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25, 1975
8:00 P.M. CDT

Remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
at the
Institute on "Stagflation: Its Political and Economic Dimensions"
Center for Economic Education
The University of Wisconsin— Milwaukee

Milwaukee, Wisconsin
Friday, April 25, 1975

FRIDAY, APRIL 25, 1975
8:00 P.M. CDT
Remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
at the
Institute on "Stagflation: Its Political and Economic Dimensions"
Center for Economic Education
The University of Wisconsin-Milwaukee
Milwaukee, Wisconsin
Friday, April 25, 1975

I welcome especially the chance to talk with you today about
the simultaneous high unemployment and high rate of inflation that we
are suffering. I am happy to have this opportunity for two reasons*
First, because I am convinced that the time has come to drop the idea
that long-run full employment and price stability are not compatible,
and to recognize, instead, that they are fully compatible. In fact, I
very much doubt that we can have full employment without price
stability, or price stability without full employment, and I think the
evidence for this is written plainly in the history of the past ten years.
Second, I think the Congress has just taken action, in the
form of a concurrent resolution in favor of a non-inflationary monetary
policy that should be most helpful to the Federal Reserve Board in executing


such a policy.



One of the most notable features of this action is

that it gives the Board long-needed assistance by giving equal standing
to price stability and maximum employment as national policy
I regard it as a tragedy that our economic problem has
often been defined as either unemployment or inflation.


It is only

in the very short run that such a choice presents itself.

For the

long run, there is no choice but that of a policy that can sustain
both high employment and stable prices.

I want to describe the elements

of such a policy applicable at the present time, but first I want to
review the effects of aiming policy now at inflation and then at full
employment, resulting in an escalation of both over the past decade.
That decade is a record of repeated switches from one of the
two objectives to the other, from

too exclusive emphasis first on

full employment and then on stopping inflation, to be followed by
renewed overemphasis on full employment, and so on through three
stop-go cycles that have brought us spiraling to rates of inflation
and unemployment, almost unprecedented in postwar history.
If we continue to zoom around the curves of this spiral, we
shall intensify the experience of the last ten years.

To end the

agony of unemployment quickly, we would find ourselves reviving and
accelerating the inflation.

To escape that inflation we might find

ourselves driven to measures -- be they tight money, high taxes,
wage and price controls -- that will once more create unemployment.




Each time round, the twin scourges of inflation and unemployment
reach higher levels, the economy becomes weaker, and investment in
the creation of new jobs diminishes.

That is what has happened so

far, and that is the danger with which we must deal.
The errors of our past policies are rooted in part in a
theory that has proved totally misleading:

the "Phillips Curve,"

that is the belief that one can trade off a little more inflation
against a little less unemployment in a stable way.

If that were true,

it would be difficult to argue the case against at least a moderate
degree of inflation.

Unemployment clearly is the greater evil.


three stop-and-go cycles have demonstrated that one cannot
permanently buy more employment by tolerating some limited degree
of inflation.

Inflation accelerates once it comes to be expected.

It then comes to be built in to wage contracts and pricing decisions.
To make the Phillips Curve stick people would have to ignore the
inflation, that is, they would have to be price blind.
that one cannot fool all the people all the time.

But we know

Inflation probably

has by now lost its power to fool evei some of the people some of the
Let me cite some of the evidence.

By early 1965, unemploy­

ment had been brought down from a peak of 7.1 in 1961 to below
5 per cent.

Had we proceeded with moderation, further gains w o u l d ‘

been possible without inflation.

But the economy was allowed to over­

heat, and by August 1966 inflation was moving at a rate of 6 per cent.




The Federal Reserve then briefly stepped on the brakes, temporarily
bringing inflation almost to a halt.

But the ensuing threat of unemploy­

ment quickly led to renewed expansionary policies. By the end of 1969
inflation had reached 7,4 per cent.

Tight money and tight budgets

then brought inflation down to less than 3 per cent by mid-1971
while unemployment rose close to 6 per cent.

Expansionary policies,

combined with wage and price controls of rapidly diminishing effective­
ness, once more revived inflation while temporarily reducing unemploy­

In 1974, inflation hit 13 per cent, in part owing to oil crises

as well as food and other shortages,
ment would have

A substantial rise in unemploy­

been inevitable as a result of these events, but the

effort once more to restrain inflation added to the effect.
1975, that effort has had a measure of success.

By early

But unemployment now

stands at 8.7 per cent, and the inflation is still high.
It is obvious from this record that a policy of switching
from one objective to another, from fighting unemployment to fighting
inflation and back to fighting unemployment, provides no answer to
our problems.

It simply escalates them.

is great to make such a switch.

Today once more the temptation

Our unemployment is very serious, while

the inflation, though far from ended, at least has lost some of its

But if such a switch of policy were made, the outcome by

now should be clear.

We would witness a possibly rapid but insufficient

reduction of unemployment which would be followed with some lag by a
new outburst of inflation, that to be followed in turn by another policy
switch and so on into a dim future.




In our present situation, I frequently hear the argument
that a massive policy switch can do no har m because there is so
much slack in the economy.

This supposedly would give time for a

period of strongly expansionary policies which could be cut off in
good time to prevent overheating.

I would not deny that some months

ago this vie w held certain attractions to me.

Meanwhile, however,

the probable end of the recession has come into much clearer view
and strong budgetary action to expand the economy has been taken.
In this changing situation, I believe that a temporary spurt in
our money and credit supply would just serve to repeat the pattern
of the past.
I want to emphasize that I would not want to tie monetary
policy permanently to any fixed rate of monetary growth at all times.
Monetary policy must retain its flexibility.

There have always

been occasions w h e n it was appropriate to use that flexibility, and
there will be in the future.

But at the present time a massive

policy switch would be a mistake.

If full employment and stable

prices are to be reached together, monetary policy must keep its
eye on both objectives.
W e must bear in mind that there has been slack in the
economy on past occasions as well, although not on the present

On those occasions, too, it seemed plausible to say that

there was plenty of time first to accelerate the expansion and then
to slow it down.

W e have seen that things do not w ork that way,

and for perfectly understandable reasons.




In the first place, the inflationary pressure in an
economy depends not only on the weight of unused resources holding
down that pressure.
economy expands.

It depends also on the speed with which the

A very rapid recovery, attractive as it would

be in other respects, carries embedded in it the seeds of future
In the second place, and this is just another way of
looking at the same facts, the record seems to show than an
increase in money and credit affects output first and prices

In other words, the lagged effect of monetary expansion

is greater for prices than for output.
ultimate result any less certain.

That does not make the

But there might be a period of

euphoria, when temporarily everything seemed to be going right.
But it would be followed by the same results that we have observed
in the past.

The euphoria, moreover, could become an obstacle to

a timely return to more moderate monetary expansion.

Given the

long lags, such a tightening of policy would in any event have to
come at a moment that many would regard as premature.

The same

prospect confronts us this time if we do not heed past experience.
Fortunately there is today no need to choose between the
objectives to fight unemployment or to fight inflation.

As I said

in the beginning, in the long run the two objectives do not compete.
They can and must be achieved together.
problem is to stop switching.

The way to resolve the

Today the same policy that can

lead us back to full employment can also lead us back to price





That is a policy of moderation in expansion, of

low-pressure rather than high-pressure tactics, and of steadiness
in keeping the twin objectives of full employment and price
stability equally in mind.
I believe that today there is widespread support for such
a policy.

Certainly there is very little left of an attitude that

may have been more common some years ago, which tended to shrug off
inflation, both as a threat and as a fact.

The v iew that inflation

will not escalate if left uncombatted, and that in any event whether
it escalates or not, inflation is only a minor evil, has lost much
of its seductiveness in the face of recent experience.
We have seen how inflation pushes business toward
bankruptcy, by destroying its liquidity and profitability, and, on
occasion by wage and price controls that tie up business decisions.
In Europe, the question has been widely raised ho w long democratic
institutions can survive in an environment in which inflation robs
some social groups of as much as 20 per cent of their income or of
their assets in a single year.
Nor do I believe that there can be an escape from inflation
through indexing«

Inflation, painful as it is, does help to cut down

irreconcilable demands upon the social product in a manner that
minimizes outright confrontation.
cushioning effect.

Indexing would eliminate that

It would push irreconcilable demands into

direct confrontation.

Social conflict, or else rapid acceleration

of inflation might be the consequence.




Controls, too, offer no solution.

At the present time,

the support for wage and price controls fortunately seems to


fallen away.

It could revive if inflation were to move back into

higher gear.

W e have now been through two periods of controls.

We know that, after an initial semblance of success, the gains
diminish while the damage mounts o

If we should fail to defeat

inflation, I would not be surprised to see us resort to controls
once more»

I can see no reason why the outcome should be any

I would not argue against forms of incomes policy that
stop short of controls.

In the past I have written extensively

about techniques that would enlist the tax system on the side of
price stability.

These techniques, I regret to say, have not been

explored as fully as I think they deserve.

But tax-based incomes

policies cannot be a substitute for proper monetary and fiscal

They can be a means of reducing the inflation bias in

the economy and, in the long run, of reducing the rate of unemploy­
ment consistent with price stability«

There are many other means

that we should examine to accomplish that most important objective,
including measures to improve productivity, to improve job markets,
to advance labor skills, to raise productivity, and to cut down the
inflationary bias inherent in many government policies and related
to money and the budget.




These are innovations to be introduced in the course of
the years.

For the immediate future, I welcome an innovation that

has recently been introduced by congressional resolution:


opportunity for the Federal Reserve to explain its policies and
plans to the Congress at periodic hearings, combined with a
declaration that makes price stability an explicit objective of
monetary policy along with maximum employment and lower interest
r a t e s , by maintaining a rate of growth of the monetary and credit
aggregates commensurate with the long-run growth potential of our

This congressional endorsement of a non-inflationary

monetary policy is a most hopeful fact.

It may not be easy to move

quickly to the rate of money growth that the Congress proposes,
since it implies a reduction of inflation to a very low level.
But there can be no doubt that it is the only way to a lasting
reduction in interest rates, and to the attainment of the low
levels of unemployment that w e all seek.