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




before the
Committee on Banking, Housing and Urban Affairs
United States Senate

July 23f 1986

I appreciate the opportunity to report once again on
the conduct of monetary policy.

I would first like to place

that matter in the larger context of the performance of the
United States and the world economy.
As you know, there have been marked contrasts in the
economic performance of different sectors and regions of this
country.

Consumption has been strongly maintained, and there

have been large increases in employment in the broad service
sector.

Housing is being built at a high rate.

But industrial

activity and business investment, which had leveled off last
year, have declined over the last six months, and the agricultural
and energy industries are under strong pressure.

As a consequence

activity in some areas of the country has advanced rather strongly,
while severe adjustments are taking place in the energy and
agricultural belts.
The net result is that the overall economic growth rate
in the United States moderated to about 3 percent through 1985
and early 1986, and apparently slackened further in the second
quarter of this year.

Moreover, growth in other major

industrialized countries remained slower than in the U.S.
during 1985 and the early part of this year.
Throughout this period, sizable increases in employment
have continued in this country; the unemployment rate has
remained generally at a little over 7 percent and, relative
to the size of the working age population, more people are
employed than ever before recorded.

In Europe, unemployment

has also remained relatively steady, but at much higher levels.




-2After more than three years of economic expansion,
the process of disinflation has continued, reinforced for
the time being by sharply lower prices of oil, by far the
most important commodity.

With industrial prices steady/

the average level of wholesale prices has been declining
here, and even faster in key countries abroad whose currencies
have been sharply appreciating relative to the dollar.
Interest rates here and abroad have also declined appreciably,
reflecting both the sense of progress against inflation and
the fact that growth has been proceeding well within capacity
restraints.
The large decline in U.S. interest rates and the
sharply higher stock market over the past year suggest the
cost of capital has declined.

The fall in oil prices has

helped bolster the real income of consumers.

Meanwhile,

the substantial depreciation of the dollar has placed our
industry in a decidedly better competitive position vis-a-vis
other industrial countries.

As many have suggested, these

underlying forces should help sustain an economic expansion
that has already lasted longer than most.
But I would be remiss in failing to emphasize much
less satisfactory aspects of the U.S. and world economic
situation.

There can be no evading the fact that some funda-

mental economic adjustments must be made within our economy
in the months and years ahead.




-3The clear challenge is to find the ways and means to
work through those adjustments in a context of sustained growth
while also consolidating and retaining the progress toward price
stability.

The conduct of U.S. monetary policy is obviously

relevant to that process.

But that single policy instrument

cannot itself provide the answer.

Complementary approaches

in the fiscal, trade and other policies of this country, and
in the approaches of other countriesf will be required as well.
The hard fact is that, while the need for complementary actions
to achieve the necessary adjustments in the United States and
world economy seems to be more widely recognized, progress in
coordinating action toward those aims has been limited.
Disequilibrium in the Industrial World
Some obvious imbalances have developed in the economies
of the industrialized world.

That is evident most of all

in the enormous deficit in our external trade and current
accounts, and in the counterpart surpluses of a few other
countries.

Unless dealt with effectively and constructively,

growing market and political pressures will, sooner or later,
inevitably have much more disturbing consequences.
The problem first clearly emerged some time ago.

The

powerful thrust of the strong U.S. economic expansion in 1983
and 1984 had spilled out abroad in the form of sharply rising
imports, aided and abetted by the exceptional strength of the
dollar internationally.




There were, for awhile, benefits on all

-4Europe and Japan to restore and maintain their growth.

The

United States also absorbed a disproportionate share of the
necessary external adjustment efforts by the heavily indebted
countries of Latin America.

Those countries have sharply

curtailed their imports since 1982, and they have become
more competitive in markets for manufactured goods.
At the same time, the United States began to be the
recipient of a growing flow of capital from abroad.

That

inflow, which pushed the dollar so high in the exchange markets
until early 1985, had the practical effect of relieving potential
pressures on our internal financial markets even in the face
of the massive and growing federal deficit.

Consequently,

private investment and construction could expand.

At the same

time, the competitive pressure from imports encouraged strong
cost-cutting and productivity efforts in the industrial sector.
That has been one powerful factor accounting for the near stability
of prices of manufactured goods over the past year or more.
We cannot, however, build a lasting foundation for
sustained growth and stability on massive international disequilibrium —

huge and rising trade deficits in the United States

and counterpart surpluses abroad.

Nor can we count on satisfying

indefinitely so much of our own needs for capital by drawing so
heavily on the savings generated elsewhere in the world —

savings

that have been so freely available in part only because internal
growth in Europe and Japan has been relatively slow.




-5Today the imbalances and strains are clearly showing.
The forward momentum of our economy has been sustained almost
entirely by consumer spending and housing construction, both
of which have been accompanied by unsustainably heavy borrowing.
Savings meanwhile have remained at a relatively low level, even by
past U.S. standards.

For more than a year, industrial production

in the United States has not grown appreciably, and there has been
some decline in 1986.

The pace of business investment has slackened.

Some of the relative weakness in industrial output
and investment over the past six months can be attributed to
temporary factors and to developments peculiar to the United
States.

For instance, some investment orders were speeded up

late last year in anticipation of tax reform, and the debate
on the nature of that reform has apparently led to some deferral
of ordering this year.

The boom in spending for computers has

subsided and commercial construction, in response to large and
growing vacancies of office space, is predictably declining.
Probably much more important in recent months have been very
sharp cutbacks in domestic oil exploration and investment,
driving energy producing states into recession-like conditions
and affecting production of steel and equipment elsewhere as well.
But a large part of the difficulty stems from the
continuing imbalances in the world economy.

On the average,

growth rates in major European economies and Japan were about
3/4 percent less than the reduced growth path of the United States




-6during 1985 and the first quarter of 1986.

However, the more

disturbing contrast lies in the source of that growth.
In the United States, the rate of growth in domestic
demand, while slowing in the third year of expansion, continued
to average about 3-3/4 percent through that period.

Domestic

demand growth in the industrialized countries of Europe and
Japan was significantly less —

about 2-1/2 percent.

In the

early part of this year, when their exports slackened, those
countries grew not at all.
The plain implication is that our overall GNP growth
rate was reduced by continuing deterioration in our trade
and current account balances.

With our current account

deficit reaching a record $135 billion annual rate in the
first quarter of this year, industrial production and investment
were restrained.

Meanwhile, foreign surpluses continued to

build through much of the period, and as their exports have
slowed, internal demand has not yet, in most of those countries,
picked up the slack.
Prospects for investment and for manufacturing activity
in the United States are heavily dependent on an improved trade
outlook.

The sharp decline in the dollar since its peak in early

1985 should help set the stage for such an improvement.

There

is evidence that U.S. producers find themselves in a stronger
competitive position.

However, the deterioration in actual trade

in manufactured goods has slowed little.




-7The decline in the dollar is both relatively recent and
from a very high level so the absence of a stronger response in
trade so far is not entirely surprising.

What is of concern is

that the domestic markets of our major industrial competitors
have remained so sluggish, raising a question as to the buoyancy
of the markets for our exports and of their own growth prospects.
You are well aware that the present imbalance among
industrial countries is reflected in strong protectionist
pressures in the United States.

Yet, as the President has

so strongly emphasized, to abandon our tradition of relatively
open markets would surely be to invite an unravelling of the
international trading order.
more inflation.

We would then have less trade and

With that, prospects for sustained growth both

here and abroad would clearly be placed in jeopardy.
I know of the complaints about "unfair11 trading practices
of other countries.

We need to deal with them energetically.

But I also know the clear lesson of Experience is that a
protectionist retreat by the United States, the world's leading
economic power, would invite recrimination and escalation.
Certainly, the most effective and promising avenue for dealing
with the trade complaints on all sides will be in the planned
round of multilateral trade negotiations rather than in a titfor-tat process of mutual retaliation.
Moreover, I believe it is demonstrable that, as a matter
of relative importance, much more fundamental imbalances in the
world economy than unfair trading practices are responsible for




-8the present pattern of trade deficits and surpluses.

Those

underlying imbalances can only be dealt with by complementary
economic policies, not protectionism.
Quite clearly it is in no one's interest —
United States or other countries —

not the

that we seek better balance

in our external accounts by deliberately restraining further
our own growth rate.

But it is also true that as things now

stand, stronger domestically generated growth in the United
States will not reduce the international imbalances.

Taken

alone, it would aggravate our trade deficit further, posing
an even more difficult adjustment problem later.
As I suggested, the recent exchange rate changes can
help us to escape that dilemma —

they should work to improve

our trade position and reduce the surpluses of others.

In

fact, faced with a combination of appreciating currencies and
slower growth in overseas markets, exporters in both Japan and
some European countries are experiencing reduced profits and
more sluggish orders from abroad.

However, in the absence of

offsetting internal sources of expansion, those same pressures
could dampen their own prospects for growth.
That is one of several reasons we should not rely on
exchange rate changes alone to produce the needed international
adjustments in the world economy.

Over a number of years, we

in the United States will certainly need to shift more of our
resources into exports, and into recovering domestic markets
where import penetration has been so high.




That, very broadly,

— 9—•

implies relatively more growth in manufacturing? relatively less
growth in services, in governmental spending, or in other sectors;
and more savings and less borrowing.

For some of the rest of the

world, the opposite shift will need to be at work —

less reliance

on exports, and more on domestic sources of growth.
Much still needs to be done to ease the way for those
adjustments.

For one thing, we in the United States are not

prepared for a really large improvement in our trade balance.
Our financial markets remain dependent on the large capital
inflows from abroad that are a necessary counterpart of our
trade and current account deficits.

Moreover, taken by itself,

depreciation of our currency in an effort to redress the trade
deficit poses a risk of renewed inflation.
Only as our huge federal deficit is cut can we comfortably
contemplate less borrowing abroad and provide assurance against
renewed inflation.

Put another way, in a growing economy,

reductions in the federal deficit will be necessary to release
the real and financial resources necessary to improve our trading
position in a way consistent with rising investment.
In a few foreign countries, such as Germany, some signs
of stronger internal growth have appeared in recent months.

But

such signs are far from uniform among key countries abroad, and
most projections of their growth for this year have been lowered,
not raised, as exports have slowed.
With rising currencies and falling oil prices, some of
those countries after years of effort have now successfully
achieved virtual stability in consumer prices.




Moreover,

-10their wholesale prices have declined sharply and are appreciably
lower than a year ago.
All of us —

and certainly this central banker —

can

appreciate the importance of maintaining a broad framework of
stability and appropriate financial disciplines to sustain that
progress*

What is at issue for some countries is their ability

to achieve and maintain vigorous internal growth at a time of
high unemployment and ample resources as external stimulus fades
away, as it must if international equilibrium is to be restored.
The appreciation of their currencies and the strong deflationary
influences of low oil and other commodity prices would appear to
offer a prime opportunity for reconciling those goals of domestic
growth and stability.
The International Debt Problem
Four years after the international debt problem broke
into our collective consciousness in 1982, when Mexico abruptly
lost access to international credit markets, that threat to our
mutual prosperity remains.

The renewed difficulties of the

oil producing countries today should not, however, obscure
the progress that has been made.

Collectively, the heavily

indebted countries of Latin America and elsewhere have made
an enormous effort to adjust their external accounts? in fact
in 1984 and 1985 they were in rough current account balance,
in contrast to an aggregate deficit of about $50 billion in 1982.
To be sure, that effort for a time was accompanied by sharply
lower imports, recession, and lower standards of living as they



-11brought their spending more in line with their internal resources.
But it is also true that many of those countries are again growing,
in some cases with vigorf as is the case with the largest single
debtor, Brazil.

Helped by the reduction in world interest rates,

external interest burdens have been reduced appreciably in some
countries relative to exports or other measures of capacity to
pay.

A number of Latin American countries have also made striking

progress in dealing with ingrained inflation for the first time
in many years, in the process gaining political support.

There

has been considerable, if uneven, progress toward liberalizing
their economic structures in ways that should encourage more
growth and productivity over time.
In the midst of this progress, the sharp decline in oil
prices over the past six months has had an enormous adverse impact
on the oil-exporting heavily indebted countries —
Nigeria, Ecuador and Mexico.

Venezuela,

At current oil prices, for instance,

Mexico would lose about a third of its 1985 exports, perhaps as
much as 15 percent of its government revenues, and the equivalent
of some 5 percent of its GNP.

Inevitably, that situation poses

a new and severe challenge for Mexico ~

a challenge that will

require strong new efforts to make the necessary economic adjustments and to improve the structure of their economy.

There is no

large cushion of external reserves to buffer the shock.

Consequentlyr

a large amount of financial resources will have to be marshalled
from abroad to help ease the transition* to maintain continuity in
debt service, and to provide a solid base for renewed growth.



-12That combination of adjustment, structural change, and
appropriate financing is, indeed, the essence of the approach
announced by the Mexican government earlier this week.

In

cooperation with the IMF and the World Bank, Mexico is undertaking a wide range of efforts to deal with both its shortand longer-range economic problems.

To my mind, their efforts

in the midst of crisis, to move toward a more open, competitive
economy are particularly encouraging.

They have joined GATT,

import restrictions are being rationalized and liberalized,
a good many state-owned enterprises are being made available
for sale (or, if too inefficient, shut down), subsidies are
being reduced and eliminated, and procedures for approving
foreign investment eased.

If carried through effectively,

those measures promise to work toward fundamental improvement
in the efficiency, competitiveness, and creditworthiness of
the Mexican economy, thereby enhancing prospects for longer-term
growth.
Today, that country is in recession.

But the program

clearly contemplates economic recovery in 1987 and 1988.
Certainly, sizable amounts of financing from abroad will be
required to support that effort.

About half of that can be committed

by the IMF, the World Bank, and the Inter-American Development
Bank.

But Mexico is calling upon commercial banks, with so

much already at stake, to play a large role as well.
In assessing that situation, I would note that the
Mexican exposure of commercial banks appears not to have increased



-13for some 18 months.

Indeed, there has been little net new lending

to Latin America as a whole over the past year.
Taking the entire period since mid-1982, the exposure of
American banks to the heavily indebted countries of Latin America
relative to their capital has declined appreciably.

That ratio

fell from about 120 percent of the capital of lending banks to
less than 75 percent at the end of last year, a decline of 38
percent.

No doubt, there has been a further reduction by now.
Those exposures, in relative terms, are actually

considerably less than in 1977 when the data were first
collected.

For some time, the pace of lending has, in fact,

been well below that contemplated by Secretary Baker when he
set out a framework for a growth-oriented approach toward the
international debt problem at the IMF meetings last autumn.
That initiative —

essentially contemplating a combination

of strong adjustment efforts and structural reform by the indebted
countries with reasonably assured financing by international
institutions and private banks —

is now being tested.

It is

being tested in difficult circumstances not foreseen at the
time —

the sharp break in oil prices.

But the basic community

of interests among borrowers and lenders —
large —

and the world at

in a coherent, cooperative approach is as strong as ever.
The debtor countries themselves have an enormous stake

in maintaining their creditworthiness and in seeking solutions
in the framework of open, competitive markets.

We all have a

strong interest in international financial order —

all the more

when there are other points of strain in the banking system.



And,

-14of course, relationships beyond the purely economic are at stake,
for the United States most of all.
The challenge is large, but with cooperation, also
manageable.

Indeed, the same oil price decline that has under-

mined the budgetary and trading position of Mexico and other large
oil exporters has relieved the pressure on those importing oil.
Interest rates have declined.

A number of borrowing countries

will require significantly less, rather than more, financing
than was contemplated a year ago.

Given the enormous progress

made in adjusting external positions, most of the borrowers
can look toward more balanced expansion in their imports and
exports as they grow —

among other things, providing renewed

opportunities for American exporters.
But I must also emphasize one essential ingredient for
success beyond the capacity of the indebted countries to manage.
Only a stable, growing world economy, with markets open to the
developing world, can provide an environment conducive to
economic expansion, more normal interest rates, and orderly
debt service by the borrowers.

That ingredient is plainly the

responsibility of the industrialized world alone.

It is one

of the reasons why we must collectively deal with the obvious
imbalances among us.
Monetary Policy in 1986
These larger issues were the background against which
the Federal Reserve has conducted monetary policy in 1986 and
reviewed its objectives for growth in money and credit this year




-15and next.

The results of the review by the Federal Open Market

Committee of target ranges for money and credit for 1986 and
tentative ranges for 1987 were discussed in the Humphrey-Hawkins
Report published and sent to the Committee at the end of last
week.

That report also sets out projections for real activity

and prices of FOMC members and Reserve Bank presidents.
As indicated in the Reportf the posture of monetary
policy remained broadly accommodative over the past six months.
The discount rate has been reduced in three steps this year by
1-1/2 percent, in part responding to and in part facilitating
declines in short-term interest rates of similar magnitude.
Long-term interest rates also moved lower, extending the sharper
drops in the second half of last year.

The general structure

of interest rates is now as low as at any time since 1977.
The reductions in interest rates in 1985 and 1986 have
clearly helped support the more interest-sensitive sectors of
the economy, reflected in part in the highest level of housing
starts since the late 1970s.

The declines have also helped

ease the debt servicing costs of businesses, farmers, developing
countries and the U.S. Government itself.
On the other side of the ledger, as interest rates have
declined, the rate of growth in debt has remained at disturbingly
high levels, although there are at least faint signs of a slackening
in the rate of debt creation after a burst around the turn of the
year.

The declines in interest rates also clearly helped induce

the general public to increase its holdings of its most liquid
assets, including demand deposits and NOW accounts included in



-16the narrow measure of the money supply, Ml.

That reaction

was undoubtedly amplified by the fact that interest is paid
on NOW accounts, which are now the favored form in which
transaction balances are held by individuals.

With interest

rate spreads currently quite narrow between NOW accounts and
other liquid assets, those accounts no doubt have served
increasingly as a repository for liquid savings as well as for
money held for transactions purposes.
Similarly, there are some indications of a greater
willingness of businesses to hold demand deposits at a time
of lower interest rates, partly because, with interest rates
down, a larger balance is necessary to compensate banks for a
given amount of services.

To some extent, an environment of

more stable prices may also be encouraging larger money holdings.
None of that was predictable with any precision, and the
rate of growth in Ml, which ran at almost 13 percent over the
first half of the year, was far above the FOMC's target range.
Action to restrain that growth within the target range —

which

would have required reducing the provision of reserves and a
significant increase in pressures on bank reserve positions -was not deemed desirable in the light of other important considerations.
One of those considerations was that growth in the broader
measures of money —

M2 and M3 —

remained well within their

respective target ranges of 6-9 percent, ending the second quarter
close to their mid-points.




That and other evidence suggested

-17that much of the growth of Ml reflected a shifting of the
composition of liquid assets rather than excessiver and potentially
highly inflationary, money creation.

That judgment was, of course,

reinforced by the moderate rate of growth for the economy
overall, the absence of indications of a strong acceleration
as the year progressed, evidence of greater stability in prices
of manufactured goods, and declining commodity prices.
In looking ahead, the Committee decided to retain the
existing ranges of 6-9 percent for M2 and M3 this year.

The

range of 3-8 percent set for Ml early in the year was not
recalibrated because of the uncertainties as to the behavior
of that aggregate at present.

Certainly the inflationary

potential of excessive money growth remains a matter of concern.
But in current circumstances, the Committee decided that the
significance of changes in Ml could only be judged in the context
of movements in the broader aggregates, and against the background
of movements in interest rates and the economy generally.

Taking

account of those factors, growth in excess of the target established
at the start of the year will be acceptable.
In circumstances of greater economic, price, and
interest rate stability, more predictable relationships between
Ml and the economy may reemerge over time, although the trend
of Ml velocity —

the ratio between GNP and Ml —

be different than earlier in the postwar period.

will likely
However,

a firm conclusion concerning the nature and stability of future
velocity characteristics may take years of experience in the new




-18institutional and economic setting.

For the time being, in

looking to next year, the Committee set out a highly tentative
range of Ml growth of 3-8 percent on the assumption that velocity
changes will be within the range of most postwar experience*
However, that judgment —
Ml range for 1987 ~

and indeed the weight to be given any

will be carefully reviewed at the start of

next year.
The tentative 1987 ranges for M2 and M3 were lowered
by one-half percentage point to 5-1/2 - 8-1/2 percent.

That

modest reduction, consistent with the long-term objective of
achieving a rate of monetary growth compatible with price stability,
is judged to be entirely compatible with a somewhat greater
rate of economic growth next year, provided that growth is not
accompanied by a marked increase in inflationary pressures.
The actual price statistics for some months have, of
course, reflected the precipitous drop in the price of oil,
and consumer prices have dropped slightly this year.

But

equally clearly, the price of oil will not continue falling
so fast, and at some point could well rise again.

More

predictably, the large depreciation of the dollar will bring
in its wake an increase in import prices of manufactured
goods.

That impact has been moderated so far by the narrowing

of the earlier wide profit margins of many of those exporting
to us and by the availability of imports from developing countries,
few of which have had any appreciable appreciation of their
currencies vis-a-vis the dollar.




-19The rate of increase in costs of housing and of many
services, which account for a large proportion of the economy,
has decelerated little if at all in recent years.

With demand

strong, measured productivity gains limited, and compensation or
increases in service occupations continuing to average 4-1/2 percent
or more, those areas continue to lend a chronic inflationary bias
to the general price level.
Those underlying forces are reflected in the projection
of FOMC members and Reserve Bank presidents that the overall
inflation rate is likely to be somewhat higher next year.

That

prospect underscores the need for vigilance in the conduct of
monetary policy.

We want to assure maintenance of the

remarkable progress toward stability as the economy grows
more strongly and as a large amount of resources are shifted
back to manufacturing industries as our trade balance improves.
Without such assurancef there would be no firm basis for expecting
the level of interest rates to remain for long at lower levels
or to decline further.
In looking toward growth in the 3-3 1/2 percent range
next year, considerable emphasis was placed by Committee members
on the potential contribution to that growth of a stronger trade
balance.

As I emphasized earlier, that shift, if it is to take

place in the context of sustained and stronger world growth,
will require appropriately complementary policies here and
abroad.




Significant progress toward dealing with our own

-20budget deficit seems to me a key ingredient in that overall
policy "mix."
The timing of another important domestic policy
instrument —

discount rate cuts —

has been influenced by

international financial and exchange rate considerations.
A substantial realignment of the excessively strong dollar
exchange rate has been a necessary and constructive part of
achieving the necessary adjustment in external trade.

But

there are clear dangers in placing excessive weight on that
approach.
History demonstrates all too clearly that a kind of
self-reinforcing cascading depreciation of a nation's currency,
undermining confidence and carrying values below equilibrium
levels, is not in that nation's interest or that of its trading
partners.

Among other things, such a movement of the dollar

now could transmit strong inflationary pressures to the United
States and inhibit the free flow of capital from abroad at
reasonable interest rates.

Moreover, other countries would

find it more difficult to sustain their forward momentum.
In the light of all these considerations, the discount
rate reductions in March and April were timed to coincide with
similar changes by one or more other key countries, minimizing
any impact on the exchange markets and consistent with the
desirability of some reduction in interest rates in the
industrialized world generally.




-21Some Lessons of Recent Experience
Experience over the first half of 1986 underscored the
difficulty —

I would say the impossibility —

of conducting

monetary policy in current circumstances according to one or
two simple, pre-set criteria.

For instance, the rapid growth

of debt and Ml clearly bear watching because of the potential
for aggravating the vulnerability of the financial structure to
adversity and because of the inflationary potential.

However,

the weight of the evidence strongly suggests that Ml alone during
this period of economic and institutional transition is not today
a reliable measure of future price pressures (or indeed a good
short-term "leading indicator" of business activity).

The

more restrained performance of the broader aggregates, as
well as the performance of the economy and prices themselves,
point in a different direction.
At the same time, pressures on the oil industry,
agriculture, and parts of manufacturing and the more general
disinflationary process are reflected in strains on some
depository institutions.

Those strains emphasize the

importance of dealing with factors more directly under the
control of lenders themselves:

excessive leveraging of

borrowers and loose credit standards.

A broad array of

approaches by the supervisory and regulatory authorities has




;y
:

-22been necessary to deal with the particular points of pressure
in a manner consistent with the stability of the entire fabric
of financial institutions and markets.
The present situation certainly makes all the more
pointed the need to provide a stronger sense of legislative
direction about the evolution of the financial system over
time.

There are also urgent specific pieces of legislation

before you to permit the FDIC and the Federal Reserve to
facilitate interstate acquisitions of failed or failing
banks and to supplement the resources of the FSLIC.
The difficulties of some financial institutions are
one specific example of economic problems that cannot be
effectively dealt with by monetary policy alone.

It is

indeed a strength of monetary policy that it can respond
flexibly to changing circumstances.

But it is equally true

that that single, broad-brush policy instrument cannot, at
one and the same time, be called upon to stimulate the
economy, protect the dollar, restrain excessive debt creation,
and shift resources away from consumption and back into
investment, manufacturing and exports —

as desirable and

important as all those goals may be.
Events of recent years have also heavily underscored
how cumbersome fiscal policy can be, and the difficulties of
achieving political consensus on such matters as tax reform
and the appropriate legislative framework for financial




-23institutions.

On an international scalef achieving consensus

on appropriate action can be still more difficult.
We have nonetheless come a long way toward restoring
growt-h and stability in this decade.

But my sense is that

all that progress is in growing jeopardy unless we act

—

we in the United States, we in the industrialized world,
and we in the world as a whole —

in mutually supportive ways.

The main directions of that effort seem to me clear
enough.

The Gramm-Rudman-Hollings legislation is an expression

of the sense of urgency surrounding our budgetary effort in
the United States.

The rest of the industrial world needs

to achieve and maintain a momentum of "home-grown" expansion.
With strong national and international leadership —
the cooperation of private and public lenders —

and with

a constructive

resolution of the economic crisis in Mexico can point the way
to a wider resolution of the debt problem in a context of
growth.
Hard as it may be to carry through on those efforts,
that is what needs to be done if the imbalances in the economy
are to be effectively addressed.

Then we will have a really

solid base for sustaining the momentum of growth and the
progress toward stability in the years ahead.

Certainly, the

Federal Reserve will play its part in that effort.




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