The Wealth Of The Nation


That is rather extreme. But I have been greatly concerned about high rates of inflation and associated excessive growth of debt, and their adverse economic consequences. To some extent these concerns may reflect the influence of my past. I recall my grandfather telling me many times about the 1920s in Germany when he had accumulated substantial capital. It was in a variety of assets that did not appreciate with the hyperinflation of that time, and he was wiped out. In addition to the personal experience, my business experience has led me to the conclusion that financial institutions play a crucial role in society. Financial institutions have fiduciary and entrepreneurial responsibilities.

How should the financial system shepherd things?

Its primary role is as intermediary between the saver and the so-called demander of money. Therefore, the financial intermediary holds both the temporary and permanent savings of the private sector. That is quite a trust. The financial institution, therefore, has to be judicious in its decisions.

In the fifties and sixties, the savings pattern was stable. People didn’t rush around deciding whether to invest in money market funds or in Treasury bills or commercial paper.

You’re talking about banks and savings and loans?

All financial institutions: insurance companies, pension funds, mutual funds. Small institutions as well as large ones. They all do their best if they balance the fiduciary responsibility with the entrepreneurial drive. If the entrepreneurial drive exceeds the fiduciary responsibility, then the credit system helps generate excesses. As you leverage the use of credit more and more, you eventually begin to jeopardize the system.

Is that what’s happened in the United States?

Some of that has happened, but it is difficult at this time to estimate the magnitude of the change.

Then let’s ask a larger question. Do we have a major economic problem now? If we do, what is the problem and how did we get to it?

We are confronted with the problem of disengaging from long periods of economic and financial excesses. As we went through the sixties into the seventies, the rate of inflation began to accelerate. Business and financial practices as well as personal rules of conduct were liberalized. Some economists offered painless solutions to complex economic issues.


We did not arrest quickly the acceleration of inflation. In finance, for example, innovative techniques were devised to hide the leveraging of balance sheets. We developed in economics a phraseology that suggested a high degree of accuracy that really didn’t exist. Such phrases as “fine tuning,” “rolling readjustments,” and “soft landing” were coined to describe a presumed nearscientific precision in economic policy. This misapplied language was utilized and politicized to give false comfort in an economic setting that was becoming increasingly complex. When you can give seemingly precise words like “soft landing” to a political leader, it is much easier for him to handle an economic issue than to say that we have serious trouble that will be difficult to solve.

So you are saying that the economists were telling the Presidents what they wanted to hear?

Some Presidents took what they wanted from that language. It should also be remembered that in the past fifteen years or so we moved from the period of the forties and fifties when we were relatively cautious—cautious because the people in power at that time all remembered the 1930s. There is nothing like the memory of a debacle to put you in a cautious frame of mind for an extended period of time. Then we went through the fifties with only a moderate economic recession and a small debt structure overhanging the economy. Gradually a new group of managers assumed responsibilities, and the lessons of the thirties began to fade. We became much more aggressive in our national economic policies and in business and financial decisions.

You mean business and financial people, investors, savers?

Everyone. Standards were gradually compromised—in personal, business, and financial life.

Do you think there is a parallel between what went on in people’s personal lives—the sexual revolution and the fragmentation in the nuclear family and all of those things that happened in the sixties—and what happened in financial life?

I think that would be very difficult to prove, but the liberalization was certainly coincident. There was a lessening in the standards of economic morality at the same time there was a loosening of social and personal morals.

The traditional economic morality would be “A penny saved is a penny earned” and “Work hard, get your reward”?

That’s right.

But now it was the speculator instead of the saver and the worker who benefited?