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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
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AOCGO
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icartes of rife.
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"
‘14A D'UIP Ott
I am delighted to be here tonight at this dinner
0
1 111
1
'11,
144."(Tote%
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
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
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-
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,
-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.
-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
-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.
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
-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
-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.
-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"
-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.
-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
-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.
-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.
-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.
-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
-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.
-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.
-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
-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.
-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
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.
•
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
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
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.
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.
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: 5
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.
os Angeles Times. "After the Storm." August 22,1982
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
The GAmerican
lewish Committee
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.
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
-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,
-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,
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.
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
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
-8
the price side.
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
-
,
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
-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
-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
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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-
-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
head on.
7ke Felfel/L
can cz.eba-te
esnecevkete 44oasr
ihreiri4eeceri
he problem has to
It5b-
be hit
-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
-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
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
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
-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/
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
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
-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
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
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.
-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
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ifkiltic. Tif.J.
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