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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  New England Council November 16, 1982  Collection: Paul A. Volcker Papers Call Number: MC279  Box 13  Preferred Citation: New England Council, 1982 November 16; Paul A. 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/c229 and https://fraser.stlouisfed.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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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) mudd@princeton.edu   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For release on delivery 8:00 PM, EST November 16, 1982   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sustainable Recovery:  Setting the Stage  Remarks by  Paul A. Volcker  Chairman, Board of Governors of the Federal Reserve System  before the  Fifty-eighth Annual Meeting of the  New England Council  Boston, Massachusetts  November 16, 1982  I am delighted to be with you tonight for several reasons. First, I can take special pleasure in joining you to honor Dick Hill.  For many years, he has stood in the first  rank of banke s, not just in Boston and New England, but in the nation and the world.  But with Dick, banking responsibilities  have been combined with a clear sense of the public interest. I*L;. is that quality that over many years has brought Dick into close contact -- as Director of the Boston Fed, as a member and President of our Federal Advisory Council, and in less formal contacts -- with me and my colleagues and predecf_:ssors in the Federal Reserve.  He has been as unstinting in his wise counsel  to us as I know he has to many of you. d, I welcome the chance to share thoughts about our economic problems with members and friends of the New England Council.  Your organization has had a mission -- to analyze dis-  passionatelyproYqems of a once relatively depressed region, propose constructive approaches and develop a needed consensus for action, and to "stick with it" yar in and yearThe relative strength and progress of the New England e:7onomy in recent years stands in part as a tribute to your faith and efforts. Of course, New England, like every other region of the country, has not been exempt from the effects of national problems. I need not linger over the human and statistical evidence of economic trouble -- th5 postwar record unemployment rate, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  unutilized industrial capacity, the signs of stress in financial markets, and the rest.  You know all that, and we also know the  sense of uncertainty and even frustration that these developments breed. But this period can also be one of great opportunity -an opportunity, with reasonable good sense and good management, to set the economy on a course of sustainable growth for many years ahead.  Indeed,. I believe substantial progress has been  made in laying the foundation for that growth.  Of course, there  are some big potential stumbling blocks ahead -- and I will be touching on them tonight.  But, first, let's summarize where  we are. For long months we have, quite obviously, been in recession.  Our situation has many of the characteristics of  earlier, recurrent postwar recessions.  But to consider recent  developments as "just another recession" would, to me, miss the essential point. For more than a decade, roughly encompassing the 1970's, our economic performance had been deteriorating in fundamental ways.  We had come earlier to take growth of 4 percent or more  a year for granted.  But the rise in productivity necessary to  support that kind of growth simply dwindled away; by the end of the 1970's it had practically disappeared. inflation got out of hand.  At the same time.  We found ourselves with the most  persistent and largest increase in price level since the Continental dollar; after a while, we had come to expect it -to anticipate it in our business decisions, in our financial   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  planning, and in our shopping.  As we did so, 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 in the  end, the growth we took for granted was undermined. By the late 1970's, the country began responding -responding most particularly by attaching high priority to the effort to deal with inflation.  The Federal Reserve, by  necessity, has been at the leading edge of that effort, recognizing no inflation can be stopped without appropriate restraint on the growth of money and credit.  And that effort  was made more difficult because complementary approaches were weak or lacking. We should never have anticipated that dealing with a deeply entrenched inflation would be fast and easy; it has not been.  Strong pressures on credit markets, with interest  rates affected by continuing inflationary expectations, have burdened capital intensive industries in general, and housing in particular.  Plans undertaken and financed in the expectation  of rapidly rising prices have had disappointing results, in some cases leading to unanticipated financial strains and even bankruptcy.  Profits have been hard hit as prices have stabilized  faster than costs and volume has declined.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  We are still some distance from price stability. B• ut I do believe we can now fairly claim the insidious upward momentum of inflation has been broken.  I judge  that not simpiy by the fact that the common indi_ces of inflation this year have been running at a third ',10 a half. of their earlier peak levels.  I believe we also  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 fal&e starts -- is beginning to yield.  One reflection is the  rapid decline in long-term interest rates in recent mo-ths although they are still very high historically.  And ti!re  are hard analytic reasons to believe that progress towani stability can be maintained during a period of business recS very. Part of my optimism in that resrect is rooted in a sense that the sta(le is being set for rest:Thration of productivity growth.  Typically, productivity does poorly in a recession;  it's hard to increase output per worker when total output is falling, as it has been.  But business after business reports  more intense efforts to boost efficiency, dna in many instances there are signs of a new sense of cooperation between management and labor.  Recent data suggest some tentative signs of  more favorable results. a period 5f expansion.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  But the real payoff should come in  -5-  At the same time, the upward trend of wage and salary costs has slowed.  The pattern is uneven among  industries and companies, partly because of contracts extending over several years. But it is unmistakable. With inflation slowing, that restraint on nominal income has been fully consistent with higher real income for those working. inflation  The demonstrated projress agaist  combined of course with the currently excessive  levels of unemployment -- should be reflected in further restraint on the (in-dwth of nominal wages.  Together with  rising productivity, the result should be slower growth in unit wage costs, paving the way for further progress toward price stability and the higher real incomes we want as the economy expands.  To be sure, movements in food, energy,  and commodity prices may not be so favorable to the consumer -they have all been affected by the recession.  But neither  is it likely we will face the kind of agricultural or energ y price shocks we had in the 1970's. I do not equate that progress against inflation with victory -- far from it.  Concern about inflation is not some-  thing we can afford to turn on or off -- not if we want to see that progress continue and price stability restored. That concern will, in turn, require continued vigilance in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6  keeping appropriate restraint on the growth of money and credit -- a matter upon which I will say a few words in a moment. That restraint, I should emphasize, is not the equivalent of a high interest rate policy -- quite the contrary.  Lending for any period of time is in essence  an act of faith -- faith, among other things, that interest paid  na years ahead will yield a real return and not  lag behind rising prices. The rapid declines in interest rates over recent months, particularly in the longer-term markets, have, I believe, partly reflected a basic reappraisal of the outlook for inflation.  Those declines in turn appear to be con-  tributing to some revival in homebuilding and supporting other sectors of the economy.  I am well aware interest rates  are still historically high, and that it is not yet clear that a broad-based recovery is underway.  Obviously, in the  circumstances, further reductions in interest rates would be welcome.  But we also want to be sure that lower rates  can continue so that the recovery will last.  Therein lies  the challenge for economic policy -- and for monetary policy specifically:  we need to combine recovery with further  progress toward stability or we would risk losing both.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7  As you know, most of the monetary and credit aggregates that the markets watch so closely are running somewhat above the targets we set for ourselves at the start of the year. So far as Ml is concerned, the data have plainly come to be distorted by institutional change -- particularly in October by a flow of funds into checking accounts as a large amount of All-Savers certificates have matured.  Prospectively, the  introduction of new forms of transaction or quasi-transaction accounts are likely to distort the figures further, although the direction of impact is less evident.  In the circumstances,  we have had little alternative to attaching much less weight to that aggregate in guiding the provision of reserves until the institutional changes settle down. More generally, current developments with respect to the growth of money and credit have had to be interpreted in the light of all the evidence we can gather with respect to the economy, price developments, interest rates, and financial pressures.  Taken together, the evidence is strong that the  desire for liquidity has strengthened appreciably this year, as sometimes happens in periods of exceptional economic uncertainty.  The turnover or "velocity" of "Ml money" has,  for instance, declined appreciably this year, instead of trending upwards as has been the pattern thouqhout the postwar period.  M2 velocity -- generally stable in most recent  years -- has declined even more sharply.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -8-  In all these circumstances, the Federal Open Market Committee has remained willing for a time -- as we indicated at midyear -- to tolerate monetary expansion at a somewhat higher than the targeted annual rate.  That approach, in the light of  the evidence of exceptionally strong liquidity demands, should in no way be interpreted as lack of continuing concern about inflation -- and happily I do not believe it has been so interpreted by the markets.  The fact is that, with velocity  patterns obviously shifting at least for a time, rigid pursuit of targets would have had the practical effect of a more restrictive policy than intended when these targets were set out.  It is not without relevance, in that connection, to  note that growth in bank credit, or private credit generally, has been relatively limited this year, tending to confirm that the greater liquidity provided has not spilled over into inflationary private credit expansion. What recent developments do emphasize is that, in a time of rapid institutional and economic change, we must be wary of highly simplified rules in the conduct of policy. That is why we have always looked to a variety of monetary and credit "targets," and retained elements of flexibility and judgment in pursuing those targets. What we do not have the flexibility to do is to abandon broad guidelines for monetary and credit growth as a means of judging policy over a period of time.  The danger of creating  excess liquidity is not so much immediate, when there is so  9-  much surplus capacity and unemployment, but rather when the economy begins to regain forward momentum.  That is why we  must continuously balance the need to meet liquidity needs today against the risks of building in fresh impetus to inflation tomorrow.  And, that is also one reason why the  prospective position of the Federal budget remains of so much concern. In the fiscal year just ended, the Federal deficit was $111 billion, anct it could well be 50 percent higher in the current fiscal year.  That current deficit, apprachinc , 5 per-  cent of the GNP, overstates the "structural" budgetary problems. High unemployment cuts revenues and increases spending, tcmporarily enlafging the deficit.  Indeed, tl.i2 current deficit,  while hardly welcome in so large a size, does provide support and impetus to the economy at a time of c•!clical weakness. But the hard fact is that, as things now stand, the deficit will remain close to current levels even as the recession passes.  Left unattended, the budget 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.  Simply pumping out more money and liquidity,  year after year, to meet the needs of the government would risk renewed inflation and drive investors away from the longterm markets once again.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The alternative of the government   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -10-  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.  Understandable con-  cern about one or the other of those "scenarios" 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; it was particularly encouraging that the Congress and the Administration acted in the face of an election with the economy in recession. Further progress will not come easily.  But I am encouraged  by the degree of consensus on the need to continue in the direction of fiscal moderation and by the fact that so much of the debate centers on "how" rather than "whether."  It  is the budgets for 1984 and beyond that seem to me especially critical, for the private economy would then be expanding more rapidly.  But we should clearly understand that failure to  act with all deliberate speed would, quite simply, be a major block to recovery and its sustainability. The remaining problem area that I would like to touch upon more fully is international economic and financial conditions.  More than ever before in the postwar world, prospects  for sustainable expansion are closely tied to what happens abroad.  And other countries are, of course, partly dependent  on our own policies and approaches.  -11-  Not just the United States but the entire industrialized world is in recession.  In greater or lesser degree, the econ-  omic and financial circumstances of other countries parallel our own -- and for similar reasons.  Unemployment is at record  levels, prospects for near-term growth today seem limited, and the financial ties that bind us to the developing world have become strained.  Should we fail to understand the full extent  of these difficulties or respond inappropriately, no country will escape the consequences. The problems of the rest of the industrialized world and their policy approaches are sn similar to ours that I need not linger over the analysis.  Suffice it to say that  our recovery can assist theirs -- and vice versa -- just as the heartening progress on the inflation front has been speeded by the interactions among us. the evident pressure  What is a threat to us all is  toward greater protectionism.  There  are those who in our present situation would draw parallels to the 1930's -- usually with little foundation.  One major  difference has been that we have not, by and large, yielded to the temptation to retreat behind national barriers to trade, with the inevitable result of cutting off each other's markets, impairing growth in trade, and dulling competitive pressure on prices.  But there are too many exceptions to that generality  to 5ermit us to rest easy.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -12-  Another threat -- essentially without precedent in the postwar world -- is an outgrowth of the financial difficulties of much of the developing world.  Those 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 energy prices and slower growth in the industrialized world, they maintained strong forward momentum.  That growth 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 Some of that credit was a official -- relatively inexpensive and long-term. But an expansion in international credit.  increasingly large chunk was from commercial banks around the world.  According to available data, which may well be in-  complete, outstanding bank credit to the non-OPEC developing countries doubled from 1975 to 1978 -- from about $60 billion to about $125 billion -- and then nearly doubled again to about $230 billion by the end of 1981. The process of rapid debt accumulation could not be sustained indefinitely.  The potential problem was brought: to a  head at this time by a combination of circumstances.  Sharply  higher interest rates increased debt service requirements rapidly relative to the capacity to service debt.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The widespread recession  -13-  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. The result is that, in the past year or so, we have seen several important borrowing countries -- first in Eastern Europe and then in Latin America -- reaching the limits of their ability to keep up the servicing of their foreign debt. As these countries experienced £train, the flow of bank credit to some others -- freely available only a few months before -was curtailed, threatening further problems. In this situation, the need for closing the gap in external payments -- sometimes at the expense of stopping internal growth for a time -- is unambiguous; when the supply of new credit is reduced, there is simpJy no alternative.  The  key question if,. how orderly this adjustment process will be. The more orderly and effective the adjustment, the more rapidly growth in the devcloping world can be restored and sustained, the more our own export markets and those of other industrialized countries will expand, and the more prompt]y any questions about the possible impact on the earnings of international banks can 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -14-  effective answers to the evident problems.  Each of the  parties has a critical role to play -- sometimes 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. In the first' instance, the borrowing country itself has the heaviest responsibility, for it must initiate and carry out the needed adjustments in its own economic policies. I do not underestimate the difficulties of such 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 potential, important economic strengths, demonstrated growth and able economic officials who understand the needs and requirements of the situation. not be  Current liquidity problems need  and for the major borrowers they are not -- symptomatic  of inherent economic weakness. Several countries -- important in themselves and important as examples -- have taken the significant step of entering into negotiations with the International Monetary Fund, seeking the kind of international endorsement of strong adjustment programs that IMF imprimatur carries.  Just last  week, essential agreement on so-called "letters of intent" was reached with Mexico and Argentina, and negotiations are underway or about to begin with other major borrowers.  -15-  Agreement with the IMF brings with it the availability of certain amounts of medium-term financing, usually over a three-year period.  To assure the adequacy of IMF resources  in current and prospective circumstances, the ongoing negotiations to enlarge the funds available to it should, and can, be brought to an early conclusion. increase  Both a sizable  nI.sic quotas and a reliable standby borrowing  arrangement -- along the general lines proposed by the U.S. Treasury some months ago -- can be readily justified. Agreement on both, now, seems to me doable.  And such  agreement would convincingly demonstrate the capacity of countries to act together to meet extraordinary needs. I realize some time will be required to obtain necessary legislative approval in each country involved.  But early  international agreement will provide the tangible assurance necessary to permit full commitment of presently available funds if needed, and those funds could be temporarily supplemented by IMF borrowing from the market or directly from member countries. The importance of IMF participation in adjustment programs is not limited to the amount that institution can itself lend.  The Fund is in a unique position for evaluating,  dispassionately and impartially, the policies of its member countries.  Approval of adjustment programs proposed by the  member will reinforce the confidence of other lenders, paving the way for needed extensions of official and private credit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -16-  In certain circumstances, national monetary authorities, acting separately or jointly under the auspices of the Bank for International Settlements, have been called upon to provide some short-term "bridging" credit to help maintain ccntinuity of international payments and ease financial shocks. and Hungary have been cases in point.  Mexico  But cases of that sort  can be justified only by a clear threat to the international banking system as a whole; monetary authorities have neither the capacity nor the authority to substitute short-term central bank credit for needed medium 0i longer-term financing. To some extent, more conventional means of official financing support, such as official export credit agencies, can play a role.  But, in the end, some borrowing countries  will find it necessary to arrange some restructuring of their outstanding debts and, for a time, to seek fresh credits from the commercial banks that have been larac sources of funds in the past. I fully realize that the extraordinarily rapid growth in bank lending to some countries in the recent past cannot reasonably continue indefinitely.  But it is also an obvious  fact that some of the largest borrowers are not in a position to repay debts suddenly, and an orderly adjustment program -a program fundamentally in the interest of borrower and lender alike -- will frequently require at least transitional financing beyond amounts appropriate to, or feasible for, the IMF and official lenders.  • -17-  It is equally a fact that, given strong and necessary adjustment programs, borrowing countries will not renuire bank financing in amounts nearly as large as the sums provided by banks over recent years.  Indeed, lending banks, working effec-  tively together to meet a clearly jused transonal need, should be able to provide the necessary margin of finance while reducing ratios of outstanding loans relative to their capital or assets.  In a number of instances, outstanding loans need  not rise much if at all next year, although negotiations to extend or rollover current matures may be necessary. From the standpoint of the banks themselves, such restructuring and the proon of some additional credit, alongside and dependent upon agreed IMF programs, will in some instances be the most effective and prudent means available to enhance the creditworthiness of borrowing countries and thus protect their own interests.  In such cases, where new loans  facilitate the adjustment process and enable a country to strengthen its economy and service its international debt in an orderly manner, new credits should not be subject to supervisory criticism. As we look ahead, both private institutions and the relevant authores and international institutions should develop more effective means of heading off crisis. banks have already undertaken promising  Some  atives to bolster  their information sources and lending judgments.  The IMF, with  resources appropriately enlarged, is likely to have an even larger role to play in maintaining essential discipline.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The  %  -18-  World Bank may wish to work more flexibly in coordinating some of its lending with the Fund.  need to review in the light of experience their own criteria, sources of information, and approaches toward the surveillance of international lending. But that is for the future.  The main requirements for  dealing with the present situation are clear enough.  The  corrective process in some countries is fairly under way. The necessary further actions can be taken in the space of coming weeks and months, so long as we have the wit and the will to do so. The theme of my remarks tonight can be summarized in a few sentences.  We have all come to recognize that lasting  prosperity must be built on a sound currency.  We cannot deal  with our economic problems in isolation from other countries. It's a complicated, difficult world, and the obstacles to progress are not going to yield to one-dimensional approaches. At the same time, we must not permit any sense of frustration and impatience to blind us to how far we've come in setting the stage for renewed prosperity. the progress against inflation. problem.  We can continue  We can deal with the budget  We can manage the threats to the fabric of the  international financial system.  We have strong and tesilient  financial institutions, and an effective apparatus of governmental institutions to contain and diffuse strains.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  Banking supervisors will  1lb  -19-  Those are some of the major reasons that I am convinced we can make the 1980's the reverse of the 1970's -a decade of renewed stability and progress -- a decade in which the doubts and uncertainties of today will give way to renewed confidence and vigor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For release on delivery 8:00 PM, EST November 16, 1982  Sustainable Recovery:  Setting the Stage  Remarks by  Paul A. Volcker Chairman, Board of Governors of the Federa l Reserve System before the  Fifty-eighth Annual Meeting of the New England Council  Boston, Massachusetts  November 16 1 1982  .  1  I rim delighted to be with you tonight for several reasons. First, I can take special pleasure in joining you to honor Dick Hill.  For many years, he has stood in the first  rdnk of bankers, not just in Boston and New England, but in the nation and the world.  But with Dick, banking responsibilities  have been combined with a clear sense of the public interest. is that quality that over many years has brought Dick into close contact -- as Director of the Boston Fed, as a member and President of our Federal Advisory Council, and in less formal contacts  with me and my colleagues and predecessors in the  Federal Reserve.  He has been as unstinting in his wise counsel  to us as I know he has to many of you. Second, I welcome the chance to share thoughts about our economic problems with members and friends of the New England Council.  Your oiganization has had a mission  to analyze dis-  passionately thu problems of a once relatively depressed region, td propose constructive approaches and develop a needed consensus for action, and to "stick with it" ye?.ar in and year out.  The  relative strength and progress of the New England economy in recent years stands in part as a tribute to your faith and efforts. Of course, New England, like every other region of the country, has not been exempt from the effects of national problems. I need not linger over the human and statistical evidence of economic trouble -- the postwar record unemployment rate, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3  planning, and in our shopping.  As we did so, 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 in the  end, the growth we took for granted was undermined. By the late 1970's, the country began responding -responding most particularly by attaching high priority to the effort to deal with inflation.  The Federal Reserve, by  necessity, has been at the leading edge of that effort, recognizing no inflation can be stopped without appropriate restraint on the growth of money and credit.  And that effort  was made more difficult because complementary approaches were weak or lacking. We should never have anticipated that dealing with a deeply entrenched inflation would be fast and easy; it has not been.  Strong pressures on credit markets, with interest  rates affected by continuing inflationary expectations, have burdened capital intensive industries in general, and housing in particular.  Plans undertaken and financed in the expectation  of rapidly rising prices have had disappointing results, in some cases leading to unanticipated financial strains and even bankruptcy.  Profits have been hard hit as prices have stabilized  faster than costs and volume has declined.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5  At the same time, the upward trend of wage and • salary costs has slowed. The pattern is uneven among industries and companies, partly because of cont racts extending over several years. But it is unmistak able. With inflation slowing, that restraint on nomi nal income has been fully consistent with higher real income for those working.  The demonstrated projress agairist  inflation -- combined of course with the curr ently excessive levels of unemployment -- should be reflecte d in further restraint on the orowth of nominal wages.  Together with  rising productivity, the result should be slow er growth in unit wage costs, paving the way for further prog ress toward price stability and the higher real incomes we want as the economy expands.  To be sure, movements in food, energy,  and commodity prices may not be so favorabl e to the consumer they have all been affected by the recession.  But neither  is it likely we will face the kind of agricult ural or energy price shocks we had in the 1970's. I do not equate that progress against inflation with victory -- far from it.  Concern about inflation is not some-  thing we can afford to turn on or off -- not if we want to see that progress continue and price stability rest ored. That concern will, in turn, require continued vigilanc e in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7  As you know, most of the monetary and credit aggregates that the markets watch so closely are run ning somewhat above the targets we set for ourselves at the start of the year. So far as Ml is concerned, the data hav e plainly come to be distorted by institutional change -- par ticularly in October by a flow of funds into checking accoun ts as a large amount of All-Savers certificates have matured.  Prospectively, the  introduction of new forms of transa ction or quasi-transaction accounts are likely to distort the fig ures further, although the direction of impact is less eviden t.  In the circumstances,  we have had little alternative to attaching much less weight to that aggregate in guiding the provis ion of reserves until the institutional changes settle down. More generally, current developments with respect to the growth of money and credit have had to be interpreted in the light of all the evidence we can gather with respect to the economy, price developments, int erest rates, and financial pressures.  Taken together, the evidence is str ong that the  desire for liquidity has strengthened appreciably this year, as sometimes happens in periods of exceptional economic uncertainty.  The turnover or "velocity" of "Ml money" has ,  for instance, declined appreciably this year, instead of trending upwards as has been the pat tern thoughouf the postwar period.  M2 velocity -- generally stable in most rec ent  years -- has declined even more sha rply.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  9-  much surplus capacity and unemployment , but rather when the economy begins to regain forward mom entum. That is why we must continuously balance the need to meet liquidity needs today against the risks of building in fresh impetus to inflation tomorrow.  And, that is also one reason why the  prospective position of the Federal budget remains of so much concern. In the fiscal year just ended, the Fed eral deficit was $111 billion, and it could well be 50 percent higher in the current fiscal year.  That current deficit, approaching 5 per -  cent of the GNP, overstates the "struc tural" budgetary problems. High unemployment cuts revenues and inc reases spending, temporarily enlarging the deficit.  Indeed, the current deficit,  while hardly welcome in so large a siz e, does provide support and impetus to the economy at a time of cs,,clical weakness. But the hard fact is that,  ?2  things now stand,  the deficit will remain close to cur rent levels even as the recession passes.  Left unattended, the budget situation poses  a strong potential for a clash between the need to finance the deficit and the rising financial requir ements for housing and for the business investment needed to sup port lasting growth in productivity.  Simply pumping out more money and liquid ity,  year after year, to meet the needs of the government would risk renewed inflat:Ion and drive invest ors away from the longterm markets once again.  The alternative of the government  -11-  Not just the United States but the entire indu strialized world is in recession.  In greater or lesser degree, the econ-  omic and financial circumstances of other countries parallel our own -- and for similar reasons.  Unemployment is at record  levels, prospects for near-term growth today seem limited, and the financial ties that bind us to the deve loping world have become strained.  Should we fail to understand the full exte nt  of these difficulties or respond inappropriat ely, no country will escape the consequences. The problems of the rest of the industrialized worl d and their policy approaches are so simi lar to ours that I need not linger over the analysis.  Suffice it to say that  our recovery can assist theirs -- and vice versa -- just as the heartening progress on the inflation fron t has been speeded by the interactions among us. the evident pressure  What is a threat to us all is  toward greater protectionism.  There  are those who in our present situation woul d draw parallels to the 1930's -- usually with little foundati on.  One major  difference has been that we have not, by and large, yielded to the temptation to retreat behind national barriers to trade, with the inevitable result of cutting off each other's markets, impairing growth in trade, and dulling comp etitive pressure on prices.  But there are too many exceptions to that generali ty  to permit us to rest easy.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -13-  in the industrialized countries and the declining level of real world trade restricted mar kets for the exports of the developing countries. Declining commodity prices put further pressure on many developing countr ies still dependent on commodity exports for a large por tion of their foreign exchange earnings. The result is that, in the past yea r or so, we have seen several important borrowing countries -- first in Eastern Europe and then in Latin Americ a -- reaching the limits of their ability to keep up the ser vicing of their foreign debt. As these countries experienced str ain, the flow of bank credit to some others -- freely availa ble only a few months before was curtailed, threatening furthe r problems. In this situation, the need for closing the gap in external payments -- sometimes at the expense of stopping internal growth for a time -- is unambiguous; when the supply of new credit is reduced, there is simply no alternative. The key question i. how orderly thi s adjustment process will be. The more orderly and effective the adjustment, the more rapidly growth in the developing world can be restored and sustained, the more our own export markets and those of other industrializ ed countries will expand, and the mor e promptly any questions about the possible impact on the earnings of international banks can be put to rest.  It is precisely for these reasons  that there exists the strongest kind of community of interest among borrowers and len ders, among governments and private businesses, and amo ng the developing and industrialized countries, in wor king together to find  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15-  Agreement with the IMF brings wit h it the availability of certain amounts of medium-term financing, usually over a three-year period. To assure the adequacy of IMF resources in current and prospective circumsta nces, the ongoing negotiations to enlarge the funds ava ilable to it should, and can, be brought to an early conclu sion. Both a sizable increase in basic quotas and a rel iable standby borrowing arrangement -- along' the general lines proposed by the U.S. Treasury some months ago -- can be readily justified. Agreement on both, now, seems to me doable.  And such  agreement would convincingly demons trate the capacity of countries to act together to meet extraordinary needs. I realize some time will be requir ed to obtain necessary legislative approval in each country involved.  But early  international agreement will provide the tangible assurance necessary to permit full commitment of presently available funds if needed, and those funds could be temporarily supplemented by IMF borrowing from the market or directly from member countries. The importance of IMF participatio n in adjustment programs is not limited to the amo unt that institution can itself lend.  The Fund is in a unique position for evalua ting,  dispassionately and impartially, the policies of its member countries.  Approval of adjustment programs proposed by the  member will reinforce the confidenc e of other lenders, paving the way for needed extensions of off icial and private credit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -17It is equally a fact that, given strong and necessary adjustment programs, borrowing countries will not renuire bank financing in amounts nearly as large as the sums provided by banks over recent years.  Indeed, lending banks, working effec-  tively together to meet a clearly justified transitional need, should be able to provide the necessary margin of finance while reducing ratios of outstanding loans relative to their capital or assets.  In a number of instances, outstanding loans need  not rise much if at all next year, although nego tiations to extend or rollover current maturities may be nece ssary. From the standpoint of the banks themselves, such restructuring and the provision of some addition al credit, alongside and dependent upon agreed IMF programs, will in some instances be the most effective and prudent means available to enhance the creditworthiness of borrowing countries and thus protect their own interests.  In such cases, where new loans  facilitate the adjustment process and enable a country to strengthen its economy and service its international debt in an orderly manner, new credits should not be subject to supervisory criticism. As we look ahead, both private institutions and the relevant authorities and international institutions shou ld develop more effective means of heading off crisis.  Some  banks have already undertaken promising initiatives to bols ter their information sources and lending judgments.  The IMF, with  resources appropriately enlarged, is likely to have an even larger role to play in maintaining essential discipline.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -19-  Those are some of the major reasons tha t I am convinced.we can make the 1980's the reverse of the 1970's -a decade of renewed stability and progre ss -- a decade in which the doubts and uncertainties of today will give way to renewed confidence and vigor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For release on delivery 8:00 PM, EST November 16, 1982  Sustainable Recovery:  Setting the Stage  Remarks by Paul A. Volcker Chairman, Board of Governors of the Federal Reserve System before the Fifty-eighth Annual Meeting of the New England Council Boston, Massachusetts  November 16, 1982  I am delighted to be with you tonight for several reasons. First, I can take special pleasure in joining you to honor Dick Hill.  For many years, he has stood in the first  rank of bankers, not just in Boston and New England, but in the nation and the world.  But with Dick, banking responsibilities  have been combined with a clear sense of the public interest. It is that quality that over many years has brought Dick into close contact -- as Director of the Boston Fed, as a member and President of our Federal Advisory Council, and in less formal contacts -- with me and my colleagues and predecessors in the Federal Reserve.  He has been as unstinting in his wise counsel  to us as I know he has to many of you. Second, I welcome the chance to share thoughts about our economic problems with members and friends of the New England Council.  Your oiganization has had a mission  to analyze dis-  passionately the problems of a once relatively depressed region, tc) propose constructive approaches and develop a needed consensus for action, and to "stick with it" 3,,,?.ar in and year out.  The  relative strength and progress of the New England economy in recent years stands in part as a tribute to your faith and efforts. Of course, New England, like every other region of the country, has not been exempt from the effects of national problems. I need not linger over the human and statistical evidence of economic trouble -- the postwar record unemployment rate, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3  planning, and in our shopping.  As we did so, 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 in the  end, the growth we took for granted was undermined. By the late 1970's, the country began responding -responding most particularly by attaching high priority to the effort to deal with inflation.  The Federal Reserve, by  necessity, has been at the leading edge of that effort, recognizing no inflation can be stopped without appropriate restraint on the growth of money and credit. was  And that effort  made more difficult because complementary approaches were  weak or  lacking. We should never have anticipated that dealing with a  deeply entrenched inflation would be fast and easy; it has not been.  Strong pressures on credit markets, with interest  rates affected by continuing inflationary expectations, have burdened capital intensive industries in general, and housing in particular.  Plans undertaken and financed in the expectation  of rapidly rising prices have had disappointing results, in some cases leading to unanticipated financial strains and even bankruptcy.  Profits have been hard hit as prices have stabilized  faster than costs and volume has declined.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5  At the same time, the upward trend of wage and • salary costs has slowed. The pattern is uneven among industries and companies, partly because of contracts extending over several years. But it is unmistakable. With inflation slowing, that restraint on nominal income has been fully consistent with higher real incom e for those working.  The demonstrated progress agairist  inflation -- combined of course with the currently exces sive levels of unemployment -- should be reflected in furth er restraint on the clrowth of nominal wages.  Together with  rising productivity, the result should be slower growt h in unit wage costs, paving the way for further progr ess toward price stability and the higher real incomes we want as the economy expands.  To be sure, movements in food, energy,  and commodity prices may not be so favorable to the consu mer they have all been affected by the recession.  But neither  is it likely we will face the kind of agricultural or energ y price shocks we had in the 1970's. I do not equate that progress against inflation with victory -- far from it.  Concern about inflation is not some-  thing we can afford to turn on or off -- not if we want to see that progress continue and price stability restored. That concern will, in turn, require continued vigilance in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7  As you know, most of the monetary and credit aggregates that the markets watch so closely are run ning somewhat above the targets we set for ourselves at the start of the year. So far as Ml is concerned, the data have plainly come to be distorted by institutional change -- par ticularly in October by a flow of funds into checking accoun ts as a large amount of All-Savers certificates have mature d.  Prospectively, the  introduction of new forms of transa ction or quasi-transaction accounts are likely to distort the fig ures further, although the direction of impact is less evi dent.  In the circumstances,  we have had little alternative to att aching much less weight to that aggregate in guiding the provis ion of reserves until the institutional changes settle down. More generally, current developments with respect to the growth of money and credit have had to be interpreted in the light of all the evidence we can gather with respect to the economy, price developments, int erest rates, and financial pressures. Taken together, the evi dence is strong that the desire for liquidity has strengthe ned appreciably this year, as sometimes happens in periods of exceptional economic uncertainty. The turnover or "velocity " of "Ml money" has, for instance, declined appreciably this year, instead of trending upwards as has been the pat tern thoughou€ the postwar period. M2 velocity -- generally stable in most recent years -- has declined even more sha rply.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9-  much surplus capacity and unemployment, but rathe r when the economy begins to regain forward momentum.  That is why we  must continuously balance the need to meet liquidity needs today against the risks of building in fresh impet us to inflation tomorrow.  And, that is also one reason why the  prospective position of the Federal budget remains of so much concern. In the fiscal year just ended, the Federal deficit was $111 billion, and it could well be 50 percent highe r in the current fiscal year.  That current deficit, approaching 5 per-  cent of the GNP, overstates the "structural" budgetary probl ems. High unemployment cuts revenues and increases spending, temporarily enlarging the deficit.  Indeed, tLe current deficit,  while hardly welcome in so large a size, does provide suppo rt and impetus to the economy at a time of c•,,clical weakness. But the hard fact is that,  Rs  things now stand,  the deficit will remain close to current levels even as the recession passes.  Left unattended, the budget 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.  Simply pumping out more money and liquidity,  year after year, to meet the needs of the government would risk renewed inflation and drive investors away from the longterm markets once again.  The alternative of the government   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11-  Not just the United States but the entire industrialized world is in recession.  In greater or lesser degree, the eco n-  omic and financial circumstances of other countries parallel our own -- and for similar reasons.  Unemployment is at record  levels, prospects for near-term gro wth today seem limited, and the financial ties that bind us to the developing world have become strained. Should we fail to understand the full extent of these difficulties or respond inappropriately, no country will escape the consequences. The problems of the rest of the ind ustrialized world and their policy approaches are sn similar to ours that I need not linger over the analysis. Suffice it to say that our recovery can assist theirs -and vice versa -- just as the heartening progress on the inf lation front has been speeded by the interactions among us. Wha t is a threat to us all is the evident pressure toward gre ater protectionism. There are those who in our present situat ion would draw parallels to the 1930's -- usually with lit tle foundation. One major difference has been that we have not, by and large, yielded to the temptation to retreat behind national barriers to trade, with the inevitable result of cut ting off each other's markets, impairing growth in trade, and dullin g competitive pressure on prices. But there are too many exceptions to that generality to permit us to rest easy.  -13-  in the industrialized countries and the declining level of real world trade restricted market s for the exports of the developing countries. Declining com modity prices put further pressure on many developing countries still dependent on commodity exports for a large portio n of their foreign exchange earnings. The result is that, in the past yea r or so, we have seen several important borrowing countries -- first in Eastern Europe and then in Latin America -reaching the limits of their ability to keep up the servic ing of their foreign debt. As these countries experienced str ain, the flow of bank credit to some others -- freely available only a few months before -was curtailed, threatening further problems. In this situation, the need for clo sing the gap in external payments -- sometimes at the expense of stopping internal growth for a time -- is unambiguous; when the supply of new credit is reduced, there is simply no alternative. The key question i how orderly this adjustment process will be. The more orderly and effective the adjustment, the more rapidly growth in the developing world can be restored and sustained, the more our own export markets and those of other industrialized countries will expand, and the mor e prompt]y any questions about the possible impact on the ear nings of international banks can be put to rest.  It is precisely for these reasons  that there exists the strongest kin d of community of interest among borrowers and lender s, among governments and private businesses, and among the developing and industrialized countries, in workin g together to find  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15-  Agreement with the IMF brings with it the availability of certain amounts of medium-term financing, usually over a three-year period. To assure the adequacy of IMF resources in current and prospective circumsta nces, the ongoing negotiations to enlarge the funds availa ble to it should, and can, be brought to an early conclu sion. Both a sizable increase in basic quotas and a rel iable standby borrowing arrangement -- along the general lin es proposed by the U.S. Treasury some months ago -- can be readily justified. Agreement on both, now, seems to me doable. And such agreement would convincingly demons trate the capacity of countries to act together to meet ext raordinary needs. I realize some time will be req uired to obtain necessary legislative approval in each countr y involved.  But early  international agreement will provid e the tangible assurance necessary to permit full commitmen t of presently available funds if needed, and those funds could be temporarily supplemented by IMF borrowing from the market or directly from member countries. The importance of IMF participatio n in adjustment programs is not limited to the amo unt that institution can itself lend. The Fund is in a uni que position for evaluating, dispassionately and impartially, the policies of its member countries.  Approval of adjustment programs pro posed by the  member will reinforce the confidenc e of other lenders, paving the way for needed extensions of official and private credit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -17It is equally a fact that, given strong and necessary adjustment programs, borrowing countries will not renuire bank financing in amounts nearly as large as the sums provided by banks over recent years.  Indeed, lending banks, working effec-  tively together to meet a clearly justified transitional need, should be able to provide the necessary marg in of finance while reducing ratios of outstanding loans relative to their capital or assets.  In a number of instances, outstanding loans need  not rise much if at all next year, although nego tiations to extend or rollover current maturities may be nece ssary. From the standpoint of the banks themselves, such restructuring and the provision of some addition al credit, alongside and dependent upon agreed IMF programs , will in some instances be the most effective and prudent mean avai s lable to enhance the creditworthiness of borrowing countrie s and thus protect their own interests.  In such cases, where new loans  facilitate the adjustment process and enable a coun try to strengthen its economy and service its internationa l debt in an orderly manner, new credits should not be subj ect to supervisory criticism. As we look ahead, both private institutions and the relevant authorities and international institutions shou ld develop more effective means of heading off crisis.  Some  banks have already undertaken promising initiatives to bolster their information sources and lending judgments.  The IMF, with  resources appropriately enlarged, is likely to have an even larger role to play in maintaining essential discipline.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The  ,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -19-  Those are some of the major reasons that I am convinced.we can make the 1980's the reverse of the 1970's -a decade of renewed stability and progress -a decade in which the doubts and uncertainties of today will give way to renewed confidence and vigor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For release on delivery 8:00 PM, EST November 16, 1982  Sustainable Recovery:  Setting the Stage  Remarks by  Paul A. Volcker Chairman, Board of Governors of the Fed eral Reserve System before the Fifty-eighth Annual Meeting of the New England Council Boston, Massachusetts  November 16, 1982  I am delighted to be with you tonight for several reasons. First, I can take special pleasure in joining you to honor Dick Hill.  For many years, he has stood in the first  rank of bankers, not just in Boston and New England, but in the nation and the world.  But with Dick, banking responsibilities  have been combined with a clear sense of the public interest. IL is that quality that over many years has brought Dick into close contact  as Director of the Boston Fed, as a member and  President of our Federal Advisory Council, and in less formal contacts -- with me and my colleagues and predecessors in the Federal Reserve.  HE has been as unstinting in his wise counsel  to us as I know he has to many of you. Second, I welcome the chance to share thoughts about our economic problems with members and friends of the New England Council.  Your olganization has had a mission  to analyze dis-  passionately thu problems of a once relatively depressed region, t,:) propose constructive approaches and develop a needed conscnsus for action, and to "stick with it" ylar in and year out.  The  relative strength and progress of the New England economy in recent years stands in part as a tribute to your faith and efforts. Of course, New England, like every other region of the country, has not been exempt from the effects of national problems. I need not linger over the human and statistical evidence of economic trouble -- the postwar record unemployment rate, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  planning, and in our shopping.  As we did so, 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 in the  end, the growth we took for granted was undermined. By the late 1970's, the country began responding -responding most particularly by attaching high priority to the effort to deal with inflation.  The Federal Reserve, by  necessity, has been at the leading edge of that effort, recognizing no inflation can be stopped without appropriate restraint on the growth of money and credit.  And that effort  was made more difficult because complementary approaches were weak or lacking. We should never have anticipated that dealing with a deeply entrenched inflation would be fast and easy; it has not been.  Strong pressures on credit markets, with interest  rates affected by continuing inflationary expectations, have burdened capital intensive industries in general, and housing in particular.  Plans undertaken and financed in the expectation  of rapidly rising prices have had disappointing results, in some cases leading to unanticipated financial strains and even bankruptcy.  Profits have been hard hit as prices have stabilized  faster than costs and volume has declined.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5-  At the same time, the upward trend of wage and salary costs has slowed.  The pattern is uneven among  industries and companies, partly because of contracts extending over several years. But it is unmi stakable. With inflation slowing, that restraint on nominal income has been fully consistent with high er real income for those working.  The demonstrated pro3ress agairist  inflation -- combined of course with the currently excessive levels of unemployment -- should be reflecte d in further restraint on the crowth of nominal wages.  Together with  rising productivity, the result should be slower growth in unit wage costs, paving the way for furt her progress toward price stability and the higher real inco mes we want as the economy expands.  To be sure, movements in food, energy,  and commodity prices may not be so favo rable to the consumer they have all been affected by the recessio n.  But neither  is it likely we will face the kind of agricultural or energy price shocks we had in the 1970's. I do not equate that progress against infl ation with victory -- far from it.  Concern about inflation is not some-  thing we can afford to turn on or off -- not if we want to see that progress continue and price stabilit y restored. That concern will, in turn, require continued vigilance in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  41•••  7_  _  As you know, most of the monetary and cre dit aggregates that the markets watch so closely are run ning somewhat above the targets we set for ourselves at the start of the year. So far as Ml is concerned, the data have plainly come to be distorted by institutional change -- par ticularly in October by a flow of funds into checking acc ounts as a large amount of All-Savers certificates have mature d.  Prospectively, the  introduction of new forms of transacti on or quasi-transaction accounts are likely to distort the figure s further, although the direction of impact is less eviden t.  In the circumstances,  we have had little alternative to attach ing much less weight to that aggregate in guiding the provis ion of reserves until the institutional changes settle down. More generally, current developments with respect to the growth of money and credit hav e had to be interpreted in the light of all the evidence we can gather with respect to the economy, price developments, int erest rates, and financial pressures.  Taken together, the evidence is str ong that the  desire for liquidity has strengthe ned appreciably this year, as sometimes happens in periods of exceptional economic uncertainty.  The turnover or "velocity" of "Ml mon ey" has,  for instance, declined appreciab ly this year, instead of trending upwards as has been the pat tern thoughoui the postwar period.  M2 velocity -- generally stable in mos t recent  years -- has declined even more sharply.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  much surplus capacity and unempl oyment, but rather when the economy begins to regain forward momentum. That is why we must continuously balance the need to meet liquidity needs today against the risks of buildi ng in fresh impetus to inflation tomorrow. And, that is alro one reason why the prospective position of the Federa l budget remains of so much concern. In the fiscal year just ended, the Federal deficit was $111 billion, and it could wel l be 50 percent higher in the current fiscal year. That cur rent deficit, approaching 5 percent of the GNP, overstates the "structural" budgetary problems. High unemployment cuts revenues and increases spending, temporarily enlarging the deficit. Indeed, the current deficit, while hardly welcome in so lar ge a size, does provide support and impetus to the economy at a time of c.•,,clical weakness. But the hard fact is that, a2 things now stand, the deficit will remain close to current levels even as the recession passes. Left unattende d, the budget situation poses a strong potential for a clash bet ween 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. Simply pumpin g out more money and liquidity, year after year, to meet the needs of the government would risk renewed inflat::on and drive investors away from the longterm markets once again. The alt ernative of the government   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11-  Not just the United States but the entire industrialized world is in recession.  In greater or lesser degree, the eco n-  omic and financial circumstances of oth er countries parallel our own -- and for similar reasons.  Unemployment is at record  levels, prospects for near-term growth today seem limited, and the financial ties that bind us to the developing world have become strained. Should we fail to und erstand the full extent of these difficulties or respond inappr opriately, no country will escape the consequences. The problems of the rest of the industrializ ed world and their policy approaches are sn sim ilar to ours that I need not linger over the analysis.  Suffice it to say that  our recovery can assist theirs -- and vice versa -- just as the heartening progress on the inflation front has been speeded by the interactions among us. the evident pressure  What is a threat to us all is  toward greater protectionism.  There  are those who in our present situation would draw parallels to the 1930's -- usually with little foundation.  One major  difference has been that we have not, by and large, yielded to the temptation to retreat behind nat ional barriers to trade, with the inevitable result of cutting off each other's markets, impairing growth in trade, and dulling competitive pressure on prices.  But there are too many exceptions to that gen erality  to permit us to rest easy.  -13-  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 furthe r  pressure on many developing countries still dependent on commodity exports for a large portion of their foreign exchange earnings. The result is that, in the past year or so, we have seen several important borrowing cou ntries -- first in Eastern Europe and then in Latin America -reaching the limits of their ability to keep up the servicing of their foreign debt. As these countries experienced strain , the flow of bank credit to some others -- freely available onl y a few months before -was curtailed, threatening further pro blems. In this situation, the need for closin g the gap in external payments -- sometimes at the expense of stopping internal growth for a time -- is una mbiguous; when the supply of new credit is reduced, there is sim pJy no alternative.  The  key question ir how orderly this adjust ment process will be. The more orderly and effective the adj ustment, the more rapidly growth in the devcloping world can be res tored and sustained, the more our own export markets and tho se of other industrialized countries will expand, and the more pro mptly any questions about the possible impact on the earnin gs of international banks can be put to rest.  It is precisely for these reason s  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15-  Agreement with the IMF brings with it the availabi lity of certain amounts of medium-term financing, usua lly over a three-year period.  To assure the adequacy of IMF resources  in current and prospective circumstances, the ongo ing negotiations to enlarge the funds available to it shou ld, and can, be brought to an early conclusion.  Both a sizable  increase in basic quotas and a reliable standby borr owing arrangement -- along' the general lines proposed by the U.S. Treasury some months ago -- can be readily justifie d. Agreement on both, now, seems to me doable.  And such  agreement would convincingly demonstrate the capacity of countries to act together to meet extraordinar y needs. I realize some time will be required to obtain necessar y legislative approval in each country involved.  But early  international agreement will provide the tangible assurance necessary to permit full commitment of presentl avai lable y funds if needed, and those funds could be temporar ily supplemented by IMF borrowing from the market or dire ctly from member countries. The importance of IMF participation in adjustment programs is not limited to the amount that institut ion can itself lend.  The Fund is in a unique position for evaluating,  dispassionately and impartially, the policies of its memb er countries.  Approval of adjustment programs proposed by the  member will reinforce the confidence of other lenders, paving the way for needed extensions of official and private credit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -17It is equally a fact that, given strong and necessary adjustment programs, borrowing countries will not renui re bank financing in amounts nearly as large as the sums provided by banks over recent years.  Indeed, lending banks, working effec-  tively together to meet a clearly justified transition al need, should be able to provide the necessary margin of finan ce while reducing ratios of outstanding loans, relative to their capital or assets.  In a number of instances, outstanding loans need  not rise much if at all next year, although negotiations to extend or rollover current maturities may be necessary. From the standpoint of the banks themselves, such restructuring and the provision of some additional credit, alongside and dependent upon agreed IMF programs, will in some instances be the most effective and prudent means available to enhance the creditworthiness of borrowing countries and thus protect their own interests.  In such cases, where new loans  facilitate the adjustment process and enable a country to strengthen its economy and service its international debt in an orderly manner, new credits should not be subject to supervisory criticism. As we look ahead, both private institutions and the relevant authorities and international institutions should develop more effective means of heading off crisis.  Some  banks have already undertaken promising initiatives to bolster their information sources and lending judgments.  The IMF, with  resources appropriately enlarged, is likely to have an even larger role to play in maintaining essential discipline.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -19--  Those are some of the major reasons that I am convinced -we can make the 1980's the reverse of the 1970's -a decade of renewed stability and progress -- a decade in which the doubts and uncertainties of today will give way to renewed confidence and vigor.    https://fraser.stlouisfed.org • Federal Reserve Bank of St. Louis  For release on delivery 8:00 PM, EST November 16, 1982  Sustainable Recovery:  Setting the Stage  Remarks by  Paul A. Volcker Chairman, Board of Governors of the Federal Rese rve System before the  Fifty-eighth Annual Meeting of the  New England Council  Boston, Massachusetts  November 16, 1982  am delighted to be with you tonight for several reasons. First, I can take special pleasure in joining you to honor Dick Hill.  For many years, he has stood in the first  rank of bankers, not just in Boston and New England, but in the nation and the world.  But with Dick, banking responsibilities  have been combined with a clear sense of the public interest. It is that quality that over many years has brought Dick into close contact -- as Director of the Boston Fed, as a member and President of our Federal Advisory Council, and in less formal contacts -- with me and my colleagues and predecessors in the Federal Reserve.  He has been as unstinting in his wise counsel  to us as I know he has to many of you. Second, I welcome the chance to share thoughts about our economic problems with members and friends of the New England Council.  Your organization has had a mission -- to analyze dis-  passionately the problems of a once relatively depressed region, t) propose constructive approaches and develop a needed consensus for action, and to "stick with it" ylar in and year out.  The  relative strength and progress of the New England e:7onomy in recent years stands in part as a tribute to your faith and efforts. Of course, New England, like every other region of the country, has not been exempt from the effects of national problems. I need not linger over the human and statistical evidence of economic trouble -- the postwar record unemployment rate, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •...  -3--  planning, and in our shopping.  As we did so, 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 in the  end, the growth we took for granted was undermined. By the late 1970's, the country began responding -responding most particularly by attaching high priority to the effort to deal with inflation.  The Federal Reserve, by  necessity, has been at the leading edge of that effort, recognizing no inflation can be stopped without appropriate restraint on the growth of money and credit.  And that effort  was made more difficult because complementary approaches were weak or lacking. We should never have anticipated that dealing with a deeply entrenched inflation would be fast and easy; it has not been.  Strong pressures on credit markets, with interest  rates affected by continuing inflationary expectations, have burdened capital intensive industries in general, and housing in particular.  Plans undertaken and financed in the expectation  of rapidly rising prices have had disappointing results, in some cases leading to unanticipated financial strains and even bankruptcy.  Profits have been hard hit as prices have stabilized  faster than costs and volume has declined.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5  At the same time, the upward trend of wage and salary costs has slowed.  The pattern is uneven among  industries and companies, partly because of contracts extending over several years. But it is unmistakable. With inflation slowing, that restraint on nominal income has been fully consistent with higher real income for those working.  The demonstrated progress agairist  inflation -- combined of course with the currently excessive levels of unemployment -- should be reflected in further restraint on the orowth of nominal wages.  Together with  rising productivity, the result should be slower growth in unit wage costs, paving the way for further progress toward price stability and the higher real incomes we want as the economy expands.  To be sure, movements in food, energy,  and commodity prices may not be so favorable to the consumer they have all been affected by the recession.  But neither  is it likely we will face the kind of agricultural or energy price shocks we had in the 1970's. I do not equate that progress against inflation with victory -- far from it.  Concern about inflation is not some-  thing we can afford to turn on or off -- not if we want to see that progress continue and price stability restored. That concern will, in turn, require continued vigilance in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7  As you know, most of the monetary and cre dit aggregates that the Markets watch so closely are run ning somewhat above the targets we set for ourselves at the sta rt of the year. So far as Ml is concerned, the data have plainly come to be distorted by institutional change -- partic ularly in October by a flow of funds into checking accounts as a large amount of All-Savers certificates have matured.  Prospectively, the  introduction of new forms of transaction or quasi-transaction accounts are likely to distort the figure s further, although the direction of impact is less eviden t.  In the circumstances,  we have had little alternative to att aching much less weight to that aggregate in guiding the provision of reserves until the institutional changes settle down. More generally, current developments wit h respect to the growth of money and credit have had to be interpreted in the light of all the evidence we can gather with respect to the economy, price developments, intere st rates, and financial pressures.  Taken together, the evidence is strong that the  desire for liquidity has strengthened appreciably this year, as sometimes happens in periods of exc eptional economic uncertainty.  The turnover or "velocity" of "Ml money" has,  for instance, declined appreciably thi s year, instead of trending upwards as has been the patter n thoughouf the postwar period.  M2 velocity -- generally stable in mos t recent  years -- has declined even more sha rply.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  9-  much surplus capacity and unempl oyment, but rather when the economy begins to regain forward momentum. That is why we must continuously balance the need to meet liquidity needs today against the risks of building in fresh impetus to inflation tomorrow. And, that is als o one reason why the prospective position of the Federa l budget remains of so much concern. In the fiscal year just ended, the Fed eral deficit was $111 billion, and it could well be 50 percent higher in the current fiscal year.  That current deficit, approaching 5 per -  cent of the GNP, overstates the "st ructural" budgetary problems. High unemployment cuts revenues and increases spending, temporarily enlarging the deficit.  Indeed, tLe current deficit,  while hardly welcome in so large a size, does provide support and impetus to the economy at a time of cs/clical weakness. But the hard fact is that, Rs thi ngs now stand, the deficit will remain close to cur rent levels even as the recession passes.  Left unattended, the budget situation poses  a strong potential for a clash betwee n the need to finance the deficit and the rising financial req uirements for housing and for the business investment needed to support lasting growth in productivity.  Simply pumping out more money and liquidity ,  year after year, to meet the needs of the government would risk renewed inflation and drive inv estors away from the longterm markets once again.  The alternative of the government  -11-  Not just the United States but the entire ind ustrialized world is in recession.  In greater or lesser degree, the econ-  omic and financial circumstances of other countries parallel our own -- and for similar reasons.  Unemployment is at record  levels, prospects for near-term growth tod ay seem limited, and the financial ties that bind us to the dev eloping world have become strained.  Should we fail to understand the full extent  of these difficulties or respond inappropr iately, no country will escape the consequences. The problems of the rest of the industrializ ed world and their policy approaches are sr simila r to ours that I need not linger over the analysis.  Suffice it to say that  our recovery can assist theirs -- and vic e versa -- just as the heartening progress on the inflation front has been speeded by the interactions among us. the evident pressure  What is a threat to us all is  toward greater protectionism.  There  are those who in our present situation wou ld draw parallels to the 1930's -- usually with little fou ndation.  One major  difference has been that we have not, by and large, yielded to the temptation to retreat behind nation al barriers to trade, with the inevitable result of cutting off each other's markets, impairing growth in trade, and dulling com petitive pressure on prices.  But there are too many exceptions to that generality  to permit us to rest easy.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -13-  in the industrialized countries and the declining level of real world trade rectricted market s for the exports of the developing countries. Declining com modity prices put further pressure on many developing countries still dependent on commodity exports for a large portio n of their foreign exchange earnings. The result is that, in the past year or so, we have seen several important borrowing cou ntries -- first in Eastern Europe and then in Latin America -reaching the limits of their ability to keep up the servicing of their foreign debt. As these countries experienced strain , the flow of bank credit to some others -- freely available onl y a few months before -was curtailed, threatening further problems. In this situation, the need for closin g the gap in external payments -- sometimes at the expense of stopping internal growth for a time -- is una mbiguous; when the supply of new credit is reduced, there is sim pJy no alternative.  The  key question ir7 how orderly this adj ustment process will be. The more orderly and effective the adj ustment, the more rapidly growth in the developing world can be restored and sustained, the more our own export markets and tho se of other industrialized countries will expand, and the more pro mpt]y any questions about the possible impact on the ear nings of international banks can be put to rest.  It is precisely for these reasons  that there exists the strongest kind of community of interest among borrowers and lender s, among governments and private businesses, and among the developing and industrialized countries, in working together to find  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15-  Agreement with the IMF brings with it the avai lability of certain' amounts of medium-term financing, usually over a three-year period.  To assure the adequacy of IMF resources  in current and prospective circumstances, the ongoing negotiations to enlarge the funds available to it should, and can, be brought to an early conclusion.  Both a sizable  increase in basic quotas and a reliable stan dby borrowing arrangement -- along the general lines prop osed by the U.S. Treasury some months ago -- can be readily justified. Agreement on both, now, seems to me doable.  And such  agreement would convincingly demonstrate the capacity of countries to act together to meet extraord inary needs. I realize some time will be required to obta in necessary legislative approval in each country involved .  But early  international agreement will provide the tangible assurance necessary to permit full commitment of pres ently available funds if needed, and those funds could be temporarily supplemented by IMF borrowing from the market or directly from member countries. The importance of IMF participation in adjustme nt programs is not limited to the amount that institution can itself lend.  The Fund is in a unique position for evaluati ng,  dispassionately and impartially, the policies of its member countries.  Approval of adjustment programs proposed by the  member will reinforce the confidence of othe r lenders, paving the way for needed extensions of official and private credit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -17It is equally a fact that, given strong and neces sary adjustment programs, borrowing countries will not renui re bank financing in amounts nearly as large as the sums provided by banks over recent years.  Indeed, lending banks, working effec-  tively together to meet a clearly justified transition al need, should be able to provide the necessary margin of finan ce while reducing ratios of outstanding loans relative to their capital or assets.  In a number of instances, outstanding loans need  not rise much if at all next year, although negotiatio ns to extend or rollover current maturities may be necessary. From the standpoint of the banks themselves, such restructuring and the provision of some additional credit, alongside and dependent upon agreed IMF programs, will in some instances be the most effective and prudent means available to enhance the creditworthiness of borrowing countries and thus protect their own interests.  In such cases, where new loans  facilitate the adjustment process and enable a country to strengthen its economy and service its international debt in an orderly manner, new credits should not be subject to supervisory criticism. As we look ahead, both private institutions and the relevant authorities and international institutions should develop more effective means of heading off crisis.  Some  banks have already undertaken promising initiatives to bolster their information sources and lending judgments.  The IMF, with  resources appropriately enlarged, is likely to have an even larger role to play in maintaining essential discipline.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -19-  Those are some of the major reasons that I am convinced.we can make the 1980's the revers e of the 1970's -a decade of renewed stability and progress -- a decade in which the doubts and uncertainties of today wil l give way to renewed confidence and vigor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  dr  For release on delivery 8:00 PM, EST November 16, 1982  Sustainable Recovery:  Setting the Stage  Remarks by  Paul A. Volcker  Chairman, Board of Governors of the Federal Reserve System before the  Fifty-eighth Annual Meeting of the  New England Council  Boston, Massachusetts  November 16, 1982  Ri  I am delighted to be with you tonight for several reasons. First, I can take special pleasure in joining you to honor Dick Hill.  For many years, he has stood in the first  rank of bankers, not just in Boston and New England, but in the nation and the world.  But with Dick, banking responsibilities  have been combined with a clear sense of the public interest. IL is that quality that over many years has brought Dick into close contact -- as Director of the Boston Fed, as a member and President of our Federal Advisory Council, and in less formal contacts -- with me and my colleagues and predecessors in the Federal Reserve.  He has been as unstinting in his wise counsel  to us as I know he has to many of you. Second, I welcome the chance to share thoughts about our economic problems with members and friends of the New England Council.  Your oiganization has had a mission  to analyze dis-  passionately the problems of a once relatively depressed region, propose constructive approaches and develop a needed consensus for action, and to "stick with it" 17.ar in and year out.  The  relative strength and progress of the New England economy in recent years stands in part as a tribute to your faith and efforts. Of course, New England, like every other region of the country, has not been exempt from the effects of national problems. I need not linger over the human and statistical evidence of economic trouble -- the postwar record unemployment rate, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  planning, and in our shopping.  As we did so, 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 in the  end, the growth we took for granted was undermined. By the late 1970's, the country began responding -responding most particularly by attaching high priority to the effort to deal with inflation.  The Federal Reserve, by  necessity, has been at the leading edge of that effort, recognizing no inflation can be stopped without appropriate restraint on the growth of money and credit.  And that effort  was made more difficult because complementary approaches were weak or lacking. We should never have anticipated that dealing with a deeply entrenched inflation would be fast and easy; it has not been.  Strong pressures on credit markets, with interest  rates affected by continuing inflationary expectations, have burdened capital intensive industries in general, and housing in particular.  Plans undertaken and financed in the expectation  of rapidly rising prices have had disappointing results, in some cases leading to unanticipated financial strains and even bankruptcy.  Profits have been hard hit as prices have stabilized  faster than costs and volume has declined.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  At the same time, the upward trend of wage and • salary costs has slowed. The pattern is uneven among industries and companies, partly because of contract s extending over several years. But it is unmistakable . With inflation slowing, that restraint on nominal income has been fully consistent with higher real income for those working.  The demonstrated progress agairist  inflation -- combined of course with the currentl y excessive levels of unemployment -- should be reflected in further restraint on the crowth of nominal wages.  Together with  rising productivity, the result should be slow er growth in unit wage costs, paving the way for further prog ress toward price stability and the higher real incomes we want as the economy expands.  To be sure, movements in food, energy,  and commodity prices may not be so favorable to the consumer they have all been affected by the recession.  But neither  is it likely we will face the kind of agricultural or energy price shocks we had in the 1970s. I do not equate that progress against inflation with victory -- far from it.  Concern about inflation is not some-  thing we can afford to turn on or off -- not if we want to see that progress continue and price stability rest ored. That concern will, in turn, require continued vigilanc e in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I  -  7-  -  As you know, most of the monetary and credit aggregates that the markets watch so closely are running somewhat above the targets we set for ourselves at the start of the year. So far as Ml is concerned, the data have plai nly come to be distorted by institutional change -- particularly in October by a flow of funds into checking accounts as a large amount of All-Savers certificates have matured.  Prospectively, the  introduction of new forms of transaction or quas i-transaction accounts are likely to distort the figures further, although the direction of impact is less evident.  In the circumstances,  we have had little alternative to attaching much less weight to that aggregate in guiding the provision of rese rves until the institutional changes settle down. More generally, current developments with respect to the growth of money and credit have had to be interpreted in the light of all the evidence we can gather with respect to the economy, price developments, interest rate s, and financial pressures.  Taken together, the evidence is strong that the  desire for liquidity has strengthened appr eciably this year, as sometimes happens in periods of exce ptional economic uncertainty.  The turnover or "velocity" of "Ml money" has,  for instance, declined appreciably this year, instead of trending upwards as has been the pattern thoughou € the postwar period.  M2 velocity -- generally stable in most recent  years -- has declined even more sharply.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9  much surplus capacity and unemployment, but rath er when the  economy begins to regain forward momentum.  That is why we  must continuously balance the need to meet liquidity needs today against the risks of building in fresh impetus to inflation tomorrow.  And, that is also one reason why the  prospective position of the Federal budget rema ins of so much concern. In the fiscal year just ended, the Federal defi cit was $111 billion, and it could well be 50 percent higher in the current fiscal year.  That current deficit, approaching 5 per-  cent of the GNP, overstates the "structural" budg etary problems. High unemployment cuts revenues and increases spending, temporarily enlarging the deficit.  Indeed, tLe current deficit,  while hardly welcome in so large a size, does provide support and impetus to the economy at a time of c,clical weakness. But the hard fact is that,  as  things now stand,  the deficit will remain close to current leve ls even as the recession passes.  Left unattended, the budget 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.  Simply pumping out more money and liquidity,  year after year, to meet the needs of the gove rnment would risk renewed inflation and drive investors away from the longterm markets once again.  The alternative of the government  -11-  Not just the United States but the entire industrialized  world is in recession.  In greater or lesser degree, the econ-  omic and financial circumstances of oth er countries parallel our own -- and for similar reasons.  Unemployment is at record  levels, prospects for near-term growth today seem limited, and the financial ties that bind us to the developing world have become strained.  Should we fail to understand the full ext ent  of these difficulties or respond inappr opriately, no country will escape the consequences. The problems of the rest of the indust rialized world and their policy approaches are so similar to ours that I need not linger over the analysis.  Suffice it to say that  our recovery can assist theirs -- and vice versa -- just as the heartening progress on the inflation front has been speeded by the interactions among us. the evident pressure  What is a threat to us all is  toward greater protectionism.  There  are those who in our present situation would draw parallels to the 1930's -- usually with little foundation.  One major  difference has been that we have not, by and large, yielded to the temptation to retreat behind nat ional barriers to trade, with the inevitable result of cutting off each other's markets, impairing growth in trade, and dulling competitive pressure on prices.  But there are too many exceptions to tha gen erality t  to permit us to rest easy.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -13-  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 furthe r  pressure on many developing countries sti ll dependent on commodity exports for a large portion of their foreign exchange earnings. The result is that, in the past year or so, we have seen several important borrowing countries -- first in Eastern Europe and then in Latin America -- reachi ng the limits of their ability to keep up the servicing of their foreign debt. As these countries experienced strain, the flow of bank credit to some others -- freely available only a few months before -was curtailed, threatening further proble ms. In this situation, the need for closing the gap in external payments -- sometimes at the exp ense of stopping internal growth for a time -- is unambiguo us; when the supply of new credit is reduced, there is simp3y no alternative.  The  key question is how orderly this adjustmen t process will be. The more orderly and effective the adjustmen t, the more rapidly growth in the developing world can be res tored and sustained, the more our own export markets and those of other industrialized countries will expand, and the more prompt ly any questions about the possible impact on the earnings of international banks can be put to rest.  It is precisely for these reasons  that there exists the strongest kind of community of interest among borrowers and lenders, amo ng governments and private businesses, and among the dev eloping and industrialized countries, in working together to find  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15-  Agreement with the IMF brings with it the availability of certain amounts of medium-term financ ing, usually over a three-year period. To assure the ade quacy of IMF resources in current and prospective circumsta nces, the ongoing negotiations to enlarge the funds available to it should, and can, be brought to an early conclusion.  Both a sizable  increase in basic quotas and a reliable standby borrowing arrangement -- along' the general lines proposed by the U.S. Treasury some months ago -- can be rea dily justified. Agreement on both, now, seems to me doa ble.  And such  agreement would convincingly demonstra te the capacity of countries to act together to meet extrao rdinary needs. I realize some time will be required to obtain necessary legislative approval in each country inv olved.  But early  international agreement will provide the tangible assurance necessary to permit full commitment of presently available funds if needed, and those funds cou ld be temporarily supplemented by IMF borrowing from the mar ket or directly from member countries. The importance of IMF participation in adj ustment programs is not limited to the amount that institution can itself lend.  The Fund is in a unique position for evalua ting,  dispassionately and impartially, the pol icies of its member countries.  Approval of adjustment programs proposed by the  member will reinforce the confidence of other lenders, paving the way for needed extensions of off icial and private credit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • -17It is equally a fact that, given stro ng and necessary adjustment programs, borrowing countries will not renuire bank financing in amounts nearly as large as the sums provided by banks over recent years.  Indeed, lending banks, working effec-  tively together to meet a clearly justifie d transitional need, should be able to provide the necessary margin of finance while reducing ratios of outstanding loans relative to their capital or assets.  In a number of instances, outstanding loan s need  not rise much if at all next year, although negotiations to extend or rollover current maturities may be necessary. From the standpoint of the banks themselv es, such restructuring and the provision of some addi tional credit, alongside and dependent upon agreed IMF prog rams, will in some instances be the most effective and prudent mean s available to enhance the creditworthiness of borrowing countrie s and thus protect their own interests.  In such cases, where new loans  facilitate the adjustment process and enable a country to strengthen its economy and service its internationa l debt in an orderly manner, new credits should not be subj ect to supervisory criticism. As we look ahead, both private institutions and the relevant authorities and international institutions should develop more effective means of heading off crisis.  Some  banks have already undertaken promising initiatives to bolster their information sources and lending judgments.  The IMF, with  resources appropriately enlarged, is likely to have an even larger role to play in maintaining essential discipli ne.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  0  -19--  Those are some of the major reasons that I am convinced.we can make the 1980's the reverse of the 1970' s -a decade of renewed stability and progress -- a decade in which the doubts and uncertainties of today will give way to renew ed confidence and vigor.  %   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For release on delivery 8:00 PM, EST November 16, 1982  Sustainable Recovery:  Setting the Stage  Remarks by  Paul A. Volcker  Chairman, Board of Governors of the Federal Reserve System  before the  Fifty-eighth Annual Meeting of the  New England Council  Boston, Massachusetts  November 16, 1982  I am delighted to be with you tonight for several reasons. First, I can take special pleasure in joining you to honor Dick Hill.  For many years, he has stood in the first  rank of bankers, not just in Boston and New England, but in the nation and the world.  But with Dick, banking responsibilities  have been combined with a clear sense of the public interest. IL is that quality that over many years has brought Dick into close contact -- as Director of the Boston Fed, as a member and President of our Federal Advisory Council, and in less formal contacts -- with me and my colleagues and predeccssors in the Federal Reserve.  He has been as unstinting in his wise counsel  to us as I know he has to many of you. Second, I welcome the chance to share thoughts about our economic problems with members and friends of the New England Council.  Your o/ganization has had a mission  to analyze dis-  passionately the problems of a once relatively depressed region, t;) propose constructive approaches and develop a needed consensus for action, and to "stick with it" ylar in and year out.  The  relative strength and progress of the New England economy in recent years stands in part as a tribute to your faith and efforts. Of course, New England, like every other region of the country, has not been exempt from the effects of national problems. I need not linger over the human and statistical evidence of economic trouble -- the postwar record unemployment rate, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  planning, and in our shopping.  As we did so, 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 in the  end, the growth we took for granted was undermined. By the late 1970's, the country began responding -responding most particularly by attaching high priority to the effort to deal with inflation.  The Federal Reserve, by  necessity, has been at the leading edge of that effort, recognizing no inflation can be stopped without appropriate restraint on the growth of money and credit.  And that effort  was made more difficult because complementary approaches were weak or lacking. We should never have anticipated that dealing with a deeply entrenched inflation would be fast and easy; it has not been.  Strong pressures on credit markets, with interest  rates affected by continuing inflationary expectations, have burdened capital intensive industries in general, and housing in particular.  Plans undertaken and financed in the expectation  of rapidly rising prices have had disappointing results, in some cases leading to unanticipated financial strains and even bankruptcy.  Profits have been hard hit as prices have stabilized  faster than costs and volume has declined.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5-  At the same time, the upward trend of wage and salary costs has slowed.  The pattern is uneven among  industries and companies, partly because of contracts extending over several years. But it is unmistakable. With inflation slowing, that restraint on nominal income has been fully consistent with higher real income for those working. inflation  The demonstrated progress agailist  combined of course with the currently excessive  levels of unemployment -- should be reflected in further restraint on the orowth of nominal wages.  Together with  rising productivity, the result should be slower growth in unit wage costs, paving the way for further progress toward price stability and the higher real incomes we want as the economy expands.  To be sure, movements in food, energy,  and commodity prices may not be so favorable to the consumer they have all been affected by the recession.  But neither  is it likely we will face the kind of agricultural or energy price shocks we had in the 1970's. I do not equate that progress against inflation with victory -- far from it.  Concern about inflation is not some-  thing we can afford to turn on or off -- not if we want to see that progress continue and price stability restored. That concern will, in turn, require continued vigilance in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7-  As you know, most of the monetary and credit aggregates that the markets watch so closely are running somewhat above the targets we set for ourselves at the start of the year. So far as Ml is concerned, the data have plainly come to be distorted by institutional change -- particularly in October by a flow of funds into checking accounts as a large amount of All-Savers certificates have matured.  Prospectively, the  introduction of new forms of transaction or quasi-transaction accounts are likely to distort the figures further, although the direction of impact is less evident.  in the circumstances,  we have had little alternative to attaching much less weight to that aggregate in guiding the provision of reserves until the institutional changes settle down. More generally, current developments with respect to the growth of money and credit have had to be interpreted in the light of all the evidence we can gather with respect to the economy, price developments, interest rates, and financial pressures.  Taken together, the evidence is strong that the  desire for liquidity has strengthc!ned appreciably this year, as sometimes happens in periods of exceptional economic uncertainty.  The turnover or "velocity" of "Ml money" has,  for instance, declined appreciably this year, instead of trending upwards as has been the pattern thoughout the postwar period.  M2 velocity -- generally stable in most recent  years -- has declined even more sharply.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9-  much surplus capacity and unemployment, but rather when the economy begins to regain forward momentum.  That is why we  must continuously balance the need to meet liquidity needs today against the risks of building in fresh impetus to inflation tomorrow.  And, that is also one reason why the  prospective position of the Federal budget remains of so much concern. In the fiscal year just ended, the Federal deficit was $111 billion, and it could well be 50 percent higher in the current fiscal year.  That current deficit, approaching 5 per-  cent of the GNP, overstates the "structural" budgetary problems. High unemployment cuts revenues and increases spending, temporarily enlarging the deficit.  Indeed, tLe current deficit,  while hardly welcome in so large a size, does provide support and impetus to the economy at a time of cclical weakness. But the hard fact is that,  ?:71  things now stand,  the deficit will remain close to current levels even as the recession passes.  Left unattended, the budget 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.  Simply pumping out more money and liquidity,  year after year, to meet the needs of the government would risk renewed inflation and drive investors away from the longterm markets once again.  The alternative of the government  -11-  Not just the United States but the entire industrialized world is in recession.  In greater or lesser degree, the econ-  omic and financial circumstances of other countries parallel our own -- and for similar reasons.  Unemployment is at record  levels, prospects for near-term growth today seem limited, and the financial ties that bind us to the developing world have become strained.  Should we fail to understand the full extent  of these difficulties or respond inappropriately, no country will escape the consequences. The problems of the rest of the industrialized world and their policy approaches are sn similar to ours that I need not linger over the analysis.  Suffice it to say that  our recovery can assist theirs -- and vice versa -- just as the heartening progress on the inflation front has been speeded by the interactions among us. the evident pressure  What is a threat to us all is  toward greater protectionism.  There  are those who in our present situation would draw parallels to the 1930's  usually with little foundation.  One major  difference has been that we have not, by and large, yielded to the temptation to retreat behind national barriers to trade, with the inevitable result of cutting off each other's markets, impairing growth in trade, and dulling competitive pressure on prices.  But there are too many exceptions to that generality  to permit us to rest easy.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -13-  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. The result is that, in the past year or so, we have seen several important borrowing countries -- first in Eastern Europe and then in Latin America -- reaching the limits of their ability to keep up the servicing of their foreign debt. As these countries experienced strain, the flow of bank credit to some others -- freely available only a few months before -was curtailed, threatening further problems. In this situation, the need for closing the gap in external payments -- sometimes at the expense of stopping internal growth for a time -- is unambiguous; when the supply of new credit is reduced, there is simply no alternative. key question i  The  how orderly this adjustment process will be.  The more orderly and effective the adjustment, the more rapidly growth in the developing world can be restored and sustained, the more our own export markets and those of other industrialized countries will expand, and the more promptly any questions about the possible impact on the earnings of international banks can 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15-  Agreement with the IMF brings with it the availability of certain amounts of medium-term financing, usually over a three-year period.  To assure the adequacy of IMF resources  in current and prospective circumstances, the ongoing negotiations to enlarge the funds available to it should, and can, be brought to an early conclusion.  Both a sizable  increase in basic quotas and a reliable standby borrowing arrangement -- along' the general lines proposed by the U.S. Treasury some months ago -- can be readily justified. Agreement on both, now, seems to me doable.  And such  agreement would convincingly demonstrate the capacity of countries to act together to meet extraordinary needs. I realize some time will be required to obtain necessary legislative approval in each country involved.  But early  international agreement will provide the tangible assurance necessary to permit full commitment of presently available funds if needed, and those funds could be temporarily supplemented by IMF borrowing from the market or directly from member countries. The importance of IMF participation in adjustment programs is not limited to the amount that institution can itself lend.  The Fund is in a unique position for evaluating,  dispassionately and impartially, the policies of its member countries.  Approval of adjustment programs proposed by the  member will reinforce the confidence of other lenders, paving the way for needed extensions of official and private credit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  -17-  It is equally a fact that, given strong and necessary adjustment programs, borrowing countries will not renuire bank financing inamounts nearly as large as the sums provided by banks over recent years.  Indeed, lending banks, working effec-  tively together to meet a clearly justified transitional need, should be able to provide the necessary margin of finance while reducing ratios of outstanding loans relative to their capital or assets.  In a number of instances, outstanding loans need  not rise much if at all next year, although negotiations to extend or rollover current maturities may be necessary. From the standpoint of the banks themselves, such restructuring and the provision of some additional credit, alongside and dependent upon agreed IMF programs, will in some instances be the most effective and prudent means available to enhance the creditworthiness of borrowing countries and thus protect their own interests.  In such cases, where new loans  facilitate the adjustment process and enable a country to strengthen its economy and service its international debt in an orderly manner, new credits should not be subject to supervisory criticism. As we look ahead, both private institutions and the relevant authorities and international institutions should develop more effective means of heading off crisis.  Some  banks have already undertaken promising initiatives to bolster their information sources and lending judgments.  The IMF, with  resources appropriately enlarged, is likely to have an even larger role to play in maintaining essential discipline.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The  , -19-  Those are some of the major reasons that I am convinced.we can make the 1980's the reverse of the 1970's  4•1.•••••  a decade of renewed stability and progress -- a decade in which the doubts and uncertainties of today will give way to renewed confidence and vigor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For release on delivery 8:00 PM, EST November 16, 1982  Sustainable Recovery:  Setting the Stage  Remarks by Paul A. Volcker Chairman, Board of Governors of the Federal Reserve System before the Fifty-eighth Annual Meetin g of the New England Council Boston, Massachusetts  November 16, 1982  .4e  I am delighted to be with you tonight for several reasons. First, I can take special pleasure in joining you to honor Dick Hill.  For many years, he has stood in the first  rank of bankers, not just in Boston and New England, but in the nation and the world.  But with Dick, banking responsibilities  have been combined with a clear sense of the public inter est. It is that quality that over many years has brought Dick into close contact  as Director of the Boston Fed, as a member and  President of our Federal Advisory Council, and in less forma l contacts -- with me and my colleagues and predecessors in the Federal Reserve.  HE has been as unstinting in his wise counsel  to us as I know he has to many of you. Second, I welcome the chance to share thoughts about our economic problems with members and friends of the New Engla nd Council.  Your oiganization has had a mission  to analyze dis-  passionately the problems of a once relatively depressed region, t.;) propose constructive approaches and develop a needed consc nsus for action, and to "stick with it" ylar in and year out.  The  relative strength and progress of the New England economy in recent years stands in part as a tribute to your faith and efforts. Of course, New England, like every other region of the country, has not been exempt from the effects of national problems. I need not linger over the human and statistical evidence of economic trouble -- the postwar record unemployment rate, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  planning, and in our shopping.  As we did so, we tended to  leverage our capital, to reduce our liquidity, to dive rt our energies into more speculative and unproductive activiti es to take risks in ways that could not be sustained.  And in the  end, the growth we took for granted was undermined. By the late 1970's, the country began responding -responding most particularly by attaching high priority to the effort to deal with inflation.  The Federal Reserve, by  necessity, has been at the leading edge of that effort, recognizing no inflation can be stopped without appropriate restraint on the growth of money and credit.  And that effort  was made more difficult because complementary approach es were weak or lacking. We should never have anticipated that dealing with a deeply entrenched inflation would be fast and easy; it has not been.  Strong pressures on credit markets, with interest  rates affected by continuing inflationary expectations have , burdened capital intensive industries in general, and hous ing in particular.  Plans undertaken and financed in the expectation  of rapidly rising prices have had disappointing results, in some cases leading to unanticipated financial strains and even bankruptcy.  Profits have been hard hit as prices have stabilized  faster than costs and volume has declined.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  At the same time, the upward trend of wage and salary costs has slowed. Th e pattern is uneven among industries and companies, pa rtly because of contracts extending over several years. But it is unmistakable. With inflation slowing, that restraint on nominal income has been fully consis tent with higher real income for those working. The demo nstrated projress against inflation -- combined of co urse with the currently exce ssive levels of unemployment -- sh ould be reflected in furthe r restraint on the orowth of nominal wages. Together with rising productivity, the re sult should be slower growth in unit wage costs, paving the way for further progress to ward price stability and the high er real incomes we want as the economy expands. To be su re, movements in food, ener gy, and commodity prices may no t be so favorable to the cons umer they have all been affected by the recession. But neit her is it likely we will face th e kind of agricultural or en ergy price shocks we had in the 1970's. I do not equate that progre ss against inflation with victory -- far from it. Conc ern about inflation is not something we can afford to turn on or off -- not if we want to see that progress continue an d price stability restored. That concern will, in turn, require continued vigilance in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7_  _  As you know, most of the monetary and credit aggregates that the markets watch so closel y are running somewhat above the targets we set for ourselves at the start of the year. So far as Ml is concerned, the data have plainly come to be distorted by institutional change -- particularly in October by a flow of funds into checking accounts as a large amount of All-Savers certificates have matured. Prospectively, the introduction of new forms of transaction or quasi-transaction accounts are likely to distort the figures further, although the direction of impact is less evident. In the circumstances, we have had little alternative to attaching much less weight to that aggregate in guiding the provision of reserves until the institutional changes settle down. More generally, current develo pments with respect to the growth of money and credit have had to be interpreted in the light of all the evidence we can gather with respect to the economy, price developments , interest rates, and financial pressures. Taken together, the evidence is strong that the desire for liquidity has streng thened appreciably this year, as sometimes happens in period s of exceptional economic uncertainty. The turnover or "ve locity" of "Ml money" has, for instance, declined apprec iably this year, instead of trending upwards as has been the pattern thoughou the postwar period. M2 velocity -- gen erally stable in most recent years -- has declined even mor e sharply.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9  much surplus capacity and une mployment, but rather when the economy begins to regain forwar d momentum. That is why we must continuously balance the need to meet liquidity needs today against the risks of bui lding in fresh impetus to inflation tomorrow. And, that is also one reason why the prospective position of the Fed eral budget remains of so much concern. In the fiscal year just ended, the Federal deficit was $111 billion, and it could wel l be 50 percent higher in the current fiscal year. That cur rent deficit, approaching 5 percent of the GNP, overstates the "structural" budgetary problems. High unemployment cuts revenues and increases spending, temporarily enlarging the deficit. Indeed, tLe current deficit, while hardly welcome in so lar ge a size, does provide suppor t and impetus to the economy at a time of c•,,clical weakness. But the hard fact is that, as things now stand, the deficit will remain close to current levels even as the recession passes. Left unatte nded, the budget situation pos es 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 nee ded to support lasting growth in productivity. Simply pumpin g out more money and liquidity , year after yoar, to meet the needs of the government would risk renewed inflat::on and drive investors away from the longterm markets once again. The alternative of the government   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11-  Not just the United States but the entire industrialized world is in recession.  In greater or lesser degree , the econ-  omic and financial circumst ances of other countries para llel our own -- and for similar reasons. Unemployment is at record levels, prospects for near-t erm growth today seem limite d, and the financial ties that bind us to the developing world ha ve become strained. Should we fail to understand the full extent of these difficulties or re spond inappropriately, no co untry will escape the consequences . The problems of the rest of the industrialized world and their policy approaches are sn similar to ours that I need not linger over the an alysis. Suffice it to say that our recovery can assist thei rs -- and vice versa -- ju st as the heartening progress on the inflation front has be en speeded by the interactions among us. What is a threat to us all is the evident pressure towa rd greater protectionism. There are those who in our presen t situation would draw parall els to the 1930's -- usually wi th little foundation. One major difference has been that we have not, by and large, yiel ded to the temptation to retr eat behind national barrie rs to trade, with the inevitable resu lt of cutting off each other' s markets, impairing growth in trade, and dulling competitive pressu re on prices. But there are too many exceptions to that ge nerality to permit us to rest easy.  -13-  in the industrialized countries and the declining level of real world trade restricted market s 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 por tion of their foreign exchange earnings. The result is that, in the past yea r or so, we have seen several important borrowing countries -- first in Eastern Europe and then in Latin America -- reaching the limits of their ability to keep up the ser vicing of their foreign debt. As these countries experienced str ain, the flow of bank credit to some others -- freely available only a few months before -was curtailed, threatening further problems. In this situation, the need for clo sing the gap in external payments -- sometimes at the expense of stopping internal growth for a time -- is unambiguous; when the supply of new credit is reduced, there is simply no alternative. The key question if7 how orderly this adj ustment process will be. The more orderly and effective the adjustment, the more rapidly growth in the developing world can be restored and sustained, the more our own export markets and those of other industrialized countries will expand, and the mor e promptly any questions about the possible impact on the earnings of international banks can be put to rest.  It is precisely for these rea sons  that there exists the strongest kin d of community of interest among borrowers and lender s, among governments and private businesses, and among the developing and industrialized countries, in workin g together to find  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15-  Agreement with the IMF brings with it the availability of certain' amounts of medium-t erm financing, usually over a three-year period. To assu re the adequacy of IMF reso urces in current and prospective circumstances, the ongoing ne gotiations to enlarge the fund s available to it should, and can, be brought to an early conclusion. Both a sizable increase in basic quotas and a reliable standby borrowing arrangement -- along the gene ral lines proposed by the U.S. Treasury some months ago -can be readily justified. Agreement on both, now, seem s to me doable. And such agreement would convincingly demonstrate the capacity of countries to act together to meet extraordinary needs. I realize some time will be required to obtain necessary legislative approval in each country involved. But early international agreement will provide the tangible assurance necessary to permit full comm itment of presently available funds if needed, and those funds could be temporarily su pplemented by IMF borrowing fr om the market or directly from member countries. The importance of IMF partic ipation in adjustment programs is not limited to the amount that institution can itself lend. The Fund is in a unique position for evaluating , dispassionately and impartia lly, the policies of its member countries. Approval of ad justment programs proposed by th e member will reinforce the co nfidence of other lenders, paving the way for needed extensio ns of official and private cred it.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .  -17It is equally a fact that, given strong and necessary adjustment programs, borrowing countries will not renuire bank financing in amounts nearly as lar ge as the sums provided by banks over recent years. Indeed , lending banks, working effectively together to meet a clearl y justified transitional need, should be able to provide the nec essary margin of finance while reducing ratios of outstanding loa ns relative to their capital or assets. In a number of instan ces, outstanding loans need not rise much if at all next yea r, although negotiations to extend or rollover current maturitie s may be necessary. From the standpoint of the banks themselves, such restructuring and the provision of some additional credit, alongside and dependent upon agreed IMF programs, will in some instances be the most effective and prudent means available to enhance the creditworthiness of bor rowing countries and thus protect their own interests. In suc h cases, where new loans facilitate the adjustment process and enable a country to strengthen its economy and service its international debt in an orderly manner, new credits should not be subject to supervisory criticism. As we look ahead, both private instit utions and the relevant authorities and internationa l institutions should develop more effective means of hea ding off crisis.  Some  banks have already undertaken promis ing initiatives to bolster their information sources and lendin g judgments.  The IMF, with  resources appropriately enlarged, is lik ely to have an even larger role to play in maintaining ess ential discipline.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -19-  Those are some of the major reasons that I am convinced.we can make the 1980's the reverse of the 1970's -a decade of renewed stability and pro gress -- a decade in which the doubts and uncertainties of today will give way to renewed confidence and vigor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For release on delivery 8:00 PM, EST November 16, 1982  Sustainable Recovery:  Setting the Stage  Remarks by  Paul A. Volcker Chairman, Board of Governors of the Fed eral Reserve System before the Fifty-eighth Annual Meeting of the New England Council Boston, Massachusetts  November 16, 1982  I am delighted to be with you tonight for several reasons. First, I can take special pleasure in joining you to honor Dick Hill.  For many years, he has stood in the first  rank of bankers, not just in Boston and New England, but in the nation and the world.  But with Dick, banking responsibilities  have been combined with a clear sense of the public interest. It is that quality that over many years has brought Dick into close contact -- as Director of the Boston Fed, as a member and President of our Federal Advisory Council, and in less formal contacts  with me and my colleagues and predecessors in the  Federal Reserve.  HE has been as unstinting in his wise counsel  to us as I know he has to many of you. Second, I welcome the chance to share thoughts about our economic problems with members and friends of the New England Council.  Your o/ganization has had a mission  to analyze dis-  passionately the problems of a once relatively depressed region, t:J propose constructive approaches and develop a needed conscnsus for action, and to "stick with it" year in and year out.  The  relative strength and progress of the New England economy in recent years stands in part as a tribute to your faith and efforts. Of course, New England, like every other region of the country, has not been exempt from the effects of national problems. I need not linger over the human and statistical evidence of economic trouble -- the postwar record unemployment rate, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  planning, and  nIur shopping.  As we did so, we tended to  leverage ou.r 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 in the  end, the growth we took for granted was undermined. By the late 1970's, the country began responding -responding most particularly by attaching high priority to the effort to deal with inflation.  The Federal Reserve, by  necessity, has been at the leading edge of that effort, recognizing no inflation can be stopped without appropriate restraint on the growth of money and credit.  And that effort  was made more difficult because complementary approaches were weak or lacking. We should never have anticipated that  t1E,1!bE with a  deeply entrenched inflation would be fast and easy; it has not been.  Strong pressures on credit markets, with interest  rates affected by continuing inflationary expectations, have burdened capital intensive industries in general, and housing in particular.  Plans undertaken and financed in the expectation  of rapidly rising prices have had disappointing results, in some cases leading to unanticipated financial strains and even S. nkruptcy.  Profits have been hard hit as prices have stabzed  faster than costs and volume has declined.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5-  At the same time, the upward trend of wage and • salary costs has slowed. The pattern is unev en among industries and companies, partly because of contracts extending over several years. But it is unmi stakable. With inflation slowing, that restraint on nominal income has been fully consistent with high er real income for those working.  The demonstrated progress agai;ist  inflation -- combined of course with the currently excessive levels of unemployment -- should be refl ected in further restraint on the orowth of nominal wages.  Together with  rising productivity, the result should be slower growth in unit wage costs, paving the way for further progress toward price stability and the higher real incomes we want as the economy expands.  To be sure, movements in food, energy,  and commodity prices may not be so favorabl e to the consumer they have all been affected by the recessio n.  But neither  is it likely we will face the kind of agri cultural or energy price shocks we had in the 1970's. I do not equate that progress against inflatio n with victory -- far from it.  Concern about inflation is not some-  thing we can afford to turn on or off -- not if we want to see that progress continue and price stab ility restored. That concern will, in turn, require continue d vigilance in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7  As you know, most of the monetary and credit aggregates that the markets watch so closely are running somewhat above the targets we set for ourselves at the start of the year. So far as Ml is concerned, the dat a have plainly come to be distorted by institutional change -particularly in October by a flow of funds into checking acc ounts as a large amount of All-Savers certificates have mature d. Prospectively, the introduction of new forms of transa ction or quasi-transaction accounts are likely to distort the fig ures further, although the direction of impact is less eviden t. In the circumstances, we have had little alternative to attaching much less weight to that aggregate in guiding the pro vision of reserves until the institutional changes settle down. More generally, current developme nts with respect to the growth of money and credit hav e had to be interpreted in the light of all the evidence we can gather with respect to the economy, price developments, interest rates, and financial pressures. Taken together, the evidence is strong that the desire for liquidity has strengthe ned appreciably this year, as sometimes happens in period s of exceptional economic uncertainty. The turnover or "veloc ity" of "Ml money" has, for instance, declined appreciab ly this year, instead of trending upwards as has been the pattern thoughou the postwar period. M2 velocity -- gen erally stable in most recent years -- has declined even more sharply.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9  much surplus capacity and unemployment, but rather when the  economy begins to regain forward momentum.  That is why we  must continuously balance the need to meet liquidity needs today against the risks of building in fresh impetus to inflation tomorrow.  And, that is also one reason why the  prospective position of the Federal budg et remains of so much concern. In the fiscal year just ended, the Fede ral deficit was $111 billion, and it could well be 50 percent higher in the current fiscal year.  That current deficit, approaching 5 per-  cent of the GNP, overstates the "structural" budgetary problems. High unemployment cuts revenues and increase s spending, temporarily enlarging the deficit.  Indeed, tLe current deficit,  while hardly welcome in so large a size, does provide support and impetus to the economy at a time of c,,, clical weakness. But the hard fact is that,  ?2  things now stand,  the deficit will remain close to current levels even as the recession passes.  Left unattended, the budget 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 supp ort lasting growth in productivity.  Simply pumping out more money and liquidity,  year after yoar, to meet the needs of the gove rnment would risk renewed inflatf.on and drive investor s away from the longterm markets once again.  The alternative of the government  •  -11-  Not just the United States but the entire industrialized world is in recession.  In greater or lesser degree, the econ-  omic and financial circumstances of other countries parallel our own -- and for similar reasons.  Unemployment is at record  levels, prospects for near-term growth today seem limited, and the financial ties that bind us to the developing world have become strained.  Should we fail to understand the full extent  of these difficulties or respond inappropriately, no country will escape the consequences. 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.  Suffice it to say that  our recovery can assist theirs -- and vice versa -- just as the heartening progress on the inflation front has been speeded by the interactions among us. the evident pressure  What is a threat to us all is  toward greater protectionism.  There  are those who in our present situation would draw parallels to the 1930's  usually with little foundation.  One major  difference has been that we have not, by and large, yielded to the temptation to retreat behind national barriers to trade, with the inevitable result of cutting off each other's markets, impairing growth in trade, and dulling competitive pressure on prices.  But there are too many exceptions to that generality  to permit us to rest easy.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -13-  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. The result is that, in the past year or so, we have seen several important borrowing countries -- first in Eastern Europe and then in Latin America -- reaching the limits of their ability to keep up the servicing of their foreign debt. As these countries experienced strain, the flow of bank credit to some others -- freely available only a few months before -was curtailed, threatening further problems. In this situation, the need for closing the gap in external payments -- sometimes at the expense of stopping internal growth for a time -- is unambiguous; when the supply of new credit is reduced, there is simply no alternative. key question if  The  how orderly this adjustment process will be.  The more orderly and effective the adjustment, the more rapidly growth in the developing world can be restored and sustained, the more our own export markets and those of other industrialized countries will expand, and the more prompt]y any questions about the possible impact on the earnings of international banks can 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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15-  Agreement with the IMF brings with it the availability of certainr amounts of medium-term financing, usually over a three-year period.  To assure the adequacy of IMF resources  in current and prospective circumstances, the ongoing negotiations to enlarge the funds available to it should, and can, be brought to an early conclusion.  Both a sizable  increase in basic quotas and a reliable standby borrowing arrangement -- along. the general lines proposed by the U.S. Treasury some months ago -- can be readily justified. Agreement on both, now, seems to me doable.  And such  agreement would convincingly demonstrate the capacity of countries to act together to meet extraordinary needs. I realize some time will be required to obtain necessary legislative approval in each country involved.  But early  international agreement will provide the tangible assurance necessary to permit full commitment of presently available funds if needed, and those funds could be temporarily supplemented by IMF borrowing from the market or directly from member countries. The importance of IMF participation in adjustment programs is not limited to the amount that institution can itself lend.  The Fund is in a unique position for evaluating,  dispassionately and impartially, the policies of its member countries.  Approval of adjustment programs proposed by the  member will reinforce the confidence of other lenders, paving the way for needed extensions of official and private credit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -17-  It is equally a fact that, given strong and necessary adjustment programs, borrowing countries will not renuire bank financing in amounts nearly as large as the sums provided by banks over recent years.  Indeed, lending banks, working effec-  tively together to meet a clearly justified transitional need, should be able to provide the necessary margin of finance while reducing ratios of outstanding loans relative to their capital or assets.  In a number of instances, outstanding loans need  not rise much if at all next year, although negotiations to extend or rollover current maturities may be necessary. From the standpoint of the banks themselves, such restructuring and the provision of some additional credit, alongside and dependent upon agreed IMF programs, will in some instances be the most effective and prudent means available to enhance the creditworthiness of borrowing countries and thus protect their own interests.  In such cases, where new loans  facilitate the adjustment process and enable a country to strengthen its economy and service its international debt in an orderly manner, new credits should not be subject to supervisory criticism. As we look ahead, both private institutions and the relevant authorities and international institutions should develop more effective means of heading off crisis.  Some  banks have already undertaken promising initiatives to bolster their information sources and lending judgments.  The IMF, with  resources appropriately enlarged, is likely to have an even larger role to play in maintaining essential discipline.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  -19-  Those are some of the major reasons that I am convinced.we can make the 1980's the reverse of the 1970's  ••11• M••  a decade of renewed stability and progress -- a decade in which the doubts and uncertainties of today will give way to renewed confidence and vigor.  41.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For release on delivery 8:00 PM, EST November 16, 1982  Sustainable Recovery:  Setting the Stage  Remarks by  Paul A. Volcker  Chairman, Board of Governors of the Federal Reserve System  before the  Fifty-eighth Annual Meeting of the  New England Council  Boston, Massachusetts  November 16, 1982  I am delighted to be with you tonight for several reasons. First, I can take special pleasure in joining you to honor Dick Hill.  For many years, he has stood in the first  rank of bankers, not just in Boston and New England, but in the nation and the world.  But with Dick, banking responsibilities  have been combined with a clear sense of the public interest. IL is that quality that over many years has brought Dick into close contact -- as Director of the Boston Fed, as a member and President of our Federal Advisory Council, and in less formal contacts -- with me and my colleagues and predecessors in the Federal Reserve.  He has been as unstinting in his wise counsel  to us as I know he has to many of you. Second, I welcome the chance to share thoughts about our economic problems with members and friends of the New England Council.  Your o/ganization has had a mission -- to analyze dis-  passionately thLi problems of a once relatively depressed region, t-.) propose constructive approaches and develop a needed conscnsus for action, and to "stick with 't" year in and year out.  The  relative strength and progress of the New England economy in recent years stands in part as a tribute to your faith and efforts. Of course, New England, like every other region of the country, has not been exempt from the effects of national problems. I need not linger over the human and statistical evidence of economic trouble -- the postwar record unemployment rate, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3  planning, and in our shopping.  As we did so, 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 in the  end, the growth we took for granted was undermined. By the late 1970's, the country began responding -responding most particularly by attaching high priority to the effort to deal with inflation.  The Federal Reserve, by  necessity, has been at the leading edge of that effort, recognizing no inflation can be stopped without appropriate restraint on the growth of money and credit.  And that effort  was made more dcult because complementary approaches were weak or lacking. We should never have anticipated that dealing with a deeply entrenched inflation would be fast and easy; it has not been.  Strong pressures on credit markets, with interest  rates affected by continuing inflationary expectations, have S urdened capital intensive industries in general, and housing in particular.  Plans undertaken and financed in the expectation  of rapidly rising prices have had disappointing results, in some cases leading to unanticipated financial strains and even S. nkruptcy.  Profits have been hard hit as prices have stabzed  faster than costs and volume has declined.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  At the same time, the upward trend of wage and salary costs has slowed.  The pattern is uneven among  industries and companies, partly because of contracts extending over several years. But it is unmistakable. With inflation slowing, that restraint on nominal income has been fully consistent with higher real income for those working.  The demonstrated prc.3ress  inflation -- combined of course with the currently excessive levels of unemployment -- should be reflected in further restraint on the circwth of nominal wages.  Together with  rising productivity, the result should be slower growth in unit wage costs, paving the way for further progress toward price stability and the higher real incomes we want as the economy expands.  To be sure, movements in food, energy,  and commodity prices may not be so favorable to the consumer they have all been affected by the recession.  But neither  is it likely we will face the kind of agricultural or energy price shocks we had in the 1970s. I do not equate that progress against inflation with victory -- far from it.  Concern about inflation is not some-  thing we can afford to turn on or off -- not if we want to see that progress continue and price stability restored. That concern will, in turn, require continued vigilance in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7  As you know, most of the monetary and credit aggregates that the markets watch so closely are running somewhat above the targets we set for ourselves at the start of the year. So far as M1 is concerned, the data have plainly come to be distorted by institutional change -- particularly in October by a flow of funds into checking accounts as a large amount of All-Savers certificates have matured.  Prospectively, the  introduction of new forms of transaction or quasi-transaction accounts are likely to distort the figures further, although the direction of impact is less evident.  In the circumstances,  we have had little alternative to attaching much less weight to that aggregate in guiding the provision of reserves until the institutional changes settle down. More generally, current developments with respect to the growth of money and credit have had to be interpreted in the light of all the evidence we can gather with respect to the economy, price developments, interest rates, and financial pressures.  Taken together, the evidence is strong that the  desire for liquidity has strengthened appreciably this year, as sometimes happens in periods of exceptional economic uncertainty.  The turnover or "velocity" of "Ml money" has,  for instance, declined appreciably this year, instead of trending upwards as has been the pattern thoughou . the postwar period.  M2 velocity -- generally stable in most recent  years -- has declined even more sharply.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  9-  much surplus capacity and unemployment, but rather when the economy begins to regain forward momentum.  That is why we  must continuously balance the need to meet liquidity needs today against the risks of building in fresh impetus to inflation tomorrow.  And, that is als.  one reason why the  prospective position of the Federal budget remains of so much concern. In the fiscal year just ended, the Federal deficit was $111 billion, and it could well be 50 percent higher in the current fiscal year.  That current deficit, approaching' D per-  cent of the GNP, overstates the "structural" budgetary problems. High unemployment cuts revenues and increases spending, temporarily enlarging the deficit.  Indeed,  current deficit,  while hardly welcome in so large a size, does provide support and impetus to the economy at a time of cclical weakness. But the hard fact is that,  71 2  things now stand,  the deficit will remain close to current levels even as the recession passes.  Left unattended, the budget 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.  Simply pumping out more money and liquidity,  year after yoar, to meet the needs of the government would risk renewed inflation and drive investors away from the longterm markets once again.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The alternative of the government  Not just the United States but the entire industrialized world is in recession.  In greater or lesser degree, the econ-  omic and financial circumstances of other countries parallel our own -- and for similar reasons.  Unemployment is at record  levels, prospects for near-term growth today seem limited, and the financial ties that bind us to the developing world have become strained.  Should we fail to understand the full extent  of these difficulties or respond inappropriately, no country will escape the consequences. The problems of the rest of the industrialized world and their policy approaches are sn similar to ours that I need not linger over the analysis.  Suffice it to say that  our recovery can assist theirs -- and vice versa -- just as the heartening progress on the inflation front has been speeded by the interactions among us. the evident pressure  What is a threat to us all is  toward greater protectionism.  There  are those who in our present situation would draw parallels to the 1930's  usually with little foundation.  One major  difference has been that we have not, by and large, yielded to the temptation to retreat behind national barriers to trade, with the inevitable result of cutting off each other's markets, impairing growth in trade, and dulling competitive pressure on prices.  But there are too many exceptions to that generality  to permit us to rest easy.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -13--  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 exch ange earnings. The result is that, in the past year or so, we have seen several important borrowing countries -- first in East ern Europe and then in Latin America -- reaching the limi ts of their ability to keep up the servicing of their fore ign debt. As these countries experienced strain, the flow of bank credit to some others -- freely available only a few months before -was curtailed, threatening further problems. In this situation, the need for closing the gap in external payments -- sometimes at the expense of stop ping internal growth for a time -- is unambiguous; when the supply of new credit is reduced, there is simply no alternat ive.  The  key question Ic how orderly this adjustment process will be. The more orderly and effective the adjustment, the more rapidly growth in the devcloping world can be restored and sustained, the more our own export markets and those of other indu strialized countries will expand, and the more promptly any ques tions about the possible impact on the earnings of inte rnational banks can be put to rest.  It is precisely for these reasons  that there exists the strongest kind of communit y of interest among borrowers and lenders, among governments and private businesses, and among the developing and industrialized countries, in working together to find  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15-  Agreement with the IMF brings with it the availability of certain amounts of medium-term financing, usually over a three-year period.  To assure the adequacy of IMF resources  in current and prospective circumstances, the ongoing negotiations to enlarge the funds available to it should, and can, be brought to an early conclusion.  Both a sizable  increase in basic quotas and a reliable standby borrowing arrangement -- along the general lines proposed by the U.S. Treasury some months ago -- can be readily justified. Agreement on both, now, seems to me doable.  And such  agreement would convincingly demonstrate the capacity of countries to act together to meet extraordinary needs. I realize some time will be required to obtain necessary legislative approval in each country involved.  But early  international agreement will provide the tangible assurance necessary to permit full commitment of presently available funds if needed, and those funds could be temporarily supplemented by IMF borrowing from the market or directly from member countries. The importance of IMF participation in adjustment programs is not limited to the amount that institution can itself lend.  The Fund is in a unique position for evaluating,  dispassionately and impartially, the policies of its member countries.  Approval of adjustment programs proposed by the  member will reinforce the confidence of other lenders, paving the way for needed extensions of official and private credit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  F  -17-  It is equally a fact that, given strong and necessary adjustment programs, borrowing countries will not renuire bank financing in amounts nearly as large as the sums provided by banks over recent years.  Indeed, lending banks, working effec-  tively together to meet a clearly justified transitional need, should be able to provide the necessary margin of finance while reducing ratios of outstanding loans relative to their capital or assets.  In a number of instances, outstanding loans need  not rise much if at all next year, although negotiations to extend or rollover current maturities may be necessary. From the standpoint of the banks themselves, such restructuring and the provision of some additional credit, alongside and dependent upon agreed IMF programs, will in some instances be the most effective and prudent means available to enhance the creditworthiness of borrowing countries and thus protect their own interests.  In such cases, where new loans  facilitate the adjustment process and enable a country to strengthen its economy and service its international debt in an orderly manner, new credits should not be subject to supervisory criticism. As we look ahead, both private institutions and the relevant authorities and international institutions should develop more effective means of heading off crisis.  Some  banks have already undertaken promising initiatives to bolster their information sources and lending judgments.  The IMF, with  resources appropriately enlarged, is likely to have an even larger role to play in maintaining essential discipline.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The  ,  Those are some of the major reasons that I am convinced we can make the 1980's the reverse of the 1970's a decade of renewed stability and progress -- a decade in which the doubts and uncertainties of today will give way to renewed confidence and vigor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis
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