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Comments by
G. William Miller
Chairman, Board of Governors of the Federal Reserve System

eeting with San Francisco Community Leaders and
Joint Boards of Directors,
Federal Reserve Bank of San Francisco

San Francisco, California
February 8, 1979


Inflation--Clear and Present Danger
Ladies and gentlemen, I'm particularly pleased to be here in San
Francisco today.

I ' m here for a reason that has to do with my general

stewardship while I'm in the Federal Reserve.

And that is a belief that

should visit the various components of the Federal Reserve System on
a regular basis, so that

can have direct contact with what's really

going on in the American economy and what's going on with the leadership
of the Federal Reserve and the leadership of all our communities.


keeps me from becoming insulated in Washington with viewpoints that are
too sterile and too unrelated to reality.

There is a good deal more

reality in San Francisco than in Washington.
I want to add my personal appreciation to the directors of the
Federal Reserve Bank of San Francisco and of the branches.

This is

indeed a very big territory, and it shows how this great nation has
developed when you realize what changes have taken place in this district
since the Federal Reserve System was set up in 1913.

If it were being

set up today, I'm sure you'd get more than one bank.

The amazing thing

about the original Federal Reserve System is that the senator who had
the most to do with it got two reserve banks for his state.

And con-

sidering the politics of today, I'm sure that California might get two
reserve banks.

Who knows?

The arrangements for my table were particularly well thought out,
because it was possible at lunch before

stepped up here to speak to

get all the inputs I need for an analysis of the economy.

The Gross

- 2 -

National Product is tied to Levis, and so the discussion of the jeans
business gave me the GNP.

And as you know, the price structure depends

. on the tuition at Stanford -- and so I got that all straightened out.
And Bill Haynes gave me some input on government finance, since he is
selling savings bonds.

(He even has a savings-bond tie on.)

So I really

was ab 1e to put the who 1e economy toge the r at 1unch , and vi ha t I ' m go i ng
to say now is obviously what I've just picked up.
Many of you may not know it, but you have had the burden placed
on you of having me represent this district in Washington.

Every governor

of the Federal Reserve, including the chairman, must be appointed from
a different district -- and I'm appointed from Cali'fornia.

So yesterday

went back to Berkeley to visit Boalt Hall, where I graduated from law
school in 1952 -- and it was a wonderful experience to be back chatting
with the faculty and visiting the campus.

And I'm delighted that Dean

Sandy Kadish is here with us for this luncheon.

He was nice enough

yesterday to show me not only the new and expanded Boalt Hall, but also
the old Boalt Hall.

This is nmv a school for oriental languages, which

is particularly pertinent of course in today's world.

So, my experiences

at Berkeley have been translated into all the great economic and political
problems of the day.
As you already heard, I was here last June at the invitation of
Arjay Miller to speak to the Bay Area Council, which was certainly a
privilege for me.

It seems to me that we are still . facing the economic

issues that we were facing at that time.

I thought it might be

appropriate, since many of you who attended that meeting probably tossed

- 3 -

my speech away, simply to repeat that earlier speech.

At least I ought

to start this discussion by hitting some of the highlights of what I
was trying to say in that particular evening.
First, I was trying to point out that inflation is a clear and
present danger, that it is a real threat to the welfare of this nation,
and that it has the potential of disrupting our society unless we deal
with it forcefully.

And so it is today that inflation still is our most

critical national problem.
A second point that I was trying to make is that the current
inflation has built up over a dozen years.

It has brought us to

where we have an unprecedented experience with high rates of inflation
in peacetime.

This phenomenon is not new to other nations but it is

new to us, and so we've had trouble coming to grips with it.

It has

built up over a long time, and because of that it has become deeply
imbedded in our system.

And because it is so deeply



going to take new initiatives, new understanding and new persistence if
we are to wring it out of the economy.
A third point I was making at that time was that anti-inflation
efforts should not be left to monetary policy alone.

Because if we

attempt to do so, the range of possible policy responses would be so
narrow, and the degree to which monetary policy would have to impinge
upon the economy would be so painful, that our policy probably would not
survive the political mechanism.

Therefore, it is important that we

marshall other government policies in order to deal with the issue,
and not leave it to the monetary authorities alone.

- 4 A fourth point I was making -- and this was the main thrust of my
speech -- was that there needed to be new directions in economic policy
along a number of fronts if we were going to be successful in wringing
out inflation.

And the fifth was that the war against inflation would

need to be unconditional and sustained over many years if we were to
be successful.
N we can pick up from that point, and perhaps review some of
the developments since that time.

Since June, we have made some progress.

There have been som significant changes in government policy.


all of them have come about easily, but nonetheless the changes are
taking place.

The United States has moved progressively to mobilize

a substantial arsenal of weapons to carry on the war against inflation.
I'd like to mention just a few of these weapons and some of the implications:
first, fiscal policy; second, incomes policy; third, reduction in
regulatory burdens; fourth, revitalization of productivity; fifth, a
balance in our international accounts; and sixth, a monetary policy
which complements and supports the other elements.
In the case of fiscal policy, there has been a major shift towards
tighter control over Federal spending and a corresponding reduction in
the Federal deficit.

Perhaps this has not been to the degree that

everyone would like, but at least the direction has been changed.


original Federal government plan for fiscal 1979, which began last
October 1, w modified to reduce spending and to


back on tax

reduction so as to shrink the proposed deficit from $60 billion to $38

That was a $22-billion shift in policy from the time that I

- 5 -

was here in June until the final decisions were made.

And while again

many of us could argue for additional action, at least that was a
major change in direction.

The President and the Congress demonstrated

in this their resolve to act in the fiscal area.
was unprecedented.

That amount of shift

I've never seen a case, none of us have seen a case,

where the President presents a plan in January and within the course of
several months is willing to shift that much out of his plan.

I think

we should commend the Congress and the President for that particular

And the new budget proposes to continue in the direction of

reduction, so that we're looking at a proposed deficit of $29 billion
for fiscal year 1980.

Again, it may not be the degree that all of us

would like, but the direction is right.
This application of fiscal restraint has a further goal, it seems
to me, that is beginning to be more understood.

That goal is to reduce

the relative role of government in the American economy.

This is important

if we are to use our resources more efficiently and effectively.


emerging pattern means that we have the prospects of reducing Federalgovernment expenditures from over 22 percent of Gross National Product
down toward 20 percent.

And over a number of years -- four, five, or

six years -- this has the potential of shifting some $60 to $70 billion
from the public sector to the private sector, where the spending and
investment decisions of individuals and businesses will be far more
beneficial in their impact upon economic progress.
A second policy area is incomes policy.

Last October 24, the

President introduced a broad-based program calling for voluntary

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moderation in wage and price actions, establishing specific standards
for wages and prices, and offering a series of


for compliance.

There is no intention anywhere that I know of in the government for
the reintroduction of mandatory controls, which are inequitable and

But it does seem to me that there is a basis for seeking

the cooperation of both management and labor to accept mutual restraint
in their own self-interest, as a contribution toward curbing inflation
and thus enhancing the prospects for real gains in compensation and

This program started off on a very negative note, and it took

some time for the specific standards to be developed and understood,
but nonetheless, there seems to be a growing acceptance of the concept.
Most of the leading corporations have now pledged their willingness
to comply.

The settlement of the oil companies recently with the Oil,

Chemical and Atomic Workers within the standards is also an encouraging
sign -- an indication that there can be cooperation from labor unions.
Support by management and labor of the President's program can certainly
make a contribution toward breaking the cycle of wages chasing prices
and prices chasing wages.

And most important, support for this program

can give the time for more fundamental fiscal and monetary policies
to take effect.
A third policy, a third weapons system, that can be marshalled in
the fight against inflation concerns the reduction of regulatory
burdens, which have added very greatly to costs and· thus to prices
without any commensurate public benefits.

This doesn't mean that we

have to give up legitimate social objectives, or objectives in terms

- 7 of the safety of our work places or our living environments.

But we

can be sensible about the application of regulations, and relate them
more to the benefits that society may experience.

Now I will be the first

to say that unwinding these unnecessary regulatory burdens will take
And it's going to require redirection in legislative and admin-


istrative areas that will not be easy to bring about.

And I'm doubtful,

frankly, that there will be much short-tenn effect from this effort.
But I think that we must keep the pressure on this area, and in the longtenn it is very important that we unleash the American enterprise
system from the unneeded and costly restraints on its flexibility, its
responsiveness and its creative capacities.

And I ·do believe that

the Administration has made a comnitment toward this objective.
A fourth policy component is directed toward revitalizing productivity.

During the first 20 years after World War II, productivity

gains in the United States were the highest in the world, running about
3 1/3 or 3 1/2 percent annually.

This provided the foundation for

annual increases in real income for all lvnericans.

This also helped

counter inflationary pressures, and contributed to a period of
prosperity and real progress.

But for the last ten years, we have

fallen woefully behind in our productivity -- fallen behind other nations,
and fallen behind our own past perfonnance.

Some steps were taken in

the last Congress to achieve the kinds of productivity gains we must
have, but they v1ere very modest and inadequate.

Let me illustrate the

problem by indicating that in Japan 20 percent of GNP is devoted to
fixed capital investment.

In Germany the figure is 15 percent, but in


- 8 -

the United States it is only 8 or 10 percent.

And as the years roll

by with us investing less and less in relation to the growth of our labor
force, we are falling further and further behind.

This productivity

weapon has hardly been used in recent years, and it needs great attention
if we are going to be successful in the long tenn in dealing with our
inflation problem.
The fifth area I want to mention is the international area.


involves the marshalling of policies and resources to bring into
balance our international accounts.

The decline of the dollar in

foreign-exchange markets over the past year and a half is very much
linked to the U.S. inflation problem and to our current-account deficit.
The decline of the dollar at the same time has been one of the causes
of our inflation, because ,we must pay more for essential imports while
the competition from imports is reduced in relation to domestically
produced goods.
One of the contributing factors to our trade deficit and hence to
our current-account deficit has been the heavy U.S. requirement for
imported oil.

The problem had its origins early in the history of this

For a long time, America was a vast, sparsely populated continent

with seemingly inexhaustable and inexpensive supplies of energy.


built this great industrial nation in part by taking advantage of cheap
energy, sometimes in substitution for capital and labor.
wrong with that at all.

There is nothing

But in time, with our ever-increasing demand,

the limitation of domestic supplies finally became a reality.

Now we

are going to have to devote ourselves, for a substantial period of time,

- 9 -

to converting our industrial facilities, our transportation equipment,
our housing stock, and our commercial installations to a more energyefficient m
ode, in line with other industrial nations who never had the
benefit of cheap energy.
The United States also is going to have to pay far more attention
to shifting to alternate sources of indigenous fuel.

Because the United

States is a heterogeneous nation, with many regional differences as
between producing and consuming areas, it has been very difficult to
hammer out national energy policies.

We are like a group of separate

nations where some are producers and some are consumers -- except that
all of them happen to be inside one nation. -It s been excruciatingly

difficult, and we haven t been successful enough, but we should remember

that there is a reason why we have these internal problems.
We finally made some progress in the 95th Congress -- perhaps not
perfect progress -- but at least we began to move in the right direction.
We were dealing, among other things, with conservation, conversion to

coal, and the new natural-gas bill j This natural-gas law creates a
single, national market where previously we had two markets -- the
higher-priced intrastate market with a surplus, and the regulated
interstate market with uncertain supplies and shortages and difficulties

in planning and developing industrial applications.

As a consequence

of the new law, we now have abundant and indeed surplus supplies nationally
and we are suddenly talking about converting back from other sources to
natural gas, when just a short timd ago we were talking about curtailing.

- 10 -

This shows the search for workable policies.

It shows at least that

we are beginning slowly, at last, to come to grips with our problems,
although we still have more to go.

We must give more consideration,

quickly it seems to me, to moving domestic oil prices toward world
prices, in order for us to make the adjustments that are essential.
And when we see how the events in Iran have interrupted world supplies
and created pressures on the availability and cost of oil, we can see
how urgent it is that we address the energy problem.
All the factors I've mentioned have influenced the decline of the

In any event, it certainly was disheartening to see some of the

market actions last year.

By late October, the lower exchange value of

the dollar could not be explained by fundamental developments such as
inflation and current-account positions.

But whatever the cause,

something had to be done because of the importance of the dollar as a
world currency.

The Administration and the Federal Reserve, in

cooperation with the governments and the central banks of Germany,
Switzerland, and Japan, decided to act forcefully to correct the excessive
depreciation of the dollar.

The measures we announced on November 1

included a substantial increase in foreign-currency resources immediately
available for intervention, expanded gold sales, and a further sharp
tightening of U.S. monetary policy.

The monetary actions -- the Federal

Reserve's principal concern -- included a 1-percent increase in the
discount rate, the largest increase since the bank crisis of the early

Parallel to that was an increase in the Federal-funds rate

and an increase in reserve requirements for large certificates of deposit.

- 11 -

The marshalling of foreign-currency resources for intervention,
which was in addition to the direct intervention by other central banks,
involved an initial total of $30 billion in Deutsche marks, Swiss francs,
and Japanese yen.

The package included swap arrangements through the

Federal Reserve, U.S. Treasury drawings from the International Monetary
Fund, Treasury sales of special drawing rights, and a U.S. Treasury
program for the sale of foreign-currency-denominated obligations.


sale represents an historic step for the United States, and opens a
new opportunity for acquiring foreign currencies without expanding the
money supplies of other nations.

The first U.S. obligations, in

Deutsche marks and Swiss francs, have already been successfully offered,
and each issue has been over-subscribed.
It is important that we continue the vigorous application of the
November l measures in order to maintain the conditions for a relatively
stable dollar.

The initial response was


Within a few days

after the November 1 action, the dollar improved sharply in relation to
all the three currencies, and since then we've had generally a period
of relatively stable conditions but with some dislocations of moderate
amount and moderate duration.

In recent days, particularly because

of the Iranian situation, the markets have been in some turmoil, but
they still stayed within boundaries that are reasonable in relati:on to
the objectives of this program.

The thing I want you to appreciate is

that we are committed to continuing forceful action, because a further
decline of the dollar would threaten our program of anti-inflation actions,

- 12 -

and would disrupt the development of both domestic and international
economic progress.

So we are finnly corrrnitted to this program, and

we have substantial resources at our disposal to use in carrying it out.
Finally, after having given all of the nice infonnation about
what other parts of government should be doing, we might say a word
about the Federal Reserve and its monetary policy.
a key role to play.

Of course, we have

The Federal Reserve has recognized its responsibility,

and has moved forcefully over the last year and has progressively applied
monetary restraint on the growth of money and credit.

The Federal-funds

and short-term interest rates have risen more than 3 percentage points
since the beginning of 1978, and consistent with the normal lag effects,
the growth of the monetary aggregates has slowed appreciably in the
last few months.

The Federal Reserve intends to continue working

towards a gradual deceleration of monetary and credit expansion, to a
pace that is consistent with price stability.

The task of monetary

policy will be aided if we can have the concurrent pursuit of tighter
fiscal policy and other supporting actions.

But we are detennined to

see that inflation is pushed in the right direction -- down toward zero
and that it is kept moving in that direction until we reach that level.
I might mention briefly some of the objectives that we've had
in monetary policy over the

past year.

One objective is to restrain

the economy -- to bring down the rate of real growth to a more sustainable

A second objective is to apply this restraint smoothly -- without

dislocations or disruptions -- and to do this with complete disclosure
so that the economic system can adjust to a known path of monetary policy.

- 13 -

A third objective is to bring about this reduction of activity while
maintaining a relatively balanced economy -- that is, avoiding pushing
the burden of adjustm
ent too much on any one sector.

In particular, we

authorized the ne\'/ money-market certificates so that the housing industry,
through thrift deposits, could have a better chance at competing for
resources and maintaining its relative position, instead of going
through the dislocation that we saw in earlier cycles.
Entering 1979, the economy is in reasonable balance, with no
significant overextension or underutilization.

We are therefore in a

position to enter a fifth year of expansion in a mode of declining
economic activity, but with reasonable balance.

I ·don't believe that

economic expansions die of old age; I think they die of some dislocation
that triggers a negative economic result.

And at the moment, I don't

see any conditions in our economy that would indicate a recession this

The policy courses we're following, of course, include the risk

of recession, and they must because that is inherent in the direction
we are trying to move.

But I'm not at all sure that present conditions

will bring about a recession in 1979.

It's more likely that we will

see a rate of growth of around 2 percent in real terms, with unemployment
increasing moderately and inflation beginning to move down gradually.
And here of course is the beginning of a long, hard process in wringing
inflation out of our system.

Because inflation has built up over so

many years, and because it is so deeply imbedded, it's going to take
five, six, seven or m
ore years if we are to succeed in this program.
Here is the real challenge.

Will we have the determination, the

fortitude, the persistence -- will . we have the character as a nation --

- 14 -

to stay with these policies and see our way through?

Or will we

weaken, will we begin to yearn fo ) instant solutions, and will we
forego the disciplines that are essential if we are to return to
the condition where we can fully achieve our national goals?


very easy for all of us to recognize those goals; we all want the same

We want full employment, price stability, and a sound and

stable dollar .

The question is not what we want, but how we get there.

And how we get there means the pursuit of proper policies, including
a forceful and responsive and restraining monetary policy over a
number of years.

If through your leadership you can help that proposition

to be translated into the political realities to sustain this effort,
then we shall succeed.

We all will be tested.

we will continue to do our best

At the Federal Reserve,

but we look for your support and

counsel to make it possible for us to achieve those goals.
very much.

# # #

Thank you

- 15 -

Question-and-Answer Period
Q. Regarding the policy that had to do with regulatory burdens, you
didn't seem to be very optimistic about what could be done.

Could you

quantify the impact that regulations have upon inflation at this time?
A. I'm not sure I can quantify it.

According to some viewpoints,

there are very large numbers involved -- and you then have to argue
benefits against costs.
to this.

But it is very clear that there are several aspects

One is the degree to which regulation inhibits competition.

The best example for that of course is the airline industry, where there
has been some move toward deregulation.

There we've seen a combination

of lower fares, greater utilization of resources, and higher profits .
. So that case is not related to environmental or safety costs :


it has to do with just creating a competitive environment, in which
better use of resources can reduce the overall cost.

When you come

to another case, such as the application of emission standards to
automobiles or the achievement of miles-per-hour objectives, the tradeoffs are very large.

You're talking in terms of tens of billions of

dollars and time schedules of several years' duration.
to a very substantial burden.

Those can amount

I am not too optimistic about this area

because the constituencies are so emotionally involved that it is very
hard to bring logic and economic analysis into play.
Reserve, of course, doesn't operate in this field.

The Federal
We are guilty of

putting a regulatory burden on financial institutions, but we are
trying to remove at least some of those burdens that we've placed.


- 16 -

are, therefore, reviewing every Federal Reserve regulation
and simplifying and eliminating those that we don't need.
to accomplish this task by the end


this year.

We hope

We've involved all of

the Federal Reserve banks in trying to reach that goal.

Our problem is

that most of the burden that we place on institutions is there because
of Congressional mandates.

So the dismantling of those mandates where

they don't have a pay-off is a very difficult task.

And that is why

I said that we are not anywhere near to making a big dent through this

But I think it is critical that we make the effort, if we

are going to turn the tide away from this inhibiting regulatory
process towards an effective economic system . .

Q. What is being done to assure continuity on the Federal Reserve
A. Today is an anniversary for me.

This is February 8, and I

was sworn in on March 8 -- so I'm 11 months old today.

We have seven members.

That is great

They're appointed every two years

for tenns of fourteen years, but recently most of the governors have
not served out their tenns.

There has been a tendency to put in a

tour of duty but not the full 14 years, because of the sacrifices that
are required and the desire to return to the private sector.

We have

two vacancies now, and we are hopeful the President will make appointments to those vacancies soon.

And we hope that with good fortune, and

with good selections, we will begin to stabilize and have more continuity.
We are short now in the Federal Reserve of some types of people that I
think will contribute to better balance in the Board of Governors.


- 17 -

have excellent professional economists.

I'm the only businessman on

the Board, and there are four who are professional economists.


say we are over-represented by businessmen and I say we are overrepresented by economists.)

But we probably need some corrmercial

bankers and perhaps some experience in other fields -- agriculture or
labor or whatever -- to balance off these other skills.

So I'm

hoping that's what the President will do, and that he will look upon this
as an opportunity to create a balanced board that will have prospects
for con ti nui ty.

# # #