a 15-percent import

surcharge. On November 24, a massive credit package to back up

sterling began to take shape. The Federal Open Market Committee

approved a $250 million increase in the swap arrangement with the

Bank of England; simultaneously, the Export-Import Bank granted

Britain a $250 million credit. The Bank of England and Federal

Reserve officials were in almost continuous telephone communication

with the other major central banks which participate in the network

of swap arrangements with the System, and on the afternoon of

November 25, a $3 billion package of credits obtained from 11 countries

and the BIS could be announced.

Federal Reserve drawings under the swap arrangements do not necessarily reflect an international payments deficit of the United States.

Regardless of our overall payments position, it is unavoidable that

from time to time the United States has a substantial deficit in relation to one country and a substantial surplus in relation to another.

If the foreign surplus country traditionally converts dollar accruals

into gold while the foreign deficit country holds most of its reserves

in dollars, the U.S. gold stock will be reduced even in the absence of an

overall payments deficit; this actually happened last quarter, when—as

you know—the United States had a payments surplus.

But insofar as the deficit in relation to the foreign surplus country

might be deemed temporary, the decline in the U.S. gold stock could

be avoided by means of a drawing on the swap arrangement with that

country. Similarly, if the foreign deficit country is pressed for reserves, it may also prefer to make a drawing on its swap arrangement

rather than reduce its reserves, provided that its deficit is considered

temporary and reversible. Hence, swap drawings initiated by the
CONDUCT OF NATIONAL SECURITY POLICY 197

System on some central bank are usually outstanding side by side with

swap drawings initiated by some other central bank.

The concern of the Federal Reserve with international matters is

certainly not restricted to the international activities of the System.

Our concern is most directly connected with the main purpose of our

monetary policy: in view of the interrelations between our country's

domestic and international monetary equilibrium, domestic policy considerations are sufficient reason for avoiding policies that would perpetuate or aggravate a payments imbalance.

It is true that the recent U.S. payments deficit has been of a character very different from that of payments difficulties of most other countries. In general, a country suffers from a payments deficit when its

imports of goods and services exceed its exports. But the United States

does not spend more abroad on goods and services than it earns. On

the contrary, it has had record export surpluses in recent years, even

after deducting all Government expenditures abroad from its export

receipts. But U.S. investors have lent and invested funds overseas

that were larger than the export surplus. Hence although the international wealth of the United States has increased, its international

liquidity has declined; its gold reserves have dropped, and its shortterm liabilities have increased faster than its liquid claims on

foreigners.

This difference between the U.S. position and the usual position of

a deficit country may be important from the point of view of needed

remedies, but it does not alter the fact that a large and persistent decline in the international liquidity of the United States can no more be

permitted to go on unchecked than could a trade deficit. There are,

in my judgment, three main reasons why a continuation of the decline

in our international liquidity would be extremely harmful for both

the United States and the rest of the free world.

First, a large part of the free world's trade and finance is conducted in U.S. dollars. But the dollar can continue in its international role only as long as the world has full confidence in its stable

value. And while the value of the dollar is ultimately based on the

prosperity and stability of the U.S. economy, confidence also is deeply

affected by changes in the relationship between our gold reserves and

our net short-term liabilities to foreigners, especially foreign monetary

authorities, which we are prepared to redeem in gold on demand.

Hence, a persistent and large deterioration in that relationship—in

other words, a persistent and large decline in our international liquidity—tends to undermine confidence in the dollar, and to threaten the

vital role of the dollar in international commerce.

More concretely, some foreign observers have contended that the

United States could have a persistent deficit in its payments only because it could rely on the international role of the dollar. Foreign

merchants, bankers, and investors have been willing to accumulate

dollar balances, and foreign central banks have been willing to accumulate dollar reserves only because the dollar has been generally

acceptable in settlement of international transactions.

Otherwise, the United States would have had to settle all payments

deficits in gold, and would have had to take drastic action long ago

to keep its gold stock from being depleted.
198 CONDUCT OF NATIONAL SECURITY POLICY

There is only a short way from this line of argument to the demand

that in the future the United States be made to abide by international

payments discipline in exactly the same way as a country whose currency does not circulate internationally; in other words, that all settlements of international payments deficits be made exclusively in

gold, and that the dollar cease to function, as a reserve currency, if

not also as a key currency in private international transactions. Such

a change would not only wipe out U.S. gold reserves, as foreigners

would convert their dollar balances into gold. It would also greatly

reduce the international liquidity of the free world as a whole, and

hence pose a serious threat to any further expansion of international

commerce, or even to the maintenance of its present volume.

Second, indefinite continuation of a payments deficit would increasingly impede the conduct of U.S. monetary policy. In the long

run, domestic and international goals of monetary policy are, in my

judgment, identical; but in an emergency situation circumstances

could arise in which a sudden elimination of a payments deficit would

require monetary measures of such severity that they would not be

appropriate from the point of view of domestic policy goals. The

longer the payments deficit remains unchecked, the greater the possibility or even probability of a sudden emergency of that kind.

Third, while the present international payments system has, in my

judgment, functioned extremely well, it is—like all human institutions—in need of further improvement. The United States has the

greatest interest not only in bringing about that improvement but also

in seeing to it that the necessary improvement does not impair the international function of the U.S. dollar. But as long as our payments

balance continues in deficit, all suggestions made by U.S. representatives will be subject to a suspicion that they aim not at improving the

system but at finding new and painless ways to finance the U.S. deficit

and thus to permit the United States to continue to run a deficit. This

suspicion, unfounded though it is, needs to be allayed if we are to attain consensus on the problem of international payments reform; it

will not be finally allayed until our payments position returns to lasting equilibrium.

The Federal Reserve is contributing to the elimination of the payments deficit primarily by a monetary policy designed to provide member banks with reserves large enough to permit them to continue to

finance our present prosperity and to attain even better utilization of

our manpower and capital resources but not so large as to permit either

domestic inflationary pressures to develop or an excessive amount of

funds to flow abroad. In accordance with our President's balance-ofpayments message of February 10, 1965, this general policy is being

supplemented by the participation of the Federal Reserve in the voluntary efforts of commercial banks and other financial institutions to

restrain the expansion of credits to foreigners. As you know, these

efforts have been successful almost beyond expectation; but they

clearly are a temporary remedy, and cannot be relied upon to bring

about lasting equilibrium.

The Federal Reserve will continue to do its part, not only in the

attempts at eliminating our payments deficit for good but also in the

work that will lead, I hope, to a better international monetary sys-

,tem. Such a system will, in my judgment, need to be based on exist-
CONDUCT OF NATIONAL SECURITY POLICY 199

ing institutions which have provided a framework for unprecedented

economic progress at home and abroad; on expanded functions of the

International Monetary Fund; on financial cooperation of the sort

pioneered through our swap arrangements; and on the continued use

of reserve currencies as a means of settling international transactions

and as international reserves side by side with gold.

Whatever the differing attitudes of countries regarding the composition of their reserves between gold and foreign exchange, it is a fact

of financial life that all countries use reserve currencies—especially

the dollar—in their exchange markets. Thus countries in balance-ofpayments surplus inevitably find their dollar balances increasing; the

monetary authorities of countries in deficit must sell dollars in their

exchange markets to support their exchange rates. This almost universal use of dollars by monetary authorities is a reflection of the

widespread employment of the dollar by private traders and financial

institutions, even in transactions that do not involve the United States.

The use of the. dollar as a reserve currency is closely related to its

function as a medium of exchange and reflects as well the predominant

position of the U.S. economy and the ready convertibility of dollars

into gold at the established price of $35 per ounce.

Certainly any proposal for changing the international monetary

system must respect these functions performed by dollars and must

avoid the introduction of incentives to convert dollar holdings into

gold.

Whether other countries do or do not wish to continue to use the

dollar as a reserve currency is, of course, up to them. The United

States does not insist that other nations accumulate dollars to meet

their reserve needs. Nor does the United States claim that the amount

of dollars that flow abroad as a result of our balance-of-payments

position necessarily or automatically corresponds to the needs of the

rest of the world or currency reserves. In this connection we, at the

Federal Reserve, can well understand those who say, in effect, that

international money will not manage itself.

The international monetary system must be flexible rather than

rigid. It must be adaptable to the differing, and, over time, changing

needs of the various countries. . It would be a great mistake to act as

if all countries were alike in their size, structures, policies, and values.

Any change in the monetary system must recognize the great diversity

that exists among countries, even among the major industrial countries.

Any such change must be an evolutionary one, preserving and building upon the valuable elements of the existing system.

If international agreement can be reached on such a basis, the reform

of our international monetary system may be expected to contribute

to world prosperity without disturbing market processes, without

violating national monetary sovereignty, and without disrupting international cooperation.

I prepared these comments, Mr. Chairman, as a basis for whatever

discussion you would like to have.

Senator JACKSON. Mr. Martin, we certainly want to thank you for

the fine way in which you have presented this problem.

In recent months we have had a number of favorable announcements regarding the balance-of-payments situation. I believe the
200 CONDUCT OF NATIONAL SECURITY POLICY

Board announced this morning that the gold loss reached a low—was it $80 million?

Mr. MARTIN. $80 million in the month of July.

Senator JACKSON. For the month of July. Are these announcements an indication that we are really getting at the heart of the problem that we face, or are we still dealing with symptoms and not the real

difficulties?

Mr. MARTIN. It is too early to tell, but there is no question that,

within the last 3 or 4 months, we have made some definite progress

and it has caused some return of confidence in our ability to deal with

this problem on a permanent basis.

Senator JACKSON. The results are certainly encouraging. In your

judgment, does this stem from the right approach to this problem, or

is it a part of a typical American way of dealing with a crisis? We

move hard and fast now, and we get some results, but is it the kind of

effort that can last for the long run? That is what I am getting at.

Mr. MARTIN. We have had several periods when we have been encouraged over the last 3 or 4 years and each time it has been followed

by a setback, so I think it is important this time that we deal with this

problem on a basis which will not permit a setback of the type that

we had a year ago, for example, when the fourth quarter turned into

our worst quarter.

Senator JACKSON. It was recently said on high authority that what

is at stake in our balance-of-payments program is, and I quote:

The protection of the dollar in ways fully consistent with sustaining prosperity

at home, maintaining our defenses abroad * * *, supplying public and private

funds to less developed nations, avoiding renewed restrictions on trade, and

the achievement of a more flexible world monetary system that will permit continued free world trade and development to progress as it has since World

War II.

Do our new financial and other techniques for handling the American economy give hope that we can generate the means to accomplish

all these objectives at once?

Mr. MARTIN. I think that the voluntary foreign credit restraint

program has been noted by our Secretary of the Treasury and by the

President as a temporary means of dealing with this problem, not as

a permanent means, and we have not yet found the permanent solution

to an adverse balance of payments.

We have dealt with it so far by three things: by tying foreign aid,

by the interest equalization tax, and by the voluntary foreign credit

restraint program, and I think all of these have served a useful purpose, but the only fundamental solution will be for us to increase our

trade surplus and continue to maintain our competitive position in the

world so that we can cover whatever we want to do in world affairs,

and here I want to make it clear that I am not against foreign aid

when I say this. I am just insisting that we be in a position to pay for

cur foreign aid.

Senator JACKSON. Can we carry on and pay for all these ambitions

at home and abroad? We have cut out a pretty big program.

For instance, we have some very substantial continuing commitments in Western Europe, to NATO. Have we reached the point

where, with the prosperity that now exists in Western Europe, some

revisions can or should be made in order to fulfill commitments that
CONDUCT OF NATIONAL SECURITY POLICY 201

we likewise have in other parts of the world where we are dealing with

countries that do not have the financial resources and the economic

and industrial backup?

Isn't there an opportunity to make some revisions and shouldn't we

make some revisions?

Mr. MARTIN. Yes.

Senator JACKSON. I am asking your personal opinion.

Mr. MARTIN. Yes; I think we should. I think that you are putting

your finger on a basic point. I think that in our foreign aid and in

our military commitments abroad we need to revise our priorities more

in accord with what our resources are than we have done to date.

Now, when I say this I am not cognizant of all the foreign policy

implications that are involved in making these decisions, but it is obvious I think that we are carrying too large a load and we have to rely

upon our friends in the world to do more in the way .of helping the

underdeveloped countries than they have been doing in recent years

if we are going to have a viable international economy.

I think we have been carrying too large a load.

Senator JACKSON. There is no reason why some of these areas, countries with well-established industrial competency, cannot carry a

larger load in proportion to what we have been carrying. Wouldn't

you say that is true?

Mr. MARTIN. I don't think there is any question of it, and particularly the surplus countries. The countries that have been accumulating surpluses recently could well use those surpluses more effectively.

Senator JACKSON. I think this is a very timely point.

Our current problem stems from the tremendous change in their

economies, thanks initially to the Marshall plan. One of the countries

in particular that has been very aggressive in trying to embarrass us,

has certainly been doing very well economically and much of the

trouble stems from that area of the world.

At least there is no reason why we shouldn't take a good hard look

at their ability to do more in that area that involves the commitment

of the United States and the other NATO countries.

Mr. MARTIN. I think we ought to put all the pressure we possibly

can on getting them to assume a larger responsibility for the overall

pro_gress of the world.

Senator JACKSON. Thank you. I have many more questions, but

I want to share them with my colleagues. Senator Simpson.

Senator SIMPSON. Thank you, Mr. Chairman. First of all, I want

to compliment the Chairman of the Board on the very splendid statement you made here this morning.

I would like to ask the Chairman what is the attitude of the Federal

Reserve Board with respect to the tightening of credit.

Mr. MARTIN. Well, we have to tread a very narrow line, Senator,

between helping the growth of the domestic economy and not permitting money to become so easy in terms of rates that it will flow abroad

where they have a higher interest rate. This is one of the major

concerns we have been dealing with recently. We are really in one

world, and with the flow of Funds being as easy as it is in the world

today we can't permit interest differentials to become too large.

Otherwise, we would have an outflow of capital and credit from this

country caused by the interest rate differential.

48-902-05—pt. 4-3
202 CONDUCT OF NATIONAL SECURITY POLICY

Senator SIMPSON. And those are some of the factors that face the

Board, I think.

Mr. MARTIN. They are, indeed. We have attempted over the recent

years to keep the short-term interest rates up—we started this in

1963—and at the same time we try to prevent longer term interest

rates from rising to such an extent that it might make it more difficult

to finance home ownership and similar activities.

Senator SIMPSON. What would be the effect of the decline in the

British currency stabilization with respect to America?

Mr. MARTIN. You mean a devaluation?

Senator SIMPSON. Yes.

Mr. MARTIN. Devaluation would cause a serious upset in the entire

international system today. I just hope that the United Kingdom

will not devalue. I think that it is essential that they take the policies

that will make it unnecessary for them to devalue. It is very difficult

to see how devaluation would help them and at the same time it would

upset the entire Western world's relationships of currencies.

Senator SIMPSON. Then our interest is as much in keeping their currency stable as our own?

Mr. MARTIN. Provided we don't do it at a sacrifice to our own.

Senator SIMPSON. But we are interested in keeping theirs stable.

Mr. MARTIN. We are interested in keeping theirs stable; right.

Senator SIMPSON. Thank you. I think that is all, Mr. Chairman.

Senator JACKSON. Senator Ribicoff.

Senator RIBICOFF. As always, Mr. Martin, it is good to listen to

you whenever you appear in front of any committee.

In reply to a question of Senator Jackson you said—and it might

be just an aside—that you weren't cognizant of all the foreign policy

implications in decisions that are made in determining American

commitments. When the Secretary of State makes a foreign policy

decision do they ever consult with you as to its impact on America's

international monetary position before they make the decision, or do

they make the decision and let you catch up with them?

Mr. MARTIN. I think it is fair to say we usually catch up with them,

Senator.

Senator RIBICOFF. You usually catch up with them. In other

words, don't we then have a very deep problem? One of the great

problems that we have in the world and at home is the whole question

of the international monetary system, the financial health of the

United States and other nations, the issues of trade that we have at

home and abroad. Since all of these are interwoven, don't you think

that the State Department does not have the right to make these decisions in a vacuum and allow the entire apparatus of Government, our

entire economy, to try to catch up with a decision that may be made

just by the State Department?

Mr. MARTIN. Yes; I agree with that. I am a member of the National Advisory Council on National Monetary and Financial Problems and we have made this point frequently through the Secretary

of the Treasury and I have had the privilege of participating in meetings with the President, as you know, periodically, and I have asserted

that view at that point.

For a number of years we talked about priorities and I found that

there were some people who thought the priorities included the avoid-
CONDUCT OF NATIONAL SECURITY POLICY 203

ance of a possible devaluation of the dollar. But I don't consider

the avoidance of devaluation of the dollar a matter of priority—I consider the maintenance of the value of the dollar a fundamental.

Senator RIBICOFF. In other words, taking the function of this committee, which looks at the coordination and cooperation of various Government departments, there is no question in my mind as we view the

world today that the problem of foreign currencies, the problem of

liquidity, the problem of deficits, the flow of gold, are just as important to the future of our Nation and our stability as many treaties

and agreements, and aid programs, that the United States is involved

in.

What do you think the State Department should do when it has a

policy decision that may impinge on other factors of American life?

Whom should they consult with?

Mr. MARTIN. I think they should consult actively with the Secretary

of the Treasury in the first instance and then with this National Advisory Council which is to coordinate the financial policies of the

Government as they affect our international relations. This Council

was set up, as you know, under the Bretton Woods Agreements Act,

and while it hasn't always functioned as actively as it might, it is a very

workable group.

Senator RIBICOFF. I agree with you, Mr. Martin. In 1962 when

Congress 'passed the Trade Expansion Act, Members were concerned

with the fact that all the decisions on trade should not be left to the

Secretary of State and they set up a separate agency or separate office

in the White House, which is headed by Governor Herter. Yet as I

have watched this develop it seems to me that the State Department is

still making policy and is still exercising a veto power over decisions

that are to be made by the group of people set up in the White House

under Governor Herter, while Congress feels that the rights of business, manufacturers consumers, and agriculture should not be decided by the State Department, but should be decided overall by an

office of the White House.

This takes place with trade and apparently it also takes place with

monetary decisions.

Mr. MARTIN. To some extent, but I think it is being improved.

Senator RIBICOFF. It is being improved. Well, in the State Department what Assistant Secretary or what office has competence in the

field of international monetary policy that could compare with the

competence in your department or in the Treasury?

Mr. MARTIN. Well, the State Department's Office of Economic

Affairs. I wouldn't want to make an invidious comparison. They

have some very competent people there. It is headed at the present

time by George Ball.

Senator RIBICOFF. But George Ball wears an awful lot of hats.

Mr. MARTIN. He is a very, very busy and very active man.

Senator RIBICOFF. He is a very able man and very busy. Right

now he is abroad with the Secretary of the Treasury. I heard on the

radio Or read in the press that he is going to consult with De Gaulle.

Getting now to another field, how many agencies in the Federal

Government have to do with international monetary policy?

Mr. MARTIN. I think primarily it is the Treasury and the Federal

Reserve.
204 CONDUCT OF NATIONAL SECURITY POLICY

Senator RIBICOFF. But how many are there? You have the Export-Import Bank. How many agencies besides Federal Reserve and

Treasury?

Mr. MARTIN. The membership of the National Advisory Council

includes the Secretary of the Treasury as Chairman, the Secretary of

State, the Secretary of Commerce, the Chairman of the Board of

Governors, and the President of the Export-Import Bank. That

pretty well embraces it.

Senator RIBICOFF. How often do the top men of all those agencies

meet together as a group?

Mr. MARTIN. Not often enough, but recently they have been meeting more frequently, Senator.

Senator RIBICOFF. In other words, you and the other agencies have

representatives who sit down together.

Mr. MARTIN. That is right.

Senator RIBICOFF. And these representatives may be 10, 15, 20 down

the scale of the departmental bureaucratic hierarchy is that correct?

Mr. MARTIN. That is correct.

Senator RIBICOFF. And so basically decisions that affect our Nation at home and abroad on a day-to-day basis are not being made by.

the Secretaries or the Chairman of the Federal Reserve, at are being made by someone 20th down in the scale?

Mr. MARTIN. I think that is true in most activities.

Senator RIBICOFF. It is, yes. In other words, don't we have a great

problem in our entire governmental setup that basically day-to-day

decisions that bear upon policy are not being made by the President

of the United States or the Secretaries who are in charge, but basic

policy is being made on a day-to-day basis with people low down on

the bureaucratic scale of your Government organization?

Mr. MARTIN. I think that is a legitimate criticism to level against

the Government, but the variety of problems are so great in Government that it is very difficult to have it work any other way.

Senator RIBICOFF. Is that quite so? Isn't this due to the fact that

we are running a government that is about 30 years behind the times

and that maybe what we need is to reorganize the Federal Establishment in such a way that we start placing authority and responsibility

into agencies which should have the authority and responsibility and

not scatter them around among intergovernmental committees that

cut across every department of our Government.

Mr. MARTIN. I agree with you on that.

Senator RIBICOFF. Another question that I always am very curious

about: How do you central bankers communicate with each other?

In other words, you had a problem, as you pointed out, at the time of

the tragic death of President Kennedy. Then you had the problem

in November 1964 of the crisis with the pound sterling.

When a crisis like this develops how do all you people involved,

located in capitals all over the world, get together and communicate

rapidly with one another to make decisions?

Mr. MARTIN. Well, we have done that almost entirely by telephone.

At the time of President Kennedy's assassination I talked to nine of

my colleagues in one afternoon.

Senator RIBICOFF. Do you put through a call and everybody gets

on a wire and everybody has a joint conversation?
CONDUCT OF NATIONAL SECURITY POLICY 205

Mr. MARTIN. No, no. This has just been a man-to-man call.

Senator RIBICOFF. That must take time. I am just curious. You

said you were able to reverse this in 1 day. I know you did great work

there. You did great work in November 1964 with the crisis in the

pound, but I am very curious. How do you go back and forth in the

interchange? In other words, does Mr. Martin make a call and say,

"I think this is a problem. This is what we ought to do." The head

of the central bank in Germany, in France, in England, and Belgium

all agree with you, or do you have a discussion back and forth? How

does this work?

Mr. MARTIN. We have a brief discussion and usually there is some

discussion at the technical level. Mr. Coombs who is the head of the

Foreign Department of the New York Federal Reserve Bank and Special Manager of the System's Open Market Account, is in touch with

some of the technical people at the Bundesbank or at the Bank of Italy,

for example, and we have improved this liaison by attending the Bank

for International Settlements meetings which are monthly.

Senator RIBICOFF. Where do they meet?

Mr. MARTIN. They meet in Basel, in Switzerland, the first Monday

of every month.

Senator RIBICOFF. Do you go to the meetings?

Mr. MARTIN. No President Hayes of the New York Federal Reserve Bank has been going.

Senator RIBICOFF. Before he goes, does he sit down with you and

make decisions of what the basic policy looks like?

Mr. MARTIN. He always talks over with me the things that he thinks

would come up and gets my views, and he also reports to me what

transpires at the meeting.

Senator RIBICOFF. You made an interesting statement in your initial

remarks that I am sort of curious about. You say:

The United States does not spend more abroad on goods and services than it

earns. On the contrary, it has had record export surpluses in recent years, even

after deducting all Government expenditures abroad from its export receipts.

What is your export surplus running? About $6 billion a year?

Mr. MARTIN. That is right.

Senator RIBICOFF. About $6 billion. About what are our international commitments a year?

Mr. MARTIN. About $4 billion.

Senator RIBICOFF. About $4 billion, and how much are we sending

abroad today?

Mr. MARTIN. Well, last year our capital outflow was $61/2 billion.

Senator RIBICOFF. What is the extent of American investments

abroad today?

Mr. MARTIN. We have a net position on foreign investment of about

$40 billion plus for the United States.

Senator RIBICOFF. What is that $40 billion bringing into the United

States in returns?

Mr. MARTIN. Mr. Young can give you the figure. Our problem on

investment there Senator, is that we have borrowed short and loaned

long, to use the 

there,

phraseology there. Although we have this

$40 billion-plus position on foreign investment, our short-term liabilities abroad have increased four times as fast as our short-term

assets.
206 CONDUCT OF NATIONAL SECURITY POLICY

Senator RIBICOFF. While Mr. Young is looking up the rate of return abroad, what is tourism taking out of our balance-of-payments

position?

Mr. MARTIN. $1.7 billion last year and it looks like it will be $2

billion this year.

Senator RIBICOFF. $2 billion this year, so one just can't attribute

the problem only to the investment aspect.

Isn't one of the things that bothers a man like De Gaulle the continued size of the American investment in his country and his fear of

having the economic life of his nation dominated by U.S. capital?

Isn't this one of his fears?

Mr. MARTIN. That is one of his fears. I don't think it is justified,

but unquestionably he thinks that we are using our deficit to finance it.

That bothers him more than the investment itself2 I think.

Senator RIBICOFF. You said that past economic difficulties were made

severe in part by the failure to understand the international implication of national decisions. Are we doing better on this score today?

Mr. MARTIN. I don't know, Senator. I think we have to watch this

extremely carefully. I think we are aware of the problems today and

we have to just keep them out on the table and keep assessing them.

Whether we will or will not deal with them effectively is going to be

determined in the next couple of years.

Senator RIBICOFF. I would like to ask you many more questions but

I am only going to ask you one more because I want to defer to Other

members of the committee. What are some of the main lessons from

past monetary history that are relevant for our country today?

Mr. MARTIN. Well, it seems to me that there are three basic lessons

that come out of this. The first one is that if you let orderly growth

and development in your economy burgeon out into a disorderly boom

where a speculative orgy takes over, you are inevitably asking for

trouble, both domestically and internationally.

Senator RrincoFF. You tried to make this point in your speech in

New York a few months ago and everything dropped on your head

when the stock market dropped.

Mr. MARTIN. I wouldn't attach too much importance to a fluctuation

in the stock market.

Senator RIBICOFF. Well, a lot of people did and evidently you were

hit broadside.

Senator JACKSON. They did at the time and now they have forgotten

about it.

Senator RIBICOFF. Go ahead, Mr. Martin.

Mr. MARTIN. I think when you do have a recession coming on, however it develops, whether or not it develops from this boom and orgy

in speculation that I have been talking about, that you have to have

Government stabilization efforts move in fairly promptly. We can't

eliminate these movements in the economy, but we can brake them to

a great extent, and the lesson of 1932 which is very vivid in my mind

is that we were slow in moving to do what we could at that time; and,

also, we tended to rely upon drastic measures to force further deflation

rather than trying to stabilize. I hope that we won't repeat that again

when, as, and if we have a decline, which we probably will have at

some time.
CONDUCT OF NATIONAL SECURITY POLICY 207

I am not predicting one, but we will have one sometime; and I think

the last point that we ought to learn from the difficulties of the thirties

is that you can't follow a policy of beggaring your neighbor.

You have to realize that the world is more interrelated and interconnected today than it has ever been. We have to bear in mind that,

if we are going to build satisfactory trade relationships, we must recognize that the funds financing this trade will flow in international

financial markets that are part, almost, of one world.

This is the flow of funds that I was talking about with Senator

Simpson a little bit earlier. I used to tell President Kennedy that

we couldn't be isolationists on monetary policy any more than we could

be in foreign policy today. It is too easy to pick up the telephone and

transfer funds. So we have to think of this as an interconnected and

interrelated world.

Those, to me, are the three basic lessons that we should learn from

the 1930 period.

Senator RIBICOFF. Mr. Chairman, may I again commend you for

what I think you are doing for the country in holding hearings such

as this. May I respectfully suggest that this committee could very

well go into a further inquiry about the failure of the State Department to take into account the economic and trade factors as they bear

on national policy in this relationship with other countries, because it

becomes very obvious in a world such as we live in that the problem

of international finance and international trade has as great a bearing on what our foreign policy should be as what has in the past been

traditional foreign policy. I think that we all should be grateful to

you for going into this line of inquiry.

Senator JACKSON. I concur with the Senator's concern in this matter. I think Chairman Martin's testimony here, particularly in this

area, represents an opportunity to bring about some improvements in

the relationships between State and the other areas of the government

that are heavily involved in finance. Certainly there is this interdependence. We have always had a certain amount of it, but never

before have financial problems been so closely tied to foreign policy

capability.

In that connection I wanted to ask, Mr. Martin, if you have any

recommendations that you could make to the committee at this time?

What about the possibility of including the Chairman of the Federal

Reserve Board as a member of the National Security Council? I do

not mean that you should have to be there on every occasion, but that

where matters relate directly to our financial strength—to the financial

implications of policies at home and abroad—the presence of the Chairman, properly alerted, would seem to me to be helpful and useful.

Mr. MARTIN. I think that the Chairman of the Federal Reserve

Board could occasionally be called in usefully to such a meeting. I

question whether he ought to be a permanent member of the group.

When I was Assistant Secretary of the Treasury a number of years

ago, I served as the then Secretary of the Treasury's alternate on the

National Security Council; and there are a great variety of things

that come up at the NSC that are not really in the sphere of the Federal Reserve. I think that one thing that has impressed me with

President Johnson's Administration, and President Kennedy's likewise, is that the Chairman of the Federal Reserve has been given op-
208 CONDUCT OF NATIONAL SECURITY POLICY

portunities to consult at the top level on a variety of problems to a

greater extent than at any time since I have been m office. I believe

that is partly due to the times that we are living in, and I don't mean

that as a criticism of previous administrations.

Senator JACKSON. No; I understand.

Mr. MARTIN. I think the times have changed, but I think that the

Federal Reserve has been brought in and we have acted. For example,

President Kennedy appointed me as a delegate to the OECD when it

first started out. I attended a couple of meetings. Mr. Heller was

the chairman of that delegation, but he appointed me as a delegate

and I attended those meetings and the Federal Reserve has been

represented.

Mr. Young, who is on my right, is a member of Working Party 3

and has attended every meeting of that organization, so that I believe

we have made some real progress in that direction.

Senator JACKSON. This is very helpful. I was not suggesting

necessarily trying to formalize by statute that you be a full member.

But it seems to me as we get heavily involved in these matters it is

self-evident that it would be wise and useful to commence dealing

with the problems early—rather than late—and not come in on them

when they are so far along that drastic measures have to be taken

and probably at a high cost.

Mr. MARTIN. Right.

Senator RIBICOFF. Could we get the figure on what is the return

to the United States on investments abroad? Did we get that figure?

Mr. MARTIN. The income on private investments was $5 billion.

Senator RIBICOFF. How much?

Mr. MARTIN. $5 billion.

Senator RIBICOFF. Basically, if you are investing $6 billion abroad

and you are bringing $5 billion back to the United States, then we

have a net outflow of only $1 billion. I often am concerned about the

hue and cry that the answer to America's balance-of-payments problem is with capital investments abroad when there is a return to the

United States of $5 billion.

Mr. MARTIN. I couldn't agree with you more on that; when you

think of the fact that we are a very vigorous, high-saving economy,

we should be a capital exporter. Our preeminent position in the

world is such that this is the role we ought to be playing, and it ought

to be a net advantage to us. I believe that we can have some differentials in money and credit conditions in this country and money and

credit conditions in foreign countries because, being a high-saving

country, we have better capital markets than they have and we have

more capital to put out. We want always to bear that in mind.

Senator JACKSON. Senator Metcalf.

Senator METCALF. Mr. Martin

'

I thank you for your statement and

I have been especially intrigued by the colloquy that has gone on between my colleagues. I have very little to add. In your statement

you say that in the long run, domestic and international goals of monetary policy are, in your judgment, identical, and of course I am glad

to hear you say that, but then you go on and say that in an emergency

situation circumstances could arise where elimination of a payments

deficit would require monetary measures of such severity that they
CONDUCT OF NATIONAL SECURITY POLICY 209

would not be appropriate from the point of view of domestic policy

goals.

I take it that you have suggested some of those measures—in your

answers to questions by the chairman and by Senator Simpson—when

you talked about tightening credit. Could you suggest some of the

others that we would have to take in this emergency situation?

Mr. MARTIN. Well, if we got into a real emergency we would have

to tighten money, as I have already indicated. We would have to face

up to our military expenditures abroad. We might have to do something drastically there. We might have to cut our foreign aid drastically. We might have to say to our tourists, "You can't travel abroad

on the scale that you are traveling." That would be a most unfortunate thing, but these are all areas that if we were in a serious crisis

we would have to face up to.

Senator METCALF. Do you anticipate, in view of the recent improvements of our balance of payments that any of these emergency

situations would be taking place in the near future?

Mr. MARTIN. I certainly hope that we will never get into a crisis

that would require us to use emergency measures of this type.

Senator METCALF. I have appreciated your discussion of new techniques and increased flexibility of our international monetary system

and I think that you have made an outstanding contribution to the

work of this committee.

Thank you, Mr. Martin.

Senator JACKSON. Senator Harris?

Senator HARRIS. Yes, sir, Mr. Chairman. I join with our chairman,

Mr. Martin, in commending you for your testimony here and your

presence. One witness before this committee a private nongovernmental witness, stated that the problem of the balance of payments

was brought about primarily because of excessive liquidity here2 that

our liquidity had grown excessively in relationship to the liquidity in

other countries, and that therefore tighter domestic money policy was

the answer.

Do you think that that is a warranted generalization, or is it an

oversimplification, or what?

Mr. MARTIN. I think that this is definitely an oversimplification..

Senator HARRIS. That witness also felt that the alleged bad side effects of a tighter money policy here at home were not fully proved. Do

you have any comments on that?

Mr. MARTIN. This is an area of judgment, Senator, and I think that

we exaggerate frequently the impact of monetary policy on both sides

of the ledger. I think we exaggerate its usefulness as to stimulating

growth and we exaggerate its usefulness as a restraining factor. That

it has some effect I have no question whatever. It is a matter of degree.

But I have felt that by and large we have been following a reasonable

monetary policy and, as I point out in this statement here, I think we

have to get in the middle frequently on some of these things.

I don't think that either side can prove specifically what the degree

of restraint or the degree of stimulus of monetary policy should be at

any given time, and what you have to do is to play down the middle on

this. I think that we have unquestionably had adequate ease in our

situation over the last couple of years, and there have been differences

in the Federal Reserve Board only as to the degree.
210 CONDUCT OF NATIONAL SECURITY POLICY

Senator HARRis. Let me ask you another question—a sort of related

question. Outside this committee it has been suggested that the Federal Deposit Insurance Corporation and the Comptroller of the Currency, and the Federal Reserve Board, or at least their functions,

should be merged. There are two aspects to that suggestion. I am not

now asking you so much about the better regulation and so forth that it

is alleged we would have from that. But what effect do you think that

would have on the ability to change the money policy here at home

through reserve requirements and on our international monetary

affairs and policies?

Mr. MARTIN. I think that the problem you raise of the three agencies

is a very important problem with respect to supervisory activities, but

I think this is a minimal problem in terms of monetary policy.

Senator HARins. In other words, if that were to be done it would

have to be done for domestic reasons, supervisory reasons, rather than

be justified on the basis of international reasons?

Mr. MARTIN. That is right.

Senator HARRIS. I believe that is all I have, Mr. Chairman.

Senator JACKSON. Following up on the earlier question of Senator

Harris, Mr. Martin, do you see any evidence that the economy is

overheating?

Mr. MARTIN. I have been worried about overheating, Senator, as

some of you have noticed from time to time. In the first quarter of

this year we were just on the verge. I used the word "brinkmanship"

before one committee. And then in the second quarter I think we

tapered down and I think it is a period now that we have to watch

very carefully because none of us knows what the impact of the Vietnam buildup is going to be.

I am not particularly worried about the deflationary side of the

economy at the moment, but I am not prepared to say that I think

we are in an inflationary bulge.

Senator JACKSON. It seems to me, and it is healthy, I suppose, that

people automatically assume with the change in events in Vietnam

that we are now entering the thermal phase of the economy, which

could be dangerous. In other words, they make the assumption, which

I think is good in the way of a warning. My impression is that the

figures do not necessarily indicate unusual economic thermal activity,

to get away from that word "overheating." Is that a fair statement?

Mr. MARTIN. I think that is a fair statement, but I don't think any

of us knows what the figures are. That is the point, and I think there

is a tendency in a period like this whenever people take the highest

figure that anyone mentions to assume that that is the figure.

Senator JACKSON. The news seems to be that we are still confronted

with a business cycle. A downturn was to have taken place depending

on when you wanted to pick it, but starting in the first half of 1966

it wasn't going to be as good as the last half of 1965, and then Vietnam

comes along and this sort of throws all the previous projections out

the window and hence the discussion gets thermal.

Mr. MARTIN. That is right.

Senator JACKSON. But in your judgment at least, with the figures

that you have had available to you, there is nothing to indicate as of

this point in time that it is getting out of control or it is warming up

too fast?
CONDUCT OF NATIONAL SECURITY POLICY 211

Mr. MARTIN. It has not gotten out of control yet, but our job is

to watch this and follow it very carefully.

Senator JACKSON. Senator Simpson.

Senator SIMPSON. Thank you, Mr. Chairman.

Does that apply also to the situation in Britain with respect to its

currency?

Mr. MARTIN. Well, the British situation, Senator, is a little different

from ours. They clearly have overheating. There is a lot of talk

now, as you see in the press, about whether the measures taken by the

British will cause a recession, but actually the British situation for some

time has been one of overfull employment, without any question

whatever.

Their unemployment rate has been under 2 percent, running at 11/2

percent, with many more jobs available than there are workers, and

in some specialized areas in Britain it is practically impossible to get

a worker.

Senator SIMPSON. In your June speech you spoke of the necessity

of the stability of our dollar, that we must prove to the world that we

were going to make a permanent approach to this question of international deficit payments. You also said that the President had gone

a pretty good distance with his measures taken February 10, 1965, but

you indicated those are not permanent.

What has the Board done with respect to that situation—to start on

a permanent cure?

Mr. MARTIN. We don't have the answer, Senator. That is the $64

question right at the moment—what is the permanent solution to

this. We have made real progress with these temporary measures,

but we have problems. I think that the international monetary field

has been worked over in the press and every place for a long time, but

you raise the basic question.

If the United Kingdom should devalue we would have trouble.

Senator SIMPSON. Mr. Chairman, that is all I have, except an observation, and perhaps you in your sagacity have already taken care

of this, but the record should show that Mr. Martin is accompanied

here by a group of people on the Board and their positions.

Senator JACKSON. Mr. Martin, would you introduce your two associates?

Mr. MARTIN. Yes, indeed. indeed. Mr. Ralph Young, who is the head of

our International Division, is also our representative, as I mentioned

earlier, in Working Party 3 of the OECD and is the Secretary of

the Federal Open Market Committee, which is the major policymaking

body of the Federal Reserve System.

Mr. Guy E. Noyes, on my left, has been with the Board for some

time and he now has the title of Adviser to the Board.

Senator JACKSON. We welcome you gentlemen to the committee.

Mr. MARTIN. I am sure they would be glad to answer any questions

also.

Senator JACKSON. I would like to ask Mr. Robert Tufts, who is

professor of economics at Oberlin and chief consultant to the committee, to ask some questions at this point. Then I will call on Mr.

Laurel Engberg, consultant to the minority.

Mr. Turrs. Mr. Chairman, I believe the price of gold has dropped

a bit recently in London. Is that right?
212 CONDUCT OF NATIONAL SECURITY POLICY

Mr. MARTIN. The price of gold in London recently got up as high

as $35.19 at one point and now it is down to $35.12.

Mr. Turrs. To what do you attribute this drop?

Mr. MARTIN. The drop, I think, has been largely due to the Russian

purchases of wheat in Canada and the expectations that they will

sell gold to finance those purchases.

MI TUFTS. That is the answer I was expecting, and do you find it

at all disconcerting that the price of gold is strongly influenced by the

state of the weather in the Soviet Union?

Mr. MARTIN. Well, it is a world supply situation, as you know,

Professor, and I think we all recognize today—and this is what we

were talking about when we talk about monetary reform—that the

addition to monetary reserves from the production of gold alone is

not likely to be sufficiently large, nor sufficiently predictable, to take

care of the needs of commerce and industry as we can see them arising ahead.

That is why there is this concern about gold generally. The only

word of caution on that is that there have been a good many times

in the past when we have had exactly the same situation and then

there has been a discovery of gold in California or some place and

it is not completely beyond the realm of possibility that we couldn't

discover gold in Siberia, or China, or some place, or in the Antarctic.

As Senator Jackson knows, they told us there was a lot of gold under

the ice down there, but nobody has been able to get to it yet. This

is the overall problem in gold.

Mr. TUFTS. Would you follow up on that just a little. In planning

for reforms of the international monetary system would you be thinking in terms of reducing our dependence on gold as the basis for

the free world monetary system?

Mr. MARTIN. I think it would be very desirable if we could, but

as I say in my statement, it is an evolutionary operation and we

ought not to reduce our dependence on gold in such a way as to endanger confidence in the gold value of the dollar and thus give people

an incentive to get out of the dollars they hold into gold.

Mr. TUFTS. I ran across a statement by Mr. Alfred Hayes recently

which I would like to quote from.

He said:

The entire European school of thought on international liquidity really

boils down to this: Is there some way we can force the United States to stop

running for an indefinite period large deficits which are causing embarrassingly

large liquidity, and involuntary accruals to liquidity, on the European Continent.

Then I also noticed recently that the German Federal Minister

for Economic Affairs, Mr. Schmiicker, said that the German Government does not see a requirement for additional liquidity in the foreseeable future and he added that, and I quote, "A stricter monetary

discipline was a more important factor.' It has been widely argued

in this country, especially by the academic economists I think, that

there is a shortage of international liquidity, but Mr. Hayes and Mr.

Schmiicker seem to suggest that there may be too much.

Do you have a comment on this?

Mr. MARTIN. There are two schools of thought on it. I myself lean

to the view that the problem at the moment is too much liquidity than

too little. I participated in a discussion of this in Vienna about a
CONDUCT OF NATIONAL SECURITY POLICY 213

year ago and we had an eminent panel. I happened to be chairman

of the meeting, and when the meeting was ended a man summarizing

it said that he could only quote from Mark Twain: "Too much of anything is bad, but too much good whisky is barely enough."

And I don't really think that there is any place in the world today

that you can really point to as being in difficulty because of inability

to get liquidity. I still think there is a longer run problem here. One

of the difficulties with these studies of liquidity is that if you go back

through the last 50 years you will find that there is frequently talk

of "There is plenty of liquidity now, but what are we going to do 5 years

from now ?" So this is a recurring theme.

Senator JACKSON. Right at this point, Mr. Martin, American corporations more and more of course are looking abroad for markets.

Some well-known American corporations outside of the oilfield, where

it has been going on for a long time, look to over half of their net income from markets abroad. There is a growing tendency in the United

States to export capital on the part of our large companies on the

grounds, and it is natural from their point of view that this is where

the great growth opportunities lie, and of course they feel too they

are rendering a service to our country by helping to increase the standard of living and improve free enterprise techniques abroad. Do you

want to comment on that ?

Mr. MARTIN. I am in complete agreement with that and this I think

goes to your earlier question, that I believe we may be carrying too

big a load at the moment for our resources, but ultimately as a high

saving economy we should be a capital exporter.

Senator JACKSON. And you see nothing inconsistent because obviously there are times when you have to cut back some, just the same

as companies may find it difficult to expand at home, and at times they

probably shouldn't be expanding, in light of the overall economic situation.

Mr. MARTIN. Yes. I think that is true, and if I may comment just

a little bit further on this, what has happened is that as the countries

of the Western world have come closer together on collaboration all

of us have tended to preach to the other one medicine that we don't

take ourselves. And what has happened is that most of Western

Europe has been very critical of U.S. monetary policy for the last

year as being too easy and told us that the way we should solve our

balance of payments is to just have a more drastic monetary policy. At

the same time, the surplus countries in Europe have refused to use

fiscal policy to deal with their surplus because that has been politically

difficult for them but they have been willing to use monetary policy.

This makes it more difficult for us because their higher rates tend to

attract funds from this country at a time when we wanted an expansionary policy.

Senator JACKSON. In other words, do not do as I do, but do as

I say.

Mr. MARTIN. As I say.

Senator JACKSON. That's the disclaimer I always used to open my

Sunday school class in Everett, Wash.

Mr. MARTIN. Right.
214 CONDUCT OF NATIONAL SECURITY POLICY

Mr. TUFTS. Returning to this liquidity question, I note in your statement that you say:

There are, in my judgment, three main reasons why a continuation of the

decline in our international liquidity would be extremely harmful for both the

United States and the rest of the free world.

So you see no general shortage of liquidity, but you feel there is a

shortage of U.S. liquidity?

Mr. MARTIN. The reserves of the Western world today are constituted from year to year by the flow of newly mined gold into the existing stock, plus the reserve currencies made available by the United

Kingdom and the United States, either through acquiring gold or

other currencies or just through running a straight deficit. Now that

we are beginning to get our own balance-of-payments into better

equilibrium, there is some talk that, oh, this will be very disastrous for

the entire Western world.

To me this is foolishness because if countries didn't have more

reserves created by this process than they needed, they wouldn't be converting them to gold. Secretary Fowler pointed this up very well in

his recent press conference on the balance of payments, that we have

to get down to the level where the reserves created this way are considered reasonable in relation to the needs.

Now, if we did pursue our balance-of-payments program to the

point where we had such a substantial surplus that there was going to

be another dollar shortage, it seems to me preposterous to believe that

a country that has been as generous as this country has been with the

Marshall plan, and has really put the whole Western world on its

feet through the Marshall plant would not be willing to find some

means of lending reserves or making reserves available for those needs.

But the difference would be that we would be doing it at our initiative

and on our own terms, instead of as presently on the initiative and

the terms of our foreign friends.

We have gotten behind the eight ball in this matter of dealing with

reserves and to me this is a very unhappy situation for the United

States to be in.

Mr. Tuvrs. Taking account of our remaining gold reserves and our

drawing rights on the Fund, swap arrangements and so forth that you

referred to this morning, has our liquidity position really deteriorated

very much?

Mr. MARTIN. Our problem is to maintain it.

Mr. Turrs. In a talk of yours at Rutgers that I read the other day

you said that—and I think you made much the same point this

morning—

The international monetary system must be flexible rather than rigid. In

particular, any change in the international payments system must respect the

monetary sovereignty of individual countries.

But with the holders of money capital in today's world willing to

put their money where it will yield the best return, is there implicit

in this fact some important limitation on monetary sovereignty? Is

any country, even the United States, free to adjust its monetary policy

to meet its narrow national economic objectives?'

Mr. MARTIN. Well, yes; I think there has to be some limit on the

sovereignty there, just ftS I think that maintenance of the gold exchange standard is a responsibility for people who use it. I don't
CONDUCT OF NATIONAL SECURITY POLICY 215

think that a country is justified in using its sovereignty just to convert everything it has into gold because it might think it ran no risk

whatever there. I think there is a responsibility. Now what the

right gold proportions ought to be, is something that has never been

clearly worked out. Some countries have tended to have a larger percentage of gold in relation to their currencies, but central banks didn't

start holding. dollars in addition to gold by any formal agreement.

They started it because it was in their self-interest. Recently some

of them have come to doubt whether it still is in their self-interest, but

the basic point here to me is that I don't believe that the countries

are yet at a point where they will cede sovereignty as distinct from

cooperation.

A jungle sovereignty is completely out. We have developed better

cooperation among central banks and treasuries than we have had

for a good many years, and we ought to develop that. But I don't

believe that anyone of us is yet at the point where we are willing to

turn over to an international institution the ability to create credit

and allocate it on the basis of our individual positions.

We may get to that point. I am perfectly willing as an idealist to

believe that Mr. Triffin was not completely crazy in setting up a plan,

and I think he has probably done a service to all of us for having sugaested this. My own feehng is that if we arrive at this point, it is

about 100 years off.

Mr. Turrs. You feel that some countries have been, shall we say,

unwisely employing their monetary sovereignty to go too deeply in

gold?

Mr. MARTIN. Without having all the facts it is hard to judge, but

looking very closely I think there are some that are taking advantage

of it, yes.

Mr. TUFTS. A good deal of criticism has been directed to France

on this score. Has Western Germany, the Federal Republic, also

been rather heavily going into gold?

Mr. MARTIN. No; I would say that the Bundesbank and the West

Germans have been very cooperative on this. They have been in a

position where they could have taken a great deal more than they

have.

Mr. Turas. Haven't they substantially increased their gold holdings in the last 2 or 3 years?

Mr. MARTIN. They have, but not in relation to other takers.

Mr. Turrs. One final question, sir, and this relates to the question

of cooperation, and coordination, and I refer again to Minister

Schmiicker. In his talk he saw need for a better monetary discipline

in the European Economic Community and thought this community

would necessarily have to conduct a common credit policy in the years

to come.

This implied, he said, that the common volume of credit had to be

controlled according to common criteria, such as the balance-of-payments situation or the cyclical position of the Community. Then he

added that he had no doubt that all of this would lead to a currency

union within the EEC.

I have two questions growing out of that. First, in view of our

close ties with the EEC countries, do you think that we also need

to coordinate our credit policies with those of the EEC in the years

to come? That is the first question.
216 CONDUCT OF NATIONAL SECURITY POLICY

Mr. MARTIN. I think we have to coordinate in the sense that I

don't believe we can have too wide differentials between the two markets. I might ask Mr. Young, who goes to Working Party 3 and

where they have discussed this very point, if he would like to comment on this.

Mr. YOUNG. Certainly, for a stable monetary system over the period

ahead, there is going to need to evolve some means of closer cooperation among the monetary authorities even than we have.today, so

that policies can be adapted one to another as rationally as

we can make them adapt, with a view to keeping the margin of interest levels between them sufficiently consistent, conforming to a

pattern that will not lead to undue capital movements between the industrial countries themselves. The industrial countries should not

be financing one another so much. They should be financing the less

developed countries.

Mr. Tuyrs. My second question is this: Would such a currency

union in Western Europe, if it indeed evolves, create any special

problems for us, or might it actually contribute to a desirable reform

of the international payments system?

Mr. MARTIN. I wouldn't be opposed to a currency union among the

Six, but one of the things that has worried me in a trade way has

been that we have started these groups like the Common Market on

the basis of liberalizing trade; and then we frequently found, as I

think sometimes happens with these currency unions, that the liberalization turns into discrimination against the outside world. I think

what we all should be working toward is a broader liberalization and

that these small groups like EEC should be as temporary as we can

make them.

Mr. Tuyrs. Thank you very much, sir.

Senator JACKSON. Mr. Engberg.

Mr. ENGBERG. Mr. Martin, it is possible that this has been partly

answered by Mr. Young, but I would like to rephrase it slightly.

What, in your opinion, do you see as the possible value and intent of

this conference that has been proposed by Secretary Fowler in regard

to the monetary problems?

Mr. MARTIN. I think Secretary Fowler made it very clear in his

talk at Hot Springs that he had no set procedure or no final goal in

mind in indicating the willingness of the United States to participate

in this conference.

Therefore, some people say, "Why have a conference at all ?" But

I think he has made his position very clear on this. It is obviously

an indication of our willingness to sit down and take a look at the

problem with those people who think that it can be solved by a reform

of the monetary system. Both Secretary Fowler and myself—and

I am in hearty agreement with him on this—want to keep an open

mind on the possibilities of monetary reform, but we have no intention of seeing the dollar downgraded or giving incentives to people

who now hold dollars to convert them into gold. And we recognize

fully that in coming to a table to consult about monetary reform we

don't come with clean hands unless we have equilibrium in our own

balance of payments; and not an equilibrium that lasts for just one

month but one that is going to be secure.
CONDUCT OF NATIONAL SECURITY POLICY 217

We have been running a balance-of-payments deficit far too long.

We have been running it, really—with the exception of one year, 1957,

in the Suez crisis—since 1951. Therefore, we are suspect in the eyes

of the world, and there are too many people who think that we are

coming to this bargaining table in order to find some means of

deferring meeting our own just obligations.

Mr. ENGBERG. Do you see, in his proposal, any support of an implied

concept that the NATO powers—the large powers of Europe—form

too narrow a base? In other words, it should be more nearly a worldwide type of thing rather than trying to build it on the so-called

NATO area?

Mr. MARTIN. I don't think he has reached any decision of any sort

on that. I think he approaches this with a completely open mind.

Mr. ENGBERG. I am always curious about the -U.S.S.R. in regard to

matters of this sort. Do they, as a government, work against the

monetary programs of the United States and Europe, or is there a

tendency to cooperate as much as they can, even though it is informally

done?

Mr. MARTIN. Certainly, I am not an authority on the U.S.S.R., but

I spent a few months over there during the war and I followed their

activities as closely as one can ever since. I am convinced that they

make their moves entirely in terms of their own self-interest. I don't

believe that they have any sense of cooperation whatever. I think

their approach to the sale of gold or to the monetary machinery of

the world is: "What is the best way for us to get a larger share than.

• we now have by entering it." I think theirs is a completely hardboiled, self-interest approach.

Now, I think, in recent years, it is quite interesting that they are

beginning to think in terms, particularly with the Iron Curtain

countries, of the necessity of having an external currency as well as an

internal currency.

They don't have the problems that the rest of us have, because, when

it comes to saving, they don't have to get saving on a voluntary basis.

They can just take it from the people. We have to get saving on a

voluntary basis. When it comes to foreign exchange for sales abroad,

they can as a government determine what they are going to spend and

how they are going to finance it but they are bound, to some extent,

by the payments mechanism of the world, and their gold has been a

very valuable asset to them.

I was in Yakutsk a good many years ago and went up to see one

of their mines there. We have constant arguments, you know, about

whether they have $2 or $4 or $10 billion of gold. The only conclusion,

I think, you can come away with if you followed all of the discussion

on it, is that they have a substantial amount of gold that is available

whenever they think they can use it effectively.

Mr. ENGBERG. You have mentioned in your statement that the

Federal Reserve Board has participated as an observer in many of

these monetary programs and conferences. Would you see any value

in the Federal Reserve Board being legally or officially tied in with

these different groups other than just sitting in as an observer in some

of these areas?

Mr. MARTIN. No I think that the way we do today is perfectly

adequate. As I say, Mr. Young here has been an active member of
218 CONDUCT OF NATIONAL SECURITY POLICY

Working Party 3 and I was designated by President Kennedy as a

delegate to the EPC of the OECD and I think that is sufficient.

I think it is up to the Federal Reserve to speak its piece when it has

a piece to speak.

Mr. ENGBERG. Since we are the nation that we are, being an observer

gives sufficient weight ?

Mr. MARTIN. I would think so.

Mr. ENGBERG. One other question I would like to ask: Senator Ribicoff was talking about the problem of consultation between the Federal

Reserve and the Department of State. How much consultation goes

on between the Federal Reserve and the Congress of the United States

and other departments in regard to monetary policies?

Mr. MARTIN. Well, I think that our appearances before the House

and the Senate are pretty regular and my good friend Mr. Patman

hardly leaves any stone unturned.

Senator JACKSON. That is what you call continuous consultation.

Mr. MARTIN. Continuous consultation.

Mr. ENGBERG. My reason for asking the question was to determine

whether or not the relationship was different when we move into the

domestic monetary program from what Senator RibicoiT was referring to in the international area.

Mr. MARTIN. No; I would say it is about the same.

Mr. ENGBERG. I think that is all, Senator Jackson.

Senator METCALF. Mr. Chairman.

Senator JACKSON. Yes, Senator Metcalf.

Senator METCALF. Mr. Martin, in your response about gold you

suggested that we don't produce enough gold and we might be able

to discover some, but the gold problem is no longer where to find it.

We know where to find it. We have all sorts of mines out West and

in Alaska, where we have gold reserves that are pretty well laid out.

The only trouble is that, at $35 an ounce, we can't mine it profitably.

Isn't there some way that we could subsidize gold without getting

into the international situation and produce more for our reserves here

in America ?

Mr. MARTIN. We have wrestled with this price of gold, as you lmow,

Senator, for a long time. The difficulty in it is that you use gold as

the standard; and if you are going to change the standard periodically, its value as a standard immediately begins to vary. I used to

study under Irving Fisher at Yale, who was a great disciple of the

commodity dollar, and I think we have an obligation to maintain the

value underlying our contractual relationships. I can see what goes

through your mind in terms of increasing production; but in order to

maintain the basis of contractual relationships and not to vary the

standard, I think all of the Western countries that have thought about

it have realized that certainly, under present conditions, we can't

change the price of gold.

Senator METCALF. It would seem to me that we could work out some

way where we could maintain that standard you are talking about in

international affairs, and even in local affairs, and try to encourage the

production of newly mined gold without interference with this $35

an ounce.
CONDUCT OF NATIONAL SECURITY POLICY 219

Mr. MARTIN. There has been some subsidization of gold in some

areas of the world, as you know, and this is one of the things that can

be considered in a broad monetary discussion, but I am unequivocally

with those who are opposed to a change in the price of gold.

Senator METCALF. Thank you very much. -

Senator JACKSON. Mr. Martin, we want to express to you and to your

associates, Mr. Young and Mr. Noyes, our appreciation for your presence here today. Your comments and responses to the various questions have been most helpful to us. I am confident that out of this record we will be able to make some recommendations that I would think

would be useful in the broad international area that we have talked

about today. You have been, as always, very forthright and very effective.

Mr. MARTIN. Very glad to come up any time, Senator. Thank you.

Senator JACKSON. The committee will now be in recess.

(Whereupon, at 12:11 p.m., the subcommittee was recessed to reconvene at the call of the Chair.)

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