National League of Cities Remarks at the Annual Congressional-City Conference.

To be here with you this afternoon, to listen to my good friend, President Jessie Rattley, describe the emotional feelings which she has on occasion like this and to listen very raptly to her moving words, to see your expression of welcome and friendship and applause has alleviated at least partly my trepidation— [laughter] about coming to meet with you on this very sobering occasion. It's good to see my old friends. And if you're still friends after my Friday speech, then I know you'll be there when the going gets tough, and I thank you for it.

This is not an easy time for me. I would guess the last 2 weeks has been perhaps the most difficult that I've experienced since I've been in the White House. With domestic and international problems and challenges before us as Americans, a time of testing is obvious to us all. What we do in this Nation affects not only our own lives but the lives of almost every human being on Earth. How we react to challenge, how we address difficult problems, how we resolve troubling questions, whether or not we demonstrate unity when we are tested, whether we depart from our principles and our ideals or whether we stand firm and rely on them in a time of trial is watched very closely, not only here in our great Nation but in every nation on Earth.

I have enjoyed and deeply appreciated my partnership with you. Two years ago, I began to implement, along with you, the Nation's first comprehensive urban policy, and we've made tremendous progress under this partnership.

Together, we've increased Federal grants-in-aid substantially to the State and to local governments, both cities and counties. But equally important, we have made possible new incentives for renewal of spirit and a marshaling, through matching commitments and matching funds, of the tremendous resources available to us from private parts of the free enterprise system of our Nation—all this done for the benefit of the people who live in the communities which you serve and also which I serve. Your constituencies are mine. Your problems are mine. Your opportunities are mine. And the fact that a President of our great country has the kind of relationship with the city and local officials of the same Nation is indeed reassuring, not only to us in this room but to those who look to us for the benefits of that leadership in the future.

I'm proud of what we've done, and at a different time I would like to discuss in detail with you the accomplishments of our partnership. But today is an extraordinary time in America. All of our progress, all of the efforts which you and I've made together, all of our renewed hopes are imperiled because of domestic and worldwide inflation, which has escalated dramatically in the last few weeks.

Oil prices have increased 109 percent in the last 12 months, worldwide. Last month in our Nation alone, energy prices went up 7 1/2 percent in 1 month—a 90-percent inflation rate in energy. Interest rates have had to climb to stay above the rate of inflation to make borrowing possible at all. And these two factors have ignited a firestorm this year that could permanently change the world economy and could permanently change our way of life. Inflation has indeed burst through its previous limits and threatens to rage out of control.

In the last 2 reporting months, for instance, the annualized wholesale inflation rates in Great Britain, in Italy, even in Japan have all exceeded 25 percent. In some other nations it's much higher. In some major nations the inflation rate has been more than 100 percent. Here in our own country, the producer price index-formerly called the wholesale price index—has increased recently at an annualized rate of almost 20 percent. We must act, we must act together, to turn this tide.

Nobody knows this better than city officials, because you are caught between skyrocketing prices and relatively frozen local revenues that fall increasingly behind what you need. Each new round of cost increases drives down the purchasing power of the State and Federal funds which you receive. Wage demands, cutback in services, tax protests, business uncertainty, and budget deficits are growing more intense. There has been a virtual collapse of the bond market, which has shut off the long-term credit to cities. Once more, needed capital improvements must wait while buildings and facilities begin to deteriorate.

Wherever we look, we see inflation clouding our future. And the fact that America is better off than most other nations is not any particular reassurance to us. Decent health care, home-ownership, business prosperity, a better life for those we serve, for working families, help for the elderly and the poor, justice for those who've suffered from deprivation and discrimination-these and other dreams can and will slip away if inflation continues.

Even more importantly, inflation is a threat to our national security. Unless controlled, it will sap our strength, our world leadership, our national unity, and with it, eventually American ideals.

That is why, after a torturous and very difficult and extended consultative period, I announced an intensified anti-inflation effort this past week.

First, I announced that the 1981 budget will be a balanced budget. Congressional leaders, who met on their own—invited my key advisers in and met frequently with me; sometimes they met 10 hours a day, 6, 8, 10 days without stopping—have pledged themselves to support this commitment of a balanced budget, Democrats and Republicans alike, an unprecedented occurrence in the constitutional history of our Nation. This will be our first balanced budget in 12 years, and since the budget was last balanced, we have added about one half trillion dollars to our Federal debt. This is the second balanced budget in 20 years, since 1961.

I also intend to cut immediately this year's allocation of funds and expenditures, and I will veto any bill which threatens this balanced budget for next year. I will use my full Presidential powers to maintain budget discipline and fiscal responsibility on the Federal Government.

Second, under the Credit Control Act of 1969, I've empowered the Federal Reserve Board to take action to curb the inflationary expansion of private credit. Americans recently have only been saving 3 percent of their earnings, almost the lowest percentage of saving in the history of our country. Only one quarter, I understand, during the Korean war, did it get this low. Savings rates in other countries like Japan and Germany run 20, 25 percent; in our country only 3 percent.

As a result of these challenges and the result of the action I've authorized, the Federal Reserve will restrain consumer revolving credit and other unsecured consumer loans, and impose new restrictions on money market funds and certain financial or commercial banks. Also, the Federal Reserve is undertaking a voluntary program with banks to restrain nonproductive loans.

This next statement is important. These restraints will not restrict home mortgages, automobile loans, or credit for small businesses or for farmers. In fact, this kind of restraint on nonproductive lending will encourage the flow of credit for the kinds of productive needs which are important to our country.

Third, I'm strengthening our voluntary program of wage and price standards that have involved business and labor and the public sector in the recommendations made to me in the so-called national accord. I consider it extremely important that as we go into these difficult days ahead that a common approach hammered out over a long period of time by public representatives, business representatives, and labor representatives, will be the guiding restraints for us in pay or wage settlements in the future.

Last year, these same kinds of voluntary restraints helped keep wage increases well below the price of consumer goods. In fact, overall wage increases in 1979 were lower than they were the previous year in 1978. Strengthening this accord or this partnership can sustain the same kind of moderation through 1980 without the distortions and inequities that always result from mandatory wage and price controls.

Fourth, I've imposed a conservation fee on imported oil that will raise gasoline prices 10 cents a gallon. I will propose to Congress a direct gasoline tax to replace this emergency measure.

This fee targets only gasoline. It will not increase at all the profits of the oil companies. Gasoline accounts for some 40 percent of all the oil that we use. This fee, by itself, will result in a reduction in gasoline consumption and, therefore, oil imports of 100,000 barrels per day the first year, and after about 3 years will reduce our gasoline consumption and our oil imports by 250,000 barrels a day. This means that for 1980 we expect our gasoline consumption on U.S. highways to decrease 400,000 barrels per day.

And finally, I'm calling for structural changes in our economy to encourage savings and productivity and innovation. I've called on Congress to pass quickly the regulatory reform act, trucking deregulation, and the phasing out of ceilings on savings account interest to encourage small investors to save and to increase the inflationary pressures of consumer credit.

When I am absolutely certain that the 1981 budget will indeed be balanced-and I am sure that this will be accomplished—I will then, and only then, consider tax reductions further to increase savings, to stimulate productivity, and to lead to increased business investment.

Now is a time for discipline for all of us and not a time for promises or for politics as usual. In choosing these anti-inflationary measures, I examined a wide range of options. Page after page after page of ideas and options were carefully assessed. I undertook extraordinary consultations with the Congress, and I sought a proper balance that will not jeopardize our important national goals or eliminate programs that benefit those who are most vulnerable to inflation.

But I would like to interlineate here to say that the ones who are the most deprived, the ones whose incomes are lowest, the ones whose incomes are most fixed, the ones who do not have the capacity or the flexibility to move from one place to another or shop extensively for the bargains, who cannot leave a job or leave a community because of the afflictions on them—those are the ones who suffer most from inflation.

In the end, there is no sugar-coated pill that can be administered to an economically suffering America. What I've advocated is strong medicine; it's bitter medicine. It will mean our first real belt-tightening since World War II, when we were fighting together against fascism. We're fighting today against an invisible enemy, but it is a very dangerous enemy and we are in for a long fight. Nothing short of stern measures will stop inflation from destroying our economy and perhaps even our way of life. There are no easy answers, there are no magic solutions, and anyone who tells you differently is either wrong or dishonest.

I will be consulting rapidly, day in and day out, as quickly as I possibly can, with all the leaders of the agencies of the Federal Government, with the key Members of Congress, and with other American leaders like you and your chosen officials. The specific budget reductions which I announce later on this month will affect everyone in this room and all those whom you serve. They go beyond simply eliminating waste. There will be cuts in good programs, in worthwhile programs which I've supported and which you and I have developed and supported together.

There will be less Federal aid to cities, but a sharper focusing of what there is in those communities where the need is greatest. Everyone must share in this common effort. There will be less even for defense programs which are not directly related to combat readiness. There are times when all of us, and particularly public officials, have to face painful budget decisions. I ask for your support in imposing and maintaining this fiscal discipline.

A balanced budget alone obviously cannot stop inflation right now, but it can help to stabilize financial markets, and it can allow interest rates to moderate, and it can take the pressure off monetary policy. And it can demonstrate that Washington and the United States is willing to lead.

The conservation fee on oil alone will add to everyone's cost of driving—I know that. But along with the energy program which is now nearing passage in the Congress and which will be expedited, it can help slash oil imports. This will not only help our Nation directly but will also lessen demand for scarce oil supplies and tend to stabilize the international petroleum markets.

The world simply cannot accommodate another year during which international oil prices more than double. It's our responsibility as the world's greatest consumer of oil to do all we can to reduce our wasteful consumption. I'm deeply grateful for what the American people have done since I've been President.

The first year I was in office, we imported 8.8 million barrels of oil every day. We have already cut that a million barrels a day. And with this program, we'll cut it even more. But we have got to stop demanding so much oil from the limited international reservoirs, which drives up prices because of intense competition for scarce supplies. And the loss of our national wealth to OPEC nations has become a torrent that only significant conservation here and increased energy production can stop.

We can expect to pay this year $80 billion to foreign countries to buy their oil-an average for every family in America of more than $1,500. Just think how many jobs and how much better quality of life for our people could be paid for with $1,500 per family, now going to foreign countries to buy their oil. I have struggled with this problem for the last 3 years. And I remember very well when I said that the energy challenge was the moral equivalent of war—the jokes that were made about it and the scorn that was heaped upon it. But, unfortunately, what we projected then has more and more rapidly come to pass, and we have got to have a common American approach to meet this challenge.

Our Nation is the economic leader of the world, and we must not shirk our responsibility. The world is watching us today to see what kind of people we have become. So far, it sees what is obvious to us: We have not been living within our means. We have been spending our savings and spending our capital and going deeper and more dangerously in debt, not just the Federal Government but the American society and American families as well.

The world is asking if we have become too self-indulgent. It asks if we can accept responsibility and share among ourselves the necessary sacrifices. And we must ask ourselves the same questions. We must ask if we have the realism and the discipline to live within our means, to recognize that we cannot spend or tax or decree or regulate or legislate our way out of inflation, and to recognize also that it is not going to be a quick task to resolve. It's going to take years to overcome this problem permanently.

The early indications from the international markets today in Europe and also in Japan are very encouraging. Gold prices have dropped today. The dollar has strengthened greatly today. Our clear message has been received by our trading partners and friends throughout the world. The domestic markets are cautious, relatively stable, and I am pleased with what has occurred so far.

I've brought to you, as responsible American leaders, a stern message. I've not tried to recruit your political approbation, I've not tried to assuage your deep concerns; I've tried to tell you the truth. And I cannot promise you instant or painless results. The inflation rate may very well go up some more before it starts down. I believe that later on this year it will drop substantially. All the economic advisers agree to this, if you and I together can carry out this program of fiscal responsibility and devote the time and the patience which will be required to reduce inflation and then to control it.

But this message of discipline and the restraint can give hope that we are capable of solving this most serious problem. It can give us hope, in doing this, that we can save something priceless in America-our deep commitment to help each other when we are in trouble. Uncontrolled inflation could shatter that commitment. It could engender among us cynicism, despair, and selfishness. It could rob us of the idealism that makes us a great and compassionate people.

Beginning now, let us resolve to fight inflation together, to make those necessary sacrifices that will permit us to lead our people at every level of government. I believe, as the President of the greatest Nation on Earth, that we can do it. It's within us to turn back inflation, to lay the foundation of a bright, and even brighter, future. The permanent benefits to our individual constituents and to our Nation will far outweigh the temporary inconvenience and the transient disappointments. The permanent benefits-that's what we must work to achieve.

Ralph Waldo Emerson once wrote, "The lesson of life is to believe what the years and the centuries say, against the hours." The hours tell us the transient message that our future is somewhat troubled, but the years tell us and the centuries tell us that America is strong and that each challenge that we face together makes us even stronger.

Let us exercise the realism and discipline of a free people and make that message ring true. Through challenge met with courage in freedom, our Nation will be stronger.

Thank you very much.