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For release on delivery
10:00 a.m. D.S.T.

Remarks by
G. William Miller
Board of Governors of the Federal Reserve System
Commencement Exercises
Babson College

Wellesley, Massachusetts
May 19, 1979

Thank you very much President Sorenson, members of the Board,
faculty of Babson, and members of the class of 1979, undergraduate
and graduate.
It is a particular privilege and responsibility for me to share
a few moments with you here this morning.

It is a privilege to

celebrate your accomplishments and a great responsibility not to
stand too long between this moment and the time you say your farewells to faculty and friends and get about the work of the world.
I'm particularly delighted to be at a place where everyone knows
what the Federal Reserve is.

When I speak with most graduating

classes they still think the Federal Reserve is an Indian


I'm glad to be with those of you who know about Ml and

Ml plus and Federal Funds and repurchase agreements and Eurocurrencies, which all of you do.
But it is also a privilege to be at a _
place that has honored,
with its academy of distinguished entrepreneurs, the great business
leadership which is the strength of this Nation.

I recall the first

entrepreneur that I met was a classmate of mine who was both a ne'redo-well and not very bright.

After only two years, when we came to a

class reunion, he was the only one who had his own chauffeur-driven

It surprised us, and we were naturally curious as to how

he had become so affluent so quickly.
explained it to us.

But being a man of finance, he

He reported that he had gone into business for

- 2 -

for $5.

He had taken up making widgets.

They cost $1.

He sold them

And he noted, that 4 percent adds up!

But, of course, the greatest entrepreneur I've ever known is a
man you've already honored -- Royal Little -- who perhaps taught me
more about business than even the great faculties who taught me in my
college and university years.

So for many reasons I'm pleased to be

And I would like to make a couple of points that I hope will

be of interest to you.
Next October we will be commemorating the 50th anniversary of
"Black Friday," the great crash on Wall Street.
Roger Babson predicted that crash.
for five years.

I understand that

I understand that he predicted it

But it is noteworthy that it will soon be 50 years

during which this Nation has not suffered a major economic dislocation,
market disruption, serious money crunch or economic panic.

That is

impressive evidence of the sound structure of our financial monetary
system and of how well it has served us.

Yet, that crash was a very

important event which helped shape economic policies for a whole

The policy responses were directed toward effecting
New techniques were developed to use government spending

as a means for economic stimulus.

Floors were built under wages and

prices to . prop them up so as to prime the pump and get th_ economy

Young people who grew up in that time, during the 1930's,

learned powerful lessons from their bitter experiences.

It is

interesting, I think, as you graduate today, to contrast the circumstances that have attained during the prelude to your personal careers
with the conditions of those times.

- 3 -

The past dozen years have been just as dramatic in the development of our Nation and our economy.

Those dozen years have been

characterized by powerful shocks and discontinuities.
Vietnam was divisive.

The state of domestic tranquility was inter-

rupted by civil disorders.
seeds of inflation.

The war in

Failure to pay for the war planted the

The threat of inflation led to the imposition of

direct wage and price controls, which proved to be both inequitable
and ineffective.

The international monetary system broke down.


U.S. economy was reflated, building up a head of steam in the kettle.
When the discredited wage and price controls were removed, the steam
blew off and we had double digit inflation and double digit interest

To compound these difficulties, the oil boycott ushered in a

five-fold increase in world petroleum prices.

The Watergate incident

and its aftermath led to a general distrust of all institutions, public
and private.

And finally there was a great recession of 1975 with 9

percent unemployment and the greatest economic distress since the
Great Depression of the 30's.

And so your young years have been filled

with far-reaching changes and stresses within our system.
During those years there also have been powerful lessons to learn.
We have learned some of the limits of government.

We have learned to

appreciate the fundamental values that exist in our private enterprise

It has been demonstrated that government spending alone cannot

fulfill our aspirations, that excessive regulation can stifle the initiative
of creativity which is essential to achieve economic well-being and social

- 4 -

The legacy for you, from our own experience as a Nation and from
the accelerating pace of change throughout the world, is an agenda of
unresolved issues.

The agenda you will face is formidable indeed.


will not try to list every item on that agenda; but let me reflect on
a couple of items which will deserve high priority throughout your
One is energy.

America was fortunate to be able to develop

through utilizing the seemingly boundless resources of a vast, almost
unpopulated continent.

Availability of abundant and inexpensive energy

fueled the growth of a great industrial economy.

But with 6 percent of

the world's population consuming 1/3 of its energy, it was inevitable
that a day of reckoning would come.
came into play with a vengeance.
billion for imported oil products.

The forces of supply and demand

In 1973, the United States paid $8
Last year we paid almost $45 billion.

This contributed to the large U.S. trade deficits and to downward pressure on the dollar.

During the next quarter of a century, while your

leadership will be critical to this Nation, we will have ended the era
fueled by abundant and cheap petroleum.

And we will need to make a

major transition, of a magnitude seldom experienced in history, from
an industrial system based upon this form of energy source to a new
system based on new sources of energy and technology.

The task ahead

is to convert our industrial, commercial; residential, transportation
and public infra-structures into more efficient energy systems.


urgently need to conserve present energy reserves, to reduce our
dependence on foreign petroleum -- and on petroleum as an energy \

- 5 -

source itself -- and to change over to alternate and more economic
energy sources.

This process will take much of the remaining years

of this century.
A second


is inflation.

that will be on your agenda for a long time to come

Today, America's most serious problem is inflation.

And inflation is inevitably linked with employment and unemployment.
Our hopes for economic well-being for all Americans depend upon our
wiping out this virulent disease.

Inflation destroys values and incomes,

drives out job-creating investments, impairs the prospects for new
housing and other construction, and breeds recession.

Perhaps the

best way to illustrate the clear and present danger of inflation is to
consider the consequences for your own lifetimes.

If inflation should

continue at the rate we are experiencing this year until you reach
retirement age -- say age 65 -- then the dollar you have in your pocket
today will be worth less than a nickel.
We just cannot let that happen to you, and we cannot let that
happen to America, and we cannot let it happen to the world.
During the year I've been in Washington there have been some
important shifts in policy to deal with this difficult probl€m.


know the fundamental causes of the problem have built up over a long
period of time.

We know that inflation is deeply imbedded; that it is

structural as well as cyclical.

And it will, therefore, take a long

time to unwind the process by which we have built it into our system.
Some fundamental, as well as some short-term policy directions, are
being taken in response.

- 6 -

One of the most encouraging policy changes has to do with the role
of government in our society.

There has now been a conscious shift --

reflecting, I believe, the viewpoints of the American people -- away
from dependence upon government spending and back to more reliance on
the private sector.
In particular, a year ago at this time the plan was for a continuing increase in Federal deficits to try to provide for some of
our economic needs.

A decision was taken to reverse that trend, to

reduce the deficits, and to reduce the relative role of Federal
spending in our economy.

We are now .on a course that will bring us toward

a balanced Federal budget by fiscal year 1981.

We are now on a course

of action that will reduce Federal expenditures from 23 percent of gross
national product down to 20 percent or less.

Over the next four or five

years, as you progress in your careers, that will mean some $60 or $70
billion transferred from government to the private sector.

The cumulative

decisions of individuals and businesses for spending and investment of
those funds will be far more effective in sustaining our economic wellbeing than the same monies spent through government.
A second important policy shift has had to do with our international

A year ago the dollar was weak and under attack.

of the dollar from

Septembe~ 197~

through October of


The decline

year added one

percent to the inflation rate because .of the higher prices paid for
imported goods and because of the lessening of competitive foreign

Because of the ripple effect of resulting price changes pro-

ceeding through the system, we still will have one percent inflation

- 7 this year from the same cause -- even though the dollar is now stable.
So over 1978 and 1979, American consumers will pay $30 billion more
for their purchases as a result of a weak dollar.

It is for that

reason that a new commitment to maintaining a fundamental economic
policy, a sound and stable dollar, has become part of the government

Last November l, the Administration and the Federal Reserve,

in cooperation with the governments of Germany, Switzerland and Japan,
launched a powerful program to demonstrate forcefully that we would
maintain a sound dollar and that we would maintain an orderly market
for the dollar on foreign exchange markets.
has strengthened.

As a result, the dollar

Already we are beginning to find the benefits of

that strength, and there is once again a sense of confidence in the
American system.
There are other complementary policies that have been put in
place, such as the incomes policy to moderate wage and price increases
in order to gain time until the more fundamental fiscal and monetary
policies can take effect.

We also have important energy programs

beginning to evolve, but they still need to be completed.

During this

period there has also been, I think, a new _
appreciation for the proper
role of monetary policy in the effort to achieve price stability.
Monetary policy had been positioned toward restraint.

It has been our

purpose in implementing monetary policy consciously to slow down the
growth rate of the U.S. economy, in order to avoid an overheating from
excess demands that would unleash a new round of inflationary pressures.
A second purpose has been to slow the economy on an orderly, progressive

- 8 -

basis, rather than through shocks and dislocations, so that adjustment
to lower levels of activity can take place smoothly and that businesses
and households can adapt themselves knowing the course of the economy.
A third objective has been to achieve the desired slowdown while
maintaining balance within the economy, thus avoiding placing too much
burden on any one sector.

Fourth, it has been our purpose to accom-

plish all this without throwing the economy into a significant recession,
which might tend to encourage new Federal spending programs which would
set us off again on a period of higher deficits, excessive government
participation in the economy, and a treadmill of inflation building
upon inflation.
All these policies can have their effect only over time.


will take five, six or seven years to wring inflation out of our

So the early years of your careers will be ones in which you

will be challenged to look at the higher and better use of your
resources to achieve your goals without contributing further to the
tendency toward this inflation bias.
There will be a necessity in these years to adopt one further
important new policy that is critical to our long-term well-being.
That is, to shift our emphasis in economic management from consumption
to investment.

It is essential that we make that shift. _ An example

of why can be taken from the experience of 16th century Spain.


the 16th century because of the discovery of the new world, Spain had
available to it vast amounts of gold and si.lver.

Unearned purchasing

power was generated, not by saving and investment in productive
capacity, but by the random event of discovering this gold and silver.

- 9 -

That purchasing power introduced into Europe created one of the most
massive inflations in our recorded history.
driven up 1,000 percent or more.

In Spain, prices were

The most elegant society ever seen

in Europe until that time was built, with great palaces and with
general well-being for everyone.

But because it was built on a

philosophy of consumption, once the resource had been used up and
not replaced, there was little left to sustain the good time.

In the

17th century, Spain was, economically speaking, barefoot.
In the 20th century we
power of the printing press.


discovered the unearned purchasing

We have sought to fulfill our appetites

for consumption by continuing to issue money and credit.

Unless we

shift our philosophy toward putting more back into the system


building the capacity to produce and achieving once again the rates
of productivity gains that were typical during our highest period of
achievement ·__ unless we do that, the heirs of our efforts may also
be economically barefoot.
But I think you should go forth today with a great sense of

America is a remarkable country with great resilience

and great strength.

It has an abundant harvest of bright, well-

prepared young people here today who will provide the leadership,
the knowledge, the skills, the determination, the will, t9 implement
these new policies and to stick with them until they achieve our
fundamental economic goals of full employment, price stability, and a
sound dollar.

And in achieving those goals, it is critical that you,

as I know you will, become the source of strength that preserves and

" ..


- 10 -


enhances the unique characteristic of the American economy which
distinguishes it from other countries -- that is, a basic system of
private enterprise.
In that system of enterprise not only do we benefit from an
inherent quality of efficiency that will contribute toward achieving
our goals, but also we enjoy the blessing of free choice that is
essential for a free society.

If during your careers there should

ever be a threat to that private enterprise system, then none of
your personal freedoms would be · secure.
I am sure you will be faithful stewards, and will achieve far
more than those before you.

Because of this, I am also confident

that America will succeed, will overcome this period of difficulty,
and that America will again clearly merit its position as the first
nation in economic achievement, in social justice and in its contribution
to peace and stability throughout the world.

Thank you very much.

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