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http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  LOS ANGELES, CALIFO RNIA HAROLD WILLIAMS DINN ER 12/16  az_  Collection: Paul A. Volcker Papers Call Number: MC279  Box 13  California — Harold Williams dinner, 1982 December 14; Paul A. Preferred Citation: Los Angeles, II I IT Volcker Papers, Box 13; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c222 and https://fraser.sdouisfed.org/archival/5297  The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Policy on Digitized Collections Digitized collections are made accessible for research purposes. Princeton University has indicated what it knows about the copyrights and rights of privacy, publicity or trademark in its finding aids. However, due to the nature of archival collections, it is not always possible to identify this information. Princeton University is eager to hear from any rights owners, so that it may provide accurate information. When a rights issue needs to be addressed, upon request Princeton University will remove the material from public view while it reviews the claim. Inquiries about this material can be directed to: Seeley G. Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) mudd@princeton.edu   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  AOCGO Arov  fie/14140  c:4414Putertor-  &kitty f rogro-t4271s  icartes of rife.  Aiwek  44041(41461.4%1L ie ow's( Goa4w/lke 0-  " ‘14A D'UIP Ott I am delighted to be here tonight at this dinner  0 1 111 1 '11, 144."(Tote%   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  4,0e  11Qaar.Ing Harold Williamsk -the Human Relations Award 6-f nge es C ap  American Jewish Committee.  is erft-ictefter-tre richly deserved.  During hiS distinguished  careers as a businessman and academic, Harold never neglected reaching out torfhe broader community in a variety of ways. His civic  esponsibilities took on greater intensity during  the per od of his solid leadership of the Securities and E4eange Commission.  That is when I came to know Harold as a forward  looking and thoughtful leader in dealing with the problems of 10'4010i IniartmiroaNA ted46  financial markets/4nd corporate  lie wai Mal yethz  0., 0  governance3 Since leaving the  Ada e.,44,, 4 tioppla-'Tech-44,4010,J  SEC, Harold's career has taken a c  :f -.27 X(10:0,41e , AtiVP/pli! del".°1  llenging new turn, to-t-he  gvti-i 11  dervtopMEET-bI-The J .- .-15aul- Getty  -Trust.  Foundations -- private  it vt $04fttii14  Of Ok #4410/C4kikvelniek.  organizations with public purposes -- have long played a unique innovative role in American society;  the Getty Trust, with  its large resources and strong leadership is bound to make a strong impact in the arts and humanities.  This occasion,  I suspect, is as much a harbinger of accomplishments yet to come as a fitting tribute to the character of Harold Williams. In some correspondence about this dinner, Harold suggested that I might somehow talk about how the realities of today's economic world blended with the concerns of humanitarianism.  I must say, Harold, when I first got your letter I  didn't know quite what to make of it.  &foe'.  Were you notso subtly  -2-  "Ct/11)110%7Hted ktfCvp veiP" tempered\  suggesting that monetary policy needed to be considerations?  y human  Or, were you, perhaps subconsciously,  r•-  viding an opportunity for me to improve my public image?  Well,  r'LL  it tl, pv:when   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  I mentioned the challenge of talking about humanitarianism w Moir ifarlik, 44 wye and central banking to one of my associates, he immediately 0 responded by saying i-t'woHld --Tiekr iv"L ji be a pretty short  speech. Upon further reflection, I decided it wouldn't be such a short speech after all.  The harsh reality of today's world requires  us to give some solid attention to why we are where we are and to where we are going, in terms of enhancing human welfare. When we talk about humarglfare we obviously have to consider a great deal beyond standards of living, emplo  ent  opportunities, productivity, and other measures of material well being.  But it is equally beyond question that a sense  of economic satisfaction, stability, and order is important to us for itself, and without it other values are threatened. And so it is not irrelevant to consider the conduct of economic policy in general, and monetary policy in particular, with group  brought together with a common interest in the larger  values of human society. We are reminded daily of the dislocations, the S. and the uncertainties in the economy today.  Far too many are  unemployed, housing has been depressed, investment is falling, and interest rates remain by historical standards high.  And those  -3-  concerns are not limited to the United States.  Rich countries  and poor, with few exceptions, are bedeviled by recession, unemployment and financial strains. What is less often noted is that these difficulties had been building for quite a long time.  At least for a  decade, routhly encompassing the 1970's, our economic performance had been deteriorating in fundamental ways.  The origins for  this country can be traced back as far as the mid-1960's, 1413-11Q6a.,  flick   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  as a nation, we 11.0.4.fox-a-w444e becdoe infatuated with our apparent economic success.  But no sooner did we congratulate  ourselves on our presumed ability to  the- bubiness  oye4414 to achieve virtual price stability, and to maintain growth than we took it for granted. That, I suppose, is one aspect of our common humanity--  ari'd tor  and in doing so we sieirimeepodAre recognize what was necessary to sustain performance.  One symptom was that we failed to accept  the budgetary consequences of spending for a war and vastly expanded social programs at the same time.  That may have  seemed at the time "socially sensitive", but once we refused to accept financial discipline, the inflationary process got underway, a4444-mitmaja-aeeerrL-ed-i-t---ers-er - iesser-svil.  And once  fairly started, it assumed a momentum of its own. As we came to expect inflation, we built it into our economic arrangements, and anticipated it in our business decisions, in our financial planning, and in our shopping.  We  tended to leverage our capital, to reduce our liquidity, to divert our energies into more speculative and unproductive activities, to take risks in ways that could not be sustained. In the end, we found the growth we had taken for granted was undermined-   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  4  by the end of the 1970's, growth in productivity practically disappeared. It's worth recalling the culmination of the process in late 1979 and early 1980 when concern about inflation, the declining value of the dollar abroad, and the budgetary outlook combined to bring interest rates to levels never before sustained in this country and incited a speculative outbreak in commodity and precious metals prices. As evidence of the corrupting influence of inflation mounted -- and not just on economic behavior but on social goals and cohesion -- a new national policy consensus emerged. The b veatl1 y 0,cce-A7 1.../ need to reorient the economy toward greater price stability, A increased investment, and improved productivity -- in short, toward the preconditions for sustainable economic growth, for higher real incomes, and for expanding employment opportunities. wgrEalaialyaccrted. The Federal Reserve, by necessity, was thrust in the position of assuming the leading edge in the effort to restore price stability.  In a fundamental sense, that was appropriate  and inevitable because no inflation can be stopped without appropriate restraint on the growth of money and credit -- and in the last analysis that is our continuing job.  But it is also  true that job has been made more difficult because complementary approaches are weak or lacking.  Instead of declining, budget  deficits have risen. .a..344-ngs and place extra pressures on .financial- markets.  For a  long while businessmen, workers, and consumers continued to plan on, and act on,   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -5expectations of continuing inflation in their pricing, wage, It and buying decisions--and even now there is,;:keXcism about whether the recent trend toward stability is "for real". And, as the continuing demands for money and credit, public and private, clashed with restrained supplies, interest rates remained very high for month after month, with strong repercussions in the very sectors of the economy -- investment and housing -- important to our future well being. In the circumstances, it is hardly surprising that some have begun to question whether it's all worthwhile -- that somehow there must be an easier "out", or that maybe inflation really was the lesser evil.  Well, I have already implied that the adjustment  could have been eased had budgets been under better control, had the world environment been more favorable, or had the public been less skeptical of the prospects of restoring price stability. But let's not engage in wishful thinking:  In the best of circum-  stances, we should never have anticipated that dealing with ingrained inflation, and rebuilding a base for growth and productivity, would be fast and easy. All that I would argue is that we had no real choice then  or now.  The longer the inflation persist14, the more 714 e 0444%4 tesdomcy 0 ,iit.14eZ04 tair /3 i t T6 difficult it wat4,144-haua_boacac to contr • Nal even more seribu  440ke  cliklow& .  economic and financial repercussions. ,14+-thi3-eountry we have-7-17-1-gtOrtre-Ily, been spared the_aconomic and gortat-disruption_af_really severe continuing iaLIation.  But we had enough by the end of the 1970's  ',vs a taste of the implications.  to iji:V&'  The true challenge for public  policy, it ssems to me, is to restore the conditions for growth in a way consistent with stability -- or in the end we will achieve neither.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -6-  I would also remind you our problems and challenges in that respect are not uniq  Governments around the world have  faced, in greater or lesser degree, inflationary, fiscal, and pro uctiv cope w or  y problems.  They are embarked on similar efforts to  h them, and, as they have done so, growth has been slow  on-existent.  One result has been that recessionary tendencies  ious countries have fed back, one on another. fVfr,frCSext The difficulties in th.a. situation are very real. 4 so are the opportunities.  But  I am convinced that in the end the  current strains and pain will soon give way to renewed growth and prosperity -- if we only have the wit, the wisdom, and the persistence necessary to capitalize on the opportunities before us. The philosophy that has guided monetary policy in recent years has been grounded on those views. As you know, the Federal Reserve has argued consistently for a policy of restrained growth in money and credit.  This policy means exactly that -- restraint  enough to keep up the pressure against inflation; growth enough to support the needs of the economy. That policy of restrained growth in money and credit, I must emphasize, is not the equivalent of a high interest rate policy -- quite the contrary.  I reject entirely the simplified  view that the Federal Reserve over time can itself dictate the level of interest rates in the marketplace.  Those interest rates  reflect the balance of savings and investment, not just in the United States but elsewhere in the world.  They reflect the  hopes and the fears of millions as they decide where to put their money, and how much to borrow. In essence, lending for  -7  any period of time is an act of faith-- fait h, among other things, that interest paid in the years ahead will yield a real return and not lag behind rising prices.  Of course,  monetary policy can influence thoss- decisions and thus the level of interest rates. But it does11101A as much or more by affecting  A  the way we look at the future-- and most espe cially the prospects for stability -- as by the technical manipula tion of bank reserves and the discount rate from day to day. To put it bluntly, over // *Co' )  :aim. achieving  and maintaining the lower level of interest rates we would all like to see must  be a reward for success in dealing  with inflation; without a sense of conviction on that scor e ) attempts to force interest rates lower would in the end be fruitless.  Happily, I believe we can now see evidence that the fundamentals are changing.  We are still some distance from price  stability.  But we can now fairly claim the insidiou s upward oi4LY momentum of inflation has been broken. I judge thatA partly by the fact that the common indices of inflation this year have been running at a third to a half of their earlier peak levels, and pal 1.5=-,h_the.fact that growth in workers compensation in nominal terms has declined to the 6 to 7 percent area, while real wages are benefitting .trom the more rapid di4i11ation on   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -8pritre-rtde.  I also believe we see signs that the hardened  skepticism of financial markets and the public at large about our ability to deal with inflation -- a skepticism bred over years of disappointment and false starts -- is beginning to yield.  One reflection is the rapid decline in long-term  interest rates in recent months -- although they are still very high historically.  And there are hard analytic reasons  to believe that progress toward stability can be maintained during a period of business recovery. Specifically, even if I discount by half what my business friends are telling me, business recovery should be accompanied by substantial gains in productivity. Combined dLe4w with the trend toward more moderate wage and salary increases, A  the result can only be slower growth in unit labor costs, which, I would remind you, are two-thirds of all costs in our economy. .-Purr-ther-tiffie Dtir  xCess capacity a.. unem 1  course, putting downward pressures on prices.  But they cannot be  the answer long-term -- we have to "build-in" the discipline and the expectations that will keep inflation declining as recovery takes hold.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  9  I do not equate our progress against inflation so far  with victory -- far from it.  Concern about inflation is not  something we can afford to turn on or off -- not if we want  to see that progress continue and price stability restored.  And that concern has  straightforward implications for  the broad directions of monetary policy in the period ahead,  although regrettably it does not resolve the myriad of detailed  matters that arise in the formulation and conduct of a specific  policy course.  For instance, while we know that the inflationary process  feeds on excessive growth of money and credit, we are faced  today with particularly difficult problems in judging what is  "excessive."  We know institutional changes are currently ) .5 Z jo ra 4 ) v faNgoos L 104 Y‘G.I thbf;414 f; ok ss s  distorting some of - li-WVa.6.1-tpaltimiNOfts-that we have used as guides  for our actions, apd-44 also know that the current period of  economic uncertainty has been accompanied by exceptional demands  for liquidity.  To hold rigidly to pre-determined targets that   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -10-  could not take these factors into account would risk a significantly greater degree of restraint than intended. For all the problems of communication to a worldwide audience that has become habituated to particular statistical relationships:, we cannot afford, during this sensitive period, to substitute form for substance in our policy-making. But we also must be wary -- we are wary -- of permitting liquidity to build up to the point that, with the passage of time, inflationary forces could again get the upper hand.  The right balance is, in the end, a matter of judgement--  but it is a judgement that has beenand will continue to be, tempered by the lessons of our past inflationary record. What is not a matter of judgement but a hard fact is that the inflationary dangers and the interest rate outlook is greatly complicated by our national fiscal position.  In the  fiscal year just ended, the Federal deficit was $111 billion, and it will probably be weeh more than 50 percent higher in the current fiscal year. In assessing the impact of that huge current defficit around 5 percent of the GNP -- it is important to distinguish between the "cyclical" and the "structural" components.  The  "cyclical" component, as the term implies, relates to the effect of current business   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -11-  conditions on the Federal budget.  High unemployment cuts  revenues and increases spending, temporarily enlarging the deficit.  As the economy recovers, that cyclical element  will diminish. It is tempting to suggest that the "budget problem" can be dealt with as a passive byproduct of recovery -- and I am afraid some in Washington are in a mood where they may not  fkkr  do  r  h-'b  s  be above temptation, gut it.—+.5-VIZEIZInt1ng. A  The hard  fact is that, as things now stand, the deficit will remain close to current levels even as the recession passes.  As the  "cyclical" portion of the deficit recedes, we will face a growing "structural" deficit -- that is the imbalance that would remain even when the economy is operating at a high level, w+tti—rnauced--infirat-ilmr.  I know of no competent budget analyst  who comes to any different conclusion.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -12-  Left unattended, that situation poses a strong potential  for a clash between the need to finance the deficit and the  rising financial requirements for housing and for the business  aS investment needed to support dllme*.ing growth iAgi productivity.  In the end, all those needs have to be supplied by savings --  and there simply isn't enough to go around. The pr^blem can in no sense be solved by  monetary policy.  The Federal Reserve can create money and  liquidity, but not savings.  Simply pumping out more money  and liquidity, year after year, to meet the needs of the  government would only risk renewed inflation.  Sooner or later --  and it's all too likely to be sooner -- investors would be  driven away from the long-term markets once again, and savings  would be diverted into inflation hedges.  The alternative of  the government bidding away a limited supply of credit from  the homebuyer or businessman is hardly more inviting -- and  would also be reflected in high real interest rates.  Under-  standably, concern about one or the other of those "scenarios"   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -13-  feeds back into today's markets, tending to keep interest  rates higher than they would otherwise be.  There was meaningful progress on this front in the  passage of tax and spending legislation last summer.  Living and  working in Washington, and at one remove conscious of the pressures converging on your elected representatives, I am well aware that further progress will not come easily.  All I  will argue is that it is essential to sustained recovery.  Try--repsrat-t-hrr-iim-Trert. -600.,c.,212 . 9 .2E2fd about the  "cyclical" component of the deficit -- which will acc  half or more of this year's imbalance.  that portion might be viewed as almost  Indeed  for  analytically,  nign, helping to  support economic activity and smog hing the adjustment to a  more stable economic path.  are relatively weak, a  hen private demands for credit  the economy is in recession, large  drftc-its can be financed.  'arrt-t-he underlying structural deficit i  •(--  AVce.,;  1.0.ornwillgt t7TT-IMMITTIM7,77671 :71:11 -7-6I-ard  ,111-.±984, in 1985, and in the yeat, s  . 0/6/i"cars)  ur economic progress  No resolution in  the Congress about interest rates, no different targets for  monetary growth, no change in the structure of the Federal -Reserve CvotRTC.. te foAd4 ri4ey can swilo&titaktimicaor savings, educe the structural budget deficits  ctittsvie4 those savAqs.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -14-  If we are concerned about money for investmentC : ite5 ;:oe:::4/17"4 ifo'dfer to be hit head on. 7 et• e c1 e 411_,Law-PICTTre-faS age57"-!"-Er3-±"treled—tre  broad parallels  that. cm-±'t between our own economic situation and that in many MA, k Ikc v Stick ceIi rk e4•• cwc. °age' other countries, andambc risks these problems may aggravate A each other.  The problems of the rest of the industrialized  world and their policy approaches are so similar to ours that I need not linger over the analysis.  What does warrant more  elaboration tonight -- partly because it is without precedent on such a scale in postwar experience  is the need for  practical programs of economic and financial adjustment in much of the developing world, where the contrast between human needs and economic reality is so stark. The developing countries, for all their problems, have been a growing, dynamic feature of the world economy. Even during the 1970's, in the face of enormously increased   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -15-  energy prices and slower growth in the industrialized world, they maintained strong forward momentum.  developed.  The middle classes  Despite enormous population growth, some inroads  began to be made on poverty.  The economic base for more  O, /SL 4..mi stable and moreA democratic political processes was developing.  That progress was marred, however, by increasingly large  external payments problems.  The current account deficits of  all non=OPEC developing countries soared to $75 billion or so after the second oil crisis and continued at that rate into this year.  For a time, those deficits were supported by a vast expansion in international credit.  Some of that credit was  official -- relatively inexpensive and long-term.  But an  increasingly large chunk was from commercial banks around the world. The process of rapid debt accumulation by the developing countries could not be sustained indefinitely. adaritit—iTI—reTE-Erciii"to --tnn—rapar-±  benr---t-6-1-7171-a-tAtios  Z4Nr—tiow_Jaharzeive-r-s,  yLii selnfliele- that debt rose.  Lending  of loans to capital or assets rising significantly.  -16-  jos  C  eev7 kvt.q_i To A  -17-‘tt.er#11445-r47  N:7111  _1  544  TheA problem was brought to a hea)117i—a- combination of circumstances. A  Sharply higher interest rates increased debt service requirements rapidly.  The  widespread recession in the industrialized countries and the declining level of real world trade restricted markets for the exports of the developing countries. Declining commodity prices put further pressure on many developing countries still dependent on commodity exports for a large portion of their foreign exchange  earnings.  Political problems, particularly in Eastern Europe, raised further  doubts in the minds of lenders. The result is that in recent months we have had to come to grips with an cle urgent need for what economists euphapistically call adjustment.  At the same time,  1V.IC we need to assure residual financing needs of a number of developing countries can A  be met.  And both the adjustment and the financing should be developed in a way that  can help lay a base for sustaining future growth.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -17Success in the first instance will fundamentally rest on something only the borrowing countries can provide -- a demonstration that they can, in fact, take measures to increase the productivity of their own economies and to close the gap in their external payments.  In the short run, the necessary measures may unavoidably  stop internal growth for a while.  But the more orderly and effective the adjustment/7k._  vd  A the more quickly confidence can be restored resumed and sustained.  the more rapidly growth can be  At that point, our own export markets and those of other  industrialized countries will benefit and any lingering questions about the possible  impact on international banks will be put to rest. It is precisely for these reasons that there exists the strongest kind of community of interest among borrowers and lenders, among governments and private businesses, and among the developing and industrialized countries, in working together to find effective answers to the evident problems. critical role to play -- soletimes together, and sometimes separately.  What  is especially important is that all these participants achieve a high degree of common understanding, recognizing the potentialities and limitations of each for action.  On the basis of that understanding, we can then deal forcefully  and effectively with the problems at hand.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -17AI do not underestimate the difficulties of the internal a • stments for relatively poor countries, often with rapidly growing populations and beset by policial problems.  But we are also fortunate that the principal countries  involved have important economic strengths, demonstrated growth potential, and able economic officials who understand the needs and requirements of the situation. Current  uidity problems need not be -- and for the major borrowers they are not --  symptomatic of inherent economic weakness.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -1S Here in Los Angeles these abstractions take on perhaps a little more concreteness in the case of Mexico.  As you know, Mexico and the IMF have hammered  out a working agreement on needed policy adjustments and a comprehensive program is being assembled to assure necessary external financing.  Taken togther, these  steps have the capacity to stabilize the situation and to begin to restore the funS.mental health of an economy that sustains 72 million of our neighbors.  The  Southwest shares a 2,000 mile border with Mexico, and Mexico is the third largest export market for the United States, accounting for $18 billion in sales in 1981.  Add to this our human, cultural and financial ties, and the orderly  functioning of the Mexican economy has obvious significance to us all. While the case of Mexico may seem more concrete to us because of our proximity, other countries must cope with similar problems, with similar human dimensions.  For instance, Argentina, Brazil, and Yugoslavia in varying degree  all face adjustment needs and we and the international community at large have a suI stantial interest in that process proceeding in as orderly and expeditious way as possible; each of those countries are in negotiation with the IMF, and each has called upon, or requested, interim financing from the United States and others, public or private. The fact is that borrowing countries, even with the strongest kind keefOGeo/OZ of steps to get their own houses in order, will require some oes+sitterTgoing  http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -19-  financial support to permit their economies to continue functioning smoothly.  Agreement with the IMF brings with it the availability  of certain amounts of medium-term financing, usually over a threeyear period.  But that may not be adequate, particularly in the  early stages of the transition.  The importance of the Fund lies as  much or more in the fact that -- as a dispassionate and impartial  international institution -- its imprimatur on a borrowing  country's program will reinforce the confidence of other lenders,  paving the way for additional extensions of official and private credit that may be needed to assure that the adjustment program can be  carried through to fruition.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -20-  Again to take a case in point, the new leadership in Mexico has undertaken a rigorous program to implement the plans agreed with the IMF in the last weeks of the previous government. Some of those measures may appear harsh in terms of budgetary discipline, reduced subsidies, and restraint on growth.  But  they also offer promise of a stronger economy, with sustainable growth, over a longer period.  Without the framework of internal  discipline and external financing, surely the adjustments for Mexico would be even more severe, and without the same prospects for recovery and future growth.  The reasons are evident:  within  the framework of the new program, creditors can resume lending with more confidence, exporters can resume shipments of essenti al good 1A distortions and dislocations in the internal economy can be reduced.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -21-  the need for internal adjustment by  latazLow-ing countries as an essential first step, I also recognize  AOLL nose that the ultimate success of tr efforts will also be dependent A on an expanding world economy.  One threat is that the worldwide  recession has brought new pressures for protectionism, here and elsewhere.  esi  I understand these pressures -- we all do. • -4-411114e4rate—teriTt5---  1441m-ea-se  to save jobs and to save companies.  But the trouble is that protectionism is a game everyone can play -and in the end it will not save jobs; it will lose them as  growth and export markets are disrupted.  .1.--Trri-gitta-petrr-nt There  is no logic in suggesting to developing countries that they make  their economies more productive and competitive in export markets --  and counting on those exports to support and strengthen their pje sato c G00107$0 financial position  exports.  only to refuse tha;m(Markets for t.4.soo oame  -22-  Economic recovery, of course, wotild relieve these and  I: S  pressures in the most constructive way.  It would permit  developing and industrialized countries alike to pursue the  necessary adjustments in a favorable environment.  adjustment efforts -- involving a temporary period  no  •of  Indeed,  slow or  rowth -- appropriate to an individual country won't work  as planned if many countries are simultaneously in the same  position.  We cannot all reduce imports and increase exports  together -- not unless we are trading with the moon.  Obviously, we would all like the  expansion.  ..S lead the way to  I share the general view that recovery in the United  States will be evident through 1983, although at a moderate rate  of speed -- probably slower than during previous post-recession  years.  I know that unambiguous evidence that the recovery is  already underway is still absent.  But encouraging signs are  evident in some rise in housing, in the improved liquidity and  wealth and reduced debt positions of consumers, and in surveys  reporting that attitudes •and orders may be stabilizing or  improving, even if from unsatisfactory levels.  The Federal  •••••••••'...  deficit, while fraught with danger for the future, is of course  http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -23-  providing massive support for incomes at present.  The rather  dramatic declines in interest rates in the latter half of this  year, albeit to levels that are still high by historical standards,  are relieving some of the financial stress and providing support  for some expanded activity.  The temptation is to pull out all the stops in an effort  to hasten the recovery process.  44t14--- contrary to the impressions  2.1.—some—==—EFITher the Federal Reserve nor any other policy body /5vr And beware of the effort to  ecall  y itself achieve that result. 0 V•kTo‘ viC4-4 try at all costs," oblivious to the danger of reigniting inflation,  ..er-lairf undermining the progress toward cost control and productivity.  To do so would simply perpetuate and aggravate the pattern of the id'', dope riA,", , ' 7CivcAri.44 hiapktfoi, 1407 Lowiie $147ev,i7  —aka!  past.  What is crucially important -- particularly in the light  of the experience of recent years -- is that we set the stage  for an expansion that can be sustained over a long period,  bringing with it strong gains in productivity and investment  and lasting improvement in employment.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -24-  I have emphasized the importance of maintaining progress  toward price stability to that outlook.  I am convinced that  with disciplined monetary and fiscal policies, we can sustain  that progress.  Mort I also know there are obstacles, present  and potential -- a perpetuation of huge deficits, a closing of our markets to competition, a refusal to support the efforts of other countries to adjust -- that would 441 work against recovery. Fra 7410 C4.7i If we turn back those tempa.t.i.ens, as I believe we will, then we will indeed have set the stage for turning the 1980's into the mirror image of the 1970's -- a decade in which doubts and uncertainties give way to renewed confidence and vigor.  I would  like to think, Harold, that the improvement in economic welfare I have been talking about tonight will be part of the continuing struggle to advance tripe human welfare -- the struggle that you have joined in so many dimensions in your own career.  * * * * * * * * *  CortA--, A  THE J. PAUL GETTY TRUST  •  :34 1875 Century Park East, Suite 2300  Harold M. Williams President and Chief Executive Officer   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Los Angeles, California 90067 Area Code(213)277-9188  November 1, 1982  The Honorable Paul A. Volcker Chairman, Board of Governors Federal Reserve System Washington, D.C. Dear Paul: I am honored, delighted and indebted to you for your willingness to speak in Los Angeles on December 14. The event as you know is sponsored by the American Jewish Committee and honors me with their Los Angeles Chapter Annual Human Relations Award. It will bring together a large cross section of the private sector and the business community at a black tie dinner in the Grand Ballroom at The Beverly Wilshire Hotel, with cocktails at 6:30 pm and dinner at 7:30 pm. Given the nature of the evening it was my sense that the speaker should be speaking to a subject which brings together the humanitarianism and the reality of today's world. Certainly our ability to foster humanitarian activities and deal with the kinds of social issues which determine the quality of our humane society are impacted greatly and directly by the health of our economy, both in terms of what it is and the confidence in its future. It is always much easier to address social causes and humanitarian needs when the economic pie is growing. Once it is static or shrinking, peoples' generosity diminishes and indeed competition sets in for shares of the diminishing resources. Certainly inflation itself is a socially destructive force, not only eroding economic resources but destroying confidence in the future.  •   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  The Honorable Paul Volcker November 1, 1982 Page Two  Therefore the urgency of re-establishing a sound economy is a center piece to our future as a humane society. The role of the Board in this context is obviously a key one and your vision is one that we need to hear. Again my deep appreciation, Paul for your willingness to do this. Please let me know if there is anything I can do to make your stay here a comfortable one. If you have time on the following day to visit the museum or if you have time and interest in meeting with any individuals or groups of people in this area, I would be pleased to arrange it. W  mest  Harol HMW:bam  ards,  M. Williams   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  December 6, 1982  Mr. John J. -lanes President Federal Reserve Bank of San Francisco San Francisco, California Dear John: I appreciate your note and research on my Los Angele.. visit. Sincerely,  PAV:ccm  • •  FEDERAL RESEInTE BANK OF SAN FRANCISCO SAN FRANCISCO, CALIFORNIA 94120 ISIZ Orr November 30, 1982 JoHN J. BALLES PRESIDENT  The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20551 Dear Paul: Regarding your scheduled speech in Los Angeles on December 14 to the American Jewish Congress, honoring Harold Williams, I am sorry that neither John Williams nor I will be able to attend. I will be at a Presidents' Conference, and John will be at a meeting of the First Vice Presidents' Conference. However, I understand that some of our directors and officers plan on being there, including Caroline Ahmanson, Chairman of the Head Office Board; Bill Tooley, member of the L.A. Branch Board, and Dick Dunn, Senior Vice President in charge of the Los Angeles Branch. Additionally, I understand that you have a breakfast meeting scheduled with the Los Angeles Times on December 15. You or Joe Coyne might possibly be interested in the attached memorandum to me from our media relations people, dealing with the editorial inclinations of the Los Angles Times, particularly with respect to the Federal Reserve System. Best personal regards, Sincerely,  9r4v-John J. Balles President  Attachment   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  FA)ERAE RESERVE BANK OF SAN FRANCISCO SAN FRANCISCO, CAI,IFORNIA 94120  November 8, 1982 MEMORANDUM TO  JOHN J. 3ALL0, President  THROUGH  GENE DROSSEL, Vice Preside5t ,L Public Information  FROM  RON SUPINSKI, Manager of Public and Media Relations Public Information  SUBJECT  EDITORIAL INCLINATIONS OF THE LOS ANGELES TIMES  As the enclosed editorials from the Los Angeles Times (starting in July 1982 and ending November 7) indicate, the newspaper's editorial writers share similar concerns with Chairman Volcker regarding ways to lift the nation out of its recessionary doldrums. Nowhere is there sharp criticism or hostility toward Federal Reserve policy. In fact, you can see that the conclusions of many of the editorials share a common thread with utterances of the Chairman. For instance, in the next-to-last paragraph of the August 22 editorial: "To keep the deficits under control, Congress and the White House may be forced to make sharp reductions in defense spending and in the growth of Social Security benefits and other entitlement programs later this year." In the same August 22 editorial, the fourth paragraph alludes to "hope for better times" with these words about the Chairman: "The reason for hope lies chiefly in the fact that, although Paul Volcker is stubborn, he is not stupid. Volcker set out in 1979 to pursue a tight-money IS licy designed to break inflation. He persisted in the policy even after it was obvious that the combination Sf tight money and the White House's fling with massive supply-side tax cuts would produce deficits big enough tS smother the economy altogether by driving interest rates sky high. In recent weeks, the Fed has allowed the money supply to grow faster and has cut its interest rates to encourage banks to cut their own rates. So far, the new policy is working...." In its editorial of October 13 ("The Message From Wall Street"), the Los Angeles Times indicates that the ball now seems to be in the backyard of the Federal Reserve by stating in the next-to-last paragraph:  2.  "The Federal Reserve Board seems ready to keep forcing interest rates down as long as Congress and the White House avoid making any more sudden moves such as last year's massive tax cuts and less massive budget cuts." And in the last editorial of last Sunday (November 7), the writer definitely tries to pin the Federal Reserve within its own 20-yard line Key paragraphs here are found towards by stating "The Fed Is the Key." the end of the editorial: "And once again it is obvious that the one institution with any real control over the future of the economy is the Federal Reserve System. Nothing that Congress or the President can do now will influence the economy as much as a continued effort by the Federal REserve to get interest rates down to the point where consumers are tempted to finance major purchases. (and jumping to the last paragraph...) In both cases, the decisions that the Federal Reserve will make in coming weeks about money supply and the discount rate -- the interest that the central bank charges on loans that it makes to member banks -- will be far more significant than anything that happened in last week's election." I also chatted on the phone with Dick Dunn, officer in charge of the Los Angeles branch and an avid reader of Times' editorials. He concludes that the newspaper's editorials that refer to the Fed's involvement in the nation's economic problems are nearly always open, democratic and without bias. Mr. Dunn maintains the tone of the editorials seldom lays the blame in this area entirely on the Fed, but rather asks for some nominal change of course by all major parties involved such as the White House, Congress and the Federal Reserve.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  It is evident that the five enclosed editorials bear out what Dick Dunn is saying. (I apologize for the small type reproductions of the earlier editorials this summer, but this material was received from the San Francisco Library System by messenger and we had no control over its form.) Gene Drossel and I have talked over the matter of Mr. Volcker appearing before the LA Times" editorial board at a breakfast session on December 15, and neither of us feel it will turn into a "witch hunt" or grilling in the third degree. Gene has participated in one of these sessions a couple of years ago with the CEO of Kaiser Steel and says the sessions are conducted in a friendly and cordial atmosphere in which the visitor is placed as much at ease as possible. The session takes the appearance of informal breakfast chatter among businessmen.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  3. However, Gene cautions that the Chairman should clear the groundrules for the session in advance. In other words, it probably should be agreed in advance that the session is for "background" purposes only, and no quotation, direct or indirect, should be attributed in print to the But if Mr. Volcker wants to amend the groundrules in some way, Chairman. he should be left with that prerogative. By the way, Gene Drossel has been contact recently with John Lawrence, senior economics editor of the LA Times. Lawrence says he will be a member of the editorial board that will have breakfast with Mr. Volcker on December 15. Lawrence expects "9 or 10" individuals to attend the breakfast and briefing session, including possibly Tom Johnson, the publisher and CEO of the newspaper; Paul Steiger, the business-financial editor, and other editorial page editors and editorial writers.  I'  Ron Supinski encls: 5 editorials  Removal Notice The item(s) identified below have been removed in accordance with FRASER's policy on handling sensitive information in digitization projects due to copyright protections.  Citation Information Document Type: Newspaper articles Citations:  Number of Pages Removed: 4  Los Angeles Times. "The Fed Is the Key." November 7, 1982. Los Angeles Times. "The Message From Wall Street." October 13, 1982. Los Angeles Times. "Bum Steer." July 21, 1982. Los Angeles Times. "Luck Is Not Enough." July 29, 1982.  Federal Reserve Bank of St. Louis  https://fraser.stlouisfed.org  or  . From the Research Library  Los Angeles Times, August 22, 1982  After the Storm --After a frenzied week of thunder and enlightenment. Congress and the White House are moving back toward.the middle of the road on economic • • policy. Vitiaving agreed to raise tax collections—and in the process cut the deficit—by $983 billion. President Reagan and Congress also have fled Washington. the better to enjoy the calm after Shen. ftorm. ••?, For the time being, both have done all in their power to pull the economy out of its slump. Some economists worry that Reagan's new coalition of Republicans and Democrats moved too slowly and that there is worse to come,but there also is reason . lo hope for better times. 11The reason for hope lies chiefly in the fact that. although Paul Volcker. chairman of the Federal Reserve Board.IS stubborn,he is not stupid. '.11/.01cker set out in 1979 to pursue a tight-money policy designed to break inflation. He persisted in .the policy even -after it was obvious that the combination of tight moniy and the White House's -fling with massive supply-side tax cuts would produce deficits big enough to smother the economy -.Altogether by driving interest rates sky'high. • In recent weeks,the Fed has allowed the money suptily to grow faster and has cut its interest rates .to encourage banks to cut their own rates. $o far,the new policy IS working The prime rate fell to 13.5% last week after months of hovering around 16%. The actions that Reagan and Congress took last week should make it easier for Volcker to push interest rates down even further.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Volcker has insisted that he needed a discernible • -trend toward smaller deficits before he could . 'safety ease credit without risking another period of J t high inflation. • By raising taxes and promising further cuts in domestic . programs. Congress gave Volcker' enough of what he wanted so that he can and , should keep chipping away at interest rates. ".. &lost economists believe that consumers will start buying enough automobiles and homes and other goods to turn the economy around if interest , rates get to 10% or 11%; those levels should be - Volcker's goal. A recovery would take care-of some of the deli- at in and of itself. Each 1% drop in unemployment. • for example. cuts $30 billion from the deficit by .! •-raising tax -income and reducing payments mr-; welfare and unemployment insurance. :Even with the new tax package, the federal deficit would probably run $150 billion for each .4 of ' the next three years if the economy.does no better -1- -than scrape along the bottom. ••• To keep the deficits under control. Congress the White House may be forced to -snake and j sharp - :reductions in defense spending and in the growth of Social Security benefits and other enutlement . programs later this year. - Those are decisions that can be put off until later this year. when it will be easier to tell whether the 4, present mix of policies is producing results. • In the meantime. the President at his Santa ,Barbara ranch and Congress in its home distncts are enutled to enjoy the calm after their storm.  Part IV, P. 4  The GAmerican lewish Committee   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  LOS ANGELES CHAPTER • Suite 315, 6505 Wilshire Blvd. • Los Angeles, Calif. 90048 • (213) 655-7071  November 18, 1982  Mr. Paul Volcker Chairman of the Board of Governors Federal Reserve System Constitution Avenue Between 20 and 21 Streets, N.W. Washington, D. C. Dear Mr. Volcker: Enclosed is a copy of our invitation to the Award Dinner honoring Harold Williams on Tuesday, December 14, 1982. The American Jewish Committee looks forward with great anticipation to your visit and the opportunity of having you as our guest speaker for this important occasion. May I please hear from you regarding your travel plans and time of arrival. Also, the privilege of arranging your hotel reservations your time of arrival and departure. If it would be more convenient for your secretary to call me regarding the above, my telephone number is (213) 655-7071. Sincerely yours  Harry Gube an Director of Resource and Development For The Western Region HG:hr Encl. cc: Harold Williams  I am delighted to be here tonight at this dinner honoring Harold Williams with the Human Relations Award of the Los Angeles Chapter of the American Jewish Committee. It is an honor he richly deserves.  During his distinguished  careers as a businessman and academic, Harold never neglected reaching out to the broader community in a variety of ways. His civic responsibilities took on greater intensity during the period of his solid leadership of the Securities and Tkir(s i Exchange CommissioniAthen I came to know Harold as a forward looking and thoughtful leader in dealing with the problems of financial markets and corporate governance.  Since leaving the  SEC, Harold's career has taken a challenging new turn, to the development of the J. Paul Getty Trust.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Foundations -- private  organizations with public purposes -- have long played a unique innovative role in American society, tool the Getty Trust, with 5)-owy 1cat1fvf4,fi, pe5ovgce 5 its large revenues and broad carp.ase-si is bound to make a large sTroct This occasion, and—eon-strue impact  ' ,11 4.2,tt,=.14:!  I suspect, is as much a harbinger of accomplishments yet to come as a fitting tribute to the character of Harold Williams. In some correspondence about this dinner, Harold suggested that I might somehow talk about how the realities of today's economic world blended with the concerns of humanitarianism.  I must say, Harold, when I first got your letter I  didn't know quite what to make of it.  Were you notso subtly   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -2-  suggesting that monetary policy needed to be tempered by human considerations?  Or, were you, perhaps subconsciously, pro-  viding an opportunity for me to improve my public image?  Well,  when I mentioned the challenge of talking about humanitarianism and central banking to one of my associates, w4t4eillt-batting an ht  e ekctTe  ue he, responded by saying it would probably be a pretty short speech. Upon further reflection, I decided it wouldn't be such 0.44PaoThe harsh reality of today's world requires a short speech QV )) 70 us to give some solid attention to why we are'herand4 where we are going, in terms of enhancing human welfare. When we talk about human welfare we obviously have to consider a great deal beyond standards of living, employment opportunities, productivity, and other measures of material well being.  But it is equally beyond question that a sense  of economic satisfaction, stability, and order is important to us for itself, and without it other values are threatened. And so it is not irrelevant to consider the conduct of economic policy in general, and monetary policy in particular, with_ groups brought together with a coinmon interest in the larger values of human society. We are reminded daily of the dislocations, the pain, and the uncertaintx in the economy today.  Far too many are  unemployed, housing has been depressed, investment is falling,  ii,v,„„), and interest rates remain by ma-ter-I-al standards high.  And those  1 3-  concerns are not limited to the United States.  Rich countries  and poor, with few exceptions, are bedeviled by recession, unemployment, and financial strains. What is less often noted is that these difficulties  4:01r had been building for quite a long time.  Er-inore=than a  decade, roughly encompassing the 1970's, our economic performance had been deteriorating in fundamental ways.  The origins for  this country can be traced back at leaat as far as the mid1960's, when, as a nation, we had for awhile become infatuated with our apparent economic success.  But no sooner did we  congratulate ourselves on our presumed ability to conquer the business cycle, to achieve virtual price stability, and to ii-4474ed. 4trz1-7:7r-rtg.,‘of--‘‘,rie.-4 7- 00 tT r maintain growth h.* 1ft--atmwas necessar to sus amn oOk c-oP 014 ogigh/ — CtAt A • la Y1240t performance. One important system was that we failed  dopez  alc  ff_i f  14470  accept the budgetary consequences of spending for a war and vastly expanded social programs at the same time.  AQ-44 once we  refused to accept financial discipline the inflationdly process  tfiniu'Yu„d' Acioe- csf":„,c  74%  0,atA144..6oi  got underway, trudOldnce fairly started assumed a momentum of its )/\ 1 /fat -) c.oy if a ic (ad NCMy own.  II  As we came to expect inflation, we built it into our economic arrangements, and anticipated it in our business decisions, in our financial planning, and in our shopping. We tended to leverage our capital, to reduce our liquidity, to divert our energies into more speculative and unproductive activities  to take risks in ways that could not be sustained.  and jn the end,vthe growth we had taken for granted was undermined,   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -4  by the end of the 1970's, growth in productivity level practically disappeared. It's worth recalling the symbol-ic culmination of the process in late 1979 and early 1980 when concern about inflation, the declining value of the dollar abroad, and the budgetary outlook combined to bring interest rates to levels never before sustained in this country and incited a speculative outbreaks in commodity and precious metals prices. As evidence of the corrupting influence of inflation mounted -- and not just on economic behavior but on social goals and cohesion -- a national policy consensus emerged.on the need to reorient the economy toward greater price stability,   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  increased investment, and improved productivity -- in short, toward the preconditions for sustainable economic growth, for higher real incomes, and for expanding employment opportunities.The Federal Reserve, by necessity, was thrust in the position 7.4c of assuming e.Seng edge in that effort. In a fundamental sense, that was appropriate and inevitable because no inflation can be stopped without appropriate restraint on the growth of money and credit -- and in the last analysis that is our con-  ,r tinuing job.  But that  IS has been made more dcult because  complementary approaches were weak or lacking.  Instead of  declining, budget deficits have risen, absorbing a bigger share of our savings and placing extra pressures on financial markets. attitudes now are changing, f'or a long while businessmen, workers, and consumers continued to plan on, and act on,  5-  assumptions of continuing inflation in their pricing, wage, / 0 1 ,0 ).4  and buying decisions.  if Al, •  And, as the demands for money and credit clashed with sustained supplies, interest rates remained very high for month after month, with strong repercussions in the very sectors of the economy -- investment and housing -- important to our future well being. In the circumstances, it is hardly surprising that some have begun to question whether it's all worthwhile -- that somehow Af)tife  there is an easierthat maybe inflation was the lesser evil.  Well, I have already implied that the adjustment could  have been eased somewhat had budgets been under better control, ha the world environment been more favorable, or/ the public Aless skeptical of the prospects of restoring price stability.  But  7;  mar  /Cc aii‘4iecit Th/aitlity  in  e best of circumstances, we should never have anticipated  that dealing with ingrained inflation, and rebuilding a base for growth and productivity, would be fast and easy.  All that  I would argue is that we had no real choicethen -- or now. The longer the inflation  •persisted,  the more difficult it would  vie I/ have been to control, withA more serious economic and financial )1" repercussions. In this country we have, historically, been spared the economic •and social disruption of really severe continuing inflation.  But we had enough by the end of the 1970's,  to give us a taste of the implication  The true challenge for  public policy, it seems to me, is to restore the conditions for growth in a way consistent with stabty -- or in the end we will achieve neither.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  6  I would also remind you our problems and challenges in that respect are not unique.  Governments around the world have  faced, in greater or lesser degree, inflationary, fiscal, and productivity problems.  They are embarked on similar efforts to  cope with them, and, as they have done so, growth has been slow or non-existent.  One result has been that recessionary tendencies  in various countries have fed back, one on another. The difficulties in this situation are very real. so are the opportunities.  But  I am convinced that in the end the  current strainSand pain will soon give way to renewed growth and prosperity -- if we only have the wit, the wisdom, and 7Lc the persistence necessary to capitalize on thoac opportunitieshoc. The philosophy that has guided monetary policy in recent /'etz/s vet/Wet/01.c 7-4! years has been i-n-fe-rFfted--kty,thjiaw. As you know, the Federal Reserve has argued consistently for a policy of restrained growth in money and credit.  This policy means exactly that -- restraint  enough to keep up the pressure against inflation; growth enough to support the needs of the economy. That policy of restrained growth in money and credit, I must emphasize, is not the equivalent of a high interest rate policy -- quite the contrary.  I reject entirely the simplified  view that the Federal Reserve over time can itself dictate the level of interest rates in the marketplace.  Those interest rates  reflect the balance of savings and investment, not just in the United States but elsewhere in the world.  They reflect the  hopes and the fears of millions as they decide where to put their money, and how much to borrow. 14'In essence, lending for   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  any period of time is an act of faith-- faith, amon g other things, that interest paid in the years ahead will yield a real return and not lag behind rising prices.  Of course,  monetary policy can influence those decisions and thus the level of interest rates.  But it does as much or more by affecting  the way we look at the future-- and most especially the prospects for stability -- as by the technical manipulation of bank reserves and the discount rate from day to day. To put it bluntly, over longer p4x1ods—e-f time, achievin g and maintaining the lower level of interest rates we would all like to see must,--in se --c, be a reward for success in dealing erk.vi set4se couplarfi okr447 ;coke)/ 4/7e topts 10 with infiation7Vati-f-e-ia.]dy forckftg the—preeess.woul d in the ikrevesr fre,Tei end be iilipass1-19-1-12. pense of •  I,  •  VP  reigniting fears of What is zpeaeis mar c.ionsi-s-t-ent  ndamentals—are  h lower—Interest rates.  Hialif/2>/i) k#44/ 7-4 e_ Lnelexed,(I believe we canA see evidence that theig e funda-  mentals are changing. stability.  We are still some distance from price  But we can now fairly claim the insidious upward  momentum of inflation has been broken.  I judge that partly by  the fact that the common indices of inflation this year have been running at a third to a half of their earlier peak levels, and partly by the fact that growth in workers compensa tion in nominal terms has declined to the 6 to 7 percent area , while real wages are benefitting from the more rapi disinfla d tion on   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -8  the price side.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  I also believe we see signs that the hardened  skepticism of financial markets and the public at large about our ability to deal with inflation -- a skepticism bred over to years of disappointment and false starts -- is beginning  yield.  One reflection is the rapid decline in long-term  interest rates in recent months -- although they are still And there are hard analytic reasons  very high historically.  to believe that progress toward stability can be maintained during a period of business recovery.  Av,(04,  -Wfm - tiCitA404AdY business recovery should,-amerrg Specifically, )  M-zcat  i)a4 n,tial gains in productivity. txlet s u c(c"iiii Q44.1-er-th±ngs, has.lit Tlie 7-Ptca roc&eiti_.) Combined witlore moderate wage and salary increases, the c.co, ouiy ir:::Le/Paili:6 result ahma-14-tke slower growth in unit labor costs, whicIj  ecopotor, ,v vy  two-thirds of all costs4  For the time being, excess capacity  s. /14i 4(bkitio,di/PtiJt,bei ale /4-/ce /eY17 ing and unemployment are, of course, thenff-elves furcea-me4g.rat  19M kffrIa,1ii1,  But they cannot be the answer long-term -- we have  4'1,Z1 ee/ to "build-in" the discipline and the expectations that we keep inflation declining as recovery takes hold.  9-  _  I do not equate our progress against inflation so far  with victory -- far from it.  Concern about inflation is not  something we can afford to turn on or off -- not if we want  to see that progress continue and price stability restored.  (bOhat concern has re-l-a-t-i-itQly- straightforward implications for  the broad directions of monetary policy in the period ahead,  although regrettably it does not resolve the myriad of detailed  matters that arise in the formulation and conduct of a specific  policy course.  For instance, while we know that the inflationary process  feeds on excessive growth of money and credit, we are faced  today with particularly difficult problems in judging what is  "excessive."  We know institutional changes are currently  distorting some of the various M's that we have used as guides  -  ,   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  for our actions, and we also know that the current period of  economic uncertainty has been accompanied by exceptional demands  for liquidity.  To hold rigidly to pre-determined targets that   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -10-  could not take these factors into account would risk a significantly greater degree of restraint than intended',for AtL 7kc /11/044t1445 t:  aa  s .GcaiRe 1A/(7ta2d 0-f (....c,1414to RI' c(€7/6k 70 a_ tv0alei w/Idt_ 4,vilekce, 74Q1aiould 7AiropNo1ivsu s 1 1 e orm for substance in aft MPIP  /  our policy-making.  4 1 = 4,: But we also must be wary -- we are wary -- )-(c4 erthoe4eitiv  of permitting liquidity to build up to the point that, with the passage of time, inflationary forces could again get the  upper hand.  The right balance is, in the end, a matter of  1 : gi : judgment -- but it is a judgment that has be=  the lessons of our past inflationary record. What is not a matter of judgment but a hard fact is that the inflationary dangers and the interest rate outlook is  greatly complicated by our national fiscal position.  In the  fiscal year just ended, the Federal deficit was $111 billion, and it will probably beit,warpw than 50 percent higher in the  current fiscal year.  In assessing the impact of that huge  etrovtAel current deficit t.„±topT-444rag 5 percent of the GN  it is  important to distinguish between thencyclical" and the  "structural" components.  The "cyclical" component, as the  term implies, relates to the effect of current business  riflet/f/1/'tic pek/oef 70   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -11-  High unemployment cuts  conditions on the Federal budget.  revenues and increases spending, temporarily enlarging the  deficit.  .e ---  irn—scr-1-a-rge --a--  0  ••  pro  •  e ••  Alb  alb  *  and impetus to the  Amk, hs the economy  •• #  recovers, that cyclical element will diminish. j'T / 7cii.,Ti( au-t---T am a rai  —the.y ;•„.--1-•  tO  e_  ai,e suggest that the "budget problem" can be dealt with as a by"or. •4 , o J.e 4 14 ;4 Va / Pc o ef ‘‘ sn' to if ettekaci ttize f product of recovery,  he har  act is t a  the deficit wi  ar ,Afs hog., /-/R-4/ /Q,7/-c&eli remain close to current 1"- ve-1494 even as the recession passes.  As the "cyclical" portion of the deficit recedes, we will  cOlgetillue face a growing "structural" deficit -- that is  the imbalance that would remain even when the economy is  operating at a high level, with reduced inflation.  I know  of no competent budget analyst who comes to any different  conclusion.  y7;r ; wishful-   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -12-  Left unattended, that situation poses a strong potential  for a clash between the need to finance the deficit and the  rising financial requirements for housing and for the business  investment needed to support lasting growth in productivity.  In the end, all those needs have to be supplied by savings --  and there simply isn't enough to go around.  Pt-±s-w-t-s-194-tia  1‘ I lo seAse- le- solve-i 7tfe AlTin-king tU-trel-ieve-tnAt problem Irs_ame-ilaLe=bm=wwtat±an by  monetary policy.  The Federal Reserve can create money and  liquidity, but not savings.  Simply pumping out more money  and liquidity, year after year, to meet the needs of the  government would only risk renewed inflation.  Sooner or later --  and it's all too likely to be sooner -- investors would be  driven away from the long-term markets once again, and savings  would be diverted into inflation hedges.  The alternative of  the government bidding away a limited supply of credit from  the homebuyer or businessman is hardly more inviting -- and  would also be reflected in high real interest rates.  Under-  standably, concern about one or the other of those "scenarios"  -13-  feeds back into today's markets, tending to keep interest  rates higher than they would otherwise be. There was meaningful progress on this front in the passage of tax and spending legislation last summer.  akela7 bleC. fr"Gtexavc  Living  Ck'5 0'1 7ht //./CCSvI-05 Caki/rPci  in Washington, am-id-all the pot-itir-a4-p-r.Q.s4-41-ratz  4 c  ate yoop e  k  I am wel  aware that further progress will not come easily.  ret.d.tk tç  All I  will argue is that it is essential to sustained recovery. To repeat the point, I am not so concerned about the "cyclical" component of the deficit -- which will account for  half or more of this year's imbalance.  Indeed, analytically,  that portion might be viewed as almost benign, helping to support economic activity and smoothing the adjustment to a  more stable economic path.  When private demands for credit  are relatively weak, and the economy is in recession, large  deficits can be financed.  But the underlying structural deficit  is growing, -arrd left unattended7Will retard our economic progress  in 1984, in 1985, and in the years beyond.  No resolution in  the Congress about interest rates, no different targets for ‘uic monetary growth, no  •• e  7- e •  Tfr‘•eiti,fr e  g m  fe7 74e f7kac7a4.L 1Pa/ u a 1 de icits \V-savings or reduce  http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  head on.  7ke Felfel/L  can cz.eba-te esnecevkete 44oasr ihreiri4eeceri he problem has to  It5b-  be hit   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -14-  A few moments ago, I alluded to the broad parallels that exist between our own economic situation and that in f4.444, ) Y// many other countries and to llom=poot.Pen+4e-1 these problems e-a Ppf(Ay -have-ta aggravate QMQ opother  eres-s-natilaii,a4-16exs.  wiarth-deveIlugtng the point fu  Tiei= becad§e  ea  where  qmen-m "3 - -5A1-4).emwri,pipThe problems of the rest of the industrialized world  and their policy approaches are so similar to ours that I  need not linger over the analysis.  What does warrant more  elaboration tonight -- partly because it is without precedent  on such a scale in postwar experience -- is the need for practical  programs of economic and financial adjustment in much of the  a/40-r Tlic flenPfk Li4'7fr“  kIlfiCelA kOkr4Le frre-11  developing world, kealiqyii JO flGkif.  e_ The -e developing countries, for all their problems,  have been a growing, dynamic feature of the world economy.  Even during the 1970's, in the face of enormously increased   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -15-  energy prices and slower growth in the industrialized world,  they maintained strong forward momentum.  developed.  The middle classes  Despite enormous population growth, some inroads  began to be made on poverty.  The economic base for more  stable and more democratic political processes was developing. That progress was marred, however, by increasingly large  external payments problems.  The current account deficits of  all non-OPEC developing countries soared to $75 billion or so  after the second oil crisis and continued at that rate into  this year.  For a time, those deficits were supported by a vast  expansion in international credit.  Some of that credit was  official -- relatively inexpensive and long-term.  But an  increasingly large chunk was from commercial banks around  the world.  arallel •henome  own economy  _on furarg-TiTpi-a-truad-  tra-s---been relatively little dependence  the process of rapid debt accumulation  •  Nb  -16-  be sustained indefinitely. by the developing countries could nbt capacity to service th47For the borrowers,debt in relation to the  debt rose.  Lending banks found ratios of loans to capital or  assets rising significantly.  The petent±-a-±-an tneTittittLa  a combination of problem was brought to a head a.tt?itel=ftme by  circumstances.  Sharply higher interest rates increased debt  service requirements rapidly.  The widespread recession in the  real world industrialized countries and the declining level of loping trade restricted markets for the exports of the deve  countries.  Declining commodity prices put further pressure  y exports on many developing countries still dependent on commodit . for a large portion of their foreign exchange earnings  Political  her doubts problems, particularly in Eastern Europe, raised furt in the minds of lenders. come The result is that in recent months we have had to 0 1 47 j0S7141' ec e€e/iT tp-clL czet/ *1/ wha7 ecot4end k-kno(47 of s need g cin kip A "% to grips with an urgent need ,r4c oke Tc,4;s kecd T/14I  4c mcit  -heap lay_a a number of developing countries kn--a--way-t-hat--cft-ft (4 //r1 The eteil .r7tieue7 4. Mc liklec/uy s-Apadie ieve/-4,44 lfway 7-1(ter 61.14 %e ase for sustaining future growth.  akd 414   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  y  i  Mute_ -1 7-  7.01f e ker0 te y Sl z t /.1,144,aeqll  foceos  nee.e.  naAcing is a demonstration  vide something only the borrowing countries can pro  r, it  7e°7-z> Da,  lee PC43 c 74 r kottlPeZ'oi" ose the gap in their that they can, in fact, take measures to c external payments.  4•1.  cre  • II  111  ec,:kuotei-eS  si4e  • 1111  .  alb  In the  keceiSaVY c stop internal growth short run, thie.-ge measures may unavoidably  for a while.  Rut_analagaus_to  *•  vp. ent process wirr-be.  more orderly and effective the adjustmen   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  ghe  4‘&06 pa/c4i c_cooiiideAce the more rapidly  t am  efp Gpe  : and sustained growth i..n.__tlie.._d,e3.za--1-ep-i-rrg-wcrr-ld can be r-el.staz.ed -4" i711,-14-444-44*.ii&e-izh reo-441-&44,447 - }1-op i other industrialized the-moropur own export markets and those of  tieR 7/1a/147  ,  )  any questions about countries will expand, and th.e_mame-pziamptly Weiii4 be put to rest. the possible impact on international banks cart ' 4/, re exists the It is precisely for these reasons that the borrowers and strongest kind of community of interest among sses, and among lenders, among governments and private busine in working togethet the developing and industrialized countries, ms. to find effective answers to the evident proble  Each of the  etimes together, and parties has a critical role to play -- som sometimes separately.  that all What is especially important is  e   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -18-  i  these participants achieve a  high degree of common understanding, recognizing the potenti-  alities and limitations of each for action.  On the basis of  that understanding, we can then deal forcefully and effectively  with the problems at hand. I do not underestimate the difficulties of the internal adjustments for relatively poor countries, often with rapidly  growing populations and beset by political problems.  But we  are also fortunate that the principal countries involved have important economic strengths, demonstrated growth potential, and able economic officials who understand the needs and requirements  of the situation.  Current liquidity problems need not be --  and for the major borrowers they are not -- symptomatic of  inherent economic weakness.  Several countries -- import4nt in them  lves and  important 4is examples -- have taken the significant step  enteri  i t  negotiations with the Inkrnational Mone ary  Fund, se king the kind, f internat/mal endorseme  of strong  adjustment progra s that IMF imprimatur carries.  Here in Los Angeles these abstractions take on perhaps  a little more concreteness in the case of Mexico.  As you know,  0 if Pelee//dIcy nd Mexico and the IMF have hammered out a working agreemen  a comprehensive program  7ii 4 ;  tiaele7)  SI•  •  ImAAL 4Au4dt4L4.41 44-414w i/74&i,c;149 being assembled)g Taken together, these steps have the capacity  7  to stabilize the situation and begin to restore the fundamental A 4(A health of the economy that sustains  neighbors.  272.... million of our  The Southwest shares a2ood mile border with Mexico,  ies bëi  the—twic_countries are extensive,  is the  Mexico  To  largest export market for the United States, c'ekt cmittati lutaxatf i uterwed,cttiii no4/  accounting for $  billion in sales in J 8 /  Cuiftinuect  040'0(,,5 141.1/14.6- ePitCr> f4(-  orderly functioning of the Mexican economy has taag-i-13-1-e—va-1-ue(to usa/   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  While the case of Mexico may seem more concrete to us with because of our proximity, other countries must cope similar problems, with similar human dimensions.  141-  /cr vee...PyAz, mcvret-a,Yugoslavia --regard7-1-701=-HUre-t-hat'A4entina, Brazil, and C/L't,c  A  )ezAtr/ frkiewr Reeds'  L -  • •  a-where we and the inter-  41111. 4111,  rest in a-sr national community at large have a substantial inte , S /epZ7 f-e,v/ef/e0e , #G,  - koc.ecs /Pocalki .7" • a  .•  alb  plucesb-70ossib1e; each of  each has those countries are in negotiation with the IMF, and United called upon, or requested, interim financing from the  States   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  and others, public or private. 761.4 sa c_ti s a_aqmber af_cas-G&T-It seems to , fm  •  that  of steps saga& borrowing countries, even with the strongest kind residual to get their own houses in order, will require some to continue ongoing financial support to permit their economies  functioning smoothly.  Agreement with the IMF brings with it  financing, the availability of certain amounts of medium-term usually over a three-year period.  But that may not be adequate  on. particularly in the early stages of the transiti  The importance  of the Fund lies as much or more in the fact that its imprimatur zisI. fi Ccu, program - as a dispassionate and impartial on a borrowings-Zboun  :international institution -  will reinforce the confidence of  other lenders, paving the way for additional extensions of official and private credit that may be needed to assure that  the adjustment program can be carried through to fruition.  Again to take a case in point, the new leadership in  Mexico has undertaken a rigorous program to implement the plans  agreed with the IMF in the last weeks of the previous government.  Some of those measures may appear harsh in terms of budgetary  discipline, reduced subsidies, and restraint on growth.  But  they also offer promise of a stronger economy, with sustainable  growth, over a longer period.  Without the framework of internal  discipline and external financing, surely the adjustments for  Mexico would be even more severe, and without the same prospects  for recovery and future growth.  The reasons are evident:  within  the framework of the new program, creditors can resume lending  with more confidence, exporters can resume shipments of essential   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -22economy goods, and distortions and dislocations in the internal  can be reduced. In emphasizing the need for internal adjustment by recognize borrowing countries as an essential first step, I also be dependent that the ultimate success of their efforts will also  on an expanding world economy.  One threat is that the world-  wide recession has brought new pressures for protectionism,  here and elsewhere.  I understand these pressures -- we all do.  to The case is pressed in immediate terms -- to save jobs and  save companies.  But the trouble is that protectionism is a  , game everyone can play -- and in the end it will not save jobs d. it will lose them as growth and export markets are disrupte 1kat  9iiiere  is no logic in suggesting/ c,a4p14.64-o&-become-me-re 7,4t'  \ atka,  support in export markets -- and counting on those exports to e thosA4and strengthen their financial position -- only to refus 711ro4   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  PV  e;-3 '  exports. and Economic recovery, of course, would relieve these other pressures in the most constructive way.  It would permit  -23alike to pursue the developing and industrialized countries ironment. necessary adjustments in a favorable env  Indeed,  ary period of slow or adjustment efforts -- involving a tempor country won't work no growth -- appropriate to an individual ously in the same as planned if many countries are simultane  position.  exports We cannot all reduce imports and increase  h the moon. together -- not unless we are trading wit lead the way to Obviously, we would all like the U.S. to  expansion.  the United I share the general view that recovery in  hough at a moderate rate States will be evident through 1983, alt vious post-recession of speed -- probably slower than during pre  years.  overy is I know that unambiguous evidence that the rec  already underway is still absent.  But encouraging signs are  roved liquidity and evident in some rise in housing, in the imp ers, and in surveys wealth and reduced debt positions of consum   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  stabilizing or reporting that attitudes and orders may be els. improving, even if from unsatisfactory lev  The Federal  future, is of course deficit, while fraught with danger for the  -24-  providing massive support for incomes at present.  The rather  dramatic declines in interest rates in the latter half of this year, albeit to levels that are still high by historical standards, are relieving some of the financial stress and providing support  for some expanded activity. The temptation is to pull out all the stops in an effort  to hasten the recovery process.  But -- contrary to the impressions  of some -- neither the Federal Reserve nor any other policy body  can by_itpalg achieve that result.  And beware of the effort to  try "at all costs," oblivious to the danger of reigniting inflation,' 0V of undermining the progress toward cost control and productivity,  o anooM „the—denser—of simply perpetuating, and aggravating, the pattern  of the past.  What is crucially important -- particularly in the  light of the experience of recent years -- is that we set the stage for an expansion that can be sustained over a long period, bringing with it strong gains in productivity and investment  and lasting improvement in employment.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -25pfaA;Lt1145 I have emphasized the importance of stmtaining progress cM4 toGiV/14cce/ 7110/} toward price stability to that outlook. ;With disciplined monetary 77.rePe_ avz  11_‘jG  and fiscal policies, we can sustain that progress.  But a—sense  ,sil)ke th7  1 ac, o45/  ": 5" " that thadiscApline-i-s-last,,fg'-perpetuation of huge deficits,A1Q1404‘ift____7.44 A-€.--441-*Z-Zr `15--61 a closing of our markets to competition, a refusal to support the efforts of other countries to adjusiall work against recovery.  and prclgEtap_elsewhere as well as at home. >9$:  ‘?‘ s I 4ei,e .  c_ze tot e coczil,  If we resist th-es-e temptations and puTzue-poli-e4es  GOnsistently  aimed at a balanced sustainable recovery then we tv:11--  e 711rt ,(/7 7,4„.)14 );,,e. 710L/1i 1-fe,1 wi-ll'fiave succeeded in accomplishing-- what I have described on  many occasions as turning the 1980's into the mirror image of  the 1970's -- a decade in which doubts and uncertainties give  way to renewed confidence and vigor.  I would like to think,  Harold, that the improvement in economic welfare I have been -~^1"444 tt 7.i =4.6e1i0;44b talking about tonight would-'be a-solid foundation for the_mdere  general sense of human welfare that is our common goal.  ,,A / ,21 We- ta.fre 1-,, ,/,f,,,,,._- Ac dZ/W4 '1, ,4f Y 5)1.r-ii,Ce ,.*m* Gate,/ r/f,fr ifkiltic. Tif.J.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  *******  Pt/  lit i1  IWAG  •  e f  ,  deet 4ferlicee  1, ,.) Sr, itiviy if•Stf/kept) vok k ,Nett takiel'e
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