In consolidating the recovery, it is essential to avoid unleashing additional inflationary forces which would threaten its success. The objective must be growth that is steady and lasting.
That sentence is quoted from the declaration issued by the heads of state at the conclusion of the first economic summit in Rambouillet in 1975. The participants obviously got the idea right and the words right. The difficulty, of course, was that the policies actually pursued in the years after Rambouillet were frequently wrong--not supportive of steady and lasting economic expansion. And the United States, along with other nations, was a major culprit.
By the beginning of 1981, several months before the seventh summit in Ottawa, the U.S. economy and the economies of the other summit nations were clearly in a state of weakness and instability. Inflation had risen to unacceptable levels. Along with inflation, up went interest rates. But there has been rather remarkable progress made in reducing both inflation and interest rates. There are exceptions in individual economies, but the trends are strong and broadly based. Interest rates are still not down to the levels we would like. But when measured against the situation two years ago, the contrast is striking.
This important turnaround has now set the stage for economic recovery. In the United States, the indicators are pointing toward a period of solid growth. But it is important that this recovery be worldwide, that it be non-inflationary, and that it be sustained. How do we--meaning the United States and the other six summit nations--maximize the probabilities that this will be the case? That is the bottom line and the central challenge at Williamsburg.
Obviously, a wide variety of more specific issues will be discussed there. As with past summits, resisting the constant pressures for protectionism will be an important topic. All political leaders are against protectionism in the abstract. But many tend to favor various forms of protectionism when their own constituents are seriously affected. Yet every nation benefits when international markets are relatively free and open. Every nation suffers when they are not. The trick is to get all nations to have enough conviction to act together in their mutual interest.
The global policy of the United States is to encourage trade. However, we realize that East- West trade cannot be divorced from overall Western political and security objectives. At the OECD ministerial meetings earlier this month, all 24 member countries agreed that we should avoid granting preferential treatment to Eastern European countries, that we should exercise financial prudence in our economic relations with the East, and that we will keep these issues under close review in the OECD. These agreements help to provide a sound basis for further discussions of East-West economic relations at Williamsburg.
The summit nations, including the United States, have just completed a major study of foreign exchange intervention. That study bears out that intervention can have only a limited short-term impact on exchange rates. It is basically incapable of changing underlying trends, and attempts to use it for this purpose can be counterproductive. In order for there to be a lasting impact on exchange rates, it is necessary to have appropriate policy changes. Nevertheless, we have agreed to consider undertaking "coordinated intervention" to help smooth out "disorderly" exchange market conditions. This issue will undoubtedly receive more attention at Williamsburg.
In recent days there have been calls for a new Bretton Woods-type conference. Late last year I said publicly, not that a conference was needed, but that we need to start giving more serious attention to the international monetary system, how we are set up to handle major debt problems, and how we relate trade and financial issues. There has been an unfortunate tendency in recent years to lurch from crisis to crisis in a kind of ad hoc fashion, and I think we can do better.
But no one should think that convening a major international conference would be a panacea for all our problems. A lot of thought and study is first needed.
In fact, no conference, nor any economic summit for that matter, should purport to provide a definitive set of solutions to the economic, trade and financial challenges that we are facing. Rather, in my judgment, a summit such as this should be viewed as an important part, but only a part, of an ongoing cooperative effort among the major industrialized nations to work toward our common goals.
Real progress has been achieved in beginning the economic recovery. And the recovery will help other nations, especially those in Europe where unemployment has increased for 11 straight years. But if the recovery is truly to be a sustained one, we must all resist the lure of the "quick fix." The only answer for lasting economic expansion lies in a courageous allegiance to long-term solutions based on market-oriented policies.