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For release on delivery
October 17, 1979
11:00 AM E.D*T.

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

before the
Joint Economic Committee

October 17, 1979

I appreciate the opportunity to appear again before this
Committee in my still-new capacity.

Some years have passed

since I had the privilege of appearing, with some frequency as
an official of the Treasury.

I note with pleasure the continuity

of membership on the Committee.

I know in some cases that member-

ship spans decades, and the Committee has played a prominent role
through the years in enhancing economic understanding and policymaking.

The Federal Reserve, as so many others, has benefitted

from the dialogue.
I belabor the obvious when I say we face unpleasant economic
circumstances, and that none of our choices is risk-free or painfree.

At the same time, the clear and widespread public perception

that the problems are difficult, but that the time has come to
deal with them, provides us with an important opportunity to put
in place and sustain forceful and appropriate policies.
Monetary policies can only be a part of the overall framework.

But they are an essential part.
It is not necessary to recite all the details of the long

series of events that have culminated in the serious inflationary
environment that we are now experiencing.

An entire generation

of young adults has grown up since the mid-1960 f s knowing only
inflation, indeed an inflation that has seemed to accelerate

In the circumstances, it is hardly surprising that many

citizens have begun to wonder whether it is realistic to anticipate
a return to general price stability, and have begun to change their


behavior accordingly.

Inflation feeds in part on itself, so part

of the job of returning to a more stable and more productive economy
must be to break the grip of inflationary expectations.
We have recently seen clear evidence of the pervasive influence
of inflation and inflationary expectations on the orderly functioning
of financial and commodity markets, and on the value of the dollar

Over a longer period of time, the uncertainties

and distortions inherent in inflation have had a debilitating
influence on investment, productivity and growth.

In the circum-

stances, the overwhelming feeling in the nation —

that we must

come to grips with the problem —
American people.

reflects the common sense of the

At the same time, we have to recognize that, after

more than four years of expansion, there are widespread anticipations
of inventory adjustments and a downturn in economic activity.


challenge is to deal with this troublesome situation in a manner
that promises, over a period of time, to restore a solid base for
sustained growth and stability.
In approaching that challenge, and in our preoccupation with
what is wrong with the economy, we should not lose sight of the
positive aspects of the current situation.
The U.S. economy has enjoyed a long and relatively
strong economic recovery; more people are employed
than ever before, over 10 million more than five
years ago.

In the face of unprecedented inflation, and enormous
new increases in energy prices, wage trends overall


have not appreciably accelerated this year,
reflecting, despite some disturbing exceptions, the
discipline and good sense of Americans in general
in accepting the need for restraint.
As the rate of increase of energy prices moderates


and it should, with responsible pricing behavior
by producers in coming months —

there is a

reasonable prospect that the overall inflation
rate will soon decline.
Investment activity, while restrained by uncertainties
of inflation and by tax and regulatory constraints, has
been relatively well maintained, even though it appears
lower than consistent with our long-term needs.
Economic activity abroad is being sustained; this
should support the recent trend of substantial growth
in U.S. exports and help to improve the overall U.S.
current account position.

More generally, the sizable imbalances among industrialized
countries are being reduced; the substantial reduction •—
even elimination —

of Japanese and German current account

surpluses is particularly noteworthy.
I don't report these facts with any complacency.

These actual

and prospective achievements, and much more, will be jeopardized
by a failure to come to grips with the home-grown inflationary
pressures that have become so pervasive, that have led to speculative
distortions, and that have undermined stability and order in the


American and the world economy.

Dealing with the sources of

inflation and instability is central to both the domestic and
international objectives of the United States; as I see. it,
these objectives are firmly interconnected, and we will be
successful in neither unless we can begin to move toward
restoring a sense of stability in our economy.
In this setting, the recent actions by the Federal Reserve
were designed to deal with the clear danger of a renewed outburst
of destabilizing and inflationary speculative pressures.,— a
development that could only complicate and distort the present
process of economic adjustment —

and at the same time to establish

a stronger foundation for orderly and sustained growth.

In one

sense, the Federal Reserve actions announced on October 6 were
part of a continuing effort to maintain control over money and
credit expansion.

Our basic targets were not changed.

But the

new measures, which involved among other things a change in
operating procedures, should provide added assurance that those
objectives will be reached.

Above all, the new measures should

make abundantly clear our unwillingness to finance a continuing
inflationary process.
Specifically, in the period ahead, more emphasis will be
placed on controlling the provision of reserves to the banking
s y s t e m — which ultimately governs the supply of deposits and
money —

to keep monetary growth within our established targets.

We have raised the discount rate so that restraint on bank reserves
will not be offset by excessive borrowing from the Federal Reserve



And we have placed a special marginal reserve requirement

of 8 percent on increases in "managed liabilities11 of larger banks
(including U.S. agencies and branches of foreign banks) because
that source of funds has financed much of the recent buildup in
bank credit.
In connection with these Federal Reserve actions., I would
lilce to emphasize several points«
First, as I suggested earlier, our immediate objective is
to forestall speculative excesses and anticipations of a new
inflationary outburst that could only complicate, and ultimately
make more severe, the process of economic adjustment that is

In doing so, I believe that our recent actions can

hasten, not postpone, the day when interest rates can decline
and more stable conditions can be restored to credit and capital
markets, thus providing part of the framework for renewed and
sta,bl,e eqonomic growth.

In the meantime, these actions are not

intended to, and will not, cut off the supply of money and credit
to the economy.

Indeed, we are conscious of the fact that there

are important areas of the economy «— home building, smaller
businesses, and others —

that are particularly dependent on a

continuing flow of credit.

In that connection, we have asked the

banks to take-special care to avoid lending to support speculative
activity, while giving particular attention to the continuing needs
of their established customers for funds to maintain normal business


Second, the doubts about the dollar in exchange markets
in recent months have been one factor increasing uncertainties
faced by businessmen and consumers alike.

Given the dollar's

central position in the international financial system, we
must recognize that its external value is particularly sensitive
to perceptions and expectations about economic policy, and
especially to concern about our ability to deal with inflation.
I see no fundamental conflict, indeed no meaningful "tradeoff/ 1 between our domestic and international economic objectives
in this respect.

We continue, on a day-to-day basis, to monitor

developments in foreign exchange markets, and if and when intervention is necessary, our actions will be closely coordinated with
those of monetary authorities abroad.
Third, the recent Federal Reserve actions offer the promise
that more effective control can be exercised over the growth of
monetary aggregates, but they are not an automatic solution to
all our difficulties*

The new technique for conducting open market

operations is not a panacea.

The definition of money itself needs

refinement, and redefinition of the monetary aggregates is currently
a major Federal Reserve objective.

We will be monitoring financial

markets and the flow of credit closely.

We will adapt our instruments

to shifting needs as time passes, but we do intend to maintain the
kind of restraint on monetary growth that this Committee and so
many others have urged for so long.


Finally, we should not rely on monetary policy alone, critical
as disciplined monetary policy is, to solve our economic problems.
We also need a sustained, disciplined fiscal policy; we need an
effective energy policy, commanding the support of all segments
of our society, that will put us more surely in control of our
destiny; we need regulatory and tax policies that will help
stimulate investment, cut costs, and increase productivity; and
we need international cooperation and understanding.

At the

IMF/World Bank meetings recently held in Belgrade, I was impressed
again by the general understanding that rising real energy prices
will require significant and painful economic adjustments and by
the consensus on the need, under current circumstances, for virtually
every country to attach high priority to the fight on inflation.
As has been amply reported, the atmosphere at those meetings
was restrained, skeptical, and uneasy.

Therein lies a danger.

I am convinced that forceful and effective policies to deal with
the evident problems can be successful.

Those policies will need

the support of concerned citizens who recognize the need for hard
decisions, for restraint, and even for sacrifice.

Pessimism and

can only erode that process.

We are passing through a period beset with exceptional
economic problems.

Let us recognize there are risks, but that those

risks will only increase if we fail to act forcibly to deal with
inflation now, and if we, fail to sustain the effort.
context in which the Federal Reserve has acted.

That is the

I am convinced

those actions, as part of a determined national effort, can help
establish the essential conditions for a more prosperous and


productive America, a strong dollar, and a sense of stability and
coherence in the world economy.