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For release on delivery
Wednesday, April 15, 1981
10:30 AM CST; 11:30 AM EST



Remarks by
Paul A, Volcker
Chairman, Board of Governors of the Federal Reserve System

Alfred M. Landon Lecture Series on Public Issues
Kansas State University
Manhattan, Kansas

April 15, 1981

I am both delighted and honored to come to this great
University this morning to take part in the Alf Landon
Lecture Series.

I understand the Governor refuses to think

of himself as in retirement.

Rather, he properly points out

that, at his age^ no one can question his -comments and policy
pronouncements as being motivated by personal ambition or
political purpose.

He certainly long ago reached the eminent

status of elder statesman; he defines that as the point at
which "you've outlived all your adversaries —» and people
pay attention to what you say*18
1 cannot- claim that exalted status,,

But 1 can take as

my keynote a remark he made* reminiscing, about his political


I said inflation was like a whirlpool, it kept

growing bigger and bigger all the time.

Mo one benefitted

except the nimble speculators, and that's still an issue

Well, what was still an issue in 1972, when that

remark was made, has becoxne the issue in economic policy
today. '
My thesis today can be suimned up in a few sentences.
We need to bring down inflation and restore price stability,
not just for its' own sake but because lack of confidence in
our currency' is incompatible with a productive^ growing

Monetary policy and the Federal Reserve have an

indispensable role to play in restoring price stability by
slowing growth -in money and credit*

In the near-term, that

process can be painful, given the momentum of inflation and
the pressures on financial markets resulting from the inflationary process•

The period of transition to more stable

prices and sustained growth will be greatly speeded and
eased to the extent other policies, public and privatef are
brought to bear on the same objectives.
The need to reduce and eliminate budgetary deficits,
reductions in tax rates, and reform of regulatory policies
all have relevance in that connection.

And in the end —•

and it should be sooner rather than l a t t e r — a t t i t u d e s and
patterns of private behavior that reinforce and sustain the
inflationary process will have to be changed.
Any successful attack on inflation must build upon the
clear recognition and understanding by the public of the
tremendous costs of price instability --. that prerequisite
is already in place.

In poll after poll —

important poll on November 4 —

including that

inflation has been identified

as the number one economic problem facing the nation today*
Obviously, as human beings-, we do not resist *—* and even
welcome ™

higher salaries and wages for ourselves, or: rising

prices for the home we already own*

But we-have come to

recognize, that those' gains, when they are-not grounded in
real growth' and productivity, are* a kind of economic "shell
game11 in ^liiafi rising incomes disappear at the super market
or the shoe store, and the price of the new house we would
like to buy rises as fast or faster than the one we already



We correctly sense something is fundamentally wrong

when the interaction of rising prices and high taxes erodes
our savings, impairs business planning, and induces us to
look toward speculative and exotic forms of investment to
stay ahead of the game.
I think it fair to say that that "man-in-thestreet" perception is now shared by most professional
economists. It was not always so.

In the 1950s and 1960s,

a substantial number of economists —
social philosopher —

taking on a role of

defended a "little" inflation as a

kind of social solvent, helping to reconcile competing
political and economic pressures.

Claims on total output,

the argument ran, would almost inevitably exceed what was
actually being produced.

Social conflict over the exact

size of each group's slice of the national pie could be
avoided by giving everyone a little extra in nominal income.
The general price level would be allowed to rise to reconcile
the irreconcilable.

It was a game of mirrors, but it seemed

acceptable for a while —

more acceptable than imposing the

degree of fiscal, monetary and other restraints necessary to
deal with inflation.
But, of course, the game was up when the public would
no longer accept nominal gains as a substitute for the real

Worse yet, the accumulated evidence indicated that

inflation, instead of being a relatively benign social solvent,


is instead a degenerative disease, progressively undermining
the economy's potential for real growth.

We have learned

that inflation feeds on itself, and each upward ratchet in
the rate of price increase brought with it more distortions
in the tax system, reduced incentives to save and invest,
and impaired economic efficiency.

From an unemployment rate

generally of less than 5 percent and productivity growth of
almost 3 percent a year through the mid-1960s, we have seen
unemployment rise to a range of 6-8 percent and productivity
drop toward zero.
Building on the public perception that, after 15 years
of bitter experience, inflation must be ended, an essential
element in the battle against inflation —
growth of money and credit —

a reduction in the

has been put in place.

exact relation between money and inflation —
of money itself —


and the definition

can be debated almost endlessly.

But there

can be little doubt that, over reasonable periods of time,
the rate of inflation is related to the growth of the money

If we are serious about inflation, the growth in the

number of dollars available for spending must be adjusted to
the sustainable real growth rate for the economy.

That is our

job in the Federal Reserve, and we are determined to carry it
We plan to make the needed reduction not all at once,
but over a period of several years.

The purpose is to permit

some time for the economy, for personal behavior, and for


existing contracts to adjust to the prospect of a alower
rate of price increase and eventual stability,
treatment" may be more dramatic —
more effective over time.


but not necessarily

What is essential is that there

be widespread appreciation of our intentions, and our ability
and will to carry them out.
From one point of view, it could be said that nothing
else needs to be done about the inflation problem


reductions in the rate of growth in the money supply should,
sooner or later, inevitably bring reductions in the rate of
increase in prices.

But the question arises as to the costs

and strains involved in the process, and whether those strains
might be minimized and progress speeded by accompanying the
needed monetary restraint with other complementary policies.
After all, my distinguished predecessors in the Federal
Reserve did not deliberately and willingly increase the
money supply and encourage inflation; quite the contrary,
they resisted inflationary forces but faced difficult
"trade-offs" and economic pressures in their decision-making.
The present inflation really started in the mid-1960s,
when the government decided to increase expenditures without
raising taxes.

An unpopular war in Vietnam was combined with

greatly expanded social spending at home, and in neither case,
was the citizenry asked in a timely and straightforward way to
pay the bill in higher taxes.

Large Federal deficits added to


hurgeoninq demands for private credit as inflation took

On at least three occasions —

1974 —

in 1966, 1969, and

restraint on credit by the Fed bit hard —

but it

stopped short of permanently turning back inflation when
severe financial pressures and recession developed.
We as a nation cannot afford any longer to compromise
with inflation.

Indeed, with expectations in financial

markets and elsewhere so sensitive to any suggestion of
policies that might lead to more inflation, expansionary
monetary policies would incite higher, not lower, interest

What we can do, however, is reduce the demands on

the economy from fiscal policy and deal with other sources
of price and cost pressures.
One aspect is the competition for money from the Federal

This year, about one-quarter of our domestic gross

savings —

and over one-half of net savings —

will be

absorbed by the Federal Government to finance the gap
between its expenditures and revenues and its "off-budget"
credit programs.

If this $8 0 billion or so of financing

were not required by the Treasury, more capital would be
available for the additional private investment we sorely
need —

including modernized plant and equipment, new

energy sources, and new homes.


But it also makes a difference how we balance the

Taxes are themselves an element in costs, and

high tax rates impair incentives; under the pressure of
inflation, effective tax rates have been rising, working
against price stability and productivity.
point of economic policy, the best way ~
realistic way —

From the standand the only

to reduce the deficit is to cut expenditures,

and do it on a much more massive scale than has been possible
in the past.
1 am greatly encouraged by the fact that our political
leadership is grasping this opportunity to make major savings*
At the same time, we must not underestimate the magnitude of
the job.

The proposed cuts of $40 to $50 billion for the

next fiscal year sound and are substantial, but they still
amount to only 7 percent of the budget total.

Defense spending

is rising, and the net reduction would be relatively small in
real terms.

Moreover, further large budget cuts will be

required in future years to make room for the tax reduction
that we need -— and those additional cuts in Federal programs
to which we have all become accustomed may be even more
difficult to achieve than those currently under consideration.
The effort is dictated by only one overriding fact:

I see no

other way to reduce the inexorable pressure that the Federal
budget places on our financial and economic system.
The next year or two will be a severe test of our
political will to sustain the anti-inflation drive.


Expenditure reduction and tax relief moving in harness are
essential to the substance and to the credibility of the
economic program.

If we can both reduce taxes and realis-

tically look toward a balanced budget and surplus as the
economy regains more normal levels of production and growth,
we will have a critical new element of policy in place.
Monetary restraint, a lower trend of Federal spending,
and tax reduction provide the financial framework for a
successful effort to control inflation.

How quickly and

effectively these policies bring results will depend upon
other actions, both public and private.

We simply cannot

afford regulatory or other policies that inhibit competition,
add unnecessarily to costs or prices, or excessively shelter
some groups from economic risks of their own making.
In that connection, we should all realize that private
decision-making —

wage bargaining, pricing policies, and

efforts to improve productivity —

will have a direct bearing

on the speed with which we return to price stability and the
strains and difficulties that process will imply.

In recognition

of that reality, this nation and others have attempted, with
varying degrees of formality, to explicitly influence wage and
price decisions through so-called incomes policies.

They have

had little or no lasting success here, and indeed have been
counterproductive when considered substitutes for other policies.
We do not want to travel down that route again.

But what we can

do is develop and communicate a M t t e r understanding of where


economic policy is heading, and encourage, on the basis of
that understanding, responses in private life that are consistent with both individual and national interests.
It is up to the Administration and the Congress to make
clear what their intentions are for tax and budget policy.
It is up to us at the Federal Reserve to communicate clearly
what will happen to the growth of money and credit.

And it

is up to the private sector to understand the change in
national direction these policies imply, and to take account
of them in their own decision-making.
One important implication of monetary policy is that
the rate of growth in the nominal GNP should slow.

That is,

of course, consistent with real growth, provided inflation

Financial policies are designed to produce that
The issue is how fast, and how smoothly.

Wages and salaries account for about two-thirds of the
national income; they are the dominant share of business

So long as the momentum of high wage settlements

continues, there is a clear danger that real activity, as
well as prices, will be squeezed as financial restraint is
brought to bear.

On a national level, the result is an

excessive level of unemployment and slow growth; on a local
or industry level, lay-offs, plant closings, and even bankruptcies would be the symptoms.
In the broadest terms, the present difficulties of the
auto industry are instructive.

The acute problems of that


industry can be traced to a number of factors —
government policies.


But surely those difficulties are

related in a significant degree to wage and cost pressures
building over a number of years.
As early as the 1950s, a pattern of wage contracts
was set providing, in essence, for inflation adjustments plus
a productivity improvement factor designed to achieve gains
in real wages. So long as national productivity was rising
and import competition was limited, these gains could be
and were achieved, consistent with the health of the

In the 1970s, however, the economic environment
Productivity growth in the economy as a whole

declined and oil prices rose dramatically.

As a result,

real wages for the average worker could not rise so rapidly
as before, and in recent years have actually declined.


auto industry itself met with fierce foreign competition.
The result of these forces was that relative wages of
auto workers and costs for the industry increased at the
same time that American cars had to compete with increasingly
efficient foreign producers.

Throughout the 1950s and 1960s,

U.S. automobile industry wages were about 30 percent more than
the manufacturing average —

a differential related to higher-

than-average skill levels and the nature of the work.


between 1970 and 1980, U.S. auto wages rose about 150 percent,
as opposed to 120 percent for manufacturing as a whole, bringing
them 60 to 70 percent above the national average.






with average labor compensation at Ford and GM approaching
$20 an hour this year, the industry is at a distinct
competitive disadvantage,
I recite these circumstances not because the auto
industry is entirely unique, but because the trends are
symptomatic of the larger problem*

If inflation is to be

unwound, and our industry is to restore full competitiveness
and provide high levels of employment, private behavior in
wage bargaining arid containing costs generally will need to
reflect the new realities of the marketplace*

With restrained

monetary and fiscal policies, that will happen.

It seems

to me both in the individual and in the national interest
for it to happen sooner rather than later*
Historically, wage and pricing decisions, particularly
in sectors of the economy characterized by large firms and
large unions, have responded sluggishly to changes in
financial conditions and the inflation outlook.


and labor alike tend to look back, to where we have been, and
make their decisions accordingly.

There is a natural tendency

to want to "catch up" with past inflation.

When productivity

growth is poor, as in the recent past, there is little or no

growth in real wages, so attempts to "keep ahead" are all the
more intense.

For workers and industry as a whole, the effort

is futile so long as productivity is not growing.

But the

efforts themselves reinforce the momentum of inflation.
A change in that "mind set" can smooth the return to
price stability.

Expectations are critical; to the extent

policies to fight inflation are credible, there will be a


strong self-interest in curbing individual behavior that
adds to costs and prices.

Moreover, to the extent pro-

ductivity is increased^ higher real income and profits can
reduce pressures for nominal wage and price increases.
Finally*, to the extent regulatory costs are reduced, and the
government refrains from protecting industry and workers
from the forces of competition at home and abroad, the
incentives for efficiency and reduced costs will increase.
These propositions seem to me to point directly to
appropriate policy approaches:

The case for "free trade" depends not just
on abstract propositions of comparative
advantage and long-run increases in national
income/ but on the advantages, here and now,

in reinforcing pressures toward price stability.
Reduced costs of regulation, and removal of
restraints on internal competition, will be
reflected not just in the lower costs for
individual products, but also in improved
national economic performance.
Productivity deserves the high priority it is
being given, again not only because of its long
range implications, but because the gains in real
income associated with a rise in productivity will
make it easier to wind down the price/wage spiral,-


And most important, we, in the Federal Reserve,
need to be convincing in our commitment to
monetary and credit restraint.

We need to build

on the consensus that inflation is at the core of
our economic problems —
number one.

that it is public enemy

We need to resist temptations to

stimulate the economy through money creation,
recognizing that, in the end, faster growth of
money and credit will impair performance, not
improve it.
So far, the fight on inflation has been a "holding action"


if we cannot see many signs of progress, neither has it gotten
noticeably worse over the past year or two.
discouraged by that record.

I am not at all

After all, the momentum of cost

and wage increases has been enormous, expectations of more
inflation are deeply ingrained in behavior, and we have absorbed
a huge new round of energy price increases.

We should be aware

that the hardest part of the job is to get the strong inflationary
trend —

built up over 15 years or more —

turned around.

stopped, and then

I believe we are in that process now.


the next year, we should begin to see some tangible progress.
If you interpret my remarks as suggesting that process
can be painful, you are right.

It already has been.

and fiscal restraints are never easy —


they are only essential.

They directly affect those dependent on credit and those
benefitting from government programs.

They may involve harsh


adjustments for those who have been accustomed to inflation
or who actively seek methods to profit from it.
But any pain will inevitably be much greater if we do
not act.

Then, we would only face the dismal prospect of

further deterioration of economic performance over time.
Conversely> to the extent our policies convince the nation
that inflation will be brought under control -- encouraging
early changes in expectations and behavior patterns —


quicker and smoother will be the transition to price stability.
I realize I cannot "prove" to you today that we will be

Many will become believers only when they see

evidence that inflation is in fact receding.

At that point,

the momentum of events should make our job easier.
But I can point out that, more than at any.time in my
experience, the necessary elements of public policy are in
place, or are being put in place.

On that basis, there are

strong new grounds for questioning the presumption of so
many private decision makers that inflation will continue.
Indeed, there should be new calculations of the balance of
risk and advantage in inflationary behavior.

And, as those

calculations do change, the tide of events will turn in a
more favorable direction.
Those of us responsible for monetary policy do not
intend to forget a key ingredient for success and confidence.
We have set our course to restrain growth in money and credit.
We mean to stick with it.