Speech

Remarks by

G. William Miller

Chairman, Board of Governors of the Federal Reserve System

at the

National Press Club

Washington, D. C.

June 7, 1978

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Thank you very much, Frank.

You've certainly pegged me

well; I did scribble this speech on the back of something like

an envelope.

But the Gettysburg address it's not!

You've also

discovered something about the power of the press and the power

of the Chairman of the Federal Reservee

Obviously, you've been

able to overcome the obstacle of the Federal Reserve's obscurity

and to find out all of its hidden secrets.

But I haven't been

able to get the Governors to stop smoking.

That's because they're

appointed by the President for these 14-year terms -- we've got to

do something about that!

I apologize to the press because you've been hearing me

quite a bit during the last three months.

Washington

~-

I had just arrived, in fact

When I first arrived in

a few members of the

press got together and impressed upon me how irresponsible I had

been because I had decided in advance to maintain an obscure and

hidden position.

wrong.

They wanted to tell me that my decision was

So after five press conferences in four weeks the press

deserves it when they have to hear the sarre thing over and over

again.

But this time it's different, because right after this

session there's going to be a quiz for the press.

tion and be sure to get things right.

So pay at ten-

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I do want to say, to Frank and to Joe and to others who

are here, that it is a special pleasure for me to a ddress the

National Press Club today.

This is my first appearance.

I'm

surprised to be here just as you're surprised to have me here

because I never expected to be a banker of any kind -- and I

certainly never expected to be a central banker.

It's true that

The Wall Street Journal, as Frank indicated, headlined my appointment with "William, Who?"

But it's also true that my secret

ambition at the end of my four-year term as Chairman is to find

that headline repeated in all of your publications, "William, Who?"

If, at that time, no one knows or cares who is Chairman of the

Federal Reserve, then Ame ri ca will be enjoying an unpara lled

period of prosperity, without inflation and with a strong dollar.

I will be forgotten, but the world will be better off.

In the meantime, conditions are otherwise.

The past dozen

years have been characterized by dramatic shocks and discontinuities.

7. -·

I

The war in Viet Nam was divisive.

The state of domestic

tranquility was interrupted by civil disorders.

Failure to pay

for that war planted the seeds of inflation. · The threat of inflation led to imposition of direct wage and price controls which

proved to be both inequitable and ineffective.

The international

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monetary system broke down.

With controls holding down the lid,

the U.S. economy was reflated building up a head of steam in the

kettle.

When the wage and price controls were removed, the steam

blew off as double digit inflation and double digit inflation

rates.

To compound the

difficulties~

the oil boycott ushered in

a five-fold increase in world petroleum prices.

The Watergate

incident and its aftermath led to a general distrust of all

institutions, public and private.

Finally, there was the great

recession of 1975, with nine per cent unemployment and the greatest economic distress since the depression of the 1930's.

Now we are in the fourth year of economic recovery from

those troubled times.

siderably.

stable.

The level of prosperity has advanced con-

Social and political conditions have become more

Yet, in the face of progress there remains nagging

uncertainty.

This is not because of any lack of agreement on economic

goals.

There is universal accord that our objectives should be

full employment, price stability, and a sound dollar.

The uncer-

tainty arises because many have come to question whether those

goals can be achieved.

- 4 America's economic goals can be achieved.

so are at our disposal.

The means to do

All we require is the will.

All that is .

needed is the realization that there is a confluence of individual

self-interests that compels us toward a common effort.

we shall realize none of our goals.

Divided,

United, we shall accomplish

all.

Inflation is now our most serious domestic problem.

It is

the number one issue, not because it has precedence over the quest

for full employment, but because under present circumstances it is

the primary obstacle to achieving full employment.

inextricably linked with unemployment.

Inflation is

Our hopes for full employ-

ment on a continuing basis depend upon wiping out the virulent

disease of inflation.

Inflation destroys values and incomes,

dries up job-creating investments, impairs the prospects for new

housing and other construction, and breeds recessions.

Perhaps the best way to illustrate the clear and present

danger of inflation is to consider the consequences for young

people who are graduating this month from America's colleges and

universities.

If inflation should be permitted to continue at

the present annual rate -- expected to be seven per cent or more

this year -- then when today's college graduates reach normal

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retirement age, the dollar they now hold would pe worth less than

a dime.

Let me emphasize that:

·at age 65, the dollar held by

today's graduates would be worth less than ten cents.

We cannot let that happen to our young people, or to

Americans of any age, or to the world.

We simply must prevail .

The value of the dollar is related to inflation.

The

decline in the value . of the dollar since last September has

caused worldwide concern.

The reason for the slide can be traced

to the record U.S. trade and current account deficits and to the

level and persistence of U.S. inflation rates.

The decline in

the dollar itself adds to inflationary pressures as the goods we

import cost more and reduce competitive constraints on domestic

products.

The United States has · a special responsibility to maintain

a sound and stable dollar.

tional trade and finance.

It is the currency for most internaIt is the

the world's monetary system.

world economic progress.

p~incipal

reserve asset for

The dollar is therefore the key to

And in our own self-interest, we need

a sound dollar to dampen inflationary pressures here at home.

As the world becomes more interdependent, the role of the

dollar will be a continuing challenge.

The bridging actions taken

- 6 in recent months have helped stabilize the dollar, and it has

regained some of its lost ground.

tant perhaps

More important -- most impor-

a stable dollar over the long term depends upon

the creation of a clear strategy to lower inflation and reduce

our international deficits.

One important factor in all of these considerations is

energy.

America was fortunate to be able to develop as a nation

by utilizing the seemingly boundless resources of a vast, almost

unpopulated continent.

The availability of abundant and inexpen-

sive energy fueled the growth of a great industrial economy.

But

with six per cent of the world's population consuming 30 per cent

of its energy, it was inevitable that a ' day of reckoning would

come.

The ·forces of supply and demand came into play with a ven-

geance.

In 1973 the United States imported $8 billion in oil

products.

Last year it was $45 billion.

This contributed to the

large U.S. trade deficit and to the pressure on the dollar.

The task ahead is to convert our industrial, commercial,

residential, transportation and public infrastructures into more

energy efficient systems.

We need to conserve present energy

reserves, to reduce dependence on foreign petroleum, and to

change over to alternate, more economic energy sources.

process will certainly take more than a decade or longer.

This

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It is clear that our economic problems are interrelated.

Inflation contributes to the decline of the dollar; the decline

of the dollar contributes to inflation.

Inflation drives up

interest rates and breeds recessions which .cause unemployment;

unemployment causes large Federal de ficits which contribute to

inflation.

Our task is to break the vicious circle.

In endeav-

oring to do so, we can learn from history, but the lessons of

the immediate past are not encouraging.

Perhaps it is time for

us to take New Directions to help shape a stronger America and

a better world.

One such New Direction would involve a conscious shift in

the philosophy of U.S. economic policy from "demand" or "consumption" management to "supply" or "investment" management.

Let me cite two periods when leading world powers have

been subjected to hyper-inflation.

century Spain.

The first occurred in 16th

The discovery of the new world gave Spain access

to vast amounts of gold and silver.

Gold from the new world

introduced massive unearned purchasing power into Spain which

drove prices up perhaps a thousand per cent.

That purchasing

power did build great palaces and it did provide the most elegant life style that had ever been experienced up to that time

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in Europe.

However, the resources were used for consumption,

with little attenti.on to investments for the future.

So, by

the 17th century Spain had run through its wealth and was economically barefoot.

Is there a parallel in our 20th century experience?

Through the printing presses there has been a massive creation

of unearned money and credit.

The United States has built the

most affluent nation ever known, with the highest standard of

living for the greatest number of people.

Is this but another

example of overindulgence in consumption?

Will we neglect

investment and deplete our capacity to provide for

erations?

fut~re

gen-

Will the legacy of our time be an economic desert?

A second New Direction would be to shift resources from

the public sector to the private sector.

The present percentage

of GNP represented by expenditures of Federal, State, and local

governments has grown steadily, until it may have reached the

point of being counterproductive.

During the last decade it

has become apparent that government spending does not always

produce the expected results -- economically or socially -- and

that it may not be the most effective way of reaching our

desired objectives.

- 9 Amidst growing

would be to

ret~rn

disenchan~ment,

a more promising course

more of the spending decisions ' to individuals

and to businesses where the cunrulative effect of thousands and

millions of private initiatives would be more efficient in sustaining and expanding economic progress.

The New Directions for economic policy should include

specific strategies and quantitative targets that give a clear

picture of where we want to be going.

With such a blueprint,

it would be possible to evaluate all proposed policies and actions

as to their contribution toward achieving the established goals.

Perhaps this could best be accomplished by designing a

model economy that would represent the ideal condition sought

within a reasonable time -- perhaps five, six, or seven years.

Then our economic policies could be directed on a steady course

to reach those targets we decided upon in our model.

The com-

ponents of such a model might include the following:

First, we should seek a balanced budget with full employment.

With the steps already taken or planned, the budget

defi~it

for FY 1979 is now expected to be $50 billion or less, down from

the original $60 billion estimate.

This trend should be continued,

with reduction to less than $40 billion in FY 1980; to less than

$20 billion in FY 1981; and reaching a balanced budget in FY 1982.

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Second, the percentage of GNP represented by Federal

expenditures should be redu ced gradually over the five-to - seven

year period from 22 per cent of GNP to 20 per cent.

Even though

the Federal Government would still be spending more than it is

now, such a program would result in $50 to $75 billion less in

spending than otherwise would be the case.

And these resources

could be shifted back to the private sector.

Third, we should establish a policy ·that will achieve a

substantial increase in business fixed investment.

The United

States has been neglecting its capital base, underemphasizing

the issue of investment for .the future, just as· Spain did in

the 16th century.

We are falling behind other principal n at ions.

Japan spends 15 per cent of its GNP for capital investment;

Germany, 21 per cent; the United States, 8 or 9 per cent.

Over

the decades we've been falling behind in our productive capacity,

our efficiency, our productivity, and our technology.

One technique for stimulating more capital investment

could be a substantial liberalization of depreciation allowances

so that the cash flows from risky investments would justify the

investments.

Later, we could explore the possibility of stimu-

lating other avenues of capital formation -- private investment

- 11 and entrepreneurship.

the

five-or-sev~n

But overall, our goal should be -- for

year period in our model -- to increase

capital spending from 9 per cent to 12 per cent of GNP.

Fourth, we should have a policy as to housing, which has

also fallen behind our demands in many periods.

In the next

five years it would be appropriate to see housing increased by

75,000 or 100,000 units per year -- each year -- until we reach

levels that are consistent with our national needs.

Fifth, we should have a vigorous program of exports, with

the specific goal of increasing our exports of goods from about

seven per cent of GNP to ten . per cent.

This would go very far

toward correcting the balance of payments deficit which plagues

us and which threatens the value · of the dollar, and would provide

more absorptive capacity for trade with other nations.

Sixth, as our program progresses) building up the capacity

to shift resources to the private sector, we should plan for

additional tax reductions for individuals.

This goal must not

conflict with the goal of balancing the budget.

It is consistent

with the goal of reducing government expenditures and giving more

of the spending decisions back to people.

- 12 Seventh, we should be more attentive than we have yet been

to regulatory reform, in order to remove the inflationary impact

of government actions outside the monetary and fiscal spheres.

And eighth, we should establish a definite commitment to

reducing inflation on a steady basis, at the rate of 1/2 to 3/4

per cent per year, until we reach our

goa~

of price stability,

full employment, and a sound dollar.

These are eight points or New Directions in a strategy

that could enable us to overcome -- in a reasonable period, an

attainable period

all of those terrible diseases which now

threaten our vitality.

I must say to you that since I have been in Washington

most of my attention has been directed to the short-term

problem

the dilemma we face at the Federal Reserve in trying

to resist inflation in the short term and the necessity we face

of fin.d ing a coordina ted fiscal and monetary policy that ensures

that the Federal Reserve is not left to do the job alone.

great deal of progress has been made in that regard.

A

It is

extremely encouraging to see the change of attitudes in Washington

and to see the specific, concrete steps that have been taken

along these lines.

13 But we still face a very trying period.

In the next few

quarters we will face the test of endeavoring to restrain inflationary pressures enough to avoid the dislocations that otherwise

will result, while

no~

slowing our economy into a recession.

And

this will require the best skills that we can marshall from all

those who participate in or are involved in Government and from

all those who have management or financial responsibility in the

private sector.

Beyond this trying period,. the opportunity exists

for our longer-range strategies to be brought into play.

My message today is:

must conquer it.

inflation is a terrible probleme

We

In the short term, we have the very difficult

task of treading our way through a narrow passage.

In the longer

run, with a united nation, we have great prospects of achieving

our goal.

And if we do, economic stability, full employment, a

sound dollar will not only contribute to our own well-be ing, but

will yield the only sure way to peace and prosperity throughout

the world.

Thank you.

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