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FOR RELEASE ON DELIVERY
THURSDAY, FEBRUARY 15, 1979
7:00 P.M. E.S.T.




THE ECONOMY AND BANKING IN 1979

Remarks of

Philip E. Coldwell

Member, Board of Governors of the Federal Reserve System

at the

Meeting of the Atlanta Chapter of the Bank Administration Institute

Atlanta, Georgia
February 15, 1979

The Economy and Banking in 1979

In my opinion the first and foremost threat to the economic,
financial and political power of the United States is the high and
rising rate of inflation.

History tells us that when people begin to

spend their money at an accelerating velocity and seek new investment
havens from inflation, even at the risk of borrowing beyond their means,
their nation is approaching the danger point of runaway inflation and
serious deterioration in the value of their currency.

I think we are

traveling this road and without firm action to combat inflation we may
suffer the ultimate consequences.

None of us want a serious recession

with its financial and social penalties.

Nor do we want the traumatic

experience of a severely depreciating currency.

So our only real

choice is to force a slowdown in credit extensions and real growth rates
until the acceleration and expectations of inflation subside.
We can defer a slowing in our economy by continued stimulus
from Government spending and high money growth rates but only at the
cost of higher inflation and severe recession later on.

On the other

hand, we may slow the economy to recession levels with only minimal
progress in reducing inflation this year.
These are indeed "no-win" choices for the Federal Reserve and
the entire economic stabilization program.

How much additional restraint

can be imposed to bring a slower growth rate without risking a recession
of unknown dimensions is a matter of judgment and timing.

But by

holding to a steady posture, the nation's economic policymakers risk




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continued expansion in the economy, further growth of consumer
demand and inflationary expectations, and with little unused labor or
plant capacity, an acceleration of inflationary pressures.

Of course,

an easing of monetary policy would exacerbate all of these problems and also
bring renewed depreciation of the value of the dollar in international
exchange.
While the recent administration effort to curtail the rising
rate of government spending may provide considerable help in reducing
inflationary pressures over the next three years, the immediate problem
for 1979 is not likely to be affected by the degree of fiscal caution
presently under discussion.

Similarly, the wage-price guidelines may

be helpful in the long-run fight to contain inflation, but in the 1979
environment, the price pressures will be more responsive

to both cost

and demand pressures, especially for food, raw materials, and energy.
Moreover the notion that inflation can be contained by a long-run pro­
gram without intensified short-run restraint, may reflect both a
procrastination of hard policy choices and an unrealistic view of
market forces.
As policymakers and as prime financial intermediaries, we
should reappraise the costs and benefits of our present policies and the
need for protection of our fundamental strength in coming months.

To

me the costs of sustaining our present level of economic activity in
terms of present and potential inflation are not acceptable.

If the

parameters of our policy choices are an accelerating inflation or a




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severe recession then an intermediate course must be found.

The

nation must not pay the cost of a dangerously accelerating inflation,
but it should also avoid the costs of serious recession.
In the current situation, with sharply divergent growth and
inflation rates among the major industrial nations and consequent
differing balance of payments positions, the U.S. flexibility in
stabilization policies is considerably restricted.

While a particular

set of policies may be desirable for domestic purposes, they may
create undesirable results for our balance of payments, exchange rate
relationships, or balance of economic strength.
In the world of horror scenarios, probably the worst for
the economic scene in the United States would be an economic
recession, rising unemployment, a declining dollar exchange rate, and
continued inflationary pressures.

Certainly none of us would

advocate policies leading to such a situation.

However, the dangers

are certainly visible and appropriate policies must be taken to
counteract them.
Much of our efforts in economic stabilization are integrally
tied to timing of policy moves.

An early move to restrain before

expectations of even greater imbalances develop is a better choice than
policy actions after a momentum of inflationary expectations has been
created.

Today we are unfortunately in the latter situation, but

even now we are in a better posture to take needed action promptly than
to procrastinate until economic or financial forces exacerbate the u n ­
tenable combination of rising inflation, speculative credit demands, and
serious further deterioration of the dollar.




-4-

In my opinion the United States is rapidly approaching full
utilization of its resources, unsustainable consumer demands, accel­
erating inflation and threatened further exchange market turmoil.
If I am correct, then action will be forced upon us whether we like
it or not.

The most extreme actions could include mandatory wage and

price controls, an allocative credit policy, import surcharges or
quotas, limits on foreign lending and other exchange controls.

But

such extreme measures are incompatible with the basic philosophy of
U.S. policy.

We attempt to operate in a free market system, both at

home and abroad, and would accept such draconian measures only under
the most severe conditions.
not develop

But to insure that such conditions do

requires a high degree of self discipline and an intensive

use of the aggregate restraints of monetary and fiscal policy.
So we come to the central question--do Americans individually
and collectively have the will to exercise such restrictive self
discipline and support aggregate measures of government restraint to
avoid the use of specific controls?

I think we do if we become

sufficiently informed and concerned about the adverse alternatives we
face.
For you in the banking industry, as leaders of community
awareness, and as principal elements in credit markets of the nation,
there is a unique set of responsibilities for financial statesmanship.
In the operation of your own banks you should press for responsible




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credit use.

You have a special responsibility to insure the safety

and soundness of your institutions--to be conservative in the granting
of credit, especially when faced with such broad-scale economic
uncertainties.
Bankers should be molding public thinking toward recognition
< f the. hard choices ahead and the. need for restrci::t in public sponcir^
cf local and state level;!..

In addition barkers should be leading the

way toward developing public support for eccnomic stabilization measures
to combat inflation.
The banking industry has a special responsibility to inform
itself about the economic and financial conditions of the nation and
the ways in which banking can strengthen the financial fabric of the
country.

As spokesmen for a large segment of the financial community,

bankers should be using their influence to foster desirable legislation
or combat unwise legislative efforts.
In conjunction with the Federal Reserve and Treasury, bankers
should be seeking new approaches to stabilize our international financial
affairs and be sure that banks are not a source of instability.

In

particular the larger banks should be aware of their role in the over­
all international picture and the potentials for damange which could
develop from excessive lending or unwise concentrations of credit in
other

countries, industries or individual firms.

With a more volatile

international financial exchange mechanism, banks need to support the
programs of the International Monetary Fund, especially in countries where
conditional extensions of IMF credit have been made.




-

6-

You may not have known that you joined an industry with such
extensive public responsibilities, but your basic jobs of managing and
investing other people's money and your participation in the nation's
money and credit markets bring with them special public visibility and
trust.

It is my pleasure to recognize your industry's great contributions

to the public good.

But we must call upon you for even greater efforts

and self-discipline if our nation is to maintain its economic strength
and regain its financial health.
Specifically let me suggest the following policies I think we
need in today's situations




1.

Redouble your efforts to justify each loan both as

to the creditworthiness of the borrower and the contribution
it may make to the profitability of the bank against the risk
accepted.
2.

Reappraise your loan program for this year to take

account of the broad economic and financial risks, especially
in the fields of mortgage and consumer credit.
3.

Resist the temptation of high-rate, high-risk loans,

and limit asset growth to your reasonable capital coverage.
4.

Restudy your terms of credit, such as maturities and

downpayments
5.

for consumer credit or margins of equity in stock.

Refuse to be stampeded into competitive excesses in

bidding for new funds or straining for the marginally acceptable
credits.

-

6.

7-

Restrain your competitive urge to stretch all dealings

to the limit of regulations, such as remote disbursement of
checks.
7. Re-analyze your bank's productivity and costs to limit
the need for rate increases and to maintain net returns.
8.

Re-emphasize your support for fiscal and monetary

restraint and for the principles of wage and price caution.
9.

Recognize your position of leadership in community

thinking and support programs of prudence in financial affairs.
Let us be sure we understand each other.

I am suggesting a

healthy new dose of caution in the banking business.

I am not suggesting

that you close the loan window or retrench, unless you are already in an
exposed position.
Lest you think I am placing the whole responsibility of correct­
ing current excesses on the banking system, I have a list of government
actions which I think are needed to stabilize our financial affairs.
Among these are:




1.

Creating a new energy program to stimulate production

of oil and gas and develop new sources of energy.
2.

Making a further cut in government spending by at

least $20 billion beyond that proposed in the budget document.
3.

Eliminating ceilings on interest rates so that savings

will be encouraged and subsidies to borrowers discouraged.
4.

Creating new U.S. inflation bonds with 9 percent

interest in $1,000 denominations.

-

5.

8-

Encouraging capital investment by rapid write-offs and

••capital gains tax reductions,
6.

Imposing reserve requirements or. a?'_ deposits for

all depository institutions ar.c restricting availability of
credit.
7.

Encouraging wage moderate.l by limit:.ng minimum, wage

increases and creating a teenage minimum.
8.

Enforcing anti-dumping laws and countering foreign

expert, subsidies.
In summary, in my opinion we must pull together to solve this
nation's inflationary problem and restore our country's financial health.




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