speeches · June 3, 1980
Speech
G. William Miller · Governor
9iw
ACTION
Date: May 28, 1980
MEMORANDUM FOR: Secretary Miller
From: Executive Secretariate
Subject: Your Speech Before the International Monetary
Conference, New Orleans, June 4
OASIA staff is preparing a draft of your New Orleans speech.
It would be useful at this stage to have your reaction to its
general thrust.
In the speech, the staff intend to trace the major develop
ments that occurred in the world economy during the 1970s and
poses the key economic issues for the international community as
we enter the 1980s. The speech would focus on the need for
structural adjustment throughout the world economy — importantly
but not exclusively in the energy sector -- and on the need to
assure the availability of adequate private and official financing
to support orderly adjustment over a medium-term period. It would
stress that while the private financial system will have to handle
the bulk of the financing, the Bretton Woods institutions — which
steered the world through the post-war reconstruction period -- are
now gearing up to play a key supportive role in the structural
adjustment/recycling effort that lies ahead.
It appears that there is not much new in this. The main alter
native theme would be a discussion of U.S. economic policy and
performance. While this would be appropriate and of great interest
to this group, we understand that Mr. baitin's office felt the state
ment should be in the international financial area. Treasury speakers
have, however, focused on the U.S. economy in some earlier statements
to this group.
May we please have your reaction to the thrust of tthhee ssppeeeecchh cas
currently conceived.
Speech thrust is O.K.
Prefer alternate theme or approach
Initiator Reviewer Reviewer Reviewer Reviewer Ex. Sec.
Surname L7~
SE:KButton
---- - ... ■
itials /Date /
apartment of Treasury
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Federal Reserve Bank of St. Louis
Department of the TREASURY
WASHINGTON, D.C. 20220 TELEPHONE 566-2041
REMARKS
BY
THE HONORABLE G. WILLIAM MILLER
SECRETARY OF THE TREASURY
BEFORE
INTERNATIONAL MONETARY CONFERENCE
NEW ORLEANS, LOUISIANA
June 4, 1980
Since I became Secretary of the Treasury last August, I've
been looking forward to the opportunity to participate in the
International Monetary Conference. I consider it part of my
coming of age as Secretary.
Last evening, when I left Washington, the radar system was
knocked out and airplanes were delayed and cancelled* I thought
that perhaps Divine Providence was interfering to see that I
did not participate in this conference. Four hours later, when
we made new connections to fly into New Orleans, I found myself
on the same plane as Paul Volcker. I then realized it was merely
Divine Providence making sure I was in good company.
Over the past ten years, my predecessors as Secretary have
addressed this Conference under circumstances that have involved
rapid and unprecedented changes which have indelibly altered the
world economic and monetary system.
The process of change continues, and today I would like to
chat with you about some of the challenges we face in the 1980s.
The problems confronting the world economy today are even more
basic than those during reconstruction following World War II.
As bankers, you are and will be in the thick of things. ^our vl?w
of the future, your lending decisions, your reaction to changes m
the world environment will all play a major role in our success
or failure in meeting the tests that lie ahead.
Many of our problems have their roots in world economic
developments of the 1970s. The past decade was disturbing in
several respects. The Seventies represented a sharp break from
M-542
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Federal Reserve Bank of St. Louis
2
the past, ushering out the post-war period of steady global recovery
and expansion. The world economy reached a turning point in 1973.
The strong world expansion from late 1969 into the early Seventies
produced a highly synchronized, but unsustainable upswing in
1972-73. Surging demand led to a world-wide inventory build-up.
Commodity prices rose dramatically, particularly for energy.
Improving living standards and rising industrial production
brought huge increases in energy demands over the post-war years,
with oil consumption far in the lead. The level of U.S. domestic
oil production peaked out. OPEC nations responded to the new
situation by raising prices.
At the beginning of the 1970s, a barrel of OPEC oil cost about
$2.00. As we enter the 1980s, the price has increased 16-fold,
playing havoc with the world economy.
The powerful inflationary and growth-depressing impact of
rising energy prices was augmented by declining productivity growth
over the last decade. This was accompanied by a proliferation of
government regulations, and more and more general and specific
interference with the private market system. As underlying infla
tion rates rose dramatically, so did inflationary expectations.
This produced the classic effect -- a flight by consumers and
businesses from money into goods.
One consequence has been a reduction in average savings rates
in many countries. Inflation has also affected the level of real
capital investment so that productive stock has not grown as
rapidly as the labor base. In the wake of sharp energy cost increases
the existing capital stock has become increasingly outmoded. At
the same time, increases in unemployment have led to larger govern
ment transfer payments, larger expenditures, and heavier pressures
on budgets.
All this has taken its toll on our economies. It has produced
major structural problems that need to be addressed forcefully in
the years ahead.
In particular, the share of GNP devoted to investment needs
to be increased. For this to happen, the hard fact is that either
the government share or the consumer share must decline.
The buffeting experienced by the world economy during the past
decade has been traumatic for governments, for labor, for business,
and for consumers -- in developed and developing countries alike.
We have all suffered from the shock; we can also learn from it.
The main lesson is that progress lies in successful adaptation.
We need to adapt our ways of thinking, our policies, our
institutions, our economic relationships, and the very structures
of our economies. All nations ha,ve the responsibility to the
international community -- and to themselves -- to contribute to
the needed adjustments. The United States and other oil importing
nations have the responsibility to reduce their excessive reliance
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3
on imported oil, to bring inflation under firm control, and to
create an environment for renewed investment and productivity
growth. The oil exporting nations have an obligation to contribute
to orderly economic and financial adaptation through responsible
production, pricing and investment decisions. Both the private
and the international financial institutions have major roles to
play in the entire process.
The U.S. Responsibility
The problems facing the U.S. economy closely parallel those
of other oil importing countries.
Foremost among these is a destructive and intolerable rate
of inflation. Inflation has built up over some 15 years, and its
roots are now deeply imbedded. Success in the battle against
inflation requires a comprehensive, integrated strategy to reduce
its fundamental causes, not just to treat its symptoms. This is
our first priority. Overcoming inflation represents by far the
most important contribution the United States can make to assuring
a stronger world economy.
The primary weapons in our war against inflation are fiscal
and monetary discipline, an effective pay and price policy, a
vigorous program to reduce reliance on imported oil, regulatory
reform, increased investment, productivity improvement, and a
sound and stable dollar.
Fiscal Policy. In order to reduce inflation and release
resources to address structural problems, we are directing major
efforts toward bringing Federal spending under more effective
control. Prudent economic management requires that the Federal
budget be balanced over the business cycle.
If approved by Congress, the budget President Carter submitted
as part of his March 14 intensified anti-inflation program would
be the first balanced budget in twelve years.
Together with measures to control Federal on— and off-budget
credit demands, the achievement of budget balance over the business
cycle will have a major impact on credit markets and on inflation
and inflationary expectations.
Monetary Policy. A second weapon in the war against inflation
is a disciplined monetary policy. The Federal Reserve has held a
tight control over the growth of the money supply in order to starve
out inflation. This has contributed to a growing confidence in
financial and other markets.
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While monetary policy has been effective, the growing threat
from inflation prompted President Carter to undertake strong
additional steps to control credit. These new, temporary measures,
in conjunction with continued monetary restraint, accomplished
their purpose. They were designed to arrest the unproductive use
of credit that was prevalent earlier in the year, and to deflate
the inflationary bubble of expectations that had contributed to the
excessive credit spending and speculation.
Credit and financial markets are now operating in an orderly
and efficient manner. Interest rates have come down sharply from
earlier peaks. We seem to have broken the back of inflationary
expectations for now. This has already made it possible to relax
the temporary controls somewhat.
As the Federal Reserve has already indicated, it is firmly
committed to its basic monetary policy and determined to maintain
the growth rate of the monetary aggregate within its established
target ranges. This is certainly the proper course to ensure
progress in the war against inflation.
Pay and Price Policy. Fiscal and monetary restraint represent
powerful weapons to attack the fundamental causes of inflation.
But these policies work slowly. Therefore, we need a ’’bridging"
technique to help avoid a vicious wage-price spiral until fiscal
and monetary measures take hold. This is the purpose of the
voluntary program to moderate pay and price increases. With the
mutual cooperation of business and labor, overall price and pay
increases have been smaller than otherwise would have been the case.
This has been very helpful in avoiding a ratcheting-up of inflation.
Government Regulation. In battling inflation, we do not intend
to overlook the cost-raising actions of government. Among these
are the unnecessary regulations that could not pass a fair assess
ment of their costs and benefits. Much of the regulation of
airlines, trucking, railroads, banking, and communications indus
tries, as well as some environmental, safety and trade regulations,
and a generally heavy burden of imposed paperwork, have created
inefficiencies distortions, and excessive costs that feed through
our economy and push up prices. The Administration is intensifying
its efforts, through legislative proposals and administrative
processes, to remove unneccessary regulations and to improve the
quality of desirable regulations. The result will be a reduction
in the overall burden of government.
A Stable Dollar. Policies to control inflation help to
strengthen the dollar. In turn, a sound and stable dollar is essen
tial if we are to achieve price stability. The two are mutually
reenforcing. Moving forcefully to assure better control over the
expansion of money and credit and to help curb excesses in commodity
and other markets will dampen inflationary forces and inflationary
expectations, and contribute to greater stability in foreign
exchange markets.
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The dollar has strengthened over the period since the President’s
November 1978, announcement of a major U.S. exchange market
i,
program. We have and will continue to deal forcefully with
unwarranted exchange market pressures in order to maintain a sound
and stable dollar.
Energy Policy. The ten-fold increase in world oil prices has
been a principal contributor to the acceleration of inflation since
1973. Oil price increases have had no less an effect in the first
year of the 1980s. To win the war against inflation, it is absolutely
essential that the United States reduce its dependence upon imported
oil and upon oil itself as a source of energy. It is essential to
our national security that we gain control over our own destiny
and that we move to do so with all possible speed.
To achieve these objectives, President Carter has proposed a
broad and comprehensive energy program, including:
— decontrol of oil prices,
— a limit on oil imports,
— energy conservation,
— increased development and use of conventional
domestic sources of energy,
— increased use of renewable energy sources and
the development of unconventional domestic energy
supplies, and
— a windfall profits tax to allocate the increased
revenues generated by decontrol of domestic oil
prices.
The latest element in this program is the President’s proposal for
a 10-cent gasoline conversation fee.
There can be no question that our national and economic security
is threatened by dependence on oil imports. The 1979 oil price
explosion was the primary cause of the acceleration in inflation,
the swift escalation of interest rates, and the massive drain of
purchasing power, all of which have combined to help throw the U.S.
economy into reverse gear.
Since 1970, we have seen our oil import bill rise from $3
billion to $90 billion. A failure to stem oil imports would have
serious consequences for our efforts to achieve lasting improvement
in the U.S. balance of payments and to maintain a stable dollar,
and would threaten our efforts to solve our domestic inflation
problem.
Low gasoline prices are a major cause of our over-consumption
of imported oil. The gasoline conservation fee introduced by
President Carter is a moderate but straightforward step toward
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reducing our dependence on foreign oil. By the end of the first
year, it would reduce oil imports by 100,000 barrels a day‘, and by
the end of the third year, it would reduce oil imports by up to
250,000 barrels a day, producing a balance of payments savings of
more than $3 billion. The fee would produce additional demand
restraint and demonstrate the willingness of the United States
to make sacrifices to curtail gasoline use. This would be an
important element in securing the international cooperation that is
vital if we are to bring the oil price explosion under control. As
you know the fee is under challenge in both the courts and in
Congress. President Carter is making a courageous, all-out effort
to retain it as an instrument of U.S. energy policy. The fight
to achieve a rational U.S. energy policy has been long and hard and
slow. No doubt there will be setbacks and detours ahead, as there
ave been in the past. But we have made considerable progress,
and we intend to achieve even more.
We have already started to see results from earlier conserva
tion efforts. During the first quarter of 1980, U.S. oil consump
tion was 9.4 percent below the same period last year. This sharp
reduction reflected consumer reactions to higher prices and increased
efficiency. It was mirrored in our demands for oil imports which
m the first quarter fell 12.4 percent from a year earlier. Data on
total energy use also confirm our increased efficiency. Between
1974 and 1978, the ratio of energy consumption per unit of indus
trial output decreased about 20 percent. Between 1972 and 1979,
energy consumption per dollar of GNP fell roughly 10 percent. The
direction is right, but we need to follow through by putting our
program fully into place.
Investment. Finally, if we are going to control and reduce the
underlying rate of domestic inflation, we will need a very
substantially higher level of investment. This means we will need
to devote a larger share of our output to investment and less to
consumption. Investment, of course, begins with savings. But
inflation until now has generally discouraged savings. It has also
dampened investment by increasing uncertainty and the risk involved.
After we have displayed the willingness and fortitude to bring
our Federal spending under control, we can and should provide the
incentives that will encourage savings, investments, and productiv
ity that are so essential to economic progress with price stability.
Overall Responsibility of the Oil Importing Nations
The problems of energy and intense inflationary pressures, of
course, also confront other oil importing nations, and are being
addressed through a variety of policies in a variety of fora.
Close cooperation -- for example, in the Summit framework, in the
IMF, and in the OECD — in analyzing problems and designing
domestic responses help minimize the danger of inconsistent or
conflicting policies and help develop agreement on the main lines
of economic Strategy. Close cooperation among the major nations
in the wake of the 1973-74 oil crisis helped avoid a destructive
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7
I
response to unprecedented balance of payments problems and movement
of the world economy into recession. As we enter the 1980s,
following yet another dramatic oil shock, the international
community has reaffirmed the need to respond in a coordinated and
cooperative way, and has reached essential agreement on the outlines
of a strategy for basic structural adjustment. Recognition of the
need and formulation of the strategy are essential first steps.
Successful implementation will require courage and persistence
throughout the oil importing world.
But a successful adjustment is not, indeed cannot be, the sole
responsibility of the oil importing countries.
Responsibilities of the Oil Exporting Nations
The oil exporters, largely the members of OPEC, have responsi
bilities as well. They also are important members of a highly
interdependent world economic and political system whose stability
must clearly be in their own interest. They must begin to act more
in recognition that misuse of their enormous economic power can
seriously damage the global economy and their own economies. At
the same time, they must also use their large financial resources
to help facilitate the required adjustments by the oil importing
world to the changed economic environment.
I believe that the OPEC countries’ responsibilities to the
global economy are several:
First, they need to follow a responsible oil pricing policy.
Uncertainty over prices and abrupt changes in them clearly have
an adverse effect on inflationary expectations and investment
behavior.
Second, the world needs to be assured of a constancy of global
oil supplies. Investment strategies and macro-economic policies
aimed at reducing oil dependence and restructuring production
processes can work only in an environment in which supply does not
fluctuate erratically.
Third, there is a need for OPEC countries to follow responsible
investment strategies. The world economy requires longer-term
investment funds to facilitate and match the needed adjustment
efforts, which inevitably will take time. The OPEC nations can
play an important role in assuring that the recycling process works
smoothly.
Fourth, OPEC has a special responsibility to the developing
countries. Ten years ago, the cost of oil to the LDCs was approxi
mately three percent of their export receipts.. It now takes about
25 percent of their exports to pay their oil bill. This drain o
scarce foreign exchange resources calls for a particularly painful
adjustment by the LDCs and ultimately detracts from their develop
ment efforts. Future OPEC investment strategies should include a
greater portion of their funds going directly to the LDCs to
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Role of the Private and the International Financial Institutions:
A Global Response to Recycling
A key challenge for the world economy in the 1980s will be
the financing and adjustment of the large imbalances in international
payments arising from the oil price increases. The institutions
represented at this conference will play a critical role in
determining whether we succeed in this recycling effort.
In some ways, the world payments situation today is reminiscent
of the situation following the major oil price increases of 1973-74.
The private financial markets, particularly the commercial banks,
provided the lion's share of the financing. The private markets
will again have to perform the bulk of the recycling task — there
is no realistic alternative.
But in contrast with the relatively rapid fall-off in the
OPEC surplus during 1976-78, it is likely that the current large
world payments imbalances will persist for some time. The softening
in the real price of oil that occurred in the mid-1970s cannot be
counted on. Moreover, indications are that some OPEC countries
will trim back their development efforts and thus that their imports
will not grow at the rapid rate of earlier years. Consequently,
while the OPEC surplus will probably edge down from the $120 billion
or so projected for 1980, we must expect sizable surpluses, and
sizable requirements for balance of payments financing, over the
next few years.
As they did in the post-war reconstruction period, the Bretton
Woods institutions -- the IMF and the World Bank group -- are
preparing to play a central role in addressing the financing and
structural adjustment needs facing the world today.
The IMF is positioning itself to meet the potentially large
demands for balance of payments financing that may arise, and to
assist countries in undertaking programs to revitalize their
economies. An increase in IMF quotas is in process, and legislation
providing for U.S. participation in that general increase is now
before the Congress. At the April meeting of the ministerial-level
Interim Committee in Hamburg, the IMF Managing Director was
encouraged to explore the possibility of borrowing additional funds
directly from major surplus countries should the need arise. The
Fund is moving to lengthen the period of adjustment associated with
its financing, and to place greater emphasis on expanding and
rationalizing the productive base in borrower countries, in recog
nition of the structural nature of some of the changes that must be
made. The IMF is also exploring ways to strengthen its surveillance
over exchange arrangements and balance of payments adjustment policies,
to encourage more timely and effective action by all countries,
including those countries which do not use Fund resources.
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These efforts by the IMF closely parallel major initiatives
being undertaken by the multilateral development banks (MDBs).
MDB loan commitments represent by far the largest official source
of external capital for the developing world, equivalent to $14
billion in 1979. These loans contribute in a major way to economic
growth and stability in the recipient countries.
In recognition of the basic change in the world economy, the
World Bank is adapting its lending programs to facilitate needed
adjustment. For example, the Bank, with strong U.S. support, is
initiating a new program of nonproject lending for structural
adjustment. Moreover, the World Bank plans to finance oil and gas
projects which, combined with other official and private financing,
will total more than $33 billion over the next five years.
Consideration is also being given to measures to expand the Bank’s
co-financing arrangments with private lenders.
The ability of the IMF and the MDBs to play a strong, construc
tive role in dealing with present problems requires that they have
adequate resources. Vitally important authorization legislation
is now pending in the Congress for an increase in the U.S. quota
in the IMF and for the U.S. contribution to the Sixth Replenishment
of the International Development Association. Timely Congressional
approval of this legislation, for the full amounts negotiated, is
central to U.S. interests — political, economic and humanitarian
— and to assuring a cooperative global response to the challenge
of the 1980s.
Conclusion
The problems of inflation, of energy, of international finance
that we face are all too apparent.
Meeting the challenges they pose will not be easy. It will
require recognition and acceptance of shared responsibilities by
nations in diverse positions. Major structural change in our
economies — and that is clearly what is required -- is difficult
and painful. It is always resisted by powerful interests, impeded by
natural attachments to familiar ways and slowed by simple inertia.
So the task is great. But so too is the prize we seek —
growing economies with inflation under control, with rising real
incomes, with energy and financial equilibria appropriate to the
new energy era in which we now live.
It is a prize that eluded us in the 1970s. Now we must summon
the economic wisdom and, even more, the political will to grasp it
in this new decade.
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jjf
DepartmenloflheTREASURY
' WASHINGTON, D.C. 20220 TELEPHONE 566-2041
REMARKS
BY
THE HONORABLE G. WILLIAM MILLER
SECRETARY OF THE TREASURY
BEFORE
INTERNATIONAL MONETARY CONFERENCE
NEW ORLEANS, LOUISIANA
June 4, 1980
Since I became Secretary of the Treasury last August, I've
been looking forward to the opportunity to participate in the
International Monetary Conference. I consider it part of my
coming of age as Secretary.
Last evening, when I left Washington, the radar system was
knocked out and airplanes were delayed and cancelled* I thought
that perhaps Divine Providence was interfering to see that I
did not participate in this conference. Four hours later, when
we made new connections to fly into New Orleans, I found myself
on the same plane as Paul Volcker. I then realized it was merely
Divine Providence making sure I was in good company.
Over the past ten years, my predecessors as Secretary have
addressed this Conference under circumstances that have involved
rapid and unprecedented changes which have indelibly altered the
world economic and monetary system.
The process of change continues, and today I would like to
chat with you about some of the challenges we face in the 1980s.
The problems confronting the world economy today are even more
basic than those during reconstruction following World War II.
As bankers, you are and will be in the thick of things. Your view
of the future, your lending decisions, your reaction to changes in
the world environment will all play a major role in our success
or failure in meeting the tests that lie ahead.
Many of our problems have their roots in world economic
developments of the 1970s. The past decade was disturbing in
several respects. The Seventies represented a sharp break from
M-542
Digitized for FRASER
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2
the past, ushering out the post-war period of steady global recovery
and expansion. The world economy reached a turning point in 1973.
The strong world expansion from late 1969 into the early Seventies
produced a highly synchronized, but unsustainable upswing in
1972-73. Surging demand led to a world-wide inventory build-up.
Commodity prices rose dramatically, particularly for energy.
Improving living standards and rising industrial production
brought huge increases in energy demands over the post-war years,
with oil consumption far in the lead. The level of U.S. domestic
oil production peaked out. OPEC nations responded to the new
situation by raising prices.
At the beginning of the 1970s, a barrel of OPEC oil cost about
$2.00. As we enter the 1980s, the price has increased 16-fold,
playing havoc with the world economy.
The powerful inflationary and growth-depressing impact of
rising energy prices was augmented by declining productivity growth
over the last decade. This was accompanied by a proliferation of
government regulations, and more and more general and specific
interference with the private market system. As underlying infla
tion rates rose dramatically, so did inflationary expectations.
This produced the classic effect — a flight by consumers and
businesses from money into goods.
One consequence has been a reduction in average savings rates
in many countries. Inflation has also affected the level of real
capital investment so that productive stock has not grown as
rapidly as the labor base. In the wake of sharp energy cost increases
the existing capital stock has become increasingly outmoded. At
the same time, increases in unemployment have led to larger govern
ment transfer payments, larger expenditures, and heavier pressures
on budgets.
All this has taken its toll on our economies. It has produced
major structural problems that need to be addressed forcefully in
the years ahead.
In particular, the share of GNP devoted to investment needs
to be increased. For this to happen, the hard fact is that either
the government share or the consumer share must decline.
The buffeting experienced by the world economy during the past
decade has been traumatic for governments, for labor, for business,
and for consumers — in developed and developing countries alike.
We have all suffered from the shock; we can also learn from it.
The main lesson is that progress lies in successful adaptation.
We need to adapt our ways of thinking, our policies, our
institutions, our economic relationships, and the very structures
of our economies. All nations ha,ve the responsibility to the
international community -- and to themselves -- to contribute to
the needed adjustments. The United States and other oil importing
nations have the responsibility to reduce their excessive reliance
Digitized for FRASER
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Federal Reserve Bank of St. Louis
3
on imported oil, to bring inflation under firm control, and to
create an environment for renewed investment and productivity
* growth. The oil exporting nations have an obligation to contribute
to orderly economic and financial adaptation through responsible
production, pricing and investment decisions. Both the private
and the international financial institutions have major roles to
play in the entire process.
The U.S. Responsibility
The problems facing the U.S. economy closely parallel those
of other oil importing countries.
Foremost among these is a destructive and intolerable rate
of inflation. Inflation has built up over some 15 years, and its
roots are now deeply imbedded. Success in the battle against
inflation requires a comprehensive, integrated strategy to reduce
its fundamental causes, not just to treat its symptoms. This is
our first priority. Overcoming inflation represents by far the
most important contribution the United States can make to assuring
a stronger world economy.
The primary weapons in our war against inflation are fiscal
and monetary discipline, an effective pay and price policy, a
vigorous program to reduce reliance on imported oil, regulatory
reform, increased investment, productivity improvement, and a
sound and stable dollar.
Fiscal Policy. In order to reduce inflation and release
resources to address structural problems, we are directing major
efforts toward bringing Federal spending under more effective
control. Prudent economic management requires that the Federal
budget be balanced over the business cycle.
If approved by Congress, the budget President Carter submitted
as part of his March 14 intensified anti-inflation program would
be the first balanced budget in twelve years.
Together with measures to control Federal on- and off-budget
credit demands, the achievement of budget balance over the business
cycle will have a major impact on credit markets and on inflation
and inflationary expectations.
Monetary Policy. A second weapon in the war against inflation
is a disciplined monetary policy. The Federal Reserve has held a
tight control over the growth of the money supply in order to starve
out inflation. This has contributed to a growing confidence in
financial and other markets.
Digitized for FRASER
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4
While monetary policy has been effective, the growing threat
from inflation prompted President Carter to undertake strong
additional steps to control credit. These new, temporary measures,
in conjunction with continued monetary restraint, accomplished
their purpose. They were designed to arrest the unproductive use
of credit that was prevalent earlier in the year, and to deflate
the inflationary bubble of expectations that had contributed to the
excessive credit spending and speculation.
Credit and financial markets are now operating in an orderly
and efficient manner. Interest rates have come down sharply from
earlier peaks. We seem to have broken the back of inflationary
expectations for now. This has already made it possible to relax
the temporary controls somewhat.
As the Federal Reserve has already indicated, it is firmly
committed to its basic monetary policy and determined to maintain
the growth rate of the monetary aggregate within its established
target ranges. This is certainly the proper course to ensure
progress in the war against inflation.
_and Price Policy. Fiscal and monetary restraint represent
powerful weapons to attack the fundamental causes of inflation.
But these policies work slowly. Therefore, we need a "bridging"
technique to help avoid a vicious wage-price spiral until fiscal
and monetary measures take hold. This is the purpose of the
voluntary program to moderate pay and price increases. With the
mutual cooperation of business and labor, overall price and pay
increases have been smaller than otherwise would have been the case.
This has been very helpful in avoiding a ratcheting-up of inflation.
Government Regulation. In battling inflation, we do not intend
to overlook the cost-raising actions of government. Among these
are the unnecessary regulations that could not pass a fair assess
ment of their costs and benefits. Much of the regulation of
airlines, trucking, railroads, banking, and communications indus
tries, as well as some environmental, safety and trade regulations,
and a generally heavy burden of imposed paperwork, have created
inefficiencies distortions, and excessive costs that feed through
our economy and push up prices. The Administration is intensifying
its efforts, through legislative proposals and administrative
processes, to remove unneccessary regulations and to improve the
quality of desirable regulations. The result will be a reduction
in the overall burden of government.
A Stable Dollar. Policies to control inflation help to
strengthen the dollar. In turn, a sound and stable dollar is essen
tial if we are to achieve price stability. The two are mutually
reenforcing. Moving forcefully to assure better control over the
expansion of money and credit and to help curb excesses in commodity
and other markets will dampen inflationary forces and inflationary
expectations, and contribute to greater stability in foreign
exchange markets.
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The dollar has strengthened over the period since the President’s
November 1, 1978, announcement of a major U.S. exchange market
program. We have and will continue to deal forcefully with
unwarranted exchange market pressures in order to maintain a sound
and stable dollar.
Energy Policy. The ten-fold increase in world oil prices has
been a principal contributor to the acceleration of inflation since
1973. Oil price increases have had no less an effect in the first
year of the 1980s. To win the war against inflation, it is absolutely
essential that the United States reduce its dependence upon imported
oil and upon oil itself as a source of energy. It is essential to
our national security that we gain control over our own destiny
and that we move to do so with all possible speed.
To achieve these objectives, President Carter has proposed a
broad and comprehensive energy program, including:
— decontrol of oil prices,
— a limit on oil imports,
— energy conservation,
-- increased development and use of conventional
domestic sources of energy,
-- increased use of renewable energy sources and
the development of unconventional domestic energy
supplies, and
— a windfall profits tax to allocate the increased
revenues generated by decontrol of domestic oil
prices.
The latest element in this program is the President's proposal for
a 10-cent gasoline conversation fee.
There can be no question that our national and economic security
is threatened by dependence on oil imports. The 1979 oil price
explosion was the primary cause of the acceleration in inflation,
the swift escalation of interest rates, and the massive drain of
purchasing power, all of which have combined to help throw the U.S.
economy into reverse gear.
Since 1970, we have seen our oil import bill rise from $3
billion to $90 billion. A failure to stem oil imports would have
serious consequences for our efforts to achieve lasting improvement
in the U.S. balance of payments and to maintain a stable dollar,
and would threaten our efforts to solve our domestic inflation
problem.
Low gasoline prices are a major cause of our over-consumption
of imported oil. The gasoline conservation fee introduced by
President Carter is a moderate but straightforward step toward
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reducing our dependence on foreign oil. By the end of the first
year, it would reduce oil imports by 100,000 barrels a day, and by
the end of the third year, it would reduce oil imports by up to
250,000 barrels a day, producing a balance of payments savings of
more than $3 billion. The fee would produce additional demand
restraint and demonstrate the willingness of the United States
to make sacrifices to curtail gasoline use. This would be an
important element in securing the international cooperation that is
vital if we are to bring the oil price explosion under control. As
you know the fee is under challenge in both the courts and in
Congress. President Carter is making a courageous, all-out effort
to retain it as an instrument of U.S. energy policy. The fight
to achieve a rational U.S. energy policy has been long and hard and
slow. No doubt there will be setbacks and detours ahead, as there
have been in the past. But we have made considerable progress,
and we intend to achieve even more.
We have already started to see results from earlier conserva
tion efforts. During the first quarter of 1980, U.S. oil consump
tion was 9.4 percent below the same period last year. This sharp
reduction reflected consumer reactions to higher prices and increased
efficiency. It was mirrored in our demands for oil imports which
in the first quarter fell 12.4 percent from a year earlier. Data on
total energy use also confirm our increased efficiency. Between
1974 and 1978, the ratio of energy consumption per unit of indus
trial output decreased about 20 percent. Between 1972 and 1979,
energy consumption per dollar of GNP fell roughly 10 percent. The
direction is right, but we need to follow through by putting our
program fully into place.
Investment. Finally, if we are going to control and reduce the
underlying rate of domestic inflation, we will need a very
substantially higher level of investment. This means we will need
to devote a larger share of our output to investment and less to
consumption. Investment, of course, begins with savings. But
inflation until now has generally discouraged savings. It has also
dampened investment by increasing uncertainty and the risk involved.
After we have displayed the willingness and fortitude to bring
our Federal spending under control, we can and should provide the
incentives that will encourage savings, investments, and productiv
ity that are so essential to economic progress with price stability.
Overall Responsibility of the Oil Importing Nations
The problems of energy and intense inflationary pressures, of
course, also confront other oil importing nations, and are being
addressed through a variety of policies in a variety of fora.
Close cooperation -- for example, in the Summit framework, in the
IMF, and in the OECD -- in analyzing problems and designing
domestic responses help minimize the danger of inconsistent or
conflicting policies and help develop agreement on the main lines
of economic strategy. Close cooperation among the major nations
in the wake of the 1973-74 oil crisis helped avoid a destructive
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response to unprecedented balance of payments problems and movement
of the world economy into recession. As we enter the 1980s,
following yet another dramatic oil shock, the international
community has reaffirmed the need to respond in a coordinated and
cooperative way, and has reached essential agreement on the outlines
of a strategy for basic structural adjustment. Recognition of the
need and formulation of the strategy are essential first steps.
Successful implementation will require courage and persistence
throughout the oil importing world.
But a successful adjustment is not, indeed cannot be, the sole
responsibility of the oil importing countries.
Responsibilities of the Oil Exporting Nations
The oil exporters, largely the members of OPEC, have.responsi
bilities as well. They also are important members of a highly
interdependent world economic and political system whose stability
must clearly be in their own interest. They must begin to act more
in recognition that misuse of their enormous economic power can
seriously damage the global economy and their own economies. At
the same time, they must also use their large financial resources
to help facilitate the required adjustments by the oil importing
world to the changed economic environment.
I believe that the OPEC countries' responsibilities to the
global economy are several:
First, they need to follow a responsible oil pricing policy.
Uncertainty over prices and abrupt changes in them clearly have
an adverse effect on inflationary expectations and investment
behavior.
Second, the world needs to be assured of a constancy of global
oil supplies. Investment strategies and macro-economic policies
aimed at reducing oil dependence and restructuring production
processes can work only in an environment in which supply does not
fluctuate erratically.
Third, there is a need for OPEC countries to follow responsible
investment strategies. The world economy requires longer-term
investment funds to facilitate and match the needed adjustment
efforts, which inevitably will take time. The OPEC nations can
play an important role in assuring that the recycling process works
smoothly.
Fourth, OPEC has a special responsibility to the developing
countries. Ten years ago, the cost of oil to the LDCs was approxi
mately three percent of their export receipts. It now takes about
25 percent of their exports to pay their oil bill. This drain of
scarce foreign exchange resources calls for a particularly painful
adjustment by the LDCs and ultimately detracts from their develop
ment efforts. Future OPEC investment strategies should include a
greater portion of their funds going directly to the LDCs to
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Role of the Private and the International Financial Institutions;
A Global Response to Recycling
A key challenge for the world economy in the 1980s will be
the financing and adjustment of the large imbalances in international
payments arising from the oil price increases. The institutions
represented at this conference will play a critical role in
determining whether we succeed in this recycling effort.
In some ways, the world payments situation today is reminiscent
of the situation following the major oil price increases of 1973-74.
The private financial markets, particularly the commercial banks,
provided the lion’s share of the financing. The private markets
will again have to perform the bulk of the recycling task — there
is no realistic alternative.
But in contrast with the relatively rapid fall-off in the
OPEC surplus during 1976-78, it is likely that the current large
world payments imbalances will persist for some time. The softening
in the real price of oil that occurred in the mid-1970s cannot be
counted on. Moreover, indications are that some OPEC countries
will trim back their development efforts and thus that their imports
will not grow at the rapid rate of earlier years. Consequently,
while the OPEC surplus will probably edge down from the $120 billion
or so projected for 1980, we must expect sizable surpluses, and
sizable requirements for balance of payments financing, over the
next few years.
As they did in the post-war reconstruction period, the Bretton
Woods institutions — the IMF and the World Bank group -- are
preparing to play a central role in addressing the financing and
structural adjustment needs facing the world today.
The IMF is positioning itself to meet the potentially large
demands for balance of payments financing that may arise, and to
assist countries in undertaking programs to revitalize their
economies. An increase in IMF quotas is in process, and legislation
providing for U.S. participation in that general increase is now
before the Congress. At the April meeting of the ministerial-level
Interim Committee in Hamburg, the IMF Managing Director was
encouraged to explore the possibility of borrowing additional funds
directly from major surplus countries should the need arise. The
Fund is moving to lengthen the period of adjustment associated with
its financing, and to place greater emphasis on expanding and
rationalizing the productive base in borrower countries, in recog
nition of the structural nature of some of the changes that must be
made. The IMF is also exploring ways to strengthen its surveillance
over exchange arrangements and balance of payments adjustment policies,
to encourage more timely and effective action by all countries,
including those countries which do not use Fund resources.
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These efforts by the IMF closely parallel major initiatives
being undertaken by the multilateral development banks (MDBs).
MDB loan commitments represent by far the largest official source
of external capital for the developing world, equivalent to $14
billion in 1979. These loans contribute in a major way to economic
growth and stability in the recipient countries.
In recognition of the basic change in the world economy, the
World Bank is adapting its lending programs to facilitate needed
adjustment. For example, the Bank, with strong U.S. support, is
initiating a new program of nonproject lending for structural
adjustment. Moreover, the World Bank plans to finance oil and gas
projects which, combined with other official and private financing,
will total more than $33 billion over the next five years.
Consideration is also being given to measures to expand the Bank’s
co-financing arrangments with private lenders.
The ability of the IMF and the MDBs to play a strong, construc
tive role in dealing with present problems requires that they have
adequate resources. Vitally important authorization legislation
is now pending in the Congress for an increase in the U.S. quota
in the IMF and for the U.S. contribution to the Sixth Replenishment
of the International Development Association. Timely Congressional
approval of this legislation, for the full amounts negotiated, is
central to U.S. interests — political, economic and humanitarian
— and to assuring a cooperative global response to the challenge
of the 1980s.
Conclusion
The problems of inflation, of energy, of international finance
that we face are all too apparent.
Meeting the challenges they pose will not be easy. It will
require recognition and acceptance of shared responsibilities by
nations in diverse positions. Major structural change in our
economies — and that is clearly what is required -- is difficult
and painful. It is always resisted by powerful interests, impeded by
natural attachments to familiar ways and slowed by simple inertia.
So the task is great. But so too is the prize we seek —
growing economies with inflation under control, with rising real
incomes, with energy and financial equilibria appropriate to the
new energy era in which we now live.
It is a prize that eluded us in the 1970s. Now we must summon
the economic wisdom and, even more, the political will to grasp it
in this new decade.
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Cite this document
APA
G. William Miller (1980, June 3). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19800604_miller
BibTeX
@misc{wtfs_speech_19800604_miller,
author = {G. William Miller},
title = {Speech},
year = {1980},
month = {Jun},
howpublished = {Speeches, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/speech_19800604_miller},
note = {Retrieved via When the Fed Speaks corpus}
}