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For release on delivery
Friday, June 11, 1976
4:00 PM E. D. T.

The World-Wide Problem of Inflation

Address by

Arthur F. Burns

Chairman, Board of Governors of the Federal Reserve System

at the Commencement Exercises of

Florida Institute of Technology

Melbourne, Florida

June 11, 1976

I am pleased to join this audience in a tribute to the
members of the graduating class, and also to their parents and
teachers who have done so much to make this day possible.
I would like to discuss with you today the dangerous disease
of inflation - - which strikes me as the economic equivalent of
high blood pressure.

The medical profession has recently urged

all of us to have our blood pressure checked.

High blood pres-

sure damages the human body and threatens the lives of those
who suffer from it.

Fortunately, when diagnosed promptly, it

can usually be treated successfully and brought under control.
I am not a physician, but I do know something about the
economic disease of inflation.

The effects of inflation are pervasive.

Persistent inflation saps the energies of a nation and undermines
economic and political institutions.

In recent years, inflation has

done great damage to the economies of many countries, including
our own.
Inflation is a man-made disease.
can be brought under control.

If properly treated, it

All of us - - and especially those

of you who are embarking on a new career - - have a vital interest

in bringing an end to the forces of inflation.


During your years here at the Institute, you have lived
through the worst inflation since World War II.

Over the past

four years alone, consumer prices in our country have risen by
35 per cent - - a n average increase of over 8 per cent a year.
Of late, the rise has moderated - - from 12 per cent in 1974 to
about half that rate currently.

An annual advance of 6 per cent

in prices, however, is still very troublesome.

If such a rate

persisted, the price level would double every 12 years.


1988, the purchasing power of each of your dollars would be
cut in half, and twelve years later - - or by the year 2000 - your already shrunken dollars would be cut in half once again.
In most other countries, inflation has been proceeding at
an appreciably faster pace than in the United States.

On the

average, consumer prices around the world rose by 15 per cent
in 1974, and they were still increasing at a rate of 11 per cent
during the past twelve months.
There is nothing inevitable about inflation, as experience
in our own and other countries indicates.

The over-all level of

prices in the United States remained relatively stable from 1952
through 1956, and again from I960 through 1964.

During the

latter period, wholesale prices actually declined a little, while


consumer prices increased at an average annual rate of about
1 per cent.

There were similar periods of relative price

stability in a number of other countries - - including Canada,
West Germany, Belgium, Switzerland, and Japan - - during the
1950!s and early 1960's.
The disease of inflation will not be cured until an aroused
citizenry demands corrective measures.

The intellectual leader-

ship that you in this graduating class and your counterparts around
the country can provide to the public at large will play a critical
role in the success of this endeavor.
Let me therefore describe briefly the characteristics of
inflation, the havoc it creates in the economic body, and the
course that must be pursued to regain a stable price level and a
healthy economy.
The current inflation in our country began in the middle
years of the 1960's.

The exuberant mood that then emerged in the

business community soon gave rise to a series of interrelated and
partly overlapping waves of speculation.

The first speculative

movement involved corporate mergers and acquisitions.


preneurs who displayed special skill in such maneuvers were hailed
as financial geniuses - - until their newly-built empires began to



Many businessmen were so preoccupied with corporate

acquisitions that they lost sight of traditional business objectives.
The productivity of their businesses suffered, and so too did the
nation's productivity.
This speculative merger movement was reinforced, and
to a degree made possible, by the speculation that developed
during the late 19601s in the market for common stocks.


prices of many stocks shot up with little regard to actual or
potential earnings.

Speculation in common stocks, moreover,

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.
The third speculative wave in our country occurred in the
real estate market.

It involved widespread building of shopping

centers, office structures, and recreational facilities, besides
land speculation and an extraordinary boom in residential construction.

Between January of 1970 and January of 1973, the

volume of new housing starts doubled and a huge inventory of
unsold homes piled up.

Once a condition of overbuilding was

recognized, residential construction plunged and for a time
virtually came to a halt in some sections of the country.


The real estate boom in the United States also had its
parallel in other countries*

For example, speculation in land

and properties became rampant in the United Kingdom during
the early 1970 f s.

And in Germany, the boom in residential

construction during 1971-73 led to an enormous increase in
unsold housing units - - and to an inevitable downturn in homebuilding.
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.
It involved massive stocking up of raw materials, machinery,
parts, and other supplies in the United States and in other
industrial countries.

Serious bottlenecks and shortages began

to develop in numerous industries.

In the resulting environment

of scarcities, the rise in prices of industrial commodities quickened
both here and abroad.
One of the unfortunate consequences of inflation is that it
masks underlying economic realities.

As early as the spring of

1973, the trend of consumer buying in this country began to

Many members of the business community, however,

paid little attention to this ominous development.

Nor did they


recognize that standard accounting practices, which had served
well enough in an era of price stability, were now masking the
deterioration taking place in business profits.

Caught up in the

euphoria of inflation, they built up inventories out of all proportion to actual or prospective sales, thus setting the stage
for a subsequent sharp decline in production and employment.
The corrosive influence of inflation goes far beyond the
distortion of businessmen's perspectives.
purchasing power of wages.

Inflation erodes the

Inflation reduces the real value

of the savings deposits, pensions, and life insurance policies
of consumers.

Inflation creates havoc in financial markets as

interest rates are driven up, funds for mortgage lending diminish,
and even some large and well-managed industrial firms encounter
difficulty in raising funds needed for plant expansion.

In siiort,

inflation upsets much of the planning that business firms and
households customarily do.

The state of confidence deteriorates,

and the driving force of economic expansion is blunted.
Concerned as we all are about the economic consequences
of inflation, there is even greater reason for concern about its
impact on our social and political institutions.

We must not risk

the social stresses that persistent inflation breeds.

Because of


its capricious effects on the income and wealth of a nation's
families and businesses, inflation inevitably causes disillusionment
and discontent.

It robs millions of citizens who in their desire

to be self-reliant have set aside funds for the education of their
children or their own retirement.
elderly especially hard.

It hits many of the poor and

And it eventually leads to business

recession and extensive unemployment, such as we have just
experienced to our sorrow.
In recent years, governments have toppled in Argentina,
Chile, and other countries - - i n large part because the citizens
of those countries had lost confidence in the ability of their
leaders to cope with the problem of inflation.

Among our own

people, the distortions, injustices, and hardships wrought by
inflation have contributed materially to distrust of government
officials and of governmental policies, and even to some loss
of confidence in our free enterprise system.

Discontent bred

by inflation can provoke profoundly disturbing social and political
change, as the history of other nations teaches.

I do not believe

I exaggerate in saying that the ultimate consequence of inflation
could well be a significant decline of economic and political
freedom for the American people.


Part of the world-wide problem of inflation in recent years
is attributable to special factors - - such as the extraordinary rise
of OPEC oil prices in 1973, and the crop shortfalls of 1972 and

But the fundamental source of inflation in our country

and others has been the lack of discipline in governmental
The current inflation began when our government embarked
on a highly expansionist fiscal policy in the middle 1960!s.


tax reductions occurred in 1964 and early 1965 and were immediately
followed by an explosion of Federal spending.

New and substantial

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

Over the past

ten fiscal years, the public debt - - including obligations of the
Federal credit agencies - - has risen by nearly $300 billion.
Deficit spending by the Federal Government can be
justified at a time of substantial unemployment.

It becomes a

source of economic instability, however, when deficits persist
in good times as well as bad.

Actually, the Federal budget has

been in deficit every year but one since I960.

The huge and

persistent deficits of the past decade added enormously to
aggregate demand for goods an^rig^vices, but they added little


to our capacity to produce.

They have thus been directly responsible

for a substantial part of the inflation problem.
It is sometimes contended that the Federal deficits of
recent years have been only a minor source of economic or
financial instability, since the amounts have usually been small
relative to total borrowing by the private sector.
faulty argument.

This is a

We must never confuse the power or respon-

sibility of private citizens with the power or responsibility of

Business firms and consumers have no way of acting

in concert to prevent an inflationary expansion of credit, and
their private actions may conflict with national objectives.


basic responsibility for economic stabilization lies with the
Federal Government,

Unless our government exercises that

function better than it has in the past, there will be little hope
for restoration of stability in the general price level.
There are some indications, I believe, that our government has of late been taking its fiscal responsibilities more

Thus, the President has recommended a very small

increase in budget outlays for the forthcoming fiscal year.
Moreover, the Congress has been acting constructively in the
exercise of its responsibilities under the Congressional Budget


Act of 1974.

There is therefore some reason for hope that total

Federal expenditures will not continue to advance at the frightening
pace of recent years.
State and local governmental budgets are also receiving
closer scrutiny nowadays.

The difficulties encountered by New

York City have had a tempering influence on the financial practices
of States and their political subdivisions - - a s well as on those
of other economic units - - across our land.

The emphasis on

sound finance that is now underway enhances the chances of
achieving a lasting prosperity in our country.


abroad are also more conscious of the need to brake the
growth of public expenditures in order to contain the forces of
Monetary policy too has an important role to play in
the fight against inflation, and we at the Federal Reserve are
well aware of that fact.

We intend to see to it that enough money

and credit are available to finance a good rate of economic expansion.
But we firmly intend to avoid excesses that would aggravate
inflation and create trouble for the future.

Many central bankers

abroad aspire to a similar course of policy, but some of them
are unable to adhere to it because of pressures from their finance


ministers or other governmental bodies.

Fortunately, under our

scheme of governmental organization, the Federal Reserve can
make, and stick to, the hard decisions that are at times avoided
by decision-makers subject to the day-to-day pressures of
political life.
Prudent fiscal and monetary policies are essential
ingredients of a national program to restore general price
stability, but they alone may not accomplish that objective within
the limits of our national patience.

Structural policies are also

needed to help restore full employment and to aid in correcting
the long-run inflationary bias in our economy.
For example, governmental efforts are long overdue to
encourage improvements in productivity through larger investment in modern plant and equipment.

A vigorous search should

be made for ways to enhance competition among our business

Governmental policies that affect labor markets

should also be reviewed.

The Federal minimum wage law is

still pricing many teenagers out of the labor market; the DavisBacon Act is still escalating costs and prices in the construction
industry; and governmental programs for income maintenance
now provide benefits on such a generous scale that they may be
blunting incentives to work.


In some countries - - for example, Canada, the United
Kingdom, the Netherlands - - attempts are being made to hold
down wage and price increases through ceilings or guidelines.
In the United Kingdom, the government has recently reached an
agreement with trade union leaders to grant tax reductions in
return for holding wage increases to an average of about 4-1/2
per cent during the year beginning on August 1.

Such a policy

would involve some decline in real income for workers in the
United Kingdom.

It offers promise, however, of cutting the

inflation rate sharply, and of relieving the downward pressures
on the pound in foreign exchange markets.
In our own country, I doubt that arrangements of that
kind would be practical.

It is clear, however, that restraint

on the part of both workers and businesses would be helpful
at the present time.
The current economic recovery is now just over a year

In some sectors of the economy, the advance of prices has

already begun to quicken - - even though unemployment remains
extensive and a significant part of our industrial plant is still

If workers now began to demand large catch-up increases

in wage rates or greatly enlarged fringe benefits, or if business


firxris began to raise prices faster than costs to increase profit
margins ? prospects for a gradual further abatement of inflation
and a prolonged and stable prosperity would be endangered.
I am confident that we will succeed in curing the disease
of inflation if the American people remain alert to the challenge.
I hope that members of this graduating class will join with me
and other citizens across the country in a national crusade to
protect the integrity of the dollar.

This objective is within our

means and is essential to a future of stable prosperity in our