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f> 14*. ■ fer ">3 '^rflct^o^. D e c e m b e r 28, 1972 7 D ear M r. P re s id e n t: I a m e n clo sin g a co p y of a p ap er on " T h e P r o b le m of In flatio n ” w h ich I w ill p r e s e n t a t a m eetin g of the A m e r ic a n E c o n o m ic A s s o c ia tio n in T o ro n to th is F r id a y . T h is p a p e r e x p r e s s e s m y deep c o n c e r n th a t in fla tio n a ry p r e s s u r e s m ay s p r e a d and in te n sify in th e co m in g y e a r . If th a t h ap p en s, a s it e a s ily m a y , w e co u ld h a v e a v e r y d ifficu lt situ a tio n in 1 9 7 4 - p e r h a p s , ra p id in flatio n e a r l y in th e y e a r , follow ed by r e c e s s i v e te n d e n c ie s to w a rd th e end of th a t y e a r . I f e e l, m o r e o v e r , th a t d i r e c t c o n tr o ls on p r ic e s and w a g e s can n o t p r a c t i c a l l y b e ex te n d e d f o r m o r e th an one y e a r . If we s u c c e e d in b rin g in g down th e r a t e of in flatio n n e x t y e a r below 2 p e r c e n t, we co u ld g lad ly ann ou nce s u c c e s s and d ro p th e w hole a p p a ra tu s . If w e d o n 't do th a t w e ll, w e p ro b a b ly w ill s t ill h a v e to g iv e up the c o n tr o ls (e x c e p t f o r stan d b y a u th o rity ), b e c a u s e of th e d is to r tio n s , in e q u itie s, and g r ie v a n c e s th a t w ill h a v e a c c u m u la te d by th e n . In s h o r t, a s I s e e i t , w e w ill e ith e r le a v e th e c o n tro ls in a n o th e r y e a r , o r th e y w ill le a v e u s . In flation is th e m o s t c r i t i c a l e co n o m ic p ro b le m th a t w e now f a c e . And th e p ro b le m is o f su ch g r a v ity th a t a b ro a d g o v e rn m e n ta l e ffo rt is re q u ir e d to co p e w ith th e t h r e a t of a new in fla tio n a ry s p i r a l . T he a tta c h e d p a p e r s t a t e s th e is s u e s q u a re ly and su p p o rts y o u r b a s i c p o licy c o m p le te ly . It s a y s a few th in g s w hich th is o r th at s p e c ia l i n t e r e s t g ro u p m a y not like - - but th e y s till need sa y in g . In view of its f a i r l y co m p re h e n s iv e s c o p e , you m a y find it helpful to r e a d th is p a p e r. A s f a r a s m y shop is c o n c e rn e d , I can a s s u r e you th a t m o n e ta ry p o licy w ill be a ca u tio u s - - but a ls o a w illin g - - p a r tn e r in any p r o g r a m d esig n ed to b re a k th e in flatio n s p i r a l . A s you w e ll -2- know, m o n e ta ry p o licy cann ot do the job a lo n e , s in c e any su ch a tte m p t w ould th r e a te n a n o th e r c r e d it cru n c h w ith d is a s tr o u s im p lic a tio n s fo r th e housing in d u stry and o th e r im p o rta n t e le m e n ts of o u r e co n o m y . B u t, a s p a r t o f a stro n g o v e r a ll p r o g r a m of co m b a ttin g in flation , I b e lie v e th a t th e F e d e r a l R e s e r v e S y s te m c a n and w ill m ak e an im p o rta n t co n trib u tio n . A t th e s a m e tim e , 1 w ill be p re p a re d to e n g in e e r su b sta n tia l sh ifts in th e r a t e o f m o n e ta ry e x p a n sio n , depending on th e n ee d s of th e e co n o m y and th e r e s u l t s o b tain ed f r o m th e e n tir e a n ti-in f la tio n a r y p r o g r a m . T h is v e r y fle x ib ility of m o n e ta ry p o licy p ro v id e s so m e a s s u r a n c e th a t su ch a p r o g r a m need not slo w e c o n o m ic exp an sio n unduly o r r i s k a n o th e r p e rio d of r e c e s s i o n . * W ith kind r e g a r d s and e v e r y good w ish f o r th e y e a r a h e a d . S in c e r e ly y o u r s . A rth u r F . B u rn s T h e H o n o rab le R ic h a r d N ixon T h e P r e s i d e n t of th e U nited S ta te s T he W h ite H ouse W a sh in g to n , D. C. E n c lo s u r e C opy to : S e c r e t a r y Shultz
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