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PAUL A. VOLCKER - Chairman,
Federal Reserve Board


Bob Clark - ISSUES AND ANSWERS Chief Correspondent
Dan Cordtz - ABC News Economics Editor

This is a rush transcript for
the press.
Any questions regarding accuracy should be referred to


Mr.' Volcker, welcome to ISSUES AND ANSWERS.

You and the Federal Reserve Board began drawing some heavy
politico*! fire this week as banks raised their prixne interest
rates on

to 15 percent and beyond.

Your critics say that you

are pushing too hard in trying to 3top inflation, that you could
push the country into a very serious recession•
Are you worried either by recession or by the political
ft re?

Well, let me say, first of all, Mr. Clark,

that I think the actions V7e took on October 6 are far from
great, political fire. We generally accept it as a responsible
and necessary set of actions; and I was very gratified by the
amount of support that was indicated at the tixvie.
We are in a very difficult economic situation, but I would
not, in terms of a possible recession, \*hich has been discussed
for months, trace that to our particular actions.

The situation

we had itfas rising inflation, speculation, a weak dollar.
We are in a better position to deal with the adjustments
that lie ahead, and some difficult adjustments nay lie ahead,
with the kind of actions we took.

I certainly believe that.

Tomorrow is the 50th anniversary of the stock

market crash cf 1929 that began the Greet Depression.

We built

a lot of fail-safe systems into the economy since then, to assure
that it can't happen again; but with all of the countries1 aid
the world's current economic problems, do you ever worry that

maybe it could happen again?
kind of thing*

I don't worry about a repeat of the 1929

We have —

you know, it is wonderful for the

media to have a 50th anniversary, but that kind of thing isn't
going to happen again. We have protections in our financial
system; we have protections in our economic policy.
are different*


We have a difficult situation and I don't want

to underestimate that, but the coincidence of 1929 is not
really relevant.
MR. CORDTZ: When you talk about that, most people wo *ld
agreef I think, that the stock market couldn't crash the w*y
it did back then, but a lot of people do seem to be concerned
that we luay be headed for a long period of —

if not recession

or depress ion, at least such slow economic growth that we are
going to have unemployment problems and the like.

Does that

concern you?

A lot of things about the economy concern

me, and very basically.

Look, in this country we are used to

having a three percent productivity growth, and that is what
really brings a higher standard of living in the end.

But that

productivity growth has slowed down in the last 10 or 15 years.
In the last year we have had no growth in productivity at

We have actually had a decline.

underlying problem for this economy.

That is a serious
It is nothing that is

directly susceptible to monetary policy.

But as we move ahead, we want to create conditions in this
country where v;e can grow again, and I think we can.

But we

have had a decade of moving in the wrong direction.

You recently made a public appearance at wliich

you spoke the unspeakable and said that the American peoplev
the average American has to look forward to a period of decline
in his living standcords?

That is corrected;I never said look forward

The point I was making is the one I just made:

When v:e

have declining productivity, and now we have the additional
complication of higher oil prices which are in effect, a tax
coming from abroad, and indeed just in the past year that tax
amounts to something like one percent of our GNP; but we are
producing less.

In fact, producing less per capita.

We have

more people at work than ever before, but we are producing less
per capita.

That means the average worker has less income,

Now we look ahead.

We want to correct that.

Now, it is

not going to be easy over a period of time, and I think people
do ha\*e to recognize that when productivity is declining,
when energy prices are increasing so rapidly, there is no way
you can increase your standard of living in the nation as a
whole, just by asking for higher wages or higher prices.
try to out raise

the other fQliow,

but collectively we cannot

consume more than we are producing.

You can


You said a couple of minutes ago that you got

some strong political support.

Now, some three weeks ago when

the Fed initiated its get-tough policies —

and you did get a

lot of support at hat time -- but this last week that political
fire we spolce of began to intensify in Yvashington, and let me
cite some instances:

The Democratic leader of the House, Jim

Wright, called your tight-money policies an open invitation to

The Chainaan of the House Banking Committee, Henry

Reuss, warned that you have let interest rates go too high in
this three-week span*

&n& Labor Secretary Marshall v/arned chat

interest rates are a very inefficient way to deal with inflation.,
Is this sort of political pressure going to force tha
Fed to trim its sails?

We are set up, of course, deliberately, with

a certain amount of insulation from political pressure.


job is to make the best ji\dgment we can and as to what is necessary
in the area of monetary policy, what is most desirable for the

And I think that the reason that Congress in its

wisdom for 50 years has maintained this certain degree of
insulation or independence is that we just can't look at what
happens next month or the next two months, or three months;
we are looking at xvhat maJcos the best conditions, the best
probability of getting a base for gzxwth and a productivity
back in this economy over a period of time: and that is always
the problem* looking with a little perspective ahead, because

sometimes what appears to be best for the next month or two
really, quite clearly, is not best when one enlarges his
MR. CLARK: But are you really confident of what you
refer to as that degree of insulation from policital pressures?
And I ask that because of some of the confrontations your
predecessors as Chairman of the Fed have had with Congress.

Yes, I feel confident in that*

The question

seems to imply that all the political comments will be on one
side, and I donft think that is true at all.

Let me ask this:

Do you accept the view that

the Federal Reserve Board is a creature of Congress and has to
bow to the will of Congress?

Well, it is a creature of Congress, quite

deliberately set up by the Congress

with this insulation of

which I spoke.
Now,Congress can change the lav/. They havenft chosen to
change that basic arrangement ever since the Federal Reserve
was established,, and I don't think they are going to*
MR. CORDTZ: Last week the Fed had to make the somewhat
embarrassing admission that there had been a $3 billion error in

estimate of the growth of the nation's money supply and,

of course, at a time like this those figures are —


attention is being devoted to them because of what they mean
for policy. Now,- tomorrow, your colleagues are going to be called
down to Capitol Hill to appear before the House Banking Committeo,
and the chairman has already called that mistake inexcusable.
Was it inexcusable,.and what happened?^ _ _ _

happy about it.

Well, mistakes happen, and I am not very

I point out the mistake was not really the

Federal Reserve's*

We compile figures that are reported to <is

every week by various banks.

We, unfortunately, had a bank

in that particular week that reported a sizable error.
suspicious about the figure.

We ware

The bank was quizzed, some adjust-

ments, were made, we were assured the figure \*as correct, it
was published.

We later found out it to be incorrect.

large error in that particular week.
in that connection.

A ve::y

But let me make two points

I have said, xny predecessors have said,

other members of the Federal Reserve Board have repeatedly
said, don't pay too much attention to these weekly figures.
They are erratic at best, and we don't form policy on the
basis of any particular week's figure. You have to look to -he
extent the money supply is important, at developments over a
period of time.

Certainly this particular misreporting which

the Federal Reserve did catch —

unfortunately, after the

preliminary figure was published —

and they are always revised

a week later -- that particular figure did not affect -- had
nothing to do with the measures on October 6 and didn't really
affect our subsequent actions.

To carry this question of .your political

independence on to your relations with President Carter, would
you back down if President Carter made it clear that your
policies, as Chairman of the Fed, were in conflict with his

basic economic views and policies?

I am not going to do that.

President Carter

made a statement right after our program was introduced.
was in close contact with the administration on this.


It so happens

the kind of problems we saw, the kind of priorities we had about
inflation, and have, have been stated repeatedly to be the
administrationf s priorities.

Let me throw a little historical perspective

on this, go back about fifteen years, when William HcChesney
Martin, who was then head of the Fed, went eyeball-to-eyeball
with Lyndon Johnson because the Federal Reserve Board at that
point had raised the discount rate higher than Johnson thought it
should be raised.

The point that Johnson made was that the

policies of the Fed should be coordinated with the overall
economic and budget policies of the administration*

Do you

agree with chat view?

Well, I think the answer Chairman Martin gave

at that time -- I happened to see an old article a few months
ago about that —

there was no basic disagreement about the

The Federal Reserve is charged with the responsi-

bility of making particular actions on the monetary side.
discharged those responsibilities.


I think in retrospect; in

fact, nobody would question the appropriateness of that Federal
Reserve action at that time.
the case in the Presidentfs

I would hope that that would be


Well, the interesting thing, to complete the

historical view here, was that Mr. Martin stood up to Lyndon
Johnson and did not back down.

Do you expect to do the same

in similar circumstances?

We are charged by law, Mr. Clark, with making

the best judgment we can wake, taking into consideration all
the factors about monetary policy, and we intend to continue co
discharge that responsibility.
MR. CORDTZ: Whatever the political support or non-support,
obviously there has been some criticism by some economists or
the Fedfs policy -MR. VOLCKER:

Remarkably few.
One of the charges, obviously, is that higher

interest rates add to inflation rather than solve it.

How dc

you e:cpect to bring prices down by raising the cost of money';

Well, you know, this is always one of the

most difficult things to explain to many people because it ic
true that interest rates enter into costs in the economy.


more basically interest rates are related to the inflationary
process, itself. When inflation is going up, thirteen or
fourteen percent a year as it is, if interest rates don*t respond,
obviously there is an enormous incentive to borrow, and there
is no incentive to lend,

if you are going to lose money in

the lending process.
So the market, itself —

forget about the Federal Reser re --

the market, itself, pulls up interest rates in those circumstances

If you look at the course of history in the United States, or
in any country, when inflation moves over a big cycle, interest
rates inevitably move over the same k5-nd of cycle, because
in a general way, they must be related to the inflation rate.
Now, what we are trying to do, and what we must do, is
maintain restraint on money and credit creation, and I think
history demonstrates pretty clearly that you canft have a lot
of inflation with restraint on the money supply.
As inflation comas down, which is the whole object of
our policy, that is, the only fundamental way to get interest
rates down, and I have no hesitation in saying that the kindr
of policies that vre are following will bring interest rates
down quicker and lower than if we took any other approach.
(Announcements )
MR. CORDTZ: Mr. Volcker, the Fed has to make policy on
the basis of what it sees ahead.

What do you see as the outlook

for the economy over the next year or so, and how long is it
going to take us to really get back to good health?

Well, as you know, virtually all economises 9

I think, in or outside of government, have been anticipating
an adjustment process.

Thay have been anticipating it, I

must say, for some months, and the characteristic if the economy
recently has been to maintain quite a lot of strength.

But \i

donft, myself, take exception to the probability that some k:~nd
of adjustment lies ahead.

Real incomes have been declining,

the savings rate is very low, inventories in a few areas, at
least, may need to go through some period of adjustment• Homebuilding has held up extremely well so far, relative to previous periods of expansion, but undoubtedly the mortgage market is tightening, and it could feel some effects, so there
could be a coiribination of influences here to give us a
period of adjustment.

What we hope, of course, is to lay the

basis during this period for a moderation of inflationary
forces in the relatively short run and lay a base for dealing
with inflation over a longer period of time, and it is going
to take some time.

That will be then a healthy situation for

a continuing and resumed economic advance subsequently.


Charles Schultze, the Chairman of the

Council of Economic Advisers, was quoted the other day as
saying that the underlying fundamental inflation rate in the
country is now probably eight to nine percent.

Can we livs

with that kind of inflation rate over long period o


I don't think so, because the trouble vith

those kinds of inflation rates is that they don't remain

If you get used to an eight or nine percent inflation

rate, the tendency is to speed above that, and then expectations begin running ahead of the actual pr-ice level-


was what was happening, in mi' judgment, in recent months,
that expectations of inflation began accelerating and the
expectations affect behavior and can themselves bring at out
a higher rate of inflation.
We began getting speculative activity in commodity
markets, not just gold that was led by the gold market, tJv*
silver market, began spreading into the copper market,
the zinc market.

Some of the consumer spending which has

been quite strong recently appears to be motivated by an r lea
of spending now, rather than later* because prices are goiig

That basically is an unhealthy situation that creates

the risk of a bigger recession later, rather than a smalle.;
So I am not one of those who thinks we can live with «.i
high rate of inflation, because I think it is inherently an
unstable condition.


What v/e have to work toward over a period of time is
getting back to a

noninflationary situation, and that is

what we intend to do.

You have pledged in the Ia3t few weeks that

you wouldn't shut off the flow of credit, but isn't the flow
of credit effectively being

shut off for a small businessman

v;ho simply can't afford to pay interest rates of 1? or 18
percent, or for a small builder of homes who can't afford a construction loan of 20 percent on homes that he may not be able
to sell because of high mortgage rates after he builds them?

The price at the moment is high, Mr;. Clark,

but we are not shutting off the flow of credit«, We expect a
continuing ex-edit expansion.

Credit has been expanding at an

exceedingly high rate.
Now# we want to moderate that, and it must be moderated
to deal with the inflationary problem.

But, again, the point

I would make is that, these interest rates you refer to
are a symptom of economic difficulties we are in; they are
a symptom of the inflationary process.

As we get a hold of

that process, that is the best assurance we can have that the
interest rates will decline, that the flow of credit can move
much more smoothly than it is at present.

You can't deal with

that situation without dealing with the inflationary process and
the kind of speculative psychology that has existed in the



Chairman Reu3S of the House Banking

seems to think the Fed needs some help in this area, and
this week in warning that interest rates are too high he
urged the Board to enforce its efforts to get banks to provi le
credit for housing for small businessmen and for farming* H<>
offered to supply legislation from Congress if necessary -presumably some form of credit controls*
Do you need legislation from Congress to back up your cr m

Definitely not, in my judgment.

We are

not capable in Washington in the Federal Reserve or elsewhere to
make the kind of detailed judgments about what loan is a goo?:.
loan or ^hat loan is a bad loan.

The attempt would only

create entirely unnecessary and unfortunate uncertainty on the
part of borrowers.
It is the job of banks and savings and loans and other
lending institutions to make that kind of judgment as

to what

the need is of their individual customers; and I have indeed
reminded them that in this process we hope that they will
particular attention to the needs of small business, the
homebuilder and all the rest, and resist any temptation to <ro
out in some loan that may look profitable at the moment but
it is not leaking much contribution to the economic



That is all a voluntary effort.


you almost assuring that"Congress will launch some rescue
efforts of its own if, for instance, you let the housing
industry to slide into serious recession?

Well, it depends upon what you mean by


"rescue effort."

Mandatory ^ U * * conrzola?


I woa.ld suggest thai that ±s not a rescue

effort, but that would only severely complicate the situation
a d lead to loss certainty about credit: availability.
Now, oth^r actions are possible.

Tlie Home Loan Bank

Board took some actions this week to relax the liquidity requirements on savings and loans.

They, of course, have borrowing

facilities for savings and loans.

There are actions that can

be taken to meet some of the particular points of strain that
might otherwise be unduly burdened.
Now, that is not a question of credit controls or credit

There is a marked difference between those types

of actions.
MR« CORDTZ: Well, to approach this from the other side,
your letter to the banks and President Carter's statements
recently have suggested

that we are going to make sure that

housing isn't too badly affected by this; but isnft housing
exactly one of the very speculative sections of the economy
that needs to be deflated?


Housing is an area that is inherently vul-

nerable to this kind of process and, General, I am not just
speaking of the Federal Reserve actions.
tionary situation we have.

The kind of infla-

You probably saw reports that

savings and loans are losing deposits in September, and savings
banks have been losing deposits.

That is before we took thes i

Because, as market rates rise in response to inflation,

those institutions tend to be in a more vulnerable position
than others.

They have not been as vulnerable in this expan-

sion as in earlier expansions, because of a variety of action i
that have been takan to improve their competitive position.
Those actions have been fairly successful.

They can not work

perfectly in a highly inflationary situation of the kind that
we have had.

Those institutions will again thrive as we begin

to get the inflationaary situation under control.
I know when I talk to savings and loan executives, quite
generally they say, "My God, we are going through a tough
situation now, but we recognize the only thing that is really
going to make us healthy is getting this inflation under control/1

One of the reasons, Mr, Volcker, that saving*

and loan associations have been losing money is because of this
Federal Reserve Board's, we might say, notorious regulation Q
which limits interest rates on regular passbook accounts to
five and a half percent, and you have to have at least $10,00'?
to buy one of those special 6-monthsf certificates.

The interest

ratas on those certificates this last week rose rather incredibly to 12.6 percent, but isn't it grossly unfair to small
savers who have only a few thousand dollars to limit their
interest to five and a half percent?

Well, there have been a lot of modifica-

tions in Regulation Q, as you know, over the past couple
of years, so that savers do have access to higher rate instruments • This is under current discussion t-jithin the Congress,
and I am sure that those matters are going to continue to
be reviewed.
The other side of the coin is the problems that some of
these institutions have in paying higher rates at this particular point in time,


MR. CLARK:- But why should that problem be heaped on the
small savers?

It should not, in a fundamental sense.


is a question of what can be done at a particular point in

And the answer seems to be that nothing can

be done now.


A lot has been done.

A half percent or a quarter increase, from

five and a quarter -•

On the passbook savings account, but a

lot has been done in terms of other forms of savings certificates

and money market certificates.

Smaller denomination Treasury bills, but most

people don't know anything about those.

They donft have th>

sophistication —

Well, we have not got a perfect situation

in this respect, but small savers have found a lot more opportunities in this particular episode than they found in earlier
episodes, and we want to work away from those restrictions,
and xsre want to work away from them as fast as we reasonably ^

Thank you very much, Mr. Volcker, for being


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