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EXECUTIVE OFFICE OF THE PRESIDENT
BU REAU O F TH E BU D GET
W A S H IN G T O N , D .C .

20503

Authority

O FFICE O F
T H E D IRECTOR

tty

. NABS, Date /D' K>.,Z^

December 27, 1965

MEMORANDUM FOR THE PRESIDENT
Subject:

Federal Reserve payments and the January budget

We have been planning to make an accounting change in the
budget which has the effect of reducing expenditures.
The Treasury pays interest to the Federal Reserve on the
Treasury securities held by the Fed. These are included in
budget expenditures for interest.
At the same time the Fed pays back to the Treasury almost
all of its earnings. 95% of those earnings are interest on
Treasury securities. We have been proposing to net these
payments against each other
• expenditures for interest are thereby reduced by
$1.8 billion
Treasury revenues are also reduced by $1.8 billion.
The deficit is not affected — since we are subtracting the
same number from both expenditures and revenues. But the
expenditure level is reduced. In making this change we would
have to make it for all past years as well, so that the change
in expenditures from year to year would not be much affected.
~ If we adopt this change, and at the same time use a defense

figure of $57 billion, the total budget expenditures in 1967
will be:
(billions of dollars)
$9*5
Vietnam
101 (subject to size of
Other.
.
legislative program and
pay raise)




110*5

2

I have become very worried, however, that this accounting
change may do great harm to your budgetary and legislative
program.
It can be defended on the grounds that
- transactions among other Federal agencies are
usually netted out
- we also net out transactions between the executive
and legislative branches (e.g. certain payments to
the General Accounting Office)
- we are not changing the measure of the deficit.
Nevertheless it will be strongly attacked
—

as evidence of a "phoney" budget; particularly in
conjunction with use of the lower defense figure

—

on grounds that these transactions have gone on for
40 years without being netted out

Moreover, the discussion of this change may open up the con­
troversy over the "independence" of the Federal Reserve.
The other major actions we are taking to reduce expenditures
—

sale of financial assets

—

stockpile sales

—

real property disposal

can all be defensed on substantive grounds.
able measures to take.

They are desir­

Hostile Congressmen and political commentators, however, will
seize upon the Federal Reserve accounting change, and use it
to tar many of the other actions with the same brush.
No matter which way we go on this, it doesn*t affect the deficit.




3

And if you:
accept the $57 billion defense estimate
propose graduated withholding, corporate tax
acceleration, and postponing the excise reductions
your January budget can show an overall 1967 deficit of about
$3-3% billion — lower than any year since 1960.
Moreover, excluding both the tax changes and the costs of
the Vietnam war, your 1967 budget would show a surplus of
$2h to $3 billion — the largest since 1951, and the third
largest in the history of the United States.
I believe this budget story is too good to be endangered by
accusationsof "manipulation," however falsethose accusations
might be.
In summary, therefore,
. if we do make the Federal Reserve accounting change,
the budget total can be held close to $110 billion —
but at a cost of charges that this is not a "true"
total




if we do not make the accounting change, the budget
will be nearer the $112 billion level — but will not
provide an invitation to such charges.

Charles L. Schultze
Director

fid " /-$

Bo Bo Form Noo 5 *
1
(11/8/50)

BUREAU OF THE BUDGET

Document Receipt
rret---

Classification
**0™

12/27/65

‘

Date

- Charles L. Schultze

Name

■

■

,

. g tfo>
.f
Office

_____________

Description of Document* Memo for President re Fed. Reserve Payments and
the January Budget.
Tos

The President

Agency

Date Received




Name and Title of Addressee
The Ranch
Building and Room dumber

Signature of Recipient

COPY

LBJ

LIBRARY

EXECUTIVE OFFICE OF THE PRESIDENT
BU REA U O F THE BU D G ET
WASHINGTON 25, D.C.

DECLASSIFIED
Authority

0MB

letter APR 111978

NAftS,

DatejfA

December 27, 1965

MEMORANDUM FOR THE PRESIDENT
Subject!

Federal Reserve payments and the January budget

We have been planning to make an accounting change in the
budget which has the effect of reducing expenditures.
The Treasury pay# interest to the Federal Reserve on the
Treasury securities held by the Fed. These are included in
budget expenditures for interest.
At the same time the Fed pays back to the Treasury almost
all of its earnings. 95% of those earnings are interest on
treasury securities. We have been proposing to n t these
e:
payments against each other
« expenditures for interest are thereby reduced by
$1.8 billion
♦ Treasury revenues are also reduced by $1.8 billion.
The deficit is not affected — since we are subtracting the
same number from both expenditures and revenues. But the
expenditure level is reduced. In making this change we would
have to make it for all past years as well, so that the change
in expenditures froia year to year would not be much affected.
If we adopt this change, and at the same time use a defense
figure of $57 billion, the total budget expenditures in 196?
will bet
Cbillions of dollars)
$9h
Vietnam...............
Other........ .
101 (subject to size of
legislative program and
pay raise)




110%

x Itav# become vearyjgorried, however,.. that. t i . ascflnnt.lnq,
.hs.
chaaoe raav do great h a m to vour budgetary and legislative
msoi»

It can be defended cm the grounds that
* transactions among other Pe<3eral agencies are
usually netted out
• wa also net out transactions betsteen the executive
and legislative branches { .9. certain paysaents to
0
the General Accounting Office)
- w© are not changing the measure o f the deficit,
f
Nevertheless it will be strongly attacked
—

as evidence of a "phoney* budget? particularly in
conjunction with use of the lower defense figure

—

on grounds that these transactions have gone on for
40 years without being netted out

Moreover, the discussion of this change stay open up the con­
troversy o*er the *independence” of the Federal Reserve.
The other major actions we are taking to rediice expenditures
—

sale of financial assets

—

stockpile sales

—

real property disposal

can all be defenaed on substantive grounds.
able n e s t e s to take.
tairs

They are desir­

Hostile Congressmen and political coromentators, however, will
seise upon the Federal Reserve accounting change, mid use it
to tar many of the other actions with the saute brush*
Mo matter ■which way w® go on this* it doesn't affect the deficit.




3

And if font

accept the $57 billion defense estimate*
propose graduated withholding, corporate tax
acceleration, and postponing the excise reductions
your January budget can show an overall 1967 deficit of about
$3-3& billion — lower than anv year since 1960.
Moreover, excluding both the tax changes and the costa of
the Vietnam war, yoar 1967 budget would aha*? a surplus of
largest in f h e Mstory of _tha Unlted Jtate,a>
cf
X believe this budget story ia too good to be endangered by
accusations of "manipulation, ” however falsethose accusations
might be,
1 t summary, therefore,
s

, if we do stake the Federal Sesesrve accounting change,
the budget total can be held close to $110 billion « •
<
but at a cost of charges that this is not a "true"
total
. if w® do not make the accounting change* the budget
will be nearer the $112 billion level — but will not
provide an invitation to such eStafpts.




(rri^prn
• ...

T •

_

:- ** Schnltse

Charles %* Schultz©
Director


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102