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For release on delivery
Tuesday, May 6, 1975
8:30 PM E. D. T.

The Current Recession in Perspective

Address by

Arthur F. Burns

Chairman, Board of Governors of the Federal Reserve System

at the Twelfth Annual Meeting of the

Society of American Business Writers

Washington, D. C.

May 6, 1975

I am glad to meet with this distinguished group of
business and financial journalists in a leisurely setting.


a policymaker, I feel I have much in common with the members
of your profession.

Both you and I must be alert to every twist

and nuance of the changing economic scene.

Both you and I must

keep busy searching the business skies for some clues to the
economic future.

I find this aspect of my work exciting and

intriguing, as I am sure you do.

But it does involve a certain

risk for both of us.
Sharing - - a s we do - - the problem of continually meeting
deadlines, we are in danger of becoming so preoccupied with
the very short run that we fail to see economic events in perspective.
For that very reason, I have wanted to take advantage of your
invitation, so that we might ponder together the historical developments which have brought our economy to its present condition.
This is a large and highly important subject.
full justice to it on the present occasion.

I cannot hope to do

Nevertheless* I shall

make a start this evening.
As you are well aware, these past few years have been
trying times for the American people.

Not only have we lived

through the agony of Vietnam and Watergate, but some of us


have even begun to wonder whether our dream of full employment, a stable price level, and a rising standard of living for
all our people, is beyond fulfillment.
Early last year, economic expansion began to falter in
our country, as it did in other countries around the world.


the same time* the pace of the inflation that had been building
for more than a decade accelerated sharply further.

As the

year advanced, it became increasingly clear that our economy
was moving into a recession.
During the past two quarters, the real gross national
product has declined by 5 per cent, and the level of industrial
production is now 12 or 13 per cent below last September.
The unemployment rate has risen swiftly, and so also has the
idle capacity in our major industries.

The decline in business

activity since last fall has been the steepest of the post-war
period, and yet the advance of the price level - - while considerably
slower than last year - - is continuing at a disconcerting pace.
No business-cycle movement can be comprehended solely
in terms of the events that occur within that cycle or the one
preceding it.

The economic currents of today are heavily


influenced by longer-range developments .-- such as changes in
economic and financial institutions, the course of public policy,
and the attitudes and work habits of people.

By examining the

historical background of recent economic troubles, we should
be able to arrive at a better understanding of where we now are.
The current recession is best viewed, and I believe it
will be so regarded by historians, as the culminating phase of
a long economic cycle.
There have been numerous long cycles in the past - that is, units of experience combining two or more ordinary
business cycles.

One such long cycle ran its course from 1908

to 1921, another from 1921 to 1933. And if we go back to the
nineteenth century, we encounter long cycles from 1879 to 1894
and from 1894 to 1908. These long cycles differ in innumerable
ways from one another.

But they also have some features in

common - - i n particular, each culminates in an economic decline
of more than average intensity.
The beginning of the long cycle that now appears to be
approaching its natural end may be dated as early as 1958, but
it is perhaps best to date its start in 1961. The upward move-^
ment of economic activity which began in that year was checked
briefly in 1967 and interrupted more significantly in 1970.


Although these interruptions were watched with concern and
some anxiety by practicing economists and other interested
citizens, they will be passed over lightly by economic historians
concerned with large events.
The reason is not hard to see.

Putting aside monthly

and quarterly data, and looking only at annual figures, we find
that total employment rose every year from 1961 through 1973.
So also did disposable personal income and personal consumption
expenditures - - both viewed on a per capita basis, and in real

This sustained upward trend of the economy came to

an end in 1974.
The successive phases of the long upswing from 1961
to 1974 provide a useful perspective on our current problems.
Some years ago, in my work at the National Bureau of Economic
Research, I observed a pattern in past long upswings - - an
initial stage that may be called the "industrial phase" followed
by what is best described as the "speculative phase. " The imbalances that develop in this latter phase lead inevitably to the
final downturn.

The events of the past 15 years conform rather

closely to this pattern.


The period from 1961 through 1964 may be regarded as
the industrial phase of the long upswing•

Productivity grew

rapidly - - increasing in the private nonfarm sector at an annual
rate of 3. 6 per cent between the final quarters of I960 and 1964,
or well above the average rate of the preceding decade.


labor costs were then remarkably stable, and so too was the
general price level.

Real wages and profits rose strongly.

During this period of sustained economic expansion, unemployment fell from about 7 per cent of the labor force to 5 per cent,
while the rate of use of industrial capacity rose substantially.
The second - - or speculative - - phase of the long upswing began around 1965 and continued through much of 1974.
This ten-year period was marked by a succession of major,
interrelated, and partly overlapping speculative waves that
in varying degrees gripped other leading industrial countries
as well as the United States.
The first speculative movement involved corporate
mergers and acquisitions.

In the euphoria of what some com-

mentators have called the Vgo-gd11 years, rapid growth of earnings
per share of common stock became the overriding goal of many
business managers.

Other yardsticks of corporate performance ~-


such as the rate of return on new investments - - were neglected,
and so too were the serious risks of increased leveraging of
common stock.
The aggregate volume of large corporate acquisitions,
which for some years had been running at about $2 billion per
year, jumped to $3 billion in 1965, to $8 billion in 1967, to
$12-1/2 billion in 1968, and then tapered off.

This was the

great era of conglomerates, when a variety of unrelated businesses were brought together under a single corporate management.

Entrepreneurs who displayed special skill in such

maneuvers were hailed as financial geniuses - - until their
newly built empires began to crumble.

Being preoccupied.

with corporate acquisitions and their conglomerate image,
many businessmen lost sight of the traditional business objective
of seeking larger profits through better technology, aggressive
marketing, and improved management.

The productivity of

their businesses suffered, and so too did the nation's productivity*
The spectacular merger movement of the late 1960's was
reinforced, and to a degree made possible, by the speculative
movement that developed in the market for common stocks.
The volume of trading on the New York Stock Exchange doubled


between 1966 and 1971, and for a time trading volume on the
American Exchange rose even faster.

The prices of many

stocks shot up with little regard to actual or potential earnings.
During the two years 1967 and 1968, the average price of a
share of common stock listed on the New York Exchange rose
40 per cent, while earnings per share of the listed companies
rose less than 2 per cent.

On the American Exchange, the

average price per share rose during the same years more than
140 per cent on an earnings base that again was virtually unchanged.
Much of this speculative ardor came from a section of
the mutual fund industry.


For the new breed of "performance

long-term investment in the shares of established

companies with proven earnings became an outmoded concept.
In their quest for quick capital gains, these institutions displayed
a penchant for risky investments and aggressive trading.


1965, a typical mutual fund turned over about one-fifth of its
common stock portfolio; by 1969, that fraction had risen to
nearly one-half.

As Wall Street then had it, the "smart money"

went into issues of .technologically-oriented firms or into
corporate conglomerates - - n o matter how well or poorly
they met the test of profitability.


Speculation in equities was cooled for a time by the
stock market decline of 1969-1970, but then it resumed again
and took on new forms.

Money managers began to channel a

preponderant part of their funds into the stocks of large and
well-known firms - - apparently with the thought that earnings
of those companies were impervious to the vicissitudes of
economic life.

A huge disparity was thereby created between

the price-earnings ratios of the "favored fifty'1 and those of
other corporations.

Share prices of these


favoredn companies

were, of course, especially hard hit in the subsequent shakeout of the stock market.
Speculation in common stocks was not confined to the
United States.

From the late 1960!s until about 1973, nearly

every major stock exchange in the world experienced a large
run-up in share prices, only to be followed by a drastic decline.
Indeed, speculation reached a more feverish pace in some
countries than in the United States.

On the Tokyo stock exchange,

for example* both share prices and the trading volume actually
doubled in the twelve months between January 1972 and January
1973, and then suffered a sharp reversal.


The third speculative wave that nourished the long upswing of our national economy occurred in the real estate market.
Homebuilding fluctuated around a horizontal trend during the

The vacancy rate in rental housing was at a high level

from I960 to 1965, then fell steadily until the end of the decade*
and thus helped pave the way for a new housing boom.


January of 1970 and January of 1973, the volume of new housing
starts doubled.

Since then, homebuilding has plunged, and in

some sections of the nation it has virtually come to a halt.
Failures of construction firms and unemployment among construction workers have reached depression levels.

These un-

happy developments stem in large measure from the excesses
of the housing boom that got under way in 1970.
Inflationary expectations clearly played a substantial
role in bolstering the demand for houses.

But the boom was

fostered also by an array of governmental policies designed
to stimulate activity in the housing sector.

These governmental

measures, however well-intentioned, gave little heed to basic
supply conditions in the industry or to the underlying demand
for housing.


In response to easy credit and Federal subsidies,
merchant builders moved ahead energetically, put up onefamily homes well ahead of demand, and thus permitted the
inventory of unsold homes to double between 1970 and 1973.
Speculative activity was even more intense in the multi-family
sector - - that is, in apartments built for renting, and particularly
in condominiums and cooperatives, which accounted for a fourth
of the completions of multi-family structures by the first half
of 1974.
The boom in housing was financed by a huge expansion
of mortgage credit and construction loans.

Real estate invest-

ment trusts played an exceptionally large role in supplying highrisk construction loans for condominiums, recreational developments, and other speculative activities.

The growth of real

estate trusts was extraordinary by any yardstick.

Their assets,

amounting to less than $700 million in 1968, soared to upwards
of $20 billion by 1973. Unsound practices accompanied this
rapid growth and, as a result, many real estate trusts now
face difficult financial problems.
The speculative boom in real estate was not confined
to residential structures.

It extended to speculation in land,


to widespread building of shopping centers, and to construction
of office buildings.

By 1972, the vacancy rate in office buildings

reached 13 per cent, but this type of construction still kept
The real estate boom in the United States during the
early 1970!s had its parallel in other countries.


in land and properties became rampant in the United Kingdom.
In 1972 alone, new house prices rose 47 per cent on the average*
The amount of credit absorbed in real estate ventures rose so
rapidly that the Bank of England felt forced to place special
controls on bank lending for such purposes.

And in Germany,

the boom in residential construction during 1971-73 left an
inventory of about a quarter million unsold units - - more than
a third of a peak year's output - - that now overhang the market.
It is in the nature of speculative movements to spread
from one country or market to another.

Just as the speculative

wave in real estate was beginning to taper off in 1973, a new
wave of speculation got under way - - this time in inventories.
That was the fourth and final speculative episode of the long
economic upswing from 1961 to 1974.

It involved massive

stocking up of raw materials, machinery, parts, and other
supplies in the United States and in other industrial countries.


The inventory speculation of 1973 and 1974 was the outgrowth of a boom in business activity that had raised its head
by 1972 in virtually every industrial country of the world.


synchronism of economic expansion in these countries was
partly coincidental, but the expansion that stemmed from
ordinary business-cycle developments was reinforced by the
adoption of stimulative economic policies almost everywhere.
As a result? production increased rapidly around the world,
and led to a burgeoning demand for raw materials, machine
tools, component parts, and capital equipment - - goods for
which our country is a major source of supply.

The pressure

of rising world demand was reinforced in our markets by the
devaluation of the dollar, which greatly improved our competitive
position in international trade.
By the beginning of 1973, as business firms attempted to
meet intense demands from both domestic and foreign customers,
serious bottlenecks and shortages had begun to develop in numerous
industries - - especially those producing steel, non-ferrous metals,
paper, chemicals, and other raw materials.

In this environment

of scarcities, the rise in prices of industrial commodities quickened
both here and abroad.

The dramatic advance of food prices in


1973, and later in energy prices, greatly compounded the worldwide inflationary problem.

In our country, these price pressures

were suppressed for a time by price and wage controls, but the
general price level exploded when controls were phased out in
late 1973 and early 1974.
One of the unfortunate consequences of inflation is that
it masks underlying economic realities.

As early as the spring

of 1973, a perceptible weakening could be detected in the trend
of consumer buying in this country.

The business community,

however, paid little attention to this ominous development.
The escalating pace of inflation fostered expectations of still
higher prices and persistent shortages in the years ahead, so
that intensive stockpiling of commodities continued.


increased out of all proportion to actual or prospective sales.
In fact, the ratio of inventories to sales, expressed in physical
terms, had risen by the summer of 1974 to the highest figure
for any business-cycle expansion since 1957 - - another year
when a severe recession got under way.
In summary, the period from 1965 to 1974 was marked by
a succession of interrelated, partly overlapping, speculative
waves - - first, in buying up of existing businesses; then, in the


stock market; next, in markets for real estate; and finally, in
markets for industrial materials and other commodities.
A prolonged speculative boom of this kind can seldom
be traced to a single causal factor.

In this instance, however,

a dominant source of the problem appears to have been the
lack of discipline in governmental finances.
The industrial phase of the long upswing drew to a close
in late 1964 or early 1965.

By then, the level of real output

was very close to the limits imposed by our nation's physical
capacity to produce.

By then, the level of wholesale prices was

already moving out of its groove of stability.


our Government did nothing to moderate the pace of expansion
of aggregate monetary demand.

On the contrary, it actually

embarked on a much more expansive fiscal policy.

The tax

reductions of 1964 were followed in 1965 by fresh tax reductions
and by a huge wave of spending both for new social programs and
for the war in Vietnam.

These misadventures of fiscal policy

doomed the economy to serious trouble, but we were slow to
recognize this.

Indeed, substantial tax reductions occurred

again in 1969 and 1971, and they too were followed by massive
increases of expenditures.


Deficits therefore mounted, and they persisted year in
and year out.

Over the last ten complete fiscal years - - that

is, from 1965 through 1974 - - the Federal debt held by the
public, including obligations of Federal credit agencies, rose
by more than 50 per cent.

The large and persistent deficits

added little to our nation's capacity to produce, but they added
substantially to aggregate monetary demand for goods and

They were thus directly responsible for much of

the accelerating inflation of the past decade.
Monetary and credit policies were not without some

As every student of economics knows, inflation cannot

continue indefinitely without an accommodating increase in
supplies of money and credit.

It is very difficult, however,

for a central bank to maintain good control of money and credit
when heavy governmental borrowing drives up interest rates,
and when the public is unwilling to face squarely the long-run
dangers inherent in excessively stimulative economic policies.
To make matters worse, laxity in our national economic
policies spilled over into private markets.

The "new economics, lf

of which less is now heard than before, held out the possibility,
if not the actual promise, of perpetual prosperity.

Many businessmen


and financiers came to view the business cycle as dead, and to
expect the Federal Government to bail out almost any enterprise
that ran into financial trouble.

All too frequently, therefore,

the canons of financial prudence that had been developed
through hard experience were set aside.
Many of our business corporations courted trouble by
permitting sharp reductions in their equity cushions or their

In the manufacturing sector, the ratio of debt to

equity - - which had been stable in the previous decade - - began
rising in 1964 and nearly doubled by the end of 1974.


a large part of the indebtedness piled up by business firms was
in the form of short-term obligations, and these in turn grew
much more rapidly than holdings of current assets.
Similar trends developed in some segments of commercial

Large money-market banks came to rely more heavily

on volatile short-term funds to finance their business customers,
and at times they increased their loan commitments to businesses
beyond prudent limits.

A few bank managers, too, began to

concern themselves excessively with maximizing short-run profits,
so that the prices quoted for their common stock would move higher.
Capital ratios of many banks deteriorated; questionable loans were


extended at home and abroad; insufficient attention was given
here and there to the risks of dealing in foreign exchange
markets; and too much bank credit went into the financing of
speculative real estate ventures.
A variety of loose practices also crept into State and
local government finance.

Faced with rapidly expanding demands

for services and limited sources of revenue, some governmental
units resorted to extensive short-term borrowing and employed
dubious accounting devices to conceal their budget deficits.
Statutory debt limits were circumvented through the creation
of special public authorities to finance the construction of housing,
schools, and health facilities.

Some of these authorities issued

so-called "moral obligation" bonds, which investors in many
instances regarded as the equivalent of "full faith and credit"

The novel financial devices seemed innocuous at

the time, but they have recently become a source of serious
concern to investors in municipal securities.
A nation cannot realistically expect prosperous economic
conditions to continue very long when the Fecleral Government
fails to heed the warning signs of accelerating inflation, when
many of its business leaders spend their finest hours arranging


financial maneuvers, and when aggressive trade unions push
up wage rates far beyond productivity gains.

After 1965, the

strength of the American economy was gradually sapped by
these ominous trends.

Productivity in the private nonfarm

sector, which had grown at an annual rate of 3. 6 per cent from
1961 through 1964, slowed to a 2. 2 per cent rate of advance
from 1964 to 1969, then to 1. 5 per cent from 1969 to 1974.
Expansion in the physical volume of national output likewise
declined during successive quinquennia.

The rate of inflation,

meanwhile, kept accelerating.
With the pace of inflation quickening, seeds of the current
recession were thus sown across the economy.

Rising prices

eroded the purchasing power of workers' incomes and savings.
Corporate profits diminished - - a fact that businessmen were
slow to recognize because of faulty accounting techniques.


dwellings were built on a scale that greatly exceeded the underlying

Inventories of commodities piled up, often at a fantastic

pace, as businessmen reacted to gathering fears of shortages.
Credit demands, both public and private, soared and interest
rates rose to unprecedented heights.


These basic maladjustments are now being worked out
of the economic system by recession .-..- a process that entails
enormous human and financial costs.

Our country has gone a

considerable distance in developing policies to alleviate
economic hardships, and these policies have been strengthened

Nevertheless, the recession has wrought great

damage to the lives and fortunes of many of our people.
This recession has cut deeply into economic activities.
It must not, however, be viewed as being merely a pathological

Since we permitted inflation to get out of control,

the recession is now performing a. painful ~- but also an
unavoidable - - function.
First, it is correcting the imbalances that developed
between the production and sales of many items, also between
orders and inventories, between capital investment and consumer
spending, and between the trend of costs and prices.
Second, business managers are responding to the
recession by moving energetically to improve efficiency - - b y
concentrating production in more modern and efficient installations,
by eliminating wasteful expenditures, by stimulating employees
to work more diligently, and by working harder themselves.


Third, the recession is improving the condition of financial

Interest rates have moved to lower levels as a result

of declining credit demands and of the Federal Reserve's efforts
to bolster the growth of money and credit.

Commercial banks

have taken advantage of the reduced demand for loans to repay
their borrowings from Federal Reserve Banks, to reduce
reliance on volatile sources of funds, and to rebuild liquid

The rapidly rising inflow of deposits to thrift

institutions has likewise permitted a reduction of indebtedness
and addition to their liquid assets.
Fourth, the recession is wringing inflation out of the
economic system.

Wholesale prices of late have moved down,

and the rise of consumer prices has also slowed.


general price stability is not yet in sight, a welcome element
of price competition has at long last been restored to our markets.
These and related business developments are paving the
way for recovery in economic activity.
confidence when the recovery will begin.

No one can foresee with
The history of our

country indicates clearly, however, that the culminating downward phase of a long cycle need not be of protracted duration.


Signs are multiplying, in fact, that an upturn in economic
activity may not be far away.

For example, employment rose

in April after six successive months of decline*
the workweek also stabilized last month.

The length of

The rate of layoffs in

manufacturing is now turning down, and some firms have been
recalling workers who formerly lost their jobs.

Sales of

goods at retail - - apart from autos - - have risen further.
Business and consumer confidence has been improving.


prospects for an early upturn in economic activity have been
strengthened by passage of the Tax Reduction Act of 1975.
Our nation stands at present at a crossroads in its

With the long and costly cycle in business activity

apparently approaching its end, the critical task now is to build
a solid foundation for our nation's economic future.

We will

accomplish that only if we understand and benefit from the lessons
of recent experience.
Since World War II, a consensus has been building in this
country that the primary task of economic policy is to maintain
full employment and promote maximum economic growth. We
have pursued these goals by being ever ready to stimulate the
economy through increased Federal spending, lower taxes, or


monetary ease.

Neglect of inflation, and of longer-run economic

and financial problems, has thus crept insidiously into public
policy making.

Our Government has become accustomed to

respond with alacrity to any hint of weakness in economic
activity, but to react sluggishly, and sometimes not at all,
to signs of excess demand and developing inflationary pressures.
The thinking of many of our prominent economists has
encouraged this bias in our economic policies.

During the

1950's and 1960!s, they frequently argued that "creeping inflation11
was a small price to pay for full employment.

Some even sug-

gested that a little inflation was a good thing - - that it energized
the economic system and thus promoted rapid economic growth.
This is a dangerous doctrine.

While inflation may begin

slowly in an economy operating at high pressure, it inevitably
gathers momentum.

A state of euphoria then tends to develop,

economic decision-making becomes distorted, managerial and
financial practices deteriorate, speculation becomes rampant,
industrial and financial imbalances pile up, and the strength of
the national economy is slowly but surely sapped.

That is the

harsh truth that the history of business cycles teaches.


To emphasize this truth, I should now like to offer this
distinguished group of journalists a bit of professional advice.
Since few of you are reluctant to pass along hints as to how I
should do my job, I have decided to suggest to you what the
really big economic news story of 1975 is likely to be.
The story has to do with the drama now unfolding on
Capitol Hill in the implementation of the Budget Control Act
adopted last year.

If I am right in thinking that our present

economic difficulties are largely traceable to the chronic bias
of the Federal budget toward deficits, there can be no doubt
about the importance of what is now being attempted.

No major

democracy that I know of has had a more deficient legislative
budget process than the United States - - with revenue decisions
separated from spending decisions and the latter handled in
piecemeal fashion.

Budgets in this country have just happened.

They certainly have not been planned.
We are now attempting to change that by adopting integrated
Congressional decisions on revenues and expenditures.
to you journalists is to follow this new effort closely.

My advice
It has a

significance for our nation that may carry far into the future.
But nothing can be taken for granted here.

We have tried budgetary


reform once before under the Legislative Reorganization Act
of 1946, and it failed.

It failed partly because of the challenge

to cherished Committee prerogatives, partly also because
Congress as a whole balked at accepting so much self-discipline.
I would urge you to study the history of that earlier effort and
to watch the present undertaking for tell-tale signs of similar
The potential gain for our nation from budget reform is
enormous even in this first year of n dry run. TT If, in fact, the
work of the new budget committees produces in the Congress a
deeper understanding of the impossibility of safely undertaking
all the ventures being urged by individual legislators, a constructive beginning toward a healthier economic environment
will have been made.

On the other hand, if the new budget

procedures are scuttled, or if they are used with little regard to
curbing the bias toward large-sized Federal deficits, there
ultimately may be little anyone can do to prevent galloping inflation
and social upheaval.
I am inclined to be optimistic about the outcome.


and more of our people are becoming concerned about the longerrange consequences of Federal financial policies*


on our nation's economic problems is gradually being gained by


our citizens and their Congressional representatives. A
healthy impatience with inflation is growing.

You journalists

are becoming more actively involved in the educational process.
I therefore remain hopeful that we shall practice greater foresight in dealing with our nation's economic problems than we
have in the recent past, and that we will thus build a better
future for ourselves and our children in the process.

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