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gor release on delivery
8:30 a . m . C . D . T . , May 7 , J 9 7 4
Xgj3Q a . m . E.D.T.)

BANKING A N D INFLATION

Summary of Remarks by
Robert C . Holland
M e m b e r , Board of Governors of the Federal Reserve System

before the

Seventy-Seventh A n n u a l Convention
Nebraska Bankers A s s o c i a t i o n
L i n c o l n , Nebraska
May 7 , 1974

I am happy to join you here this m o r n i n g , but
it is a v e r y unhappy subject which I am a d d r e s s i n g .
Inflation has come to be the dominant economic
problem of today.

This statement applies not only to

the United S t a t e s , but to virtually all the

industrialized

nations of the w o r l d .
In greater or lesser d e g r e e , this problem has
been building here in America for a decade or longer.

Its

causes--and our attempted cures--have v a r i e d over those
y e a r s , but never did we master it.

In much of the latter

half of the 1960's, the root cause of our inflation was
excess demand, spurred by large deficits in our "guns
and butter" Federal budgets.

Occasionally during those

years, and for a longer interval in the early 1970's,
demand

for goods and services was brought under c o n t r o l ,

but strong cost-push pressures kept prices climbing
nonetheless.

T h e n , in 1973 and 1974, shortages on the

supply side — first of food, then of industrial raw
m a t e r i a l s , and finally of energy—triggered the sharpest
new price advances of the d e c a d e , and the end is not yet
in s i g h t .

- 2 We have been fairly imaginative in the v a r i e t y
of tools we have tried to use to slow the inflation, but
not altogether successful in their a p p l i c a t i o n .

The

Federal budget was finally pulled into surplus late
last year, but already it is starting to slip back
toward deficit and there is talk in Congress of actions
that would deepen that deficit still m o r e .
fiscal policy cannot halt inflation.

That kind of

W e tried wage and

price c o n t r o l s , but after some initial successes

their

distortions chafed and they were battered by the latest
inflationary outbursts; they died one week ago at their
low point in c r e d i b i l i t y , and few bothered to mourn their
passing.

We have tried to encourage expanded s u p p l i e s ,

but in most areas they are a long time coming.

Thus far

the only major result is sharply increased farm p l a n t i n g s .
If this year's harvest measures up to its indicated abundant
proportions, it w i l l indeed exert a major force holding
down food and related prices and be a significant brake
on the inflationary spiral.

But the thanks that the

Midwestern farmer is due for his invaluable contribution

- 3 may be accompanied by another cost-price squeeze on h i m ,
a poignant reminder that few counter-inflationary

forces

are p a i n l e s s .
The chief remaining instrument in our antiinflationary arsenal is monetary policy.

We have used it

hard and often during the past decade to try to slow the
inflationary spiral.

I think it has helped from time to

time, but not without som? unpleasant side effects in
the form of credit market distortions, disproportionate
downward pressures on housing and several other a r e a s ,
and historically high levels of interest r a t e s .

Yet

now it once again bears a very heavy share of the burden
of fighting inflation, for the very practical reason
that no other public policy tool seems presently capable
of doing more of the j o b .
In these circumstances, some people can be
tempted to throw up their hands in despair.

Floating

along on the inflationary tide can be a beguiling p r o s p e c t ,
with more and more contracts tied to rising price indexes,
and public welfare programs primed to help out the laggards.

- 4 That course
arguments

I hope we firmly r e j e c t .
against i t .

against it.

There are theoretical

There are practical arguments

But the most compelling argument I know against

it is that the average American citizen is against it.

He

doesn't like the idea of bobbing along on a swelling
inflationary tide--he detests it.

In the e n d , I believe

that kind of broad national conviction w i l l strengthen
the w i l l of both public and private policy makers to do
what has to be done to bring inflation back to e a r t h .
If that is to be d o n e , and if monetary policy is
to be a workhorse in that anti-inflationary e n d e a v o r , then
I must say to you that banks are in for an uncomfortable
time.

The basic design of our financial system has banks

at its c o r e , and it makes banks the chief channel through
which the bite of monetary restraint is spread through the
economy.

Your liabilities become costly and hard to

support, your bond portfolios drop in market v a l u e , and
you are pressed to speak in discouraging terms to your
good loan c u s t o m e r s , either in terms of higher interest
rates or constrained

loan totals or b o t h .

The Federal

- 5 Reserve talks of such unpleasantries to you as high
reserve requirements and possibly increased interest rate
ceilings on time d e p o s i t s .
Plenty of causes of irritations w i l l arise
between u s .

There w i l l be human mistakes in actions--

misunderstandings w i l l

occur --and imperfections in

institutions and markets may produce some jarring m o m e n t s .
Your role and ours w i l l be in some respects
an u n h a p p y one--but it w i l l be absolutely essential to
success in this b a t t l e .

Whatever the irritations and

secondary difficulties we f a c e , we both must put first
things first.

W e need to give top priority to those things

that further the efforts to slow down inflation.
the nation's number one economic e n e m y .
community's biggest economic e n e m y .
greatest economic e n e m y .

It is

It is your

It is your own bank's

The essence of banking is

taking custody of people's dollars and promising to give
them back in good shape.
stock

in

If the dollar which is your

trade continues to be a rapidly depreciating

a s s e t , then you are in a losing

business.

So I appeal to you--in your own interest and
the nation*s--to be the leaders in the fight against
inflation.
to

Give your support, and your wisest

counsel,

the makers of monetary and fiscal policy as they

pursue this s t r u g g l e .

That struggle is so fierce and

closely contested that you could help to make the
difference.