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MONDAY, MARCH 24, 1975
NOON C.D.T. (1:00 p.m. E.D.T.)


Remarks of

Philip E. Coldwell
Board of Governors
of the
Federal Reserve System

Before the

Spring Semester Seminar
Rice University

March 24, 1975
Houston, Texas

Have We Learned From Our Mistakes?

Over the past year the United States has witnessed another
of the repetitive postwar business cycle turning points from in­
flation to recession.

Both the inflation and the recession have

been stronger than at any time in the past 40 years.

This repeated

pattern reflects imbalances, instabilities, and uncertainties
created partly by the inherent free choice nature of our society and
partly the public policy mistakes of politicians, economists, business­
men and labor leaders.

Since most of us prefer to keep the free

enterprise capitalistic economy, we must look to the correction of
policy mistakes or at least learn from them and avoid repeating them.
Today I want to catalogue and briefly discuss six primary
areas of public policy or attitudes x*hich I think have had an im­
portant bearing upon the repetitive business cycles of the postwar

First, as a nation we have failed to recognize the per­

sistent debilitating effects of inflation both as a disrupter of
economic progress and as the greatest tax on all our people.


policy has just not placed the requisite high priority on this

Time and time again our nation has taken actions which

clearly had inflationary consequences without parallel actions to
offset those effects.


Secondly, our people fail to understand the price features
of interest rates and have failed to recognize that long-term interest
rates reflect both demand and supply of credit as well as the expecta­
tion of inflation.

Perhaps the best recent example of this has been

the House of Representatives1 resolution calling for Federal Reserve
action to lower long-term interest rates.

We could flood the mar­

ket with new bank reserves but this would just force a large decline
in short-term rates and a temporary small decline in long-term rates.
If, as one would expect, the investors viewed such action by the
Federal Reserve as a long-run inflationary move, we should expect
long-term rates to rise as investors demand an even higher inflation
Thirdly, in recent years, the monetarists have demanded
a steady growth of money supply and have so conditioned the politicians,
Congress, and even the large banks to this theory that they are
demanding Federal Reserve policy based exclusively on this one policy

It is difficult to speak without emotion on this will-o-the-

wisp, statistical myth, which represents the miracle seeking of our
professional economists and politicians.

Those who have worked at

monetary policy know of the difficulties of reaching a single targeted
policy, especially Oue grounded upon theoretical desires, rather than
the practical world of our complex ever-changing economic environment.
The narrowly-defined money supply may have policy relevance in a


long-term model with two-year targets but even then it must be
broadened to include the rapidly developing near-money use of time
and savings accounts, certificates of deposits, commercial paper
and loan participations.

Our people have become interest-sensitive

and are holding large blocks of spare cash in interest-bearing
accounts, which can be converted on a moment's notice to transactions

In effect, as individuals, they are following by more

than five years, the persistent move of large corporations which
have been managing their cash balances in a steadily more interest­
conscious way.
The money supply advocates similarly fail to recognize the
impact of the large and volatile foreign balances which move in and
ouL of our banking system.

Since such balances count toward the

money supply, their extreme shifts necessarily complicate any
attempt to meet a particular target.
But the primary difficulty I have with the monetarist
approach is their blind allegiance to a single target.
is not constructed in such a simple fashion.

Life just

The problems with

Penn Central, Franklin National, the tenuous character of an illiquid
banking system, and now the prospectively massive budget deficit
financing, all militate against a single-minded approach to monetary

The Federal Reserve has modified its monetary aggregate

objectives because of these and because of the trends in money market



conditions, especially short-term interest rates.

The monetarists

counsel a hands-off-policy on such matters, particularly interest
rates, but it is difficult to see how our central bank can ignore
them when interest-sensitive funds move with such rapidity between
nations and we must pay attention to the international position of
the dollar.
Fourth, the international problems of our nation have
failed to receive adequate attention from either the public or
private sectors.

While the charge of benign neglect has been

excessively harsh of late we still permit further growth of the
large overhang of dollars abroad;

we permitted our nation to be­

come dependent on foreign sources of many basic raw materials; and
we tolerated continuous balance of payments deficits and a volatile
unstable exchange rate.

While there are limits to which public

policy can restrain international out ['lows, without self-defeating
credit or exchange controls, we have not attacked the fundamental
causes of the outflows nor even kept the balance of relative interest
rates sufficiently in mind.

Of course, the fundamental problems

have been the use of the dollar as the vehicle and reserve currency
of the free world and the outflows for military endeavors as well
as grants and loans.
Fifth, and crucial to our problems of yesterday and today,
has been our failure to come to grips with the rising government


expenditures and budget deficits*

Not only has government responded

to the welfare and protection demands of the population, but has pro­
vided a steadily widening array of new services.

These, coupled

with the pressures of inflation and rising wage costs, have enlarged
government expenditure levels at an accelerating rate.

Even more

unfortunate though, government has not been willing to raise revenues
to pay for the higher spending and therefore deficits have increased.
Congress seems to have just one remedy for any problem, especially
economic downturns, and that remedy is increased spending.
The sixth mistake has been to permit and in places even
encourage corporate or union monopoly powers.

With such power

businessmen and union leaders have raised prices and wages at rates
which bear little resemblance to the normal changes elsewhere.
Such disruptive policies coupled with the lack of competitive dis­
cipline have contributed to the cyclical pressures on our economy.
I recognize that you have n strong interest in the future
of our economy, for sometime soon you may escape these hallowed

But then you face the economic realities of obtaining a job.

Hopefully, you will have so trained and educated yourselves that you
will offer a prospective employer a mutually profitable arrangement.
Hopefully, also, our economy will be in an ascending mode, generating
new jobs in the many diverse fields in which you seek employment.


We also arc vitally interested in economic recovery and
progress and we hope to achieve them without committing the same
mistakes of past periods.

Thus we hope that Congress will act

promptly to pass a tax cut and incentive tax investment bill which
can be implemented promptly.

Wo also hope that Congress will be

sparing in its budget approvals of other bills to hold down the

For monetary policy, we need cautious expansion of re­

serves to provide a balanced credit base upon which the future
expansion will be established.

Business and labor need to get

together to reach a conservative position on wages and prices over
the coming months.

With luck abroad and favorable actions on the

above-mentioned policies ar home, we can look toward a sustained
recovery with an equilibrium base for expansion including low rates
of inflation and improving employment prospects.