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UNIVERSITY OF MINNESOTA
Transcript of Question-Answer Session
following public lecture
"Effective Economic Policy:

Some Key Requirements1
1

by Mark H. Willes, President
Federal Reserve Bank of Minneapolis
November 17, 1977
(The lecture text is available in pamphlet form from the
Department of Finance and Insurance, University of Minnesota)
Q.

Dr. Willes, the business community has had a lack of confidence, not knowing
what the economic policy of the Administration is or where it’ going.
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They have counted on Dr. Burns as sort of the mainstay of fighting
inflation. From all reports, there’ a high probability that Dr. Burns
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will not be reappointed as the chairman. What effect does one man, the
chairman, have on the Federal Reserve's policies? If Dr. Burns remains
as a member of the Board, will he continue to be a strong influence?

A.

Well, that’ obviously the question I guess I am asked most frequently
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as I speak to various groups. Arthur Burns is a tremendously strong
personality who has had enormous impact both within the Federal Reserve System
and in government circles in general and he is in a position now where he
has earned enormous respect on the part of businessmen and the public in
general. I personally don’ think the world will come to an end if h e ’
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not reappointed. I say that for two reasons. (He, by the way, was a
professor of mine at Columbia and so I know him well. He disavows that
he had anything to do with me and sometimes when I see what he does, I
disavow I have anything to do with him.) The fact of the matter is
when Bill Martin, who was his predecessor, was about to leave the Board
of Governors, everybody said, fNobody can have the credibility that
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Chairman Martin had!1 And very quickly Arthur Burns had the same credibility
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and then some, and I think that would happen again. I ’ like to think
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that our government institutions aren’ dependent on one man. Second,
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the Federal Open Market Committee which is the primary committee that makes
monetary policy, which consists of the seven members of the Board of Governors
in Washington and then the twelve Reserve Bank Presidents, my counterparts
all around the country, is now made up of a group of strong-willed,
independent individuals. Frankly, I would not expect any perceptible change
in monetary policy almost regardless of who is appointed to take his place.

Q.

Dr. Willes, you’ spoken about the need for the consent and agreement of
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the public and yet many critics talk about the mystique that surrounds the
Federal Reserve System. This week’ Business Week, for example, asserts
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that regardless of who succeeds Burns/ greater openness will be forced on




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the central bank. Congressman Reuss states the case, "Ordinary people
have to be able to understand what the Fed is up to." Do you agree, and
I suspect you do, based on your speech here, that more openness is necessary
and is likely to come and if so, specifically, what forms will such
increased openness take?
A.

Well, that's an interesting question. I certainly do agree that we need
to be more open. I was very surprised when I joined the Fed to find out
I was part of a conspiracy and I've been trying to find out ever since
where the conspiracy is. I haven't found it yet. And yet, very often in
the public mind, we're considered to be part of some mystical group that
gets together in secret and decides to overthrow the economy. I think
a lot more openness is desirable but I think there are special ways,
preferred ways to do that. We just had, this month, much to the chagrin
of some of my colleagues...we invited two congressmen from this district
to sit in on our Board meeeting, one Republican and one Democrat just to
keep it even, but I thought that was a perfectly appropriate thing to do.
I think it's good for legislators to see very directly how we work and how
we function; that we're not hatching secrets, that we don't do things in
a mysterious way. On the other hand, some of the attempts of Congress to
open us up, I think, are counterproductive. The typical request is to have
us audited by the General Accounting Office. The concern that I and my
colleagues in the System have about that is that that can very easily slip
from a financial audit, where we have absolutely nothing to hide, where
we're distressingly clean, to very specific attempts on the part of the
General Accounting Office and the Congress to tell us how to conduct
monetary policy. I don't think that is a productive kind of openness
because one of the difficulties we face is that very often, the "right"
economic policy may be right in the long run but very difficult in the
short run. I don't think we want to be any more subject than we already
are to the very short-run political pressures that might cause us to make
some of the mistakes that I referred to in my talk.

Q.

Dr. Willes, in the case of the domestic steel industry, what do you see as
the most favorable alternative, long-run, in regard to unemployment,
retention of a basic industry, and a favorable impact on all related steel
using industries?

A.

Was that asked by a steel vice-president? There are no good solutions to
the problem of steel in my judgement. We have gotten ourselves into a bad
position and we're going to have to pay the price to get out. What I
would do, for whatever it's worth, and I have lost some of my best friends
for saying this in public, but what I would do is allow, maybe even
encourage, a reduction in the size of the steel industry in this country.
We have a tremendous amount of inefficient steel generating capacity which
is just not efficient; relative to that that can be produced in Japan and
elsewhere. We ought to...let Japan send us steel, that steel which they
can give us more cheaply, and we'll use our resources to produce other
things. Obviously, I don't think we ought to eliminate the steel industry,
but I don't think that's...you know people who talk about doing away with




the U.S. steel industry I don’ think are being realistic. We're talking
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about changes on the margin and I think that we can be competitive with
certain parts of our steel making capacity and for that part that we can’
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be, we ought just accept the cheaper Japanese steel and use our resources
on other things. Now the human cost of that is very great. Those people
who live in towns that are supported primarily by steel producing facilities
and so on, would have tremendous dislocation and I think we have a responsi­
bility to help them adjust and shift to other things, but w e fre going to
have to make the adjustment sooner or later unless we want to permanently
subsidize the U.S. steel industry. If w e ’ going to have to make the
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adjustment sooner or later, seems to me we ought to be about the business
of making that rather than trying to hold off the adjustment by raising
barriers to imports of foreign steel.
Would you comment with regard to the proposed substantial increases in
social security taxes, number one, and secondly, is the proposed figure of
full employment by 1983 realistic or should this figure of 4% unemployed
be revised upwards?
The social security problem is a disaster. This has been one of those
areas where, as a government, we found it easy to make nice promises and
then figure out how w e ’ finance them later. Now people are beginning to
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understand that you can’ do that forever. Again, there’ no easy solution
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to that problem; w e ’ going to have to do two things, in my judgement.
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W e ’ going to have to start thinking about scaling down benefits, as
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difficult as that is to talk about, and then w e ’ just going to have to
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increase the taxes that we pay to support it. Anybody who thinks that
there is an easy solution to that problem is just being, in my judgement,
outrageously misleading and mischievious. The proposed goal for unemploy­
ment of 4% by 1983...The main concern I have about the bill is that the
government would actually try to do it. If it becomes, as some suggest,
a "planning document1 which is put on the shelf, fine. If you feel better
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about voting for it and then put in on the shelf, that’ good. If the
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government really tried to achieve 4%, with the kinds of problems we
have currently in our economy, what we would really get as a result is
accelerating inflation. I don’ think 4% is a realistic unemployment goal,
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given the structure of the labor market and the imperfections that we have
at the moment.
Dr. Willes, recently M-l has been losing its significance to economists
and business analysts because of developments of check credit and "NOW"
accounts; would you please comment on that?
It is clear that things have been going on which change the way we should
regard M-l, with electronic money and corporations being able to have
savings accounts and so on. Interestingly enough, and I tried to indicate
that I am not a monetarist, although I am often accused of that, but those
who are of that persuasion have run a number of their kinds of calculations
and have found that even with the changes in the demand for money that you
referred to, the predictability of those equations and their value in
analysis really hasn’ changed very much. So to the extent that you agree
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that’ the right way to view the world, I don’ think that anything signifi­
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cant has happened.
Q.

There are a number of questions here which are concerned about the very
high recent growth rates in the money supply and wonder whether, one, you
could explain them to people; why have you as the Federal Reserve System
let that happen if it has such important effects for inflation and unemploy­
ment; and a related question is that some people would like to hear you
comment on what relation, if any, some of this increase in the money supply
may have had to recent Federal Government deficits?

A.

Just to rephrase the question, so I think I ’ sure I fm answering the right
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one, why did we say that money was going to grow at 6 1/2% and it grew at
9%? [Right] The real reason is that we didn’ want badly enough (we,
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meaning the collective Federal Reserve System) didn’ want badly enough to
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keep it down. I read in the paper and magazines and so on all the time
how the Fed can’ control the money supply; I think that’ a bunch of
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baloney myself. We can control it if we want to. Now, what’ involved
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is that, this year, for example, if we had tried to keep the rate of money
down, interest rates would have gone up sooner and faster than they did.
My response is, you know, so what, because I quess I ’ convinced that
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by not restraining the growth of money, what we in fact did is put in
play a series of forces that are going to generate more inflation and that,
in turn, is going to have a much more significant impact on long-term
interest rates than anything that we would have done otherwise. So,
unfortunately, the answer to your question is, we made a mistake and we
deserve black marks as a result.

Q.

What is the major difference between monetarists and rational expectation
theory?

A.

Monetary theory says that it is possible in one way or another, without
going through the mechanism, to systematically influence what goes on in
the economy. Rational expectations in effect says that it’ not possible
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for monetary policy or fiscal policy to systematically influence what
happens in the economy. That’ obviously a gross over-simplification,
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but when I understand better I ’ give you another answer.
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Q.

This question says, "Can you suggest ways in which the plight of the
non-land owning or young farmer might be ameliorated?1 How can someone
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break into farming these days?

A.

That’ an interesting question. How can somebody who can’ inherit the
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land break into farming? I think that’ a very serious question and one
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that I think we ought to work on a little bit. One possibility that
occurs to me is that we ought to make it possible for wealthy people like
you who have money to invest to help him break into farming. As it is now,
with many of the statutes that we have in various states, the person, the
farmer, he or she, has to either own the land himself or borrow to
somehow make things work. In North Dakota, for example, there’ a
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law against corporate farming. I think it would make a lot of sense
to have "corporate farms" which would make it possible for people to




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invest in the farm and let the farmer have a managing controlling interest
and earn the results of his work and, in effect, have access to equity
financing as well as debt financing. Now, when I ’ tried that out on
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a couple of farm groups they say, "Oh, my goodness, that means the demise
of the family farm." In my judgement it means just the opposite of that.
It means that we can find ways to help family farms remain and stay
economically viable by giving him the financial resources that currently
we only allow for corporations.
Q.

Dr. Willes, herefs a question submitted by one of our people that a lot
of people facing retirement have to face. The person says, "I am sixtyfour years old and must retire soon. Inflation is eroding my savings and
my few bonds. Honestly, is there any real hope of relief? What can I do?"

A.

I am not optimistic about the short-run outlook for inflation and I think
those who are on fixed incomes have difficult days ahead because we have
not...we continue to have policy makers and others who are putting in place
a series of programs that, in my judgement, are going to mean higher, not
lower, rates of inflation. Itfs only going to be when we have the courage
and the realism to break that cycle that w e 1re going to have any kind of
long-run solution to the problem. I have great concern for those in the
group that the question implied because I think the days are going to be
very difficult indeed.

Q.

Dr. Willes, I believe a banker has asked this question: "What is the
future of the dual system of federally and state chartered banks?"

A.

I think the future is great. Itfs going to require, in some states,
more aggressive state regulators than we have. I see no indication that
the dual system of banking is on the demise. In fact, I ’ seen a great
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resurgence of influence and interest on the part of state banking regulators
and I think that’ all to the good.
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Q.

This question reads, "I just looked at a sample financial statement for
the U.S. Government that showed debt exceeded assets by a considerable
amount. How can we expect to deal, in normal business fashion, with the
situation?"

A.

Oh, you couldn’
t! Yo u ’ be out of business long ago! I guess one of the
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implications of what I was saying is that I don’ think the government can,
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either, for slightly different reasons. I mean, nobody’ going to call
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the debt; we own the debt; w e ’ not going to call it on ourselves. We
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can always pay the debt as a government; we just have to print the money
to do it. The cost of the debt— the economic significance of the debt is
what it has to do with inflation and that sort of thing. As I mentioned
in my speech, I think the government deficit is far too high for this
stage in the business expansion and I think that the only thing we can
do in my judgement is collectively convince the politicians who vote on
it that it's got to be lower.




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Q.

This question says that your talk seems pretty pessimistic in terms of
misguided government policies and lack of understanding and so on and
your short-term outlook on a number of different issues, inflation and
unemployment, doesn’ seem very optimistic, either. What’ your outlook
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for longer-term survival of the American economy as we know it in the
free enterprise system?

A.

I personally think that w e ’ at a very important juncture in terms of
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the United States economy and really more than that because economic
problems and issues and how we deal with them tend to spill over and have
enormous effect on social and political reality. I think we're at a
crossroads. I think we can decide to continue to do what w e ’ done
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in the past, in which case I would not be at all optimistic about the
survival of the system as we now know it. Because I think that what we
would have as a result of inflation and other things that would take place
is persistent attempts to try and control that through wage and price
controls and other kinds of government interference. We would end up
with a very regimented, very highly controlled economic system, as we
have in many other parts of the world w h o ’ gone down this same road.
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On the other hand, and maybe I have to think this way just in order to
get up and feel good in the morning, but over the long sweep of history,
I ’ always had an enormous regard for the American people— for their
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willingness to sacrifice when they understand what the real needs are. I
just kind of have the feeling, if not the hope, in my bones that w e ’
ll
have the courage to demand more responsible public economic policy. If
we do that, even though it’ going to hurt in the short run and w e ’
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going to have to make the sacrifices to make it work, then I think the
long-run outlook would be very bright, indeed. Certainly, as I compare
the United States with other countries in the world, with one or two
very small exceptions, too small to hold all of us, there’ no place
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that’ better and I am still proud to be an American and delighted to be
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part of the system that’ trying to work out the difficulties that w e ’
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talked about.