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Washington, D. C •.

November 16, 1978

When I came to Washington eight months ago, it wasn't yet perceived
that the biggest problem, the most important domestic problem was inflation.
Since that time, inflation has really escalated in everyone's concerns.
We live in changing times, and there are many reasons why we have
been brought to the point where inflation is a critical problem. It realtes not
only to our well-being, but also to our interrelation with other countries of


the world more than we can imagine.
In your industry' you have been aware of the great technological changes

since World War II that have transformed industrial activities, and of their
implications. You have probably also been conscious of the great social changes.
Our society is now made up of more young people -- because of the wave of births
following World War II -- and of more older people -- because of longevity
increases -- and so there are relatively fewer people producing the goods and
services we all need. You are aware of the kinds of changes this entails.
You've also been aware -- consciously orunconsciously -- of our shift
from a rural, agrarian society to an urban soCiety.

Certainly, at the tum of

the century, most Americans still lived on farms and in families of three
generations which ordered and transmitted experience; now, most Americans
live in urban areas with only one, one and a half, or two generations in a household.

The peer group for finding out what life is about and how to deal with it

is completely different.


We've also seen tremendous change in the political climate, accompanying
the birth of literally a hundred new nations, and the breakdown of international
systems that governed prior to World War II. This has accelerated, causing
all kinds of tensions.

As all these things happen, it is not surprising that we've lost some of
our markers, lost our bearings a bit, and gone through a period of groping.
It is my hope that we are coming back to a time when we can approach more
logically and with more objectivity the kind of issues we must deal with if we
are to restore the economic vitality we need for our own well-being and for
world conditions that are conducive to peace and prosperi1y.
In the short time I have been in Washington, inflation has been recognized

and has become the number one domestic problem. Inflation grew up over a
period of time because our aspirations had run somewhat beyond our capacity
to create all the things we wanted o r thought we were entitled to.

We are paying

a price now for twelve years during which we did not save, invest or create the
productivi1y to achieve the level of economic output and economic abundance
that we all wanted.
In that atmosphere, it was my duty on March 9, the first day I was in

office, to point out this severe problem in testifying before the House Banking
Committee. Since that time, monetary policy has moved high on the list of
interests because it is one of the key factors for dealing with these conditions.


Monetary policy faced a very serious dilemma when I came to Washington.
In the face of accelerating inflation, and without other policy responses, monetary

policy was faced with a very difficult choice. We could respond immediately and
try to handle the situation by ourselves by restraining money and credit -- in
which case we would have brought the economy to its knees -- or we could validate inflation by continuing to make credit and money abundantly available -- in
which case we would have put off the day of reckoning, but eventually been called

to account for conditions far more harsh and far more destructive to our society.
We chose a slightly different course of blowing the whistle on inflation,
of trying to attract attention to the problem and to sell the proposition that the
problem required response from all those who deal with the economy -- particularly those in the government , but also those in the private sector.
Since that time, we have slowly been in the process of declaring war on
inflation, of mobilizing the arsenal of weapons that is essential if we are to
destroy this enemy and return to stability.
Let me just comment for a few minutes on that arsenal of weapons and
how it's been growing.

Then with the time we have left, I'd be delighted to

respond to any of your questicns or give you equal time to rebut what I am
going to say.
The arsenal of weapons includes, first, fiscal policy; second, incomes
policy; third, reduction of regulatory burdens; fourth, revitalization of productivity; fifth, balance of international accounts ; and sixth, a responsible monetary


When I took office in March, the outlook for fiscal policy in FY 79 was
for a federal budget deficit of $6 0. 5 billion, an increasing deficit.

This as we

completed the fourth year of economic eJ1.'J)ansion and during the year that we
would enter the fifth year of economic expansion from the great recession of
74-75. We also faced a policy of taxation which would contribute to that deficit
by giving a large dividend to the American public in an election year.
It was also exjlected that the economy would grow at a real rate of

4-3/4 per cent, a very high rate of growth


the 5. 5 per cent real

growth in 1977 and the 4. 6 per cent real growth in 1976 that had already built
up a high utilization of economic capacity.
Fiscal policy has changed, and while none of us can be satisfied that it
has done all the things we would dream of and hope for, we should give good
credit to the Administration and to the Congress for their willingness to shift
these policies so quickly. It is unprecedented. I know of no time in. American
history when fiscal plans were shifted so quickly in response to a perceived
As a consequence as we entered FY 79 on October 1, that expected
deficit of $60. 5 billion had been reduced to $38. 5 billion, a $22 billion reduction
in planned fiscal stimulus.

The rate of growth for this calendar year had been

reduced from a 4-3/4 per cent target to 3-3/4 per cent, evidencing, in the
face of an election year, a willingness to bring the economy to a slower rate
of growth, to cut the amount of tax reduction, to cut the 3;mount of spending -and to make some changes.


Many of you may say; '\vell, more should have been done!' My only
point is that someting was done and it was of an order of magni1ude that was
more thari insignificant.
Second, as to incomes policies, the President gave the first indications
of an incomes policy on April 11, when he took up the theme of inflation as a
serious and present threat. At that time, he asked for moderation, but as
the year progressed and as it was apparent that inflation was more virulent and
the problems more pervasive, he accelerated his policy responses. On October
24, he introduced the concept which you all are now struggling with: a voluntary
program of wage and price restraints with some standards for wages and prices.
I'm delighted, personally, that the President has not opted for and will
not opt for mandatory wage and price controls. Mandatory controls are inequitable, inefficient, won't work, and shouldn't be tried. But I do thirik there
is something to be said for a policy of standards. If we had a speed limit in
America today that was described to you simply as "drive ata reasonable speed,"
then with well-engineered automobiles on well-engineered tires eve1yone would be
driving about 80 miles an hour. We have a speed limit of 55 miles per houri
I'm not sure you drive at 55, "!:mt I'm sure you drive nearer to 55 than to 80.
When it comes to the economy, if we set up some "speed limits" on
wages and prices, I don't know what the outcome will be because these are
volunta1y, but I do know we'll get behavior closer to those standards then if
we had no standard at all. In that sense, we all can gain something by an


incomes policy as a companion to these other fundamental policies in the fiscal
and monetary areas.
I also know that the success in this particular area of restraint depends
entirely upon the degree to which the private sector, management and labor,
is willing to cooperate and willing to see and understand that its own self
interest is tied to the process of curing this dreadful disease of inflation.
I rather suspect that in your industry you will cooperate because you
have a history of responsible cooperation with government in areas where we
have a common interest arid a common objective, and I'm counting -- and I'm
sure the Administration is counting -- on- that kind of support.
A third important weapon in the arsenal is the reduction of regulatory
burden. We have had high aspirations for improving our environment, improving the conditions in which we live and we work, and these are certainly
desirable objectives. What we have failed to do, occasionally, is to implement
our improvements through regulations and procedures that are· appropriate, in
terms of their cost or their management burdens to the benefits we receive.
I'm not going to dwell on this subject. I hope we don't lose sight of


importance. I hope that, wh8tever happens with inflation, there will continue
to be a vigorous effort in this field, because the payoff comes slowly and
out drama.


There will be a tendency, if things do ·get better, to forget this

area, but I hope that you will be among those who continue to clamor for
responsible regulation that will reduce the burden, and yield us the benefits
we want with appropriate costs.


The Federal Reserve doesn't lay a heavy burden on society through
its regulation, although it lays some burden on banks and financial institutions •
.But while that burden is not, in the aggregate, large, we intend to examine and
rewrite every regulation we have on the books in the next year in
order for us to make a contiibution -- even in a small way -- to bringing
better sense into the whole regulatory area.
A fourth important weapon in the arsenal is to revitalize productivity.
Productivity has been the key during much of. the post-war era to the rising
real incomes of businesses and families. We've lost our way in this area. For
the first twenty years after World War II, productivity gains ran at an average
of 3-1/3 per cent a year. They contributed to conditions under which we could
achieve real income gains. For the last ten years, productivity gains have only
been 2 per cent -- which is terrible -- but for the last five, the situation has been
worse: productivity gains of only 1-1/3 per cent. There is no way we can maintain
our competitiveness in the world or break the cycle of wages chasing prices and
prices chasing wages unless we find, again, the key to productivity gains.


would allow us to accomplish our tasks and give us the resources to increa se our
own yield from the economic system.
On this same point, we have neglected the investment side of our economy.
We have managed our economy for too long on the demand side, and we have
not given adequate attention to supply. We have underinvested. Germany spends
15 per cent of GNP for business-fixed investment; Japan, 20 per cent; the United
States, 8 or 9 per cent. It's no wonder that we are falling behind.


There is just no question that in the government and in the private
sector and through your associations we need to generate understanding about
this issue and bring about conditions that will incentivize the commitment, the
assuming of risk that goes with business investment, so that we can step up
our level of investment to 12 or 13 per cent of GNP over a period of 10 or
more years, so that we can reestablish our industrial leadership, so that we
can re-engineer the costs that go into our system. Then, we can have a modern,
efficient, productive capacity, reduce our


costs per unit of output, renew

our technology, and once again achieve leadership in the world.
A fifth important weapon is to reestablish balance in our international
accounts. We have suffered for some time from the good fortune of having
inherited a continent of abundance. Because we had a continent that was
sparsely populated, with abundant and inexpensive energy, we have used
energy in lieu of other resources to build our standards of living. Our population is 6 per cent of the world population, but we use 30 per cent of the world's
That was all right when we had abundant, inexpensive energy and a
small population. But as our desires for energy continued to ir.crease geometrically, and we used it wastefully because it was so ine:;;,,.'Pensive, the day
of reckoning was finally to come. We now have ahead of us the prospect of
requiring ten or fifteen years to convert our industrial stock, our transportation stock, our residential stock to energy efficiency, and to increase and


develop the utilization of our indigenous sources of energy. These are the
alternatives to what we have accepted as a short-term necessity ; that is , the
importation of large amounts of expensive petroleum.
In 1973 this nation imported $8. 5 billion worth of oil and oil products;
in 1978, this year, it will be ove r $40 billion. In 1973, this country had a
balanced trade account.

This year, we will have a deficit of $32 billion.

It is that kind · of deficit, along with our high inflation rate, that con-

tributes to a weak dollar . Once a currency b.ecomes weak, it adds to inflation,
because the things we import cost more and also take competitive pressures
off domestic products.

The decline of the dollar in the last year has added one

per cent to our inflation rat.e, constituting a tax of $20 billion on all Americans.
The more a weak dollar to infl ation, the more the dollar weakens
and the more vicious the cycle . On the other side, the more a currency like
the yen appreciates, the more cheaply it can buy its imports, the less inflation
it has, the stronger its currency, the more it can buy cheaply. We've got to
break this cycle of the dollar.


We are beginning to do so.

The process is underway. But one of the

keys was to buy the time that is essential

tO s olving the fund amentals of re-

ducing inflation and balancing our accounts. For that reason, on November 1,
we announced the actions that you know about, combining the strong medicine of
monetary restraint with very forceful bridging actions to correct the diso rderly foreign exchange markets, to restore stability, and to enhance the



prospects for continued moderate growth of our economy as we wring out
Finally, there is the sixth weapon of monetary policy. Here, we are
trying to accomplish a minor miracle by implementing and supporting the
other economic and anti-inflation policies in. a way that will give us a new
approach to wringing out inflation. We are attempting consciously to slow
the rate of growth of the economy, to do so on an orderly and steady basis,
without jolts and upsets, ·without dislocations. We are attempting to do so
while maintaining balance in the economy, avoiding the burden of restraint
falling too he avily on one sector. For that reason , we authorized the new
money market certificates that have allowed resources to continue to flow
into thrift instituions and support housing, and allowed the housing industry
to continue at a decent rate of production when prior e)qJerience would have
predicted disintermediation and decline.
So we are seeking a slowing in the rate of growth, a steadiness in the
slowing, a balance in the condition of the economy, so that we can majntain a
reduced rate of growth without a recession and avoid creating a political
environment of reflation as happened in 1974-75.
Monetary policy is poised to be forceful, steady and determined. It
is indeed reassuring to find that for the first time I can remember in quite a
while monetary policy, as tough as it is, is being applauded by the private
sector, being applauded by the Congress, and being applauded by the President.
That's a new day, and it gives me courage and hope.


Let me assure you that monetary policy will -- as the President
suggested in his October 24 speech -- contuiue to be responsible and do its
part in seeing that we win this war against inflation so as to bring about
conditions for price stability, full employment, and a stable dollar that are
essential to our well being.
I know that all of you here would share the general view that all these
problems are fundamentally the result of government, that government is the
culprit. Of course that's true; government has been a very l arge contributor
to our problems, and there is no reason the government should duck its

responsibility. Certainly, at the Federal -Reserve, we don't intend to duck
But let me remind you that we live in a democracy, and we live in a
world, fortunately, where the private sector has far more influence than it
realizes on its government. For that reason, I think you have far more
capacity than you realize to contribute to strengthening this arsenal of weapons
and making sure we succeed in this war.
I'm reminded of a paraphrase from the comic strip Pogo, where Pogo
says, "I have met the government and he is us." To the extent that you want
your government to correct its imperfections of the


it needs your voice,

your support, your understanding, your encouragement. I'm sure that if we
have that, the government itself will reform and will play its role.

We at the Federal Reserve will certainly play our role.