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D ear M r.

P re sid e n t:

L a st w eek,

a t th e Q u a d ria d m e e tin g ,

I p resen ted a se t of

g

s t a t is ti c a l ta b le s th a t g iv e a r a t h e r c o m p r e h e n s iv e v ie w o f p r i c e

I
V*
g

and w age d e v e lo p m e n ts s in c e the b e g i n n i n g of 1 9 6 9 .
I d rew

one co n clu sio n f ro m t h i s ev id e n ce , n a m e ly , th a t it

o.
JW

31

i s d ou b tfu l w h e th e r w e h a v e m a d e a n y p r o g r e s s in m o d e r a t i n g th e

2.
p a c e of in flatio n .

T h e f ig u re s on th e b e h a v io r of c o n s u m e r p r i c e s

in M a y r e i n f o r c e m y f e a r s .
I r e a l iz e th at m o r e o p tim is tic in te rp re ta tio n s h a v e b een
m a d e --a n d a re

s t i ll b e in g m a d e ,

th e A d m in is tr a tio n .

by o t h e r o -- b o t h w ith in and o u tsid e

I h a v e trie d h a rd to re a d th e e v id e n ce th e ir w ay;

I fin d th a t I c a n n o t do b o .
In m y j u d g m e n t,

s e m e o f u s a r e co n tin u in g to i n t e r p r e t th e

e c o n o m ic w o rld on th e m o d e l of th e 1 9 4 0 ’ s and 1 9 5 0 's .

In f a c t ,

th e

s t r u c t u r e o f th e e c o n o m y h a s ch a n g e d p ro fo u n d ly s i n c e th e n .
T h e r e w a s a tim e w hen th e o n s e t of a b u s in e s s r e c e s s i o n w a s
ty p ic a lly fo llo w e d in a fe w m o n th s by a d e c lin e in th e p r i c e l e v e l an d

/




T h e P r e s i d e n t - P a g e 2.

in w a g e r a t e s ,

o r a t l e a s t by a m o d e r a ti o n o f th e r i s e .

lo n g e r th e c a s e .

T he b u sin e ss c y c le is still a liv e ,

eo; but its in n er re s p o n se m e c h a n ism ,

T h a t is no

in d e e d to o m u c h

w h ich h a s n e v e r sto o d s till,

is now v e r y d if fe re n t f r o m w h at it w a s e v e n t e a o r tw en ty y e a r 6 a g o .
F a i l u r e to p e r c e i v e th is m a y b e r e s p o n s i b l e f o r s o m e s h o r t ­
c o m in g s in o u r n a tio n a l e c o n o m ic p o lic y .
in fla tio n u n d e r c o n tr o l,

I d oubt if w e w ill b rin g

o r e v e n g e t a s a t i s f a c t o r y e x p a n sio n g oin g,

w i t h o u t a m a j o r s h i f t in e c o n o m i c p o l i c y .
L e t m e tu rn ,
not w o rk in g ?

first,

to th e q u e s tio n :

W h y a r e th e o ld r u l e s

^

W h y is in fla tio n co n tin u in g a t a v ir t u a ll y u n d im in ish e d

r a t e in th e f a c e o f s u b s t a n t i a l u n e m p l o y m e n t o f m e n ,

m ach in ery ,

p lan t an d e q u ip m e n t?
T h e a n s w e r i s to b e fou n d in th e c h a n g e d c h a r a c t e r o f o u r
lab o r and p ro d u ct m a rk e ts .
I.

H e r e a r e a few of th e m :

O u r s u c c e s s in m o d e r a t i n g d o w n tu r n s in e c o n o m i c
a c tiv ity d u rin g th e p o s tw a r p e rio d h a s r e d u c e d th e
c o n c e r n of w o r k e r s o v e r th e p o s s ib ility of p ro lo n g e d
u n e m p lo y m e n t an d th e f e a r s of b u s i n e s s m e n o f a
p ro tra cte d

s lu m p in s a l e s .

W a g e and p r i c e d e c is io n s

a r e n o w b e in g m a d e on th e a s s u m p tio n th a t g o v e r n ­
m e n t a l p o lic y w ill m o v e p r o m p tl y to c h e c k a s l u g g i s h
econom y.

»

Z.

T h e p a s t d e ca d e h a s w itn e ss e d a v a s t g ro w th of
t r a d e u n io n is m in th e p u b lic s e c t o r - - m a i n l y a m o n g
S ta te and lo c a l e m p lo y e e s but a lso F e d e r a l e m p lo y e e s.
W e h a v e h a d in n u m e r a b le i l l e g a l s t r i k e s o f p u b lic
e m p lo y ees,

am o n g th e m th e p o sta l s tr ik e .

Photocopy fro
m Gerald

These

s tr ik e s h av e b een p re p o n d e ra n tly s u c c e s s fu l,

iA t h e

s e n s e th a t th e e m p lo y e e s g o t p re tty m u c h w h at th e y
asked fo r.

In t h i s e n v i r o n m e n t ,

b o th th e t r a d e u n io n

R.
Ford Library




T h e P r e s i d e n t - P a g e 3.

l e a d e r s an d th e r a n k an d f ile h a v e c o m e to b e li e v e
th a t th e g o v e rn m e n t la c k s

e ith e r th e p o w er o r th e

w ill to r e s i s t th e ir d e m a n d s .

They h ave th erefo re

b e c o m e p r o g r e s s i v e l y b o l d e r in p u sh in g w a g e a n d
o th e r d em an d s.
3,

D u rin g th e p a s t d e c a d e ,

w e have also had a v a st

e x p a n sio n of w e lfa r e p r o g r a m s .
are

W hen su b sid ie s

p ro v id e d by g o v e rn m e n t to s t r i k e r s - - a n d th is

i s w h a t w e h a v e b e e n d oin g m o r e an d m o r e - - w o r k e r s
on s t r i k e c a n h o ld o u t l o n g e r .
a r e fu lly a w a r e o f th is ,

E asin ess m an ag ers

and th ey a r e th e r e fo r e le s s

in clin e d to ta k e a s tr ik e th an w a s th e c a s e te n o r
tw en ty y e a r s a g o .

1

4.

T h e L a n d ru m -G riffin A c t h as w eak en ed th e p o w e r
o f t r a d e u n io n l e a d e r s r e l a t i v e to th e r a n k an d file
m e m b e rsh ip . - A s a re s u lt,

Gought

w hen th e l e a d e r s h a v e

m o d e ra te w age se ttle m e n ts,

th ey h a v e f r e ­

q u e n tly b e e n th w a r te d by a r e b e llio u s m e m b e rs h ip #
5.

N o n -u n io n e n te r p r is e s h a v e a lw a y s b een in flu en ced
in t h e i r w a g e p o lic ie s by w h at th e u n io n is e d e s t a b l is h ­
m e n ts w e r e d o in g .

W ith t r a d e u n io n s b e c o m i n g

n ow a d ju s t rr:o re q u ick ly t o - - o r

n on u n ion b u s i n e s s e s
eveu a n ticip a te --th e

w a g e s b e in g s e t in th e u n io n iz e d s e c t o r .

6.

T h e p e r s i s t e n c e o f in fla tio n , w h ic h h a s b e e n ru n n in g
a m ad co u rse sin ce

1964,

h a s by now m a d e p r a c tic a lly

e v e r y p a r tic ip a n t in th e e c o n o m ic p r o c e s s in f la tio n m in d ed .
(a)

W o rk ers

s e e k w a g e i n c r e a s e s th a t w ill

c o m p e n s a te fo r p o st e ffe c ts of in fla tio n on
th e ir r e a l in c o m e s and p ro v id e s o m e i n s u r ­
a n ce a g a in s t fu tu re p ric e a d v a n c e s ,

b esid es

p r o v id in g f o r s o m e i m p r o v e m e n t in th e iv
liv in g s ta n d a r d .

R.

s t r o n g e r an d m o r e in flu e n tia l,

Photocopy from Gerald




T he P r e s i d e n t - P a g e 4.

?

2.

r*
cr




T h e P r e s i d e n t - P a g e 5.

(b)

Eueinesemc-n mark up tlxeir prices evea
when demand is weal?, partly because they
expect their costs to go up, partly because
they fear further erosion of their shrunken
profit margins, and partly because they ex-

I

pect that their competitors--facing similar
problems--will behave similarly.
(c)

Buyers, whether in the consumer or the

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o

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v
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g

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S.
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business sector, have become accustomed
to paying hipher prices, and therefore offer
less resistance to price advances than they
v/ould in an environment of stable price ex­
pectations.
(d)

Businessmen, expecting to pay back in cheaper
dollars, have become more inclined to borrow.
Lenders, having similar expectations with regard
to inflation, tend to hold out for higher interest
rates.

Every sign that inflation may be quickening

leads to expectations of higher interest ratee and
thus reinforces these tendencies.

21

S.

jr

.5




T h e .P r e s id e n t - P a g e 6.

(e)

In s h o r t ,

e v e r y p a r t o f th e d e c is io n -m a k in g

p r o c e s s i a th e b u s in e s s and fin a n c ia l w o rld
i s n ow b e in g s h a p e d by in f la tio n a r y e x p e c t a t io n s ,
e v e n in th e fa .ce o f h e a v y u n e m p l o y m e n t .
W e th u s f a c e a n e n tir e ly n ew e c o n o m ic p r o b l e m - -o n e th at o u r

nation has never before had to face: namely, an inflation feeding on

(J

its e lf a t a tim e of s u b s ta n tia l u n e m p lo y m e n t.

3*
o

J
§*

r

3
G

M u c h o f o u r e c o n o m i c t h i n k i n g ivnd e c o n o m i c p o l i c y h a s n o t

3

a.
y e t c a u g h t up w ith th e c h a n g e s th a t h a v e ta k e n p la c e in th e s t r u c t u r e

I
of our econom y.

V /e c o n t i n u e to r e l y o n m o n e t a r y a n d f i s c a l p o l i c i e s

th a t v /o rk e d r e a s o n a b ly w e ll t e a o r twenty y e a r s a ^ o ,

u n m in d fu l o f

th e profou n d ch a n g e s i a o u r e co n o m ic e n v iro n m e n t.
T h e f i r s t re q u ire m e n t of a new e co n o m ic p o licy is re co g n itio n
o f th e u n e a s in e s s th a t c h a r a c t e r i s e s th e e c o n o m ic w o r ld — an u n e a s in e s s
th a t is slo w in g th e b u s in e s s r e c o v e r y an d w h ich m a y co n tin u e to im p e d e
it th is y e a r and n e x t.
C on su m ers a re

s a v in g a t a h ig h r a t e ,

p a rtly b e c a u s e of e x istin g

u n e m p l o y m e n t a n d p a r t l y b e c a u s e o£ c o n c e r n a b o u t w h a t i n f l a t i o n i s
d oin g t o t h e i r i n c o m e s a n d s a v i n g s .
T h e re is a ls o a m o od of h e sita tio n am on g b u sin e ss m e n .
see th e ir w age co sts a cce le ra tin g ,

They

th e y f e a r th a t th e y w ill b e u n ab le

,

E!

t o r a i s e t h e i r p r i c ©3 s u f f i c i e n t l y t o c o v e r t h e i r h i g h e r c o s t s ,

an d --

w ith p r o f its a l r e a d y s h a r p l y e r o u e d an d i n t e r e s t r a t e s h i g h - - m a n y
h e s ita te ab o u t u n d e rta k in g new in v e s tm e n ts .
th a t b u sin e ss c a p ita l in v e stm e n t,

I t i s i m p o r t a n t to. n o t e

in r e a l t e r m s ,

h a s b e e n d eclin in g

in th e p r e s e n t e c o n o m ic r e c o v e r y ; th is is v e r y u n u su a l f o r th is s ta g e
o f th e b u s in e s s c y c le .
A s you alre a d y know ,

I h u v e r e l u c t a n t l y c o m e to th e c o n c lu s io n

th a t o u r m o n e ta r y an d f is c a l p o lic ie s h a v e not b een w o rk in g a s e x p c c te d ;
th e y h a v e n ot b ro k e n th e b a c k of in fla tio n ,

n o r a r e th ey s tim u la tin g

e co n o m ic a ctiv ity a s e x p e cte d .
W h a t th e e c o n o m y b a s i c a l l y la c k s is
th e fu tu re .

su ffic ie n t co n fid e n c e in

T h e r e is a w id e s p re a d fe e lin y th at w e a r e d riftin g ,

in fla tio n m a y b e g e ttin g out of c o n tr o l.

W o rrie d ,

,

th at

unhappy p eo p le

w ill n o t a c t to e n la r g e t h e i r a c t i v i t y in th e e c o n o m ic a r e n a o r a n y o t h e r .
I a m c o n v in ce d th a t th e r e c t o r a t i c n of co n fid e n ce r e q u i r e s ,
ab o v e e v e ry th in g e ls e ,
in flatio n .

a firm

W ith th is a c h ie v e d ,

to w a r d s fu ll e m p lo y m e n t.

g o v e r n m e n t a l p o l i c y w ith r e g a r d to
our econ om y can m ove forw ard

W ith o u t i t,

we m ay

8t u m b l e - - p e r h a p e

stu m b le a ll th e m o r e if w e t r y a m o r e e x p a n s iv e m o n e ta r y o r
f is c a l p o licy .
T h e r e c e n t n e r v o u s n e s s of fin a n c ia l m a r k e t s su p p lie s a
w arn in g th a t w e m u s t not o v e rlo o k :

e v e ry tim e w e m o r e ,

or

Photocopy from Gerald R. Ford Library




T h e P r e s i d e n t - P a g o 7.




T h e P r e s i d e n t - P a g e S.

a p p e a r to m o v e ,
rise.

in a m o r e " s t i m u l a t i v e d i r e c t i o n ,

N e e d le s s to s a y ,

in te re st ra te s

th is d is c o n c e r tin g b e h a v io r co u ld f r u s t r a t e

o u r h o p e s w ith r e g a r d to r e s i d e n t i a l b u ild in g a n d S ta t e a n d l o c a l
co n stru ctio n .
W hat I reco m m e n d ,
m a la ise ,

a s a w a y o u t of th e p r e s e n t e c o n o m ic

is a stro n g w ag e and p ric e p o licy .

I h a v e a l r e a d y o u tlin e d to y o u a p o s s i b l e p a th f o r s u c h a
p o l i c y * - e m p h a t i c an d p o in te d ja w b o n in g ,
p ric e re v ie w

i

fo llo w ed by a w a g e an d

b o a r d ( p r e f e r a b ly th r o u g h th e i n s t r u m e n t a l i t y o f th e

C a b i n e t C o m m i t t e e o n E c o n o m i c P o l i c y ) ; a n d in t h e e v e n t o f i n ­
su fficie n t s u c c e s s

(w h ich i s now m o r e p r o b a b le th a n it w o u ld h a v e

b e e n a y e a r o r tw o a g o ),

fo llo w e d --p e rh a p s no l a te r th an n e x t

J a n u a r y -- b y . a s ix ? m o n th w a g e and p r i c e f r e e z e .
S o m e s u c h p lan a s th is i s ,

I b e lie v e ,

e s s e n ti a l to c o m e to

g r i p s w ith t h e tv /in p r o b l e m s o f i n f l a t i o n a n d u n e m p l o y m e n t .
A f i r m w a g e and p r i c e p o licy w ill not g e t a t th e b a s ic
p r o b le m --th e ab u se of e co n o m ic p o w e r.

B u t th e k in d o f l e g i s ­

l a t i o n t h a t w o u ld b e n e e d e d w il l n o t b e p a s s e d in t h e n e x t y e a r o r
tw o .

|
1




T h e P r e s i d e n t - P a g e 9.

A lso ,

a firm

w a g e and p r i c e p o licy s u c h a s I 'm

m a y n o t r e s t o r e fu ll p r i c e
a ir,

sta b ility .

B u t it w ill a t l e a s t c l e a r th e

d am p en in fla tio n a ry p sy ch o lo g y ,

h a p s le a v e elb o w r o o m

su g g e stin g

b o ls te r co n fid en ce,

and p e r ­

fo r a m o re stim u la tiv e fis c a l p o licy to h a ste n

th e d e c lin e o f u n e m p lo y m e n t.
L et m e say,

fin ally ,

th a t m y o m is s i o n o f a n y r e f e r e n c e to a

m o r e s tim u la tiv e m o n e ta r y p o licy is d e lib e r a te .
I feel,

M o n e ta ry p o licy ,

h a s d on e its jo b fu lly .
T h e i s s u e s th a t I'v e to u ch ed on in th is le tt e r a r e c l e a r l y of

th e g r e a te s t im p o rta n c e .
of m y th e sis,

If y o u s h o u ld w a n t m e to c l a r i f y a n y p a r t

do le t m e know .
S in ce re ly y o u rs,

A rth u r F .

T h e H o n o r a b le R i c h a r d N ix o n
T h e P r e s i d e a t o f th e U n ite d S ta te s
T h e W h ite H o u se
W a sh in g to n ,

A FB:ccm

D.

C.

B u rn s


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102