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REPG
f the Secretary of the T
on the State of the Finances
FOR THE FISQAL YEAR ENDED JUNE 30. W7B
TRANSITION QUARTER
^^ ^
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-M\
DEPARTMENT OF THE TREASURY
DOCUMENT NO, 3270
Secretary
For t a l e by the S u p e r i n t e n d e n t of D o c u m e n t s , U . S . Government
P r i n t i n g Office, W a s h i n g t o n , D . C . 20402
i'-)
THE SECRETARY OF THE TREASURY
WASHINGTON
January 6, 1977
Dear Sirs:
I have the
a
report
of the
on
United
combined
honor
the
to transmit to you
state of
the finances
States Government
for the
fiscal year ended June 30, 1976,
and transition quarter ended September 30,
1976.
This
submission
is in
accordance
with 31 U.S.C. 1027.
Sincerely j^ours,
President of the Senate
Speaker of the House of Representatives
The statistical tables to this Annual Report will be published in a separate
STATISTICAL APPENDIX.
CONTENTS
Page
Introduction
XIX
REVIEW OF TREASURY OPERATIONS
Financial Operations
Capital Markets and Debt Management
Domestic Economic Policy
General Counsel, Office of the
United States Treasurer, Office of the
Enforcement, Operations, and Tariff Affairs
Tax Policy
International Affairs
ADMINISTRATIVE REPORTS
Administrative Management
Alcohol, Tobacco and Firearms, Bureau of
Comptroller ofthe Currency, Office ofthe
Computer Science, Office of
Director of Practice, Office of
Engraving and Printing, Bureau of
Equal Opportunity Program, Office of
Federal Law Enforcement Training Center
Fiscal Service:
Government Financial Operations, Bureau of
Public Debt, Bureau of the
Foreign Assets Control, Office of
Internal Revenue Service
Mint, Bureau ofthe
Revenue Sharing, Office of
United States Customs Service
United States Savings Bonds Division
United States Secret Service
3
10
37
38
41
42
51
62
127
139
149
153
153
155
160
163
166
180
183
185
214
219
223
244
249
EXHIBITS
Public Debt Operations, Regulations, and Legislation
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Treasury notes
Treasury bonds
Treasury bills
'.
Department Circular, Public Debt Series No. 21-75, July 10, 1975, regulations
governing 2 percent depositary bonds
DepartmentCircular, Public Debt Series No. 22-75, July 10, 1975, regulations
governing 2 percent Treasury bonds—REA series
Department Circular, Public Debt Series No. 11-73, December 19, 1973,
amended, regulations governing 5 percent Treasury certificates of indebtedness—REA series
Department Circular No. 653, Ninth Revision, April 23, 1974, First Amendment, offering of United States savings bonds, series E
Department Circular No. 905, Sixth Revision, March 18, 1974, First Amendment, offering of United States savings bonds, series H
Department Circular No. 653, Ninth Revision, April 23, 1974, Second
Amendment, offering of United States savings bonds, series E
Department Circular No. 905, Sixth Revision, March 18, 1974, First Amendment, First Supplement, offering of United States savings bonds, series H ...
263
269
273
276
277
278
279
292
299
319
VI
CONTENTS
Page
11, Department Circular No. 418, Second Revision, Septeniber 29, 1976, issue and
sale of Treasury bills
12, An act to increase the temporary debt limitation until March 15, 1976
13, An act to increase the temporary debt limit, and for other purposes
14, An act to increase the temporary debt limit, and for other purposes
Capital Markets and Debt Management
15, Statement of Secretary Simon, October 30, 1975, before the Subcommittee on
Economic Stabilization of the House Committee on Banking, Currency and
Housing, on the financial plight of New York City..
16, Statement by Under Secretary for Monetary Affairs Yeo, December 9, 1975,
before the Subcommittee on Securities ofthe Senate Committee on Banking,
Housing, and Urban Affairs, on the securities activities of commercial banks..
17, Statement of Under Secretary for Monetary Affairs Yeo, January 21, 1976,
before the House Ways and Means Committee, on proposals relating to taxexempt financing
18, Statementof Secretary Simon, February 17, 1976, before the House Ways and
Means Committee, on the public debt limit, increased long-term Treasury
borrowing, and removal of the 6-percent rate ceiling on savings bonds
19, Statement by Assistant Secreiary Gerard, June 1, 1976, before the House Ways
and Means Committee, on the public debt limit
326
328
329
329
330
339
353
361
366
Doniestic Economic Policy
20, Excerpt from statement by Assistant Secretary Jones, August 19, 1975, before
the American Accounting Association, Tucson, Ariz., on the economic
recovery and future fiscal and monetary policies
21, Excerpt from statement of Secretary Simon, August 25,1975, before the Senate
Committee on Banking, Housing, and Urban Affairs, concerning the
implications of Lockheed Aircraft Corp,'s foreign sales activities on the
Government's emergency loan guarantee program
22, Excerpt from statement by Under Secretary Schmults, September 24, 1975,
before the House Budget Committee's Community and General Government
Task Force, urging renewal of the general revenue sharing program
23, Excerpt of remarks by Secretary Simon, October 22, 1975, at Pepperdine
University in Los Angeles, urging business leaders to put their "own house
in order" as part of an effort to restore public confidence in the American
economic system
24, Excerpt from statement by Secretary Simon, February 4, 1976, before the Joint
Economic Committee, regarding the impact of government regulation on the.
private sector
,
25, Remarks of Assistant Secretary Jones, June 26, 1976, before the Western
Economic Association and the Western Finance Association, San Francisco,
Calif,, on the "Challenge of Economic Leadership"
26, Other Treasury testimony published in hearings before congressional committees, July 1, 1975-September 30, 1976
370
372
373
375
377
379
386
Enforcement, Operations, and Tariff Affairs
27, Statement by Assistant Secretary Macdonald, November 18, 1975, before the
Subcommittee on Trade of the House Ways and Means Committee, on
Customs appraisement of imports of automobiles,
28, Address by Assistant Secretary Macdonald, March 11, 1976, before the
International Trade Club of Chicago, Chicago, III., on international unfair
trade practices
,
29, Statemeni by Assistant Secretary Macdonald, March 24, 1976, before the
Subcommittee on Trade of the House Ways and Means Committee, on the
duty-free importation of U.S.-made materials
30, Excerpt from statement by Deputy Assistant Secretary Featherstone, April 22,
1976, before the Privacy Protection Study Commission, on the Bank Secrecy
Act
31, Excerpt from statement by Assistant Secretary Macdonald, June 28, 1976,
before the Commerce, Consumer, and Monetary Affairs Subcommittee of
the House Committee on Government Operations, on the Bank Secrecy Act..
32, Statement by Assistant Secretary Macdonald, July 28, 1976, before the
Subcommittee to Investigate Juvenile Delinquency ofthe Committee on the
Judiciary, on President Ford's Narcotic Sentencing and Seizure Act of 1976,.,
386
390
392
394
398
403
CONTENTS
Tax Policy
33, Statement of Secretary Simon, July 31, 1975, before the House Ways and
Means Committee, on a tax program for increased national savings
34, Statement by Secretary Simon, December 3, 1975, at the Tax Foundation's 27th
National Conference, New York City, setting forth a proposal for basic tax
reform
35, Statement of Secretary Simon, March 17, 1976, before the Senate Finance
Committee, on major tax revisions and extension of expiring tax cut
provisions
36, Statement by Secretary Simon, March 22, 1976, before the House Ways and
Means Committee, on proposed estate and gift tax revision
37,
38,
39,
40,
41,
42,
43,
Trade and Raw Materials Policy
Statement by Secretary Simon, December 11, 1975, before the Senate
Committee on Commerce, on American participation in East-West trade.,
Joint State/Treasury press release, January 16, 1976, on U,S, commodity policy,.,
Statement by Secretary Simon, January 29, 1976, before the Senate Finance
Committee, on a review ofthe administration ofthe Trade Act of 1974 and
U,S. international trade policy
Statement by Assistant Secretary Parsky, April 26, 1976, before the Subcommittees on International Resources, Food, and Energy; International
Economic Policy; International Organizations; and International Trade and
Commerce of the House Committee on International Relations, entitled
"UNCTAD IV: The U,S, Approach to Current Economic Issues"
Excerpt of statement by Deputy Assistant Secretary Vastine, May 19,1976, at
joint hearings of the Senate Committees on Armed Services, Commerce and
Foreign Relations, on S, 71,3, the Deep Seabed Hard Minerals Act
Excerpt of joint statement by Secretary Simon and Minister of Finance Kisiel
on the occasion ofthe Secretary's visit to the Polish People's Republic, June
22-23, 1976, issued by the U.S. Embassy in Warsaw
Excerpt of statement by Assistant Secretary Parsky, July 27, 1976, before the
Senate Committee on Foreign Relations, regarding UiS, participation in the
renegotiated international coffee and tin agreements and in the extended
wheat agreement
.,,..,
Investment and Energy Policy
44, Communique of the Conference on International Economic Cooperation,
December 16-19, 1975, Paris, France...
45, Statement by Assistant Secretary Parsky, February 17, 1976, before the Senate
Committee on Interior and Insular Affairs and the Senate Commerce
Committee, regarding financing an Alaskan natural gas transportation system..
46, Statement by Assistant Secretary Parsky, March 31, 1976, before the House
Committee on Science and Technology, concerning Federal financial
incentives to encourage synthetic fuels production
47, Statement by Assistant Secretary Parsky, May 3, 1976, before the Subcommittee on Foreign Commerce and Tourism of the Senate Committee on
Commerce, regarding the Treasury study of foreign portfolio investment in
the United States
48, Statement by Assistant Secretary Parsky, submitted for the record to the Senate
Judiciary Committee in connection with S, 2387, June 9, 1976, entitled "Oil
Company Divestiture"
...,,
VII
Page
405
417
420
463
471
475
476
486
495
498
499
503
505
509
512
516
International Monetary Affairs
49, Communique of the Interim Committee of the Board of Governors of the
International Monetary Fund on the International Monetary System, issued
after its fourth meeting, in Washington, D . C , August 31, 1975
50, Statement by Secretary Simon as Governor for the United States, September
2, 1975, at the joint annual meetings of the Boards of Governors of the
International Bank for Reconstruction and Development and its affiliates and
the International Monetary Fund, Washington, D,C
51, Text of the "Declaration of Rambouillet" following meeting of heads of states
and governments of France, Federal Republic of Germany, Italy, Japan, the
United Kingdom of Great Britain and Northern Ireland, and the United States
of America, November 17, 1975
52, Communique ofthe Ministerial Meeting ofthe Group of Ten, December 19,
1975, Paris, France
521
523
529
530
VIII
CONTENTS
Page
53. Communique of the Interim Committee of the Board of Governors of the
International Monetary Fund on the International Monetary System, issued
after its fifth meeting, Kingston, Jamaica, January 7-8, 1976
54. Address by Under Secretary for Monetary Affairs Yeo, January 24, 1976, to
the IOth Annual Conference on "Wall Street and the Economy" at the New
School for Social Research, New York, N.Y., regarding the effect of world
economic recovery on international payments
55. Remarks by Secretary Simon on March 10, l976,for the Distinguished Lecture
Series, Mainz, Federal Republic of Germiany, on economic policy in a
changing world ecoriomy
56. Remarks by Under Secretary for Monetary Affairs Yeo, March 30, 1976, before
the Institutional Bond Club of New York at the City Midday Club, New York,
N.Y., on international liquidity
57. Remarks by Deputy Assistant Secretary Widman, May 24, 1976, at the World
Trade Institute, World Trade Center, New York, N.Y., on U.S. balance of
payments policy
58. Statemerit of Secretary Simon, June 1, 1976, before the Subcommittee on
Iriterriational Trade, Investment, and Monetary Policy of the House
Committee on Banking, Currency and Housing, on amendment of the
Articles of Agreement of the International Monetary Fund and ari increase
in the U.S. quota
59. Statement of Secretary Simon, June 22, 1976, at the OECD ministerial meeting
in Paris
,
:
60. Text of the Joint Declaration following meeting at Dorado Beach, P.R., on June
27-28, 1976
61. Remarks by Under Secretary for Monetary Affairs Yeo, July 14, 1976, before
the German-Arrierican Chamber of Commerce, New York, N.Y., entitled
"Promoting Growth with Stability"
531
533
536
542
547
551
560
566
568
Developing Nations
62. Communique of the Joint Ministerial Committee of the Boards of Governors
of the International Bank for Reconstruction and Development and the
International Monetary Fund on the Transfer of Real Resources to
Developing Countries (the Development Committee), January 9, 1976,
issued at the close of its fifth meeting in Kingston, Jamaica
63. Summary of Statement by Acting Assistant Secretary Bushnell, January 28,
1976, before the Subcommittee on Foreign Assistance and Economic Policy
ofthe Senate Foreign Relations Committee, on proposed replenishment and
expansion of membership ofthe Inter-American Development Bank and U.S.
membership in the African Development Fiind
64. Joint Communique on the Second Session ofthe United States-Saudi Arabian
Joint Commission on Economic Cooperation, February 29, 1976, Riyadh,
Saudi Arabia
65. Joint Statement of the United States-Israel Joint Committee for Investment and
Trade, March 3, 1976, Jerusalem
66. Statement by Acting Assistant Secretary Bushnell, March 4, 1976, before the
Subcommittee on Legislation and National Security of the House Government Operations Committee, on the payment of foreign debts owed the U.S.
Government...
67. Statementof Assistant Secretary Parsky, April 8, 1976, before the Subcommittee on Foreign Operations of the Senate Appropriations Committee,
regarding U.S. contributions to the international development banks
68. Statement of Deputy Assistant Secretary Bushnell as Temporary Alternate
Governor for the United States, April 23, 1976, before the ninth annual
meeting of the Asian Development Bank Board of Governors, Jakarta,
Indonesia
69. Statement by Secretary Simon, May 7, 1976, on his visit to Chile
70. Joint Communique on May 11, 1976, of Mario Henrique Simonsen, Minister
of Finance of Brazil, and Secretary Simon
71. Address by Assistant Secretary Parsky as Temporary Governor for the United
States, May 18, 1976, at the Inter-American Development Bank meeting in
Cancun, Mexico
72. Joint statement of Secretary Simon and Secretary of State Kissinger, June 1,
1976, on UNCTAD IV at Nairobi, Kenya
570
571
574
577
580
584
593
597
598
599
603
CONTENTS
IX
Page
73. Statement by Secretary Simon, June 9, 1976, before the House Committee on
International Relations, presenting the views of the administration on H.R,
11463, the proposed amendment to the Export Administration Act that deals
with foreign boycotts of countries friendly to the United States
74. Press release, June 17, 1976, announcing meeting between Secretary Simon and
Argentine Minister of Economy Martinez de Hoz, for discussion of the new
Argentine economic program
Testimony on International Matters
75. Other Treasury testimony in hearings before congressional committees
610
Organization and Procedure
76. Treasury Department orders relating to organization and procedure
INDEX
612
623
STATISTICAL APPENDIX
The tables to this Annual Report will be published in the separate Statistical
Appendix.
NOTE.—Details of figures may not add to totals because of rounding.
605
610
Secretaries, Deputy Secretaries, Under Secretaries, General Counsels, Assistant Secretaries,
Deputy Under Secretaries, and Treasurers of the United States serving in the Department
of the Treasury from January 21, 1973, through September 30, 19761
Term of service
To
From
12, 1972 May
8, 1974
8,1974
Jan. 22, 1973 May
July 31, 1974 Feb.
Mar. 3, 1976
8,1974
13,1976
June
May
8, 1974
Jan. 27, 1969 July
July
9, 1974 June 30,1975
Aug. 5, 1975
June 12, 1972 Mar. 17,1973
8,1974
Mar, 15, 1974 July
July
9, 1974 Oct. 28, 1975
Apr, 14, 1976
July
June
Aug.
Apr.
Dec.
Apr.
June
Aug.
Jan,
May
May
June
Aug.
July
Sept.
Nov.
Apr.
1, 1970 June
2, 1973 July
1, 1974
1,
12,
11,
12,
18,
22,
8,
28,
24,
1,
17,
3,
6,
14,
1969
1971
1972
1972
1972
1973
1974
1974
1974
1974
1975
1975
1975
1976
Jan,
July
1, 1973
8,1974
21,1973
17,1975
July
1, 1974
Sept. 2,1975
Feb,
1,1974
Sept, 14,1976
Sept, 1,1975
Nov, 15,1975
,,.,
Aug, 18, 1972 Mar. 14,1974
4,1973
Aug, 22, 1972 Juiy
Aug, 3, 1973 Apr, 13, 1974
June 15, 1962 July
July 29, 1975
28,1975
Dec, 17, 1971 Feb.
June 21, 1974
14,1974
Officials
Secretaries of the Treasury:
George P, Shultz, New York.
William E, Simon, New Jersey,
Deputy Secretaries:
William E. Simon, New Jersey.
Stephen S, Gardner, Pennsylvania,
George H, Dixon, Minnesota,
Under Secretaries for Monetary Affairs:
Paul A, Volcker, New Jersey.
Jack F. Berinett, Connecticut.
Edwin H, Yeo III, Pennsylvania,
Under Secretaries (Counselors):2
Edwin S, Cohen, Virginia,
Jack F, Bennett, Connecticut,
Edward C, Schmults, New York,
Jerry Thomas, Florida,
General Counsels:
Samuel R. Pierce, Jr,, New York,
Edward C, Schmults, New York,
Richard R, Albrecht, Washington.
Assistant Secretaries:
Eugene T. Rossides, New York,
Edgar R, Fiedler, New York,
Warren F. Brecht, Connecticut.
John M, Hennessy, Massachusetts,
Frederic W. Hickman, Illinois,
Edward L. Morgan, Arizona,
David R, Macdonald, Illinois.
Frederick L. Webber, Virginia, 3
Gerald L. Parsky, Washington, D,C,3
Charles A. Cooper, Florida.
Sidney L. Jones, Michigan,
Charles M, Walker, California,
Harold F, Eberle, Jr,, California.3
Robert A. Gerard, Washington, D.C,
Deputy Under Secretaries:
Jack F, Bennett, Connecticut,
James E. Smith, Virginia.
William L, Gifford, New York.
Fiscal Assistant Secretaries:
John K. Carlock, Arizona.
David Mosso, Virginia.
Treasurers of the United States: 4
Romana Acosta Banuelos, California,
Francine I, Neff, New Mexico.
IFor officials from Sept. 11. 1789, to Jan. 20. 1973, see exhibit 81, 1973 Annual Report.
2Act of May 18, 1972, which established the Deputy Secretary position, permitted the Under Secretary position lo be
used as a counselor to tlie Secretary and so designated by the President as desired.
3Act of May 18, 1972, provided for two Deputy Under Secretaries, to be designated Assistant Secretaries by the
President as desired.
-fTreasury Department Order 229, Jan. 14.1974. raised the position of Treasurer of the United States from the operating
level of the Department to the Office of the Secretary.
XI
PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS OF THE DEPARTMENT OF
THE TREASURY AS OF SEPTEMBER 30, 1976
Secretary of the Treasury
William E. Simon
Deputy Secretary of the Treasury
George H. Dixon
Under Secretary for Monetary Affairs
Edwin H. Yeo III
Under Secretary
Jerry Thomas
General Counsel
Richard R. Albrecht
Office, Secretary of the Treasury:
Adviser to the Secretary (Counsellor to the Chairman,
Economic Policy Board)
(Vacancy)
Executive Assistant to the Secretary
John C. Gartland
Director, Executive Secretariat
Ann M. Morgan
Confidential Assistant to the Secretary
Barbara A. Jensen
Senior Consultant
John Lintner
Office, Deputy Secretary of the Treasury:
Executive Assistant to the Deputy Secretary
Thomas J. McDowell
Office, Under Secretary for Monetary Affairs:
Assistant Secretary (International Affairs)
Gerald L. Parsky
Deputy Assistant Secretary for Trade and Raw
Materials Policy
J. Robert Vastine
Deputy Assistant Secretary for Investment and Energy Policy
John M. Niehuss
Deputy Assistant Secretary for International Monetary Affairs
F. Lisle Widman
Deputy Assistant Secretary for Developing Nations... Richard D. Erb
Deputy Assistant Secretary for Research and Planning
Roger E. Shields
Deputy to the Assistant Secretary for Saudi Arabian
Affairs
Lewis W. Bowden
Deputy to the Assistant Secretary and Secretary of
IMG (International Monetary Group)
George H. Willis
Inspector General
Weir M. Brown
Assistant Secretary (Capital Markets and Debt Management)
Robert A. Gerard
Deputy Assistant Secretary (Capital Markets Policy)... (Vacancy)
Director, Office of Securities Markets Policy.... A. Gary Klesch
Director, Office of Municipal Finance
Robert A. Ladig (acting)
Director, Office of Capital Markets Legislation.. Basil N. Petrou
Deputy Assistant Secretary (Debt Financing)
(Vacancy)
Director, Office of Market Analysis and Agency
Finance
Roland H. Cook
Director, Office of Government Financing
Francis X. Cavanaugh
Senior Adviser (Debt Research)
Edward P. Snyder
Special Assistant to the Secretary (Debt Management)
John J. Niehenke
Deputy to the Assistant Secretary for New York
Finance
Mark D. Coler
Assistant Secretary (Economic Policy)
Deputy to the Assistant Secretary
Director, Office of Financial Analysis
Sidney L. Jones
George G. Kaufman
John H. Auten
Fiscal Assistant Secretary
Deputy Fiscal Assistant Secretary
Assistant Fiscal Assistant Secretary (Banking)
Assistant Fiscal Assistant Secretary (Financing)
Assistant Fiscal Assistant Secretary
David Mosso
Paul H. Taylor
John A. Kilcoyne
Philip J. Fitzpatrick
Lester W. Plumly
Treasurer ofthe United States
Department Bicentennial Coordinator
Francine 1. Neff
Abby L. Gilbert (acting)
XII
PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS
XIII
Special Assistant to the Secretary (National Security).... William N. Morell
Deputy Special Assistant to the Secretary
Gerald W. Nensel
Office, Under Secretary:
Special Assistant to the Under Secretary
Joseph J. Adams
Special Assistant to the Under Secretary for Revenue
Sharing and Intergovernmental Relations
Kent A. Peterson
Assistant Secretary (Administration)
Deputy Assistant Secretary for Administration and
Director, Office of Management and Organization..
Director, Office of Administrative Programs
Director, Office of Audit
Director, Office of Budget and Finance
Director, Office of Personnel
Director, Office of Computer Science
Director, Office of Equal Opportunity Program
Warren F. Brecht
J. Elton Greenlee
Robert R. Fredlund
Wilbur R. DeZerne
Arthur D. Kallen
Morris A. Simms, Jr.
Francis A. McDonough
David A. Sawyer
Assistant Secretary (Legislative Affairs)
Deputy Assistant Secretary (Legislative Affairs)
Special Assistant to Assistant Secretary
Harold F. Eberle, Jr.
John H. Harper
John E. Hunnicutt
Assistant Secretary (Enforcement, Operations, and Tariff
Affairs)
(Vacancy)
Deputy Assistant Secretary (Operations)
James B. Clawson
Director, Office of Operations
William F. Hausman
Director, Foreign Assets Control
Stanley L. Sommerfield
(acting)
Deputy Assistant Secretary (Enforcement)
James J. Featherstone
Director, Office of Law Enforcement
William B. Butler
Chief, Interpol (National Central Bureau)
Louis B. Sims
Deputy Assistant Secretary (Tariff Affairs)
Peter O, Suchman
Director, Office of Tariff Affairs
Richard B. Self (acting)
Special Assistant to the Secretary (Public Affairs)
Deputy Special Assistant to the Secretary
(Vacancy)
John O, Mongoven
Assistant to the Secretary and Director, Office of Revenue
Sharing
Jeanna D. Tully
Office, General Counsel:
Deputy General Counsel
Henry C. Stockell, Jr,
Assistant General Counsel and Chief Counsel, Internal Revenue Service
Meade Whitaker
Assistant General Counsel
Wolf Haber
Assistant General Counsel
Russell L. Munk
Assistant General Counsel
Hugo A. Ranta
Counselor to the General Counsel
Forest D, Montgomery
Director of Practice
Leslie S, Shapiro
Assistant Secretary (Tax Policy)
Deputy Assistant Secretary for Tax Legislation
Deputy Assistant Secretary for Tax Analysis
Associate Director, Office of Tax Analysis
Tax Legislative Counsel
International Tax Counsel
Director, Office of Industrial Economics
Charles M. Walker
William M. Goldstein
David F. Bradford
Harvey Galper
:... (Vacancy)
David S. Foster
Karl Ruhe
BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
Director
Deputy Director
Assistant Director (Administration)
Assistant Director (Criminal Enforcement)
Assistant Director (Inspection)
Assistant Director (Regulatory Enforcement)
Assistant Director (Technical and Scientific Services)
Chief Counsel
Rex D. Davis
John G. Krogman
William J. Rhodes
Michael La Perch, Jr.
(acting)
Jarvis L. Brewer
Stephen E. Higgins
A. Atley Peterson (acting)
Marvin J. Dessler
XIV
PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS
OFFICE OF THE COMPTROLLER OF THE CURRENCY
Comptroller ofthe Currency (acting)
First Deputy Comptroller
First Deputy Comptroller (Operations)
Deputy Comptroller (Operations Review)
Deputy Comptroller (Special Surveillance)
:.
Deputy Comptroller (Washington Operations)
Deputy Comptroller (Operations Planning)
Deputy Comptroller (Banking Operations)
Deputy Comptroller (Economics)
Deputy Comptroller (Strategic Studies)
Deputy Comptroller (Trust Operations)
Deputy Comptroller (FDIC Affairs)
Chief Counsel
Deputy Chief Counsel
Associate Deputy Comptroller (International Operations)
Associate Deputy Comptroller (Special Projects)
Associate Deputy Comptroller (Electronic Funds Transfer
Systems)
Associate Deputy Comptroller (Bank Organization and Structure)
Special Assistant to the Comptroller
Special Assistarit to the Comptroller (Corigressional Affairs)..
Special Assistant to the Comptroller
,,
EEO Officer
Consumer Affairs (Director)
Director, Public Affairs
Director, Communications
Robert Bloom
Robert Bloom
H. Joe Selby
Thomas G. DeShazo
Robert A. Mullin
Richard D. Chotard
W.A. Howland, Jr.
Charles B. Hall
David C, Motter
David H. Jones
Dean E, Miller
Joseph M. Ream
C. Westbrook Murphy
John E. Shockey
Robert R. Bench
Paul Homan
Thomas W. Taylor
Gail W, Pohn
James T. Keefe
Donald A, Melbye
Robert A, Baer
Thomas G. DeShazo
Thomas W. Taylor
William B. Foster
Caryl Austrian
BUREAU OF ENGRAVING AND PRINTING
Director
Deputy Director
Assistant Director (Administration)
Assistant Director (Operations)
Assistant Director (Research and Engineering)
James A. Corilori
Keririeth A, DeHart
Seymour Berry
Everett J, Prescott
Richard C, Sennett
FEDERAL LAW ENFORCEMENT TRAINING CENTER
Director
Deputy Director
Associate Director for Training
Arthur F. Brandstatter
(Vacancy)
Alvin C, Turner
(acting)
Assistarit Director (Criminal Investigator Training Division).,. William H. McClarin
Assistant Director (Police Training Division)
Peter W. Phillips
(acting)
Associate Director for Admiriistratiori
David W, McKiriley
Assistarit Director (Special Trairiing Divisiori)
Robert T, Lacey
Assistarit Director (Washington Liaison Office)
John C. Dooher
BUREAU OF GOVERNMENT FINANCIAL OPERATIONS
Commissioner
Deputy Commissioner
Assistant Commissioner,
Assistant Commissioner,
Assistant Commissioner,
Assistant Commissioner,
Assistant Commissioner,
Administration
Banking and Cash Management
Comptroller
Disbursemerits arid Claims
Government-wide Accountirig
Dario A, Pagliai
Gerald Murphy
George L. McConville
Lloyd L. Morgan
Steve L,.Comirigs
Michael D, Serlin
John O, Turner
INTERNAL REVENUE SERVICE
Commissiorier
Donald C. Alexander
Deputy Commissioner
William E, Williams
Assistant Commissiorier (Accouuts, Collectiori arid Taxpayer ,
Service)
James I, Owens
(acting)
Assistarit Commissioner (Admiriistratiori)
Joseph T. Davis
PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS
XV
Assistarit Commissiorier (Compliarice)
Sirigletori B, Wolfe
Assistarit Commissiorier (Employee Plaris arid Exempt Orgariizatioris)
Alvin D, Lurie
Assistant Commissioner (Irispectiori)
Warren A. Bates
Assistant Commissioner (Plarining and Research)
Anita F. Alpern
Assistant Commissioner (Technical)
John L. Withers
Chief Counsel
Meade Whitaker
BUREAU OF THE MINT
Director
Deputy Director
Assistant Director
Assistarit Director
Assistant Director
Assistant Director
Assistant Director
for
for
for
for
for
Mary T. Brooks
Frank H, MacDonald
Chadwick B. Pierce
Arnold Bresnick
Francis B. Frere
George G. Ambrose
Alan J, Goldman
Admiriistratiori
Mariagemerit Plaririirig
Marketing and Statistical Services
Production
Technology
BUREAU OF THE PUBLIC DEBT
Commissioner
Deputy Commissiorier
Assistarit Commissiorier (Washirigtori)
Assistant Commissioner (Field)
Chief Counsel
,
,. H,J, Hiritgeri
William M. Gregg
Kerineth W, Rath
Martin French
Calvin Ninomiya
UNITED STATES CUSTOMS SERVICE
Commissioner of Customs
Deputy Commissioner of Customs
Assistant Commissioner (Operations)
Assistant Commissioner (Regulations and Rulings).
Assistant Commissioner (Administration)
Assistant Commissioner (Investigations)....
Assistant Commissioner (Iriternal Affairs)
Assistant Commissioner (Enforcement Support)
Chief Counsel
Vernon D, Acree
G.R. Dickerson
Roland Raymond
Leonard Lehman
John A, Hurley
George C. Corcoran, Jr.
William A, Magee, Jr.
Alfred R, DeAngelus
Theodore W, Allis
UNITED STATES SAVINGS BONDS DIVISION
National Director
Deputy National Director
Director of Sales
Director of Advertisirig arid Promotiori
Francine I. Neff
Jesse L. Adams, Jr.
Walter R. Niles
, Louis F, Perririello
UNITED STATES SECRET SERVICE
Director
Deputy Director
Assistant Director
Assistant Director
Assistarit Director
Assistarit Director
Assistant Director
(Protective Intelligence)
(Investigations)
(Protective Forces)
(Irispectiori)
(Administration)
H, Stuart Kriight
Lilburn E, Boggs
James T. Burke
Burrill A. Petersori
Thomas J. Kelley
Myron I. Weinstein
Francis A, Long
ORGANIZATION OF THE DEPARTMENT OF THE TREASURY
SECRETARY
DEPUTY SECRETARY
UNDER SECRETARY
FOR
MONETARY AFFAIRS
Commissioner
Internal Revenue
Service
(Accounts. Collsclion.
and Ta.payei Seivice)
Assistant Secretary
AssisUnt SecrelaiT
(Capital MarKels and
Debt Management)
Assistant Secretary
(Tax Polic,)
UNDER SECRETARY
Assistant Secretary
Fiscal Assistant
Assistant Secretary
(Economic Policy)
Secretary
(Legislative Affairs)
(Enforcement,
Operations, & Tariff
Affairs)
C l i c e o l , .Analysis
Depoty Ass . Sec. lo.
Irade and
Kaw Mater ais Pole,
Assistant Commissionei
(Admimslialion)
Ollice ol
l a . legislative Counsel
Ollice
onal
l a . Co nsel
Deputy Asst. Sec. f »
International
Monetary AHairs
Assistant Commissjonei
(Employee Plans 1
a c m p l Oigani;ations)
ol Ihe United States
Capital Markets Pi
Special Assistant
to the Secretary
(National Security)
Deputy Asst. Sec. lor
Energy and InKstment
Policy
Assistant Commssionei
(Compliance)
Deputy Assi Se
U
Governmeni financial
U
legal Division
Ollice ol Oiicctoi
Fiist Deputy Comptiolleis I
Ollice ol
Industiial Economics
Deputy Compt,olle.s
Special Assistant
to the Secretary
(Debt Management)
Ass,stan.C.m.ionei
Assistant Commissionei
(Planning and Reseaich)
» Saudi Aratan Ailairs
Inspectoi General l a
(lechnical)
September 30, 1976
I
INTRODUCTION
This statement reviews some of the major domestic and international
developments which affected areas of Treasury interest and responsibility
during fiscal 1976 and the transition quarter. Detailed information on the
operating and administrative activities ofthe Department ofthe Treasury
is provided in the main text of the report and supporting exhibits. Further
information is contained in a separate Statistical Appendix.
DOMESTIC DEVELOPMENTS
The Domestic Econoinic Recovery
The U.S. domestic economic situation improved substantially. At the
beginning of fiscal 1976 an economic recovery was just getting underway
after the severe recession downturn. The economy bottomed out early in
1975 and once again began to expand. During the ensuing 18 months of
economic expansion which includes the period under review, real GNP
rose at a 6 1 /4-percent annual rate. In the first 12 months of the expansion,
real output rose at over a 1 1/4-percent annual rate before slowing to a
4 1 /4-percent rate of advance in the next 6 months. This was an impressive
turnaround when compared with the negative growth registered during the
severe recession of 1974 and early 1975^—the deepest recession since the
1930's. While recovery is far from complete, the U.S. economy is back on
a path of economic expansion and making good progress.
Significant improvements also occurred in U.S. employment conditions
although the unemployment rate remained disturbingly high. Civilian
employment rose by 3 1/2 million persons—a strong recovery by past
cyclical standards. The labor force also rose by about 3 million persons and
the number of persons unemployed was reduced only slightly from over
8 million to the 7 1/2 million level. The total unemployment rate during
the transition quarter was 7.8 percent, down from a peak quarterly rate
of 8.7 percent at the end of fiscal 1975.
Specific structural employment problems persist in the forms of very
high rates of unemployment among minority groups, certain geographical
pockets of high unemployment, and serious difficulties in particular
industries. Various government programs continue to try to alleviate these
specific unemployment problems. In round numbers, recent annual
expenditure levels have been close to $20 billion in unemployment
assistance, about $2.5 billion in public employment programs, and another
$6 billion or sb in manpower training programs. These are substantial
levels of expenditure, but even higher levels of Federal expenditures in
XIX
XX
1976 REPORT OF THE SECRETARY OF THE TREASURY
these and other areas have been urged by some in order to reduce the rate
of unemployment. In general, the current administration has believed that
a sustainable economic expansion would do more to reduce unemployment than anything else and that excessive government stimulus would
only create additional problems.
Personal consumption has been a major source of strength in the
recovery and it will necessarily continue to be an important element.
Personal consumption increased at about a 10 1/2-percent annual rate
leading to a renewal of economic activity throughout the economy. With
price inflation removed, the real growth of personal consumption was 5
percent. Duringthe latter months of fiscal 1976, gains in real consumption
slowed down and a minor inventory reaction resulted, particularly for
some nondurable industries. Consumers remained cautious during the
transition quarter and spending was proceeding about in line with fairly
modest income gains. After correction for inflation, retail sales had been
virtually flat during the latter months of fiscal 1976 and the transition
quarter. Continuation of this sluggishness for much longer would raise
questions as to the strength of the economic expansion. Evidence of
strengthening began to emerge at the turn ofthe transition quarter and the
early months of the new fiscal year.
A crucial element in the current economic outlook is an expected,
acceleration of capital investment. Spending for capital equipment
bottomed out early in fiscal 1976 and modest improvement had been
registered by the end of the transition quarter with larger increases
expected in 1977. Improving corporate profits, the prospect of emerging
capacity constraints in some industries, and the overall improvement in
business demand are basic reasons for expecting increased capital
spending.
Business spending for inventories swung from massive liquidation
during the last half of fiscal 1975 to accumulation during the 15-month
period under review. This contributed to very rapid growth in GNP. By the
close ofthe transition quarter, the rate of increase in inventory was leveling
off and apparently contained a certain amount of involuntary accumulation. However, the bulk of inventory investment was still voluntary and
appeared to be justified by the fundamentals of the economic situation.
Nonetheless, sluggishness in retail sales was beginning to cause some
concern by the end of the transition quarter and inventory-sales ratios,
while low by historical standards, were rising.
The other major investment sector^—housing—has been slow to regain
satisfactory levels of operation although a cyclical recovery is now
apparently underway. Total private housing starts were averaging about
a l l / 4 million-unit annual rate in the early months of fiscal 1976 and
moved up to about a l l / 2 million rate by the fiscal yearend. A sharp
monthly increase to a 1.8 million rate occurred at the close ofthe transition
quarter, but the significance of such monthly changes is difficult to judge.
INTRODUCTION
XXI
In any event, residential construction activity is expected to continue to
show gradual improvement. A large and continuing flow of savings into
thrift institutions provides mortgage financing, and new building permits
also point to increased activity.
On balance, the economic expansion was proceeding fairly satisfactorily
as the transition quarter came to a close. Real growth had slowed to the
4-percent range but a similar slowing had occurred in the second year of
previous postwar expansions. In the present case, it seemed to reflect the
cessation of rapid rebuilding of inventories rather than any serious
imbalances or lack of forward momentum in the economy. However, there
was room for difference of opinion as to whether or not a satisfactory pace
of expansion would continue spontaneously, or whether some moderate
increase in economic stimulus might be required.
Slower Rates of Inflation
One of the more encouraging features of the economic expansion was
the progress made in controlling inflation. While real output increased
rapidly, the double-digit inflation that crested in 1974 steadily moderated.
Consumer prices rose at slightly less than a 6-percent annual rate in
contrast to a gain of 9.3 percent in fiscal 1975. Wholesale prices rose 5.0
percent in contrast to an 11.6-percent rise in fiscal 1975. Some of the
improvement was due to special factors in the food and fuel area, and it
was disturbing that the wholesale prices of industrial commodities rose at
a 6.5-percent annual rate during the 15-month period, particularly since
even somewhat higher annual rates of increase were being registered by
the end of the period. On balance, however, considerable improvement
had occurred in the inflation area.
The improvement was reflected in a better balance between wage costs
and productivity increases. Output per man-hour in the private business
sector rose at a 4.1 -percent annual rate, well above the meager 1.7-percent
rise during fiscal 1975. Compensation per man-hour, on the other hand,
rose less rapidly, at a 7.8-percent annual rate in contrast to a 10.6-percent
rate in fiscal 1975. As a result, cost-push pressures eased substantially.
Labor costs per unit of output, which had risen at an 8.7-percent annual
rate during fiscal 1975, increased at a 3.5-percent annual rate during fiscal
1976 and the transition quarter.
After sorting through the detailed statistics, it appears that three things
could be said about the inflation problem. First, considerable progress has
been made in moderating inflation pressures, and the economic recovery
that has occurred is directly related to the improvement. Second, despite
this progress, the current 5- to 6-percent rate of inflation is still far too high
and will continue to distort the economy and its financial markets until the
rate of inflation can be returned to the 2- to 3-percent range. Third, and
more broadly, inflation remains the greatest single threat to both the
XXII
1976 REPORT OF THE SECRETARY OF THE TREASURY
sustainability of the current economic expansion and the longer term
stability of the U.S. economy.
The Budget and Fiscal Developments
Recent budgetary experience has been dominated by two major
developments: The strong upward momentum of Federal spending and
large budget deficits because of economic recession. In fiscal 1966,
Federal outlays totaled some $135 billion. By fiscal 1974 spending had
increased to $268 billion. After this doubling in a period of 8 years, Federal
spending then jumped 36 percent in just 2 fiscal years—1974 to 1976.
While some of this sharp increase in the last 2 fiscal years was recession
induced, expenditure increases were spread widely throughout all the
major categories. The rapid momentum of rising Federal spending has
increasingly restricted rational economic choice because the bulk of the
Federal budget, an estimated 75 percent, is considered to be uncontrollable in the technical budgetary sense of the term.
For fiscal 1976 the President initially proposed budget outlays of $349.4
billion. In January 1976 this estimate was raised to $373.5 billion.
Continued efforts were made by the administration during fiscal 1976 to
hold down the growth of Federal spending including the frequent use of
the Presidential veto power. These efforts and other developments held
the fiscal 1976 outlay figure to $365.6 billion—about $8 billion below the
January estimate. Spending in the transition quarter totaled $94.5 billion.
This was $3.5 billion below the January estimate and $7.6 below a midsession review estimate prepared in July 1976. An assumed shift in
spending into the transition quarter did not occur.
Receipts were held down by the recession, and large budget deficits
resulted. Final budget results show a $65.6 billion deficit in 1976 and a
$12.7 billion deficit in the transition quarter. Future budgetary prospects
were clouded by the forward momentum of Federal spending, but the
recovery of the economy was contributing to strong growth in receipts.
Taxation Developments
Tax policy developments reflected the urgent need for both substantial
income tax reduction coupled with spending control and comprehensive
tax reform to promote efficiency and equity and to provide tax simplification.
Temporary tax cuts had been enacted in March 1975 in the Tax
Reduction Act of 1975 and would have expired at the end of calendar
1975. The President proposed in October 1975 a permanent $28 billion
income tax cut for fiscal 1977 tied to equivalent Federal spending cuts.
The program included $20.7 billion in personal income tax reductions
concentrated at low- and middle-income levels and $7 billion of business
tax cuts to encourage investment in productive facilities. But Congress
passed a temporary tax cut in December 1975 of $i8.4 billion to expire in
INTRODUCTION
XXIII
6 months. The President vetoed the bill because in his view it was
inadequate and provided no spending limitation. Congress sustained the
veto. A short-term compromise was immediately enacted in the Reventie
Adjustment Act of 1975 which provided temporary tax reduction and a
spending limitation commitment. The act extended with some modification the 1975 tax cuts and withholding rates for the first 6 months of 1976.
In his 1976 state ofthe Union address, the President renewed his request
for a permanent income tax cut. His fiscal 1977 budget assumed
congressional approval of his tax cut recommendation of $28.1 billion
coupled with $0.8 billion of reduced revenue from other income tax
proposals, $3.3 billion of increased revenues from a proposed social
security tax rate increase, and $2.1 billion of increased revenues from
proposed higher unemployment taxes. The net effect on fiscal 1977
receipts of all tax changes in the budget was estimated to be a net reduction
of $23.4 billion.
Three short-term tax cut extensions were enacted after mid-1976 as
Congress continued to debate the omnibus tax reduction and reform bill,
H.R. 10612. Finally, a $16.8 billion tax cut extension for fiscal 1977 was
enacted in the Tax Reform Act of 1976.
The administration continued to recommend and urge enactnient of
numerous tax reform proposals in fiscal 1976. Proposals were directed at
substantially reducing the number of individuals with high economic
incomes who pay little or no tax, encouraging economic growth through
more capital formation, encouraging job creation, making estate and gift
taxation more equitable^ and helping State and local governments borrow
needed furids. Comprehensive tax reform resulting in a net revenue gain
of $ 1.5 billion iri fiscal 1977 was enacted in the Tax Reform Act of 1976
encompassing many of the administration's recommendations with
congressional modifications.
Overall, the impact on fiscal 1977 budget receipts of tax cut extensions
and reform measures in the 1976 Tax Reform Act was reduced revenues
of $15.3 billion.
Domestic Finances
The financial markets during the 15 months absorbed record amounts
of funds at generally declining interest rates. Occasional tightening actions
by the Federal Reserve in response to flareups in the rates of growth of
the monetary aggregates were followed by periods of more ready credit
accommodation during which interest rates fell to successively lower
levels. By late September 1976, money market rates were fluctuating
around 5 1/4 percent, about 3/8 percent below the level of June 1975. In
the bond markets, the decline in yields on Treasurys was somewhat less
than 3/8 percent, while the decline in yields on corporates and municipals
was considerably greater—nearly 1 percentage point. Nonetheless, by
historical standards, these rates were still very high.
XXIV
1976 REPORT OF THE SECRETARY OF THE TREASURY
The large volume of financing was marked by divergent trends.
Strengthened deiriands for long-term funds, not only on the part of the
Treasury but also for corporate securities and mortgages, were moderated
by continuing weak demand for short-term credit, especially on the part
of the business sector.
Nonfinancial corporations continued the restructuring of their balance
sheets and improved their liquidity through the funding of short-term debt.
Bank loans to nonfinancial corporations declined by about $9 billion, and
although other types of corporate short-term nonfinancial borrowings
(notably, commercial paper and finance company loans to business)
expanded modestly, nonfinancial corporations reduced their short-term
borrowings significantly. At the same time, there were $39.5 billion in net
new issues of corporate and foreign bonds—only slightly below the record
rate reached in fiscal 1975—and net new stock issues expanded to $21
billion.
During fiscal 1976, the reduction in business borrowings from commercial banks, coupled with the slow pace of other bank lending, enabled the
commercial banks to place substantial funds in Treasury securities.
Although the pace of expansion of total bank credit, at about 4 1 /2 percent
for the fiscal year, was relatively slow, commercial bank net purchases of
Treasury securities accounted for about 32 percent ofthe net volume of
Treasury securities issued to the public.
In all. Treasury securities in the hands of the public (that is, excluding
holdings by trust funds, other Government accounts, and the Federal
Reserve) increased by $73 billion during fiscal 1976. These net issues
served to help finance off-budget agency borrowing for Federal credit
programs as well as the Treasury deficit. The Federal Financing Bank
accounted for the bulk of such financing, increasing its loans by $9.1
billion.
Not only commercial banks but also nonfinancial corporations, savings
institutions, and State and local governments, in the course of rebuilding
their liquidity positions, added unusually large amounts to their holdings
of Treasury securities, absorbing in combination about 44 percent of the
net issues to the public. Some Treasury issues attracted widespread
purchases by individuals, bringing net purchases by individuals to about
1.8 percent of the total. Net purchases of Treasury securities by foreign
investors were relatively small.
The Treasury tailored its security offerings to meet investor preferences
and also with a view toward lengthening the average rnaturity of the
marketable debt. Notes and bonds totaling $44.3 billion comprised 55
percent of the net offerings other than special issues to Government
accounts. In May, the first offering was made ofa 10-year note under newly
granted authority. In addition, savings bonds increased by $4.2 billion.
Although the percentage of debt issued to the public in the form of
Treasury bills was considerably lower than in othef recent years, the
INTRODUCTION
XXV
required huge financing operation resulted in a net increase in Treasury
bills outstanding of $32.6 billion.
The municipal bond market was able to absorb a record volume of bond
issues in fiscal 1976, despite a degree of temporary unsettlement
precipitated in part by the New York City crisis. Municipal bond yields,
as measured by the Bond Buyer index, reached a peak of 7.67 percent in
October 1975 but had receded to about 6 3/4 percent by mid-1976.
During the transition quarter, municipal bond offerings remained strong,
but yields continued to decline in line with market trends, reaching 6 1/2
percent in late September 1976.
The pattern of financing in fiscal 1976 was carried over into the
transition quarter. Short-term credit demands rose at a moderately faster
pace even though bank loans to business continued to decline. A
curtailment in corporate security offerings was about offset by stronger
mortgage demands. While Treasury's net borrowings from the public
subsided noticeably from the fiscal 1976 rate, the overall volume of
financing consummated during the transition quarter was at a record rate.
The placement of these heavy financing demands during the 15 months
was facilitated by the surge of funds to savings institutions. Notwithstanding some hesitation early in fiscal 1976, new records were set for inflow
of funds to savings and loan associations, mutual savings banks, credit
unions, insurance companies, and corporate and State and local government pension funds, which altogether totaled $143 billion. In addition,
nonfinancial businesses put some ofthe proceeds of their security offerings
and of their heavy internal flows into credit market instruments. Foreign
investors also supplied some $15 billion in funds to the credit markets, a
rate somewhat below that of several recent years and considerably below
the $21 billion in fiscal 1971. Although the provision of funds by the
banking system remained on the low side ($42 billion), the heavier inflow
of funds to savings institutions was sufficient to provide a ready market for
the enlarged demands for credit without much growth in purchases by
individuals.
INTERNATIONAL DEVELOPMENTS
The world economy underwent substantial changes during the period
under review. At the beginning of July 1975, only the U.S. and Japanese
economies had begun to pull out of their respective recessions. For the
industrial economies as a whole, negative real growth of some 4 percent
had been experienced in the preceding half year but during the last half
of 1975 recovery spread as confidence was rebuilt—in large part due to
the strength ofthe U.S. performance. By the end ofthe first half of 1976
the major economies were growing at annual rates in excess of 7 percent
while the industrial world in total expanded in real terms around 6 percent.
XXVI
1976 REPORT OF THE SECRETARY OF THE TREASURY
As often happens during periods of expansion, ''pauses" in the recovery
process follow high and unsustainable rates of growth. The late summer
months reflected such periods of pause in most of the major economies,
but by the end of September some indications of renewed progress on the
growth front were appearing.
Economic recovery was reflected in a resumption in the growth in both
the nominal and real value of world exports and imports, which turned
upward again in the first and second quarters of 1976, after allowance for
seasonal factors. Trade volumes rose an estimated 13-14 percent after
experiencing declines in the half year leading into the fiscal year.
Equally significant to progress in the recovery of real growth was the
reduction in worldwide inflation rates that took place in the 15-month
period. The global annual rate of inflation, which had already receded
from the peak level reached in November 1974, showed some further
improvement. By May 1976, however, it was still extremely high at 11
percent, as measured by the IMF calculation of 12 months' changes in
consumer prices.
Industrial countries as a group brought down the 12 months' increase
in consumer prices from over 11 percent in the second quarter of 1975,
to about 7 percent in August 1976, though in individual countries there
were wide differences, ranging from 1 1/2 percent in Switzerland to 17
percent in Italy. The U.S. figure was 5.6 percent in August.
Progress was also made in slowing down price advances in the oilexporting countries, and in Australia and South Africa. Slow progress was
made in less industrialized European countries where the rate of price
advance averaged 16 percent in June 1976, and inflation actually became
worse in the oil-importing developing countries as a group, rising to 33
percent in July 1976 (74 percent in the Western Hemisphere in that
month). Although these latter high average rates of inflation were
influenced by hyperinflation in a few countries, there were also mixed
results among countries with less extreme rates of price increases.
Economic recovery also was accompanied by some important shifts in
the pattern of world payments. After allowing for official transfers in the
form of grants, there remained in calendar 1976 about $41 billion of the
current account surpluses of the oil-exporting group which had to be
reflected in the corresponding current deficits of other countries and
financed (as compared with about $40 billion in calendar 1975). However,
it is estimated that OECD (Organization for Economic Cooperation and
Development) countries will account for about $23 billion in 1976, as
against about $6 billion in 1975, and that the net current deficits for the
rest ofthe world, including the state trading countries, will accordingly be
reduced to about $ 18 billion, as against about $34 billion in 1975. Among
individual countries, the current account positions of the United States,
France, Italy, and the Nordic group appear to have softened, while those
of Japan, Benelux, and Switzerland were expected to harden, between the
2 years.
INTRODUCTION
XXVII
Financing ofthe unusually large current account deficits resulting from
the oil price increase has meant that foreign debts to private international
lenders have been increasing much more rapidly than in the years before
1974. Consequently, a number of countries are seeking to reduce their
rates of borrowing by restraining domestic demand, curbing inflation, and
strengthening their current account positions. In doing so, they presumably shift part of their deficits to other oil importers which continue to
attract private capital, given that the OPEC (Organization of Petroleum
Exporting Countries) surplus which must be offset is essentially set by
governments of producer countries rather than by economic factors.
The current impact of these large payments imbalances on the world
economy and the global financial system to some extent has become less
severe as the value of world trade has increased, but each year of large
OPEC surpluses adds to their cumulative effect. In 1974, the ratio to world
imports (cost, insurance, and freight) of the gross current account
imbalances appears to have been in the range of about 10 percent, as
against less than 4 percent in 1973, because ofthe increase in oil prices.
In 1975, this ratio fell to about 7 1/2 percent and in 1976 might be in the
neighborhood of 6 percent, which is still well above the 1973 figure.
International Monetary Developments
Negotiations on reform ofthe international monetary system succeeded
in reaching agreement on future provisions in the IMF Articles of
Agreement relating to exchange arrangements, and on measures to further
move gold from the center ofthe monetary system. The first major revision
ofthe Articles of Agreement ofthe International Monetary Fund since its
inception in 1945 was completed by the Governors ofthe Fund, with the
Secretary acting for the United States. It was then transmitted to member
governments for their formal approval. The revised Articles were
accompanied by a proposed increase in IMF quotas ofabout one-third, to
SDR 39 billion (about $45 billion), after the Interim Committee of the
Board of Governors (in which the United States is represented by the
Secretary of the Treasury) resolved the difficult questions of allocating
new quotas among individual countries. This involved a doubling ofthe
quota shares ofthe oil-producing countries and a corresponding reduction
of the shares of the developed countries, leaving the oil-importing
developing countries with an unchanged share of the quotas in the Fund.
The U.S. share in quotas was reduced, but changes in certain requisite
qualifled majorities mean that future proposals to amend the Articles, or
to increase quotas, cannot become effective without U.S. approval.
The amended IMF Articles will give countries latitude tp apply
exchange arrangements of their choosing. However, this freedom of
national choice as to exchange regimes will be subject to general
obligations applicable to all countries to pursue policies that are necessary
to achieve underlying economic stability, which is recognized to be a
XXVIII
1976 REPORT OF THE SECRETARY OF THE TREASURY
prerequisite for exchange stability. Member countries also undertake,
under the amended Articles, to avoid manipulation of the exchange rate
or, more generally, of the international monetary system in order to
prevent the effective adjustment of payments imbalances or to gain unfair
advantage over other members. The Fund is given responsibility for
overseeing the international monetary system in order to ensure its
effective operation. Moreover, the Fund is directed to exercise 'Tirm
surveillance" over the exchange rate policies of members, and to adopt
specific principles for the guidance of all members with respect to these
policies.
The principal features ofthe understandings reached on gold were: (1)
The official price of gold in the IMF Articles will be eliminated, with the
special drawing right (SDR) taking the place of gold as the unit of account
for the IMF; (2) all requirements to use gold in transactions with the IMF
will be eliminated, and the IMF will be prohibited from accepting gold in
any transaction unless there is an 85-percent majority vote to the contrary;
(3) one-sixth of the Fund's gold (25 million ounces) will be sold over a
4-year period, with the excess of sales receipts over the present official
gold price being channeled to a trust fund for the benefit of developing
countries; also, one-sixth ofthe Fund's gold will be restituted (i.e., sold to
members in proportion to their quotas in the IMF in exchange for currency
at the present official gold price) over the same 4-year period.
Supplementing this agreement, the members of the Group of Ten
industrial countries undertook to observe certain transitional arrangements with respect to their treatment of gold. They agreed not to peg the
price of gold or to increase the aggregate quantity of gold held by the Fund
and the monetary authorities of the Group of Ten, and to respect any
further conditions that were agreed upon by their central banks at regular
meetings. These arrangements will be reviewed in 2 years.
The major decisions on all these matters were reached through an
intensive series of informal and formal international negotiations during
the year in which the Secretary of the Treasury and the Under Secretary
for Monetary Affairs took leading roles. Basic understandings on exchange
rate arrangements under the amended IMF Articles were reached in
bilateral discussions with the Government of France and endorsed by the
heads of state participating in the summit meetings in Rambouillet in
November 1975. These understandings formed the basis for agreement by
the IMF Interim Committee in Jamaica in January 1976. Agreements on
gold and the distribution of quotas were reached at the meeting of the
Interim Committee in August 1975, in Washington.
Legislation authorizing U.S. acceptance of the proposed amendments
to the Articles of Agreement of the Fund and consent to the proposed
increase in the U.S. quota in the IMF was approved by the Congress and
signed by the President in October 1976. The amendment ofthe Fund's
Articles of Agreement and the proposed increase in IMF quotas will
INTRODUCTION
XXIX
become effective, however, only after acceptance ofthe amendments by
60 percent ofthe member countries having 80 percent ofthe voting power.
During 1975-76, access to Fund resources was liberalized in several
ways. Each regular credit tranche was temporarily enlarged by 45 percent,
effective during the interim period preceding the coming into effect ofthe
proposed amendment to the IMF Articles. The IMF's compensatory
financing facility was substantially liberalized in December 1975. And, as
noted above, a trust fund has been established (separate from the IMF but
managed by it as trustee) for the benefit of developing countries.
The special IMF oil facility, under which the Fund borrowed about $8.2
billion for lending to countries in need in 1974-76, was terminated in the
spring of 1976. This action was related to the realization that, while deficit
countries had been given a breathing space by this facility, to meet the
initial impact of higher oil prices, the Fund should now return to its normal
policies of fostering payments adjustment while providing assistance
through its regular procedures, thus helping countries to adjust their
deficits and avoid excessive borrowing to finance payments deficits that
would otherwise continue to pile up too much foreign debt.
The net use of Fund credit rose from about SDR 5 billion ($6.2 billion)
at the end of June 1975 to SDR 12 billion ($13.9 billion) at the end of
August 1976.
National Economic Policies and the Renewed Threat of Inflation
As the world recovery gained momentum in the summer of 1976, it
became clear that inflationary pressures were reviving quickly even
though unemployment in industrial countries was receding slowly. The
Secretary of the Treasury joined with other Finance Ministers and
monetary authorities in endorsing a strategy for sustainable economic
expansion, pointing to the need for caution in the pursuit of expansionary
policies. Such new spending might produce a renewed round of excessive
inflation and a resulting loss of confidence of businessmen and consumers,
thus failing to achieve the desired lasting expansion. This theme was
strongly supported by the Secretary both in Paris at the OECD Ministerial
meeting in June 1976 and by President Ford at the Puerto Rico summit
meeting in June 1976. It received wide acceptance at the annual meeting
of the IMF and World Bank in Manila in October 1976.
Exchange Rate Relationships and World Reserves
During this recovery period the currencies of the advanced countries
continued to be permitted to move against the dollar, either individually,
or jointly, as through the European common margins agreement (the
''snake"). The latter required intervention, often on a substantial scale, to
maintain the basically fixed rates among the participating countries. Also,
a number of countries borrowed abroad on official account or with official
guarantees. In these countries, part ofthe dollar exchange available to the
xxx
1976 REPORT OF THE SECRETARY OF THE TREASURY
market was provided by feeding these governmental receipts into the
market. Increasingly, however, countries began to carry out the broad
objective under the Rambouillet and Jamaica agreements, allowing
exchange rates to reflect underlying conditions in the national economies
rather than intervening officially to resist market forces tending to produce
changes in the exchange rates.
In 1975-76, the Canadian dollar, theGerman mark, the Swiss franc, and
the Japanese yen tended to appreciate in dollar terms while several
currencies, including the French franc, the pound sterling, and the Italian
lira, decreased in dollar value, reflecting relatively high rates of inflation
and large payments deficits. The dollar value ofthe SDR depreciated from
$1,236 at the end of June 1975 to $1,146 at the end of June 1976. At the
end of the transition quarter the dollar value of the SDR stood at $ 1.154.
Gross official reserves of all reporting countries rose from SDR 186
billion in June 1975 to SDR 207 billion ($237 billion) in June 1976, for
an annual rate of increase of 11 percent. About one-third of this accrued
to the oil-exporting countries, and the remainder was divided among the
industrial countries and the developing countries. Thus, less than a fifth
of the current surplus of the oil-exportirig countries was financed by
reported reserve accumulation in these countries as a group, a much
smaller portion than in 1974-75.
International Trade and Raw Materials Policies
As trade and raw materials policies have grown in international
importance in recent years. Treasury's role in both national and international policy formulation has become progressively more active. The need
for coordinated domestic and international policy goals has produced an
increasing emphasis on trade and raw material policy formulation. U.S.
positions on a more open and market-oriented world trading order were
important elements in the Rambouillet and San Juan economic summit
meetings. The United States actively participated in negotiations leading
to a consensus among major trading nations to avoid artificial stimulus of
exports through use of official export credits. As a member of the
interagency Task Force on the Law of the Sea, the Department proposed
a weighted voting system for the International Seabed Authority and
helped develop a financing program for the operating arm of the
Authority.
The East-West Foreign Trade Board, chaired by the Secretary of the
Treasury, continued to monitor trade with the nonmarket economies to
ensure that it remained consistent with U.S. national interests. The Board
has kept a close watch on Soviet grain purchases and the negotiation of
the U.S.-U.S.S.R. Long-term Grain Sales Agreement. In addition. Secretary Simon visited Poland, Yugoslavia, and Romania in June 1976 to
explore ways of strengthening economic, trade, and financial relations
with those states.
INTRODUCTION
XXXI
The Treasury played an active role in formulation of U.S. commodity
policies, providing staff support and policy input to the Commodities
Policy Coordinating Committee, which it cochairs with the State Department, and participating in the interagency Commodities Policy Task
Force.
The multilateral trade negotiations (MTN) underway in Geneva are the
principal means for pursuing the U.S. goal of a more free and open marketoriented system. Positions adopted by the United States in the MTN with
respect to tariffs, subsidies and countervailing duties, safeguards, customs
matters, and special treatment for developing countries have benefited
from active Treasury participation. The Department also helped in
preparation ofthe U.S. generalized system of preferences for developing
countries' exports.
North-South Relations
The UNCTAD IV meeting in Nairobi was of symbolic importance in the
North-South dialog. The United States made a series of concrete proposals
in Nairobi and agreed to participate over the next 2 years in a series of
undertakings to come to grips with key economic issues such as
commodity policy, trade, debt, transfer of technology, and special
measures to assist the poorest nations. While political considerations
sometimes overrode substance at the conference, confrontation was
avoided and agreement was reached on a work program which should
allow developed and developing nations to bring technical expertise to
bear on critical economic issues.
International Investment
During 1975 and 1976, the United States continued its efforts to
maintain a free and open climate for international investment. As a result
of U.S. initiatives, and with active participation by the Treasury, the
member governments of the OECD adopted, in June of 1976, a declaration on international investment and multinational enterprises with the
objective of promoting a stable and open environment for international
investment. In addition and again at a U.S. initiative, the OECD began
discussions aimed at removal of existing impediments to the flow of
international portfolio capital. During 1976, the U.N. Commission ori
Transnational Corporations undertook a comprehensive program designed to lead to the formulation of a U.N.-wide code of conduct for
multinational enterprises.
In March of 1976 President Ford established a Cabinet-level Task Force
on Questionable Corporate Payments Abroad to review the problem of
bribery. As a result of the task force work, in June 1976 the President
announced that he intended to propose legislation to the Congress
requiring reporting and disclosure of certain payments by U.S. businesses
to foreign government officials. In addition, the United States proposed to
XXXII
1976 REPORT OF THE SECRETARY OF THE TREASURY
the United Nations in August 1976 that action be taken toward a
comprehensive international agreement to curb corrupt practices in
international commerce. As a result, an intergovernmental working group
of the Economic and Social Council charged with developing an
international agreement on illicit payments, is expected to report to the
Council in the summer of 1977.
In the spring of 1976, the Treasury completed its benchmark survey of
foreign portfolio investment in the United States, as a part of an overall
administration survey of foreign investment in the United States, required
by the Foreign Investment Study Act of 1974. Also, Congress passed
legislation in September 1976 to create the necessary legal authority to
maintain a regular information collection program with respect to foreign
investment in the United States and U.S. investment abroad.
The Committee on Foreign Investment in the United States, an
interagency group chaired by Treasury officials, was established by
President Ford in the spring of 1975 to coordinate overall policy towards
inward investment. It considered certain proposed investments by foreign
governments in the United States—including an investment by Romania
in the Island Creek Coal Co. and a proposed Iranian investment in
Occidental Petroleum.
International Energy Developments
The most significant international energy developments have been the
increasing solidarity and cooperation among consuming nations, the
initiation of a producer/consumer dialog on energy matters in the Energy
Commission of the Conference on International Economic Cooperation
(CIEC), and the continued dominance by OPEC ofthe world oil market.
As a result of the 1973 oil embargo, 19 industrialized oil-consuming
countries established the International Energy Agency (lEA) to help
coordinate their international energy policies. The lEA has succeeded in
(1) developing an international oil allocation system to ensure adequate
distribution of oil supplies among member countries in the event of
another embargo, and (2) adopting a long-term cooperative program to
promote increased energy production in member countries.
The CIEC was formally inaugurated by a Ministerial meeting in
December 1975. It was agreed that discussion of international economic
issues would take place among delegates from 19 countries representing
the OPEC and nonoil developing countries and 8 representatives of the
developed nations beginning in February of 1976 with the objective of
meeting periodically leading up to a Ministerial conference scheduled for
December 1976.
Discussion of energy issues in CIEC concentrated on the effects of
higher oil prices on world economic progress and the problems of effecting
a smooth transition from a world economy based on hydrocarbon energy
sources to one based increasingly on alternative energy sources. This
INTRODUCTION
XXXIII
commission is the only international forum where oil producers and oilconsuming nations are engaged in a dialog on important energy issues, and
its deliberations are breaking new ground in international economic
relations.
Developing Nations Finance
The Secretary has frequently expressed the U.S. philosophy surrounding
our contribution to the financing of developing-country needs: Development assistance should be thought of not as an international welfare
program to redistribute the world's wealth but as an important element of
an international investment program to increase the rate of economic
growth in developing nations and to provide higher living standards for the
people of every nation.
The United States provides financial assistance to developing nations
both through multilateral channels such as the World Bank group, the
regional development banks, and the IMF, and through bilateral channels
such as the Agency for International Development and Public Law 480.
Multilateral assistance has been accelerated: Congress appropriated
$745.5 million for U.S. contributions to the international development
banks for fiscal 1977, compared with $695.6 million for fiscal 1976. The
World Bank group committed $6.9 billion for development projects in
fiscal 1976, an increase of 13 percent over 1975. Commitment levels of
the Inter-American Development Bank (IDB) rose to $1.2 billion, a 16percent increase, and those ofthe Asian Development Bank increased to
$880 million, a sizable increment. These increases in the commitments of
the international financial institutions can be expected to continue in the
near future.
Repeatedly, the Secretary has stressed the importance of sound
financial policies for the development banks. A step in this direction was
taken when the World Bank adopted a lending rate formula which covers
the cost of funds to the Bank plus its operating costs. Similarly, the IDB
adopted an automatic lending rate formula, and one is under consideration
as well in the Asian Development Bank. These actions will enable the
development banks to continue to have access to capital markets at
favorable interest rate terms. Thus, the banks will be better able to finance
their expanded levels of development lending.
In addition to long-term development financing needs, developirig
nations have requirements for short-term balance of payments financing.
Large current account deficits have been encountered by non-oilexporting developing countries in recent years due to the twin shocks, in
1974 and 1975, of higher oil prices and recession in the industrialized
countries. The international community has responded to the situation in
various ways. With a doubling of net official flows, and an even larger
increase in private flows, the current account deficits of developing
XXXIV
1976 REPORT OF THE SECRETARY OF THE TREASURY
countries have been financed, providing these countries time to undertake
necessary economic adjustments.
In the bilateral sphere, the United States has pursued a number of
programs for financing developing-country needs. The Agency for
International Development committed $2.3 billion in loans and grants and
supporting assistance in fiscal 1976, $200 million less than in 1975. Under
Public Law 480, during fiscal 1976 and the transition quarter. Title I sales
agreements for $914 million were signed, while Title II donations totaled
$247 million. Programs ofthe Overseas Private Investment Corporation
and the Council on International Economic Policy contributed to the
security of private investment flows to developing countries.
The growing foreign indebtedness of developing countries is a matter of
particular concern to the Treasury. On January 30, 1976, the Secretary
submitted to Congress the administration's second annual report on the
external debt of developing countries. The vast majority of loans by the
United States to developing countries are repaid on schedule. However,
rome countries have fallen into arrears on their repayments to the United
States, and the Treasury has taken vigorous action to encourage these
countries to become current on their payments.
Although the Treasury does not believe that generalized debt rescheduling should be employed as a form of foreign assistance, it recognizes that
in a few exceptional cases the official debts of a developing country must
be rescheduled for the economy of that country to remain viable. The
United States signed rescheduling agreements in March 1976 with
Pakistan arid with Bangladesh. In June 1976, the United States entered
into a multilateral understanding with other creditor countries pursuant to
which each country agreed to enter into a bilateral agreement with Zaire
to reschedule certain outstanding indebtedness of Zaire.
Finally, to strengthen U.S. economic and financial relationships with the
countries of the Middle East, the Secretary visited Saudi Arabia, Egypt,
Israel, Syria, and the United Arab Emirates. The Secretary also traveled
to three Latin American nations—Chile, Brazil, and Mexico. The visit to
Brazil settled several bilateral trade disputes, and in Chile the Secretary
warned officials that U.S. support for their economic programs depends
on the Chilean Government's commitment to the protection of human
rights.
Financial Support Fund
The Secretary testified before both House and Senate committees
advocating approval of the Support Fund of approximately $24 billion
negotiated in April 1975 as a temporary safety net, or insurance
mechanism, to strengthen international cooperation in the energy and
economic policies of participating OECD members. It would be used to
supplement other sources of financing ifit developed that these countries
could not obtain elsewhere on reasonable terms the financing they need
INTRODUCTION
XXXV
to avoid introducing restrictive trade policies, capital controls, or unduly,
severe deflation. The Agreement establishing the Support Fund had been
ratified by 15 OECD member countries^ including Germany and Japan, by
the end of fiscal 1976 and 3 other countries have completed domestic
procedures prerequisite to ratification. The Congress did not act on the
bill before adjournment, however.
CONCLUSION
The U.S. domestic economic situation improved substantially during
fiscal 1976 and the transition quarter. Strong gains in production,
employment, and real income were achieved during this period of cyclical
recovery although the unemployment rate remained disturbingly high.
Real growth had fallen slightly below a 4-percent annual rate by the end
of the period, but this seemed to reflect the cessation of rapid rebuilding
of inventories rather than any serious imbalances or lack of forward
momentum in the economy.
One of the more encouraging features of the economic expansion was
the progress made in controlling inflation. While real output increased
rapidly, the double-digit inflation that crested in 1974 moderated to the
5- to 6-percent range. However, this rate was still far too high and inflation
remained the greatest single threat to both the sustainability ofthe current
economic expansion and the longer term stability of the U.S. economy.
In other industrial countries, a period of rapid real growth in fiscal 1976
was succeeded by a pause in the past few months. World trade expanded
vigorously after declining during the recession. Some further progress was
made in reducing excessive rates of inflation in some industrial countries,
but in the rest of the world abnormally high rates persisted. In calendar
1976, OECD countries anticipated current payments deficits totaling
about $23 billion, while the oil-importing developing countries and the
state trading countries together may record about $18 billion in deficits.
A current account surplus of about $41 billion for the group of oilexporting countries was anticipated.
Negotiations on reform of the international monetary system, which
began in 1972, were completed, resulting in the first major revision ofthe
Articles of Agreement of the International Monetary Fund since its
inception in 1945. The United States adhered to the revised Articles and
agreed to an increase in the resources of the IMF of about one-third, to
a total of $45 billion.
The U.S. emphasis on moderate but sustainable economic progress, and
on the avoidance of overstimulatory policies that could re-ignite inflation,
received wide international acceptance. Exploratory discussions on a wide
front were also undertaken in the fields of energy, commodity policies,
international investment, and other matters of concern to developing
countries. The United States maintained the basic posture that commodity
XXXVI
1976 REPORT OF THE SECRETARY OF THE TREASURY
problems and international debt resettlement problems should be examined on a case-by-case basis.
The United States continued to provide financial assistance to developing nations through both multilateral and bilateral channels, based on the
philosophy that development assistance should be considered as an
important element of an international investment program to increase the
rate of economic growth and provide higher living standards for the people
of every nation, and not as an international welfare program to redistribute
the world's wealth.
REVIEW OF TREASURY OPERATIONS
FINANCIAL OPERATIONS
Summary
On the unified budget basis the deficit for fiscal 1976 was $65.6 billion
and $ 12.7 for the transition quarter! Net receipts for fiscal 1976 amounted
to $300.0 billion ($19.0 billion over fiscal 1975), and outlays totaled
$365.6 billion ($41.0 billion over 1975). Transition quarter receipts and
outlays were $81.8 and $94.5, respectively.
Fiscal 1976 borrowing from the public amounted to $82.8 billion as a
result of (1) the $65.6 billion deficit, (2) a $7.8 billion increase in cash
and monetary assets, and (3) a $9.4 billion decrease in other means of
financing. During the transition quarter borrowing from the public totaled
$ 18.0 billion resulting from (1) the $ 12.7 billion deficit, (2) a $2.9 billion
increase in cash and monetary assets, and (3) a $2.4 billion decrease in
other means of financing.
As of June 30, 1976, Federal securities outstanding totaled $631.3
billion, comprised of $620.4 billion in public debt securities and $10.9
billion in agency securities. Ofthe $631.3 billion, $479.7 billion represented borrowing from the public. Federal securities outstanding as of
September 30, 1976, were $645.7 billion, which included $634.7 billion
in public debt securities and $11.0 billion in agency securities. Of the
$645.7 billion, $497.7 billion represented borrowing from the public.
The Government's fiscal operations in fiscal years 1975 and 1976 and
the transition quarter are summarized as follows:
[In billions of dollars]
1975
Budget receipts and outlays:
Receipts
Outlays
1976
TQ.
281.0
300.0
81.8
324.6
-43.6
365.6
-65.6
94.5
-12.7
50.9
-.3
82.8
-7.8
18.0
-2.9
.6
-9.5
2.0
.7
-8.0
-2.1
.1
-2.0
-.5
Budget deficit ( - )
Means of financing:
Borrowing from the public
Increase in cash and other monetary assets ( - )
Other means:
Increment on gold and seigniorage
Outlays of off-budget Federal agencies
Other
;
Total budget financing
-
4
1976 REPORT OF THE SECRETARY OF THE TREASURY
THE BUDGET
$Bil.
365.6
Outlays ^
300
200
Deficit
100
1966
1967
1968
1.969
1970
1971
1972
1973
1974
1975
1976
Fiscal Years
Receipts
Total budget receipts amounted to $300.0 billion in fiscal 1976 and
$81.8 billion in the transition quarter. A comparison of net budget receipts
by major source for fiscal years 1975 and 1976 is shown below, along with
the transition quarter receipts.
[In millions of dollars]
Source
Individual income taxes
Corporation income taxes
Employment taxes and contributions
Unemployment insurance
Contributions for other insurance and retirement
Excise taxes
Estate and gift taxes
Customs duties
Miscellaneous receipts
Total budget receipts
1975
1976
TQ.
122,386
40.621
75,204
6,771
.4,466
16,551
4,611
3,676
6,711
131,603
41,409
79,909
8,054
. 4,752
16,%3
5,216
4,074
8,026
38,801
8,460
21,803
2,698
1,259.
4,473
1,455
1,212
1,612
280,997
300,005
81,773
Projected estimates of receipts to future years, required ofthe Secretary
of the Treasury, are shown and explained in the President's budget.
Individual income taxes.—Individual income taxes reached $131.6
billion infiscai 1976, an increase of $9.2 billion over fiscal 1975. The Tax
Reduction Act of 1975 and the Revenue Adjustment Act of 1975 together
reduced individual tax payments by $9.4 billion in fiscal 1975, by $13.2
billion in fiscal 1976, and by $0.5 billion in the transition quarter.
REVIEW OF TREASURY OPERATIONS
J
Extension of the individual tax cuts, codified in Public Law 94-455,
reduced the transition quarter receipts by an additional $2.5 billion.
Corporation income taxes.—Corporation income taxes increased by $0.8
billion over fiscal 1975 to reach $41.4 billion in fiscal 1976. Legislation
enacted during 1975 reduced corporate tax payments by $0.8 billion in
fiscal 1975, by $2.6 billion in fiscal 1976, and by $0.2 billion in the
transition quarter. Extension of the corporate tax cuts, codified in Public
Law 94-455, further reduced transition quarter payments by $0.3 billion.
Employment taxes and contributions.—Receipts from this source totaled
$79.9 billion in fiscal 1976. The increase in the social security taxable
earnings base from $13,200 to $14,100, effective January 1, 1975,
contributed $1.6 billion ofthe $4.7 billion increase from 1975 to 1976.
Unemployment insurance.—Unemployment insurance receipts increased by 19 percent in fiscal 1976 to $8.1 billion. State tax deppsits at
the Treasury, the largest component in this category, increased by $1.1
billion (or 21 percent), reflecting increased State financing of past
unemployment benefits.
Contributions for other irisurance and retirement.—Receipts in this
category increased by $0.3 billion to a total of $4.8 billion in fiscal 1976
and $1.3 billion in the transition quarter.
Excise taxes.—Receipts of excise taxes in fiscal 1976 were $17.0 billion,
an increase of $0.4 billion over fiscal 1975, and totaled $4.5 billion in the
transition quarter. Fiscal 1976 and the transition quarter figures reflect the
phasing out of the telephone excise tax.
Estate and gift taxes.—The fiscal 1976 increase of $0.6 billion in this
category reflects in part the recovery in the level of stock prices.
Customs duties.—Customs duties increased by $0.4 billion, reaching
$4.1 billion in fiscal 1976.
Miscellaneous receipts.—These receipts totaled $8.0 billion in fiscal
1976, an increase of $1.3 billion over fiscal 1975. Deposits of earnings by
the Federal Reserve System declined by $0.3 billion. This was more than
offset by the inclusion of an additional $1.4 billion of oil import fees (the
constitutionality ofwhich were upheld by the Supreme Court on June 17,
1976). In addition, the totals for fiscal 1976 and the transition quarter
exclude, while fiscal 1975 includes. Government Receipt Clearing
Account F3875, which was reclassified effective with the September 1975
publication of the Monthly Treasury Statement.
Outlays
Total outlays in fiscal 1976 were $365.6 billion (compared with $324.6
billion for 1975). Transition quarter outlays amounted to $94.5 billion.
Outlays by major agency for fiscal years 1975 and 1976 and the transition
quarter are presented in the following table. For details see the Statistical
Appendix.
6
1976 REPORT OF THE SECRETARY OF THE TREASURY
[In miUions of dollars]
1975
^976
3,572
9,725
87,471
112,411
7,488
17,649
9,247
41,177
3,198
3,267
16,575
26,920
-14,098
3,525
12,796
90,160
128,785
7,079
25,742
11,936
44,335
3,759
3,670
18,415
30,112
-14,704
1,221
3,850
22,509
34,341
1,397
5,905
3,003
9,699
1,051
953
3,957
9,153
-2,567
324,601
Funds appropriated to the President
Agriculture Department
Defense Department
Health, Education, and Welfare Department
Housing and Urban Development Department
Labor Department
Transportation Department
Treasury Departmenl
Energy Research and Development Administration!
National Aeronautics and Space Administration
Veterans Administration
Other
;
Undistributed intrabudgetary transactions
365,610
94,473
Totaloutlays
TQ.
I Effective Jan. 19, 1975, the functions of the Atomic Energy Commission were transferred to the Energy Research
and Development Administration.
Cash and monetary assets
On June 30, 1976, cash and monetary assets amounted to $23.7 billion.
The balance consisted of U.S. Treasury operating cash of $14.8 billion
($7.2 billion more than June 30,1975); $ 1.6 billion held in special drawing
rights ($0.3 billion less than fiscal 1975); a net $3.2 billion with the
International Monetary Fund ($1.0 billion more than 1975); and $4.0
billion of other cash and monetary assets ($0.2 billion less than 1975).
Cash and monetary assets totaled $26.6 billion on September 30, 1976.
This amount was comprised of U.S. Treasury operating cash of $17.4
billion; $1.6 billion in special drawing rights; a net $4.0 billion with the
International Monetary Fund; and $3.6 billion of other cash and monetary
assets.
For a discussion of the assets and liabilities in the Treasury's account,
see page 170. Transactions affecting the account in fiscal 1976 and in the
transition quarter are shown separately in the following tables:
Transactions affecting the account ofthe U.S. Treasury, fiscal 1976
[In millions of dollars]
Operating balance June 30, 1975
Excess of deposits or withdrawals ( - ) , budget, trust, and other accounts:
Deposits
Withdrawals ( - ) . . .
Excess of deposits or withdrawals ( - ) , public debt accounts:
Increase in gross public debt
Deduct:
Net discounts ori new issues
Interest increment on savings and retirement plan
securities
Net public debt transactions included in budget, trust,
and other Goverment accounts
Net deductions
Operating balance June 30, 1976
7,589
:..
347,455
409,384
-61,929
87,244
9,899
3,526
4,642
18,067
69,177
.73~.....
14,835
REVIEW OF TREASURY OPERATIONS
/
Transactions affecting the account of the U.S. Treasury, transition quarter
[In millions of dollars]
Operating balance June 30, 1976
Excess of deposits or withdrawals ( - ) , budget, trust, and other accounts:
Deposits
Withdrawals ( - )
Excess of deposits or withdrawals ( - ) , public debt accounts:
Increase in gross public debt
Adjustments to gross public debt:
Net discounts on new issues
Interest increment on savings and retirement plan
securities
Net public debt transactions included in budget, trust,
and other Govemment accounts
Net adjustments ( + )
i 14,828
89,807
101,996
-12,189
14,269
-2,317
-909
3,729
~Z7.
503
Operating balance Sept. 30, 1976
14,773
17,414
• Effective July 1, 1976, "other demand deposits" are excluded from the operating balance.
Corporations and other business-type activities of the Federal Government
The business-type programs which Government corporations and
agencies administer are financed by various means: Appropriations (made
available directly or in exchange for capital stock), borrowings from either
the U.S. Treasury or the public, or by revenues derived from their own
operations. Various agencies have been borrowing from the Federal
Financing Bank, which began operations in May 1974. The bank is
authorized to purchase and sell securities issued, sold, or guaranteed by
Federal agencies.
Corporations or agencies having legislative authority to borrow from the
Treasury issue their formal securities to the Secretary of the Treasury.
Amounts so borrowed and outstanding are reported as liabilities in the
periodic financial statements of the Government corporations and
agencies. In fiscal 1976, borrowings from the Treasury, exclusive of
refinancing transactions, totaled $26.6 billion, repayments were $18.2
billion, and outstanding loans on June 30, 1976, totaled $53.1 billion.
During the transition quarter, borrowings from the Treasury, exclusive of
refinancing transactions, totaled $26.6 billion, repayments were $22.3
billion, and outstanding loans on September 30, 1976, totaled $57.4
billion.
Those agencies having legislative authority to borrow from the public
must either consult with the Secretary of the Treasury regarding the
proposed offering, or have the terms of the securities to be offered
approved by the Secretary.
The Federal Financing Bank makes funds available in accordance with
program requirements to agencies having authority to borrow from the
bank. Interest rates shall not be less than rates determined by the Secretary
of the Treasury taking into consideration current average yields on
outstanding Government or bank securities of comparable maturity. The
bank may charge feps to provide for expenses and reserves. During fiscal
1976 and the transition quarter, all funds loaned by the bank have been
borrowed from the Treasury.
8
1976 REPORT OF THE SECRETARY OF THE TREASURY
During fiscal 1976, Congress granted new authority to borrow from the
Treasury in the total amount of $11.3 billion, adjustments reduced
borrowing authority by $6.8 billion, a net increase of $4.5 billion. During
the transition quarter. Congress granted new authority to borrow from the
Treasury in the total amount of $10.8 billion, adjustments increased
borrowing authority by $1.1 billion, making a total increase of $11.9
billion. The status of borrowings and borrowing authority and the amount
of corporation and agency securities outstanding as of June 30, 1976, and
as of September 30, 1976, are shown in the Statistical Appendix.
Unless otherwise specifically fixed by law, the Treasury determines
interest rates on its loans to agencies by considering the Government's cost
for its borrowings in the current market, as reflected by prevailing market
yields on Government securities which have maturities comparable with
the Treasury loans to the agencies. A description of the Federal agency
securities held by the Treasury on June 30, 1976, and on September 30,
1976, is shown in the Statistical Appendix.
During fiscal 1976 and during the transition quarter, the Treasury
received $2.4 billion and $0.9 billion, respectively, from agencies which
consisted of dividends, interest, and similar payments. (See the Statistical
Appendix.)
As required by Department Circular No. 966, Revised, semiannual
statements of financial condition, and income and retained earnings are
submitted to the Treasury by Government corporations and business-type
agencies (all other activities report on an annual basis). Quarterly
statements showing direct and guaranteed loans, and annual statements of
commitments and contingencies are also submitted. These statements
serve as the basis for the combined financial statements compiled by the
Treasury which, together with individual statements, are published
periodically in the Treasury Bulletin. Summary statements ofthe financial
condition of Government corporations and other business-type activities,
as of September 30, 1976, are shown in the Statistical Appendix.
Government-wide financial management
Improving availability of information on budget and fiscal data.—In
accordance with requirements ofthe Congressional Budget and Impoundment Control Act of 1974 (Public Law 93-344) which amended,the
Legislative Reorganization Act of 1970, Treasury, in conjunction with the
Office of Management and Budget, the Congressional Budget Office, and
others, assisted the General Accounting Office in reviewing a glossary of
terms to provide standard terminology and definitions for use by Federal
agencies in providing fiscal, budgetary, and program^related data and
information to the Congress. The glossary was published in November
1975. Treasury also furnished technical assistance to GAO in its efforts to
develop congressional sourcebooks for executive branch inventories of
REVIEW OF TREASURY OPERATIONS
V
program evaluation activities, recurring reports to the Congress, and
information systems and sources.
Joint Financial Management Improvement Program.—During the fiscal
year, two major projects were undertaken. First, a JFMIP project team
studied the work processes associated with the financial management
programs in the Farmers Home Administration. As a result, a new loan
disbursement procedure was developed. This procedure should result in
interest savings to both the Government and the public by handling the
disbursement of loan funds on a more timely basis. The second project
involves the Bureau of Alcohol, Tobacco and Firearms. JFMIP is working
with ATF to develop a management information system which will provide
Bureau decisionmakers with substantive data in a more efficient manner.
International Monetary Fund.—The Treasury, as U.S. correspondent
with the International Monetary Fund for matters related to the Fund's
government finance statistics project, sent a delegation headed by the
Fiscal Assistant Secretary to the Fund's Seminar on Government Finance
Statistics in Paris on March 23-25, 1976. The Treasury delegation
contributed particularly in the area relating to the definition and treatment
of nonfinancial public enterprises and public financial institutions. The
Fund is working to resolve the institutional questions raised by the
Treasury and other Fund member country delegations.
Selected statistics on finance data for fiscal 1974 are being collected by
the Fund for publication in early spring of 1977. The Treasury furnished
the Fund pertinent fiscal 1974 data for which Treasury is the source, as
well as preliminary Federal sector data for fiscal 1974. With regard to
finalized fiscal 1974 Federal sector and other relative statistical data,
information sources from outside the Treasury sphere will furnish these
data to Treasury for review and passage to the Fund by the end of 1976.
Immediately thereafter, comparable data for fiscal years 1973 and 1975
will be furnished.
Emergency Loan Guarantee Board
The Secretary of the Treasury is Chairman of the Emergency Loan
Guarantee Board, a three-man board consisting also of the Chairman of
the Board of Governors ofthe Federal Reserve System and the Chairman
of the Securities and Exchange Commission. The Board, established by
lawin August 1971 (15 U.S.C. 1841-1852), wasauthorized, upon making
certain specified findings, to guarantee private bank credit to major
business enterprises in an aggregate amount of up to $250 million. The
Board's authority to enter into any new guarantee agreements terminated
in December 1973.
The Board submitted a special report to Congress on June 28, 1973,
which contained a description of the Board's operations together with a
recommendation that the guarantee program not be continued beyond its
termination date. Termination of the guaranteed loan program does not
10
1976 REPORT OF THE SECRETARY OF THE TREASURY
affect the Board's ability to carry out its obligation to Lockheed Aircraft
Corp., the only borrower.
On October 9, 1975, the Board submitted its fourth annual report to
Congress for the year ended July 31, 1975. In accordance with the
requirements of the Emergency Loan Guarantee Act, the report fully
describes the Board's operations during the year with focus on Lockheed
Aircraft Corp. A fifth annual report is forthcoming for the period August
1, 1975, through September 30, 1976.
CAPITAL MARKETS AND DEBT MANAGEMENT
Capital Markets Policy
The progress made toward reduction in the growth of inflation during
fiscal 1976 was reflected in the improved health of U.S. capital markets
in general, and equity markets in particular. While this improvement in the
capital markets was gratifying, concern remained as to the ability of firms
to raise new equity capital through these markets. In this regard, the
Treasury continued its efforts to develop tax and regulatory policies which
would aid in the recovery of our capital markets and promote wider access
to equity markets in particular. Included among these efforts was the
Department's support for passage of comprehensive financial institution
reform, embodied in the Financial Institutions Act of 1975, as well as
participation in the implementation ofthe Securities Acts Amendments of
1975 and development of a central market system. Additionally, the
Department continued its review of the Glass-Steagall Act restrictions on
securities activities of commercial banks and released an issues paper on
this topic entitled "Public Policy Aspects of Bank Securities Activities."^
In an effort to improve the Department's capital market operations, and
in recognition of the interrelationship between the Department's debt
market activities and its activities in the areas of equity market development and financial institutions reform, the Secretary created the Office of
the Assistant Secretary (Capital Markets and Debt Management). The
responsibilities of the Assistant Secretary (Capital Markets and Debt
Management) include the traditional policymaking issues associated with
the management of Treasury debt market activities, including Federal
Financing Bank activities, as well as the legislative and policymaking issues
dealing with corporate debt and equity market activities and municipal
debt market regulation.
iSee exhibit 16.
REVIEW OF TREASURY OPERATIONS
11
Federal Debt Management
In fiscal 1976 the Treasury financed a record deficit in an atmosphere
of overall economic recovery and increased private demands for credit.
Over the year as a whole, iridustrial production and housing improved,
employment and incomes were up, and the rate of unemployment
declined. Despite the improvement in economic activity, and the accompanying increase in total credit demands, inflation receded and market
interest rates declined somewhat over the course of the year. In this
relatively favorable financing climate, the Treasury refunded $26.1 billion
of maturing coupon securities privately held and raised $79.6 billion of net
new money in the private market. The increase in public debt outstanding
for the year was a record $87.2 billion, which surpassed the $61.8 billion
previous high of fiscal 1944 by $25.4 billion.
The Treasury acted aggressively in 1976 to lengthen the maturity
structure of the debt, thus avoiding excessive refunding requirements in
the near future which would compete with private borrowings and inhibit
the expansion of private credit essential to finance the economic recovery.
Debt restructuring was achieved primarily by (1) regular quarterly issues
of long-term bonds and 7- to 10-year notes, and (2) regular issues of
2-, 4-, and 5-year cycle notes.
Total offerings of coupon issues to private investors in fiscal 1976 by
maturity area were: $27.8 billion maturing within 2 years, $36.1 billion
maturing in 2 to 7 years, $4.7 billion in the 7 to 10 year range, and $3 billion
maturing in over 10 years.
To develop a broad market for the coupon financings of the size and
frequency necessary to accomplish significant debt lengthening, the
Treasury made use ofthe fixed-price subscription technique twice in fiscal
1976 and once during the transition quarter. In these offerings the price
and interest coupon were set at the time of the announcement in order to
elicit a large response from small investors. In February 1976, $6 billion
of 7-year notes were sold to private investors, and in May and August 10year notes were sold to private investors in amounts of $4.7 billion and $8
billion, respectively.
The Treasury achieved substantial ''regularization" of coupon issues in
fiscal 1976 by continuing its issues of 2-year cycle notes and by establishing
new 4- and 5-year note cycles. The 2-year notes mature at the end ofeach
month, 4-year notes at the end of each quarter, and 5-year notes at the
middle of each quarter.
The shift in 1976 from short-term bill financing to longer term coupon
financing resulted in a reversal of the 10-year decline in the average
maturity of the debt. The average length of the privately held Treasury
marketable debt had steadily declined from 5 years 4 months in June 1966
12
1976 REPORT OF THE SECRETARY OF THE TREASURY
MARKET YIELDS AT CONSTANT MATURITIES 1971-1976^
I IIIIII II M I I IIIII I IIi ll r I IIIII III 1 I I IIIIIII III 1 III IIIII I IIM II III II I M
' Monthly averages of daily market yields of public debt securities. Bank discount rates of Treasury bills.
to 2 years 4 months in February 1976, but increased to 2 years 9 months
by the end of the transition quarter.
Financing operations
Fiscal 1976 began amid evidence that recessionary forces in the
economy were dissipating. Following five consecutive quarters of.significant decline, economic activity turned around in the second quarter of
calendar 1975 and real GNP showed a modest increase of 1.6 percent at
an annual rate, the first increase since 1973. In addition, housing starts had
improved modestly and some progress had been made in reducing the
backlog of unsold homes, but business fixed investment spending
continued to decline. However, total employment improved for the third
successive month in June 1975 and the unemployment rate declined to 8.6
percent ofthe labor force, down from 9.2 percent in May. On the inflation
front the latest evidence indicated that the deceleration in inflation which
began in the fourth quarter of 1974 had extended into the April-June 1975
period.
In the money and capital markets short rates had progressively declined
over the course of fiscal 1975, while intermediate and long rates rema;ined
relatively high, but at the start of fiscal 1976 all rates were advancing.
Federal furids rates were moving higher, and higher yields were posted on
all maturities of commercial paper and on large certificates of deposit. In
addition, major commercial banks had boosted their prime lending rate by
- REVIEW OF TREASURY OPERATIONS
13
1/2 percentage point to 7 1/2 percent. This was the first increase in the
prime rate since July 1974, when the rate reached a record 12 percent
before falling steadily to 7 percent in June 1975. At this time, yields on
Treasury securities were increasing primarily because of uncertainty about
the course of monetary policy and the heavy Treasury financing requirements.
The Treasury ended fiscal 1975 with an operating cash balance of $7.6
billion, the lowest yearend level since the $5.9 billion at the end of fiscal
1969. To meet seasonal new cash needs, about $4.9 billion of new cash
was raised in July through increases in each ofthe five regular weekly bill
auctions and the 52-week bill auction. In addition, $3.3 billion of new
money was raised in July through the sale of two coupon issues, a 4-year
note and a 2-year note.
The 4-year note, which had been auctioned in June for payment in July,
was the Treasury's first issue of an end-of-quarter 4-year cycle note. The
note was auctioned at an average yield of 7.83 percent with the coupon
set at 7 3/4 percent. Total tenders received amounted to $5.4 billion of
which the Treasury accepted $1.8 billion. Commercial banks were allotted
$ 1 billion, or 54 percent ofthe issue. Response to the auction of the 2-year
note was favorable with tenders from the public again totaling $5.4 billion.
The Treasury accepted $1.5 billion at an average yield of 7.52 percent and
a coupon of 7 1/2 percent. Dealers were awarded $0.8 billion, or nearly
51 percent of this issue. Following this auction, rates increased due to the
lack of secondary market interest in the new notes and in anticipation of
the higher yields which were believed to be needed to successfully
complete the Treasury August refinancing.
The terms ofthe August financing were announced on July 23 with the
Treasury indicating that it would refund $4.8 billion of notes privately held
maturing on August 15, 1975, and raise $1 billion in new cash with the
auctioning of three new securities.
The new securities offered were $3 billion of 2 3/4-year notes, $2 billion
of 7-year notes, and $0.8 billion of 25-year bonds. Response to the
auctions was quite favorable. On July 29 the Treasury received $5.7 billion
of tenders for the $3 billion of 2 3/4-year notes, including $0.9 billion in
noncompetitive tenders. Nearly $3.1 billion was accepted at an average
yieldof 7.94percentwith a 7 7/8 percent coupon. Commercial banks were
allotted $1.8 billion, or 60 percent ofthe issue. The next day about $3.7
billion of tenders were received from the public for the $2 billion of 7-year
notes. For this issue, tenders as low as $1,000 were acceptable. The $2
billion of accepted tenders included $0.3 billion of noncompetitive
tenders. The average yield was 8.14 percent which resulted in a coupon
set at 8 1/8 percent. Commercial banks and dealers combined took 81
percent of the issue with banks taking 42 percent, or $847 million, and
dealers $793 million, or 39 percent. In the final part of the refunding
private investors submitted $2 billion of tenders for the $0.8 billion of 25-
14
1976 REPORT OF THE SECRETARY OF THE TREASURY
Offerings of marketable Treasury securities excluding refunding of regular bills,
fiscal 19/6 and transition quarter
[In millions of dollars]
Cash offerings
Date
TQTT
Apr. 1
July 9
July 31
Aug. 15....
Aug. 15....
Aug. 15....
Aug. 29....
Sept. 4
Sept. 30....
Oct. 1
Oct. 7
Oct. 22
Oct. 31
Nov. 17....
Nov. 17....
Dec. 31
1976
Jan, 6
Jan. 26
Feb. 2
Feb. 17
Feb.17
Feb. 17
Mar. 3
Mar. 17....
Mar. 31 ....
Apr. 1
Apr. 5
May 17
May 17
May 17
June 1
June 10
June 30
Description
For new
money
For
refunding
Allotted to
Federal
Reserve and
Gov't
accounts
Average
auction yield
(percent)
NoTF.s AND B O N D S
1 1/2 percent note, Apr. I,
1980 1
7 3/4 percent note, June 30,
1979
7 1/2 percent note, July 31,
1977
7 7/8 percent note. May 15,
1978
8 1/8 percent note, Aug. 15,
1982
8 3/8 percent bond. Aug. 15,
1995-2000
8 1/4 percent note, Aug. 31,
1977
:
8 1/2 percent note, Sept. 30,
1979
8 3/8 percent note, Sept. 30,
1977
1 1/2 percent note, Oct. 1,
1980 1
8 percent note, Feb. 28.
1978
8 1/8 percent note. Dec. 31,
1978
7 1/2 percent note, Oct. 31,
1977
,
7 7/8 percent note, Nov. 15,
1982
8 3/8 percent bond, Aug. 15,
1995-2000
7 1/4 percent note, Dec. 31,
1977
,
7 1/2 percent note, Dec. 31,
1979
7 3/8 percent note. May 15,
1981
6 3/8 percent note, Jan. 31,
1978
7 percent note, Feb. 15,
1979
8 percent note, Feb. 15,
1983
8 1/4 percent bond. May 15,
•2000-05
6 5/8 percent note, Nov. 30,
1977
...,,
7 1/2 percent note. Mar. 31,
1980
6 3/4 percent note. Mar. 31,
1978
1 1/2 percent note, Apr. 1,
19811
7 3/8 percent note, Feb. 15,
1981
6 1/2 percent note, Apr. 30,
1978
7 7/8 percent note. May 15,
1986
7 7/8 percent bond, Feb. 15,
1995-2000
7 1/8 percent note, May 31,
1978
7 5/8 percent note, June 30.
1980
6 7/8 percent note, June 30,
1978...
Total notes and bonds...
(•)
1,782
1,782
7.83
1,516
7.52
535
2,516
1,372
4.423
7.94
353
1.663
902
2,918
8.14
140
661
313
1.114
8.44
1,516
2.021
8.25
2,081
8.54
1.930
3,226
8.44
2
2
10
2,011
2,081
1,263
2,110
2,115
2,517
2,517
8.14
3,156
3.156
7.55
8.10
141
384
2T902
7.92
1,001
150
1,151
8.23
212
2,765
7.28
2,006
2,006
7.50
2,020
2,020
7.40
1,053
925
1.500
1.397
189
2.511
6.49
7.05
1,666
1,426
1,600
4.692
3,244
2.775
1,939
7,958
217
185
215
617
8.09
2,628
2,628
6.62
2.069
2.069
7.54
3.162
6.76
922
2.143
(•)
(*)
2,628
2.628
7.38
6.61
1,086
1,188
300
2,574
2,267
2,480
472
5,219
358
393
117
868
8.19
1,043
1,442
82
2,567
7.16
2.185
2,185
7.71
640
3,331
6.99
45,563
26,077
9.084
80,724
15
REVIEW OF TREASURY OPERATIONS
Offerings of marketable Treasury securities excluding refunding of regular bills,
fiscal 1976 and transition quarter—Continued
[In millions of dollars]
Cash offerings
Date
For new
money
Description
For
refunding
Allotted to
Federal
Reserve and
Gov't
accounts
•Total
Average
auction yield
(percent)
BILLS (MATURITY VALUE)
Change in offerings of
regular bills:
7975
July-September
October-December
14,234
12,678
14.234
12.678
7.243
60
7,243
60
34,215
34 215
1,000
1.000
849
849
1976
January-March..
April-June
Total change in regular
bills
Other bill offerings:
1975
Aug. 8
6.280 percent, 18-day.
maturing Aug. 26. 1975..
6.175 percent, 13-day,
maturing Sept. 18, 1975.
6.156 percent, 20-day,
maturing Sept. 25, 1975.
5.823 percent, 139-day.
maturing Apr. 22. 1976..
5.220 percent, 10-day.
maturing Dec. 18, 1975..
5.140 percent. 18-day,
maturing Dec. 26, 1975..
Sept. 5
Sept. 5
Apr. 8..
June 8 .
602
602
601
601
2,503
2,503
2.010
2,010
10.267
Total offerings—fiscal
1976
Dec. 8
2,002
Total other bill offerings...
Dec. 8
700
2.002
4.834 percent, 14-day,
maturing Apr. 22, 1976..
5.520 percent, 9-day,
maturing June 17, 1976..
Dec. 5
700
90.045
9,084
NOTES A N D BONDS
Apr. 1
July 9
July 30
Aug. 16
Aug. 16
Aug. 16
Aug. 31
Sept. 14
Sept. 30
,
1 1/2 percent note, Apr. 1,
19811
7 5/8 percent note, Aug. 15.
1981
6 7/8 percent note. July 31.
1978
6 7/8 percent note. Aug. 15,
1979
8 percent note, Aug. 15,
1986
8 percent bond, Aug. 15. .
1996-2001
6 5/8 percent note, Aug. 31,
1978
6 7/8 percent note, Sept. 30,
1980
6 1/4 percent note, Sept. 30.
1978
:.:.
Total notes and bonds..
BILLS (MATURITY
(*)
2.586
2,586
7.63
2,855
2,855
6.95
6.91
1,370
919
700
2.989
4,811
3,228
1,476
9,515
588
395
592
1.575
8.01
1.298
1.597
54
2.949
6.67
2.141
2,141
6.93
1,188
3,195
27,805
6.30
16,837
VALUE)
Change in offerings of
regular bills:
July-September
Total change in regular
bills
Total offerings—transition
quarter
7,820
3,148
• Less than $500,000.
I Issued in exchange for 2 3/4 percent Treasury bonds, investment series B-1975-80.
28,112
16
1976 REPORT OF THE SECRETARY OF THE TREASURY
year bonds which were auctioned on July 31, at an average yield of 8.44
percent with a coupon set at 8 3/4 percent. Dealers acquired $0.5 billion,
or over 58 percent of the offering.
At the time of the August refunding announcement, the Treasury also
disclosed its projected new cash needs for the last half of calendar 1975,
estimated to be $41 billion. This was $3 billion more than previously
announced in mid-June. Although the August refunding package was
generally in line with market expectations, some investors were surprised
at the $3 billion upward revision of the Treasury's financing needs in the
second half of 1975.
In order to meet the major part of its new money requirements through
the first week of September, the Treasury indicated that an additional $3.5
to $4 billion would be borrowed in late August and early September
through issues of 2- and 4-year notes, and $3 to $3.5 billion would be raised
between mid-August and mid-September by additions to the regular
weekly bill auctions. As it turned out, the Treasury raised $4.6 billion of
new money through Treasury bills in August, $3.6 billion from increases
in regular weekly bill auctions and $ 1 billion from an 18-day bill added to
outstanding bills maturing on August 26. The large supply of Treasury
securities as well as expectations that the supply would continue to be
heavy throughout the year reduced investor interest in the auctions ofthe
two new coupon issues.
The first ofthe two cash offerings in August was a 2-year note auctioned
on August 14 at an average yield of 8.25 percent. This was 75 basis points
above the average yield in the July auction of securities of comparable
maturity. The Treasury accepted $2 billion of the $5 billion in tenders
submitted by the public, including $0.5 billion of noncompetitive tenders:
The coupon was set at 8 1/4 percent. Commercial banks were allotted $ 1.2
billion, or nearly 60 percent of the issue.
The second of the cash offerings in August was a 4-year 1-month note
auctioned on August 21 for payment September 4. This was the second
of the Treasury's 4-year cycle notes. This auction also encountered
investor resistance and resulted in an average yield of 8.54 percent, the
highest rate on a Treasury note in over a year. About $2.1 billion of the
$4.4 billion in public tenders was accepted, including 90 percent of the
amount of notes bid for at the highest yield and $0.5 billion of
noncompetitive tenders. The interest rate on the notes was set at 8 1/2
percent. Commercial banks and dealers acquired 72 percent ofthe issue,
with $1 billion, or 50 percent, allotted to commercial banks and $448
million, or 22 percent, awarded to dealers.
The cautious atmosphere that prevailed in the financial markets in
August carried over into September as investor uncertainty was largely
influenced by the large financing needs of the Treasury, the continuing
financial crisis in New York City, and signs that economic activity was
perhaps recovering faster than expected, which gave rise to growing
REVIEW OF TREASURY OPERATIONS
17
concern about renewed inflationary pressures. During the month, shortterm interest rates changed very little with rates on Treasury bills
fluctuating in a narrow range. However, yields on Treasury couponbearing securities rose slightly.
September 3 brought the Treasury announcement of two cash management bills totaling $ 1.5 billion to be auctioned on September 4 and issued
on September 5. These cash manageme^nt bills were reopenings of
outstanding bills maturing in 13 and 20 days. Investors submitted $3 billion
of tenders for the $0.8 billion of 13-day bills accepted at the average rate
of 6.29 percent and $3.2 billion of tenders for the $0.7 billion of 207day
bills accepted at the average rate of 6.28 percent.
On September 10, the Treasury announced its cash requirements for the
remainder of the year and its financing plans for September. With
expenditures running ahead of earlier projections and having decided to
maintain a higher average cash balance, the Treasury raised its estimates
of needed financings in the second half of 1975 to $44-$47 billion, $3-$6
billion more than the $41 billion figure estimated in August.
The Treasury's September financing plans called for $4 billion in new
cash to. be raised by adding $ 1 billion to the refunding ofthe $2 billion of
maturing 2-year notes, by the addition of $ 1 billion to the auction of 52week bills, and by the auction of $2 billion of 29-month notes. The
announcement had a depressing effect on the coupon niarket initially.
However, in the September 16 auction of 2-year notes, an unexpectedly
large amount of noncompetitive tenders resulted in about 45 percent of
the $3.2 billion issue being purchased by individual investors and smaller
financial institutions. This resulted in a relatively small amount allotted to
dealers, which left the notes in a favorable trading position. Total tenders
received amounted to $6.9 billion of which $1.4 billion represented
noncompetitive bids. The average yield of 8.44 percent was 19 basis points
above the average yield at the auction of similar notes a month ago. The
coupon set on this issue was 8 3/8 percent.
The improved market tone following the auction was reinforced by the
release ofthe Consumer Price Index for August which showed a rise at only
a 2-percent annual rate, the smallest monthly increase in 3 years. In the
auction of the 29-month note on September 24 for payment on October
7, bidding was aggressive and resulted in an average yield of 8.10 percent
and a coupon of 8 percent. The Treasury accepted $2.1 billiori ofthe $3.9
billion of tenders. Noncompetitive bids from individuals and smaller
financial institutions again accounted for a sizable proportion ofthe issue,
about $1.1 billion. Response to the sale ofthe September 52-week bill was
good, and the Treasury accepted $1.9 billion of the $5.2 billion of
submitted tenders, $1.1 billion of which was for new money. In addition,
another $2.1 billion of new money was raised during the month through
increases in the regular weekly bill auctions.
18
1976 REPORT OF THE SECRETARY OF THE TREASURY
In October, interest rates in the money and bond markets fell sharply
as Federal Reserve monetary policy eased and the Treasury revealed that
its rernaining debt financing for the year would be easy to manage. Over
the course of the morith, prices on Treasury coupon issues improved
substantially, helped in part by increased investor preferences for highquality securities and by moderate business financing needs.
In the October 7 auction of 38-month notes the average yield was 8.14
percent. The Treasury accepted $2.5 billion ofthe $3.3 billion in tenders
and set the coupon at 8 1/8 percent. Commercial banks and dealers
accounted for 85 percent ofthe issue, 56 and 29 percent, respectively. At
midmonth, the auction of $3 billion of 2-year notes resulted in an average
yield of 7.55 percent. This was 89 basis points lower than the yield on $3
billion of 2-year notes auctioned on September 16. The Treasury accepted
$3.2 billion, including $0.6 billion of noncompetitive bids, and set a
coupon of 7 1/2 percent.
On October 22, the Treasury announced that its borrowing requirements for the remainder of 1975 would amount to between $8 billion and
$ 11 billion of new cash with $1.1 billion to be raised in auctions of notes
and bonds by the end of October in connection with the November
quarterly refunding. Another $0.5 billion to $ 1.5 billion would be obtained
by the sale of coupon issues later in the year, and the remaining $5.5 to
$8.5 billion would be raised as additional amounts in Treasury bill
auctions. Despite this potential increase in the supply, bill rates, which had
declined throughout the month, continued to decline and fell 95 to 160
basis points in October. For the month as a whole, the Treasury raised $4.2
billion of new money frorh bills, $1.1 billion from the 52-week bill and $3.1
billion from additions to regular weekly bill auctions.
The November quarterly refunding consisted of an offering of $2.5
billion of 7-year notes and $ 1 billion of 24-year 9-month bonds to refund
$2.4 billion of notes held by the public maturing November 15 and to raise
$1.1 billion in new cash. The long bond was a reopening of the 8 3/8
percent bonds maturing in August 2000. The refunding offering was fairly
iri line with what market participants expected, and both issues were very
well received.
The 7-year notes were auctioned October 29 to yield 7.92 percent with
the coupon set at 7 7/8 percent. Total tenders received amounted to $4.5
billion and the Treasury accepted $2.5 billion, including $0.4 billion of
noncompetitive bids. Commercial banks acquired $1.1 billion, or 45
percent, and dealers were awarded $1.0 billion, or 41 percent. The next
day the $ 1 billion of 24-year 9-month bonds was auctioned at an average
yield of 8.23 percent. Total tenders received for the issue amounted to
$2.2 billion. Dealers acquired nearly 70 percent ofthe issue. With this sale
of $ 1 billion of long bonds the Treasury had used nearly all of its authority
to borrow from the public up to $ 10 billion in long bonds without regard
to the 4 1/4-percent interest rate ceiling.
REVIEW OF TREASURY OPERATIONS
19
Interest rates in the money and bond markets stabilized in November
after dropping sharply in the previous month. While slightly easier
conditions were preserit in the Federal funds market, reports of very large
weekly increases in the money stock produced doubts that the monetary
authorities would promote further declines iri interest rates in the near
term. Although th^ Federal Reserve did not alter its stance, the market
looked for an eventual tightening. As a result, investors marked time arid
interest rates declined no further. Events in the troubled municipal bond
sector also aided in stabilizing rates as two favorable developments helped
to ease the New York City crisis. The State legislature passed a plan
designed to avoid a New Vork City default on its maturing notes, and
President Ford stated that he would propose legislation to provide shortterm loans to the city to be administered by the Treasury.
During the month, the Treasury met its cash needs by increasing the size
of its regular weekly bill auctions and the 52-week bill auction. For the
month $2;8 billion was raised from the regular weekly bill auctions and
$1.2 billion from the 52-week bill auction. At the end ofthe month the
Treasury announced plans to raise $3.2 billion of new money in the
Treasury bill market in early December through auctions of $2 billiori of
139-day cash mariagement bills on December 2, and through auctions of
$0.6 billion of 10-day cash management bills, and $0.6 billion of 18-day
cash management bills on December 5.
interest rates rose in early December, but declines later in the month
more than offset earlier increases. The continued concern of market
participants that the Federal Reserve might tighten money market
conditions and the large volume of new corporate and U.S. Government
issues contributed to the upward pressure on rates.
The 139-day bills auctioned on December 2 represented an additional
amount ofthe 26-week bills dated October 23, 1975, due April 22, 1976.
About $5.3 bilHon of public tenders was received and the Treasury
accepted $2 billion at an average yield of 5.82 percent. In the auction held
on December 5 the average yield was 5.22 percent on the $0.6 billion of
10-day bills and 5.14 percent on the $0.6 billion of 18-day bills. Iri additiori
to the new money raised through cash management bills, on December 9,
the Treasury announced that $3 billion of new cash would be raised
through coupon-bearing obligations during December. This financing
involved an auction df $2.5 billion of 2-year notes on December 16 to
refund $1.5 billion of maturing notes held by the public and to raise $1
billion in new cash, and an auction of $2 bilHon of 4-yeai- notes on
December 22. The offerings were larger than some market participants
had anticipated so rates on Treasury coupons inched upward through midDecember as dealers reduced their inventories of seciirities in preparation
for the auctions.
Response to the auction of 2-year notes was favorable and $1.1 billion
was raised in new cash. Tenders from the public amounted to $4.3 billion.
20
1976 REPORT OF THE SECRETARY OF THE TREASURY
The Treasury accepted $2.6 billion, including $0.7 billion of noncompetitive tenders, at an average yield of 7.28 percent. The coupon rate was set
at 7 1/4 percent. Commercial banks were awarded $1.6 billion, or 63
percent of the issue, while dealers received $0.4 billion, or 17 percent. The
4-year nofe^ were auctioned on December 22 for paymerit on January 6,
1976. The auction attracted $4.3 billion of public tenders with the
Treasury accepting $2 billion at the average yield of 7.50 percent and an
identical 7.50 coupon. Commercial banks and dealers were awarded 84
percent ofissue, with $ 1 billion, or 50 percent, going to commercial banks
and $0.7 billion, or 33 percent, to dealers. Excluding this end-of-quarter
4-year cycle note paid for in January, gross market borrowing from private
investors amounted to $59.2 billion in the July-December 1975 half of
fiscal 1976. Treasury bills accounted for $28.9 biUion and coupon
securities $30.3 billion. On a net basis the Treasury raised $48.6 billion
of new money from private investors with Treasury bills accounting for
$28.9 billion and coupon securities $19.7 billion.
At the end of the first half of fiscal 1976, business statistics continued
to show that the cyclical recovery in economic activity was improving and
that the pace of recovery had picked up toward yearend, following a
marked slowdown in the fall. In the bond market yields were well below
their levels of November. Money market rates, meanwhile, had dropped
back to the levels of last spring. Federal funds and 90-day Treasury bills
were both around 5 1/8 percent, while 3-month commercial paper was
down to around 5 3/4 percent and the prime rate was cut to 7 1/4 percent.
In January interest rates continued to fall sharply, particularly shortterm rates, with some rates falling,to their lowest levels in more than 3
years. When the Federal Reserve reacted to the sluggishness ofthe money
supply growth by pushing the Federal funds rate down further to 4 3/4
percent, money market rates continued their steep descent. The Federal
Reserve discount rate was lowered from 6 percent to 5 1/2 percent, and
the prime rate was reduced first to 7 percent and .later to 6 3/4 percent.
Rates on Treasury bills continued their recent sharp declines despite
sizable additions to outstanding bills through increases in regular weekly
auctions totaling $2.7 billion in new money: Rates on the 3-month
Treasury bill dropped almost steadily over the month. On January 26, the
average issuing rate was 4.76 percent, about 45 basis points below the rate
set at the final auction in December and the lowest rate since the auction
of November 6, 1972. The 52-week bill auctioned on January 7, at 5.58
percent, down 86 basis points from the yield at the December 10 auction,
raised $1.1 billion in new cash.
Yields ori coupon securities, however, reversed course before midmonth as market participants were concerned about the pace of recovery
and the heavy borrowing needs of the Treasury. As a consequence, the
Treasury's two-part offering in January totaling $4.5 billion to refund $ 1.6
REVIEW OF TREASURY OPERATIONS
21
billion of maturing issues and to raise $2.9 billion of new cash was given
an unenthusiastic reception.
The Treasury's January financing plans called for the auction of a 5-year
4-month note, the first issue in the Treasury's 5-year note cycle, and a 2year note. In the auction ofthe longer note on January 13, the Treasury
accepted $2 billion ofthe $3.3 billidn ofpublic tenders at the average yield
of 7.40 percent and set a coupon rate of 7 3/8 percent. Commercial banks
and dealers acquired most ofthe issue, $1.1 billiori, or 55 percent, and $0.7
billion, or 32 percent, respectively. The shorter 2-year note was auctioned
on January 14 to refund $1.6 billion of bills, $1.4 billion of which was held
by the public, and raise $0.9 billion in new cash. The auction drew $3.6
billion of tenders and the Treasury accepted $2.3 billion at the average
yield of 6.49 percent and a coupon rate of 6 3/8 percent. To get the desired
$2.3 billion, the Treasury accepted 89 percent ofthe notes bid for at the
highest yield of 6.51 percent. Again commercial banks and dealers
acquired most of the issue—$1.3 billiori, or 54 percent, by commercial
banks and $0.6 billion, or 26 percent, by dealers.
On January 27 the Treasury announced its expected borrowing
requirements for the first half of 1976 as well as the offerings in its
February financing operation. The Treasury revealed it expected to
borrow between $35 billion and $40 billion in the market during the first
6 months of 1976 and in its February financing it intended to refund $4.3
billion of maturing publicly held debt and raise about $2.5 billion in new
money. To be auctioned were $3 billion of 3-year notes, $3.5 billion of 7year notes, and $0.4 billion additional outstanding 8 1/4 percent bonds
maturing in 2005 (which exhausted the remainder of the Treasury's
authority to issue $10 billion of bonds not subject to the 4 1/4-percent
ceiling).
In auctions on February 5, the Treasury sold $3.1 billion of 3-year notes
at an average yield of 7.05 percent with a coupon rate set at 7 percent,
and $0.4 billion of 29-year 3-month 8 1/4 percent bonds at an average
yield of 8.09 percent. Small investors accounted for $0.5 billion of the
notes and $25 million ofthe bonds. In its offering of $3.5 billion of 7-year
notes, the Treasury fixed the coupon at 8 percent to be issued at par. The
fixed-price subscription technique, which had not been used in the past 6
years, caught the market by surprise. The response to the offering was so
enthusiastic that the issue was heavily oversubscribed with requests
totaling $29.2 billion. Because of the great demand for the issue, the
Treasury had to change the amount of fully allotted subscriptions from
$500,000 to $200,000. Individuals alone were allotted $2.3 billion ofthe
issue.
Despite the restrictive subscription approach, public sales resulted in an
enlargement of the issue to $6 billion, $2.5 billion more than originally
intended. This boosted new cash raised to $5.1 billion and reduced
somewhat the Treasury's borrowing requirements in the months ahead.
22
1976 REPORT OF THE SECRETARY OF THE TREASURY
Moreover, mainly because of the excellent reception given to the fixedprice offering of 7-year 8 percent notes, the decline in the average length
ofthe marketable interest-bearing debt privately held, which had fallen to
2 years 5 months at the end of January, was reversed and increased to 2
years 7 months.
Later in the month an additional $2.6 billion of new money was raised
through the auction on February 20 of a 21 -month note at an average yield
of 6.62 percent and a coupon rate of 6 5/8 percent. As is generally the case
in cash sales of shorter maturity coupon issues, commercial banks and
dealers bid successfully for most ofthe issue. Commercial banks received
$ 1.5 billion, or 57 percent of the issue while dealers received $0.6 billion,
or 22 percent. In the Treasury bill market $2.4 billion of new money was
raised in February, $ 1.6 billion through additions to the regular weekly bill
auctions and $0.8 billion from an addition to the 52-week bill.
During most of February, activity in the money and securities markets
was conducted in a more comfortable economic climate. The rate of
inflation slowed again. Employment expanded further and the unemployment rate dropped 0.2 percentage point to a 14-month low of 7.6 percent.
Interest rate movements were mixed. Short-term rates moved up while
longer term yields changed very little or edged lower. This was generally
true also in March as interest rates were about unchanged over the month
as a whole. Around mid-March Congress approved an increase in the
amount of bonds exempt from the 4 1 /4-percent interest ceiling from $ 10
billion to $12 billion and extended the allowable rriaturity of note issues
(which are not subject to a rate ceiling) from 7 years to 10 years.
New cash raised in March consisted of $ 1.1 billion in Treasury bills and
$3 billion in coupon issues as the Treasury continued efforts to meet its
cash needs for the first half of 1976. On March 5, $2.1 billion of new cash
was obtained by the auction of a 4-year note at an average rate of 7.54
percent and a coupon rate of 7.50 percent. This issue was an end-ofquarter 4-year cycle note. Total tenders received from the public
amounted to $5.4 billion. The $2.1 billion of accepted tenders included
$0.7 billion of noncompetitive bids. On March 18, $0.9 billion was raised
with the sale of $3.1 billion of 2-year notes sold at an average yield of 6.76
percent with the coupon rate set at 6 3/4 percent. Noncompetitive bids
accounted for $0.7 billion of this issue also. An additional $2.6 billion of
new cash was raised with the auction of a 4-year 10 1/2-month note on
March 24 for payment April 5, 1976, at an average yield of 7.38 percent.
The coupon on this issue was set at 7 3/8 percent. The notes were well
received by market participants. Nearly $5.1 billion of tenders were
submitted by the public, including $0.5 billion of noncompetitive tenders.
Commercial banks were allotted $1.2 billion and dealers $0.9 biUion, 46
and 32 percent, respectively.
No other coupon securities were issued in April, but the Treasury picked
up $2.5 billion of new money to meet seasonal cash needs with the issuance
REVIEW OF TREASURY OPERATIONS
23
o f a 14-day cash management bill on April 8. The 14-day cash management bills represented an additional amount of 26-week bills dated
October 23, 1975, and maturing April 22, 1976. The bills were auctioned
on April 7 for payment on April 8. About $7.6 billion of tenders were
submitted ofwhich the Treasury accepted $2.5 billion at an average yield
of 4.91 percent. In addition, activity in the regular weekly bill auction and
52-week auction resulted in $0.6 billion of new cash. About $1 billion of
new cash was raised through enlarging the amount ofthe 52-week bill, part
ofwhich was offset by the net $0.4 billion paydown in regular weekly bills.
In April, unemployment declined and inflation held at about a 6-percent
annual rate. The economic recovery continued, but at a slower pace.
Interest rates in the money and bond markets declined through most of
April but posted sharp increases near the end ofthe month. While yields
on most Treasury coupon securities closed the month at about the same
levels as at the end of March, Treasury bill rates declined steadily most of
April. In the April final weekly auction the 3- and 6-month bills were sold
at average yields of 4.91 percent and 5.29 percent, respectively, about 6
and 7 basis points below their levels at the end of March. At the regular
monthly auction of 52-week bills the average rate was 5.65 percent, down
14 basis points from the rate obtained on the March 31 sale of 52-week
bills.
After modest declines over most ofthe month, yields on Treasury bills
and coupon securities rose to new highs for the year in late May. Average
issue rates on 13-week bills were 67 basis points higher at the last weekly
auction in May than in April's last auction, while the 26-week bill rate was
up 72 basis points. Firmer conditions in the money market for Federal
funds and the crowded calendar for new corporate and municipal issues
were mainly responsible for the increase in yields. Tnterest rates on all
money market instruments also rose in May, and at month's end most
banks raised their prime lending rate from 6 3/4 percent to 7 percent.
Meanwhile, on the economic front, the index of leading indicators rose 1.4
percent in May, the largest increase in 10 months; personal income rose
$11 billion, or at a 9.8-percent annual rate of growth; employment rose
and the unemployment rate fell 0.2 percentage points; and residential
construction improved. However, retail sales were off and fell $1.1 billion
in May.
The Treasury's May quarterly refunding was announced on April 28.
Three new securities, were offered to refund $4.1 billion of privately held
Treasury notes maturing on May 15 and raise $2.2 billion in new cash. The
offering consisted of $2 billion of 2-year notes, $3.5 billion of 10-year
notes to be sold in a fixed-price offering at par, and $0.8 billion of reopened
7 7/8 percent bonds. The announcement was well received and bidding
interest was good.
For the 2-year notes $4.4 billion ofpublic tenders were submitted in the
May 4 auction and $2.3 billion was accepted, including $0.6 billion of
24
1976 REPORT OF THE SECRETARY OF THE TREASURY
noncompetitive tenders. Successful bids resulted in a 6.61 percent average
yield and a 6 1/2 percent coupon. Commercial banks were allotted $1.2
billion, or 55 percent of the issue.
About $3.5 billion of 10-year notes were to be issued to the public with
the coupon set at 7 7/8 percent. This was the first time the Treasury used
its new authority to issue notes with a maturity of up to 10 years. The 7 7/8
percent coupon drew approximately 41,000 subscriptions totaling $8.9
billion in the May 5 offering. Subscriptions for $500,000 or less amounted
to $3.9 billion and these were accepted in full. Because ofthe substantial
response, larger orders were only allotted 15 percent of amounts tendered.
Total accepted subscriptions from the public amounted to $4.7 billion,
$1.2 billion more than originally sought.
Yields were rising as the May 7 bond auction approached. The auction
attracted good interest and about $0.8 billion of tenders for the 7 7/8
percent bond were accepted from the public at an average yield of 8.19
percent. Dealers were awarded $0.5 bilHon, or 62 percent of the issue.
The entire May refunding operation raised about $3.7 billion in new
cash and increased, by 3 months, the average length of the marketable
interest-bearing public debt privately held to 2 years 8 months. Most of
this increase was achieved through the sale of the Treasury's fixed-price
10-year note.
On May 13, a $2.3 billion offering of 2-year notes was announced to
refund $ 1.4 billion in notes maturing May 31 and raise about $0.9 billion
of new cash. The average yield on the new notes auctioned on May 19 was
7.16 percent, 55 basis points above the 2-year note auctioned May 4. The
accepted tenders amounted to $2.5 billion of the $4.7 billion tenders
received from the public. Just over $1 billion was for new cash. A 7 1/8
percent coupon was assigned to the issue. Commercial banks acquired
$1.3 billion, or 53 percent of the notes.
In the Treasury bill market the $0.9 billion of new money raised in the
regular monthly auction ofthe 52-week bill was nearly offset by paydowns
of $0.8 billion in regular weekly bills during the month of May. The same
procedure was true in June when the Treasury raised $0.5 billion of new
cash with its 52-week bill that was more than offset by a $ 1.2 billion decline
in regular weekly bills.
Unlike May, in June interest rates in the money and bond markets halted
their upward movement and edged slightly back toward lower levels.
During the month, the Treasury auctioned a 2-year note and a 4-year 1month note to raise $2.8 billion in new cash. In addition, $2 billion of cash
management bills were sold and redeemed during the month.
The June 3 auction of 4-year I-month notes had been announced on
May 18. The $2 billion offering for new cash attracted good investor
interest. About $2.2 billion ofthe $5.1 billion of tenders was accepted.
With the yield on accepted competitive bids set at 7.71 percent, a 7 5/8
REVIEW OF TREASURY OPERATIONS
25
percent coupon was placed on the 4-year cycle note which began trading
at a premium in the secondary market.
On June 4, the Treasury announced the June 7 auction of $2 billion in
cash management bills. The 9-day bills, issued June 8, represented an
addition to an outstanding issue of bills maturing June 17, 1976. Over $6
billion of tenders were received and the average rate of the accepted $2
billion was 5.52 percent.
June 15 brought the announcement ofthe 2-year Treasury note auction
to be held on June 21. The issue was thought to be quite manageable.
About $2 billion of notes held by the public were refunded and $0.6 billion
of new cash was raised when the Treasury accepted $2.6 billion ofthe $4.2
billion of tenders received from the public. The average yield was 6.99
percent and a 6 7/8 percent rate was set. Commercial banks acquired $ 1.4
billion, or 54 percent of the issue.
With this 2-year note issue the Treasury sold $53.1 billion of securities
to the public during the January-June half of fiscal 1976, compared with
$59.2 billion in the July-December half year. New cash raised in the
second half of the fiscal year amounted to $31 billion compared with $48.6
billion in the first half, with coupon issues accounting for $27.3 billion and
Treasury bills $3.7 billion. In the first half of fiscal 1976, bills represented
a much larger percentage of the new cash raised, 59 percent, compared
with 12 percent in the second half.
At the end of June rates on most Treasury bills were 10 to 25 basis points
below their May levels. Yields on intermediate- and long-term securities
also declined, reflecting good market demand for existing supplies as well
as for the Treasury's last note auctioned in fiscal 1976, a 5-year 1-month
note for payment on July 9.
The economic outlook was mixed at the end of fiscal 1976. Productivity
and GNP continued to grow, but at much slower rates than in the
January-March 1976 quarter. An increasing labor force was the main
reason for the 0.2-percent increase in the unemployment rate to 7.5
percent in June. Consumer spending was lagging, but capital spending
grew at a 9.6-percent annual rate during the April-June quarter. Prices
rose faster in the April-June period than in January through March, but
wages grew at a lesser rate. The economy was still advancing, but not
enough to restore full confidence in the recovery.
On June 30, the Treasury received authority to issue up to $17 billion
of bonds held by the public with interest rates exceeding 4 1/4 percent.
Theprevious limit was $12 billion and on June 30, the public held $10.4
billion.
On this same date the statutory debt limit of $400 billion was
temporarily increased from $627 billion to $636 billion through September 30, 1976, $682 billion through March 31, 1977, and $700 billion
through September 30, 1977. Debt subject to the limit at the end of June
totaled $621.6 billion.
26
1976 REPORT OF THE SECRETARY OF THE TREASURY
Fiscal 1976 ended in a firm market atmosphere with interest rates in the
money and bond markets declining. At this time the monetary aggregates
were growing at a slow pace and market participants saw little reason for
the Fed to alter its position on the growth ofthe money supply and interest
rate stability.
Since the Treasury had a healthy $ 14.8 billion operating cash balance,
market participants expected no great increase in Treasury securities in
the near future.
July economic data was both encouraging and discouraging. New orders
for nondefense capital goods jumped by a record amount. The index of
leading indicators rose 0.5 percent, posting its 17th consecutive monthly
gain. Industrial production increased only 0.2 percent in July, the smallest
increase in 9 months, while personal income rose I percent, its largest gain
in 9 months. Retail sales declined and, while total employment posted a
slight increase, the large number of new workers entering the labor market
pushed the unemployment rate up from 7.8 percent to 7.9 percent.
The first issue in the transition quarter was the 5-year 1 -month note sold
for new cash on June 19 for payment on July 9. This 5-year cycle note was
received very well and about $2.6 billion of the $5.5 billion of public
tenders was accepted. The average yield was 7.63 percent and a 7 5/8
percent coupon was set.
There were no coupons maturing during July but a second note issue for
new cash, a 2-year note, was announced on July 14, to be auctioned on
July 20. Interest in the auction was good and $2.9 billion ofthe $4.8 billion
in tenders received from the public was accepted. A 6 7/8 percent coupon
was set when the average yield on accepted bids came to 6.95 percent.
About $0.3 billion ofthe accepted amount was noncompetitive bids. The
issue commanded a small premium in the secondary market and was bid
up 19/64 over the auction price in before-issue trading the following week.
In the Treasury bill market rates continued to move downward and
wound up generally 15 to 40 basis points below their June levels. Coupon
yields were down slightly for the month as a whole. In the money market
the Federal funds rate averaged 5.31 in July, down 17 basis points from
their June average. Rates on commercial paper, 90-day bankers acceptances, and 90-day negotiable CD's also fell. A few banks reduced their
prime lending rate 1/4 point to 7 percent in late July.
Market participants remained divided over what course Federal
Reserve monetary policy would take. Since a lower Federal funds rate did
not seem probable, the consensus was for stable interest rates in the near
future. Meanwhile, the market was anxiously awaiting the forthcoming
Treasury announcement of its August financing plans.
Economic performance was mixed again in August. Retail sales rose at
a 2.3-percent seasonally adjusted rate while housing starts reached a
seasonally adjusted annual rate of 1.54 million units, its highest level since
April 1974. Industrial production rose for the 17th consecutive month.
REVIEW OF TREASURY OPERATIONS
27
However, both the index of leading indicators and durable goods orders
fell by 1.5 percent in August. Capital spending was unusually low for the
current level of business expansion, and the economy continued to operate
well below capacity.
The Treasury had announced its plans for the August financing on July
28. The midsession review ofthe 1977 budget, issued in July, estimated
a $20 billion transition quarter deficit. The Treasury estimated that $15
to $17 billion in new borrowing was required to finance the deficit and
meet its other requirements in the transition quarter. Since $5.5 billion of
this borrowing had been completed in July, only $9.5-$ 11.5 billion was
needed.
About $4.5 billion in privately held notes maturing on August 15 were
to be refunded and $2.5 billion in new cash was to be raised. Three new
issues were announced: $2 billion of 3-year notes to be auctioned August
3; $4 billion of 10-year notes to be sold by the subscription method at a
fixed price on August 4; and $1 billion of 25-year bonds to be auctioned
August 6. The announcement was well received and even stirred demand
for some outstanding issues. The 3-year note auction produced strong
investor bidding. The average yield on accepted competitive bids was 6.91
percent and the Treasury assigned a 6 7/8 percent coupon. About $2.3
biUion ofthe $5.4 bilHon in public tenders was accepted, including a high
$0.7 billion in noncompetitive tenders.
Public response to the 10-year note was tremendous and resulted in the
issue being substantially oversubscribed. Plans to accept all subscriptions
of $500,000 or less accompanied by a 20-percent deposit were scaled
down to accept only amounts of $300,000 or less. Subscriptions above
$500,000 accompanied by the 20-percent deposit were accepted in the
amount of $300,000, while all subscriptions without the 20-percent
deposit were rejected. About $8 billion of the $24.6 billion in public
subscriptions was accepted. This was $2 billion more than originally
planned. The issue immediately began trading at a premium as dealers
attempted to acquire inventories.
The note was well distributed with the bulk of it going to banks and
individuals while dealers received very little. Because more cash was raised
than planned. Treasury borrowings for the near future were scaled down.
Rounding out the refunding was the 25-year bond maturing August 15,
2001. This issue also drew good response. The average accepted yield was
8.01 percent. Ofthe $2.5 bUlion in public tenders, $ 1 billion was accepted.
An 8 percent coupon was assigned. The three new issues raised almost $6.8
billion in new cash.
Due to the August financing and especially the fixed-price 10-year note
sale, the average length ofthe marketable interest-bearing public debt held
by private investors rose from 2 years 6 months to 2 years 10 months.
In line with market expectations, a 2-year note was announced on
August 13. This $2.5 billion offering was auctioned August 19 to refund
28
1976 REPORT OF THE SECRETARY OF THE TREASURY
Disposition of marketable Treasury securities excluding regular hills,
fiscal 1976 and transition quarter
[In millions of dollars]
Redeemed
for cash or
carried to
matured debt
Securities
Date of retirement
Description and maturing date
Exchanged
for new
issue at
maturity
1975
Aug. 15
Sept. 30
Oct. I
Nov. 15
Dec. 31
5 7/8 percent note, Aug. 15, 1975....
8 3/8 percent note, Sept. 30, 1975 ...
1 1/2 percent note, Oct. 1. 1975
7 percent note. Nov. 15, 1975
7 percent note, Dec. 31, 1975
Feb. 15, 1971...
Sept. 4, 1973....
Oct. 1. 1970
Aug. 15, 1971 ..
Nov. 15, 1973..
5,092
2.009
30
2,581
1,519
2,587
33
1976
15
15
31
1
15
15
31
30
30
6 1/4 percent note, Feb. 15, 1976....
5 7/8 percent note. Feb. 15. 1976....
8 percent note. Mar. 31, 1976
1 1/2 percent note, Apr. 1, 1976
6 1/2 percent note. May 15, 1976....
5 3/4 percent note. May 15, 1976....
6 percent note. May 31, 1976
8 3/4 percent note, June 30, 1976....
7 1/2 percent note, Aug. 15, 1976....
Feb. 15. 1969...
Aug. 15. 1972 ..
Apr. 9, 1974
Apr. 1, 1971
May 15, 1%9...
Feb. 15, 1972...
Mar.25. 1975..
May 15, 1974...
Oct. 1, 19691 ...
1,217
3,713
2,191
27
2,304
2,306
1,498
2,011
89
2.522
1,232
97
Feb.
Feb.
Mar.
Apr.
May
May
May
June
June
NOTES AND BONDS
Total coupon securities.,
534
212
393
496
82
692
7,679
2,042
30
3,115
1,731
3,739
4,945
2,288
27
2.697
2,802
1,580
2,703
89
26,587
BILLS
1975
Aug. 26
Sept. 18
Sept. 25
Dec. 18
Dec. 26
Other:
6.280
6.175
6.156
5.220
5.140
percent
percent
percent
percent
percent
(18-day)
(13-day)
(20-day)
(10-day)
(18-day)
Aug. 8, 1975 ..
Sept. 5, 1975..
Sept. 5, 1975..
Dec. 8, 1975 ..
Dec. 8, 1975 ..
1,000
849
700
602
601
1,000
849
700
602
601
1976
Jan. 31...
Apr. 22..
Apr. 22..
June 17..
6.560
5.823
4.834
5.520
percent
percent
percent
percent
(292-day)
(139-day)
(14-day)
(9-day)
Apr. 14, 1975..
Dec. 5, 1975 ...
Apr. 8, 1976....
June 8, 1976...
1,397
2,002
2,503
2,010
1,586
2,002
2,503
2,010
11,664
11,853
Total other bills..
Total securities—fiscal 1976..
NOTES AND BONDS
Aug. 15
Aug. 15
Aug. 31
Sept. 30
7 1/2
6 1/2
5 7/8
8 1/4
percent
percent
percent
percent
note,
note,
note,
note,
Aug. 15, 1976...
Aug. 15, 1976...
Aug. 31, 1976...
Sept. 30. 1976..
Oct. 1. 1969
Feb. 15. 1973...
Mar. 3. 1975....
Sept. 30. 1974..
3,003
2,216
1,608
1,697
Total coupon securities.,
Total securities—transition
quarter
1.102
1,667
54
326
4.105
3,883
1,662
2,023
11,673
8,524
11.673
1 Govemment agency holdings redeemed prior to maturity by authority of the Department of the Treasury.
$ 1.6 billion of privately held notes maturing August 31. Ofthe $4.3 billion
in public tenders, $2.9 billion was accepted, including $0.3 billion
submitted noncompetitively. A 6 5/8 percent rate was set when the
average yield came to 6.67 percent.
This average yield of 6.67 percent was 28 basis points below that of
July's offering of 2-year notes as bill and coupon rates continued to decline
through August. Interest rates on money market instruments moved
slightly lower also or remained unchanged from July levels. The release
ofthe Federal Open Market Committee policy record for the committee's
July 20 meeting revealed a lower tolerance range of 4 3/4 to 5 3/4 percent
for the Federal funds rate, which encouraged most market participants.
On August 25, a 4-year note auction was announced for August 31 to
raise $2 billion in new cash. Bidding for the issue was aggressive and the
REVIEW OF TREASURY OPERATIONS
29
average yield of 6.93 percent on accepted tenders was 78 basis points
below the June 3 auction of 4-year 1 -month notes. A 6 7/8 percent coupon
was set on the issue and about $2.1 billion of the $5.4 billion in public
tenders was accepted, including $0.5 billion of noncompetitive bids.
With the August financing operations accomplished smoothly and with
the inflation outlook improving, rates on outstanding intermediate- and
long-term issues continued to decline. Likewise, Treasury bill rates
generally declined over the course of the month. However, in September
rates on both bills and coupons reversed their downward trend near the
end of the month.
A $2.5 billion issue of 2-year notes was announced on September 13,
to be issued September 30. This was the last issue offered in the transition
quarter. The September 21 auction drew $5.2 billion in tenders in a good
market climate. The average yield was 6.30 percent, 37 basis points below
the August 19 auction of 2-year notes. The $2.9 billion of accepted public
tenders refunded $1.7 billion of notes held by the public maturing
September 30. A 6 1/4 rate was assigned to the issue.
Gross offerings to the public in the transition quarter totaled $25 billion,
$17.1 billion of which was for new cash.
Only $0.3 billion in new cash came from bill issues as the Treasury
continued to rely more on coupon issues for new money as it restructured
the debt. Ofthe $16.8 billion in new money raised in coupon issues, $5.3
billion was in 2-year cycle note issues. About $6.1 billion was raised with
issues maturing in 2 to 7 years. The 10-year 8 percent note raised $4.8
billion and the 25-year 8 percent bond raised $0.6 billion.
The quarter ended with $5.7 billion of authority available to the
Treasury to issue bonds with more than a 4 1/4-percent interest rate. A
$ 17.4 billion cash balance was held in the Treasury on September 30, while
the public debt stood at $634.7 bUlion.
Changes in Federal securities
Federal securities include the marketable and nonmarketable debt
issues ofthe Department ofthe Treasury as well as those obligations issued
by Federal agencies which are part of the unified budget totals and in
which there is an element of Federal ownership. The Federal agency
securities included are the participation certificates of the Government
National Mortgage Association, the debt issues ofthe Export-Import Bank
of the United States and the Tennessee Valley Authority, Postal Service
bonds. Defense family housing mortgages, and various guaranteed issues
of the Federal Housing Administration.
Federal securities outstanding at the end of fiscal 1976 totaled $631.3
billion—$87.2 bUlion, or 16 percent, more than the $544.1 billion
outstanding at the end of fiscal 1975. Total Treasury public debt issues
outstanding amounted to $620.4 billion, an increase of $87.2 billion, while
Federal agency issues outstanding totaling $10.9 billion were about the
30
1976 REPORT OF THE SECRETARY OF THE TREASURY
Federal debt and Government-sponsored agency debt
[In billions of dollars]
Class of debt
Public debt securities:
Marketable public issues by maturity class:
Within 1 year...
1 to 5 years
5 to 20 years
Over 20 years
Total marketable issues
Nonmarketable public issues:
Series E and H savings bonds
U.S. savings notesi
Investment series bonds
Foreign govemment series:
Dollar denominated
Foreign currency denominated
Other nonmarketable debt
Total nonmarketable public issues
Govemment accounts series (nonmarketable)
Non-interest-bearing debt
Total gross public debt
Federal agency securities:
Govemment National Mortgage Association
Export-Import Bank of the United States
Tennessee Valley Authority
Defense family housing
Other
,
Total Federal agency debt
Total Federal debt
Govemment-sponsored agency securities:
Federal home loan banks
Federal National Mortgage Association
Federal land banks
Federal intermediate credit banks
Banks for cooperatives
Govemment-sponsored agency debt
June 30,
1974
June 30,
1975
June 30,
1976
Sept. 30,
1976
139.9
77.2
44.4
5.1
163.9
101.9
41.3
8.4
204.2
127.0
49.5
11.9
206.1
131.1
57.3
13.2
266.6
315.6
392.6
407.7
61.9
.5
2.3
65.5
.4
2.3
69.7
.4
2.3
70.8
.4
2.3
23.4
1.6
1.5
21.6
1.6
.9
19.9
1.6
2.2
19.2
1.6
3.0
91.3
92.3
%.l
97.3
115.4
1.0
124.2
1.1
130.6
1.2
128.6
1.1
474.2
533.2
620.4
634.7
4.4
2.9
2.7
1.4
.6
4.3
2.6
2.1
1.3
.6
4.2
2.6
2.1
1.2
.8
4.1
3.0
2.0
1.1
.8
12.0
10.9
10.9
11.0
486.2
544.1
631.3
645.7
18.6
25.2
11.1
8.0
2.5
21.2
28.2
14.2
9.5
2.9
19.4
29.9
16.1
10.3
3.7
19.1
30.7
16.6
10.8
3.9
65.4
76.1
79.3
81.1
1 U.S. savings notes first offered in May 1967; sales discontinued after June 30, 1970,
same level as a year ago. Outstanding marketable Treasury securities at
the end of fiscal 1976 amounted to $392.6 billion, up $77.0 billion from
fiscal 1975. Treasury bills accounted for $32.6 billion ofthe increase in
marketable debt. Treasury notes $41.5 billion, and Treasury bonds $2.8
billion. By the end ofthe transition quarter. Federal securities outstanding
reached a level of $645.7 billion, $634.7 billion ofpublic debt securities
and $11.0 billion of Federal agency issues.
Ownership
Private investors held $385.0 billion of the $631.3 billion of Federal
debt issues outstanding at the end of fiscal 1976. The Federal Reserve
System and Government accounts held the remaining $246.3 billion. Net
Federal borrowing from the public, which includes the Federal Reserve
and foreign investors, amounted to $82.8 billion in fiscal 1976, an alltiriie
high. This was $32 billion more than the $50.9 billion borrowed in fiscal
1975. In fiscal 1976 private investors acquired $73.1 billion, or 88 percent
31
REVIEW OF TREASURY OPERATIONS
PRIVATE HOLDINGS OF MARKETABLE FEDERAL SECURITIES
Federal Agency Securities
September 1976
i
8.8
^Participation Certificatesi^ - ^
1971 1972 1973 1974 1975 1976
1971 1972 1973 1974 1975 1976
Fiscal Years & Transition Quarter
ofthe funds borrowed from the public, while the Federal Reserve System
absorbed $9.7 bUlion, or 12 percent.
Private investors also held $72.9 billion of federally sponsored agency
issues, an increase of $ 1.4 billion for the year. Federally sponsored agency
securities held by the Federal Reserve System and Government accounts
increased $1.8 billion to a level of $6.4 billion.
Norimarketable public debt increased $10.2 billion in fiscal 1976, just
$0.3 billion more than in fiscal 1975. Special nonmarketable securities
issued only to Government accounts and trust funds such as the Federal
old-age and survivors insurance trust fund increased $6.4 billion and
accounted for nearly 63 percent of the total increase in nonmarketable
debt. Savings bonds and notes outstanding increased by $4.2 billion, while
special nonmarketables to foreign investors declined $1.7 billion. Other
nonmarketables increased $0.3 billion.
Government-sponsored agencies, while subject to some degree of
Federal supervision, are privately owned. Thus, they are not included in
the unified budget totals, and their obligations are not included in Federal
debt. In fiscal 1976, the outstanding debt of Government-sponsored
agencies increased $3.2 billion compared with $10.7 billion a year ago.
Individuals.—Individuals increased their holdings of public debt securities $9.3 billion compared with $6.3 billion in fiscal 1975. About $4.2
billion, or 45 percent of the increase, was in savings bonds, while other
securities, mostly marketables, increased $5.1 billion. More than half of
the increase in marketable securities was a result ofthe large response by
32
1976 REPORT OF THE SECRETARY OF THE TREASURY
individual investors to the fixed-price subscription technique used by the
Treasury in the February and May refundings. On June 30, 1976,
individuals held $96.4 billion of public debt securities. Holdings of U.S.
savings bonds and notes amounted to $69.6 billion, and holdings of other
Treasury securities were $26.8 billion.
Insurance companies.—In fiscal 1976 insurance companies increased
their holdings of public debt securities $3.4 billion compared with $1.2
billion in fiscal 1975. Holdings of Federal agency issues increased only
slightly. At the end of the fiscal year, insurance companies held $10.5
bUlion of public debt securities and $0.4 billion of Federal agency issues.
Savings institutions.—Public debt securities held by savings and loan
associations increased $4.1 billion in fiscal 1976 compared with 0.4 billion
in fiscal 1975. Holdings of Federal agency securities were down slightly.
At the end of fiscal 1976, savings and loan associations held $8.5 billion
of public debt securities and $0.4 billion of Federal agency issues.
Mutual savings banks held $5.1 billion of public debt securities at the
end of fiscal 1976, an increase of $ 1.5 billion compared with a gain of $ 1.0
OWNERSHIP OF FEDERAL SECURITIES
$Bil.
Gov't
Accounts
Federal
Reserve
Private Nonbank Investors
Savings
All Other
Corps.
Institutions
Com'l
Banks
Individuals
650
Total
631.3
June 30, 1976
600
1501
128.0
94.7
100
97.2
93.7
50
40.7
25.4
0
650
-645.7-
September 30, 1976
600J
150
100
o
-^
148.1
134.8
96.7
50h
95.4
100.4
44.2
26.1
REVIEW OF TREASURY OPERATIONS
33
billion in fiscal 1975. Holdings of Federal agency securities changed
slightly, and at the end of fiscal 1976 were just under $0.4 billion.
State and local governments.—At the end of fiscal 1976, State and local
governments held $39.5 billion ofpublic debt securities. This represented
a gain of $9.9 billion compared with $1.3 billion added a year ago. The
increase in holdings was the largest ever for this investor group. Holdings
of Federal agency issues increased $0.2 billion to a level of $3.7 billion.
Foreign and international.—Foreign investors held $70.6 billion of
public debt securities at the end of fiscal 1976, an increase of $4.6 billion
compared with $9.2 billion added a year ago. Holdings of marketable
issues increased $6.3 billion while foreign special nonmarketables
declined $ 1.7 billion. Holdings of Federal agency securities were about the
same as last year, $20 million, at the end of fiscal 1976.
Nonfinancial corporations.—Corporations added $11.8 billion ofpublic
debt securities to their holdings in fiscal 1976 compared with $2.4 billion
last year. More than 70 percent of the increase was in Treasury bills as
corporations sought to rebuild balance sheet liquidity. At the end of fiscal
1976, corporations held $25 billion ofpublic debt securities. Holdings of
Federal agency issues were about the same as in fiscal 1975, $0.4 bUlion.
Other private nonbank investors.—Other private nonbank investors
increased their holdings ofpublic debt securities $5.7 biUion in fiscal 1976
compared with an increase of $9.8 billion in fiscal 1975. Holdings of
Federal agency securities increased $0.2 billion. At the end of fiscal 1976,
these investors held $29.0 biUion ofpublic debt issues and $0.6 billion of
Federal agency securities.
Commercial banks.—In the absence of strong business loan demand,
commercial banks continued to be heavy purchasers of public debt
securities in fiscal 1976 and acquired $22.8 billion. This was $7.0 billion
more than the increase in fiscal 1975. From a total of 30 coupon offerings
to private investors for refunding and new cash in fiscal 1976, with a gross
volume of $71.6 billion, commercial banks initially acquired $34.8 billion,
or nearly 49 percent. At the end of fiscal 1976, commercial banks held
$91.8 billion ofpublic debt securities, which was only $2.0 billion less than
the post-Worid War II peak of $93.8 billion in February 1946. Holdings
of Federal agency securities totaled $ 1.9 billion, down slightly from fiscal
1975.
Federal Reserve System.—In fiscal 1976, the Federal Reserve System
increased its holdings ofpublic debt securities $9.7 billion, compared with
$4.3 billion a year earlier. Holdings of Federal agency securities increased
slightly. At the end of fiscal 1976, the System held $94.4 billion ofpublic
debt securities and $0.3 billion of Federal agency issues.
Government accounts.—Holdings of public debt securities by Government accounts increased $4.3 billion in fiscal 1976 compared with $7.1
billion in fiscal 1975. Special nonmarketable securities held by these
accounts increased $6.4 billion while holdings of marketables declined
34
1976 REPORT OF THE SECRETARY OF THE TREASURY
Estimated ownership of public debt securities on selected dates 1966-76
[Dollar amounts in billions]
June 30,
1966
23.5
10.0
5.0
7.3
24.5
311.6
14.2
9.5
Total gross debt outstanding
$65.0
.4
21.7
$69.2
.4
26.8
$70.5
.4
28.8
80l
Wu
96^4
99^7
5.9
2.6
r3.9
28.3
356.8
10.8
ri3.4
7.1
3.6
r4.3
29.6
66.0
13.2
r23.2
10.5
5.1
8.5
39.5
70.6
25.0
29.0
11.6
5.3
8.8
39.1
74.6
25.7
34.1
3202.4
r234.1
284.5
298.9
53.2
80.5
138.2
r69;0
84.7
145.3
91.8
94.4
149.6
93.3
96.4
146.1
3316.1
3 474.2
533.2
6204
634!7
23
26
17
14
20
17
26
11
17
29
16
.30
15
15
'24
16
31
15
15
23
ioO
'
Sept. 30,
1976
54.8
42.2
64.3
Commercial banks
Federal Reserve banks
Govemment accounts
June 30,
1976
3 154.9
Total private nonbank investors..
$61.4
.5
18.8
72^8
Total individuals
Insurance companies
Mutual savings banks
Savings and loan associations
State and local govemments
Foreign and intemational
Corporations
Miscellaneous investors4
June 30,
1975
$49.2
Estimated ownership by:
Private nonbank investors:
Individuals:!
Series E and H savings bonds
U.S. savings notes2
Other securities
June 30,
1974
100
Percent
Percent owned by:
Individuals
Other private nonbank investors
Commercial banks
Federal Reserve banks
Govemment accounts
Tbtal gross debt outstanding
.
16
28
13
16
27
100
~
ToO
.
foO
r Revised.
1 Including partnerships and personal trust accounts.
2 U.S. savings notes first offered in May 1%7; sales discontinued after June 30, 1970.
3 Adjusted to reflect the reclassification in July 1974 of outstanding non-interest-bearing special notes issued lo the
Intemational Monetary Fund and other intemational lending institutions. The adjusted amounts were $3,810 million at
the end of fiscal 1966 and $825 million at the end of fiscal 1974.
4 Includes nonprofit institutions, corporate pension tmst funds, nonbank Govemment security dealers, certain
Govemment deposit accounts, and Govemment-sponsored agencies.
$2.1 billion. Holdings of Federal agency issues increased slightly. At the
end of fiscal 1976, Government accounts held $ 149.6 billion ofpublic debt
securities and $2.0 billion of Federal agency issues.
Federal Financing Bank
The Federal Financing Bank (FFB) was established under legislation
enacted in December 1973 to centralize Federal and federally assisted
borrowings. The bank has become the vehicle through which most Federal
agencies finance programs that would otherwise involve the sale or
placement of credit rharket instruments, including agency securities,
guaranteed obligations, participation agreements, and sales of assets. The
major exceptions to date are title XI ship mortgage bonds, federally
guaranteed tax-exempt housing and urban renewal notes and bonds, and
Government National Mortgage Association asset sales. The FFB itself
obtains financing by borrowing from the Secretary of the Treasury, and
Treasury borrowing to meet the needs ofthe FFB is reflected in the public
debt accounts.
Summary of Federal Financing Bank holdings, heginning fiscal year 1974
[In millions of dollars]
Net change in holdings
Holdings end of period
Obligation
Fiscal
1974
Fiscal
1975
Agency assets:
Farmers Home Administration
Health, Education, and Welfare medical facilities loan program
Rural Electrification Administration
Secretary of the Treasury (N.Y.)
Small Business Administration
Government-guaranteed loans:
Chicago, Rock Island & Pacific Railroad
Defense foreign miUtary sales
General Services Administration
Housing and Urban Development New Communities Administration .
National Railroad Passenger Corporation (Amtrak)
Overseas Private Investment Corporation
Rural Electrification Administration
Small business investment companies
Student Loan Marketing Association
Washington MetropoUtan Area Transit Authority
Total
Fiscal,
1975
TQ.
2,180.0
2,738.0
4,049.4
1,500.0
33.9
4,984.6
2,748.0
85.9
4,768.1
3,248.0
4,049.4
1,000.0
%.8
33.9
5,000.0
62.1
8,800.0
118.7
166.4
9,650.0
125.7
353.7
1,082.1
160.0
5,000.0
60.1
Fiscal
1976
1,435.0
TQ.
70
m
<
On-budget agency debt:
Tennessee Valley Aulhority
Off-budget agency debt:
Export-Import Bank of the Uniied Slates
U.S. Postal Service
U.S. Railway Association
Fiscal
1974
Fiscal
1976
935.2
1,248.0
51.4
-216.5
500.0
11.5
3,800.0
56.6
166.4
85C
O
H
m
111.7
45.1
21.0
317.5
5.5
254.8
47.5
240.0
177.0
898.9
68.8
27.5
567.5
5.4
948.0
70.7
'^OO.O
1.
5.6
1,106.6
75.0
37.-5
602.4
5.4
1,159.9
90.9
405.0
177.0
25,887.7
111.7
45.1
21.0
317.5
5.5
254.8
47.5
140.0
177.0
787.2
23.7
6.5
250.0
-.1
693.2
23.2
160.0
9,110.8
7.L
187.3
1,082.1
-4.4
5.6
207.7
6.2
10.0
34.9
"2ii'.9
20.2
5.0
>
c
70
o
m
>
H
O
z
C/5
36
1976 REPORT OF THE SECRETARY OF THE TREASURY
On September 30, 1976, FFB holdings of Federal agency and Government-backed obligations totaled $25.9 billion, having increased by $9.1
billion in fiscal 1976 and by $3.5 billion in the transition quarter. (See
tables 1 and 2.) FFB purchases of assets of on-budget Federal agencies,
especially of the Farmers Home Administration, accounted for a major
portion of FFB financing activity. Purchases of New York City loans from
the Secretary ofthe Treasury under the New York City Seasonal Financing
Act of 1975 also contributed to the relative importance of agency assets
in the FFB portfolio on September 30, 1976.
FFB holdings of loans guaranteed by other Federal agencies nearly
tripled between June 30, 1975, and September 30, 1976. This occurred
without adding to the number of agencies whose guarantee programs were
financed through the FFB.
During the second session ofthe 94th Congress, legislation was enacted
to provide for additional agency guarantees of obligations by several new
programs. It is expected that these new programs will add substantially to
existing potential for expansion of FFB financing activity during fiscal
1977.
New York City's Financial Situation
During fiscal 1976, the Department was substantially engaged in matters
relating to the financial situation in New York City. At the direction ofthe
President, departmental officials monitored events on a daily basis through
the early months ofthe fiscal year, engaging in numerous discussions with
representatives of New York City, New York State, as well as with the
private sector.
During September and October of 1975, the Secretary and other
Department officials made numerous formal and informal appearances
before committees of Congress considering possible legislative action.' In
addition, the Department participated in the development of amendments
to chapter IX of the bankruptcy laws, to deal with the practical and legal
problems which might be precipitated by a large municipal bankruptcy.
In December 1975, the New York City Seasonal Financing Act of 1975
(Public Law 94-143) was enacted, giving the Secretary ofthe Treasury
authority to extend short-term seasonal loans for essential services in
aggregate amounts not to exceed $2.3 billion during the course of a fiscal
year. To implement the act, the Department entered into a credit
agreement with New York City, New York State, and the State-created
Emergency Financial Control Board, setting forth the terms and conditions of the loan relationship between New York City and the Treasury.
During fiscal 1976, $1.26 billion in loans was extended and repaid with
interest prior to the end of the fiscal year.
The loan program is based on New York City's July 1 fiscal year.
Accordingly, the loans advanced during the transition quarter in the
• See exhibit 15.
REVIEW OF TREASURY OPERATIONS
37
amount of $1,075 bilHon are scheduled to be repaid during the last 3
months of New York City's fiscal year—April-June.
The loan program is administered by the Office of New York Finance,
which reports to the Assistant Secretary for Capital Markets and Debt
Management. The office is staffed by 14 professionals, 11 of whom are
located in Washington. The remainder are located in a branch office
established in New York City. The office is responsible for handling loan
transactions under the Seasonal Financing Act, as well as for monitoring
on a daily basis the financial condition of New York City, evaluating the
reports provided the Treasury pursuant to the credit agreement and
advising the Assistant Secretary as to matters relating to the loan program.
DOMESTIC ECONOMIC POLICY
The Secretary of the Treasury is the chief Government adviser to the
President on fiscal and financial affairs and thus plays.a key role in the
formulation and execution of domestic economic policy. In discharging
these responsibilities, the Secretary obtains primary support from the
Assistant Secretary for Economic Policy.
The Assistant Secretary for Economic Policy informs the Secretary and
other top policy officials of current and prospective economic developments and contributes to the determination of appropriate economic
policies. He is assisted in these functions by his own Deputy and by the
Counsellor to the Secretary, and he can call on the services of other
Treasury offices, including the Office of Financial Analysis, which is under
his direct supervision.
The Assistant Secretary for Economic Policy, or his delegate, regularly
represents the Treasury on a variety of interagency groups and from time
to time at meetings of the Organization for Economic Cooperation and
Development in Paris. He supervises the analysis within Treasury of
economic trends, participates in the decisionmaking process on Treasury
debt management operations, and explains administration economic
policy through speaking engagements, congressional testimony, and other
public appearances.
The Assistant Secretary for Economic Policy also participates with the
Secretary in the Troika, which develops the official economic projections
and advises the President on alternative courses of action. Other Troika
members are the Council of Economic Advisers and the Office of
Management and Budget. Within Treasury, the staff support for Troika
activities in the general economic area is provided by the Office of
Financial Analysis and in the tax area by the Office of Tax Analysis.
The economic projection for calendar year 1976 developed within the
38
1976 REPORT OF THE SECRETARY OF THE TREASURY
Troika and described in the January 1976 Economic Report of the
President and the Budget ofthe United States Government for Fiscal Year
1977 called for an increase in the aggregate demand for goods and services
ofabout 12 1/2 percent from 1975 levels. Of this increase, roughly 6 to
6 1/2 percent was expected to be a rise in the volume of economic activity
and 6 percent to be inflation. (In contrast, real output fell by about 2
percent in 1975 and prices rose by more than 9 percent.) Economic
activity accelerated more rapidly than expected early in the year followed
by some deceleration in the rate of growth, so that for the full calendar
year 1976 real growth appears to be falling into the projected range.
Progress in containing inflation has clearly been greater than expected,
and the estimated rate of advance of prices has been lowered to the 5percent range.
During the course of fiscal 1976 and the transition quarter, the domestic
economy moved from the initial phases of cyclical recovery into a period
of moderate growth which should form a foundation for a sustainable longterm expansion. Federal budget deficits were held below what had been
expected for both fiscal 1976 and the transition quarter, and though still
very large, the deficit is expected to narrow in fiscal 1977. Monetary policy
remained on a fairly steady course of moderate expansion. Inflation
continued to be the major threat to a period of sustained growth but
considerable progress was made in dampening inflationary pressures.
OFFICE OF THE GENERAL COUNSEL
The General Counsel, appointed by the President by and with the advice
and consent of the Senate pursuant to an act of Congress approved May
10, 1934, is the chief law officer of the Department of the Treasury. As
the chief law officer, the General Counsel administers the Legal Division,
composed of all attorneys performing legal services in the Department and
all nonprofessional employees providing support to the attorneys, and is
responsible for all of the legal activities of the Department.
The primary role of the General Counsel is to serve as the senior legal
and policy adviser to the Secretary of the Treasury and other senior
Treasury officials. As such, the General Counsel reviews the legal
considerations relating to policy decisions affecting the management of
the public debt, administration of the revenue and customs laws,
international economic, monetary, and financial affairs, law enforcement,
and other departmental activities. Other responsibilities include providing
general legal advice wherever needed, coordinating Treasury litigation,
preparing the Department's legislative program and comments to the
Congress on pending legislation, reviewing the Department's regulations
REVIEW OF TREASURY OPERATIONS
39
for legal sufficiency, and counseling the Department on conflict of interest
and ethical matters. The General Counsel also is responsible for hearing
appeals to the Secretary ofthe Treasury from administrative decisions of
bureau heads or other officials.
The General Counsel manages the Legal Division through the Deputy
General Counsel, the Assistant General Counsels, the Chief Counsels, and
the Legal Counsels. The Chief Counsel for the Internal Revenue Service,
Assistant General Counsel—Tax Legislative Counsel, and the Chief
Counsel for the Comptroller ofthe Currency report directly to the General
Counsel. The remaining Assistant General Counsels, Chief Counsels, and
Legal Counsels report to the General Counsel through the Deputy General
Counsel. In addition, the Office of Director of Practice is part ofthe Legal
Division under the supervision of the General Counsel.
Legislation
During fiscal 1976 and the transition period, the General Counsel
provided the Department's views to the Congress on nearly 1,500 bills on
non-tax-related matters pending before the Congress. In addition, the
Legal Division participated in drafting a number of legislative proposals
during this period. Among the more significant were:
1. Proposed legislation for the renewal of the revenue sharing program
(the State and Local Fiscal Assistance Act of 1972) which was submitted
to the Congress by the President. The renewal legislation was subsequently
approved by the Congress and signed by the President on October 13,
1976 (Public Law 94-488).
2. Legislation to amend the Bretton Woods Agreements Act to
authorize U.S. acceptance of proposed amendments,to the International
Monetary Fund Articles of Agreement, and U.S. consent to an increase
in its quota in the International Monetary Fund. This was introduced in
the Congress as H.R. 13955.
3. Legislation to allow for U.S. participation in a replenishment of the
resources of the Inter-American Development Bank. This bill was
consolidated with two other bills, authorizing participation in the African
Development Fund and providing for entry of nonregional countries and
the Bahamas and Guyana into the Inter-American Development Bank, and
became law on May 31, 1976 (Public Law 94-302).
Litigation
The Legal Division is responsible for formulating the Department's
position on litigation involving Treasury activities and for working with the
Department of Justice in the preparation of litigation reports, pleadings,
trial and appellate briefs, and assisting in trying all cases in which the
Department is involved.
There are many thousands of individual cases pending in the U.S.
Customs Court, the U.S. Tax Court, and other Federal courts. Only a few
40
1976 REPORT OF THE SECRETARY OF THE TREASURY
of the more significant cases will be mentioned in this report.
In Federal Energy Administration et al. v. Algonquin SNG et al., and the
consolidated case of Commonwealth of Massachusetts et al. v. Simon et al.,
several Northeastern States and their Governors, and several public
utilities brought suit against the Secretary of the Treasury and the
Administrator of the Federal Energy Administration challenging, on
various statutory and constitutional grounds. Proclamation No. 4341,
issued by the President on January 23, 1975, which imposed supplemental
license fees on the importation of oil or certain petroleum products into
the United States. The Supreme Court decided that provisions ofthe Trade
Expansion Act of 1962 gave the President the authority to impose the
license fees to protect the national security in the face of excessive oil
imports. The decision confirms that the President, in exercising his
authority to adjust imports in the interest of national security, may utilize
means more varied and flexible than the imposition of quotas.
In United States v. Yoshida International, Inc., the Court of Customs and
Patent Appeals reversed the U.S. Customs Court decision and upheld the
authority ofthe President to impose a 10-percent additional duty on most
imported articles pursuant to Presidential Proclamation No. 4074.
Although the plaintiff in Yoshida decided not to apply to the Supreme
Court for certiorari, the issues have been raised in a separate case, Alcan
Sales Division of Alcan Aluminum Corp. v. United States, and the Supreme
Court is considering a petition to grant certiorari in that case.
In two cases. United States Steel Corporation v. Simon and Zenith Radio
Corporation v. Simon, Treasury's 70-year-old policy under the countervailing duty law of not considering rebates or remissions of indirect taxes upon
exportation to be bounties or grants under that law was challenged in the
Customs Court. These cases, still pending in the Court, have serious
implications for U.S. trade, since a high proportion of total exports to this
country are relieved from indirect taxes of various types upon exportation.
In Goolsby v. Simon a Federal district court granted the Government's
motion to dismiss the case, holding that the Uniform Relocation Assistance Act and the National Environmental Policy Act of 1969 were
inapplicable to a recipient government's capital project in which revenue
sharing funds were used. The plaintiff has appealed this decision and the
case is presently pending before the Fifth Circuit Court of Appeals.
In Logan and Logan v. Secretary of State, Secretary of the Treasury,
Chairman and the Board of Governors ofthe Federal Reserve System, and
Federal Reserve Bank of New York, a class action suit was brought on behalf
of all U.S. citizens who hold certified claims against the Government of
Czechoslovakia, seeking to compel the United States to vest, sell, and
distribute the proceeds from the sale of 18.4 metric tons of gold allegedly
belonging to Czechoslovakia as well as blocked Czechoslovakian property. The court dismissed the case, holding, as the United States argued,
that the Governments ofthe United Kingdom and France had a sovereign
REVIEW OF TREASURY OPERATIONS
41
interest in the gold, so the doctrine of sovereign immunity precluded the
court from exercising its jurisdiction over the gold, and that the authority
of the United States to take action against Czechoslovakian property is
discretionary and cannot be mandated by the court. The plaintiffs have
appealed this decision.
Regulations
In October 1975, the Office ofthe Chief Counsel for Revenue Sharing
prepared civil rights regulations which are among the most comprehensive
nondiscrimination regulations found in any agency of the Federal
Government. These regulations became effective on October 22, 1975,
and are found in 31 CFR, part 51.
During the fiscal year the Office of the Chief Counsel of the Office of
Foreign Assets Control prepared a substantial number of technical
amendments to the Foreign Assets Control Regulations designed to update
these regulations prior to their republication in pamphlet form.
Also during fiscal 1976, the Office of the General Counsel assisted in
the development of a system of making recurring Government payments
such as those to social security recipients without recourse to check
instruments. These efforts resulted in publication of regulations codified
at 31 CFR, part 210.
OFFICE OF THE UNITED STATES TREASURER
The Treasurer of the United States is also the National Director of the
U.S. Savings Bonds Division. In one or both of these capacities, she has
spoken to more than 100 gatherings across the Nation during the period
of this report, and to audiences such as businessmen, bankers, educators,
farm and conservation groups, labor conventions, and women's groups. As
a spokesman for Treasury programs and policies, she addresses the
subjects of general economic conditions; the Department's responsibilities; the role of the free market in the economy; and the value of thrift
and the role of savings bonds for individuals and the Nation.
The Treasurer has responsibilities in the area of reviewing and endorsing
U.S. currency, and was active in helping to promote the new $2 bill which
went into circulation April 13, 1976.
As chairman of departmental Bicentennial activities, the Treasurer took
an active role in helping to develop a diverse program to highlight the
history and responsibilities of the second oldest department in the
executive branch. Treasury activities included:
• Issue of special coins and medals in honor of the Bicentennial.
• Nationwide Bicentennial youth debates, in which more than 9,000
winners received Treasury medals made by the Bureau of the Mint
42
1976 REPORT OF THE SECRETARY OF THE TREASURY
and copies of the Declaration of Independence by the Bureau of
Engraving and Printing.
• A series of exhibits at the Main Treasury Building highlighting the
Department's role in international economic policy, in raising funds
in the capital market, and in financing our national economic
development; and saluting Treasury women past and present.
Treasury also mounted Bicentennial exhibits in Milwaukee, Wis.,
Houston, Tex., Geneva, Switzerland, and Brussels, Belgium.
• A departmental display at the U.S. Bicentennial Exposition on
Science and Technology at the Kennedy Space Center, Fla.,
highlighting the use of science and technology in law enforcement,
bank regulation, and manufacture of stamps and money.
Other special activities included preparing a departmental cube exhibit,
which depicted the history and functions of the Department's 12 bureaus
for use by civic groups; loaning artifacts to the Freedom Train; and the
appearance of the Treasurer on a television '*Bicentennial Minute." The
Treasurer also assisted in the preparation and dedication of the Treasury
Time Capsule, a granite capsule which contains artifacts and statements
by current Department of the Treasury officials and which will be opened
100 years from now for the Nation's Tricentennial celebration. The
Secretary's inscription on the capsule reads: ''America's greatest resource
is the vibrant heritage of a free people. May we have the wisdom and the
vision to nourish this birthright forever."
ENFORCEMENT, OPERATIONS, AND TARIFF
AFFAIRS
Six operating bureaus ofthe Department ofthe Treasury are supervised
by the Assistant Secretary (Enforcement, Operations, and Tariff Affairs),
who is assisted by three deputies and three staff offices (Offices of Law
Enforcement, Operations, and Tariff Affairs). The bureaus are U.S.
Customs Service, Bureau of Engraving and Printing, Bureau of the Mint,
U.S. Secret Service, Federal Law Enforcement Training Center, and the
Bureau of Alcohol, Tobacco and Firearms. The policies and operations of
the Office of Foreign Assets Control are also directed by the Assistant
Secretary. In addition, the Assistant Secretary acts as the principal adviser
to the Secretary on all law enforcement matters under the jurisdiction of
the Treasury, including review and coordination of the enforcement
responsibilities of the Internal Revenue Service.
Law Enforcement and Operations
The Deputy Assistant Secretary (Enforcement), with the assistance of
the Office of Law Enforcement, supervises the Federal Law Enforcement
REVIEW OF TREASURY OPERATIONS
43
Training Center, the U.S. National Central Bureau of Interpol, and the law
enforcement activities ofthe U.S. Secret Service, the Bureau of Alcohol,
Tobacco and Firearms, and the U.S. Customs Service. During the period
covered by this report, the Deputy Assistant Secretary continued his
review of all Treasury law enforcement policies and programs, with
particular attention to legislative programs affecting the bureaus such as
those relating to gun control, additional jurisdiction for the Secret Service,
and the availability of materials to law enforcement agencies.
The Deputy Assistant Secretary (Operations), with the assistance ofthe
Director, Office of Operations, exercises general line supervision, as
delegated, over all bureau activities, with special attention to costeffective design and execution of programs, assignment of appropriate
resources, efficiency of management, coordination of programs within
Treasury and with other departments, review of senior personnel appointments, and monitoring of management information reports.
Antinarcotics prograni
With increased administration emphasis on drug abuse. Treasury
continued a high level of antinarcotics activities. The Department
participated in activities of the Cabinet Committee on International
Narcotics Control, the Cabinet Committee on Drug Law Enforcement,
and the Domestic Council Drug Abuse Task Force. Treasury efforts
emphasized evaluating the cost-effectiveness of foreign narcotics assistance programs, formulating recommendations which led to an expanded
Customs role in the drug program, focusing on the narcotics trafficker's
fiscal resources through revitalization of tax enforcement aimed at highlevel drug traffickers, and expanding efforts to reduce the tremendous
amounts of money illegally taken out of the country either to purchase
drugs or to transfer drug profits to safe and secret bank accounts abroad.
A U.S.-sponsored resolution urging governments to outlaw the financing of narcotics trafficking and to exchange information to identify persons
committing such offenses was adopted unanimously by the United Nations
Economic and Social Council. The United States-Swiss Mutual Assistance
Treaty in Criminal Matters, which becomes effective in January 1977,
should expedite the exchange of information concerning persons engaged
in criminal activities, including alleged drug traffickers. Exploratory
discussions have been held or are underway with a number of other
countries concerning mutual assistance agreements to disrupt the financing of transnational crimes.
The U.S. Customs Service concluded agreements with counterpart
organizations in Mexico and Austria to increase cooperation in the
suppression of customs offenses, including the smuggling of narcotics and
other contraband.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Organized crime
The Deputy Assistant Secretary (Enforcement) supervised the participation of the Secret Service, Customs, and ATF in the organized crime
strike forces of the Department of Justice, and promoted more active
participation in the work of these strike forces by the special agents of IRS.
Anti-terrorism
The Deputy Assistant Secretary (Enforcement) represented the Treasury in the Working Group of the Cabinet Committee to Combat
Terrorism, supervising and coordinating the participation of the Secret
Service, Customs, and ATF on subcommittees of that group.
Financial recordkeeping
Treasury regulations, issued as part 103, 31 CFR, under the authority
of Public Law 91-508, require financial institutions, including banks and
brokerage firms, to keep certain basic records that have a high degree of
usefulness in the investigation of tax, regulatory, or criminal matters. The
Assistant Secretary (EOTA) has responsibility for the administration of
these regulations, which also provide for reports of the international
transportation of monetary instruments, reports of interests in foreign
bank accounts, and reports of unusual domestic currency transactions.
The Federal bank supervisory agencies, the Securities and Exchange
Commission, the Federal Home Loan Bank Board, the National Credit
Union Administration, and the IRS have been delegated enforcement
responsibilities under the general supervision of the Assistant Secretary.
During the last half of fiscal 1976, Treasury cooperated with the
Commerce, Consumer, and Monetary Affairs Subcommittee of the
Committee on Governrnent Operations of the House of Representatives
in the subcommittee's review ofthe implementation ofthe provisions of
titles I and II of Public Law 91-508. On June 28, 1976, the Assistant
Secretary testified in detail concerning the history and implementation of
the regulations.'
As a result of information obtained by IRS and Drug Enforcement
Administration, it was determined that certain banks have been used by
drug traffickers to conceal large currency transactions, which should have
been reported in accordance with Treasury regulations referred to above.
In order to deter similar violations in the future, new bank examination
procedures for reviewing currency transactions were developed and
implemented with the cooperation of the Federal bank supervisory
agencies.
In fiscal 1976, the IRS received an estimated 25,000 Forms 4789,
Currency Transaction Report, and processed 50,633. The Customs
Service received 23,967 Forms 4790, Report of the International
Transportation of Currency or Monetary Instruments. During the same
>See exhibit 31.
REVIEW OF TREASURY OPERATIONS
45
period, 15,646 banks, 13,812 credit unions, and 3,496 savings and loans
were examined for compliance with the regulations.
Protective responsibilities
Beginning in November 1975, the Deputy Assistant Secretary (Enforcement) conducted a critique of Secret Service protection techniques and
methods. This critique was directed by the Secretary of the Treasury
following assaults on the President in fall 1975. The purpose ofthe critique
was to determine all means by which the Secret Service could improve its
protective operations and its techniques for receiving and evaluating
intelligence.
The Assistant Secretary (EOTA) approved and published proposed
regulations, in compliance with Public Law 94-196, for the Secret Service
to reimburse State and local governments which use their resources to
protect foreign diplomatic missions and temporary domiciles.
During fiscal 1976 and the transition quarter, the Assistant Secretary
maintained continuous liaison with the Advisory Committee on Candidate
Protection, which authorized protection for 12 Presidential candidates
during the primary campaigns, beginning in October of 1975. During the
transition quarter, the Office of Law Enforcement processed requests for
protection made by candidates of minor parties.
Counterfeiting
Counterfeiters in fiscal 1976 produced approximately $35 million in
counterfeit U.S. currency, down 28 percent from the alltime high of $48.6
million established last year. In the transition quarter, counterfeit
production amounted to $5.5 million.
Fiscal 1976 losses to the public dropped to $3.37 million from $3.60
million in fiscal 1975, with the Secret Service seizing almost $32 million
of the counterfeiter's total output before it reached victims. In the
transition quarter, losses to the public were $1.1 million with seizures
amounting to $4.4 mUlion.
Federal Law Enforcement Training Center
In the summer of 1975, the Federal Law Enforcement Training Center
underwent a major transformation as it moved from a downtown office
building in Washington, D . C , to a 1,500-acre facility at the former Naval
Air Station (Glynco) in Brunswick, Ga. The facility, capable of accommodating a constant training load of 750 students, was Treasury's first
experience in operating a complete remote establishment requiring
maintenance of extensive buildings and grounds and providing a resident
population housing, food, and recreation as well as training.
Training operations at the new site began the first week in September,
with Secretary Simon and a full panoply of congressional and Georgia
dignitaries dedicating the newCenter on September 12, 1975. For interim
46
1976 REPORT OF THE SECRETARY OF THE TREASURY
rehabilitation of buildings and grounds, the Center expended $2 million.
A design master plan calls for some new structures and more extensive
adaptation of existing facilities, utilizing a congressional appropriation of
$28 million. When this major construction program is completed in fiscal
1979, the Center's facilities for law enforcement training will be unequaled
anywhere in the world.
As the student load stabilizes near the Center's capacity, the new facility
will not only enhance the quality of law enforcement training but also
reduce per capita cost. During the year ended September 30, 1976, an
estimated $5 million was saved in student per diem costs alone.
In fiscal 1976, the Department of Health, Education, and Welfare and
the Federal Protective Service of the General Services Administration
were added as participating agencies.
Firearms and explosives control program
The Gun Control Act of 1968 and regulations thereunder provide the
basis for programs of ATF aimed at preventing the illegal possession and
misuse of firearms by criminals. Title XI of the Organized Crime Control
Act of 1970, which regulates explosives, establishes the authority for ATF
programs aimed at curbing the acquisition and misuse of explosives by
criminals. Most criminal investigations within the latter program involve
actual or attempted bombings, followed by investigations ofthe thefts of
explosives.
On June 19, 1976, President Ford's law enforcement message to the
Congress called for a four-part effort stressing the rights of law-abiding
Americans and deemphasizing the rights of criminals. In addition to
measures for tightening the enforcement of existing gun laws, the
President proposed, and the Department drafted, new firearms legislation
which included mandatory sentencing and a ban on the manufacture and
sale of cheap handguns known as ''Saturday Night Specials."
To achieve these ends, the President directed ATF to employ and train
500 additional special agents and to double its investigative efforts in the
Nation's 10 largest metropolitan areas. With White House approval, this
was later expanded to 11 areas.
Treasury requested a supplemental budget of approximately $20 million
for the purpose of implementing the President's program in all of the 11
standard metropolitan statistical areas (SMSA's), but a House/Senate
Appropriations Conference Committee approved only sufficient funding
for 3. The SMSA's of Boston, Chicago, and Washington, D . C , were
selected as a pilot project. The objectives of Operation Concentrated
Urban Enforcement (CUE) are to develop Federal criminal cases against
persons using firearms and explosives in criminal activities in the Nation's
largest cities; to reduce or eliminate major illegal sources of''street type"
firearms and explosives located outside the SMSA's; and to trace all
firearms seized or retained in crimes committed within the target areas to
REVIEW OF TREASURY OPERATIONS
47
determine, among other things, the type of firearms used, the sources of
those firearms, and the retail and subsequent purchasers of them.
Interpol
In fiscal 1976, the U.S. National Central Bureau (USNCB), International Criminal Police Organization (Interpol), assisted local. State, and
Federal law enforcement agencies with 771 foreign criminal investigative
requests and foreign law enforcement with 2,907 criminal investigative
requests. These figures reflect an increasing workload that has been due,
in part, to the USNCB's continued efforts to inform these agencies
concerning the assistance which Interpol can provide in criminal investigations with transnational aspects.
The Chief of the USNCB briefed the 94 U.S. attorneys during their
annual meeting. With the cooperation o f t h e U.S. Attorney Advisory
Committee, a followup program was initiated to inform local prosecutors.
Each U.S. attorney was provided with a list of the State and county
prosecutors in his area, together with a supply of Interpol brochures and
annual reports for distribution. The Chief of the USNCB also briefed the
U.S. Marshals from across the country at their annual meeting.
The USNCB had an exhibit booth and literature at the International
Association of Chiefs of Police conference in Denver, Colo., in September
1975, as well as at the National Sheriffs Association's annual conference
in Chicago, 111., in May 1976.
Interpol briefing and orientation classes have become a part of most
Federal law enforcement agent training classes. The agents are then able
to provide more accurate information about Interpol's capabilities to the
local and State police.
In October 1975, Treasury led the U.S. delegation to the 44th Interpol
General Assembly in Buenos Aires, Argentina. The General Assembly,
representing 122 member countries, adopted substantive resolutions in
the areas of international fraud (white collar crimes); traffic in stolen or
misappropriated motor vehicles; taking of hostages; illicit drug trafficking;
prevention of currency counterfeiting; recruitment of police officers for
juvenile delinquency work; and bilateral police agreements.
During the fiscal year, the United States, through Treasury's coordination, participated in Interpol international symposiums on juvenile
delinquency, violent crimes committed by organized groups, drug trafficking, crimes in seaports, computerized search files, prediction of crime,
Interpol telecommunications, forensic sciences, and the European Regional Conference.
Cargo security program
The Department, through the Customs Service, is conducting a visible,
effective, and multifocused program in the area of cargo security. Aspects
of this program include high-security warehouses, security seals, theft
48
1976 REPORT OF THE SECRETARY OF THE TREASURY
information systems, merchandise quantity control, cargo statistical
analyses, surveys of cargo-handling terminals and procedures, and
investigations of crimes involving international cargo.
The Customs Service, with its unique physical presence of Federal
officers at all points where international cargo arrives and is stored
awaiting clearance, is in a pivotal position to operate and enforce cargo
security programs.
Under Customs imported merchandise quantity control program, there
were 323 seizures for manifesting violations in fiscal 1976, which led to
penalties assessed against carriers in the amount of $8.9 million.
A vigorous program to reduce false manifesting of containerized cargo
was pursued. During the year, the program was credited with recovery of
$0.9 million in extra duty and taxes, the discovery of $8.4 million in
unmanifested merchandise, and the assessment of fines and penalties in
the amount of $2.1 million.
A new high-security seal was proposed for mandatory use on all portto-port in-bond carload and container lot movements of cargo in Customs
custody.
ATF continued its extensive reporting network on theft of firearms from
interstate shipments. Since the inception of the program, commercial
carriers have voluntarily reported to ATF 2,265 incidents involving the
theft of approximately 14,200 firearms. Forty-six criminal cases have been
perfected against 84 defendants. Forty-one of the defendants were either
presently or formerly employed by the carrier.
Treasury enforcement communications system (TECS)
TECS provided direct communication capability between the constituent Treasury law enforcement organizations: Customs, ATF, and the
Intelligence and Internal Security Divisions of IRS. The system also
provided access to other law enforcement information through interface
with the FBI National Crime Information Center and the national law
enforcement teletype system.
Inquiries during fiscal 1976 produced 2,264 pieces of positive information, or "hits," and resulted in 1,687 arrests. The total of terminals on line
rose to 673.
Realignment of ATF
A major activity of the Office of Law Enforcement was a study of the
operations of the Bureau of Alcohol, Tobacco and Firearms that
culminated in a realignment ofthe Bureau's organization for handling its
criminal enforcement responsibilities. On August 30, 1976, the Under
Secretary, with the approval ofthe Secretary, ordered the realignment, to
be effective December 1. At the end of the transition quarter an
implementation group, under the direction of a three-member steering
REVIEW OF TREASURY OPERATIONS
49
committee, one of whom was the Director of the Office of Law
Enforcement, was completing plans to put the realignment into effect.
Engraving and printing
A basic realignment ofthe Bureau of Engraving and Printing into three
functional areas (Administration, Operations, Research and Engineering)
was approved by the Department and made effective in fiscal 1976.
Reissuance ofthe $2 bill as a Federal Reserve note, series 1976, marked
a program of major import to the Bureau. Not simply a commemorative
issue, the $2 note is designed to become a permanent part of U.S. currency.
The production goal of 400 million $2 notes by July 4, 1976, was exceeded
by the Bureau on April 30 with a total of 419 million $2 notes produced
and delivered.
Productivity was improved and savings realized by mechanization of
currency trimming operations, shrink wrapping of currency bricks, and
stamp bookforming, and the use of plastic in the banding ofcurrency. The
Bureau is also experimenting with an all-wood pulp currency paper and
with machine counting ofcurrency. Both promise significant productivity
improvement and savings.
The Bureau in fiscal 1976 was in the final phases of acquiring total inhouse capability for gravure cylinder manufacture. After manufacturing
phase-in, all attendant shipping and security costs will be eliminated.
Exterior areas of the Bureau were refurbished in anticipation of the
influx of Bicentennial visitors. During fiscal 1976, 619,515 visitors took
the tour of engraving and printing operations, with an additional 159,315
in the transition quarter.
Customs services
During fiscal 1976 and the transition quarter, respectively, the Customs
Service collected a record $4.9 billion and $ 1.4 billion in duties and taxes,
processed over $ 113 billion and $31 billion of imported goods, and cleared
269 million and 106 million arriving persons, 78 million and 22 million
vehicles, 353,000 and 106,000 aircraft, and 129,000 and 39,000 vessels.
Under Customs enforcement mission, merchandise seized, including
illicit drugs, prohibited articles, undeclared merchandise, etc., was valued
at $660 million and $31 million. There were over 23,000 and 7,000 drug
seizures, including 368 and 45 pounds of heroin, 1,030 and 236 pounds
of cocaine, and 380 and 58 tons of marijuana. Duriugfiscal 1976, Customs
also seized 21.4 million units of polydrugs.
Customs air interdiction program utilized, for the first time, the
NORAD/FAA long-range radar in concert with its own mobile groundbased radars for detection and tracking of smuggler aircraft along the
southern border. The prime example of this coordination. Operation Star
Trek, resulted in 262 aircraft detections and 43 intercepts.
50
1976 REPORT OF THE SECRETARY OF THE TREASURY
During fiscal 1976, Customs launched a major currency control
program to identify and prevent the transfer of funds destined to support
smuggling activities.
Import and export statistics depend upon data collected by the Customs
Service. In fiscal 1976 and the transition quarter, respectively, customs
officers, located at some 100 ports of entry, verified 6 million and 1.5
million line items on 3.3 million and 850,000 entries filed, and transmitted
approximately 8.5 million and 3 million export and import documents to
the Bureau of the Census. These vital trade statistics also served for the
establishment and enforcement of commodity quotas, of which Customs
administered more than 700.
Customs played an important role in the full range of programs of the
Customs Cooperation Council, an 80-member international organization
with headquarters in Brussels, which promotes cooperation in customs
enforcement measures and the facilitation of international trade.
Mint
The Mint produced over 12.6 billion domestic coins in fiscal 1976, a
moderate reduction from the 13 billion plus produced in fiscal 1975, and
3.1 billion coins in the transition quarter. Productivity was improved by
the acquisition of new carbide blanking dies, high-speed quad-strike
presses and by the automation of the coin pallet tracking system.
The extraordinary demand for pennies subsided in fiscal 1976 and
resulted in inventory gains at both the Mint and Federal Reserve banks.
Closing inventories at the Mint of 3.2 billion coins were up 1.9 billion, or
146 percent, over the 1.3 billion held in inventory at June 30 last year, and
rose to 3.7 billion at the end of the transition quarter.
The Mint participated extensively in activities of the Bicentennial,
producing 45 million congressionally authorized, 40 percent silver
Bicentennial coins. Also, orders for Bicentennial gold and sUver medals
exceeded expectations, resulting in increased activity in the production,
packaging, and shipping of these items.
The Mint deposited $757 million in the general fund of the Treasury,
principally from seigniorage, during fiscal 1976 and an additional $112
million during the transition quarter.
The fiscal 1976 cycle ofthe continuing audit of U.S.-owned gold at Mint
institutions was completed. During this cycle, about 12 percent ofthe gold
stored at Bureau of the Mint depositories was audited and found to be
intact. An additional 5 percent was audited during the transition quarter.
A contract study of U.S. coinage system requirements to the year 1990
was completed and was under review at the end of fiscal 1976.
Tariff Affairs
The Office of Tariff Affairs was established in 1971 to provide policy
direction, review, and final action on recommendations by the Customs
REVIEW OF TREASURY OPERATIONS
51
Service on administration ofthe Antidumping Act and countervailing duty
law. The office is also responsible for policy review in other actions under
the tariff laws, including classification, value marking, and quota regulations.
Amended antidumping regulations, consistent with the amendments to
the Antidumping Act contained in the Trade Reform Act of 1974, became
effective on July 26, 1976. They required more detailed injury information
in line with the additional responsibilities placed upon the Secretary ofthe
Treasury to determine at the initial stage of a case whether there is
substantial doubt on the question of injury to the domestic industry. The
new regulations also provided for the first time for a discontinuance of an
investigation on a company-by-company basis. Another new provision in
the regulations permitted a retroactive withholding appraisement in
certain situations; e.g., when price assurances given as part ofthe basis for
a revocation are violated.
Compared with 10 cases begun in fiscal 1975, 27 investigations were
initiated in fiscal 1976, and 1 during the' transition period. Treasury
reached 11 final affirmative determinations during fiscal 1976, with 2 of
these cases resulting in a formal dumping finding. During the transition
period, four additional final affirmative decisions were issued, one of these
a formal dumping finding.
During fiscal 1976, 10 countervailing duty investigations were commenced, with an additional 4 investigations initiated during the transition
period. During fiscal 1976 Treasury issued 25 final countervailing duty
decisions. In 13 of these cases countervailing duties were imposed, 6 of
which were the subject of a waiver; 11 cases resulted in negative
determinations and 1 in a termination. During the transition period, three
cases resulted in the imposition of countervailing duties, one of which
involved a waiver. This represents an increase from fiscal 1975, when only
five final countervailing duty decisions were issued, with three of those
involving affirmative decisions.
During the transition period, the Treasury invited comments on that
section of its antidumping regulations dealing with treatment of circumstances of sale, and on its proposed countervailing duty regulations. Final
adoption of new countervailing duty regulations should occur during the
next fiscal year.
TAX POLICY
Legislation
During fiscal 1976, the administration proposed substantial income tax
cuts accompanied by limits on Government spending. The goal was to
stimulate economic activity, to reduce tax burdens on individuals and
52
1976 REPORT OF THE SECRETARY OF THE TREASURY
businesses, and to restrain the expanding size of Government. Tax reform
also received the administration's guidance and support as the Congress
continued to deliberate on those measures. The administration's reform
proposals were directed at substantially reducing the number of individuals with high economic incomes who pay little or no tax, encouraging
economic growth through more capital formation, encpuraging job
creation, making estate and gift taxation more equitable, particularly with
respect to farnris and closely held business, and helping State and local
governments borrow needed funds.
Tax reduction.—President Ford proposed to the Congress on October
6, 1975, a permanent $28 billion income tax cut program tied to equivalent
Federal spending cuts. The program included $20.7 billion in personal
income tax reductions concentrated at low- and middle-income levels and
$7 billion of busihess tax cuts to encourage investment in productive
facilities. The individual income tax cut proposals would have increased
the personal exemptions from $750 to $1,000, reduced tax rates for
individuals, and replaced the present minimum and maximum standard
deduction by a single flat standard deduction of $ 1,800 for single persons
and $2,500 for married persons filing jointly ($1,250 for married persons
filing separately). Also proposed were business tax cuts which would have
reduced the maximum corporate tax rate from 48 percent to 46 percent,
continued the current reduction in the tax rate on the first $50,000 of
taxable income, made permanent the 1975 Tax Reduction Act increase
in the investment credit from 7 percent (4 percent in the case of public
utilities) to 10 percent, and provided tax relief to electric utilities.
The House passed its version of a tax cut in H.R. 10612 on December
4, 1975, and the Senate passed its version in H.R. 5559 on December 15,
1975. The House-Senate conferees reached agreement on the Senate's
version, H.R. 5559, which was an $8.4 biUion compromise tax cut for 6
months. The Congress voted its adoption on December 17, 1975, and sent
the bill to the White House. President Ford vetoed H.R. 5559 on
December 17 because it was an inadequate tax cut amounting to only $ 18
billion on a full-year basis and provided no spendings limitation. By
contrast, the President's proposed tax cut would amount to $28 billion
with a doUar-for-doUar spending cut. In addition to the bill's inadequate
overall tax cut and lack of spending-cut commitment, the President stated
that the smaller tax cut extension in the bill would not give middle-income
individuals a fair share ofthe tax cut. The House sustained the President's
veto on December 18, 1975.
Public Law 94-164, the Revenue Adjustment Act of 1975, approved by
the President on December 23, 1975, was a short-term compromise on tax
reduction and spendings limitation. The act extended with some modification the 1975 tax cuts and withholding rates for the first 6 months of
1976. The act also contained a declaration of policy on spending control
and a commitment to reduce the spending level in fiscal 1977 equal to any
REVIEW OF TREASURY OPERATIONS
53
reduction in taxes after June 30, 1976, if conditions warranted. The major
provisions of the Revenue Adjustment Act were: (1) An increase in the
minimum standard deduction from $ 1,600 to $ 1,700 for single persons
and from $1,900 to $2,100 for married persons filing jointly; (2) the
percentage standard deduction was continued at 16 percent of adjusted
gross income but the maximum standard deduction was increased from
$2,300 to $2,400 for single persons and from $2,600 to $2,800 for married
persons filing jointly; (3) an increase in the $30 nonrefundable tax credit
for each taxpayer and dependent to the greater of $35 per capita or 2
percent of the first $9,000 of taxable income; (4) an extension of the
earned income credit; and (5) an extension ofthe 20-percent corporate
tax rate on the first $25,000 of taxable income, 22-percent rate on the next
$25,000, and 48-percent rate in excess of $50,000.
The President, however, continued to urge that his larger tax cut
proposal be enacted permanently. In his state of the Union address on
January 19, 1976, President Ford renewed his proposal for the $28 billion
permanent income tax cut. The effect on tax year 1976 of this proposal
would be tc apply the smaller congressional tax cuts for the first 6 months
and the larger administration tax cuts for the second 6 months and
thereafter. The President's fiscal 1977 budget, presented on January 21,
1976, assumed congressional approval of his tax cut recommendation to
become effective July 1, 1976. The proposed reductions would be
permanent and would give individuals and corporations about $ 10 billion
more a year in tax cuts than they would receive if the 6-month tax cut
extension enacted in December 1975 were applied on a full-year basis.
The Senate Finance Committee, when it approved its version ofthe tax
reform bill, H.R. 10612, on June 10, 1976, agreed to make permanent the
tax cuts set to expire June 30, 1976, but the Senate, because of the
numerous tax revision measures, could not complete action on H.R. 10612
in time permanently to extend the tax cuts. The Senate tacked a temporary
tax cut extension on House-passed bill H.R. 10051, relating to tax
treatment of certain life insurance distributions. The Congress passed H.R.
1005 1 on June 29, 1976, which froze tax withholding rates and corporate
tax rates for estimated tax payments through August 30, 1976, thus
continuing for 2 months the tax cuts which would have expired June 30,
1976. President Ford approved the legislation. Public Law 94-331, on
June 30, 1976. Public Law 94-396, approved on September 3, 1976,
extended the existing withholding rates one-half month through September 15, 1976. Another half-month extension, through September 30,
1976, was enacted in Public Law 94-414, approved on September 17,
1976. Finally, a permanent tax cut was enacted in Public Law 94-455, the
Tax Reform Act of 1976. The basic tax cut provisions of the act made
permanent the temporary tax cut provisions of the Revenue Adjustment
Act of 1975 including the standard deduction increases and the $35
nonrefundable tax credits for each taxpayer and dependents, but ex-
54
1976 REPORT OF THE SECRETARY OF THE TREASURY
tended, through 1977, the earned income credit under the individual
income tax and the 20-percent tax rate on the first $25,000 of taxable
income and the $50,000 surtax exemption under the corporate income
tax.
Tax reform.—At the beginning of fiscal 1976, the House Ways and
Means Committee continued its examination of the Federal tax system.
The committee had reached tentative decisions during fiscal 1975 and in
substance had adopted Treasury's tax reform proposals of April 30, 1973.
A major bill was prepared by the committee in 1975 but it was not
reported.
On July 8, 1975, Secretary Simon in testimony before the committee
renewed the administration's request for tax reform legislation. Even
though the draft committee bill was somewhat less strict than the Treasury
proposals, the Secretary stated that on the whole the draft bill was
reasonable and acceptable. The committee bill included the Treasury's
concept of a minimum taxable income intended to deal with the problem
of taxpayers with high economic incomes who pay little or no income tax.
The bill also included the Treasury's concept of a limitation on artificial
accounting losses intended to deal with tax avoidance by means of tax
shelters. Other provisions included tax simplification, elimination of
withholding tax on foreign interest income, lengthening of the holding
period to 1 year for long-term capital gains, a progressively smaller portion
of long-term capital gain to be taxable if assets are held for long periods,
and administrative provisions relating to tax return preparers, declaratory
judgments regarding the status of charitable organizations, and withholding taxes on gambling winnings. The Secretary also supported the
committee's intent to deal with disclosure of tax returns and tax return
information. The Secretary also offered a proposal to limit industrial
development bond financing. He also requested that the committee
support the existing DISC (domestic international sales corporation)
provisions because of the vital need for investment capital and urged
adequate assessment of DISC'S importance for exports and employment.
The Secretary discussed extensively the importance of capital formation.
He also offered new tax proposals relating to electric utilities.
On July 31, 1975, Secretary Simon in testimony before the committee
made specific capital formation proposals which included the integration
of corporation and individual income taxes. In addition, he proposed
measures to encourage individuals to increase their savings for investment.' In his March 22, 1976, statement to the Ways and Means
Committee, the Secretary presented the administration's position on
revision of estate and gift taxation.2
The Ways and Means Committee reported a comprehensive tax reform
bill, H.R. 10612, on November 12, 1975, and the House passed the bill
1 See exhibit 33.
2 See exhibit 36.
REVIEW OF TREASURY OPERATIONS
55
on December 4, 1975. The Senate Finance Committee reported its version
of H.R. 10612 on June 10, 1976. After considerable amendment, the
Senate approved the bill on August 6, 1976, and the conferees reached
agreement on September 13, 1976. [Public Law 94-455, the Tax Reform
Act of 1976, was approved by President Ford on October 4, 1976.] In
addition to the tax cut provisions discussed earlier, the act:
Restructured and increased the present "add-on" type of minimum
tax (adopted in lieu of the administration's proposals for an alternative
minimum taxable income).
Restricted the amount of immediately allowable deductions in taxshelter ventures in real estate, farming, oil and gas, movies, equipment
leasing, and sports franchises.
Restructured the maximum marginal tax on "earned income."
Lengthened the holding period for long-term capital gains.
Liberalized the tax treatment of capital losses and the loss carryover.
Limited the deduction for nonbusiness interest.
Provided some tax simplification (and in some instances liberalized
tax treatment) by restructuring the tax tables for individuals, the
deduction for alimony, the retirement income credit, the child care
deduction, the sick pay and military disability exclusions, and the
moving expense deduction.
Tightened up the deduction for expenses attributable to the business
use of homes, the rental of vacation homes, deductions for attending
foreign conventions and for travel expenses away from home by State
legislators, and the tax treatment of qualified stock options.
Terminated use of exchange funds as a capital gains tax avoidance
device.
Restructured the throwback rules for distributions of accumulation
trusts and the treatment of multiple trusts.
Restructured and extended the 10-percent investment credit.
Liberalized and restructured the tax treatment of employee stock
ownership plans.
Extended the period for net operating loss carryover and restricted
potential abuse.
Revised the tax treatment of foreign income of individuals, controlled
foreign corporations and their shareholders, foreign taxes and the
foreign tax credit, and Western Hemisphere trade corporations, China
Trade Act corporations, and corporations operating in Puerto Rico and
U.S. possessions.
Restricted tax benefits for taxpayers participating in international
boycotts and bribe-produced income.
Restricted certain DISC benefits.
Provided new or revised rules for confidentiality and disclosure of tax
56
1976 REPORT OF THE SECRETARY OF THE TREASURY
returns and return information and for income tax return preparers,
assessments, withholdings, and other administrative matters.
Provided tax incentives to encourage the preservation of historic
structures.
Provided for establishment of individual retirement accounts for
nonworking spouses.
Liberalized the limitation on contributions to certain H.R. 10 plans
and retirement deductions for Armed Forces Reserves and National
Guard.
Revised the treatment of private foundation set-asides and payouts.
Provided declaratory judgments regarding tax-exempt status of
charitable organizations.
In addition, the 1976 act repealed and revised obsolete and rarely used
provisions ofthe Internal Revenue Code. Almost 150 Code sections were
repealed and deletions were made in about 850 other Code sections. The
deletion of the so-called deadwood did not affect tax policy or result in
substantive changes.
Secretary Simon in his December 3, 1975, speech at the annual
conference of the Tax Foundation urged basic tax reform which would
completely redesign and restructure the income tax to make it simple,
equitable, and efficient.3 [At the signing ofthe Tax Reform Act of 1976
on October 4, 1976, President Ford requested the Secretary of the
Treasury to study the potential for restructuring and simplifying the
present tax code and to report to him in December 1976.]
Energy tax program.—In fiscal 1976, the administration continued its
initiative to enact tax and other measures related to energy. On July 8,
1975, Secretary Simon presented to the Ways and Means Committee the
Labor-Management Committee's recommendations released by the
White House on June 13, 1975. The proposals would revise the tax laws
apphcable to electric utilities by (a) increasing the investment tax credit
to 12 percent for certain utility facilities; (b) permitting immediate
investment credit on progress payments on construction; (c) extending 5year amortization for pollution control facilities until 1981; (d) providing
a 5-year amortization for costs incurred in converting from a petroleumfueled generating facility; (e) permitting depreciation of construction
progress expenditures during the construction period; and (f) allowing
utility shareholders to defer taxes on reinvested dividends. The proposal
regarding the investment credit and depreciation would apply only if the
tax benefits are "normalized" for ratemaking purposes.
The President's state ofthe Union address in January 1976 renewed the
request for action on an electric utilities program. In addition, the
administration renewed its request for residential energy conservation
credit that would stimulate homeowners expenditures for thermal effi3 See exhibit 34.
REVIEW OF TREASURY OPERATIONS
57
ciency improvements such as storm doors and windows and insulation of
existing homes. The administration also proposed treating, for a limited
period, geothermal drilling and precommercial development expenditures
as research and experimental expenditures to be immediately written off
against income. The objective was to provide an incentive during
development of geothermal projects. In testimony before the Senate
Finance Committee on March 17, 1976, Secretary Simon renewed the
administration's utilities tax proposals.^
Earlier, H.R. 6860, which provided a national energy conservation
program, had been passed by the House on June 19, 1975 (Secretary's
Annual Report for fiscal 1975). The Senate Finance Committee reported
an amended H.R. 6860 on August 27, 1976. The amendments substituted
several tax provisions designed to encourage greater energy conservation
and efficiency and to stimulate development of alternative forms of energy
to natural gas and oil. An increase in the gasoline tax of one-half cent per
gallon for a 3-year period would increase revenues sufficiently to offset
revenue losses from the tax incentives, some of which are administration
proposals with modifications. The incentives would be directed at
residential energy conservation and efficiency, at business investment in
alternatives or supplements to the use of oil and natural gas, and other
related energy development, use of equipment, etc. By the end of the
period, no further congressional action had taken place, although some
energy-related reform measures were included in the Tax Reform Act of
1976.
Capital formation.—During fiscal 1976, the administration proposed
revision of the tax laws to mitigate the substantial bias under the income
tax against savings and investment and against equity financing as
compared with debt financing. On July 31, 1975, in testimony before the
Ways and Means Committee, Secretary Simon proposed the integration
of the corporation and individual income taxes. The intent was to
encourage more equity investment by eliminating the burden of double
taxation of dividend distributions by corporations. Double taxation would
be eliminated by providing, in part, for a deduction at the corporate level
for dividends paid out, in part, for a gross-up of dividends and a credit at
the shareholder level for corporate taxes paid. The Ways and Means
Committee organized a Task Force on Capital Formation to study the
subject in detail and to report during the next Congress. In his testimony
before the Senate Finance Committee on March 17, 1976, on tax revisions
and tax cuts. Secretary Simon renewed these capital formation proposals,
but on budgetary grounds recommended deferring a phase-in of the
integration proposal until 1978.^*
Estate and gift taxes.—During fiscal 1976, the administration proposed
substantial estate and gift tax relief The relief would (1) in the case of a
4 See exhibit 35.
58
1976 REPORT OF THE SECRETARY OF THE TREASURY
small business interest or a family farm HberaHze the present provisions for
installment payment of estate tax; (2) increase the estate tax exemption
from $60,000 to $150,000; and (3) completely exempt transfers between
spouses from estate and gift tax. The proposal for liberalization of the
installment payment provisions was announced in the President's 1976
state of the Union address; the other aspects of the proposal were
presented by Secretary Simon to the Senate Finance Committee on March
17, 1976, and to the House Ways and Means Committee on March 22,
1976.5 On August 2, 1976, the Ways and Means Committee reported the
bUl, H.R. 14844, which would provide extensive revision ofthe estate and
gift tax laws. The bill incorporated most ofthe administration's proposals.
However, the Senate, which amended and approved the general tax reform
bUl, H.R. 10612, on August 6, 1976, included therein estate and gift tax
revision amendments. Public Law 94-455, the Tax Reform Act of 1976,
included higher estate tax exemptions, provided relief for smaller
businesses in the form of more liberal valuation and tax payment methods,
and more liberal tax-free transfers between decedent and spouse. In
addition, the law imposed more capital gains taxes on inherited assets
when sold and restricted tax avoidance of generation-skipping by limiting
the use of trusts for that purpose.
Aiding State and local governments.—To make State and local borrowing
more effective and equitable, the administration revised its taxable
municipal bond proposal included in the April 1973 tax proposals. The
revised bond proposal was presented by Under Secretary Yeo on January
21, 1976, in testimony before the House Ways and Means Committee.^
The proposal is intended to broaden the market for State and local bonds
by providing the option to local governments to issue taxable bonds. In
addition, the proposal would eliminate the tax-exempt status of industrial
development bonds. The Federal Govemment would pay an interest
subsidy equal to 30 percent of the net interest expense on qualified State
and local obligations on which the issuer agrees to pay federally taxable
interest. On April 8, 1976, the House Ways and Means Committee
reported on H.R. 12774, which would provide for a taxable bond option
with a 35-percent subsidy of the interest yield, but the bill was not
considered by the House.
Social security and railroad retirement.—To assure the future financial
stability of the social security system, the President proposed in his 1976
state ofthe Union address, effective January 1,1977, a payroll tax increase
for employees and employers. The current social security tax rate is 5.85
percent for each employee and employer. Under this proposal, in 1977 the
tax rate would be 6.15 percent on a maximum wage base of $16,500.
Social security legislation enacted in 1972 and 1973 provided for
increasing automatically the maximum amount of annual earnings to be
5 See exhibit 17.
REVIEW OF TREASURY OPERATIONS
59
taxed and credited toward old-age, survivors, disability, and health
insurance. Automatic adjustments become effective January 1 of a given
calendar year. The most recent increase became effective January 1,1976,
when the base was raised from $14,100 to $15,300. (The base will be
$16,500 effective January 1, 1977.)
Public Law 94-202, approved January 2, 1976, provided for the
institution of an annual wage-reporting system effective after 1977 for
social security and Federal income tax purposes instead of quarterly wage
reporting. Annual wage reporting will affect the determination of the
annual taxable wage base subject to social security taxes. Beginning with
the taxable wage base to become effective January 1, 1981, annual rather
than quarterly "average earnings" will be used in the formula to determine
the tax base.
Public Law 94-92, approved August 9, 1975, amends the RaUroad
Unemployment Insurance Act to increase unemployment and sickness
benefits for railroad workers. The benefits increase is financed by an
increase in the employing carriers' contribution rates beginning January
1976. No change is made in the amount of payroll ($400 per month)
subject to the contribution rate. A sliding-scale tax rate schedule is
provided which inversely relates the rate level to the balance of money in
the railroad unemployment insurance account fund.
Unemployment compensation.—The unemployment compensation program is a Federal-State insurance system designed to provide temporary
wage loss compensation to workers if unemployed. Funds accumulated
from payroll taxes permit payment of benefits to unemployed insured
workers. The Federal Government and the States impose employer payroll
taxes. If a State law meets Federal requirements, employers receive a 2.7percent credit against the 3.2-percent Federal payroll tax. The effective
Federal tax therefore is 0.5 percent. The Federal tax is imposed on taxable
wages defined as wages up to $4,200 per year.
H.R. 10210, the Unemployment Compensation Amendments of 1976,
passed by the Congress on October 1, 1976, increases the limit on the
Federal tax base and increases the tax rates primarily to replenish
exhausted unemployment compensation funds. The taxable wage base
limit is raised from $4,200 to $6,000, effective January 1, 1978. This
change would require, in effect, that the States tax the first $6,000 of
earnings (rather than $4,200). The net Federal payroll tax is increased
temporarily from 0.5 percent to 0.7 percent, effective January 1, 1977,
and will be reduced back to 0.5 percent after all advances to the Federal
extended unemployment compensation accounts are repaid. [The President approved the act. Public Law 94-566, on October 20, 1976.]
Excise /ajc^5.—PubHc Law 94-280, approved May 5, 1976, extended for
2 years, to September 30, 1979, the temporary excise rate increases and
temporary taxes used to finance the highway trust fund.
60
1976 REPORT OF THE SECRETARY OF THE TREASURY
Public Law 94-455, the Tax Reform Act of 1976, changed the tax on
large cigars from a bracket system to specific rates based on the intended
retail price to an ad valorem tax on 8 1/2 percent ofthe wholesale price.
A number of regulatory excises, which were imposed many years ago such
as the taxes on imported oleomargarine, white phosphorus matches, and
adulterated butter were repealed by the "deadwood" part of the act as
other laws now provide for controls over these products. The attachment
of certain equipment to trucks was excluded from the definition of
"further manufacture" while credit or refund of tax was provided for parts
added to light-duty trucks in connection with the first retail sale.
Other legislation.—Public Law 94-81, approved August 9, 1975,
provides for nonapplication of the depreciation recapture rules in certain
tax-free liquidations involving tax-exempt organizations.
Public Law 94-202, approved January 2, 1976, amends the Code
provisions regarding the collection of U.S. taxes on articles produced in
the Virgin Islands and transported to the United States.
Public Law 94-236, approved March 19, 1976, provides that certain
New York City pension funds may hold and acquire notes or bonds of the
city of New York without being in violation ofthe "exclusive benefit" rules
or prohibited transactions provisions.
Public Law 94-253, approved March 31, 1976, provides tax treatment
for exchanges under the final system plan for the Consolidated Rail
Corporation (ConRail).
Public Law 94-267, approved April 15, 1976, permits tax-free rollovers
of distributions from employee retirement plans in the event of plan
termination.
Public Law 94-331, approved June 30, 1976, permits a life insurance
company to disregard a distribution during the last month of its taxable
year, determined to have been made out of the policyholders' surplus
account, if such distribution is returned to the company not later than the
due date for filing its income tax returns (including extensions).
Public Law 94-396, approved September 3, 1976, changes the tax
treatment of the gain on the lapse of options to buy or sell securities.
Public Law 94-401, approved September 7, 1976, permits a WIN credit
not to exceed $1,000 paid or incurred by a taxpayer to an eligible
employee whose services are performed with a child day care services
program.
Public Law 94-414, approved September 17, 1976, changes the
treatment of affiliated banks for purposes of common trust fund provisions
of the Code.
Administration, interpretation, and clarification of tax laws
The Department of the Treasury, during fiscal 1976, issued 44 final
regulations, 16 temporary regulations, and 45 notices of proposed
rulemaking relating to matters other than alcohol, tobacco, and firearms
REVIEW OF TREASURY OPERATIONS
6 1
taxes. The Department issued 10 final regulations and 13 notices of
proposed rulemaking relating to alcohol, tobacco, and firearms taxes. In
addition, it published a discussion draft of proposed regulations on the
taxation of fringe benefits and issued a revision of the Internal Revenue
Service's Statement of Procedural Rules. Two ofthe final regulations, 13
ofthe temporary regulations, and 14 of the notices of proposed rulemaking
were issued under the Employee Retirement Income Security Act of 1974.
During the transition quarter, the Department issued 12 final regulations, 2 temporary regulations, and 10 notices of proposed rulemaking
relating to matters other than alcohol, tobacco, and firearms taxes. Three
ofthe final regulations, both ofthe temporary regulations, and three ofthe
notices of proposed rulemaking were issued under the Employee Retirement Income Security Act of 1974. In addition, there were six final
regulations and two notices of proposed rulemaking to alcohol, tobacco,
and firearms taxes.
Among the subjects dealt with in these regulations and proposed
regulations were: The tax credit for purchase of a new principal residence,
social security taxes, domestic international sales corporations, industrial
development bonds, participation and vesting requirements for qualified
pension plans, percentage depletion, the provision of joint and survival
annuity benefits by a qualified pension plan, qualification as a custodian
for individual retirement accounts and qualified pension plans, tax
treatment of long-term contracts, capital construction funds for vessels,
the definition of a medical research institute, the investment credit for
movies, the 1975 tax rebate, child care expense deduction, personal
exemption credit, the foreign tax credit, the farm recapture provisions,
employee stock ownership plans, retroactive amendments to qualified
employee benefit plans, and current taxation of shipping profits.
DISC report
Pursuant to the Revenue Act of 1971, the Treasury submitted to the
Congress its third annual report on the operation and effect of the DISC
legislation. The report covered DISC year 1974 (essentially calendar year
1973).
Tax treaties
Bilateral income tax treaties with the U.S.S.R., Poland, Romania, and
Iceland were ratified in fiscal 1976 and are now in force. Income tax
treaties with Israel, Egypt, the United Kingdom, and Korea were signed
during the year and have been submitted to the Senate for approval.
Income tax treaties with the Republic of China (Taiwan) and the
Philippines are approaching completion. Negotiations and technical
discussions on income tax treaties were conducted with Brazil, Canada,
Hungary, India, Spain, and Yugoslavia, and estate tax treaty discussions
were held with Germany. On May 18, 1976, the Treasury issued a press
62
1976 REPORT OF THE SECRETARY OF THE TREASURY
release listing all countries with which income tax treaty discussions were
in various stages of progress, and releasing the text of the current model
income tax treaty.
Participation in international organizations
Treasury representatives participated in the work of the Committee on
Fiscal Affairs of the Organization for Economic Cooperation and
Development (OECD), including membership on a number of working
parties of the Committee. Treasury representatives also attended the
annual general assembly ofthe Inter-American Center of Tax Administrators (CIAT), the Ad Hoc Group of Experts on Tax Treaties between
Developed and Developing Countries, sponsored by the United Nations,
and the UNESCO conference on the taxation of copyright royalties.
Treasury representatives appeared before a panel convened under the
General Agreement on Tariffs and Trade to defend the DISC provisions.
INTERNATIONAL AFFAIRS
Trade and Raw Materials Policy
Fiscal 1976 was a transitional period for the international trade
community. The world economy, led by the United States and other major
industrial countries, began to recover from the most severe recession since
the 1930's. The developed and developing countries held extensive
consultations and devoted a substantial amount of effort to formulating
policies that would convert this recovery into a sustained economic
expansion. A major goal of these efforts was to assure that a free and open
world trade environment prevails so that the increased benefits to be
derived from such a system can be shared by all.
From 1974 through late 1975 growth ofthe global economy and, in turn,
world trade was severely depressed. The real output of the major
industrialized nations fell suddenly and sharply and the volume of world
trade declined for the first time since World War II. Significant pressures
were experienced by countries with domestic and balance of payments
problems to adopt protectionist measures. The emerging recovery and the
extensive international consultations relieved these pressures to some
extent. However, serious problems remain. A significant increase in
energy prices could, for example, substantially undermine the economic
progress made by Western economies thus far, developed as well as
developing countries alike, and thereby lead to renewed pressures for
protectionism.
The Department of the Treasury has played an active and substantive
role in dealing with international trade issues during fiscal 1976. In close
REVIEW OF TREASURY OPERATIONS
63
cooperation with the executive departments. Treasury has worked hard to
promote a free and open international trading system.
Response to protectionism
Despite significant pressures created by the global economic decline
and increased energy prices there was not a general retreat toward
protectionist measures during fiscal 1976. There were, however, exceptions to this norm. A number of countries, both developed and developing,
which were experiencing serious balance of payments and internal
problems, instituted trade restrictive measures. These measures included
quantitative restrictions, import surcharges, prior import deposit schemes,
and tariff rate quotas. Fortunately, for the most part, these measures were
not extensive in their coverage and were temporary in nature.
During fiscal 1976, the United States was in the forefront in opposing
the introduction of new or the intensification of existing restrictive trade
practices. Our leadership was demonstrated by the active role the United
States played in the economic summit conferences in Rambouillet'
(November 1975) and Puerto Rico2 (June 1976). At both conferences the
United States stressed the close relationship between international trade
and national economic policies, the need to ensure greater stability in
world economic and financial conditions, and opposition to measures
which would distort trade and lead to a resurgence of protectionism.
With these objectives in mind, the participants of the Rambouillet
summit (the United States, France, Britain, Japan, West Germany, and
Italy) agreed that the current multilateral trade negotiations (MTN)
should aim at achieving substantial tariff cuts, even eliminating tariffs in
some areas, at significantly expanding agricultural trade, and at reducing
nontariff measures to provide for a maximum possible level of trade
liberalization. 3
The United States received authority to enter into negotiations with the
passage ofthe Trade Act in January of 1975. Following passage ofthe act
the MTN were able to progress from a largely preparatory stage to a
substantive negotiating stage.
The major industrialized countries have agreed in principle to attempt
to conclude the current round of negotiations by 1977. Substantial
progress was made during fiscal 1976 toward this goal; however, in the
coming year greater efforts must be made if we are to complete the
negotiations by 1977. Thus far the United States has been a strong, positive
motivating force in the MTN, encouraging progress toward a liberalization
of trade. We will continue to press for progress in these negotiations,
advocating freer and more open trade.
ISee exhibit 51.
2 See exhibit 60.
3 See exhibit 39.
64
1976 REPORT OF THE SECRETARY OF THE TREASURY
The United States, in June of 1976, also joined with other members of
the Organization for Economic Cooperation and Development (OECD)
to reaffirm the OECD trade pledge for the second consecutive year. The
pledge represents a mutual commitment by signatories to avoid the
imposition of trade or other current account restrictions for balance of
payments reasons. The U.S. call for a renewal ofthe pledge emphasized
the interdependence of the world economic system, the need for
cooperation, and the need to adopt policies that would assure free and
open world trade. The United States also stated its intention to work within
the OECD and other international organizations for the complete
liberalization of trade for the benefit of all nations.
U.S. commodity policy
The U.S. international commodity policy was elevated to a new level of
recognition during 1975-76 with wide-ranging and positive policy
initiatives pursued by officials of Treasury, State, and other agencies in a
number of important international fora. U.S. international commodity
policy, which was formulated under State-Treasury leadership within the
interagency framework, was first enunciated by Secretary Kissinger at
Kansas City in May 1975. Then, at the U.N. Seventh Special Session in
September 1975 he proposed a set of poHcy initiatives including:
Establishment of a producer-consumer forum for every key commodity to
discuss ways to improve the efficiency, growth, and stability of commodity
markets; creation of a development security facility in the IMF to provide
developing countries compensatory financing assistance for shortfalls in
their export earnings; a "major international effort" to promote the
development of raw material resources in developing countries; and
proposals to increase food production in developing countries, food aid to
those countries, and world food security through a system of grain
reserves. 4
The first major task of the interagency Commodity Policy Coordinating
Committee (CPCC), which was established at the Assistant Secretary level
in December 1975 and is jointly chaired by Treasury and State, was to
formulate a "Comprehensive Approach to Commodity Policy. "^ The final
program formulated by the CPCC was a forthcoming set of proposals
designed to coordinate U.S. participation in a number of important
international fora during the coming year. It was aimed at finding
constructive means to fulfill many of the objectives put forth in the
UNCTAD Secretariat's October 1975 proposed "Integrated Program,"
which is widely supported by developing countries, and at fulfilling
objectives agreed upon by developed countries.
The first of the major international fora in which the United States
participated during 1976 was the Conference on International Economic
Cooperation (CIEC) at Paris, which was organized by Ministers of
4 See exhibit 38.
5 See exhibits 40 and 43.
REVIEW OF TREASURY OPERATIONS
65
developed and developing countries, to begin an intensified North-South
dialog. The Ministers established 4 commissions (Energy, Raw Materials,
Development, and Financial Affairs), each consisting of 15 members, 10
from developing countries and 5 from industrialized countries. Treasury
was designated as the lead agency for the Financial Affairs Commission
and took an active role in the other commissions. The Commission on Raw
Materials (CORM) examined problems in commodities and the range of
possible solutions to these problems. The CORM met in February, March,
April, June, and July 1976 to discuss investment, trade, production, buffer
stock arrangements, and compensatory financing for developing countries
suffering balance of payments difficulties, and will meet again in October
and November to develop recommendations for followup action in other
fora. The December Ministerial meeting will attempt to resolve remaining
differences in agreed resolutions based on these recommendations.
The United States and other IMF members implemented the proposal
to liberalize provisions of the existing IMF compensatory financing
facility. The United States also recommended setting aside part ofthe new
IMF trust fund for concessionary loans or grants to the poorer developing
countries, which were highly dependent on commodity exports and which
suffered shortfalls on export earnings. That proposal was not accepted by
other members of the IMF, however. The revised IMF compensatory
financing facility has drawings already authorized this year totaling nearly
SDR 1.7 billion during the period 1966-75. Drawings by developing
countries this year have amounted to SDR 1.1 billion.
Another major focus for the North-South dialog on commodity issues
was the Fourth United Nations Conference on Trade and Development at
Nairobi, Kenya, in May 1976. In a spirit of cooperation with developing
countries, the United States, with some reservations, joined in the
consensus on the UNCTAD IV Resolution on Commodities. By doing so,
the United States agreed to participate in preliminary commodity meetings
to determine the nature of problems affecting commodities and to
examine, without commitment, measures which might be appropriate for
each product. The United States participated in the first of these meetings,
on copper, in September 1976 and will participate in meetings for other
commodities during late 1976, 1977, and early 1978. Although many
countries see these conferences leading directly to negotiations of
commodity agreements, the United States has made no prior commitment
to participate in any such negotiations.^
The United States also agreed, by signing the Nairobi Resolution, to
participate, without any commitment, in preparatory meetings to examine
whether further arrangements for financing buffer stocks, including
common funding, are desirable. After they have taken place, the United
<iSee exhibit 43.
66
1976 REPORT OF THE SECRETARY OF THE TREASURY
States will decide whether to participate in the negotiating conference for
a common fund, scheduled for March 1977.
Another U.S. policy initiative called for in the "Comprehensive
Approach" was the International Resources Bank (IRB) proposal, which
was refined following its rejection at UNCTAD IV^ and which has received
increasing support, especially from other industrial countries. The basic
functions of the IRB would be to: Mobilize and encourage the flow of
foreign capital, management, and technology to raw material projects in
developing countries, when participants in projects invite IRB assistance;
encourage adherence to standards of equity and observance of contractual
undertakings by host countries and private companies participating in
resource projects; and minimize political obstacles to achieving the
rational international allocation of capital investment in raw material
resources by providing an international mechanism for political risk. The
IRB proposal is scheduled to receive further discussion in the Raw
Materials Commission of CIEC. The IMF/World Bank Development
Committee has agreed to consider studying the IRB proposal and the
feasibility of including it in the World Bank group.
The U.S. Government believes that free operation of commodity
markets is preferable to agreements and other mechanisms that regulate
markets. It is, however, ready to consider specific proposals for commodity agreements, on a case-by-case basis, where they can improve the
operation of the market. In some cases, we have found commodity
agreements appropriate and not detrimental to U.S. economic interests.
For example, in September 1976 the Senate approved U.S. participation
in the Fifth International Tin Agreement, which went into force on July
1, 1976. In addition, the Senate ratified in August 1976 U.S. participation
in the Third International Coffee Agreement, effective on October 1,
1976, and an extension ofthe International Wheat Agreement. We have
also agreed to participate in the negotiations ofa new international sugar
agreement. In other cases, we found that commodity agreements were
inappropriate, as, for example, in the case of cocoa.
In addition to working with the United States and other developed
countries in a number of international fora, developing countries have
sought to improve their economic position by means of groups comprised
entirely of developing countries. However, intemational producer associations during the 1975-76 period generaUy failed to advance their goal of
increasing commodity prices for the sole benefit of the developing
countries.
Agricultural commodity developments
Coffee.—The new Intemational Coffee Agreement is an improvement
over previous agreements, but it still contains provisions such as producer
7 See exhibit 72.
REVIEW OF TREASURY OPERATIONS
67
country export quotas, that may be troublesome. However, during the
current period of coffee shortage and high prices the quotas are
suspended. Moreover, in the event that quotas do become effective, the
agreement does contain provisions to assure flexibility in the assignment
of quotas based on export performance and the level of individual country
stocks of coffee. Therefore, new and more efficient producers will not be
unduly discriminated against. Treasury played a major role in assessing the
likely economic impact ofthe old ICA. On the basis of this assessment, the
United States successfully negotiated additional protection for consumers.«
Wheat.—The United States has also long been a member of the
International Wheat Agreement. U.S. ratification ofthe extension ofthe
IWA until June 30, 1978, was important to the continuation of ongoing
discussions of proposals for an international system of grain reserves. The
IWA currently has no economic provisions—they have been suspended
since 1971—but the council does serve as an effective framework for the
exchange of information and the coordination of food aid. ^
Grain reserves.—The United States has proposed, in the London
discussions, a system of internationally coordinated nationally held grain
reserves to enhance world food security. Participating countries would be
required to accumulate or draw down their reserve stocks of grain in
response to production above or below trend respectively. There would
be no direct relation between prices and reserve stock management. The
burden of holding reserves would be borne by developed country
exporters and importers. Access to reserves would be denied nonparticipants. Discussions on grain reserves proceeded at a slow pace as other
countries have explored reserve proposals containing price provisions and
the feasibility of shifting discussions to other fora. The United States
resisted both of these initiatives.
Grain sales.—In another area of agricultural commodity policy, the
United States completed negotiations with the Soviet Union for a 5-year
grain sale agreement, effective on October 1, 1976. Under the terms ofthe
agreement, the U.S.S.R. agreed to purchase a minimum quantity of 6
million metric tons of U.S. wheat and corn per year. Additionally, options
allowing purchases up to 8 million tons per year and providing for
consultations before purchases above 8 million tons were also included.
Treasury supported the U.S.-U.S.S.R. agreement because it does eliminate
some ofthe uncertainty surrounding Soviet grain import requirements and
the market disruptions associated with the large, unpredictable Soviet
grain purchases in the past. Because of the uniqueness of the Soviet
situation and the greater market efficiency achieved through the grain
sales agreement, Treasury supported the agreement.
«See exhibit 43.
68
1976 REPORT OF THE SECRETARY OF THE TREASURY
Cocoa.—Negotiations of the Second International Cocoa Agreement,
which the United States chose not to join, were also conducted during
fiscal 1976. A thorough evaluation of potential costs and benefits of the
agreement showed that it was unworkable and that the export quota
provision would be a serious threat to normal market operations.
Rubber.—After working on a price stabilization scheme throughout
most of 1975-76, the Association of Natural Rubber Producing Countries
submitted a proposal at the June 1976 International Rubber Study Group
meeting. However, the proposal was a statement of general objectives and
principles and did not include a description of the mechanisms of the
scheme and how they might work. The leading natural rubber producers
are expected to ratify a specific stabilization agreement in November
1976.
Bananas.—The Union of Banana Exporting Countries (UPEB), whose
charter was provisionally approved in 1974, was formally established in
Panama on January 23, 1976. However, Ecuador, the world's largest
exporter, remains outside the group. A major goal of UPEB is the
establishment of an international banana agreement with production goals
and an export quota system.
Mineral commodity developments
Tin.—In September, the Senate ratified U.S. participation in the Fifth
International Tin Agreement.«This is the first Tin Agreement the United
States has joined and the decision was based on an interagency analysis
of the impacts on the U.S. economy. The Fifth Tin Agreement and U.S.
participation in it is expected to reduce price fluctuations, foster stable
supplies, and reduce fluctuations in developing country export earnings
from tin.
Bauxite.—The 11 members ofthe bauxite producer group, the International Bauxite Association (IBA), at their meeting in November 1975,
failed to approve a minimum pricing policy and instead recommended that
IBA producers adopt minimum price levels. Individual bauxite producers
continued in 1975-76 to attempt to raise export earnings, within the loose
cooperative framework of the IBA, through increased export taxes or
renegotiation of contracts with aluminum companies.
Copper.—In June 1976, the Conference of Ministers ofthe Intergovernmental Council of Copper Exporting Countries (CIPEC) failed tb reach
agreement on a way of either continuing, eliminating, or phasing out its
15 percent export restriction. As a consequence, the CIPEC provision for
export restrictions expired June 30.
Iron ore.—In October 1975, the Association of Iron Ore Exporting
Countries (AIOEC) was formally inaugurated at a Ministerial meeting in
London and disclaimed any intention of functioning as an iron ore cartel.
8 See exhibit 43.
REVIEW OF TREASURY OPERATIONS
69
Law of the Sea
Treasury representatives served on the U.S. delegation to the third U.N.
Law of the Sea Conference. The Conference, which held a spring and
summer 1976 session in New York, has endeavored to draft a single
comprehensive treaty package which will include a judicial system, fish
conservation, navigation, marine pollution, marine scientific research,
coastal states rights, and deep ocean mining. The United States has
important objectives in all of these areas. No one of them can be
compromised in order to achieve progress in another. The revenue
sharing, resource and commodity policy issues implicit in the deep ocean
mining provisions of the Conference are particularly difficult, and, unless
settled satisfactorily, could prevent agreement on a package.^ Treasury has
endeavored to ensure that the final treaty package is consistent with the
U.S. commodity policy of permitting the efficient production of resources.
The developing countries have also taken the position that only the
operating arm of the proposed International Seabed Authority, the
Enterprise, should have the guaranteed right to conduct mining activities.
As a compromise, in 1975, the developed nations, both capitalist and
Socialist, proposed the establishment of a parallel system of exploitation.
Under this system, all states and their publicly or privately owned mining
companies would have assured access to the seabed along with the
Enterprise. The developed states also agreed to set aside half of the known
mine sites for the Enterprise and the developing countries.
Many developing countries have expressed doubts about the parallel
system on the grounds that it did no good to set aside part ofthe mine sites
for the Authority if it did not possess the financial resources or the
technology to exploit these sites. In view of this concern, at the summer
1976 session in New York, the U.S. Government informed the Conference
that we would be prepared to agree to a means of financing the Enterprise
so that it could begin mining operations in the same time frame that state
and private operators began operations.
Prior to the next session, in May of 1977 in New York, Treasury and
the U.S. delegation will be working closely with other countries to finalize
this proposal. It is expected that all states which join the Authority will help
to finance the Enterprise. Profits from the Enterprise will be used to assist
developing nations. That session will determine if indeed it is possible to
negotiate a "package" treaty. Meanwhile, Congress will be considering
unilateral legislation that would assure U.S. firms' rights to mine the deep
ocean will be protected.
East-West trade
Progress in the development of U.S. commercial relations continued in
fiscal 1976, despite the legislative restrictions on the normalization of
9 See exhibit 41.
70
1976 REPORT OF THE SECRETARY OF THE TREASURY
East-West trade relations contained in title IV of the Trade Act of 1974
and the Export-Import Bank legislation of 1974. The total turnover of U.S.
trade with Communist countries in 1975 was $3.98 biUion, up substantially
from the 1974 total of $3.24 billion.
The East-West Foreign Trade Board, established by the President on
March 27, 1975, with Secretary Simon as Chairman and Assistant
Secretary Parsky as Executive Secretary, met several times during the
year. During the briefperiod the Board has been in existence, it has dealt
with numerous questions of significant importance to the development of
East-West trade. The most persistent of these has been the normalization
of U.S. commercial relations with the U.S.S.R., the nonmarket economy
countries of Eastern Europe, and the People's Republic of China, 'o Among
other activities, the Board and its working group have closely monitored
the purchases of grain by the Soviet Union over the past year and a half
as well as the negotiation of the U.S.-U.S.S.R. Long Term Grain Sales
Agreement which was concluded in October 1975, entered into force on
October 1, 1976, and wiU run to September 30, 1981. The Board, at the
request of the Board of Directors of the Eximbank, has also provided
policy advice concerning proposed Eximbank financing of projects in the
nonmarket economies.
On June 2, 1976, President Ford forwarded to the Congress his
recommendation that Congress approve extension ofthe waiver authority
as provided in section 402 ofthe Trade Act of 1974, allowing the United
States-Romanian trade agreement to remain in force for another year.
Congress, by not voting in either House against extension, allowed the
agreement to remain in force.
Secretary Simon, as honorary Director, attended the annual meeting of
the Board of Directors ofthe U.S.-U.S.S.R. Trade and Economic Council
in October 1975. In June 1976, the Secretary visited Poland and Romania
for wide-ranging meetings with Ministers responsible for economic affairs.
While in Poland the Secretary participated in the exchange of instruments
of ratification ofthe convention on the avoidance of double taxation.'' In
Romania Secretary Simon participated in the opening of the third session
of the U.S.-Romanian Economic Council and delivered a message of
support from President Ford.
Investment and Energy Policy
During 1975 and 1976, the United States continued its efforts to
maintain a favorable climate for international investment. As a result of
these efforts, the Organization for Economic Cooperation and Development (OECD) adopted a declaration designed to promote a stable and
open environment for international investment. The United States also
lOSee exhibit 37.
11 See exhibit 42.
REVIEW OF TREASURY OPERATIONS
71
proposed that the OECD undertake an exercise designed to reduce
impediments to international flows of portfolio capital. There have also
been domestic and international initiatives in which Treasury participated
to develop procedures to curb illicit payments in international commerce.
Additionally, the benchmark survey of foreign investment in the United
States was completed, and the Committee on Foreign Investment in the
United States considered several proposed investments.
The Treasury's role in the development of a comprehensive energy
policy primarily focused upon economic and financial issues, from both
a domestic and international perspective. This focus included concern
over capital formation and financing problems in developing new sources
of energy. In addition, the Department has been involved with the issues
of recycling surplus financial reserves of the oil-producing countries, the
economic problems of energy deficient developing countries, and other
international trade and financial aspects of energy resources.
Several legislative measures have been enacted which contributed to
our national and international energy policy. These measures have
included provisions for a national strategic petroleum reserve; standby
allocation, rationing, and other authorities for use in the event of an
emergency; development and production of the Naval Petroleum Reserves; price decontrol of selected products and gradual decontrol of
crude oil prices; and several energy conservation programs. These
provisions will assist in reducing our energy vulnerability.
International investment
Foreign Portfolio Investment Study.—Pursuant to the Foreign Investment Study Act of 1974, the Treasury and Commerce Departments
completed their respective studies of foreign portfolio and direct investment in the United States and have reported their results to Congress. Each
study consisted of a benchmark statistical survey and analysis and research
into various aspects of foreign portfolio and direct investment in the
United States.
The term "foreign portfolio investment" generaUy refers to foreign
investments in U.S. securities that do not involve any significant influence
on the management ofthe enterprise. The definition used for the purpose
of this study covers investments in the United States in voting stocks
involving less than 10 percent ownership by the foreign investor, in
nonvoting stocks, and in debt instruments with maturities of more than 1
year by persons residing in foreign countries (other than nonvoting stock
and debt owned by a "direct investor"). It should also be noted that the
term "foreign" includes U.S. nationals residing abroad and excludes
foreign nationals residing in the United States.
Among the highlights of the survey,' an important finding was that for
various reasons foreign portfolio holdings of U.S. stocks were about 37
1 See exhibit 47.
72
1976 REPORT OF THE SECRETARY OF THE TREASURY
percent higher than previously estimated. However, considering the long
period of time—33 years—since the previous benchmark, the differences
between the survey results and the previous estimates suggest that the
conceptual and institutional structures of our current reporting systems
are adequate.
International Investment Survey Act of 1976.—In October 1976 the
President signed legislation which broadens the U.S. Government's
existing authority for collection of data on foreign investment in the United
States and U.S. investment abroad. The act also mandates that benchmark
surveys for foreign portfolio and direct investment in the United States and
for direct investment abroad be undertaken every 5 years and that a onetime survey of U.S. portfolio investments abroad be undertaken.
Proposed International Banking Act of 7976.—This bill (H.R. 13876)
was proposed by the House Committee on Banking, Currency and Housing
to provide for Federal regulation of foreign banks operating in the United
States. The bill passed the House by a large margin, but, becauseof several
controversial features in the bill, the Senate took no action. The issue of
foreign bank regulation is expected to be taken up by the 95th Congress.
H.R. 13876 would have had far-reaching effects on the operations of
foreign banks in the United States. Some provisions ofthe act would have
provided increased operating authority for foreign banks, while others
would have subjected them to increased Federal regulation or supervision
similar to existing regulations on large, domestically owned banks.
Treasury testified for the administration in support of the bill with
certain modifications where it was felt that no added protection of U.S.
interests would result or where certain provisions might lead to retaliation
on the extensive activities of U.S. domestic banks operating abroad.
Committee on Foreign Investment in the United States.—During this 15month period, the interagency Committee on Foreign Investment in the
United States, established in May 1975 under the chairmanship of
Treasury to monitor and to coordinate the formulation of U.S. policy on
foreign investment here, considered a number of issues in this area. Several
included investment proposals that the Committee examined pursuant to
its specific responsibility of reviewing foreign investments in this country
which might have major implications for the U.S. national interests. One
was the joint venture of the Government of Romania and the Island Creek
Coal Co., a subsidiary of the Occidental Petroleum Corp. Another was the
bid by Societe Imetal, a French firm, to take over Copperweld Corp. A
third was the proposed investment by the Government of Iran in the
Occidental Petroleum Corp. In each of these cases the Committee decided
that it had no objection to the proposed transaction.
Among the other functions the Committee performed was the coordination of executive branch positions on the International Investment
Survey Act of 1976 (Public Law 94-472). The Committee also served as
REVIEW OF TREASURY OPERATIONS
73
a forum for interagency discussion of questions that have arisen in
international negotiations.
OECD investment package.—On June 21, 1976, the member governments of the OECD (except Turkey) jointly adopted a Declaration on
International Investment and Multinational Enterprises, which consists of
a package of instruments designed to promote a stable and open
environment for international investment.
The OECD Declaration addresses three areas of concern regarding
international investment. First, the member countries declare that they
should treat foreign investors no less favorably than they treat domestic
enterprises in similar circumstances. Secondly, they agree to minimize
possible damage to other member countries of official incentives or
disincentives to foreign direct investment. Finally, they recommend
guidelines for the behavior of multinational enterprises, including expectations regarding disclosure of information, financing, competitive practices, taxation, employment and industrial relations, illicit payments, and
the transfer of technology. Along with this, they state their general
responsibilities toward multinational enterprises (MNE's), for instance, to
treat them in accordance with international law.
U.N. Commission on Transnational Corporations (TNCs).—The Commission on T N C s decided at its second meeting in Lima, Peru, in March
1976 to attach high priority to the formulation of a code of conduct. Early
in 1977, an intergovernmental working group will begin discussions aimed
at producing an annotated outline to serve as a basis for discussion of the
code.
Other tasks the Commission will undertake include the following: ( I )
Establishment of a comprehensive information system; (2) research on the
political, economic, and social effects of the operations and practices of
MNE's; (3) organization of a technical cooperation program; and (4)
work leading to a definition of MNE's.
U.S. proposal in the OECD Committee on Financial Markets.—In order
to further liberalize international flows of portfolio capital. Secretary
Simon proposed at the OECD Ministerial meeting on June 22, 1976, that
the Committee on Financial Markets be charged with identifying the
various obstacles to international flows of portfolio capital and establishing a procedure for consultations with a view toward reducing such
impediments.
A U.S. note on the proposal was circulated to delegations in the
Committee. It noted that there are various kinds of impediments to capital
flows in addition to official restrictions, which are currently reviewed in
connection with country observance ofthe OECD Code of Liberalization
of Capital Movements. Many procedures and requirements established by
the private financial communities in major capital markets may have
inhibiting effects on international flows of portfolio capital.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
The program proposed by the United States envisions a measured threestep effort: (1) Identifying impediments to international flows of portfolio
capital, (2) explaining the rationale for each impediment, and (3)
discussing how particular impediments may be reduced or eliminated. The
Committee is to consider the U.S. proposal at its November 4-5, 1976,
meeting.
Questionable corporate payments abroad.—Among the provisions of the
Declaration on International Investment and Multinational Enterprises
adopted in June 1976, the OECD member countries made recommendations to MNE's regarding illicit payments, at the suggestion ofthe United
States. It is stated in the guidelines for MNE's that enterprises should not
render—and they should not be solicited or expected to render—any bribe
or other improper benefit, direct or indirect, to any public servant or
holder of public office.
In March 1976 the United States proposed that a comprehensive
international agreement to curb corrupt practices in international commerce be negotiated in the United Nations. Subsequently, the Economic
and Social Council took action by establishing an intergovernmental
working group on the problem. The group is charged with examining the
problem of corrupt practices and elaborating in detail "the scope and
contents of an international agreement to prevent and eliminate illicit
payments * * * in connection with international commercial transactions." The first meeting of this group is scheduled for October 1976 and
it is expected to report back to the Council at its session in the summer
of 1977.
The U.S. proposal would provide for an agreement that would deal not
only with those who offer illicit payments but with those who solicit and
receive them as well.
In March 1976, President Ford established a Cabinet-level Task Force
on Questionable Corporate Payments Abroad to conduct a coordinated
review of the problem of bribery and to recommend any new actions it
might consider necessary. The task force, ofwhich Secretary Simon is an
active member, explored the nature and extent of the illicit payments
problem and reviewed the activities ofthe U.S. Government agencies that
were dealing with it. As a result of that investigation, a number of options
were submitted to the President to supplement existing measures.
In June 1976, the President announced that he had directed the task
force to prepare legislation to require reporting and disclosure of certain
payments by businesses to foreign governments. The task force drafted the
Foreign Payments Disclosure Act, transmitted by the President to
Congress on August 3, 1976.
The bill requires reporting to the Department of Commerce of certain
classes of payments made by U.S. businesses and their foreign subsidiaries
and affiliates in relation to business with foreign governments. It covers a
broad range of payments relating to government transactions, as well as
REVIEW OF TREASURY OPERATIONS
75
political contributions and payments made directly to foreign public
officials. The bill was not acted upon by Congress in the last session, but
is expected to be given a full hearing in the next session.
International investment and capital flows (OPEC investors)
The financial reserves accumulated by the oil-exporting countries,
which generated considerable public and congressional interest following
the quadrupling of oil prices, continue to be a source of sizable inflows to
the U.S. capital markets. Ofthe estimated $42 billion in total accumulations by the Organization of Petroleum Exporting Countries (OPEC) in
1975, about $ 10 billion was invested in the United States in both long- and
short-term instruments. In contrast to the investment patterns of the oilexporting countries in 1974 and early 1975, there has been a trend toward
longer term holdings in the United States. Approximately 60 percent of
flows into the United States in 1975 were in long-term banking and
portfolio investments. In the first 6 months of 1976, long-term investments
in the United States by the oil-exporting nations were increasingly in
Treasury bonds and notes and were well ahead of last year's pace. Oilexporting country purchases of U.S. stocks this year, at $1.1 billion
through June, were also ahead of last year's purchases. Treasury interprets
this preference for longer term investments as an expression of confidence
in the security and profitability of investments in the United States.
International Energy Agency (lEA)
As a result of the 1973 Arab oil embargo, 19 industrialized oUconsuming countries established the lEA to help coordinate their
international energy policies. The goals of these policies are to reduce
dependence upon imported oil through conservation, accelerated development of indigenous resources, and shared research and development.
To meet supply emergencies, the lEA updates methods to restrain demand
and share existing supplies equitably. Treasury participated in meetings of
the Governing Board and in the Standing Groups on Emergency Questions, Long-Term Cooperation, and the Oil Market.
Standing Group on Emergency Ques tions. ^Progress was made in
developing procedures necessary to implement the sharing of fuel assets
in emergencies under terms of the agreement. The Emergency Management Manual, completed in preliminary form, reflected all of the basic
decisions, goals, and procedures for emergency operations. Tests were
successfully run on processing data which would be needed under
emergency conditions. Plans were also completed for the full-scale testing
of all emergency procedures later this year.
Standing Group on Long-Term Cooperation.—Agreements have been
made to facilitate cooperation among lEA members in solving energy
supply and demand difficulties. Treasury participated in several international working groups developing guidelines for energy investment
76
1976 REPORT OF THE SECRETARY OF THE TREASURY
incentives, for the joint international research efforts, and for the
implementation of the minimum safeguard price.
Standing Group on Oil Market.—Treasury has participated in this group
and in particular in its Ad Hoc Working Group on Capital Investment and
Financial Structure. This group is undertaking an evaluation of the
feasibility of forecasting the energy industry capital requirements for
OECD countries, and the ability of the industry to finance such capital
investments.
Conference on International Economic Cooperation (CIEC)
The dialog between the industrialized nations of the North and the
developing nations of the South took a major step forward in December
1975 with the establishment of the CIEC.2 The CIEC involves 27
representatives from developed countries and oil and nonoil developing
countries and carries a 1-year mandate "to initiate an intensified
international dialog on the international economic situation, to address
problems, and to further international economic cooperation for the
benefit of all countries and peoples." Due to its limited participation and
generally less formal procedures, the CIEC has proven to be a useful forum
for discussing a large variety of international issues of mutual concern.
Discussions in the CIEC are taking place simultaneously in four different
commissions: The Energy Commission, the Raw Materials Commission,
the Development Commission, and the Financial Affairs Commission.
Following are brief accounts ofthe work conducted so far in the individual
commissions.
Energy Commission.—Treasury participated actively in the Energy
Commission, which provides the only formal mechanism for oil producers,
consumers, and developing nations to try to strengthen cooperation and
develop common goals and solutions to the world's energy problems.
The Commission's work has been divided into two phases. The first
phase, analytical in nature, was completed in July and considered, among
other issues, the effects of higher oil prices on the world economy and the
problems of effecting a smooth transition from a hydrocarbon-based
economy to one based increasingly on alternative energy sources.
Treasury participated in the work of this phase, including work on the
effects of the 1974-75 oil price increases on the U.S. economy and the
energy deficient developing countries. In addition. Treasury participated
in the development of a U.S. proposal for an International Energy Institute,
designed to bring technical and managerial expertise to assist in the
development of world energy resources, particularly the indigenous
resources of the energy deficient developing countries.
Raw Materials Commission.—During the first half of 1976, the Raw
Materials Commission reviewed a number of issues related to the raw
materials industry especially as they relate to the developing countries.
2 See exhibit 44.
REVIEW OF TREASURY OPERATIONS
77
The two most predominant issues were (1) access to developed country
markets for LDC exports of raw materials and processed products and (2)
the purchasing power of the LDC's resulting from raw materials exports.
The United States has been generally sympathetic with LDC efforts to
increase their access to markets of developed countries. The United States
has urged the LDC's to solve their problems of purchasing power by
diversifying their productive base and increasing their production. The
LDC's have been promoting the indexation of raw material prices to the
prices ofthe exports of developed countries as a means of protecting their
purchasing power. The United States strongly opposes this approach as
inefficient and impracticable.
The adoption of the Resolution on Commodities (An Integrated
Program for Commodifies: UNCTAD 93 (IV) ) at Nairobi in May of 1976
has in large measiire overtaken the work of the Raw Materials Commission. However, the LDC's in the Commission are intent on using it as a
forum to persuade the developed countries to react more favorably toward
the LDC-sponsored solutions to raw material problems, especially during
discussions under the Integrated Program which will take place through
the end of 1978.
Development Commission.—The Development Commission was established "to facilitate arrangements which seem desirable in the area of
cooperation for development." Specifically, the Commission has explored
a varied list of development-oriented issues: Trade, balance of payments,
food and agriculture, infrastructure, transfer of resources, industrialization, transfer of technology, foreign investment, and the poorest developing countries. Increasingly, the agenda item "transfer of resources" has
assumed a dominant position in the Development Commission's deliberations since two key interests of the developing countries, indebtedness
(also discussed by the Financial Affairs Commission) and official
development assistance, are included under this item. The March 1976
session of the Development Commission produced the first so-called
"energizing" document of the Conference, a brief, noncontroversial
statement of consensus on the International Fund for Agricultural
DevelopmiCnt, calling on all countries in a position to contribute to the
Fund to inform the U.N. Secretary-General before April 15 ofthe amounts
of their initial contributions.
Financial Affairs Commission.—The Financial Affairs Commission has
held substantive discussions on such topics as world balance of payments
trends, the financing of developing country payments deficits, treatment
of the financial assets of oil-producing nations, private direct investments
in developing countries, access of developing nations to capital markets,
and the debt situation facing developing nations.
The foreign indebtedness of nonoil LDC's has surfaced as one of the
principal concerns in the Financial Affairs Commission's discussions, as
nonoil developing countries have pressed for acceptance of generalized
78
1976 REPORT OF THE SECRETARY OF THE TREASURY
debt relief. While the United States may provide debt relief for individual
developing countries in cases of actual or imminent default, the United
States does not subscribe to the use of debt relief as a development
assistance measure nor to the application of generalized debt-relief or
similar schemes for groups of developing countries.
In examining the overall financial situation in nonoil LDC's, the United
States has acknowledged the transfer of resources to these nations as a
critical issue in the dialog. In this regard, the United States not only has
examined debt and development assistance issues but has pursued efforts
that will improve LDC access to capital markets and has studied various
proposals which can lead to more direct investment in nonoil LDC's.
Energy policy
The energy crisis has created intense and detailed interest by the public
and the Congress. Some progress has been made in implementing a
national energy policy, but it is not complete. Treasury officials have
responded to congressional and public inquiries and invitations to speak
at hearings presenting their views on a wide range of energy issues and
energy-related legislation and regulatory policy. Treasury's participation
in the Energy Resources Council involves analysis and recommendation
of options for our national energy policy. In particular. Treasury's interests
have centered on the financial and economic aspects of energy availability,
as well as the area of taxation. Analyses have been made in such major
energy policy areas as financing synthetic fuels development, uranium
enrichment through competitive private programs, effects of dismemberment of the major oil companies, deregulation of natural gas, options for
transporting Alaska natural gas to the lower 48 states, and energy taxes.
Synthetic fuels.—Treasury participated in the effort to promote the
development of synthetic fuels through analysis ofthe financial assistance
provisions in the legislation proposed by the administration. Treasury
officials testified before congressional committees on this aspect of the
legislation. 3
Energy Independence Authority.—The staff worked with other agencies
on the administration proposal for an Energy Independence Authority to
promote development of energy resources. Treasury representatives
testified before a congressional committee on this proposal.
Uranium enrichment.—Treasury staff was consulted about the financial
and economic aspects of commercialization of the uranium enrichment
industry. A Treasury representative testified before a congressional
committee on this subject.
Alaskan natural gas transportation.—A major energy project is the
transportation of natural gas from Alaska. The Treasury wrote a section
on financing such a transportation system in the Interior Department
report: "Alaskan Natural Gas Transportation Systems," a report to the
3 See exhibit 46.
REVIEW OF TREASURY OPERATIONS
79
Congress pursuant to Public Law 93-153, December 1975. In addition,
the financing aspects of this large project have been under continuous
study. Treasury officials have testified about the problems of financing this
project before congressional committees and the Fecieral Power Commission.^
Divestiture of major oil companies.—Treasury performed extensive
analysis of the effect of divestiture on the oil industry, the economy, and
the Nation's energy outlook.5 The result was a published staff study
entitled "Implications of Divestiture."
Strategic petroleum reserves.—Through review of environmental impact
statements and the FEA (Federal Energy Administration) plan for
strategic petroleum reserves. Treasury assisted in the development of this
important emergency measure.
Interagency cooperation
Treasury staff participated in various important interagency task forces
and committees:
Intergovernmental Coordinating Committee.—This Committee coordinated the work of Federal agencies with the States in the development and
implementation of energy programs and policies.
Geothermal Advisory Council.—To facilitate and encourage the development of geothermal energy. Treasury took part in the development of
policies for the encouragement of geothermal projects.
Nuclear energy policy coordination.—Treasury supplied staff expertise to
the Energy Resources Council subcommittee which integrates the
procedures of Federal agencies relating to the development of nuclear
energy.
Energy information.—In view of the congressional interest in energy
information as expressed in the Energy Policy and Conservation Act, the
FEA was instrumental in establishing the Federal Interagency Council on
Energy Information. This Council coordinates the collection and consolidation of energy information used by all Government agencies.
Presidential Task Force for Reform of FEA Regulation.—This task force
was established to simplify and make improvements in the FEA price and
allocation regulations.
Liquefied natural gas (LNG).—Treasury representatives participated in
the interagency Task Force on Liquefied Natural Gas in implementing a
new national policy regarding LNG imports.
International Monetary Affairs
World economic and financial developments
The world economy.—By the beginning of fiscal 1976, the world as a
whole was nearing the trough of the worst recession in post-World War
II history. The likely course of future recovery and expansion was still
4 See exhibit 45.
5 See exhibit 48.
80
1976 REPORT OF THE SECRETARY OF THE TREASURY
unclear, and most industrial countries looked to the United States to lead
the recovery and provide them with a substantial degree of export-led
growth.
As of July 1, 1975, only the United States and Japan had entered the
recovery phase of the cycle. This revival—soon to enter the expansion
stage—spilled over to the other industrial countries both through direct
effects, e.g., trade expansion, and through indirect psychological influences. The U.S. upswing clearly affected the confidence levels of
European businesses and consumers. A return to more normal inventory
levels, following the massive inventory adjustments experienced by the
major countries during the downturn, provided the basis for the recovery
and expansion stages of the cycle that emerged during the fiscal year.
In the first half of fiscal 1976, the recovery became statistically more
evident as the industrial world experienced real growth of some 4.3
percent, with the largest OECD members growing at a 5-percent annual
rate. The turn of the year brought increased recognition of the fact that
the recovery was indeed picking up speed and strength. In some countries
the recovery was led by increased consumer expenditures as the extraordinarily high savings rates of the 1973-75 period were reduced to more
normal levels and by inventory rebuilding. In others such as Japan the
recovery was primarily export led. In general, investment expenditures
remained relatively low by historical standards following roughly 2 years
of negative real investment. One direct result of the real investment
decumulations has been that plant and equipment capacity has not
expanded at normal rates and, when adjusted for depreciation and the
inefficiencies of existing capacity brought about by the effect of higher oil
prices on relative factor inputs, has probably declined. Consequently,
room for noninflationary expansion is more limited than in earlier
recovery periods as "bottleneck" situations in some industrial sectors may
be reached more quickly than during previous cycles.
In fiscal 1976, inflation subsided somewhat from the extremely high
rates of the first half of fiscal 1975 and the major country GNP deflators
increased 8.3 percent (annual rate) after rising 10 percent in the last half
of fiscal 1975. Even with this improvement, inflation rates remained
substantially in excess of acceptable levels.
The strength of the recovery/expansion in the last half of fiscal 1976
began to affect inflationary pressures as cost-of-living increases quickened
in a number of the major countries between January and June 1976.
Structural shifts.—In addition to the failure to adjust to higher oil prices,
during the decade ofthe 1960's and into the 1970's, structural shifts have
been taking place that have altered the basic shape of many of these
industrial economies.
Higher inflation rates have become more difficult to eradicate in.the
context of indexed wages and liberal retirement schemes, increased
welfare transfers, strikes and unemployment benefits, and other factors
REVIEW OF TREASURY OPERATIONS
81
leading to large public sector deficits which have been financed in larger
part by money creation.
The share of national income going to wages and compensation
increased significantly. Between 1960-64 and 1974-75 the share of
consumption in relation to domestic product has also risen: In Italy from
47 to 60 percent; in the United Kingdom from 64 to 71 percent; in Sweden
from 62 to 69 percent; and in Germany from 54 to 62 percent.
At the same time as governments have assumed a larger role in domestic
economies, the proportion of government (national, state, and local)
expenditures to GDP (gross domestic product) has shown substantial
increase. In the Netherlands, Sweden, and the United Kingdom, government expenditures (purchases of goods and services, capital outlays, and
gross transfer payments) now equal more than 50 percent of GDP.
While government expenditures have been rising, so have the budget
deficits. Public sector borrowing in Italy, for example, in 1975 equaled 15
percent of gross national product; in the United Kingdom the figure was
11 percent.
Perhaps the most serious (in terms of longer term real growth effects)
structural shift has occurred in the relative growth rates of real gross fixed
investment and real private consumption expenditures. In the OECD area
as a whole, real fixed investment growth rates have declined substantially
between the sixties and the seventies from an annual rate of growth of 6.5
percent in 1963-69 to 3.9 percent in 1970-74. While real private
consumption expenditures also grew less rapidly in 1970-74 than during
the earlier period, the difference was substantially less—from 4.9 percent
in 1963-69 to 4.0 percent in 1970-74. During the 1974-75 recession real
consumption continued growing at 2.5-3.5 percent rates while fixed
investment declined each year, at 4-4.5 percent rates.
It is apparent that this structural shift will need to be reversed and growth
rates for real investment in the OECD area increased if overall growth is
to be at a level sufficient to promote full employment.
The severity of the recent recession led to substantially reduced real
investment rates, lower real growth rates, and resulting lower growth of
productive capacity in most major countries. Unless this is made up,
capacity limits could be reached at an unusually early stage in the upturn.
Although it is difficult to estimate the margin of unused capacity with a
high degree of accuracy, recent trends suggest that it may be lower than
earlier estimates suggested. Capacity utilization in some industries in some
countries is already quite high and there is a clear danger of the
reemergence of bottlenecks unless investment in key sectors is quickly
increased. In addition, changes in relative input prices resulting from the
exorbitant increase in energy prices have rendered a portion of existing
capital stock obsolete and may well have raised required capital output
ratios for the future. The economic and political need to develop new
sources of energy, as well as emphasis on pollution control facilities, will
82
1976 REPORT OF THE SECRETARY OF THE TREASURY
also increase investment requirements tremendously over the next decade.
In short, the need to make up for low investment ratios earlier in the
1970's, sectoral pressures on capacity, technical obsolescence, and the
objectives of greater energy self-sufficiency and pollution control all
require increasing the share of private capital formation in GNP.
Maintaining (or restoring) the historical share of GNP going into fixed
investment will not suffice. These structural shifts cannot be reversed
overnight but there is a serious question as to whether the patterns now
prevailing are compatible with sustained growth, high levels of employment, and external equilibrium.
Payments patterns and financing developments.—The unexpectedly
rapid economic expansion that occurred during the course of the fiscal
year in most of the industrial world was reflected in a return to sizable
current account deficits for the industrial countries as a group. In
consequence, the deficits of the LDC's and the nonmarket economies
declined significantly, although remaining at a high level, while OPEC
members in the aggregate experienced current account surpluses somewhat above last year's level.
The dramatic shifts in the external positions of major industrial
countries in calendar 1975 toward larger current account surpluses or
smaller deficits were, to a large extent, the result of both recession-induced
reductions in final import demand and major adjustments in inventory
positions. Reversal of this pattern resulted in a dramatic swing in the
opposite direction. For example, the U.S. position swung from a small
current account deficit in 1974 to a sizable surplus in 1975 and back to
a trade deficit of $2.9 billion in the first half of 1976. The United States
now expects a swing in the current account balance between 1975 and
1976 on the order of $12 biUion.
There is not likely to be any financing problem in the aggregate sense
for the OECD area, but several individual countries are facing difficulties.
They may find it more difficult to obtain the financing they seek in 1977
and will be under much heavier pressure to reduce their deficits. These
problems have resulted from attempts during 1974-75 to maintain
employment and real growth despite a worldwide recession, from
continuing adjustment costs resulting from sharply higher oil prices, and
from failure to allow exchange rates to adjust to market conditions,
resulting in a loss of competitiveness.
A substantial number of industrial countries attempted to mitigate the
severity of the 1973-75 expansion-recession by accepting and financing
deficits (both current account and budget) rather than by limiting
aggregate domestic demand. Much ofthe external debt undertaken in the
process was medium term and financed imports for consumption rather
than investment. This only resulted in a postponement of adjustment and
a sizable buildup in the absolute level of both external and domestic debt.
The debt service flows necessary to amortize these debts are substantial
REVIEW OF TREASURY OPERATIONS
83
and are beginning to be burdensome for some countries since the funds
have not, by and large, been used to increase export production which
would aid in servicing the increased debt. In a number of cases lenders
have begun to see the large debt accumulations (not just the result of oil
price increases) as being potentially troublesome and are becoming more
selective in their credit extensions.
Current projections suggest that perhaps 18 members ofthe OECD will
experience current account deficits this year, but for the large majority of
these countries normal capital market financing, official borrowings, and
use of reserves will provide adequate external finance to cover the deficits.
A few may face some financing difficulties, although they have not yet
exhausted their access to private markets or international institutions.
For the nonindustrial world increased demand for raw material imports
reflecting the strength of the recovery in the industrial world is resulting
in both higher volumes and prices for nonoil LDC exports. In light of
external debt limitations a number of LDC's have recently accepted more
reasonable growth targets that will result in lower import growth. The
favorable shift in terms of trade (other than oil) and external demand may
produce a reduction of perhaps $8 billion in the aggregate deficit positions
ofthe non-oil-producing LDC's in 1976. This improvement, however, is
not likely to be equally spread among nonoil LDC's and the net
improvement in the external position ofthe nonoil LDC's as a group may
camouflage financing difficulties of individual countries.
The transformation of the Communist countries from essentiaUy
balanced external positions to substantial trade deficits in the last 2 years
is a noteworthy development in the world economy. It is currently
estimated that the nonmarket economies of Eastern Europe, the U.S.S.R.,
and the People's Republic of China experienced substantial deficits in
trade with the West during 1975. Perhaps as much as a $10 billion deficit
on current account was financed by the West (including OPEC) last year.
While important export markets, the Communist countries are also heavy
borrowers in Eurocurrency medium-term credit and bond markets. The
Western financial capital involved—both through capital markets and
through official trade credits—has become substantial.
The third beneficiary ofthe industrial countries' recovery will be OPEC
members, as recovery results in increased demand for oil imports. Many
OPEC members have increased imports faster than had been expected
with the result that more members are now expected to be in deficit and
others to have very small surpluses in 1976, although the group as a whole
will continue to have a large surplus. OPEC member governments are
increasingly becoming aware of expenditure restraints and a number of
countries have publicly reduced government spending plans and are thus
likely to experience lower import growth rates than in the previous year.
Foreign exchange developments and operations.—The performance of
the foreign exchange market has improved progressively during the 3 years
84
1976 REPORT OF THE SECRETARY OF THE TREASURY
of experience under the system of generalized floating rates which evolved
following the breakdown of the par value system. As in previous years,
there were periods during which exchange rate movements for particular
currencies were large, but there was increased recognition in the market
that rate movements reflected underlying economic and financial conditions in the world economy, and the foreign exchange markets have
functioned in a way that has facilitated the flow of international trade and
payments. At the Rambouillet economic summit meeting in November
1975, agreement was reached to intensify consultations among Finance
Ministers and central banks on underlying economic conditions, to work
towards greater economic stability, and to act to counter disorderly
conditions in the foreign exchange market.' The understandings reached
at the meeting also formed the basis for subsequent agreement on the
provisions relating to exchange arrangements to be incorporated in
amendments to the IMF Articles of Agreement, and thus set the stage for
agreement by the IMF Interim Committee in January 1976 on a
comprehensive revision of the Articles. 2
Movements in exchange rates for the U.S. dollar in terms of the major
foreign currencies were mixed over the period under review. As noted in
other sections in this report, high rates of inflation persisted in all
countries, but wide differences in inflation rates and economic performance among countries also persisted, which explains much ofthe diversity
in exchange rate movements during the period. Relative to the group of
currencies participating in the European common margins "snake"
arrangement, the dollar rose by more than 10 percent in value during the
first half of fiscal 1976, following a comparable decline duriugfiscal 1975.
The rate was little changed in the second half and depreciated during the
transition quarter. The dollar's value increased by large amounts relative
to the Italian lira and the pound sterling, with most movement occurring
after the first half of the fiscal year. The dollar also rose somewhat against
the French franc, particularly after that currency's departure from the EC
shake in mid-March 1976. The dollar declined slightly in value relative to
the Canadian dollar, the Japanese yen, and the Swiss franc. On a tradeweighted average basis, the dollar appreciated by about 5 percent in terms
of other OECD currencies, almost entirely during the first half of the fiscal
year. On this measurement it remained quite steady over the second half
and the transition quarter, with the appreciation against some currencies,
principally the pound sterling and the Italian lira, offset by a depreciation
relative to others, notably the Canadian dollar and the currencies
remaining in the EC snake.
Changes in the U.S. dollar values of major foreign currencies during the
15-month period are:
ISee exhibit 51.
2 See exhibit 53.
REVIEW OF TREASURY OPERATIONS
85
Canadian dollar, -- 6 percent; Japanese yen, 4- 3 percent; Swiss franc, -- 2
f
f
percent; German mark, —3 percent; French franc, —18 percent; U.K.
sterling, - 2 4 percent; Italian lira, - 2 6 percent.
The appreciation ofthe dollar early in the fiscal year reflected the effects
of reversal of a number of developments which had been a factor in its
depreciation in terms of several major foreign currencies during the
preceding several months. U.S. interest rates rose relative to those in other
major centers; economic recovery in the United States proceeded in
advance of that in a number of other industrial countries; and the United
States appeared to be gaining control over inflation.
Foreign exchange market operations by the Federal Reserve early in the
fiscal year were undertaken primarily to purchase foreign currencies,
chiefly German marks, needed to repay outstanding swap indebtedness
with foreign central banks incurred earlier in 1975 and in late 1974. Such
swap debts had reached a peak in excess of the equivalent of $1 billion.
Among the major foreign authorities, the Japanese, German, and Italian
authorities sold dollars in the market to provide support for their
respective currencies, while the Swiss authorities purchased dollars to
curb appreciation of the Swiss franc. The French authorities, after
countering some speculative pressure prior to the French franc's reentry
into the EC snake arrangement on July 10, purchased dollars as their
currency appreciated in terms of the German mark and other EC snake
participants.
In October 1975, easing of interest rates on dollar-denominated
deposits, concern over the possibility of a New York City default, and
release of economic indicators suggesting that the recovery of the U.S.
economy might be slowing influenced the market. During a brief period
of dollar selling in the markets, the dollar depreciated against nearly all
major foreign currencies. The Federal Reserve purchased a small amount
of dollars, against German marks, to counter market disorder, reversing
these transactions during ensuing weeks. In November and December,
market conditions improved and, while the U.S. economic recovery
slowed, it remained well in advance of that in the rest of the world.
Substantial demand for Swiss francs continued, however, and the Swiss
authorities intervened to curb further appreciation ofthe Swiss franc. As
noted earlier, the French authorities also made large dollar purchases. The
Italian and the Japanese authorities continued to sell dollars to counter
pressure on their currencies. Throughout the latter part of calendar 1975,
the pound sterling was steady in terms of the dollar, and the Bank of
England gained dollars from market operations.
In the second half of the fiscal year, movements in the values of major
foreign currencies in terms of the dollar were more a reflection of
developments in individual foreign countries than of events in the United
States. In general, these movements were indicative of the ability of the
86
1976 REPORT OF THE SECRETARY OF THE TREASURY
system to respond to changes in underlying economic circumstances. To
help counter disorderly conditions in the markets for sterling and Italian
lira, U.S. authorities provided short-term swap assistance to the Bank of
England and to the Bank of Italy.
Early in calendar 1976, the Italian lira depreciated, at times sharply,
following the resignation of the Government. After a sizable depletion of
its foreign exchange reserves through intervention in support of the lira
over a period of several months, the Bank of Italy withdrew from the
market beginning January 21, allowing the lira, floating freely, to
depreciate further. Following the formation of a new government in
February, the Bank of Italy reentered the market at the beginning of
March. Capital flight from Italy continued, however, and the Bank of Italy
drew a total of $500 million on its swap line with the Federal Reserve
during the quarter.
The British pound depreciated abruptly in early March, and the 2 1/4percent exchange rate margins of the EC snake currencies came under
significant pressure. The markets anticipated further movements in
currency exchange rates to reflect divergent price and external account
performances and outlook among the major industrial countries, and
substantial intervention in both dollars and European currencies was
undertaken by participating countries to maintain the EC snake margins.
The German central bank purchased very large amounts of foreign
exchange, particularly the currencies of other EC snake participants. On
March 15, the French franc abandoned the EC snake arrangements and
depreciated by about 4 percent. In addition, the Belgian and Dutch
authorities suspended their narrower 1 1 /2 percent Benelux exchange rate
margins. The Bank of England also intervened on a large scale, selling
dollars in the market to curb the depreciation of sterling. Although the
dollar was not itself the major focus of attention, exchange market
conditions became unsettled from time to time, and the Federal Reserve
periodically sold German marks to counter disorderly trading conditions.
The yen had begun to appreciate in December after depreciating
throughout most of 1975.
After the Italian lira reached a low point in early May, the Italian
authorities applied a temporary 50-percent, 90-day deposit requirement
on virtually all purchases of foreign currencies and introduced other
measures designed to limit speculation against the lira. Sterling continued
to experience strong selling pressure and, early in June, short-term standby
lines of credit totaling $5.3 billion were made available to the Bank of
England by major industrial countries, including $1 billion each by the
U.S. Treasury Exchange Stabilization Fund and the Federal Reserve
System. By the end of the fiscal year, the British had drawn slightly more
than $ 1 billion against these credit lines, including $200 million each from
the U.S. Treasury and Federal Reserve.
Following departure of the French franc from the EC snake arrangement, the currency band was maintained although the Netherlands guilder
REVIEW OF TREASURY OPERATIONS
87
and Belgian franc experienced renewed selling pressure periodically and
depreciated toward their lower limits against the German mark. The Swiss
franc continued to experience substantial demand and reached record
levels against both the German mark and the dollar. In response, the Swiss
authorities indicated that they were prepared to intervene massively and
further tightened restrictions on franc transactions. The Canadian dollar
also appreciated, probably reflecting both high Canadian interest rates,
particularly relative to U.S. rates, and large external borrowing.
Strong selling pressure on sterling developed in the third quarter of
1976. The British authorities responded by raising interest rates, increasing the minimum lending rate to a record 13 percent. Trading in EC snake
currencies during the transition quarter was dominated by widespread
expectations that the German mark would be revalued relative to the other
participating currencies. Federal Reserve intervention during the third
quarter was limited to sales of $25 miUion equivalent of DM at times when
trading became unsettled, purchases ofabout the same amount of DM at
other times, and purchases of Belgian francs tp reduce outstanding swap
debt to the Belgian National Bank. Selling pressures on the French franc
intensified early in the third quarter, but the franc subsequently appreciated. Bank of Italy intervention gains early in the quarter permitted
repayment in full ofthe $500 million drawing on the Federal Reserve swap
line earlier in the year. But selling pressure on the lira reemerged, as funds
placed with the Bank of Italy in May under the 3-month deposit
requirement began to be withdrawn and with the passing of seasonally
large demand for lire. Germany's gold collateral loan to Italy was
extended, with the Italian authorities repaying $500 million of the $2
billion outstanding. The Japanese yen appreciated by 5 percent during the
quarter. Following heavy trading in Canadian dollars during late June and
early July, the market calmed and the Canadian dollar declined briefly,
rising again toward the end ofthe transition quarter.
Gold market prices, as measured by the London fixings, declined during
thefiscalyear, by $42.45 perfinetroy ounce to $123.80 on June 30, 1976.
Following the U.S. Treasury auction of 500,000 ounces at $ 165.05 on June
30, 1975, gold traded in the $163-$ 165 range in July and August. In
September 1975 the price declined to an average of $ 144 and traded close
to that level through December 1975. In January 1976 the price moved
down to an average of $ 132 and traded fairly narrowly around that level
through March before gradually drifting to the $126 level in June. The
price dipped further in July and August, and was at the level of $ 116 at
the end of September.
International monetary reform
During fiscal 1976, agreement was reached on the main elements of a
new international monetary system. The agreement reached on January
8 in Jamaica by the Interim Committee of the International Monetary
88
1976 REPORT OF THE SECRETARY OF THE TREASURY
Fund 3 concluded nearly 5 years of international debate and negotiation on
international monetary reform and represents the most fundamental
change in the international monetary order since the postwar system was
constructed at the 1944 Bretton Woods Conference. The proposed
amendment to the IMF's Articles of Agreement and increase in IMF
quotas agreed upon in Jamaica are a major contribution to the effective
functioning of the international monetary system and fulfill critical U.S.
policy objectives in the international economic area. At the end of fiscal
1976, the proposed amendment and quota increase were awaiting
ratification by member countries, and legislation to authorize U.S.
acceptance of the proposed amendment and consent to the proposed
increase in the U.S. quota was under consideration in the Congress.^
Negotiations on reform of the international monetary system formally
began in July 1972 with the creation ofthe IMF's Committee on Reform
of the International Monetary System and Related Issues (Committee of
Twenty). The events leading up to the formation of this Committee, as well
as the issues considered by it, were set forth in detail in the Annual Reports
of the Secretary of the Treasury for fiscal years 1972-74.
The Committee of Twenty negotiations achieved substantial progress
toward consensus on the general outlines of a reformed system during
1972 and 1973, looking toward a system providing for adjustable par
values and floating exchange rates, effective and symmetrical inducement
to balance of payments adjustment on the part of countries in both surplus
and deficit, and elevation ofthe special drawing right (SDR) to a position
as unit of account and central reserve asset ofthe system in place of gold.
The Committee of Twenty negotiations were, however, overtaken by a
rapid escalation of worldwide inflation, widespread resort to exchange rate
floating in early 1973, and the major alteration of the world payments
structure resulting from the sharp increases in oil prices in late 1973 and
in 1974. The Committee decided, in light ofthe instability then existing
in the world economy and major uncertainty about the future, that it would
be impractical and undesirable to try to agree upon and implement in the
near future a highly structured reform of the international monetary
system, and decided instead that the reform process should take a more
evolutionary course. At its final meeting in June 1974, the Committee
made several recommendations for immediate action and for further work
on possible amendments to the IMF Articles of Agreement:
1.
2.
Establishment of a senior policy-level body (the present Interim
Committee) in the IMF to oversee the operations and evolution
of the monetary system and to undertake further work on
amendments to the IMF Articles of Agreement.
Establishment of a Development Committee under the joint
3 See exhibit 53.
4 On Oct. 20, 1976, President Ford signed this legislation (Public Law 94-564).
REVIEW OF TREASURY OPERATIONS
3.
4.
5.
89
auspices of the IMF and International Bank for Reconstruction
and Development (IBRD) to carry forward the study of the broad
question ofthe transfer of real resources to developing countries.
Creation of a special IMF oil facility.
Adoption of a new procedure for valuing the SDR in terms of a
basket of currencies.
Adoption of a set of guidelines for floating exchange rates
developed by the Committee of Twenty.
The Interim Committee, on which the United States is represented by
the Secretary of the Treasury, was formally established in October 1974
and immediately entered into intensive negotiations concentrating on two
broad areas: The formulation and implementation of actions to deal with
immediate economic and financial problems, and amendment ofthe IMF
Articles of Agreement, with longer term implications for the structure of
the international monetary system. By August 1975, agreement in
principle had been reached in the Interim Committee on measures to
phase gold out of a central role in the monetary system and on details of
an expansion of IMF quotas.^ Exchange arrangements remained the key
unresolved issue.
Important impetus was given to the Interim Committee negotiations by
the RambouUlet economic summit meeting in November 1975, at which
understandings were reached on the provisions regarding exchange
arrangements to be incorporated in the amended Articles of Agreement.
On the basis of these understandings, the way was cleared for agreement
by the IMF membership on the text of a specific amendment. And, on
January 8, 1976, in Jamaica, the Interim Committee reached a comprehensive agreement on outstanding international monetary issues,^ combining long-term structural reforms ofthe international monetary system with
measures to meet immediate balance of payments financing needs.
The Jamaica agreements.—The agreements reached by the Interim
Committee at Jamaica involved major revisions of the international
monetary arrangements established at the 1944 Bretton Woods Conference, while preserving the basic objectives of that system. Thus, the broad
objectives of promoting international monetary cooperation, facilitating
the exchange of goods, services, and capital among countries, and
providing resources for temporary balance of payments financing needs
are reaffirmed, while certain operational aspects of the IMF and of the
system are being revised to conform to the evolving needs of the
international economy. The reforms ofthe system that have been agreed
upon are designed to promote a smoothly operating monetary order and
to avoid the shocks and disequilibria which arose under the Bretton Woods
system and which ultimately led to its collapse.
5 See exhibit 49.
6See exhibit 53.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
The final Jamaica package included agreements in the following areas,
some of which had been reached in principle at earlier stages in the
negotiations:
1.
2.
3.
4.
5.
Amendment of the IMF Articles pertaining to exchange arrangements.
Actions to further reduce the role of gold in the system, many of
which also involve amendment of the Articles.
Other amendments to the Articles dealing with the special
drawing right and with the operations and organization of the
Fund.
An increase in the financial resources of the Fund.
Measures designed to increase members' access to IMF resources.
The proposed amendment to the Articles of Agreement will become
effective upon its acceptance by three-fifths ofthe IMF's members having
four-fifths of the total voting power.
Exchange arrangements.—A central achievement ofthe reform negotiations was the agreement reached on new provisions relating to exchange
rate arrangements to replace the obsolete par value provisions of the
present Articles. The changes endorsed by the Interim Committee in
Jamaica reflect recognition and agreement that future efforts must focus
on achievement of the underlying economic stability that is a prerequisite
for exchange rate stability, rather than on action to peg or manage
exchange rates. This constitutes a fundamental reorientation of the
Bretton Woods exchange rate provisions and a concentration on the real
determinants of monetary stability—stability in underlying economic and
financial conditions—rather than on the exchange rate consequences
which were the focus of Bretton Woods.
This change in focus underlies the new Article IV, "Obligations
Regarding Exchange Arrangements." This critical part of the Articles
provides the legal framework and nucleus of a new system. In summary,
the new article IV contains five major provisions:
First, the article provides for specific obligations of each member to
promote underlying stability. Each member must, with due regard to its
circumstances, "endeavor to direct its economic and financial policies
toward the objective of fostering orderly economic growth with reasonable
price stability," and " s e e k to promote stability by fostering orderly
underlying economic and financial conditions."
Second, the article provides wide latitude for a member country to adopt
specific exchange arrangements of its choice. Each member must
collaborate with the Fund and with other members to assure orderly
exchange arrangements, but the article does not insist on par values or any
particular exchange rate regime. It permits a range of exchange rate
practices—including floating; common margins arrangements such as
REVIEW OF TREASURY OPERATIONS
91
those presently applied by a number of European countries; and pegging
to another currency, to a basket of currencies, or to the SDR.
Third, the article requires that members avoid manipulating exchange
rates or, more generally, the international monetary system, to prevent
effective balance of payments adjustment or to gain an unfair competitive
advantage. This requirement is aimed at promoting responsible exchange
rate behavior, the avoidance of competitive undervaluation and beggarthy-neighbor policies. It can, moreover, yield a major improvement over
Bretton Woods, in providing for symmetrical Fund examination of surplus
as well as deficit countries.
Fourth, the article provides authority for the IMF to oversee the
compliance of each member with its obligations—the undertakings to
promote stability, to avoid manipulation that prevents adjustment or gives
an unfair advantage, and to collaborate with the Fund and with other
members to assure orderly exchange arrangements. This authority for
Fund surveillance gives the Fund the task of applying a global perspective
to actions of those members that cause adjustment or other problems for
other members.
Fifth, the article provides a framework for decisions on future evolution
of the system by high majority vote if modification is called for to meet
future needs.
In summary, the new article IV contains the essential elements of a
balanced, realistic, and workable system, monitored by the IMF. Member
countries have freedom to pursue exchange practices of their choice, but
undertake important commitments for responsible behavior—to follow
stable economic and financial policies, and to avoid actions that distort
world production, trade, and investment to the harm of others. The IMF,
for its part, will pay less attention to such procedural questions as whether
a currency is floating or fixed, but will have broad new authority to oversee
the system to promote its effective operation and to oversee the
compliance of members with their obligations. These obligations are
designed to minimize international tensions in exchange matters, while at
the same time giving member countries greater freedom to choose the
exchange procedure they wish to utilize.
The IMF is the focal point of the system. The IMF is to oversee both the
system to ensure its effective operation and the compliance of each
member with the obligations set out in the new article IV. Members are
obliged to provide the Fund with the information necessary for intelligent
surveillance of their exchange rate policies. In addition, the Fund is called
upon to adopt "specific principles" for the guidance of members with
respect to those exchange rate policies to assure that manipulative
practices are avoided. In the Bretton Woods system the Fund's attention
was more likely to be directed toward a member in times of crisis, and more
narrowly focused toward exchange markets. By contrast, under the new
system. Fund consultations with members are likely to be more continu-
92
1976 REPORT OF THE SECRETARY OF THE TREASURY
OUS, more broadly based, more concerned with the real international
impact of a country's actions, and directed to all countries.
Gold.—In the second main area ofthe Jamaica agreement, the following
measures will be adopted to promote a further reduction in gold's role in
the international monetary system:
1. The official price of gold in the IMF Articles will be abolished, and
gold will lose its formal position as unit of account for the system—e.g.,
for expressing the value of currencies, for determining the value of the
SDR, and for calculating members' rights and obligations in the Fund.
While gold has already ceased to perform many of the functions of unit
of account and reserve asset in practice, formal recognition of these
changes is basic to the international demonetization of gold.
2. All requirements for the use of gold in transactions between the Fund
and its members—e.g., in quota subscriptions, in payment of charges, and
in replenishment operations—will be eliminated. In addition, the IMF will
be prohibited from accepting gold, unless there is a decision to the
contrary by an 85-percent majority vote. Existing requirements for use of
gold in members' transactions with the Fund are to be replaced in most
cases with requirements to use SDR's or, if so decided, members'
currencies.
3. It was agreed to begin disposal under the authority of the present IMF
Articles of Agreement of 50 million ounces of gold held by the IMF (about
one-third of its total holdings), 25 million ounces to be sold at public
auction for the benefit of developing countries and 25 million ounces to
be sold to IMF members in proportion to their quotas.
4. The IMF will be empowered to dispose of its remaining gold holdings
in a variety of ways and by an 85-percent majority vote in each case.
Furthermore, in order to assure that, for a transitional period while these
changes are taking effect, gold does not reemerge as an important
monetary instrument, the Group of Ten countries—the major goldholding nations—have agreed to the following arrangements, which came
into force on February 1, 1976: (1) That there be no action to peg the price
of gold; (2) that the total stock of gold now in the hands of the IMF and
ofthe monetary authorities ofthe Group of Ten wiU not be increased; (3)
that the parties to these arrangements agree that they will respect any
further conditions governing gold trading that may be agreed to by their
central bank representatives; and (4) that each party agrees that these
arrangements will be reviewed by the participants at the end of 2 years and
then continued, modified, or terminated. Any party to these arrangements
may terminate adherence to them after the initial 2-year period. Other
nations may also adhere to these arrangements (Switzerland and Portugal
have done so).
Special drawing rights.—In parallel with phasing down gold's monetary
role, the new system provides an expanded role for the special drawing
right, and modifies certain of the rules governing that asset.
REVIEW OF TREASURY OPERATIONS
93
When the SDR was originally created in 1968, its value was established
in terms of gold and linked to currencies through their par values,
essentially through the par value ofthe dollar. With the suspension of gold
convertibility ofthe dollar and the widespread move away from par values,
it became unrealistic to value the SDR in terms of par values and difficult
to determine the rates to be used in IMF transactions. To overcome this
problem, agreement was reached on an interim basis to value the SDR in
terms of a weighted basket of the market exchange rates of 16 major
currencies, with the dollar representing approximately one-third of the
basket. Such a basket valuation technique is particularly well-suited to a
world of widespread floating of exchange rates, and the Fund has
subsequently operated without difficulty.
Under the amended Articles, the link between the SDR and gold is
severed. The SDR replaces gold as the common denominator of the
system, and as the unit for measuring IMF rights and obligations. The
SDR's value will continue to be determined by the present basket
technique. The possibility is provided for future modification in the
valuation technique in the event there is a widespread view that a different
technique is needed. A majority of 85 percent is required for a change in
the valuation principle or a fundamental change in the application of the
valuation principle. Other, more technical changes require a 70-percent
vote. A provision for modification of the SDR valuation technique is
needed because the present basket was introduced on an interim,
somewhat experimental basis, and because an evolution in exchange
arrangements could make it appropriate to shift to a different valuation
technique.
The SDR is expected to take on an increasingly important role, not only
as a unit of account used in measurements, but also as an asset used in
transactions. With respect to its use as an asset, the amended Articles
obligate members to collaborate with the Fund in their policies on reserve
assets toward the objective of making the SDR the principal reserve asset
ofthe international monetary system. In addition, the SDR takes over from
gold the preferred status as asset to be received by the Fund in payment
of charges, in meeting repurchase obligations, and to be accepted by
members in exchange for currencies replenished by the Fund.
A number of technical steps have been taken to improve the SDR's
quality and usability so that it may better fulfill its purposes. Thus countries
will have greater freedom to enter into SDR transactions with each other
on a voluntary basis; the possible uses have been expanded; and the Fund
may broaden the categories of holders—though not beyond official
entities—and the operations in which they engage. Also, the decisions for
altering certain policies governing SDR's are made easier such as the terms
and conditions governing approved transactions, and the rules that require
countries to "reconstitute" or repurchase after a certain period some of
the SDR's they have used.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
At the same time that these rules governing use of the SDR's are being
eased, important safeguards have been retained which help assure that the
SDR will remain a widely accepted and valued asset. Thus, the limit on
members' obligations to accept SDR's is retained, and IMF quotas remain
the basis for new SDR allocations.
The reduction in the monetary role of gold contained in the agreements
represents major progress toward an objective held for many years by the
United States and many other countries. Gold is a valued commodity, but
clearly not a sound basis for an international monetary system. The
provisions in the new system reducing gold's role and expanding that of
the SDR represent a move toward realism and stability.
IMF operational and organizational changes.—The negotiation of a
comprehensive amendment of the IMF Articles provided an opportunity
for introducing needed operational changes. The original Articles were
heavily focused on the mechanics of the monetary system and contained
detailed rules and regulations which did not contain either scope for
flexibility in day-to-day operations or scope for adaptation over time.
In light of these problems, a large number of changes are proposed
affecting IMF operations. The purpose is to modify obsolete provisions,
to simplify operations, and to adopt structural changes. Among the
modifications are the following:
1. Usability of currencies is assured. Under the present Articles,
countries, regardless df the strength of their external positions, can
effectively prevent use of their currencies by the Fund for loans to others.
Agreement to the usability of IMF currency holdings has been consistently
promoted by the United States and was considered essential, in part
because quota subscriptions can be paid in full in national currencies
under the amended Articles. Under the amended Articles, there are
provisions to ensure that the Fund's holdings of all currencies will be
usable by the Fund in accordance with its policies. Similarly, members will
be required to provide their currencies to other members when that
currency has been specified by the Fund for repurchase. This agreement
will add substantially to the Fund's usable resources at present and in the
future and will strengthen its ability to provide balance of payments
assistance to members.
2. The Fund's authority to invest is made explicit. Currencies not in
excess of the Fund's reserves can be invested in income-producing and
marketable obligations of international financial organizations or of the
members whose currencies are used for the investment.
3. The Fund's policy on repurchase (repayment) is modified. The
provisions in the present Articles are obsolete and cumbersome, being
more appropriate to a par value system than to present arrangements. The
amendment provides the Fund with authority to establish policies on
repurchase appropriate to the needs of the system.
REVIEW OF TREASURY OPERATIONS
95
Organizational changes of the IMF are also being made. Most important
is a provision which would permit, by 85 percent majority vote, the
establishment of a Council, with decisionmaking power, to replace the
present Interim Committee, which is an advisory body. The Council would
be charged with supervising the management and adaptation of the
international monetary system, including the continuing operation of the
adjustment process, and development in global liquidity.
Increase in IMF quotas.—IMF quotas will be expanded by approximately SDR 10 billion, to a new total of SDR 39 billion (a 33.6-percent
increase). The U.S. quota in the Fund will be increased by SDR 1,705
million, from SDR 6,700 million to SDR 8,405 million. As a result of
changes in quota shares agreed in the negotiations, the United States will
experience a slight reduction in its voting share in the IMF to just under
20 percent. This change will be accompanied, however, by an increase in
the majority required for decisions of major policy significance in the IMF
from 80 percent to 85 percent.
Increased access to IMF resources.—The Jamaica agreements also
contained a number of measures to expand members' access to IMF
resources in the present world economic situation. These steps are listed
below and described in following sections:
1. Members' access to regular IMF credit resources has been temporarily expanded.
2. A major liberalization of the IMF's compensatory financing facility
has been implemented.
3. A trust fund, designed to utilize the profits on sales of IMF gold for
the benefit of developing countries, has been established.
IMF operations
During fiscal 1976, the IMF experienced a further substantial increase
in lending, with purchases of currencies (drawings) by IMF members
reaching a record SDR 7.6 biUion (about $8.9 biUion),^ a 46-percent
increase over drawings in fiscal 1975. Drawings during the transition
quarter amounted to SDR 1.3 billion. This increase reflected significant
growth in drawings from the IMF's regular resources and from some ofthe
IMF's special facilities—the compensatory financing facility, the buffer
stock facility, the extended Fund facility, and the oil facility.
Regular IMF resources.—Purchases under the IMF's regular resources
during fiscal 1976 amounted to SDR 2,218 million by 27 countries, and
during the transition quarter amounted to an additional SDR 320 million.
Over this 15-month period, the United Kingdom was the single largest
borrower, with drawings of SDR 1.4 billion followed by South Africa (SDR
246 million) and Argentina (SDR 160 mUlion). Principal currencies
drawn from the IMF were the U.S. dollar, the French franc, the German
7 Conversions from SDR's to dollars in this section are made at the rate of $1.17 equals SDR 1. This is the fiscal 1976
monthly average dollar/SDR exchange rate. The value of SDR's is determined by a basket of 16 currencies whose values
fluctuate daily in response to changes in market exchange rates.
96
1976 REPORT OF THE SECRETARY OF THE TREASURY
mark, and the Japanese yen. Special drawing rights were drawn from the
IMF in the amount of SDR 448 million during fiscal 1976 and SDR 13.5
million during the transition quarter.
Repayments of outstanding drawings (repurchases) totaled SDR 630
million for fiscal 1976 and SDR 113 million for the transition quarter.
Currencies used in repurchase included German marks (SDR 104
million), U.S. dollars (SDR 67 miUion), Japanese yen (SDR 31 mUlion),
and French francs (SDR 27 million). Repurchases with special drawing
rights amounted to SDR 443 million.
As of September 30, 1976, cumulative drawings under the IMF's regular
resources, from the beginning of IMF operations, amounted to SDR
31,075 million, of which SDR 9,762 mUlion was in U.S. dollars.
Cumulative repurchases amounted to SDR 17,920 million, ofwhich SDR
4,792 million was in U.S. doUars.
The U.S. reserve position in the IMF increased to SDR 2,790 million
during fiscal 1976 and 3,416 million during the transition quarter as a
result of net purchases of U.S. dollars by other countries amounting to
SDR 1,212 million.
As a temporary measure, pending implementation of the proposed
amendment to the IMF Articles of Agreement, members' access to regular
IMF credit resources was increased by 45 percent in January 1976 as a
means of assisting in meeting exceptional financing needs.
There was no activation during fiscal 1976, nor during the transition
quarter, of the General Arrangements to Borrow (GAB). These arrangements for lending to the Fund, established in 1962 by the 10 major
industrial country members of the Fund, including the United States, are
designed to supplement the IMF's resources needed to cope with
developments that threaten to impair the operations of the international
monetary system. Commitments to the GAB, which totaled the equivalent
of approximately SDR 5,500 million on September 30, 1976, were most
recently renewed on October 29, 1974, for a period of 5 years. The U.S.
share in the GAB is $2 bUlion.
IMF oil facility.—The IMF oil facility was a temporary facility created
in 1974 and designed to respond to emergency balance of payments
financing needs arising from sharply increased oil prices, and has been
described in earlier Annual Reports. New lending from the facility was
terminated on March 31, 1976. Drawings from this facUity were made by
55 countries and totaled the equivalent of SDR 6,902 million during the
period of its operations.
The resources available to the oil facility were derived from loans to the
IMF by the oil-exporting countries and by a number of developed
countries. These loans will be repaid by the Fund over the 4- to 7-year
maturity of drawings from the oil facility. Interest charges on oil facility
drawings are based on the cost of borrowings by the oil facility, and
REVIEW OF TREASURY OPERATIONS
97
averaged 6.9 percent under the 1974 facUity and 7.6 percent under the
1975 facility.
On August 1, 1975, the IMF established a subsidy account under a trust
arrangement separate from the IMF, to reduce the effective rate of charges
on oil facility drawings by the least developed IMF members most seriously
affected by the increased price of petroleum. The account will be financed
by voluntary national contributions, which are expected to total approximately SDR 160 million and to make possible an interest subsidy of
approximately 5 percentage points for eligible borrowers from the oil
facility. Subsidy payments from the account will be made over the
1976-83 period. The first subsidy payments to 18 IMF members were
disbursed in July 1976 and totaled SDR 14 million.
IMF commodity-related financing arrangements.—The IMF has two
commodity-related facilities in operation, a compensatory financing
facility and a buffer stock facility. The IMF compensatory financing
facility was established in 1963 and liberalized in 1966 and again in 1975.
In order to be eligible to draw from the facility, a member must: (1) Be
experiencing a shortfall in export earnings that is temporary and
substantially beyond its control, (2) have an overall balance of payments
need, and (3) agree to cooperate with the IMF in finding appropriate
solutions to its balance of payments difficulties.
Following a recommendation of the Interim Committee, the IMF
substantially liberalized the compensatory financing facility in December
1975. The liberalization, which was strongly supported by the United
States, provided for: (1) Elimination ofthe existing limit of 10 percent on
forecasts of annual export growth in the postshortfall period, an important
factor in the calculation of compensable export shortfalls; (2) increased
quota limits on compensatory financing drawings, from 25 percent of
quota in any 12-month period to 50 percent of quota, and from 50 percent
of quota on total drawings outstanding to 75 percent of quota; in addition,
elimination of the 75 percent of quota limit on combined compensatory
and buffer stock drawings; (3) requests based on shortfall period ofwhich
export data are estimated for up to 6 months; and (4) modification ofthe
rules relating to reclassification of drawings from the IMF's regular
resources into compensatory purchases to permit reclassification to be
made within 18 months, instead of 6 months, from the date ofthe ordinary
drawings.
The amount of export shortfall eligible for compensation is calculated
as the difference between export in the shortfall year and the average
annual level of exports in a 5-year period centered on the shortfall year
(i.e., taking into account export forecasts for the 2 succeeding years), and
subject to the quota limits noted above. Drawings from the facility are
subject to the same charges and repurchase obligations as apply to the
regular resources (presently 4 to 6 percent annual charge and repurchases
over 3 to 5 years).
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1976 REPORT OF THE SECRETARY OF THE TREASURY
During the 13 years since the compensatory financing facility was
established, 57 countries have made 104 drawings. As of September 30,
1976, drawings totaled cumulatively SDR 3,039 million and outstanding
drawings amounted to SDR 2,270 million. Drawings amounted to SDR
1,777 mUlion in fiscal 1976 and to SDR 862 million in the transition
quarter. Purchases increased rapidly following the December 1975
liberalization of access to this facility and drawings in the first three
quarters of calendar 1976 amounted to substantially more than total
drawings during the preceding 13 years of the facility's existence.
The second IMF commodity-related financing arrangement—the buffer
stock facility—was created in 1969 to assist members having balance of
payments needs in financing their contributions to international buffer
stocks that meet specified IMF criteria. Drawings from the buffer stock
facility carry the same interest rate and repayment provisions as do regular
IMF drawings, except tliat disbursements of funds from an international
buffer stock to a member must be used to repay drawings from the buffer
stock facility. Loans from this facility are subject to the condition that a
member borrowing from the facility must cooperate with the IMF to find
appropriate solutions to its balance of payments difficulties. Countries
may draw up to 50 percent of quota under the facility. As noted above,
the 1975 liberalization ofthe compensatory financing facility eliminated
the 75-percent quota limit on combined compensatory and buffer stock
drawings.
Under the terms of the facility, an international buffer stock could be
eligible for IMF financing if it met criteria designed: (1) To ensure that
all IMF members, whether or not they participate in the buffer stock, are
treated equitably by the buffer stock arrangement, and in particular that
consumers as well as producers participating in the arrangement are able
to have an effective voice in decisions on its operations; (2) to provide that
the buffer stock pricing policies contribute to earnings stabilization, that
stock accumulations and sales balance out over the medium term, that
excessive use is not made of quantitative controls, and that funds from the
IMF are used only for financing related to acquisition of stock; and (3) to
prevent long-term restriction of supply as a means of artificially maintaining prices above a long-term trend.
Two international buffer stocks—tin and cocoa—were declared eligible
in 1970 and 1973, respectively, under the IMF's criteria for financial
support from this facility, although funds have been drawn only with
respect to the tin buffer stock. Total drawings have amounted to SDR 30
million by five countries. SDR 0.3 million in drawings was outstanding as
of September 30, 1976.
Extended Fund facility.—The extended Fund facility, created on
September 13, 1974, is designed to provide medium-term balance of
payments assistance to IMF members in support of comprehensive
programs of structural economic adjustment. In order to draw from the
REVIEW OF TREASURY OPERATIONS
99
extended Fund facility, a member must prepare and adhere to a
comprehensive multiyear program of structural reform approved by the
IMF. Credits may be provided over a 3-year period, subject to adherence
to the agreed program, in contrast to the normal 1-year limit on the
availability of regular IMF resources under standby arrangements.
Drawings from this facility have longer repayment periods (4 to 8 years)
than do drawings from the IMF's regular resources, and bear a slightly
higher interest rate in the later years. A country may draw up to 140
percent of its quota under this program but not in excess of 165 percent
of its quota from both this source and from the IMF's regular resources
combined. (The joint limit was temporarily raised to 176 percent of quota
pursuant to the temporary expansion of access to the IMF's regular
resources.)
As of September 30, 1976, extended Fund arrangements had been
approved for two countries—Kenya and the Philippines—for SDR 67
million and SDR 217 million, respectively. In August 1975, Kenya drew
SDR 8 million and in September 1976, the Philippines drew SDR 90
million under their respective arrangements.
Trustfund.—The IMF established on May 5, 1976, a trust fund designed
to utilize the profits on sales of IMF gold for balance of payments
assistance on concessional terms to 61 low-incpme developing country
members. The origin ofthe concept ofthe trust fund, first proposed by the
United States in November 1974, was described in the fiscal 1975 Annual
Report.
The trust fund and IMF gold sales meet two major objectives of the
United States in the international economic area: Further reduction in the
international monetary role of gold, and mobilization of resources to meet
urgent balance of payments financing needs of the poorest developing
countries in the present period of exceptional payments imbalance.
The trust fund, which is legally separate from the IMF but managed by
it as trustee, will be financed mainly from profits on the sale of IMF gold
amounts received in excess ofthe present official price of gold (about $42
per ounce). The trust fund may also accept national contributions. Sales
of a total of 25 million ounces of gold at public auction will be held over
a 4-year period beginning June 2, 1976. Sixteen auctions of 780,000
ounces each have been scheduled for the first 2 years at approximately 6week intervals. As of September 30, 1976, the IMF had conducted three
auctions, yielding an average price of $ 119.15 per ounce of gold and total
profits of $184 million.
Developing country members of the IMF will receive a direct transfer
of part ofthe profits on IMF gold sales in proportion to their quotas in the
IMF. The balance of the profits will be available to the trust fund for
balance of payments credit to eligible countries. In order to borrow from
the trust fund, an eligible member must have a balance of payments need
and must have in place an economic program designed to improve its
100
1976 REPORT OF THE SECRETARY OF THE TREASURY
balance of payments situation. Trust fund loans will carry a 10-year
repayment term, including a grace period of 5 years, and an interest rate
of one-half of 1 percent. Initial disbursements on loans under the trust fund
are expected to occur early in calendar 1977.
Financial Support Fund
The proposed Financial Support Fund was described in some detail in
last year's Annual Report. In brief, the Support Fund is designed as a
temporary financial mechanism—a "safety net"—to encourage cooperation in energy and economic policy by supplementing other sources of
financing in the event participating OECD members cannot obtain
elsewhere, on reasonable terms, financing needed to avoid recourse to
restrictive trade policies, capital controls, or undue restraints on domestic
economic activity. Despite the continued satisfactory operation of
international financial markets as a whole, there is no assurance that each
OECD member country will be able to attract adequate financing on
reasonable terms. The potential danger is that a country could be moved
to adopt inappropriate policies because of the unavailability of such
financing—or out of concern that financing would not be available in the
future—and that other countries would take similar policy actions to
protect their own positions. The risk is that recourse to such policies could
spread quickly and result in serious disruptions of the world economy,
reduction of worldwide economic well-being, and less cooperation in
energy policy. This risk is shared by all countries, as are the benefits to be
gained through avoidance of such policies.
The Financial Support Fund is designed to protect against this risk by
providing an assured source of financing to participating OECD countries,
whose policies will determine both whether the world economic order
remains liberal and open and whether the oil-importing countries will
succeed in reducing their dependence on unstable and excessively costly
energy sources. If the Fund's resources are used, specific policy conditions
on its loans will be prescribed in order to assure cooperative solutions to
mutual economic and energy problems.
The Financial Support Fund will comprise total member country quotas
of SDR 20 billion (about $23 billion at the dollar/SDR rate of exchange
prevailing in the latter part of fiscal 1976), with the U.S. quota amounting
to SDR 5,560 mUlion (about $6.5 billion), or about 27.8 percent ofthe
total. Participants' quotas will determine their share in financing loans
made by the Fund, their share in risks in loans made by the Fund, their
voting rights (each member has a number of votes in proportion to its
quota), their maximum financial liability to the Fund, and the amount they
may borrow from the Fund.
The United States expects to meet its share in the financing of loans
made by the Financial Support Fund through the issuance of guarantees
REVIEW OF TREASURY OPERATIONS
10 1
covering market borrowings by the Fund. The United States could,
however, choose to extend direct loans to the Fund, for market considerations or other reasons. Such loans would be extended from the Exchange
Stabilization Fund under existing authority.
Negotiation of the agreement establishing the Financial Support Fund
was initiated in the Group of Ten and completed by a temporary working
party of the OECD. The agreement was signed, subject to necessary
legislative action, by the United States and most other OECD member
countries in Paris on April 9, 1975, and had been ratified by 15 OECD
members by the end of fiscal 1976—Austria, Belgium, Canada, Denmark,
Germany, Greece, Iceland, Japan, New Zealand, Norway, Portugal,
Sweden, Switzerland, Turkey, and the United Kingdom. Three other
countries—Ireland, France, and the Netherlands—had completed necessary domestic procedures but had not yet deposited instruments of
ratification. The legislative process is still underway in six countries—
Australia, Finland, Italy, Luxembourg, Spain, and the United States.
Proposed legislation authorizing U.S. participation in the Financial
Support Fund was submitted to the Congress on June 6, 1975. Early in
fiscal 1976, hearings on U.S. participation in the Financial Support Fund
were held by the Senate Foreign Relations Committee and the Subcommittee on International Trade, Investment and Monetary Policy of the
House Committee on Banking, Currency and Housing. The Secretary
testified again before the Senate Foreign Relations Committee on behalf
ofthe Support Fund on March 26, 1976, and the legislation was favorably
reported. On June 4, 1976, the Secretary testified on behalf of the Support
Fund before the Senate Committee on Banking, Housing, and Urban
Affairs, reemphasizing the need for U.S. participation in the Fund. As of
September 30, 1976, however, the legislation had not been approved by
either the House or the Senate.
Organization for Economic Cooperation and Development
The OECD continues to serve as one of the primary international sites
for consultation and cooperation on economic and financial policy issues
among its 24 member states. In addition to carrying forward its longestablished role of regularly examining the economic conditions prevailing
in its member states as well as various aspects of economic, fiscal, and
monetary policy, the OECD has intensified its activities in the areas of
energy, commodities, and relations with the developing countries, through
the new bodies mentioned in last year's Annual Report. With respect to
these latter activities, the OECD played a significant role by providing a
means for the developed countries to discuss the issues in the ongoing
North-South dialog that has been taking place during 1976 at the
Conference on International Economic Cooperation (CIEC) in Paris.
At the annual Ministerial-level meefing of the OECD Council held in
102
1976 REPORT OF THE SECRETARY OF THE TREASURY
Paris on the 21st and 22d of June 1976,^ which was attended by Secretary
Simon as well as Secretary Kissinger, OECD Ministers agreed that in the
growing economic interdependence among nations member governments
bear a great responsibility to promote noninflationary growth, employment, and social progress not only among their countries but for the world
at large. The Ministers recognized that the steady economic growth
necessary to restore full employrnent and satisfy rising expectations will
not prove sustainable unless further\progress is made towards eliminating
inflation. Principles were agreed to guide national economic policies in
achieving the moderate but sustained economic growth which would
produce these results.
The Ministers renewed for an additional year their Declaration on Trade
of 1974, constituting a pledge to avoid restrictive actions on trade and
other current external transactions which could lead to reprisal by others
and impair the process of economic recovery.
Acting in a new area of interest, the Ministerial meeting agreed that
cooperative action arhong member countries could improve the foreign
investment climate and encourage the positive contribution multinational
enterprises can make to economic and social progress while minimizing
difficulties that may arise from their activities. To implement this
approach. Ministers approved a series of investment understandings
including national treatment of foreign-owned enterprises, the use of
official incentives and disincentives to international investment, and
voluntary guidelines for multinational enterprises.
Ministers also reaffirmed their governments' commitment to improved
relations with developing countries as expressed in the Declaration on this
subject adopted at last year's meeting.
The Economic Policy Committee and its subgroups on growth (Working
Party 2) and on prices and costs (Working Party 4) continued to devote
particular attention to evaluation of the factors contributing to unacceptably high inflation in circumstances of low or moderate economic activity
accompanied by persistently high levels of unemployment. Working Party
3, which is concerned with policies for the promotion of better payments
equilibrium and to which the U.S. delegation is led by the Under Secretary
of the Treasury for Monetary Affairs, focused its attention on the sharp
swing in the external payments positions and related financing requirements of member countries. A Temporary Working Party, to which the
U.S. delegation is also headed by Treasury, continued its work on financial
and economic issues arising out ofthe dialog with oil-exporting and other
developing countries and also reviewed the payments position of smaller
OECD countries.
Generally, Treasury representatives participated extensively in a broad
range of OECD activities, leading or joining in the work of U.S. delegations
8 See exhibit 59.
103
REVIEW OF TREASURY OPERATIONS
to, among others, committees dealing with questions concerning international investment and multinational enterprise, trade, export credits,
energy and the International Energy Agency, commodities, fiscal affairs,
financial markets, and relations with developing countries.
U.S. balance of payments
The main balance of payments development during fiscal 1976 was a
sharp swing in the merchandise trade balance, from a roughly $9 billion
annual rate surplus in the July-December 1975 half to a $6 billion annual
rate deficit in the January-June 1976 half. Because of its timing, this shift
is best examined on a half-year rather than full fiscal year basis.
U.S. merchandise trade, July 1974-September 1976
[Balance of payments basis, seasonally adjusted; in $ billion, rounded]
Half-year totals
July-Dec.
1974
Exports ( + )
Jan.-June
1975
July-Dec.
1975
Quarter
Jan.-June
1976
July-Sept.
1976
51.6
(Balance excluding agricultural
exports and fuel imports)
29.6
iTl
44.1
6l
23.2
-48.1
-49.9
-58.3
-32.6
-13.6
-34.5
MT9
-35.0
-17.1
-41.2
-10.0
-22.6
-3.7
Trade balance
55.3
xTl
42.9
-15.2
-40.2
Fuels
Other
54.2
10^9
41.9
-55.4
Imports ( - )
52.9
109
40.8
Agriculture
Other
4.7
4.3
-3.0
-3.0
(7.4)
(7.9)
(0.6)
(2.9)
(0.6)
NoTF..—Half-year data, due to seasonal adjustment on a calendar-year basis, will not add precisely to fiscal-year
totals.
Summary of U.S. international transactions
[Millions of dollars]
Fiscal
1975
Exports of goods and services
Merchandise, excluding military
Other goods and services
Imports of goods and services
Merchandise, excluding military
Fiscal
1976
T.Q.*
148,364
154,817
42,577
104,360
44.004
109,706
45,111
29,581
12,996
-139,618
-143,419
-41,708
-103,084
-108,456
-32,614
Other goods and services
-36,534
-34,%3
-9,094
U.S. Government economic grants
-2,939
-2,536
-1,461
Remittances, pensions, and other transfers
-1,753
-1,797
-464
-31,405
-1,220
-3,029
-27,156
-35,530
-2,604
-3,416
-29,510
:-8,901
-407
-1,454
-7,040
U.S. assets abroad, net (increase/capital outflow ( - ) )
U.S. official reserve assets, net
Other U.S. Govemment assets
U.S. private assets
Foreign assets in the United States, net (increase/capital
inflow ( + ) )
Foreign official assets
Other foreign assets
Statistical discrepancy
22,222
21,307
8,471
13,138
9,084
9,212
12.095
3,013
5,458
5.129
7,154
1,485
* Preliminary July-September 1976, seasonally adjusted.
Source: Survey of Current Business, December 1976, published by U.S. Department of Commerce, Bureau of
Economic Analysis.
104
1976 REPORT OF THE SECRETARY OF THE TREASURY
The major factor in this surplus-to-deficit swing on net merchandise
trade was the strong recovery of U.S. import demand, by the third
(January-March) quarter of fiscal 1976, to more or less cyclically normal
levels—following an extraordinary slump during the second (January-June) half of fiscal 1975 associated with general recession and massive
inventory adjustments in the U.S. domestic economy. Between the
July-December 1974 and the January-June halves of fiscal 1975 there was
a roughly $ 10 billion annual rate slowdown in U.S. nonfuel imports, which
between the first and second halves of fiscal 1976 was completely reversed
again.
A second important factor contributing to this change on total trade
account was a combined cyclical and trend increase in the volume of
petroleum imports, reflecting rising consumption plus declining domestic
production, that was compounded by rising oil-import prices.^ The
recession-period decline in U.S. total fuel imports was both briefer and
smaller than for other imports, and the net increase in such fuel imports
between first-half fiscal 1975 and second-half fiscal 1976 was roughly $4
billion on an annual rate basis.
Agricultural exports, after holding steady at roughly a $22 billion annual
rate, through both fiscal 1975 and fiscal 1976, have risen somewhat further
in the transition quarter.
The U.S. trade balance excluding agricultural exports and fuel imports
has shifted over this period (all amounts on annual rate basis) from (a) a
roughly $1 billion surplus in the July-December 1974 half of fiscal 1975
to (b) recession-related temporary surpluses of roughly $ 15 billion in both
of the two following half years, to (c) continuing but much smaller
surpluses, of almost $6 billion and roughly $2 billion, respectively, in the
January-June half of fiscal 1976 and the transition quarter.
Treasury foreign exchange reporting system
Throughout fiscal 1976 the Treasury foreign exchange reporting system
staff worked actively to improve the system for the current reporting of
portfolio capital movements transactions. This work was done primarily
through visits and communications with selected current and potential
reporters to discuss both conceptual and operational problems and to
review procedures for correct reporting. These efforts not only produced
significant amounts of previously omitted data but also improved
reporters' understanding of the reporting requirements and the importance of the data.
In support of the President's reporting reduction program, three
periodic reports were discontinued as of June 30, 1976. These were the
monthly Preliminary Summary to Treasury Foreign Exchange Form B-1;
the annual Form C-4, "Short-Term" Liquid Claims on "Foreigners" in
Countries Not Listed Separately on Form C-3; and the quarterly Form
9See exhibit 57.
REVIEW OF TREASURY OPERATIONS
105
S-4, Foreign Debit and Credit Balances. Notice ofthe amendments to the
Treasury Regulations revoking the reports was published in the Federal
Register on June 29, 1976.
At the close ofthe fiscal year, revision of reporting forms was underway
to eliminate through consolidation at least five other separate reports
required by law.
Treasury foreign currency reporting system
On October 29, 1975, revised bank report forms were instituted to
resolve reporting problems which had arisen with the initial forms, to
increase the usefulness ofthe reports to the bank regulatory agencies, and
to measure more precisely the foreign exchange market phenomena being
studied.
In response to the President's reporting reduction program, action was
undertaken to drop one nonbank report form. Foreign Currency Form
FC-3a, and to revise reporting thresholds on another nonbank report
form. Foreign Currency Form FC-3.
Developing Nations
International development banks i
In the 15-month period, the Congress appropriated $695.6 million for
the resources ofthe international development banks for fiscal 1976 and
$745.5 million for fiscal 1977, as shown in the table below:
U.S. participation in international development banks
($ millions]
Appropriation
Institution
Authorization
Intemational Development Association—IV
Inter-American Development Bank:
Paid-in
Callable
Fund for Special Operations
Asian Development Bank—Ordinary Capital:
Paid-in
Callable
Asian Development Fund
African Development Fund
Total
Fiscal 1976
Fiscal 1977
320.0
375.0
120.0
1,530.0
600.0
225.0
20.0
200.0
50.0
24.1
66.4
25.0
24.1
%.5
25.0
5.0
2,275.0
695.6
745.5
10.0
The international development banks committed $8,992 million to over
80 developing countries in fiscal 1976. The distribution of commitments
by insfitufion was as follows: World Bank group, $6,878 mUlion; InterAmerican Development Bank (IDB), $1,231 million; and Asian Development Bank (ADB), $883 million.
To put into perspective the importance of these banks to development
assistance generally, total lending flows from the international developt See exhibit 67.
106
1976 REPORT OF THE SECRETARY OF THE TREASURY
ment banks are equal to over 66 percent of the total official development
assistance from OECD countries in calendar year 1975.
As of September 30, 1976, the United States was behind the schedules
observed by other nations contributing to the international development
banks. Although the United States is the largest single contributor to the
banks, other donors together contribute more than twice as much.
Contributions from other donors thus complement the U.S. subscriptions
and increase the financial impact of these institutions, which stress the role
of market forces in the effective allocation of resources, the development
of outward-looking trading economies, the critical role of private
enterprise, and the importance of spreading development benefits to the
poorer people of developing countries.
The World Bank group
The International Bank for Reconstruction and Development (IBRD)
and its affiliates, the International Development Association (IDA) and
the International Finance Corporation (IFC), committed $6,878 million
for development projects in their member countries in fiscal 1976. This
volume represents a 13-percent increase over the fiscal 1975 level and a
66-percent increase over the lending level in fiscal 1974. The IBRD made
new loans of $4,977 million ($658 mUlion more than in the preceding
fiscal year) while new IDA credits were $1,655 miUion (compared with
$1,576 mUlion in fiscal 1975). New IFC investments in equity and loans
to the private sector totaled $245 million in fiscal 1976 (compared with
$212 miUion in fiscal 1975 and $203 mUHon in fiscal 1974). As of June
30,1976, total IBRD loans outstanding amounted to $26,091 million, total
IDA credits outstanding were $10,450 million, and total IFC cumulative
net commitments were $1,507 million. During the transition quarter, the
IBRD made new loans of $814.7 million, IDA extended new credits of
$325.7 million, and IFC made new loans and investments of $2.5 million.
IBRD and IDA lending is increasingly concentrated in agriculture and
rural development. For the second consecutive year lending to agriculture
and rural development was greater than for any other sector. Agricultural
projects accounted for 27 percent of total lending in fiscal 1976. Other
important sectors of IBRD/IDA lending in 1976 included development
finance companies and industry (21 percent), transportation (22 percent), and electric power (14 percent). IFC investments were concentrated in iron and steel (27 percent), relending for industry (18 percent),
textiles (16 percent), construction materials (5 percent), and chemicals
(3 percent).
The IBRD and IDA committed funds for 214 development projects in
76 countries in fiscal 1976. The distribution of commitments by region was
as follows: Africa, $891 million; Asia, $2,807.7 miUion; Latin America,
$2,448 million; and Europe, the Middle East, and North Africa, $1,485.6
million. India was the largest individual borrower ($894 miUion), while
REVIEW OF TREASURY OPERATIONS
107
Indonesia was second ($517 million), and BrazU third ($498 million).
IFC commitments during fiscal 1976 went to 33 enterprises in 23
developing countries. By region, IFC commitments went to 4 projects in
Europe ($92.0 mUlion), 10 projects in Asia ($75.8 mUlion), 9 projects in
Latin America ($36.5 mUlion), 8 projects in Africa ($34.0 million), and
1 project in the Middle East ($7.0 million). Yugoslavia received the largest
individual total ($50 million), with Korea second ($47.8 mUlion), and
Turkey third ($38.5 mUlion).
At the annual meeting of the World Bank in Washington in September
1975, Secretary Simon set forth a range of proposals as part of the U.S.
program to assist the developing countries. 2 As a matter of high priority.
Secretary Simon proposed the creation of a development security facility
in the IMF to help meet the balance of payments needs of primary
producing countries arising from temporary shortfalls in export earnings
due to circumstances primarily beyond their control. He pledged U.S.
support for a major capital expansion of the IFC, the only member of the
World Bank group which is designed exclusively to promote private
investment. Finally, the Secretary stressed the importance of sound
financial policies for the World Bank group and the appropriateness of a
substantial increase in World Bank capital. During the fiscal year, progress
was made in achieving these objectives. The first step in strengthening the
Bank's financial structure has been the development of a lending rate
formula which covers both the cost of funds to the Bank in world financial
markets and the administrative and liquidity costs of the Bank. On June
1, 1976, the Bank's interest rate was raised from 8.5 percent to 8.85
percent and on July 1 from 8.85 percent to 8.9 percent.
The lending operations of the IBRD are financed by paid-in capital
subscriptions, funds borrowed in capital markets and from govemments
and central banks, sales of participations, principal repayments on loans,
and earnings on loans and investments. The IBRD's net outstanding
funded debt increased by $2,360 miUion during fiscal 1976 to $14,647
million. As of June 30, 1976, 25 percent ofthe Bank's obligations were
held by investors in the United States, 21 percent in Germany, 10 percent
in Japan, 8 percent in Saudi Arabia, and 7 percent in Switzerland. The
remaining 29 percent of outstanding borrowings were held by investment
institutions, including central banks and government agencies in more
than 80 countries.
In May 1976, the Executive Directors ofthe IBRD recommended that
the Bank be authorized to increase its capitalization by $8.4 billion from
its 127 member countries. In order to participate in the IBRD capital
increase, the United States requires congressional authorization. The
Secretary ofthe Treasury forwarded a legislative proposal in June 1976.
The 94th Congress took no action on this legislation. Under the proposal.
2 See exhibit 50.
108
1976 REPORT OF THE SECRETARY OF THE TREASURY
the United States would subscribe to 13,005 shares of capital at a cost of
$1,568.9 million. Of this amount, 10 percent would be paid-in and 90
percent would be in the form of callable capital. The U.S. share would
represent approximately 19 percent ofthe proposed increase. As a result,
U.S. voting power in the IBRD would decrease from 22.6 percent to 21.9
percent, a shift consistent with our policy of burden-sharing. The IBRD
capital increase is an important element in U.S. foreign assistance policy
as the United States considers the Bank to be an indispensable source of
capital for the developing countries. The proposed increase would allow
the Bank to maintain its current level of commitments until the 1980's.
During the year, IBRD gross borrowings reached a record level of
$3,811 million, up nearly 8 percent from $3,510 miUion borrowed in fiscal
1975. The main source of borrowed funds to the Bank changed substantially in fiscal 1976. In the preceding 3 years, governments and central
banks were the major sources, supplying 59 percent of total borrowed
funds in fiscal 1973, 80 percent in fiscal 11974 and 75 percent in fiscal 1975.
In 1976, governments and central banks supplied 35 percent of borrowed
funds, while private markets supplie(i 61 percent of the total. The
remaining 3 percent was borrowed by the Bank from the interest subsidy
fund established during the year to permit concessional lending from the
"third window" of the IBRD. This was a new and temporary source of
funds to the Bank.
1
The principal suppliers of borrowed capital in fiscal 1976 were the
United States ($1,275 million), Germany ($666 million), and the
petroleum-exporting countries ($445 million, ofwhich Kuwait accounted
for $155 million).
i
During fiscal 1976, IDA granted new credits totaling $ 1,655 million, an
increase of $79 million over fiscal 1975. IDA credits are funded primarily
by member country contributions, grants from the net income of the
IBRD, repayments of credits, and earnings. During the year, the United
States contributed $320 mUlion toward the first U.S. installment of IDA's
fourth replenishment. Usable resources of IDA, cumulative to June 30,
1976, amounted to $11,514 million, consisting of $10,100 mUlion in
member contributions, $1,125 million in transfers from IBRD net income,
and the remainder from earnings, participations in credits, and repayments
on outstanding credits.
The United States has taken the lead in publicly supporting a major
expansion of IFC capital through statements made by Secretary Simon at
the annual meeting ofthe IBRD/IMF in September 1975 and by Secretary
of State Kissinger at the U.N. Seventh Special Session in the same month.
Agreement was reached on the general principles and amounts to be raised
at gatherings of the IFC's principal shareholders in Paris in November
1975 and in New York in January 1976. Ofthe proposed U.S. subscription,
$44.6 million would be appropriated in fiscal 1978 and $33.4 mUlion each
in fiscal 1979 and fiscal 1980. The proposal would result in a substantial
REVIEW OF TREASURY OPERATIONS
109
reduction—from 33 percent to 25 percent—in the U.S. share of IFC
capital, a reduction consistent with our policy on burden-sharing.
Inter-American Development Bank
During fiscal 1976, the IDB committed a total of $1,231 million from
its two windows, for a 16-percent increase in lending over the previous
fiscal year. Of this amount, $586 million was lent on conventional terms
from Ordinary Capital resources and $645 million on concessionary terms
from the Fund for Special Operations (FSO). In addition, the IDB
committed $129.5 million in funds administered by the Bank for various
donors, primarily from the Venezuelan trust fund (VTF). During the
transition period, the IDB committed $284.4 million ($108.5 mUlion in
Ordinary Capital resources and $175.9 million from the FSO). Cumulative
lending by the IDB from its own resources totaled $9.3 billion as of
September 30, 1976. Of this amount, $4.2 billion had been lent from
Ordinary Capital, $4.4 billion from the FSO, and $0.7 billion from other
resources, primarily the U.S. Social Progress Trust Fund (SPTF).
The power and agriculture sectors received most ofthe funds committed
during 1976. About 28 percent ($339 million) went to power and 23
percent ($283 million) to agriculture. On a cumulative basis, agriculture
has received the largest amount, 23 percent, or $2.1 billion; power has
received the next largest amount, 21 percent, or $1.9 billion.
Lending operations of the IDB are financed mainly from capital
subscriptions, borrowings in international capital markets, and members'
contributions to the FSO. At the end of fiscal 1976, the total subscribed
capital ofthe IDB was $6,248 million, ofwhich $983 mUlion was paid-in
and $5,265 million was caUable. The resources ofthe FSO amounted to
$5,436 million. U.S. subscriptions to IDB capital shares were $2,409
million, or 38.6 percent ofthe total. Including contributions authorized,
but still pending appropriation, the United States has accounted for $3,640
million, or 70 percent of total resources contributed to the FSO. As of
September 30, 1976, the United States had appropriated its final
installment to the FSO replenishment initiated in 1970.
In fiscal 1976, the IDB placed long-term borrowings of $369 million
equivalent in international capital markets, including $150 million in the
United States. In addition, the Bank sold $34 million in 2- and 5-year bonds
to central banks in Latin America. The Bank's funded debt amounted to
$1,816 million equivalent as of June 30, 1976.
At the 1976 annual meeting of the IDB in Cancun, Mexico, Assistant
Secretary Parsky, as U.S. Temporary Governor, announced that final
congressional action was expected shortly on a bill authorizing the United
States to vote for the new replenishment of the Bank's resources as well
as for the amendments permitting nonregional membership in the Bank.^
This legislation was signed into law on May 31,1976, and Secretary Simon,
3 See exhibits 63 and 71.
110
1976 REPORT OF THE SECRETARY OF THE TREASURY
as the U.S. Governor to the IDB, voted on June 1, 1976, in favor ofthe
amendments to the Bank's charter necessary to bring the replenishment
and nonregional membership exercises into effect.
Under the terms ofthe replenishment;agreement, the regional member
45
countries wiU provide the Bank with $6, IK million in additional resources
over the 1976-79 period, of which $5,100 mUlion would consist of
assigned subscriptions to capital shares ($332 million paid-in and $4,768
million callable) and $ 1,045 million in contributions to the FSO. In voting
for the replenishment resolutions, the United States also formally agreed,
subject to appropriation of the necessalry amounts by the Congress, to
subscribe to $1,650 mUlion in capital ($120 million paid-in and $1,530
million callable) and to contribute $600 million to the FSO. The legislation
also permitted Secretary Simon to vote on the nonregional membership
resolution. Nine nonregional countries (Belgium, Denmark, Germany,
Israel, Japan, Spain, Switzerland, the United Kingdom, and Yugoslavia)
formally joined the Bank on July 9, 1976, and Austria, the Netherlands,
Italy, and France are expected to become members before the end of
calendar year 1976. Together, the 13 nonregional countries will subscribe
to $434.3 miUion ($72 million paid-in and $363 miUion callable) in IDB
shares and contribute an equal amount to the FSO.
At the annual meeting ofthe IDB, Mr. Parsky commended the Bank for
expanding its lending to the agriculture sector and its assistance to the
poorest peoples of Latin America. He urged, however, that both the Bank
management and the Board of Directors give more attention to the
implementation aspects of loans, improving estimates and control of
project costs, and increasing the supervision of projects currently
underway. He also suggested that consideration be given to canceling
balances in old, slow-disbursing loans in order to free up scarce resources.
Additionally, he suggested that the limited resources of the FSO be
reserved for those countries most in need of concessional assistance and
that middle-income countries increasingly switch their borrowing to
Ordinary Capital and the Venezuelan trust fund. He underscored the U.S.
conviction that the Bank should increase its support to the private sector
in Latin America through greater lending to productive enterprises outside
the public sphere and through loans to credit institutions which assist in
mobilizing domestic savings.
On September 16, 1976, the IDB Board of Directors voted to increase
its lending rate on capital loans to 8.6 percent, resulting from adoption of
a proposal for a new lending rate system for loans financed from ordinary
and interregional capital. The proposal was prompted by concerns arising
from the sharp increase in the Bank's annual level of disbursements and
borrowings, and the possible adverse impact this would have on the Bank's
creditworthiness in international capital markets in the absence of an
interest rate which fully covers costs and permits an accretion to reserves.
The proposal provides for a new lending interest rate adjusted each July
REVIEW OF TREASURY OPERATIONS
1 1 1
1, based on a two-part formula: A calculation of the Bank's borrowing
costs during the past year plus a spread to cover the Bank's administrative
and liquidity costs.
Asian Development Bank
During fiscal 1976, the Asian Development Bank committed a total of
$883 million, ofwhich $669 million were Ordinary Capital loans, and $214
million from Special Funds/Asian Development Fund. As a result, the
Bank's cumulative loans stood at $2,944 million at June 30, 1976, $2,207
million from Ordinary Capital and $737 million from Special Funds.
Lending during the transition quarter brought cumulative loans outstanding as of September 30, 1976 to $2,267.4 million from Ordinary Capital
and $741.8 million from Special Funds. Since the Bank's inception in
1966, public utilities have received the largest amount of ADB loan funds
($1,030 million, or 35 percent) followed by industry ($670 million, or 23
percent), and agriculture and agro-industry ($661 mUlion, or 22 percent).
In fiscal 1976, agriculture, including agro-industry, was the largest
beneficiary of Bank lending, accounting for $262 million, or almost 30
percent of total lending.
The Bank obtains its resources for Ordinary Capital from subscriptions
to the Bank's Ordinary Capital stock. Cash for disbursements is provided
by paid-in capital subscriptions, funds borrowed in private capital markets
and from governments and central banks (backed by callable capital
subscriptions), repayments of principal and interest on loans, and net
earnings on investments. Special Funds/ADF loan resources come from
member country contributions, set-asides from Ordinary Capital earnings,
and repayments of loans.
On June 30, 1976, the Bank's subscribed Ordinary Capital stock totaled
$3,202 million. The administration's request for a second U.S. installment
of $120.6 million to the first Ordinary Capital increase was approved on
June 30, 1976, and the United States subscribed that amount to the ADB
on July 27, 1976, raising the total U.S. capital share to $482.5 miUion. This
subscription, plus a Canadian special increase of $ 156 million effective on
September 1, 1976, raised the level of Bank capital to $3,479 million as
of that date.
In fiscal 1976, the Bank borrowed $539 million in international capital
markets—an amount exceeding its cumulative borrowings through fiscal
1975. Ofthe $539 million total the ADB raised $225 mUlion in the United
States, $82 million from the Netherlands, $67 million from Germany, and
$50 million from Japan. At the end of fiscal 1976, the Bank's total funded
debt stood at $917.3 million.
In November 1975, Bank management proposed a second general
capital increase for the ADB equal to 135 percent of capital subscribed
as of mid-1977 to finance Ordinary Capital lending from mid-1977
through 1981. This would total about $4.96 million (ofwhich 15 percent
112
1976 REPORT OF THE SECRETARY OF THE TREASURY
would have been paid-in capital) and permit Ordinary Capital lending to
rise by about $75 million per year from 1977 through 1981. Discussion in
the Board continued through early calendar 1976 with U.S. representatives urging efforts by the Bank to improve its financial policies so as to
reduce its dependence on paid-in capital. On September 7, 1976, the
Board of Directors voted to recommend to the Board of Governors
ratification ofa 135-percent increase in 1977 subscribed capital including
10 percent paid-in capital. The U.S. Director voted against the proposal,
stating that while the United States fully supported a capital increase, it
was concerned about the level of paid-in capital being requested.
By the end of calendar 1975, the Asian Development Fund had nearly
exhausted its commitment authority, having only $40.9 million available
for new loans. Aware of this impending situation, representatives of ADF
donor countries met during the spring and summer of 1975 to negotiate
a replenishment of these resources. During these negotiations, a general
formula was developed whereby most d onors agreed to contribute to the
fund amounts equal to approximately 150 percent of their original
contributions. The United States reiterated its continuing support for the
ADF, but stated it could not give any commitment on the size or timing
of a U.S. contribution. Recognizing the U.S. reservation, in December
1975, the Board of Governors approved a 1976-78 replenishment ofthe
ADF totaling $830 million. The United States abstained on the resolution,
noting that the suggested U.S. contribution of $231 million was too high.
Foreseeing this position, the resolution permitted donors to change their
contribution levels subject to the approval of ADB Governors. After'
consultations with the Congress, in June 1976, the administration
requested that the U.S. contribution be set at $ 180 million. On September
10, 1976, the ADB Governors approved the new U.S. level and a reduction
in the New Zealand contribution to $5.4 million from $9.2 mUlion. These
downward adjustments were partially offset by a $34 million increase in
the Canadian contribution.
The ninth annual meeting of the Board of Governors of the ADB was
held in Jakarta, Indonesia, in April 1976. At the time, the head ofthe U.S.
delegation expressed continuing American support for the ADB and
identified the major issues of interest to the United States.^ He stated that
the United States supported the ADB's emphasis on increasing lending to
the agriculture sector and programs which directly benefit the rural poor.
He commended the Bank management's efforts to increase the utilization
of appropriate intermediate technology and to mobilize cofinancing for
development projects, thus contributing to a more efficient use of the
Bank's capital resources. The U.S. delelgate also called on the Bank to
explore the feasibility of equity investments in productive, employmentcreating enterprises permitted by the Articles of Agreement.
4 See exhibit 68.
REVIEW OF TREASURY OPERATIONS
113
African Development Fund
The African Development Fund (AFDF) was created on July 3, 1973,
as the concessional lending affiliate of the African Development Bank
(AFDB). The fund is designed to channel non-African resources into the
African development process and to help meet the need for softer terms
for projects in those African nations which could not borrow at the terms
offered by the AFDB.
At the end of fiscal 1976, the fund membership included 12 European
countries, Canada, Brazil, Japan, Saudi Arabia, and the AFDB representing all of its member states. The membership remained the same through
the transition quarter. The United States expects to join the institution
before the end of calendar 1976.5 In anticipation of U.S. membership, the
Governors of the fund adopted a resolution at the annual meeting of the
African Development Bank and Fund in Kinshasa, Zaire, in May 1976,
permitting the United States to join as soon as the U.S. Congress passed
the necessary legislation.
Congress subsequently authorized U.S. membership at a level of $25
million and appropriated $5 million in the fiscal 1976 budget and an
additional $10 million in the fiscal 1977 budget for an inifial U.S.
contribution of $15 million. With the U.S. contribution, total resources
pledged to the fund are expected to amount to $410 million, up from an
inifial figure of $100 million in 1973.
The growth in the fund's lending activities has been consistent with the
growth in resources. In calendar 1974, the first full year of the AFDF's
operation, its lending totaled $46.2 million. In 1975, the rate of lending
almost doubled to $92 million. The fund expects to lend $100 million in
1976, and plans to increase the amount again in 1977 and beyond. All
loans carry a service charge of 0.75 percent per annum on the disbursed
amount with a repayment period of 50 years, including a 10-year grace
period. The fund has concentrated primarily on the development of
agriculture and transportation, but has also been active in lending to the
public utility, health, and education sectors.
Outlook for the developing countries
In 1974 and 1975, the historic pattern of moderate current account
deficits was broken by the twin shock of higher oil prices and severe
recession among the industrial economies. Aggregate deficits of the oilimporting developing countries in 1974 and 1975 were on the order of $27
billion and $35 billion, respectively, including transactions that were
financed by official grants.
As a result of the economic expansion now underway in the industrial
world and domestic policy adjustment by the less developed countries
(LDC's) the deterioration of aggregate current account deficits turned
5 See exhibit 63.
114
1976 REPORT OF THE SECRETARY OF THE TREASURY
around. Consequently the 1976 total is expected to fall to about $27
billion—about $8 billion less than in 1975. Nevertheless, this deficit stUl
is large by historical standards.
The deficits in general have to date been financed without grave
difficulties. In 1974 and 1975, in addition to traditional flows such as
official bilateral, multilateral, and private direct investment flows, $4-$5
billion was provided in the form of OPEC loans and grants. These OPEC
flows only partially offset the $ 11 billion annual increase in the direct cost
of oil imports and they were not distributed among developing countries
in proportion to costs. One to two billion dollars were provided by IMF
credit, including the oil facility, and reserves were drawn down by $1
bUlion in 1975 (they increased $3 billion in 1974). The remainder ofthe
deficits was financed by borrowing from private capital markets at the
unprecedented rate of $9-$ 10 billion each year largely in the form of
commercial bank lending (including Euroborrowing).
The greatly expanded flows of capital to nonoil developing countries,
in the aggregate, offset the deterioration of the balance of payments
caused by the recession and provided time to permit adjustment to the
structural impact of oil prices to take a form less abrupt than severe
cutback in imports. The combined impact of higher oil costs and recession,
however, slowed down growth in the developing countries. From 1970 to
1973, the average growth rate of these countries was around 6 percent.
For 1975 and 1976, the World Bank has estimated growth rates at 2.2
percent and 4.4 percent, respectively!
Net borrowing from private capital markets is continuing to take place,
in part because countries are allowing reserve levels to rise substantially
after last year's decline—the only year in more than a decade in which
developing country reserves declined] Assuming OPEC capital flows to
developing countries continue at the level reached in 1975 and total
official bilateral and multilateral flows are on the order of $20 billion in
1976, then some $7 billion of the aggregate deficit plus an amount
equivalent to the increase in reserves will have to be financed (net) by a
combination of IMF credit, direct investment, and borrowing from private
capital markets.
Although the record of the first half of 1976 does not indicate that
financing problems will arise in the aggregate, individual countries may
experience difficulties in adjusting their economies. The low-income
countries will continue to pose a special problem in this regard. Most of
these countries have experienced very slow growth in recent years and are
heavily dependent upon concessional resource flows. The absolute
magnitude of their deficits is not large, but increased bilateral and
multilateral assistance may have to be directed toward these countries.
While the 1976 deficit of the nonoil LDC's appears to be financially
manageable, continuation of large current account deficits has implications which extend beyond the short term (particularly on external debt
REVIEW OF TREASURY OPERATIONS
1 15
and growth). These countries will have to actively pursue internal
adjustment to structural changes and to modify the level and composition
of imports to maintain the momentum of their development efforts.
Inappropriate or ineffective policies will impair the long-term prospects
for growth.
Development Committee
The Development Committee, a joint Ministerial committee of the
World Bank and International Monetary Fund, was established in October
1974 to focus on the broad question of the transfer of real resources to
the LDC's. Last year's Annual Report discussed the work of the
Development Committee at its first three meetings.
The fourth meeting of the Development Committee was held in
Washington in September 1975. The Committee agreed to ask the
Executive Directors of the IMF to continue their work on the trust fund
and stressed the contribution that the World Bank's third window would
make toward meeting the capital needs of the developing countries. The
Committee also agreed that the Executive Board of the IBRD should give
prompt consideration to a selective increase in the capital ofthe IBRD and
received a report from the Working Group on Access to Capital Markets.
At its January 1976 meeting in Kingston, Jamaica, the Development
Committee noted the decision of the Interim Committee to estabUsh the
trust fund to provide balance of payments assistance to low-income
countries, as well as understandings reached regarding increased access to
IMF resources. The Committee received an interim progress report from
its Working Group on Access to Capital Markets and urged expanded use
of cofinancing arrangements by the World Bank and the regional
development banks. The Committee also supported an early increase in
the capital of the International Finance Corporation and expressed its
strong support for a substantially enlarged fifth replenishment of the
International Development Association.^
At its June 1975 meeting, the Development Committee agreed to
establish a Working Group to review regulatory and other constraints
affecting LDC access to capital markets, and to continue its study of
proposals to support LDC access to private markets, including a possible
multilateral guarantee fund. During fiscal 1976, the working group met
five times to consider issues related to access to capital markets.
At its first meeting in July 1975, the working group agreed upon a status
report on its initial activities to the Development Committee. The working
group devoted its second meeting in October 1975 to an informal seminar
with seven representatives of banks and other institutions active internationally in private capital markets. At its third meeting in November 1975,
the working group reviewed the possible use of multilateral guarantees and
prepared an interim progress report for the Development Committee. The
fiSee exhibit 62.
116
1976 REPORT OF THE SECRETARY OF THE TREASURY
fourth meeting of the working group in April 1976 examined regulatory
impediments to market access, improved secondary markets for LDC
obligations, and possible approaches to the use of multilateral guarantees.
At its fifth meeting, the working group drafted a second interim report for
the Development Committee, following its discussion on capital market
regulations, guarantees, cofinancing, and technical assistance.
The original 1974 parallel resolutions ofthe World Bank and the IMF
establishing the Development Committee provided that at the end of 2
years, the Boards of Governors of the Bank and the Fund would review
the performance of the Committee and take such action as they deemed
appropriate. [ At the joint Fund/Bank annual meeting in Manila in October
1976, the Governors agreed to extend the Committee's mandate unchanged for another 2 years.]
Investment security
The CIEP Interagency Coordinating Group on Expropriation, whose
membership includes the Departments of State, Treasury, Defense, and
Commerce, was established in fiscal 1972 to implement President Nixon's
policy statement of January 19, 1972, on expropriation. Duriugfiscal 1976
and the transition quarter, the Group reviewed the continuing trend in
several developing countries toward a diminished role for foreign private
investment and the Group took several steps to strengthen the implementation of U.S. policy.
In several developing countries, the governments have taken steps to
expropriate significant portions of U. S. investment. While the United
States recognizes a country's right to expropriate a foreign investor for a
public purpose, the U.S. Government expects that its investors will receive
prompt, adequate, and effective compensation. To achieve satisfactory
settlements, the Interagency Group employs a variety of diplomatic
instruments.
A recent major expropriation in Peru iis particularly noteworthy. At the
request of the Peruvian Government and the U.S. company, a U.S.
Government delegation reached a negotiated settlement with the Government of Peru. President Ford had named a personal representative to head
the delegation to negotiate a conclusion |of this dispute that was fair to both
the Government of Peru and the U.S.I company. In this case, the U.S.
delegation was able to develop and express independent views on the
merits of the key issues such as tax claims and valuation. The delegation
was assisted in developing these independent views through access to
information which the U.S. Governrnent had gathered and assessed
through its own resources and by commissioning an outside consultant to
establish a reasonable range of values for the expropriated property.
Therefore, the delegation was able to encourage both parties to exhibit
greater flexibility and eventually was able to reach settlement acceptable
to both sides, which satisfied our right under international law to receive
REVIEW OF TREASURY OPERATIONS
117
prompt, adequate, and effective compensation when the property ofa U.S.
investor is expropriated. The U.S. Government role in this case may
provide a useful precedent for enabling the U.S. Government to play a
constructive role in other appropriate expropriatory situations.
In the third quarter of fiscal 1976, a policy review was completed which
produced several steps to strengthen the implementation of U.S. policy on
expropriation. Most importantly, the review resulted in a proposal to
increase the capital ofthe International Finance Corporation from $108
million to $648 million in order to diversify the sources of foreign
investment in developing countries. The proposal has been submitted to
Congress for authorization. A second policy review was requested by the
Economic Policy Board on July 15 and is continuing.
Delinquent debt and reschedulings
The total principal outstanding on post-World War II debts owed the
United States was $36.7 bUlion on December 31, 1975. As most of this
debt is a result of U.S. Government foreign aid and export credit programs
undertaken during the last 30 years, it is not surprising that a high
proportion of it, nearly 70 percent by value, is owed by non-oil-exporting
developing countries.
Since World War II, the vast majority of these debts have been paid on
time. During calendar years 1974 and 1975, the United States collected
almost 6 billion in U.S. dollars on principal and interest due on long-term
credits, and the equivalent of almost $ 1 billion in principal and interest on
foreign currency loans. ^ As of December 31, 1975, principal and interest
due and unpaid 90 days or more on post-World War II debt amounted to
$748 million. Although the total of delinquent debt was reduced during
1974 and 1975, about half is subject to special political or other factors,
as in the cases of China and Cuba, which make prompt payment unlikely
at this time.^
On January 30, 1976, Secretary Simon submitted to Congress the
administration's second annual report on developing countries external
debt and debt relief provided by the United States. (The report is required
by section 634 (g) ofthe Foreign Assistance Act of 1961, as amended in
1974.) The report is comprehensive, containing detailed information on
the debt situation of major debtor countries and the means by which the
United States and other creditor countries have dealt with debt service
problems.
On March 4, 1976, a bilateral agreement was signed with Pakistan
rescheduling approximately $203 million in debt service falling due over
the 5-year period 1975-79. This agreement, effective as of April 22, 1976,
implemented an understanding reached on June 28, 1974, with Pakistan
7This excludes indebtedness prepaid by the Govemment of India and simultaneously granted back according to
mutually agreed terms specified in the original agreements of indebtedness.
«See exhibit 66.
118
1976 REPORT OF THE SECRETARY OF THE TREASURY
by the World Bank in its capacity as Chairman ofthe Pakistan Consortium.
U.S. implementation of a 1973 understanding, under which the United
States agreed to reschedule approximately $23 million in debt falling due
during fiscal 1974, was also formalized in the 1976 agreement. Under the
1974 World Bank understanding. other creditors will provide the
equivalent of $454 million in debt relief over the 4-year period 1975-78.
All creditors agreed that the terms of relief would be at a grant element
of no less than 62 percent.
Directly related to the agreement with Pakistan and the 1971 war which
resulted in the independence of Bangladesh is an agreement by the
Government of Bangladesh to assume liability for projects visibly located
in its territory. In the bilateral agreement signed on March 4, 1974, and
effective on April 22, 1976, the United States will reschedule $85 million
in debt service obligations being assumed by Bangladesh. The United
States and other creditors have agreed that the loans assumed by
Bangladesh will be rescheduled on terms equivalent to a minimum of 84
percent grant element. Bangladesh will also assume responsibility for
servicing $2.6 million in Export-Import Bank loans which will not be
rescheduled.
In response to Zaire's serious problems in meeting its debt obligations,
the Paris Club creditors concluded an ad referendum rescheduling
agreement on June 16, 1976. Under the terms of this agreement, principal
and interest not yet settled for the period January 1, 1975, to June 30,
1976, and principal payments only for the second half of 1976 are to be
rescheduled. In the upcoming months, bilateral agreements between Zaire
1
and its creditors will be negotiated to| implement formally the Paris Club
agreement.
Local currency management
One of the responsibilities of the Secretary of the Treasury is to
determine which foreign currencies held by the United States are in excess
of normal requirements. The purpose of this determination is to assure
maximum use of local currencies in lieu of dollars.
During fiscal 1976 the decision was made to remove two countries,
Tunisia and Poland, from the excess currency list after the following fiscal
year. This leaves only five excess currency countries—Burma, Egypt,
Guinea, India, and Pakistan. As local currency receipts have decreased
and in-country expenses have increased, countries have lost their excess
status. When this has happened, special foreign currency programs,
conditioned on the availability of excess funds, are phased out. These
programs involve scientific and research projects which usually have some
political benefit, but because of their lower priority might not otherwise
be funded were it not for the availability of excess currencies.
REVIEW OF TREASURY OPERATIONS
1 19
Bilateral assistance
The Department of the Treasury participates in the U.S. Government
development finance program through its membership in the National
Advisory Council on International Monetary and Financial Policies, on the
Overseas Private Investment Corporation (OPIC) Board of Directors, and
on various interagency committees designed to coordinate economic
assistance programs. Treasury's principal concerns are to promote the
efficient utilization of bilateral assistance resources and to assure that
bilateral aid objectives remain consistent with overall U.S. economic
interests and the operation of U.S. multilateral aid efforts.
The three principal institutions responsible for administering U.S.
bilateral economic assistance programs are the Agency for International
Development (AID) (development loans and grants and supporting
assistance), the Department of Agriculture (Public Law 480 food for
peace program), and OPIC (war and political risk insurance and direct
financing of U.S. private investments in developing countries).
Agency for International Development.—As a member ofthe Development Loan Committee of AID, Treasury focuses primarily on the
economic impact of AID development programs in the recipient country
and on the latter's economic policy performance. During fiscal 1976, AID
committed nearly $2.3 billion in loans and grants for specific projects and
supporting assistance. This total was about $200 million less than the
amount committed in 1975. Ofthe $2.3 billion, $1.5 bUlion was in grants
and $801 million in loans.
Public Law 480.—Treasury is represented on the Interagency Staff
Committee, which reviews all Public Law 480 proposals. Treasury looks
primarily at the impact of this program on the U.S. balance of payments
and the domestic economy. During fiscal 1976 and the transition quarter.
Title I sales agreements were signed with participating governments and
private trade entities for a total value of $913.9 million, higher than the
previous year but nevertheless down significantly from the levels of earlier
years. Title II donations totaled $247.4 mUlion, roughly $ 100 million lower
than the previous year.
Overseas Private Investment Corporation.—The Department of the
Treasury is represented on OPIC's 11-man public/private Board of
Directors. OPIC administers two major programs to encourage U.S.
investment in the developing countries: Investment insurance against the
political risks of expropriation, inconvertibility, and war, revolution, and
insurrection; and investment finance which provides both direct loans and
commercial risk guarantees.
OPIC issued $1,222 million in investment insurance in fiscal 1976, a
slight increase from the $1,211.9 million issiied in fiscal 1975. The
financing program guaranteed $16,994 miUion of new investment in the
120
1976 REPORT OF THE SECRETARY OF THE TREASURY
developing countries and extended $ 10.75 million in direct lending during
fiscal 1976.
Relations with developing nations
The Office of Developing Nations was formed in April 1976 to provide
a focal point for coordinating Treasury's policies and operations with
LDC's. This responsibility, which had previously been divided among
several offices, includes continued staff support for joint cooperation
commissions with Mid-Eastern and South Asian countries, except Saudi
Arabia, which is handled by the Office of Saudi Arabian Affairs formed
in June 1974, and for other bilateral cooperative arrangements with
developing countries. Because ofthe significant influence on international
finance and commerce exerted by member states of OPEC, analysis and
projection of OPEC balance of payments has received priority attention.
Similarly, the balance of payments outlook for the LDC's as a group and
its impact on world payments and financing patterns has been closely
studied.
The OPEC countries' current account surplus declined in 1975 to an
estimated $40 billion from the record figure of $70 billion in 1974. This
reflected a dramatic increase in imports combined with a reduction in oil
revenues owing to reduced world demand. Some of the more populous
countries and smaller oil producers (Algeria, Ecuador, Gabon, and
Indonesia) moved into a deficit position in their current account. Saudi
Arabia alone accounted for almost half of the aggregate current account
surplus.
Following the decline in 1975, OPEC oil revenues are projected to
increase to $115 billion during 1976, as a result of the improving world
economy and the October 1975 oil price increase, with the aggregate
OPEC surplus reaching $43 billion. A slowing of import growth, which had
already begun in 1975, will continue in 1976 owing to port congestion and
other physical constraints in several countries and financial constraints in
others.
Those countries which moved into deficit in 1975 are expected to
remain in deficit, while the sparsely populated Persian Gulf countries will
account for an even larger share ofthe aggregate surplus in 1976. Future
trends in the combined OPEC current account will be affected in an
important way not only by the demand for oil and natural gas but, to a large
extent, by several factors affecting their import levels.
On the one hand, a key physical constraint should be alleviated as
projects designed to expand port capacity, especially in the Persian Gulf,
are completed beginning in 1977. Manpower shortages in those states will
continue to necessitate reliance on imported labor. Service contracts with
foreign governments and firms will remain an important supplement to
available domestic human resources.
On the other hand, several of the countries now in deficit or in near. deficit may experience increasing financial constraints. Many of them
REVIEW OF TREASURY OPERATIONS
121
have already turned to the Eurodollar market to obtain supplemental
financial resources necessary to carry out their development plans. It can
be expected that both the number of OPEC countries seeking loans and
the amounts involved will increase. At the same time, some of these
countries have already begun to reassess their development plans and to
scale expenditure targets downward in response to the elimination of their
payments surpluses.
Regarding disposition of the OPEC surplus, the trend toward longer
term investment appears to be continuing. The proportion of the surplus
invested in the United States has also been rising, from 20 percent of the
total in 1974, to 24 percent in 1975, and 35 percent during the first half
of 1976.
Middle East.—During the period under review, continuing efforts were
made to strengthen U.S. trade and financial relationships with the
countries of the Middle East. Treasury continued to provide support for
the joint commissions established with a number of Mid-East countries and
to participate in their activities. These efforts are aimed at providing a
sound basis for peace and stability in the area and to facilitate attainment
of our goals in the fields of energy and economic policy.
In pursuit of these objectives, in February and March 1976, the
Secretary visited Saudi Arabia, Egypt, Israel, Syria, and the United Arab
Emirates. In Saudi Arabia he led the U.S. delegation to the second meeting
of the United States-Saudi Arabian Joint Commission on Economic
Cooperation, which in its 2-year history has emerged as a central element
in strengthening U.S. economic relationships with Saudi Arabia.
The joint communique issued at the end of the meeting in Riyadh
reviewed the progress made under several major project agreements and
discussed future areas of cooperation.^ Six separate projects, wholly
financed by the Saudi Government through a trust fund set up in the
Treasury, will entail the expenditure of over $113 million, much of it in
the United States. The U.S. representation to the Joint Economic
Cooperation Commission office in Riyadh is working successfully with
Saudi officials in monitoring ongoing projects and in developing new areas
of program activity.
The Secretary's visit to Egypt, building upon foundations laid during
President Sadat's visit to the United States in the fall of 1975, further
demonstrated the U.S. commitment to work constructively with the
Egyptians to resolve Middle Eastern and domestic problems. The United
States-Egypt Joint Cooperation Commission has been instrumental in
assessing Egypt's specific problems and directing technical assistance and
other programs toward their solution. The Commission's Joint Working
Group on Economic and Financial Cooperation, chaired on the U.S. side
by the Assistant Secretary for International Affairs, has concentrated its
efforts on working with the Egyptian Government to improve the climate
9 See exhibit 64.
122
1976 REPORT OF THE SECRETARY OF THE TREASURY
for private investment in Egypt and to encourage greater participation by
the U.S. private sector in Egypt's economic development. Accordingly,
the United States signed a tax treaty with Egypt, an Egypt-United States
Business Council was established to promote cooperation between the two
business communities, and assistance was given in identifying specific
obstacles to approval and implementation of key investment proposals.
The Assistant Secretary for International Affairs is a member of the
United States-Iran Joint Commission for Economic Cooperation, and
Treasury officials participated in meetings of the Commission's Joint
Committee on Economics and Finance in September 1975 and August
1976.
Secretary Simon is the U.S. Chairman ofthe United States-Israel Joint
Committee for Investment and Trade and headed the U.S. delegation to
the second meeting of the Committee in Jerusalem on March 1, 1976.
While in Jerusalem, the Secretary signed an agreement establishing the
United States-Israel Binational Industrial Research and Development
Foundation which, after entry into force, will provide funds for mutually
beneficial cooperation in industrial research and development activities, 'o
On November 20, 1975, the Secretary signed a tax treaty with Israel which
is now before the Senate. Treasury was also instrumental in helping launch
the Israel-United States Business Council, consisting of representatives of
the U.S. and Israeli private sectors, which is expected to complement the
work of the governmental Joint Committee.
Policy and actions on the Arab boycott.—As a result of the greatly
expanded financial and business relationships between the United States
and the Mid-East Arab States, attention was increasingly focused on
problems surrounding the Arab boycott of Israel. Several bills aimed at
countering the impact ofthe boycott on U.S. firms were introduced in the
Congress, and Secretary Simon and other senior Treasury officials gave
the administration's position on these bills in testimony before congressional committees and in public statements." The legislative process
culminated in passage by the Congress of the Tax Reform Act of 1976,
which included denial of certain tax benefits to U.S. persons for
cooperation with or participation in international boycotts.
Latin America.—The importance of economic and financial relations
with Latin America was highlighted by Secretary Simon's trip to Chile,
Brazil, and Mexico in May 1976. Events leading to announcement of a
$600 million swap arrangement with Mexico in September 1976 demonstrated in a dramatic way the firm resolve of the U.S. Government to
support Mexico's efforts to strengthen its economy.
The Secretary's visit to Brazil aimed at resolution of several specific
trade problems and establishment of closer economic cooperation
10See exhibit 65.
11 See exhibit 73.
REVIEW OF TREASURY OPERATIONS
1 23
between the two Governments. A joint communique issued by Secretary
Simon and Finance Minister Simonsen • 2 summarized the results of the
visit, including settlement of several important bilateral trade disputes and
announcement of the two Ministers' agreement to establish and cochair
a consultative group on trade, investment and financial issues.
The Secretary's visit to Chile had a twofold purpose: (1) To encourage
the Chilean Government in its efforts to correct the severe economic
imbalances of the past and in its stated desire to meet its responsibilities
to creditors throughout the world; and (2) to discuss the human rights
situation in Chile and its implications for United States-Chile economic
cooperation.
In conversations with Chilean officials, including President Pinochet,
Secretary Simon emphasized that U.S. support of Chile's economic efforts
depended on the Chilean Government's commitment to the protection of
human rights. The Secretary met with Finance Minister Cauas and other
Chilean officials, who pointed to a number of measures they were taking
to improve the human rights situation in Chile, including the release of
political prisoners under the parole program and other programs.'3
In Mexico, Secretary Simon had the opportunity to meet with President
Echeverria and other top officials to discuss the state of the Mexican
economy and U.S. economic relations with that country. In light of the
December 1975 agreement to expand and extend the swap agreement
which the United States has had with Mexico for many years, developments in Mexico's balance of payments situation were the subject of
continuing discussions between Mexican and U.S. officials. The Mexican
Government decided to break with its long tradition of maintaining a fixed
parity for the peso and announced floating of the exchange rate on
September 1, 1976, resulting in a substantial devaluation.
The Mexican Government made arrangements with the IMF and the
United States to obtain substantial resources in support of a program to
adjust its balance of payments. On September 20, the Treasury and the
Federal Reserve System announced arrangements with the Government
of Mexico whereby short-term drawings up to $600 million would be
available to the Bank of Mexico to counter disorderly exchange market
conditions during a transitional period pending the receipt of mediumterm financing from the IMF. Drawings under these arrangements would
have maturities of up to 90 days. Of this amount, and at the option ofthe
Government of Mexico, the Federal Reserve System would make available
amounts repaid in advance of maturity under the existing Federal Reserve
System reciprocal currency arrangements up to $180 million. The
remaining amounts would be made available by the Treasury through the
Exchange Stabilization Fund under swap arrangements.
12 See exhibit 70.
13 See exhibit 69.
ADMINISTRATIVE
REPORTS
ADMINISTRATIVE MANAGEMENT
Special studies, projects, and programs
Numerous studies and projects were completed by the management
staff within the Office ofthe Assistant Secretary (Administration) which
developed management systems and operating procedures to strengthen
general organization effectiveness.
Office ofthe Secretary.—An evaluation of organizational responsibilities
for overall planning procedures resulted in long-range planning and
program evaluation functions being reassigned to the Office of Budget and
Program Analysis. The integration of long-range planning with budgeting
will strengthen overall planning efforts by highlighting the financial impact
of the plans.
A comprehensive analysis has been made ofthe nature and status ofthe
Office of Revenue Sharing compliance program. Research was conducted
into the following substantive areas: Cooperative agreements with other
Federal agencies. State human rights agencies. State audit agencies, and
independent auditors employed by State and local governments; procedures for processing complaints; case histories of complaints; intergovernmental relations and public affairs activities in furtherance of the
compliance program; and allocation of staff resources.
A review of the organization and operations of the Office of Foreign
Assets Control studied its current operations in the context of changing
political and economic circumstances caused by shifts in U.S. foreign and
domestic policies. Specifically, the study addressed current and potential
workload and operational effectiveness, and validated resource requirements.
A newly created Office ofthe Assistant Secretary (Capital Markets and
Debt Management) includes programs formerly assigned to the Office of
Debt Analysis, the Special Assistant (Debt Management), and the Office
of Capital Markets Policy. Supervision and coordination of these functions
by an Assistant Secretary recognizes their increasing importance and
priority.
Disestablishment of the Office of Domestic Gold and Silver Operations
became effective July 31, 1975. Those functions not terminated were
transferred to the Office ofthe Assistant Secretary (International Affairs).
A study is underway to determine the feasibility of formalizing an
agreement between the Departments of Treasury and Labor, and the
Equal Employment Opportunity Commission. The agreement would
attempt to foster consistent practices in the investigation of the employment practices ofthe financial institutions for which Treasury has contract
compliance responsibilities.
Departmental.—The Department's policy on the in-house operation of
commercial or industrial activities has been updated. Requirements of
periodic review of in-house activities and procedures for approval of new
starts have been revised to require more intensive analysis and justification.
As an expression of Treasury's commitment to make the Department
more responsive to the consumer, a consumer representation plan was
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1976 REPORT OF THE SECRETARY OF THE TREASURY
developed and promulgated throughout the Department by the Office of
the Secretary. The plan includes actions which expand the opportunities
that persons will have to present their views on any potential legislation,
regulation, or program decision by Treasury which might affect them. A
Special Assistant to the Secretary serves as coordinator of the consumer
representation effort to insure effective solicitation and use of consumer
views.
A comprehensive contract study of U.S. coinage has been completed.
The study examined improved ways of making future coin demand
projection to 1990, the ability of the coinage production-inventorydistribution system to meet demand, and the options which are open for
changes to the sizes, denominations, and composition of coins.
A task force examined the feasibility and potential benefits of automating all or part ofthe budget process within the Department. The task force
discussed the status of budget automation with other departments and
agencies. Office of Management and Budget, General Accounting Office,
and the Congressional Budget Office. The study produced a three-phased
plan for automation of the Treasury budget process which would aline the
budget and accounting systems in order to identify cost and performance
of each program.
A management review of the civil emergency preparedness program is
now in progress. The purpose of the review is to document the participating Treasury bureaus' views on the program's strengths and weaknesses.
The findings will guide Treasury's approach with the Federal Preparedness
Agency (FPA) and administration of the Department's emergency
preparedness functions.
Management by objectives.—The departmental management by objectives program has been reemphasized Department-wide as an important
management vehicle for focusing on short-term priority objectives to
improve program operations. Treasury's success in managing by objectives, and the high visibility ofthe process, are due to the meetings between
the Deputy Secretary and the bureau heads to review progress and identify
potential problems.
Productivity.—The Department maintains a longstanding commitment
to productivity management. To insure continued improvement, a
management consultant firm conducted a review of the Department's
productivity management efforts and accomplishments to date. Specifically, the review assessed the validity of current productivity measures,
identified areas with immediate improvement opportunities, recommended changes to the existing measurement system, and developed an
approach and recommendations for a Department-wide productivity
management program to include improvement, measurement, costs, and
quality of output. The review was conducted in headquarters and selected
field locations of all Treasury bureaus with the exception of the Office of
the Comptroller of the Currency and the Federal Law Enforcement
Training Center. Those two organizations were excluded since significant
projects for improving their organization and operations were currently
underway.
A study of criminal enforcement activities in the Southeast region ofthe
Bureau of Alcohol, Tobacco and Firearms is in progress. This pilot project
was undertaken to demonstrate the feasibility of establishing usable
productivity measures for the management of the Department's law
enforcement programs.
ADMINISTRATIVE REPORTS
1 29
Advisory committee management.—The Assistant Secretary (Administration), as departmental advisory committee management officer,
continues to advise and assist all Treasury components in the application
of procedures required by the Federal Advisory Committee Act (Public
Law 92-463) and reviews advisory committee utilization and effectiveness.
Assistance to foreign governments and officials.—The Foreign Visitor
Program office has provided orientation, educational, and training
programs on a continuing basis to foreign visitors referred by the Agency
for International Development (AID) and other agencies, both governmental and nongovernmental. In fiscal 1976 and the transition quarter,
over 100 man-days have been involved in such activity. Visitors have come
from less developed countries and also from Western Europe and other
industrial areas of the world for more advanced and specialized consultations and training.
Emergency preparedness
The principal program emphasis this period has been on improving the
overall Treasury readiness posture at the regional level. To accomplish
this, staff visits were made to the 10 standard Federal regions to exchange
information and ideas with FPA Regional Directors, Treasury regional
preparedness coordinators, and other bureau personnel. They also assisted
in the preparation for the regional readiness reviews that were conducted
by Treasury and FPA teams during the latter part of fiscal 1976. The
preliminary findings of these reviews indicate an overall improvement in
the state of emergency preparedness at the regional level.
In spring 1976, the plans and procedures of the Department's emergency planning program were exercised and tested at national headquarters level and in two selected regions during the conduct of Federal civil
readiness Exercise REX-76. The overall Treasury participation emphasized the testing of (1) contingency communications and operating
plans/procedures, (2) damage estimate/assessment procedures, and (3)
the practical implementation of lessons learned in Exercise REX-75.
During the exercise, three action/control teams relocated to the Treasury
emergency operating facilities, as appropriate for the play of the exercise
scenario.
Other important activities conducted during the period included:
(1) Participation with other agencies in a major review of Civil
Emergency Preparedness Policy Planning Guidance.
(2) Assisting in the preparation of a Federal Response Plan for
Peacetime Nuclear Emergencies.
(3) Commencement of a management review of the administration of
the Department's civil emergency preparedness program.
Treasury payroll/personnel information system
The Treasury Employee Data and Payroll Division was assigned two
major projects in fiscal 1976: (1) Implementation of the Treasury
payroll/personnel information system (TPPIS), and (2) improvement in
reporting of minority statistics in the Department.
TPPIS is a major administrative project that encompasses all bureaus,
the five existing automated Department payroll systems, and the individual
bureau manual personnel processing systems. TPPIS will be a single
automated system providing automated payroll and personnel processing,
reporting, and cost center accounting. Further, TPPIS will employ remote
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1976 REPORT OF THE SECRETARY OF THE TREASURY
intelligent terminals for data input and informational reporting. This will
alleviate one ofthe serious deficiencies of current systems, which does not
allow submitting offices to resolve errors immediately or control the data
in the system.
In June 1976, the Secretary approved the implementation of TPPIS at
two sites: (1) The IRS Detroit Data Center for 100,000 IRS employee
accounts, and (2) the Bureau ofthe Mint San Francisco Computer Facility
for 45,000 employee accounts of Treasury bureaus other than IRS.
The developmental phase ofthe TPPIS implementation project has been
completed for bureaus other than IRS. Reporting requirements have been
determined, user operating manuals developed and printed, and training
packages developed and tested. The conversion phase began on September 26, 1976, with the conversion ofthe Bureau of Alcohol, Tobacco and
Firearms to TPPIS. The conversion phase is expected to be completed in
December 1977, including the conversion of IRS to TPPIS.
The management ofthe automated REST (reporting employee statistics
in Treasury) system is a function of the Treasury Employee Data and
Payroll Division. Several projects have been accomplished and are
planned which improve both the quality and timeliness of minority
statistical reporting.
Accomplishments include the mechanization of the annual Distribution
of Employment by Percentile Bureau Report, considerably reducing staff
hours needed for the manual compilation of statistics. In addition, an
automated procedure has been developed to enter into the REST system
certain personnel/payroll data from the payroll systems. This will reduce
substantially the manual effort required at the bureaus and data processing
facilities and also eliminate the cause of many errors.
Internal auditing
The Office of Audit made appraisals of selected audit activities at the
Office of Revenue Sharing and the U.S. Secret Service, and another at the
Bureau of Engraving and Printing was in progress at the end of the
reporting period. A survey was also made of internal auditing at the Office
of the Comptroller of the Currency.
The appraisal at the Office of Revenue Sharing identified opportunities
to improve, within the constraints imposed by the size of its audit staff, the
timeliness of processing external audit reports and compliance cases, the
monitoring of State audit agreements, the accounting for the status of
cases, and the control of case files. Action on recommendations in these
areas is well underway.
The Office of Audit staff worked with a Customs task force on
developing a cost management information system and also with the
Treasury Employee Data and Payroll Division in implementing the
Treasury payroll/personnel information system. Work on TPPIS is
concentrating on reviewing the adequacy of internal controls, ensuring a
proper conversion from the IRS system, and arranging for GAO involvement in the accounting system approval process. Focusing on issues raised
in a Bureau of Alcohol, Tobacco and Firearms internal audit, a review of
the ATF accounting system identified ways to improve accounting
procedures and practices.
An audit was made of selected administrative policies of the U.S.
Railway Association at the request of the Under Secretary. The resulting
report commented on consulting contracts with former officers, documen-
ADMINISTRATIVE REPORTS
131
tation and criteria for official entertainment expenses, the reimbursement
of employees electing to commute rather than to relocate, and other
matters. Local and syndicated news coverage reinforced the principal
conclusion of the examination that the USRA Board of Directors should
become actively involved in the review and approval of compensation and
fringe benefit policies.
A report on an audit of the Exchange Stabilization Fund contained
recommendations intended to improve the management of outstanding
advances, to encourage adherence to travel regulations, and to strengthen
accounting controls in several other areas. Financial audits were also made
of the working capital fund, the Treasury Historical Association, the
closeout of economic stabilization program activities, and the Treasury
Welfare Association.
The Director of the Office of Audit coordinates Treasury employee
allegations of violations of the merit system that are inappropriate fqr
normal grievance or appeals procedures. Able technical counsel is
provided by specialists in the departmental Office of Personnel. Most of
the allegations that are made concern the promotion process or adverse
actions. Over 40 cases have been established in the last 2 years, and only
3 remain unresolved. A leveling off of new cases probably reflects
elimination of an initial backlog.
How to increase reliance on grant audits made by non-Federal auditors
emerged as the principal issue addressed in working with other agencies
as a member of an Audit Reform Task Force and the National Intergovernmental Audit Forum. The staff also participated in departmental
studies of productivity measurement.
Budget and program analysis
Pursuant to Treasury Order No. 200, Amendment 7, dated April 15,
1976, the Office of Budget and Finance was reconstituted as the Office of
Budget and Program Analysis, including a Division of Budget and Long
Range Planning and a Division of Program Analysis.
The Office of Budget and Program Analysis continued to develop
policies and procedures and to direct and coordinate the formulation,
justification, and presentation of short- and long-range budget estimates.
During fiscal 1976, the estimates totaled $47.6 billion. The amount
includes $2.6 billion for operating appropriations, $38.6 bUlion for public
debt and other interest and miscellaneous accounts, and $6.4 billion for
general revenue sharing. During the transition quarter, budget estimates
totaled $12.2 billion and included $0.7 billion for operations, $9.9 billion
for public debt and other interest and miscellaneous accounts, and $1.6
billion for general revenue sharing.
During the period of this report, staff of the office:
(1) Established and maintained controls on expenditures, number of
personnel on roll, and motor vehicle fleet to comply with limitations and
directives prescribed by OMB.
(2) Issued a directive establishing a Treasury financial resource
management system. It revises the instructions pertaining to the Treasury
long-range planning system and the spring budget preview. It also provides
new instructions for evaluation and productivity plans. These functions
and related reports are now combined as the spring review phase of an
integrated financial resource management system.
(3) Gave special budgetary consideration and emphasis, including the
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1976 REPORT OF THE SECRETARY OF THE TREASURY
preparation of requests for budget amendments and supplemental
appropriations and reimbursements, to programs of special concern to the
administration. These included a supplemental appropriation of $13.4
million for the U.S. Customs Service ($9.6 million in fiscal 1976 and $3.8
million for the transition quarter) to enable it to respond to the new
Presidential initiative concerning the interdiction of narcotics at U.S.
borders; and $21.7 million in fiscal 1976 and the transition quarter for
additional travel and other costs associated with protection of Presidential
candidates and foreign dignitaries by the U.S. Secret Service.
(4) Obtained supplemental appropriations for the cost of pay increases
authorized by Executive Order 11883, wage board actions, and administration action amounting to $84.6 million. An additional amount of $ 13.9
million of the increased pay costs was absorbed by application of
management savings, reimbursements, and certain administrative action.
(5) Assisted in the preparation and presentation of budget requests for
funds totaling nearly $700 million to be appropriated to the President for
the U.S. share to the international financial institutions of which the
Secretary of the Treasury serves as a Governor.
Personnel management
A new Government-wide position evaluation system was tested and
applied in a number of Treasury field and headquarters offices. A 2-day
workshop was given on the application of eight draft standards utilizing the
new approach.
An evaluation review was completed of position management systems
of the 13 personnel offices reporting to Office of Personnel.
The Department's average grade continues to be monitored. Since
1968, the Department's average grade has been relatively steady at about
7.7.
New regulations were developed to achieve uniformity in the administration of laws governing annual premium pay for administratively
uncontrollable overtime, with a view toward reducing overtime costs.
The departmental guide on merit promotion was revised and issued.
This material will assist bureaus in determining basic requirements which
bureau plans must meet and will aid the Department in monitoring bureau
activities.
Bureaus have continued to gain in making the development of their
managers and executives a systematic process. In formal programs, 25
managers and executives attended the Federal Executive Institute in
Charlottesville, Va., and over 220 attended the various programs of
Executive Seminar Centers.
Emphasis has been placed on refining the formal upward mobility
program and expanding the conceptual base to include all informal
activities resulting in the movement/placement of underutilized and
undertrained employees. Extensive research has been conducted preliminary to implementing an automated interbureau placement system. The
bureaus have identified 708 target positions to be filled through formal
upward mobility programs; of that number, 356 employees were in
training and 277 had been placed into target positions as of September 30,
1976. Bureaus reported 11,320 employees participating in informal
programs.
Efforts to improve bureau personnel management programs continued.
During fiscal 1976, the Department conducted a nationwide followup
ADMINISTRATIVE REPORTS
133
evaluation of the Bureau of the Mint. Positive change as a result of last
year's surveys was seen during followup evaluations in Secret Service,
Customs Service, and Public Debt. Headquarters-level surveys were
completed in ATF, Public Debt, and the FLETC.
As a joint venture of three executive departments. Treasury undertook
the development of a training workshop in the onsite personnel management survey process to improve the expertise and effectiveness of
evaluators.
In response to the Secretary's concern over the responsibility of
managers and supervisors to clearly communicate standards of acceptable
performance, the Employee Relations Staff published and distributed a
handbook for Treasury managers and supervisors identifying their roles in
the management of human resources.
Treasury's labor relations program continues to be an innovative,
expanding, and dynamic force in the management process. Again, as in the
previous fiscal year. Treasury led all Cabinet agencies in the extent to
which its employees have organized. More than 96,000 employees are
represented by 18 different unions in 9 Treasury bureaus. Over 90 percent
of all eligible employees are now organized, and virtually all of these are
covered by negotiated agreements. The trend toward increased third-party
involvement in Treasury's labor-management relations continues. Unionmanagement controversies involving unfair labor practice charges,
impasses in negotiations, and questions of negotiability have been referred
in increasing numbers to third parties for resolution.
Procurement and personal property management
During fiscal 1976 and the transition quarter, the negotiation of 42
blanket purchase agreements for use by all Treasury bureaus provided a
savings in excess of $ 160,000. The consolidation of Treasury requirements
for 562 undercover law enforcement vehicles, procured through GSA,
resulted in a significant dollar savings over separate procurement methods
and an improved quality of vehicle; vehicles purchased included compacts, intermediate-size and full-size sedans.
Treasury's personal property transactions included the reassignment
within Treasury of property valued in excess of $800,000; transfer of
personal property valued in excess of $2.7 million to other Federal
agencies for their use; and the donation of personal property valued at
approximately $1.1 million no longer needed by the Federal Government
for use by State organizations and nonprofit groups. Treasury also
obtained, without cost, personal property valued at over $5.6 million from
other Federal agencies.
Real property management
The Federal Law Enforcement Training Center was established at the
former Glynco Naval Air Station, Brunswick, Ga., in August 1975, on the
basis of a right-of-entry permit granted to Treasury by the Department of
the Navy. The formal transfer of the excess Navy land and structures to
Treasury will be consummated by November 1, 1976. The space occupied
by the Federal Law Enforcement Training Center at 1310 L Street, NW.,
Washington, D . C , has been reassigned to the U.S. Secret Service as an
interim collocation site, to meet expansion needs and to serve as the first
step toward the goal of total consolidation for Secret Service headquarters
activities.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
The Office of the Secretary opened a new field office in New York for
the Office of Equal Opportunity Program. The existing field offices in
Atlanta, Chicago, Houston, and Los Angeles were expanded in size to
accommodate augmented staffs, and the Washington, D . C , field office
was relocated to permit similar augmentation.
The U.S. Customs Service completed moving its headquarters offices
into the Federal Building at 1301 Constitution Avenue, NW., Washington,
D . C , on June 30, 1975. The move of Customs' computer operations into
the building has been delayed until a renovation prospectus, which will
permit the construction of a computer room, is approved.
The U.S. Secret Service pistol range will be relocated in November 1976
from the existing obsolete facility in the Main Treasury Building to a new
range under construction in the 12th and Pennsylvania Avenue Federal
Building. The vacated facility in Main Treasury will be reclaimed to
expand the space available within the Main Treasury complex for office
and storage functions.
Planning for the relocation of the Cash Room, including all of the
necessary historical evaluations and approvals, was completed prior to the
Bureau of Government Financial Operations' decision to discontinue the
cash services function. The proposed new location on the first floor ofthe
Treasury Building, just north of the west entrance, was planned and
designed to receive the banking function and to free the Cash Room for
conference and ceremonial use, and for possible restoration. The banking
activity closed on July 1, 1976, and the Cash Room was vacated on August
1, 1976. The design and construction plans for the proposed new facility
offer a viable possibility for the creation of another entrance to Main
Treasury, should the need arise.
Major renovations in the Main Treasury complex are continuing. The
installation of air conditioning in the first 2 of 10 zones was completed on
March 31, 1976. Funds have been transferred to the General Services
Administration for the initiation of renovation work in six additional
zones, to take place over the next several years.
The relocation of Printing Management, including the Printing Procurement and Graphics Branches, to newly created office space in the
basement ofthe Treasury Annex was completed in September 1976. This
combined effort in space planning, interior design, and construction
implementation by Treasury group forces will result in an annual reduction
of about $ 17,500 in lease costs; it will also release for reassignment a large
block of office space on the fifth floor of Main Treasury for expanding
Office of the Secretary staff requirements. This and other measures to
achieve better space utilization in the Main Treasury complex have
already resulted in the reclamation of 24,000 square feet of previously
unoccupied space for specialized operational use, and cost avoidances of
about $380,000. Recurring annual savings are estimated to approach $1.8
million.
Printing management
The Federal Law Enforcement Training Center's move from Washington, D . C , to Brunswick, Ga., during the first quarter of fiscal 1976 made
it necessary for Printing Management to prepare for printing support for
the Center. Discussion resulted in an approved support arrangement
which included the establishment of a duplicating facility and the transfer
ADMINISTRATIVE REPORTS
1 35
of a nrinting procurement officer from the Office of the Secretary to the
FLETC
The recent Printing Management physical consolidation now provides
contiguous space for the Assistant Director and the immediate staff, and
the Printing Procurement and Graphics Branches. The space is directly
above the newly consolidated departmental printing plant in the Treasury
Annex. Developmental expansion during fiscal 1976 now makes it possible
to handle all printing requests, regardless of their complexity, for the
Office of the Secretary and bureaus served.
A concerted effort by Printing Management during fiscal 1976 to
upgrade the copying machine program was successful. One ofthe benefits
was greater flexibility for the Office of the Secretary in acquiring various
brands of copiers, systems, services, and supplies, resulting in cost savings,
more dependable equipment, and better service to users.
The development of a plan for an office reorganization in the
departmental printing plant began during fiscal 1976. It will produce
greater job specialization, thereby facilitating production and efficiency in
the office and, concomitantly, in the plant.
Fiscal 1976 realized the largest amount of printing ever produced in the
Department ofthe Treasury, attributed largely to the construction of many
sophisticated, full-color Bicentennial promotional pieces, especially in the
numismatic area of the Bureau of the Mint. Other new programs such as
the Freedom of Information and Privacy Acts generated additional
printing and binding. The increased printing volume from these new laws
is anticipated to continue in the future.
Physical security
Procedures were issued which require that all requests for security-type
containers be reviewed by the Office of Physical Security. As a result of
detailed reviews of a total of 5 6 requests within the Office of the Secretary,
20 were disapproved. With an average cost of $750 per container, this has
resulted in a cost avoidance of $ 15,000 along with the attendant savings
in space requirements and a reduction in the vulnerability of compromise
of obsolete classified material.
An exhaustive survey was conducted of existing security alarm and
protective systems in the Main Treasury and Annex Buildings and leased
buildings in order to revalidate requirements. This survey determined the
costs versus accrued benefits and resulted in the elimination, reconfiguration, and consolidation of certain alarms with an annual cost savings of
approximately $9,000.
As mandated by Execufive Order No. 11652, enfitled "Classification
and Declassification of National Security Information and Material," a
concerted effort has been made to reduce the number of officials
authorized to originally classify national security information and material. This effort has reduced by 77 percent the number of authorized
classifiers, from 699 in 1972 to 162 in 1976, and also contributes to a
reduction in the number of documents unnecessarily classified.
A new identification card was developed and issued to former departmental Presidential appointees which provides these individuals with a
means for immediate access to the Main Treasury and Annex Buildings.
New building passes are being issued to personnel of the Office of the
Secretary and those bureaus utilizing the same building pass system as the
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Main Treasury and Annex Buildings. The accountability of previously
issued passes did not provide for acceptable security. These new passes are
an integral part of the new controlled-access procedures which have
enhanced the security posture of these buildings.
Telecommunications
Telecommunications complex.—Construction work is in progress on the
renovation of the first-floor vault complex of the Main Treasury Building.
The complex will eventually contain the Treasury automated communications system (TACS), the new Centrex telephone system, and support
activities for the two systems. The project is being monitored by both Real
Property and Telecommunications activities and will be completed during
calendar year 1976.
The consolidation of telecommunications activities and the replacement of obsolete equipment with electronic devices will make available
approximately 5,000 square feet of office space within the Department.
Treasury automated communications system.—A request for proposal
was issued in May 1976 asking vendors to bid on the automation of the
existing Communications Center. A tour of the vault complex and a
preproposal conference were held for approximately 50 representatives of
interested vendors. Proposals have been received and are being evaluated
by a team of representatives from the Telecommunications, Computer
Science, and Procurement activities. A contract should be awarded by the
end of 1976.
Treasury electronic telephone system.—Several interim steps in the
conversion of the Treasury telephone system to Centrex II were accomplished in fiscal 1976. Currently about 15 percent ofthe telephones in the
Department have been converted to the new service. The final step will
occur with the conversion ofthe Main Treasury, Internal Revenue Service,
and Customs Service in the first quarter of fiscal 1977.
Secretarial secure travel communications.—A portable communications
trip package was developed during fiscal 1976 to provide direct secure
message communications between overseas trip sites and the Treasury
Communications Center. Traffic can be routed over international circuits,
reducing the Treasury delegation's dependence upon State Department or
Department of Defense facilities. A trip communications officer was
assigned to accompany the Secretary during international travel. During
1976 and the transition quarter, he participated in five overseas trips.
Planning is in progress to upgrade the portable teletype terminals to take
advantage of the higher speed capabilities of the Treasury automated
communications system, thus greatly reducing message handling times and
transmission costs during future Secretarial travel.
Radio frequency program.—The law enforcement units ofthe Department have experienced difficulty with their mobile radio transmissions due
to interference from weather broadcasts, which occupy the same frequency spectrum assigned to land mobile radio. Appeals have been made
to the agency concerned and to the appropriate interagency committee in
an attempt to resolve this conflict. Substantial steps were taken, but the
situation remains unresolved.
Private communications for law enforcement.—A new family of electronic equipment which provides a limited degree of protection for voice
communications was field-tested and demonstrated to potential users
within the Department. The voice protection device (VP-II) was devel-
ADMINISTRATIVE REPORTS
1 37
Oped by the National Security Agency for use on mobile radio systems. A
miniaturized hand-held version ofthe VP-II is under development. At this
time, a requirement for approximately 2,000 of the devices has been
identified.
Data encryption devices.—Development of encryption devices for
computer data communications has started in the Federal Government.
The Department has participated in joint efforts of the Internal Revenue
Service, the Federal Reserve Board, the National Security Agency, and the
National Bureau of Standards to develop prototype devices. The devices
may become standard interface equipment for use by all Government
agencies to satisfy unclassified data protection requirements.
Paperwork management
Implementation of new directives system.—Major emphasis has been
directed toward implementation of the directives system developed in
fiscal 1975. A goal of converting all policy issuances to the new codified
system was established and significant strides were made, with 60 percent
of the goal being accomplished.
Records disposition scheduling.—Surveys of files classification systems in
the Office ofthe Secretary were undertaken as a means of assisting offices
in the implementation of the schedules developed in fiscal 1975. This
resulted in realistic scheduling of records for disposition and in installation
of improved standardized files classification systems.
Privacy Act implementation.—In addition to traditional paperwork
management functions, the Paperwork Management Staff also has
responsibility for oversight of the administration of the Privacy Act of
1974 (Public Law 93-579). Most requests for information under the
Privacy Act are directed toward the enforcement and revenue collection
agencies ofthe Department—Customs Service, Internal Revenue Service,
Bureau of Alcohol, Tobacco and Firearms, Secret Service, and Interpol.
During the first year of operation, basic policy and practice were defined
and three departmental reports were prepared.
International support
The International Support Staff served as the principal coordination
point in the Office ofthe Secretary in the formulation and implementation
of plans for the Secretary's reception held on September 2, 1975, in the
Main Treasury Building, as part of the IMF/IBRD conference. This
reception honored many foreign dignitaries and was attended by over
1,200 guests, including top elected and appointed officials of the Federal
Government. This project created a wide range of challenges, as this was
the first reception of its kind held within the building in recent years.
Secretary Simon and Deputy Secretary Gardner attended several highlevel meetings which involved 8 trips abroad to 21 foreign countries.
Administrative arrangements were coordinated by the International
Support Staff
Facilities management
A Facilities Management coordination program has been established to
provide space planning services, improve space utilization, and coordinate
work projects in the Office of the Secretary.
Facilities Management review of projects and related purchases has
resulted in greater efficiencies and economy. Studies of office space
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Utilization such as one completed for the Office of Tax Policy have resulted
in reductions in space assignments and the housing of increased numbers
of personnel within the Office of the Secretary space.
Environmental programs
The Assistant Secretary (Administration) approved environmental
assessments concerning a proposed approval by the Comptroller of the
Currency of an application for the establishment of a branch of a national
bank, and an ATF proposal to relocate its headquarters laboratory from
Washington, D . C , to nearby Maryland. Assistance was provided to the
General Services Administration in the preparation of an environmental
assessment concerning a GSA proposal to relocate and consolidate two
Treasury bureaus in a newly constructed building in Washington, D . C ,
leased by GSA.
Treasury continued its participation as a statutory member of the
Advisory Council on Historic Preservation (ACHP). In addition to such
activities, the Department was involved with internal historic preservation
matters as, for example, a Treasury-ACHP memorandum of agreement
concerning an ATF permit action in connection with the proposed
expansion of the facilities of a California winery. The agreement
formalized measures to mitigate any adverse effect ofthe expansion on the
historic character of existing winery facilities.
Department-wide energy conservation efforts during this period led to
Treasury's placing second among 27 Federal agencies in energy reduction
ratings for buildings and facilities. Treasury did experience some difficulty
in energy conservation with respect to law enforcement vehicles and
equipment. The nature of law enforcement operations precluded total
attainment of mileage and gasoline usage reduction goals.
In the area of pollution abatement, action was completed in conjunction
with the Environmental Protection Agency (EPA) and applicable State
agencies concerning a Treasury-EPA consent agreement to terminate the
use of the Bureau of Engraving and Printing's incinerator at its Washington, D . C , headquarters, and on an application for a National Pollutant
Discharge Elimination System permit for the Customs Service Detector
Dog Training Center, Front Royal, Va. Action in accordance with the
Treasury-EPA agreement was completed well ahead of schedule and will
contribute to improving air quality in Washington, D.C.
Safety
Treasury, with one of the oldest safety programs in the Federal
Government, established a milestone with the inauguration of its "safety
plan of action" project as reqiiired by the Secretary ofthe Treasury. The
prototype plan, nearing completion by the Secret Service, will be the
model for the remaining bureaus. The entire plan, which wUl be completed
by the close of fiscal 1977, will encompass every element of the Code of
Federal Regulations as applied to safety and health.
Highlighting the year's activities was the occasion of the 19th annual
meeting ofthe Treasury Safety Council, attended by the Deputy Secretary,
the top staff, and the heads of bureaus.
Treasury Historical Association
The Treasury Historical Association held its second annual meeting on
April 15, 1976, at which a special Bicentennial annual report was issued.
ADMINISTRATIVE REPORTS
139
There were several guest speakers including former Secretary of the
Treasury John W. Snyder. Election of a new Board of Directors was held.
At a meeting of the new Board held on May 19, 1976, an election of
officers resulted in the appointment of Dr. Charls E. Walker, Chairman,
Richard R. Albrecht, President, Francine I. Neff, Vice President, Arthur
D. Kallen, Treasurer, and Abby L. Gilbert, Secretary. Sid Sanders
continues on as Executive Secretary.
Membership in the Association increased from 210 at the close of fiscal
1975 to 304 at the end of September 1976.
BUREAU OF
ALCOHOL, TOBACCO AND FIREARMS
The mission ofthe Bureau of Alcohol, Tobacco and Firearms (ATF) is:
To reduce the misuse of firearms and the unsafe or insecure storage of
explosives, and to assist other Federal, State, and local law enforcement
organizations in reducing crime and violence in which firearms and
explosives are used, through effective enforcement of the firearms and
explosives laws of the United States; to assure that all revenue due under
the Federal alcohol and tobacco tax statutes is collected, and to obtain,
to the maximum extent possible, voluntary compliance with those laws; to
suppress illicit manufacture and sale of nontaxpaid alcoholic beverages;
to suppress commercial bribery, consumer deception, and other improper
trade practices in the alcoholic beverage industry through effective
administration and enforcement of the Federal Alcohol Administration
Act; and to assure compliance with the wagering tax laws through effective
enforcement of the criminal and forfeiture provisions of the Internal
Revenue Code.
The primary ATF law enforcement goals are to keep firearms out of
criminal hands and to deter criminal bombings, or if this is not successful,
to obtain evidence to convict the persons performing or responsible for
illegal acts involving firearms or explosives. The elimination of the
manufacture and sale of illicit alcohol, ATF's original mission, is still a
responsibility and one in which ATF has had substantial success.
Gangland violence in the 1930's prompted Congress to pass the
National Firearms Act of 1934, which imposed a tax on automatic and
other gangster type weapons and required their registration. This
legislation was followed by the Federal Firearms Act of 1942, which
regulated interstate commerce in firearms. Responsibility for both laws
was assigned to ATF.
Firearms crimes in the 1960's, heightened by the assassination of a
President, a Senator, and a prominent civil rights leader, brought
enactment ofthe Gun Control Act of 1968. The act encompassed existing
firearms laws enforced by ATF, and added new provisions. It was followed
in 1970 by passage of title XI ofthe Organized Crime Control Act, which
assigned explosives regulation and enforcement jurisdiction to ATF.
During fiscal 1976, ATF initiated a pilot program to curb crime
involving the use of guns in three U.S. metropolitan areas. The Bureau also
140
1976 REPORT OF THE SECRETARY OF THE TREASURY
completed two studies—the first of their kind—which documented the use
and source of crime handguns. Regulations governing the multiple sale of
handguns by federally licensed firearms dealers became effective, curbing
another source of weapons intended for criminal use. A program to
identify and prosecute the Nation's most dangerous, armed criminals was
intensified.
A total of $7.6 billion in alcohol and tobacco excise tax was collected
by ATF in fiscal 1976—the third largest segment of U.S. revenue,
following personal and corporate income taxes. The revenue collection for
the transition quarter was $1.3 billion.
It became Bureau policy in fiscal 1976 to give public notice when
deficient alcoholic beverage products are withdrawn from the market.
ATF also intensified its regulatory enforcement program against trade
practice violations. This included the publication of identifying information relating to ATF action against holders of alcoholic beverage operating
permits. The Office of Regulatory Enforcement also took initial steps in
conversion of distilled spirits products to metric standards of fill.
Criminal enforcement
In fiscal 1976, ATF made progress in several criminal enforcement
areas: the initiation of Operation Concentrated Urban Enforcement
(CUE); the identification of sources of firearms illegally purchased,
possessed, and used by the criminal element; the arrest of significant
criminals; the arrest of persons involved in theft of firearms from interstate
shipments; the successful investigation and prosecution of persons
involved in the illegal trafficking of firearms internationally; and the
investigation of major conspiracies involving significant explosives,
wagering, and liquor violations.
During the year, investigations resulted in 3,986 arrests by ATF special
agents who made 6,915 seizures of contraband firearms, explosives,
liquor, and vehicles valued at $1.5 mUlion. Federal convictions in cases
originated by ATF totaled 3,130. In addition, more than 20,000 investigations, including technical, regulatory, organized crime, and foreign
assistance investigations were closed. For the transition quarter, there
were 337 arrests, and 1,729 contraband seizures valued at $375,406. More
than 5,000 investigations were closed.
Operation CUE was started in the Washington, D . C , area on February
16, 1976. Boston and Chicago were selected as the other two CUE cities.
The primary objective of Operation CUE is to reduce the criminal misuse
of firearms and explosives, and to perfect criminal cases against persons
engaged in their illegal use, by the concentration of personnel and other
investigative resources in major metropolitan areas. In fiscal 1976, 591
cases were investigated in this pilot program. In the transition quarter.
Operation CUE was in full operation in the three pilot cities, with 675
investigations developed in the period.
Significant Criminal Enforcement Project.—This program was designed
to accelerate the apprehension of armed and dangerous criminals who
willfully violate Federal firearms, explosives, and wagering laws, and to
assist State and local law enforcement officials in their fight against crime
and violence.
In fiscal 1976, special agents identified 1,019 criminals meeting the
project criteria; 684 armed and dangerous criminals were recommended
for prosecution. At the fiscal yearend, 297 convictions had been obtained.
ADMINISTRATIVE REPORTS
14 1
resulting in the incarceration of 50 defendants. Some 239 others awaited
sentencing. During the transition quarter, 255 significant criminals were
identified, with 171 recommended for prosecution. A total of 74
convictions were obtained.
In one major case, special agents, utilizing concentrated undercover
investigative techniques, interdicted and eliminated a major source of
firearms being illegally supplied to the criminal element. As a result of this
investigation, two members of the ring, both convicted felons, were
arrested and charged with multiple violations of Federal firearms laws. A
federally licensed firearms dealer was arrested and charged with illegal
sales and recordkeeping violations.
Another ATF investigation involved several SCEP targets who were
conspiring to damage and destroy, by means of homemade bombs,
buildings and construction equipment located on various sites in the New
York City area. The investigation resulted in successful prosecution ofthe
executive director of a federally funded antipoverty organization and
others for violations of the Federal conspiracy and explosives laws and
interference with commerce by threats and violence.
International traffic in illegal firearms.—Illegal acquisition of firearms
and explosives within the United States, destined for terrorist organizations in Ireland, Mexico, and other countries, requires constant investigative attention. Cases perfected by special agents under this project also
involved gunrunning to Japan, Lebanon, Jamaica, and Canada.
In one notable case, ATF special agents arrested a foreign official
involved in an attempt to divert into illegal channels 500 submachineguns
intended for international shipment. Another significant investigation
resulted in the conviction of two persons involved in the illegal gunrunning
to Northern Ireland of 378 firearms and 140,000 rounds of ammunition.
ATF concluded a case involving a group of men of Syrian and Lebanese
extraction, attempting to purchase illegally 500 firearms which were to be
smuggled out of the United States concealed in door panels of an
automobile. The investigation implicated 7 persons who had obtained 37
guns for this purpose. Three were convicted. One fled the country prior
to arrest and is now a fugitive.
Project Identification.—During fiscal 1976, ATF completed and published the first documented national study of handguns involved in crimes.
Based on a total of 10,617 crime handguns submitted from 16 major
metropolitan cities, tracing revealed that 71 percent, or 6,538, of the
handguns had a barrel length of 3 inches or less, and 61 percent, or 6,476,
handguns were .32 caliber or less. These figures indicate that concealability is an overriding factor in the selection of crime handguns.
In fiscal 1976, special agents, utilizing the tracing section under Project
Identification, assisted in the successful prosecution of Bobby Joe Keese,
the person who, in 1974, kidnapped and murdered an American Consul
in Hermosillo, Mexico. Testimony of ATF firearms technologists also
helped convict Keese.
Explosives investigation.—The potential threat to public safety requires
the Bureau to assign high priority to explosives investigations. During fiscal
1976, approximately 1,760 explosive incidents were investigated by
special agents, including 723 bombings, 204 attempted bombings, 59
accidental detonations, and 141 incendiary incidents. In the transition
quarter, 440 explosive incidents were investigated, including 181 bomb-
142
1976 REPORT OF THE SECRETARY OF THE TREASURY
ings, 51 attempted bombings, 15 accidental detonations, and 35 incendiary incidents.
A typical case in the central United States involved several firebombings
of businesses, one of which resulted in three firemen losing their lives.
Through diligent investigative efforts, ATF agents obtained indictments
against five well-known organized crime figures for the firebombings and
the deaths of the three firemen.
ATF seized 116 vehicles valued at approximately $300,000 and monies
in excess of $240,000. The Bureau, working with inteUigence information
and investigative leads received from other Federal, State, and local
enforcement agencies, has recommended the Federal Government
proceed with civil actions against $25 million in seizures retained as
evidence by these various enforcement agencies.
Interstate firearms theft project.—Each year thousands of firearms are
stolen while in transit between licensed firearms dealers, manufacturers,
and importers. These stolen weapons are highly desired by the criminal
element.
As of June 30, 1976, a total of 2,045 investigations into the theft of
13,400 firearms from interstate and foreign shipments have been made by
ATF. Special agents have perfected 42 criminal cases against 75
defendants. The total number of firearms theft investigations at the end
of the transition quarter was 2,150.
The pressure of intense ATF investigations coupled with successful
prosecutions has caused an appreciable decline in the number of thefts.
A typical investigation is one where a special agent in New York City,
while working undercover, purchased 18 new .38 caliber revolvers, a short
time later contracted for another purchase, and at the time of delivery
recovered 155 revolvers. The firearms, stolen from an export warehouse
at the JFK Airport, New York City, were consigned to the Bank of
Bangkok, Thailand.
Assistance to other law enforcement agencies.—The Bureau, through the
enforcement of law over which it has jurisdiction, provides investigative
and technical assistance to State, local, and other Federal law enforcement
agencies. A concentrated effort against crime and violence has resulted
from this close cooperation and many criminals have been jailed. During
fiscal 1976, ATF made 3,809 referrals of information to other agencies,
many of which resulted in arrest and conviction for major criminal
offenses. In the transition quarter, 352 information referrals had been
made by ATF.
An example of an ATF referral: Acting on information from a
confidential informant, ATF special agents gained the confidence of
several violators, and obtained firsthand knowledge that the subjects
possessed contraband. State agents then executed a search warrant on a
suspect's premises, arrested five persons, and recovered five truckloads of
stolen property valued at thousands of dollars. ATF also assists State and
local enforcement agencies through Interpol.
Regulatory enforcement
Consumer protection.—Enforcement efforts continued against unlawful
trade practices defined in the Federal Alcohol Administration Act. In
fiscal 1976, permits of 21 alcohol beverage industry members were
suspended for periods of from 2 to 20 days; 39 offers in compromise were
assessed, totaling $176,000; several cases were referred to the Justice
ADMINISTRATIVE REPORTS
143
Department for criminal prosecution. Five permits were suspended from
July through October 1976. During this period, four offers in compromise
were assessed.
More than 100,000 alcoholic beverage labels and 30,000 advertisements were reviewed to ensure compliance with Federal law and prevent
deceptive labeling and advertising. A recall program was initiated to
provide for removal of improperly labeled products from the marketplace.
During the transition quarter, 25,000 labels and 7,500 advertisements
were reviewed.
Public disclosure policy.—To aid consumers, ATF began on January 1,
1976, to make public notice when deficient alcoholic beverages are
withdrawn from the market. This information is published, following any
withdrawal, in the monthly ATF Bulletin. If a withdrawn product involves
a health hazard, flagrant consumer deception, large quantities of a
deficient product, or similar situations, a news release also is issued by
Bureau headquarters. For lesser violations, news releases are issued at the
regional level.
As part of its public disclosure policy, the Bureau began to list in its
monthly bulletin actions against alcoholic beverage permitholders, where
such action was initiated after January 1, 1976. This disclosure pertains
to offers in compromise, permit suspensions, and revocations. ATF
retained the option to issue news releases relative to these actions as a
deterrent against further violations.
Metrication.—In fiscal 1975, an ATF decision permitted the wine
industry to convert from U.S. to metric standards of fill. A similar decision
pertaining to distilled spirits was adopted in fiscal 1976. The Bureau
believes that conversion to metric standards is advantageous for consumers, industry, and Federal and State regulatory agencies.
Wine bottlers will convert to seven standard metric sizes by January 1,
1979; this conversion progressed during fiscal 1976. The metric sizes for
wines are 100 ml., 187 ml., 375 ml., 750 ml., 1 liter, 1.5 liters, and 3 liters.
Metric standards of fill will be mandatory for distilled spirits beginning
January 1, 1980. Six metric sizes were approved: 50 ml., 200 ml., 500 ml.,
750 ml., 1 liter, and 1.5 liters. Distillers will begin conversion to metric
standards in fiscal 1977.
Wine-labeling terms.—In fiscal 1976, ATF proposed regulations to
define the wine-labeling terms "appellation of origin" and "viticultural
area." Both terms relate to a wine's origin. The ATF proposal would give
added assurance of the origin of a wine within precise geographic
boundaries. At public hearings in San Francisco and in Washington, D . C ,
in April 1976, it became evident that the proposal was controversial. The
Bureau concluded that further study of the proposal was in order prior to
any decision or action on these wine-labeling terms.
Ingredient labeling.—Proposed ATF regulations to require ingredient
labeling of alcohoHc beverages were the subject ofpublic hearings in fiscal
1975. Testimony presented and comments received were overwhelmingly
negative. The Bureau concluded that ingredient labeling was not desirable
at this time and withdrew its proposal in fiscal 1976. The Food and Drug
Administration has since announced that it intends to require ingredient
labeling of alcoholic beverages.
Records and reports.—ATF and distilled spirits industry representatives
have undertaken a major project to simplify records and reports required
of distilled spirits bottlers. The aim of this joint effort is to lessen a burden
144
1976 REPORT OF THE SECRETARY OF THE TREASURY
on government and industry by adopting requirements more compatible
with modern commercial accounting procedures and data processing
equipment. The Bureau is hopeful that regulations to implement these
plans can be issued in fiscal 1977.
Firearm and explosive inspections.—An important aspect of Operation
CUE is the expanded program of firearms compliance inspections in the
CUE cities of Boston, Chicago, and Washington, D.C. Inspection
conducted as a part of CUE, as well as 28,000 additional inspections
nationwide, were a valuable source of information on the diversion of
firearms to criminal elements as well as a way of ensuring dealer
compliance with Federal law.
With the assistance of the Mining Enforcement and Safety Administration (Interior), ATF inspected every explosive licensee and permittee in
fiscal 1976. As a part of each inspection, ATF and MESA officers placed
special emphasis on the security of explosives and the prompt reporting
of losses and thefts to ATF.
Black powder.—Public Law 93-639, January 4, 1975, amended Federal
regulations on the use of black powder and accessory items for antique
firearms and devices. The law raised from 5 to 50 pounds the amount of
commercially manufactured black powder which may be purchased for
this purpose. In fiscal 1976, Bureau regulations were proposed to
implement the amended law. Final regulations will become effective in
fiscal 1977.
Technical and scientific services
Laboratories.—ATF laboratories provided technical and scientific
support in enforcing the laws and regulations administered by the Bureau.
Headquarters and regional laboratories also assisted, without charge, any
requesting State or local law enforcement agency.
ATF continued its leading role in ink identification and tagging, adding
many ink formulations to the more than 3,000 catalogued in the world's
most complete ink library. Because of ATF initiative, 25 percent of U.S.made inks are now tagged with a trace chemical, increasing the Bureau's
ability to analyze and date questioned documents. The percentage of
chemically tagged inks will more than double in fiscal 1977.
Voiceprint analysis, pioneered by ATF, gained wider acceptance in
fiscal 1976. In two important cases, voiceprint analysis aided in the
conviction of defendants who threatened the President of the United
States, and of a murderer in Colorado. Seventy voiceprint cases were
processed. Other important identification laboratory functions were
firearms, toolmark, fingerprint, and handwriting examinations. The
workload in these areas exceeded 2,436 cases. During the transition
quarter, 603 cases were processed.
The broad range of forensic services performed included examination
of hair, blood, arson and bomb debris, soil, metal fragments, and myriad
other evidentiary materials. Analysis of materials required microscopy,
complex chemical methods. X-ray equipment and sophisticated instruments to perform atomic absorption and neutron activation tests. Some
2,436 cases were processed.
The new rapid atomic absorption technique, developed by ATF for
gunshot residue analysis, was one ofthe most requested forensic services.
In a case that set a precedent in the Virgin Islands, an ATF gunshot residue
ADMINISTRATIVE REPORTS
1 45
analysis was introduced for the first time in a murder trial. The defendant
was convicted.
In fiscal 1976, 13,844 items of evidence relating to 2,867 cases were
submitted to the forensic laboratory for examination. Cases ranged from
arson and bombings to assault with firearms. About 75 percent of this work
was performed for some 400 State and local law enforcement agencies.
Items of evidence examined during the transition quarter totaled 3,461.
New and better procedures for examination of evidentiary materials
were developed. Other crime laboratory scientists and forensic students
were trained in specialized methodology.
Most chemical laboratory work related to regulatory enforcement,
chiefly tax classification and consumer protection. Examination of
alcoholic beverage products included test for proof, fill, additives, harmful
ingredients and proper labeling.
Formula submission doubled and analyses tripled for nonbeverage
drawback products—foods, flavors, medicines—containing alcohol. A
contributing factor was the ban on use of Red Dye No. 2 and chloroform
in such products. The workload was accommodated by increasing the use
of automated test techniques. Other testing guaranteed that industrial
alcohol products—toilet preparations, industrial formulas—were labeled
correctly. ATF ensured that both drawback and industrial products were
constituted to prevent recovery of alcohol for beverage use.
New findings permitted ATF scientists better to distinguish cigar and
cigarette tobaccos for tax purposes.
The chemical laboratory also tested foods, artificial flavors and other
articles for compliance with regulations set by the Internal Revenue
Service and the Food and Drug Administration.
During fiscal 1976, chemical laboratory scientists and technicians
examined 4,778 samples, 6,214 formulas, more than 7,000 labels for
specially denatured alcohol products, 2,075 samples and 3,430 formulas
for nonbeverage food flavors and medicines, 8,635 alcoholic beverage
samples, 65 tobacco samples, and 10 samples of excise tax products. More
than 8,052 such examinations were conducted during the transition
quarter.
Relocation.—During fiscal 1976, work began toward relocation ofthe
ATF headquarters laboratories from Washington, D . C , to a new location
in Rockville, Md. The Rockville facility will provide critically needed
space and a more efficient and safer laboratory design.
National Firearms Act weapons.—NFA weapons, which include shortbarreled shotguns and rifles, machineguns, silencers, and destructive
devices, are controlled by ATF. In fiscal 1976, ATF processed 14,818
applications involving the manufacture, import and export, transfer, and
registration of NFA weapons. A total of 2,711 certifications were prepared
as documentary evidence for court proceedings. Some 3,705 applications
were processed during the transition quarter. Certifications processed in
the transition quarter totaled 678. The Bureau maintained the National
Firearms Registration and Transfer Record, which is the control file for
NFA weapons.
Imports.—Under provisions of the Gun Control Act of 1968 and the
Mutual Security Act of 1954, > 17,075 import permits were issued in fiscal
1 The Intemational Security Assistance and Arms Export Control Act of June 30,1976, superseded the Mutual Security
Act as statutory authority for control of arms importation.
1 46
1976 REPORT OF THE SECRETARY OF THE TREASURY
1976 for firearms, ammunition, and irnplements ofwar. Of these permits,
14,406 were for firearms, 1,352 for firearms and ammunition, 645 for
ammunition, and 584 for other implements ofwar. Disapproved applications totaled 1,041. Import permits issued in the transition quarter totaled
4,269 during which time 260 applications were disapproved.
Firearms tracing.—The National Firearms Tracing Center traced
domestic and imported firearms to the point of first retail sale for Federal,
State, and local law enforcement agencies. A total of 39,761 trace requests
were received, 59 percent of these from State and local agencies. By mid1976, trace requests had increased to an annual rate of nearly 50,000.
More than 13,000 gun trace requests were acted upon in the transition
quarter. The Firearms Technology Branch also maintained the Bureau's
firearms reference collection of more than 3,500 weapons.
Explosives technology.—Expertise in explosives tracing was expanded in
fiscal 1976, providing much needed assistance to law enforcement
agencies. A total of 626 traces were completed. For the transition quarter,
157 traces were completed. Funding approved for fiscal 1977 will enable
ATF to develop a national explosives tagging system. The goal is a system
to detect explosives prior to a bombing and to trace the source of
explosives after a bombing.
An ATF-developed explosives mailer, to be used for shipment of small
laboratory samples of explosives and bomb debris, is expected to be in
service in fiscal 1977. The Bureau was appointed to a Federal Aviation
Administration task force on explosives security at airports, and task force
recommendations will be implemented at U.S. airports. An ATF representative also served on the research and development panel of the
working group to combat terrorism.
Data processing.—ATF converted to a data processing system which
provided a sophisticated report capability in the areas of property
accounting and inventory control. The new system resulted in a saving of
two man-years of analysis and development effort.
In support of Operation CUE, a management information system was
developed for analysis of criminal enforcement case workload and
resource utilization in the three CUE cities. The system is designed for
expansion to other cities.
Administration
Financial management-planning system.—Design of this multiple-use
system was completed in fiscal 1976. It is intended to monitor daily Bureau
progress, yield valuable analysis data, improve resource allocation,
automate many recurring and special reports, and facilitate decisions on
program priorities.
Grade and age limits.—In line with the President's cost reduction
program, ATF established GS-05 as a maximum entry recruitment level
for both special agent and inspector positions. An age limit of 35 years for
special agent recruits in classification series GS-1811 was approved by the
Department and submitted to the Civil Service Commission. Implementation ofthe age limit requirement will begin in October 1976. Standard
oral panel interview procedures for special agent positions are being
implemented and will assure more uniform application of interview
techniques for these positions.
Personnel management evaluation.—A full-scale review of regional
offices was completed. Followup visits are scheduled to assess progress.
ADMINISTRATIVE REPORTS
147
An ATF order. Personnel Management Evaluation Program, established
the requirement for regional selr-evaluation programs.
Labor and employee relations.—Fiscal 1976 marked the final year of the
Bureau's first negotiated agreement with the National Treasury Employees Union which represents about 1,000 ATF employees. A new
agreement is being negotiated.
During fiscal 1976, the Department of Labor ruled in favor of a Bureau
position concerning employee rights, which is considered to have
significance beyond ATF. The case concerned rights of employees under
Executive Order 11491, as amended, in the area of labor-management
relations.
ATF held that employees excluded from coverage ofthe order were not
granted the same rights as Federal employees covered by the order. The
Bureau's position was adopted, establishing the principle of agency
authority, under the order, in the areas of personnel policies, practices and
working conditions.
Training.—Through fiscal 1976, 1,335 employees completed training at
the Federal Law Enforcement Training Center, Brunswick, Ga. ATF
programs there were expanded. Also expanded was the Bureau's executive
development program.
The redesigned inspector training program was completed by 133
inspectors. A self-instruction course for firstline supervisors had 26
participants and 12 graduates. ATF provided training, funded in part by
the Law Enforcement Assistance Administration (Justice), to 41,460
employees of Federal, State, and local agencies.
Property management.—The capital assets property system was designed in fiscal 1976 to replace a less precise system in use since ATF
became a separate Bureau in 1972. Unique numbers identify property
items, and partial automation will reduce manual recordkeeping requirements.
Communications.—Equipment was integrated with the Treasury enforcement communications system to permit automatic transmission of
data from headquarters to receiving sites. This eliminated a staffing
requirement. Efforts to cut long-distance telecommunications costs
resulted in an annual billing reduction of $70,000.
Equal employment c>p/7orrM/t/ry.—Accomplishments included appointment and training of full-time regional EEO officers, EEO training for
firstline supervisors, and onsite program reviews for six regions. Minorities
and women filling special agent and inspector positions increased by 46.
A program stressing the hiring of Spanish-speaking personnel in Dallas,
New York, and San Francisco was instituted. Skills surveys, employee
orientation, and supervisor seminars continued to stress the Bureau's
upward mobility program.
Firearms records.—Records of federally licensed firearms dealers who
discontinue their businesses are forwarded to regional offices. Inadequate
storage space has presented a problem in retrieval of data from these
records.
A three-region pilot program now provides for sending these records to
the headquarters Distribufion Center. There an open-ended filing system
permits searches of indexed records in an average of 20 minutes,
compared to a 2- to 5-hour average for unprocessed records. If the project
is adopted Bureau-wide, records from all regions will be stored in the new
system.
148
1976 REPORT OF THE SECRETARY OF THE TREASURY
Paperwork reduction.—A study team identified 1,500 forms used at the
regional and national levels. Many of the forms dated from the time ATF
became a separate Bureau in 1972. A decision to centralize the ATF forms
program resulted in the removal of 678 forms from the system.
Of 194 forms requiring reporting by the public, 49 were identified as
being unnecessary. Most of these forms are required by statute or
regulation. Work is underway to change such requirements and eliminate
the forms. When completed, forms required of the public will be reduced
by 25 percent.
Inspection
The Office of Inspection has four primary areas of responsibility:
Protecting Bureau integrity; reviewing operational activities; auditing the
Bureau's fiscal position; and implementing the Bureau's security program.
Integrity investigations.—During fiscal 1976, the Operations Review
Division conducted 124 inquiries into allegations involving employee
conduct. A total of 31 separate actions resulted from these investigations;
4 resignations, 11 adverse actions, and 16 clearances. A total of 31
employee conduct inquiries were completed in the transition quarter.
Operations review.—Reviews ofthe operations of 14 Criminal Enforcement district offices and Regulatory Enforcement area offices were used
by management to initiate corrective action where necessary. The Division
also supervised 75 investigations of accidents involving Bureau personnel
or property.
Internal auditing.—Audits and surveys were conducted to appraise a
broad range of financial management activities affecting administration,
regulatory and criminal enforcement, and technical and scientific services.
Special emphasis was placed on assessing the adequacy of the ATF
accounting, procurement, and payroll systems. The audit staff also assisted
the Operations Review Division in selected operational and integrity
investigations. Development of this team concept has brought expertise of
varying disciplines to bear on complex aspects of Bureau operations.
Decentralization of the Internal Audit Division began in 1975, with
establishment of a staff in San Francisco. During fiscal 1976, additional
internal auditors were located in Cincinnati and Dallas. This expansion of
the internal audit program enabled ATF to perform timely audits of
Bureau programs, react quickly to changing conditions and management
needs, and conserve travel and per diem funds.
Security.—The Security Division conducted 546 employee background
and security update investigations in fiscal 1976, and 137 in the transition
quarter. The majority of these were background investigations of new
employees, resulting principally from the initiation of Operation CUE.
Publications
ATF provides to the public and members of regulated industries a wide
selection of publications relating to alcohol, tobacco, firearms, and
explosives. Information in these publications explains citizen rights under
ATF regulations, industry member requirements, and actions and new
positions taken by ATF. Included in this listing of publications were
Published Firearms Ordinances, The Explosives List, Monthly and
Cumulative ATF Bulletins, Bomb Threats and Search Techniques, and
Questions and Answers to the Gun Control Act.
ADMINISTRATIVE REPORTS
149
Public affairs
Information services.—More than 70 news releases in the fiscal year, and
18 in the transition quarter, were prepared and distributed by the
headquarters Office of Public Affairs, covering such topics as major
firearms and explosives cases and important regulatory changes.
Congressional liaison.—Congressional liaison officers prepared more
than 980 letters in response to congressional inquiries.
Public and industry liaison.—National and international meetings are an
important contact point between ATF, law enforcement agencies, and
regulated industries. A public affairs officer participated in 16 such
meetings including the International Association of Chiefs of Police
Convention and the AFL-CIO Industries Show. Four conferences were
attended during the transition quarter.
Bicentennial.—The public affairs staff produced a film on ATF
laboratory activities which was incorporated in a Bureau educational
display at the U.S. Bicentennial Exhibit on Science and Technology at the
Kennedy Space Center in Florida. Work was initiated on the ATF museum
which will be located in Bureau headquarters.
Internal public affairs.—A summary ofnational newsclippings concerning ATF was prepared and published three times a week. A monthly
newsletter was written, published and distributed to all ATF employees.
Disclosure
The Disclosure Office, which directs the Bureau's implementation ofthe
Freedom of Information Act, as amended in 1974, and the Privacy Act of
1974, completed its first full year of operation. The following statistics
cover the transactions of the office in fiscal 1976:
Freedom of Information Act requests, 291; requests granted in full, 80;
requests granted in part, 33; requests denied, 25; administrative appeals,
11; appeals granted in full, 2; appeals granted in part, 7; appeals denied,
2; suits brought against ATF under the FOI Act, 4. Privacy Act requests,
287; requests granted in full, 159; requests granted in part, 64; requests
denied, 14; administrative appeals, 7; appeals granted in full, 0; appeals
granted in part, 7; appeals denied, 1. Total disclosures accounted for by
ATF, 65,910.
OFFICE OF THE
COMPTROLLER OF THE CURRENCY!
The Office of the Comptroller of the Currency was established in 1863
by the National Currency Act, redesignated in 1864 as the National Bank
Act (12 U.S.C. 38). The Comptroller, as Administrator of National Banks,
is charged with regulating and supervising the national banking system,
within the scope of existing statutes and in such a manner as to best serve
the public interest.
1 Additional information is contained in the separate Annual Report of the Comptroller of the Currency.
150
1976 REPORT OF THE SECRETARY OF THE TREASURY
Prevailing economic conditions in recent years were reflected in the
generally conservative position ofthe banking industry. At yearend 1975,
total assets of national banks had increased by 3.6 percent to approximately $554 billion, a relatively moderate rate of increase.
In order to respond more effectively to new and challenging developments in the banking industry, the Comptroller of the Currency commissioned the first major comprehensive review and evaluation ofthe Office,
conducted by the independent management consulting firm of Haskins &
Sells in 1974-75.
A series of major recommendations emerged from the study: Reorganization of the internal office structure on a functionally oriented basis,
implementation of a program designed to monitor national banks in order
to anticipate circumstances which might adversely affect the soundness or
liquidity of individual banks or the national banking system in general,
requirement of more timely reporting by national banks according to
uniform principles of accounting and reporting, greater emphasis in bank
examinations on analysis and interpretation of financial data and less
emphasis on detailed verification procedures, unification of the financial
budgeting process, budget data, and actual expense data into a system of
responsibility accounting and reporting, and publication of guidelines for
submission of applications for charters, branches, and other corporate
functions.
Implementation of the study's recommendations commenced in September 1975. The Office's internal organization structure was revised to
more properly meet the needs of effective supervision, regulation, and
examination ofthe national banking system. A senior policymaking body,
including both Washington and regional office personnel, was established
to serve as counsel to the Comptroller's executive committee and to
coordinate and manage all functional and operational activities.
To assist in the effective development and execution of Office policy,
the Strategic Studies unit was established in September 1975, principally
to identify, monitor, and assess significant developments in the financial
services industry which are likely to impact the Office, the national
banking system, and the public, and to recommend ways to respond to
those developments. To closely monitor industry developments, the unit
maintains frequent contact with leading national banks, securities analysts, and investment bankers. Its banking research group performs
research studies on issues of current or potential importance to the Office
and serves as a resource for servicing the needs of other units for
information and analysis. Its statistics group is primarily responsible for
receiving, processing, and editing national bank reports of condition and
income and responding to public requests for report data.
A formal operations planning process currently is being implemented
and refined by the Operations Planning unit created in September 1975.
The planning process will ensure adoption of overall Office policy and
operating objectives and will integrate the performance of all units toward
those objectives. Each organizational unit of the Office annually submits
a set of operating plans detailing specific performance objectives and
action programs for a 5-year planning cycle. All plans are reviewed and
evaluated by the planning unit and senior management based on actual
performance.
ADMINISTRATIVE REPORTS
151
The Division of Finance and Administration has been charged with the
development and implementation of a cost-center responsibility budgeting
process to: (1) Project, monitor, and control expenses and property; (2)
employ available funds in the most efficient and profitable manner; and
(3) implement an improved computer-based fiscal information system to
provide more comprehensive and timely financial reporting. The division
director, serving as the Comptroller's chief financial adviser, has been
responsible for establishing specific guidelines for budget preparation and
will coordinate and analyze all budget submissions on both the Washington
and regional office levels. Budget implementation is scheduled for January
1977.
An operations review function was created in September 1975 to
monitor and evaluate all phases of Office activities through frequent
review of all Office policies, practices, and procedures. Operations review
encompasses: (1) The operations review program which monitors the
quality ofthe Office's performance of its bank supervisory and regulatory
duties; (2) the internal audit unit which examines all facets of administrative operations through financial audits and performance reviews; and (3)
the equal employment opportunity program which attempts to identify
and resolve discriminatory practices. In March 1976, an EEO advisory
committee comprised of Washington and regional office representatives
was established to serve as a continuing consultative link of communication between management and the total work force on matters of an EEO
nature.
Implementation of recommendations for the corporate functions area
commenced with the appointment of a regional director for corporate
activities for each ofthe 14 national bank regions. This action in perhaps
the most fundamental area of the Office's activities reflects a major
objective of delegating the responsibility for virtually all processing of
applications to the regional offices. To facilitate the transfer of this
function, the management study recommended the adoption of written
policy guidelines for the approval or disapproval of corporate applications.
Another important goal has been to streamline the processing of
applications through revised forms instructions and internal processing
procedures.
In ensuring the optimum standards for bank regulation and supervision,
the Office conducts periodic examinations of all national banks to assess
their soundness, performance, and compliance with banking statutes. The
bank examination process, considered the factfinding arm ofthe Office's
supervisory mission, has been reviewed and substantially revised. Major
emphasis has been placed on evaluating banks' internal control systems so
as to improve manpower utilization during examinations, verifying data
available from bank records rather than developing similar data at the time
of examination, and implementing advanced testing procedures, thereby
increasing examination efficiency. The trust operations unit and banking
operations units including the domestic, international, and EDP functions
have revised examination procedures, improved the form and content of
examination reports, and designed working papers and work programs to
reflect the actual work performed during examinations and to support the
conclusions reached.
152
1976 REPORT OF THE SECRETARY OF THE TREASURY
The consumer affairs unit is responsible for protecting the rights of the
public by ensuring bank compliance with the many consumer protection
laws. Administration of this obligation is accomplished through the bank
examination process and through the review and resolution of consumer
complaints alleging violations of law. In 1975, an automated consumer
complaint information system (CCIS) was developed to monitor the
volume and type of complaints processed, to determine which banks have
an inordinate number of complaints filed against them, and to utilize
consumer complaints for policy program development. It is expected that
consumer issues will intensify and increasingly affect legislative policies
and regulatory responsibilities. In order to directly supplement the
examination process, a new consumer examination is being developed to
concentrate on bank compliance with consumer legislation, such as truthin-lending, equal credit opportunity, and mortgage lending. Initially, the
consumer examination will be performed independently, although integration with the regular commercial examination may occur sometime in the
future.
The national bank surveillance system (NBSS) is one of the new
functions which will most serve to improve the efficiency of examinations.
NBSS is a computer-based, ratio-oriented early warning system identifying
trends and conditions in individual banks and in the banking industry
which may require special surveillance. A comprehensive bank data base
includes data from reports of condition and income, past due loans, and
bank examination reports. The statistical profile of each national bank
compared with profiles of its peers and a newly developed action control
system provide timely and useful information for bank surveillance and
examination. The complete program includes specially trained NBSS
specialists based in the Washington unit and in each region.
Since the principal resource ofthe Office is its people, the management
of human resources represents a major functional responsibility. During
the past 15 months, efforts have been directed toward implementing a
progressive program of human resources management which will ensure
that the bureau attracts, retains, and develops the most effective
work force. The initial thrust has been directed toward establishing the
organization, policies and programs necessary for effective recruitment,
manpower planning, personnel development, compensation and benefits,
and employee relations. To satisfy the organization's human resources
needs, a national recruitment program has been designed to identify and
recruit candidates with outstanding qualifications. Essential to the
manpower planning program is the establishment of a computerized
human resources information system, currently being developed.
In the field of personnel development, the main thrust is to provide
quality professional continuing education and career development programs to produce and maintain a high level of excellence, particularly in
the Office's force of approximately 2,300 commercial and trust bank
examiners. In the compensation and benefits area, a progressive position
management/classification program is being implemented which ensures
the most effective and economical distribution of positions, pay equity,
and optimum utilization of manpower resources. In addition, an improved
employee relations program is being implemented by management which
ensures consistent and equitable treatment of all employees.
ADMINISTRATIVE REPORTS
15 3
OFFICE OF COMPUTER SCIENCE
The Office of Computer Science is the focal point for the ADP program
in the Department. The Office has central management responsibilities for
ADP planning, policy, and evaluation throughout the Department. Also,
it furnishes computer processing and systems development services to the
analytical, policy formulation, and administrative functions ofthe Office
of the Secretary.
In fiscal 1976, the Department had 140 computer systems, used 30,200
work years, and spent $483,864,000 in the ADP program. These resources
support nationwide programs such as tax administration, general revenue
sharing, debt management and administration, analysis of alternative
Federal tax policies, revenue collection, law enforcement, and protective
intelligence.
The major departmental functions ofthe Office include continued work
with the Internal Revenue Service on the proposed tax administration
system. Assistance was provided also to the Bureau of Government
Financial Operations, the U.S. Secret Service, the U.S. Customs Service,
the Bureau of the Public Debt, and other bureaus and offices in planning
new systems capabilities to support mission-related and administrative
functions.
The Office of Computer Science is implementing a program to
strengthen ADP management and performance in the Department. The
key to this program is a new departmental directive which includes, in one
place, all guidelines, policies, and procedures appropriate to the management of ADP.
The Office actively pursued its applications development functions
during the reporting period. Major initiatives included the development of
general purpose economic analysis systems to support Office of the
Secretary components. These systems improve significantly the productivity of economists by minimizing their need to concern themselves with data
processing considerations. Special projects include survey processing for
the Office of Industrial Economics; generation of several large, complex
data bases for the Office of Tax Analysis; and development of a system for
the Office of Government Financing to handle a variety of functions
including generation of the "quote sheet" and yield curves.
In the Computer Center, a principal achievement was the establishment
of a user services group to help users have access to the services provided
by the Center and to promote more cost-effective use of computer
technology by the user community. Also, computer usage charges were
reduced by 12 percent in fiscal 1976, reflecting improved efficiency and
utilization of the Computer Center.
OFFICE OF DIRECTOR OF PRACTICE
The Office of Director of Practice is part of the Office of the Secretary
of the Treasury and is under the supervision of the General Counsel.
Pursuant to the provisions of 31 CFR, part 10 (Treasury Department
154
1976 REPORT OF THE SECRETARY OF THE TREASURY
Circular No. 230), the Director of Practice institutes and provides for the
conduct of disciplinary proceedings against attorneys, certified public
accountants, and enrolled agents who are alleged to have violated the rules
and regulations governing practice before the Internal Revenue Service.
He also acts on appeals from decisions of the Commissioner of Internal
Revenue denying applications for enrollment to practice before the IRS
made under 31 CFR, section 10.4.
On July 1, 1975, there were 126 derogatory information cases pending
in the Office under active review and evaluation, 6 ofwhich were awaiting
presentation to or decision by an administrative law judge. During the
fiscal year, 127 cases were added to the case inventory ofthe Office, and
34 cases during the transition quarter. Disciplinary actions were taken in
56 cases by the Office or by an administrative law judge during the fiscal
year, and 13 in the transition quarter. Actions for the fiscal year were
comprised of 2 orders of disbarment, 29 suspensions (either by order of
an administrative law judge or by consent of the practitioner), 23
reprimands, and 2 resignations; for the transition quarter, 10 suspensions
and 3 reprimands. The actions affected 11 attorneys, 21 certified public
accountants, and 24 enrolled agents in the fiscal year; 2 attorneys, 4
certified public accountants, and 7 enrolled agents in the transition
quarter. Thirty-five cases in the fiscal year were removed from the Office
case inventory after review and evaluation showed that the allegations of
misconduct did not state sufficient grounds to maintain disciplinary
proceedings under 31 CFR, part 10; 19 such cases were removed in the
transition quarter. At the end ofthe fiscal year, there were 162 derogatory
information cases under consideration in the Office. As of September 30,
1976, there were 164 cases so pending.
During the fiscal year, 15 attorneys, certified public accountants, and
enrolled agents petitioned the Director of Practice for reinstatement of
their eligibility to practice before the IRS. Favorable disposition was made
on 13 of those petitions and reinstatement was granted. Four petitions
were added during the transition quarter ofwhich three received favorable
disposition with reinstatement granted. Three petitions remained pending
as of September 30, 1976. In addition, during fiscal 1976, there was one
appeal from a denial by the Commissioner of Internal Revenue of an
application for enrollment to practice before the IRS. This appeal
remained pending at the close of the transition quarter.
Eight administrative proceedings for disbarment or suspension were
initiated against practitioners before the IRS during fiscal 1976. Together
with the 6 cases remaining on the administrative law judge docket on July
1, 1975, 14 cases were before an administrative law judge during the fiscal
year. Four of those cases resulted in the acceptance of an offer of consent
to voluntary suspension from practice before the IRS pursuant to 31 CFR,
section 10.55(b) prior to reaching hearing. Initial decisions imposing
disciplinary actions were rendered in four of the cases. In two cases, the
initial decision ofthe administrative law judge was that the respondent be
disbarred from further practice before the IRS. Two suspensions from
practice before the IRS were invoked. At the end of the fiscal year, six
cases were pending on the docket awaiting presentation to or decision by
an administrative law judge and in the transition quarter, one case was
added. Thus, on September 30, 1976, seven cases were pending before an
administrative law judge.
ADMINISTRATIVE REPORTS
1 55
During fiscal 1976, two cases were appealed to the Secretary from initial
decisions by an administrative law judge. One case resulted in a reduction
of the disposition made by the administrative law judge from disbarment
to suspension. The other, on appeal from the initial decision rendered in
fiscal 1975, resulted in an affirmation ofthe administrative law judge's
order of disbarment. During the transition quarter, one appeal to the
Secretary was made and was pending as of September 30, 1976.
During the fiscal year, the Office represented the Department in one
employee appeal to the Civil Service Commission of an adverse action
taken against him by a bureau of the Department.
Proposed regulations governing practice before the Bureau of Alcohol,
Tobacco and Firearms were pending at year's end. Those regulations
would provide the Director of Practice with parallel duties with respect to
such practice as he has relative to practice before the IRS.
On March 21, 1975, the Director of Practice was named executive
director for the Joint Board for the Enrollment of Actuaries. The Joint
Board, formed pursuant to section 3041 of the Employee Retirement
Income Security Act of 1974, is responsible for the enrollment of
individuals who wish to perform actuarial services under the act and for
the suspension and revocation of the enrollment of such individuals after
notice and opportunity for hearing.
During the fiscal year, the Joint Board promulgated regulations
governingtheenroUmentof actuaries before January 1, 1976. In addition,
regulations governing standards of performance by enrolled actuaries and
Joint Board regulations implementing the Freedom of Information and
Privacy Acts were adopted. Two public hearings were held relative to
those regulations. A third public hearing was held during the transition
quarter relative to proposed regulations governing the enrollment of
actuaries on or after January 1, 1976.
During the fiscal year, 3,753 applications for enrollment were filed. Of
those, 2,417 were enrolled. There were 178 applications withdrawn and
59 applications were abandoned. Proposed denials were issued 1,241
applicants, of which 740 were denied enrollment. Including the undetermined proposed denials, 359 applications were pending at the close of the
fiscal year.
To facilitate the regulations governing enrollment, three actuarial
examinations were offered applicants for enrollment during the fiscal year.
The examinations, scheduled at 58 cities, were coordinated by the
executive director. In this connection, a total of 2,661 applications were
processed.
The Joint Board had not adopted regulations governing revocation and
suspension as of the fiscal year's close.
BUREAU OF ENGRAVING AND PRINTING
The Bureau of Engraving and Printing, the world's largest securities
manufacturing establishment, designs and produces the major evidences
of a financial character issued by the United States. It is responsible for
156
1976 REPORT OF THE SECRETARY OF THE TREASURY
the production of U.S. currency, postage stamps, public debt securities,
and miscellaneous financial and security documents.
Finances
The regular operations of the Bureau of Engraving and Printing have
been financed since July 1, 1951, by means of a revolving fund established
pursuant to Public Law 656, August 4, 1950 (31 U.S.C. 181). Agencies
which the Bureau serves are required to make reimbursement for all costs
incidental to the performance of work or services requisitioned.
The total cost of sales and services was $ 111,289,000 for fiscal 1976 as
compared with $101,269,000 in fiscal 1975. See the Statistical Appendix
for detail.
In order to generate sufficient funds to cover direct and indirect costs
of operations as well as to accumulate an adequate reserve for replacement
of capital equipment, the Bureau included in the cost of its products a
surcharge which, during fiscal 1976, amounted to $4,788,000.
Currency program
Currency deliveries in fiscal 1976 totaled 2.8 billion notes, approximately the same as the number produced in fiscal 1975. During the
transition quarter, 0.7 billion notes were produced.
On November 3, 1975, the Secretary ofthe Treasury announced that
the Bureau of Engraving and Printing would commence production of $2
Federal Reserve notes for first-day-of-issue on April 13, 1976, the
anniversary of Thomas Jefferson's birth. During fiscal 1976, the Bureau
produced over 400 million $2 Federal Reserve notes, representing
approximately 14 percent ofthe total currency program. Supplanting onehalf the face value of the annual requirement for $ 1 notes with $2 notes
would permit savings in manufacturing costs estimated at $27 million over
the next 5 years.
During fiscal 1976, the Bureau placed into operation six production
models ofcurrency overprinting and processing equipment (COPE). This
equipment, acquired through lease-to-ownership financing, will reduce
costs for currency manufacturing by approximately $1.8 million annually.
Several additional improvements in currency manufacturing were in
progress, including automatic sheet counting, examining modifications,
automated packaging, and revised work standards. Potential annual
recurring savings are estimated to be $1.5 mUlion.
Postage stamp program
Deliveries of U.S. postage stamps were 31.5 billion pieces in fiscal 1976,
compared with 28 billion pieces in fiscal 1975. During the transition
quarter, 6.9 billion stamps were produced.
As part of the continual modernization of Bureau operations, particularly in the labor-intensive postage stamp processing areas, the Bureau has
contracted for 6 postage stamp booklet-forming machines capable of
producing any variety of folded booklet containing from 2 to 36 stamps.
Practical and production acceptance trials of a prototype were successfully completed. Two additional machines are scheduled for delivery in
November 1976 and the remaining three machines during 1977. Savings
from use of the six machines are estimated at $1 million annually.
Also planned is an automated book-stamp packaging system which will
produce subpackages within master packages, a concept that permits the
ADMINISTRATIVE REPORTS
15 7
U.S. Postal Service to improve field operations by maintaining the integrity
of a sealed unit until delivery to the point of issue.
The Bureau also began utilizing glue instead of stitching for binding
stamp and food coupon books, which is expected to save approximately
$414,000 annually.
Food coupon program
Approximately 14 percent of the food coupon requirements were
produced by the Bureau during fiscal 1976. The Bureau continued to
assure a sufficient supply of food couporis for the Department of
Agriculture through execution of contracts with two private sector firms.
Responsibility included the establishment and monitoring of quality and
security controls and procedures.
Presses
A multicolor intaglio web press purchased for the primary production
of postage stamps in coil form became operational in November 1975,
affording the Bureau improved capability to produce three-color coil
stamps and multidenomination book stamps printed on a common sheet.
The proposed acquisition of a used two-color letterpress will effect
savings in the printing of a number of securities by accomplishing face
printings in one operation instead of two. Production of Treasury notes on
the two-color letterpress wiU yield annual savings of $95,000 for an initial
investment of $5,000 plus shipping and installation charges.
Delivery has been made of four high-speed intaglio sheet-fed presses for
currency production, having capabilities far in excess ofthe presses being
replaced. These new presses represent a segment ofthe Bureau's plan to
modernize press equipment to decrease unit costs to the Federal Reserve
System.
Inks
Significant progress has been made toward producing currency and
postage stamps with water wipeable inks through the acquisition ofa sheetfed multicolor intaglio press. Advantages in using water wipeable inks
include savings of large quantities of wiping paper used to remove excess
ink from the engraved plate; reduction in the bulk of waste generated in
the wiping operation; and the elimination of the use of more volatile
solvents. Although the press is in the experimental ink-testing mode, it is
made operational for producing postage stamps as production requirements warrant.
Quality control
The Quality Control Branch developed and implemented procedures
for the new high-speed currency and postage stamp equipment to assure
that the highest quality is maintained while the cost benefits of the
equipment are maximized: These procedures incorporate the immediate
feedback of information to operating personnel to preclude the manufacture of unacceptable products. The program provides additional confidence that the quality of circulated currency is consistently maintained at
acceptable levels.
Internal audit program
An intensive program of internal audit provided for the evaluation and
reexamination of operational efficiency and economy, and ensured
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1976 REPORT OF THE SECRETARY OF THE TREASURY
compliance with prescribed regulatory directives. During fiscal 1976 and
the transition quarter, 78 reports of audit were released and contained 408
recommendations for possible improvements which were referred for
management consideration. Coverage included fiscal and management
type audits and reviews of operations and programs, conducted on a
scheduled, special, and unannounced basis.
Destruction of mutilated securities
The Bureau installed a system to destroy paper securities which
eliminates the air pollution associated with the former incineration
method. Improvements in the process originally envisioned produced
immediate savings of $70,000 annually. Additional savings of $260,000
during fiscal 1977 and approximately $441,000 in fiscal 1978 are expected
with the acquisition of additional equipment.
Safety
Because of the industrial nature of Bureau operations, employee safety
is a matter of vital management concern. Safety management programs
include comprehensive safety training; investigation and analysis of all
accidents to identify standard cause factors; scheduled and unscheduled
safety audits; incorporation of safety and health standards into the
equipment acquisition cycle to insure safety coverage from initial design
to the disposition stage; the establishment, implementation, and review of
safety and health standards; and input and involvement by employee safety
committees.
Labor-management relations
The Bureau fosters constructive and harmonious relationships with
employees and labor organizations representing them. Special emphasis
and attention is directed toward the conduct of all labor-management
dealings within the spirit and intent of Executive Order 11491, as amended
by Executive Order 11838 of February 6, 1975. At the close ofthe period,
there existed within the Bureau grants of exclusive recognition to 17
AFL-CIO affiliate unions covering 25 craft units, 1 noncraft unit, 1 guard
unit, and 1 GS clerical/technical unit.
Position management
During fiscal 1976, the Bureau's position management program was
reviewed by the Office of Personnel, Department ofthe Treasury. Under
the Bureau's program, a Position Management Board (PMB) was
established to coordinate manpower planning activities, recommend
policy and procedures to the Director, and allocate manpower. Reviews
by the PMB were cited by the Department as constituting an excellent
means of assuring utilization of sound position management principles and
techniques. The report also indicated excellent participation in the
program by both management officials and industrial relations specialists.
Management development
The current management development program emphasizes the identification and selection of individuals possessing those characteristics
indicating potential for effective management in the Bureau of Engraving
and Printing. For each managerial position filled, the proportion of
managerial ability versus technical expertise is established. The evalu-
ADMINISTRATIVE REPORTS
1 59
ation-selection process includes identification of managerial skills by
means of the assessment center technique.
Developmental positions have been identified for those with assessed
managerial potential. The selection process for such positions stresses
general managerial skills. Individual development plans designed for each
candidate highlight the training and experience necessary for movement
into the management sphere.
Seminars have also been developed for new and advanced managers
which are designed around structural, technological, and management
issues impacting upon the Bureau's operational effectiveness.
Personnel management reviews
A special study compared the Bureau's security guard position with
similar positions in other agencies in terms of types of security programs
operated, duties performed, grade levels, and pay structures. Analysis also
included such factors as age distribution, employee turnover, average pay,
differentials, and overtime during the past 5 years. Several courses of
action were explored which would permit upgrading the guard position
and/or its reclassification in the police series.
The Bureau participated in the Civil Service Commission's review of
draft standards for the new factor evaluation system (FES) of classification. Thirteen positions were reviewed, audited, and redescribed in the
FES format. These positions represent approximately 125 incumbents in
the clerical, secretarial, professional, and technical series. In anticipation
of this new system, FES training has been incorporated into the Bureau's
basic supervisory training program.
A study was initiated to ensure accurate and expeditious processing of
retirement applications. Findings indicated the need for a standard
operating procedure manual and a monitoring system, which are now in
the developmental stages.
Upward mobility
Thirteen employees were selected for placement into identified upward
mobility positions, all of which are GS positions affording promotional
opportunities beyond the target level. The process for selection into these
positions included the assessment center technique, which was reviewed
in the Civil Service Commission's Technical Memorandum 75-5, "An
Overview of the Upward Mobility Assessment Center for the Bureau of
Engraving and Printing."
A comprehensive review ofthe first year's program was made, resulting
in revisions of the upward mobility program and promotion policies.
Provisions have been made for greater emphasis and an improved
framework for career counseling, a mechanism for acquiring basic skills
judged to be lacking in some program participants, and greater flexibility
in the application process as well as the selection process.
Awards
During fiscal 1976, 1,228 employees received special achievement
awards and 30 employees received high quality pay increases, with
nonrecurring savings of $143,394 being realized.
Under the employee suggestion phase ofthe program, 183 suggestions
were received, of which 55 were adopted, with savings of $423,516.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
During the transition quarter, 50 employee suggestions were received for
consideration.
Eighteen superior work performance awards were presented to summer
employees.
The awards program is being reviewed with emphasis on the concept of
group awards based on the achievement of measurable objectives which
can be linked to organizational improvement. Experimentation with
production work teams has been conducted in preparation for broader
implementation of this group concept.
A comprehensive study has been completed which assesses the impact
of the mandatory linkage of the awards program with the performance
evaluation system on the effectiveness of both programs. Major reviews
of both programs are expected.
Service to the public
The exhibit phase of the Bureau's public relations program was
accelerated to accommodate Bicentennial-related numismatic and philatelic events for the period from July 1, 1975, to the end of calendar year
1976. Security exhibits were provided for 15 scheduled activities. The
Bureau produced a series of three distinctive Bicentennial souvenir cards
which were released for first-day sale at the American Stamp Dealers
Association's National Postage Stamp Show, New York, N.Y.; the
International Philatelic Exhibition, Philadelphia, Pa.; and Stamp Expo '76,
Los Angeles, Calif. In addition, souvenir cards were issued in conjunction
with exhibit participation at the American Numismatic Association's
annual conventions at Los Angeles, Calif, and New York, N.Y., as well
as the Government-sponsored U.S. Bicentennial Exposition on Science
and Technology at Cape Canaveral, Fla. Sales of souvenir cards not only
responded to expressed public interest but also served to defray costs of
participation by the Bureau at these events.
For the 15-month period, a total of 778,830 visitors utilized the public
tour facilities of the Bureau, which continues to be one of the major
attractions for visitors to the Washington area. The heavy influx of
Bicentennial tourists during the summer months necessitated the issuance
of admission tickets on a first-come-first-served basis, to assure equity and
to accommodate the greatest number of persons.
OFFICE OF EQUAL OPPORTUNITY PROGRAM
Total program operations
The Office of Equal Opportunity Program is under the immediate
supervision of the Assistant Secretary (Administration). It assists the
Secretary and the Assistant Secretary (Administration) in the formulation,
execution, and coordination of policies related to equal opportunity for
Treasury employees and employment policies and programs of commercial banks, savings and loan associations, - savings banks, and other
financial institutions that are Federal depositaries or issuing and paying
agents of U.S. savings bonds and savings notes.
ADMINISTRATIVE REPORTS
16 1
Federal equal employment opportunity program
Improvement in the administration of Treasury's equal employment
opportunity program was highlighted by increased emphasis on the
Federal women's program and Spanish-speaking program. In conjunction
with the observance of International Women's Year, a variety of new
techniques were employed to increase the awareness ofthe need for equal
employment opportunities for women. Some ofthe techniques employed
included: workshops, seminars, and films on career development, upward
mobility, and job interviewing skills; equal employment opportunity
awareness sessions for managers; establishment of child care information
centers; and a restructuring of Federal women's program committees.
Actions to strengthen the Spanish-speaking program include restructuring of the Spanish-speaking Program Coordinators Committee, development and utilization of specialized recruitment teams, and more reliance
on the cooperative education program to increase the representation of
Spanish-speaking employees. In addition, a 2-day seminar for bureau
special emphasis program coordinators (Spanish-speaking program coordinators, upward mobility program coordinators, and Federal women's
program coordinators) was held in February 1976 to build a team
approach to the development and implementation of a results-oriented
program.
A review of the EEO complaint processing system resulted in publication of the new appendix to the Department's equal opportunity regulations for the processing of complaints of discrimination, including
procedures for age discrimination compliants. The Department still ranks
among the best of the Federal agencies in the expeditious processing of
complaints.
To increase the employment of minorities and women in professional
positions, recruitment goals were established for a variety of occupations
including revenue officer, revenue agent, special agent, attorney, and
accountant.
The following table of Treasury full-time employment statistics for the
period December 1968 through November 1975 shows a steady growth
in minority employment indicating success in implementing the Department's affirmative action plan. These statistics show that black employment increased by 65.8 percent and Spanish-speaking by 271.8 percent
over an 8-year period.
Contract compliance
During fiscal 1976, the Treasury contract compliance program instituted a variety of changes to improve operating efficiency and to assure
uniform emphasis in the conduct of compliance reviews. A Standard
Compliance Review Report Format (SCRRF) was developed to assure the
full compliance review coverage as required by the Office of Federal
Contract Compliance. Codified regulations and requirements as set forth
under Executive Order 11246 were disseminated to all banks in addition
to a contract compliance handbook. An additional regional office was
opened in New York which will service the financial institutions in the
State of New York and in the New England States.
Each regional office has instituted an affirmative action orientation
program for banks scheduled for compliance reviews during the next
quarter. This program presents bankers with an advance notice of the
matters to be covered during the review and provides technical assistance
162
1976 REPORT OF THE SECRETARY OF THE TREASURY
Department of the Treasury full-time employment by minority group status
1972
1974
1975
Comparison
1974-1975
Comparison
1968-1975
1968
1970
82,155
88,351 102,813 M 14.686 122,648
11,777
1.052
79
482
68,765
13,234
1,489
104
596
72,928
15,619
2,247
128
813
84,006
18,216
3,437
175
1,230
91,628
19,533
3,912
192
1,485
97,526
1,317
475
17
255
5,898
72
13.8
.1
20.7
6.4
7,756
2,860
113
1,003
28.761
65^
271.8
143.0
208.0
41.8
19,120
18,867
24.126
25,526
28,174
2,648
10.3
9,054
47.4
4,947
255
25
80
13,813
5,156
398
33
%
13,184
5,904
791
45
159
17.227
6,679
1,065
84
181
17,517
6,664
1,168
57
228
20,057
M5
103
-27
47
2,540
^1
9.7
-32.1
26.0
14.5
1,717
913
32
148
6,244
34!7
358.0
128.0
185.0
45.2
19,480
23,826
27,601
33,295
33,064
-231
-.6
13,584
69.7
2?7i08
264
26
141
16,341
3^67
422
30
183
19.724
4^90
551
35
249
22,476
5369
1,008
50
445
26,223
5^822
960
49
437
25,796
253
-48
-1
-8
-427
41
-4.8
-2.0
-1.8
-1.6
TJU
696
23
2%
9,455
uTo
263.6
88.5
209.9
57.9
28,893
28.960
32,321
35,580
36,639
1.059
3.0
7,746
26.8
1,144
332
21
186
27,210
1.283
389
30
203
27,055
1.587
519
34
222
29,959
2.050
803
44
368
32,315
2.406
820
47
491
32.875
356
17
3
123
560
VTA
2.1
6.8
33.4
1.7
1,262
488
26
305
5,665
110.3
147.0
123.8
164.0
20.8
9,491
10,665
12.037
13,257
13,328
71
.5
3,837
40.4
Tsl
35
3
55
9,247
218
54
5
67
10,321
307
88
8
90
11,544
399
136
16
105
12,601
435
130
14
131
12,618
36
-6
-2
26
17
9J0
-4.4
-12.5
24.8
.1
284
95
11
76
3,371
65l
271.4
366.7
138.1
36.5
No.
Total employees*
Black
Spanish-American
American Indian
Oriental
Other
GS 1-4:
Total
Black
Spanish-American
American Indian
Oriental
Other
GS 5-8.
total
Black
Spanish-American
American Indian
Oriental
Other
GS9-12:
Total
Black
Spanish-American
American Indian
Oriental
Other
GS 13-18:
Total
Black
Spanish-American
American Indian
Oriental
Other
Percent
7,962
7.0
No.
40,493
Percent
49.2
* The totals include wage board personnel. Grade comparisons are for GS series only.
r Revised.
NOTE.—For figures for 1%9, 1971, and 1973, see 1974 Annual Report, p. 116.
by the Compliance Staff in preparing necessary data. The orientation
program has facilitated the review process and has clarified innumerable
questions of how to prepare materials and reports required by the Office
of Federal Contract Compliance.
Regional managers and headquarters staff have participated in each of
the American Bankers Association's 11 affirmative action seminars and in
similar seminars conducted by the National Association of Bank Women.
These meetings have enabled Treasury, with minimum staff, to reach
seyeral thousand decisionmakers and especially those responsible for
developing and implementing the banks' affirmative action programs.
During fiscal 1976, 15 show cause notices were issued to financial
institutions as the first step in a possible sanction proceeding. In each
instance where there was either no affirmative action plan and program
or refusal to comply with the requirements, these notices were sufficient
to effect results and subsequently were withdrawn.
Bank minority employment continues to increase impressively. In the
latest data submitted to the Joint Reporting Committee, minority
employment is now 16 percent, or 164,437 of a total of 1,042,984
employees, broken down as follows: 97,116 blacks; 2,463 American
ADMINISTRATIVE REPORTS
1 63
Indians; 19,779 Orientals; and 45,079 Hispanic Americans, compared
with under 40,000 employed in 1968 of a total of 800,000, representing
22,000 blacks; 12,000 Hispanic Americans; 5,000 Orientals; and 600
American Indians.
FEDERAL LAW ENFORCEMENT TRAINING CENTER
The Federal Law Enforcement Training Center (FLETC) is an
interagency training facility formally established as an entity within the
Department ofthe Treasury on March 2, 1970, under the supervision of
the Assistant Secretary (Enforcement, Operations, and Tariff Affairs).
The Department of the Treasury, as lead agency for operating the
Center, controls the Center's day-to-day activities. A Board of Directors,
comprised of representatives at the Assistant Secretary level from the
major departments which have agencies participating in the Center, and
on which there are nonvoting members from the Office of Management
and Budget and the Civil Service Commission, determines FLETC training
policy, programs, criteria, and standards, and resolves conflicting training
requirements.
The Center conducts basic and common advanced courses in criminal
investigator and police training for participating agencies and furnishes
facilities for the participating agencies to conduct advanced, inservice,
refresher, and specialized (AIRS) training for their own law enforcement
personnel. At present, 28 law enforcement organizations and units,
representing most major executive departments and independent Federal
agencies and the legislative branch, participate in Center programs.
In the 15-month period, participating status was extended to the
Departments of Health, Education, and Welfare and of Housing and
Urban Development, the Office of Investigation of the Department of
Agriculture, and the Federal Protective Service of the General Services
Administration. The Center also furnished training on a space-available
basis to personnel from 23 other Federal, State, and local agencies.
At the end of the transition quarter, negotiations were continuing with
the Department of Justice for the transfer to the FLETC of all training
programs for law enforcement personnel ofthe Immigration and Naturalization Service.
Training facilities
The location of the Federal Law Enforcement Training Center was
initially planned on federally owned land near Washington, D . C , but a
lawsuit filed underthe National Environmental Policy Act (NEPA) caused
a 3-year delay in beginning construction of the facility and increased the
estimated cost. Therefore, at the request of the Congress, Treasury, in
conjunction with the General Services Administration, reviewed available
Federal installations in the continental United States to determine if any
could be utilized effectively for the law enforcement training program.
Based on the results of that review and Secretary Simon's recommendation, the Congress in May of 1975 authorized the expenditure of $30
164
1976 REPORT OF THE SECRETARY OF THE TREASURY
million for the adaptation ofthe former Glynco Naval Air Station, located
on the southeast coast of Georgia near the city of Brunswick, as the
Center's facility. Initial saving to the Government by locating this
installation at Glynco was close to $37 million.
During the summer of 1975, the Center was able to renovate the
essential portions ofthe facility and, in September 1975, began operations
at Glynco. The Center was officially dedicated on September 12, 1975, by
Secretary Simon, in the presence of Senators Talmadge and Nunn and
Congressman Ginn, of Georgia; Congressman Steed, chairman of the
House Appropriations Subcommittee for Treasury; Governor Busbee of
Georgia; and Senators Bellmon and Domenici and Congressmen Holland
and Levitas. Additional renovation is continuing and one of three existing,
partially constructed dormitories has been completed.
A design master plan for the permanent facilities ofthe Center has been
approved. The plan will concentrate basic course facilities in a core
walking campus four blocks in size. It calls for accommodations for a
constant population of 750 students; construction of a classroom building,
a 72-point indoor firing range, a permanent driver training range, and
additional physical training facilities; and the completion of the other
dormitories begun but not completed by the Navy.
The Center's present facilities include buildings for administration,
classrooms and training, dining, dormitories, instructor offices, procurement and supply, facilities engineering and maintenance, motor pool
service station and garage, printshop, gymnasium, student center, convenience store, and auditorium; an outdoor firing range; an interim driver
training range; a practical exercise project, which includes raid houses and
a mock criminal court facility; an aquatic training pool; and athletic fields
and courts.
Training programs
Criminal investigator training.—During the 15-month period, 25 classes
were trained by the Criminal Investigator Training Division (CITD), with
a total of 982 students graduating. Of these classes, two were completed
in Washington, D . C , before the Center began operations at Glynco. The
Criminal Investigator 7-week basic training program includes instruction
in criminal law, criminalistics, legal and investigative techniques, and
communication skills. In addition, the CITD staff conducted common
AIRS training in advanced law enforcement photography referred to later
in this report.
Police training.—The Police Training Division (PTD) conducted 30
classes in the basic 5-, 6 1/2-, 8-, and 12-week courses, graduating 1,002
officers. The 6 1/2-week basic course was initiated during fiscal 1976 for
those agencies whose training needs were not as extensive as other
participating agencies. Police subjects include criminal law, human
relations, criminalistics, arrest techniques, and communication skills. In
addition, 2- and 4-week AIRS programs have been developed by the PTD
staff and will be scheduled during fiscal 1977. The PTD also provided
assistance in AIRS courses administered by the participating agencies.
Special training.—With the transfer of operations from Washington,
D . C , to Glynco, and the resulting expansion in Center staff and programs,
the Special Training Division was established to provide for programs in
physical training, firearms training, and driver training.
ADMINISTRATIVE REPORTS
1 65
The physical training program serves trainees in the basic courses as well
as many AIRS programs. Courses consist of training in arrest and selfdefense tactics, physical fitness and agility, drownproofmg/water survival,
emergency medical techniques, first aid, cardiopulmonary resuscitation,
and aerobic fitness. The Center's physical training facilities consist of a
gymnasium, aquatic training pool, athletic fields, exercise room, and
classroom, all of which were renovated from existing facilities.
The firearms training program covers the basic fundamentals of
marksmanship, safety, police-type combat firing, and riot gun training, for
all trainees in the basic program and those in several AIRS programs.
The driver training program serves police training students and some
AIRS classes. In fiscal 1977, the training will be included in the criminal
investigator training program. Available courses include basic driving
course, advance basic with four-wheel drive course, defensive driving, bus
training, patrol wagon training, and an 80-hour instructors course.
A significant achievement in the driver training program has been the
avoidance of any physical injuries since driver training was incorporated
as a Center program in 1974.
Advanced, inservice, refresher, and specialized training.—As part of its
mission, the Center provides facilities to the participating agencies for the
conduct of their advanced, inservice, refresher, and specialized training
programs.
In fiscal 1976 and the transition quarter, 3,063 students, representing
6,442 man-weeks of training, participated in AIRS programs at Glynco.
Agencies conducting programs during this period were Bureau of Alcohol,
Tobacco and Firearms, IRS-Intelligence, U.S. Customs Service, National
Park Service, U.S. Park Police, U.S. Marshals Service, U.S. Fish and
Wildlife Service, National Marine Fisheries Service, and Department of
State.
In addition, the Center staff conducted 6 classes in advanced photography, graduating 62 students. Common AIRS courses in advanced law
enforcement refresher (4 weeks) and basic law enforcement refresher (2
weeks) will be added in fiscal 1977 within the Police Training Division.
Instructional services and curriculum development
The Instructional Services Division supported the instructional staff
with systems for use in critiquing, evaluating, and reviewing practical
exercises; design, illustration, and production of graphic arts for classroom
programs; an improved management system for printed materials,
audiovisual software, and audiovisual hardware; a doubling ofthe Center's
circulating library collection and an expansion of operating hours; and
development of a photographic service for instructional programs and
public information. Goals for the coming year include addition of
individual learning carrels to the library, updating of classroom controls
for instructional aids and lighting, and improved productivity in present
services.
Extensive work continued in improving and updating curricula and
adapting courses to the needs of new participating agencies.
Management improvement
A major accomplishment for the Center has been its ability to train more
students in improved facilities at a lower overall cost, thus increasing the
quality of law enforcement throughout government. By housing and
1 66
1976 REPORT OF THE SECRETARY OF THE TREASURY
feeding students within the educational complex, the overall impact ofthe
training was enhanced and savings of approximately $5 million were
realized as compared with payment of full per diem.
FISCAL SERVICE
Bureau of Government Financial Operations
The functions ofthe Bureau are Government-wide in scope. It disburses
by check, cash, or other means of payment for most Government agencies;
settles claims involving loss or forgery of Treasury checks; manages the
Government's central accounting and financial reporting system by
drawing appropriation warrants, by maintaining a system of accounts for
integrating Treasury cash and funding operations with the financial
operations of disbursing and collecting officers and of Government
program agencies including subsystems for the reconciliation of check and
deposit transactions, and by compiling and publishing reports of budget
results and other Government financial operations; provides banking and
related cash services involved in the management of the Government's
cash resources; under specified provisions of law is responsible for
investing various Government trust funds; administers certain U.S.
currency matters such as directing the various aspects of the issue,
redemption, and custody of U.S. currency, and overseeing the destruction
of currency unfit for circulation; provides central direction for various
financial programs and practices of Government agencies; and directs a
variety of other fiscal activities.
Disbursements and check claims
Disbursing operations.—A total of 665.9 million checks, savings bonds,
and electronic funds transfer (EFT) payments were produced by the
Division of Disbursement's 11 disbursing offices for more than 1,700
Government administrative offices from July 1, 1975, through June 30,
1976. Close to 98 percent of these payments were computer produced.
The payments were produced at an average unit cost of $().0428. In
addition, more than 121 million computer-generated Federal tax deposit
(FTD) forms were produced and mailed. In the transition quarter, 150.3
million checks, savings bonds, and EFT payments were produced; more
than 27 million FTD forms were produced and mailed.
Significant achievements in fiscal 1976 and the transition quarter are as
follows:
1. Treasury's EFT recurring payment system, a major element of the
direct deposit system, was implemented. This systern provides capability
for the rapid computer-assisted transfer of funds between the Department
ofthe Treasury, Federal Reserve banks, and member banks. Four Federal
Reserve offices implemented EFT processing under a pilot program. Over
2.1 million EFT payments were processed (for issuance through the
payment date of July 3, 1976) on behalf of recipients of social security,
supplemental security income, and disability insurance benefits. During
ADMINISTRATIVE REPORTS
1 67
the transition quarter, over 5.9 million EFT payments were processed (for
issuance through the payment date of October 3, 1976) through 21 of 31
Federal Reserve offices designated as processing offices and representing
11 of the 12 districts. By the end of calendar year 1976, the remaining
district. New York, will have been included in the system. Conversion of
the civil service annuity file for EFT processing became effective with the
July 1, 1976, payment date. Over 75,000 civil service EFT payments were
processed for issuance through the payment date of October 1. Direct
deposit of funds in financial organizations for revenue sharing payments
was introduced during July 1976 with 635 direct deposit payments dated
July 6. There were 18,317 direct deposit payments dated October 4. Of
these, 13,008 were EFT payments, the first under revenue sharing.
During September 1976 certain deposits and nonbenefit payments such
as grants, investments, replacement of lost composite checks, and
unemployment compensation payments to States were included in the
EFT system. Related terminal equipment was installed in headquarters
and the Washington Disbursing Center to transmit commencing September 17 the financial data using the Federal Reserve communications
system.
2. Of 37 agencies working toward automating their accounts payable
by submitting magnetic tapes to disbursing offices for the issuance of
vendor and miscellaneous payments, 9 automated in fiscal 1976, 2 during
the transition quarter. Under the automated system, computer-generated
cards which accompany many ofthe checks to be mailed to the addressee
provide the check recipient with a permanent record of the purpose or
object ofthe payment. Many objects can be included on one card, allowing
a single payment for all. Use of the card eliminates the time-consuming
manual processing of large quantities and various sizes of paper notices by
the agencies and the disbursing offices, and reduces the number of
inquiries concerning the purpose of payments.
3. Eleven additional production model check-wrapping systems were
installed and became operational. The system manufactures an envelope
from a roll of paper while simultaneously inserting a check and as many
as three separate inserts. The envelope costs for mailing checks are
consequently reduced. Approximately 324 million checks were wrapped
in fiscal 1976, resulting in a savings of approximately $500,000.
4. During the latter part of January 1976, a new system was implemented for receipt of certain social security nonreceipt claims on tape and
submission of stop payment data to the Division of Data Processing on
magnetic tape. This new system reduced most ofthe clerical keypunching
and typing functions required under the previous system of receiving paper
claims and submitting paper stop payment requests and related punched
cards to the Division of Check Claims. In addition, a magnetic tape is sent
to the Washington Disbursing Center for issuance of substitute checks in
lieu of paper documents previously furnished. The new system reduces
clerical errors, speeds up the processing of nonreceipt claims and the
issuance of substitute checks, and reduces the amount of paper used. Once
the system is fully operational and the Social Security Administration is
able to submit all claims on magnetic tape, it is estimated that 12 man-years
and an annual savings of approximately $150,00() will be realized.
The following table is a comparison ofthe workload for fiscal years 1975
and 1976 and the transition quarter:
168
1976 REPORT OF THE SECRETARY OF THE TREASURY
Classification
Operations financed by appropriated funds:
Checks and electronic funds transfers:
Social security benefits
Supplemental security income payments
Veterans benefits
Income tax refunds
Veterans national service Ufe insurance dividends
Other
Savings bonds
Adjustments and transfers
1975
1976
T.Q.
Total workload—reimbursable items
Total workload
360.589.208
53.826.563
86,049,429
68,407,107
2,965,693
70.690.757
8,032.199
334.380
92.004,802
13,888,762
18,905,704
2,498,760
47,047
17,639.001
1,960.330
78.841
711.790.725
Operations financed by reimbursements:
Railroad Retirement Board
Bureau of the Public Debt (General Electric Co. bond
program)
340.024.721
50.683.926
85.069.062
• 122.751.650
4,248,518
2 100,754.343
7,918,396
340,109
650.895,336
147,023,247
13.767.833
13.876.014
3,428,623
1,463,114
1,558.599
15,230,947
15.434.613
3.428.623
727,021,672
666,329,949
150,451,870
« Includes 54,612,071 tax rebates.
2 Includes 30,291,958 special $50 payments.
Settling check claims.—During fiscal 1976, the Division of Check Claims
processed 1.5 million requests to stop payment on Government checks.
This resulted in 723,043 paid-check claims acted upon, including 108,097
referred to the U.S. Secret Service for investigation because of forgery,
alteration, counterfeiting, or fraudulent issuance and negotiation. Reclamation was requested from those having liability to the United States on
143,808 checks.
During the year, 68,414 paid-check claims resulted in settlement checks
to payees totaling $16.1 million; 4,885 claims resulted in settlement
checks to endorsers totaling $1.3 million; and 33,911 claims resulted in
payments to other agencies of $7.1 million for death and nonentitlement
cases. In addition, 258,321 substitute checks valued at $ 132.9 million were
authorized to replace checks that were lost, stolen, destroyed, or not
received.
During the transition quarter, the Division processed 395,857 requests
to stop payment on Government checks. This resulted in 210,990 paidcheck claims acted upon, including 26,095 referred to the U.S. Secret
Service for investigation. Reclamation was requested on 48,131 checks.
During the quarter, 20,569 paid-check claims resulted in settlement
checks to payees totaling $7.2 million, 1,932 claims resulted in settlement
checks to endorsers totaling $490,287, and 14,560 claims resulted in
payments to other agencies of $3.4 million for death and nonentitlement
cases. In addition, 44,330 substitute checks valued at $32.0 million were
authorized.
The project to further automate check claims operations is continuing.
Stop payment requests for social security and supplemental security
income checks are now submitted on tape and automatically processed by
the computer.
Government-wide accounting
Government accounting systems.—The accounting information management system (AIMS) project, a large-scale systems development effort
to redesign and modernize the accounting and financial reporting systems
of the Bureau of Government Financial Operations, has attained significant milestones toward implementation of several important subsystems.
ADMINISTRATIVE REPORTS
1 69
Development ofa prototype electronic funds transfer telecommunications
network was started in July 1975, and is now nearing the completion stage.
In September 1976, the computer-to-computer link became operational
between the Federal Reserve Bank of New York and the Treasury for
transmission of payment and deposit messages, for transfer of funds
between reserve accounts, and for performing accounting functions on the
transactions as they occur. In a related area, the deposits-in-transit
subsystem, a control, tracking, and reporting system designed to account
for moneys received by or for the Government, has also reached the
implementation stage. Standardized deposit and debit voucher forms,
suitable for automated input processing, have been manufactured and are
being distributed to all Federal agencies and to the banking community.
In a parallel test operation, several agencies having a large volume of
collection activity each month are submitting detail deposit and debit data
on magnetic computer tape, and it is expected that these agencies will
begin live submissions on magnetic tape by January 1977. The conversion
of the central accounting system from second-generation magnetic tape
files to a third-generation data base environment has been progressing on
schedule. The analysis ofthe current system and initial design ofthe new
data base was completed. In fiscal 1977, the data base design will be
finalized and the data base created.
The Secretary approved a plan which calls for the development and
publication of consolidated financial statements for the Government on an
accrual basis. However, there are major conceptual issues which must be
studied and resolved before useful and reasonably reliable consolidated
financial statements can be prepared in accordance with generally
accepted accounting principles applicable to the Federal Government.
Accordingly, the Advisory Committee on Federal Consolidated Financial
Statements was formed to advise, recommend, and lend vital staff
assistance to the Secretary. The committee met in May and September of
1976 to discuss such conceptual issues as the format and coverage ofthe
statements, pension fund liabilities, and valuation of assets, depreciation,
and contingencies. Many of the broad conceptual issues are expected to
be resolved before June 1977. A target date of February 1978 was set for
publication of the first official report which will cover the fiscal year
ending September 30, 1977.
Volume I of the Treasury Fiscal Requirements Manual for Guidance of
Departments and Agencies (TERM) was reissued in its entirety. A
photocomposed camera-ready copy of the TERM was produced through
the use of a computer time-sharing text-editing system. The reissue of the
manual furnished agencies with a single updated volume, and provides a
more effective reference tool. Procedures were prescribed in volume I
concerning: (1) Special fiscal yearend and transition quarter closing
operations due to enactment of the Congressional Budget Act of 1974
(Public Law 93-344); (2) discontinuance of loan account reporting; (3)
reports by agencies on unexpended balances of appropriations and funds;
(4) information previously contained in Treasurer's Memorandums on
requisitioning, preparation, and issuance of Government checks; (5)
processing payments in the event of expired continuing resolutions; (6)
reclassification ofthe —F3875 ''Budget Clearing Account (Suspense)"
from governmental to proprietary; (7) elimination ofthe requirement that
appropriation warrants be countersigned by GAO; (8) elimination of
funded checking accounts; (9) reporting requirements for grants, loans.
1 70
1976 REPORT OF THE SECRETARY OF THE TREASURY
credits, and contingent liabilities involving foreigners; and (10) wage and
tax information to be provided to taxing authorities in compliance with the
Privacy Act of 1974. Volume II of the TERM, "Procedural Instructions
for the Guidance of Federal Reserve Banks and General Depositaries
Relating to Responsibilities Toward the Department ofthe Treasury," was
released in part containing introductory material and procedures concerning the electronic funds transfer system. Also issued was Volume III ofthe
TFRM, ''Unfit Currency Regulations for the Guidance of Federal Reserve
Banks."
The simplifled intragovernmental billing and collection (SIBAC) system
was expanded to include motor pool and supply billings processed by the
General Services Administration, Federal Supply Service. Monthly
billings for motor pool charges were implemented in November 1975, and
bimonthly bUlings for supplies began in August 1976.
The accounting function for redeeming agency securities and interest
payments for all remaining special agent accounts in Treasury, which had
been maintained by the Bureau of Government Financial Operations, was
transferred to the Bureau ofthe Public Debt effective May 1, 1976. Audits
of agency securities and interest payments will continue to be performed
by the Bureau of the Public Debt.
In response to a request from Congress for a report on the effect of
extending the city income tax withholding provisions of Public Law
93-340 to cities and other jurisdictions with fewer than 500 Federal
employees, a survey was sent to all agencies requesting cost data. From
this study. Treasury concluded that while the administrative costs for
withholding city income taxes in the jurisdictions with fewer than 500
Federal employees would be proportionately higher than for the over-500
areas, they would be reasonable in relation to the benefits to be gained by
the localities.
To commemorate the Bicentennial, the American Revolution Bicentennial Administration (ARBA), in cooperation with the Bureau ofthe Mint,
designed and produced gold medaUions in three sizes for public sale. The
Bureau of Government Financial Operations developed internal procedures to assure proper payment, transfer, and financial accounting and
reporting for the gold needed to produce the medallions. Treasury realized
a profit of $1.6 million from the sale of 19,830 fine troy ounces of gold
to ARBA at a total sales price of $2.4 million.
Assets and liabilities in the account ofthe U.S. Treasury.—Table 53 in the
Statistical Appendix shows the balances at the close of fiscal years 1975
and 1976 and the transition quarter of those assets and liabilities
comprising the account ofthe U.S. Treasury. The assets and liabilities in
this account include the cash accounts reported as the "operating
balance" in the Daily Treasury Statement. Other assets included in the
account of the U.S. Treasury are gold bullion, coin, coinage metal, paper
currency, deposits in Federal Reserve banks, and deposits in commercial
banks designated as Government depositaries.
Treasury's gold balance was $11,619.9 mUlion at the beginning ofthe
fiscal year, $ 11,598.3 million and $ 11,597.8 at June 30 and September 30,
respectively. Sales for gold auctioned on June 30, 1975, amounted to
$21.1 million and are reflected in the balances. Sales were made to the
American Revolution Bicentennial Administration amounting to
$419,235 in the fiscal year and $418,000 in the transition quarter.
Stocks of coinage metal stood at $402.1 million at beginning of fiscal
ADMINISTRATIVE REPORTS
17 1
1976. The balance was $333.5 million at June 30 and $319.1 million at
September 30. Such stocks included silver, copper, nickel, zinc, and alloys
of these metals which are not yet in the form of finished coins.
The number of depositaries of each type and their balances on June 30
and September 30, 1976, are shown in the following table:
June 30, 1976
Number of
accounts
Depositaries I
Federal Reserve banks and branches
36
Other depositaries reporting directly to the Treasury:
Special demand accounts
Otheri
Domestic
Foreign 4
9
17
44
1,489
13,7%
15,392
Balance
Depositaries reporting through Federal Reserve
banks:
General
SpeciaKTreasury tax and loan accounts)
Total
2$12,209,559,463
: Sept. 30, 1976
Number of
accounts
Balance
36
3$13,482,428,321
6.690.000
9
527.430,000
33,761,550
13,814,462
17
44
35,859,501
9,415,967
46,377,211
2,854,010,572
1,426
13,072
26,431.269
4,118,651,246
15,164.213,257
14,605
18,200,216,303
1 Includes only depositaries having balances with the U.S. Treasury. Excludes those designated to furnish official
checking account facilities or other services to Govemment officers but not authorized to maintain accounts with the
Treasury. Banks designated as general depositaries are frequently also special depositaries, hence the total number of
accounts exceeds the number of banks involved.
2 Includes checks for $234,510,600 in process of collection.
3 Includes checks for $183,541,659 in process of collection.
4 Principally branches of U.S. banks and of the American Express Intemational Banking Corp.
Government officers deposit moneys which they have collected to the
credit of the U.S. Treasury at Federal Reserve banks or at designated
Government depositaries, domestic or foreign. Certain taxes are also
deposited directly by the employers or manufacturers who withhold or pay
them. All payments are withdrawn from the U.S. Treasury account.
Cash deposits and withdrawals affecting the Treasury's operating
balance are summarized in the following table for fiscal years 1975 and
1976 and the transition quarter.
Deposits, withdrawals, and halances in the U.S. Treasury account
[In millions of dollars]
Fiscal
Operating balance at beginning of period
Cash deposiis:
Gross lax collections (selected)
Public debt receipts
Gas and oil lease sale proceeds
Other
Total cash deposits
Cash withdrawals:
Public debt redemptions
Letter of credit transactions:
Medicare
HEW granis
Unemployment insurance
Other (includes refunds and 1975 rebates)
Total cash withdrawals
Operating balance at close of period
Fiscal
1975
1976
TQ.
9,158
7,589
> 14,828
291,746
388.251
3.252
271,155
299.802
462.771
1,224
276,869
75,039
121,128
1,126
13,642
954,404
1,040,663
210,935
348.116
393,594
106,354
13,294
16,424
11.915
566,224
15,903
20,862
16,339
586,720
4,178
5.651
3.101
89,065
955.973
1.033,417
208,349
7,589
14,835
17,414
I Total operating balance excludes "other demand deposiis" effeclive July 1, 1976.
Investments.—The Secretary ofthe Treasury, under specific provisions
of law, is responsible for investing various Government trust funds. The
Department also furnishes investment services for other funds of Govern
172
1976 REPORT OF THE SECRETARY OF THE TREASURY
ment agencies. At the end of the transition quarter. Government trust
funds and accounts held public debt securities (including special securities
issued for purchase by major trust funds as authorized by law), Government agency securities, and securities of privately owned Governmentsponsored enterprises. See the Statistical Appendix for tables showing the
investment holdings by Government agencies and accounts.
Issuing and redeeming paper currency.—The Treasury is required by law
(31 U.S.C. 404) to issue U.S. notes in amounts equal to those redeemed.
In order to comply with this requirement in the most economical manner,
U.S. notes are issued only in the $ 100 denomination. U.S. notes represent
only a very small percentage of the paper currency in circulation.
Federal Reserve notes constitute over 99 percent of the total amount
ofcurrency. The Bureau of Engraving and Printing prints and holds these
notes in a reserve vault until needed by the Federal Reserve banks. The
Bureau of Government Financial Operations accounts for Federal Reserve
notes from the time they are delivered to the reserve vault by the Bureau
of Engraving and Printing until redeemed and destroyed.
The Bureau also handles all claims involving burned or mutilated
currency. During fiscal 1976, payments totaling $9.0 million were made
to 51,603 such claimants and $2.4 million to 12,094 claimants during the
transition quarter.
A comparison of the amounts of paper currency of all classes, issued,
redeemed, and outstanding during fiscal years 1975 and 1976 and the
transition quarter follows:
[In thousands]
Fiscal 1975
Pieces
Outstanding July 1
Redemptions during period
Outstanding end of period
6.475.293
3,062,447
2,729.614
6,808,126
Amount
$70,100,055
22,478,294
14.967.262
77.611,087
TQ.
Fiscal 1976
Pieces
Amount
6,808,126 $77,611,087
3.207.354
22.275,951
2.724,415
15.287.064
7.291.065
84.599.973
Pieces
Amounl
7.291.065 $84,599,973
711,357
5,164.905
660,728
3,575,263
7 341,695 86,189,614
Details ofthe issues and redemptions for fiscal 1976 and the transition
quarter and ofthe amounts outstanding at the end ofeach period are given
by class of currency and by denomination in a table in the Statistical
Appendix. Other tables in that volume give further information on the
stock and circulation of currency and coin in the United States.
Data processing.—During the year, 822.6 million Treasury checks
issued worldwide by civilian and military disbursing offices were paid and
reconciled by the electronic check payment and reconciliation system,
and during the transition quarter 174.6 million.
Improving the automated central accounting system embracing all cash
financial operations of the Government continued as an ongoing project.
This system, which brings together all of the cash transactions of the
Federal Government, is the data base for Federal budget results published
in the Monthly Treasury Statement of Receipts and Outlays of the U.S.
Government and in the annual Combined Statement of Receipts, Expenditures and Balances of the U.S. Government.
In addition to providing computer services for entities within the
Bureau, the Division of Data Processing converted about 45 million
Federal tax deposits to magnetic tape for the Internal Revenue Service in
fiscal 1976 and nearly 12 million in the transition quarter.
173
ADMINISTRATIVE REPORTS
Banking and cash management
Federal depositary system.—The types of depositary services provided
and the number of depositaries for each of the authorized services as of
June 30, 1975, and June 30 and September 30, 1976, are shown in the
following table:
Type of service provided by depositaries
Receive deposits' from taxpayers and purchasers of public debt securities for
credit in Treasury tax and loan accounts
Receive deposits from Government officers for credit in Treasury's general
accounts
Maintain checking accounts for Government disbursing officers and for
quasi-public funds
Fumish bank drafts to Govemment officers in exchange for collections
Maintain Slate unemployment compensation benefit payment and clearing
accounts
Operate limited banking facilities:
In the United Slates and ils outlying areas
In foreign areas
1975
1976
T.Q.
13,722
13,796
13,072
949
880
887
6,636
1,023
5.826
5,725
43
43
43
192
227
190
219
190
218
(*)
(*)
* The number of depositaries providing this service al June 30, 1976, was insignificant (estimated al less than 25);
therefore, this informaiion will not be shown in subsequent reports.
Cash services.—During fiscal 1976, plans were finalized to discontinue
entirely the cash services furnished by the Division of Cash Services to the
public. Federal Government agencies, and banks in the Washington, D . C ,
metropolitan area. This action effectively reduced the Division to one
major function, that of examining and settling mutilated currency claims,
eliminated the need for 76 employees, and resulted in annual savings of
$1.4 million.
These services were discontinued for two basic reasons: (1) The services
furnished the public and Government agencies through the Cash Room
could no longer be economically justified. For the public, the services
consisted of the cashing of Treasury checks and the issuance and
redemption of U.S. savings bonds. Local and many overseas Government
offices were served by providing facilities where they could deposit
receipts and other collections into the Treasury. These are services that
can be provided entirely by the banking system at a lower unit cost. (2)
The cash services to local area banks, i.e., selling coin and currency to the
banks and buying their excess coin and currency, are by law functions of
the Federal Reserve banks and therefore should more appropriately be
performed by the Federal Reserve Bank of Richmond for the Washington
area. Essentially, the providing of these services to the public and the
banks by the Treasury was an anachronism left over when the subtreasury
system was abolished in 1921.
The first step was taken on June 30, 1976, when the Cash Room was
closed. Concurrent with the closing, arrangements were completed for
Government agencies to make their deposits with either a commercial
bank or a Federal Reserve bank. All indications are that those members
ofthe public who fornierly used the Cash Room facilities have been able
to obtain the necessary services at local banking institutions with a
minimum of inconvenience.
The second step, the discontinuance of cash services to local area banks,
is divided into three phases: (1) Effective October 12,1976, the Richmond
and Baltimore Federal Reserve offices will begin serving the suburban
Virginia and Maryland banks which obtained coin and currency through
correspondent banks in Washington, D . C ; (2) beginning early in 1977,
the Federal Reserve Bank of Richmond will begin providing currency
174
1976 REPORT OF THE SECRETARY OF THE TREASURY
services to banks located in Washington, D . C ; and (3) beginning
sometime in 1978, upon completion of its new building, the Federal
Reserve Bank of Richmond will provide coin services to the Washington,
D . C , banks.
During the year, the Division of Cash Services processed over 51,000
mutilated currency claims and paid out $8.9 million in settlement thereof,
and in the transition quarter, 12,000 claims with $2.4 million in settlement.
Methods of destroying unfit currency.—The Treasury continued during
fiscal 1976 to encourage the use of more ecologically clean methods of
destroying currency which is no longer fit for circulation. A total of nearly
3,000 tons of unfit currency are destroyed every year by methods tested
and approved by the Treasury.
Two methods are used to destroy currency—incineration and pulverization. Incineration is still the more prevalent method, being used by 28
Reserve offices which account for 86 percent of the currency. Although
incineration effectively destroys the currency, the equipment has to be
very carefully controlled and correctly operated to keep its emissions
within limits permitted by locally applicable air quality standards.
Consequently, the Treasury has been encouraging the Reserve banks to
convert to pulverization which grinds the currency to a fibrous residue or
to very fine particles. Seven banks are now pulverizing the unfit currency
and five others are ordering the necessary equipment.
Another ecologically clean destruction method which is on the horizon
is the slicing, or shredding, ofthe currency into narrow strips. This method
is being considered in connection with high-speed currency processing
systems which are being developed. Shredding also has the advantage of
using the least amount of energy among the three destruction methods
described.
During fiscal 1976 currency destruction tests were made on equipment
made by three different manufacturers. The Treasury approved one
incinerator and one pulverizer for use in destroying unfit currency. At the
present time, three manufacturers of incinerators and four manufacturers
of pulverizers are authorized to supply equipment for this purpose.
Foreign currency management.—The Foreign Currency Staff's automatic funding concept of maintaining local currency bank balances
sufficient only to meet the disbursing officers' immediate needs, first
implemented in Latin America during fiscal 1975, has been expanded to
include most European, African, and Asian countries. The Foreign
Currency Staff expects to have automatic funding fully implemented
worldwide in fiscal 1977. To date, balances in disbursing officers'
operating accounts have been reduced by $29 million, which is resulting
in recurring annual interest savings of approximately $2.1 million.
This same funding concept was implemented in June 1976, with one
military disbursing officer at a projected annual interest savings of
$250,000. The Foreign Currency Staff will approach the Department of
Defense to solicit assistance in implementing the procedure for all military
disbursing officers worldwide.
Processing Federal tax deposits.—Under provisions of Treasury Department Circular No. 1079, tax withholders and certain taxpayers are
supplied with partially punched Federal tax deposit (FTD) cards which
they forward to their banks with their tax payments. The FTD cards are
then routed to Federal Reserve banks which complete the punching and
forward them to the Treasury in Washington. The Bureau of Government
ADMINISTRATIVE REPORTS
175
Financial Operations enters the data from the FTD cards on magnetic
tapes which are furnished to the Internal Revenue Service for reconciliation with taxpayers' returns. While this procedure is still in effect, a new
procedure for processing Federal tax deposits was implemented on a pilot
basis in May 1976 with depositaries serviced by the Kansas City Federal
Reserve Bank. It provides for the taxpayer to present his tax payment and
FTD card to his bank which daily forwards a report of the total amount
of the deposits received to the appropriate Federal Reserve bank. The
bank also forwards a copy of the report, together with the FTD cards, to
the Internal Revenue Service for reconciliation with the taxpayers'
returns. This procedure is targeted to completely replace the old
procedure by January 1977. It will eliminate the processing of the FTD
cards by the Bureau and is expected to result in substantial cost savings
to the Department and expedite reconciliation of the FTD cards with the
taxpayers' returns.
The types of tax payments which are collected in this manner include
withheld individual income and social security taxes, corporation income
taxes, certain excise taxes, railroad retirement taxes, and Federal
unemployment taxes. Collections received under this system during the
period July 1, 1975, through June 30, 1976, totaled $239,004.9 miUion
and required the processing of 45.3 million cards, compared with
$233,847.5 million collected and 44.4 mUlion cards processed in the
previous year. In addition, collections received during the transition
quarter totaled $23,900.5 million and required the processing of 11.4
million cards. The following table shows the volume of deposits processed
by Federal Reserve banks for fiscal years 1960 through 1976.
Fiscal year
1960
1%1
1%2
1%3
1964
1%5
1966
1%7
1968
1%9
1970
1971
1972
1973
1974
1975
1976
Individual
income and
social security
taxes
9,469,057
9,908,068
10,477,119
11,161,897
11,729,243
12,012.385
12,518.436
15.007,304
17,412,921
23,939.080
26,612,484
28,714,587
32.336,751
34,606,495
37,755,332
39,634,697
40,464.446
Railroad
retirement
taxes
10,625
10 724
10 262
9,937
9,911
9 859
9.986
10 551
14 5 %
12.479
11.622
12,367
15,080
11.202
10,360
10,072
10.444
Federal excise
taxes
598,881
618 971
610 026
619,519
633,437
644 753
259,952
236 538
233 083
272.048
296.487
323.730
364,556
398,624
452,796
451,981
469,681
Corporate
income taxes
22 783
394 792
1.297,052
1,235,452
1,249,034
1.309,668
1,495.260
1.803.689
1,944,280
1.856,430
Unemployment taxes
192,905
956,201
1,409,527
1,978,266
2,340,052
2,363.091
2.500,974
10,078,563
10 537,763
11 097,407
11.791.353
12,372,591
12 666,997
12,788,374
15 277,176
18,055,392
25,520.659
28,348,950
31.255,919
35,435.582
38,489,847
42,362,229
44,404,121
45,301,975
NoTF..—Comparable data for 1944-59 wUl be found in the l%2 Annual Report, p. 141.
Paying grants through letters of credit.—Treasury Department Circular
No. 1075, first published May 28, 1964, established a procedure to
preclude withdrawals from the Treasury any sooner than necessary in
cases where Federal programs are financed by grants or other payments
to various organizations outside the Federal Government. Under this
procedure, Government departments and agencies issue letters of credit
which permit grantees to make withdrawals from the account of the
Treasury of the United States when funds are needed for program
purposes.
176
1976 REPORT OF THE SECRETARY OF THE TREASURY
At the close of the 12-month period ended June 30, 1976, 95
Government agency accounting stations were financing with letters of
credit under the Federal Reserve bank system. During the period, the
Bureau of Government Financial Operations processed 79,690 withdrawal transactions aggregating $50,582 million, compared with 116,426
transactions totaling $46,685 miUion in fiscal 1975; 21,634 transactions,
totaling $46,685 million, were processed during the transition quarter.
Further, the test of the letter of credit-Treasury RDO system implemented in fiscal 1974 with two participating agencies, and to date
expanded to include eight agencies, has proven very successful. Accordingly, Treasury regulations governing advance financing under Federal
grants and other programs are being revised to promulgate the system.
Under this system, the letters of credit are maintained by the Treasury
regional disbursing offices where payments are made by Treasury check
upon receipt of requests from grantees. The payment requests contain
brief status of funds reports which enable agencies to monitor the cash
management practices of grantees on a more current basis.
At June 30, 1976, 34 Government agency accounting stations were
financing with letters of credit under the Treasury RDO system. During
the year. Treasury regional disbursing offices issued 48,693 checks,
totaling $12,948 million, in response to grantee requests; 15,495 checks,
totaling $3,829 million, were issued to grantees during the transition
quarter.
Operations planning and research
The Operations Planning and Research Staff is continuing its systems
developmental activities for a number of fiscal functions including the
following major systems revisions:
(1) Implementation of the program for paying recipients of recurring
Federal payments by credit to their accounts in financial organizations is
well underway. Under the program, which is optional for the recipient,
payments will be accomplished by means of electronic funds transfer to
the financial organizations designated by the recipients. The option of
having payments directed to a financial organization was offered to all
social security recipients by October 1975. The electronic funds transfer
system is being progressively implemented and will be completed by
December 1976. This option will be offered to all civil service annuitants
by November 1976 with payments made by electronic funds transfer by
January 1977. Railroad retirement annuity payments are scheduled for
implementation in this system nationwide in December 1976. Revenue
sharing payments were included in October 1976 on a limited basis and
will be made nationwide using this system in January 1977. Veterans
compensation and pension payments will be included during 1977. It is
estimated that approximately 74.8 million payments will be made by
electronic funds transfer during fiscal 1977.
(2) The joint efforts of Operations Planning and Research Staff and
Federal Reserve to develop a check truncation system have progressed to
the point of implementation of a pilot operation. Under this system, the
flow of paid Treasury checks will stop at the level of the Federal Reserve
banks. Magnetic tape and microfilm records will be substituted for the
hundreds of millions of checks now returned by the Federal Reserve banks
to the Treasury for final payment and reconciliation. The pilot operation
ADMINISTRATIVE REPORTS
1 77
was begun in June 1976. It will be expanded in February 1977 with fullscale implementation of the system by the end of 1977.
Miscellaneous fiscal activities
Auditing.—At June 30, the Audit Staff included 28 professional auditors
and as of September 30, 1976, there were 31 auditors assigned to three
branches—Headquarters, Insurance Company, and Field Office. Staff
. members are rotated among these branches to provide the broadest base
of experience possible.
The Audit Staff as of September 30, 1976, issued a total of 57 audit
reports on financial, compliance, and operational matters. There were 36
audit reports issued as of June 30 an(J 21 additional ones issued as of
September 30, 1976. The audits ranged from small imprest funds to the
accounting for several multibillion-dollar Federal trust funds and the audit
of U.S. Government-owned gold. Onsite audits as well as management
surveys and operational reviews were made at various disbursing centers
ofthe Bureau throughout the United States. Also, onsite audits were made
of the cancellation, verification, and destruction of unfit currency at
virtually all of the Federal Reserve banks and branches.
In addition, the Audit Staff assigned personnel to the annual audit ofthe
Exchange Stabilization Fund and to the Interagency Task Force for
Indochina Refugees.
As the result of the annual examination of the financial statements and
related supporting information of surety companies. Bureau auditors
found 276 of these companies qualified for Certificates of Authority as
acceptable sureties on bonds running in favor of the United States (6
U.S.C. 8). Certificates are renewable each July 1 and a list of approved
companies (Department Circular 570, Revised) is published annually in
the Federal Register for information of Federal bond-approving officers
and persons required to give bonds to the United States.
Loans by the Treasury.—The Bureau administers loan agreements with
those corporations and agencies that have authority to borrow from the
Treasury. See the Statistical Appendix for tables showing the status of
Treasury loans to Government corporations and agencies at June 30 and
September 30, 1976.
Federal Financing Bank.—The loans outstanding balance at the end of
fiscal 1976 was $22.4 billion, and at the end ofthe transition quarter, $25.9
billion (see table on p. 35). Interest of $1.2 billion was collected from
borrowers during the fiscal year and $407 million during the transition
quarter; $900 million during the year and $380 million during the quarter
was paid on borrowings from the Secretary of the Treasury.
Liquidation of Reconstruction Finance Corporation assets.—The Secretary ofthe Treasury's responsibilities in the liquidation of RFC assets relate
to completing the liquidation of business loans and securities with
individual balances of $250,000 or more as of June 30, 1957, and
securities of and loans to railroads and financial institutions. Net income
and proceeds of liquidation amounting to $60 million have been paid into
Treasury as miscellaneous receipts since July 1, 1957. Total unliquidated
assets as of September 30, 1976, had a gross book value of $2.6 million.
Liquidation of Postal Savings System.—Effectiye July 1, 1967, pursuant
to the Act ofMarch 28, 1966 (39 U.S.C. 5225-5229), the unpaid deposits
of the Postal Savings System were required to be transferred to the
178
1976 REPORT OF THE SECRETARY OF THE TREASURY
Secretary ofthe Treasury for liquidation purposes. As of June 30, 1970,
a total amount of $65.1 million, representing principal and accrued
interest on deposits, had been transferred for payment of depositor
accounts. All deposits are held in trust by the Secretary pending proper
application for payment. Payments for the 15-month period totaled
$429,037. Cumulative payments amount to $58.1 miUion plus pro rata
payments to the States and other jurisdictions of $6 million. The
undistributed fund balance as of September 30, 1976, was $1 million.
Government losses in shipment.—During the 15-month period, claims
totaling $309,710 were paid from the fund established by the Government
Losses in Shipment Act, as amended (40 U.S.C. 721-729). Details of
operations under this act are shown in the Statistical Appendix.
Donations and contributions.—During the 15-month period, the Bureau
received ''conscience fund" contributions totaling $69,212 and other
unconditional donations totaling $667,891. Other Government agencies
received conscience fund contributions and unconditional donations
amounting to $65,902 and $754,600, respectively. Conditional gifts to
further the defense effort amounted to $23,584. Gifts of money and the
proceeds of real or personal property donated in this period for reducing
the public debt amounted to $265,369.
Foreign indebtedness
World War I.—The Governments of Greece and Finland made payments
during fiscal 1976 of $328,898 and $3,068,487, respecfively. The latter
amount represents a final payment by the Government of Finland on their
World War I indebtedness. For a complete status of World War I
indebtedness to the United States, see the Statistical Appendix.
Credit to the United Kingdom.—The Government of the United
Kingdom made at principal payment of $71.3 million and an interest
paymentof $58.9 million on December 31, 1975, under the Financial Aid
Agreement of December 6,1945, as amended March 6,1957. The interest
payment included $10.9 mUlion representing interest on principal and
interest installments previously deferred. Through June 30, 1976, cumulative payments totaled $2,510.4 million, ofwhich $1,380.0 mUlion was
interest. A principal balance of $2,558.0 million remains outstanding;
interest installments of $319.9 million which have been deferred by
agreement also were outstanding at the end of the period.
Indonesia, consolidation of debts.—The Government ofthe Republic of
Indonesia made payments in fiscal 1976 of $4,573,020 in principal and
$701,948 in interest on deferred principal installments in accordance with
the Indonesian Bilateral Agreement of March 16, 1971. The normal
payment of interest on principal is not due until June 11, 1985.
Payments of claims against foreign governments.—The 16th installment
of $2 million was received from the Polish Government under the
agreement of July 16, 1960, and pro rata payments on each unpaid award
were authorized.
The fourth installment of $2,082,000 was received from the Hungarian
Government under the agreement of March 6, 1973. The fourth installment was greater than the minimum installment of $945,000 because 6
percent of the dollar proceeds of imports into the United States from
Hungary for the 12 months ending December 31, 1975, exceeded the
minimum installment by $ 1,137,000 thereby raising the annual installment
from $945,000 to $2,082,000. Before any payment can be made on the
ADMINISTRATIVE REPORTS
1 79
previously certified Hungarian awards, the Foreign Claims Settlement
Commission will have to complete the adjudication and certification of
new awards. As the new awards are received from the Commission, an
initial payment of $ 1,000 or the principal amount ofthe award, whichever
is less is being made.
Administration
Personnel administration.—To meet the needs ofthe Bureau, 12 major
personnel policies were developed or revised, including: appeals and
grievances, upward mobility, troubled employee, time and leave, pay
administration, labor-management-employee relations, position classification, merit promotion, and performance evaluation. All supervisors and
employees were given the opportunity to attend a series of orientation
sessions on these latter two programs.
Flexitime.—Consistent with effective completion ofthe Bureau mission,
a flexible hours policy was developed and implemented for full-time
employees in the headquarters offices. The policy has been effective in
terms of increased employee morale, the elimination of tardiness problems, and reduction in the use of overtime work.
Labor-management relations.—Union activity remains centered in the
Division of Disbursement with four regional disbursing centers (Austin,
Birmingham, Philadelphia, and Washington, D.C.) dealing with certified
exclusive representatives. All have ties with AFGE, AFL-CIO, except
Austin which deals with NFFE. The Bureau enjoys stable and harmonious
labor relations as a result of management training, affirmative employee
relations policies, dedication and cooperation with its unions. The Bureau
policy of good faith bilateralism is accepted by all levels of Bureau
management.
Automated personnel reporting.—A system has been developed, using
the ''data base'^ concept, which greatly enhances the statistical reporting
capabilities of the Personnel Administration Staff. The system contains
pertinent personnel data for all currently active employees. Similar data
are also maintained for employees who have separated since January
1975. The system has successfully generated personnel rosters, classification series and grade distributions, turnover and retirement statistics,
employee profiles, average grade reports, and other valuable information
used by Bureau management in its decisionmaking processes.
Training.—A "Personnel Management for Supervisors" course was
developed and conducted for approximately 140 supervisors and managers during 6 training sessions. This course was also conducted in
conjunction with personnel management evaluation surveys of the Austin
and Birmingham Disbursing Centers. An in-depth summer aid program
was developed and organized with great emphasis on assisting the students
to think about their employment goals and ambitions in relation to their
present and future plans for education. A comprehensive orientation and
training program was also developed and conducted for the WIN II
placements. This training was specifically designed to assist the participants in sharpening their skills in order to qualify for a Government job
at the end of their training.
Position classification.—A trial application ofthe new factor evaluation
system (FES) was conducted throughout the headquarters offices.
Employees were interviewed and their work described in terms ofthe nine
factors evaluated under FES. As intended and anticipated, there were few
180
1976 REPORT OF THE SECRETARY OF THE TREASURY
changes in grade reflected by the trial application. Whenever possible, all
position descriptions are now being written in the FES format.
Extension of check-wrapping operations in disbursing centers led to
establishing a new wage grade position structure in several centers,
including new foreman positions and, in Philadelphia,the Bureau's first
general foreman. New Bureau functions such as electronic funds transfer
and accrual financial statements led to creation of new projected positions
for those functions. Reductions in cash services and several reorganizations led to restructuring many positions and organizations. In addition, an
improved system for establishing and recording competitive levels was
implemented. Paraprofessional and upward mobility positions were
structured as planned or as warranted.
Staffing.—The Personnel Administration Staff made significant accomplishments in placing employees affected by the phaseout of the Division
of Cash Services. Avoiding a reduction in force, 58 Cash Services
employees, or more than one-half of those affected, were successfully
placed in vacant positions, thereby reducing outside recruitment costs and
retaining valuable employees. Efforts in recruiting accountant trainees
resulted in the appointment of 10 recent college graduates, 60 percent of
whom represent females and minorities. Working within the constraints
imposed by the Civil Service Commission, equal employment opportunities remain a priority in recruitment activities. To improve community
service and involvement, two unpaid work experience programs for lowskilled clerical persons were introduced. The first program was with the
United Planning Organization and involved the placement of seven
persons from the local Opportunities Industrialization Center. Upon
completion ofthe 12-week program, three trainees were offered positions
within the Bureau. Through the second program (WIN), for a period of
13 weeks, unpaid work experiences and training were provided to 13
welfare mothers who were interested in developing skills necessary for
entry into the job market. Additionally, 107 summer aids (needy youth),
3 Federal junior fellows, 13 summer exam students, and 46 stay-in-school
students were employed by the Bureau. The first cooperative education
program in the Bureau resulted in the appointments of two female and two
male students majoring in accounting. This program wUl ultimately
become the Bureau's prime recruitment source. Continuing efforts were
made to enhance employment opportunities for Vietnam-era veterans, the
handicapped, and disabled veterans.
Upward mobility.-^\sf'\\.\\ support and cooperation at all levels, accomplishments in this area remain conspicuous: 490 employees completed a
skills survey, 796 candidates received career counseUng with a total of 43
placements in upward mobility positions.
The troubled employee.—This program has been in effect for almost a
year and covers not only alcoholism and drug abuse but all personal
problems and concerns which may affect an employee's job performance.
Inhouse training covering the program has been offered to all supervisors,
and employees have been informed about the program. In addition, a
"Community Services Guide" was prepared and distributed to all
employees informing them where various types of personal and family
services, including treatment for alcoholism and drugs, are available.
Bureau of the Public Debt
The Bureau of the Public Debt is charged with the administrative
functions arising from the Treasury's debt management activities. These
ADMINISTRATIVE REPORTS
181
functions extend to transactions in the security issues ofthe United States,
and ofthe Government agencies for which the Treasury acts as agent. The
Bureau prepares the offering circulars and instructions relating to each
offering ofpublic debt securities, and directs the handling of subscriptions
and making of allotments; prepares regulations governing public debt
securities and conducts or directs all transactions thereof; supervises the
public debt activities of fiscal agents and agencies authorized to issue and
pay savings bonds; orders, stores, and distributes all public debt securities;
audits and records retired securities and interest coupons; maintains
individual accounts with owners of registered securities and authorizes the
issuance of checks in payment of interest thereon; processes claims on
account of lost, stolen, destroyed, or mutilated securities; maintains
accounting control over public debt financial and security transactions,
security accountability, and interest costs; and prepares public debt
statements. The Bureau's principal office ancl headquarters is in Washington, D.C. An office is also maintained in Parkersburg, W. Va., where most
Bureau operations related to U.S. savings bonds and U.S. savings notes are
handled.
Management improvement
A Univac 1110 computer system was installed in the Parkersburg office.
This computer will allow all of the Parkersburg systems to be processed
on one computer in one language, replacing five older computers using
three languages. In addition, telecommunication circuits were installed
between Washington and Parkersburg. The use of these circuits and
remote job entry terminals has made it possible for the Washington office
to utilize the new computer facility. During the next several years, there
will be a phase over of Washington office systems from the Office of the
Secretary's Univac 1108 to the new Univac 1110. Approximately
$700,000 annually is currently spent for processing on the Univac 1108.
A Treasury-Federal Reserve task force was formed to expand the bookentry program of issuing Government securities. The task force will
develop an expanded book-entry system designed to eliminate the use of
definitive securities in new Treasury offerings. Elimination of definitive
securities will reduce the amount of paperwork created by the increasing
volume of public debt transactions; protect against loss, theft, and
counterfeiting; and substantially reduce costs. Expansion of the bookentry system will result in a more effective and efficient administration of
the public debt.
The Bureau has initiated a project to develop a proposal for two new
series of savings bonds to replace the series E and series H bonds. The
series E bonds issued in the 1940's will begin to reach their third extended
maturities in 1981. It was therefore decided to begin now to design a new
bond that could be in place well in advance of 1981; that can be designed
to take advantage of the latest data entry equipment; that will have more
attractive terms and simplified regulations; and that can be offered in
exchange for the maturing securities. The change was prompted also
because the savings bonds that have already been issued exceed 4 billion
and the recordkeeping problems are staggering; there are substantial
amounts of accrued interest on the older bonds for which the taxes have
been deferred; and it is increasingly difficult to determine legal ownership
in many cases involving older bonds where the original owner is deceased.
Ten additional issuing agents began reporting series E savings bonds
sales on magnetic tape in lieu of using registration stubs. A recurring
annual savings of $191,741 should be realized based on the volume of
182
1976 REPORT OF THE SECRETARY OF THE TREASURY
issues handled each year by these agents. Fifty-four issuing agents are
participating in this continuing program.
The procedure for interest payments to the Government National
Mortgage Association (GNMA) was revised at the request of GNMA.
Registered interest payments are now transferred from a Treasury symbol
account directly to a GNMA symbol account, thereby eliminating the need
to prepare and mail checks.
The Federal Reserve Bank of Boston and Federal Reserve Bank of
Atlanta branches at New Orleans and Jacksonville have joined the Federal
Reserve Bank of Atlanta in reporting daily activity of securities transactions to the Bureau on magnetic tape. This permits the immediate
introduction of daily public debt activity into the processing cycle without
data conversion.
In order to improve service to the public, the Issues Branch, Division of
Transactions and Rulings was established in the Savings Bond Operations
Office, Parkersburg. The establishment of this Branch resulted in a
reduction of 3 weeks in the time required to issue bonds authorized as
replacements for bonds lost, stolen, or destroyed, or involved in complex
cases that the Federal Reserve banks could not handle.
Government-sponsored agencies were notified of Bureau plans to
discontinue servicing their securities. The Bureau will assist the agencies
in transferring functions to themselves or their agents.
Bureau operations
During the fiscal year and transition quarter, 177,000 individual
accounts covering publicly held registered securities other than savings
bonds, savings notes, individual retirement bonds, and retirement plan
bonds were opened, and 85,000 were closed. This increased the number
of open accounts to 472,000 covering registered securities in the principal
amount of $13,924 million. There were 978,000 interest checks with a
value of $878 million issued during the period.
Redeemed and canceled securities other than savings bonds, savings
notes, and retirement plan bonds received for audit included 6,947,000
bearer securities and 506,000 registered securities. Coupons totaling
14,440,000 were received.
During the period, 70,000 registration stubs of retirement plan bonds,
52,000 registration stubs of individual retirerhent bonds, 17,000 retirement plan bonds, and 3,000 individual retirement bonds were received for
audit.
A summary ofthe public debt operations handled by the Bureau appears
on pages 12-29 of this report and in the Statistical Appendix.
U.S. savings bonds.—The issuance and retirement of savings bonds
result in a heavy administrative burden for the Bureau ofthe Public Debt,
including auditing and classifying all sales and redemptions; establishing
and maintaining registration and status records for all bonds; servicing
requests from bond owners and others for information; and adjudicating
claims for lost, stolen, and destroyed bonds.
Detailed information on sales, accrued discount, and redemptions of
savings bonds will be found in the Statistical Appendix.
There were 199 million stubs or records on magnetic tape and microfilm
representing the issuance of series E savings bonds received for registration, making a grand total of 4,100 million, including reissues, received
ADMINISTRATIVE REPORTS
1 83
through September 30, 1976. All registration stubs of series E bonds are
microfilmed, audited, and destroyed, after required permanent record
data are prepared by an EDP system in the Parkersburg office.
Ofthe 152 million series A-E savings bonds and savings notes redeemed
and charged to the Treasury during the period, 148 million (97.4 percent)
were redeemed by authorized paying agents. For these redemptions the
agents were reimbursed quarterly at the rate of 15 cents each for the first
1,000 bonds and notes paid and 10 cents each for all over the first 1,000
for a total of $ 19,292,000 and an average of 13.02 cents per bond and note.
Interest checks issued on current income-type savings bonds (series H)
during the period totaled 5,267,000 with a value of $602 million. New
accounts established for series H bonds totaled 153,000 while accounts
closed totaled 149,000.
Applications received during the period for the issue of duplicates of
savings bonds and savings notes lost, stolen, or destroyed after receipt by
the registered owner or his agent totaled 85,000. In 49,000 of such cases
the issuance of duplicate bonds was authorized. In addition, 25,000
applications for relief were received in cases where the original bonds were
reported as not being received after having been mailed to the registered
owner or his agent.
OFFICE OF FOREIGN ASSETS CONTROL
The Office of Foreign Assets Control administers five sets of regulations.
The Foreign Assets Control Regulations and the Cuban Assets Control
Regulations prohibit, unless licensed, all trade and financial transactions
with North Korea, North Vietnam, South Vietnam, Cambodia, and Cuba,
and their nationals. South Vietnam and Cambodia were added to the
schedule of blocked countries under the Foreign Assets Control Regulations following the takeover of these countries by Communist forces in
April 1975. These regulations also block assets in the United States ofthe
above-named countries and their nationals.
Under a general license contained in the Foreign Assets Control
Regulations, all transactions with the People's Republic of China are now
authorized except transactions abroad by foreign firms, owned or
controlled by Americans, involving shipment to the People's Republic of
China of internationally controlled strategic merchandise unless the
transaction is appropriately licensed under the Transaction Control
Regulations (see below). Also, transactions in Chinese assets blocked in
the United States as of May 6, 1971, remain prohibited.
The Transaction Control Regulations supplement the export controls
exercised by the Department of Commerce over direct exports from the
United States to Eastern Europe and the U.S.S.R. These regulations
prohibit, unless licensed, the purchase or sale or the arranging of the
purchase or sale of strategic merchandise located outside the United States
for ultimate delivery to Communist countries of Eastern Europe, the
U.S.S.R., the People's Republic of China, North Korea, North Vietnam,
1 84
1976 REPORT OF THE SECRETARY OF THE TREASURY
South Vietnam, and Cambodia. The prohibitions apply not only to
domestic American companies, but also to foreign firms owned or
controlled by persons within the United States. A general license permits
sales of these commodities to the listed countries other than North Korea,
North Vietnam, South Vietnam, and Cambodia, provided shipment is
made from and licensed by a COCOM-member country. (COCOM, for
Coordinating Committee, is a NATO entity which develops policy on sales
of strategic items to Communist countries.)
The Office also administers controls on assets remaining blocked under
the World War II Foreign Funds Control Regulations. These controls
continue to apply to blocked assets of Czechoslovakia, Estonia, Latvia,
Lithuania, and East Germany, and nationals thereof, who were, on
December 7, 1945, in Czechoslovakia, Estonia, Latvia, or Lithuania or,
on December 31, 1946, were in East Germany.
Finally, the Office administers the Rhodesian Sanctions Regulations,
controlling transactions with Rhodesia and its nationals. The regulations
implement United Nations Resolutions calling upon member countries to
impose mandatory sanctions on Southern Rhodesia. An exception to the
prohibition against imports of merchandise of Southern Rhodesian origin
is authorized by general license for certain strategic and critical materials,
pursuant to section 503 of the Military Procurement Act of 1971.
Under the Foreign Assets Control Regulations and the Transaction
Control Regulations, the number of new license applications received
during fiscal 1976 (including applications reopened) was 874, with 1,097
applications acted upon. During the transition quarter, the number of
applications received was 90, with 78 applications acted upon.
New applications for licenses and requests for reconsideration under the
Cuban Assets Control Regulations totaled 640 during fiscal 1976, and a
total of 641 applications were acted upon. During the transition quarter,
the number of new applications received was 96, with 95 applications
acted upon.
During fiscal 1976, 856 new applications (including applications
reopened) were received under the Rhodesian Sanctions Regulations and
864 applications were acted upon. During the transition quarter, the
number of new applications received was 115, with 110 applications acted
upon.
During fiscal 1976, 19 new applications (including applications reopened) were received under the Foreign Funds Control Regulations and
21 applications were acted upon. During the transition quarter, no new
applications were received and one application was acted upon.
Certain broad categories of transactions are authorized by general
licenses set forth in the regulations, and such transactions may be engaged
in by interested parties without the need for securing specific licenses.
During fiscal 1976, there was one criminal case action by the Department of Justice involving violations ofthe regulations administered by this
Office. Criminal court fines totaling $ 15,000 were collected as a result of
criminal convictions reported in fiscal 1975. Civil penalties amounted to
$4,974 and the total value ofmerchandise under seizure at the end ofthe
fiscal year and transition quarter amounted to $2,650. There were no
forfeitures of merchandise.
ADMINISTRATIVE REPORTS
185
INTERNAL REVENUE SERVICE i
The Internal Revenue Service administers the internal revenue laws
embodied in the Internal Revenue Code (26 U.S.C.) and certain other
statutes, including the Employee Retirement Income Security Act of 1974
(Public Law 93-406, 88 Stat. 829).
Receipts
Gross revenue collections in fiscal 1976 totaled $302.5 billion, an
increase of $8.7 billion (3.0 percent) over fiscal 1975. Collections passed
the $300 billion mark for the first time, just 4 years after the $200 billion
level was achieved and 13 years after the $ 100 billion line was crossed. The
growth in collections was the smallest in 5 years due, partly, to tax
reductions for individuals and corporations under the 1975 Tax Reduction
and Revenue Adjustment Acts.
Income taxes accounted for over two-thirds of all tax receipts. Individual
income taxes amounted to $159.0 billion, up $2.6 billion (1.6 percent)
over 1975. Corporate income taxes were $46.8 billion, an increase of $ 1.0
billion (2.3 percent).
Employment taxes of $74.2 billion registered the largest dollar increase
for the year, rising $4.1 billion (5.8 percent). An increase in the social
security wage base and higher wage and salary levels were major factors
affecting this area.
Excise tax revenue of $17.3 billion rose $0.4 billion (2.4 percent).
Receipts from this source reflected a general increase despite a reduction
in manufacturers' tax on trucks and buses, the continued phasing out of
the telephone excise tax, and repeal of the sugar tax.
Estate and gift tax collections of $5.3 billion recorded the largest rate
of increase of any major tax category for the year, advancing 13.2 percent
($0.6 billion). Both the estate and gift tax components of this combined
tax class were higher.
During fiscal 1976, the IRS paid refunds of $34.7 billion to 68.0 million
taxpayers whose payments and credits exceeded their tax liabilities. In
fiscal 1975 a total of 122.5 million refunds totaling $40.1 billion were paid.
In both fiscal years the number and amount of individual refunds were
affected by the Tax Reduction Act of 1975. Included in 1976 data are 4.2
million checks totaling $0.9 billion for the new earned income credit
(EIC). In fiscal 1975, the Service paid $7.9 bUlion in 1974 tax rebates and
generated 54.7 million extra checks for rebate refunds alone. This
accounted for the unusually high volume of individual checks issued in
fiscal 1975.
IRS service centers received 127.1 million tax returns in 1976,
compared with more than 126 mUlion in 1975. Individual and fiduciary
returns totaled 84.1 million compared with 85.5 million in 1975. The
decrease is attributed to economic conditions and the increase in the
standard deduction which changed the filing requirements and thus
decreased the filing population. Nearly 28 million individual taxpayers, 34
percent of all individual filers, used the short form 1040A in 1976 as
compared with more than 22 million in 1975, an increase of 24 percent
in the number of forms 1040A filed. The Service received 54.5 million
(Additional information will be found in the separate Annual Report of the Commissioner of Internal Revenue.
Transition quarter data will appear in an appendix to that report.
1 86
1976 REPORT OF THE SECRETARY OF THE TREASURY
forms 1040, an 11-percent decrease from the 61.4 million in 1975. The
reduction in form 1040 filers and the increase in form 1040A filers was
primarily attributable to a form 1040A mailout to some 13.8 million
individuals who had previously filed form 1040, but whose income
indicated that they could use the short form.
Assisting taxpayers
The American tax system depends upon self-assessment and voluntary
compliance. Every year taxpayers must determine their correct tax and file
returns reporting it. Recognizing that taxpayers do not find this task easy,
the IRS tries to help them to be in a better position to prepare their own
returns.
During 1976, the IRS continued to expand assistance to taxpayers
through a program designed to offer quality service, and to make taxpayer
assistance readily available to taxpayers. Special training in basic tax law
requirements was given to increase the effectiveness of taxpayer service
personnel.
Before the 1976 filing period, a standard quality review system was
implemented nationwide. The methods for providing taxpayer assistance
were systematically monitored and measured to ensure the assistance was
accurate, courteous, and timely. In over 600,000 contacts randomly
sampled during the 1976 filing period (reviewing service returns, prepared
observing walk-in inquiries, monitoring responses to taxpayer telephone
inquiries, and reviewing referrals and correspondence), taxpayer assistors
achieved an accurate rate of about 90 percent.
Specific criteria were issued for locating Taxpayer Service offices,
emphasizing convenience to public transportation and first-floor locations. Low noise level and taxpayer privacy considerations were factors in
the criteria. During the 1976 filing period, walk-in service was offered in
about 740 permanent offices and in over 220 temporary filing-period-only
offices. More offices were located in the inner city (133 in 1976, 112 in
1975), and in suburban and rural locations (185 in 1976, 92 in 1975), for
taxpayer convenience. Extended-hours service was offered in most IRS
offices for taxpayers unable to call or visit during normal business hours.
The Service again provided special assistance to taxpayers speaking
foreign languages, with 117 offices (and over 390 employees) offering tax
assistance in Spanish and 148 offices (and over 500 employees) providing
help in other foreign languages.
Under the volunteer income tax assistance program (VITA), the Service
trained over 20,000 volunteers who provided free tax assistance to elderly,
Spanish-speaking, low-income, and other taxpayers in their communities.
Over 150,000 individuals attended approximately 3,000 IRS-sponsored
classes on taxes.
A major effort to raise the level of public awareness about the earned
income credit, which benefited low-income taxpayers, was emphasized in
Taxpayer Service contacts and through liaison with other Service
activities. This program included notices sent with the cooperation of
other Government agencies (Health, Education, and Welfare, Agriculture, Labor) to taxpayers who were eligible for the EIC. Notices were also
sent by IRS to taxpayers who filed tax returns without claiming the EIC,
but who apparently qualified based on tax return information. The EIC was
allowed to about 6 million taxpayers for a total of approximately $1.2
billion, averaging out to some $203 per taxpayer who claimed the credit.
ADMINISTRATIVE REPORTS
187
During 1976, the Service received about 38 million written, telephone,
and walK-in inquiries. The total consisted of over 28 million telephone
calls, more than 9 million walk-in inquiries, and over 150,000 written
inquiries. More than 60 percent of these inquiries occurred during the
flling period from January 1 through April 30, 1976. In that period, the
IRS received almost 17 million telephone calls, over 6 million walk-in
inquiries, and over 60,000 written inquiries, for a total of over 23 million
requests for assistance.
Toll-free telephone service was offered for the third straight year
nationwide. While the number of answering sites was reduced from 85 in
1975 to 82 this year, the reduction did not interfere with the quality and
depth of assistance available to taxpayers at each location.
Under this system, any taxpayer in the United States may call the IRS
for assistance without having to pay a long-distance telephone charge.
Toll-free numbers are listed in the income tax return packages provided
to taxpayers. Taxpayers may also use the toll-free network to call for
information or clarification of the bills and notices they receive relating
to their accounts. These notices are accompanied by an enclosure which
lists a toll-free telephone number and suggests that the taxpayer use the
number to obtain assistance or further explanation.
The toll-free telephone system has provided taxpayers with greater
telephone access to IRS offices and has made an IRS office as close to
taxpayers as their own telephones.
Communications with taxpayers.—During 1976, the Service's program
to improve form letters, computer notices, and other similar taxpayer
communications continued to be a major objective. A special unit of
writer-editors continues to review all such standard communications to
ensure they are personalized and understandable to the average taxpayer.
National Office units and field offices reviewed a total of 1,800 form letters
and notices during the year and were able to eliminate 479 of them as
duplicative or unnecessary.
The Service continues to inform taxpayers of their rights under the tax
laws and to provide complete, courteous responses to taxpayer inquiries.
Tax publications.—To reinforce information provided taxpayers during
direct contact, and to assure nationwide consistency in the application of
the tax laws, the Service also distributes, free of charge, a number of
publications.
The major IRS publications are Publication 17, Your Federal Income
Tax; Publication 334, Tax Guide for Small Business; and Publication 225,
Farmer's Tax Guide. Also, the Service has issued publications dealing with
special tax problems such as reporting the sale of a personal residence or
computing the value of donated property.
New tax publications developed in 1976 included Publication 591, Tax
Credit for the New Home Buyer; Publication 592, The Federal Gift Tax;
Publication 593, Income Tax Benefits for U.S. Citizens Who Go Overseas;
Publication 595, Tax Guide for Commercial Fishermen; Publication 596,
Tax Benefit for Low-Income Individuals; Publication 597, Information on
the United States-Canada Incorae Tax Treaty; Publication 598, Tax on
Unrelated Business Income of Exempt Organizations.
The mass media.—The Service 6ontinued to use the Nation's mass media
to furnish tax information to the public. In 1976, over 17,900 radio and
TV stations, daily and weekly newspapers, and magazines received
material prepared by the IRS to inform and assist taxpayers. Service
188
1976 REPORT OF THE SECRETARY OF THE TREASURY
personnel participated in 6,432 interviews, answered 19,243 media
inquiries, and made 5,642 talks to citizen groups.
Nearly 8,200 news releases were issued to the media. These releases
covered such topics as services available to taxpayers, appeal rights,
correct filing of returns, the Presidential campaign fund checkoff, tax
advice for disaster victims, earned income credit, pension benefit plans,
the real estate allowance, the personal exemption allowance, as well as
numerous releases relating to rulings, procedures, regulations, and other
legal interpretations, positions, and announcements.
Some of the releases, as well as radio and TV scripts, were translated
into Spanish for use in areas where it is widely spoken as a second language.
Tax question-and-answer columns were written for nationwide distribution to weekly newspapers and magazines.
The Service also produced and distributed to field offices two color
films, one covering audit and appeals procedures, and the other providing
tax information to assist small businessmen. These IRS films were shown
on 152 occasions by TV outlets and 2,430 occasions by civic associations,
service, professional, and educational groups from January through June
of 1976.
Electronic tax service.—The integrated data retrieval system (IDRS),
which links all district and area offices and Puerto Rico through video
terminals to computer files at the IRS service centers, processed 282.2
million inquiries during 1976.
The installation of large computers and related components with faster
processing capabilities has enabled the Service to be more responsive to
taxpayer requests and has caused rapid growth in the use ofthe equipment.
The IRS service centers processed an average of 2.4 million inquiries per
service center each month during the last half of fiscal 1976 compared with
1.8 million in the same period in 1975, an increase of 33 percent.
Tax forms improvements
The Service continues in its efforts to ensure that the number and
content of reports it requires of the public are kept to the absolute
minimum needed to meet the requirements of the law and to permit
efficient administration of the tax system. The IRS continued to resist
outside efforts to add nontax data to forms.
This year the simplification effort was stepped up with a line-by-line
review ofthe major return forms in an attempt to delete unnecessary items
and to insure that the forms did not place an undue burden on the public.
Larger numbers of forms and questions were deleted than in previous
years.
The Service, in addition to its own review, solicits suggestions from
taxpayers, practitioners, organizations, industry groups, and other interested parties for improving tax forms and instructions and reducing
reporting requirements. This year for the first time a public hearing was
held on forms 1040 and 1040A. Announcements were published in the
Federal Register and in the Internal Revenue Bulletin. Local newspapers
ran articles inviting all interested persons to present their comments, and
public interest groups were encouraged to participate. Nonetheless, only
two speakers participated.
Among the changes made on this year's return was the addition of
address information boxes requested by the Census Bureau for revenue
sharing purposes. A line was added for the new earned income credit for
ADMINISTRATIVE REPORTS
189
certain individuals with less than $8,000 adjusted gross income, and for
the new deduction of $30 for each personal exemption other than
exemptions for age and blindness. Also, optional tax tables were expanded
to cover adjusted gross income of up to $15,000.
Revenue Adjustment Act.—Because the Revenue Adjustment Act of
1975 was enacted on December 22, 1975, after the tax forms were sent
to print, and because the new law contained various, and in some cases
retroactive, effective dates, the provisions ofthe act had to be communicated to taxpayers who had already filed fiscal year returns as well as those
who were about to file their calendar year returns. The IRS revised or
developed forms, special instructions, tax computation worksheets and
issued press releases tQ notify taxpayers ofthe tax law changes. Among the
forms developed were Form 1040FY (1975-76), Fiscal Year Tax
Computation Schedule; Form 1040ES, Estimated Tax Worksheet; and
Corporafion Estimated Tax, Form 1120-W (FY 1975-76), Form 1120-W
(1976), Form 1120-W (1976-77).
During 1976, new pension forms were developed to implement the
Employee Retirement Income Security Act of 1974. Of major importance
were three forms requiring the joint efforts of the Department of Labor
and IRS: Form 5500, Annual Return—Report of Employee Benefit Plan
(with 100 or more participants); Form 5500-C, Annual Return—Report
of Employee Benefit Plan (with fewer than 100 participants none of whom
is an owner-employee); and Form 5500-K, Annual Return—Report of
Employee Pension Benefit Plan for Sole Proprietorship and Partnerships
(with fewer than 100 participants and at least 1 owner-employee). The
final version of the forms reflected IRS and Labor response to over 1,600
public comments received as a result of publishing for comment the
proposed forms in the Federal Register. The new pension law also required
the development of annual information return Form 5329, Return for
Individual Retirement Savings Arrangement, required to be filed by
individuals who have established individual retirement accounts.
Privacy Act impact.—September 27, 1975, was the effective date ofthe
Privacy Act of 1974 provisions that affected many forms, letters, and
notices which request information from individuals. The Privacy Act
specifies, in part, that the taxpayer must be informed of the authority for
the request, of whether compliance is mandatory or voluntary, of the
principal purpose for which the information is intended, ofthe routine uses
which may be made of the information, and ofthe effects on the taxpayer
of not providing all or part of the information.
To comply with the provisions of the act which affected over 200 major
tax forms, the Service provided detailed information about the act on form
1040 and 1040A instructions to cover all forms, schedules, and supporting
statements taxpayers use in connection with their individual tax returns.
For filers in need of this information, new Publication 876, Privacy Act
Notification, was developed between the effective date ofthe Privacy Act
and the date filers received their form 1040/1040A packages. In August
1975, Notice 403, the Privacy Act of 1974, was developed for distribution
to taxpayers who must furnish additional information concerning incorrect social security numbers for tax administration purposes.
Tax rulings and technical advice
The Service's tax ruling program consists of letter rulings and published
revenue rulings.
190
1976 REPORT OF THE SECRETARY OF THE TREASURY
A letter ruling is a written statement issued to a taxpayer by the National
Office interpreting and applying the tax laws to a specific set of facts. Such
a ruling provides advice concerning the tax effects of a proposed
transaction so that the taxpayer may structure the transaction to comply
with the tax laws, thus resolving issues in advance and avoiding future
controversy. Letter rulings are not precedents and may not be relied upon
by other taxpayers.
Technical advice is counsel or guidance as to the interpretation and
proper application of the tax laws to a specific set of facts. It is furnished
by the National Office at the request of a district office in connection with
the audit of a taxpayer's return or claim for refund or credit. Frequently,
the district director's request is made in response to the suggestion of the
taxpayer that technical advice be sought.
A revenue ruling is an interpretation of the tax laws issued by the
National Office and published in the Internal Revenue Bulletin for the
information and guidance of taxpayers, practitioners, and IRS personnel.
Most revenue rulings are based on letter rulings or technical advice which
have the potential of setting precedents or have such broad applicabUity
that general guidance should be offered to people in similar situations.
Test program for processing ruling requests.—On July 1, 1974, the
Service initiated a test program in the Reorganization and Excise Tax
Branches, Office ofthe Assistant Commissioner (Technical), to change
the processing of ruling requests. Under the test program, a representative
of the Branch would contact, within 7 workdays after receipt of the
request, the taxpayer or the taxpayer's representative to discuss informally
the procedural and substantive issues involved in the ruling request.
The test program proved to be feasible in the two branches and was very
favorably received by taxpayers, taxpayer representatives, and the
Americah Bar Association. Due to the success of the program, it was
expanded on July 1, 1975, to include (with only a few exceptions) ruling
requests received by all the ruling branches in Technical. Under this
expanded test program, the taxpayer or the representative was contacted
within 15 workdays after receipt of the ruling request to discuss the
procedural and substantive issues involved in the ruling request. On July
19, 1976, the Service announced in Rev. Proc. 76-29 that the test program
had been adopted as a permanent change. The 15-day rule is now an
ongoing part of Technical's procedures for handling ruling requests.
Accounting methods rulings.—During fiscal 1976, receipts increased 14
percent over fiscal 1975 in requests for rulings regarding accounting
methods. The increase occurred principally in two areas.
First, a significant portion of this increase was attributable to the large
number of requests by manufacturers to change to the full absorption
method for inventory valuation. This activity was primarily a result ofthe
promulgation in 1973 of section 1.471-11 ofthe Income Tax Regulations,
which provided a transition period for manufacturers to change to the full
absorption method for inventory valuation.
Second, many taxpayers requested permission to readopt the last-in
first-out (LIFO) method of inventorying their goods, as well as many
requests for changes from taxpayers already on the LIFO method. The
LIFO method softens the impact of inflationary trends on prices paid for
goods and, in effect, reduces or defers taxpayers' current profits and taxes.
Requests for method changes in the LIFO area are expected to increase
until the present inflationary spiral levels off or reverses.
ADMINISTRATIVE REPORTS
191
Internal Revenue Bulletin.—The weekly Internal Revenue Bulletin is the
authoritative publication of the Commissioner for announcing official
rulings and procedures of the Service and for publishing Treasury
decisions, Executive orders, tax conventions, legislation, court decisions,
and other items of general interest. Bulletin contents of a permanent
nature are consolidated semiannually into Cumulative Bulletins. Copies of
the weekly and semiannual issues are distributed within the Service and
are made available to the public by the Superintendent of Documents, U.S.
Government Printing Office, Washington, D . C 20402, on a single copy
or subscription basis.
During 1976, items in the Bulletin included 559 revenue rulings, 51
revenue procedures, 16 public laws relating to Internal Revenue matters
and 13 committee reports, 2 Executive orders, 65 Treasury decisions
containing new or amended regulations, 14 delegation orders, 3 Treasury
Department orders, 14 notices of suspension and disbarment from
practice before the Service, 242 announcements of general interest, and
7 court decisions.
The Bulletin Index-Digest System, revised as of December 31, 1974,
provides a rapid and comprehensible means of researching material
published in the Internal Revenue Bulletin after 1952. The major part of
the system consists of digests of Bulletin items arranged under headings
that facilitate a topical approach to a search for items on a specific issue.
With the aid of finding lists, the researcher can locate items by Code
section or number.
Tax Reduction Act of 1975
The Tax Reduction Act of 1975, Public Law 94-12, provided for
allowable credits for earned income, personal exemptions, and purchase
of residence. The earned income credit is in effect a negative income tax;
it is a 10-percent refundable credit with a maximum of $400 reduced by
10 percent of adjusted gross income over $4,000. The personal exemption
credit is an additional $30 personal exemption tax credit. The house
purchase or residence credit provides for a maximum of $2,000 tax credit
on the purchase of a new principal residence, the construction of which
was commenced prior to March 26, 1975, and purchased between March
21, 1975, and January 1, 1977.
Data on these several credits for tax year 1975 is shown in the following
table (data through June 30, 1976):
Earned income credits
Personal exemption credits
Residence credits
6.0 million
190.5 million
472,000
$1.2 billion
$5.7 billion
$653 million
Presidential election campaign fund
During fiscal 1976, a total of 21.1 million individual income tax returns
had designations for the Presidential election campaign fund (PECF); this
was 25.5 percent of the returns processed by the IRS in that period. The
total amount designated in fiscal 1976 was $33.5 million. In fiscal 1975
there were 19.9 million individual tax returns with PECF designations
totaling $31.7 miUion.
The cumulative amount credited to the Presidential election campaign
fund since the checkoff was initiated in 1972 is $95.2 million.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Wagering taxes
Responsibility for administering the civil aspects of the Federal
wagering tax laws was returned to the Service by Treasury Order 221-3,
Revision 1, effective February 21, 1976. The responsibUity for enforcing
the criminal aspects of the wagering tax laws, including the forfeiture
provisions, remains with the Bureau of Alcohol, Tobacco and Firearms.
The Wage, Excise, and Administrative Provisions Branch of the IRS
Individual Tax Division is responsible for wagering tax matters involving
the application of the laws.
Creditability of foreign taxes by oil-producing corporations
One issue actively considered during the year was the question of
whether amounts received by foreign governments from the production of
mineral resources may be treated as creditable taxes for U.S. purposes by
domestic corporations. Three significant news releases were issued in
fiscal 1976 which pertain to this issue.
In IR 1591, the Service announced that it had taken the position that
the share of oil production retained by a foreign government under a
production sharing agreement is in substance a royalty in its entirety, and
is not eligible for the foreign tax credit.
Subsequently, the Service announced in IR 1608, Rev. Rul. 76-215, that
amounts received by an Indonesian Government entity under a production
sharing agreement are not income taxes for purposes of sections 901(b),
903, and 164(a)(3) ofthe Code. This position was applied prospectively.
The last release, IR 1638, specified the circumstances under which a
foreign tax credit will be allowed when a levy is imposed by a foreign
government which owns minerals extracted by U.S. taxpayers. The Service
expects this issue to be one of continuing concern in the upcoming year.
Multicorporation " F " reorganizations
The publication of Rev. Rul. 75-561, 1975-2 C B . 129, revoking Rev.
Rul. 69-185, 1969-1 C B . 108, marked a major change in Service position
with respect to whether the merger of two or more commonly owned
operating corporations could qualify as reorganizations within the
meaning of section 368(a)(1)(F) of the Code. The earlier position
contained in Rev. Rul. 69-185 was that the Service would not follow
several court decisions which held that a transaction resulting in the
combination of two or more operating corporations constituted an " F "
reorganization. In Rev. Rul. 75-561, this position was revoked and the
Service announced it would now follow those cases, as well as other court
cases, which had held that a merger of a wholly owned subsidiary
corporation into its parent which qualified as a liquidation under section
332 ofthe Code (to which section 334(b)(2) does not apply) could also
qualify as a reorganization under section 368(a)(1)(F).
Employee plans and exempt organizations
The Office of Employee Plans and Exempt Organizations (EP/EO)
administers the regulatory responsibilities assigned to the Service concerning employee benefit plans as well as tax-exempt organizations. In the
National Office, the structure consists of Employee Plans, Exempt
Organizations, and Actuarial Divisions. EP/EO field staff are located
primarily in 7 regional offices and 19 key districts, and local service is
provided in numerous other offices.
ADMINISTRATIVE REPORTS
1 93
Employee plans.—The Employee Plans activity ensures that the Employee Retirement Income Security Act of 1974 (ERISA) is administered
in accordance with the law. Major emphasis has been placed on developing
those regulations most urgently needed by taxpayers.
The Special Reliance Procedure and ERISA Guidelines issued in
November of 1975 provided that, for employee plans which comply with
the procedure, the ERISA Guidelines will be treated as fixed for a certain
period so that they can be relied upon for drafting employee plans and
amendments without regard to changes in the ERISA Guidelines during
such period. A new procedure was established whereby law firms may
obtain approval from a district director that the form of their pattern plan
satisfies the qualification requirements of the Code.
The IRS has continued to coordinate implementation of ERISA with the
Department of Labor and the Pension Benefit Guaranty Corporation in
order to issue regulations, procedures, and rulings compatible with those
issued by such other agencies and to reduce duplication of reporting by
taxpayers.
* The employee plans master file is being redesigned to provide for the
processing of applications used for plan qualification determinations and
the new form 5500 series returns and is expected to be operational in July
1977.
In January 1976 a case inventory control and management information
reports system was implemented with computer terminals in all key
districts. It has proved to be an effective system for controlling applications
for approval of plans and plan amendments.
Exempt organizations.—During 1976, the Service received 44,377
applications and reapplications from organizations seeking a determination of their tax-exempt status or seeking a determination of the effect of
organizational or operational change on their status. The Service issued
43,668 determinations and ruling letters. In addition, 309 technical advice
memoranda were issued. The Service devoted an average of 530 field
professional positions to the examination of 16,635 exempt organization
returns and to other exernpt organization activities. Also, 5 regulations, 70
revenue rulings and revenue procedures, 4 delegation orders, 12 forms, 9
news releases, and 3 publications were issued in 1976. Question-andanswer sheets were also prepared for taxpayer service use on exempt
organizations.
A taxpayer compliance measurement program (TCMP) covering the
examination of private foundations, public charities, and social welfare
organizations was initiated in 1975. The first phase of the program was
completed April 30, 1976; the second phase continues until December 31,
1976. The program is designed to identify patterns and characteristics of
compliance and noncompliance of the exempt organizations being
studied.
The number of active entities recorded on the exempt organizations
master file increased from 692,000 in 1975 to 756,000 in 1976.
Exempt Organizations Division has revised its management reporting
systems to maximize cost effectiveness. The revisions include the
utilization of computer technology to identify, select, and control
examination inventories; to control applications for exemption; and to
provide to management and other interested parties information essential
to carry out the mission of Exempt Organizations.
1 94
1976 REPORT OF THE SECRETARY OF THE TREASURY
Exempt Organizations Division is participating in testing the feasibility
of decentralizing the processing of exempt organization returns. All
processing is currently done by the Philadelphia Service Center. The test
involves processing the returns at the Cincinnati Service Center that would
be filed there if a decentralized system were in use.
A revenue procedure concerning guidelines and recordkeeping requirements for private schools was published. Extensive changes had been made
to the revenue procedure in order to reflect public comments received.
Five revenue rulings were published concerning the treatment of
exempt organization income from the rental of display space to exhibitors
at convention trade shows.
Final regulations were published on December 12, 1975, regarding the
computation of unrelated business tax on exempt organizations from the
sale of advertising in periodicals.
On February 17, 1976, final regulations were published providing the
definition of medical research organizations for purposes of foundation
status determinations and limits on deductibility of charitable contributions.
Public hearings were held June 6, 1976, to consider the proposed
regulation defining an "integrated auxiliary of a church." This definition
is critical in determining whether a church-related organization is required
to file an annual information return. The Service is reconsidering the
proposed definition. Under the Commissioner's discretionary authority,
church-related organizations covered by a group ruling issued to a parent
church were excused from filing a 1975 information return.
During 1976, 38 regulations, 17 revenue rulings and procedures, 6
delegation orders, 25 forms, 19 news releases, 1 publication, and 27
technical information releases including questions and answers on plans,
mergers and consolidations, employee stock ownership plans, the Special
Reliance Procedure, and the ERISA Guidelines were issued in the
employee plans area. In addition, the National Office issued 5,446 opinion
letters on master and prototype plans.
ERISA requires the conformance of all new pension benefit plans,
approximately 500,000 existing corporate plans, and an estimated
400,000 existing self-employed plans.
In 1976, the Service devoted an average of 790 field professional
positions to carrying out its regulatory responsibility in the employee
benefit plans area.
This responsibility is met by issuing advance determination letters
regarding the qualification of pension, profit-sharing, and other employee
benefit plans and by conducting an examination program to determine
whether plans continue to qualify in operation and to verify the
appropriateness of deductions for plan contributions. The number of
determination letters issued with respect to corporate and self-employed
plans during 1976 was 47,313, a decrease of 33.2 percent from 1975. The
decrease is attributed to the passage of ERISA and the fact that the IRS
was in the process of developing regulations under the new law.
Actuarial matters.—In 1976, the Service devoted 19 average positions
to preparing actuarial determinations, interpreting and clarifying provisions of ERISA and regulations issued thereunder, and serving on joint
committees and task forces with Labor and with the Pension Benefit
Guaranty Corporation.
ADMINISTRATIVE REPORTS
195
In addition, the Service contributed technical and administrative
assistance to the Joint Board for the Enrollment of Actuaries, established
by ERISA and under the joint direction of Treasury and Labor, in the
screening and processing of over 4,000 applications for enrollment. By
June 30, 1976, almost 2,400 applicants had been enrolled.
Audit of returns
The IRS audits tax returns in order to help ensure the highest possible
degree of voluntary compliance with the tax laws. While audit activity is
the primary method that the IRS uses to encourage voluntary compliance,
every return is subject to scrutiny by IRS employees and computers. When
a return is received in one ofthe 10 IRS service centers, it is first checked
manually for completeness and accuracy and for certain obvious errors
such as the claiming of a partial exemption or duplicate deductions. Then
the service center's computers check the accuracy of the taxpayer's
arithmetic and pick up other errors which may have escaped manual
detection such as the failure to reduce medical deductions by 3 percent
of adjusted gross income.
Returns selections.—The primary method used by the IRS in selecting
returns for audit is a computer program of mathematical formulae—the
discriminant function system (DIF)—which measures the probability of
tax error in each return. Returns identified by the system as having the
highest error potential are selected for audit. Since this system was
introduced in 1969, the IRS has reduced the number of taxpayers
contacted whose audit would result in no tax change (all taxes) from a
peak of 43 percent in 1968 to a historic low of 22 percent in 1976. The
Service is continuing its efforts to reduce the number of no-change
examinations and repetitive audits that result in no changes. In 1976,
procedures were implemented to dispense with an examination in certain
circumstances when the taxpayer has been audited for the same issue in
either of 2 prior years and the audit resulted in little or no change in tax.
Returns may also be chosen for audit under the taxpayer compliance
measurement program, a computerized system which makes a random
selection of returns within income classes for research purposes, such as
updating DIF formulae on more current taxpayer filing and reporting
characteristics. Audits conducted under TCMP must be more intensive
than most in order to develop the information required by TCMP.
The computer selection of returns is complemented by manual selection
in various instances. For example, if the IRS is auditing the return of a
partnership (or of one business partner), the returns ofthe partners (or
additional partners) may also be audited. Other returns may be manually
selected as a result of information from other enforcement activities, news
reports, or criminal investigations. The IRS also screens returns with
adjusted gross income above certain limits, and some returns of taxpayers
who submit claims for refund or credit after filing their returns.
Results of audit activity.—The IRS audited 2,546,419 tax returns of all
types in 1976, 80,714 more than the 2,465,705 audited in 1975. The 1976
total was more than in any year since 1968, when 2,903,722 were
examined. Ofthe total returns audited in 1976, 141,204 were examined
in service centers, compared with 112,550 last year. The remainder were
examined in district offices by revenue agents, tax auditors, and employee
plans and exempt organization specialists. Examinations conducted by
revenue agents and such specialists under field audit techniques totaled
1 96
1976 REPORT OF THE SECRETARY OF THE TREASURY
119,110 returns, a decrease of 32,566 returns, or 4 percent, from last year.
[Examinations of Employee Plans decreased about 36,000 returns (this
decrease is largely due to a change in methodology used in reporting
referrals from Audit Division) and Exempt Organizations decreased about
4,000 returns with an increase of about 7,000 examinations in other tax
areas.] Examinations conducted by tax auditors under office audit
procedures numbered 1,625,445 returns, an increase of 86,277 returns,
or 6 percent, over last year. Audit coverage of income, estate and gift tax
returns increased to 2.59 percent compared with 2.55 percent achieved
in 1975.
The Service's examination program resulted in $5.2 billion of additional
tax and penalties recommended. While recommendations exceeded $5
billion for the fourth straight year, the total was about $ 156 million below
last year.
During 1976, assessments totaled $4.4 billion, including $3.7 billion in
assessed tax and penalties and $717 million in interest. In 1975,
assessments amounted to $4.5 billion, ofwhich $3.8 billion represented
tax and penalties and $695 million represented interest.
Examiners are required to determine a taxpayer's correct tax liability—
no more, no less. This means that examiners look for indications that
taxpayers have overstated, as well as understated, their tax liability. In
1976, Service examinations disclosed overassessments on 137,455 returns, accounting for refunds of $290.5 mUlion.
Service center programs.—The IRS service center review program began
in 1972. It is generally limited to the verification or resolution of issues
which can be satisfactorily handled by service center personnel through
correspondence with the taxpayer. More than 1,882,000 returns were
checked in service centers in 1976, a 42-percent increase over 1975.
Most of these returns involved obviously unallowable items such as
medical expenses not reduced by the 1-percent and 3-percent limitations.
Approximately 1,474,000 returns were corrected in 1976, compared with
952,000 in 1975.
The service centers also conducted correspondence examinations of
returns selected under district office criteria involving issues such as
charitable contributions or interest payments, which generally can be
resolved through correspondence with the taxpayer. A total of 141,204
returns in this category were examined during 1976, an increase of nearly
25 percent over the 112,550 examined in 1975.
Computer-assisted audits.—The Service has an ongoing program to use
computers in audits of tax data in automated accounting systems. Both
generalized computer programs and specifically developed programs are
used to retrieve and analyze data essential to an examination. These
computer programs permit an automated "eye-balling" of massive data
files with the printout of only those items of possible audit interest. Both
taxpayers and the IRS save time and expense since computer-assisted
audits can be done in a fraction of the time needed to do the same job
manually.
Over 8,000 applications of these computer audit techniques were
performed in 1976, double that of 1975. These are done by computer audit
specialists, experienced revenue agents who have received intensive
training in computer hardware, programming languages, and audit
techniques.
The Program Audit Library (PAL), a system of generalized computer
programs developed by the Service and designed specifically for tax audits.
ADMINISTRATIVE REPORTS
197
was expanded in 1976 to include statistical sampling techniques. PAL also
includes programs for data selection, stratification, and summarization.
Coordinated examination program.—All large-case taxpayers, except
financial institutions and utilities, whose gross assets exceed $250 million
are included in the coordinated examination program. Financial institutions and utilities are included in the program if gross assets exceed $ 1
billion.
Because large-case taxpayers have complex accounting operations and
tax issues, the Service turned to the team audit or coordinated examination
concept when examining the tax returns of these taxpayers. This approach
combines the skills of the accountant-revenue agents with those of
economists, computer audit specialists, international tax examiners,
engineering agents, excise tax examiners, employee plans examiners, and
employment tax examiners.
At the end of fiscal 1976, there were 1,240 large cases in this program
which averaged 2.7 open years per case. This is the fourth consecutive year
the average open years in the large-case program has been less than 3 per
case.
During 1976, the IRS expanded its practice of conducting industrywide
audits involving the contemporaneous examination of major companies in
a given industry. Nine industries are currently being audited by this
approach, four more than 1975.
Tax shelter program.—In 1974, the IRS established a nationwide tax
shelter examination program coordinated by the National Office. Due to
the multidistrict involvement of promoters and investors, these examinations were conducted under industrywide audit concepts. This approach
insures a greater degree of consistency and uniformity in the Service's
overall treatment of the tax aspects of shelter programs.
Examinations of tax shelters are conducted by field personnel analyzing
the entire enterprise first to determine whether participants, barring
unexpected problems, can reasonably be expected to earn a profit
appropriate to the investment and degree of risk involved. The business
is then studied to determine possible improper or excess allocation of
deductions and also to make certain that individual items causing
operating losses are properly claimed deductions.
Computer-assisted audit techniques are being used, when appropriate,
to assist in the examination of large partnership tax shelters. These shelters
generate many related tax returns and present a major clerical problem to
the Service. To correct this, the Service has developed computer programs
to expedite the manual processing workflow in these examinations.
During 1976, the Service conducted examinations of possible tax shelter
abuses by investors in the oil and gas, real estate, farm operations, and
motion picture industries. The program wUl be expanded in 1977 to
include other widespread abusive shelters.
Joint Committee review.—The Internal Revenue Code provides that all
income, estate and gift tax refunds and credits which exceed $100,000
must be reported to the Joint Committee on Internal Revenue Taxation.
During 1976, 1,506 cases involving overassessments of $1 billion were
reported to the Joint Committee, as compared with 1,356 cases and $969
million in 1975.
During 1976, some changes were adopted to permit more efficient
handling of these cases. Until this year, final decisions had to be made in
the National Office in the name ofthe Commissioner and reported to the
198
1976 REPORT OF THE SECRETARY OF THE TREASURY
Joint Committee on these cases. Now, the Regional Commissioners are
authorized to take these actions on cases within their regional jurisdiction.
In addition, the Assistant Commissioner (Compliance) now has authority
to take final action for the Commissioner on matters formally presented
by the Joint Committee relating to reports submitted under this provision
of the Internal Revenue Code.
Audit information management system.—ThQ audit information management system (AIMS) is a video terminal-oriented management
information and case control system replacing the current system for
controlling returns in inventory and production. The new system is an
expansion ofthe existing integrated data retrieval system currently located
in the IRS service centers.
This new system was successfully pilot-tested in 1976 and will be
implemented nationwide during 1977. AIMS will provide for more rapid
responses to taxpayer inquiries and faster assessment and refund action
resulting in improved taxpayer relations. Also, the system will provide for
automated control and verification of assessments from the point of origin
in the district office and service center.
The perpetual inventory feature of the new system provides prompt
location of any return in the Audit Division. This, feature combined with
mbre timely produced management reports will permit increased efficiencies in staffing and better workload management and control.
Technical reference information system.—In 1976, the Service began
nationwide use ofthe technical reference information system (TRI). This
system involves computerized legal research. All or any portion of court
decisions, revenue rulings, statutes, or portions of the Internai Revenue
Manual can be retrieved through TRI. IRS personnel are able to research
issues more quickly and thoroughly than by doing traditional manual
research, with resulting monetary savings. The IRS is currently leasing 15
computer terminals and plans to install a number of additional terminals.
Computer production of reports on audit changes.—In 1976, the Service
increased its use of automated report-writing equipment for the production of Form 1902-E, Report of Individual Income Tax Audit Changes,
and accompanying Form 3547, Explanation of Adjustments, through the
acquisition of 40 report-writing machines. Located in local district offices,
the new equipment replaced older, antiquated equipment in several
districts, and provided a facility for automated onsite preparation of audit
change reports in many district offices which previously did not have such
a capability. The new equipment will improve the ability of district offices
to service the increasing office audit workload and will provide increased
service to the public. Also, the increased capacity of this equipment
enables the Service to greatly enhance the present 1902-E programs by
incorporating additional schedules (income averaging, sick pay exclusion,
retirement income credit, etc.) into the system.
The appeals process
Administrative appeals.—The Internal Revenue Service encourages the
resolution of tax disputes through an administrative appeals system rather
than through litigation. Taxpayers who disagree with a proposed change
to their tax liability are entitled to a prompt, independent review of their
cases. The appeals system is designed to minimize inconvenience, expense,
and delay to the taxpayer in disposing of contested tax cases.
ADMINISTRATIVE REPORTS
199
Within the system, there are two levels of appeal: The district
conference staff in the Audit Division ofthe district director's office, and
the Appellate Division in the Regional Commissioner's office. Each level
of appeal is independent ofthe other, and each has different authority and
jurisdiction. Their common and principal objective is the early disposition
of disputed cases, with a fair and impartial application of the law.
For the initial appeal conference, a taxpayer may choose either the
district conference staff or the regional appellate staff Opportunities for
such a hearing are offered at 58 district offices and 40 regional offices
throughout the country. Conferences are also arranged, as needed, at
other IRS locations by circuit-riding conferees at a place and time
convenient to the taxpayer.
Proceedings are informal in both of these offices. Taxpayers may
represent themselves or be represented by an attorney, accountant, or any
other adviser enrolled to practice before the IRS. If the disputed tax
liability, for each taxable year involved in the dispute, is $2,500 or less,
the taxpayer may obtain a district conference and a subsequent regional
conference without filing a written protest. At the conference taxpayers
are given the opportunity to present their views and discuss the merits of
the issues. If agreement cannot be reached during the district conference,
the taxpayer is advised of his further appeal rights and may then request
a regional appellate office conference.
In a majority of cases, the taxpayers and district or regional conferees
reach a mutually acceptable basis for resolving their tax disputes.
Consequently, very few cases go to trial.Tn the past 10 years, 97 percent
of all disputed cases were closed without trial. In 1976, the appeals
function disposed of 56,004 cases by agreement; the Tax Court tried 1,407
cases; and the U.S. district courts and Court of Claims tried 344 cases.
Thus, in disputed tax matters, the administrative appeals system continues
to serve the taxpayer well. The system provides for an expeditious,
independent, and impartial review of tax cases, and one measure of its
success is its ability to efficiently resolve the great majority of tax disputes
without litigation.
District conference.—District conference staffs consider disputes involving factual questions regardless of size. They also consider whether
proposed actions by a district director's office, with respect to issues
disputed by a taxpayer, reflect the correct interpretation of the Internal
Revenue Code, as clarified by the courts and by IRS regulations and
revenue rulings. In addition, since AprU 1, 1974, district conference staffs
have had the authority to settle cases where the amount of tax in dispute
was $2,500 or less, by taking into account the hazards of litigation; that
is, the possibility that the Service might lose the case ifit were litigated due
to factors such as weight accorded to evidence, lack of clear precedents,
or questions pertaining to how the law applies to a given, unusual set of
facts. Previously, only appellate conferees had this settlement authority,
which meant that many taxpayers had to take their cases to the regional
appellate office in order to settle unclear issues.
Since receiving this settlement authority, the percentage of agreed cases
closed by district conference staffs has significantly increased. Where
settlement authority could be exercised, about 30 percent of these cases
have been settled on that basis. The results have been favorable to
taxpayers in terms of time, convenience, and expense as well as to the IRS
200
1976 REPORT OF THE SECRETARY OF THE TREASURY
in terms of reducing the number of cases going to the regional appellate
offices or to the courts.
District conference staffs reach agreement with the taxpayer in about
73 percent ofthe cases they considered in 1976.
Appellate Division.—Cases considered by the Appellate Division cover
a wide range of issues from the most elementary to the most complex. They
involve additional taxes or claims for refund ranging from small amounts
to millions of dollars, including individual and corporation income tax,
estate tax, gift tax, excise tax, employment tax, and offers in compromise.
Cases considered fall into two broad categories: Nondocketed cases
involve cases in which the taxpayer is protesting a proposed action by the
district director, involving additional taxes, a refund disallowance, or a
rejection of an offer in compromise. These cases made up about 57 percent
of Appellate's workload in 1976. The second category of cases are known
as docketed, and these involve cases where taxpayers have filed for a
hearing before the U.S. Tax Court.
In 1976, 71 percent of nondocketed cases and 73 percent of docketed
cases closed by the Appellate Division were closed by agreement with the
taxpayer.
Tax fraud investigations
The Intelligence Division is responsible for the enforcement of the
criminal provisions of the tax laws. Special agents investigate evasion of
income, estate, gift and excise taxes, failure to file returns, failure to remit
trust fund taxes (withheld income and social security taxes), the filing of
false withholding exemption statements, false claims for refunds, and the
preparation of false returns for others. When evidence of tax evasion or
tax fraud is identified, the Intelligence Division investigates and recommends prosecution when warranted.
Special projects are sometimes carried out to determine the extent of
noncompliance in a given geographical area or occupational field, if a
pattern of noncompliance is detected, or to increase the coordination of
investigations covering an already identified area of noncompliance. One
successful project completed this year involved an extortion and kickback
scheme employed in the construction of a $700 million nuclear power
plant. This project resulted in 16 prosecution recommendations and has
generated tax assessments in excess of $1 million. Other recent and
significant intelligence investigations have focused on tax evasion by large
corporations; abuse of tax havens in foreign countries; corruption ofpublic
officials through payoffs and kickbacks; and preparation of fraudulent tax
returns.
During 1976, the Intelligence Division completed 8,797 investigations
and recommended prosecution of 3,147 taxpayers. Grand juries indicted
or courts filed information on 1,331 taxpayers. Prosecution was successfully completed in 1,193 cases. In 839 cases taxpayers entered guilty pleas,
138 pleaded nolo contendere, and in 216 cases the taxpayers were
convicted after trial. Acquittals and dismissals totaled 77 and 71,
respectively. Of the 1,172 taxpayers sentenced during 1976, 486, or 41.5
percent, received jail sentences compared with 40.3 percent last year.
Organized crime and strike force activities.—The IRS cooperates in the
Federal Government's fight against organized crime by participating in the
Federal organized crime and strike forces program. Located in 17 major
cities, strike force units are headed by attorneys from the Justice
ADMINISTRATIVE REPORTS
201
Department. The objective of this program is to coordinate the combined
forces of Federal law enforcement agencies against the criminal element
in our society. The IRS is responsible for ensuring the income from illegal
activities is correctly reported and taxed and for detecting criminal
violations ofthe tax laws. During 1976, the IRS contributed 660 staff years
of direct investigative and examination time to the strike force effort.
A total of 130 organized crime members and their associates were
convicted or pleaded guilty to tax charges during the year and 721
prosecution cases were pending when the year ended.
Since the inception of the organized crime program in 1966, 669
organized crime members and associates have been convicted or have
pleaded guilty to various tax charges.
Narcotics investigations.—As part of its special enforcement program,
the Service continued to identify and investigate significant tax violations
by middle and upper echelon narcotics financiers and traffickers. During
1976, the IRS completed 326 criminal tax investigations, obtained 56
indictments, and achieved 51 convictions of financiers and traffickers.
Delinquent taxes and compliance
In its mission to maintain the highest degree of voluntary compliance
with the tax laws, the Service makes every reasonable effort to secure
delinquent returns and to collect delinquent taxes. These activities are
constantly monitored to ensure appropriate and uniform application ofthe
laws, and to protect the rights of taxpayers.
During 1976, the Service reduced both the number of outstanding
delinquent accounts assigned to district offices and the dollar value of
those accounts. Compared with 1975, the number of delinquent accounts
cases assigned to district offices declined by over 21 percent, while the
total dollar value of these accounts was reduced by nearly 12 percent.
Since nonpayment of business taxes withheld from employees' wages
continues as the foremost delinquency problem facing the collection
activity, the following programs have been developed to deal with those
violations: The delinquency prevention program, which identifies potential business delinquents at a time when the situation can be reviewed and
the causes ofthe problem corrected; the new Federal tax deposit system,
which reduces processing time by more than half, presently implemented
in several service centers with full implementation scheduled before the
end of calendar 1976; and the trust fund compliance program, which was
revised to allow institution of civil measures as well as criminal prosecution
of chronic noncompliance cases, to provide uniform criteria for selection
of cases, and to expand those cases which can be monitored.
Program accomplishments.—In 1976, the collection activity disposed of
over 2.7 million delinquent accounts receivable, including approximately
327,000 cases in which the taxpayer, when notified of a delinquency,
contacted the IRS field offices to resolve the matter ("notice cases"). The
remaining 2.4 million deUnquent accounts required field contact by
district employees. Approximately 59 percent of these field contacts
involved business taxpayers.
Nearly $3.5 billion in delinquent taxes was collected during the year, an
increase of approximately $700 miUion over 1975. District personnel also
disposed of over 1.3 million failure to file investigations, including 300,000
categorized as returns compliance program leads. For 1976 approximately
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1976 REPORT OF THE SECRETARY OF THE TREASURY
785,000 delinquent returns were secured involving nearly $540 miUion in
additional taxes.
Repeater taxpayers have always been a primary concern ofthe Service.
During 1976, 21 percent of delinquent individual income taxpayers were
repeaters, while the rate for business taxpayers was 55 percent.
Because of the high business repeater rate and the fact that these
taxpayers are required to hold "in trust" the withheld taxes of their
employees, the Service continues to stress the importance of bringing
business repeaters into voluntary compliance, primarily through the trust
fund compliance program. At the beginning of 1976, there were 224,000
taxpayers with delinquent trust fund accounts amounting to over $756
million. Of these accounts, 2,800 had a balance due of $25,000 or more.
At the end of 1976, the number of taxpayers with delinquent trust fund
accounts had been reduced to some 143,000 with an outstanding balance
of approximately $630 mUlion. The number of delinquent trust fund
accounts over $25,000 also declined to slightly over 2,300.
Tax administration abroad
The Service maintains a system of permanent foreign posts to help
coordinate its domestic and foreign tax programs. Revenue Service
representatives (RSR's) at these stations are involved in compliance and
taxpayer assistance activities and maintain cooperative contacts with
foreign tax agencies. Foreign operations of the IRS are the responsibility
of the Office of International Operations (OIO).
Since 1948, when OIO established an office in Paris, the number of
foreign posts staffed by RSR's has increased to 14. At present, posts in
Bonn, London, Paris, and Rome cover Western Europe and North Africa.
Those in Mexico City, Caracas, and Sao Paulo are responsible for Mexico,
Central America, and South America, while Canada is serviced from
Ottawa. Offices in Tokyo, Manila, Kuala Lumpur, and Canberra administer OIO activities in Japan, Southeast Asia, Australia, and New Zealand.
A post in Teheran covers the Middle East and one in Johannesburg
services Africa south of the Sahara.
These foreign posts provide a vital tax administration link with more
than 2 million Americans living abroad. In 1976, the RSR's continued their
support of the international aspects of the compliance and enforcement
functions ofthe Service. This included the audit of tax returns, collection
of delinquent accounts, intelligence investigations, year-round taxpayer
assistance, and overseas collateral investigations for district offices in the
United States.
The RSR's also maintain a broad network of personal contacts with
foreign tax authorities and other foreign government officials, the U.S.
Department of State and other agencies, as well as the American
communities abroad. These cooperative contacts are a key element in
overseas compliance activities. In addition, the RSR's act as a liaison with
foreign competent authorities in tax treaty matters and, on occasion, are
called upon to represent the U.S. competent authority in conferences with
foreign tax officials involving international tax issues.
Foreign language training for the OIO.—The OIO continues to
strengthen the language capability of its overseas staff through intensive
training courses in foreign languages.
Prior to RSR's entering assignments overseas, they are required to
receive broad instruction in the language ofthe host country. During their
ADMINISTRATIVE REPORTS
203
tour of duty, this skill can be improved through language training offered
by the State Department.
Revenue agents, tax auditors, revenue officers, and taxpayer service
representatives, temporarily detailed overseas, also receive language
training. To meet their needs, the OIO has established, at National Office
headquarters, a language laboratory which presently offers basic conversation courses in French, German, and Spanish.
In addition to improving the language ability of its staff, the OIO is
making every effort to employ, whenever possible, revenue agent, revenue
officer, and tax auditor trainees with a dual language capability.
Compliance overseas.—^^The OIO's audit activity takes place primarily
within the United States. This activity focuses on securing compliance with
Federal tax laws from resident and visiting aliens, and foreign corporations
conducting business in the United States. Personnel of the OIO, at
National Office, also examine thousands of tax returns filed by Americans
living abroad.
The more complex tax return examinations continue to be conducted
at the foreign country site of origin, and during 1976 the number of these
audits increased over previous years. Until 1972, these audits were
generally conducted by foreign post personnel. Since then, revenue agents
and tax auditors are assigned to the OIO on detail from stateside duty for
short overseas tours. During these tours, the temporarily assigned audit
personnel travel through foreign posts performing audits under the
supervision of the RSR's. This arrangement has greatly increased the
number of overseas audits, and is an important factor in encouraging an
increase in voluntary compliance abroad.
During the past year, the Service gave increased attention to the proper
tax reporting of bribes, illegal political contributions, and other illicit fiscal
activities. In many cases, these fiscal irregularities have involved arrangements between foreign nationals and American companies. These situations have enlarged the scope of assistance that the OIO normally
provides to the IRS stateside districts. At the request of a stateside district,
the OIO will examine the accounts of a foreign subsidiary of a U.S.
corporation to determine whether they properly account for all income
and deductions which may have U.S. tax consequences. These OIO
support audits also make a positive effort to determine whether American
foreign subsidiary corporations are serving as conduits for bribes,
prohibited contributions, or other illicit activities.
Although most IRS delinquent tax collections occur within the United
States or its possessions, an increasing number are made in foreign
countries either by the IRS personnel on temporary detail or by the
permanent RSR's. This collection activity is generated by an increase in
delinquent accounts abroad, with dollar amount per account averages
more than twice the amount of similar domestic accounts. During 1976,
the OIO continued an effective overseas collection program, with special
attention to collections in the Dominion of Canada. Currently, the OIO
plans to expand the collection program during 1977. Revenue officers, on
temporary detail, are scheduled to provide support to RSR's at posts in
Western Europe, the Far East, Central and South America, and Canada.
Tax treaties and the competent authority.—The numerous tax treaties
with other countries are designed to eliminate double taxation, remove tax
barriers to trade and investment, and help curb tax avoidance. The United
States now has income tax treaties with 37 countries and estate tax treaties
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1976 REPORT OF THE SECRETARY OF THE TREASURY
with 13 countries. These include income tax treaties with the Soviet Union,
Poland, Romania, and Iceland, which became effective during the past
year upon exchange of instruments of ratification. A new income tax treaty
to replace the current treaty with the United Kingdom was signed in
December 1975 and awaits ratification by both the U.S. Senate and the
British House of Commons.
The Assistant Commissioner (Compliance) is the designated U.S.
competent authority in administering tax treaties. As such, he is responsible for negotiating agreements with foreign competent authorities to
provide relief from the double taxation which results when both the United
States and another treaty country subject the same income of a taxpayer
to their respective taxes without an offsetting credit.
The number of taxpayer requests for competent authority assistance and
the number of cases under negotiation reached a new high in 1976,
representing a 40-percent increase over the prior 4 years. The competent
authority continues to resolve these cases with a high degree of success.
Adjustments to taxpayer income under U.S.-foreign competent authority
agreements to provide relief have totaled more than $ 131 million since
issuance of a revenue procedure in 1970 to cover taxpayer requests for
competent authority assistance. Competent authority cases currently in
inventory involve tax treaties with Australia, Belgium, Canada, Denmark,
Finland, France, Italy, Japan, Luxembourg, the Netherlands, Norway,
South Africa, Sweden, Switzerland, the United Kingdom, and the Federal
Republic of Germany.
In 1976 meetings were held with tax officials from several treaty
countries to improve the administration ofthe treaties involved. As a result
of these and earlier conferences, working arrangements have been
reached for more effective exchanges of information and for resolution of
recurring problems which arise from interaction of U.S. and foreign tax
laws. Such dialogs will continue in the future with the aim of concluding
further reciprocal arrangements with treaty partners.
Technical assistance to foreign count ries.^-ThQ Tax Administration
Advisory Services Division provides reimbursable technical advisory
assistance in tax administration to requesting foreign governments in
cooperation with the Department of State and the Agency for International Development. Continuing the program established in 1963, the
Service provided onsite technical assistance during 1976 to seven
countries—Bolivia, El Salvador, Guatemala, Liberia, Paraguay, Trinidad
and Tobago, and Uruguay. In addition, short-term mobile instructor teams
conducted audit techniques training in Liberia and the RepubHc of China,
and ADP systems design training in Uruguay. The training was tailored to
the needs of each country at low unit cost. A broad tax administration
survey was conducted for the Government of Sierra Leone at the latter's
request.
The Service was host to 313 tax officials from 66 countries. In the years
since 1963, over 4,200 tax officials from 123 countries have participated
in study-observation programs. These visits give the participants the
opportunity to see actual work processes and operations in various IRS
offices and divisions nationwide, and frequently provide the motivating
factor in instituting change in the visitor's own tax administration.
In March 1976, a 7-week middle management seminar in tax administration brought together 21 participants from 9 countries, demonstrating
once again that peoples of diverse cultures can work together with mutual
good-will. The countries involved were Barbados, Egypt, Indonesia, Iraq,
ADMINISTRATIVE REPORTS
205
Japan, Nepal, Nigeria, Republic of China, and Trinidad and Tobago.
The Commissioner of Internal Revenue completed his term as third
councilor for the Inter-American Center of Tax Administrators (CIAT),
this hemisphere's multinational organization for promoting better tax
administration among its 26 member countries. The Commissioner
attended the CIAT Executive Council meeting in El Salvador in February
and, accompanied by the Director, Tax Administration Advisory Services
Division, represented the United States at CIAT's 10th general assembly
held in El Salvador in May. A member of the Audit Division staff
represented the IRS at CIAT's 15th technical seminar held in Haiti in
January 1976.
In March, the Service hosted a CIAT-sponsored, 2-day meeting of
representatives from Brazil, Canada, Mexico, and. Venezuela to discuss
ways tax administrators might deal more effectively with multinational
corporations.
Federal-State exchange program.—The IRS has formal agreements to
provide reciprocal exchange of^tax information with 48 States, the District
of Columbia, Puerto Rico, Guam, and American Samoa. New model
agreements are planned to implement the mpre stringent disclosure
provisions contained in the Tax Reform Act of 1976. These provisions will
require all Federal-State tax agreements to be renegotiated.
Magnetic tape data containing tax information on approximately 66
million taxpayer records were extracted from the individual master file for
tax year 1974, sorted by State, and furnished to tax authorities in 39 States,
the District ofColumbia, and Puerto Rico. The IRS is currently developing
a new annual standardized business master file extract tape program to be
furnished to participating States. This program will include Federal
unemployment tax information and current business master file extract
data. Presently, States are provided limited tape extracts of information
from the business master file and other Service master files relating to gift
taxes and exempt organizations.
Assistance to State and local governments
During 1976, the IRS responded to several requests from State
governments for technical assistance under the Intergovernmental Personnel Act.
The Service provided the State of Tennessee with an adviser to assist in
the development of an intelligence capability to investigate suspected tax
fraud practices.
The IRS also provided over 120 weeks of training assistance for 74
employees of State and local governments, including a specially designed
computer auditing course for 21 employees of the Department of
Taxation, Hawaii; training in excise tax law for Treasury employees,
Puerto Rico; basic revenue agent instruction for employees of the State
of Vermont; and investigative techniques training for Department of
Revenue employees, Pennsylvania.
In addition, employees of the State of New York and from two of its
counties were provided special IRS assistance to enable them to design tax
courses and to instruct their own employees.
Research and testing
Study of alternative filing procedures.—Approximately 12,000 individual taxpayers were sent questionnaires seeking information about current
206
1976 REPORT OF THE SECRETARY OF THE TREASURY
filing practices and opinions on two alternative filing procedures—a
staggered filing system and the extension of the current 3 1/2-month filing
period to 6 months. Results of the survey, together with input from State
tax administrators and other interested groups, will be incorporated in the
Service's study of alternatives to the current filing period.
Problem resolution tests.—\r\ an effort to simplify the taxpayer's job of
meeting tax obligations, the IRS, during 1976, conducted tests in four
districts covering special problem resolution procedures. The tests were
intended to provide solutions to problems taxpayers have in dealing with
various IRS components, as well as to help Service management identify
factors causing problem patterns. Test results will be analyzed to
determine the need for any procedural br organizational changes which
may facilitate the resolution of taxpayer problems.
Optical character recognition.—The IRS is exploring the feasibility of
substituting optical character recognition (OCR) equipment for data
transcription. Cost-benefit analyses are being conducted to determine if
OCR equipment could prove to be a more ecpnomical means of converting
data recorded on Federal tax deposit forms and other forms with print
characteristics controlled by the Service.
High-speed printers.—Tests have been completed to determine potential
IRS applications for high-speed, nonimpact printers. These printers
represent a technological breakthrough over existing designs and can print
up to 25 times as fast as conventional printers. Because nonimpact printers
can produce high-quality output at greater rates of speed, they have the
potential for cutting the costs associated with producing taxpayer notices,
periodic service center reports, and one-time printing efforts. Indications
are that substantial savings would accrue over the next several years if
these printers were installed in each service center.
Remittance processing system.—Based on successful tests with a
computerized system to expedite clearance and deposit of tax remittances,
the IRS has asked manufacturers to submit proposals for remittance
processing systems to be installed in each ofthe 10 service centers. When
installed, these systems should reduce processing costs by combining
remittance data input, numbering, and preparation of accounting documents in a single operation. The system should also accelerate remittance
posting to account status and tax data ba^es, and provide a "fact of filing"
indicator for account status operations.
Compliance ADP applications test.—Onsite tests are being conducted in
field offices to determine the costs and benefits of ADP applications in
support of district office audit functions. Applications are related to
providing direct computational assistance to revenue agents in their
examinations, mechanizing clerical tasks, and providing reports for local
management purposes.
Tax Reform Act of 1976
A number of substantive tax law changes and major revisions to the Tax
Code were considered by both sessions ofthe 94th Congress. During these
sessions, the Revenue Adjustment Act of 1975 was enacted to continue
certain antirecession tax reductions through the first half of 1976, pending
enactment of comprehensive tax legislation. The IRS prepared necessary
forms and instructions to implement the act and its subsequent extensions.
A number of proposals to change the Code were analyzed. These ranged
from energy conservation credits to the tax treatment for rental of vacation
ADMINISTRATIVE REPORTS
207
homes. Such proposals were reviewed for administrative feasibility and for
their effect upon the tax revenues. The results of these analyses were
provided to the Secretary of the Treasury and congressional committees.
Confidentiality of tax returns
Several bills, including the proposed Tax Reform Act, for safeguarding
the confidentiality of Federal tax return information were introduced in
the 94th Congress. Generally, these bills would amend the Internal
Revenue Code to restrict the disclosure of information from a tax return.
The provisions prescribe, by statute, the persons to whom, and the purpose
for which, disclosure of such information may be made. These bills impose
stronger penalties for unauthorized disclosure of tax return information.
These provisions and penalties would apply to employees, former
employees, or other individuals who are allowed statutory access to return
information including State tax officials and officials of other Federal
agencies.
Commonwealth status slated for Northern Mariana Islands
Congress has approved a covenant which paves the way for the Northern
Mariana Islands to become a Commonwealth of the United States. When
the Marianas become a Commonwealth, the covenant provides that the
Commonwealth will apply the income tax laws ofthe United States for its
territorial income tax, similar to the Government of Guam. The IRS is
implementing an agreement to collect social security taxes on behalf of the
Northern Mariana Islands Government. The funds collected will be
transferred to the United States and will be operated as a separate trust
fund until the Northern Mariana Islands achieve full Commonwealth
status, or earlier, if mutually agreeable. At that time this trust fund will be
fully integrated into the U.S. Social Security Administration.
Delinquent child support program
The Department of Health, Education, and Welfare has begun the
operation of a parent locator service, authorized by law, to locate absent
parents who have not been making court-ordered payments for child
support and to collect those delinquent payments. The law also directs, if
necessary, that IRS would provide certain tax return information such as
the last known home address or most recent place of employment for
absent parents. In addition, upon certification by a State that courtordered support payments are delinquent and uncollectable through State
collection efforts, the IRS is required to assess and collect these delinquent
payments as though they were tax deficiencies. Amounts collected are to
be remitted to the States. Plans for implementing this law have been
completed.
Restricting access to tax returns
Fiscal 1976 saw the disclosure activities again subject to continual
concern, study, and oversight. Congressional hearings were conducted on
proposed legislation dealing with tax return and tax information disclosures. In addition, the Privacy Commission, the Administrative Conference of the United States, and the Senate Select Committee to Study
Governmental Operations with Respect to Intelligence Gathering made
recommendations to Congress for legislative actions concerning disclosure matters.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
The Disclosure Operations Division was established in the National
Office to provide program guidance to the newly created disclosure officer
positions in all IRS field offices. Both actions reflect the Service's concern
over the individual's right of privacy and its responsibUity to respond
expeditiously to requests for information and documents under the
disclosure laws and regulations. Field officials now act on certain requests
for testimony of Service employees and make initial determinations
concerning Freedom of Information requests as well as process requests
for information under the Privacy Act of 1974.
The Service's disclosure activities are oriented to limit access to tax
information, assuring that only those persons entitled by law are properly
permitted to inspect such data, and to require that those who have access
to such information maintain safeguards for its protection. On the other
hand, the Service strives to make available as much nonprotected
information and documents under the Freedom of Information Act and
the Privacy Act of 1974 as possible. Important strides were made in both
regards as evidenced by the decline in the number of requests for tax
information from Federal agencies and others, and the increase in^he
number of requests for information and documents under the Freedom of
Information Act.
Returns-filed projections
Planning throughout the Service is based on projections of the number
of returns to be filed. The planning requirements of the various units of
the Service require that workload projections be prepared for the entire
United States as well as for service center areas, regions, and districts.
Specialized projections are also made for research purposes. The
projections are updated each year to incorporate changes in the economic
and demographic outlook as well as the effects of tax law changes and filing
patterns. Statistical techniques are used to identify the relationships
between tax returns filed and the economic and demographic changes.
The total number of primary returns and supplemental documents is
expected to grow from 127.3 million in calendar year 1975 to 164.7
million in 1985. This is an increase of 29.4 percent and reflects the
expected growth in economic activity over the next decade.
Tax models
Originally developed almost 15 years ago to meet Treasury's need for
timely estimates ofthe revenue effects of proposed tax legislation, the tax
models continue to be valuable tools for economic planning. Five basic
models, representing the returns of individuals, corporations, sole proprietorships, partnerships, and estates, are now used. Each model consists of
a set of generalized computer programs used with specially structured data
files comprising records in the statistics of income files.
In addition to the basic tax model for individual returns, the Service has
developed, in connection with the Federal-State Tax Collection Act of
1972, a special individual model set, "State Tax Models." These models
are designed to permit reliable data estimates for each ofthe 50 States and
the District of Columbia. Toward this end, the models are based on the
full statistics of income sample (over 200,000 returns for 1974) instead
of the subsample of about 100,000 returns used for the basic model.
ADMINISTRATIVE REPORTS
209
Art advisory panel
Since 1968, a 12-member panel of art experts, including museum
directors, scholars, and art dealers, has helped the Service determine the
value of works of art donated to charity or included in taxable gifts or
estates.
The Commissioner's art advisory panel held 3 meetings at the National
Office during fiscal 1976, reviewing 541 items representing works of art
with a claimed value of more than $40 miUion. Adjustments were
recommended on approximately 63 percent ofthe items and amounted to
more than $13 million. Assistance was provided to the panel by the
inhouse art program which, in addition, provides support to field requests
for valuing such works of art as antique furniture, ceramics, Oriental and
African art, gemstones, and historical and political memorabilia. Almost
half of the appraisal items received are now being referred to the inhouse
art activities program for valuation recommendations.
In its 8 years of operation, the panel has reviewed estimates valued at
more than $185 million and has recommended valuation adjustments of
over $48 million.
Maintaining IRS integrity and efficiency
Internal audit and security programs of the Inspection Service aid IRS
managers in their efforts to maintain the highest levels of integrity and
efficiency.
Internal audit activities.—The Internal Audit Division independently
reviews all IRS activities to ensure that policies, procedures, and controls
protect taxpayer rights and the revenue, and that Service operations are
carried out efficiently, effectively, and in accordance with laws and
regulations. Varied auditing techniques, including computer analyses and
statistical sampling, are used to detect operating problems and integrity
breakdowns.
Improvements and savings.—During the year. Internal Audit emphasized reviews of controls for safeguarding tax information, assuring
equitable treatment of taxpayers, and safeguarding of revenue receipts and
other Service assets. The resulting Internal Audit reports enabled
management to strengthen the controls in these key areas, improve service
to taxpayers, and stimulate an attitude of integrity awareness within the
Service. In addition, measurable savings and additional revenue resulting
from Internal Audit activities were estimated to total nearly $12 million.
Corrective actions on some internal audit findings do not result in
measurable savings or additional revenue, but instead accelerate the
collection of taxes or otherwise increase the effectiveness or efficiency of
the Service. Management actions of this type were taken on accounts and
returns estimated to total $4 million.
Fraud, embezzlement, or misconduct.—One ofthe basic purposes ofthe
internal audit program is to detect fraud, embezzlement, or other
wrongdoing on the part of Service employees or others who attempt to
corrupt employees.
Integrity reviews during 1976 resulted in the detection of 10 fraudulent
refund schemes involving 258 returns with refunds totaling $477,000.
Nearly $402,000 of these refunds were stopped before issuance to the
claimants. Only one scheme involved a Service employee. In addition, the
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Internal Audit Division participated with other Service components in the
investigation of nine other refund schemes totaling in excess of $1.4
million. The Service has established a committee, which includes an
Internal Audit representative, to appraise fraudulent tax and refund
schemes and recommend improved controls for detecting and deterring
such schemes.
The integrity reviews were also a contributing factor in the referral to
the Internal Security Division of information indicating possible breaches
of integrity by 401 employees and other individuals.
Internal security activities.—The Internal Security Division conducts
background investigations of IRS job applicants and investigates complaints of criminal and noncriminal misconduct and irregularities concerning employees. It also investigates persons outside the IRS who attempt to
bribe or otherwise corrupt Service employees or who threaten or assault
employees.
The Division also investigates the unauthorized disclosure of Federal tax
return information, disclosure or use of information by preparers of
returns, and charges against tax practitioners. In addition, the Division
conducts special investigations and inquiries as required by the Commissioner and the Office of the Secretary of the Treasury.
During 1976, the Internal Security Division was responsible for the
arrest or indictment of 125 individuals, including 27 employees or former
employees and 98 taxpayers, tax practitioners, or others. A total of 90
defendants were convicted during the year, including 71 defendants who
pleaded guilty rather than go to trial. Forty-three of these convictions were
for bribery, 27 were for assault, and the remainder involved such other
criminal charges as embezzlement, conspiracy to defraud the Government, obstruction of justice, and subscribing to false returns.
Employees who engage in improper behavior or unlawful actions
constitute a very small percentage of the IRS work force. The vast majority
of investigations relating to alleged acts of impropriety by Service
personnel result in exoneration of the employees.
The Internal Security Division completed 17,004 investigations during
the year. In addition, singular and multiple police record searches were
conducted on 19,861 persons considered for temporary, short-term
appointments or for positions created for special economic and educational programs.
These searches or investigations resulted in the rejection of 199 job
applicants and in disciplinary actions such as separations, suspensions,
reprimands, warnings, or demotions against 957 employees.
Bribery attempts.—IRS employees continued to report those persons
who challenged the integrity ofthe Service through attempted bribery. In
1976, 179 employees reported 204 possible bribery attempts resulting in
51 arrests or indictments. At the end of fiscal 1976, 42 persons were
awaiting trial on bribery charges. Historically, approximately one of every
four such attempts results in prosecution of the taxpayer.
Assaults and threats on IRS employees.—During 1976, 705 investigations were initiated and 27 persons were convicted or pleaded guilty. An
additional 13 persons were placed in the pretrial diversion program,
subject to revocation of probation, or referred to local authorities for
prosecution. In instances where prosecution is not authorized—which is
the situation in most cases involving threats—inspectors, with the approval
of the U.S. attorney, contact the alleged assailant to inform him or her of
ADMINISTRATIVE REPORTS
2 11
the applicable Federal statutes concerning assaults or threats on Government employees. The individual is also advised that repetitive acts could
result in serious consequences, including prosecution.
Investigative teamwork.—Breaches of integrity by individuals can be
investigated jointly by Internal Audit and Internal Security with the
assistance of the IRS Intelligence Division in some cases.
In one case, a former tax technician was arrested for filing 37 false
income tax returns, claiming refunds of over $118,000. After her arrest,
she offered the explanation that she was "conducting a test" of refund
procedure but was unable to explain 15 savings accounts she had recently
opened under fictitious names.
A refund scheme in Ohio, which did not involve an employee, led to the
arrest of an individual who filed false income tax returns claiming refunds
of over $588,000 at five different IRS service centers.
Violations of tax laws discovered during internal audits and integrity
investigations are referred to the IRS Intelligence Division for investigation if no employees are involved. During the year, there were 54 such
referrals.
In each region, joint Internal Audit-Internal Security integrity development projects were initiated to probe identified high-risk Service operations. For example, tests were made at service centers to determine that
revenue receipts were accurately and timely accounted for. This included
testing whether taxpayer payments were input to the computerized
integrated data retrieval system in accordance with prescribed procedures. Also, controls over taxpayer delinquent accounts in office branches
at district offices were reviewed, accountability records were verified, and
the propriety of collection actions were determined, including abatement
of penalties and writeoff of accounts as uncoUectable. A third project
involved tests to determine whether undeHvered refund checks were
effectively safeguarded at service centers against unauthorized reissuance.
Cost reduction and management improvement
With the support and involvement of managers and executives at all
levels, IRS vigorously applied its best efforts to achieve efficiency and
savings during 1976. Through a planned management by objectives
approach and emphasis on productivity measurement, IRS accomplished
a number of objectives and made progress toward others resulting in
savings (some of a cost avoidance nature) of many millions of dollars.
During 1976, several major projects to reduce mailing and distribution
costs were accomplished, resulting in savings in excess of $4 million. The
mail classifications for quarterly mailouts. Package X, some tax forms
orders, as well as Publications 17 and 334 were changed. Also, the IRS
developed a wide commercial bill of lading program for commercial
shipments of tax forms and other printed material. Each commercial bill
of lading produced saves the Government $ 12.50 over the processing and
postaudit price of a Government bill of lading. Savings in this area alone
exceeded $ 100,000. Another similar effort involved diverting to commercial transportation all material that could not be economically moved by
mail, and this created savings of $500,000 per year over the past 2 years.
In the telecommunications area the cost reduction program initiated last
year was expanded, resulting in improved service at a substantially lower
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1976 REPORT OF THE SECRETARY OF THE TREASURY
cost. By reducing Federal Telecommunications System (FTS) charges and
local telephone equipment, a $3.3 million savings was achieved.
The Service's ongoing reports curtailment project canceled enough
reports to result in a 1976 savings of approximately $300,000.
Records disposal during calendar year 1975 resulted in the release of
space and equipment valued at approximately $2.1 million. A total of
155,098 cubic feet of records were destroyed in accordance with regular
programs, and 365,436 cubic feet of records were retired to the Federal
Records Center.
Special emphasis was placed on efficient and economical space and
property management to encourage cost consciousness. The implementation of internal management systems provided a means for closer
monitoring and control of space and property inventories. These management systems and the continued emphasis on cost reduction, particularly
through implementation of open office planning and multiple occupancy
work stations, will result in the release of additional space in the future.
Also, furniture and machine rehabilitation and repair have prolonged
equipment lifetime and improved utilization.
Employee participation in cost reduction efforts was successfully
promoted through the incentive awards program. During 1976, 937
employee suggestions were adopted, resulting in tangible benefits of
$2,008^666 (an increase of $1,298,466 over last year).
In addition, 345 awards were granted for special achievements which
saved IRS $1,328,723 ($792,823 more than last year's savings). In both
categories, many employees received letters signed by President Ford
thanking them for their participation in improving economy. All award
recipients had created tangible benefits of $5,000 or more.
The Service continues to rank as one ofthe top Federal agencies in the
area of safety and health, although the rate of 2.8 disabling employee
injuries per million staff hours worked in calendar year 1975 is an increase
over the 1974 rate of 1.9.
Service personnel drove 135.3 miUion miles on official business in 1975
with 874 accidents, for a low accident frequency rate of 6.4 accidents per
million miles driven.
Executive development.—The Service continued to maintain a competent and effective career executive corps by enroUing 20 employees in
executive development training. Included in this training were 16
employees selected by nationwide competition and 4 incumbent executives.
Middle-management development.—The Service's course for new middle managers, reduced last year from 4 weeks to 2 1/2 weeks, was offered
15 times. This enabled the Service to substantially reduce the backlog of
middle managers requiring this training. Training costs were further
reduced by conducting the program at field locations as well as in the
National Office.
Basic management training.—Increased responsibilities have made the
position of the IRS first level manager more complex and critical. Thus,
the basic management training course, attended by all new managers,
provides the IRS with a means to prepare first-level supervisors for their
responsibilities.
This year the basic management training course was redesigned to
include more essential material in the same classroom time. Job aids were
developed to instruct the manager in the basic mechanics of the position
ADMINISTRATIVE REPORTS
2 13
as well as to provide a ready reference when on the job. Subjects such as
communications, motivation, labor relations, and performance appraisal
are taught in a manner that integrates them into the manager's job.
Labor-management activities.—In July 1975 the IRS concluded negotiations for a 3-year collective bargaining agreement with the National
Treasury Employees Union (NTEU), covering 30,000 employees in the
Data Center, National Computer Center, and in 9 of 10 service centers.
Overall, the National Office agreement, the multicenter agreement, and
the multiregional and multidistrict agreements cover over 65,000 IRS
employees.
This agreement renewed the need for training managers and supporting
staff people on their supervisory responsibilities under its provisions.
Briefings were held for management officials and first-level managers
received formal training.
Presently the IRS and NTEU are involved in negotiating a new
multidistrict agreement covering 30,000 employees in 57 of 58 districts.
Upon completion of these negotiations, negotiations for a new multiregional agreement will commence.
Approximately 220 unfair labor practice cases and 330 collective
bargaining agreement arbitration cases were filed during the past year,
which represents a significant increase over the previous 12-month period.
During the year, the agency has conducted training on local negotiations, arbitration, and unfair labor practice procedures to increase the
expertise of personnel specialists engaged in the administration of
Executive Order 11491, as amended, and the provisions ofthe collective
bargaining agreements.
Employment of the handicapped.—The IRS continued to increase its
employment ofthe handicapped in all occupations. By the end of calendar
year 1975, 1,642 handicapped persons were employed by the IRS. Over
100 blind individuals were working as taxpayer service representatives in
IRS districts and as tax examiners in the service centers.
Each year, the IRS focuses attention on the valuable contributions of
IRS handicapped employees and their ability to perform top-level work by
presenting an IRS Outstanding Handicapped Employee of the Year
Award. This year, for the first time, two employees received this honor:
Robert Clayton, from the Phoenix District, and Breland Collier, from the
Jackson District. Mr. Clayton received an additional honor in being
selected as the Department of the Treasury's Outstanding Handicapped
Employee of the Year.
Equal employment opportunity.—The IRS continued to increase equal
employment opportunity and to insure upward mobility opportunities for
all employees. There was minimum hiring during the period from yearend
1975 to yearend 1976, with a total onboard increase of only 4 percent.
Increases in minority representation exceeded that figure, however, with
a total minority increase of 4.8 percent, from 14,321 to 15,008. Blacks
increased by 4.5 percent, from 11,101 to 11,596, and Hispanics by 13.6
percent, from 2,188 to 2,486. It is also notable that 21 percentof the total
increase were minorities.
Revenue officer training.—The revenue officer training program (phase
III) was changed from 2 weeks of classroom training to a self-taught
program requiring about 40 hours of study. This produced an annual
savings of over $250,000 in travel, per diem, and staff costs for training
about 400 new revenue officers.
214
1976 REPORT OF THE SECRETARY OF THE TREASURY
Also, the redesigned program eliminated the need for senior revenue
pfficers to serve as classroom instructors. Instead, trainees are given
individual instruction and guidance, as needed, by a revenue officer at
their work location.
Taxpayer Service training.—Major efforts have been made to improve
Taxpayer Service employees' training. Basic courses have been redesigned
to emphasize technical accuracy in answering taxpayer questions. The
training program for taxpayer service specialists has been significantly
improved to provide greater tax information in more complex areas. Also,
improvements have been instituted in the refresher tax law program given
all employees furnishing taxpayer assistance during the filing period. The
refresher program provides assistors with sufficient knowledge of tax law
to answer a wide range of taxpayers' questions.
BUREAU OF THE MINT i
The Mint became an operating bureau of the Department of the
Treasury in 1873, pursuant to the Coinage Act of 1873 (31 U.S.C. 251).
All U.S. coins are manufactured at Mint installations. The Bureau ofthe
Mint distributes coins to and among the Federal Reserve banks and
branches, which in turn release them to commercial banks. In addition, the
Mint maintains physical custody of Treasury stocks of gold and silver,
handles various deposit transactions, including inter-Mint transfers of gold
and silver bullion, and refines and processes gold and silver bullion.
During the 15-month period, functions performed by the Mint on a
reimbursable basis included the manufacture and sale of proof coin sets
and uncirculated coin sets, medals of a national character, the Bicentennial 40-percent silver proof and uncirculated coin sets, and medals
commemorating the Bicentennial, including America's First Medals in
pewter and the American Revolution Bicentennial Administration
(ARBA) medals; and, as scheduling permitted, the manufacture of foreign
coins.
The headquarters of the Bureau of the Mint is located in Washington,
D C . The operations necessary for the conduct of Mint business are
performed at seven field facilities. Mints are situated in Philadelphia, Pa.,
and Denver, Colo.; assay offices in New York, N.Y., and San Francisco,
Calif.;2 and bullion depositories in Fort Knox, Ky. (for gold) and West
Point, N.Y.3 (for silver). The Old Mint, San Francisco, houses the Mint
Data Center, the Mint Museum, and the Special Coinage and Medals
Division (order processing facility).
The Mint Security Force, supported by extensive and sophisticated
alarm systems, closed-circuit television coverage, special vaults or other
controlled locking devices, and a personnel security clearance program,
provided protection for all employees and assets under the jurisdiction of
the Bureau ofthe Mint. A total of 56 Mint security officers completed the
1 Additional informaiion is contained in the separate Annual Report of the Direclor of the Mint.
2 The U.S. Assay Office al San Francisco also operates as a mint.
3 Coinage operations are also performed at the West Point BulUon Depository.
ADMINISTRATIVE REPORTS
2 15
5-week course at Treasury's Federal Law Enforcement Training Center,
Brunswick, Ga. A compact pistol range was installed within the Old Mint
to allow for the development and maintenance of proficiency in the use
of official weapons by security personnel.
The Fiscal Assistant Secretary established a three-member Continuing
Committee for the Audit of U.S.-owned gold located at various depositories at appropriate intervals. The Committee consists of one representative
each from the Bureau of the Mint, the Bureau of Government Financial
Operations, and the Federal Reserve Bank of New York. The General
Accounting Office was invited to have participants in these audits as
observers. During the fiscal year, an audit was conducted of each of the
four Mint depositories where gold is stored (Fort Knox, Ky.; U.S. Assay
Office, New York; U.S. Assay Office, San Francisco; and the Denver
Mint). By September 30, 1976, about 17.5 percent ofthe gold stored at
Bureau of the Mint depositories had been audited and found intact. The
Committee will perform a complete audit of all U.S.-owned gold over a
10-year cycle.
The Bureau of the Mint deposited a total of $923,212,610 into the
general fund of the Treasury during this 15-month period, $811,188,513
during fiscal 1976 and $112,024,097 during the transition quarter.
Seigniorage on U.S. coinage accounted for $747,406,877 during fiscal
1976 and $98,937,792 during the transition quarter.
Domestic coinage
During the 15-month period, U.S. mints produced, for general circulation, cupronickel-clad dollars, half dollars, quarters, and dimes, cupronickel 5-cent pieces, and 1-cent pieces composed of 95 percent copper, 5
percent zinc.
In fiscal 1976 the Philadelphia Mint manufactured, for general circulation, 4,912,622,000 coins; the Denver Mint 6,001,278,032 pieces; the
West Point Depository 1,701,709,196 1-cent pieces; and the U.S. Assay
Office, San Francisco, 2,251,312 dimes.
The Bicentennial-design coins in the dollar, half dollar, and quarter
denominations were released for general circulation in the early months
Bureau ofthe Mint operations fiscal years 7975 and 1976, and transition quarter
Fiscal year
Selected items
Newly minted U.S. coins issued:'
1 dollar
50 cents
25 cents
10 cents
5 cents
1 cent
Total
Inventories of coins in Mints, end of period ..
1975-
1976
.
56,267,000
308,164,000
674,344,000
913,980,000
756,960,000
9.886.662,200
146,400,000
239,900,000
1,072,000.000
874,400,000
618,200,000
7.711.700,000
12,900,000
42.800,000
193.600,000
232.000,000
114.300,000
2,030.200,000
12,5%.377,200
10.662.600,000
2,625.800,000
3.741.300.000
r 1.293,300.000
3.248,400.000
Electrolytic refinery produciion:
Gold—fine ounces
Silver—fine ounces
(r)
4,643,895.42
5,004,140.42
Balances in Mint, end of period:
Gold bullion—fine ounces
SUver bulUon—fine ounces
266,700,077
43.819.864
266.188,680
40.197.341
T.Q.
I For general circulation only,
r Revised.
266.177,852
39.849,021
216
1976 REPORT OF THE SECRETARY OF THE TREASURY
U.S. coins manufactured
General circulation
Denominaiion
Number of
pieces
Numismatic 1
Number of
pieces
Face value
FISCAL YEAR
1 dollar:
Cupronickel
Silver-clad
50 cents:
Cupronickel
Silver-clad
25 cents:
Cupronickel
Silver-clad
10 cents
5 cents
1 cent
Total
Face value
Total comage
Number of
pieces
1976
189.849,287
$189,849,287.00
4,626,623
26,688,332
$4,626,623.00
6.688,332.00
194.475.910
6,688,332
$194,475,910.00
6,688,332.00
292,109,349
146,054,674.50
4.626.623
26.688,332
2.313.311.50
3,344,166.00
2%,735,972
6,688,332
148,367,986.00
3,344,166.00
1,244,171,349
311,042,837.25
1,025,400,661
656,131.349
39,210.198,545
102.540,066.10
32.806,567.45
92,101,985.45
4,626,623
26.688,332
4,626,623
4,626,623
4,626,623
1,156,655.75
1,672,083.00
462,662.30
231,331.15
46,266.23
312,199.493.00
1,672.083.00
103,002,728.40
33,037,898.60
92,148,251.68
4 12,617,860,540
874.395.417.75
47.824.734
20,541.430.93
1,248.797,972
6,688,332
1,030,027,284
660,757.972
9.214,825,168
12,665,685,274
894,936,848;68
TRANSITION QUARTER
1 doUar:
Cupronickel
Silver-clad
50 cents:
Cupronickel
Silver-clad
25 cents:
Cupronickel
Silver-clad
850.183
5 590,454
$850,183.00
590,454.00
850,183
590,454
$850,183.00
590,454.00
51.200
$25,600.00
850.183
5 590,454
425.091.50
295,227.00
901,383
590,454
450,691.50
295,227.00
201.887,200
50,471,800.00
850.183
5 590,454
212.545.75
147,613.50
202,737,383
590,454
50,684,345.75
147,613.50
10 cents
434,941,200
43,494,120.00
850.183
85,018.30
435,791,383
43.579,138.30
5 cents
212,723,200
10.636.160.00
850.183
42,509.15
213,573,383
10,678,669.15
6 2,271,232,070
22,712,320.70
850,183
8,501.83
2,272,082,253
22,720,822.53
7 3,120,834,870
127,340,000.70
6,872,460
2,657,144.03
3,127,707,330
129,997,144.73
Icent
Total
1 All numismatic coins were manufactured al the U.S. Assay Office, San Francisco, and included 2,909,335 1975 proof
sels (dollar, half dollar, and quarter dollar dated 1776-1976; all other denominations dated 1975), 2,567,471 1976 proof
sets (dollar, half dollar, and quarter dollar dated 1776-1976; all other denominations dated 1976).
2Consists of 2,823,592 proof and 3.864,740 uncirculated coins for inclusion in Bicentennial coin sels.
3 Includes 1,701,709,1% 1-cenl coins produced al the U.S. Bullion Depository al West Point.
4Includes 189,849,287 Bicentennial dollars, 292,074,049 Bicentennial half dollars, and 1,244,136,049 Bicentennial
quarter dollars.
5 Consists of 386,778 proof and 203,676 uncirculated coins for inclusion in Bicentennial coin sels.
6Includes 355,955,870 1-cenl coins produced al the U.S. Bullion Depository at Wesl Point.
7 Includes 51,200 Bicentennial half dollars and 201,887,200 Bicentennial quarter dollars.
NOTE.—All dollars, half dollars, quarter dollars, and dimes for general circulation are three-layer composite c o i n s outer cladding 75 percent copper, 25 percent nickel bonded lo a core of pure copper. Proof coins for inclusion in the 1975
and 1976 proof sels are of the same metallic composition as those for general circulation. Coins for inclusion in
Bicentennial proof and uncirculated coin sels are three-layer composite coins with an outer cladding 800 parts silver, 200
parts copper, bonded lo a core approximately 209 parts silver, 791 parts copper.
of fiscal 1976. The half dollar was released in Minneapolis on July 7, 1975,
and the quarter in Chicago on August 18, 1975. The dollar was made
available to the public on October 13, 1975.
During the transition quarter, a total of 3,120,834,870 domestic coins
for general issue were produced.
Approximately 13.3 billion coins were shipped by the Bureau of the
Mint to the Federal Reserve banks and branches and the Treasury during
the 15-month period.
Coinage study
As part of the Mint's continuing effort to provide the United States with
the best possible coinage system, a contract was awarded in May 1975 to
conduct a comprehensive analysis of U.S. coinage requirements to 1990.
The final report was completed in September 1976.
ADMINISTRATIVE REPORTS
217
The purpose ofthe study was to review and recommend changes in Mint
facilities and in coinage forecasting, production planning, and the
distribution systems for the present U.S. coins and possible alternatives.
The impacts of various alternatives on public and private interests were
assessed to develop coinage system recommendations to 1990. Among the
more noteworthy recommendations of the study were elimination of the
1-cent coin and the half dollar and substitution for the present dollar coin
of a $1 coin sized between the present quarter and half dollar. The
Department and the Bureau of the Mint.did not have sufficient time by
September 30 to review thoroughly the recommendations ofthe coinage
study, and had not, therefore, endorsed or rejected its conclusions and
recommendations.
Foreign coinage
The Bureau ofthe Mint produces coinage for foreign governments on
a reimbursable basis, provided the manufacture of such coins does not
interfere with U.S. coinage production. During the 15-month period. Mint
installations produced 800,976,163 coins for Liberia, Panama, Peru, and
the Philippines.
Production
Domestic coin production remained at approximately the same rate as
during the previous reporting period.
The Mint developed, tested, and approved an ADP pallet control system
during the first half of fiscal 1976. Beginning in the second half, shipments
of minor coins from the Denver Mint to Federal Reserve banks were added
to the system implemented earlier for shipments of all denominations from
Philadelphia. Also, a simplified, cost-saving technique for scheduling coin
shipments was instituted.
Technology
The Bureau of the Mint's Laboratory in Washington continued to
provide technical expertise on the authenticity of U.S. coins, examining
2,309 questioned coins submitted by the U.S. Secret Service and other law
enforcement agencies, involving 248 cases.
Coin demand
The Bureau of the Mint continued its close liaison with the Federal
Reserve in determining coin requirements. Demand for coins, as measured
by the net outflow from Federal Reserve banks to commercial banks,
totaled 12.9 billion coins for the period. Coin balances at the Federal
Reserve banks increased by approximately 375 million coins from the end
of fiscal 1975. Closing inventories at the Mint were up 2.4 billion. The
Mint, therefore, absorbed most ofthe increase in joint inventories, which
closed at 7.0 billion coins, or 67 percent over June 1975.
Marketing and statistical services
Public Law 93-127 required the Mint to produce 45 million 40 percent
silver Bicentennial-design coins in dollar, half dollar, and quarter dollar
denominations. The Mint elected to produce 4 million three-coin proof
sets and 11 million three-coin uncirculated sets. The Mint began accepting
218
1976 REPORT OF THE SECRETARY OF THE TREASURY
orders in November 1974; however, because of legislative restriction on
releasing the coins prior to July 4, 1975, all shipping has been conducted
during this reporting period. Approximately 3 million Bicentennial proof
sets and 4 million Bicentennial uncirculated sets had been sold and shipped
as of September 30, 1976. During September 1975, the Mint began
making the uncirculated sets available in bulk quantities at a reduced
price. These were sold primarily to banking institutions, which in turn
offered them for sale to the public, affording a much wider distribution of
the sets during the Bicentennial year. Over 2.2 mUlion sets were sold in
this way.
In addition to these Bicentennial programs, the Mint accepted orders for
approximately 4.1 miUion regular 1976 proof sets and 1.9 million regular
uncirculated sets. Shipment of these will continue through calendar year
1976.
As part of the Department of the Treasury's observance of the
Bicentennial of the American Revolution, the Mint continued to reproduce in antique-finished pewter the first 10 medals authorized by the
Continental Congress. Orders were accepted for the two final units,
representing four pewter medals. Medals in the fourth unit honored Lt.
Col. John E. Howard and Lt. Col. William Washington; approximately
200,000 of each were sold. The fifth and final unit of the series
commemorated the action of Gen. Nathaniel Green and Capt. John Paul
Jones. The public was also offered the oppdrtunity to order the complete
10-piece series. During the entire America's First Medals program,
approximately 2,400,000 medals were sold.
The bronze 1 5/16-inch medal honoring the customhouse at New York,
the last of the 10-medal historic customhouse series, was released in
conjunction with the dedication ofthe New York Customhouse on August
1, 1975.
In continuing cooperation with the American Revolution Bicentennial
Administration the Mint produced the fifth ofthe series of ARBA national
medals commemorating events of the American Revolution. In addition
to the yearly medals, the National Bicentennial Medal was offered in
January 1976 in seven different sizes and alloy combinations, including
gold. Also during the reporting period, the 1976 ARBA PhilatelicNumismatic (stamp and medal) Commemorative was offered. The 1976
single medals in bronze and sUver will be offered in October 1976,
completing the ARBA series.
Administration
The Department of the Treasury selected the computer facilities at the
Old Mint, San Francisco, to implement, operate, and maintain payroll and
related personnel services for the Treasury payroll/personnel information
system (TPPIS). The Mint will provide these services to all Treasury
bureaus with the exception ofthe Internal Revenue Service. Implementation of TPPIS began in fiscal 1976, with all Treasury bureaus scheduled
to be on-line in 15 months.
The Mint completed the centralization of its own payroll/personnel
services at the Old Mint with the adaptation of the departmental integrated
payroll/personnel system (DIPS) developed by the Department of the
Interior, which system forms the basis for TPPIS.
ADMINISTRATIVE REPORTS
219
OFFICE OF REVENUE SHARING i
The Office of Revenue Sharing is located within the Office of the
Secretary for administrative purposes. The Revenue Sharing staff,
consisting of approximately 95 professional and clerical positions, has
offices at 2401 E Street, N.W., in Washington, D.C.
During fiscal 1976 and the transition quarter, $7.8 billion was distributed to more than 38,000 States, counties, cities, towns, townships, Indian
tribes, and Alaskan native villages which are recipients of shared revenues.
This brought to $26.7 billion the amount of money returned to States and
local governments since the inception of the general revenue sharing
program in 1972.
The State and Local Fiscal Assistance Act of 1972 (31 U.S.C.
1221-1263) authorized the distribution of $30.2 bUlion during the 5-year
period that ends December 31, 1976. The money is allocated according
to formulas contained in the law which use data based on population, per
capita income, and general tax effort for each recipient unit of government.
Program renewal
In April 1975, President Ford requested that the Congress renew the
general revenue sharing program past its presently scheduled termination
date of December 31, 1976. In his request, the President proposed that the
program be extended for an additional 5 3/4 years, through September
1982.
The Subcommittee on Intergovernmental Relations and Human Resources of the Committee on Government Operations of the House of
Representatives held hearings on the President's and other renewal
proposals from September 1975 through early December 1975. On June
10, 1976, the full FIouse of Representatives passed a measure which would
extend the program for 3 3/4 years.
Hearings were conducted in the Senate on August 25, 1976 by the
Subcommittee on Revenue Sharing of the Senate Finance Committee;
and, on September 14, 1976, the full Senate passed a bill to extend general
revenue sharing for 5 3/4 years.
On September 30, 1976, the House and Senate adopted a conference
report recommending extension ofthe program for 3 3/4 years, to October
1, 1980.
While considering renewal legislation. House and Senate committees
investigated the effects of changes to the data factors and formulas used
for allocations in the revenue sharing program. The Office of Revenue
Sharing obtained the necessary data and produced more than 80 trial
allocations to estimate the amounts which recipient governments might
receive under revenue sharing formulas with different data elements.
Suggested formula changes were proposed by various Members of
Congress, the Office of Management and Budget, and others; however,
renewal legislation has retained the data factors and formulas of the
original act.
Data improvement
During the year, the Office made significant improvements in the data
base used to allocate revenue sharing funds. For example, the Bureau of
• Additional informaiion is contained in the Annual Report of the Office of Revenue Sharing, Mar. 1, 1976.
220
1976 REPORT OF THE SECRETARY OF THE TREASURY
the Census revised 1973 population and 1972 per capita income data for
revenue sharing purposes. These revised data were developed using the
most recent information available from the Census Bureau's annual
Boundary and Annexation Survey, special censuses, and other data series
which indicate changes since 1970.
The Office used the revised 1973 population and 1972 per capita
income estimates, and fiscal 1975 adjusted taxes and intergovernmental
transfer data to compute allocations for the period July 1,1976-December
31, 1976 (seventh entitlement period).
Revenue Sharing's annual data improvement program is an administrative procedure to identify and to correct data errors. As part of this
program, in February 1976, each government was asked to examine the
data used to compute its seventh entitlement period allocation and submit
proposed corrections for any data elements considered to be in error.
More than 1,600 governments questioned at least one data element. After
careful study of these challenges, data corrections were made for 400
governments. Additional revisions resulted from ongoing data improvement efforts of the Bureau of the Census and the Office of Revenue
Sharing. Altogether, about 3,000 revisions were made to the data elements
prior to the initial allocation of funds for entitlement period seven.
The Office of Revenue Sharing and the Bureau of the Census maintain
an ongoing program of data review and evaluation to make the data for
each entitlement period the most accurate available. As a result, data for
thousands of governments were revised after review by the governments
themselves in February 1976. To give the recipient governments an
opportunity to propose corrections to the revised figures, a supplemental
data improvement program was conducted. In June 1976, data notices
were mailed to all governments whose data had been revised since
February 1976.
Electronic funds transfer and direct deposit
During the year, recipient governments were given the option of having
their revenue sharing payments deposited directly into bank accounts. Of
the 1,310 recipients of the largest revenue sharing payments offered the
opportunity to participate in the initial conversion in July, 875 elected to
do so.
More than half of the 38,000 revenue sharing recipients were to be paid
using electronic funds transfer or direct deposit in October 1976; and the
Office of Revenue Sharing expects that payments using these techniques
will continue to increase.
Audit procedures
Significant improvements were made to procedures used to audit
revenue sharing accounts of recipient governments during the period.
Revenue sharing law authorizes the Office of Revenue Sharing to work
with State audit agencies to review expenditures of shared revenues by
State and local governments, as appropriate to the State agency involved.
By the end of Federal Fiscal Year 1976 and the transition quarter, the
Office of Revenue Sharing had concluded audit agreements with 43 States
and the District of Columbia. These agreements provide audit coverage
of 40 States and more than 15,000 units of local government. In addition,
the Audit Division of the Office of Revenue Sharing continued its efforts
to encourage recipients whose accounts are audited by independent public
ADMINISTRATIVE REPORTS
22 1
accountants to include the audit of revenue sharing funds in their annual
audits.
During fiscal 1976 and the transition quarter, 6,904 external audit
reports were reviewed by the Audit Division, as compared with 2,815
during prior years. These external audits disclosed 409 violations of the
revenue sharing Act and Regulations. In addition, 51 audits were made by
Office of Revenue Sharing staff during 1976 and 14 reviews were made
of the performance of state auditors in auditing revenue sharing funds.
With assistance from the U.S. Customs Service, 131 simplified (mini)
audits were made of recipient governments which received less than
$10,000 on an annual basis. This special procedure includes a review of
internal control, compliance checks and a limited examination of
vouchers.
During the year, considerable progress was achieved in reducing the
backlog of noncompliance matters which had arisen during the course of
audits of recipient governments. In Fiscal Year 1976, 213 cases were
opened and 261 closed.
In addition, the Audit Division increased the number of confirmations
of payment amounts requested by and for IPAs. During Fiscal Year 1976,
the Office of Revenue Sharing issued 3,392 confirmations, as compared
with the previous year's total of 2,260.
Civil rights compliance
A Civil Rights Division was organized within the Office of Revenue
Sharing during the year to improve the administration of the steadily
increasing civil rights compliance workload.
Section 122 ofthe Revenue Sharing Act provides that "no person in the
United States shall on the ground of race, color, national origin, or sex be
excluded from participation in, be denied the benefits of, or be subject to
discrimination under any program or activity funded in whole or in part
. . . " with shared revenues.
During the 15-month period the Office of Revenue Sharing received
over 300 civil rights complaints, more than double the number of
complaints filed during the first 2 1/2 years of the program; Total civil
rights complaints exceed 500.
Although the civil rights staff of the Office of Revenue Sharing has been
small—a total of 10 specialists was authorized for fiscal 1976—it has been
effective. More than 100 cases already have been resolved, mainly through
negotiation and efforts to achieve voluntary compliance.
To assist in conducting field investigations and to help resolve
discrimination complaints, the Office has entered into 15 cooperative
agreements with State human rights agencies, 12 ofwhich were signed on
or after July 1, 1975. These agencies also are recognized by the Equal
Employment Opportunity Commission for purposes of investigating
complaints involving States and local governments under the Civil Rights
Act of 1972. Over 12,000 recipients are in States involved in such
agreements, nearly a third of the total.
The Office signed a cooperative agreement with the Department of
Justice during the period, bringing to four the number of Federal
interagency cooperative working agreements it has completed to achieve
a more coordinated enforcement ofthe nondiscrimination provision ofthe
Revenue Sharing Act with compliance requirements of other Federal laws.
222
1976 REPORT OF THE SECRETARY OF THE TREASURY
Legal issues
During the 15-month period, the Chief Counsel was involved in the
initiation or defense of 18 legal actions. The legal issues in those suits
involved civil rights, the applicability of the National Environmental
Policy Act (NEPA), and the Uniform Relocation Assistance Act to the
expenditure of revenue sharing funds, and the determination of data
factors for use in the revenue sharing allocation formulas.
In October 1975, the Chief Counsel's office issued revised civU rights
regulations. As now published, they are among the most comprehensive
civil rights regulations of any agency of the Federal Government.
In the area of litigation, the court held in the case of Goolsby v. Simon
(U.S.D.C, M.D., Georgia) that NEPA and the Uniform Relocation
Assistance Act were not applicable to a capital project in which revenue
sharing funds were used. The case is now on appeal in the fifth circuit by
the plaintiffs. In another fifth circuit case, Davidek et al. v. Hidalgo County
Commissioners et al. (U.S.D.C, S.D., Texas), unappealed, the court held
that NEPA was inapplicable to a capital project in which revenue sharing
funds were used.
In United States v. Chicago (U.S.D.C, N.D., IU.), the court, bn February
2, 1976, ordered the city of Chicago to adopt specific goals for hiring and
promoting minorities and women in the Chicago Police Department. The
Office of Reyenue Sharing was required to monitor the employment
practices ofthe police department to ensure compliance with the Revenue
Sharing Act. On May 27, 1976, the court implemented a plan and
timetable for the city's compliance with the court's decree of February 2,
1976, to enable the city to obtain the release of the revenue sharing
entitlements which had been withheld.
On July 1, 1976, the court ordered payment ofthe city's revenue sharing
payment for the fourth quarterly installment of the sixth entitlement
period, due on July 5, 1976. In all other aspects, the decree of February
2, 1976, remains in full force and effect until further order of the court.
During the fiscal period, the Chief Counsel issued approximately 250
letter rulings to recipient governments seeking guidance for the use of
revenue sharing funds. A current and revised edition of letter rulings is in
preparation.
Antirecession fiscal assistance
During fiscal 1976, Congress enacted a rneasure directing the U.S.
Treasury Department to distribute funds to States and local general
governments based on certain unemployment data. These antirecession
funds supplement the general revenue sharing payments authorized by the
State and Local Fiscal Assistance Act of 1972.
Responsibility for the administration ofthe new antirecession program,
authorized by Title II ofthe Public Works Employment Act of 1976 (P.L.
94-369), was assigned to the Office of Revenue Sharing. Appropriations
of funds to be distributed and of money to be used to administer the new
program were made available in fiscal 1977.
The Revenue Sharing organization
The staff is organized into nine functional units, as follows:
Administration.—Manages personnel, budget, central services and
other internal administration of the Office.
ADMINISTRATIVE REPORTS
223
Program Planning and Coordination.—Coordinates special research
projects at the request of the Director; manages the program planning
system.
Data and Demography Division.—Responsible for acquisition of current
and accurate data used to compute allocations of funds; conducts data
improvement program.
Systems arid Operations Division.—Computes allocations of funds;
writes payment vouchers; does all associated accounting; issues and
processes required reports; produces computer-generated communications and publications.
Audit Division.—Conducts and coordinates audit of recipient governments; reviews audits made by State audit agencies, certified public
accountants and independent public accountants.
Civil Rights Division.—Responsible for ensuring compliance with the
civil rights provisions of revenue sharing and antirecession law; conducts
investigations of allegations of noncompliance; cooperates with other
Federal agencies. State governments, and civil rights, women's rights, and
governmental organizations.
Intergovernmental Relations and Technical Assistance Division.—Provides technical advice and assistance to States and local governments;
maintains liaison with pubHc interest groups.
Public Affairs Division.—Provides information about general revenue
sharing to the public, the media, citizens groups, other Federal agencies,
research groups, and the Congress.
Chief Counsel.—Interprets the law; issues opinion letters, prepares
regulations; represents the Office of Revenue Sharing in all legal matters
concerning the general revenue sharing and antirecession programs.
UNITED STATES CUSTOMS SERVICE
The principal mission ofthe Customs Service is to enforce customs and
related laws against the smuggling of contraband; to assess, collect, and
protect the levying of import duties and taxes; and to control carriers,
persons, and articles entering or departing the United States by enforcing
the Tariff Act of 1930 and numerous other statutes and regulations which
govern international traffic and trade.
To accomplish this mission, the Customs Service performs the following:
1. Examination and clearance of carriers, persons, and merchandise
consistent with the requirements for the proper assessment and collection
of customs duties, taxes, fees, fines and penalties and compliance with the
customs laws and regulations applying to international commerce.
2. Detection and prevention of all forms of smuggling and other illegal
practices designed to gain illicit entry into the United States of prohibited
articles, narcotics, drugs, and all types of contraband.
3. Detection and investigation of illegal activities to apprehend
violators and otherwise take effective action to reduce, prevent, and deter
violations of laws and regulations enforced by Customs.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
4. As the principal border enforcement agency, the administration and
enforcement of over 500 other laws and regulations of approximately 60
Government agencies relative to international traffic and trade.
5. The most effective application of resources to carry out the total
Customs mission, consistent with efficiency in Government and economy
and service to the public.
During fiscal 1976 Customs cleared over 269 million persons arriving
in the United States. More than 79 million cars, trucks, and buses crossed
the country's borders; an additional 129,000 ships and 353,000 aircraft
were also cleared. This involved making 78 million baggage examinations
and processing 13 million customs declarations. In the transition quarter.
Customs cleared more than 79 million persons. Cars, trucks, and buses in
excess of 22 mUlion crossed the U.S. borders, and 37,000 ships and
103,000 aircraft were cleared. During this period there were over 3 million
declarations made and 23 million bags examined.
There were 42 million foreign mail parcels to be processed in fiscal
1976, requiring over 2 million informal mail entries. Customs collected a
record $4.9 billion in duty and taxes and processed 113.6 billion dollars'
worth of imported goods, which required over 3 million formal entries
(those over $250 in value). During the transition quarter, there were
approximately 10 million foreign mail parcels processed, resulting in over
600,000 informal mail entries. Customs collections of duties and taxes in
the transition quarter exceeded $ 1.4 billion (more than $300 million over
the same 3-month period last year).
The Customs enforcement mission also produced tangible results during
fiscal 1976. Merchandise seized, including illicit drugs, prohibited articles,
undeclared merchandise, etc., was valued at $821 million. There were
about 23,000 drug seizures. These seizures included 1,030 pounds of
cocaine, 21.4 mUlion units of polydrugs, and 380 tons of marijuana. There
were 368 pounds of heroin seized—an increase of 220 percent over fiscal
1975. In addition, neutrality violations—smuggling arms out ofthe United
States to other countries—^jumped from 674 cases to 1,517 cases in fiscal
1976.
The transition quarter yielded similar results of the enforcement
mission. The same category of value ofmerchandise seized exceeded $31
million—more than 7,000 drug seizures resulted in 45 pounds of heroin,
236 pounds of cocaine, and 115,000 pounds of marijuana being kept off
the market.
Enforcement
Interdiction
The major thrust of the enforcement effort is to intercept attempts to
introduce contraband occurring daily along the borders ofthe continental
United States. This contraband may consist of anything from narcotics and
guns to airplanes and automobiles. To accomplish this mission, customs
officers respond quickly and investigate vigorously all significant arrests
and seizures. Despite this vigorous enforcement effort, smuggling attempts
continue to increase.
During fiscal 1976, a major currency control program was launched to
try to identify and prevent the transfer of funds destined to support
smuggling activities. Since money is the recurring factor in all such
transactions, strict enforcement ofthe Currency and Foreign Transactions
ADMINISTRATIVE REPORTS
225
Reporting Act should have a marked effect on the flow of contraband,
including narcotics and dangerous drugs. By expanding investigative
energies in this area, considerable success is expected in the drive to
restrict, as much as possible, the flow of illegal goods across the borders.
In fiscal 1976, the Customs currency enforcement effort extended the
application of the law to include the entire spectrum of criminal activity.
Increased emphasis was placed on detecting and developing intelligence
information on outbound violators. Those violations which appear to
result from willful intent to violate the law are given as much investigation
as circumstances dictate to identify any relationship with other criminal
activity. Thorough investigations will not only identify any relationship
with other criminal activity, but may also provide the basis for felony
prosecution for currency violations.
In late 1975, the Customs currency program was related to the neutrality
program along our southern border. Various law enforcement agencies
were made aware of an additional tool for penetrating criminal activity,
and new sources of information were developed. In February 1976 a 90day pilot currency enforcement program was initiated in the New York
region. Its purpose was to develop sources of information within law
enforcement and to provide a basis upon which can be developed sound
enforcement and investigative techniques. There have been 36 seizures
from 36 violators, $775,613 seized, and 5 persons arrested. During the
same 3-month period in 1975, 15 seizures were made from 15 persons,
$314,025 was seized, and 3 persons were arrested. More significant were
two examples of interrelationship of an agency outside Treasury. Information provided by the Drug Enforcement Administration (DEA) was
expanded through investigation by customs officers into sufficient
probable cause to search two persons about to depart the United States.
In the separate incidents, seizures were made of $7,000 and $54,000.
Air interdiction.—In response to the escalating level of smuggling by
private aircraft across the Nation's border, especially the southern border,
the Congress, in 1969, authorized the establishment of a Customs air
support program.
Today, there are six air support branches located at military airbases
near San Diego, Tucson, El Paso, San Antonio, New Orleans, and Miami.
These locations were selected because of their proximity to major air
smuggling routes along the border, but smugglers can, and do, cross the
border almost anywhere. Since the southern border ofthe United States
is more than 3,000 miles long, each air branch has the responsibility for
protecting an air corridor that, on the average, is 700 miles wide.
Although the air interdiction program achieved several developmental
milestones in the period, the most significant in terms of overajl program
impact was the successful utilization, for the first time, of the NORAD/
FAA long-range radar and the installation of supporting mobile groundbased radars for smuggler detection and tracking. Using these resources.
Customs demonstrated that the radar networks could be integrated into
the total air interdiction system to provide Customs with the information
and leadtime necessary to permit the aerial interception of the smuggler
aircraft. The dominant example of successes in this regard is Operation
Star Trek; during this 50-day operation, ground-based radars detected 262
aircraft and Customs made 43 intercepts.
Ground-based radars are only one facet of the approach Customs is
taking to counteract smuggling through the use of private aircraft.
226
1976 REPORT OF THE SECRETARY OF THE TREASURY
Customs multifaceted approach involves the following additional elements:
1. Intelligence information on suspect aircraft which is available in
the Treasury enforcement communications system (TECS).
2. The private aircraft reporting system (PARS), which requires
that all private aircraft crossing the Southwest border give at least
a 15-minute advance penetration report before entering the U.S.
airspace and land at one of 13 specially designated airports.
3. The private aircraft inspection reporting system (PAIRS), which
automates the arrival records of all general aviation-type aircraft
arriving from foreign countries and clearing U.S. Customs.
Arrival information on all aircraft in PAIRS is immediately
accessible to enforcement units through TECS.
4. Air tactical interdiction units to intercept suspect aircraft.
The combination of these elements enables Customs to concentrate on
high-risk private aircraft by screening out legitimate private aircraft. The
Customs air support program seized 130 aircraft in fiscal 1976, an increase
of more than 91 percent over last year, ahd 453,000 pounds of marijuana.
Marine interdiction.—The objective ofthe marine interdiction program
is the detection and interdiction of smuggled contraband in water
boundary areas while insuring that reporting and entry requirements for
conveyances, goods, and persons are met. The Customs Service presently
has an inventory of 56 boats, located at 28 different locations throughout
the United States.
The small boat reporting system was developed to close a potential
avenue for illicit drug smugglers. Present Customs regulations do not
require all small boats to make an immediate report to Customs when
returning from a foreign port or international waters; however, under the
President's recently proposed new legislation, the masters of boats,
including pleasure vessels, will be required to report immediately.
Customs regulations will then be amended to require that all small boats
returning from foreign countries immediately report for inspection at
designated locations at the entrances to inland waterways or harbors.
Small boats and private yachts provide an ideal means for narcotics
smugglers to elude customs inspection and bring illicit drugs into the
United States with minimal risks.
In a localized enforcement effort over a 3-day holiday weekend in mid1975, customs officers focused on 70 boats known to be in Bimini. Within
a reasonable period following that weekend, 40 boats still had not reported
to Customs. One of those was under charter to an individual under
indictment for conspiracy to import narcotics. Subsequent investigations
have resulted in 10 additional penalties being imposed.
The following are examples of marine cases:
On July 1, 1975, customs officers seized 30,000 pounds of marijuana in
Dover, Del., in a case involving a 65-foot trawler and 14 vehicles. This case
included 31 arrests and the confiscation of several weapons, 3 jungle cats,
and $100,000 in cash.
On August 23, 1975, customs officers in Savannah, Ga., seized 36,000
pounds of marijuana in a case involving 3 marine vessels—a 65-foot
trawler, a 23-foot cabin cruiser, and a houseboat. Eight vehicles were also
seized along with several weapons, and 21 arrests were made.
On January 23, 1976, 4 pounds 8 ounces of cocaine were found in a
container bolted onto a ship's hull in Seattle, Wash.
ADMINISTRATIVE REPORTS
227
On January 19, 1976, a case involving 4 boats, 8 vehicles, and 3 boat
trailers in Ventura, Calif, resulted in the seizure of 32,520 pounds of
marijuana and 13 arrests.
Border interdiction.—With 96,000 miles of border to patrol. Customs
concentrated on increasing the selectivity criteria for patrol and inspection
forces, and in improving productivity-enhancing hardware for interdiction
purposes. The border intrusion detector system was expanded and
improved between ports of entry along the Mexican border. In addition.
Customs used night vision and infrared devices to detect and interdict
clandestine intrusions along the vast, desolate region of the Southwest
border.
Mail interdiction.—In addition to collecting revenue. Customs mail
facilities combated the smuggling of narcotics, weapons, explosives, stolen
property, and other contraband, by making over 5,000 seizures of illicit
narcotics in both military and nonmilitary mail. Illegal drugs were
uncovered in a diversity of articles such as camel saddles. Bibles, and baby
powder cans, as well as in letter class mail.
X-ray screening devices were introduced in major mail units. A "blitz"
technique by Special Narcotics Identification Forces was utilized when
significant shipments of contraband were arriving from specific countries,
with packages from that particular country being opened and thoroughly
examined.
Interdiction summary.—In addition to the interdiction efforts already
mentioned, significant accomplishments were made during fiscal 1976 in
seven other major areas: Detection and tracking systems; radar systems;
observation and surveillance systems; contraband detection systems;
ground sensor systems; aircraft and marine systems; and special projects.
Specific major accomplishments within the above areas completed
through fiscal 1976 include the following significant deployments: (a)
Military aircraft modified to meet specific Customs Air Patrol use; (b)
high-performance twin jet civilian aircraft equipped with radar and
infrared sensors to complement the Air Patrol strength; (c) airborne
forward looking infrared systems to track suspect aircraft in darkness and
to maintain a safe distance without giving away one's position or being
endangered by sudden maneuvers by the suspect aircraft; (d) mobile
search radars with a 100-mile coverage to detect low-altitude smuggler
flights over the border; (e) ground intrusion sensors, with associated
repeaters and displays modified by Customs Laboratory, to detect and
report covert intrusions of vehicles and persons in remote, desolate areas;
(f) tagging devices for covert emplacement in suspect aircraft resources
to detect and track suspect aircraft in dense traffic or vast, remote regions;
(g) items of night vision equipment for observing and interdicting
smuggling traffic in near total darkness; (h) fixed site X-ray contraband
detection device; (i) closed-circuit television system installed at San
Ysidro, Calif, to provide permanent legal record of primary and
secondary interviews of personnel and vehicles; (j) unattended border
area surveillance system to detect suspect aircraft carrying tagging
beacons covertly emplaced on them; (k) scanning and monitoring the
entire avionics communication bands!
Also, Customs technical support program has established an electronic
laboratory fully equipped and instrumented to design, develop, fabricate,
and test circuits, receivers, and digital processors; an optical laboratory
fully instrumented to test and evaluate optical and infrared devices and
228
1976 REPORT OF THE SECRETARY OF THE TREASURY
systems; and mobile optical laboratory van to test, evaluate, and support
critical maintenance of optical and infrared devices in the field.
Fraud, neutrality violations
Fraud.—Customs antifraud program continues to be highly successful
in terms of losses of revenue (LOR) discovered through field investigations and cash collections returned to the Government resulting from
recovered duties, fines, and penalties. During fiscal 1976, 103 agent manyears were expended on fraud investigations with the following results: (a)
$ 17,396,450 LOR attributable to fraud investigations, (b) $ 172,922 LOR
per fraud agent man-year, (c) $19,307,264 total revenue collections
attributable to fraud investigations, and (d) $187,449 revenue collections
per fraud agent man-year.
The following are several significant fraud cases of fiscal 1976:
As a result of the information provided from a confidential source,
agents in California developed a fraud case concerning asparagus grown
and processed in Mexico. Investigation showed that entered values had
been grossly understated and, in addition, false contracts were submitted
to Customs. On April 29, 1976, the Federal grand jury returned a 115count indictment against the corporation and three of the corporate
officers. LOR was approximately $364,208 with a forfeiture value of
$13,346,544.
On April 19, 1976, the president of a major importer of sportswear
appeared in U.S. district court, Portland, Oreg., and, in behalf of his firm,
entered pleas of guilty to 150 separate counts of criminal fraud (18 U.S.C.
542). Sentencing has been postponed pending receipts of a final probation
report. The maximum penalty that can be imposed for the criminal
violations is $750,000 ($5,000 for each offense). The court action
culminates an investigation which established that the false and incomplete value information furnished U.S. Customs by the importing firm
has resulted in a $537,406 LOR on merchandise having a forfeiture value
of $17,852,055.
An importer of semiconductors in the Florida area imported merchandise in violation of U.S. laws by commingling of foreign and U.S. parts and
invoicing them as U.S.; understating unit values; failing to invoice a selling
commission and representing items manufactured abroad as being merely
assembled. LOR was $979,730 and forfeiture value was $60,470,322.
Neutrality violations and related matters.—In the '^rea of neutrality
violations and related acts, customs officers have been active in attempting
to curtail the illegal shipment of arms to terrorist groups. A special
program has been initiated whereby more attention will be focused on
pilots and aircraft suspected of such illegal activity. Regulations already
in effect require pilots to report their arrival at the first port of entry. By
vigorously following up any failures to report arrivals, progress can be
made to increase airplane seizures and assess additional penalties against
the pilots.
On February 19, 1976, in one arms case, U.S. Customs agents arrested
2 suspects when they attempted to deliver to undercover officers
approximately 20 Browning 9-mm pistols converted to fully automatic
weapons. At the time of their arrest, one ofthe suspects had on his person
a fully automatic Browning 9-mm pistol. Two additional pistols were
discovered in the pickup truck that they were driving. Subsequent to the
arrest, agents executed a search warrant on a warehouse and seized 480
ADMINISTRATIVE REPORTS
229
MAC 10 Ingram 9-mm fully automatic machineguns with silencers and
988 magazines.
In addition to neutrality violations, customs officers have increased their
enforcement of the currency program, having found that currency
violators are frequently narcotics traffickers, also. In one such case, on
August 16, 1976, municipal police in Tijuana, Mexico, searched a vehicle
occupied by three Mexicans. A briefcase in the vehicle contained
$102,000 to be used for the purchase of heroin. Interrogation and
investigation by the federal judicial police led to the arrest of five
additional persons alleged to be involved in the narcotics buy. On August
22, 1976, five of the violators, who were U.S. citizens, were released to
U.S. Customs officers. Four were arrested, and the fifth suspect was
questioned and released. One of those arrested was identified as a heroin
dealer in Los Angeles. Investigations determined that the currency had
been provided by a major heroin supplier in San Francisco; the supplier
and his wife were also arrested and charged with violations of currency
laws, narcotic laws, and conspiracy.
The special agent in charge, Los Angeles, received information from
DEA that a suspect would be departing the United States with a large sum
of U.S. currency. DEA information indicated that he was a currency
courier for a cocaine smuggling operation, headquartered in Bogota,
Colombia. On December 17, 1975, the suspect was placed under
surveillance by customs officers, and the next day he was arrested as he
prepared to depart via commercial aircraft to Bogota. A search conducted
after the arrest resulted in the seizure of $91,899 in unreported currency.
Fraud and smuggling summary.—The following table summarizes
Customs efforts in fraud and smuggling:
EstabUshed loss of revenue
Arrests
Number of seizures
Appraised value of seizures
Number of penalty assessments
$17.8 million
1,172
1,%7
$36.6 million
1,582
Penalties imposed
Cases opened
Cases closed
Ca.se backlog
$1,044.5 million
29,202
27,145
18,971
During fiscal 1976, Customs was required to support the Secret Service
in its task of providing security for Presidential candidates in recent
campaigns. Some 40 man-years were diverted to this operation, hampering
efforts in the fraud program. Fiscal 1977 should be more productive since
more resources will again be devoted to the fraud program.
Enforcement support
Detector dogs.—Narcotic detector dogs have been utilized by Customs
since 1970. This unique part of the enforcement program provides an
efficient and effective means to detect marijuana, hashish, cocaine,
heroin, and many of their derivatives. This effective search and detection
method is used in screening arriving carriers, cargo, and mail for the
presence of narcotics and dangerous drugs.
For example, in most cases it would take a customs officer 20 to 30
minutes to assure himself that a vehicle coming across the border is free
of drugs, as compared with 4 or 5 minutes for a dog team. A dog can check
400 to 500 packages in 30 minutes; the same work would take an employee
several days.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Customs detector dogs screen over 21 million units of mail, cargo, and
vehicles arriving annually. Detector dog teams trained at the modern
training center in Front Royall, Va., contributed directly to the seizure of
more than 52,000 pounds of marijuana, 4,200 pounds of hashish, 93
pounds of cocaine, 71 pounds of heroin, and 3 million units of dangerous
drugs.
Treasury enforcement communications system (TECS).—TECS is a focal
program in enforcement support and is closely interrelated with the
information and radio communications systems. This system provides
customs inspectors, special agents, and patrol officers with up-to-date vital
information so that they can effectively and efficiently assist in the Federal
effort to suppress narcotics trafficking, terrorism, transnational white
collar crime, dealing in stolen vehicles and other articles, and other crimes
against the Federal revenue and the citizenry.
It provides the systemic technology for operating a series of information
systems and subsystems of vital importance to Customs management and
operations, as well as an index to all of Customs central files.
TECS has a data base of over 660,000 records and a network of 668
terminals. To improve upon this system and to enable it to expand its
services to Customs and other Federal agencies, a number of changes to
the systern were implemented in fiscal 1976. A new B7700 computer was
installed in the San Diego computer facility and all ongoing systems were
converted from the old computer to the new; new terminals were installed
2it preclearance airports of Winnepeg and Vancouver and Kennedy
International Airport; a telecommunications study was completed which,
when implemented, will improve performance and will result in long-range
reduction in telecommunications cost; and a terminal procurement
contract was completed to allow for upgrading of international airport
TECS facilities and to extend service to additional field offices. Also, a new
file was established that contains an index of wanted persons in the FBI's
National Crime Information Center (NCIC) data base, which has
contributed substantially to apprehension of wanted persons. Interface
with the California law enforcement and telecommunications system
(CLETS) was completed, providing TECS users with quick access to
drivers' licenses and license-tag information available in State and local
law enforcement agencies. Plans are underway to install TECS terminals
for use by the Coast Guard and the State Department in a joint Federal
effort to combat international terrorism.
Communications support program.—The heart and major thrust of the
Customs communications system is a series of regional communication
centers which, when fully implemented, will provide complete radio
coverage along the entire perimeter of the United States. These centers
will contain sector radio and message center facilities, and will provide
total communications and 24-hour duty officer support to the entire
regional management tearh.
Additionally, zone or local radio coverage will be provided at all ports
of entry and international airports. Local communications facilities have
been initiated and are proving of considerable value in certain remote or
highly active ports; however, primary emphasis is being accorded the
perimeter system.
With the completion pf two sectors in fiscal 1976, coverage now
includes seven regions and extends along the perimeter of the United
States from San Francisco south to the Mexican border, along the Mexican
ADMINISTRATIVE REPORTS
23 1
border around the Gulf Coast, up the Atlantic coast to the Canadian
border, and west along the Canadian border to Buffalo, N.Y. In fiscal
1976, also, local zone communications were installed in Puerto Rico, the
Virgin Islands, the Miami Airport and Seaport, the Los Angeles Airport
and Seaport, Detroit, Chicago, and New York City.
In addition to the expansion of the radio communications system, in
1976, a nationwide administrative teletype system was activated, connecting headquarters with 61 key Customs locations throughout the country.
Any station can send a message to any other station, or simultaneously to
a number of other stations.
In fiscal 1976, the communications capability available to the Customs
headquarters in Washington was significantly increased. The communications center was expanded, a command and control center was added, and
the Baltimore region sector control center was established in this complex.
With the completion of this complex, headquarters now has a total
communications capability 24 hours a day for strategic direction of
enforcement operations and administrative control over Service field
offices.
Customs enforcement information system.—A number of enforcement
information systems were introduced or perfected during 1976 which had
significant impact on enforcement activities. One of the major improved
systems is the vessel violation profile system ( W P S ) , which provides realtime information on the smuggling activities of commercial vessels. A
sampling of less than 30 vessels in this system contributed to narcotics
seizures with aggregate street value of $244 million in fiscal 1976, as well
as seizures of 3 commercial ships with values ranging from $100,00,0 to
$5 million.
A subsystem addressed in fiscal 1976 is the currency and monetary
instrument reporting system (CMIR) to monitor the filing pattern of
individuals carrying large amounts of currency or monetary instruments
into and out of this country to establish whether there is any correlation
between the movement of currency and monetary instruments and illegal
activities.
In fiscal 1976, a significant accomplishment was the completion of a
modernized search, arrest, seizure reporting system which now combines,
into one integrated computer-processed form, several reports previously
prepared and compiled by cumbersome manual methods. All enforcement-related management and statistical reports have been automated,
and the combined savings in manpower and associated costs realized
through this program amount to hundreds of thousands of dollars.
Another major information system perfected was the private aircraft
reporting system, while considerable progress was made on the small boat
reporting system.
Military predeparture inspection program.—The military customs advisory program was established in 1974 to train military personnel (military
customs inspectors [ Excepted] ) to inspect personnel, cargo, baggage, and
mail, thus enabling them to perform their own customs inspections at the
point of departure overseas.
Originally, six permanent customs advisers were stationed in Guam,
Philippines/Taiwan, Germany, Korea, Thailand, and Okinawa/Japan.
With the conclusion of the Vietnam conflict and mass deployment of
troops to the United States, two of the advisory positions (Guam and
Thailand) were abolished during fiscal 1976. Special projects such as the
preclearance of the returning personnel and equipment engaged in the
232
1976 REPORT OF THE SECRETARY OF THE TREASURY
annual ''Reforger" military exercises in Germany were also undertaken in
a cooperative effort to facilitate customs clearance. In addition to the
military customs inspectors (Excepted) in the Pacific and European
Commands, there are 1,248 military and 75 DOD civilian employees in the
United States who have been designated as customs inspectors (Excepted). They perform customs clearances at 88 foreign bases (military
airbases which receive aircraft from outside the Customs territory) in the
United States.
International activities.—Customs played an important role in the full
range of programs of the Customs Cooperation Council, an 80-member
international organization with headquarters in Brussels, which highlighted customs enforcement and the facilitation of international trade. By
chairing the Finance Committee and presenting a major paper on the role
of the Council, as well as sending delegations to the plenary Council
session and all committee, and working party meetings. Customs not only
contributed to individual programs but also continued to influence the
overall direction of the Council.
Responding to initiatives by United States and Australian Customs, the
Council accelerated work on customs enforcement, developing a working
draft of a multilateral convention on mutual customs assistance and
instructing the Permanent Technical Committee and its Working Party on
Customs Enforcement to prepare a draft convention for consideration by
the Council for adoption at its June 1977 plenary session. It is anticipated
that the convention will consist of a main body of rules and a series of
procedural annexes to be accepted separately, including a special annex
on assistance in action against the smuggling of narcotic drugs. The
Council's "Recommendation on the Pooling of Information Concerning
Customs Fraud" entered into force, and the Council continued to
cooperate with other international organizations dealing with enforcement, especially the International Criminal Police Organization (Interpol)
and the U.N. Commission on Narcotic Drugs.
Final drafts of mutual customs assistance agreements were negotiated
bilaterally with the Governments of Austria and Mexico. The agreements
provide for an expanded range of cooperative effort in the enforcement
of customs laws and regulations.
Cabinet Committee on International Narcotics Control (CCINC).—The
Cabinet Committee on International Narcotics Control was formed in
September 1971 to launch an accelerated attack on the international
aspects of the drug abuse problem. The U.S. Customs CCINC training
program has been designed to train foreign enforcement officials in border
control activities, emphasizing interdiction techniques, border surveillance, antismuggling programs and methods, cargo control, and searchand-seizure methods. The program is aimed at foreign customs officials or
other border control officials who exercise some form of customs function
or responsibility.
To date. Customs has trained nearly 4,500 foreign officials from 65
different countries. Of these, middle-management training in narcotics
interdiction has been provided to 336 foreign customs officials in the
United States. The remainder have been trained in their own countries.
High-level officials of foreign customs services participate in the 3-week
senior level observation program under the auspices of CCINC As of July
1976, 40 representatives of 23 countries had visited the United States. In
ADMINISTRATIVE REPORTS
233
addition, during fiscal 1976, U.S. Customs hosted 32 foreign customs
officials not sponsored by CCINC
As a more recent departure within the scope of foreign assistancefunded international narcotics control training, the U.S. Customs Service
has initiated a 3-week training program directed at narcotics detector dog
trainers. Since its inception, 43 officers from 11 countries have participated in this program. There have also been six participants in a 14-week
course geared to detector dog handlers.
Merchandise Processing and Duty Assessment
Cargo theft prevention
The Customs Service has assumed the responsibility for preventing theft
from international cargo while in Customs custody. Customs has a unique
capability of improving cargo security because of the daily presence of
customs inspectors at all points at which international cargo is processed.
This allows for the daily involvement of trained customs investigators in
preventing and minimizing losses from revenue fraud and improper
handling. Additional benefits are gained by the protection ofthe public's
health and safety, and reductions in the cost of imported goods and
services are thereby realized.
Cargo security awareness.—Customs emphasizes educating the importing community and carriers concerning the merits of cargo security.
Customs has now conducted cargo security miniseminars for some 5,000
executives representing importers, freight forwarders, manufacturers, and
insurance agents.
Customs has designed two types of antitheft posters and eight different
antipilferage slogan signs, printed in English and Spanish. Posters and signs
have been circulated to the field for display in warehouses, terminals,
freight sheds, container and devanning stations, security cribs, offices, and
on docks and piers.
The Customs Service has conducted surveys at 540 locations which have
resulted in the expenditure of over $23.4 million by private industry for
improvements in physical and procedural security.
An illustration of the proper use of the identification of theft-prone
facilities and the significant results obtained from voluntary compliance
with the "Standards for Cargo Security" is this randomly selected airport
and seaport terminal experience. These two terminals are representative
of the hundreds of such facilities which have been surveyed by Customs
and which have adopted Customs recommendations to improve their
security. They dramatically demonstrate the effectiveness ofthe Customs
cargo security program.
Terminal " A " is operated by a large, international, foreign flag air
carrier. From July 1972 through September 1974, this carrier reported 58
incidents of theft totaling $64,517 at this terminal. The Customs Service
performed a cargo security survey at this location on June 20, 1974. From
October 20, 1974, through November 1975, this same carrier reported 15
instances of theft and $1,891 in losses.
Terminal " B " is a publicly owned seaport facility. From July 1971
through December 1973, this operator reported 49 instances of theft with
a value of $5,924. In October 1973 the Customs Service conducted its
cargo security survey. By April 1974, all of Customs recommendations had
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1976 REPORT OF THE SECRETARY OF THE TREASURY
been complied with. From April 1974 through November 1975, this same
operator reported only six thefts valued at $891.
Imported merchandise quantity control {IMQC) program.—As an adjunct
to the cargo security program, the IMQC program was established by
Treasury Decision 71-22 with the purpose of promoting better manifesting ofmerchandise, developing a system for identifying trends in imported
cargo handling, and obtaining reports of overages and thefts, achieved
because of both local Customs and carrier interpretations and procedures.
In January 1975, a revised edition of the IMQC instruction manual was
published to achieve maximum uniformity in the administration and
operation of the program. Customs headquiarters representatives conducted 32 lectures on the manual throughout the United States. Over
3,000 representatives from Customs, carriers, the importing community,
and insurers received instructions in the use of the new manual.
Under the IMQC program, there were 323 seizures for manifesting
violations in fiscal 1976. These violations led to penalties being assessed
against carriers in the amount of $8,888,656. Audits of carrier records to
verify claims of nonimportation or to detect manifesting errors have
resulted in discovery of 1,746 discrepancies and assessment of additional
duties, damages and/or penalties assessed in the amount of $796,532.
Customs has collaborated with the Imports Branch, Bureau of Alcohol,
Tobacco and Firearms (ATF), to conduct security surveys of Customs
bonded warehouses to which shipments of imported nonsporting, surplus
military or automatic firearms are to be consigned. Based upon Customs
evaluation ofthe facility, ATF will approve or disapprove the importation
permit. As of June 1976, four surveys had been conducted and only one
warehouse had been found to possess adequate security.
Customs program against cargo crime (C-PACC).—C-PACC is a
continuing program utilizing the expertise of the Customs enforcement
arms to achieve a reduction in cargo crime through arrests, apprehensions,
seizures, establishment of a deterrent, gathering of inteUigence, and
followup accountability. From March 1, 1975, the inception date, through
June 30, 1976, C-PACC has been responsible for 574 instances of seizures
and/or penalties valued at $9,466,935 and 105 arrests, including 30
recovered stolen vehicles, 8.7 lbs. of cocaine, 80 lbs. of liquid hashish, and
20 lbs. of marijuana.
A major innovation in the program included the updating of the seal
used to secure cargo which was last improved in 1912. A new, highsecurity seal approved by Treasury last year is now mandatory on all portto-port inbond carload and container lot movements of cargo which are
still within Customs custody.
Theft information system (TIS).—In 1975, a Customs Theft Information
Committee worked to establish a viable theft information system to
ascertain the value, quantity, type of merchandise, and location of
pilferages or thefts of cargo from Customs custody or control. The Miami
and Los Angeles regions were chosen as TIS test sites.
On December 12, 1975, the TIS Committee judged the tests so
successful that it recommended that Customs headquarters (1) process
the test data for input into the computer; (2) generate reports regarding
thefts, i.e., volume, location, description ofmerchandise, carrier, dates,
etc.; (3) evaluate printouts; and (4) implement TIS nationally.
Containerization program.—It has been estimated that the U.S. Government is deprived of $40 million in revenue each year through the false
ADMINISTRATIVE REPORTS
235
manifesting (underreporting) of containerized cargo. To reduce this loss,
a program was instituted at 48 ports in February 1975 to conduct full
examinations of 2 percent of the containers shipped directly to importers'
premises. The results of this increased enforcement showed a return of
approximately $3.10 for every dollar spent. During the year, the program
was credited with the recovery of $860,054 in extra duty and taxes, the
discovery of $8,433,117 in unmanifested merchandise, and the assessment
of fines and penalties in the amount of $2,054,014.
Merchandise processing
Processing commercial merchandise.—Key to the efficient movements of
goods, 3.3 million formal entries of merchandise were processed in fiscal
1976. This was 8.3 percent more than in fiscal 1975. Almost $5 billion in
revenues were collected on 113.6 billion dollars' worth of merchandise.
Since not all merchandise can be allowed into the country, it is Customs
task to determine the classification of all merchandise for both statistical
and revenue-producing purposes. The statistical information is turned
over to the U.S. Tariff Commission, through the Census Bureau, for use
in the negotiation of international trade agreements. As a result, many
industries and jobs have been saved from unfair competition from
overseas.
Customs mail operations.—All incoming foreign mail is processed by
Customs for revenue and enforcement purposes. During fiscal 1976,
Customs mail branches processed approximately 50 million mail parcels,
prepared over 2.2 million mail entries, and collected over $20 million in
duty, with a manpower allocation of 485 man-years. Over 80 percent of
the foreign mail is processed by Customs mail branches at its locations in
New York, San Francisco, Los Angeles, and Chicago. Customs mail
specialists prepare mail entries on all international and military mail
arriving in the United States from abroad.
Import statistics.—CoUection of import statistics is an integral part of
processing merchandise imported into the United States. In fiscal 1976
customs officers, located at some 100 ports of entry, verified 6 million line
items on the 3.3 miUion entries filed. This represents verification of
approximately 39 million individual items. The present high quality of
import statistics flows from commodity expertise essential to the effective
collection of revenue, and to the enforcement, and admissibility mission
of Customs.
Customs also participates in the gathering of export data and transmits
approximately 8.5 million documents to the Bureau of the Census
annually. Customs is currently developing administrative procedures that
will allow for the collection and verification of the export declarations,
resulting in more reliable export data.
Quotas and international agreements.—One ofthe principal uses of these
vital trade statistics is in the establishment of commodity quotas. Currently
the Customs Service enforces more than 700 such quotas.
In addition to commodity quotas, meat and agricultural products are
monitored by customs officers.
Separate monitoring of other commodities such as certain meats and
speciality steels is performed to observe the commodities and determine
the possible need for establishing quotas. Other imports such as coffee and
textiles are subject to various other international agreements.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Textile agreements.—Currently, the United States has separate bilateral
textile agreements with 31 other countries covering trade in cotton, wool,
and manmade fiber textiles and apparel. Ten of these agreements include
systems under which imports from the exporting country must be visaed
prior to entry. During fiscal 1976, Customs administration and maintenance of these agreements, under the direction of the President's
Committee for Implementation of Textile Agreements, involved an
expenditure of approximately 165 man-years.
International Coffee Agreement.—In February 1976, the United States
became a signatory to the International Coffee Agreement of 1976, which
was subsequently submitted to the Senate for ratification. Enabling
legislation will be sought but is not expected to be passed before the
October 1976 implementation date. However, this legislation is not
necessary for the first phase of the program, which involves only
monitoring the movement of coffee. This monitoring or tracking system
is designed to provide accurate statistical data on the quantities of coffee
imported by consuming member nations and will serve as an allocation
base to exporting member countries if and when quotas are subsequently
established under the agreement.
Customs laboratories.—During fiscal 1976, Customs laboratories analyzed approximately 170,000 samples, resulting in over 15,000 changes in
the tariff classification of imported commodities. Necessitated by the
continuously changing technology which has multiplied the number of
different kinds of items imported into the United States, as well as the
increasing complexity of finished products submitted to the laboratories
for analysis, efforts were initiated in fiscal 1976 to develop guidelines for
more cost-effective sampling. Applying the guidelines developed, one field
laboratory analyzed 697 samples of wood products identified as probable
high-risk commodities, resulting in 113 classification changes and
$123,000 in additional Federal revenues.
International activities
Customs participated actively in the continuing program for facilitating
international trade, in the Customs Cooperation Council, a worldwide
organization of customs services. Major initiatives included development
of 5 new technical annexes to the International Convention on the
Simplification and Harmonization of Customs Procedures, bringing the
total number of annexes adopted by the Council to 17. Eventually the
convention will cover all aspects of customs procedures, involving
approximately 30 annexes. In addition, the Council stepped up work on
the development of an international harmonized commodity description
and coding system which can serve as an international commodity code
for transportation and the collection of trade statistics as well as for
customs purposes. This project is of major interest to U.S. Government
agencies and private business sectors, and Customs has coordinated U.S.
participation in developing the project.
Customs also participated in significant projects of other international
organizations in the field of trade facilitation. Principal among these was
the U.N. Economic Commission for Europe's Review Conference in
November 1975 to revise the 1959 TIR Convention, culminating 4 years
of preparatory work. This convention makes possible the expeditious
transit of cargo across national borders and through customs territory by
means of a carnet and an international guarantee system. The revision
ADMINISTRATIVE REPORTS
237
Updates the convention in the light of technological advances during the
past decade in the transportation of cargo.
Modernization
Customs Modernization and Simplification Act.—In August 1975, H.R.
9220, the Customs Modernization and Simplification Act, was introduced
by Congressmen Green and Conable, ranking members of the Trade
Subcommittee ofthe House Ways and Means Committee, and referred to
that committee for consideration. The Customs Modernization and
Simplification Act as drafted by the Customs Service would permit the
Service to adapt modern business techniques to the collection of duties on
commercial importations. H.R. 9220 contains provisions which would
allow Customs to fully implement the automated merchandise processing
system program now under development. In addition, the bill would
strengthen the laws pertaining to the verification of entry information and
permit the expansion of Customs regulatory audit program. The bill also
contains long-needed administrative simplification amendments such as a
flat rate of duty on purchases accompanying returning residents and an
increase in the monetary limit applicable to informal entries. Finally, the
bill contains a revision of the provision for the licensing and regulating of
customhouse brokers. From August 3 to August 6, 1976, the Trade
Subcommittee held hearings on H.R. 9220. No further action has been
taken since that time. In the Senate, the proposed legislation was referred
to the Senate Finance Committee.
Automated merchandise processing system (AMPS).—AMPS is an
ongoing program designed to improve, nationwide, the Customs Service
supervision and control over all merchandise entering the United States,
collection of duties, and uniform enforcement of regulations governing
importation.
The AMPS program is based on an operational concept approved by the
Commissioner of Customs in the summer of 1974 called the Customs
concept system. The concept, a. nationwide computer-supported telecommunications and data processing system, is being implemented through a
phased and cost-effective modular operational deployment plan. Functional system design and detailed functional specifications, encompassing
full entry and revenue processing for Customs, were completed during
fiscal 1976. Fiscal 1977 will be devoted to computer system design
development and programming for the Customs concept system. Simultaneously, hardware specifications will be identified, resulting in the
issuance of a request for proposal in fiscal 1977 for computer delivery in
fiscal 1978.
Currently, individual AMPS capabilities are being developed and
implemented at selected, geographically dispersed ports, providing field
operations in Customs with urgently needed assistance, and improving the
processing of imported merchandise. The first phase of the Customs
concept system, the early implementation system, which provides immediate delivery control, entry screening, and collection processing, is now
fully operational at Philadelphia, Chicago Seaport, Baltimore, Chicago's
O'Hare Airport, and Miami. As a result, a total of 10 percent of all Customs
entries and 13 percent of all collections are now on the automated system.
A total of 30 percent of all Customs entries and collections will be
supported by the system with completion of the implementations sched-
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1976 REPORT OF THE SECRETARY OF THE TREASURY
uled for other ports in the Chicago region and at Boston during fiscal 1977,
and at New Orleans and Houston during early fiscal 1978.
At the same time that new ports are being added to the network,
refinements are continuously being developed so that the system itself
more exactly meets the needs of the importing community. For example,
a recent change to the system has allowed the import specialist more
latitude in designating bypass criteria for entry selection, and has markedly
reduced his burden of routine work because 40 to 50 percent ofthe entries
are being liquidated by computer. The import specialist can now
concentrate more of his time and attention on new importers, complex
entries, and intensified enforcement efforts. Another major improvement,
now in development, permits field users to store erroneous entries on-line
and make corrections to them at a later time. This will eliminate
duplication of effort in Customs Entry Control Sections.
Local manifest clearance systems have also been installed at most major
seaports, and expansion to major airports is planned. These systems allow
centralized clerical units, assisted by local computer support when
justified by the volume, to post entry documents, freeing valuable
inspector man-hours. Inspector time can then be devoted to more
productive activities.
Vessel entry and clearance bill:—The proposed entry and clearance
legislation, which would amend many navigation laws to provide more
flexibility in administration, received clearance from the Office of
Management and Budget on February 9, 1976. It is anticipated that it will
be introduced early in the first session ofthe 95 th Congress. The bill would
amend or repeal some 60 navigation laws, including those relating to
reports of arrival and entry by vessels, and authorize the establishment of
appropriate controls by regulations.
Revision of vessel manifest form.—The proposal to revise the Customs
Regulations to provide for a modified vessel manifest form based on the
standardized Cargo Declaration prepared by the Intergovernmental
Maritime Consultative Organization was the subject of a notice of
proposed rulemaking published in the Federal Register on August 6, 1975
(40 F.R. 33038). Comments received in response to the notice are being
evaluated, and it is expected that publication of amendments to the
Regulations to provide for the use of this modified manifest form will be
before January 1, 1977.
Collocation.—Collocations of regional offices to promote improved
communications and greater adherence to the team concept were
accomplished in three of the nine Customs regions in fiscal 1976. Only
three offices remain to be collocated, with San Francisco and Miami
scheduled for completion in fiscal 1977. The Baltimore region is
substantially collocated while final action awaits the restoration of its
historic customhouse by the General Services Administration.
Collocations of District Directors with the special agents in charge were
completed in 25 of 42 locations in fiscal 1976, the remainder being in
various planning stages.
Border improvements.—The upgrading of Customs facilities resulted in
the construction and operation of new border stations at Richford, Vt., and
Monticello and Bridgewater, Maine. Construction on the border facility
at Nogales, Ariz. ($2.7 million) has been completed with occupancy
expected shortly. In addition, new inspection facilities were opened at
ADMINISTRATIVE REPORTS
239
Lambert Field, St. Louis, Mo., and Patrick Henry Field, Newport News,
Va., both provided at no cost to the Federal Government.
Two Customs border stations have received approval as solar heating
demonstration projects by the Energy Research and Development
Administration. The Hamlin, Maine, inspection station, completed in
1975, has been selected for solar heating retrofit, and the Sherwood, N.
Dak., station, scheduled for opening in 1978, will be designed with a solar
heating system. Both projects are funded under the Solar Heating and
Cooling Demonstration Act of 1974.
Customs accelerated passenger inspection system (CAPIS).—The rapid
growth of international air travel necessitated the development of an
accelerated inspection for intemational air travelers. The resultant system,
CAPIS, offers the advantages of full passenger-inspector contact whereupon a determination is made as to the degree of baggage inspection to
be conducted.
The CAPIS module is designed to provide a pleasant, efficient, and
versatile work station for inspectors. The number of inspection counters
is reduced by 25 percent from the traditional configuration and provides
for wider aisles which promotes smoother passenger movement.
A highlight of the CAPIS module is the free lane exits through which
75 percent of the passengers are released after initial processing. A
traveler requiring additional inspection is routed to inspectors further
down the conveyor belt where baggage can be more closely examined
without delaying other travelers. After initial installation at Miami,
Montreal, and Toronto, CAPIS has since been installed at Boston (Logan
Airport); Washington, D.C. (DuUes); Philadelphia, Pa.; Bangor, Maine;
Great Falls, Mont.; San Juan (Eastern); Nassau; Bermuda; Minneapolis,
Minn.; Houston, Tex.; and St. Louis, Mo.
Trade Policy
Trade Act of 1974—generalized system of preferences (GSP).—The
generalized system of preferences (part V ofthe Trade Act of 1974) went
into effect on January 1, 1976. To fulfill Customs responsibility under the
act, immediate actions were taken to implement GSP.
Headquarters teams were sent to all nine Customs regions to conduct
seminars explaining GSP procedures to both Customs officials and the
importing public. Materials for training customs officers were developed
and distributed. This was followed by the issuance of GSP regulations and
directives to guide Customs employees, importers and their representatives, and foreign producers and shippers in GSP matters. A brochure on
GSP, providing the traveling pubHc with the information necessary to
expedite customs clearance, was prepared and made available.
Currently 137 countries/territories and 2,724 major item numbers in the
Tariff Schedules ofthe United States are eligible for GSP. During the first
month GSP was in effect, the number of GSP imports represented 2.5
percent of all importations reported. In June 1976, GSP imports were
more than doubled, representing 5.2 percent of the total importations
reported.
Antidumping and countervailing duties.—A major revision of part 153 of
the Customs Regulations was published as Treasury Decision 76-176 on
June 25, 1976. The publication effectuated changes made in the
Antidumping Act of 1921 by the Trade Act of 1974.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Draft revisions of the countervailing duty regulations are now before
Treasury and will be published shortly in proposed rulemaking form.
Revision of part 175, Customs Regulations, pertaining to appeal and
review procedures for American manufacturers, is underway.
Fiscal 1976 saw a marked jump in the number of dumping allegations
made. Twenty-two antidumping and 10 countervailing duty cases were
initiated; 14 antidumping and 23 countervailing duty determinations were
published, requiring 148 antidumping master lists to be circulated to field
offices for their use in assessing dumping duties. Presently 61 findings of
dumping are in effect. Most prominent in fiscal 1976 workload was the
antidumping investigation that involved automobiles exported to the
United States from 28 automobile manufacturers located in 8 countries,
resulting in the largest antidumping investigation ever to be conducted.
Regulatory Activities
Regulatory audit.—Included in Customs modernization and simplification changes is the regulatory audit which will provide the Customs Service
with an ability to establish a firm basis for determining compliance with
various laws and regulations through the use of audit procedures in lieu
of more costly physical controls or other means of verification. While not
all firms can be audited, the application of scientific sampling methods and
information quantified through computer analysis permits selecting for
audit those companies identified as most likely to provide Customs with
high-payoff transactions.
During fiscal 1976, 925 audits of various types were performed which
resulted in revenues in excess of $6 million. Ofthe audits performed, 14
were referred to the Office of Investigations for suspicion of fraud while
79 other audits were performed for the Office of Revenue Sharing. In
another major assist, not included in the above figures, regulatory auditors
were assigned to a Justice Department task force which investigated
petroleum sales to an electric utility company. Task force findings
disclosed fraudulent billings to the utility and unpaid taxes by the selling
company in excess of $22 million. As all the details of this investigation
have not been completed, the final amount of recovery cannot be stated
at this time, but is expected to far exceed the initial $22 million amount.
Regulatory Audit has accepted the containerization challenge and
during fiscal 1976 developed and field-tested a containerization miniaudit
program. The test results of the miniaudit program have been so
successful, the audit program will be implemented on a nationwide basis
during the next fiscal year.
Other-agency requirements.—Besides enforcement ofthe Tariff Act of
1930 as amended, the Customs Service is charged with assuring importer
and traveler compliance with the laws and regulations of other Federal
agencies. Customs must administer over 500 statutory or regulatory
requirements for about 60 other agencies and/or administrations with
almost 40 percent of the 10,000 or more Tariff Schedule item numbers
subject to the requirements of Federal agencies other than Customs.
During calendar year 1975, Customs processed 96.5 billion dollars'
worth of imported merchandise involving 5.2 million transactions. Of this
amount, 36 percent of the transactions and 64 percent of the value
represent merchandise subject to other-agency requirements.
ADMINISTRATIVE REPORTS
24 1
From effectively enforcing motor vehicle safety and emission standards
to controlling food and drug importations. Customs is making a meaningful contribution to the safety and welfare of society while enhancing its
image as a responsive and dynamic service organization.
Freedom of information.—In response to the requirements imposed
upon Federal agencies by the Privacy Act of 1974, and the amendments
to the Freedom of Information Act of 1974, the Customs Service has
formalized procedures for the handling of requests for records.
Requests from the public for disclosure of records were received at the
rate of approximately 125 per month. The number of pages of records
heretofore disclosed from the files of the Customs Service is in the order
of tens of thousands. A systematic review and implementation of the
Privacy Act requirements concerning the maintenance, collection,
dissemination, and safeguarding of information and records pertaining to
individuals were undertaken and are still in process. Guidance and
instructions concerning the requirements of the act have been provided
to the various elements ofthe Customs Service, both at headquarters and
in the field.
Internal security.—Working in coordination with other agencies including the Office ofthe United States Attorney, 77 criminal investigators in
9 regional offices closed and completed a total of 504 investigations. Of
that total, 80 were either referred for criminal prosecution or resulted in
indictments. Also undertaken in the same reporting period were 162
investigations involving either administrative discipline (adverse action)
or procedural change. Over 120 investigations resulted in the allegations
being refuted or a determination made that there, was no misconduct on
the part of an employee. Thus, in the majority of these allegations which
resulted in administrative investigations, no action was taken against the
employee since the allegation was false or inaccurate or it could not be
substantiated.
Full field investigations.—As the Customs Service is the Nation's first
line of defense against smuggling, the full field investigation is Customs
safeguard mechanism to insure that employment of any individual is
unquestionably in the interest of national security. The full field is an
extensive preappointment investigation conducted on all sensitive positions, which in the past included the majority of the positions in the
Customs Service and in the near future will be extended to cover all
positions. An average of 1,215 full field investigations are conducted each
year with each taking an average of 50 man-hours to complete.
Security clearances.—For the period of fiscal 1973 through the first part
of fiscal 1976, Customs has granted an average of 405 security clearances
a year. In fiscal 1976, there has been a marked increase in the number of
security clearance requests, as the Customs Service enforcement program
is becoming more involved with the use of military classified equipment
in its surveillance activities and other programs which require access to
military installations.
Internal audits.—The internal audit activity is much like the Customs
counterpart ofthe GAQ. When the Customs Service is charged with a new
program. Customs management must have available an internal audit
capacity to assure that Customs programs are being carried out, that those
implementing the program are adhering to established policy and
242
1976 REPORT OF THE SECRETARY OF THE TREASURY
procedure, and that resources to support the programs are being
judiciously spent.
In 1976,212 audits, surveys, and special projects were completed by the
headquarters and regional staffs, an increase of 118 over the 94 cases
completed in 1975. A substantial portion ofthe increase is attributable to
improved planning, management, and coordination. Some ofthe increase
is due to a change in audit direction towards more specific reports which
address fewer unrelated topics.
Two major ADP audit areas of the past year were: (1) automated
merchandise processing systems (AMPS), and (2) administrative ADP
support. The combined budget for these two areas for fiscal 1976
exceeded $ 10 million. The reports identified for management those areas
in which increased efficiencies could be effected and improved managment is required. The impact of improved efficiency and accuracy of data
processing is not limited to the two areas as improvements benefit nearly
every organizational entity in Customs.
Other Activities
Operation Sail 1976.—The U.S. Customs Service, working in close
cooperation with the American Revolution Bicentennial Administration,
devised a simplified entry and clearance procedure to facilitate the
movement between ports in the United States of the vessels participating
in Operation SaU 1976.
Recordations.—Approximately 340 trademarks, service marks, and
copyrights, or renewals, assignments, and name changes therefor were
recorded for irhport infringement protection. Eight patent surveys and
renewals were approved. Fees collected for these services totaled
approximately $66,000.
Micromation.—The pilot test of this project was successfully completed
in May 1975 and the potential for expansion was significantly enhanced
with a procurement action for 143 microfiche readers and 18 reader/
printers in late fiscal 1975. Subsequent to this procurement, micromation
has been expanded into all regional headquarters, 33 districts, and 64 ports
of entry. During fiscal 1976, nine additional reporting requirements were
converted to microfiche output, consisting of approximately 16 miUion
pages of printed material with a. resultant savings to Customs of
approximately $250,000. With the objectives of reducing computer time
expended in producing hardcopy output and a significant reduction in
costs, expansion of this project will continue in fiscal 1977 with the
conversion of other reporting requirements to microfiche.
Acquisition ofa National Data Center computer.—During fiscal 1976, a
request for proposal action was submitted through Treasury to GSA for
acquisition ofthe National Data Center computer equipment. This request
resulted in the installafion of an "interim ADPE" (IBM 370/155) at the
headquarters Data Center. Subsequent to readiness review and acceptance, production of all current operational systems was converted from
the IBM 360/50 and fime-shared equipment to the IBM 370/155. OMB
and GSA directives require the interim ADPE to be replaced by
competitive procurement, and a request for proposal has been prepared
and forwarded to Treasury for review during the transition quarter. The
IBM 370/155 has provided Customs with short-term relief in allowing
greater productive capacity, more throughput, and faster turnaround in
ADMINISTRATIVE REPORTS
243
meeting its production requirements, while the longer term solution
available in the procurement action is being processed.
Excess property.—Customs again led Treasury agencies in utilization of
excess property in fiscal 1976. This program provides substantial savings
to the Government, allowing more cost-conscious use of available
resources. Customs acquisitions include such items as 7 helicopters
(acquired from Army and Air Force surplus), with an original value of over
$ 1.6 million, to be used in the continuing antinarcotics program; 31 house
trailers from Health, Education, and Welfare ($ 125,000) for use at border
ports or marine facilities; radar and other electronic equipment from
Justice (DEA) for law enforcement purposes, valued at $500,000; and
numerous other acquisitions totaling $4 million for the year.
Administrative rulings.—Amendments to the Customs Regulations
setting forth procedures for applying for rulings on the legal consequences
of prospective transactions were published in the Federal Register July 30,
1975. Under the regulations, the conditions under which rulings are issued
and published are set forth. Procedures are also included which apply to
applications for internal advice rulings on pending transactions.
Interpretative regulations.—Amendments to the regulations incorporating policies reflecting previous administrative and court interpretations of
the partial exemption from duty under item 807, Tariff Schedules of the
United States, were published in the Federal Register on September 18,
1975. These regulations set forth in detail all the requirements necessary
for eligibility for an exemption from duty of American-made components
which have been assembled as parts of imported merchandise.
Minority-owned bank program.—As a result of continued efforts, 20
minority-owned banks located in 11 different States are now receiving
customs collections. Deposits into these minority-owned banks are
approximately $181 million monthly and represented 34 percent ofthe
entire June 1976 collections of over $529 million. On a projected basis.
Customs is currently depositing collections in these banks at an annual rate
of over $2 biUion.
Importer identification system.—U.S. Customs Service computer-prepared bills, notices of liquidation, and refunds are automatically sent to
importers based on a match of name and address with an assigned number
within the identification system. This identification file contained over
315,000 records prior to June 1976. Extensive review during the month
of June permitted purging of approximately 115,000 inactive records. In
addition to the cost savings recognized in reduced computer running time,
much-needed computer capacity was made available through this action
for other Customs applications.
Penalties assessed.—During fiscal 1976, Customs received, reviewed,
and prepared legal decisions regarding violations of customs and related
laws and regarding claims for liquidated damages assessed under Customs
bonds. Of those cases which liability was under $100,000, there were 271
resulting in penalty and forfeiture and 23 resulting in liquidated damages.
The total amount was over $12 miUion.
More than 200 cases had liability over $100,000, which brought the
total cases to almost 500 with total dollars to nearly $449 million.
During fiscal 1976, there was almost $15 million imposed by penalty
decisions.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
UNITED STATES SAVINGS BONDS DIVISION
The U.S. Savings Bonds Division promotes the sale and retention of U.S.
savings bonds and the encouragement of individual thrift. Because the
average life of series E and H savings bonds is about twice that of the
marketable debt, this form of savings constitutes a long-term underwriting
of the Treasury's debt structure and makes possible the widespread
distribution of the national debt through its ownership by a substantial
number of small investors.
The program is carried out by a small staff of less than 450 people with
the active assistance of thousands of volunteers who are leaders in
business, labor, finance, and the media.
Sales of series E and H savings bonds totaled $7.3 billion in fiscal 1976,
and $1.8 billion in the transition quarter. Participation in the payroll
savings plan as of September 30, 1976, totaled close to 9 1/2 million
people. There were a total of $71.1 bUlion in savings bonds and savings
notes held at the close of fiscal 1976 and the transition quarter. During
fiscal 1976, holders of these savings vehicles received over $3.9 billion in
interest, while an additional $900 million was paid in interest during the
transition quarter.
Office of the National Director
Some of the resulting changes of a management review of the Savings
Bonds Division were: The Office of Executive Secretary, U.S. Industrial
Savings Committee, and the Advertising and Promotion Branch of the
Division were restructured; a new office, Program Planning and Market
Analysis, was established; and a number of long-range projects and studies
were set in motion that will be beneficial over the next few years.
Major U.S. savings bonds campaigns were launched among a number
of new groups, including a drive in the U.S. Congress.
A new role and mission statement for the Division—the first new
statement in pver 6 years—was approved by the Secretary. The statement
highlights the twin goals of increasing the sale and retention of savings
bonds and of encouraging thrift and personal savings by Americans.
A newly designed series E bond was launched to mark the Bicentennial.
During July 1976, all bonds sold over the counter could be stamped "July
4, 1976."
The National Director of the U.S. Savings Bonds Division, Mrs.
Francine I. Neff, carried on an active speaking schedule on behalf of the
bond program. She spoke to more than 100 different groups in 40 different
States, obtaining wide exposure for the program. The Director's audiences
included representative groups in the fields of business, banking, labor,
academia, conservation-interest and women's groups.
U.S. Industrial Payroll Savings Committee
The leader ofthe 1976 nationwide payroll savings campaign in industry
was George A. Stinson, chairman. National Steel Corp., and Chairman of
the U.S. Industrial Payroll Savings Committee. The 1976 campaign was
launched in Washington, D . C , on January 23, 1976. The annual meeting
ofthe Committee was highlighted by a meeting with President Ford at the
White House. Serving on the Committee with Mr. Stinson were 13 former
chairmen and 50 top executives of the Nation's major corporations.
Committee members conduct top management meetings, urge the chief
ADMINISTRATIVE REPORTS
245
executives in their areas and industries to conduct payroll savings drives,
and set strong examples by the campaigns they conduct in their own
companies. Through September 30, 1976, 34 committee members had
completed their company campaigns and had enrolled over 362,000
employees either as new savers or as employees with increased allotments.
Chairman Stinson contributed much time and effort to the campaign.
He traveled to 22 cities to address 33 meetings of business and community
leaders, and to help members of the Committee launch their area and
industry campaigns.
On April 22, 1976, Mr. Stinson appeared on the NBC television network
"Today" show. Sixty NBC stations also presented their local volunteer
leaders to further publicize the campaign. Mr. Stinson provided sales tools
for the volunteers and staff workers in the campaign, including a brochure
for top executives and a color motion picture entitled "Take Stock in
America." Mr. Stinson produced three newsletters for volunteers to
publicize the campaign and also ran a full-page ad featuring the 1976
Committee members with a photo ofeach in all editions ofthe Wall Street
Journal on January 29, 1976.
The U.S. Industrial Payroll Savings Committee has been the principal
force in raising the sales of E Bonds in the $25 to $200 denominations to
$4.9 billion annually, more than $2.3 billion higher than in 1962 before
the Committee was formed.
Federal campaign
The annual savings bonds campaign for Federal employees was
conducted between March and June 1976. This staggered campaign
approach allowed field promotional staff more time to give personal
attention to field installations while the headquarters staff had more time
to organize and carry out a successful campaign.
The Interdepartmental Savings Bonds Committee was headed by
Thomas S. Kleppe, Secretary ofthe Interior. President Ford and Secretary
Kleppe met at the White House on January 8 and filmed a message to all
Federal employees outlining the importance of U.S. savings bonds. The
President stated, in part, "There is no better time than now, in our
Bicentennial year, to renew our confidence in America and its promising
future, and there is no better way to do it than buying United States savings
bonds."
The Federal kickoff rally was held on February 12. Secretary Kleppe
and National Director Neff acted as cochairmen. Approximately 1,600
people attended the rally at which television personality Ralph Edwards,
the honorary chairman, was the main speaker. Mr. Edwards was a very
appropriate choice for this Bicentennial year because he was honored by
the Treasury Department in 1945 as the man who sold more savings bonds
than anyone else during the Second World War.
The Federal establishment, with a work force of approximately 2 1/2
million civilian employees and about 2 million military personnel,
produced sales for the first 9 months of 1976 totaling $740 million. Over
300,^^00 new savers or increased allotments were obtained. Sixty percent
of Federal civilian employees are now buying savings bonds, compared
with 58 percent at the beginning of the campaign.
Volunteer activities
Some 670,000 volunteers nationwide provided irnportant leadership for
the success of the savings bonds program. Traditionally, State Governors
246
1976 REPORT OF THE SECRETARY OF THE TREASURY
serve as honorary volunteer chairmen, while a volunteer State chairman
and his committee members provide leadership through a wide range of
activities. Volunteer county chairmen in the more than 3,000 counties
throughout the country provided community leadership in support ofeach
State's savings bonds program.
The volunteer chairmen ofthe State savings bonds committees met with
Treasury officials during the National Sales Conference in Washington,
D . C , in November 1975 to discuss the past year's activities and to plan
the 1976 program. Sessions were presided over by Bland W. Worley,
chairman ofthe State Chairmen's Council and chairman and president of
the American Credit Corp.
Volunteers participated in special Bicentennial celebrations throughout
the country. Many of these activities were connected with Washington's
Birthday Week ceremonies. State Governors were presented with a
ceremonial savings bonds flag and a unique Liberty Bell, mounted beside
a piece of wood from the original structure of Independence Hall, giving
recognition and appreciation to the citizens of each State for their savings
bonds purchases.
On the local level, savings bonds volunteer county chairmen presented
Treasury awards and sayings bonds as prizes to 8,000 winners in
Bicentennial yoiith debates. This was a national Bicentennial program
involving high school and college students in the art of debate.
On July 4 many ofthe full-scale replica Liberty Bells, presented to the
States in 1950 by the Treasury, were rung across the Nation to commemorate the Nation's 200th birthday. Savings bonds volunteer chairmen
participated in these bell-ringing ceremonies arranged by State Bicentennial commissions.
During the year^ Secretary Simon appointed three new volunteer State
chairmen and reappointed three others. He also appointed one new
honorary State chairman.
Banking support
Throughout 1976, banking volunteers encouraged and participated ih
a wide variety of activities to promote bond sales and service. They sent
letters to fellow bankers urging their support ofthe savings bonds program.
State banking chairmen made platform presentations and presented
citations at Statebahking conventions. Resolutions endorsing the program
were passed and banking volunteers sent press releases and announcements to the media on behalf of savings bonds.
Members ofthe Amierican Bankers Association Savings Bonds Committee and Treasury officials discussed plans for 1976 savings bonds activities
at the Savings Bonds National Sales Conference in November 1975. Hovey
S. Dabney, chairman ofthe ABA Savings Bonds Committee and chairman
and president of the National Bank and Trust Co:, Charlottesville, Va.,
presided over the sessions.
A joint ABA and Treasury Bicentennial promotion encouraged bankers
to offer customers special July 4, 1976, dating on bonds issued during the
entire month of July. Some banks also promoted the sale of $25 bonds for
$17.76 during July as a special Bicentennial activity.
Labor support
America's labor unions and their leaders reaffirmed their traditional
support of savings bonds and the payroll savings plan.
ADMINISTRATIVE REPORTS
247
Secretary Simon reappointed George Meany, president, AFL-CIO, as
Chairman of the National Labor Committee. Members of Mr. Meany's
committee were as follows: Glenn E. Watts, president. Communications
Workers of America; Frank E. Fitzsimmons, president. International
Brotherhood of Teamsters, Chauffers, Warehousemen and Helpers of
America; Al H. Chesser, president. United Transportation Union; and
Leonard Woodcock, president. International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America.
To further recognize the importance of labor support in the savings
bonds program. Secretary Simon hosted a luncheon meeting for members
of the National Labor Committee on December 16, 1975. Treasury
attendees included Deputy Secretary Stephen S. Gardner; Francine I.
Neff, National Director, U.S. Savings Bonds; Jesse Adams, Deputy
National Director; Walter R. Niles, Director of Sales; Winston L.
McMullen, national labor representative; and Clarence Selin, special
Treasury representative.
Deputy Secretary Gardner presented certificates of appointment to the
committee members. He emphasized the importance ofthe program to the
Treasury by saying: "Labor has been at the heart of the payroll savings
plan, which is the very heart of the savings bonds program. If national
unions. State federations and local labor organizations continue this
wholehearted support, the savings bonds program is sure to be a success
in 1976."
Committee Chairman George Meany reviewed labor's traditional
support of the program and remarked that while the current record of
achievement is impressive, he believed the program should be greatly
expanded.
National Director Neff spoke at the United Steel Workers of America
annual convention in August 1976 and presented USWA President I.W.
Abel with a special award. Mr. Abel was a member ofthe National Labor
Committee for 10 years.
On State and local levels, union officials continue to serve as volunteers
for the program. The labor press has been of great help by their continuing
use of savings bonds ads, editorials, and news stories.
Advertising
The public service advertising campaign for savings bonds, conducted
in cooperation with the Advertising Council, enjoyed one of its best years
in 1976. According to Council estimates the media contributed more than
$75 million in space, time, and services. Included in the contributions
during the 15-month period were more than 25,000 ads in newspapers and
240,000 lines in national magazines.
The advertising campaign was centered around the Nation's history,
tracing the contribution of citizen financing to the Nation's growth.
Created by the Leo Burnett Co., volunteer task-force agency of the
Council, the theme was "Take Stock in Anierica—200 Years at the Same
Location."
In the annual savings bonds awards competition for company communicators—based on payroll savings promotion appearing in company
publications in 1975^Brian Masterson of Grumman Aerospace Corp. was
named "Communicator ofthe Year," and Martin Marietta received the
grand award for a total corporate campaign. Members of the National
Employee Communications Committee, which held its annual meeting in
248
1976 REPORT OF THE SECRETARY OF THE TREASURY
Washington in April, judged the contest, and awards were announced May
24 at the conference of the Ihternational Association of Business
Communicators in Denver.
National organizations
The National Organizations Committee, under the Chairmanship of
Valerie F. Levitan of Soroptimist International, continued its strong
support of the bond program. Through this group individual club units
were asked by their national presidents to participate in the "Seven-Point
Program" of cooperation, and results to date indicate widespread
participation among the Nation's civic, fraternal, and patriotic organizations.
Public affairs
The Office of Public Affairs developed a comprehensive package of
"Copy Themes" for use by media, and a special package of news releases,
proclamations, and scripts for the "Minute Man Week" ceremonies in
February. A new series of feature articles on the history of the bond
program was launched.
Public Affairs personnel assisted with appropriate remarks and made
informational arrangements for over 100 appearances of the National
Director, U.S. Savings Bonds. Other Treasury officials, speaking in behalf
of the bond program, were also assisted.
Articles on the savings bonds program were prepared for the American
Legion Magazine, the Ethyl Digest and other magazines. Continuing close
collaboration with leading financial writers and editors brought about
increased coverage in a number of magazines, including U.S. News &
World Report and Changing Times. In addition, information was supplied
to columnists such as Don G. Campbell, John Cunniff, Merle E. Dowd,
Leonard Groupe, Sam Shulsky, and others.
During the period covered by this report, some 5,500 pieces of
correspondence were handled concerning the bond program.
Charles R. Buxton, editor/publisher, Denver Post, continues to serve as
chairman of the National Committee of Newspaper Publishers.
EDP program
For the 11 years of its operation the EDP program has served as a
valuable management tool. It enables the Division to measure progress in
the payroll savings program and helps to indicate where major work effort
must be expended by the field staff. The centralized collection and
publication of payroll savings statistics relieves the State offices of many
hundreds of hours of clerical time and provides a meaningful picture of
the payroll savings program. This assists the National, regional, and State
levels to formulate realistic sales plans each year and to establish payroll
savings goals.
During fiscal 1976 the program was expanded to include the centralized
collection of statistics from Federal departments and agencies, in addition
to companies in the private sector and to State and local governmental
entities. At the end of fiscal 1976 the total number of reporting units in
the private sector and in State and local governments was 39,397. This
represents 22,031 interstate units (including branches of companies) and
17,366 intrastate companies. Total employment in these companies is
ADMINISTRATIVE REPORTS
249
shown as 27.7 million; the number of employees signed up to buy savings
bonds in these companies is 6.9 million, or 24.9 percent.
In the Federal sector, the number of reporting units is 2,997 including
civilian and military headquarters and field units. Total employment is 4.4
million; participation, 2.1 million or 48.3 percent.
Training and staff development
The Division continues to recruit and move young persons up through
the ranks. Through an American Management Association-prepared
course, "Principles of Professional Salesmanship," and on-the-job training
assignments, recent college graduates and persons promoted through the
upward mobility program are trained for key sales promotion, managerial,
and administrative positions. A program of sales instruction/training—
"20-Point System for Guaranteed Sales Success" by Dartnell-Andersonn—is used as a refresher course for veteran promotional staff members.
A line management training program entitled "How to Improve
Individual Manager Performance," prepared by the American Management Association, was continued in fiscal 1976. A management library,
publicized quarterly, has been extensively used by all staff members.
During fiscal 1976, 5 of 12 persons selected for the executive development
program were involved in a planning conference to assist in the development of a national sales program while 3 of the 12 attended courses
presented by the Civil Service Commission and Advance Management
Research, Inc.
UNITED STATES SECRET SERVICE
Responsibilities
The major responsibilities ofthe U.S. Secret Service, defined in section
3056, title 18, United States Code, are protective and investigatory. The
protective responsibilities include protection of the President of the
United States; the members of his immediate family; the President-elect;
the Vice President or other officer next in the order of succession to the
office of President; the Vice President-elect; and the members of their
immediate families; the person of a former President and his wife during
his lifetime; the person ofthe widow of a former President until her death
or remarriage; minor children of a former President until they reach 16
years of age, unless such protection is declined; the person of a visiting
head ofa foreign state or foreign government; and, at the direction ofthe
President, other distinguished foreign visitors to the United States and
official representatives of the United States performing special missions
abroad.
In addition. Public Law 90-331 authorizes the U.S. Secret Service to
protect major Presidential or Vice Presidential candidates. This law also
provides that, upon request ofa Presidential or Vice Presidential nominee
ofa major political party, as determined by the Secretary ofthe Treasury
after consultation with the advisory committee, the Secretary may
250
1976 REPORT OF THE SECRETARY OF THE TREASURY
authorize the U.S. Secret Service to furnish protection to the spouse of
such major Presidential or Vice Presidential nominee, beginning not more
than 60 days prior to the general Presidential election.
The investigative responsibilities are to detect and arrest persons
committing any offense against the laws of the United States relating to
coins, obligations^ and securities of the United States and of foreign
governments; and to detect and arrest persons violating certain laws
relating to the Federal Deposit insurance Corporation, Federal land
banks, joint-stock land banks, and Federal land bank associations.
Protective operations
During fiscal 1976 and the transition period, the Secret Service provided
protection for President and Mrs. Gerald R. Ford and their four children;
Vice President and Mrs. Nelson A. Rockefeller and their two sons; former
President and Mrs. Richard M. Nixon; John Kennedy, Jr.; and former First
Ladies, Mrs. Harry S. Truman, Mrs. Dwight D. Eisenhower, and Mrs.
Lyndon B. Johnson.
In addition, the Secret Service provided protection for Secretary of
State Henry A. Kissinger (on a reimbursable basis) and Secretary ofthe
Treasury William E. Simon. Secretary Kissinger made 16 foreign trips
during fiscal 1976 and 3 during the transition period; Secretary Simon
made 8 foreign trips during fiscal 1976 and 3 foreign trips during the
transition period. The majority of these trips were extensive and involved
large-scale protective and logistical problems.
In fiscal 1976 the Service was subjected to an extraordinary increase in
protective responsibilities by the unexpected early initiation pf protection
for 12 major Presidential candidates. During this period, the candidates
made 3,975 trips which included 11,480 stops. During the transition
period, the candidates/nominees made 528 additional trips (1,851 stops).
During the transition period, protection vVas afforded to one Vice
Presidential candidate and two Vice Presidential nominees. During the
same period, protective efforts at the two major political conventions
required extensive manpower.
In September 1976, Congress authorized the Secret Service to protect
the spouses of Presidential and Vice Presidential nominees. During the
transition period, this included Mrs. Rosalynn Carter, Mrs. Joan Mondale,
and Mrs. Elizabeth Dole.
Foreign dignitary protection remained a major effort with 106 foreign
dignitaries receiving protection during fiscal 1976. These included 103
visits by heads of a foreign state or government and 3, other distinguished
visitors to the United States. An additional 35 heads of foreign states or
governments have been protected during the transition period. Largescale protective endeavors included the visits ofthe Emperor of Japan and
Queen Elizabeth of Great Britain, the International Conference in Puerto
Rico, and the opening sessions of United Nations General Assemblies No.
30 and No. 31.
The Executive Protective Service provided protection for the White
House Presidential offices, the official Vice Presidential residence, and the
foreign diplomatic missions of 127 countries at more than 300 locations
in the metropolitan area ofthe District ofColumbia. Additionally, the EPS
provided protection for the annual International Monetary Fund meeting
in Washington, D . C , and the International Conference in Puerto Rico.
On December 31, 1975, Public Law 94-196, amending title 3 ofthe
ADMINISTRATIVE REPORTS
25 1
United States Code, was signed by President Ford. It authorizes the
Executive Protective Service to provide protection to foreign diplomatic
missions outside of Washington, D . C , provided certain specifications are
satisfied. Further, the law provides for reimbursement of State and local
governments for their assistance in accordance with this law.
Protective research
In fiscal 1976 the Intelligence Division implemented an improved
computerized name search system which provides a more thorough and
flexible searching of the Master Name Index. On-line computer response
time has been improved by 100 percent. A new information retrieval
system was developed tO permit speedier and more efficient file searching.
The Service has initiated studies to provide more comprehensive data
for the evaluation of individuals suspected of threatening the life of the
President and others protected by the Service.
Technical Development and Planning Division.—This Division, in
cooperation with both the Data Systems and Communications Divisions,
completed a system to provide current status information oh the personnel
in all field offices. This information facilitates the formation of special
protective details and the notification of agents assigned.
This Division also completed work in conjunction with the National
Park Service on four of the gates to the White House complex. The new
high-strength steel gates will provide protection against anyone gaining
access to the complex by ramming the gates. The design for the six
remaining gates is in progress.
Design of personnel body armor to provide various levels of ballistic
protection was completed. The new armor has been distributed to all
Service personnel.
During the fiscal year, the Technical Development and Planning
Division initiated action in the following areas:
1. A voice privacy system which will provide message security for
both protective and investigative functions;
2. An expansion ofthe White House computerized security system;
3. New protective vehicles to both replace and enhance the number
of vehicles presently utilized to transport the various protectees
of the Service;
4. An automatic system for processing and identification of both
latent fingerprints and palmprints; and
5. New perimeter protective systems.
In fiscal 1976 communications facilities and equipment were expanded
to meet the requirements of the candidate/nominee protective activities.
This included portable communications packages used in direct support
of protective trip requirements.
A new system for clearing individuals for access to the political
conventions and inaugural festivities was developed jointly by Intelligence
Division and Data Systems Division and placed into service prior to the
Democratic National Convention.
Data Systems Division.—The Data Systems Division provided technical
support to ADP long-range study groups. Chaired by operating elements
of the Secret Service, these groups were established to study and
determine the automated data processing needs of the Service over the
next 6 to 8 years.
252
1976 REPORT OF THE SECRETARY OF THE TREASURY
During the transition quarter, the Data Systems Division continued to
supply technical support to the ADP long-range study groups until the final
reports are consolidated into a presentation to the ADP Steering
Committee in October of 1976.
Liaison Division.—During the period, the Liaison Division was highly
active at the U.S. Capitol, the Department of State, and numerous other
agencies regarding visits of protectees abroad and the activities of
numerous protectees traveling domestically.
In addition, the Division continued to provide liaison in various criminal
cases and investigative referrals both to and from Federal agencies.
During fiscal 1976, the Technical Security Division shipped new alarm
and lock equipment to approximately 95 percent of Secret Service field
offices and resident agencies. These have been installed and are in
operation in approximately 60 percent of the offices. All offices will be
equipped by January 1, 1977.
The new redesigned White House lock and key system was approximately 95 percent completed during fiscal 1976.
Investigative operations
Duriugfiscal 1976, $35.1 million in counterfeit U.S. currency was seized
by the U.S. Secret Service, down 28 percent from the alltime high of $48.6
million established the previous year. Ninety percent ofthe counterfeiter's
total output, $31.7 million, was seized before it was placed into circulation.
Losses to the public dropped to $3.37 million, 7 percent under fiscal 1975
and about 5 percent under the average loss of $3.53 million experienced
during the 5-year period fiscal 1971 through fiscal 1975.
Of the total counterfeit reported during fiscal 1976, $29.6 million can
be directly traced to counterfeit operations initiated during the year.
Ninety-six percent of the counterfeit currency attributed to these new
operations was seized before entering circulation, and the counterfeit
plant operations which produced 94 percent of this currency were
successfully suppressed prior to the end of the fiscal year.
Counterfeiting activity increased sharply during the transition quarter.
Losses to the public reached $1.1 million, an increase of 47 percent over
the closing 3 months of fiscal 1976. Seizures during the transition quarter
reached $4.4 million.
Counterfeiting investigations.—The following are summaries of three
cases successfully concluded by the Secret Service during fiscal 1976.
The first case began in January of 1976 when the Newark office received
information indicating that a resident of northern New Jersey was seeking
a single buyer for $3.5 million in counterfeit $ 100 Federal Reserve notes.
The suspect had been long known to the Secret Service as the probable
source of a dozen different types of counterfeit issues, ofwhich nearly $2.5
million were successfully passed, but the Service had been unable to
develop sufficient evidence to make a case against him. Promptly after
receipt ofthe new information, an undercover agent was introduced to the
suspect. The suspect gave several sample notes to the agent and told the
agent that only sample notes had been printed, but that he would be able
to make full delivery within 5 weeks. A surveillance of the suspect's
movements developed no information which disclosed the location of his
plant.
In early February the suspect telephoned the agent that he was ready
to make delivery. Two days later, the suspect and agent met at a Newark
ADMINISTRATIVE REPORTS
253
motel. Covering agents observed the suspect and undercover agent drive
to the suspect's residence and emerge a few minutes later with a large
suitcase. The suspect was arrested while driving back to the motel with the
undercover agent. The $3.5 million in new counterfeit $100 bUls was
seized—they had been printed in the suspect's basement. He is now
awaiting sentence.
The second case originated in the New Orleans area during December
of 1975. The owners of 12 different businesses reported they had received
anonymous letters enclosing 2 samples of a new and fairly deceptive
counterfeit $20 bill. The letters, signed "Andrew," offered to sell large
quantities of the counterfeit and outlined an elaborate payment scheme.
An initial delivery to a merchant cooperating in the investigation was
arranged but "Andrew" failed to appear.
In late February "Andrew" surfaced again in Jacksonville, using the
same anonymous letter approach. A $25,000 delivery was arranged with
a merchant cooperating in the investigation. The package was delivered
on schedule, but by two young boys stopped and hired by "Andrew" on
the street. The following day "Andrew" called to give payment instructions. By prearrangement the merchant was absent and "Andrew" was
requested to call again in 30 minutes. The initial call was traced. A few
minutes later "Andrew" and his son were arrested in a downtown motel
room with $160,000 of $20 notes in their possession. An addifional $1.7
million were seized at the counterfeiter's residence in Waco, Tex. The
arrest of a New Orleans businessman and two of his employees followed.
They had been "Andrew's" only other customers; all three received I -year
sentences. "Andrew" and his son received sentences of 7 and 5 years,
respectively.
The third case originated in the Atlanta area with the appearance of a
new counterfeit $20 bill. Two months later 23 other related new
counterfeit issues appeared in scattered locations ranging in denomination
from $ 1 to $ 100. All were associated by workmanship with the issue which
originally appeared in Atlanta. Information obtained from arrested passers
resulted in the identification of a Cleveland hoodlum as being a major
distributor of the counterfeits. Examination of the suspect's telephone
records linked him with a printer in the Atlanta area who had a previous
counterfeiting record.
Simultaneously, undercover agents in the Atlanta area succeeded in
gaining an introduction to a woman believed to be the local distributor of
counterfeits. A small purchase of counterfeits was made from her. As she
drove from the scene, the suspect printer's car was noted following. A
second, larger deal with the female suspect was quickly arranged which
resulted in her arrest and the seizure of $100,000 in counterfeits. The
suspect printer, also on the scene, was taken into custody. Subsequently,
over $ 1 million in counterfeits and equipment was recovered from the
printer's residence. The Cleveland distributor was also arrested. None of
the principals have as yet been sentenced. Over $1.3 million in counterfeit
was seized during the investigation; less than $30,000 was successfully
passed on the public.
Check forgery.—During fiscal 1976, the Service received 108,724
checks for investigation, a record in this activity for the third consecutive
fiscal year, and a 39-percent increase over fiscal 1975. The Department
paid approximately 823 million checks during fiscal 1976. The Service
received 132 checks per million checks paid so that the Service received
254
1976 REPORT OF THE SECRETARY OF THE TREASURY
1 check for investigation for every 7,575 checks the Department paid.
During the transition quarter, 33,679 checks were received for
investigation; 24,660 checks were received during the same period last
year.
After setting records during the previous 2 fiscal years, arrests for checkrelated offenses declined. During fiscal 1976, the Service made 5,171
check-related arrests as compared with 6,602 in fiscal 1975 and 5,465 in
fiscal 1974.
During the transition quarter, 1,394 check-related arrests were made
compared with 1,710 during the same period last year.
Additionally, for the second consecutive fiscal year, a significant
number of the forged-check cases have been generated by the supplemental security income (SSI) program. During fiscal 1976, the Service
received 12,750 forged SSI checks for investigation as opposed to 7,500
such checks in fiscal 1975, an increase of 70 percent. Although it is
anticipated that the trend will continue, it is expected that the rate of
increase will diminish.
The backlog of pending check cases at the end of fiscal 1976 increased
to 82,528, as compared with 42,478 at the end of fiscal 1975. This backlog
continued to increase during the transition quarter. Assuming even a
minimal increase in the number of checks paid by the Department during
fiscal 1977, the check workload will continue to be heavy for the near
future.
Despite achievements over the past several fiscal years in the area of
check investigations, Campaign '76 necessitated reordering of priorities in
the investigative activities and temporarily curtailed efforts in the check
area.
The increase in the number of checks received for investigation during
fiscal 1976 and the number of check investigations pending are attributable in part to the decline in the number of check-related arrests and to
the reduced availability of manpower for assignment to this activity.
The basic indicators of check forgery activity were all up significantly
during fiscal 1976. Tactical countermeasures, although somewhat curtailed during fiscal 1976, did prove effective. Overall control of the
situation hasbeen maintained, despite the dramatic increase in the number
of forged checks received.
In early April 1975, three persons negotiated several altered and forged
U.S. Treasury checks in Grand Forks, N. Dak. As a result ofthe alertness
of local authorities, agents from the Denver office traced the three to a
commercial airline flight bound for Honolulu, HawaU. On April 12, 1975,
two of the persons, both Americans, were arrested in Honolulu when en
route to ManUa, Republic ofthe Philippines. On April 16, 1975, a Filipino
alien was arrested in San Francisco after being identified as the third
individual involved in the North Dakota case. All defendants were
returned to the U.S. district court in Grand Forks for judicial action and
on July 2, 1975, entered pleas of guilty. They were subsequently sentenced
to 6 years. Three other members of this gang, one American and two
Filipinos, were arrested by Philippine authorities on local charges. During
the arrests, the authorities seized over $200,000 worth of counterfeit U.S.
Treasury checks as well as plates used in making the checks. These three
suspects remain in custody in the Republic of the Philippines.
In another check case, an individual was arrested in Boston, Mass., in
May of 1975 after a lengthy investigation dating back to the early part of
ADMINISTRATIVE REPORTS
255
1973. The individual fit the description of the forger responsible for
stealing and negotiating a large number of U.S. Treasury cnecks in the
northeastern part ofthe United States. The defendant appeared before the
U.S. Magistrate at Hartford, Conn., where he was arraigned on a basis of
a John Doe warrant issued in September of 1973 charging him with
possession of stolen mail. He was held in lieu of $50,000 cash bail. At that
time there was also a warrant outstanding for him for violation of Federal
parole. In a written statement, the defendant advised that he stole, forged,
and altered U.S. Treasury checks in the Hartford, Boston, and Philadelphia districts. His usual modus operandi was to steal not only Treasury
checks but the bank statements of other people and use the statements as
identification when he cashed the checks. The defendant was charged with
five counts of forgery and six counts of possession of stolen mail. In
September 1975 he was sentenced to a term of 10 years in prison.
Bond forgery.—Bond forgery investigations increased during fiscal
1976, with 14,356 bond investigations being opened as compared with
12,645 in fiscal 1975, 13,163 in fiscal 1974, and 13,849 in fiscal 1973.
Stolen bonds continually appear in the hands of known dealers of stolen
securities in large metropolitan areas. House burglary is a popular means
to obtain bonds; however, bank robbery, office burglary, and mail thefts
are also major sources. Many of the dealers utilize part-time forgers, who
either buy stolen bonds outright or operate on a consignment basis. They
then travel across the country forging and redeeming the stolen bonds.
At the end of the fiscal year, there were 777,173 stolen bonds,
representing a face value of $52,581,915, entered into the National Crime
Information Center (NCIC) by the Secret Service. Each of these bonds
represents a potential forgery case and a loss to the Government if
presented for redemption.
The number of stolen bonds entered into the NCIC by the Secret Service
increased during the transition quarter to 799,153, representing a face
value of $54,467,340.
During fiscal 1976, 144 persons were arrested for bond forgery, as
compared with 199 persons arrested in fiscal 1975. Knovi^n organized
crime figures continue to be connected with many of those arrested.
For the transition quarter, 37 persons were arrested for bond forgery
compared with 32 persons arrested during the same period last year.
During fiscal 1976, prior to forgery and redemption, the Secret Service
recovered 5,757 stolen bonds with a face value of $487,575.
During the transition quarter, 1,809 stolen bonds, face value $312,905,
were recovered.
In July 1974, an unknown male forged and redeemed six $1,000 bonds
in Cincinnati, Ohio. These bonds were among $8,525 worth ofbonds that
had been stolen from the registered owner's residence in Chicopee Falls,
Mass. A bank surveillance photograph was taken of the suspect in
Cincinnati. In August 1974, in Miami, Fla., the same unknown male forged
and redeemed additional bonds which were among $34,475 in bonds
stolen from the registered owner's residence in Beverly, Mass. The
descriptions of the suspect in the Cincinnati case and in the Miami case
were similar and the handwriting was associated as being the same forger.
Between September and December 1974, numerous bonds were forged
and redeemed by the same suspect in different registered owners' names
in eight different States. All the bonds were stolen in large thefts from
registered owners' residences in Massachusetts.
256
1976 REPORT OF THE SECRETARY OF THE TREASURY
In October 1974, the Portland, Oreg., office obtained an arrest warrant
for the suspect based on positive identification of known photos of the
forger. A concentrated investigative effort by four field offices led to the
forger's arrest in December 1974 in Boston. A search ofthe forger at the
time of his arrest disclosed a loaded six-shot .32-caliber revolver,
concealed in the waistband of his trousers, and over $5,000 in cash. When
interviewed, he stated he normally paid a dealer 10 percent for a package
ofbonds, and he worked alone forging bonds throughout the country. He
would handle only large packages in the name of the same registered
owner. In September 1975, this multiple interdistrict bond forger was
sentenced to 10 years' imprisonment after pleading guilty to 11 counts of
forgery. During 6 months of activity, he forged 549 bonds and redeemed
them for over $110,000.
Identification Branch.—The Identification Branch ofthe Special Investigations and Security Division serves all field offices by conducting
technical examinations of handwriting, handprinting, typewriting, fingerprints, palmprints, striations on counterfeit currency, altered documents,
and other types of physical evidence.
During fiscal 1976, members of the Identification Branch conducted
examinations in 7,133 cases involving 408,499 exhibits. This resulted in
the identification of 2,262 suspects and a total of 261 court appearances
to furnish expert testimony. During the transition quarter, an additional
1,800 cases involving approximately 103,000 exhibits were examined.
Identifications were made in 565 instances, necessitating 75 court
appearances.
Treasury Security Force
The Treasury Security Force, a uniformed branch of the U.S. Secret
Service, protects the Main Treasury complex and participates in providing
security to the White House. The Force also enforces Treasury's restricted
access policy.
During fiscal 1976, the Force expended 7,142 hours in an intensive inService training program. During the transition quarter, 1,750 hours of
training were expended. Thirty felony arrests, compared with 40 in fiscal
1975, were made by the Force; most of the arrests were effected in the
Cash Room as individuals attempted to cash forged checks. The Cash
Room operation was closed by the Treasury on July 1, 1976. However, the
sale of Government securities will continue at the building.
Organized crime
The Secret Service provided special agents to 16 organized crime strike
forces located throughout the United States. One intelligence research
specialist assigned to headquarters coordinated and disseminated organized crime intelligence information to Secret Service field offices.
Because of the unusually large numbers of candidates and the early
starting date of the 1976 Presidential campaign, agents have been more
highly involved in protective assignments than ever before. Even so, the
Secret Service continued its participation in the strike forces and its
involvement in organized crime investigations.
Administration
Major revisions to the method of cost accumulation by the automated
accounting system were developed during fiscal 1975 for implementation
effective with the start of fiscal 1976. Essentially, these revisions alined the
ADMINISTRATIVE REPORTS
257
system of cost accumulation ofthe organizational structure and programs
of the U.S. Secret Service.
These revisions were successfully implemented on schedule and have
significantly improved the capacity of the automated accounting system
to provide meaningful fiscal 1976 financial data in a timely fashion for both
external reporting purposes and internal management needs.
An Employee Relations Branch was established in the Personnel
Division to provide more effective, personal attention to both management and line employee needs.
As a test of the new factor evaluation system of classification. Secret
Service clerk-typist and clerk dictating-machine transcriber positions
were evaluated under FES standards. Appropriate FES training was
secured for specialists and selected executives.
Two ofthe four Secret Service merit promotion plans were revised, with
significant employee input. Internal regulations. Freedom of Information
and Privacy Act considerations were also taken into account, resulting in
improved procedures.
New initiatives were undertaken during fiscal 1976 to strengthen
paperwork management programs in the Secret Service. Policies and
procedures communicated in the directives system were revised and
updated, comprehensive new records disposition schedules were developed, nonessential forms were canceled, and modern word-processing
equipment was incorporated into offices having a high volume of
paperwork.
The U.S. Secret Service has developed an occupational safety and
health action plan based on the requirements of Executive Order 11807,
dated September 28, 1974, and part 29 CFR 1960. The plan is the first
to be developed using guidelines established by the Department of Labor.
When implemented, it should significantly improve the safety and health
of Service employees. The plan will be used by the departmental Safety
Director as a guide to assist other Treasury bureaus in the deyelopment
of their action plan.
As the functions and responsibilities ofthe Service continue to grow, the
fragmentation of operations as well as the need for additional space has
become more acute. The solution is a consolidated site for the Secret
Service headquarters operation. Phase I of this project includes the
appointment of a Consolidated Building Liaison Group, the development
of a Space Utilization Survey to document requirements, and the
acquisition of the services of a consulting firm to draw up specifications.
This phase is near completion.
Inspection
The continued assignment of personnel from the Office of Inspection to
protective details limited the number of office inspections conducted
duriugfiscal 1976. Beginning October 1,1975, and continuing through the
end ofthe fiscal year, three Inspectors and two special agents were selected
for full-time assignments to the Candidate/Nominee Protective Division.
In addition, five Inspectors and four Assistant Inspectors were assigned,
on a rotating basis, to various candidate/nominee details in administrative
capacities.
Training
Man-hours of training conducted by the Office of Training for personnel
engaged in investigative, protective, and administrative functions totaled
229,000. In addition, 11,400 man-hours of interagency training and 6,400
man-hours of nongovernment training were completed for a total of
258
1976 REPORT OF THE SECRETARY OF THE TREASURY
246,800 man-hours. In the transition quarter, there were 18,400 manhours of training conducted by the Office of Training for personnel
engaged in investigative, protective, and administrative functions. In
addition, 2,500 man-hours of interagency training and 2,900 man-hours
of nongovernment training were completed for a total of 23,800 manhours.
The Secret Service provided firearms training for students ofthe Federal
Law Enforcement Training Center through September 1976(181 students
from the Criminal Investigator School and 1,250 students from the Police
School). In addition, firearms training was provided to 1,484 employees
of other agencies. The Secret Service provided firearms instructor training
courses for 88 employees of other agencies. Firearms training was also
provided for all the enforcement personnel of the Secret Service.
During the transition quarter, firearms training was provided for 20 IRS
employees. Firearms training was also provided for all the enforcement
personnel of the Secret Service during this period.
During fiscal 1976, the Secret Service's management training system
became fully operational, providing a planned program of regularly
scheduled management training for each of the Service's supervisors,
managers, and executives. The system includes a balance of specialized
Secret Service courses, interagency programs, and nongovernment
training. During fiscal 1976, the Training Resource Center enrolled
approximately 580 students with 207 completing course requirements. A
training technician was hired to administer programs on a daily basis. A
building supervisory skills program, consisting of 10 hours of slide-tape
and workbook exercises on supervisory techniques, was added to the
Center's curriculum. Next year, video-tape programs for individual use
and new programs for use in field offices will be added.
During the transition quarter, 144 students enrolled in the Training
Resource Center with 33 completing course requirements.
A catalog of training programs was published in fiscal 1976. It contained
43 courses offered by the Office of Training to Secret Service employees.
Twenty-three dignitary protection seminars were conducted for 460
command level police officers. This 2-week program was offered jointly
by the Secret Service and the Federal Bureau of Investigation.
Training was provided for 544 agents from Alcohol, Tobacco and
Firearms, Customs, and Internal Revenue Service in protective operations
of the Secret Service in 25 classes. These courses were conducted in
various districts throughout the United States and were designed to allow
the use of these agents on temporary protective assignments to supplement
Secret Service agents during Campaign '76.
Eleven candidate/nominee detail training courses were given with a
total of 352 Secret Service agents trained. The purpose of this course was
to refamiliarize the agents with current protective procedures and to
participate in practical exercises before being assigned to a candidate.
Ten protective operations briefings were presented for 200 midlevel
supervisory police personnel engaged in protective activities either in an
operational or a training capacity.
Forty Secret Service agents qualified as first-aid instructors in two firstaid instructor courses.
Ten protective forces driving courses were presented to 60 special
agents and special officers. This course is intended to improve protective
driving techniques as well as normal driving skills.
ADMINISTRATIVE REPORTS
259
Seven special agent training courses were conducted. A total of 250 new
agents received this training in all aspects of the Secret Service protective
and investigative responsibilities.
There were 70 "Attack on a Principal" exercises. These 1-day exercises
simulated various types of attacks on protectees and tested the protective
detail's ability to react to the attack and to respond within the total team.
There were numerous 1- and 2-day briefings presented to various police
agencies throughout the country and to Federal agencies in the Washington, D . C , area. These briefings were primarily on protection but did
include investigative responsibilities at times.
During the transition quarter, a special agent training course was
conducted with 35 new special agents attending. Several briefings were
given for local police in various parts of the country.
For the first time in history, the Office of Training conducted briefings
for nominees and staffs. Presidential nominee Jimmy Carter and Vice
Presidential nominees Walter Mondale and Robert Dole were briefed on
the role of the Secret Service and the necessity of cooperating with each
other.
Legal counsel
During fiscal 1976, the Secret Service resubmitted a legislative proposal
to the Secretary of the Treasury that would amend title 18, United States
Code, section 871, "Threats against the President and successors to the
Presidency," to cover threats made against all protectees ofthe U.S. Secret
Service.
The Secret Service also proposed title 18, United States Code, section
513, forgery of Government checks, bonds or other obligations, which
would in effect eliminate the need to rely on title 18, United States Code,
section 495, "Contracts, deeds, and powers of attorney " and other Federal
statutes in the investigation of violations concerning Treasury checks,
bonds or other obligations. In effect, this section would centralize all
existing laws relating to Treasury checks, bonds or other obligations that
now appear in various parts of the United States Code and apply to
contracts, deeds, and powers of attorney as well as checks, bonds or other
obligations.
Lastly, the Secret Service submitted a legislative proposal to amend its
basic authorization by altering its protective responsibilities, in some cases
eliminating categories presently authorized protection and adding others.
There are presently 75 lawsuits pending in which the Secret Service is
a party. These cases involve, among others, the Federal Tort Claims Act
and alleged violations of civil rights stemming from the protective and
investigative responsibilities of the Service.
In addition, the Office of Legal Counsel drafted memoranda, reports,
and legal opinions on the following: Reproductions of obligations of the
United States—955; administrative claims involving employees of the
Secret Service—174; Training Division projects—54; general litigation
matters—80; inquiries from other agencies—30; Secret Service personnel
matters—20; petitions for remission of forfeiture of seized equipment—
55; interpretation of protection laws—28; interpretation of counterfeit
laws—23; interpretation of forgery laws—6; comments on proposed
legislation—32; Freedom of Information and Privacy Act matters—112;
legal research projects—3; pending major lawsuits—7; pending lawsuits—
49.
During the transifion quarter, 224 such documents were drafted.
EXHIBITS
Public Debt Operations, Regulations, and Legislation
Exhibit 1.—Treasury notes
Two Treasury circulars—one containing a subscription offering and one covering an
auction for cash with prices established through competitive bidding—are reproduced in this
exhibit. Circulars pertaining to the other note offerings during fiscal 1976 and the transition
quarter are similar in form and therefore are not reproduced in this report. However, essential
details for each offering are summarized in the table in this exhibit, and allotment data for
the new notes will be shown in table 37 in the Statistical Appendix. During the period there
were no offerings in which holders of maturing securities were given preemptive rights to
exchange their holdings for new notes.
DEPARTMENT CIRCULAR NO. 11-76. PUBLIC DEBT
DEPARTMENT OF THE TREASURY,
Washington, April 29, 1976.
I. OFFERING OF NOTES
1. The Secretary of the Treasury, pursuant to the authority of the Second Liberty Bond
Act, as amended, offers $3,500,000,000 of notes of the United States, designated 7 7/8
percent Treasury Notes of Series A-1986, at par. The amount of the offering may be
increased by a reasonable amount to the extent that the total amount of subscriptions
warrants. Additional amounts of these notes may be issued to Government accounts and to
Federal Reserve Banks. The 6 1/2 percent Treasury Notes of Series B-1976, and 5 3/4
percent Treasury Notes of Series E-1976, maturing May 15, 1976, will be accepted at par
in payment, in whole or in part, to the extent subscriptions are allotted by the Treasury. The
books will be open through Wednesday, May 5, 1976, for the receipt of subscriptions.
II. DESCRIPTION OF NOTES
1. The notes will be dated May 17, 1976, and will bear interest from that date, payable
on a semiannual basis on November 15, 1976, and thereafter on May 15 and November 15
in each year until the principal amount becomes payable. They will mature May 15, 1986,
and will not be subject to call for redemption prior to maturity.
2. The income derived from the notes is subject to all taxes imposed under the Internal
Revenue Code of 1954. The notes are subject to estate, inheritance, gift or other excise taxes,
whether Federal or State, but are exempt from all taxation now or hereafter imposed on the
principal or interest thereof by any State, or any of the possessions of the United States, or
by any local taxing authority.
3. The notes will be acceptable to secure deposits of public moneys. They will not be
acceptable in payment of taxes.
4. Bearer notes with interest coupons attached, and notes registered as to principal and
interest, will be issued in denominations of $1,000, $5,000, $10,000, $100,000 and
$ 1,000,000. Book-entry notes will be available to eligible subscribers in multiples of those
amounts. Interchanges of notes of different denominations and of coupon and registered
notes, and the transfer of registered notes will be permitted.
5. The notes will be subject to the general regulations ofthe Department ofthe Treasury,
now or hereafter prescribed, governing United States notes.
III. TENDERS AND ALLOTMENTS
1. Subscriptions accepting the offer made by this circular will be received at Federal
Reserve Banks and Branches and at the Bureau ofthe Public Debt, Washington, D.C. 20226,
through Wednesday, May 5, 1976. Each subscription must state the face amount of notes
subscribed for, which must be $ 1,000 or a multiple thereof
2. All subscribers are required to agree not to purchase or to sell, or to make any
agreements with respect to the purchase or sale or other disposition of any notes of this issue
at a specific rate or price, until after midnight. May 5, 1976.
3. Commercial banks, which for this purpose are defined as banks accepting demand
deposits, and dealers who make primary markets in Government securities and report daily
263
264
1976 REPORT OF THE SECRETARY OF THE TREASURY
to the Federal Reserve Bank of New York their positions with respect to Government
securities and borrowings thereon, may submit subscriptions for account of customers
provided the names of the customers are set forth in such subscriptions. Others will not be
permitted to submit subscriptions except for their own account.
4. Under the Second Liberty Bond Act, as amended, the Seeretary of the Treasury has
the authority to reject or reduce any subscription, to allot more or less than the amount of
notes applied for, and to make different percentage allotments to various classes of
subscribers when he deems it to be in the public interest; and any action he may take in these
respects shall be final. Subject to the exercise of that authority, subscriptions for $500,000,
or less, will be allotted in full provided that 20% of the face value of the securities for each
subscriber is submitted as a deposit (in cash or the notes referred to in Section I which will
be accepted at par). Such deposits must be submitted to the Federal Reserve Bank or Branch,
or to the Bureau of the Public Debt, with the subscription; this will apply even if the
subscription is for the account of a commercial bank or securities dealer, or for one of their
customers. Guarantees in lieu of deposits will not be accepted. Allotment notices will not
be sent to subscribers submitting subscriptions in accordance with this paragraph.
5. Subscriptions not accompanied by the 20% deposit will be received subject to a
percentage allotment. On such subscriptions a 5% deposit (in cash or the notes referred to
in Section I which will be accepted at par) will be required from all subscribers except
commercial and other banks for their own account. Federally-insured savings and loan
associations. States, political subdivisions or instrumentalities thereof, public pension and
retirement and other public funds, international organizations in which the United States
holds membership, foreign central banks and foreign States, dealers who make primary
markets in Government securities and report daily to the Federal Reserve Bank of New York
their positions with respect to.Government securities and borrowings thereon. Federal
Reserve Banks, and Government accounts. Commercial banks and securities dealers
authorized to enter subscriptions for customers will be required to certify that they have
received the 5% deposit from their customers or guarantee payment of the deposits.
Allotment notices will be sent out promptly upon allotment to subscribers submitting
subscriptions in accordance with this paragraph. Following allotment, any portion of the 5
percent payment in excess of 5 percent ofthe amount of notes allotted may be released upon
the request of the subscriber.
6. Subscribers may submit subscriptions under the provisions ofeach ofthe two foregoing
paragraphs, i.e., up to $500,000, with a 20% deposit and in any amount with a 5% deposit.
Each of the two types of subscriptions will be treated as separate subscriptions.
IV. PAYMENT
1. Payment at par for notes allotted hereunder must be made or completed on or before
May 17, 1976, at the Federal Reserve Bank or Branch or at the Bureau ofthe Public Debt.
Payment must be in cash, notes referred to in Section I (interest coupons dated May 15, 1976,
should be detached), in other funds immediately available to the Treasury by May 17, 1976,
or by check drawn to the order ofthe Federal Reserve Bank to which the tender is submitted,
or the United States Treasury if the subscription is submitted to it, which must be received
at such Bank or at the Treasury no later than: (1) Wednesday, May 12, 1976, if the check
is drawn on a bank in the Federal Reserve District of the Bank to which the check is
submitted, or the Fifth Federal Reserve District in case ofthe Treasury, or (2) Monday, May
10, 1976, if the check is drawn on a bank in another district. Checks received after the dates
set forth in the preceding sentence will not be accepted unless they are payable at a Federal
Reserve Bank. Payment will not be deemed to have been completed where registered notes
are requested if the appropriate identifying number as required on tax returns and other
documents submitted to the Internal Revenue Service (an individual's social security number
or an employer identification number) is not furnished. In every case where full payment is
not completed, the payment with the tender up to 5 percent of the amount of notes allotted
shall, upon declaration made by the Secretary ofthe Treasury in his discretion, be forfeited
to the United States.
2. Delivery of notesin bearer form will be made on May 17, 1976, except that if adequate
stocks of the notes are not available on that date, the Department of the Treasury reserves
the right to issue interim certificates on that date which will be exchangeable for the notes
when available at any Federal Reserve Bank or Branch or at the Bureau of the Public Debt,
Washington, D.C. 20226. If a subscriber elects to receive an interim certificate, the
certificate must be returned at his own risk and expense.
v . ASSIGNMENT OF REGISTERED NOTES
1. Registered notes tendered as deposits and in payment for notes allotted hereunder are
not required to be assigned if the notes are to be registered in the same names and forms
EXHIBITS
265
as appear in the registrations or assignments ofthe notes surrendered. Specific instructions
for tne issuance and delivery of the notes, signed by the owner or his authorized
representative, must accompany the notes presented. Otherwise, the notes should be
assigned by the registered payees or assignees thereof in accordance with the general
regulations governing United States securities, as hereinafter set forth. When the new notes
to be registered in names and forms different from those in the inscriptions or assignments
ofthe notes presented the assignment should be to "The Secretary ofthe Treasury for 7 7/8
percent Treasury Notes of Series A-1986 in the name of (name and taxpayer identifying
number)." If notes in coupon form are desired, the assignment should be to "The Secretary
of the Treasury for 7 7/8 percent coupon Treasury Notes of Series A-1986 to be delivered
to
."" Notes tendered in payment should be surrendered to the Federal
Reserve Bank or Branch or to the Bureau ofthe Public Debt, Washington, D.C. 20226. The
notes must be delivered at the expense and risk of the holder.
VI. GENERAL PROVISIONS
1. As fiscal agents of the United States, Federal Reserve Banks are authorized and
requested to receive subscriptions, to make such allotments as may be prescribed by the
Secretary ofthe Treasury, to issue such notices as may be necessary, to receive payment for
and make delivery of notes on full-paid subscriptions allotted, and they may issue interim
receipts pending delivery of the definitive notes.
2. The Secretary of the Treasury may at any time, or from time to time, prescribe
supplemental or amendatory rules and regulations governing the offering, which will be
communicated promptly to the Federal Reserve Banks.
GEORGE H . DIXON,
Acting Secretary of the Treasury.
DEPARTMENT CIRCULAR NO. 17-76. PUBLIC DEBT
DEPARTMENT OF THE TREASURY,
Washington, July 15, 1976.
I. INVITATION F O R TENDERS
1. The Secretary of the Treasury, pursuant to the authority of the Second Liberty Bond
Act, as amended, invites tenders on a yield basis for $2,750,000,000, or thereabouts, of notes
of the United States, designated Treasury Notes of Series P-1978. The interest rate for the
notes will be determined as set forth in Section III, paragraph 3, hereof Additional amounts
of these notes may be issued at the average price of accepted tenders to Govemment accounts
and to Federal Reserve Banks for themselves and as agents of foreign and international
monetary authorities. Tenders will be received up to 1:30 p.m.. Eastern Daylight Saving time,
Tuesday, July 20, 1976, under competitive and noncompetitive bidding, as set forth in
Section III hereof.
II. DESCRIPTION OF NOTES
1. The notes will be dated July 30, 1976, and will bear interest from that date, payable
on a semiannual basis on January 31, 1977, July 31, 1977, January 31, 1978, and July 31,
1978. They will mature July 31, 1978, and will not be subject to call for redemption prior
to maturity.
2. The income derived from the notes is subject to all taxes imposed under the Internal
Revenue Code of 1954. The notes are subject to estate, inheritance, gift or other excise taxes,
whether Federal or State, but are exempt from all taxation now or hereafter imposed on the
principal or interest thereof by any State, or any of the possessions of the United States, or
by any local taxing authority.
3. The notes will be acceptable to secure deposits of public moneys. They will not be
acceptable in payment of taxes.
4. Bearer notes with interest coupons attached, and notes registered as to principal and
interest, will be issued in denominations of $5,000, $10,000, $100,000 and $1,000,000.
Book-entry notes will be available to eligible bidders in multiples of those amounts.
Interchanges of notes of different denominations and of coupon and registered notes, and
the transfer of registered notes will be permitted.
5. The notes will be subject to the general regulations ofthe Department ofthe Treasury,
now or hereafter prescribed, governing United States notes.
266
1976 REPORT OF THE SECRETARY OF THE TREASURY
III. TENDERS AND ALLOTMENTS
1. Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of
the Public Debt, Washington, D.C. 20226, up to the closing hour, 1:30 p.m.. Eastern Daylight
Saving time, Tuesday, July 20, 1976. Each tender must state the face amount of notes bid
for, which must be $5,000 or a multiple thereof, and the yield desired, except that in the case
of noncompetitive tenders the term "noncompetitive" should be used in lieu of a yield. In
the case of competitive tenders, the yield must be expressed in terms of an annual yield, with
two decimals, e.g., 7.11. Fractions may not be used. Noncompetitive tenders from any one
bidder may not exceed $500,000.
2. Commercial banks, which for this purpose are defined as banks accepting demand
deposits, and dealers who make primary markets in Government securities and report daily
to the Federal Reserve Bank of New York their positions with respect to Government'
securities and borrowings thereon, may submit tenders for account of customers provided
the names of the customers are set forth in such tenders. Others will not be permitted to
submit tenders except for their own account. Tenders will be received without deposit from
banking institutions for their own account. Federally-insured savings and loan associations,
States, political subdivisions or instrumentalities thereof, public pension and retirement and
other public funds, international organizations in which the United States holds membership,
foreign central banks and foreign States, dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their positions with
respect to Government securities and borrowings thereon, and Government accounts.
Tenders from others must be accompanied by payment of 5 percent of the face amount of
notes applied for.
3. Immediately after the closing hour tenders will be opened, following which public
announcement will be made by the Department ofthe Treasury ofthe amount and yield range
of accepted bids. Those submitting competitive tenders will be advised ofthe acceptance or
rejection thereof. In considering the acceptance of tenders, those with the lowest yields will
be accepted to the extent required to attain the amount offered. Tenders at the highest
accepted yield will be prorated if necessary. After the determination is made as to which
tenders are accepted, a coupon rate will be determined at a 1/8 of one percent increment
that translates into an average accepted price close to 100.000 and a lowest accepted price
above 99.500. That rate of interest will be paid on all of the notes. Based on such interest
rate, the price on each competitive tender allotted will be determined and each successful
competitive bidder will be required to pay the price corresponding to the yield bid. Price
calculations will be carried to three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations ofthe Secretary ofthe Treasury shall be final. The Secretary
of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole
or in part, including the right to accept tenders for more or less than the $2,750,000,000 of
notes offered, and his action in any such respect shall be final. Subject to these reservations,
noncompetitive tenders for $500,000 or less without stated yield from any one bidder will
be accepted in full at the ayerage price i (in three decimals) of accepted competitive tenders.
IV. PAYMENT
1. Settlement for accepted tenders in accordance with the bids must be made or
completed on or before July 30, 1976, at the Federal Reserve Bank or Branch or at the
Bureau ofthe Public Debt, Washington, D.C. 20226. Payment must be in cash, in other funds
immediately available to the Treasury by July 30, 1976, or by check drawn to the order of
the Federal Reserve Bank to which the tender is submitted, or the United States Treasury
if the tender is submitted to it, which must be received at such Bank or at the Treasury no
later than: (1) Tuesday, July 27, 1976, if the check is drawn on a bank in the Federal Reserve
District of the Bank to which the check is submitted, or the Fifth Federal Reserve District
in the case of the Treasury, or (2) Friday, July 23, 1976, if the check is drawn on a bank
in another district. Checks received after the dates set forth in the preceding sentence will
not be accepted unless they are payable at a Federal Reserve Bank. Payment will not be
deemed to have been completed where registered notes are requested if the appropriate
identifying number as required on tax returns and other documents submitted to the Internal
Revenue Service (an individual's social security number or an employer identification
number) is not furnished. In every case where full payment is not completed, the payment
with the tender up to 5 percent ofthe amount of notes allotted shall, upon declaration made
by the Secretary of the Treasury in his discretion, be forfeited to the United States.
•Average price may be al, or more or less than 100,000.
EXHIBITS
267
V. GENERAL PROVISIONS
1. As fiscal agents of the United States, Federal Reserve Banks are authorized and
requested to receive tenders, to make such allotments as may be prescribed by the Secretary
ofthe Treasury, to issue such notices as may be necessary, to receive payment for and make
delivery of notes on full-paid tenders allotted, and they may issue interim receipts pending
delivery of the definitive notes.
2. The Secretary of the Treasury may at any time, or from time to time, prescribe
supplemental or amendatory rules and regulations governing the offering, which will be
communicated promptly to the Federal Reserve Banks.
GEORGE H . DIXON,
Acting Secretary of the Treasury.
SUPPLEMENT TO DEPARTMENT CIRCULAR NO. 17-76. PUBLIC DEBT
DEPARTMENT OF THE TREASURY,
Washington, July 2 1 , 1976.
The Secretary of the Treasury announced on July 20, 1976, that the interest rate on the
notes described in Department Circular—Public Debt Series—No. 17-76 dated July 15,
1976, will be 6 7/8 percent per annum. Accordingly, the notes are hereby redesignated 6 7/8
percent Treasury Notes of Series P-1978. Interest on the notes will be payable at the rate
of 6 7/8 percent per annum.
DAVID Mosso,
Fiscal Assistant Secretary.
Summary of information pertaining to Treasury notes issued during fiscal 1976 and transition quarter
Date of
preliminary
announcement
June
July
July
July
Aug.
Aug.
Sept.
Sept.
Oct.
Oct.
Oct.
Dec.
10
1
9
22
9
Dec.
9
1976
Jan.
7
Jan.
7
Jan.
Jan
Feb.
Feb.
Mar.
Mar.
Apr.
Apr.
May
May
June
July
July
July
Aug.
Aug.
Sept.
ON
00
Department
circular
Date
19-75
20-75
23-75
24-75
26-75
27-75
28-75
29-75
30-75
31-75
32-75
34-75
35-75
1-76
2-76
3-76
4-76
6-76
7-76
8-76
9-76
10-76
11-76
13-76
14-76
15-76
16-76
17-76
18-76
19-76
21-76
22-76
23-76
1975
June 19
July 11
July 24
July 24
Aug. 7
Aug. 7
Sept. 11
Sept. 11
Oct.
2
Oct. 10
Oct. 23
Dec. 10
Dec. 10
1976
Jan.
7
Jan.
7
Jan. 28
Jan. 28
Feb. 13
Feb. 27
Mar. 12
Mar. 17
Apr. 29
Apr. 29
May 14
May 19
June 16
June 21
July 15
July 29
July 29
Aug. 13
Aug. 25
Sept. 14
Concurrent
offering
circular
No.
Treasury notes issued
(all offered for cash)
Type of
auction l
Average
price
High
price
Low
price
Minimum
denomination
. 7 3/4 percent Series E-1979
. 7 1/2 percent Series K-1977
24-75, 25-75 7 7/8 percent Series F-1978
23-75, 25-75 8 1/8 percent Series B-1982
27-75
8 1/4 percent Series L-1977
26-75
8 1/2 percent Series F-1979
29-75
8 3/8 percent Series M-1977
28-75
8 percent Series G-1978
. 8 1/8 percent Series H-1978
. 7 1/2 percent Series N-1977
33-75
7 7/8 percent Series C-1982
35-75
7 1/4 percent Series P-1977...
Yield .
do ...
do ...
do ...
do ...
do ...
do ...
do ...
do ...
do ...
do ...
do ...
99.731
99.%3
99.768
99.921
99.998
99.840
99.883
99.786
99.899
99.909
99.762
99.945
3100.034
3100.018
3100.233
3100.343
3100.180
3100.145
3 99.955
3 99.893
3100.121
3100.055
3100.027
3100.018
99.664
99.945
99.695
99.711
99.926
99.773
99.847
99.722
99.761
99.836
99 603
99.890
$5,000
5.000
5.000
1,000
5,000
1,000
5,000
5,000
5,000
5,000
1,000
5,000
Accepted tenders
34-75
7 1/2 percent Series G-1979.
do ...
100.000
3100.238
99.898
1,000
1975
July
9
July 31
Aug. 15
Aug. 15
Aug. 29
Sept. 4
Sept. 30
Oct.
7
Oct. 22
Oct. 31
Nov. 17
Dec. 31
1976
Jan.
6
2-76
1-76
4-76, 5-76
3-76, 5-76
7 3/8 percent Series D-1981
6 3/8 percent Series J-1978
7 percent Series H - 1979
8 percent Series A 1983
6 5/8 percent Series Q-1977
7 1/2 percent Series C-1980
6 3/4 percent Series K-1978
7 3/8 percent Series E-1981
6 1/2 percent Series L-1978
7 7/8 percent Series A-1986
7 1/8 percent Series M-1978
7 5/8 percent Series D-1980
6 7/8 percent Series N-1978
7 5/8 percent Series F-1981
6 7/8 percent Series P-1978
6 7/8 percent Series J-1979
8 percent Series B 1986
6 5/8 percent Series Q-1978
6 7/8 percent Series E-1980
6 1/4 percent Series R - 1 9 7 8
do
do
do
Subscription4 .
Yield
do
do
do
do
Subscription4 .
Yield
do
do
do
do
do
Subscription^ .
Yield
do
99.892
99.788
99.867
3100.108
99.935
3100.000
99.806
99.751
99.761
"99.957'
99.853
99.982
99.980
99.801
3100.039
3 99.990
3100.074
3100.101
3 99.837
99.925
99.818
99.908
99.940
99.765
'99.936'
99.693
99.789
99.951
99.861
99.907
3100.082
3 99.796
3 99.844
3100.076
3 99.953
3 99.987
99.881
99.625
99.752
99.909
99.843
99.880
99.917
99.799
99.907
3100.065
3 99.903
3 99.963
99.880
99.764
99.870
1,000
5.000
5.000
1.000
5.000
1.000
5,000
1,000
5,000
1,000
5,000
1,000
5,000
1,000
5,000
5,000
1,000
5,000
1,000
5,000
Jan.
Feb.
Feb.
Feb.
Mar.
Mar.
Mar.
Apr.
May
May
June
June
June
July
July
Aug.
Aug.
Aug.
Sept.
Sept.
11-76, 12-76
10-76, 12-76
19-76, 20-76
18-76, 20-76
do
• All auctions for issues of notes were by the "yield" method in which bidders were required
to bid on the basis of an annual yield; after tenders were allotted an interest rate for the notes
was established at the nearest 1 /8 of 1 percent increment that translated into an average accepted
price close to 100.000.
2 Payment could not be made through Treasury tax and loan accounts for any of the issues.
Issue
date
26
2
17
17
3
17
31
5
17
17
1
10
30
9
30
16
16
31
14
30
Maturity
date
June
July
May
Aug.
Aug.
Sept.
Sept.
Feb.
Dec.
Oct.
Nov.
Dec.
30,
31,
15,
15,
31,
30,
30,
28,
31,
31,
15,
31,
1979
1977
1978
1982
1977
1979
1977
1978
1978
1977
1982
1977
Dec. 31, 1979
May
Jan.
Feb.
Feb.
Nov.
Mar.
Mar.
Feb.
Apr.
May
May
June
June
Aug.
July
Aug.
Aug.
Aug.
Sept.
Sept.
15,
31,
15,
15,
30,
31,
31,
15,
30,
15,
31,
30,
30.
15.
31,
15,
15,
31,
30,
30,
1981
1978
1979
1983
1977
1980
1978
1981
1978
1986
1978
1980
1978
1981
1978
1979
1986
1978
1980
1978
Date
tenders
received
Payment
date 2
1975
1975
June 25 July 9
July 17 July 31
July 29 Aug. 15
July 30 Aug. 15
Aug. 14 Aug. 29
Aug. 21 Sept. 4
Sept. 16 Sept. 30
Sept. 24 Oct. 7
Oct. 7 Oct. 22
Oct. 16 Oct. 31
Oct. 29 Nov. 17
Dec. 16 Dec. 31
1976
Dec. 22 Jan. 6
1976
Jan. 13 Jan. 26
Jan. 14 Feb. 2
Feb. 5 Feb. 17
Feb. 3 Feb. 17
Feb. 20 Mar. 3
Mar. 5 Mar. 17
Mar. 18 Mar. 31
Mar. 24 Apr. 5
May 4 M a y 17
May 5 M a y 17
May 19 June 1
June 3 June 10
June 21 June 30
June 29 July 9
July 20 July 30
Aug. 3 Aug. 16
Aug. 4 Aug. 16
Aug. 19 Aug. 31
Aug. 31 Sept. 14
Sept. 21 Sept. 30
3 Relatively small amounts of bids were accepted at a price or prices above the high shown.
However, the higher price or prices are not shown in order to prevent an appreciable
discontinuity in the range of prices, which would make it misrepresentative.
4 Sold at par with the interest rate fixed prior to the sale, and subscriptions received subject
to allotment.
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EXHIBITS
269
Exhibit 2.—Treasury bonds
A Treasury circular covering an auction of Treasury bonds for cash is reproduced in this
exhibit. Circulars pertaining to other bond offerings during fiscal 1976 and the transition
quarter are similar in form and therefore are not reproduced in this report. However, essential
details for each offering are summarized in the table in this exhibit, and allotment data for
the bonds will be shown in table 38 in the Statistical Appendix. During the period there were
no offerings in which holders of maturing securities were given preemptive rights to exchange
their holdings for new bonds.
DEPARTMENT CIRCULAR NO. 25-75. PUBLIC DEBT
DEPARTMENT OF THE TREASURY,
Washington, July 24, 1975.
I. INVITATION FOR TENDERS
1. The Secretary of the Treasury, pursuant to the authority of the Second Liberty Bond
Act, as amended, invites tenders on a yield basis for $800,000,000, or thereabouts, of bonds
of the United States, designated Treasury Bonds of 1995-2000. The interest rate for the
bonds will be determined as set forth in Section III, paragraph 3, hereof Additional amounts
of these bonds may be issued at the average price of accepted tenders to Government
accounts and to Federal Reserve Banks for themselves and as agents of foreign and
international monetary authorities. Tenders will be received up to 1:30 p.m., Eastern
Daylight Saving time, Thursday, July 31, 1975, under competitive and noncompetitive
bidding, as set forth in Section III hereof. The 5 7/8 percent Treasury Notes of Series C-1975,
maturing August 15, 1975, will be accepted at par in payment, in whole or in part, to the
extent tenders are allotted by the Treasury.
II. DESCRIPTION OF BONDS
1. The bonds will be dated August 15, 1975, and will bear interest from that date, payable
semiannually on February 15 and August 15 in each year until the principal amount becomes
payable. They will mature August 15, 2000, but may be redeemed at the option ofthe United
States on and after August 15, 1995, in whole or in part, at par and accrued interest on any
interest day or days, on 4 months' notice of redemption given in such manner as the Secretary
ofthe Treasury shall prescribe. In case of partial redemption, the bonds to be redeemed will
be determined by such method as may be prescribed by the Secretary ofthe Treasury. From
the date of redemption designated in any such notice, interest on the bonds called for
redemption shall cease.
2. The income derived from the bonds is subject to all taxes imposed under the Internal
Revenue Code of 1954. The bonds are subject to estate, inheritance, gift or other excise taxes,
whether Federal or State, but are exempt from all taxation now or hereafter imposed on the
principal or interest thereof by any State, or any of the possessions of the United States, or
by any local taxing authority.
3. The bonds will be acceptable to secure deposits of public moneys. They will not be
acceptable in payment of taxes.
4. Bearer bonds with interest coupons attached, and bonds registered as to principal and
interest, will be issued in denominations of $1,000, $5,000, $10,000, $100,000 and
$1,000,000. Book-entry bonds will be available to eligible bidders in multiples of those
amounts. Interchanges of bonds of different denominations and of coupon and registered
bonds, and the transfer of registered bonds will be permitted.
5. The bonds will be subject to the general regulations ofthe Department ofthe Treasury,
now or hereafter prescribed, governing United States bonds.
III. TENDERS AND ALLOTMENTS
1. Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of
the Public Debt, Washington, D.C. 20226, up to the closing hour, 1:30 p.m.. Eastern Daylight
Saving time, Thursday, July 3 1, 1975. Each tender must state the face amount ofbonds bid
for, which must be $ 1,000 or a multiple thereof, and the yield desired, except that in the case
of noncompetitive tenders the term "noncompetitive" should be used in lieu of a yield. In
the case of competitive tenders, the yield must be expressed in terms of an annual yield with
two decimals, e.g., 7.11. Fractions may not be used. Noncompetitive tenders from any one
bidder may not exceed $500,000.
270
1976 REPORT OF THE SECRETARY OF THE TREASURY
2. Commercial banks, which for this purpose are defined as banks accepting demand
deposits, and dealers who make primary markets in Government securities and report daily
to the Federal Reserve Bank of New York their positions with respect to Government
securities and borrowings thereon, may submit tenders for account of customers provided
the names of the customers are set forth in such tenders. Others will not be permitted to
submit tenders except for their own account. Tenders will be received without deposit from
banking institutions for their own account. Federally-insured savings and loan associations.
States, political subdivisions or instrumentalities thereof, public pension and retirement and
other public funds, international organizations in which the United States holds membership,
foreign central banks and foreign States, dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their positions with
respect to Government securities and borrowings thereon, and Government accounts.
Tenders from others must be accompanied by payment (in cash or the notes referred to in
Section I which will be accepted at par) of 5 percent ofthe face amount ofbonds applied for.
3. Immediately after the closing hour tenders will be opened, following which public
announcement will be made by the Department ofthe Treasury ofthe amount and yield range
of accepted bids. Those submitting competitive tenders will be advised ofthe acceptance or
rejection thereof In considering the acceptance of tenders, those with the lowest yields will
be accepted to the extent required to attain the amount offered. Tenders at the highest
accepted yield will be prorated if necessary. After the determination is made as to which
tenders are accepted, an interest rate will be established at the nearest 1/8 of one percent
necessary to make the average accepted price 100.000 or less. That will be the rate of interest
that will be paid on all of the bonds. Based on such interest rate, the price on each competitive
tender allotted will be determined and each successful competitive bidder will be required
to pay the price corresponding to the yield bid. Price calculations will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923, and the determinations ofthe
Secretary of the Treasury shall be final. The Secretary ofthe Treasury expressly reserves the
right to accept or reject any or all tenders, in whole or in part, including the right to accept
tenders for more or less than the $800,000,000 ofbonds offered to the public, and his action
in any such respect shall be final. Subject to these reservations, noncompetitive tenders for
$500,000 or less without stated yield from any one bidder will be accepted in full at the
average price (in three decimals) of accepted competitive tenders.
IV. PAYMENT
1. Settlement for accepted tenders in accordance with the bids must be made or
completed on or before August 15, 1975, at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt. Payment must be in cash, notes referred to in Section I (interest
coupons dated August 15, 1975, should be detached), in other funds immediately available
to the Treasury by August 15, 1975, or by check drawn to the order ofthe Federal Reserve
Bank to which the tender is submitted, or the United States Treasury if the tender is submitted
to it, which must be received at such Bank or at the Treasury no later than: (1) Tuesday,
August 12, 1975, if the check is drawn on a bank inthe Federal Reserve Districtof the Bank
to which the check is submitted, or the Fifth Federal Reserve District in the case of the
Treasury, or (2) Friday, August 8, 1975, if the check is drawn on a bank in another district.
Checks received after the dates set forth in the preceding sentence will not be accepted unless
they are payable at a Federal Reserve Bank. Payment will not be deemed to have been
completed where registered bonds are requested if the appropriate identifying number as
required on tax returns and other documents submitted to the Internal Revenue Service (an
individual's social security number or an employer identification number) is not furnished.
In every case where full payment is not completed the payment with the tender up to 5
percent of the amount of bonds allotted shall, upon declaration made by the Secretary of
the Treasury in his discretion, be forfeited to the United States. When payment is made with
notes, a cash adjustment will be made to or required ofthe bidder for any difference between
the face amount of notes submitted and the amount payable on the bonds allotted.
v . ASSIGNMENT OF REGISTERED N O T E S /
1. Registered notes tendered as deposits and in payment for bonds allotted hereunder are
not required to be assigned if the bonds are to be registered in the same names and forms
as appear in the registrations or assignments ofthe notes surrendered. Specific instructions
for tne issuance and delivery of the bonds, signed by the owner or his authorized
representative, must accompany the notes presented. Otherwise, the notes should be
assigned by the registered payees or assignees thereof in accordance with the general
regulation governing United States securities, as hereinafter set forth. Bonds to be registered
in names and forms different from those in the inscriptions or assignments of the notes
EXHIBITS
271
presented should be assigned to "The Secretary of the Treasury for Treasury Bonds of
1995-2000 in the name of (name and taxpayer identifying number)." If bonds in coupon
form are desired, the assignment should be to "The Secretary of the Treasury for coupon
Treasury Bonds of 1995-2000 to be delivered to
." Notes tendered
in payment should be surrendered to the Federal Reserve Bank or Branch or to the Bureau
of the Public Debt, Washington, D.C. 20226. The notes must be delivered at the expense
and risk of the holder.
VI. GENERAL PROVISIONS
1. As fiscal agents of the United States, Federal Reserve Banks are authorized and
requested to receive tenders, to make such allotments as may be prescribed by the Secretary
ofthe Treasury, to issue such notices as may be necessary, to receive payment for and make
delivery of bonds on full-paid tenders allotted, and they may issue interim receipts pending
delivery of the definitive bonds.
2. The Secretary of the Treasury may at any time, or from time to time, prescribe
supplemental or amendatory rules and regulations governing the offering, which will be
communicated promptly to the Federal Reserve Banks.
WILLIAM E . SIMON,
Secretary of the Treasury.
SUPPLEMENT TO DEPARTMENT CIRCULAR NO. 25-75. PUBLIC DEBT
DEPARTMENT OF THE TREASURY,
Washington, August 1, 1975.
The Secretary of the Treasury announced on July 31, 1975, that the interest rate on the
bonds described in Department Circular—Public Debt Series—No. 25-75, dated July 24,
1975, will be 8 3/8 percent per annum. Accordingly, the bonds are hereby redesignated 8 3/8
percent Treasury Bonds of 1995-2000. Interest on the bonds will be payable at the rate of
8 3/8 percent per annum.
DAVID Mosso,
Fiscal Assistant Secretary.
TS
m
•V
Summary of information pertaining to Treasury bonds issued during fiscal 1976 and transition quarter
Date of
preliminary
nouncement
1975
July 23
Oct. 22
1976
Jan. 27
Apr. 28
July
28
Concurrent
offering
circular
No.
Department
circular
Date
5-76
12-76
7 975
July 24
Oct. 23
1976
Jan. 28
Apr. 29
20-76
July
25-75
33-75
29
Type of
auction 1
Average
price
High
price
Low
price
Issue
date
7975
Aug. 15
Aug. 154
23-75, 24-75
32-75
? 3/8 percent of 1995-2000
J 3/8 percent of 1995-2000
Yield
Price
99.327
101.50
3 99.948
101.73
98.917
101.34
3_76, 4-76
10-76, 11-76
8 1/4 percent of 2000-05
7 7/8 percent of 1995-2000
do .
do .
101.75
%.73
102.14
3 97.50
101.42
96.36
18-76,19-76
8 percent of 1996-2001
1 Some issues of bonds were auctioned by the " p r i c e " method, with the interest rate being
announced prior to the auction, and bidders were required to bid a price. Other auctions were
held by the "yield" method in which case bidders were required to bid a yield; after tenders were
allotted an interest rate for the bonds was established at the nearest 1/8 of 1 percent necessary
to make the average accepted price 100.000 or less.
2 Payment could not be made through Treasury tax and loan accounts for any of the issues.
3 Relatively small amounts of bids were allotted at a price or prices above the high shown.
However, the higher price or prices are not shown in order to prevent an appreciable
discontinuity in the range of prices, which would make it misrepresentative.
70
H
Accepted tenders
Treasury bonds issued
(all auctioned for cash)
Yield
o
May 155
Feb. 186
1976
Aug. 16
Date
tenders
received
Payment
date2
May 15,2005
Feb. 15,2000
1975
July 31
Oct. 30
7976
Feb. 5
May
7
7 975
Aug. 15
Nov. 17
1976
Feb. 17
May 17
Aug. 15,2001
Aug
Aug. 16
Maturity
date
Aug. 15,2000
Aug. 15,2000
6
4Interest was payable from Nov. 17, 1975.
5 Interest was payable from Feb. 17. 1976.
6 Interest was payable from May 17. 1976.
NOTE.—The maximum amount that could be bid for a noncompetitive basis for each issue
was $500,000. All issues had a minimum denomination of $1,000.
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EXHIBITS
273
Exhibit 3.—Treasury bills
During the fiscal year and transition quarter there were 66 weekly issues of 13-week and
26-week bills (the 13-week bills represent additional amounts of bills with an original
maturity of 26 weeks), 17 52-week issues, 1 issue of 139 days and 7 issues of short-dated
("Federal Funds") bills. A press release inviting tenders for 13-week and 26-week bills is
reproduced in this exhibit and is representative of all releases except those for short-dated
bills. The press release of September 3, 1975, announcing the initiation of this type of shortterm offering is also included in this exhibit, as well as the detailed offering press release of
the same date, which is representative of all such releases. Also reproduced is a press release
which is representative of releases announcing the results of offerings. Data for each issue
during the period appears in table 39 in the Statistical Appendix.
PRESS RELEASE OF SEPTEMBER 14, 1976
The Department of the Treasury, by this public notice, invites tenders for two series of
Treasury bills to the aggregate amount of $5,200 million, or thereabouts, to be issued
September 23, 1976, as follows:
91-day bills (to maturity date) in the amount of $2,100 million, or thereabouts,
representing an additional amount of bills dated June 24, 1976, and to mature December
23, 1976 (CUSIP No. 912793 C7 9), originally issued in the amount of $3,103 million, the
adclitional and original bills to be freely interchangeable.
182-day bills, for $3,100 million, or thereabouts, to be dated September 23, 1976, and to
mature March 24, 1977 (CUSIP No. 912793 F3 5).
The bills will be issued for cash and in exchange for Treasury bills maturing September
23, 1976, outstanding in the amount of $5,208 million, ofwhich Government accounts and
Federal Reserve Banks, for themselves and as agents of foreign and international monetary
authorities, presently hold $2,876 million. These accounts may exchange bills they hold for
the bills now being offered at the average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and noncompetitive bidding,
and at maturity their face amount will be payable without interest. They will be issued in
bearer form in denominations of $10,000, $15,000, $50,000, $100,000, $500,000 and
$1,000,000 (maturity value), and in book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to one-thirty p.m..
Eastern Daylight Saving time, Monday, September 20, 1976. Tenders will not be received
at the Department of the Treasury, Washington. Each tender must be for a minimum of
$10,000. Tenders over $10,000 must be in multiples of $5,000. In the case of competitive
tenders the price offered must be expressed on the basis of 100, with not more than three
decimals, e.g., 99.925. Fractions may not be used.
Banking institutions and dealers who make primary markets in Government securities and
report daily to the Federal Reserve Bank of New York their positions with respect to
Government securities and borrowings thereon may submit tenders for account of customers
provided the names of the customers are set forth in such tenders. Others will not be
permitted to submit tenders except for their own account. Tenders will be received without
deposit from incorporated banks and trust companies and from responsible and recognized
dealers in investment securities. Tenders from others must be accompanied by payment of
2 percent of the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department ofthe Treasury ofthe arnount and
price range of accepted bids. Those submitting competitive tenders will be advised of the
acceptance or rejection thereof. The Secretary of the Treasury expressly reserves the right
to accept or reject any or all tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders for each issue for
$500,000 or less without stated price from any one bidder will be accepted in full at the
average price (in three decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be made or completed at
the Federal Reserve Bank or Branch on September 23, 1976, in cash or other immediately
available funds or in a like face amountofTreasury bills maturing September 23, 1976. Cash
and exchange tenders will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in exchange and the issue price
of the new bills.
Under Sections 454(b) and 1221(5) of the Intemal Revenue Code of 1954 the amount
of discount at which bills issued hereunder are sold is considered to accrue when the bills
are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration
as ciapital assets. Accordingly, the owner of bills (other than life insurance companies) issued
hereunder must include in his Federal income tax return, as ordinary gain or loss, the
274
1976 REPORT OF THE SECRETARY OF THE TREASURY
difference between the price paid for the bills, whether on original issue or on subsequent
purchase, and the amount actually received either upon sale or redemption at maturity during
the taxable year for which the return is made.
Department ofthe Treasury Circular No. 418 (current revision) and this notice prescribe
the terms ofthe Treasury bills and govern the conditions of their issue. Copies ofthe circular
may be obtained from any Federal Reserve Bank or Branch.
PRESS RELEASES OF SEPTEMBER 3, 1975
In order to meet its financing needs through the low point of its operating cash balance
in mid-Septemiber, the Treasury will sell up to $0.8 billion of an additional amount of the
bills maturing September 18,1975, and up to $0.7 billion of an additional amount of the bills
maturing September 25,1975. These 13- and 20-day bills will be auctioned only through the
Federal Reserve Bank of New York on September 4 for payment on September 5. The
minimum acceptable tender for each of these issues will be $10 million, with increments of
$1 million above that minimum.
The need for a short-term cash management instrument of this type has substantially
increased over the past several years and is a result of the growing concentration of large
payments in the first several working days of each month. This in turn has led to the
substantial increase in the variability of the Treasury's cash balance, thereby requiring that
the Treasury either maintain abnormally high balances to accommodate the intra-monthly
low point in the balance or to borrow directly from the Federal Reserve. The resulting
variability of the Treasury's balance at the Federal Reserve Bank affects the reserves of the
banking system in a manner that often requires the Federal Reserve to undertake large open
market operations to offset this reserve impact. These operations have at times been
unsettling to the market. Use of short-dated bills of this type, first offered by the Treasury
in August of this year, represents a new means for the maintenance of orderly markets. As
such, this offering serves miich the same purpose as Tax Anticipation Bills which have been
offered from time to time in the past to provide financing over a low point in the Treasury's
cash balance prior to a major tax date. Unlike the use of Tax Anticipation Bills, however,
the sale of these bills carries no implication of a future paydown. However, depending upon
cash requirements, the Treasury may choose to either increase or decrease the amounts to
be offered when these bills mature.
These short-dated bills have been referred to as "Federal Funds Bills." The minimum $10
million tender size and the offering solely through the Federal Reserve Bank of New York
simplify the auction and permits these bills to be sold on much shorter notice than is the case
with regular bill auctions. Investors outside of New York may subscribe through
correspondent banks or dealers in New York or directly with the Federal Reserve Bank of
New York by wire.
The Department of the Treasury, by this public notice, invites tenders for two series of
Treasury bills to the aggregate amount of $1,500,000,000, or thereabouts, to be issued
September 5, 1975, as follows:
13-day bills (to maturity date) in the amount of $800,000,000, or thereabouts,
representing an additional amount of bills dated March 20, 1975, maturing September 18,
1975 (CUSIP No. 912793 XP6), and
20-day bills (to maturity date) in the amount of $700,000,000, or thereabouts,
representing an additional amount of bills dated March 27, 1975, maturing September 25,
1975 (CUSIP No. 912793 XQ4).
The bills will be issued on a discount basis under competitive bidding, and at maturity their
face amount will be payable without interest. They will be issued in bearer form in
denominations of $10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value), and in book-entry form to designated bidders.
Tenders will be received fof each issue only at the Federal Reserve Bank of New York up
to noon. Eastern Daylight Saving time, Thursday, September 4, 1975. Wire and telephone
tenders may be received at the discretion of the Federal Reserve Bank of New York. Each
tender for each issue must be for a minimum of $ 10,000,000. Tenders over $ 10,000,000 must
be in multiples of $1,000,000. The price on tenders offered must be expressed on the basis
of 100, with not more than three decimals, e.g., 99.925. Fractions may not be used.
Banking institutions and dealers who make primary markets in Govemment securities and
report daily to the Federal Reserve Bank of New York their positions with respect to
Govemment securities and borrowings thereon may submit tenders for account of customers
provided the names of the customers are set forth in such tenders. Others will not be
permitted to submit tenders except for their own account. Tenders will be received without
deposit from incorporated banks and tmst companies and from responsible and recognized
275
EXHIBITS
dealers in investment securities. Tenders from others must be accompanied by payment of
2 percent of the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department ofthe Treasury ofthe amount and
price range of accepted bids. Those submitting tenders will be advised of the acceptance or
rejection thereof The Secretary of the Treasury expressly reserves the right to accept or
reject any or all tenders, in whole or in part, and his action in any such respect shall be final.
Settlement for accepted tenders in accordance with the bids must be made at the Federal
Reserve Bank of New York on September 5, 1975, in immediately available funds.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the amount
of discount at which bills issued hereunder are sold is considered to accrue when the bills
are sold, redeemed or otherwise disposed of, and the bills are excluded from consideration
as capital assets. Accordingly, the owner of bills (other than life insurance companies) issued
hereunder must include in his Federal income tax return, as ordinary gain or loss, the
difference between the price paid for the bills, whether on original issue or on subsequent
purchase, and the amount actually received either upon sale or redemption at maturity during
the taxable year for which the return is made.
Department ofthe Treasury Circular No. 418 (current revision) and this notice prescribe
the terms ofthe Treasury bills and govern the conditions of their issue. Copies of the circular
may be obtained from any Federal Reserve Bank or Branch.
PRESS RELEASE OF SEPTEMBER 20, 1976
Tenders for $2,100 million of 13-week Treasury bills and for $3,100 million of 26-week
Treasury bills, both series to be issued on September 23,1976, were opened at the Federal
Reserve Banks today. The details are as follows:
13-week bills maturing
Dec. 23, 1976
Range of accepted competitive
bids
26-week bills maturing
Mar. 24, 1977
Discount
rate
Investment
ratel
5.000
5.032
5.028
5.13
5.17
5.16
Discount
rate
Investment
rate'
Percent
High
Low
Average
98.736
298.728
98.729
5.214
5.246
5.236
397.364
497.348
97.353
5.43
5.46
5.45
/
1 Equivalent coupon-issue yield.
2 Tenders at the low price for the 13-week bills were allotted 94 percent.
3 Excepting one tender of $3,500,000.
4 Tenders at the low price for the 26-week bills were allotted 38 percent.
Total tenders received and accepted by Federal Reserve districts
26-week bills
13-week bills
Received
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
$
31.530.000
3,700,235,000
21,315,000
31,435,000
20.995,000
23,090,000
256,420,000
54.135,000
24.855.000
26,575,000
29,045.000
183,215,000
$4,402,845,000
Accepted
$
16,530,000
1,870,950,000
20,765,000
30,310,000
15,845,000
19,320,000
31,475,000
27,720,000
6,855,000
23,050,000
16,045,000
22,190,000
1 $2,101,055,000
1 Includes $325,175,000 noncompetitive tenders from the public.
2 Includes $162,675,000 noncompetitive tenders from the public.
Received
$
26,450,000
4,453,050,000
8,800,000
63,940,000
17,975,000
15,215,000
298,915,000
42,545,000
37,310,000
18,145,000
25,150.000
222.265.000
$5,229,760,000
Accepted
$
11,450,000
2,802,050,000
8,800,000
13,940,000
7,475,000
15,030,000
103,855,000
20,545,000
21,810,000
18,145,000
14,910,000
64,165,000
2 $3,102,175,000
276
1976 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 4.^Department Circular, Public Debt Series No. 21-75, July 10, 1975,
regulations governing 2 percent depositary bonds
DEPARTMENT OF THE TREASURY,
Washington, July 10, 1975.
AUTHORITY: 31 U.S.C. 752, 754b; 5 U.S.C. 301.
§ 348.0 Offering of bonds.
The Secretary of the Treasury under authority of the Second Liberty Bond Act, as
amended, offers, at par, 2 percent Depositary Bonds to depositaries and financial agents
designated under the provisions of section 5153 ofthe Revised Statutes of 1873, as amended
(12 U.S.C. 90); the Act of May 7, 1928, 45 Stat. 492 (12 U.S.C. 332); the Act of June 19,
1922, 42 Stat. 662 (31 U.S.C. 473); and section 10 of the Act of June 11, 1942, 56 Stat.
356 (12 U.S.C. 265), which have executed a depositary, financial agency and collateral
agreement satisfactory to the Secretary of the Treasury. The bonds will be sold to such
depositaries and financial agents in an amount not to exceed in any case the amount for which
the depositary and financial agent is qualified. This offering will continue until terminated
by the Secretary of the Treasury.
§348.1 Description of bonds.
(a) General.—The bonds will be issued in book-entry form on the books of the
Department of the Treasury, Bureau of the Public Debt, Washington, D.C. 20226.
(b) Terms and rate of interest.—The bonds, bearing interest at the rate of 2 percent per
annum, payable by Treasury check on a semiannual basis on June 1 and December 1 in each
year, will be issued in multiples of $1,000, and will mature twelve years from issue date.
(c) Nontransferability.—2 percent Depositary Bonds are not transferable, but they will be
acceptable to secure deposits of Federal funds with, and the faithful performance of duties
by, depositaries and financial agents designated under the statutory provisions shown in
§ 348.0, and may not be obtained or used for any other purpose.
§ 348.2 Subscription for purchase and issue date.
Eligible investors may subscribe for bonds under this offering through submission of a
subscription to the Department of the Treasury, Domestic Banking Staff, Bureau of
Government Financial Operations, Washington, D.C. 20226, which office will determine the
appropriate amount and issue date of bonds to be issued. A confirmation of the issuance,
in the form of a written advice, which shall specify the amount and describe the bonds by
title and maturity date, shall be sent to the subscriber.
§ 348.3 Redemption/reinvestment.
(a) Before maturity.—A bond may be redeemed either at the option of the United States
or the owner, in whole or in multiple $ 1,000 amounts, at par and accrued interest, at any
time, upon not less than 30 days' notice in writing given by either party to the other. From
the date of redemption designated in such notice, interest on the bonds to be redeemed shall
cease, and the unredeemed portion, if any, shall continue to be held in book-entry form with
the original issue date. Any such notice of redemption given by an owner shall be addressed
to the Department of the Treasury, Domestic Banking Staff, Bureau of Governmental
Financial Operations, Washington, D.C. 20226.
(b) At maturity.—Unless the Department of the Treasury, Bureau of the Public Debt,
Division of Public Debt Accounts, Washington, D.C. 20226, or the office specified in (a)
above, has received from the owner, at least two weeks prior to the maturity date of a bond,
a written request for payment at maturity, the bond shall be automatically redeemed at
maturity and the principal amount reinvested in the owner's name in a new bond having the
same description in all material respects as the one redeemed. In all such instances, interest
will not be paid on the redemption date but on the next regular interest payment date, unless
the redemption date coincides with the interest payment date.
§ 348.4 Taxation.
The income derived from the bonds is subject to all taxes imposed under the Internal
Revenue Code of 1954, but the bonds are exempt from all taxation now or hereafter imposed
on the principal or interest thereof by any State or any ofthe possessions ofthe United States,
or by any local taxing authority.
§ 348.5 Reservations.
The Secretary ofthe Treasury reserves the right to reject any application for the purchase
of bonds hereunder, in whole or in part, and to refuse to issue or permit to be issued any such
bonds in any case or any class or classes of cases if he deems such action to be in the public
EXHIBITS
277
interest, and his action in any such respect shall be final. The Secretary ofthe Treasury may
also at any time, or from time to time, supplement or amend the terms of these regulations,
or of any amendments or supplements thereto.
JOHN K. CARLOCK,
Fiscal Assistant Secretary.
Exhibit 5.—Department Circular, Public Debt Series No. 22-75, July 10, 1975,
regulations governing 2 percent Treasury bonds—REA series
DEPARTMENT OF THE TREASURY,
Washington, July 10, 1975.
AUTHORITY: 31 U.S.C. 752-754b; 5 U.S.C. 301.
§ 347.0 Offering of bonds.
The Secretary of the Treasury under authority of the Second Liberty Bond Act, as
amended, offers to borrowers from the Rural Electrification Administration, U.S. Department of Agriculture, 2 percent Treasury Bonds—R.E.A. Series. The bonds will be sold to
such borrowers with the specific approval of the Rural Electrification Administration for
each transaction. This offering will continue until terminated by the Secretary of the
Treasury.
§ 347.1 Description of bonds.
(a) General.—The bonds will be issued in book-entry form on the books of the
Department of the Treasury, Bureau of the Public Debt, Washington, D.C. 20226.
(b) Terms and rate of interest.—The bonds, bearing interest at the rate of 2 percent per
annum, payable on a semiannual basis on January 1 and July 1 in each year, will be issued
in multiples of $ 1,000, and will mature twelve years from issue date. Interest will be paid by
Treasury check.
(c) Nontransferability.—2 percent Treasury Bonds—R.E.A. Series are not transferable
nor entitled to any privilege of conversion, and they may not be sold, discounted or pledged
as collateral for a loan or as security for the performance of an obligation, or for any other
purpose.
§ 347.2 Procedure for purchase.
Subscriptions for approved borrowers shall be submitted by the Rural Electrification
Administration, together with the remittances, to the Bureau of the Public Debt, Securities
Transactions Branch, Washington, D.C. 20226.
§ 347.3 Issue date.
The issue date of a bond shall be the date on which funds in full payment therefor are
received by the office described in § 347.2,
§ 347.4 Redemption/reinvestment.
(a) Before maturity.—A bond may be redeemed either at the option ofthe United States
or the owner, in whole or in multiple $ 1,000 amounts, at par and accrued interest, at any
time, upon not less than 30 nor more than 60 days' notice in writing given by either party
to the other. From the date of redemption designated in any such notice, interest on the bonds
to be redeemed shall cease, and th. unredeemed portion, if any, shall continue to be held
in book-entry form with the original issue date. Any such notice of redemption given by an
owner shall be addressed to the Department of the Treasury, Bureau of the Public Debt,
Washington, D.C. 20226.
(b) At maturity.—Unless the Department ofthe Treasury, Bureau ofthe Public Debt, has
received from the owner, at least one week prior to the maturity date of a bond, a written
request for payment at maturity, it shall automatically redeem the same at maturity, and
reinvest in the owner's name the principal amount in a new bond having the same description
in all material respects as the one redeemed. In all such instances, interest will not be paid
on the redemption date but on the next regular interest payment date, unless the redemption
date coincides with the interest payment date.
§ 347.5 Taxation.
The income derived from the bonds is subject to all taxes imposed under the Internal
Revenue Code of 1954. The bonds are subject to estate, inheritance, gift or other excise taxes,
whether Federal or State, but are exempt from all taxation now or hereafter imposed on the
principal or interest thereof by any State or any of the possessions of the United States, or
by any local taxing authority.
278
1976 REPORT OF THE SECRETARY OF THE TREASURY
§ 347.6 General provisions.
(a) Regulations.—2 percent Treasury Bonds—R.E.A. Series shall be subject to the general
regulations with respect to United States securities, which are set forth in the Department
of the Treasury Circular No. 300, current revision (31 CFR, Part 306), to the extent
applicable. Copies of the circular may be obtained from the Bureau of the Public Debt,
Department of the Treasury, Washington, D.C. 20226, or a Federal Reserve Bank or Branch.
(b) Reservations.—The Secretary of the Treasury reserves the right to reject any
application for the purchase of bonds hereunder, in whole or in part, and to refuse to issue
or permit to be issued any such bonds in any case or any class or classes of cases if he deems
such action to be in the public interest, and his action in any such respect shall be final. The
Secretary of the Treasury may also at any time, or from time to time, supplement or amend
the terms of these regulations, or of any amendments or supplements thereto.
JOHN K. CARLOCK,
Fiscal Assistant Secretary.
Exhibit 6.—Departnient Circular, Public Debt Series No. 11-73, December 19, 1973,
amended, regulations governing 5 percent Treasury certificates of indebtedness- REA
series
DEPARTMENT OF THE TREASURY,
Washington, July JO, J975.
Department of the Treasury Circular, PubHc Debt Series No. 11 -73, dated December 19,
1973 (31 CFR, Part 345), is hereby amended to provide for the payment of interest on the
5 percent Treasury Certificates of Indebtedness- R.E.A. Series, by credit through a Federal
Reserve Bank or Branch; to authorize the submission of subscriptions to such facility; and,
to redesignate § 345.5 as § 345.6 and to insert a new § 345.5 that provides customary tax
information, as shown below:
Section 345.1(b) is revised as follows:
§345.1 Description of certificates.
*
*
*
*
*
*
*
(b) Terms and rates of interest.—The certificates, bearing interest at the rate of 5 percent
per annum, will be issued in multiples of $1,000 and will mature one year from issue date.
Interest on the certificates will be computed on an annual basis and, unless redeemed prior
to maturity, will be payable six months from issue date and at maturity. Interest may be paid
to an owner by having the amount thereof credited by a Federal Reserve Bank or Branch,
acting as fiscal agent ofthe United States, to the reserve account of a member bank servicing
such owner and for the latter's account. Such action will be taken at the owner's option. If
not exercised, payment of interest will be made by Treasury check.
Section 345.2 is revised as follows:
§ 345.2 Subscription for purchase.
The recipient of a 5 percent loan from the Rural Electrification Administration or Rural
Telephone Bank may subscribe for certificates under this offering, up to the amount of the
unexpended portion ofthe loan, by submitting a subscription, together with the remittance,
to the Federal Reserve Bank or Branch ofthe district in which the subscriber is located. The
subscription form must show the amount of certificates desired, and give the title of the
designated official of the subscriber authorized to redeem, them.
The present § 345.5 is redesignated as § 345.6 and a new § 345.5 is added as follows:
§ 345.5 Taxation.
The income derived from the certificates is subject to all taxes imposed under the Intemal
Revenue Code of 1954. The certificates are subject to estate, inheritance, gift or other excise
taxes, whether Federal or State, but are exempt from all taxation now or hereafter imposed
on the principal or interest thereof by any State orany ofthe possessions ofthe United States,
or by any local taxing authority.
The foregoing amendments were effected under authority of 31 U.S.C. 754, 754b and 5
U.S.C. 301 for the purpose of facilitating the payment of interest and the submission of
subscriptions for 5 percent Treasury Certificates of Indebtedness—R.E.A. Series. Notice and
public procedures thereon are unnecessary as the fiscal policy of the United States is
involved.
JOHN K. CARLOCK,
Fiscal Assistant Secretary.
279
EXHIBITS
Exhibit 7.—Department Circular No. 653, Ninth Revision, April 23, 1974, First
Amendment, offering of United States savings bonds, series E
DEPARTMENT OF THE TREASURY,
Washington, December 9, 1975.
§ 316.8 Extended terms and improved yields for outstanding bonds,
(a) Extended maturity periods. * * *
(3) Bonds with issue dates May /, 1952, through November /, 1965. Owners of Series E
bonds with issue dates of May 1, 1952, through November 1, 1965, may retain their bonds
for a second extended maturity period of 10 years.
(4) Bonds with issue dates of December /, 1965, or thereafter. Owners of Series E bonds
with issue dates of December 1, 1965, or thereafter, may retain their bonds for an extended
maturity period of 10 years.
*
*
*
*
*
*
*
The foregoing revisions and amendments were effected under authority of Section 22 of
the Second Liberty Bond Act, as amended (49 Stat. 21, as amended; 31 U.S.C. 757c), and
5 U.S.C. 301. Notice and public procedures thereof are unnecessary as the fiscal policy of
the United States is involved.
DAVID Mosso,
Fiscal Assistant Secretary.
00
O
TABLE 13-A
BONDS BEARING ISSUE DATES FROM DEC. 1, 1945, THROUGH MAY 1, 1946
Issvt*^ n r i c e
Dene)raiii a t l o n
. . - . . - - .
Period
( y e a r s and months a f t e r
$7.50
10.00
$18.75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
(1) Redemption v a l u e s d u r i n g e a c h h a l f - y e a r p e r i o d ( v a l u e s
c r e a s e on f i r s t day of p e r i o d ) *
in-
THIRD EXTENDED MATURITY PERIOD**
30 y e a r s 0 months)
Ann1•o^t^Tna^•A
t o 0-6
t o 1-0
t o 1-6
t o 2-0
t o 2-6
t o 3-0
t o 3-6
t o 4-0
to 4-6
t o 5-0
t o 5-6
t o 6-0
t o 6-6
t o 7-0
t o 7-6
t o 8-0
t o 8-6
t o 9-0
t o 9-6
tolO-0
y
. . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
..
lliXllin^-)
. ( 6/1/76)
(12/1/76)
( 6/1/77)
(12/1/77)
( 6/1/78)
(12/1/78)
( 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/80)
( 6/1/81)
(12/1/81)
( 6/1/82)
(12/1/82)
. ( 6/1/83)
(12/1/83)
. ( 6/1/84)
(12/1/84)
( 6/1/85)
. (12/1/85)
$22.96
23.65
24.36
25.09
25.85
26.62
27.42
28.24
29.09
29.96
30.86
31.79
32.74
33.72
34.74
35.78
36.85
37.96
39.10
40.27
41.48
$57.41
59.13
60.91
62.73
64.62
66.55
68.55
70.61
72.73
74.91
77.15
79.47
81.85
84.31
86.84
89.44
92.13
94.89
97.74
100.67
103.69
$114.82
118.26
121.82
. 125.46
129.24
133.10
137.10
141.22
145.46
149.82
154.30
158.94
163.70
168.62
173.68
178.88
184.26
189.78
195.48
201.34
207.38
$229.64
236.52
243.64
250.92
258.48
266.20
274.20
282.44
290.92
299.64
308.60
317.88
327.40
337.24
347.36
357.76
368.52
379.56
390.96
402.68
414.76
$459.28
473.04
487.28
501.84
516.96
532.40
548.40
564.88
581.84
599.28
617.20
635.76
654.80
674.48
694.72
715.52
737.04
759.12
781.92
805.36
829.52
$1148.20
1182.60
1218.20
1254.60
1292.40
1331.00
1371.00
1412.20
1454.60
1498.20
1543.00
1589.40
1637.00
1686.20
1736.80
1788.80
1842.60
1897.80
1954,80
2013.40
2073.80
$2296.40
2365.20
2436.40
2509.20
2584.80
2662.00
2742.00
2824.40
2909.20
2996.40
3086.00
3178.80
3274.00
3372.40
3473.60
3577.60
3685.20
3795.60
3909.60
4026.80
4147.60
v^ P 1H
—
(3) From b e g i n - (4) Frora b e g i n (2) From b e g i n n i n g of c u r r e n t n i n g of each
n i n g of e a c h
maturity period
jrr. p e r i o d t o li-y r . p e r i o d
3rd e x t e n d Defej.iiiiJ.nf; Ul.
i;cBJ.iuixnB v/i.
each %-yr. pd.
n e x t Jj-yr. p d .
ed m a t u r i t y
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
3-0
8-6
9-0
9-6
10-0
•(nv<»o^Ttl<»nt•
(annual percentage r a t e )
5.99
6.01
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3 /
percent
5.99
6.02
5.98
6.03
5.97
6.01
6.01
6.00
5.99
5.98
6.01
5.99
6.01
6.00
5.99
6.02
5,99
6,01
6.00
6.00
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6,00
6,00
....
j _ Month, day, and year on which issues of Dec. 1, 1945, enter each period. For subsequent issue months add the appropriate number of months*
L/
I j Third extended raaturity reached at 40 years 0raonthsafter issue,
"iJ Yield on purchase price from issue date to 3rd extended raaturity date Is 4,32 percent.
*
**
For earlier rederaption values and yields see appropriate table in Departnent Circular 653, 9th Revision, as amended and supplemented,
This table does not apply if the prevailing rate for Series E bonds being issued at the time the extension begins is different from 6.00 percent.
-J
ON
73
-0
o
o
-n
H
X
rn
CO
m
n
70
m
H
>
73
<
O
^
H
X
m
H
73
m
>
C/5
c
73
XABLB 14-A
BONDS BEARING ISSDE DATES FROM JUNE 1 THROUGH NOV. 1, 1946
$7.50
10.00
Issue price
Denoraination
Period
(years and raonths after
second extended raaturity at
30 years 0 raonths)
$18.75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
(1) Rederaption values during each half-year period (values Increase on first day of period)*
THIRD EXTE^^)ED MATURITY P E R I O D A *
Approxiraate investment yield
(annual percentage rate)
(2) Frora begin- (3) Frora begin- (4) From beginning of current ning of each
ning of each
maturity period -i-yr. period to -i-yr. period
to beginning of beginning of
to 3rd extendeach -'i-yr. pd.
next ^i-yr. pd.
ed maturity
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
l/( 6/1/76)
(12/1/76)
( 6/1/77)
(12/1/77)
( 6/1/73)
(12/1/78)
( 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/00)
( 6/1/81)
(12/1/81)
( 6/1/32)
(12/1/82)
( 6/1/83).
(12/1/83)
( 6/1/84)
(12/1/84)
( 6/1/85)
(12/1/85)
( 6/1/86)
$23.26
23.96
24.63
25.42
26.18
26.97
27.73
28.61
29.47
30.36
31.26
32.20
33.17
34.16
35.19
36.24
37.33
38.45
39.60
40.79
42.02
$58.16 $116.32
119.80
59.90
123.40
61.70
127.10
63.55
130.92
65.46
134.84
67.42
133.90
69.45
143.06
71.53
147.36
73.60
151.78
75.89
156.32
78.16
80.51 161.02
165.04
02.92
85.41 170.02
175.94
87.97
90.61 181.22
186.66
93.33
96.13 192.26
99.01 193.02
203.96
101.98
210.08
10.5.0^
$232.64
239.60
246.80
254.20
261.84
269.63
277.80
286.12
294.72
303.56
312.64
322.04
331.68
341.64
351.88
362.44
373.32
384.52
396.04
407.92
420.16
$465,28
479,20
493.60
508.40
523.63
539.36
555.60
572.24
539.44
607.12
625.28
644.08
663.36
633.23
703.76
724.33
746.64
769.04
792.03
815.34
040.32
$1163.20
1198.00
1234.00
1271.00
1309.20
1343.40
1339.00
1430.60
1473.60
1517.80
1563.20
1610.20
1658.40
1703.20
1759.40
1812.20
1866.60
1922.60
1930.20
2039.60
2100.30
$2326.40
2396.00
2463.00
2542.00
2613.40
2696.80
2778.00
2861.20
2947.20
3035.60
3126.40
3220.40
3316.80
3416.40
3513.80
3624.40
3733.20
3845.20
3960.40
4079.20
4201.60
5.93
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6,00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
Percent
5.98
6.01
6.00
6.01
5.99
6.02
.99
.01
.00
.98
.01
.99
.01
5.99
6.00
6.00
6.00
5.99
6.00
6.00
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
m
X
X
DO
H
C/5
1/ Month, day, and year on X7hich issues of June 1, 1946, enter each period. For subsequent Issue raonths add the appropriate nuraber of months.
2J Third extended raaturity reached at 40 years 0 months after issue.
3^/ Yield on purchase price frora issue date to 3rd extended maturity date is 4.35 percent,
*
**
For earlier redemption values and yields see appropriate tahlfi In Departraent Circular 653, 9th Revision, as araended and .supplemented.
This table does not apply if the prevailing rate for Series E bonda being issued at the time the extension begins is different from 6.00 percent.
to
00
to
00
TABU5 41-A
BONDS BEARING ISSUE DATES FROM DEC. 1, 1955, THROUGH TIA^CH 1, 1956
Issue price
Denoraination
$18.75
25.00
Period
(years and months after
first extended maturity at
19 years 8 raonths)
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
(1) Rederaption values during each half-year period (values increase on first day of period)*
SECOND EXTENDED MATURITY PERIOD**
Approxiraate investment yield
(annual percentage rate)
(2) From begin- (3) From begin- (4) From beginning of current ning of each
ning of each
maturity neriod -g-yr. period to 'a-yr. period
to beginning of beginning of
to 2nd extendeach '-s-yr. pd.
next h-yr. pd.
ed maturity
Percent
0-0
0-6
-1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
3-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
]/
,(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
8/1/75)
2/1/76)
8/1/76)
2/1/77)
8/1/77)
2/1/78)
8/1/78)
2/1/79)
8/1/79)
2/1/80)
8/1/80)
2/1/81)
8/1/81)
2/1/82)
8/1/82)
2/1/83)
8/1/83)
2/1/84)
8/1/84)
2/1/85)
8/1/85)
$41.48
42.72
44.01
45,33
46,69
48.09
49.53
51.02
52.55
54.12
55.75
57.42
59.14
60.91
62.74
64.62
66.56
68.56
70.62
72.74
74.92
$82.96
85.44
88.02
90.66
93.38
96.18
99.06
102.04
105.10
108.24
111.50
114.84
118.28
121.82
125i48
129.24
133.12
137.12
141.24
145.48
149.84
$165.92
170.88
176.04
181.32
186.76
192.36
198.12
204.08
210.20
216.48
223.00
229.68
236.56
243.64
250.96
258.48
266.24
274.24
232.48
290.96
299.68
$331.84
341.76
352.03
362.64
373.52
384.72
396.24
403.16
420.40
432.96
446.00
459.36
473.12
487.28
501.92
516.96
532.48
548.48
564.96
581.92
599.36
$829.60
854.40
880.20
906.60
933.80
961,80
990.60
1020.40
1051.00
1082,40
1115.00
1148.40
1182.80
1213.20
1254.80
1292.40
1331.20
1371.20
1412.40
1454.80
1498.40
$1659.20
1708.30
1760.40
1813.20
1867.60
1923.60
1981.20
2040,80
2102.00
2164.80
2230.00
2296.80
2365.60
2436.40
2509.60
2534.80
2662.40
2742.40
2824.80
2909.60
2996.30
$16592
17088
17604
18132
18676
19236
19812
20408
21020
21648
22300
22968
23656
24364
25096
25848
26624
27424
28248
29096
29968
5.98
6.01
6.01
6.00
6.00
6.00
6.00
00
00
00
00
00
00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
Percent
5,98
6,04
6,00
6,00
6.00
,99
,02
,00
,98
.02
,99
5.99
5.99
Percent
6.00
6.00
6.00
6.00
6,00
6,00
00
00
00
00
00
00
00
00
6.00
6.00
6.00.
6.00
6.00
5.99
\ J Month, day, and year on which Issues of Dec. 1, 1955, enter each period. For subsequent issue raonths add the appropriate number of raonths.
21 Second extended maturity reached at 29 years 8 months after Issue.
2J Yield on purchase price fron Issue date to 2nd extended raaturity date Is 4.72 percent.
*
**
For earlier redemption values and yields see appropriate table in Department Circular 653, 9th Revision, as anended and supplemented.
This table does not apply If the prevailing rate for Series E bonds being issued at the time the extension begins is different frpm 6.00 percent.
73
m
o
73
H
O
H
X
m
&n
m
n
73
m
H
>
70
<
H
X
m
H
73
m
>
C
73
<
TABLE 42-A
BONDS BEA]
!IING ISSUE DATE APRIL 1 OR MAY 1, 1956
Issue price
Denomi nation
. • . . • • « •
Period
(years and months after
first extended maturity at
19 years 8 raonths)
$18.75
25.00
$37.50
50,00
$75,00
100.00
$150,00
200.00
$375,00
500.00
$750,00
1000,00
$7500
IOOOO
(1) Rcdenptlon values during each half-year period (values increase on first day of period)*
SECOND EXTENDED MATURITY PERIOD**
Approximate Investment vield
(annual percentage rate)
(2) From beginning of current
raaturity period
to beginning of
each *$-yr. pd.
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
.
. . . 1/(12/1/75)
.
. . ( 6/1/76)
.
. (12/1/76)
.
. ( 6/1/77)
,
. (12/1/77)
.
( 6/1/78)
.
(12/1/78)
.
( 6/1/79)
.
. (12/1/79)
.
. ( 6/1/80)
, (12/1/80)
.
.
( 6/1/81)
.
• (12/1/81)
.
. ( 6/1/82)
. (12/1/82)
.
.
( 6/1/83)
.
. (12/1/83)
. (6/1/84)
.,
.
. (12/1/84)
.
. ( 6/1/85)
, (12/1/85)
.
$42.54
43.82
45,13
46.48
47.88
49.32
50.79
52,32
53.89
55,51
57.17
58.89
60.65
62.47
64.35
66,28
68.26
70,31
72,42
74,59
76,83
$85.08
87.64
90.26
92.96
95.76
98.64
101.58
104.64
107.78
111,02
114.34
117.78
121.30
124.94
128.70
132.56
136.52
140.62
144.84
149,18
153,66
$170,16
175,28
180.52
185,92
191.52
197,28
203,16
209.28
215.56
222,04
228,68
235.56
242,60
249,88
257,40
265,12
273,04
281.24
289.68
298.36
307.32
$340.32
350.56
361.04
371.84
383.04
394,56
406,32
418.56
431,12
444.08
457.36
471.12
485.20
499.76
514,80
530,24
546,08
562.48
579.36
596.72
614.64
$850.80
876.40
902.60
929.60
957.60
986,40
1015,80
1046.40
1077.80
1110.20
1143.40
1177.80
1213.00
1249.40
1287.00
1325,60
1365.20
1406.20
1448.40
1491,80
1536,60
$1701.60
1752,80
1805,20
1859,20
1915,20
1972,80
2031.60
2092.80
2155,60
2220,40
2286.80
2355.60
2426.00
2498,80
2574.00
2651,20
2730,40
2812;40
2896,80
2983,60
3073.20
$17016
17528
18052
18592
19152
19728
20316
20928
21556
22204
22868
23556
24260
24988
25740
26512
27304
28124
28968
29836
30732
6,02
6,00
5,99
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6.00 3/
(3) Frora begin- (4) From beglnning of each
ning of each
Ji-yr, period to h- yr. period
beginning of
tc 2nd extendnext 'i-yr, pd.
ed raaturity
Percent
6.02
5.98
5.98
6.02
6.02
5.96
6.02
6.00
6.01
5.98
6.02
5.98
6.00
6.02
6.00
5.97
6.01
6.00
5.99
6.01
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.01
m
X
X
5
H
c
^
2^/ Month, day, and year on which issues of April 1, 1956, enter each period. For issues of May 1, 1956, add 1 inonth.
2 f Second extended raaturity reached at 29 years 8 months after issue.
3^/ Yield on purchase price from issue date to 2nd extended raaturity date is 4.81 percent.
*
**
For earlier redenption values and yields see appropriate table in Departnent Circular 653, 9th Revision, as amended and supplemented.
This table does not apply if the prevailing rate for Series E bonds being issued at the time the extension begins is different from 6.(J0 percent.
to
00
to
00
TABLE 43-A
4^
BONDS BEARING ISSUE DATES FR0!{ JUNE 1 THROUGH SEPT. 1, 1956
Issue price
Denoraination
Period
(years and raonths after
$13.75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500,00
$750.00
1000.00
$7500
IOOOO
(1) Rederaption values during each half-year period (values increase 3n first day of period^ •k
fir''*' °v«-«^j«j « , . . ^ ' . . „4.*..,•,
SECOND EXTENDED MATURITY PERIOF
19 years 8 raonths)
'*
«
$170.56
175.63
180.96
186.36
191.96
197.72
203.64
209.76
216.08
222.56
229.20
236.08
243.16
250.48
258.00
265.72
273.63
281.92
290.36
299.03
308.04
$1705.60
1756.30
1809,60
1863.60
1919.60
1977.20
2036.40
2097.60
2160.30
2225.60
2292.00
2360.30
2431.60
2504.30
2530.00
2657.20
2736.30
2319.20
2903.60
2990.30
3080.40
Approximate investraent yield
(annual percentage rate)
(2) From begin- (3) From begin- (4) From beginning of each
ning of current ning of each
raaturity period '5-yr. period tc h-•yr. period
to '>"'' ovf-or.^to beginning of beginning of
ec maturity
next 'i-yr. pd.
each ?i-yr. pd.
Pcrcoot
0-0
0-6
1-0
1-6
2^0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
.
. . . l/( 2/1/76)
.
. ( 8/1/76)
.
. ( 2/1/77)
.
. ( 8/1/77)
.
. ( 2/1/78)
.
. ( 3/1/73)
.
( 2/1/79)
.
( 8/1/79)
.
( 2/1/30)
.
. ( 8/1/00)
.
. ( 2/1/01)
.
. ( 8/1/31)
.
. ( 2/1/32)
.
. ( 8/1/82)
.
. ( 2/1/33)
.
. ( 8/1/83)
.
. ( 2/1/34)
.
. ( 8/1/84)
.
. ( 2/1/35)
.
( 8/1/35)
.
( 2/1/36)
$42.64
43.92
45.24
46.59
47.99
49.43
50.91
52.44
54.02
55.64
57.30
59.02
60.79
62.62
64.50
66.43
63.42
70.48
72.59
74.77
77.01
$85.23
87.34
90.43
93.18
S5.98
93.86
101.82
104.33
103.04
111.28
114.60
118.04
121.58
125.24
129.00
132.86
136.84
140.96
145.18
149.54
154.02
$341.12
351.36
361.92
372.72
383.92
395.44
407.28
419.52
432.16
445.12
453.40
472.16
436.32
500.96
516.00
531.44
547.36
563.34
530.72
593.16
616.08
$852,30
878,40
904,30
931.80
959,80
933,60
1018.20
1048.30
1030.40
1112.30
1146.00
1130.40
1215.80
1252.40
1290.00
1323.60
1363.40
1409.60
1451.30
1495.40
1540.20
$17056
17563
18096
18636
19196
19772
20364
20976
21603
22256
22920
23603
24316
25043
25300
26572
27363
23192
29036
29903
30804
6.00
6.01
5.99
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
Percent
6.00
6.01
5.97
6.01
6.00
5.99
6.01
6.03
6.00
5.97
6.00
6.00
6.02
6.00
5.98
5.99
6.02
5.99
6.01
5.99
Percent
6.00
6,00
6,00
6,00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6,00
6,00
6,00
6,00
6.00
6.00
5.99
I f Month, day, and year on which Issues of June 1, 1956, enter each period. For subsequent issue months add the appropriate number of raonths.
2f Second extended maturity reached at 29 years 8 months after issue.
3f Yield on purchase price fron issue date to 2nd extended raaturity date is 4.32 percent.
•
**
For earlier redemption values and yields see appropriate table in Department Circular 653, 9th Revision, as amended and suppleraented.
This table does not s^p^y if the prevailing rate for Series E bonds being Issued at the time the extension begins is different from 6.00 perccnC*.
\D
as
73
m
3
O
o
T)
H
X
m
GO
70
m
H
>
73
<
O
TJ
H
X
m
H
70
m
>
CO
C
73
TABLE 44-A
BOiroS BEARING ISSUE DATE OCT. 1 OR NOV. 1, 1956
$18.75
25.00
Issue price
Denoraiiiat ion
Period
(years and raonths after
first extended maturity at
19 years 3 raonths)
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
(1) Rederaption values during each half-year period (values increase on first day of period)*
SECOiro KXTEITOED MATURITY PERIOD**
Approximat e investment vield
(annual percentage rate)
(2) From begin- (3) Frora begin- (4) From beginning of each
ning of current ning of each
maturity period h- yr. period to 'i-yr. period
to beginning of beginning of
to 2nd extendnext J^-yr. pd.
each ij-yr, pd.
ed raaturity
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
3-0
0-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 3-0
to 3-6
to 9-0
to 9-6
tolO-0
2/
.
. .
.
.
.
.
.
.
.
.
.
.
.
,
.
.
.
.
.
.
.
.
l/( 6/1/.76)
. (12/1/76)
. ( 6/1/77)
, (12/1/77)
. ( 6/1/73)
. (12/1/73)
. ( 6/1/79)
. (12/1/79)
. ( 6/1/30)
. (12/1/30)
. ( 6/1/81)
. (12/1/31)
. ( 6/1/32)
. (12/1/82)
. ( 6/1/33)
. (12/1/33)
. ( 6/1/34)
. (12/1/84)
. ( 6/1/35)
. (12/1/35)
. ( 6/1/36)
$43.03
44.32
45.65
47.02
43.43
49.03
51.33
52.92
54.51
56.14
57.33
59.56
61.35
63.19
65.09
67.04
69.05
71.12
73.26
75.45
77.72
$06.06
00.64
91.30
94.04
96.36
99.76102.76
.1.05.34
109.02
112.28
115.66
119.12
122.70
126.38
130.13
134.03
133.10
142.24
146.52
150.90
155.44
$172.12
177.28
132.60
188.03
193.72
199.52
205.52
211.63
213.04
224.56
231.32
230.24
245.40
252.76
260.36
263.16
276.20
284.43
293.04
301.30
310.33
$344.24
3.54.56
365.20
376.16
337.44
399.04
411.04
423.36
436.03
449.12
462.64
476.43
490.30
505.52
520.72
536.32
552.40
563.96
536.03
603.60
621.76
$360.60
836.40
913.00
940.40
968.60
997.60
1027.60
1053.40
1090.20
1122.80
1156.60
1191.20
1227.00
1263.30
1301.80
1340.30
1331.00
1422.40
1465.20
1509.00
1554.40
$1721,20
1772.30
1326.00
1830.80
1937.20
1995.20
2055.20
2116.80
2180.40
2245.60
2313.20
2382.40
2454.00
2527.60
2603.60
2631.60
2762.00
2044.30
2930.40
3018.003103.30
$17212
17723
18260
18803
19372
19952
20552
21163
21804
22456
23132
23324
24540
25276
26036
26316
27620
23443
29304
30180
31083
6,00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
Percent
6.00
6.00
6,00
6.00
5.99
6.01
5.99
6.01
5.98
6.02
5.98
6.01
6.00
6.01
5.99
6.00
6.00
6.02
5.98
6.02
Percent
6,00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.02
m
X
X
5
d
^
o
o
l l Month, day, and year on v/hich issues of Oct. 1, 1956, enter each period. For Is.sues of Nov. 1, 1956, add 1 raonth.
2/ Second extended maturity reached at 29 years 3raontlisafter issue.
3J Yield on purchase price frora issue date to 2nd extended raaturity date is 4.35 percent.
*
**
For earlier redemption values and' yields sec appropriate table in Department Circular 653, 9th Revision, as amended and supplemented.
This table does not apply if the prevailing rate for Series E bonds being issued at the time the extension begins is different from 6.00 percent.
to
00
to
00
TABLE 46.A
ON
BOTTOS BEARING ISSUE DATES FRO?I FEB. I TIIROUGH IIAY 1 , 1957
Issue price
Denomi n a t i o n
$18.75
25.00
.
Period
(y e a r s and months a f t e r
f i r s t ex t e n d e d raaturity a t
18 y e a r s 11 n o n t h s )
$37.50
50.00
$75.00
100,00
$150,00
200.00
$375,00
500,00
$750,00
1000,00
$7500
IOOOO
(1) Rederaption v a l u e s d u r i n g e a c h h a l f - y e a r p e r i o d ( v a l u e s
c r e a s e on f i r s t day of p e r i o d ) *
In-
SECOND EXTEITOED MATURITY PERIOD**
Approximate I n v e s t m e n t vield
(annual percentage r a t e )
(2) From b e g i n - (3) From begin- (4) From beginn i n g of c u r r e n t ning of each
ning of each
m a t u r i t y p e r i o d 'i-yr, period to ^ - y r . period
t o b e g i n n i n g of beginning of
to 2nd extendeach h - y c . pd.
next 5|-yr, pd.
ed raaturity
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
t o 0-6
t o 1-0
t o 1-6
t o 2-0
t o 2-6
t o 3-0
t o 3-6
to 4-0
t o 4-6
t o 5-0
t o 5-6
t o 6-0
t o 6-6
t o 7-0
t o 7-6
t o 8-0
t o 3-6
t o 9-0
t o 9-6
tolO-0
2^ f
. . .
l/(
. (
. (
(
. (
. (
. (
. (
(
(
, (
(
(
(
(
(
(
(
(
(
(
1/1/76)
7/1/76)
1/1/77)
7/1/77)
1/1/73)
7/1/73)
1/1/79)
7/1/79)
1/1/80)
7/1/00)
1/1/01)
7/1/81)
1/1/82)
7/1/32)
1/1/33)
7/1/3.3)
1/1/34)
7/1/34)
1/1/85)
7/1/35)
1/1/86)
$42.59
43.87
45.13
46.54
47.94
49.37
50.85
52.33
53.95
55.57
57.24
53.95
60,72
62,54
64.42
66,35
63.34
70.39
72.51
74.68
76.92
$85.18
37.74
90.36
93.03
95.33
98.74
101.70
104.76
107.90
111.14
114.48
117.90
121.44
125.03
123,84
132.70
136.63
140.73
145.02
149.35
153.84
$170.36
175.48
180.72
186.16
191.76
197.48
203.40
209.52
215.80
222.23
228.96
235,30
242,88
250.16
257,68
265.40
273i36
231.56
290.04
298.72
307.68
$340.72
350.96
361.44
372.32
383.52
394.96
406.30
419.04
431.60
444.56
457.92
471.60
485.76
500.32
515.36
530.80
546.72
563.12
580.03
597.44
615.36
$851,30
377,40
903.60
930.80
953.30
937,40
1017.00
1047.60
1079.00
1111.40
1144.30
1179.00
1214,40
1250,30
1233,40
1327.00
1366.30
1407.30
1450.20
1493.60
1538,40
$1703,60
1754,80
1307.20
1861.60
1917.60
1974.80
2034.00
2095.20
2153.00
2222.80
2239.60
2358.00
2423.00
2501.60
2576.80
2654.00
2733.60
23.15.60
2900.40
2987.20
3076.80
$17036
17540
13072
18616
19176
19743
20340
20952
21580
22228
22896
23530
24283
25016
25.763
26.540
27336
28156
29004
29872
30763
6.01
5.99
6.00
6.00
6,00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
G.OO
6.00
6.00 3 /
Percent
6.01
5.97
6.02
6,02
5,97
6,00
6,02
5,99
6,01
6.01
5.97
6.01
5.99
6.01
5.99
6.00
6.00
6.02
5,99
6.00
Percent
6,00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
5,99
6,00
1 / Mon : h , d a y , aiid y e a r on which i s s u e s of F e b . 1 , 1 9 5 7 , e n t e r e a c h p e r i o d . For s u b s e q u e n t 1s s u e mont hs add t h e appropriate number of months.
2 j Second extended raaturity reached at 28 years 11 months after Issue.
2J Yield on purchase price from issue date to 2nd extended raaturity date is 4,94 percent.
*
**
For earlier redemption values and yields see appropriate table in Departraent Circular 653, Dth Revision, as amended and suppleraented.
This table does not apply if the prevailing rate for Series E bonds being issued at the time the extension begins is different frora 6.00 percent.
—
vC
Os
73
m
*10
o
5
O
Tl
H
X
m
C/3
m
70
^1
>
73
<
O
Tl
H
X'
rn
^
m
>
C/5
73
<
TABLE 47-A
BONDS BEARING ISSUE DATE JUNE 1, 1957
$18.75
25.00
Issue price
Denomination
Period
(years and raonths after
fi'^r-*-
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.OC
$750.00
1000.00
$7500
IOOOO
(1) Redenption values during each half-year period (values Increase on first day of period)*
'>->'<-»n'1'«'1 M».-..%.4 .... »t-
SECOND EXTENDED MATURITY PERIOD**
13 years 11 months)
Approximate investment yield
(annual percentage rate)
(2) From begin- c(3) From begin- (4) From beginning of current ning of each
ning of each
maturity period 'i-yr„ period to h-•yr. period
to beginning of beginning of
to 2nd extendeach 'i-yr. pd.
next 'i-yr, pd.
ed raaturity
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
3-0
3-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 3-6
to 9-0
to 9-6
tolO-0
2/
.
. l/( 5/1/76)
. . . (11/1/76)
. . . ( 5/1/77)
. . (11/1/77)
. . . ( 5/1/78)
, . . (11/1/73)
. . ( 5/1/79)
. . (11/1/79)
. . ( 5/1/80)
. . (11/1/80)
. . ( 5/1/31)
. . (11/1/31)
. . . ( 5/1/32)
. . (11/1/32)
. . ( 5/1/83)
. . (11/1/33)
. , ( 5/1/84)
. . (11/1/84)
. , ( 5/1/35)
. . (11/1/35)
. . ( 5/1/36)
$42.78
44.06
45.39
46.75
43.15
49.59
51.08
52.61
54.19
55.82
57.49
59.22
60.99
62.32
64.71
66.65
63.65
70.71
72.33
75.01
77.27
$35.56
33.12
90.73
93.50
96.30
99.13
102.16
105.22
103.33
111.64
114.93
113.44
121.93
125.64
129.42
133.30
137.30
141.42
145.66
150.02
154.54
$171.12
176.24
131.56
137.00
192.60
193.36
204.32
210.44
216.76
223.23
229.96
236.83
243.96
251.23
253.34
266.60
274.60
232.34
291.32
300.04
309.03
$342.24
352.43
363.12
374.00
335.20
396.72
403.64
420.33
433.52
446.56
459.92
473.76
437.92
502.56
517.63
533.20
549.20
565.63
532.64
600.03
613.16
$355.60
831.20
907.30
935.00
963.00
901.80
1021.60
1052.20
1033.30
1116.40
1149.30
1134.40
1219.30
1256.40
1294.20
1333.00
1373.00
1414.20
1456.60
1.500.20
1545.40
$1711.20
1762.40
1815.60
1870.00
1926,00
1933.60
2043.20
2104.40
2167.60
2232.30
2299.60
2368.30
2439.60
2512.30
2533.40
2666.00
2746.00
2323.40
2913.20
3000.40
3090.80
$17112
17624
13156
13700
19260
19836
20432
21044
21676
22323
22996
23683
24396
25123
25334
26660
27460
23234
29132
30004
30903
5.93
6.01
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
Percent
5."98
6.04
5.99
5.99
5.98
6.01
5.99
6.01
6.02
5.93
6,02
5.98
6.00
6.02
6.00
6.00
6.00
6.00
5.99
6.03
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6,00
6,01
6.03
m
X
X
53
H
C3
/
1/ Month, day, and year on which issues of June 1, 1957, enter each period,
2 / Second extended raaturity reached at 23 years 11 raonths after issue.
3f Yield on purchase price frora issue date to 2nd extended raaturity date is 4,96 percent,
ft For earlier.redemption values and yields see appropriate table in Department Circular 653, 9th Revision, as amended and supplemented,
** This table does not apply if the prevailing rate for Series E bonds being issued at the tirae the extension begins is different from 6,00 percent.
to
00
-J
to
00
00
TABLE 43-A
BONDS BEARING ISSUE DATES FROM JULY 1 THROUGH NOV. 1, 1957
$18.75
25.00
IS.SUC price
Denomination
Period
(years and months after
£4pet- ^ v t - ^ n A n t l m aturity at
18 years ] 1 rnonths)
.
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
lederaptiorI values during each half-year period (values In(1) I
crease on first day of period)*
SECOiro EXTENDED I4ATURITY PERIOD**
Approximate Investment yield
(annual percentage rate)
ning of current
raaturity period
to beginning of
each 'i-yr. pd.
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6 .
to 1-0 .
to 1-6 .
to 2-0 .
to 2-6 .
to 3-0 .
to 3-6 .
to 4-0 .
to 4-6 .
to 5-0 .
to 5-6 •
to 6-0 .
to 6-6 .
to 7-0 .
to 7-6 .
to 8-0 .
to 8-6 .
to 9-0 .
to 9-6 .
tolO-0 .
2f
..
.
.
.
.
.
.
.
,
.
.
.
.
.
.
.
.
.
.
.
.
.
, l / ( 6/1/76)
(12/1/76)
( 6/1/77)
(12/1/77)
, ( 6/1/78)
. (12/1/78)
( 6/1/79)
,
(12/1/79)
. ( 6/1/80)
. (12/1/BO)
( 6/1/31)
< (12/1/31)
,
( 6/1/02)
(12/1/32)
( 6/1/33)
(12/1/33)
, ( 6/1/34)
(12/1/34)
( 6/1/35)
.
(12/1/35)
( 6/1/36)
$43.16
44.45
45.79
47.16
48.53
50.03
51.54
53.03
54,67
56.31
53.00
59.74
61.54
63.33
65.23
67.24
69.26
71,34
73.43
75.63
77.95
$86.32
83.90
91.53
94.32
97.16
100.06
103.03
106.16
109.34
112.62
116.00
119.48
123.03
126.76
130.56
134.43
133.52
142.63
146.96
151.36
155.90
$172.64
177.80
183.16
133.64
194.32
200.12
206.16
212.32
213.63
225.24
232.00
230.96
246.16
253.52
261.12
263.96
277.04
235.36
293.92
302.72
311.30
$345.23
355.60
366.32
377.23
338.64
400.24
412.32
424.64
437.36
450.43
464.00
477.92
492.32
507.04
522.24
537.92
554.03
570.72
537.34
605.44
623.00
$363.20
339.00
915.30
943.20
971.60
1000.60
1030.30
1061.60
1093.40
1126.20
1160.00
1194.30
1230.30
1267.60
1305.60
1344.30
1335.20
1426.30
1469.60
1513.60
1559.00
$1726.40
1773.00
1831.60
1336.40
1943.20
2001.20
2061.60
2123.20
2186.80
2252.40
2320.00
2389.60
2461.60
2535.20
2611.20
2689.60
2770.40
2853.60
2939.20
3027.20
3113.00
$17264
17730
18316
18364
19432
20012
20616
21232
21863
22524
23200
23396
24616
25352
26112
26396
27704
23536
29392
30272
31.130
5,93
6.00
6.00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6,00
6.00
6,00
6.00
6,00
6.00
6.00
6.00
6.00 3/
ning of each
'i-yr. period to
beginning of
next -'i-yr. pd.
Percent
5.98
6.03
5.98
6.02
5.97
6.04
5.93
5,99
6.00
6.00
6.00
6.03
5.98
6.00
6.00
6.01
6.01
6.00
5.99
6.00
ning of each
Jl-yr. period
to 2nd extended raaturity
Percent
6.00
6.00
6.00
6,00
6.00
6,00
6,00
6.00
6.00
6.00
6,00
6.00
6.00
6,00
6.00
6.00
6.00
6.00
5.99
6.00
I f Month, day, and year on vzhich issues of July 1, 1957, enter each period. For subsequent issue raonths add the appropriate number of months.
2 / Second extended naturity reached at 23 years 11 nonths after is.sue.
3/ Yield on purcliase price froia issue date to 2nd ejitended raaturity date is 4.99 percent.
*
**
For earlier.redemption values and yields see appropriate table in Department Circular 653, 9th Revision, as amended and supplemented.
This table does not apply if the prevailing rate for Series E bonds being issued at the time the extension begins is different from 6.00 percent.
73
m
'V
O
73
H
O
H
X
m
m
n
73
m
H
>
73
O
H
X
m
H
73
m
>
c
73
TABLE 8 7 - A
BOiroS BFJVRING I S S U E DATES FROM D E C . 1 ,
Issue price
Denomination
Period
(years and months after
original maturity at
7 years 0 raonths)
$18.75
25.00
$37.50
50.00
$56.25
75.00
$75.00
100.00
$150.00
200.00
1 9 6 8 , THROUGH MAY 1 ,
$375.00
500.00
$750.00
.1000.00
$7500
IOOOO
(1) Redemption values during each half -year period (value 5 Increase on first day of period)*
— „
F.XTENDED ^tATURITY PERIOD**
1969
Approximate Investment yield
(annual percentage rate)
(2) From begin- (3) From begin- ( 4) From beginning of each
ning of current ning of each
maturity period 'l-yr, period to 'i-yr. period
to beginning of beginning of
to extended
next ij-yr. pd.
maturity
each ^-yr. v ^ .
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
. . . 1/(12/1/75)
.
. ( 6/1/76)
.
(12/1/76)
.
( 6/1/77)
.
(12/1/77)
..
( 6/1/78)
(12/1/78)
.
.
( 6/1/79)
.
(12/1/79)
.
( 6/1/80)
(12/1/80)
.
( 6/1/81)
.
(12/1/81)
.
.
( 6/1/82)
(12/1/82)
.
.
( 6/1/83)
.
. (12/1/83)
.
( 6/1/84)
. (12/1/84)
.
tolO-0 .
. ( 6/1/85)
. (12/1/85)
10-0 2 J
..
$27.11
27.92
28.76
29.62
30.51
31.43
32.37
33.34
34.34
35.37
36.43
37.53
38.65
39.81
41.01
42.24
43.50
44.81
46.15
47.54
48.96
$54.22
55.84
57.52
59.24
61.02
62.86
64.74
66.68
68.68
70.74
72.86
75.06
77.30
79.62
82.02
84.48
37.00
39.62
92.30
95.08
97.92
$31.33
83.76
86.28
88.86
91.53
94.29
97.11
100.02
103.02
106.11
109.29
112.59
115.95
119.43
123.03
126.72
130.50
134.43
138.45
142.62
146.88
$108.44
111.68
115.04
118.48
122.04
125.72
129.48
133.36
137.36
141.48
145.72
150.12
154.60
159.24
164.04
168.96
174.00
179.24
184.60
190.16
195.84
$216.88
223.36
230.08
236.96
244.08
251.44
258.96
266.72
274.72
282.96
291.44
300.24
309.20
318.48
328.03
337.92
348.00
353.48
369.20
380.32
391.68
$542.20
553.40
575.20
592.40
610.20
623,60
647.40
666,80
686,80
707.40
728.60
750.60
773.00
796.20
820.20
844.80
870.00
896.20
923.00
950.80
979.20
$1084.40
1116.30
1150.40
1184.30
1220.40
1257,20
1294.30
1333.60
1373.60
1414.80
1457.20
1501.20
1546.00
1592.40
1640.40
1639.60
1740.00
1792.40
1346.00
1901.60
1958.40
$10844
11168
11504
11843
12204
12572
12948
13336
13736
14148
14572
15012
15460
15924
16404
16896
17400
17924
18460
19016
19584
5.98
6.00
5.996.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
Percent
5.98
6.02
5.98
6.01
6.03
5.98
5.99
6,00
6,00
5,99
6,04
5.97
6.00
6.03
6.00
5,97
6,02
5,98
6.02
5.97
Percent
6.00
6.00
6.00
6,00
6,00
6,00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
5.99
5.99
6.00
5.99
6,00
5.97
m
X
X
00
H
c^
\ l Month, day, and year on which Issues of Dec. 1, 1968, enter each period. For subsequent issue months add the appropriate number of months.
2J Extended raaturity reached at 17 years 0 raonths after issue.
2J Yield on purchase price frora issue date to extended maturity date is 5.73 percent,
*
**
For earlier rederaption values and yields see appropriate table in Departnent Circular 653, 9th Revision, as amended and suppleraented.
This table does not apply if the prevailing rate for Series E bonds being Issued at the time the extension begins is different from 6.00 percent.
to
00
to
O
TABLE 89-A
BONDS BEARING ISSUE DATES F.ROM DEC. 1, 1969, THROUGH MAY 1, 1970.
Issue price
Denomination
$18.75
25.00
Period
(years and raonths after
original raaturity at
5 years 10 months)
$37.50
50.00
$56.25
75.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
(1) Redemption values during each half-year period (values increase on first day of period)*
EXTENDED MATURITY PERIOD**
Approxiraate investment yield
(annual percentage rate)
(2) From begin- (3) From begin- (4) Frora beginning of each
ning of current ning of each
maturity neriod ii-yr. period' to '-i-yr. neriod
to extended
to beginning of beginning of
next ii-yr. pd.
maturity
each 'i-yr. pd.
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
3-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
1/(10/1/75)
( 4/1/76)
(10/1/76)
( 4/1/77)
(10/1/7Z)
( 4/1/78)
(10/1/78)
( 4/1/79)
(10/1/79)
( 4/1/80)
(10/1/80)
( 4/1/81)
(10/1/81)
( 4/1/82)
(10/1/82)
( 4/1/33)
(10/1/83)
( 4/1/84)
(10/1/84)
( 4/1/85)
(10/1/85)
$25.90
26.68
27.48
28.30
29.15
30.03
30.93
31.85
32.81
33.79
34.81
35.85
36.93
38.04
39.18
40.35
41.56
42.81
44.09
45.42
46.78
$51.80
53.36
54.96
56.60
58,30
60.06
61.86
63.70
65.62
67.58
69.62
71.70
73.86
76.08
78.36
80.70
83.12
85.62
88.18
90.84
93.56
$77.70
30.04
82.44
84.90
87.45
90.09
92.79
95.55
93.43
101.37
104.43
107.55
110.79
114.12
117.54
121.05
124.68
128.43
132.27
136.26
140.34
$103.60
106.72
109.92
113.20
116.60
120.12
123.72
127.40
131.24
135.16
139.24
143.40
147.72
152.16
156.72
161.40
166.24
171.24
176.36
181.68
187.12
$207.20
213.44
219.34
226.40
233.20
240.24
247.44
254.80
262.43
270.32
278.48
286.30
295.44
304.32
313.44
322,80
332.48
342.48
352.72
363,36
374.24
$518,00
533.60
549.60
566.00
533.00
600.60
613.60
637.00
656.20
675.30
696.20
717.00
738.60
760.80
783.60
807.00
831.20
856.20
881.80
908.40
935.60
$1036.00
1067.20
1099.20
1132.00
1166.00
1201.20
1237.20
1274.00
1312.40
1351.60
1392.40
1434.00
1477.20
1521.60
1567.20
1614.00
1662.40
1712.40
1763.60
1816.80
1871.20
$10360
10672
10992
11320
.11660
12012
12372
12740
13124
13516
13924
14340
14772
15216
15672
16140
16624
17124
17636
18168
13712
6.02
6.01
6.00
6.00
6.01
6.00
6.00
6.00
6.00
6.00
6.00
. 6.00
6.00
6,00
6.00
6,00
6.00
6.00
6.00
6.00 3/
Percent
6.02
6.00
5.97
6.01
6.04
5.99
5.95
6.03
5.97
6.04
5.98
6,03
.6,01
5,99
5.97
6.00
6.02
5.98
6.03
5.99
Percent
6.00
6.00
6.00
6.00
6,00
6.00
6,00
6.00
6,00
6.00
6.00
6.00
6.00
m
n
73
m
H
>
70
<
O
Tl
5,99
For earlier redenption values and yields see appropriate table in Departnent Circular 653, 9th Revision, as amended and supplemented.
This table does not apply if. the prevailing rate for Series E bonds being issued at the time the extension begins is different from 6,00 percent*
C/3
H
X
m
jL/ Month, day, and year on which Issues of Dec, 1, 1969, enter each period. For subsequent issue months add the appropriate number of raonths.
2 j Extended raaturity reached at 15 years 10raonthsafter issue.
3^/ Yield on purchase price from issue date to extended raaturity date is 5.86 percent.
*
**
73
m
•0
O
73
H
O
*n
H
X
m
H
70
m
>
to
C
70
<
TABLE 90-A
BONDS BEARING ISSUE DATES FROH JUNE 1 THROUGH NOV. 1, 1970
$18.75
25.00
Issue price
Denomination
Period
(years and months after
original maturity at
5 years-10 raonths)
$37.50
50.00
$56.25
•75.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
(1) Redenption values during each lialf-year period (values increase on first day of period)*
FJICTENDED MATURITY PERIOD**
-
Approximate investment yield
(annual percentage rate)
(2) From begin- (3) From begin- (4) From beginning of each
ning of current ning of each
raaturity period 'i-yr. period tc Ji-yr. period
to beginning of beginning of
to extended
each 'i-yr. pd.
next 'i-yr. pd.
naturity
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
3-0
8-6
9-0
9-6
10-0
to 0-«
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
21
.
. l/( 4/1/76)
. . (10/1/76)
. ( 4/1/77)
(10/1/77)
, ( 4/1/78)
. (10/1/78)
( 4/1/79)
(10/1/79)
( 4/1/80)
(10/1/30)
( 4/1/81)
(10/1/31)
( 4/1/82)
(10/1/82)
( 4/1/83)
(10/1/83)
( 4/1/84)
(10/1/34)
( 4/1/85)
(10/1/85)
( 4/1/86)
$26.02
26.30
27.60
28,43
29.29
30,16
31.07
32.00
32.96
33.95
34.97
36.02
37.10
38,21
39,36
40.54
41,75
43,01
44,30
45,63
47.00
$52.04
53.60
55.20
56.86
58.53
60.32
62.14
64.00
65.92
67.90
69.94
72.04
74.20
76.42
73.72
81. OG
83.50
36.02
33.60
91.26
94.00
$78.06 $104.08 $203.16
107.20
214.40
80,40
110.40
32.80
220.30
113.72
227.44
35'. 29
87.37
117.16- 234.32
241.23
90.43
120.64
124.23
93.21
243.56
123.00
96.00
256.00
263.63
93.03
131.84
101.35
135.30
271.60
139.33
279.76
104.91
144.03
283.16
103,06
111.30
143.40
296.30
114,63
152.84
305.63
314.33
113.03
157.44
121.62
162.16
324.32
125.25
167.00
334.00
129.03
344.03
172.04
354.40
177.20
132.90
132.52
365.04
136.39
141.00
183.00
376.00
$520.40
536.00
552.00
568.60
535.30
603.20
621.40
640.00
659.20
679.00
699.40
720.40
742.00
764.20
737.20
310.30
335.00
860.20
836.00
912.60
940.00
$1040.80
1072.00
1104.00
1137.20
1171.60
1206.40
1242.30
1280.00
1313.40
1353.00
1393,80
1440.80
1434.00
1523.40
1574.40
1621.60
1670.00
1720.40
1772.00
1825.20
1880.00
$10403
10720
11040
11372
11716
12064
12423
12800
13134
13530
13933
14403
14340
15234
15744
16216
16700
17204
17720
18252
18800
6,00
5.93
5.99
6,01
5,99
6,00
6,00
6,00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6,00 3/
Percent
6,00
5.97
6.01
6.05
5.94
6.03
5.99
6.00
6.01
6.01
6.01
6,00
5.98
6,02
6.00
5.97
6.04
6.00
6.00
6.00
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.01
6.00
6.00
6.00
m
X
X
53
H
C3
/
\ l Month, day, and year on wliich issues of June 1, 1970,- enter each period. For subsequent issue months add the appropriate number of months.
2 1 Extended naturity reached at 15 years 10 months aft.er issue.
2 J Yield on purchase price from issue date to extended maturity date is 5.39 percent,
*
**
For earlier redemption values and yields see appropriate table in Department Circular 653, 9th Revision, as amended and supplemented.
This table does not apply if the prevailing rate for Series E bonds being issued at the time the extension begins is different from 6.00 percent.
to
VO
292
1976 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 8.—Department Circular No. 905, Sixth Revision, March 18, 1974, First
Amendment, offering of United States savings bonds, series H
DEPARTMENT OF THE TREASURY,
Washington, December 9, 7975.
§ 332.8 Extended terms and improved yields for outstanding bonds.
(a) Extended maturity periods. * * *
(2) Bonds with issue dates June 1, 7952, through May 1, 1959. Owners of Series H bonds
with issue dates of June 1, 1952, through May 1, 1959, may retain their bonds for a second
extended maturity period of 10 years.
(3) Bonds with issue dates of June 7, 7959, or thereafter. Owners of Series H bonds with
issue dates of June 1, 1959, or thereafter, may retain their bonds for an extended maturity
period of 10 years.
*
*
*
*
*
*
*
The foregoing revisions and amendment were effected under authority of section 22 ofthe
Second Liberty Bond Act, as amended (49 Stat. 21, as amended; 31 U.S.C. 757c), and 5
U.S.C. 301. Notice and public procedures thereon are unnecessary as the fiscal policy ofthe
United States is involved.
DAVID MOSSO,
Fiscal Assistant Secretary.
TABLE
BONDS
BEAIRlftG
I S S U E DATES
ISSUE PRICE • • • • • . . . .
$500
R E D E M P T I O N AND N A T U R I T Y VALUE
500
___^^_^^^_^j_^_^_^^^_______^___^^__________________
P E R I t C OF T I f E BOhO I S HELD
A F T . . F EXTENDED M A T U R I T Y AT
19 Y E A R S . 8 MCNTHS
.5
I .0
1 .5
2.0
2.5
3.0
3.5
4 .0
M.5
5.0
5.5
CO
5 .5
7.0
7.5
8.0
3.5
5.0
3.5
IC.O
y
y
J/
•
••
YEARS .
YEARS .
YEARS .
YEARS .
YEARS •
YEARS .
YEARS .
YEARS .
YEARS .
YEARS •
YEARS .
YEARS .
YEARS *
YEARS .
YEA.RS .
YEARS .
YEARS o
YEARS .
YEARS .
YEARS Z J
1/
412/1/751
I G/1/76)
tl2/l/76l
I 6/1/771
112/1/771
I S/1/79I
• 12/1/78 1
I G/1/791
H2/1/79J
I 6/1/30)
112/1/801
I 6 / 1 / Ell
112/1/31)
I 6/1/82)
112/1/82)
I
6/1/33)
112/1/93)
I 6/1/64)
112/1/8M)
I 6/1/95)
-
9-A
FROM O C T . I t
1 2 5 5 THR*OUGH M A R . 1 » 1 S5 S
ISfOOO
SlOfOOO
APPROXIMATE INVESTMENT Y I E L D
StOGO
10»00Q
I ANNUAL PERCENTAGE RATE)
- _ - -— - . - - - _ _ _ - . - _ - - — _ - . _ _ _ _ _ _ _ _
«--_-,_--»..«____«
- - - - I 2 » FROM
1 3 1 FOR
IU ) FROM
BEGINNING
H A L F - Y E A R EACH
U)
AMOUNTS OF I N T E R E S T
OF CURRENT
PC.
P R E - INTEREST
CHECKS FDR EACH D E N O M I N A T I O N •
MATURITY
CEDING
P M T . CATE
^
PD. T O E A .
INTEREST
TO 2ND
SECOND EXTENDED M A T U R I T Y P E R I O D * *
INTEREST
PAYMENT
EXTENDED
P M T . DATE
CATE
MATURITY
$15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
SltOOO
IfCOO
$30.00
30.00
30J00
30.CO
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30#00
30.00
30.00
30.00
30.00
30.00
30«00
30.00
$1 50 . 00
150.00
1 5 0 . CO
15 0 . 0 0
15 0 . 0 0
1 5 0 .CO
15C.D0
1 5 0 . CO
150.00
150.00
150.00
150.00
1 5 0 .CO
150.00
150.00
1 5 0 . CO
1 5 0 . CO
150.00
1 50 . CO
15C.0Q
$300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00
30Q.0C
300.00
300.00
300.OQ
300^00
300.00
300.00
300.00
300.00
300.00
300.00
PERCENT
G.OO
6.0 0
6.0 0
6.00
6.00
6.0 0
6.00
6.0 0
6iOO
5.0 0
G.OO
6.00
G.OO
6.00
6.00
6.0G
6.00
6.00
G.OO
J G.OO
PERCENT
6.00
6.00
6.00
6.00
6.00
6.0C
6 . CO
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.0C
PERCENT
6.00
6.00
6.00
6.00
6 .00
6.00
E.OO
6.00
5 i'oo
6.00
5 .CO
B.OO
6.00
6.00
5.CO
6.00
6,00
5.00
6.00
m
X
X
C
D
di
f O N T H . DAY AND YEAR ON WHICH I N T E R E S T CHECK I S PAYABLE CN I S S U E S OF O C T . l » 1 3 5 5
FOR SUBSEQUENT I S S U E
KONTHS ADD A P P R O P R I A T E NUMBER OF MONTHS.
SECOND EXTENDED M A T U R I T Y REACHED AT 2 9 YEARS AND 8 MONTHS AFTER I S S U E D A T E .
Y I E L D ON PURCHASE P R I C E FRCM ISSUE CATE TO SECOND EXTENDED M A T U R I T Y DATE ON BONDS CATED
O C T . 1 AND
NOV. 1 . 1 9 5 5 I S q . 3 1 t ;
D E C . 1 . 1 3 5 5 THROLGH M A R . 1 . 1 9 56 I S M . 3 2 » .
FOR E A R L I E R
AMENDED
I N T E R E S T CHECKS AND Y I E L D S
ANC S U P P L E K E K T E D .
SEE A P P R O P R I A T E
THIS TABLE DOES NOT APPLY I F THE P R E V A I L I N G
BEGINS I S D I F F E R E N T FROM 6 . 0 0 P E R C E N T .
RATE
TABLE
I N DEPARTMENT
FOR S E R I E S
H BONDS B E I N G
CIRCULAR
ISSUED
£ 0 5 . S T H R E V I S I O N . AS
AT THE TIME
THE E X T E N S I O N
to
VO
to
TABLE 10-A
BONOS B E A R I N G
ISSUE PRICE
RECEMFTION AND M A T U R I T Y
VALUE
P I R I O D OF T I M E BCNO I S HELD
A- TE.l EXTENDED M A T U R I T Y AT
19 Y E A R S . a'.MCNTHS
.5
I .0
1.5
'2.0
2.5
3.0
3.5
i(.0
4.5
5.0
5.5
E.O
E.5
7.0
7.5
£.0
9.5
B.O
3.5
10.0
3/
2/
2/
•
*«
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
2/* .
1/
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
•
.
.
.
1 6/1/76)
112/1/75)
1 6/1/77)
112/1/77)
1 6/1/73)
112/1/78)
1 6/1/79)
112/1/79)
J 6/1/SOI
112/1/30)
1 6/1/eil
112/1/81)
1 6/1/S2)
112/1/82)
1 6/1/831
112/1/93)
1 6/1/34)
112/1/84)
1 6 / 1 / 3 5)
112/1/85)
ISSUE
$500
500
DATES
FROM
$1 . ODD
1.000
A P R . 1 THROUGH S E P , 1 . 1 55G
$5,000
5.000
$10»0UD
10.000
J l ) AMOUNTS OF I N T E R E S T
CHECKS FOR EACH D E N O M I N A T I O N
SECOND EXTENDED
$15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.CO
$30^00
30.00
30 JOO
30.00
30.00
30.100
30.00
3o-.no
30.00
30 JOO
3 0 . DO
30.00
30.00
30JU0
.30s 0 0
30.00
30J00
30 JOO
30 JOO
30.00
MATURITY
•
PERIOD**
$150.00
1 50 . C0-1 50 . CU
15 0.0 0
15 0 . 0 0
1 50 . CO .
150.00
1 5 0 . CO
15 0 . 0 0
1 50-. CO
15 0.0 0
- 15 0 . 0 0
15t?.0 0
150.00
15 COO
150.00
1 50. CO
1 50 . GO
1 50 . CO'
150.00
$300.00
300.00
300,00
300.00
300.00
300.OC
300.00
300.00
300.00
300.OQ300,00
300.00
300.00
300,OC
300.00
300.00
300.00
300.00
300.00
300.00
APPROXIMATE I N V E S T M E N T Y I E L D
lANNUAL PERCENTAGE R A T E )
1 2 ) FROM
BEGINNING
OF CURRENT
MATURITY
P D . TO El\ ,
INTEREST
P M T . DATE
< 3 ) FOR
HALF -YEAR
FC. PRECEDING
INTEREST
PAYMENT
CATE
PERCENT
6 .0 0
5.0 0
G.0 0
CDO
6.00
G.OO
6.00
6.0 0
6.00
6.0C
6.00
6.00
6.00
G.OO
6.00
6.00
G.OO
5.0 0
5.0 0
l y 6.00
PERCENT
G.OO
6.00
6.00
6 . CO
6.00
6.00
6 . CO
6.00
6.00
6.00
6.00
G.OO
6 . GC
G.OO
6.00
6 . CO
6.CO
6.00
6-.C0
6.00
14) FROM
EACH
INTEREST
P M T . CATE
TO 2ND
EXTENDED
MATURITY
PERCENT
6.0C
6.. CO
6.00
5.GO
6 .CO
6 . CO
5.00
6.00
D.GC
6 . CO
6 .CO
5 .CO
5 .CC
6.00
5 ;co
5.DC
E.CC
6.CO
6.0C
f C N T H . DAY AND YEAR ON W.HICH I N T E R E S T CHECK I S PAYABLE CN I S S U E S OF A P R . 1 . 1 9 5 5 . FOR SUBSEQUENT I S S U E
MONTHS ADD APPROPRIATE NUMBER OF MONTHS.
SECOND EXTENDED H.ATURITY REACHED AT 2 9 YEARS ANC 8 MONTHS AFTER I S S U E C A T E .
Y I E L D ON PURCHASE P R I C E FROM ISSUE DATE TO SECOND EXTENDED MATURITY DATE ON BONDS D A T E D : A P R . 1 AND
MAY 1 . 1 9 5 6 I S 4 . 3 9 S ; JUNE 1 THROUGH S E P . 1 . 1 9 5 6 I S 4 . 4 0 S .
FOR E A R L I E R I N T E R E S T CHECKS AND Y I E L D S
AMENDED AND S U P P L E M E N T E D .
SEE A P P R O P R I A T E
I H I S TABLE DOES NOT APPLY I F THE P R E V A I L I N G
BEGINS I S D I F F E R E N T FROM 5 . 0 0 P E R C E N T . '
TABLE
I N DEPARTMENT
RATE FOR S E R I E S H BONDS B E I N G
CIRCULAR
ISSUED
9 0 5 . S T H R E V I S I O N . AS
AT T.HE TIME
THE E X T E N S I O N
ON
73
m
o
73
H"
H
X
m
oo
m
n
73
m
H
>
70
<
O
Tl
H
X
m
H
73
m
>
c
73
TABLE 1 1 - A
BONDS
•ISSUE P R I C E . . . . . . . . .
R E D E M P T I O N ANO M A T U R I T Y VALUE
P E R I C D OF T I H E BOND I S HELD
A F T E F EXTENDED M A T U R I T Y A T
1 9 Y E A R S . 8 MONTHS
.5
1.0
1.5
2.0
2.5
YEARS
.
J.0"
YEARS
.
3.5
4.0
YEARS
.
YEARS
. . bf
.
YEARS
.
4
.5
5.0
5.5
5.0
6.5
7.0
7.5
e.o
YEARS
.
YEARS
.
YEARS
YEARS
.
YEARS
.
YEARS
•
YEARS
.
.
YEARS
.
YEARS
.
YEARS
.
.
.
.
YEARS
.
YEARS
••
.
.
YEARS
•
.
.
YEARS
l O . O
1/
.
YEARS
£.5
I.O
9.5
1/
1/
.
.
.
Z / .
.
,
112/1/76)
1 6/1/771
112/1/77)
1
6/1/78)
J12/1/78)
) 6/1/79)
112/1/79)
\ 6/1/80)
112/1/30)
\
6/1/81)
112/1/31)
1
6/1/32)
n 2 / l / 3 2 )
1
6/1/33)
112/1/33)
\ 6/1/84 )
112/1/84)
1 6/1/65)
U2/1/85)
f 6/1/86 )
BEARING
I S S U E DATES
$500
500
FiROM O C T .
$1,000
1.000
1 .
125 6 THROUGH J A N .
$5,000
5.0C0
$10,000
10.000
H)
AMOUNTS OF I N T E R E S T
CHECKS FOR EACH D E N O N I N A T I O N *
*SECOND EXTENDED M A T U R I T Y P E R I O D * *
$^15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
$30»0C
30.00
30.00
30.00
30.00
30.00
30.100
30.00
30.00
30.00.
3 0 JOO
30.100
30.00
3 0 JOO
30J0Q
30.00
30.00
30.00
30.100
30.00
$300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.OC
300.00
300.00
300.00
300.00
300.00
300.OC
300.00
300.00
300.00
30C.00
300.00
S 15 C C O
150.00
15 0 . 0 0
1 50 . 0 0
1 50 . CO
15C.00
150.00
15 0 . 0 0
1 50 . 0 0
1 50 . CO
1 50 . CO
1 50 . CO
15 0 . 0 0
1 50 . C O
1 50 . CO
150.00
15 C O O
150.00
1 50 . CO
15 C O O
1 .
1 £5 7
APPROXIMATE INVESTMENT Y I E L D
( A N N U A L PERCENTAGE RATE)
-
1 2 ) FROM
BEGINNING
OF CURRENT
MATURITY
PD . T O E A .
INTEREST
P M T . DATE
« 3 ) FOR
14 ) FROM
H A L F - Y E A R EACH
PD.
PRE- INTEREST
CEDING
P M T . DATE
INTEREST
TO 2ND
PAYMENT
EXTENDED
DATE
MATURITY
PERCENT
6 . 00
6.00
6.00
6.0 0
6.0 0
6.00
G.OO
G.OO
G.OO
G.OO
G.OO
6.0 0
6.00
G.OO
G.OO
G.OO
6.00
6.00
G .00
3 7 6 . CO
PERCENT
6.00
' 6.0C
• 6 . DD
6.00
6.00
G.OO
6.00
G.OO
G.OO
5.00
6.GO
6.0 0
6 . GO
G.OO
G.OO
G.CC
6 . CO
6 . CO
5.00
6 . CO
PERCENT
5 .00
5 .CG
5.CC
6.00
6.00
5 .00
6.00
5.CO
6.0C
6.0G
6.00
6.00
6 .CO
6.00
E.CC
5 .00
S.CC
5 .00
6.00
m
X
X
2
H
c^
h O N T H . CAY AND YEAR ON WHICH I N T E R E S T CHECK I S P A Y A B L E CN I S S U E S OF O C T . 1 . 1 9 5 6 . FOR SUBSEQUENT I S S U E
MONTHS ADD A P P R O P R I A T E NUMBER OF MONTHS.
SECOND EXTENDED M A T U R I T Y REACHED AT 2 9 YEARS AND 8 MONTHS AFTER I S S U E D A T E .
Y I E L D ON PURCHASE P R I C E FROM ISSUE DATE TO SECOND EXTENDED M A T U R I T Y OATE ON BONDS D A T E D : O C T . 1 AND
NOV. 1 . 1 9 5 6 I S 4 . 4 3 % ; DEC. 1 . 1 9 5 6 THROLGH J A N . 1 . 1 9 5 7 I S 4 . 4 5 « .
FOR
E A R L I E R I N T E R E S T CHECKS AND Y I E L D S
AMENDED AND S U P P L E M E N T E D .
SEE
APPROPRIATE
T H I S TABLE DOES NOT A P P L Y I F THE P R E V A I L I N G
BEGINS I S D I F F E R E N T FROM 6 . 0 0 P E R C E N T .
RATE
FOR
TABLE
SERIES
IN
DEPARTMENT
H BONDS B E I N G
CIRCULAR
ISSUED
9 0 5 . 6 TH R E V I S I O N .
A T T HE
TIME
THE
AS
EXTENSIJDN
to
29-A
to
FROM JUNE
VO
ON
TABLE
EONDS B E A R I N G
ISSUE PRICE . . . . . . . . .
R E C E M F T I O N AND M A T U R I T Y VALUE
ISSUE
\J
\ J
y
. .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
- .
l i
t \ J
.
.
,
.
,
,
,
,
,.
,
,.
.
, ,.
, ,.
.
,,
, ,.
•
112/1/75)
1 6/1/76)
112/1/75)
I
6/1/77J
1 1 2 / 1 / 7 7)
1 6/1/78 )
fl2/1/78)
1
G/1/79)
n 2 / l / 7 9 )
» 6/1/BO)
U2/1/BD)
1 6/1/91)
112/1/31)
1
6/1/32)
112/1/821
» 6 / 1 / 53)
1 1 2 / 1 / 3 3)
1 5 / 1 / 3 4)
I12/1/S4)
1
5/1/35)
$1,000
1.000
1 THROUGH N O V .
$5,000
5.000
$15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
$30.00
30.00
30.00
30*00
30.00
3D.DO
30JOO
30.00
3 0 JOO
30.00
30.00
30.00
30.00
30JOO
30^00
30.00
3 0 JOO
30.100
$iscon
I N T E R E S T CHECKS AND
ANO S U P P L E M E N T E D ,
APPROXIMATE INVESTMENT Y I E L D
( A N N U A L PERCENTAGE RATE)
3O;DO
30.00
1 3 ) FOR
HALF-YEAR
PD.
PRECEDING
INTEREST
PAYMENT
DATE
PERCENT
6..00
6.00
6.00
6.00
6.0C
6.00
G.OO
5.0Q
6.0C
G.OO
6.00
G.nc
6.00
6.00
6.00
6.00
5.0 0
6.0 0
6.00
3/
6.0C
$300.00
300.00
300.00
300.00
300.00
300.00
300.OC
300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00 '
300.00
15 c o o
150.00
1 5 0 . GO
1 50 . CO
150.00
1 5 0 . CO
1 50 . CO
1 50 . CO
150.00
15C00
1 50.00
15C00
1 5 0 . CO
i 5 c o n
15 0 . 0 0
1 5 0 . GO
1 50 . CO
15 0 . 0 0
1 50 . CO
1965
1 2 ) FROM
BEGINNING
OF CURRENT
MATURITY
PD . T O E A .
INTEREST
P M T . DATE
PERCENT
6.0C
5 . GO
6 . CO
5.00
6.CO
5 . CO
5.00
5.00
5.00
5 . CO
6.00
G.OO
5.00
6.00
6 . CO
G. 00
6.0 0
5.CO
6 . CO
6.CO
14 ) FROM
EACH
INTEREST
P M T . DATE
TO F I R S T
EXTENDED
MATURITY
PERCENT
5 .CO
B.OO
G.CC
E.CC
6.00
6.00
6.CC
E.OO
6.00
S .00
5.00
6.CO
5 .00
E.OO
5 .00
5.00
6.CC
6.GO
5 ,00
73
m
O
70
H
O
H
X
m
C/3
m
n
73
m
H
>
70
<
O
H
X
m
H
73
m
M O N T H . CAY ANC YEAR ON W H I C H I N T E R E S T CHECK I S PAYABLE ON I S S U E S OF JUNE
MONTHS ADC A P P R O P R I A T E NUKBER CF MONTHS.
EXTENDED MATURITY REACHED AT 2 0 YEARS -ANC 0 MONTHS AFTER I S S U E D A T E .
Y I E L D ON PURCHASE P R I C E FROM ISSUE CATE TO EXTENDED M A T U R I T Y I S 5 . 1 3 * .
« FCR E A R L I E R
AMENDED
1 .
$10,000
10.000
H)
AMOUNTS OF I N T E R E S T
CHECKS FDR EACH D E N O M I N A T I O N *
^
EXTENDED MATURITY P E R I O D * *
P E R I C D OF T I h E BOND I S HELD
AFTER F I R S T M A T U R I T Y AT
1 0 YEARS.
0 MONTHS
. 5 YEARS
1 . 0 YEARS
: . 5 YEARS
2 . 0 YEARS
2 . 5 YEARS
3 . 0 YEARS
3 , 5 YEARS
4 . 0 YEARS
4 . 5 YEARS
S.O YEARS
r . s YEARS
5 . n YEARS
6 . 5 YEARS
7 . 0 YEARS
7 . 5 YEARS
£ . 0 YEARS
. 3 . 5 YEARS
.=3.0 Y E A R S
E.S YEARS
l O . O YEARS
DATES
$500
500
YIELDS
SEE
APPROPRIATE
• • T H I S TAGLE DOES NOT APPLY I F T HE P R E V A I L I N G
B E G I N S I S D I F F E R E N T FROM G.OO P E R C E N T .
RATE
TABLE
FOR S E R I E S
IN
DEPARTMENT
H BONDS
BEING
1.
1965.
FOR
SUBSEQUENT
ISSUE
>
CO
C
73
<
CIRCULAR
ISSUED
905.
AT
6TH R E V I S I O N . A
THE T I M E THE
EXTENSION
TABLE 3 n - A
BONDS B E A R I N G
I S SUE P R I C E . .
REOEM.- T I O N AND M A T U R I T Y
VAL UE
ISSUE
2/
2/
3/
•
•*
YEARS . <.
YEARS .
YEARS .
YEARS .
YEARS .
YEARS-.
YEARS . ,
YEARS .
YEARS .
YEARS .
YEARS .
YEARS .
YEARS .
YEARS .
YEARS .
YEARS , .
YEARS .
YEARS . ,
YEARS .
YEARS 2 / .
. 1 / 1 6/1/75)
. .
112/1/76)
. 1 6/1/77)
1 1 2 / 1 / 7 7)
1 5/1/78)
112/1/73)
, 1 6/1/79)
112/1/79)
. 1 6/1/SO)
112/1/30)
1 6/1/31)
,
112/1/81)
. 1 6/1/£2)
«12/1/32)
1 G/1/33)
112/1/83)
1 G/1/94)
,
I12/1/S4)
1 6/1/35)
.
112/1/95)
1»
1965
$5,000
5.000
$1,000
1.000
THROUGH
EXT ENDED
$15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
$30JOO
3 0 JOO
30.CD
30.00
30iOQ
30.00
30.OD
30.100
30.00
3OJ0O
30.100
30.DD
30.01.1
30.100
30.00
30.00
30^00
30.00
30.00
30.00
MATURITY
$150.CO
150.CQ
15CD0
15n.CC
150.00
1 5 0 . CO
15 C O O
150.00
15 C O O
150.CC
150.00
15 C O O
150.00
1 5 0 . CO
1 5 0 . CO
15 C O O
150.00
15C00
150.00
15 C O O
EARLIER
AMENDED
I N T E R E S T CHECKS AND Y I E L D S
AND S U P P L E M E N T E D .
SEE
APPROPRIATE
TABLE
*
DEPARTMENT
1965
12 J FROM
OEGINNING
OF CURRE NT
MATURITY
INTEREST
P M T . DATE
PERCENT
5.0 0
G ,0 0
G.OO
G.OO
6.0 0
5.00
G.OO
G.OO
6.00
G.CC
5.00
G.OO
G.OO
5.0 0
G.OO
6.00
5.0C
6.00
5.0C
3 / 6.00
$300.00
300.00
300.00
300.00
300.00
300.OG
300.00
300.OC
300.00
300.00
300.00
300.00
300.00
300.OC
300.OC
- 300.00
300.00
300.00
300.00
300.00
IN
1..
APPROXIMATE INVESTME U
YIELD
1 ANNUAL PERCENTAGE R A T E )
PEKiOD**
h O N T H . CAY ANC YEAR ON WHICH INTEREST CHECK I S PAYABLE CN I S S U E S OF D E C .
MONTHS ADD A P P R O P R I A T E NUMBER OF MONTHS.
EXTENDED M A T U R I T Y REACHED AT 20 YEARS ANC 0 MONTHS A F T E R I S S U E D A T E .
Y I E L D CN PURCHASE P R I C E FROM I S S U E DATE TO EXTENDED MATURITY I S 5 . 2 9 * .
FOR
HAY
$10,000
10.OCC
1 1 ) AMOUNTS OF I N T E R E S T
CHECKS FOR EACH D E N O M I N A T I O N
P E R I CD OF T I h E BOND I S HELD
AT
A r TER F I R S T M A T U R I T Y
10 Y E A R S .
0 FONTHS
.5
I .0
1.5
2.0
3.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
E.5
7 .0
7 .5
£.0
R.S
2.0
3.5
1D.U
DATES FROM D E C .
$500
SOU
1 ,
19G5.
CIRCULAR
1 3 ) FOR
HALF-YEAR
PD.
PREC E D I KG
I N T E REST
PAYMENT
CATE
PERCENT
6.00
6.00
6.00
6.00
s.oo
6.00
G.OO
G.OO
G.CO
6.00
6.00
6.00
5.CQ
6.00
6.00
G.CO
6.00
G.CO
5.00
5 . CO
14 ) FROM
EACH
INTEREST
PMT. DATE
TO F I R S T
EXTENDED
MATURITY
PERCENT
6.00
6.00
5 .OC
6.00
E.OC
6.0C
5.CC
6.00
5 (CO
E.OC
E.OO
5 .00
6.00
6.0C
E.OC
5.CO
6.00
5 .00
6.00
m
X
DO
H
FOR S UDSEQU ENT" I S S U E
9C5 . 6 T H
THIS TABLE DOES NOT APPLY IF THE PREVAILING RATE FOR SERIES H BONDS BEING ISSUED AT THE TIME
BEGINS I S DIFFERENT FROM 5 . 0 0 PERCENT.
REVISION.
AS
THE EXTENSION
to
VO
-o
to
TABLE 3X-A
00
BONDS BEARING ISSUE DATES FROM JUNE 1 THROUGH NOV. . 1 . 1 9GS
ISSUE PRICE . . . . . . . . .
REC EM'TION AND MATURITY VALUE
PERTCC OF TIKE BOND IS HELD
AFTER FIRST MATURITY AT
20 YEARSo. 0 MONTHS
• s YEARS
1.0
1.5
2.0
2.5
2.0
2.5
4 .0
4.5
5.0
5.5
S.n
5.5
7.0
7.5
E.O
8.5
5.0
9.5
13.0
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS 2 / .
17
.
. .
.
. •
.
. .
. .
. .
.
. .
. .
. .
.
.
.
. .
.
. .
. .
112/1/76)
t 6/1/77)
112/1/77)
1 6/1/78)
112/1/78)
t 6/1/79)
112/1/79)
1 6/1/30)
112/1/80)
1 6/1/81 )
112/1/31)
1 6/1/32)
112/1/32)
1 6/1/83)
112/1/83)
» 6/1/84 )
112/1/84)
t 6/1/85)
I12/1/8SJ
i 6/1/96)
$500
500
-
$1,000
1.000
$5,000
5.00Q
$10,000
10.COC
11) AMOUNTS OF INTEREST
CHECKS FOR EACH DENOMINATION •
^
EXTENDED MATURITY PERIOD**
$15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.Otr
15.00
15.00
15.00
15.00
15.00
15.00
15.OD
15.00
15.00
15.00
15.00
$30.00
3D.0Q
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30 JOO
30.00
30.00
30.00
30.00
30J00
3'0«00
30 JOO
30.00
$150.00
150.00
1 50.CC
150.00
1 50. G
O
15C00
150.00
150.00
150.CQ
150.00
1 5 0 . CO
1 5 0 . QO
150.00
150.00
150.00
150.00
1 5 0 . CO
150.00
1 5 0 . GO
150.00
$300.00
.300.00
300.00
300.00
300.00
300.00
300.00
300.QC
300,00
300.00
300.00
300.CC
300.OG
300.00
300.00
300.00
30Q.OC
300.00
3QQ.0Q
300.00
APPROXIMATE INVESTMENT YIELC
J ANNUAL PERCENTAGE RATE)
12) FROM
BEGINNING
CF CURRENT
MATURITY
PD . T O E A .
INTEREST
PMT. DATE
13) FOR
HALF-YEAR
PD.
PRECEDING
INTEREST
PAYMENT
DATE
PERCENT
6.00
6.00
S.OC
6.00
6,0.0
6.00
6.00
6.QQ
6.0Q
6.00
5.0Q
6,0 0
6.QQ
6.00
6.00
6.00.
6.0G
6.00
6.00
3/ 5.00
PERCENT
5.00
6 . CO
5.00
6 . CO
6.0 06.CQ
6.00
5.00
6.00
6 . CO
6.00
6.00
5.00
5.00
6 . DO
G.CO
6.00
6.CC
6.00
6.00
t4 ) FROH
EACH
INTEREST
PMT. DATE
TO F IRST
EXTENDED
MATURITY
PERCENT
5.. CD
6 .CO
6.00
5.CO
6.00
5 .00
S.OC
6.CO
6.CO
5.00
E.OC
E.CC
E.OC
S.CC
6.CO
6.CO
6.00
B.OO
6.C0
1 / MONTH. CAY AND YEAR ON WHICH INTEREST CHECK IS PAYABLE ON ISSUES OF JUNE 1 . 1366". FOR SUBSEQUENT ISSUE
MONTHS ADD APPROPRIATE NUFBER OF MONTHS.
Z J EXTENDED MATURITY REACHED AT 20 YEARS ANO 0 MONTHS AFTER ISSUE DATE.
3 / YIELD ON PURCHASE PRICE FROM ISSUE DATE TO EXTENDED MATURITY IS 5 . 3 5 * .
• FCR EARLIER INTEREST CHECKS ANC YIELDS SEE APPROPRIATE TABLE I N DEPARTMENT CIRCULAR 3C5i 6TH. REVI SION. AS
AMENDED AND SUPPLEMENTED.
• • T H I S TABLE DCES NOT APPLY I F THE PREVAILING RATE FOR SERIES H BONDS BEING ISSUED AT THE TIME THE EXTENSION
BEGINS I S DIFFERENT FROM 6 . 0 0 PERCENT.
ON
73
m
10
O
73
H
H
X
m
C/5
m
n
73
m
H
>
73
O
•n
H
X
m
H
73
m
>
c
C/3
70
299
EXHIBITS
Exhibit 9.--Department Circular No. 653, Ninth Revision, April 23, 1974, Second
Amendment, offering of United States savings bonds, series E
DEPARTMENT OF THE TREASURY,
Washington, August 10, 1976.
The Department ofthe Treasury is adopting a new schedule of interest accruals for United
States Savings Bonds, Series E, bearing the issue date of September 1, 1976, or thereafter,
to provide therefor the minimum investment yield required by section 4 of Public Law
94-232, approved March 15, 1976. Supplemental tables of redemption values and
investment yields are also being published for bonds of various earlier issue dates which will
be entering their next extended maturity period.
Accordingly, Department of the Treasury Circular No. 653, Ninth Revision, dated April
23, 1974, and the tables incorporated therein, as amended, (31 CFR, Part 316), are hereby
further amended to prescribe interest accruals for bonds bearing issue dates of September
1, 1976, or thereafter; to provide the table of redemption va-lues and investment yieldi
therefor; and, to provide tables of redemption values and investment yields for the next
extended maturity period for bonds bearing issue dates of December 1, 1946, through May
1, 1948; December 1, 1956, through January 1, 1957; December 1, 1957, through May 1,
1960; and December 1, 1970, through May 1, 1972. Section 316.2(e) and Table 1 are
revised, and Tables 15-A, 16-A, 17-A,45-A,49-A, 50-A,51-A, 52-A, 53-A, 54-A,55-A,
56-A, 57-A, 58-A, 91-A, 92-A, 93-A and 97 are added, as follows:
Section 316.2 Description ofbonds. * * *
(e) Investment yield {interest). The investment yield (interest) on a Series E bond will be
approximately 6 percent per annum, compounded semiannually, if the bond is held to
maturity, but the yield will be less if the bond is redeemed prior thereto. A bond bearing the
issue date of September 1, 1976, or thereafter, beginning in the third month from such issue
date, will increase in redemption value on the first day of each month up to and including
the thirtieth month from issue date so as to provide for such period an investment yield of
no less than 4 per centum per annum, compounded semiannually. Thereafter, its redemption
value will increase at the beginning ofeach successive half-year period. The interest will be
paid as part of the redemption value. See Table I.
*
*
*
*
*
*
*
The foregoing revisions and amendments were effected under authority of section 22 of
the Second Liberty Bond Act, as amended (49 Stat. 21, as amended; 31 U.S.C. 757c), and
5 U.S.C. 301. Notice and public procedures thereon are unnecessary as the fiscal policy of
the United States is involved.
DAVID MOSSO,
Fiscal Assistant Secretary.
TADLE 1
BONDS BEARING ISSUE DATES BEGINNING SEPTEMBER 1, 1976
Zssue p r i c e
DenomjLnatlon
$18.75
25.00
• • • « • • •
• • • e • • •
Period
( y e a r ^ and a o n t b a a f t e r i s s u e )
$37.50
50.00
$56,25
75.00
$75.00 $150.00
100.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
Approximate investment yield
(annual percentage rate)
(2) From i s s u e (3) From b e g i n - (A) From begin-^
d a t e t o b e g i n - n i n g of each
ning of each
n i n g of each
period t o
period to
period
b e g i n n i n g of
maturity
next period
(1) Redemption v a l u e s d u r i n g each p e r i o d ( v a l u e s i n c r e a s e on f i r s t
day of p e r i o d ) \ J
Percent
0- 0
0- 2
0- 3
0- 4
0- 5
0- 6
0- 7
0- 8
0- 9
O-IO
O-n
1- 0
1- 1
1- 2
1- 3
1- 4
1- 5
1- 6
1- 7
l-.a
.
$18,75
18.88
18.94
19.00
19.07
19.13
19.20
19.28
19.36
19.45
19.53
19.61
19.69
19.77
19.85
19.94
20.02
20.10
20.18
20.27
1- 9 to l-K.'
1-10 to 1-11 . . . . . . . . .
1-U to 2- ( . . . . , . . , .
1
20.35
20.43
20.52
22*
2»
222233-
.
20.60
20.69
20.78
20.87
20.96
21.05
21.14
21.71
22.31
4- 0 to 4- 6
,
4- 6 to 5-0 .
5-0
2/ . , , , , . .
22.97
23.67
25.20
0
1
2
3
4
5
6
0
6
t b .(V. 2
t o 0-« 3
to 0- 4
to 0- 5
to 0- 6
ttf 0 - 7
to 0- 8
to 0- 9
to Q-10
to ,9-1,1
to 1- 0
to 1- 1
to 1- ?
to 1- 3
to 1- 4
to 1- 5
to 1- 6
to 1- 7
to 1- 8
to 1- 9
to 2- 1
to 2- 2
to 2- 3
to 2- 4
.to 2^ 5
.to 2- 6
to 3- 0
to 3- 6
to 4- 0
i
•
•
•
.
•
•
•
•
V « t .9 •* • t t
• •
•
• • • . • • . .
• • •
• .
• • •
• . • • • • • •
•
. . . . . . . ,
• • • • • . . .
• . . • . • • •
.
.
.
.
.
.
.
.
.
.
.
.
,
.
. . . . . . .
..... o .
, . , , , , ,
, . , , , , .
. . • . , . .
.. ,
. , , , , . ,
. . , . . , , . .
. . •
, ,
. . . , , , . . .
. , ,
.
. 4 ,
. . , . , . , .
?37.50
37.76
37.88
38.00
38.14
38.26
38.40
38.56
38.72
38.90
39.06
39.22
39.38
39.54
39.70
39.88
40.04
40.20
40.36
40.54
40.70
40.86
41,04
41.20
41.38
41.56
41.74
41.92
42.10
42.28
43.42
44.62
45.94
47.34
50.40
$56.25
56.64
56.82
57.00
57.21
57.39
57.60
57.84
58.08
58:35
58.59
58.83
59.07
59.31
59.55
59.82
60.06
60.30
60.54
60.81
61.05
61.29
61.56
61.80
62.07
62.34
62.61
62.88
63.15
63.42
65.13
66.S3
68.91
71.01
75.60
$75.00
75.52
75.76
76.00
76.28
76.52
76.80
77.12
77.44
77.80
78.12
78.44
78.76
79.08
79.40
79.76
80.08
80.40
80.72
81.08
81.40
81.72
82.08
82.40
82.76
83.12
83.48
83.84
84.20
84.56
86.84
89.24
91.88
94.68
100.80
$150.00
151.04
151.52
152.00
152.56
153.04
153.60
154.24
154.88
155.60
156.24
156.88
157.52
158.16
158.80
159.52
160.16
160.80
161;44
162.16
162.80
163.44
164.16
164.80
165.52
166.24
166.96
167.68
168.40
169.12
173.68
178.48
183.76
189.36
201.60
I f Kot redeemable during first 2 mbnths after issue.
Maturity value reached at 5 years and 0 nonths after issue.
^2/
$375.00
377.60
378.80
380.00
381.40
382.60
384.00
385.60
387.20
389.00
390.60
392.20
393.80
395.40
397.00
393.80
400.40
402.00
403.60
405.40
407.00
408.60
410.40
412.00
413.80
415.60
417.40
419.20
421.00
422.80
434.20.
446.20
459.40
473.40
504.00
$750.00
755.20
757.60
760.00
762.80
765.20
768.00
771.20
774.40
778.00
781.20
784.40
787.60
790.80
794.00
797.60
800.80
804.00
807.20
810.80
814.00
817.20
820.80
824.00
827.60
831.20
834.80
838.40
842.00
845.60
868.40
892,40
918.80
946.80
1008.00
$7500
7552
7576
7600
7628
7652
7680
7712
7744
7780
7812
7844
7876
7908
7940
7976
8008
8040
8072
8108
8140
8172
8208
8240
8276
8312
8348
8334
8420
8456
8684
8924
9188
9468
10080
o
o
'
4.19
4.07
4.01
4.10
4.05
4.11
4.23
4.31
4.45
4.50
4.54
4.57
4.59
4.61
4.67
4.68
4.69
4.70
4.73
4.73
4.74
4.76
A.76
4.78
4.80
4.82
4.83
4.85
4.86
4.95
5.03
5.14
5.25
6.00
Percent
4.19
3.84
3.83
4.46
3.81
A.A3
5.05
5.03
5.6A
A.99
A.97
A.95
4.93
4.91
5.50
4.86
A.84
A.82
5.A1
4.78
4.76
5.34
4.72
5.30
5,28
5.25
5.23
5.21
5.19
5.39
5.53
5,92
6.09
12,93
Percent
6,00
6.06
6.10
6.14
6.17
6.22
6.25
6,28
6,30
6.31
6.34
6,37
6,40
6.A3
6.A7
6,A9
6,53
6,57
6.61
6.64
6,69
6,74
6,78
6,83
6,88
6.92
6.97
7.03
7.09
7.15
7.59
8.29
9.A8
12.93
73
m
O
73
H
H
X
m
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n
73
m
H
>
73
<
H
X
m
H
73
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>
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73
<
TABLF. 15-A
BOIIDS BEARING ISSUE DATES FROM DEC. 1» 1946, THROUGH MAY 1,^1947
$7.50
10.00
Period
(yearfl and nonths after
second extended naturity at
30 years 0 nonths)
$18,75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
(1) Rederaption values during each half-yenr period (values Increase on first day of period)*
THIRD EJCTENDED MATURITY PERIOD**
Approximate Investment yield
(annual percentage rate)
(2) From begin- (3) From begin- (A) From beginning of current ning of each
ning of each
naturity period Jj-yr, period to %-yr. period
to beginning of beginning of
to 3rd extendeach Jj-yr, pd. next Si-yr, pd, ed naturity
Percent
O-O
0-6
i-0
1-.6
2*0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to fi-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
.
1/(12/1/76)
( 6/1/77)
(12/1/77)
( 6/1/78)
(12/1/78)
( 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/80)
( 6/1/81)
(12/1/81)
( 6/1/82)
(12/1/82)
( 6/1/83)
(12/1/83)
( 6/1/84)
(12/1/84)
( 6/1/85)
(12/1/85)
( 6/1/86)
(12/1/86)
?23.58
24.29
25.02
25.77
26.54
27.34
28.16
29.00
29.88
30.77
31.70
32.64
33.62
34.63
35.67
36.74
37.84
38.98
40.15
41.36
42.60
$53.9.6
60.73
62.55
64.43
66.36
68.35
70.40
72.51
74.69
76.93
79.24
81.61
64.06
86.58
89.18
91,86
94,61
97,45
100,38
103,39
106,49
$117,92
121.46
125.10
128.86
132.72
136.70
140.80
145.02
149.38
153.86
158.48
163.22
168.12
173.16
178.36
183.72
189.22
194.90
200.76
206.78
212.98
$235.84
242.92
250.20
257.72
265.44
273.40
281.60
290.04
298.76
307.72
316.96
326.44
336.24
346.32
356.72
367,44
378.44
389.80
401.52
413.56
A25.96
$471.68 $1179.20
A85.84
1214.60
500.40
1251.00
515.44
1288.60
530.88
1327.2a
546.80 1367.00
563.20
1408.00
580.08
1450.20
597.52
1493.80
615.44
1538.6.0
633.92
1584.80
652.88
1632.20
672.48
1681.20
692.64
1731.60
713.44
1783.60
73/i.88
1837.20
756.88
1892.20
779.60
1949.00
803.04
2007.60
827.12
2067.80
851.92
2129.80
$2358.40
2429.20
2502.00
2577.20
2654,40
2734.00
2816.00
2900.40
2987.60
'3077.20
3169.60
3264.40
3362.40
3463.20
3567.20
3674.40
3784.40
3898,00
A015.20
A135.60
4259.60
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
. 6.00
6.00
6.00
6.00
6,00.
6,00
6,00
6,00
6,00
6,00
m
X
X
55
H
6,00 1/
1 / Month, day, and year on vhich Issues of Dec. 1, 19A6, enter each period. For suhsequent issue nonths add the appropriate number of Bonths.
2 / Third extended naturity reached at AO years 0 months after issue,
3^/ Tield on purchase price from Issue date to 3rd extended naturity date is A.39 percent,
* Por earlier redenption values and yields see appropriate tahle In Departraent Circular 653, 9th Revision, as amended and supplenented.
** This table does not apply Ifthe prevailing rate for Series E bonds being is.sued at the tline the extension begins Is different fron^O.OO percent^
o
o
to
TABLE 16-A
BONDS BEARING ISSUE DATES FROM JUNE 1 THROUGH NOV, 1, i9A7
Issue p r i c e
Denonination
• • • • «
• • • • •
$7.50
10.00
$18,75
25.00
$37.50
50,00
$75,00
100.00
$150,00
200.00
$375.00
500,00
$750,00
lOOO.OQ
Period
( y e a r s and months a f t e r
second extended n a t u r i t y a t
30 y e a r s 0 nonths)
(1) Redemption v a l u e s d u r i n g each l i a l f - v e a r period ( v a l u e s i n c r e a s e on f i r s t day of p e r i o d ) *
THIRD EXTENDED MATURITY PERIOD**
Approxinate investment y i e l d
(annual p e r c e n t a g e r a t e )
(2) Fron b e g i n - (3) Fron b e g i n - (4) From b e g i n ning of c u r r e n t ning of each
ning of each
n a t u r i t y period h- y r . p e r i o d t o %-yr. period
t o beginning of beginning of
to 3rd e x t e n d each %-3nr, p d .
n e x t ^ - y r . pd.
ed m a t u r i t y
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
A-0
A-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9r6
10-0
t o 0-6
t o 1-0
t o 1-6
t o 2-0
t o 2-6
t o 3-0
t o 3-6
t o A-0
t o A-6
t o 5-0~
t o 5-6
t o 6-0
t o 6-6
t o 7-0
t o 7-6
t o 8-0
t o 8-6
t o 9-0
t o 9-6
tolO-0
2/
,
,
.
,
.
.
.
.
.
.
,
.
.
.
.
.
.
.
.
.
.
.
,
,
,
,
,
,
.
,
,
.
.
,
.
,
l / ( 6/1/77)
, (12/1/77)
. ( 6/1/78)
, (12/1/78)
. ( 6/1/79)
. (12/1/79)
. ( 6/1/80)
. . .
(12/1/80)
. . . ( 6/1/81)
, , . (12/1/81)
. . . , ( 6/1/82)
. . .
(12/1/82)
, . . ( 6/1/83)
. . .
(12/1/83)
. . . ( 6/1/8A)
. . .
(12/1/8A)
. . . ( 6/1/85)
. . .
(12/1/85)
• . • ( 6/1/86)
. . .
(12/1/86)
. . . ( 6/1/87)
$23.90
2At62
25.36
26.12
26.90
27.71
28.54
29.40
30.28
31.19
32.12
33.09
34,08
35.1'?
36,16
37.24
38.36
39.51
A0.70
A1.92
A3.17
$59.76
61.55
63.AO
65.30
67.26
69.28
71.3*
73.50
75.70
77.97
80.31
82.72
85.20
87.76
90.39
93.10
95.90
98.77
101.7A
104.79
107.93
$119.52
123.10
126.80
130.60
134.52
138.56
142.72
147.00
151.40
155.94
160.62
165.44
170.40
175.52
180.78
186.20
191.80
197.54
203.48
209.58
215.86
$239.04
246.20
253.60
261.20
269.04
277.12
285.44
294.00
302.80
311.88
321.24
330.88
340.80
351.04
361.56
372.40
383.60
395.08
A06.96
A19.16
A31.72
$A78.08
A92.40
507.20
522.40
538.08
554.24
570..<?a
588.00
605.60
623.76
642.48
661.76
681.60
702.08
723.12
744.80
767.20
790.16
813.92
838.32
863.44
$1195.20
1231,00
1268,00
1306,00
1345,20
1385.60
1427.20
1470.00
1514.00
1559.40
1606.20
1654.40
1704.00
1755.20
1807.80
1862.00
1918.00
1975.40
2034.80
2095.80
2158.60
$2390.40
2462.00
2536,00
2612J)0
2690.40
2771,20
2354,40
2940,00
3028,00
3118,80
3212,40
330.S,80
3408.00
3510.40
3615.60
3724.00
3836.00
3950.80
4069.60
4191.60
4317.20
5.99
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6i00
6.00
6.00
6.00
6.00 3 /
Percent
5.99
6.01
5.99
6.00
6.01
6.00
6.00
5.99
6.00
6.00
6.00
6.00
6.01
5.99
6.00
6.02
5.99
6.01
6.00
5,99
—.
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6.00
5.99
5.99
—-^
JL_/ Ifonth| day, and year on vhich Issues of June 1, 1947, enter each period. For subsequent issue months add the appropriate nunber of nonths.
' 2 / Third'extended naturity reached at 40 years 0 nonths after issue.
?/ Yield on purchase price fron issue date to 3rd extended naturity date is 4.42 percent.
* For earlier redenption values and yields see appropriate table in Department Circular 653, 9th Revision, as anended and supplemented,
** This table does not apply if the prevailing rate for Series E bonds being is.sued at the tirte the extension begins Is different fron 6,00 percent*
73
"0
m
O
73
H
O
H
X
m
C/3
m
^
n
73
m
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73
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O
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H
X
m
H
73
>
CO
73
<
TABLE 17 -A
BONDS BEARING ISSUE DATES FROM DEC. 1, 1947. THROUGH MAY 1. 1948
Iasue price
Denonination
.. . •
r • ..
• • .• • • • f
Period
(years and months after
second extended naturity at
30 years 0 nonths)
$7.50
10.00
$18,75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
(1) Redemption values during each half-year neriod (values increase on first day of period)*
THIRD EXTENDED MATURITY PERIOD**
Approximate investment yield
(annual percentage rate)
(2) From begin- (3) From begin- (4) Fron beginning of current ning of each
ning of each
maturity period ^-yr. period to ^-yr. period
to beginning of beginning of
to 3rd extendeach '-l-yr. pd. next 'j-yr, pd, ed maturity
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to A-0
to A-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
.
1/(12/1/77)
"" ( 6/1/78)
(12/1/78)
( 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/80)
( 6/1/81)
(12/1/81)
( 6/1/82)
(12/1/82)
( 6/1/83)
(12/1/83)
( 6/1/8A)
(12/1/84)
(6/1/85)
(12/1/85)
( 6/1/86)
(12/1/86)
( 6/1/87)
(12/1/87)
$24.22
24,95
25.70
26.47
27,26
20.08
28.92
29.79
30.69
31.61
32.56
33.53
34.54
35.57
36.64
37.74
38.87
A0.0/»
A1.2A
A2.A8
A3.75
$60.56
62.38
6A,25
66.18
68.16
70.21
72.11
7 4 . A8
76.72
79.02
81.39
83.83
86.3A
88.93
91.60
9A.35
97.18
100.10
103.10
106.19
109.38
$121.12
124.76
128.50
132.36
136.32
140.42
144.62
148.96
153.44
158.04
162.78
167.66
172.68
177.86
183.20
188.70
194.36
200.20
206.20
212.38
218.76
$242.24
240.52
257.00.
264.72
272.64
280,84
289,24
297,92
306.88
316.08
325.56
335.32
345.36
355.72
366.40
377.40
388.72
400.40
A12.40
A2A.76
A37.52
$484.48 $1211.20
499.04
1247.60
514.00
1285.00
529.44
1323.60.
545.28
1363.20
561.68
1404.20
578.48
1446.20
595.84
1489.60
613.76
1534.40
632.16
1580.40
651.12
1627.80
670.64
1676.60
690.72
1726.80
711.44
1778.60
732.80
1832.00
754.80
1887.00
777.44
1943.60
800.80
2002.00
824.80
2062.00
849.52
2123.80
873.04
2187,60
$2422.40
2495.20
2570.00
2647.20
27-26.40
2808^40
2892.40
2979.20
3068,80
3160.80
3255.60
3353.20
3453,60
3557.20
3664.00
3774.00
3837.20
4004,00
4124,00
4247,60
A375.20
6ioi
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
Percent
6.01
6.00
6.01
5.98
6.02
5,98
6.00
6.02
6.00
6,00
6.00
5.99
6.00
6.00
6.00
6.00
6,01
5.99
5.99
6.01
Percent
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.01
m
X
X
H
C/5
1 / Month, day, and year on vhich is.sues of Dec. 1, 19A7, enter each period. For mibsequent issue months add the appropriate number of nonths.
2 / Third extended naturity reached at AO years 0 nonths after issue.
3/ Yield on purcliase price fron issue date to 3rd extended naturity date is A,A6 percent,
*
•A
For earlier redemption values and yields see appropriate tahle in Department Circular 653. 9th Revision, «« ^"'^"^^^ «J^,?"PPij»j;^^* .Q _ „ . „ .
This table does not apply if the prevailing rate for Series E bonds being issued at the time the extension begins is different fron 6.00 percent.
o
O
TABLE A5-A
BONDS BEARING ISSUE DATE D E C . 1, 1956, or JAN. 1, 1957
Issue price
Denoni nation
• • • • « • • •
Period
(years and months after
Bt extended naturity at
fir
19 years 8 nonths)
$18.75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$ 7 5 0 . OOIOOO. 00
(1) Redemption values d uring eacTi half-year period
crease on first day of period)*
———-—
SECOND EXTENDED
$7500
IOOOO
(valu es in-
MATURITY PERIOD**
——
Approxinate investment yield
(annual percentage v tIte)
(2) From begin- (3) From begin- (4) Fron beginning of current ning of each
ning of each
naturity period Jj-yr. period to %-yr. period
to 2nd extendto beginning of beginning of
next ^i-yr. pd.
ed maturity
each ^i-yr. pd.
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
A-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to A-0
to A-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
.
.,
.
,
.
.
.
.
.
.
,
.
,
.
.
,
.
•
,
.
.
.
, l/( 8/1/76)
. . ( 2/1/77)
, ( 8/1/77)
, ( 2/1/78)
, ( 8/1/78)
• ( 2/1/79)
. ( 8/1/79)
. ( 2/1/80)
, ( 8/1/80)
( 2/1/.31)
( 8/1/81)
. (2/1/8.?)
( 8/1/82)
( 2/1/83)
(8/1/83)
( 2/1/84)
( 8/1/84)
( 2/1/8.5)
( 8/1/85)
( 2/1/86)
( 8/1/86)
.$43.27
44.57
45.91
47.28
48.70
50,16
51,67
53,22
54.81
56,46
58,15
59.90
61.69
63.54
65.45
67,41
69,44
71.52
73.66
75.87
78.15
.$86.54
89.14
91.82
94.56
97.40
100,32
103.34
106.44
109.62
112.92
116.30
119.80
123.38
127,08
130.90
134,82
138,88
143,0^.
147,32
151,74
156.30
$173.08
178.28
183.64
189.12
194.80
200.64
206.68
212.88
219.24
225.84
232.60
239,60
246,76
254.16
261,80
269,64
277.76
236.08
294,64
303.48
312,60
$346.16
356,56
367.28
373.24
389.60
401.28
A13.36
425.76
438,48
451.68
465.20
479.20
493.52
508.32
523.60
539.28
555.52
572.16
589.23
606.96
625.20
$865.40
891.40
918.20
945.60
974.00
1003.20
1033.40
1064.40
1096.20
1129.20
1163.00
1198.00
1233.80
1270.80
1309.00
1348,20
1388.80
1430.40
1473.20
1517.40
1563.00
$1730.80
1732.80
1336,40
•1891.20
1948.00
2006.40
2066.80
•2128.80
2192.40
2258.40
2326.00
2396.00
2467.60
2541.60
2618.00
2696.40
2777.60
2860.80
2946.40
3034.80
3126.00
$17308
17328
18364
18912
19480
20064
20668
21288
21924
22554
23260
23960
24676
25416
26180
26964
27776
28603
29464
30348
31260
6,01
6,01
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
Percent
6.01
6.01
5.97
6.01
6.00
6,02
6.00
5.98
6.02
5.99
6.02
5.98
6.00
6.01
5.99
6.02
5.99
5.98
6.00
6.01
Percent
. 6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.06
6.00
6.00
6.00
6.01
6.01
——.
1/ Month, day, and year on wdiich is.sues of Dec. 1, 1956, enter each period. For issues of Jan, 1, 1957> add. 1 month.
" 2 / Second extended maturity reached at 29 ye.1rs 8 months after issue.
3/ Y.leld oh purchase price from is.sue date to 2nd extended maturity dato I s A.n7 oftrcent,
.
•
**
Tor earlier redemption values .nnd yields sec apnroprlate table in Den.nrtncnt Circular 653, 9th Revision, as amended and supplemented,
This table does not apply If t!ic prevailing rnte for Series E honds bolnf, issued at the time tha extension begins is different from 6.00 percent.
73
m
o
73
H
O
H
X
m
CO
cn
n
73
m
H
>
70
<
O
n
H
X
m
H
73
m
>
or)
C
73
<
BONDS BEARING ISSUE D A T E D E C . 1 , 1957
Issue price
Denomina tio
.
*
$18.75
25.00
Period
(vears and nonths after
fir- Jt extended naturity at
iir
18 years 11 nonths)
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
(1) Redemption values during each half-year period (values Increase on first da y of period)*
. . i . . . . . .
SECOND EKTENDED ?tATimiTY PERIOD**
"
"
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to A-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
toi0-0
2/
.
1/(11/1/76)
7 ( 5/1/77)
(11/1/77)
( 5/1/78)
(11/1/78)
( 5/1/79)
(11/1/79)
( 5/1/80)
(11/1/80)
( 5/1/81)
(11/1/81)
( 5/1/82)
(11/1/82)
( 5/1/83)
(11/1/83)
(5/1/84)
(11/1/84)
( 5/1/85)
(11/1/85)
, ( 5/1/86)
» (11/1/86)
$43.35
44.65
45.99
A7.37
48.79
50.25
51.76
53.32
5A.91
56.56
58.26
60.01
61.81
63.66
65.57
67.54
69.56
71.65
73.80
76.01
78.29
$86.70
89.30
91.98
94.74
97.58
100.50
103.52
106.64
109.82
113.12
116.52
120.02
123.62
127.32
131.14
135.08
139.12
143.30
147.60
152.02
156.58
$173.40
178.60
183.96
189.48
195.16
201.00
207.04
213.28
219.64
226.24
233.04
240.04
247.24
254.64
262.28
270.16
278.24
286.60
295.20
304.04
313.16
$346.80
357.20
367.92
378.96
390.32
A02.00
AIA.08
A26.56
A39.28
452.A8
~A66J)8
A80.08
A9A.48
509.28
524.56
540.32
556.48
573.20
590.40
608.08
626.32
$867.00
893.00
919.80
947.40
975.80
1005.00
1035.20
1066.40
1098.20
1131.20
1165.20
1200.20
1236.20
1273.20
1311.40
1350.80
1391.20
1433.00
1476.00
1520.20
1565.80
$1734.00
1736.00
1839.60
1894.80
1951.60
2010.00
2070.40
2132.80
2196.40
2262.40
2330.40
2400.40
2472.40
2546.40
2622.80
2701.60
2782.40
2866.00
2952,00
3040.40
3131,60
$17340
17860
18396
18948
19516
20100
20704
21328
21964
22624
23304
24004,
24724
25464
26228
27016
27824
28660
29520
304 04
31316
Approximate Investnent vield
(annual percentage rate)
(2) From begin- (3) Fron begin- (A) Fron beginning of current ning of each
ning of each
naturity period Jj-yr. period tc h- yr. period
to beginning of beginning of
tc 2nd extendeach k-yr, pd. next 'i-yr. pd. ed naturity
Percent
6.00
6.00
6.00
6,00
6.00
6,00
6.00
6.00
6,00
6.00
6,00
6.00
6.00
6,00
6,00
6.00
6,00
6,00
6,00
6,00 3/
Percent
6.00
6.00
6.00
6.00
5.98
6.01
6.03
5.96
6.0>
6.01
6.01
6.00
5.99
6.00
•6.01
5.98
6.01
6.00
5.99
6.00
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
*.00
6.00
6.00
6.00
SeOP
rn
X
X
H
C/5
fi,m
•hn'
£.00
1 / M o n t h , d a y , a n d y e a r o n v h i c h issues o f D e c . 1 , 1 9 5 7 , enter e a c h p e r i o d ,
" 2 / Second extended n a t u r i t y reached a t 2 8 yeara 1 1 n o n t h s a f t e r i s s u e .
' 3 / Yield o n p u r c h a s e p r i c e f r o n issue d a t e t o 2nd extended n a t u r i t y d a t e i s 5.00 p e r c e n t .
* V o v earlier r e d e n p t i o n v a l u e s and y i e l d s s e e appropriate table I n D e p a r t n e n t Circular 6 5 3 , 9th R e v i s i o n , a s anended and s u p p l e m e n t e d .
** T b i s t a b l e d o e s n o t a p p l y I f the prevailing r a t e for Series E b o n d s being Issued a t t h e tine the e x t e n s i o n b e g i n s l a d i f f e r e n t f r o a 6*00 p e r c e n t *
U)
o
o
TABLE 50-A
BONDS BFARIHG ISSUE DATES FROTi JAN, 1, THROUGH MAY 1, 1953
I s s u e pir>4^«B
lation
Period
(y sars and months after
first ex tended naturity at
18 years 11 nonths)
$18.75
25.00
$37.50
50.00
$75.00
100.OO
$150.00
200.00
$375.00
500.00
$750.00 ' $7500
IOOOO
1000.00
(1) Rederaption values during each half-year period (values increase on first day of period)*
SECOND EXTENDED MATURITY PERIOD**
Ann^/^vfma^0 •fnV0e^m»n^ w4*1<f
(annual percentage rate)
to 0-6 . . . 1/(12/1/76)
to 1-0
. . ( 6/1/77)
to 1-6
. (12/1/77)
to 2-0
. ( 6/1/78)
to 2-6
, (12/1/78)
to 3-0
. ( 6/1/79)
to 3-6
. (12/1/79)
( 6/1/80)
to 4-0
to A-6
(12/1/80)
to 5-0
, ( 6/1/81)
. (12/1/81)
to 5-6
to 6-0
. ( 6/1/82)
to 6-6
, (12/1/82)
to 7-0
. ( 6/1/83)
to 7-6
• (12/1/83)
to 8-0
, ( 6/1/84)
to 8-6
, (12/1/84)
to 9-0
, ( 6/1/85)
to 9-6
, (12/1/85)
toi0-0
, (6/1/86)
2/
,
, (12/1/86)
$43.75
45.06
A6.A1
A7.81
A9.2A
50.72
52.2A
53.81
55.A2
57.08
58.80
60.56
62.38
6A.25
66.18
68.16
70.21
72.31
7A.A8
76.72
79.02
$87.50
90.12
92.82
95.62
98.A8
lOl.AA
104.48
107.62
110.84
114.16
117.60
121.12
124.76
128.50
132.36
136.32
140.42
144,62
148.96
153.44
158.04
$175.00
180.24
185.64
191.24
196.96
202.88
208.96
215.24
221.68
228.32
235.20
242.24
249.52
257.00
264.72
272.64
280.84
289.24
297.92
306.88
316.08
$350.00
360.48
371.28
382.48
393.92
405.76
417.92
430.48
443.36
456.64
A70.A0
A8A.A8
A99.0A
51A.00
529.AA
545.28
561.68
578.48
595.84
613.76
632.16
$875.00
901.20
928.20
956.20
984.80
1014.40
1044.80
1076.20
1108.40
1141.60
1176.00
1211.20
1247.60
1285.00
1323.60
136r.20
1404.20
1446.20
1489.60
1534.40
1580.40
$1750,00
1802.40
1856.40
1912.40
1969.60
2028.80
2089.60
2152.40
2216.80
2283.20
2352.00
2422.40
2495.20
2570,00
2647.20
2726.40
2808.40
2892.A0
2979.20
3068.80
3160.80
$17500
18024
1856A
19124
19696
20288
20896
21524
22168
22832
23520
2422A
24952
25700
26472
27264
28084
28924
29792
30688
31608
ON
(2) Fron begin- (3) Fron begin- (A) Fron beginning of current ning of each
ning of each
yr. period
naturity period Jj-^yr. period to
to beginning of beginning of
ta 2nd extend*
each *s-yr. pd. next ^-yr. pd.
ed naturity
.
5.99
5.99
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
If
Percent
5.99
5.99
6.03
5.98
6.01
5.99
6.01
5.98
5.99
6.03
5.99
6.01
6.00
6.01
5.98
6.02
5.98
6.00
6.02
6.00
—r-
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.03
6.00
6.00
6.00
6.00
6.00
6.01
6.00
jL/ Month, day, and year on vhich issues of Jan. 1, 1958, enter each period.' For subseqtient issue nonths add the appropriate nunber of months.
7 j Second extended naturity readied at 28 years 11 nonths after, is.sue.
^/ Yield on purchase price fron issue date to 2nd extended naturity date is 5.0A percent.
* For earlier redenption values and yields see appropriate table in Departnent Circular 653, 9th Revision, as amended and supplemented.
** This table does not apply if the prevailing rate for Series £ bonds being is.sued at the tirae the extension, begins Is different froa 6.00 percent*
73
\'
Percent
O-O
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
—
70
H
O
H
X
m
C/3
70
CT)
H
>
73
<
o
H
X
m
a
>
73
<
;
TABLE 51-A
BONDS BFARING ISSUE DATE JUNE 1, 1958
Issue price
Denonination
$18.75
25.00
Period
( y e a r s and n o n t h s a f t e r
f i r s t extended m a t u r i t y a t
18 y e a r s 11 n o n t h s ) ;
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
,500.00
$750.00
1000.00
$7500
IOOOO
(1) Redemption Values d u r i n g - e a c h h a l f - y e a r p e r i o d ( y a l u e s i n c r e a s e on f i r s t day of p e r i o d ) *
SECOND EXTENDED HATIIRITY PERIOD**
Approxinate Investnent yield
(annual percentage rate)
<2) Fron b e g i n - (3) prwB b e g i n - (A) Fron b e g i n n i n g , of c u r r e n t n i n g of each
n i n g of each
n a t u r i t y p e r i o d %-yr. p e r i o d t o HrTTm i>erlod
t o b e g i n n i n g of b e g i n n i n g of
t o 2ttd e x t e n d each J i r y r . p d .
n e x t %^yr. p i t
ed n a t u r i t y
Percent
O-O
0^6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
. 6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
t o 0-6
t o 1-0
.to i - 6
to 2-0
t o 2-6
t o 3-0
t o 3-6
t o 4-0
t o 4-6t o 5-0
t o 5-6
t o 6-0
t o 6-6
t o 7-0
t o 7-6
t o 8-0
t o 8-6
t o 9-0
t o 9-6
tolO-0
2/
.
; ; . . 1/C 5 / 1 / 7 7 )
. . . 7 (11/1/77)
. . . , ( 5/1/78)
. . . . (11/1/78)
. . , . (5/1/79)
i . . . (11/1/79)
. . . . ( 5/1/80)
. . . . . (11/1/80)
. . . . (5/1/81)
. . . . . (11/1/81)
. . . . ( 5/1/82)
. i . .(11/1/82)
. . / i , ( 5/1/83)
. . . . (il/1/83)
. . . . < 5/1/8A)
. . . ,- (11/1/8A)
. . . . ( 5A/85)
. . . . (11/1/85)
. . i . " ( 5/l<86)
. . . . (11/1/86)
. . . . ( 5/1/87)
$A3.94
45.26
46.62
48*01
49,45
50.94
5 2 , A7
5A.04
55*66
57.33
59.05
60.82
62.65
6A.53
66.46
68.A6
70.51
72.63
74,80
77.05
79.36
$87.88
90.52
93.24
96.02
98.90
101.88
IOA,94
1015,08
111,32
ilA.66
118.10
121.64
125.30
129,06
132,92
1.36,92
1A1,02
1A5.26
1A9,60
15A.10
158.72
$175.76
181;04
186.A8
192.0A
l«f7.80
203*76
209.88
216.16
222.64
229.32
236.20
2A3,28
250,60
258.12
26S.8A
273,84
282.04
290.52
299.20
308.20
317.44
$351,52
362,08
372,96
38A,08
395.60
A07.52
A19,76
432,32
4A5,28
458,64
472.40
486.56
501,20
516,24
531,68
5A7.68
56A,08
581,04
598.40
616.AO
634.88
$878.80
905.20
932.AO
960.20
989.00
1018.80
10A9.40
1080.80
1113.20
1146,60
1181,00
1216,40
1253,00
1290.60
1329.20
1369.20
1A10.20
1A52.60
1A96.00
15A1.()0
1587.20
$1757.60
1810.40
1864,80
1920,40
1978.00
2037.60
2098.80
2161.60
2226.40
2293.20
2362.00
2A32,80
2506,00
2581.20
2658.40
2738.40
2820,40
2905.20
2992.00
3082.00
3174.40
jl_/Month, day, and year on vhich Issues of June 1, 1958, enter'4Bach period.
^ / Secbnd extended maturity reached at 28 years 11 nonths after Issue.
^/ Yield on purcliase price'fron issue date to 2nd extended naturity date Is 5.05 percent.
$17576
18104
186A8
19204
19780
20376
20988
21616
22264
22932
23620
2A328
25060
25812
26584
27384
28204
29052
29920
30820
31744
'. 6.()1
—,'»'
6,01
5,99
5,99
6.00
6.00
.6.06
6.00
6.00
6.00
6.00
6.00
6.00
6.00
•;• 6.00. ,
6.00
6.00
6.00
V 6,00
6.00 3 /
^
,
Percent
6.01
6.01
5.96
6.00
6.03
,:'\:;6.01.:,'-'
5.98
6.00
6.0(Jl
6^06
5.99
6,02
6.Q6
5.98
6.ci2
5.991
6.01
5i98
6*02
6,00
^
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
,6.00
6.00
/
6.00 •
6.00
- 6.00
6.00
6.00
6.00
6.00
6.01
m
X
X
00
C/5
6.00
•••',;'•
•
•
•
~
^
.
^
' * ' For earlier redenption values and yield's see appropriate tatile in Departnent Circular 653« 9th Revision, as anended and suppleaented. ,
** This table does not apply if the prevailing rate for Series E bonda being lamied at tlie tine the extension begins l0 differenC ivQ9i 6«0'0 percent*
O
-J
o
00
TABLE 52-A
BONDS BEARING ISSUE DATES FROM Jin,Y 1 THROUGH NOV. 1 , 1958
Issue price
Denon ina t ion
•
$18.75
25.00
•
Period
(years and nonths after
Y a n A a A «t.>^iav4 *••. a ^
first ex
18 y ears 11 months')
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
(1) Rederaption values during each half.-vear neriod (values i n crease on first day of period)*
SECOND EXTENDED MATURITY PERIOD**
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to A-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
21
.
. l/( 6/1/77)
. . (12/1/77)
( 6/1/78)
(12/1/78)
( 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/80)
( 6/1/81)
• (12/1/81)
( 6/1/82)
(12/1/82)
( 6/1/83)
(12/1/83)
( 6/1/8A)
(12/1/84)
, ( 6/1/85)
(12/1/85)
( 6/1/86)
, (12/1/86)
( 6/1/87)
$44.34
45.67
A7.0A
A8.A5
49.91
51.AO
52.94
54.53
56.17
57.85
59.59
61.38
63.22
65.11
67.07
69.08
71.15
73.29
75.A9
77.75
80.08
$88.68
91.3 A
94.08
96.90
99.82
102.80
105.88
109.06
112.34
115.70
119.18
122.76
126.44
130.22
134.14
138.16
142.30
146.58
150.98
155.50
160.16
$177.36
182.68
188.16
193.80
199.64
205.60
211.76
218.12
224.68
231.40
238.36
245.52
252.88
260.44
268.28
276.32
284.60
293.16
301.96
311.00
320.32
$354.72
365.36
376.32
387.60
399.28
411.20
423.52
436.24
449.36
462.80
476.72
491.04
505.76
520.88
536.56
552.64
569.20
586.32
603.92
622.00
640.64
$886.80
913,40
940,80
969,00
998,20
1028,00
1058,80
1090.60
1123.40
1157.00
1191.80
1227.60
1264.40
1302.20
1341.40
1381.60
1423.00
1465.80
1509.80
1555.00
1601.60
$1773.60
1826.80
1881.60
1938.00
1996.40
2056.00
2117.60
2181.20
2246.80
2314.00
2383.60
2455.20
2528.80
2604.40
2682.80
2763.20
2846.00
2931.60
3019.60
3110.00
3203.20
$17736
18268
18816
19380
19964
20560
21176
21812
22468
23140
23836
24552
25288
2604A
26828
27632
28460
29316
30196
31100
32032
vO
-J
(2) Fron begin- (3) Fron begin- (4) Fron b e g i n ning of each
ning of current ning of each
naturity period Jj-yr. period to Sj-yr. period
to beginning of beginning of
to 2nd extend*
ed maturity
each *i-yr. pd.
next ^i-ryr. pd.
Percent
O-O
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
^
^
Approxinate investnent yield
(annual percentage rate)
—.^
6.00
6.00
6,00
6.01
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 1/
Percent
6.00
.6.00
5.99
6.03
5.97
5.99
6.01
6.02
5.98
6.02
6.01
6.00
5.98
6.02
5.99
5.99
6.02
6.00
5.99
5.99
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
5.99
5.99
5.9>
""
1,/ Month; day, im d year on vhich issues of July 1, 1958, enter each pieriod. For subsequent issue mon ths add the appropriate nunber of nonths*
2 / Second externled naturity reached at 28 years 11 nonths after issue
2 J Yield on pur<:harie price from issue date to 2nd extended naturity date is 5.08 percent.
* For earlier redemption values and yields sec appropriate table in Department Circular 653, 9th Revision, as amended and supplenented.
** Thl^t§b^e does not apply if the prevailing rate for Series E bonds being issued at the time the extension begins la different fron 6,00 percent*
Qs
73
m
3
O
23
o
•
n
H
X
m
C5
/
m
n
73
m
>
73
<
o
Tl
H
X
m
H
m
>
73
CO
c
73
T.^.BLE 5 3 - A
iiONDS BEARING ISSUE DATE DEC. 1 ,
Issue price
Denonination
..
. .
*
*
Period
(years and months after
first extende<3 naturity at
18 yeara 11 nonths)
$18.75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
1958
$750.00
1000.oo'
$7500
IOOOO
(1) Redenption values during each half-year period (values increase on first day of period)*
SECOND EXTENDED ^TURITY PERIOD**
Approximate investment yield
(annual percentage rate)
(2) Fron begin- (3) Fron begin- (4) Fron beginning of current ning of each
ning ef each
naturity period Ji-yr. period to h r y t * period
to beginning of beginning of
to 2nd extendeach «j-yro pd. next ?$-yr. pd. ed maturity
Percent
0-0 to 0-6 . . , 1/(11/1/77)
0-6 to 1-0 . . . 7 ( 5/1/78)
1-0 to 1-6 . . . . (11/1/78)
Z-6 to 2-0 • . < 0 ( 5/1/79)
2-0 to 2-6 ,• • « . (11/1/79)
2-6 to 3-0 • • , . C 5/1/80)
3-0 to 3-6 • . 4 . (11/1/80)
3-6 to 4-0 . . . • ( 5/1/81)
.
4-0 to 4-6 . . . , (11/1/81)
4-6 to 5-0 . , , . ( 5/1/82)
5-0 to 5-6 . . , . (11/1/82)
. ( 5/1/83)
5-^ to 6-0 . .
6-0 to 6-6 . . » . (11/1/83)
6-6 to 7-0 , . • • ( 5/1/84)
7-0 to 7-6 e • , , (11/1/84)
7-6 to 8-0 * , • . ( 5/1/85)
8-0 to 8-6 • . » . (11/1/85)
8-6 to 9-0 « • » • ( 5/1/86)
9-0 to 9-6 •. . , p <11/1786>
9-6 tolO-0 a . , . ( 5/1/87)
10-0 2f
« • • , . (11/1/87)
»
$44.54
45.88
47,25
48.67
50.13
51,63
53.18
54.78
56.A2
58.11
59.86
61.65
63,50
65.A1
67.37
69.39
71,47
73.62
75,83
78.10
80,44
$89,08
91.76
94.50
97.34
100.26
103.26
106.36
109.56
112.84
116.22
119,72
123.30
127.00
130.82
134,74
138.78
1A2.94
147.24
151.66
156.20
160.88
$178.16
183,52
189.00
194.68
200.52
206.52
212.72
219.12
225.68
232.44
239.A4
2A6.60
254.00
261.64
269.A8
277.56
285.88
294.AS
303.32
312.40
321.76
$356,32
367.04
378.00
389,36
401,04
413.04
425.44
438.24
451.36
464.88
478.88
493.20
508.00
52J.28
538.96
555.12
571.76
588.96
606.64
624.80
643.52
$890.80
917.60
945.00
973.40
1002.60
1032.60
1063.6(^
1095.60
1128,40
1162*20
1197.20
1233.00
1270.00
1308,20
1347.40
1387.80
1429.40
1472.40
1516.60
1562.00
1608.80
$1781.60
1835.20
1890.00
1946.80
2005.20
2065.20
2127.20
2191,20
2256.80
2324.40
2394.40
2466.00
2540.00
2616,40
2694.80
2775.60
2858,80
2944.80
3033.20
3124*00
3217.60
$17816
183.52
18900
19468
20052
20652
21272
21912
22568
23244
23944
24660
25400
26164
26948
27756
28588
29448
30332
31240
32176
6.02
5.99.
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6.00^,
6,00 1/
Percent
6.02
5.97
6.01
6.00
5.98
6.00
6.02
5.99
5.99
6.02
5.98
6.00
6.02
5.99
6.00
6.00
6.02
6.00
5.99
5,99
Percene
6.0O
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.0Q
6.0(1
6.00
6.0(1
6.00
6.0©
6.0(1
5.9^
5.9?
5.9»
m
X
X
DO
H
C/5
>
—«•
T j Month* day, and year on vftlch issues: of Dec. 1, 1958, enter each p«rlod. v
"if Second extended fsaturitt reached at 28 years 11 imnths after issue.
^
^/ Yield on purchase price'froA-issue date to 2n4 extended naturity date i n 5.10 percent.
* For earlier redenption values « i A yields see appropriate table. In Departnent Circular 653^ 9tft Kevfsion* ss anended and supplemented*
4 * Thl8 tAbl@ does noC sppl^r i t the prevaiUns tste foe Series E bonds being issued at the tine thft est'ension begins i« d&ffecen^ Scsa $*00 p«rc«nte
O
o
TABLE 54-A
BONDS BEARING ISSUE DATES FROM JAN. 1 THROUGH MAY 1, 1959
Issue price *
Denonination .
$18.75
25.00
$37.50
50.00
$75,00
100.00
$150.00
200.00
$375.00
500,00
$750,00
1000,00
$7500
IOOOO
Approximate Inveatnent yield
(annual percentage rate)
—
-J
ON
Period
(yeara and nonths after
first extender* ttkat-it^ir^ » •
*
18 years 11 nonths)
(1) Redemntion values during each half-year period (values increase. on first day of period)*
SECOND EXTENDED MATURITY PERIOD**
(2) Fron begin- (3) Fron begin- (4) Fron begin-.
ning of current ning of each
ning of each
naturity period .*j-yr. period to. *i- yr. period
2nd extendto beginning of
beginning of
e^ na turity
each %-yr. pd.
next '-i-yr. pd.
Percent
0-0
0^6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to 4-6
to 5-0
to 5-6
to 6-0
to 6^6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
.
.
.
,
.
,
.
,
1/(12/1/77) , $44,95
. ( 6/1/78)
46,30
. (12/1/78)
A7,69
49,12
• ( 6/1/79)
. (12/1/79)
50.59
. ( 6/1/80)
52.11
. (12/1/80)
53.67
. ( 6/1/81)
55,28
, . (12/1/81)
56.94
, , ( 6/1/82)
58.65
. , (12/1/82)
60.41
62.22
, . ( 6/1/83)
. (12/1/83)
64.09
66.01
. C 6/1/84)
, (12/1/84)
67.99
70.03
. ( 6/1/85)
72.13
, (12/1/85)
. ( 6/1/86)
74.30
, (12/1/86)
76.52
. ( 6/1/87)
78.82
81,18
. (12/1/87)
$89.90
92.60
95.38
98.24
101.18
104.22
107.3A
110.56
113.88
117.30
120.82
124.A4
128.18
132.02
135.98
140.06
144.26
148.60
153.04
157.64
162,36
$179.80
185.20
190.76
196.48
202,36
208.44
214^68
221.12
227,76
234,60
241,64
248,88
256,36
264,04
271,96
•280.12
288.52
297.20
306.08
315.28
324.72
$359.60
370.40
381,52
392,96
A0A,72
416,88
429,36
4A2,24
455,52
469.20
483.28
497.76
512.72
528.08
5A3,92
560,2A
577,OA
59A.AO
612,16
630.56
6A9.AA
$899.00
926.00
953.80
982.A0
1011.80
10A2.20
1073.AO
1105.60
1138.80
1173.00
1208.20
12AA,A0
1281,80
1320,20
1359,80
1A00.60
1AA2,60
1A86,00
1530,A0
1576,A0
16?3,60
$1798.00
1852.00
1907.60
1964.80
2023.60
2n8A.A0
21A6.80
2211.20
2277.60
23A6.00
2A16,A0
2A88.80
2563.60
26A0oA0
2719.60
2801.20
2885.20
2972.00
3060.80
3152.80
32A7.20
$17980
18520
19076
196A8
20236
208AA
21A68
22112
22776
23A60
2A164
24888
25636
26404
27196
28012
28852
29720
30608
31528
32472
6.01
6.01
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
Percent
6.01
6.00
6.00
5.99
6.01
5.99
6.00
6.01
6.01
6.00
5.99
6.01
5.99
6.00
6.00
6.00
6.02
5.98
6.01
5.99
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
5.99
6.00
5.99
6.00 1/
I f Month, day, and year on vhich issues of Jan, 1, 1959, enter each period. For subsequent issue nonths add the appropriate number of nonths,
' 2 / Second extended naturity reached at 28 years 11 nonths after issue,
3/ Tield on purchase price fron issue date to 2ndextended naturity date is 5,13 percent,
* For earlier redenption values and yields see appropriate'table in Departraent Circular 653, 9th Revision, as anended and supplemented,
** This table does not apply if the prevailing rate for Series E bonds being issued at the tine the extension begins is different fron 6«00 percent.
73
m
o
73
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O
TI
H
X
m
CA)
S
n
70
m
H
>
.
<
O
Tl
H
X
m
H
73
>
TABLE 55-A
BONDS BEARING ISSUE DATES PROM JlfNE 1 THROUGH AUG. 1 , 1 9 5 9
Issue price
Denomination .
Period
(y«sars and nonths afterfirst extended naturity at
17 years 9 nonths)
$18.75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750,00
1000,00
$7500
IOOOO
(l)vRedemption values during each half-year period;(values in*
crease on flrstCday of period)*
SECOND EXTENDED MATURITY PERIOD** ,
_«—-.-,-«—,
0-0 to 0-6
0-6 to 1-0
1-0 to 1-6
1-6 t o 2-0
2-0 to 2-6
2-6 to 3r0
3-0 to 3-6
3^6 to 4-0
4-0 to 4-6
4-6 to S ^
5-0 to 5-6
5^6 to 6-0
6-0 to 6-6
6-6 to 7-0
7-0 to 7-6
7-6 to 8-0
8-0 to 8-6
8-6 to 9-0
9-0 to 9-6
9-6 tolO-0
10^0 2/ «
. . , i7( 3/1/77)
. , . 7 (9/1/77)
• . . . C; 3/1/78)
• . . . (9/1/78)
" , , , (3/1/79)
.
. . . . ( 9/1/79)
. . . . ( 3/1/80)
«r4 . . (9/1/80)
. , , i ( 3/1/81)
\ » « » (9/1/81)
*-« « • (3/1/82)
« V « « ( 9/1/82)
. ^ , . ( 3/1/r.J)
. ; . • ( 9/1/83)
. « . . < 3/1/84)
•. , ^ v ( 9/1/84)
. , . . (3/1/85)
. * > > ( 9/1/85)
, * * i ( 3/1/86)
. . * . (9/1/86)
. . . *.( 3/1/87)
$42.25
43.52
44.82
46.17
A7.55
48.98
50.45
51.96:
53.52
55.13
56,78
58*48
60,24
62,05
63,91
65,82
67.80
69.83
71,93
74.09
76.31
$338.00
$84.50 $169.00
174,08
348*16
87.04
89.64
358,56
179.28
92.34.
184,68
369.36
190.20
95.10
380.40
97.96
195.92
391.84
100.90
201.80
403.60
207.84
415.68
103.92
107.04
214,08 . 428,16
110.26
220.52
441*04
454.24
113.56
227.12
467.84
233.92
116.96
481.92
120.48
240.96
496.40
248.20
124,10
511.28
127,82
255.64
526.56
131.64
263.28
542.40
135.60 ; 271.20
139.66
279.32
558.64
575.44
143.86
287.72
148,18
296.36
592.72
610,48
305.24
152.62
$845.00
870.40
896.40
923.40
951*00
979.60
1009.00
1039.20
1070.40
1102.60
1135,60
1169.60
1204.80
1241.00
1278.20
1316.40
1356.00
1396.60
1438.60
1481.80
1.526,20
$1690,00
1740,80
1792.80
1846,80
1902,00
1959.20
2018*00
2078.40
2140.80
2205*20
2271.20
2339,20
2409.60
2482.00
2556.40
2632.80
2712.00
2793.20
2877.20
2963.60
3052.40
Approxinate investnent yield
(annual percentage rate)
(2) Fron beginning of , current
naturity period
t o beginning of
cach:Ji-yr. pd.
Percent .
$16900
17408
17928
18468
19020
19592
20180
20784
21408
22052
22712
23392
24096
24820
25564
26328
27120
27932
28772
2963.6
30524
6,01
• \ •,5.99
^
6,00
6.00
6.00
6,00
6,00
6.00
6,00
6^00
6,00
6.00
6.00
6.00
6.00
- ^ 6.00^ •>"
6.00
6,00
6*00
6.00 3/
(3) Fron begin- (A) Fron beginning of each
ning of each
%-yr.
period to Js-yr. period
beginning of
to 2nd extendnext %-yr« pd. ed naturity
Percent
6.01
5,97
6.02
5.98
6.01
6.00
5,99
6.00
6.02
5.99
5*99
6.02 "
6.01
6*00
5.98
6.02
5.99
6.01^
^.01
5i99
:
Percent
6.00 «
6.00
6;00
6.00
6.0C:
6,00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6,00
6.00
6,00
6.00
.6,00
5.99
m
X
X.
53
s
JL^/ Month, day, and year on vhicH issues of June 1, 1959, enter each period. For .sub.sequent issue months add the appropriate nuraber of months,
"2/ Second extended naturity reached at 27 years 9 nonths after^issue. , ,
^Z Yield on purcliase price fron issue date to 2nd extended Piaturity date is 5.12 percent,
* For earlier redemption values and yields,sea appropriate table in Departnent Circular 653, Sth Revision, as anended and supplenented.
** This table does not'apply if the^prevailing sate for Series S bonds being Issued at the time the extension l)egins is different fro« 6.00 percent*
U)
TABLE 56-A
BONDS BEARING ISSUE DATES FROM SEPT.. 1 THROUGH NOV. 1, 1959
Issue price
Denomination
$18,75
25.00
Period
(years and nonths after
first extended naturity at
17 years 9 nonths)
$37,50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
Approximate investment yield
(annual percentage rate)
(2) Frora begin(1) Redemption values during each half-year period (values inning of current
crease on first dav of period)*
raaturity
period
'.
~
.
—-.
—
to beginning of
SECOlfl) EXTENDED MATURITY PERIOD**
each Jj-yr. pd.
Percent
C-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to 4-0
to A-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
.
i/( 6/1/77)
(12/1/77)
( 6/1/78)
(12/1/78)
( 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/80)
(6/1/81)
(12/1/81)
( 6/1/82)
(12/1/82)
( 6/1/83)
(12/1/83)
( .6/1/84)
(12/1/84)
( 6/1/85)
(12/1/85)
( 6/1/86)
(12/1/86)
( 6/1/87)
$42.62
43.90
A5.22
A6.57
A7.97
A9.A1
50.89
52.A2
53.99
55.61
57.28
59.00
60.77
62.59
64,47
66,40
68,39
70.44
72,56
74.73
76.98
$85.24
87.80
90.44
93.14
95.94
98.82
J.01.78
104.84
107.93
111.22
114.56
118.00
121.54
125.18
128.94
132.80
136.78
140.88
145.12
149.46
153.96
$170.48
175.60
130.88
186.28
191.88
197.64
203.56
209.68
215.96
222.44
229.12
236.00
243.08
250.36
257.38
265.60
273.56
281.76
290.24
298.92
307.92
$340.96
351.20
361.76
372.56
383.76
395.28
407.12
419.36
431.92
444.88
458.24
472.00
486.16
500.72
515.76
531.20
547.12
563.52
530,43
597,34
615.84
$852.40
878.00
904.40
931.40
959.40
983.20
1017.80
1048.40
107-9.30
1112.20
1145.60
1180.00
1215.40
1251.30
1239.40
1328.00
1367.30
1408.30
1451.20
1494.60
1539.60
$1704.30
1756.00
1803.80
1362.80
1918.80
1976.40
2035.60
2096.80
2159.60
2224.40
2291.20
2360.00
2430.80
2503.60
2578.80
2656.00
2735.60
2317.60
2902.40
2939.20
3079.20
$17048
17 560
18088
18628
19188
19764
20356
20968
21596
22244
22912
23600
24308
25036
25788
26560
27356
23176
29024
29892
30792
6.01
6.01
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
—
(3) Frora begin- (4) From beginning of each
ning of each
Jj-yr. peribd to %-yr. period
beginning of
to 2nd extendnext %-yr. pd. ed maturity
Percent
6.01
6.01
5.97
6.01
6.00
5.99
6.01
5.99
6,00
6,01
6.01
6.00
5.99
6.01
5,99
5,99
6,00
6,02
5.98
6.02
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.01
6.00
6.02
1/ Yfonth, day, and year on x#hlch issues of Sept. 1, 1959, enter each period. For subseqtient is.sue months add the appropriate number of months.
^ / Second extended maturity reached at 27 years 9 months after issue.
^ Yield on purchase price frora issue date to 2nd extendedraaturitydate is 5,15 percent,
^
73
m
O
73
H
O
Tl
H
X
m
C/5
m
n
73
m
H
>
70
<
O
•Tl
H
X
m
H
73
m
>
CO
C
73
* For earlier redemption values'and yields see appropriate table in Department Circular 653, 9th Revision, as araended and supplemented.
•* This table does not apply if the prevailing rate for Series E bonds being Issued at the time the extension begins is different from 6.00 percent*
<
BONDS BEARING ISSUE DATES FR0?1 DEC. 1, 1959, THROUGH FEB. 1, 1960
issue price
Denonination
Period
(years and nonths after
first extended naturity at
17 years 9 months)
$18.75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
(1) Redemption values during each half-vear neriod (valiies Increase on first day of per.iod)*
— _ . - - SECOND
—-_..
——.—
«——
EXTENDED MATURITY PERIOD**
Approx [mate Investment yield
(annual percentage rate)
(2) From begin- (3) From beginning of current ning of each
maturity period Jj-yr, period to
to beginning of beginning of
each ^-yr, pd.
next JjE-yr, p d .
Percent
O-O
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
. . . l/( 9/1/77)
to 0-6
to 1-0
, ( 3/1/78)
to 1-6
, ( 9/1/78)
to 2-0
( 3/1/79)
to 2-6
• (9/1/79)
to 3-0
( 3/1/80)
to 3-6
( 9/1/80)
( 3/1/81)
to 4-0
( 9/1/81)
to 4-6
( 3/1/82)
to 5-0
, ( 9/1/82)
to 5-6
( 3/1/83)
to 6-0
( 9/1/83)
to 6-6
( 3/1/84)
to 7-0
( 9/1/84)
to 7-6
to 8-0
, ( 3/1/85)
to 8-6
, ( 9/1/85)
, ( 3/1/86)
to 9-0
» ( 9/1/86)
to 9-6
, ( 3/1/87)
tolO-0
2/
.
, ( 9/1/87)
$42.72
44*00
45.32
46.68
48.08
49.52
51.01
52.54
54.12
55.74
57.41
59.13
60.91
62.74
64.62
66.56
68.55
70.61
72.73
74.91
77.16
$85.44
88.00
90.64
93.36
96.16
99.04
102.02
105.03
108.24
111.48
114.82
118.26
121.82
125.48
129.24
133.12
137.10
141.22
145.46
149.82
154.32
$170.88
176,00
181.28
186.72
192.32
198.08
204.04
210.16
216.48
222.96
229.64
236.52
243.64
250.96
258.48
266.24
274.20
282.44
290.92
299.64
308.64
$341.76
352.00
362.56
373.44
384.64
396.16
408.08
420.32
432.96
445.92
459.28
473.04
487.28
501.92
516.96
532.48
548.40
564.88
581.84
599.28
617.28
$854.40
880.00
906.40
933.60
961.60
990.40
1020.20
1050.80
1082.40
1114.80
1148.20
1182.60
1218.20
1254.80
1292.40
1331.20
1371.00
1412.20
1454.60
1498.20
.1543.20
$1708.80
1760.00
1812.80
1867.20
1923.20
1980.80
2040.40
2101.60
2164.80
2229.60
2296.40
2365.20
2436.40
2509.60
2584.80
2662.40
2742,00
2824,40
2909,20
2996,40
3086,40
$17038
17600
18128
18672
19232
19808
20404
21016
21648
22296
22964
23652
24364
25096
25848
26624
27420
28244
29092
29964
30864
...
..
5,99
6.00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6,00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
Percent
5,99
6,00
6,00
6,00
5.99
6.02
6.00
6.01
5.99
5.99
5.99
6.02
6.^1
5.99
6.00
5.98
6.01
6.00
5,99
6.01
( )From
A
beginning of each
h -•yr. period
to 2nd extended maturity
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.01
—-
1/ Month, day, and year on vhich issues of Dec. 1, 1959, enter each period. For subsequent issue nonths add the appropriate number of nonths,
^ / Second extended naturity reached at 27 years 9 nonths after issue.
3/ Yield on purchase price fron issue date to 2nd extended naturity date is 5.16 percent.
*
*»
For earlier redenption values and yields see appropriate table in Departraent Circular 653, 9th Revision, as amended and supplemented.
This table does not apply if the prevailing rate for Series E bonds being issued at the time the extension begins is different fron 6.00 percent*
m
X
X
00
C5
/
U)
T4BLE 58-A
BONDS BFJ^.ING ISSUE DATES FROM MARCH 1 THROUGH MAY 1, 1960
Issue price
Denonination
•
*
••.•^ • •
$18,75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00r
'$750.00
1000.00
$7500
IOOOO
Approximat e investnent yield
(annual percentage rate)
(2) From beginPeriod
(years and nonths after
first extended naturity at
• 17 years 9 nonths)
(1) Redemption values during each half-year period (values Increase on first day of period)*
. . . . . .....
. . . . . .-~-.
i . . . . . . ^ . . .
SECOND KXTENDED MATURITY PERIOD**
ning of current
naturity period
to beginning of
each *i-yr. pd.
Percent
0-0 to 0-6
0-6 to 1-0
1-0 to 1-6
1-6 to 2-0
2-0-to 2-6
2-6 to 3-0
3-0 to 3-6
3-6 to A-0
4-0 to A-6
4-6 to 5-0
5-0 to 5-6
5-6 to 6-0
6-0 to 6-6
6-6 to 7-0
7-0 to 7-6
7-6 to 8-0
8-0 to 8-6
8-6 to 9-0
9-0 to 9-6
9-6 tolO-0
10-0 2 1
,
.
.
,
.
.
.
.
.
.
,
.
.
.
.
.
.
.
.
.
.
.
1/(12/1/77)
. ( 6/1/78)
. (12/1/78)
. ( 6/1/79)
, (12/1/79)
. ( 6/1/80)
. (12/1/80)
. ( 6/1/81)
, (12/1/81)
. ( 6/1/82)
. (12/1/82)
. ( 6/1/83)
. (12/1/83)
. ( 6/1/84)
. (12/1/84)
. ( 6/1/85)
. (12/1/85)
. ( 6/1/86)
. (12/1/86)
. ( 6/1/87)
. (12/1/87)
$43.10
44.39
45.72
47.10
48.51
49.96
51.46
53.01
54.60
56.24
57.92
59.66
61.45
63.29
65.19
67.15
69.16
71.24
73.37
75.58
77.84
$86.20
•83.78
91.44
•94.20
97.02
99.92
102.92
106.02
109.20
112.48
115.84
119.32
122.90
126.58
130.38
134.30
1.38.32
142.48
146v74
151,16
155.68
$172,40
177.56
182.88
188.40194.04
199.84
205,84
212.04
218.40
224.96
231.68
238.64
245.80
253.16
260.76
263.60
276.64
284.96
293.48
302.32
311.36
$344.80
355.12
365.76
376.80
388.08
399.68
411.68
424.08
436.80
449.92
463.36
477.28
491.60
506.32
521.52
537.20
553.28
569.92
536.96
604.64
622.72
$862.00
887.80
914.40
942.00
970.20
999.20
1029.20
1060.20
1092.00
1124.80
1158.40
1193.20
1229,00
1265.80
1303.30
1343.00
1333.20
1424.80
1467.40
1511.60
1556.80
$1724.00
1775,60
1828,80
1884,00
1940.40
1998.40
2058.40
2120.40
2184,00
2249.60
2316,80
2386.40
2458.00
2531.60
2607.60
2636.00
2766.40
2849.60
2934.80
3023.20
3113.60
$17240
17756
18288
18840
19404
19984
20584
21204
21840
22496
23168
23864
24530
25316
26076
26360
27664
28496
29348
302.32
31136
5.99
5.99
6.01
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00 3./
(3) From begin- (4) From beginning of each
yr, period to
beginning of
next h-yr. pd.
%
-
Percent
5,99
5.99
6.04
5.99
5.98
6.00
6.02
6.00
6.01
5.97
6.01
6.00
5.99
6.00
6.01
5.99
6.02
5.98
6.02
5.98
ning of each
^ - y r , period
to 2nd extended maturity
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
5.99
6.00
5.98
\ t Month, day, im d year on vhich issues 0 f March 1 , 1960, enter each ieriod. For subsequent issue months add the appropriate nunber o I nonths.
? / Second extentled maturity reached at 27 years 9 months after Is.sue.
3 / Yield on pure base price from issue date .to 2nd extended maturity date is 5.20 percent.
* For earlier redemption values and yields see appropriate table in Departraent Circular 653, •9th Revlsionj as amended and supplemented.
** This table does"Ytot fpply if-the prevailing rate for Series E bonds being issued at the time the extension begins is different from 6,00 percent.
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TAIiLE 91-A
BONDS BEARING ISSUE DATES FROM DEC, 1, 1970, THROUGH MAY 1, 1971
Issue price
Denomination
•
• •
Period
(years and months after
origiiwi*
5 years 10 nonths)
$18,75 $37.50 $56.25
25.00 50,00 75.00
$75.00 $150.00
100.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
(1) Redemption values during each half -year period (values increase on first day of period)*
EXTENDED MATURITY PERIOD**
Approximate .investment yield
(annual percentage rate)
(2) From begln.- (3) From begin- (4) From beginning of current ning of each
ning of each
naturity period '5-yr. period to ^i-yr, period
to extended
UCgXIIIIXIIg UI. beginnlng of
each -Vyr. pd, . next Ji-yr, pd.
naturity
Percent
O-O to 0-6
0-6 to 1-0
1-0 to: 1-6
1-6 to 2-0
2-0 to 2-6
2-6 to 3-0
3-0 to.3-6
3-6 to A-0
4-0 td 4-6
4-6 to 5-0
5-0 to 5-6
5-6 to 6-0
6-0 to 6-6
6-6 to 7-0
7-0 to 7-6
7-6 to 8-0
8-0 to 8-6
8-6 to 9-0
9-0-\o 9-6
9-6 tolO-0
10-0.2/
•
, , 1/(10/1/76)
• . 7 ( A/1/77)
, . . (10/1/77)
. . ( A/1/78)
, . . (10/1/78)
, . . ( A/1/79)
, . . (10/1/79)
, . , ( A/1/80)
. . (10/1/80)
, . ( A/1/81)
».. , (10/1/81)
. . ( A/1/82)
, , , (10/1/32)
. . ( A/1/83)
, . .(10/1/83)
, . . ( A/1/8A)
, . . (10/1/84)
• . ( A/1/85)
, . ; (10/1/85)
, .. . ( A/1/86)
, . . (10/1/86)
$26,08 $52,16 $78.24 $104.32 $208.64
26,86
214.88
53,72 80.58
107.44
27,67
55,34
83.01
110.68
221.36
28.50
57,00 85.50
114.00
228.00
58,70
29.35
88.05
117.40 .234.80
30.23
60,46
120.92
90.69
241.84
62,28
31.1A
93.42 124.56
249.12
32.08
64,16
256.64
96.24
128.32
66,08
33.OA
99.1^
132.16
264.32
3A,03
68,06 102.09
136.12
272.24
35.05
70,10 105.15
140.20
280.40
288.80
36.10
72,20 108.30
144.40
37.18
148.72
297.44
74,36 111.54
76,60 114.90
38.30
153.20 306.40
157.80
315.60
39.A5
78,90 118.35
81,26 121.89
A0.63
162.52
325.04
A1.85
334.80
83,70 125.55
167.40
344.88
A3.11
86,22 129.33
172.44
AA.AO
177.60
355.20
88,80 133.20
45,73
91,46 137.19
182.92 365.84
94.20 141.30 188.40 376.80
47,10
$521.60 $1043.20 $10432
537.20
10744
1074.40
553.40
1106.80
11068
570.00
1140.00
11400
11740
587,00
1174.00
604,60
1209.20
12092
622,80
1245.60
12456
641,60 1283.20
12832
660,80
1321.60
13216
680.60
1361.20
i3612
701,00
1402.00
14020
14440
722,00 1444.00
743,60
1487.20
14872
1532.00
15320
766,00
15780
789.00
1578.00
16252
812.60
1625.20
837.00
1674.00
16740
862.20
1724,40
17244
888,00
17760
1776.00
914,60 1829.20
18292
942,00 1884.00
18840
-•
—.
5.98
6.01
6.0C
5.99
5.99
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6,00 !/•
Percent
5.98
6.03
6.00
5.96
6.00
6.02
6.04
5.99
5.99
5.99
5.99
5.98
6.02
6.01
5.98
6.01
6.02
5.98
5.99
5,99
Percent
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6.00
6.00
6,00
5,99
5,99
5,99
c
n
X
X
DO
^
-~
1/ >ibnth, day, and year on vhich issues of Dec, 1, 1970, enter each period. For subsequent issue nonths add the appropriate nunber of nonths,
' 2 / Extended maturity reached at 15 years 10 nonths after issue,
3"/ Yield on purchase price.fron issue date to extended naturity date is 5,90 percent,
•
M
T o t earlier redemption values and yields see appropriate table in Department Circular 653, 9th Revision, as amended and supplemented,
This table does not apply If the prevailing rate for Series E bonds beini; issued at the time the extension begins is different fron 6.00 percent*
OJ
Os
TABLE 92-A
BONDS BEARING ISSUE DATES FROM JUNE 1 THROUGH NOV. 1, 1971
$18.75 $37.50 $56,25
25.00
50.00 75,00
Issue price
Denonination
Period
(years and months after
original maturity at
5 years 10 months)
$75.00 $150.00
100.00
200.00
$375.00
500.00
$750.00
1000.00
$7500
IOOOO
(1) Redemption values during each half-year period (values increase on first day of period)*
EXTENDED MATURITY PERIOD**
Approxinate Investment yield
(annual percentage rate)
(2) From begin- (3) Frora begin- (4) From beginning of each
ning of current ning of each
maturity period ij-yr, period to %-yr. period
to extended
to beginning of beginning of
maturity
each ^-yr. pd. next ^-y^. pd,
Percent
O-O
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
S-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to A-0
to A-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
.
...
.
.
.
.
.
,
.
.
.
,
.
.
. >
.
.
.
.
.
.
.
.
l/( 4/1/77)
, (10/1/77)
. ( 4/1/73)
. (10/1/73)
( 4/1/79)
(10/1/79)
( 4/1/80)
(10/1/80)
• ( 4/1/81)
, (10/1/81)
, ( 4/1/82)
. (10/1/82)
. ( 4/1/83)
(10/1/83)
, ( 4/1/84)
(10/1/84)
. ( 4/1/85)
, (10/1/85)
, ( 4/1/86)
(10/1/86)
( 4/1/87)
$26.15
26.93
27.74
28.57
29.43
30.32
31.22
32.16
33.13
34.12
35.14
36.20
37.28
38.40
39.55
40.74
41.96
43.22
44.52
45.85
47.23
$52.30
53.86
55.48
57.14
53.86
60.64
62.44
64.32
66.26
68.24
70.28
72.40
74.56
76.80
79.10
81.48
83.92
86.44
89.04
91.70
94.46
$78.45 $104.60
80.79
107.72
83.22
110.96
114.23
85.71
88.29
117.72
121.28
90.96
124.83
93.66
96.48
128.64
132.52
99.39
102.36
136.48
105.42
140.56
103.60
144.80
111.84
149.12
115.20
153.60
158.20
118.65
122.22
162.96
125.38
167.84
172.83
129.66
133.56
178.03
183.40
137.55
188.92
141.69
$209.20
215.44
221.92
223.56
235.44
242.56
249.76
257.28
265.04
272.96
281.12
289.60
298.24
307.20
316.40
325.92
"335.68
345.76
356.16
-366.30
377.34
$523.00 $1046.00 $10460
538.60
1077.20
10772
554.80. 1109.60
11096
11423
571.40
1142.30
583.60
1177.20
11772
606.40
1212.30
12128
624.40
12483
1248.80
643.20
1236.40
12864
1325.20
662.60
13252
632.40
1364.80
13648
702.30
1405.60 . 14056
14480
724.00
1448.00
745.60
14912
1401.20
763.00
15360.
1536.00
15820
791.00
1582.00
814.30
16296
1629.60
839.20
16784
1678.40
864.40
17 238
1723.30
890.40
17808
1780.80
917.00
18340
13.34.00
944.60
1339.20
18392
5.97
5.99
5.99
6.00
6.01
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00 3/
Percent
5.97
6.02
5.98
6.02
6.05
5.94
6.02
6.03
5.98
5.98
6.03
5.97
6.01
5.99
6.02
5.99
6.01
6.02
5.97
6.02
Percent
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.02
—--
I f Month, day, and year on wliich Issues of June 1, 1971, enter each period. For subsequent issue months add the appropriate number of months,
"2/ Extended maturity reached at 15 years 10 months after issue.
3 / Yield on purcliase price from issue date to extended maturity date is 5.92 percent.
* For earlier redemption values and yields see appropriate table in Department Circular 653, 9th Revision, as araended and supplemented.
**• This table does not apply if. the prevailing rate for Series E bonds being Issued at the time the extension begins is different from 6.00 percent.
73
m
'V
O
73
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BONDS BEARING ISSlfE DATES FROM DEC. 1, 1971, THROUGH MAY 1, 1972
Issue price
•
Denomination *,
$18.75 $37.50
25.00
50.00
Period
(years and months after
jriglnal maturitv. at
5 years 10 months)
$56.25
75.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750^00
1000,00
$7500
IOOOO
(1) Redemption valu es during each half -vear period (values increase on first day of period)*
EXTENDED MATURITY PERIOD**
Appros imate investment yield
(annual percentage rate)
(2) Frora begin- (3) Frora begin- (4) From beginning of current ning of each
ning of each
maturity period •^-yr, period to h - y x , period
to beginning of beginning of
to extended
each 4-yr. pd. next Ij-yr. p d .
maturity
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
5-6
6-0
6-6
7-0
7-6
8-0
8-6
9-0
9-6
10-0
to 0-6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to A-0
to A-6
to 5-0
to 5-6
to 6-0
to 6-6
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
.
1/(10/1/77)
. 7 ( A/1/73)
, (10/1/78)
.. ( A/1/79)
. (10/1/79)
, . ( A/1/80)
. (10/1/80)
. , ( A/1/81)
. (10/1/81)
1 . ( A/1/82)
, . (10/1/82)
. ( A/1/8.3)
, . (10/1/83)
, . ( A/1/84)
, . (10/1/84)
• . ( 4/1/85)
, . (10/1/85)
, ( 4/1/86)
, . (10/1/86)
, . ( A/1/87)
, . (10/1/87)
$26.21 $52.A2 $78.63 $104.84 $209.68
27.00
5A.00 81.00
108,00
216.00
27.81
111.24
222.48
83.43
55.62
114.56
28. 6A 57.28
85.92
229.12
118.00
236.00
29.50
59.00 88.50
30.38
121.52
243.04
60.76
91.14
31.30
93.90 125.20
2.50.40
62.60
128.92
32.23
257.84
96.69
6A.A6
33.20
99.60
132.80
265.60
66.AO
34.20
136,30
273.60
68.AO 102.60
140.88
231.76
35.22
70.A4 105.66
290.24
36.28
145.12
72.56 103.84
37.37
149.43
293.96
74.74 112.11
38.49
76.98 115.47
153.96
307.92
153.56
39.64
317.12
79.28 118.92
163.32
40.83
326.64
81.66 122.49
163.24
42.06
336.48
84.12 126.18
43.32
173.28
346.56
86.64 129.96
44.62 89.24 133.86
173.48
356.96
45.96
183.84
367.68
91.92 137.88
A7.3A
94.68 142.02
189.36
378.72
$524.20 $1048,40 $10434
540.00
1080,00
10800
11124
556.20
1112.40
572.80
1145.60
11456
590.00
1180.00
11800
1215.20
12152
607.60
626.00 1252.00
12520
1239,20
644.60
12892
664.00
1328,00
13280
634.00
1363,00
13680
704.40
1403.80
14088
725.60
14512
1451.20
747.40
14948
1404,30
769.30
15396
1539.60
792.80
1535.60
15356
816.60
16332
1633.20
841.20
16324
1632.40
866.40
17328
1732.80
892.40
17848
1784.30
18.38.40 18334
919,20
18936
1893.60
946.80
6.03
6.01
6.00
6.00
5.99
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6,00
6.00
6.00 3/
Percent
6.03
6.00
5.97
6.01
5.97
6.06
5.94
6.02
6.02
5.96
6.02
6.01
5.99
5.98
6.00
6.02
5.99
6.00
6.01
6.01
Percent
6.00
6.00
6.00
6.00
6.00
6.0O
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.01
6.01
6.006.00
6.01
6.01
.
I f Month, day, and year on vhich issues of Dec. 1, 1971, enter each period.. For subseouent issue months add the appropriate nuraber of nonths.
2f Fjctended naturity reached at 15 years 10 nonths after Is.sue.
3/ Yield on purchase price fron issue date to extended naturity date is 5.94 percent.
For earlier redemption values and yields see apnropriate table in Denartraent Circular 653, 9th Revision, as amended and supplemented.
This table does not apply if the prevailinf; rate for Series E bonds being issued at the time the extension begins is different fron 6,00 percent*
m
X
X
W
5
00
TABLE 97
BONDS BEARING ISSUE DATES FROM DEC. 1, 1973, THROUGH AUG, 1 , 1976
Issue price
Denomination
• v • • ^ •
. . . . . .
Period
Cyeavs and nonths after issue)
$18,75
25,00
$37,50
50,00
$56,25
-75,00
$75,00
100,00
$150,00
200.00
$375.00
500.00
$750.00
1000.00
$ 7500
IOOOO
(1) Redemption values during each half-vear period (values increase
on first dav of period)
73
Approximate investment yield
(annual percentage rate)
(2) From iasue (3) From begin- (4) Fron begindate to begin- ning of each
ning of each
ning o i each . Jl-yr. period to
h-yr. period
beginning of
to maturity
yr« period
next H-yr. pd.
h-
Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
4-0
4-6
5-0
to 0^6
to 1-0
to 1-6
to 2-0
to 2-6
to 3-0
to 3-6
to A-0
to A-6
to 5-0
2/
.
.
.
,
.
.
.
,
,
.
,
.
1/(12/1/73)
7 ( 6/1/7A)
. (12/1/7A)
. ( 6/1/75)
. (12/1/75)
. (6/1/76)
. (12/1/76)
. ( 6/1/77)
. (12/1/77)
. ( 6/1/78)
. (12/1/78)
$18.75
19.10
19.61
20.10
20.60
21.IA
21.71
22.31
22.97
23.67
25.20
$37.50
38.20
39.22
40.20
A1.20
A2.28
A3.A2
AA.62
A5.9A
A7.3A
50.A0
$56.25
57.30
58.83
60.30
61.80
63.A2
65.13
66.93
68.91
71.01
75.60
$75.00
76.A0
7 8 . AA
80.AO
82.A0
8A.56
86.8A
89.2A
91.88
9A.68
100.80
$150.00
152.80
156.88
160.80
16A.80
169.12
173.68
178.A8
183.76
189.36
201.60
$375.00
382.00
392.20
A02.00
412.00
422.80
43A.20
4A6.20
A59.40
A73.40
504.00
$750.00
764.00
784.40
804.00
824.00
845.60
868.40
892.40
918.80
946.80
1008.00
$ 7500
7640
7844
8040
8240
8456
8684
8924
9188
9468
10080
—-.
3.73
4,54
A,69
4,76
4,86
4,95
5,03
5.14
5.25
6,00
Percent
3.73
5.34
5.00
4.98
5.24
5.39
5.53
5.92
6.09
12.93
Percent
6.00
6.25
6.37
6.57
6.83
7.15
7.59
8.29
9.48
12.93
1 / Month, day and year o n vhich issues of December 1 , 1973, enter each period. These are representative dates. For subsequent issue dates^
"
aubatitute the ndnth, day and year o f i s s u e o n the first line, and the appropriate six-month accrual date on each succeeding line. For
exanple: if the issue date of the bond is October 1 , 197A, the entries on succeeding lines in this column vould be 10/1/7A, 4/1/75, 10/1/75,
4/1/76, 10/1/76, etc., to the maturitv date of 10/1/79; if the issue date of the bond is July 1 , 1976,, the line entries vould be 7/1/76,
1/1/77, 7/1/77, 1/1/78, 7/1/78, etc.,'to the maturity date of 7/1/81.
2 / >Uttj|d:ity value reached nt 5 years and 0 months after issue.
m
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319
EXHIBITS
Exhibit 10.—Department Circular No. 905, Sixth Revision, March 18, 1974, First
Amendment, First Supplement, offering of United States savings bonds, series H
DEPARTMENT OF THE TREASURY,
Washington, August 10, 1976.
The Department ofthe Treasury is announcing the interest payments and investment yields
for United States Savings Bonds, Series H, of various issue dates which are entering their next
extended maturity periods.
Accordingly, Department of the Treasury Circular No. 905, Sixth Revision, dated March
18, 1974, and the tables incorporated therein, as amended (31 CFR, Part 332), are hereby
supplemented for the purpose of providing tables showing the schedule of interest payments
and investment yields for the next extended maturity period for bonds bearing issue dates
of February 1, 1957, through May 1, 1958; and December 1, 1966, through May 1, 1968.
Accordingly, Tables 12-A, 13-A, 14-A, 32-A, 33-A and 34-A are added as set forth below.
The foregoing supplement was effected under authority of section 22 ofthe Second Liberty
Bond Act, as amended (49 Stat. 21, as amended; 31 U.S.C. 757c), and 5 U.S.C. 301: Notice
and public procedures thereon are unnecessary as the fiscal policy of the United States is
involved^
DAVID MOSSO,
Fiscal Assistant Secretary.
TABLE la-A
B O N D S BEARI.NG
ISSUE PRICE
. . . . . . . . .
U E O E M P T I O N AND MATUlilTY VALUE
PEPIOD Of TIME PHKin IS HE.LD
AFTER EXTENDED MATURITY AT
20 YEARS* 0 MONTHS
.jy ( «^/1/77l
^/l/7M)
8/1/78)
2/1/79)
ri/1/79)
2/1/^0)
• 5 YEARS
1.0
1.5
2.0
2.S
3*
-0
3.5
«o
*
«.5
5.0
5.5
eo
.
6.5
ro
,
7.5
8.0
8.5
9.0
9.5
10.0
y
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
e/i/fco)
2/l/i?M
^/\/b\)
2/1/62)
b/\/b2)
2/1/83)
fl/1/^3)
2/1/PU)
B/\/fiU)
£:.,
2/1/rtS)
e/l/R5)
2/1/efe)
H/i/et»)
2/1/87)
ISSUE, O A T E S K H U M
*500
SOO
>1,0U0
1,000
FEB, t THRUUGH
i5,0(i0
5,000
M A Y I#
$U»#000
10,000
(t) AMOUNTS UF INTEREST
CHfCKS FfiK feACH DENOMINATION •
SECUNO EXTE^iDF.D MATURITY PERIOD**
iis.oo
1S, 0 n
15,00
15,00
15,00
15.00
15,00
15.00
15,00
15,00
J5,00
15,00
15,00
15,00
15,00
15,00
15.00
15,00
15,00
15.00
.$30.0 0
30,00
30,0 0
30,0 0
30,00
30,00
30,00
30.00
30.00
30,00
30,0 0
30,00
30,00
30,00
30,00
30,00
30.00
30.00
.30.U0
30,00
$150,00
150,0 0
150,0 0
150,00
150,00
150,0 0
150,00
150,0 0
150.0 0
150.0 0
150,00
150,00
150.0 0
150.00
150,00
150.00
150,0 0
150,00
150,00
150,00
$300.00
300,00
300,00
300.00
300,00
300,00
300,00
300,00
30 0,0 0
300,00
300,00
300.00
300.00
300,00
300,00
30 0,0 0
300,00
300,00
30 0,00
300,00
O
1957
APPROXIMATE INVESTMENT YIELD
(ANNUAL PERCENTAGE H A T E )
(2) FROM
BEGINMNG
OF CURRENT
MATURITY
PO, TO EA.
INTEREST
PMT, OATE
PERCENT
6.00
6,00
6,00
6,00
6,00
6,00
6,00
6.00
6,00
6,00
6,00
6,00
6.00
6,00
6,00
6,00
6,00
6,00
6,00
2/ 6,00
(3) FOK
HALF-YEAR
PO, PRECEDING
INTEREST
PAYMENT
DATE
PERCENT
6,00
6,00
6,00
6,00
6.00
6.0*0
6.00
6.00
C.OO
6,00
6,00
fc.OO
6,00
6,00
6,00
6.00
6,00
6,00
6,00
6.00
(U) FROM
EACH
INTEREST
PMT. DATE
TO 2N0
EXTENDEO
MATURITY
PERCENT
6.00
6.00
6.00
6,00
6,00
6,00
6,00
6.00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6«00
6.00
6.00
6.00
•«••
HQNTh, DAY A.^D.VEAR ON --HICH INTEREST CHfCK IS PAYAl^Lt CN ISSUES OF FEB. 1» 1957. FOR SUBSEQUENT -ISSUE
MONTHS ADD APPROPRIATE NUMBER OF MONTHS,
2J SECONO EXTENDED M A T U R H Y
R E A C H E O AT 30 YEARS AND 0 MONTHS AFTE» iSSuE DATE.
3/ YIELD ON PURCHASE PJ^ICE FRDM ISSUE DATE TO SECOND EXTENDED MATURITY IS «.5e«.
* FUR EARLIER I^TERE.ST C H E C K S AND YIELDS SEE APPROPRIATE TABLE iN DEPARTMENT CHCULAR 905# 6TH REVlSlONi AS
AMENDED AND SUPPLEMENTED,
*• THIS TABLE DDES NOT APPLY IF THE PHEVAlLlMG RATE Ft)R SERIES H BONDS BEING ISSUED AT THE Tl*<£ THE EXTeNSlOM
8EGI=><S JS DIFFERENT FRQM 6,00 PERCENT,
73
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TABLE U - A
SU^40S BEAPIkS ISSUE DATES FROM JUNE 1 THROUGH NOV, i t 1957
X8SUE PRICE • « • • • • • • •
REDEMPTION A N O MATURITY VALUK
PERIOD DF TIME BnNO IS HELD
AFTER EXTENDED MATURITY AT
20 Y E A R S , 0 MONTHS
J YEARS
s o YEARS
. YEARS
1.5
2.0 YEARS
2.S YEARS
S.O YEARS
3.5 YEARS
YEARS
«.o YEARS
^.5
YEARS
5.0
5.5 YFARS
6.0 YEARS
6.5 YEARS
7.0 YEARS
7.5 YEARS
8.0 YEARS
8.5 YEARS
^.0 YEARS
«.5 YEARS
10.0 Y^ARS
.ki
,1/
,.,
, ,
, .
, .
, ,
, .
, ,
, •
, .
, ,
, .
, ,
, ,
, ,
, ,
, *
, ,
, .
, .
(12/1/775
( 6/1/78)
(12/1/78)
( 6/1/79)
(12/1/79)
f 6/1/ftO)
(12/1/80)
( 6/1/81)
(12/1/81)
( 6/1/82)
(12/1/82)
( 6/1/83)
(12/1/83)
( 6/l/6«)
(12/1/8^)
( 6/1/85)
(12/1/85)
( 6/1/86)
(12/1/86)
( 6/1/87)
$500
500
$1«000
1#000
S5»000
5i000
$10,000
lOtOOO
fl) AMOUNTS OF INTEREST
CHECKS FQR EACH DENOMINATION *
.SECOND EXTENDED MATURITY PERIOD**
$15.00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,ao
15,00
15,00
15,00
15.00
15,00
15,00
15,00
15,00
15,00
15,OU
$30,00
30.00
30,00
30,00
30,00
30,00
30,00
30,00
30,00
30,00
30,00
30,00
3Uo00
30.00
30.00
30.00^
30.00
30.00
30,00
30,00
S150.00
150,00
150,00
150,00
150,00
150,00
150,00
150.00
150.00
150.0 0
150,00
150,00
150.00
150.00
150.00
150.00
150.00
150.00
150.00
150,00
$300.00'
300,00
300,00
30 0,0 0
300,00
300,00
300,00
300.00
300,00
300,00
30 0. UO
300.C^
300.00
300,00
300,00
300,00
300.00
300.00
300.9,0
300,00
APPROXIMATE INVESTMENT YIELD
(ANNUAL PERCENTAGE RATE)
(2) FROM
BEGINNING
OF CURRENT
MATURITY
PO. TO E A .
INTEREST
P M T , DATE
PERCENT
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6.00
6iOO
6.00
6.00
6,00
6.00
6,00
6,00
5/ 6,00
(3) FOR
(«) FROM
HALF-YEAR EACH
PD, P R E - INTEREST
CEDING
P M T , DATE
INTEREST TO 2N0
PAYMENT
EXTENDED
DATE
MATURITY
PERCENT
6.00
6.00
6.00
6.00
6,00
,6.00
6.00
6.00
6.00
6.00
6,00
6,00
6,00
6,00
6,0 0
6,00
6,00
6,00
6,00
6,00
PERCENT
6.00
6.00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6.00
6.00
6.00
6.00
6.00
«»••
1/ M O N T H , DAY AND' YEAR ON WHICH INTEREST CHECK IS PAYABLE ON ISSUES OF JUNE 1#: 1957, FOR SUBSEQUENT ISSUE
MONTHS A D D APPROPRIATE NUMBER OF M O N T H S ,
2 / SECOND EXTENDED MATURITY REACHED AT 30 YEARS AND.0 MONTHS AFTER ISSUE! D A T E ,
1 / YIELD ON PURCHASE PRICE FROM ISSUE DATE T Q SECOND EXTENDED MATURITY IS «.63X,
• F O R EARLIER INTEREST CHECKS AND YIELDS ?EE. APPRQPftlATE TABLE IN DEPARTMENT CIRCULAR 9 0 5 , 6TH REVISION, AS
AMENDED AND SUPPLEMENTED.
« * T H I S TABLE D D E S N C J T APPLY IF THE PREVAILING RATE FOR SERIES H BUNDS BEING ISSUED AT THE TI^E THE EXTENSION
8ESINS IS DIFFERENT FW~DM 6,00 P E R C E N T ,
m
X
X
DO
H
TABLE la-A
BONDS BEARING ISSUE DATES FROM DEC, 1, 1957 THROUGH
ISSUE .PRICE
REOEHPTIQM AND MATURITY VALUE
PERIUD 0? TIME BONO IS H E L O
AFTER EXTENDED MATURITY AT
20 YEARS# 0 MONTHS
•5 YEARS
1.0 YEARS
1«5 YEARS
2.0 YEAftS
2.5 YEARS
3.0 YEARS
3.5 YEARS
A.O YEARS
fl.5 YEARS
5.0 YEARS
5.5 YEARS
6.0 YEARS
6.5 YEARS
7.0 YEARS
7.5 YEARS
8.0 YEARS
8.5 YEARS
9.0 YEARS
9.5 YEARS
10.0 YEARS ?/•
,ty ( 6/1/t^)
,
,
,
,
,
,
,
,
,
.
,
,
,
,
,
,
,
,
,
,
,
,
.
.
•
.
,
.
•
,
.
,
,
,
•
.
,
.
(12/1/78)
t 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/80^
C 6/J/81)
(12/1/81)
( 6/1/82)(12/1/82)
( 6/1/83)
(12/1/83)
( 6/l/8a)
(12/l/8a)
( 6/1/85)
(12/1/85)
t 6/1/86)
(12/1/86)
( 6/1/87)
(12/1/87)
&50o"
500
£1,000
1,00.0
S5,000
5,000
SIO,OOU
lOfOOO
c n AMOUNTS OF INTEREST
CHECKS FOR EACH DENOMINATIOM *
SECONO EXTENDED MATURITY PERIOD**
$15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
J5,00
15.00
15.no
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
$30,00
30,00
30,00
30,00
30,00
30,00
30,00
30,00
30,no
30,00
30,00
30,00
30.i)0
30,00
30,00
30,00
30,00
30,00
50,00
30,00
S150,00
150,00
150,00
150,00
150,00
150,00
150,00
150.00
150,00
150.00
150,00
150,00
150,00
150,00
150,00
150.00
150,00
150,00
150,00^
!50,00
$300,00
300,00
300,00
300,00
300,00
300,00
300,00
300,00
300,00
300,00
300,00
30 0,0 0
300,00
300*00
300,00
300,00
300,00
300,00
300,00
300,00
to
to
MAY I, 1958
APPROXIMATE^INVESTMENT YIELD
(ANNUAL PERCENTAGE RATE).'
(2) FROH
BEGINNING
OF CURRENT
MATURITY
PD, TO EA,
INTEREST
PMT. DATE
PERCENT
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6.00
6,00
6.00
6,00
6,00
6,00
6,00
6,00
6,006,00
6,00
5/ 6.00
(3) FOR
HALF YEAR
PD,
PRECEDING
INTEREST
PAYMENT
DATE
PERCENT
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
(«) FROM
EACH
INTEREST
PMT.. DATE
TO ZNO
EXTENDEO
MATURITY
PERCENT
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6.00
6.00
!»••«
y
MONTH, DAY AND YEAR UN WHJCH INTEREST CHECK IS PAYABLE ON ISSUES OF DECt 1# l^Sf, FOK SUBSEQUENT ISSUE
MONTHS ADO APPROPRIATE NUMBER OF MONTHS,
2/ SECOND EXTENDED MATURITY REACHED AT 30 YEARS AND 0 MONTHS AFTER ISSUE DATE.
5/ YIELD ON PURCHASE PRICE FROM ISSUE DATE TO SECOND EXTENDED MATURITY IS <l,6ex,
• FOR EARLIER INTEREST CHECKS AND YIELDS SEE A P P R Q F R I A T E TABLE IH DEPARTMENT CIRCULAR 905# 6TH REVISION, AS
AMENDED AND SUPPLERAENTED,
•* THIS TABLE DOES NOT APPLY IF THE PREVAILING RATE FOR SERIES H BONDS BEING ISSUED AT THE TIME THE tXTENSXOM
BEGINS IS DIFFERENT FROM. 6,00 PERCENT,
73
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73
TABLE 32-A
BDNDS BEARINli ISSUE DATES FROM D E C , 1, 1966 THROUGH
ISSUE P R I C E
• • . . . . • • •
RED.EMPTIOM AND M A T U R I T Y V A L U E
PERIOD OF TIME BHND IS H E L O
AFTER FIRST MATURITY AT
10 YEARS* 0 MONTHS
.5
1.0
1,5
2,0
2,5
3,0
3,5
«,0
^.5
5,0
5,5
6,0
6,5
7,0
7.5
8,0
6.5
9.0
9.5
10.0
y
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
bl
,\J
, .
, ,
, .
, .
, ,
» ,
, ,
, ,
, ,
, ,
, ,
» .
, ,
, .
, .
, ,
» ,
, ,
, ,
( 6/1/77)
(12/1/77)
( 6/1/7f»)
(12/1/78)
( 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/80)
( 6/1/81)
(12/J/81)
( 6/1/82)
(12/1/8?)
( 6/1/83)
(12/1/83)
( 6/l/8«)
(12/1/6<*)
( 6/1/85)
(12/1/65)
( 6/1/86)
(12/1/86)
$50 0
rdo
$1,000
1,000
$5,00 0
5,000
MAY 1, 1967
$10,000
10,000
(1) AMOUNTS OF INTEREST
CHECKS FOR EACH DENOMlNATIUM •
EXTENDED MATURITY PERIOD**
S15.00
15,00
15.00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15.00
15.00
15.00
15,00
15,00
15,00
$30,00
30,00
30,00
30,00
30,00
30.0 0
30,00
30,00
30,00
30,00
30,00
30,00
30,00
30,00
30, UO
30,00
iO.OO
30.00
30,0 0
30.00
$150,00
150.0 0
150.00
150,00
150,00
150.0 0
150.0 0
150,00
150,0 0
150.00
150,0 0
150,00
150.00
150,0 0
150,00
150,00
150,0 0
150,00
150,00
150,00
5300,00
300,00
300,00
300,00
300,00
300,00
300,00
300,00
300,00
300,00
300,00
300,00
300.00
300,00
300,00
300,00
300,00
300,00
300.00
300.00
MONTHr OAY AND YEAR UN whICH INTEREST CHECK IS PAYABLE O N ISSUES OF D E C , \ t
MONTHS ADO APPROPRIATE NUMBER OF M O N T H S ,
2 / EXTENDED MATURITY PEACHED AT 20 YEARS AND 0 MONTHS AFTER ISSUE D A T E ,
|> YIELD JN P'URCHASE PRICE FRrjM ISSUE DATE TO EXTENDED MATURITY IS 5,^0%,
A P P R O X I M A T E INVESTMENT YIELD
(ANNUAL P E R C E N T A G E R A T E )
(2) FROM
BEGINNING
OF CURRENT
MATURITY
PD, TO EA,
INTEREST
P M T , DATE
(3) FUR
(a) FROM
HALF-YEAR EACH
PD. P R E - INTEREST
CEDING
P M T . DATE
INTEREST TO FIRST
PAYMENT
EXTENDED
DATE
MATURITY
PERCENT
6,00
6.00
6,00
6,0 0
6.00
6,00
6.00
6.00
6,00
6,00
6,00
6,00
6.00
6.00
6,00
6.00
6,00
6,00
6,00
3/ 6,00
PERCENT
6.00
6,0 0
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6.00
6,09
6,00
6.00.
6.00
-6.0 0
6,00
6,00
6,00
6,00
PERCENT
6,00
6,00
6,00
6,00
6,00
6,00
6.00
6,0 0
6,00
6.00
6.00
6,0 0
6,00
6,00
6,00
6,00
6,00
6,00
6,00
m
X'
X
DO
H
GO
»•*»
1966, FOR SUBSEQUENT ISSUE
* FOR EARLIER INTEREST CHECKS AND YIELDS SEE APPROPRIATE TABLE IN DEPARTMENT CIRCULAR 905f 6TH REVISIONi AS
AMENDED AND SUPPLEMENTED,
«* THIS TABLE DDES Nf?T APPLY IF THE PREVAILING RATE FOR SERIES ,H BONDS BEIMG ISSUED AT THE TIME THE EXTENSION
BEGINS IS OIFFEREKT FROM 6,00 PERCENT,
LO
to
TABLE 33-A
BONDS BEARING ISSUE DATES FROM Ju^E 1 THROUGH NOV, 1 ,
ISSUE PRICE . . • , , , , • , ,
HEOEMPTION ANO MATURITY VALUE
PERIOD OF TIME BOND IS HELD
AFTER FIRST MATURITY AT
10 YEARS* 0 MONTHS
YEARS
,
1.0 YEARS
1.5 YEARS
2.0 YEARS
2.5 YEARS
3.0 YEARS
3.5 YEARS
« o YEARS
. YEARS
4.5
5,0 YEARS
5.5 YEARS
6,0 YEARS
6,5 YEARS
7.0 YEARS
7.5 YEARS
8,0 YEARS
8,5 YEARS
9,0 YEARS
9.5 YEARS
10,0 YEARS 2/!
.5
,f/
,*.
. ,
, .
. .
, .
. .
, ,
, ,
, .
, ,
, ,
, ,
, ,
. .
, ,
, ,
, ,
, ,
, .
(12./1/77)
( 6/1/78)
(12/1/78)
( 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/80)
( 6/1/81)
(12/1/81)
( 6/1/62)
(12/1/82)
( 6/1/83)
(12/1/83)
( 6/i/8a)
(JP/1/80)
( 6/1/85)
(12/1/85)
C 6/1/66)
(12/1/86)
( 6/1/87)
$500
500
$1,000
1,000
$5,000
5,000
$10,000
10,000
(1) AMOUNTS OF INTEREST
CHECKS FOR EACH DENOMINATION *
EXTENDED MATURITY PERIOD**
$15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15.00
15.00
15.00
15.00
15,00
15,00
15,00
15.00
15,00
15.00
15,00
.15,00
$30.0 0
30,00
30.00
30.00
30,00
30.00
30.00
30,00
30,00
30,00
30,00
30,00
30,0 0
30,00
30,00
30,00
30.00
30.00
30,00
30.00
$150,00
150,00
150.00
150.00
150,00
150.00
150,00
150,00
150,00
150,00
150.00
150,00
150.00
150,00
150,00
150.0 0
150,00
150.00
150,00
150,00
$300.00
300.00
300.00
300,00
300.00
300.00
300.00
300,00
300,00
300.00
300,00
300,00
300,00
300,00
300,00
300,00
300,00
300.00
300,00
300.00
1/ MONTH, DAY AND YEAR ON WHICH'INTEREST CHECK IS PAYABLE ON ISSUES OF JUNE i f
MONTHS ADH APPROPRIATE NUMBER OF MONTHS,
2J EXTENDEO MATURITY REACHED AT 20 YEARS ANO 0 MONTHS AFTER ISSUE DATE,
3/ YIELD ON PURCHASE PPICE FRCJM ISSUE DATE TQ EXTENDED MATURITY IS 5,a6X,
K)
1967
APPROXIMATE INVESTMENT YIELD
(ANNUAL PERCENTAGE RATE)
(2) FROM
BEGINNING
OF CURRENT
MATURITY
PD. TQ EA,
INTEREST
PMT, DATE
(3) FOR
HALF-YEAR
PD.
PRECEDING
INTEREST
PAYMENT
DATE
PERCENT
6,00
6,00
6.00
6,00
6,00
6,00
6.00
6,00
6,00
6,00
6,00
6,00
6.00
6,00
6,00
6,00
6,00
6,00
6,00
3/ 6,00
PERCENT
6.00
6.0U
6.00
6.00
6,0t)
6,00
6,00
6,00
6,00
6.0U
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
(a) FROM
EACH
INTEREST
PMT. DATE
TO FIRST
EXTENDED
MATURITY
PERCENT
6.00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6«00
6,00
6,00
6,00
>.00
6,00
6,00
6,00
6.00
• ••««
1967. FOR SUBSEQUENT ISSUE
* FOR EARLIER INTEREST CHECKS AND YIELDS SEE APPROPRIATE'^TABLE IN DEPARTMENT CIRCULAR 905| 6TH REvISlON, AS
AMENDED AND SUPPLEMENTED,
** THIS TABLE DOES ^UT APPLY IF THE PREVAILING RATE FOR SERIES H BONDS BEING ISSUED AT THE TIME THE E X T E N S I Q M
8EGIN3 IS DIFFERENT FROM 6,00 PERCENT,
73
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73
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<
T A B L E 3<I-A
BONDS B E A R I N G ISSUE DATES FROM
ISSUE PRICE ,
R E D E M P T I Q N A N D MATURITY VALUE
PERIOD OF TIME BOND IS HELD
AFTER FIRST MATURITY AT
lu YEARS, 0 MfiMTMS
,5
1.0
1,5
2.0
2.5
3.0
3,5
1,0
<«.5
5,0
5,5
6,0
6,5
7.0
7.5
-6.0
8.5
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
VEARS
YEARS
YEARS
YEARS
YEARS
. . ,1/ ( 6/1/78)
. . (12/1/78)
.
.
, ( 6/1/79)
,
. (12/1/79)
.
, ( 6/1/60)
.
(12/1/60)
.
. ( 6/1/81)
.
(12/1/81)
.
, ( 6/1/82)
.
(1^/1/82)
.
( 6/1/83)
,,
(12/1/83)
.,
{ fe/l/8«)
.,
(l2/i/8a)
.,
( 6/1/85)
(12/1/85)
.,
( 6/1/86)
.,
9.0 W E A R S . ,
(12/1/86)
( 6/1/87)
9.5 Y E A R S . ,
(12/1/87)
10,0 Y E A R S 2./,
$500
500
$1( 000
000
D E C , T, 1 9 6 7 T H R O U G H
S5,U0O
5,000
$10,000
10,000
(1) AMOUNTS OF INTEREST
CHECKS FOR EACH DENOMINATION
EXTENDED MATURITY PERIOD**
$15.00
15.00
15.00
15.00
15.00
15.,00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
i 5.00
$30.00
30.00
30.00
30.00
30.00
30.00
30,00
30,00
30.00
30.00
30.0 0
30.00
30.00
30.00
30.00
30.00
30.00
30.00
iO.OO
30.00
$150,00
150.00
150.00
150,00
150,00
15.0.00
150,00
150.00
150,00
150,00
150.00
150,00
150.00
150.00
150.00
150.00
150.00
150.00
150,00
150.00
$300.00
300.00
300.00
30 0.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00
30 0.00
300.00
300.00
300.00
300.00
300.00
300,00
300.00
300.00
H A Y 1, 1 9 6 6
APPROXIMATE INVESTMENT YIELD
(ANNUAL PERCENTAGE RATE)
(2) FROM
BEGINNING
OF CURRENT
MATURITY
PO. TO EA.
INTEREST
PMT. DATE
(3) FOR
(a) FROM
HALF-YEAR EACH
PD. PRE- INTEREST
CEDING
PMT. DATE
INTEREST TO FIRST
PAYMENT
EXTENDED
DATE
MATURITY
PERCENT
6.00
6,00
6,00
6,00
6,00
6.00
6,00
6,00
6,00
6.00
6,00
6,00
6,00
6,00
6.00
6,00
6,00
6,00
6,00
3/ 6,00
PERCENT
6.00
6,00
6,00
6,00
6.O0
6.00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
6,00
PERCENT
6,00
6,00
6,00
6,00
6,00
6.00
6,00
6.00
6.00
6,00
6,00
6,00
6,00
6,00
6,00
6.00
6,00
6,00
6.00
m
X
X
55
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••••'
)
! / MONTH, OA) ikNl YEAR ON ICHICH INTEREST CHEC" 'l"pAYABLE'0N'l8SUEr0F''0ECn I'l967r'F0R SUBSEQUENT' ISSUE
_
r
MONTHS ADD APPROPRIATE NUMBER OF MONTHS.
2/ EXTENDED MATURITY REACHED AT 20 YEARS AND 0 M Q N T H S AFTER ISSUE DATE,
f/ Y I E L D O N PURCHASE PRICE FROM ISSUE DATE TO EXTENDED MATURITY IS 5,5lX,
* FOR EARLIER I N T F W E S T CHECKS AND YIELDS SEE APPROPRIATE TABLE IN DEPARTMENT CIRCULAIR 905, 6TH REVISION, AS
AMENDED AND SUPPLEMENTED,
*• THIS TABLE DOES N Q T APPLY IF THE PREVAILING RATE FOR SERIES H BONDS BEING ISSUED AT THE TIME THE EXTENSION
BEGINS IS OIFFEPF.NT FROM 6,00 PERCENT.
*
to
326
1976 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 11.—Department Circular No. 418, Second Revision, September 29, 1976, issue
and sale of Treasury bills
DEPARTMENT OF THE TREASURY,
Washington, September 29, 1976.
The Department of the Treasury announces the revision of Department Circular No. 418,
revised, as amended. This revision effects two additions to the current circular, as amended.
The additions are: first, the provision that Treasury Bills will be issued in denominations
(maturity value) of $10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000 and
second, that tenders for such Treasury Bills will also be accepted at, and the Treasury Bills
issued directly from, the Department of the Treasury, Bureau of the Public Debt,
Washington, D.C. 20226. The new regulations are set forth at the end of this notice. Because
the fiscal policy of the United States is involved, it is found unnecessary to issue these
regulations with notice and public procedure thereon under 5 U.S.C. 553(b) or subject to
the effective date limitation of 5 U.S.C. 553(d).
This second revision is effected under the following authority: 80 Stat. 379; sec. 8, 50 Stat.
481, as amended; sec. 5, 40 Stat. 290, as amended; 5 U.S.C. 301; 31 U.S.C. 738a, 754.
DAVID MOSSO,
Fiscal Assistant Secretary.
This revision of Department Circular No. 418 becomes effective on October 1, 1976.
Sec. 309.1 Authority for issue and sale.—The Secretary of the Treasury is authorized by
the Second Liberty Bond Act, as amended, to issue Treasury bills of the United States on
an interest-bearing basis, on a discount basis, or on a combination interest-bearing and
discount basis, at such price or prices ahd with interest computed in such manner and payable
at such time or times as he may prescribe; and to fix the form, terms, and conditions thereof,
and to offer them for sale on a competitive or other basis, under such regulations and upon
such terms and conditions as he may prescribe. Pursuant to said authorization, the Secretary
of the Treasury may, from time to time, by public notice, offer Treasury bills for sale, and
invite tenders therefor, through the Federal Reserve Banks and Branches and through the
Department ofthe Treasury, Bureau ofthe Public Debt. The Treasury bills so offered, and
the tenders made, will be subject to the terms and conditions and to the general rules and
regulations herein set forth, except as they may be modified in the public notices issued by
the Secretary of the Treasury in connection with particular offerings, i
309.2 Description of Treasury bills (General).—Treasury bills are bearer obligations ofthe
United States promising to pay a specified amount on a specified date. They will be payable
at maturity upon presentation to the Bureau of the Public Debt, Washington, D.C. 20226,
or to any Federal Reserve Bank or Branch. Treasury bills are issued only by Federal Reserve
Banks and Branches and the Bureau ofthe Public Debt pursuant to tenders accepted by the
Secretary of the Treasury, and shall not be valid unless the issue date and the maturity date
are entered thereon. Treasury bills bearing the same issue date and the same maturity date
shall constitute a series.
309.3 Denominations and exchange.—Treasury bills will be issued in denominations
(maturity value) of $10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000.
Exchanges from higher to lower and lower to higher denominations of the same series
(bearing the same issue and maturity dates) will be permitted at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D.C. 20226. Insofar as
applicable, the general regulations of the Treasury Department governing transactions in
bonds and notes will govern transactions in Treasury bills.
309.4 Taxation.—The income derived from Treasury bills, whether interest or gain from
the sale or other disposition of the bills, shall not have any exemption, as such, and loss from
the sale or other disposition of Treasury bills shall not have any special treatment, as such,
under the Internal Revenue Code, or laws amendatory or supplementary thereto. The bills
shall be subject to estate, inheritance, gift or other excise taxes, whether Federal or State,
but shall be exempt from all taxation now or hereafter imposed on the principal or interest
thereof by any State, or any of the possessions of the United States, or by any local taxing
authority. For purposes of taxation the amount of discount at which Treasury bills are
originally sold by the United States shall be considered to be interest.
309.5 Acceptance of Treasury bills for various purposes.
(a) Acceptable as security for public deposits.—Treasury bills will be acceptable at maturity
value to secure deposits of public monies.
1 Accordingly, these regulations do not constitute a specific offering of Treasury bills.
EXHIBITS
327
(b) Acceptable in payment of taxes.—The Secretary ofthe Treasurv, in his discretion, when
inviting tenders for Treasury bills, may provide that Treasury bills of any series will be
acceptable at maturity value, whether at or before maturity, under such rules and regulations
as he shall prescribe or approve, in payment of income taxes payable under the provisions
ofthe Internal Revenue Code. Treasury bills which by the terms of their issue are acceptable
in payment of income taxes may be surrendered to any Federal Reserve Bank or Branch,
acting as fiscal agent ofthe United States, or to the Bureau ofthe Public Debt, Washington,
D.C. 20226, fifteen days or less before the date on which the taxes become due.
(1) In the case of payments of corporation income taxes (including payments of
estimates) for taxable years ending on or after December 31, 1967, the bills shall be
accompanied by a pre-inscribed Form 503, Federal Tax Deposit, Corporation Income Taxes,
on which the face amount of the bills being surrendered should be entered in the space
provided for the amount ofthe tax deposit. The office receiving the bills and Form 503 will
acknowledge receipt of the bills to the owner corporation and effect the tax deposit on the
date on which the taxes become due. Accordingly, in these cases, it will no longer be
necessary to submit receipts for Treasury bills to the Internal Revenue Service with the
corporation's declaration or tax return.
(2) In the case of payments of all other income taxes the office receiving the bills will issue
receipts (in duplicate) to the owners. The original of the receipt shall be submitted, by the
owner, in lieu of the bills, together with the tax return, to the District Director, Internal
Revenue Service.
(c) Discounting by Federal Reserve Bank of notes secured by Treasury bills.—Notes secured
by Treasury bills are eligible for discount or rediscount at Federal Reserve Banks as provided
under the provisions of section 13 ofthe Federal Reserve Act, as are notes secured by bonds
and notes of the United States.
(d) Acceptable in connection withforeign obligations held hy United States.—Treasury bills
will be acceptable at maturity, but not before, in payment of interest or of principal on
account of obligations of foreign governments held by the United States.
309.6 Public notice of offering.—When Treasury bills are to be offered, tenders therefor
will be invited through public notice given by the Secretary of the Treasury. Such public
notices may be issued by the Secretary of the Treasury in the name of "the Treasury
Department" with the same force and effect as if issued in the name ofthe Secretary ofthe
Treasury. In such notice there will be set forth the amount of Treasury bills for which tenders
are then invited, the date of issue, the date or dates when such bills will become due and
payable, the date and closing hour for the receipt of tenders at the Federal Reserve Banks
and Branches and at the Bureau ofthe Public Debt, Washington, D.C. 20226,and the date
on which payment for accepted tenders must be made or completed.
309.7 Tenders; submission through Federal Reserve Banks and Branches and to the Bureau
ofthe Public Debt.—Tenders in response to any such public notice will be received at the
Federal Reserve Banks, or Branches thereof and at the Bureau of the Public Debt,
Washington, D.C. 20226, and unless received before the time fixed for closing will be
disregarded. Each tender must be for a minimum amount of $ 10,000. Tenders over $ 10,000
must be in multiples of $5,000 (maturity value). In the case of competitive tenders the price
or prices offered by the bidder for the amount or amounts (at maturity value) applied for
must be stated, and must be expressed on the basis of 100, with not more than three decimals,
e.g., 99.925. Fractions may not be used.
309.8 Tenders; when cash deposit is required.—Tenders should be submitted on the printed
forms and forwarded in the special envelopes which will be supplied on application to any
Federal Reserve Bank, or Branch or to the Bureau of the Public Debt, Washington, D.C.
20226. If a special envelope is not available, the inscription ''Tenderfor Treasury Bills'' should
be placed on the envelope used. The instructions set forth in the public notice announcing
the offering should be observed with respect to the submission of tenders. Banking
institutions generally may submit tenders for account of customers provided the names of
the customers are set forth in such tenders. Others, than banking institutions, will not be
permitted to submit tenders except for their own account. Tenders from incorporated banks
and trust companies, and from responsible and recognized dealers in investment securities
will be received without deposit. Tenders from all others must be accompanied by a payment
of such percent of the face amount of the Treasury bills applied for as the Secretary of the
Treasury may from time to time prescribe: Provided, however, that such deposit will not be
required if the tender is accompanied by an express guaranty of payment in full by an
incorporated bank or trust company. Forfeiture ofthe prescribed payment may be declared
by the Secretary ofthe Treasury, if payment is not completed, in the case of accepted tenders,
on the prescribed date.
309.9 Tenders; acceptance hy the Secretary ofthe Treasury.—Ai the time fixed for closing,
as specified in the public notice, all tenders received by the,Federal Reserve Banks and
Branches and by the Bureau ofthe Public Debt will be opened. The Secretary ofthe Treasury
will determine the acceptable prices offered and will make public announcement thereof.
328
1976 REPORT OF THE SECRETARY OF THE TREASURY
Those submitting t e n d e r s will be advised of the a c c e p t a n c e or rejection thereof, and p a y m e n t
on a c c e p t e d t e n d e r s must be m a d e or c o m p l e t e d on the date specified in the public notice.
3 0 9 . 1 0 Tenders; reservation of right to reject.—In considering the a c c e p t a n c e of t e n d e r s ,
the highest prices offered will be a c c e p t e d in full d o w n to the a m o u n t required, and if the
same price a p p e a r s in two or m o r e t e n d e r s and it is necessary to a c c e p t only a part of the
a m o u n t offered at such price, the a m o u n t a c c e p t e d at such price will be p r o r a t e d in
a c c o r d a n c e with the respective a m o u n t s applied for. However, the Secretary o f t h e Treasury
expressly reserves the right on any occasion to a c c e p t non-competitive t e n d e r s e n t e r e d in
a c c o r d a n c e with specific offerings, to reject any or all t e n d e r s or parts of t e n d e r s , and to
award less t h a n the a m o u n t applied for; and any action he may take in any such respect or
respects shall be final.
309.11 Tenders; payment of accepted tenders.—Settlement for a c c e p t e d tenders in
a c c o r d a n c e with the bids must be m a d e or c o m p l e t e d at the a p p r o p r i a t e Federal Reserve
Bank or Branch or at the Bureau of the Public Debt in cash or o t h e r immediately available
funds on or before the d a t e specified, e x c e p t that the Secretary of the T r e a s u r y , in his
discretion, w h e n inviting t e n d e r s for T r e a s u r y bills, may provide: ( a ) that any qualified
depositary may m a k e such s e t t l e m e n t by credit, on behalf of itself and its c u s t o m e r s , up to
any a m o u n t for which it shall be qualified in excess of existing deposits, w h e n so notified by
the Federal Reserve Bank of its District or ( b ) that such s e t t l e m e n t may be m a d e in maturing
T r e a s u r y bills a c c e p t e d in e x c h a n g e . W h e n e v e r the Secretary provides for settlement in
m a t u r i n g T r e a s u r y bills, cash adjustments will be m a d e for differences between the par value
of the m a t u r i n g bills and the issue price of the new bills.
309.12 Relief on account of loss, theft or destruction, e t c . — ( a ) Relief on a c c o u n t of the
loss, theft, d e s t r u c t i o n , mutilation or d e f a c e m e n t of Treasury bills may be given only u n d e r
the authority of, and subject to the conditions set forth in section 8.of the Act of July 8, 1937
( 5 0 Stat. 4 8 1 ) , as a m e n d e d (31 U.S.C. 7 3 8 a ) and the regulations p u r s u a n t t h e r e t o in
T r e a s u r y D e p a r t m e n t Circular No. 300 insofar as applicable.
( b ) In case of the loss, theft, d e s t r u c t i o n , mutilation or d e f a c e m e n t of Treasury bills,
i m m e d i a t e advice, with a full description of the bill or bills involved, should be sent to the
Bureau of the Public Debt, Division of Securities O p e r a t i o n s , D e p a r t m e n t of the Treasury,
W a s h i n g t o n , D.C. 2 0 2 2 6 , either direct or t h r o u g h any Federal Reserve Bank or Branch, and,
if relief u n d e r the statutes may be given, instructions and necessary blank forms will be
furnished.
3 0 9 . 1 3 Functions of Federal Reserve Banks.—Federal Reserve Banks and Branches, as
fiscal agents o f t h e United States, are a u t h o r i z e d to perform all such acts as may be necessary
to carry o u t the provisions of this circular and of any public notice or notices issued in
c o n n e c t i o n with any offering of T r e a s u r y bills.
3 0 9 . 1 4 Reservation as to terms of circular.—The Secretary of the Treasury reserves the
right further to a m e n d , s u p p l e m e n t , revise or withdraw all or any of the provisions of this
circular at any time, or from time to time.
Exhibit 12.—An act to increase the t e m p o r a r y debt limitation until M a r c h 15, 1976
(Public L a w 94—132,94th C o n g r e s s , H.R. 10585, N o v e m b e r 14, 1975]
Puhlic debt limit.
Temporary
sTu^s.C. 757h
note.
'
Repeal: effective
3 r u s c 757b
note:
'
Ann-, p. 246.
Be it enacted hy the Senate and House of Representatives of the United
States o f .America in Congress assemhled, T h a t during the period beginning
*^" ^^^ ^^^^ of ^he e n a c t m e n t of this Act and ending on M a r c h 15, 1976,
the public d e b t limit set forth in the first s e n t e n c e of section 21 of the
Second Liberty Bond Act (31 U.S.C. 7 5 7 b ) shall be temporarily increased
by $ 1 9 5 , 0 0 0 , 0 0 0 , 0 0 0 .
S E C . 2. Effective on the d a t e of the e n a c t m e n t of this Act, the first
section of the Act of J u n e 30, 1975, entitled ' ' A n Act to increa.se the
t e m p o r a r y d e b t limitation until N o v e m b e r 15, 1 9 7 5 ' ' ( P u b l i c Law 9 4 - 4 7 ) ,
is hereby repealed.
EXHIBITS
329
Exhibit 13.—An act to increase the temporary debt limit, and for other purposes
(Public Law 94-232, 94th Congress, H.R. 1 1893, March 15, 19761
Public debt limit.
Temporary
increase.
31 U.S.C. 757h
note.
Repeal: effectiv(
date.
31 U.S.C. 757h
note.
89 Slat. 693.
U.S. savings bonds,
inierest rate.
Be it enacted hy the Senate and House of Representatives of the United
States of America in Congress assemhled. That during the period beginning
on the date of the enactment of this Act and ending on June 30, 1976, the
public debt limit set forth in the first sentence of section 21 of the Second
Liberty Bond Act (31 U.S.C. 757b) shall be temporarily increased by
$227,000,000,000.
SEC. 2. Effective on the date of the enactment of this Act, the first
section ofthe Act of November 14, 1975, entitled "An Act to increase the
temporary debt limitation until March 15, 1976" (Public Law 94-132), is
hereby repealed.
SEC. 3. (a) The last sentence ofthe second paragraph ofthe first section
ofthe Second Liberty Bond Act (3 I U.S.C. 752) is amended by striking out
"$10,000,000,000'' and inserting in lieu thereof "$ 12,000,000,000".
(b) Section 18(a) of the Second Liberty Bond Act (3 1 U.S.C. 753) is
amended by striking out "seven years" and inserting in lieu thereof "ten
years".
SEC. 4. Section 22(b)(1) ofthe Second Liberty Bond Act (31 U.S.C.
757c(b) ) is amended by adding at the end thereof the following new
sentence: "The investment yield on series E savings bonds shall in no case
be less than 4 per centum per annum compounded semiannually for the
period beginning on the first day of the calendar month following the date
of issuance (or, beginning on October 1, 1976, if later) and ending on the
last day of the calendar month preceding the date of redemption".
Exhibit 14.— An act to increase the temporary debt limit, and for other purposes
[Public Law 94—334,94th Congress, H.R. 14114, June 30, 1976]
Public debt limit.
Temporary
increase.
31 U.S.C. 757b
note.
Be it enacted hy the Senate and House of Representatives of the United
States of America in Congress assemhled. That the public debt limit set forth
in the first sentence of section 21 of the Second Liberty Bond Act (31
U.S.C. 757b) shall be temporarily increased as follows:
(1) for the period beginning on July 1, 1976, and ending on
September 30, 1976, by $236,000,000,000,
(2) for the period beginning on October 1, 1976, and ending on
March 31, 1977, by $282,000,000,000, and
(3) for the period beginning on April 1, 1977, and ending on
September 30, 1977, by $300,000,000,000.
SEC. 2. The last sentence of the second paragraph of the first section of
the Second Liberty Bond Act (3 1 U.S.C. 752) is amended by striking out
"$12,000,000,000" and inserting in lieu thereof "S 17,000,000,000".
330
1976 REPORT OF THE SECRETARY OF THE TREASURY
Capital Markets and Debt Management
Exhibit 15.—Statement of Secretary Simon, October 30, 1975, before the Subcommittee on
Economic Stabilization of the House Committee on Banking, Currency and Housing, on the
financial plight of New York City
I appreciate the opportunity to appear before you on this subject of utmost importance.
I must commend the members of the subcommittee for the extremely responsible way in
which you have conducted these proceedings. In my 3 years in Washington I cannot recaU
a more extensive exploration of issues. You have wisely provided the opportunity for
presentation of a wide variety of points of view on these difficult and exceedingly important
matters.
As the committee is aware, these proceedings parallel proceedings now taking place in
your counterpart committee in the Senate. They too have been conducting their proceedings
with due regard for the importance of the issues involved. In that connection, I have been
particularly struck by the comments, on separate occasions, of two members of the Senate
Banking Committee, Senator Edward Brooke of Massachusetts and Senator Joseph Biden
of Delaware. In urging that the Senate act with well-considered prudence, both of them aptly
characterized this decision as perhaps the most important one facing the U.S. Congress since
the Gulf of Tonkin resolution in 1965. I agree.
The issue facing the Congress today is not simply whether to avert default of New York
City. To be sure, if Congress enacts legislation providing Federal financial assistance in
amounts sufficient to meet debt service on the city's outstanding obligations, default will be
averted. But in the final analysis, the issue presented has far broader implications: Namely,
whether our system of financing State and local government credit needs—a system which
has served this country well for more than a century—will be replaced by a system of Federal
financing and by Federal control of fiscal and financial decisionmaking at the State and local
level.
We can talk all we want about strict guidelines, about narrow drafted legislation, about
the importance of meeting an immediate need. But the fact remains that Congress, as
representative ofthe American people, is imbued with an overriding sense of fairness. And
what Congress is prepared to do for one city it must be and will be prepared to do for all
other units of government in the United States.
There are things that must be done and that can be done at all levels of government with
respect to New York City's financial crisis. I have outlined such a program in the past and
I will reiterate it in my testimony before the committee today. Before turning to that,
however, I want to highlight a point which I believe to be of paramount importance. I have
often said that there are two risks presented by a default: The financial and the psychological.
I have often expressed the view that the financial risk can be managed, and recent events
support that position. But at the same time, I have been equally candid about our inability
to measure the psychological impact and about our concerns that dire predictions and
vigorous rhetoric may compound whatever psychological risks do in fact exist.
Let's look at some of the language which has dominated the debate in both Houses of
Congress: "Federal money or Federal troops"; "Catastrophe"; "New York City will go down
the drain"; "Too horrible to imagine"; "Major banks will be insolvent." Is there any
justification for this phraseology? Can Congress make a decision of this importance, of such
far-reaching implications, largely in reliance on this type of analysis? Of course not. Congress
and the American people are entitled to the facts, if any, underlying such reasoning. We must
consider these issues on the basis of facts and not on the basis of buzz words and rhetoric.
At the same time, it is clear to all that the issue must be resolved promptly; that this crisis
has already persisted too long. As I have said before, continued delay and uncertainty
increases the psychological risk and may cause the consequences to be more severe.
Certainly the potential impact today, or in 6 weeks, will be greater than if the matter had
been resolved 3 months ago. If New York City had provided for an orderly restructuring of
its debt at that time, we would not be facing the same concerns we face today.
A recent experience provides a factual basis for evaluating our judgments—and I must
emphasize that they are judgments—concerning the impact of a default by New York City.
On Friday, October 17, at 9 a.m., $453 million of New York City's short-term notes became
due and payable. At that time. New York City had insufficient funds to satisfy these
obligations., Moreover, many observers believed that it was quite unlikely that New York City
would obtain such funds by the time the banks closed that afternoon. Indeed, even New York
officials advised the President ofthe imminence of default. While New York City ultimately
did obtain the funds, what happened that day is a good measure of how our financial markets
respond to financial reversals and how the people of the city of New York function under
such circumstances.
EXHIBITS
331
Let's look at some professional surveys of the marketplace on that fateful Friday:
Moody's Bond Survey: "The possibility of a New York City note default last Friday led
to brief unsettlement in tax-exempts. Other market sectors, however, showed little
reaction."
Chase Manhattan Bank Money Market Report: "On Friday, doubt over the timely
payment of maturing New York City notes led to some price erosion, but there is still
substantial improvements over the week."
Business Week: "New York barely escaped default today, but the municipal bond market
held essentially firm. This casts some light on the favorite question of bond market
analysts: To what extent do the current levels of municipal bond prices already
discount default? Alan H. Meltzer of Carnegie-Mellon University thinks that Friday's
bond market supports the view that Federal assistance is unnecessary, if the concern
is the financial market."
John Nuveen & Co.: "It is refreshing to note that the market was not totally mesmerized
by New York City's problems, but in fact, reacting to events within the money
market."
Smith Barney <c Co.: "The key element near term is certainly the New York City
S
situation. One view assumes financial catastrophe; the other that the market has
discounted most of the problems. We lean toward the latter view."
These are the views of professionals. But what were the people told? The following day,
Saturday, October 18, banner headlines in the New York Times reported "Financial Markets
Disrupted" and a front-page story characterized market behavior as "alternately sluggish and
chaotic * * * a taste of what default by New York City might mean."
For those who turned to the financial pages, a very different picture emerged. In light
trading, the stock market declined some 10 points during the period of uncertainty in the
morning, recovered on the news that default had been averted, and then fell back 6 points
for the day. Hardly disruption. But the damage had been done. Although the Wall Street
Journal and others later took the Times to task, a further erosion of public confidence had
taken place. When will our leaders recognize that extreme and unsupportable rhetoric can
only increase the risks?
I don't believe there is sufficient recognition of the extraordinary performance of the
municipal market over the past 9 months. In the third quarter alone. State and local
governments raised $ 13.7 billion in bonds and notes to bring the 9-month total to $45 billion.
By contrast, only 5 years ago, in the third quarter of 1970, $8.6 billion was raised. And last
week the municipal market continued its vigorous rally. States and cities from throughout
the country raised substantial amounts of money at lower interest rates, in some cases
significantly lower, than those which have prevailed over the last 2 months.
Three months to the day after it paid nearly 6 percent for a loan, Maryland borrowed $85
million at 5.3 percent. Is New York City dragging the municipal bond market down? I hardly
think so. If I may draw an analogy to Gresham's law, bad bonds don't make good bonds bad;
they make good bonds better, as Maryland and other well-run communities have recently
found out.
For the record I shall submit detailed evaluations of activity in the municipal bond market.
These evaluations clearly belie the contention so ohen heard in this committee and elsewhere
in the Halls of Congress that somehow the New York City financial crisis is responsible for
devastating the municipal bond market. Nothing could be more incorrect. But I must point
out again, the psychological risks cannot be dismissed. Uncertainty can have a very disruptive
effect on markets: An early resolution of this matter remains of utmost importance.
In order for this committee to evaluate the need for legislation, I would urge that you
concentrate on several basic questions. What \yould be the impact on our financial markets
if the city is unable to pay its noteholders oh time? What impact would it have on the ability
of the city to provide essential services?
At the same time, the committee must ask itself what the price will be for Federal
assistance. What is the price the American people will have to pay in terms of higher
borrowing costs for all borrowers? What is the price our economy will pay if more marginal
borrowers are crowded out of our capital markets? And what is the price our society will pay
if the Federal Government takes over the fiscal and financial decisionmaking process at the
State and local level?
In asking if the Federal Government should act to prevent default through financial
assistance, all these questions must be addressed.
Condition of New York State and its agencies
Many times in recent days this conimittee has been told that Cbngress must act to prevent
default by New York City because ifit fails to act, New York State and its agencies will also
default. But to my knowledge, none of the witnesses who have testified in this matter have
332
1976 REPORT OF THE SECRETARY OF THE TREASURY
advised the Congress or anyone else as to why such an event will in fact occur. Each of the
agencies ofthe State are separate and distinct and, ultimately, each will be judged on its own
merits.
It is clear to all of us that the State must act and must act promptly to improve the credit
of certain of its agencies. With respect to the New York State Housing Finance Agency, the
financial community has acted most responsibly in analyzing this agency's financing and in
presenting a proposal designed to remedy some of its difficulties. We urge the State to act
promptly on these proposals.
With respect to the State itself, the current official estimate ofthe State's deficit for the
fiscal year ending March 31, 1976, is $611 million. New York State should act to reduce that
deficit.
The financial difficulties of New York State and its agencies cannot be attributed entirely
to New York City. More importantly, a resolution ofthe financial situation in New York City
through congressional action or otherwise will not cure those financial difficulties.
Responsible action must be taken at the State level to prevent an extension of the financial
crisis to the State and its agencies.
Again, I must emphasize that we must not be misled by dire predictions and vigorous
rhetoric. Our views as to the financial risk notwithstanding, the psychological risk remains
a serious concern. The only meaningful solution to the financial crisis which now exists is
responsible action at appropriate governmental levels.
Building a bridge to the capital markets
All levels of government, and the private sector as well, share the responsibility for
developing a workable program that will restore New York City's access, and that ofthe State
as well, to the capital markets. What must be done is to build a solid bridge, span by span,
over which New York City can return to the private capital markets. In my view, such a
program should involve the following elements:
First, and foremost. New York City must implement a credible balanced budget plan which
provides for the prompt elimination of budget deficits. The institutional framework is now
in place, and the Emergency Financial Control Board and the new deputy mayor appear to
be operating in concert, devoting all of their resources to implement the fiscal policies
necessary to return the city to the market. The plan adopted October 15 represents a very
constructive step. It attacks many of the major concerns: Payroll levels will be cut, operating
expenses are being removed from the capital budget, capital expenditures are being reduced.
At this point, however, there is no clear guidance in other important areas: Levels of health
services, employee benefit and retirement programs, the City University. All of these areas
must be dealt with if New York City is to be on a sound financial footing.
Expenditure reductions must be accompanied by a continued realinement of the city's
management to insure that the tough decisions which have to be made will continue to be
made. Until investors are convinced that New York City's management is in control ofthe
city's financial future, there can be no market.
Second, during the period of transition to balanced budget operations, the State should
provide New York City with a temporary source of additional revenues to meet cash-flow
requirements in the interim period. It appears that through the end of this fiscal year. New
York City's expenditures not including debt service will exceed its revenues by approximately
$700 million, according to figures supplied by the city. In addition, New York City will have
a peak seasonal cash need amounting to $1.3 billion during the December-March period.
Resources are available to meet these needs. For example, New York State could impose
an emergency and temporary tax, perhaps a 3-year increase in the State sales tax on a slidingscale 3-percent, 2-percent, 1-percent basis. As the situation improves, these funds can be
repaid by New York City. At that point all the people ofthe State could benefit as repayment
by the city would allow a reduction in tax rates to below existing levels.
Alternatively, the city could borrow such funds, with the loans collateralized by assets in
employee pension funds.
Let me be clear, I am not suggesting that such methods are the only possibilities. New York
State has vast financial resources and there are many potential sources ofthe necessary funds.
But to those who would say that all resources have been exhausted, these are only two
examples of what could be done.
Third, there must be an orderly proceeding for the restructuring of New York City's debt.
As the President announced yesterday, the administration is sending up legislation
establishing procedures under which large cities could seek the assistance ofa Federal court
in restructuring their financial obligations. The legislation provides that cities with
populations exceeding 1 million, having the express approval of the State, may petition for
court enforcement of a plan to reschedule payments to creditors. Such a petition must be
accompanied by an expenditure reduction plan to return the city to a sound fiscal basis.
Within the context of such a proceeding, holders of short-term securities will be required
EXHIBITS
333
to extend maturities for a reasonable period. In addition, only if necessary, the city's
bondholders may be asked to agree to a moratorium on debt service payments for a period
of time.
The legislation announced by the President also authorizes the city to issue new certificates
of indebtedness if—and this is important—the court approves. These certificates could be
granted priority rights to the city's revenue stream and may provide an alternative means of
dealing with the cash-flow problem I discussed a few moments ago.
Once the threshold of budgetary control has been crossed, these actions can provide the
bridge to return New York City to the capital markets. But any comprehensive program of
reform must deal with longer range concerns as well. We in the Federal Government have
a clear responsibility with respect to this part of the process.
As a fourth part ofthe program, the Federal Government must accelerate a comprehensive
reexamination of all Federal, State, and local relationships. We must determine whether the
priorities, practices, and procedures ofthe past in all areas—welfare, housing, food stamps,
medical assistance, and the like—are consistent with the needs ofthe last quarter ofthe 2()th
century.
Specifically, we should review once again our administrative machinery and make
whatever changes are necessary to provide State and local governments the full benefits they
are entitled to under existing law.
But a comprehensive response requires more action as well. If we determine that large
cities and populous States are unfairly disadvantaged under existing formulae or programs,
we should consider corrective legislation, if necessary, to remedy whatever imbalances exist.
We must ask whether our assistance programs fulfill their intended purpose, or whether
they help people they were not designed to help. Have our programs grown so cumbersome,
so abuse-prone, that they are fast losing their base ofpublic support? If so, and if fewer funds
are therefore available to help the really needy, the ones who get hurt are the poor
themselves.
Fifth, we must propose structural improvements in the municipal bond market. In
proposing these changes, we will not have lost sight of the fact that even in these unsettled
times the municipal market has served State and local government well.
During September alone, for example. State and local government raised nearly $4.5
billion in tax-exempt bonds and notes, a truly extraordinary performance. And, as shown in
a recent Salomon Bros, study, which I shall submit for the record, such funds were raised
at a cost not disproportionate to historical levels.
Traditionally, yields on tax-exempt securities have been, on the average, 30 percent lower
than taxable yields. Yield spreads will vary according to quality, maturity, call protection,
monetary conditions, and similar factors. Moreover, yields will also vary within rating
categories. For example, largely because ofthe substantial volume of debt outstanding, yields
on New York City securities were significantly higher than yields on comparably rated
securities of other issuers. The Salomon Bros, study shows that in September, the spread
between prime municipals and comparable quality utility issues was squarely on the 30percent figure.
While the market has performed well, improvements can be made. In recent years an
imbalance between supply and demand has developed. Tax-exempt borrowing is at
unprecedented levels: Nearly $45 billion ofbonds and notes in the first 9 months df this year
alone. But the growth in demand, especially from institutions, has not kept pace. Casualty
companies, always large buyers, have had their need for tax-exempt income reduced. And
commercial banks, traditionally the largest purchasers of tax-exempts, have cut back their
participation substantially, reflecting reduced taxable income as a result of loan losses,
leasing activities, and foreign tax credits. In 1969, commercial banks were net purchasers
of municipals in an amount equal to 97 percent of new issue volume. For the first 6 months
of this year, their net purchases dropped to 12 percent of new issue volume.
In addition, also as a consequence of these specialized sources of demand, yields in the
tax-exempt market tend to rise disproportionately during periods of tight money as banks
are forced to commit their limited credit resources to their commercial customers.
Accordingly, to broaden the market, and to effect a reduction in the volume of tax-exempt
debt. State and local governments should be afforded the option of issuing debt on a taxable
basis, with an appropriate interest subsidy from the Federal Government. Also, tax-exempt
debt now issued for nongovernmental purposes—pollution control and industrial development bonds—should be issued only on a fully taxable basis, again with appropriate interest
subsidies. According to our calculations, these changes should result in a substantial benefit
to State and local governments in the form of a broader market for their securities, which
could result in lower borrowing costs at little, if any, expense to the Federal Treasury.
Lastly, partially in recognition ofthe growing participation ofthe smaller investor in the
State and local bond market, we believe the time has come for a federally imposed uniform
system offinancial accounting and reporting by State and local issuers which sell a substantial
amount of securities in our capital markets.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Precipitated by major financial reversals such as the Penn Central bankruptcy, there has
been a marked increase in the tendency of investors to restrict themselves to higher grade
instruments—a "flight to quality" to use the terminology ofthe market. We must satisfy this
legitimate interest of the investing public in detailed, accurate, and comparable data by
requiring complete and accurate disclosure. Such a system of disclosure has helped make
our corporate markets the finest in the world. The time has come to extend it to the municipal
market as well.
In my view, it is these steps which Congress and the Nation must focus upon in dealing
with New York City's financial crisis:
•
A sound fiscal policy administered by a realined management, and including a
credible balanced budget;
•
A temporary increaise in State assistance;
•
An orderly mechanism for debt restructuring, with the financial community and
investors participating in the bridge back to the capital markets;
•
A comprehensive reexamination of Federal, State, and local relationships;
•
A broader market for municipal securities; and
•
A uniform financial disclosure system for State and local government.
This is.a program designed to attack the causes of the problem at their roots. Unlike the
legislative proposals before us today, it is far more likely to return our greatest city to a totally
sound fiscal basis.
Proposed legislation
The legislative approaches before us have a single overriding objective: To prevent default
by providing Federal financial assistance in amounts equal to the city's cash needs for
operations, capital expenditures, and debt service. And each is subject to the same general
concerns.
First, any such assistance would involve further expansion of already enormous Federal
credit demands, driving up Federal borrowing costs even higher. Because the borrowing costs
of all other issuers would rise as well, all Americans would pay the price in the form of higher
interest rates, more expensive mortgages, and higher prices for goods and services.
Second, the discipline ofthe market would be lost. Spending would be constrained not by
the desire to avoid higher borrowing costs or the loss of credit, but through pervasive Federal
fiscal and financial control of local government. As for the principle of home rule that is so
fundamental to our system of government in the United States, I would only note that any
entity that gives up its ability to make its own financial decisions has basically lost its power
to rule.
Guarantees and insurance
There is absolutely no difference between a guarantee program and an insurance program.
Either would involve a commitment by the Federal Governrhent to meet debt service
requirements in the event the issuer is unable or unwilling to make such payments out of its
own revenue sources. And once provided, a guarantee could not be withdrawn if, for
example, the issuer failed to meet the fiscal conditions of the program. The Govemment's
obligation under a guarantee program would be to the investor, not to the issuer.
Impact on capital markets
It has been stated altogether too often before this committee that New York City is not
asking for a bailout, that it is not even asking for a loan, but it is asking merely for a Federal
guarantee and that such a guarantee would not cost the American taxpayers one cent.
Nothing could be more incorrect.
No aspect of this debate troubles me more than the continuous suggestions that the solution
is free. Too often, the "free lunch syndrome" dominates decisionmaking at all levels of
society and government.. Well, ladies and gentlemen, let me say again—as I have many
times—there is no such thing as a free lunch.
I don't care how ingenious the disguise may be—call it a guarantee, insurance, reinsurance,
or what you will—the fact of the matter is that it is borrowing. And we will pay the price,
not only in the future, but right away.
Any expansion of Federal credit—including a federally guaranteed municipal bond—
would further strain our overburdened capital markets. Federal borrowing costs would rise
and, since our borrowing rate establishes a benchmark in the marketplace, the borrowing
costs 6f all other issues would rise as well. And if guaranteed bonds retained the tax-exempt
feature, the impact on unguaranteed municipal issuers would be especially direct and could
be severe.
Such inflationary forces would also enhance the flight to quality. Yield differentials
between the stronger and the weaker credits are at record highs: Recently the spread between
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A and Baa industrial bonds has been as high as 200 basis points, double the 1974 figures and
4 times greater than the 1971-73 average. Additional Federal credit in the market could
cause these spreads to widen further.
To repeat, for the American people these are the real costs that would be incurred with
a guarantee program: The cost of higher interest rates, higher mortgages, more expensive
products, and the like. Very high costs indeed.
Too often, when we concern ourselves with the problems of the municipal bond market
we tend to forget that this market is not entirely distinct, but is instead an integral part of
our capital market structure as a whole. And the same things that are happening in our capital
markets as a whole are happening in the municipal market. Higher rates, shorter maturities:
These are the concerns the Nation's mayors brought to the President and to the Joint
Economic Committee 2 weeks ago. But they misplaced the blame. The blame primarily lies
not with New York City, but with inflation, caused by massive continuing Federal deficits
and the substantial new Federal borrowing required to finance them. The proposals before
us today would only exacerbate these problems.
Fiscal restraint
Equally great are the potential costs imposed by these programs on fiscal and financial
decisionmaking at the State and local level. Like all borrowers, a State or local government's
access to credit depends upon its.ability to persuade potential lenders that its financial affairs
are such that the lender can reasonably expect to be repaid. A Federal guarantee would have
the effect of removing this element of concern on the part of the lender and thus have the
corresponding effect of removing the market-imposed restraints on the borrower.
The only effective substitute for the restraints of the marketplace would be direct Federal
control over the budgets of those local governments that participated in Federal guarantee
programs. While some have suggested the interposition of State control, I seriously doubt
whether it would provide a viable alternative. There would be little reason for a State agency
not to yield to the same pressures as a local government in the absence of discipline from
the market or from the Federal managers.
Federal control of fiscal and financial affairs at the local level presents grave practical and
philosophical difficulties. This is not a dispute between liberals and conservatives, but rather
simply a question of the right of citizens to be governed by their duly elected local leaders
rather than by Federal bureaucrats.
We would have to create a new bureaucracy simply to concoct and enforce the guidelines
as to local priorities we here in Washington would be imposing on the governments of the
Nation. We would be confronted with the sorry spectacle of duly elected local officials lining
up outside my door, attempting to persuade me that they were carrying out their
responsibilities in a satisfactory fashion. We would, in short, be contravening constitutionally
imposed principles of federalism—principles which lie at the heart of the structure of
government in this Nation.
Thousands, perhaps tens of thousands, of governments would resist this intrusion into local
affairs. And they would be absolutely right. But in the final analysis, theirs would be a
Hobson's choice: Submit to Federal control or pay the price of independence in the bond
markets.
Finally, there are those who say that New York City is a special case; that New York has
unique problems not faced by other cities. But let's look at the facts:
•
Median family income in New York City is just about at the national average;
•
The median income of minority families is nearly $2,000 higher than the national
average;
•
The percentage of the population on welfare is lower than that of Newark,
Philadelphia, Washington, Baltimore, or St. Louis.
New York's burden has come, not from caring for the poor, but from subsidizing the middle
class through massive municipal payrolls and fringe benefits, through free tuition at the City
University and similar programs.
Accordingly, to those who would say that New York is unique, that helping New York will
not obligate us to help other cities, I say we are already obligated. We are obligated to local
officials throughout the country who have risked their careers by insisting on fiscal restraint.
Would financing the deficits of New York City be consistent with our obligation to them?
And can we really draw the line at New York City? I doubt it. Assistance to one city would
create an intolerable precedent for the future.
None of us can assess with any degree of precision the contribution the division of
governmental authority called for by the Constitution has made to the quality of life in this
country. But I doubt our society would be as heterogeneous, as tolerant of diversity, as
responsive to local needs if all basic decisions were made here in Washington.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Comparison with existing programs
It is such considerations which plainly distinguish the pending bills from programs such
as FDIC or FHA insurance. It is altogether appropriate to require that all of the Nation's
banks be subject to the same operating standards and be subject to consistent and detailed
Federal supervision and regulation. It is equally appropriate that a citizen seeking the
assistance of the Federal Government in obtaining a mortgage disclose fully his financial
situation and open the property he or she desires to purchase to extensive Federal scrutiny.
Imposing uniform standards on State and local governments is plainly an entirely different
matter. Each political subdivision in this Nation has unique needs. And each is led by people
selected for the job by an electorate which believed that such people could best translate the
needs ofthe community into effective governmental decisions. Yet any program of financial
assistance would require bureaucrats in Washington to supervise these decisions and reverse
them if necessary, irrespective ofthe wishes ofthe local electorate. It is one thing to regulate
a corporation. Under our democratic system, it is quite another to supervise and control the
affairs of local governments.
In short. State and local government have a special status in our Federal system. The
proposals for Federal financial assistance now pending before this committee would, of
necessity, require that such special status be ended.
Unguaranteed participation
Chairman Reuss in this House and Chairman Proxmire in the Senate have proposed
legislation which would condition Federal assistance on private sector agreement to provide
a specified percentage ofthe aggregate financial need on an unguaranteed basis. In addition.
Senator Proxmire's measure would require the State to provide the city with substantial
additional revenues, through new taxes or other means. These proposals correctly recognize
that the prime beneficiaries of Federal action to prevent default are not the people of New
York City, but investors and politicians. Although the burden on the Federal Treasury would
be lessened somewhat under these proposals, all ofthe concerns I have just expressed apply
equally to these proposals.
Guarantees, insurance, loans—each of these proposals has serious implications for the
condition of our capital markets, would eliminate market restraints on spending at the State
and local level, and could erode the traditional autonomy of these levels ofgovernment over
their fiscal and financial affairs.
Impact of default
I have concentrated today on a variety of approaches to the financial situation in New York
City and New York State. I believe the approach I have suggested is desirable and workable.
I cannot support the approaches—guarantees and similar forms of assistance—suggested to
this committee. To complete the analysis, however, it is necessary to discuss the
consequences if none of the approaches is adopted.
Necessary concepts
To set the framework for my analysis ofthe impact of default, it is important to define some
relevant terms and concepts. I sense that the dialog concerning the issue has been hampered
by confusion over the meaning and import of certain key words. First, there is "insolvency"
which, simply stated, means that a person or a city has current obligations which exceed its
available funds. "Default" is a technical legal term describing a debtor's refusal or inability
to pay a creditor who has demanded payment. "Bankruptcy" describes a legal proceeding—
provided for in the Constitution—under which an insolvent party in default turns over to a
court the job of deciding how his financial resources will be apportioned among creditors.
In looking at default and bankruptcy, we should also draw a distinction between the options
available in the event of a corporate default and those available with respect to a municipal
default. If a corporation defaults and is subsequently brought under the jurisdiction of a
Federal bankruptcy court, one option—albeit often not the most desirable one—is
liquidation: The sale of assets to satisfy the claims of creditors and the subsequent
disappearance of the corporation as a continuing entity. Both common sense and
constitutional principles preclude such an option with respect to municipal defaults.
In this respect, a default by a State or local government is closely analogous to a default
by an individual person. In either case, if a bankruptcy proceeding ensues, resources essential
to the maintenance of life in the one case and essential services in the other are protected
from the demands of creditors.
It is important to reemphasize this point: If New York City defaulted, it would continue
to exist and to operate. Tax payments. Federal and State assistance payments, and other
sources of revenue would continue to flow. Indeed, the growth in New York City's tax
revenues continues to outpace virtually every other large city: The growth rates in Los
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Angeles, San Francisco, and Boston, for example, are substantially lower. Over the last 5
years alone, general fund and real estate taxes have increased from $4.6 billion to $7 billion.
While much of this new taxation may have been counterproductive by driving businesses and
residents out ofthe city, the fact remains that we cannot attribute New York City's difficulties
to an inability to generate revenues. And while there is a cash-flow shortage which must be
met, as the President indicated, services essential to life and property will be provided.
In short, it is essential not to confuse the legal and idiomatic meanings of the term
"bankruptcy." In common parlance, we may use bankruptcy to define a condition devoid
of substance or resources. By that definition. New York has not been, is not now, and will
not be bankrupt. However, a Federal debt restructuring proceeding is an appropriate solution
for dealing with New York City's creditors in an orderly way.
Analysis
My views on the impact of a potential default have not changed materially. I have always
believed that a default would be undesirable. I have always believed that a default should
be avoided by any appropriate means. But putting aside for a moment the desirability of
avoiding default, I cannot conclude that a default would devastate our financial markets or
our economy.
At the same time, I have often underscored the importance of psychological factors and
our inability to predict psychological reactions with any certainty. We have been carefully
monitoring the marketplace daily and have noted the developing psychological impact.
Restraint is of utmost importance: Dire predictions of impending doom could well become
self-fulfilling.
Today, the municipal market is proceeding along two tracks. On the one hand, the market
is in the midst of its most vigorous rally of the year. At the same time the doomsayers are
promising collapse as a consequence of the New York crisis, the market is going the other
way: Interest costs have dropped one-half percent in 3 weeks.
I remain deeply concerned, however, about the confidence factor. How long can we stand
the daily battering, the consistent misinformation generated by those who will stop at nothing
to obtain Federal assistance? While my overall views remain the same, there is little question
that such rhetoric will make the impact of default more severe than it otherwise would have
been.
My views on the overall question of the impact of default are fully expressed in my
testimony before the Joint Economic Committee and other committees and I do not need
to repeat them in detail here. I will submit all of my testimony on this subject for the record.
I do want to concentrate and expand upon one particular concern: The impact of a potential
default on the ability of other State and local governments to raise necessary funds in the
municipal market.
Earlier in my testimony, I noted that municipal governments are facing the same pressures
as all other borrowers: A diminishing supply of capital at higher and higher rate's caused
primarily by inflation and the growing Federal usurpation of the supply of credit in this
country. I mentioned that within the municipal market itself there are structural problems
which need to be addressed as State and local capital requirements grow faster than the
demand for tax-exempt securities. I have also noted that all investors are increasingly
sensitive to quality considerations and are demanding more and more evidence of financial
soundness. These phenomena will continue to play an important role in the market,
regardless of what happens to New York City.
Perhaps the most important factor in today's market is uncertainty, a psychological factor
which markets do not tolerate well. A number of intermediaries and investors are, we
understand, refusing to commit funds to the market—thus impairing the borrowing ability
of many State and local governments—until the New York City situation is resolved. New
York City's difficulties have been the major factor in the uncertainty and have intensified
investor concern with quality. But New York's financial crisis did not create the other
problems besetting the market, and an end to that crisis will not make them go away.
Markets have a tendency to discount future events and a potential New York City default
has been discounted to a significant degree in the form of higher yields and shifts in quality
preferences. If default actually occurs, a possible further shift in quality preferences could
influence the ability of credits which are perceived to be weak to raise funds in the capital
markets. By contrast, the stronger credits may well benefit as investors' preferences shift even
further in the direction of the higher grade issues.
Let's look at the way the municipal market has performed in the fact of a possible default
by New York City and in the face of all the uncertainty that possibility has engendered. As
I indicated earlier, many local governments throughout the country—including cities in the
Northeast and in New York State itself—have raised funds at reasonable rates. In the last
3 weeks alone, average yields in the municipal market—that is, the'borrowing costs of State
and local governments—have dropped a full one-half percentage point. And yields on the
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1976 REPORT OF THE SECRETARY OF THE TREASURY
higher grade securities of the better run issuers have dropped even further. All in all, the
market has performed extremely well.
It is such market performance that leads me to the judgment that a default by New York
City will not mean that other cities throughout the country will not have access to credit.
All cities are facing investor demands for more and better disclosure and a default by Ne\w
York City will not still those demands. But no other city has had a cumulative deficit like
New York City's and thus none must borrow simply to meet operating needs from year to
year. To the extent other cities must borrow within a fiscal year to deal with seasonal cashflow variations, I cannot conclude that a default will materially impair their ability to do so.
The market has and should continue to distinguish between cities which have the money to
pay their debts and those that do not. To repeat, bad bonds do not make good bonds bad;
they make good bonds better.
In asking ourselves what the impact of a default would be, we must also ask the corollary
question of what could be the impact of various mechanisms to avoid default. If, for example.
New York City were able to avoid default by implementation of the plan discussed at the
beginning of my testimony, I believe that the result would be a renewed sense of faith in the
ability of the State and local government sector and our financial institutions to deal with
even the most severe problems in a responsible manner.
If, on the other hand, default were to be avoided by a Federal assistance program, the
reaction could be more complex. If default were avoided only through the Federal
Government paying New York City's debts, it would not signify that New York City or any
other State or local government was able to carry out its financial obligations. Just the
contrary would be the case. Meanwhile, there could be far more incentive for State and local
governments to embark on more spending programs, irrespective of whether resources were
available to finance them. The discipline built into the present system would be lost.
And even if the assistance program were limited to New York City, its impact would be
felt throughout the country. Issuers and investors would come tb believe that every municipal
security—or certainly those of major borrowers—in effect carried the moral obligation of
the United States, even without a guarantee in advance. What the Federal Government would
do for New York, all would believe, it would necessarily do for any other jurisdiction which
became unable to meet its obligations.
But perceptive investors would recognize the fundamental change in our system of finance
and would see the risks presented. The inflationary expectations generated by the actual and
potential expansion of Federal credit involved would serve to accelerate some ofthe adverse
trends we have seen in the markets over the recent past. Investors would become even more
wary of long-term commitments and would demand even higher yields on the commitments
which are made. The ability of all sectors ofthe economy to finance investments in our future
growth could be further impaired.
This committee faces some difficult choices. The risks of a default, given the psychological
aspect, are, in the final analysis, unknown and unknowable. My own judgment—and I must
emphasize the highly subjective nature of any judgment in this area—is that such risks should
be manageable. Moreover, as I have indicated in my testimony today, the legislative proposals
present a series of concerns which outweigh the risks as I perceive them. I would urge the
committee to concentrate its resources and its influence on approaches to the problem which
will restore confidence in the fiscal and political integrity ofthe State and local governmental
sector.
Mr. Chairman, it has been more than 7 months since the market closed for the securities
of New York City. For this entire period, the citizens of the greatest city in the world—its
financial, industrial, and cultural hub—have lived from crisis to crisis. As one with deep
personal and professional ties to New York City, I have great compassion for the plight of
the citizens of New York and I share their determination to achieve a prompt and proper
end to the crisis.
Over this period much in the way of laudable progress has been made. An "untouchable"
expenditure increase for fiscal year 1975-76 was pared somewhat. The municipal payroll has
been reduced by some 31,000 employees. The cumbersome overlay of bureaucratic
structures has been partially reorganized and financial professionals are now playing an
increasingly important role in the affairs of the city.
If this degree of progress has been made, one may legitimately ask, why hasn't the market
reopened to the city? I am afraid the answer lies in timing. Each of these steps, while laudable
in and of itself, invariably came too late.
It is difficult to state precisely what actions would have reopened the market at any given
point in time. But it must be clear to all that what would have reopened the market in April
would ,no longer do the job in June. And what would have been adequate in June was
insufficient in August. In short, throughout these long and enervating months, events and
demands consistently outdistanced actions.
Another important point emerges from this troublesome history. There can be no doubt
that Federal financial assistance at any point along the way would have stopped the reform
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process dead in its tracks. We need only look at what occurred when MAC was created in
early June. For 6 weeks, virtually nothing in the way of reforms was accomplished. In late
June, the need to obtain legislative approval of the city's budget caused a brief flurry of
activity—announcements of layoffs, hospital and firehouse closings. But as the garbage piled
up over the Fourth of July weekend, most layoffs were rescinded, and the closing orders were
largely ignored.
It was not until it became clear that MAC would be unable to borrow in August that the
process of reform began anew. Each new deadline was faced with more strident demands
for Federal assistance. And, after such assistance was again refused, the city and the State
managed to take another hesitant, painful step in the right direction.
At the end of August, after nearly 6 months of crisis, the first meaningful data regarding
the city's finances was released. While subsequent events have revealed that even such data
was inaccurate and inadequate, at least a benchmark with which to measure the
accomplishments of the past and the challenges of the future had been established. Again
I asked the inevitable question: Would such actions have taken place if Federal assistance
had been promised or provided?
Much has been done, but much more needs to be done:
•
The plan for the prompt elimination of the budget deficit must be fully
implemented;
•
In that regard, the State must act to provide a temporary supplement to the city's
existing revenue base;
•
Capital expenditures must be reduced severely and operating expenses must be
fully eliminated from the capital budget;
•
New revenue sources must be explored. For example, the Environmental
Protection Agency has called for new and increased tolls on the city's bridges for
environmental reasons. Why not for revenue reasons as well?
•
The drain on city revenues from the City University must be halted, either through
State takeover or through reasonable tuition charges;
•
The health and hospitals program, with its massive payroll and 25 percent vacancy
rate, should be scaled down;
•
More economically sound standards for future pension benefits must be implemented;
•
The city's accounts must be fully conformed to acceptable accounting principles;
•
Reform of the city's management structure must be completed;
•
Steps must be taken to restructure the city's debt.
If these things are done, and the market does not reopen, is default the only solution? In
recent weeks and again today, I have expressed the view that the financial risks presented
by a default can be managed and, in such circumstances, the impact need only be temporary
and manageable. At the same time, I have been equally candid about our inability to measure
the psychological impact. Let me repeat once again: While the market has performed well
to date, it can only stand for so long the consistent battering^the dire predictions and
vigorous rhetoric—which the proponents of Federal assistance have brought to bear.
The time has come to concentrate all of our efforts on restoring our greatest city to fiscal
integrity. I have said many times that fiscal integrity is easy to lose and hard to recover. As
we proceed through this difficult period in our history, I can only hope that the travails of
New York City will have some impact on our attitudes as to the proper role of government
in our society. As the President said yesterday, what New York City has learned in the past
7 months is a valuable lesson for us all. As we proceed with legislative consideration of the
city's financial crisis, let us not ignore this important message.
Exhibit 16.— Statement by Under Secretary for Monetary Affairs Yeo, December 9, 1975,
before the Subcommittee on Securities of the Senate Committee on Banking, Housing, and
Urban Affairs, on the securities activities of commercial banks
Mr. Chairman and members of this distinguished committee, I am pleased to testify before
you today on behalf of the Treasury Department in connection with your study of securities
activities of commercial banks. The role of commercial banks in the securities markets has
attracted increasing attention in recent years. Spurred by changing economic conditions and
market forces, commercial banks have gradually expanded their financial services in the
securities field.
This expansion, of course, has been circumscribed by the boundaries of the Banking Act
of 1933, more popularly known as the Glass-Steagall Act, and has been inhibited in some
cases by uncertainty and confusion concerning the extent to which the act limits bank
securities activities. This is particularly true with respect to those activities which commercial
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1976 REPORT OF THE SECRETARY OF THE TREASURY
banks did not perform in 1933 and which Congress consequently did not contemplate when
enacting the Glass-Steagall Act restrictions. It seems clear that a thorough review of the
Glass-Steagall Act restrictions is desirable at this time. We should determine to what extent
the act's restrictions on bank entry into the securities business remain valid in light of changes
that have occurred in the economy, the banking industry, and government regulation of
banking and securities transactions since 1933.
As you are aware, the Capital Markets Working Group is conducting a review of these
matters. That review does not emphasize the legal aspects of current bank security activities.
Although these questions are important, in our view, the first priority should be to examine
each bank security activity to determine whether as a matter of public policy each is desirable
and should be permitted by law. Only after the determination is made that a bank security
activity be permitted, need the question of regulation be considered.
Our initial issues paper, titled "Public Policy Aspects of Bank Securities Activities" which
I will submit for the record [excerpt follows], Mr. Chairman, attempts to identify the various
puWic policy considerations that should be weighed in determining the proper scope of
commercial bank participation in the securities business. As our issues paper indicates, we
have avoided definite judgments on these questions because we believe that they would be
premature. Instead, the paper presents the potential advantages and disadvantages of each
activity for the purpose of eliciting comment and factual data that will enable us to reach
conclusions. I would like to summarize for this committee the major areas covered by the
study.
Public policy considerations
In assessing the desirability of bank participation in particular securities activities, the
foremost consideration should be the effect of such bank activities upon the long-term health
ofthe securities markets and their ability to meet the capital needs of American enterprise.
A second and perhaps equally important consideration is the effect that such bank activities
would have on the stability and integrity ofthe commercial banking system. This will require
an examination ofthe probable impact of these activities upon competition between various
segments of the financial community and an assessment of the likely benefits in terms of
increased efficiencies and lower costs in obtaining financial services. The broad ramifications
of increased economic concentration within the financial community must also be explored.
With respect to bank brokerage-oriented and money management activities, the effect on
the liquidity and efficiency of secondary markets is an important public policy consideration.
Finally, bank security activities must be analyzed in terms of their compatibility with sound
bank practices and their potential for creating conflicts of interest and other difficulties
within the commercial banking system.
Agency and brokerage-oriented services.—Commercial banks presently offer several agency
and brokerage-oriented services which provide customers with access to securities markets.
These services include the dividend reinvestment plans, automatic investment services, and
voluntary investment plans. In each of these services, the bank acts as a conduit between their
customers and the broker-dealer community by channeling the bank's customers' orders to
purchase or sell securities to a broker or dealer.
Bank sponsorship of these brokerage-oriented services has several advantages. First, these
services could increase competition within the brokerage business. Secondly, the introduction of these services could benefit investors and the capital markets by providing a
convenient and low-cost means of purchasing securities and thereby encouraging greater
participation by small individual investors in the securities markets.
However, the concentration of investment services within a relatively small number of
banks could lead to an overconcentration in investment in a few favored stocks, usually wellestablished issues, and in an allocation of investment funds away from smaller emerging
companies to larger established ones. Thus, bank investment services could reinforce
tendencies toward a tiered market.
Stated another way, the concern is that such concentration could harm market efficiency
by greatly reducing the diversity of investment opinions and the number of independent
investment decisionmakers in the marketplace. Financial market efficiency, as opposed to
efficiency in executing and clearing transactions, may well depend upon the maintenance of
a broad range of diverse viewpoints and decisionmakers in the market.
Money management activities.—Commercial banks have provided money management
services to individual customers on a fiduciary as well as agency basis. However, commercial
banks may collectively manage in a commingled investment account only assets held on a
true fiduciary (as opposed to investment) basis. Thus, the principal question in the money
management area is whether commercial banks should be permitted to sponsor and manage
commingled investment accounts or mutual funds.
The primary advantage of allowing banks to sponsor mutual funds is that the small investor
would have access to the sophisticated portfolio management services of commercial banks.
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341
Many bank trust departments, particularly in the larger banks, have large, highly trained
staffs devoted to the management of funds entrusted to the bank. Through the sponsorship
of mutual funds, the bank could make this expertise available to the general public. While
the small investor currently has access to the money management expertise of bank trust
department through the common trust fund, participation in a common trust fund is limited
to the bank's trust customers.
Bank participation in the mutual fund field might also benefit the investing public by
providing increased competition within the industry, which could encourage better
investment services and lower sales load charges and investment advisory fees.
Bank participation in the mutual fund field could give rise to certain concerns. The
promotional incentives and pressures created by virtue ofthe bank's pecuniary stake in the
success of the fund, it can be argued, could be destructive of prudent and disinterested
banking. A bank sponsoring a mutual fund would have a strong interest in insuring the
successful performance of its fund so as to attract investors, and avoid a loss of public
confidence and good will because of poor performance of its fund.
Some fear that the bank's stake in the fund might distort its credit decisions. For example,
the bank could be tempted to make unsound loans to investors to finance the purchase of
shares in the fund, or for the purpose of assisting companies in which the fund had invested.
In addition, the bank could be tempted to undertake, directly or indirectly, to make its credit
resources available to the fund, or to exploit its access to confidential information in its
commercial department for the benefit of the fund.
These potential abuses may be controlled through appropriate regulation and supervision
by bank authorities. The Federal Reserve System, for example, has carefully limited the
dealings between a bank holding company and a closed-end investment company for which
it acts as an investment adviser.
Corporate financing services.—Perhaps the central policy issue raised by the expansion of
bank corporate financing services is whether such activities will result in greater
concentration of economic power within the financial community, and, if so, would such
concentration result in more or less efficient, competitive financial markets better able to
serve the needs of American enterprise, both large and small.
Bank expansion into new markets offers the potential for additional competition, which
may be especially desirable where the new market is highly concentrated. Such competition
could provide consumers with more innovative and less costly services. It is generally
recognized that the competitive benefits of bank expansion into new financial activities are
maximized where such expansion occurs through de novo entry, rather than through the
acquisition of existing concerns. De novo entry of new competitors not only increases the
number of competitors, but also provides an incentive for the entering company to compete
vigorously in order to build its share of the market.
On the other hand, some observers contend that banks possess such leverage in so many
key areas of finance that, if banks are permitted to engage in these financial activities, they
would possess unfair competitive advantages over other financial institutions. A danger may
exist that bank activities in related financial fields could have an anticompetitive effect
through the potential tying of one bank service to another. For example, a customer seeking
credit from a bank might determine voluntarily to purchase other bank services, not on their
economic merit, but only to enhance its chances of obtaining credit. Thus, the mere offering
of related financial services by banks could have a tying effect.
Medium- and long-term lending.—As a practical matter, banks have provided corporations
with an alternative source of long-term financing. Many corporate entities rely on bank credit
for longer term financing needs. Commercial banks—along with certain insurance
companies^have helped in providing financing and financial advice to many less than prime
credits which have faced difficulties in publicly issuing securities in the capital markets.
To the extent that commercial bank long-term lending displaces—rather than supplements—corporate securities underwriting as a means of corporate financing, there could be
an adverse impact on investment banking firms. Thus, the evolution of commercial banking
services in the area of long-term lending must be considered in the context of the possible
long-range effects on interindustry competition and economic concentration within the
financial community.
Conclusion
Mr. Chairman, I have summarized for you today some ofthe public policy considerations
of various bank securities activities. The issues are explained in much greater detail in the
Treasury issues paper. These questions require careful review by the Congress and others
interested in the formulation of public policy in this area. The ultimate decisions that are
made could be of great importance to the future of our financial system.
We at Treasury look forward to working with the subcommittee on these issues in the
future.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
EXCERPT FROM ISSUES PAPER ENTITLED "PUBLIC POLICY ASPECTS OF
BANK SECURITIES ACTIVITIES "
V. Analysis of the Advantages and Disadvantages of Bank Participation in Securities
Activities
In assessing the desirability of bank participation in the above-described securities
activities, the foremost consideration should be the effect of such bank activities upon the
long-term health of the securities markets and their ability to meet the capital needs of
American enterprise. A second, and perhaps equally important, consideration is the effect
that such bank activities would have on the stability and integrity of the commercial banking
system.
The impact of bank participation in the various securities activities on the capital markets
may be analyzed in terms of the impact on the primary capital markets or the "new issues"
markets, and on the secondary capital markets. For example, bank underwriting or corporate
securities would bear more directly on the functioning ofthe primary markets while dealing—
i.e., market making—would involve the secondary markets.
As assessment of the desirability of such bank activity would require a consideration of
the probable effect on the competitive posture of the investment banking industry and its
ability to service the capital needs of corporations, especially smaller companies. Some argue
that the lifting of the restriction on bank underwriting would result in a more competitive
investment banking industry. Others contend that, because of the competitive advantages
possessed by banks, bank entry into the investment banking business would eventually result
in a single integrated industry and a greater concentration of economic power within the
financial community. Thus, it is argued, lifting ofthe Glass-Steagall restrictions could result
in less competition within the investment banking business through the consolidation of
closely related financial activities in a single group of institutions.
The desirability of other bank securities activities must be assessed in terms of their
immediate effect on the secondary markets. Some argue that bank participation in
brokerage-oriented and investment activities could reinforce the trend toward centralization
of investment decisions in a small number of large institutions. Centralization of investment
decisions, it is feared, could distort the valuation function ofthe market and, therefore, the
allocation of capital to American enterprise. For example, it is alleged that institutional
investors have in the past favored a few favorite stocks to the detriment of less favored
companies, generally smaller or emerging companies. It further argued that the domination
of secondary trading by large institutions may also decrease market liquidity and increase
price volatility. On the other hand, proponents of such bank activities contend that they
would increase investor participation in the secondary markets by providing investors with
convenient and less costly access to those markets.
Some claim that bank sponsorship of the various investment services could also indirectly
affect the primary markets. For example, bank automatic investment plans and the other
investment services, it is argued, may cause a net reduction in commission revenues paid to
brokerage firms in a competitive rate environment. A reduction in commission revenues
could result in a shrinkage in the number of retail brokerage firms that could affect the
viability of the distribution system for new issues.
The second important public policy consideration in assessing the desirability of bank
entrance into the securities field is the effect that such an expansion of bank operations would
have on the stability and integrity of the commercial bank system. The securities business,
especially underwriting and dealing in securities, is inherently risky and subject to wide
fluctuation in earnings. Concern has been expressed that bank participation in this business
could,seriously threaten the adequacy of bank capital, and could weaken public confidence
in commercial banks since there is a risk that the fortunes and good will ofthe bank and its
securities affiliates will rise and fall together. Moreover, some people fear that the
combinatibn of investment banking and commercial banking would give rise to potential
conflicts in that banks would be encouraged to make undesirable loans and investments to
support their investment banking operations.
This latter consideration is less cogent in some areas of the securities business than in
others. Thus, for example, the provision by banks of investment services to customers would
not appear to threaten the capitalization of banks since such business generally requires very
little capital investment. Similarly, it can be argued that the provision of financial advice to
corporate clients or the arrangement of private placements on an agency basis for corporate
clients would not appear to pose any direct risk to bank capital or to threaten public
confidence in commercial banks, although potential conflicts between their financial
advisory and commercial lending business do exist.
Investment services
In analyzing the advantages and disadvantages of bank participation in brokerage-oriented
and money management activities, the focus must be on the economic and financial impact
of concentration of such services in a few financial institutions. Other issues such as conflicts
EXHIBITS
343
of interest, institutionalization of markets, efficiency of markets and financial intermediaries,
and competition all seem to result from or relate to the issue of concentration.
Bank entry into various brokerage-oriented and money management activities could result
in either of two forms of concentration. Conglomerate concentration would result where a
single financial institution, such as a bank, provides a broad range of investment services.
Horizontal concentration occurs when the number of financial entities providing investment
services is reduced. Horizontal concentration could result from the entry by banks into new
securities activities through merger with, or acquisition of, existing financial entities that
perform these services, or through the attrition of competitors that provide services which
banks offer. Conversely, bank entry into new securities activities de novo could result in
horizontal deconcentration.
The concentration of investment services in one institution such as a bank has several
advantages and disadvantages. Some observers argue that such conglomerate concentration
can lower costs of providing investment services by spreading the overhead of investment
advisory, account maintenance and processing functions over a broader customer base. To
the extent that such cost savings are passed on to customers, the cost of securities transactions
would be reduced, thereby enhancing the efficiency of securities markets and encouraging
greater investor participation.
In addition, it is argued that the concentration of investment and other financial services
in a single institution may provide customers with more convenient access to securities
markets, and thereby further encourage participation by small individual investors in
securities markets. On the other hand, it can be argued that providing individual investors
more convenient and less costly access to investment services may not necessarily result in
a net increase in savings and investment. Whether a net increase in investment resulted would
depend on whether investors diverted funds from consumption of goods and services or
diverted funds from other investments such as time deposits.
A principal disadvantage of conglomerate concentration of investment and other financial
services within banks rests in the increased potential for conflicts of interest. It is claimed,
for example, that potential conflicts may arise between a bank's investment management
activities and its commercial lending operations.
The principal advantages of horizontal concentration whereby the number of institutions
providing investment services is reduced are the increased efficiencies resulting from
economies of scale. Horizontal concentration of investment services in a few multiservice
banks, however, may produce several adverse effects on the capital markets. Many observers
argue that increased concentration of investment services in banks could lead to an
overconcentration in investment in a few favored stocks, usually well-established issues, and
in an allocation of investment funds away from smaller emerging companies to larger
established ones. Thus, bank investment services, it is argued, reinforce tendencies toward
a tiered market.
Stated another way, the argument is that such concentration harms market efficiency by
reducing the diversity of investment opinions and the number of independent investment
decisionmakers in the marketplace. Financial market efficiency, as opposed to efficiency in
executing and clearing transactions, may well depend upon the maintenance ofa broad range
of diverse viewpoints and decisionmakers in the marketplace. Moreover, the concentrations
of investment advice in a small number of large institutions could adversely affect the
liquidity and stability of the securities markets.
Agency and brokerage-oriented services
As noted above, commercial banks presently offer several agency services which provide
customers with access to securities markets. These include voluntary investment plans,
automatic investment plans, dividend reinvestment plans, and custodial accounts.
It is argued that these services benefit investors and our capital markets by providing bank
customers with a convenient, low-cost, and more cbmpetitive means of purchasing securities.
While it is clear that these plans do provide customers with a convenient means of access
to securities markets, the extent to which such services provide cost savings to investors is
uncertain. On the one hand, banks, through their strong competitive position and by virtue
ofthe economies associated with large orders, may be able to negotiate lower brokerage fees
for their customers than the latter would be able to obtain by themselves. On the other hand,
it is argued that the banks' own service charges may, in many cases, offset to a great extent
any commission savings.
To date, these investment services have had limited success in attracting new investors to
the securities markets. However, they may have had some success in attracting new capital
to the securities markets. Dividend reinvestment plans have experienced substantial growth
in recent years and are now offered by almost 500 issuers, is Individuals participating in such
plans often augment the amounts made available through dividends for investment.
iSSee WiUiam E. Chatlos, "Growth of Automatic Dividend Investment Plans," Financial Executive at 38. (October
1974.)
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Therefore, it appears that these plans have had a positive effect in attracting additional capital
to securities markets on the part of small investors. Because ofthe automatic nature of such
plans and the allocation of fractional shares, they not only facilitate, but in many cases make
possible, the reinvestment of typically small amounts of cash dividends. In so doing, they may
reduce the tendency of shareholders to allocate dividend payments to consumption rather
than savings.
While automatic investment plans also have a potential for attracting new investors to the
markets, they have generally not realized this potential to date. Banks sponsoring automatic
investment plans report that approximately 40 to 60 percent of participants in the plans are
first-time stock market investors. i9 However, investor participation in these plans has fallen
dramatically short of market projections by the industry itself and, thus, the volume of
investment through these plans has not been significant. 20 Voluntary investment plans have
apparently had even less success in attracting bank customers to participate in the securities
markets. It can be argued that declining stock prices, rather than the nature ofthe investment
service itself, has been the primary reason for low investor participation in these plans.
It is argued that bank sponsorship of investment plans creates opportunities for abuse. One
alleged abuse arises from the bank's interest-free use of customers' funds during the
acquisition interval of the investment plans.
Banks offering automatic investment services are permitted to invest customers' funds
pending the banks' execution of securities transactions for the investment plans. The banks'
use of customers' funds during the acquisition interval of investment plans, it is argued,
conflicts with the interest of customers in receiving prompt or best execution for their
securities transactions. The banks contend that the Comptroller ofthe Currency regulations,
requiring that funds held in a fiduciary capacity by national banks awaiting investment shall
not be held uninvested any longer than is reasonable for the proper management of the
account, provide adequate protection. 21 In addition, banks are subject to an examination by
Federal and State banking authorities to protect and prevent abuses with respect to funds
held during the acquisition interval.
Some observers contend that potential conflicts also arise in connection with bank trust
operations. The knowledge of impending purchases or sales of securities for automatic
investment plans, it is argued, could influence the investment decisions of the trust
department and other investment operations of banks.
The sponsorship by banks of various investment services may also give rise to potential
conflicts with respect to their commercial ioan business. It is argued that a bank may be in
a position to favor a borrowing corporation through its automatic investment service or to
use that service as a means of gaining new loan business. Spokesmen for the banking industry
respond that banks have little incentive to invest in the securities of issuers solely because
the issuers are borrowers. Such an investment in the secondary market for an issuer's security
would only be of an indirect benefit to the issuer, and would be substantially outweighed by
the potential loss of a bank's reputation as an investment adviser.
It is also alleged that banks may be encouraged to make loans to issuers whose stocks have
been purchased by bank customers through a bank investment service in order to enhance
the financial condition of the issuer so as to prevent a loss of public confidence in its
investment services. Banking industry spokesmen respond that banks would not possess any
incentive to make such loans because the bank's reputation is not at risk inasmuch as it is
not acting as an investment adviser, but is merely providing a nondiscretionary investment
service to customers. Nonetheless, it can be argued that there would be a strong association
in the public mind between the bank and its investment services. As a result, the bank's public
image could suffer if stocks offered through its investment services declined substantially in
value. The existing bank examination procedures may, however, deter banks from making
unsound loans for the purpose of assisting issuers whose stocks are held by bank customers
of bank-sponsored investment services.
Banks might attempt to engage in the retail brokerage business in direct competition with
broker-dealer firms, assuming they are not prohibited from doing so by the Glass-Steagall
Act. The principal advantage of this activity would be increased competition within the
brokerage industry which could perhaps result in lower transaction costs for small investors.
In addition, customers may find it more convenient to have their brokerage needs met at the
same institution which handles other financial matters.
l ^ h e American Bankers Association, in its response to the SEC's inquiry concerning bank-sponsored investment
services (Securities Act Release No. 5491 of Apr. 30, 1974), reported that approximately 40 percent to 60 percent of
automatic investment plan participants were first-time stock investors.
20The New York Clearing House Association, responding to the SEC's inquiry concerning bank-sponsored investment
services, reported that, while there are approximately IS.CXK) automatic investor service accounts administered by banks,
investor participation has fallen short of market projections. Similarly, the Security Pacific National Bank responded that
after I year of operation, its service had only approximately 1,5(X) participants, or less than 2 percent of the projected
market.
2112 CFR sec. 9.10.
EXHIBITS
345
On the other hand, some fear that increased competition within the brokerage industry
may cause an undesirable shrinkage in the number or broker-dealer firms, especially during
the current difficult period. Substantial attrition among retail brokerage houses because of
bank entry could threaten the viability ofthe existing capital-raising system which depends
on a strong network of broker-dealers to distribute new corporate issues. Some fear that,
should this occur, pressures would be created to permit commercial banks to engage in the
underwriting of corporate issues, as well as retail brokerage. Thus, it is argued, the question
of bank participation in retail brokerage cannot be considered apart from the broader
question of the role of banks in the investment banking field.
Moreover, the brokerage operations of banks could pose a threat to the integrity and
financial stability of commercial banks. First, a large retail brokerage operation would
require significant capital to support the necessary investment in plant and equipment, as well
as the brokerage operation itself. Asset growth has outpaced growth in capital and the
commercial banking industry presently faces a capital adequacy problem. Banks have
generally been unable to raise equity capital in recent years due to low stock prices.
Moreover, high loan losses are, in some cases, making inroads into existing capital resources.
It may be questioned whether existing levels of bank capital could support entry by banks
on a significant scale into a new area requiring substantial amounts of additional capital.
Secondly, banks would be associated in the public's mind with various securities
investments by virtue of their brokerage activities. Public confidence in commercial banks
could suffer if securities held by customers of bank investment services declined substantially
in value.
In addition, the cyclical nature and low predictability of earnings from brokerage
operations could hinder the ability of commercial banks to raise capital. One reason for the
relatively low price/earnings ratios of most bank stocks today is the fact bank earnings
recently experienced a decline after many years of steady growth. Investors generally bought
bank stocks for steady, if moderate, growth in earnings. Banks are now in the process of
attempting to make their earnings less susceptible to changes in interest rates and the health
of the economy. The return to a steady earnings growth pattern, it is hoped, will allow the
banks to regain investor confidence in their stocks and thereby bring about high price levels.
Bank entrance into the retail brokerage business, it can be argued, would not be in harmony
with this objective.
Money management activities
Commercial banks have provided money management services to individual customers on
a fiduciary as well as an agency basis. However, commercial banks may collectively manage
in a commingled investment account only assets held on a true fiduciary (as opposed to
investment) basis. 22Thus, the principal question in the money management area is whether
commercial banks should be permitted to sponsor and manage commingled investment
accounts or mutual funds.
The primary advantage of allowing banks to sponsor mutual funds is that the small investor
would have access to the sophisticated portfolio management services of commercial banks.
Many bank trust departments, particularly in the larger banks, have large, highly trained
staffs devoted to the management of funds entrusted to the bank. Through the sponsorship
of mutual funds, the bank could make this expertise available to the general public. While
the small investor currently has access to the money management expertise of bank trust
departments through the common trust fund, this investment vehicle possesses certain
disadvantages. Common trust funds of banks generally provide less frequent and complete
disclosure of investment performance than do mutual funds. Moreover, participation in a
common trust fund is limited to the bank's trust customers, while participation in a mutual
fund is open to any investor.
Bank participation in the mutual fund field might also benefit the investing public by
providing increased competition within the industry. Some observers believe that this
competition could encourage better investment services and lower sales load charges and
investment advisory fees.
On the other hand, bank expansion into the mutual fund field could pose the risk of
economic concentration within that industry. As noted above, such concentration could have
potential adverse consequences for our capital markets.
Furthermore, bank participation in the mutual fund field would appear to give rise to the
same potential abuses and hazards which the Glass-Steagall Act was designed tp eliminate.
The promotional incentives and pressures incidental to a bank's sponsorship of a mutual
fund, as well as the bank's pecuniary stake in the success ofthe fund, it can be argued, could
be destructive of prudent and disinterested commercial banking and of public confidence
22The Supreme Court, in Investmenl Company Institute v. Camp, 401 U.S. 617 (1971), held that the Glass-Steagall Act
prohibits commercial banks from operating commingled investment funds comprised of numerous individual agency
investment accounts.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
in the commercial banking system. A bank sponsoring a mutual fund obviously would have
an incentive to promote the sale of participations in the fund in order to insure its profitable
operation. Thus, the bank would have a strong interest in insuring the successful performance
of its fund so as to attract investors. But, the bank's stake in the fund's success is more than
this. The bank's reputation and goodwill stands squarely behind the fund so that imprudent
or unsuccessful management of the fund could result in a loss of public confidence in the
bank itself, as is evidenced by the experience of bank-managed real estate investment trusts.
These promotional incentives and pressures, it is argued, create the potential for abuses
within the commercial bank's operation. Some fear that the bank's stake in the fund might
distort its credit decisions. Thus, the bank could be tempted to make unsound loans to finance
the purchase of shares in the fund, or for the purpose of assisting companies in which the
fund had invested. In addition, the bank could be tempted to undertake, directly or indirectly,
to make its credit resources available to the fund, or to exploit its access to confidential
information in its commercial department for the benefit of the fund.
These potential abuses may be limited to some extent through appropriate regulation and
supervision by banking authorities. The Federal Reserve System, for example, has carefully
limited the dealings between a bank holding company and an investment company for which
it acts as an investment adviser. The bank holding company is prohibited from (1) purchasing
for its own account securities of such an investment company, (2) making discretionary
purchases of such securities in an agency or fiduciary capacity, (3) extending credit to such
an investment company, and (4) accepting securities of such an investment company as
collateral for loans for the purchase of such securities. 23
While potential abuses arising from bank sponsorship of mutual funds may be limited by
similar restrictions enforced through examination procedures, it can be argued that it is
impossible to prevent all such abuses from occurring by regulatory fiat. It can be further
argued that no amount of regulation could protect against the risk that the fortunes and
goodwill of the bank and the mutual fund will rise and fall together.
Corporate financing services
Some commercial banks have aggressively expanded the types of financial services offered
to corporate and governmental clients. They have offered corporations medium-term loans,
financial consulting advice, and services in arranging private placements. In addition,
commercial banks have sought legislation to permit them to underwrite municipal revenue
bonds. This expansion is limited by the boundaries ofthe Glass-Steagall Act, which continues
to prohibit banks from underwriting and dealing in corporate securities.
Perhaps the central policy issue raised by the expansion of bank financial services is
whether such activities will result in greater concentration of economic power within the
financial community, and, if so, would such concentration result in more or less efficient,
competitive financial markets better able to serve the needs of American enterprise, both
large and small.
Bank expansion into new markets offers the potential for additional competition, which
may be especially desirable where the new market is highly concentrated. Such competition
could provide consumers with more innovative and less costly services. It is generally
recognized that the competitive benefits of bank expansion into new financial activities are
maximized where such expansion occurs through de novo entry, rather than through the
acquisition of existing concerns. De novo entry of new competitors not only increases the
number of competitors, but also provides an incentive for the entering company to compete
vigorously in order to build its share of the market. 24
On the other hand, some observers contend that banks possess siich enormous leverage
in so many key areas of finance that, if banks are permitted to engage in these financial
activities, they would possess unfair competitive advantages over other financial institutions.
Thus, it is argued that, if banks are permitted to continue to expand their financial activities
in competition with investment bankers, a few large money center banks will eventually
dominate the securities and investment banking business.
A danger may exist that bank activities in related financial fields could have an
anticompetitive effect through the potential tying of one bank service to another. Such tying
could occur through formal or informal agreements or tying arrangements between a bank
and its customer whereby the bank agrees to sell one product over which it has substantial
2312 CFR sec. 225.125(g).
24Scherer, "Industrial Market Structure and Economic Performance," 366-78 (1970). The Bank Holdinjg Company Act
amendments of 1970 recognize the greater competitive benefits of de novo entry vis-a-vis entry by acquisition of existing
firms. Thus, in authorizing the Federal Reserve Board to authorize bank holding companies to engage in nonbanking
activities, the act permits the Board to differentiate between activities commenced de novo and activities commenced by
the acquisition of a going concern. 12 U.S.C. 1843. The Board has done so by providing for an expedited procedure for
de novo entry by banking holding companies into each of the nonbanking activities which the Board has thus far authorized
under the 1970 amendments. Sec. 225.4(b) of Regulation Y, 12 CFR sec. 225.4(b).
EXHIBITS
347
market power (such as credit) only on the condition that the customer agree to purchase
another bank product.
Tying arrangements are possible where the seller possesses substantial market power or
monopoly power over a particular product (tying product) so that it can use its power over
that product to acquire market power over another product (tied product). Since banks
possess substantial market power with respect to a variety of financial services, especially
credit, banks may be encouraged to use that market power to increase their power with
respect to other financial services which they are authorized to provide.
However, the ability of banks to engage in tying is sharply limited by the antitrust laws,
particularly section 1 of the Sherman Act. Moreover, a special statutory provision makes it
illegal per se for banks to enter into tying arrangements. 25 However, the possibility of
voluntary tying, or what is called tying effect, still exists. For example, a customer seeking
credit from a bank might determine voluntarily to purchase other bank services, not on their
economic merit, but only to enhance its chances of obtaining credit. Thus, the mere offering
of related financial services by banks could have a potentially anticompetitive tying effect.
The offering of more than one service by a bank is not necessarily entirely anticompetitive.
Credit customers of a bank may choose to purchase other services from the same financial
institution to achieve economies, to reduce the risk of disclosure of confidential information,
or simply for convenience. It is only where the customer purchases the tied product solely
to curry favor with the bank and thereby enhance its access to other bank services that tying
effect undesirably distorts the marketplace.
Accordingly, it has been suggested that in assessing whether banks should be permitted
to engage in the various proposed securities activities, each activity should be evaluated in
terms of the potential undesirable tying effect that might result. If it is determined that bank
entrance into a particular securities activity raises a strong likelihood of an undesirable tying
effect, consideration should be given to whether such activity should be prohibited, or, short
of that, whether restrictions or regulations should be implemented to alleviate the possibility
of a tying effect. For example, it may be possible to require banks to notify their customers
that their purchase of other bank services will have no effect upon their decision to provide
a particular service to a customer.
But, some observers believe that the question of economic concentration is more than the
possibility that banks may exercise their substantial market power in anticompetitive ways
that distort market decisions. They argue that if banks are permitted to engage in various
financial activities, they may eventually come to dominate these financial areas through their
natural competitive advantages. Thus, in their view, the broader question that must be faced
is whether such a concentration of economic power within commercial banks would be in
the best interest of the capital markets.
Financial advisory work
Several policy arguments can be made in favor of commercial banks being permitted to
offer corporation customers financial advisory services. To begin with, the provision of
financial advice to corporations seems a logical supplement to existing bank services such
as providing short- and medium-term credit. Financial counseling in individual and family
financial affairs has traditionally been an integral part of the banking business. Business
enterprises also require counseling on a wide range of matters relating to financial aspects
of their operations. It seems quite natural that commercial banks should seek to meet the
financial counseling needs of business enterprises as well as individuals.
Allowing commercial banks to offer corporations financial consulting services would
provide an added convenience to corporate customers who^could receive financial advice
as well as other bank services from the same financial institution. Bank entrance into the
financial counseling business would also increase competition in this business and thereby
could result in more efficient, less costly, and a wider variety of services than might otherwise
be available.
Finally, the offering of financial advisory services by banks clearly falls outside the scope
of those activities proscribed by the Glass-Steagall Act, nor does the offering of such services
give rise to the potential abuses that the Glass-Steagall Act was designed to prevent. The
provision of financial advice for a fee does not involve the promotion of securities activities
such as underwriting, in which the bank has a pecuniary stake. Therefore, the offering of
financial advice does not produce promotional pressures and incentives on the part of the
bank which creates the potential for abuses within commercial banking operations.
On the other hand, it can be argued that permitting commercial banks to offer financial
advisory services may tend to increase concentration of economic power in the commercial
banking industry. It seems reasonable to conclude that commercial banks, by virtue of their
25Sec. 106(b)of the Bank Holding Company Act amendments of 1970, PubUc Law 91-607, 84 Slat. 1766-67,12U.S.C.
c. 1972.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
natural competitive advantages, such as economies and providing customers the convenience
of a multiservice financial institution, would capture a significant portion of financial
advisory business from the investment banking industry. Investment banking firms may thus
be stripped of one source of revenues that helps cushion the cyclicality of their earnings in
their investment banking operations. The net result may be an enhancement ofthe economic
power of commercial banks at the expense of the investment banking industry.
In addition, there is a danger that banks would possess an unfair competitive advantage
in providing financial advisory services by virtue of their market power in providing
traditional banking services such as credit. Thus, corporate clients, especially during periods
of tight credit, may voluntarily choose to purchase financial advisory services from the bank
so as to enhance their chances of obtaining credit from the bank. This undesirable tying effect
could perhaps be alleviated by appropriate regulation.
Finally, some people feel that potential conflicts could arise between commercial bank
lending and trust operations and the provision of disinterested financial advice in mergers
and acquisitions. For example, a bank, in advising a corporate client to acquire a particular
company, could be influenced by the fact that the bank has a substantial investment in the
target corporation, either in the form of a commercial loan or a securities holding ofthe trust
department. Furthermore, a bank might have an incentive to recommend a financing
alternative in which it could participate.
The Comptroller of the Currency has authorized national banks to provide financial
advisory services to corporate clients on the ground that such services are incidental to the
business of banking and are not prohibited by the Glass-Steagall Act. 26 However,
uncertainties concerning the extent to which the Glass-Steagall Act applies to bank financial
advisory activities, coupled with the act's harsh criminal penalties, 27 have inhibited the
evolution of bank financial advisory services. For example, in advising corporate clients in
mergers and acquisitions, which may involve the issuance of securities, banks are uncertain
to what extent they can become involved in the negotiations without risking a violation of
the Glass-Steagall Act's prohibitions against underwriting corporate securities. Similar
uncertainties arise in connection with banks arranging private placements for corporate
clients.
In view of these considerations, the Comptroller of the Currency is of the view that the
criminal penalties provided in section 21 of the Glass-Steagall Act28 should be repealed.
These harsh measures, it is argued, are inappropriate in a statute containing such gray areas
between what is permissible and what is forbidden.
Medium- and long-term lending and private placements
As noted above, commercial banks, particularly the large money center banks, offer a
range of services that are designed to meet corporate needs for long-term financing. These
include the granting of medium- and long-term loans and the arranging of private placements.
Such services could be viewed as substitutes for securities underwritings.
The trend toward longer term lending, it is argued, is beneficial. Proponents argue that such
lending provides corporations with an alternative source of long-term financing. This
additional competition in financial markets could benefit corporations by lowering the costs
of capital.
Moreover, medium- and long-term lending represents a part of the traditional banking
business and does not violate the underwriting prohibitions of the Glass-Steagall Act. Nor
do such lending practices give rise to the potential abuses ofthe commercial banking system
against which the Glass-Steagall Act was intended to protect. Because such lending does not
involve the bank in buying and selling investments for its own account, such bank activity
does not create the promotional pressures and incentives associated with investment banking
that threaten prudent and disinterested commercial banking.
On the other hand, to the extent that commercial bank long-term lending displaces
corporate securities underwriting as a means of corporate financing, the net effect could be
a diminution of investment banking firms and a corresponding increase in the importance
of commercial banks as suppliers of long-term capital. Thus, the evolution of commercial
banking services in the area of long-term lending must be considered in the context of the
possible long-range effects on interindustry competition and economic concentration within
the financial community.
The participation of commercial banks in arranging private placements of corporate debt
securities would also appear to have several benefits. An obvious benefit is increased
competition in providing private placement services to corporations, which could lower the
26In many cases, national banks seek to offer financial advisory services through a new operating subsidiary of the bank.
The Comptroller of the Currency must approve the creation of a subsidiary for that purpose under 12 CFR sec. 7.7376,
which provides that a national bank may engage in any activity that is incidental to the business of banking by means of
an operating subsidiary.
27rhe Glass-Steagall Act provides for up to 5 years' imprisonment for violations. 12 U.S.C. 378(b).
2812 U.S.C. 378(b).
EXHIBITS
349
costs to corporations of raising debt capital. In addition, increasing the number of financial
institutions that are able to arrange private placements, particularly outside of the major
financial centers, could make this type of financing more readily available to smaller
corporations. Corporations often prefer to raise funds through private placements rather
than public offerings in order to avoid the delay involved in registered public offerings, to
save on costs of flotation, and to permit the tailoring ofeach loan indenture to each particular
situation. Moreover, for those small corporations that do not have access to public markets,
private placements provide an alternative means of access to the capital markets.
Bank participation in the private placement area produces other benefits. Commercial
banks are able to serve more efficiently the financial needs and convenience of corporate
clients by offering a complete package of services. By offering full financial services, banks
permit corporate clients to satisfy all their financial needs at the same financial institution.
Moreover, the arrangement of private placements by commercial banks would not appear
to create the same inherent conflicts of interest which arise when a commercial bank also
engages in the underwriting and distribution of corporate securities. When arranging private
placements, a bank acts as an agent for its corporate client rather than as a principal in buying
and selling securities for its own account. Thus, the bank would not be subject to the same
promotional pressures or incentives associated with investment banking that could threaten
prudent and disinterested commercial banking.
On the other hand, commercial bank expansion in the private placement business raises
the same concerns over economic concentration that are raised by commercial bank
expansion into other financial advisory services. Banks could reduce private placement and
financial advisory business of investment banking firms. The lending function may be an
important advantage in competing with the investment banking industry for this business. For
example, if a commercial bank advises a corporate client, which has an outstanding line of
credit with the bank, that it needs long-term financing in the form of a private placement,
the client may feel obligated to use the bank's services in arranging the private placement.
Thus, it is argued, bank private placement and financial advisory activities may threaten
the viability of some investment banking firms, especially smaller firms specializing in
mergers, acquisitions, and private placements. In the long term, this would lead to a further
concentration of economic power within the commercial banking industry and a weakening
of the investment banking industry.
Finally, while bank participation in arranging private placements would not appear to
create the same potential for abuse that occurs when commercial banks underwrite corporate
securities, it can be argued that this bank activity is not entirely free of potential conflicts.
In arranging a private placement, a bank will necessarily have a stake in insuring that the
offering is successfully placed, especially if the bank's fee is contingent upon the successful
placement of the offerings, and even more so if the proceeds of the placement are used to
retire an interim obligation to the bank. The promotional pressures thus created in arranging
a private placement for a corporation could cause a bank to make imprudent loans to the
corporation in order to complete or facilitate the successful placement of securities. For
example, the bank could make a long-term loan to satisfy that portion of the offering that
could not be placed with an institutional investor. Alternatively, the bank could make a loan
to the corporate issuer in order to enhance its financial condition and thereby encourage an
institution to invest in a private placement of the issuer's securities.
The policies and objectives of the Glass-Steagall prohibition against commercial bank
underwriting and dealing in corporate securities are discussed in detail in the appendix:
"Review of the History, Policies and Objectives of the Glass-Steagall Separation of
Commercial and Investment Banking." As noted above, three primary reasons for enactment
of the prohibition can be identified from the legislative history. First, it is evident that the
Congress concluded that the separation of commercial and investment banking was
necessary to protect and maintain the financial stability of commercial bank operations and
to ensure public confidence in commercial banking.
Secondly, Congress desired to eliminate the potential for conflicts of interest which could
arise from performance of both commercial banking and investment banking operations.
Congressional investigation 29 into the breakdown ofthe banking system in the early 1930's
revealed the following actual or potential conflicts arising from the operations of security
affiliates of commercial banks:
(1) Banks made excessive and nonprudent loans to their security affiliates, which they
would not normally have made if they were dealing with nonrelated entities.
(2) Securities were sold by the security affiliates to their parent banks or another of their
affiliates under repurchase agreements.
(3) Bank funds were used to purchase excessive security holdings of security affiliates.
29Hearings before a subcommittee of the Senate Committee on Banking and Currency pursuant to S. Res. 71,71 st Cong.,
3d sess.. part I 1064(1931).
350
1976 REPORT OF THE SECRETARY OF THE TREASURY
(4) Banks made excessive and nonprudent loans to their customers to purchase
securities underwritten by their security affiliates, or in which their security affiliates
otherwise had an interest.
(5) Security affiliates of banks conducted manipulative transactions in their parent
banks' stock.
(6) Bank officers received compensation from security affiliates far in excess of that
paid to them by their banks and otherwise personally profited from the operations of
security affiliates.
(7) Security affiliates engaged in high leveraging and unwise risk-taking in reliance
upon access to the resources of their parent banks.
(8) Banks faced a significant loss of confidence by depositors and others as a result of
losses by such persons in the operations of the banks' security affiliates and the resultant
termination of depositor relationships.
A final concern that motivated Congress in enacting the Glass-Steagall prohibition was the
feeling that bank securities operations tended to exaggerate financial and business
fluctuations and undermine the economic stability of the country by channeling bank
deposits into "speculative" securities investments. Underlying these judgments, however,
was the belief held by Senator Glass and others that investment banking was outside the
traditional and proper sphere of commercial banks whose role was viewed as limited mainly
to making short-term, self-liquidating loans to finance goods in the process of production and
commerce.
Many of the concerns underlying Congress' decision to divorce commercial and
investment banking appear to have been allayed in large part by subsequent economic and
regulatory developments. By enacting the Securities Act of 193 3 and the Securities Exchange
Act of 1934, Congress subjected underwriting and dealing in corporate securities to a
pervasive regulatory frartiework. The 1933 act provided investors with protection against
abuses related to false or misleading information in connection with securities underwritings.
The 1934 act also provided investors with piotection against insider self-dealing and
manipulation of securities markets, and prohibited the extension of credit by broker-dealers
to customers for the purchase of new issues. 3o
In addition, commercial banks have been subject to a far more extensive Federal regulatory
system than existed prior to 1933. The Bank Holding Company Act of 1956 granted the
Board of Governors of the Federal Reserve System authority to supervise the nonbanking
affiliates of banks. Section 7 of the Securities Exchange Act of 1934 authorized the Board
to regulate the extension of bank credit for the purchase of securities. 31 This provision
effectively achieved one of the underlying objectives of the Glass-Steagall legislation which
was to control speculative uses of commercial banks' assets in the securities markets. Federal
and State laws have provided increasingly stricter standards for commercial bank fiduciaries
in exercising investment discretion on behalf of public investors. All these developments tend
to reduce the potential for the abuses of commercial bank securities operations which
occurred in the l920-30's.
It is against this background that the question whether banks should be again permitted
to engage in investment banking must be assessed. It appears, however, that some of the
inherent conflicts and potential hazards that arise from the combination of commercial and
investment banking remain valid concerns even in light ofthe development of securities and
banking regulation since 1933. For example, the securities business is inherently risky and
subject to wide fluctuations in earnings. Some people, both within and outside the banking
industry, have expressed concern that the severe cyclical nature of this business might lead
to a weakening of public confidence in banks should they be permitted to engage in it once
again. While Federal deposit insurance might mitigate any adverse effects on public
confidence, they fear that the risk remains that the fortunes and goodwill of the bank and
its securities affiliate will rise and fall together.
In addition, it is argued that the possibility always exists that banks will be encouraged to
make imprudent loans and investments to promote or support their investment banking
activities. While these potential abuses may be limited through examination and oversight
by banking authorities, it is impossible to prevent all such abuses from occurring by legislative
or regulatory fiat.
A review of the Glass-Steagall provisions separating commercial banking and investment
banking should not be limited to a consideration ofthe policies and objectives that motivated
Congress in 1933. Rather, the review should encompass broader policy considerations that
reflect current financial and economic concerns. Two such policy considerations that may
not have been contemplated by Congress in enacting the Glass-Steagall prohibitions concern
30Securities Exchange Act of 1934, sec. 11(d), 15 U.S.C. sec. 78k(d).
3115 U.S.C. sec. 78g.
EXHIBITS
351
the question of economic concentration within the financial community and the problem of
capital adequacy. These policy considerations are explored below.
An assessment ofthe desirability of bank underwriting and dealing in corporate securities
requires a consideration of the effect of such bank activity on the competitive structure of
the investment banking industry and its ability to service the capital needs of corporations,
particularly small and emerging companies. Some observers argue that the entry of
commercial banks into the underwriting field would significantly enhance the competitive
environment in the existing investment banking industry. They point to the present highly
concentrated structure ofthe investment banking industry in which the top 10 firms managed
85 percent bf corporate underwritings in 1974.32 Bank entry, it is argued, wbuld increase the
number of competitors and result in more efficient, less costly services for corporate issuers.
On the other hand, some people fear that, while bank entry into the investment banking
field might provide increased competition in the short term, the integration of commercial
and investment banking, in the long term, could result in less competition and less liquidity
in our capital markets. This would be especially true, it is argued, should the commercial
banking system become more streamlined and dominated by a few large money center banks
possessing extensive networks of correspondent banks.
This fear is grounded on the belief that, in the long term, commercial banks would
dominate the investment banking business. It is contemplated that commercial banks would
seek to enter the underwriting business by acquiring existing investment banking firms, rather
than taking the more difficult course of starting a de novo investment banking operation. The
existence of firmly established client relationships within the current investment banking
industry and the commercial banks' lack of skills and experience in this area would make
it unlikely that commercial banks could establish new investment banking operations and
promptly obtain a meaningful position in the industry through de novo activities. On the other
hand, entry by acquisition of going concerns should be easy since many investment banking
firms, particularly those with financial difficulties or capital ownership concentrated in a few
individuals or families, would probably be eager to affiliate with a commercial bank.
Thus, it is argued that ultimately commercial banks would acquire a dominant position in
the investment banking industry, although a substantial number of the large and wellestablished investment banking firms would probably survive. However, these investment
banking firms would eventually enter the commercial banking business in order to remain
competitive with the commercial banks. Thus, the full integration of commercial and
investment banking would be completed.
On the other hand, it can be argued that the foregoing analysis fails to take into account
the probable regulatory system under which such bank entry into the investment banking
field would occur. First, bank entry into a new nonbanking activity such as investment
banking would be subject to the strictures of the antitrust law. While the ways in which the
antitrust laws might affect such bank expansion are uncertain, there are several potential
theories under which the antitrust laws could be applied to restrict or control bank expansion
into the investment banking field.
Secondly, if banks were permitted to enter the investment banking business, the Congress
could determine that such entry should take place under the existing provisions ofthe Bank
Holding Company Act, which provide a vehicle for bank expansion into nonbanking
activities under Federal Reserve Board supervision. If this were to occur, bank entry into the
investment banking business would be carefully regulated by the Board to insure that the
public benefits of such entry are not outweighed by the adverse effects of decreased
competition or undue concentration of resources. 33 In considering the effect of bank entry
on competition, the Board is concerned with the loss of potential competition and, thus,
encourages de novo entry or entry by "foothold" acquisition of one of the smaller firms in
the market, as opposed to entry by acquisition of a major existing concern. 34 Where the bank
holding company has the capacity to enter de novo, the Board views entry through acquisition
of an existing business as a loss of potential competition.
Thus, it can be argued that, if banks were permitted to enter the underwriting business
under the present Bank Holding Company Act provisions, the Federal Reserve Board would
32Investment Dealers Digest, Corporate Financing Directory at 18 (Mar. 11, 1975).
33The Bank Holding Company Act authorizes the Federal Reserve Board to permit bank holding companies to engage
in nonbanking activities which the Board determines "to be so closely related to banking or managing and controlling banks
as to be a proper incident thereto." In determining whether a particular nonbanking activity is so related to banking as to
be a proper incident thereto, the Board is directed to weigh the expected benefits of the requested bank activity against
possible adverse effects, such as undue concentration of resources, and decreased or unfair competition. Sec. 4(c)(8) of
the Bank Holding Company Act, 12 U.S.C. sec. 1843(c)(8). This provision, which was added by 1970 amendments to the
act, was designed to permit bank holding company expansion into related financial areas where the Federal Reserve Board
finds such expansion to be in the public interest.
34For a description of the Federal Reserve Board's policy in this regard, see Note. "Implementation of the Bank Holding
Company Act Amendments of 1970: The Scope of Banking Activities," 71 Mich. L. Rev. 1170, 1199-1200 (1973).
352
1976 REPORT OF THE SECRETARY OF THE TREASURY
regulate such entry so as to promote competition and to avoid undue concentration within
the investment banking industry.
A second policy consideration that may not have been a primary basis for the GlassSteagall prohibitions is the impact of investment banking operations on the adequacy of bank
capital. It is clear that both regulators and investors are concerned over the adequacy of
current levels of capital in both the commercial and investment banking industry. Not only
are commercial bank capital-to-asset ratios very low by traditional standards, but a number
of broker-dealers have declared bankruptcy or been forced to merge in recent years because
of capital problems.
On the other hand, it has been suggested that banks could enter the corporate underwriting
business by the use of security affiliates and thereby limit the direct risk to bank capital. In
such cases, banks would be under strict limitations as to the aggregate amount of credit or
investments that they could extend to or make in their security affiliates. 35 In addition, the
amount of dividends they could pay to their holding companies would be limited. 36 While
these and other restrictions would in some measure insulate the bank from any financial
problems of a security affiliate, some observers believe that in reality it is extremely unlikely
that a bank would fail to support a nonbank affiliate in financial difficulty to the extent
permitted by law. If a bank did fail to honor this "moral obligation," public confidence in
that bank, and perhaps in the banking system as a whole, could be severely shaken.
It can be further argued that bank entry into investment banking also poses a risk to the
earnings stability of commercial banks. Although corporate underwriting can be a highly
profitable enterprise,37 it is a risky business subject to wide fiuctuations in earnings. A good
market can produce high profit levels whereas in a bad market there may be few, if any,
corporations able to seek new capital in the long-term markets. Some fear that investment
banking would introduce added cyclicality to bank earnings at a time when commercial banks
are trying to regain the stable earnings growth trends of the 1960's. They maintain that it
is unlikely the multiples on bank equities will improve materially until some earnings
predictability and stability is regained. And until the market prices of bank stocks improve,
it is unlikely banks will be able to significantly improve their capital positions.
Underwriting of municipal revenue bonds
As described in an earlier section, commercial banks may now underwrite and deal in
general obligation bonds issued by a political subdivision of a State, but not in revenue bonds
offered by the same issuer. It has long been argued that banks should be allowed to underwrite
both types of municipal obligations. Several government agencies have recently supported
this change. The Senate passed legislation in the 93d Congress that would have permitted
commercial banks to underwrite municipal revenue bonds, but the House failed to act on it. 38
Proponents of the change argue that, insofar as issue characteristics and marketability are
concerned, there are no significant differences between general obligation issues and revenue
issues. However, the prohibition of bank underwriting of revenue bonds, they maintain, has
a marked influence on the sale and distribution of such bonds to the detriment ofthe issuers
involved. Extensive studies have demonstrated that issuers of revenue bonds receive fewer
bids from underwriting syndicates than do issuers of general obligation bonds of comparable
size, maturity, and quality. As a result, those issuers of revenue bonds pay relatively higher
interest costs. 39 It is estimated that the interest costs that could be saved by allowing bank
underwriting of revenue bonds would amount to millions ofdollars annually. 40N0 systematic
quantitative study that refutes these conclusions has been conducted.
Opponents of allowing banks to underwrite revenue bonds contend that such action would
ultimately lead to an undesirable concentration of economic activity in commercial banks.
Proponents argue, however, that the history of commercial bank activity in underwriting
general obligation municipal bonds indicates that the banks would not dominate the
35Sec. 23A of the Federal Reserve Act. 12 U.S.C. 371c. prohibits, with certain exceptions, a member bank from
extending credit to or making investments in any affiliate in an amount in excess of 10 percent of the capital stock and
surplus of the member bank. Where credit and investments are made in more than one affiliate, the aggregate amount of
such credit and investments shall not exceed 20 percent of the capital stock and surplus of the member bank.
36A national bank must obtain the approval of the Comptroller of the Currency in order to pay dividends in excess of
the total of its net profits for the year, combined with its retained net profits of the previous 2 years. 12 U.S.C. 6(Kb). Member
banks that are not national banks must seek such approval from the Board of Govemors of the Federal Reserve System.
12 u s e . 324.
37Hayes. "Investment Banking: Power Structure in Flux," Harvard Bus. Rev. at 137-138 (March-April 1971).
38S. 3838. 93d Cong.. 2d sess. (1974).
39Peter Keir and James Kichline. "Interest Cost Effects of Commercial Bank Underwriting of Municipal Revenue
Bonds," Federal Reserve Bulletin (August 1%7); Reuben Kessel, "A Study of the Effects of Competition in the Tax-exempt
Bond Market." The Joumal of Political Economy, vol. 79. No. 4 (July-August 1971); and Wm. Paul Smith, "Commercial
Bank Entry into Revenue Bond Underwriting; Competitive Impact & Public Benefits," Washington, D . C : Office of the
Comptroller of the Currency, 1968.
40See Report of the Senate Committee on Banking, Housing, and Urban Affairs on S. 3838. S. Rep. No. 93-1120. 93d
Cong.. 2d sess. 12-13 (1974).
EXHIBITS
353
underwriting of revenue bonds to the exclusion of existing investment banking firms.
Throughout the past 40 years, commercial banks have been joined by investment bankers
as participants and as managers of underwriting syndicates. There is a well-established record
of cooperation in the underwriting of general obligation issues, but little evidence of either
intent or opportunity for commercial banks to engage in predatory practices or to exclude
investment bankers. While commercial banks have been highly successful as underwriters
of general obligation issues, investment banking houses have always played a major role as
underwriters of such issues. There is also little evidence to support the theory that
commercial bankers could, or indeed would wish to, exclude investment bankers from the
underwriting of municipal revenue bonds. Thus, it is argued that commercial bank entry into
revenue bond underwriting would not lead to an undesirable concentration of activity in
commercial banks.
It is also alleged that permitting commercial banks to underwrite revenue bonds would
create confiicts of interest between the banks' investment banking and fiduciary functions.
Certainly a potential confiict exists between the interest of the underwriting section of a
commercial bank in achieving the minimum yield for the agency offering the security issue
and the goals of bank investment managers and trust account managers who seek to achieve
some desirable combination of risk and return on investment. However, while the potential
for conflicts exist, there is no record of actual conflicts arising from commercial bank
underwriting of general obligation municipals during the past 40 years that they have engaged
in such activity.41 Since municipal revenue bonds are comparable to general obligation
municipals in all essential characteristics, there is no reason to believe that actual conflicts
of interest would arise in bank underwriting of revenue bonds.
Furthermore, under Federal and State law, member banks may not now sell their dealer
inventory to fiduciary accounts except when lawfully authorized in the trust instrument, by
local law or under specific direction of a court. However, member banks could sell their
dealer inventory to their own portfolios. Moreover, most States prohibit banks from selling
underwritten securities to fiduciary accounts except under specific direction of a court. In
any event, it is argued that a safeguard of this nature can be easily incorporated into Federal
law permitting commercial banks to underwrite municipal revenue bonds.
Exhibit 17.—Statement of Under Secretary for Monetary Affairs Yeo, January 2 1 , 1976,
before the House Ways and Means Committee, on proposals relating to tax-exempt financing
Mr. Chairman and members of this distinguished committee, I want to discuss with you
a question of major importance to the Nation as a whole and to govemment at all levels. The
subject is tax-exempt financing and the municipal bond market.
The market for tax-exempt bonds is basically strong and provides a necessary mechanism
for State and local govemment financing. We do not seek to diminish in any way the vitahty
of the municipal market. On the contrary, our proposals will build upon its basic strength
to create a more stable, efficient, and equitable market for financing the future capital needs
of State and local govemments.
Our focus is on whether new tax measures are needed to improve conditions in that market
and, if so, what form they should take. And our view is that State and local govemments,
issuing debt for public purposes, should be afforded the option of doing so on a fully taxable
basis, with a 30-percent interest subsidy from the Federal Govemment.
Basically, our proposal is designed to eliminate an artificial and unnecessary constraint on
the efficient financing of State and local govemment: the present limitation of the class of
potential lenders to those entities which can profitably use tax-exempt income. The
paradoxes in the current situation are manifold:
First, the second largest borrowing sector in our capital markets (after the Federal
Govemment) is narrowly confined to only a segment of the potential lender class.
Second, some of the Nation's largest groupings of financial assets are effectively denied
opportunity to make investments in the future growth of our States and cities.
Third, the value of holdings of tax-exempt securities can be significantly affected by
changes in tax rates, changes which may occur without consideration of, and with no desire
to create, such an impact.
It is such concems which have led us to the conclusion that the taxable bond option is an
idea whose time has come.
4lThis issue was probed extensively in 1967 hearings before the Subcommittee on Financial Institulions of the Senate
Committee on Banking and Currency on S. 1306,90th Cong., 1 st sess. (I %7). Opponents of commercial bank underwriting
of revenue bonds were unable to present a single instance where a bank had been guilty of a conflict of interest in
underwriting and dealing in general obligation issues.
354
1976 REPORT OF THE SECRETARY OF THE TREASURY
Tax-exempt status under the Internal Revenue Code
State and local governments issue three types of obligations which qualify for the interest
exemption under the Internal Revenue Code. The first category consists of general
obligations issued by a State or its political subdivisions. In the second category are
obligations not secured by general funds but by revenues which the State or political
subdivision derives from specific projects. The third group consists of industrial development
bonds, or IDB's, which are obligations secured by the revenues or property of a private party.
In 1968, Congress sought to limit the growth of tax-exempt IDB financing by providing that
such bonds will be taxable unless issued for specified purposes, such as housing,
transportation, solid waste disposal, or pollution control.
The municipal market
At the outset, I want to emphasize that the municipal bond market as a whole performed
very well in 1975. A record of $29 billion in new issues was established last year. Table 1
shows that this was the culmination of a steady upward trend over the past 15 years.
Despite its generally favorable performance, the municipal bond market is not without its
difficulties. There are three basic problems which any proposed changes should address: The
cyclical instability ofthe municipal bond market; critical changes in supply/demand patterns;
and the present inefficiency of the exemption as a financing mechanism. Although these
problems are interrelated, I will discuss each separately.
The cyclical volatility of the market is caused by the behavior of the major purchasers of
State and local debt. There are three m^jor participants in the market—commercial banks,
fire and casualty insurance companies, and individual investors, including personal trusts. All
other investors taken together comprise a small fraction of the purchasers of net new issues
of municipal securities. Table 2 indicates the composition of ownership. As shown in this
table, commercial banks histbrically have been the most important purchasers of State and
local debt. The participation of commercial banks means that the market may be adversely
affected during periods of credit stringency or strong demand for bank loans or when the
banking system's need for tax exemption diminishes. In such periods, the bond market tends
to perform relatively poorly. And as the role ofthe banks becomes less significant, individual
investors are called upon to take up part of the slack.
The volatility problem thus has two dimensions. First, individual investors will not
completely offset the decrease in participation of commercial banks so that the total volume
of debt that State and local governments can issue tends to decline. Secondly, individuals
are only willing to absorb larger amounts of municipal debt at sharply increasing interest
rates. The result, as shown iri table 3, is a fiuctuating relationship between taxable and taxexempt interest rates.
The volume of municipal debt and the interest rates at which it can be sold are thus
critically infiuenced by the fact that the market responds not only to overall changes in the
supply and demand for credit, but also to shortrun changes in the financial situation of a single
group of institutional lenders. A primary objective of tax proposals concerning municipal
bonds must be to moderate the market impact of these cyclical phenomena.
Our second area of concern involves the longrun prospects for the municipal bond market.
The role of commercial banks is also important in this regard. Because their need for taxexempt income has declined, there is growing concern that commercial banks will on average
TABLE 1. — Volume of gross new issues of long-term municipal honds hy year
[Million?; of dollars]
Year
1960
1961
1%2
1%3
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974 :
1975
Source: Bond Buyer.
Gross issues
;
7.229
8.359
8.558
10.107
10.544
11.084
11.089
14.288
16.374
11.460
17.762
24.370
22.941
22.953
22.824
29.224
TABLE 2.—Net change in ownership of municipal securities
Seasonally adjusted annual rates
Commercial banks
Year
Billions
of
dollars
1960...
1%I
1962
l%3
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
19751..
5.3
5.1
5.4
5.7
6.0
7.3
5.6
7.8
9.5
9.9
11.2
17.6
14.4
13.7
17.4
16.2
Billions
of
dollars
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
lOO.O'
100.0
100.0
100.0
3.5
1.2
-1.0
1.0
2.6
1.7
3.6
-2.2
-0.7
9.6
-0.8
-0.2
1.0
4.3
10.0
10.0
Billions
of
dollars
66.0
23.5
-18.5
17.6
43.3
23.3
64.3
-28.2
-7.4
96.9
-7.2
-1.1
7.0
31.4
57.5
61.7
Percent
0.6
2.8
5.7
3.9
3.6
5.2
2.3
9.1
8.6
0.2
10.7
12.6
7.2
5.7
5.5
2.4
11.3
54.9
105.6
68.4
60.0
71.2
41.1
116.7
90.5
2.0
95.5
71.6
50.0
41.6
31.6
14.8
Fire and casualty insurance
companies
Billions
of dollars
0.8
l.O
0.8
0.7
0.4
0.4
1.3
1.4
1.0
1.2
1.5
3.9
4.8
3.9
All othei
Percent
Billions
of
dollars
15.1
19.6
14.8
12.3
6.7
5.5
23.2
18.0
10.5
12.1
13.4
22.2
33.3
28.5
10.4
13.6
0.4
0.1
-0.1
O.l
-0.6
0.0
-1.6
-0.5
0.6
-l.l
-0.2
1.3
1.4
-0.2
0.1
1.6
7.6
2.0
-1.9
1.8
-10.0
-28.6
-6.4
6.3
-11.1
-1.8
7.4
9.7
-1.5
0.6
m
X
X
DO
H
C/3
9.8
I First three quarters annualized.
Source: Federal Reserve Board, flow of funds data.
Ul
356
1976 REPORT OF THE SECRETARY OF THE TREASURY
TABLE 3. — Tax-exempt and taxahle interest rates and ratio of the two
Tax-exempt interest rate
(Bond Buyer 20)
I960..
1961..
1962..
1963..
1964..
1965..
1966..
1967..
1968..
1969...
1970...
1971...
1972...
1973...
1974...
1975...
Pcncni
3.54
3.45
3.17
3.16
3.22
3.25
3.81
3.92
4.42
5.66
6.36
5.52
5.25
5.22
6.09
7.06
Taxahle interest rate
(Moody's Corporate New Issue)
l\'
4.82
4.70
4.46
4.41
4.54
4.71
5.59
5.91
6.70
7.97
8.85
7.74
7.47
7.88
9.08
9.42
73.5
71.6
71.1
71.7
70.9
69.0
. 68.2
66.3
66.0
71.0
71.9
73.9
70.3
66.3
67.1
75.0
be less interested in municipal bonds in the future. Table 4 shows the ownership of municipal
securities for selected periods since 1960. The data shown there indicates that commercial
banks absorbed over 70 percent of the net new issues of municipal debt over the period from
I960 to 1970, a period which saw their share of the total debt outstanding almost double.
Since 1970, however, commercial banks have absorbed only one-half of the net new issues,
barely enough to keep their share of the total debt outstanding constant. Thus, so far as longterm development of the market is concerned, other sources of financing must be found if
the volume of municipal borrowing is to be maintained.
At the same time, inflation in all of its manifestations has and will continue to create sharply
increased levels of demand. The impact of inflation starts with the higher cost of capital
improvements which tax-exempt credit is designed primarily to finance. A more indirect, but
equally real, byproduct is the tendency of individuals to seek to shift certain functions to
municipal government in order to preserve a standard of living. More mass transit, free
university tuition, and public recreation facilities all impose strains on the market.
Moreover, the problem is aggravated by another development—the increasing use ofthe
market to finance capital outlays, particularly pollution control and other industrial facilities,
which do not fall within the traditional categories of State and local financing. Table 5 shows
the growing volume of these two types of tax-exempt financing since 1971. At present, the
published data indicate that $2.9 billion, or just less than 10 percent of new borrowing in
the municipal bond market, is undertaken for these nongovernmental purposes, particularly
for private pollution control facilities. Moreover, specialists in this field believe that these
figures may be underestimated by a factor of two due to the relatively large volume of private
placements which are not reflected in the published data. This contrasts sharply with the
situation in 1968, when the IDB limitations were first enacted. Then the volume of industrial
development bond financing was approaching $1.6 billion annually. Moreover, since these
bonds are issued with long maturities, they impact on that part ofthe market which is already
showing structural weakness, and exacerbate the problem.
In short, the long-range prospect for the municipal bond market is clouded by two
interrelated elements: State supply of credit and growing demand for credit. If these two
problems are not dealt with now. State and local governments borrowing for conventional
municipal purposes will find, over time, their market outlets further constrained and their
interest rates rising higher.
This leads to the third problem—the present inefficiency ofthe exemption and the resulting
growth in Federal revenue losses and tax sheltering. We believe that the Federal and State
and local governments have a strong, mutual interest in improving the efficiency ofthe taxexempt market and that we must seek new ways to achieve this important objective.
Tax exemption has provided lower interest costs to State and local governments in a
particularly inefficient way—the cost to the Federal Government is greater than the benefits
to municipal borrowers. The degree to which tax exemption reduces interest costs paid by
governmental borrowers varies with the length of the maturity of the particular debt
obligation. Tax-exempt securities enjoy a greater reduction in interest rates relative to
taxable securities for short-term maturities than for longer term obligations. On average, taxexempt interest rates are more than 40 percent below taxable rates for issues of 1 year or
less, about 30 percent for intermediate issues, and about 20 percent for 30-year bonds. This
represents the saving to municipal borrowers.
TABLE 4. — Ownership of municipal securities, yearend outstandings, selected years
Commercial banks
Year
Total
Billions
of
dollars
I960
1965
1970
1974
70.8
100.3
144.5
204.1
30.8
36.4
45.6
60.3
Nonlife insurance
Percent
of
total
Percent
of
total
Billions
of
dollars
Percent
of
total
Billions
of
dollars
43.5
36.3
31.6
29.6
17.7
38.9
70.2
100.3
25.0
38.8
48.6
49.2
8.1
11.3
17.8
30.7
11.4
11.3
12.3
15.1
All others
Billions
of
dollars
14.2
13.7
10.9
12.8
Percent
of
total
20.1
13.7
7.6
6.3
m
X
X
DO
H
Source: Federal Reserve Board, flow of funds data.
<1
358
1976 REPORT OF THE SECRETARY OF THE TREASURY
TABLE 5.—Tax-exempt borrowing
[Dollar amounts in millions]
Year
Gross long-term
tax-exempt
borrowing
1971
1972
1973
1974
1975
$24,370
22.941
22.953
22.824
29.224
PoUution control
$
93
594
1.750
2.140
2.508
Other industrial
development
bonds
Total
nongovernmental
Percent of
market
$220
471
270
337
398
$ 313
1.065
2.020
2.477
2.906
1.3
4.6
8.8
10.9
9.9
Source: Bond Buyer.
At the same time, the cost to the Treasury can be estimated by reference to the marginal
tax rate ofthe average tax-exempt investor. It has been estimated that the average marginal
tax bracket of all investors in tax-exempt bonds is over 40 percent. In other words, if all these
investors purchased taxable rather than tax-exempt bonds, the U.S. Treasury would receive
additional revenues equal to over 40 percent ofthe interest on these bonds. Thus, the revenue
loss to the Treasury is equal to over 40 percent of the bond interest that would be paid if
that interest were taxable. Yet, as indicated above, the benefit to the issuing State and local
governments is substantially less than 40 percent of the interest that would be paid on such
taxable obligations. For this reason, the present exemption is a very inefficient means of
providing lower borrowing costs for State and local governments.
For example, if in one year $30 billion of long-term debt were issued at a tax-exempt
interest rate of, say, 6.3 percent rather than a taxable rate of 9 percent. State and local
governments would secure a reduction in interest payments of some $800 million in the first
year of that debt. On the other hand, if all that interest had been fully taxable and if purchasers
of that debt had no investnient alternatives available except taxable bonds, the Treasury
would have realized revenue gains of $1.1 billion. The $300 million difference represents
revenue losses not passed through to issuing governments, or the benefit accruing to investors
under present exemption.
Treasury proposals
Let me now turn to measures which I feel can significantly improve the performance of
the municipal bond market with respect to all three of these problem areas. The measures
proposed here will deal with the volatility problem by freeing the market from its current
oyerdependence on the need for tax-exempt income and the availability of credit from
particular classes of lenders. At the same time, new long-term sources of funds will be made
available to the municipal market. Finally, tax-exempt interest rates will be reduced and will
be maintained at a lower ratio to taxable rates than has been achieved historically,
particularly for longer term maturities. Finally, as a result of our recommendations. State and
local governments will receive substantial benefits in terms of lower net borrowing costs.
The taxable bond option
We believe the market should decide the basis upon which State and local securities are
issued. To accomplish this objective, issuers should be afforded the opportunity of issuing
debt on a taxable basis and, iri such circumstances, would receive an automatic 30-percent
interest subsidy from the Federal Government.
Let me be clear. By supporting the taxable bond option, I am not implying that State or
local government must or should have a higher level of subsidy from the Federal Government.
Our objective is not more in the way of direct subsidy but rather assistance in a more
meaningful form: the removal of significant constraints on the functioning of the second
largest sector of our capital markets.
After the Federal Government itself. State and local governments as a class are the largest
borrowers in our capital markets. Yet this enormous borrowing class is severely restricted
in the sources of funds it may tap. It is, as a practical matter, shut off from the billions of
dollars held by pension funds and the billions more held by foundations and other
nontaxpaying institutions. It is largely barred from other important potential lenders—for
example, life insurance companies—whose need for tax-exempt income is normally
insubstantial. In short, the taxable bond option would introduce to this market a muchneeded element of flexibility of freedom, under which the market should function more
efficiently.
Participation by State and local governments in this program would be entirely voluntary.
The issuing governments would decide whether they wish to continue to use conventional
tax-exempt financing or the new subsidized taxable instrument. In most cases, we anticipate
that issuers will advertise bonds for sale seeking bids on both a taxable and tax-exempt basis.
EXHIBITS
359
Issuers would switch from one market to the other depending on which provided the lower
net interest cost. As a general rule, we would expect that once the option is working
effectively the after-subsidy interest costs in the taxable market would be equal to the interest
cost prevailing in the tax-exempt market. If this were not the case. State and local
governments would issue debt in the less expensive market until interest rates were again
brought into close alinement.
Municipal borrowers will not elect the subsidized taxable and option unless the subsidy
is sufficiently large to induce some borrowers to switch from the tax-exempt to the taxable
market. An option offering very low subsidy would not be utilized. It is also clear, however,
that we cannot look at the tax-exempt market as ifit were completely homogeneous. Within
this market, instruments differ with respect to their maturity, their creditworthiness, and
other factors. The ratio of tax-exempt to taxable interest rates not only varies over time but,
as noted earlier, also varies with the maturity ofthe instrument. Generally, for shorter term
maturities tax-exempt yields are a much lower proportion of taxable yields than is the case .
for longer term instruments. Thus, a relatively low subsidy may offer a limited inducement
for municipalities borrowing short term to enter the taxable market, but a number of issuers
of longer term securities may be attracted. Perhaps more importantly, at any given time
investors otherwise similarly situated may differ substantially in their need for—and therefore
the value of—tax-exempt income. Over time, it is short-range considerations of this nature
which may turn out to be most significant.
Assuming the option induces a portion of State and local government borrowing to come
to the taxable market, the reduced volume of tax-exempt borrowing will, in turn, lead to lower
tax-exempt interest costs regardless of whether individual issuers choose to issue their debt
on a taxable or a tax-exempt basis.
How does the taxable bond option answer the three problem areas ofthe municipal market
considered earlier? Both the cyclical volatility of the current tax-exempt market and the
supply/demand imbalances are directly counteracted by this proposal. This will occur
because State and local borrowers will be able to appeal to new types of lenders if they are
able to offer taxable instruments. Pension funds and life insurance companies, for example,
can be expected to be attracted to such securities. Their preference for liquidity is less than
that of the banks and they would, therefore, be interested in longer term obligations having
the higher yields.
These results can be predicted with some confidence. The specific effects of the taxable
bond option will, of course, depend on many factors, including the market's acceptance of
the new instrument and the need for tax-exempt income at any given time.
It is important to remember that the benefits of reduced borrowing costs for State and local
governments come only partly from the interest subsidy. They also result from lower yields
accepted by those high-bracket investors who purchase tax-exempt bonds. That is, the net
return to them on new tax-exempt investments will decline as a portion ofthe new issues are
transferred from the tax-exempt to the taxable market. The benefit to State and local
governments will exceed the net cost of the interest subsidy.
Revenue impact
In our judgment, a subsidy of 30 percent of the net interest cost will provide much-needed
fiexibility in the longer end of the market and should induce a number of issuers of longer
term obligations to switch from the tax-exempt market. The net cost ofthe plan will depend
bn the gross subsidy which is paid to all municipal issuers of taxable securities, reduced by
the additional revenues generated by the higher volume of taxable, as opposed to tax-exempt,
issues. While the tax revenue inflow may be expected to offset some ofthe gross subsidy costs,
it is unreasonable to expect that, on balance. Treasury will make money from this plan. This
is because the plan is an optional one for State and local governments. Consequently, they
will only use it if there are cost benefits to be realized. Therefore, the taxable bond option
should not be advocated as a revenue raiser. It is fully justifiable because the benefits from
improvement in the structure of the market and in the efficiency of the exemption will be
large relative to any net Federal costs.
In table 6, we show the cost components of the interest subsidy and how those costs will
vary over time. It should be noted here that the first-year costs are only a fraction of what
the total longrun costs will be, since each successive year's issue of new debt will generate
subsidy costs in addition to those ofthe previous years. The gross subsidy costs are $39 million
the first year and climb to $486 million per year by the 10th year. Offsetting these costs are
Federal tax revenues of $32 million the f^rst year and $405 million per year by the 10th year.
Thus, the net annual costs grow from $7 million to $81 million over 10 years. The table also
indicates the benefits to State and local governments in terms of lower net interest expense.
As a result of the plan, interest rates paid by State and local governments decline by about
46 basis points in the over 15-year maturity range. Therefore, over 10 years, these savings
in annual interest payments grow from $69 million to $868 million. Thus, the ratio of State
360
1976 REPORT OF THE SECRETARY OF THE TREASURY
TABLE 6.—Annual costs and benefits of taxable municipal hond plan with 30 percent
subsidy
[Millions of dollars]
Year
Gross subsidy cost
Revenues generated
Net subsidy cost
Reduction in State and local interest costs
•
'
I
2
3
4
39
32
7
69
79
66
13
141
122
102
20
218
166
139
27
297
5
'
F0~
20
178
35
381
486"
405
81
868
and local benefits to net Federal costs exceeds 10 to 1.1 want to caution you that the precise
costs and benefits will depend on market conditions which cannot be foreseen in advance.
However, while the figures shown in the table can only reflect the particular assumptions
made, we believe them to be indicative of general market conditions which may be expected
to prevail in the future.
Recommended procedures for the taxable bond option
If a governmental unit elects to issue federally taxable obligations, and Treasury agrees to
pay the subsidy, neither the election nor the subsidy could be revoked or adversely modified,
even if the statute were later amended or repealed. In most cases the subsidy agreement
should be obtainable automatically through appropriate certification that certain general
standards have been fulfilled. For example, the subsidy would be payable only if the
instrument is marked to show clearly that all interest payments are subject to Federal tax.
The subsidy itself would be a fixed percentage ofthe issuer's net interest expense and could
not be varied administratively.
An issuer could elect the taxable bond option only for State or local obligations which
would be exempt under section 103 but for the election. Certain obligations otherwise
eligible would not qualify: Obligations where the net interest expense is unrealistically high
based on fair market value; obligations having maturity of less than 1 year; obligations held
by a congressionally established entity owned wholly or partly by the United States; and
obligations held by a State or local issuer of exempt bonds. The first and second limitations
are designed to avoid administrative burdens and excessive subsidy costs. The third is
necessary to prevent additional Federal subsidies for certain transactions already subsidized
by Federal agencies. The rule disqualifying obligations to be acquired by a State or local
government issuer is intended to prevent the issuance ofbonds merely to obtain the Federal
interest subsidy—for example, where two issuers swap their new obligations.
Initially, an issuer's net interest expense in excess of 12 percent would not be subsidized.
This ceiling could be modified prospectively based on subsequent experience. Where
necessary net interest expense would be adjusted to reflect discounts or premiums. The
subsidizable amount would be determined after deducting appropriate and administrative
costs. We anticipate that such costs will be low because, unlike certain other proponents of
an option, we contemplate minimum Federal involvement.
The interest subsidy payment would be made to the paying agent immediately before the
interest is payable to the holder. The subsidy would be held in escrow. It would be released
for payment to the holder only upon receipt from the issuer of its portion of interest then
due. The payer would file an information return with the Internal Revenue Service reporting
the payment of taxable interest, including the subsidy.
The statute must be drafted carefully to prevent arbitrage—issuing obligations in one
market for the purpose of investing the proceeds in a different market at a higher yield. With
respect to tax-exempt obligations. Congress attempted to limit arbitrage in 1969. The Code
now provides that the bonds will be taxable if the proceeds are invested in Federal or other
securities producing a materially higher yield over the term ofthe bonds. The artificially low
yields so required had the unintended effect of creating windfalls. By using such devices as
deep discount bonds and stripped coupons, promoters could show municipal finance officers
that there were still opportunities for arbitrage profit. The promoters thus induced many
advance refundings and other bond issues in situations where they would not otherwise have
occurred. This included issues of housing authority bonds where no more than 10 percent
ofthe proceeds went into housing. While Treasury believes that we have ended most ofthe
abuses, the situation still bears close watching. Based on this experience, we caution you that
the taxable bond option must incorporate appropriate restrictions on arbitrage.
In addition to the specific protections set forth above, we also believe it would be prudent
to limit the option to obligations which are sold through a competitive public offering,
insuring thereby that all terms are set on an arm's-length basis and not with an eye to taking
unfair advantage of benefits provided. Some will contend that this would be an unwarranted
discrimination against the many legitimate negotiated transactions. In our judgment.
EXHIBITS
361
however, it is an infinitely more desirable approach than the alternative of giving the Treasury
discretion to disapprove yields and other terms of all issues. That would involve a serious and
unnecessary intrusion into State and local affairs.
Since 1973, when Treasury previously recommended the taxable bond option, there have
been significant changes in the budget process. The option cannot work unless those who
want to purchase taxable obligations know that Federal funds will be available to pay the
subsidy for the life of the bonds. This will require a change in the normal appropriations
)rocess. You may wish to consider making or authorizing appropriations without fiscal year
imitation.
F
The pollution control exemption
The Municipal Finance Officers Association and the Securities Industry Association have
recommended repeal or substantial limitation ofthe pollution control exemption for private
companies. This recommendation warrants serious consideration as an additional method of
improving the market for State and local securities. The large volume of such issues has had
an adverse effect on interest rates for longer term municipal obligations, with which these
private credits compete.
Last year Treasury recommended that the pollution control exemption be limited to
identifiable facilities installed in plants already in operation. This would focus the exemption
more clearly and eliminate some ofthe difficulty in applying the current provision. The 1975
proposal would, however, tend to favor certain kinds of plant and equipment and certain
industries. Furthermore, there would still be considerable difficulty in attempting to identify
the portion of a facility which functions only for pollution control and the net costs allocable
to it.
Conclusion
Ladies and gentlemen, it is important not to misunderstand either the purpose or the nature
of the measures before us today. These measures are not the product ofthe New York City
financial crisis. Nor are they a direct consequence of the pressures on State and local
governments to provide more and more services. The purpose of the taxable bond option
is far more basic. It is designed to broaden the market for financing the various needs of State
and local governments. The new market can function in a truly free manner, since it will no
longer be severely constrained by the changing tax considerations of investors. The proposal
is also designed to insure that the $220 billion par value of our Nation's wealth now held in
the form of State and local securities is not impacted adversely by tax changes.
I am delighted that your committee is giving this important subject such prompt and careful
attention. We look forward to working closely with you in formulating a sound legislative
program.
Exhibit 18.—Statement of Secretary Simon, February 17,1976, before the House Ways and
Means Committee, on the public debt limit, increased long-term Treasury borrowing, and
removal of the 6-percent rate ceiling on savings bonds
It is never easy to go through the process of reconciling the manifold demands for more
Government spending on the one hand with our willingness and ability to pay for these
demands on the other. But while the budget, and particularly the fact of a substantial budget
deficit, are of course intimately related to the issues which face us, we are not here to consider
proposals to increase or reduce the size of the deficit. Today, we are here to consider another
substantial increase in the temporary debt ceiling. But in addition, we also have the rare
opportunity to consider legislative proposals which, simply stated, help everyone and hurt
no one.
I refer, of course, to Treasury's proposals to amend the Second Liberty Bond Act in two
respects. First, we are proposing that the authorized maximum maturity of notes issued
pursuant to that act be changed from 7 years to 10 years. And second, we are proposing that
the amount of long-term debt exempted from the 4 1/4-percent rate ceiling imposed by the
\ct be increased by $10 billion.
While these proposals are not new, they are more important today than ever before. The
reasons upon which the restrictions in existing law were originally based simply no longer
apply. Indeed, there are few, if any, observers of the capital markets who believe the existing
restrictions are healthy for the Govemment, for the capital markets, for the economy, or for
the people of the Nation.
In addition, we are also proposing that the 6-percent rate ceiling on savings bonds be
removed. Such action would permit the rate on savings bonds to be varied from time to time,
reflecting the interests of both taxpayers and savers.
362
1976 REPORT OF THE SECRETARY OF THE TREASURY
Debt Limit
Before turning to these key proposals, let me address the primary question facing this
committee today: An increase in the temporary debt limitation.
As you know, the present temporary debt ceiling of $595 billion (enacted on November
14, 1975) will expire on March 15, at which time the limit will revert to the permanent ceiling
of $400 billion. The committee estimates of when the debt subject to the limit would
approach the $595 billion level have been quite accurate. In the final week before the
expiration of the temporary limit, the actual amourit of debt subject to limit will closely
approach the temporary limit. Accordingly, during that week, the limit may hinder the
effective management of the Treasury's debt and cash balance.
As is customary, I have provided you with a monthly record of the debt subject to limit
from June 30, 1975, through September 30, 1977, and interim monthly estimates for months
in which the peak does not occur on the last day ofthe month. While today we are concerned
primarily with establishing a debt limit for the near term, data is provided as an indicator of
our financing requirements based upon the President's budget through fiscal 1977. As I will
discuss in detail later, these requirements have serious debt management implications.
Specific requirements
The Second Concurrent Resolution on the 1976 budget provided for levels ofpublic debt
of $622.6 billion at the end ofthe fiscal year 1976 and $641 billion at the end ofthe transition
quarter. It is, however, not clear what level for cash balance was assumed in the congressional
budget resolution. Furthermore, the level of debt in the resolution apparently does not
provide for agency debt that is subject to the statutory limitation. As a technical matter,
moreover, depending on the cash volume assumption, the peak debt levels are reached on
June 15 and August 31.
In the Federal budget for fiscal year 1977, debt subject to statutory limitation is estimated
at $624.2 billion at the end of fiscal year 1976 and $643.1 billion on September 30. These
figures are based on an assumed $9 billion cash balance. The Treasury estimates assume a
$6 billion cash balance and a $3 billion margin for contingencies and show debt limit needs
of $630 billion at the June peak and $645 billion at the August peak. Accordingly, we are
requesting that the temporary debt limitation be reenacted at $645 billion through
September 30, or, in any event, not less than $630 billion for June 30.
Second Liberty Bond Act Amendments
Let me now turn to an issue of only slightly less urgency and far greater concern: the current
confinement of Treasury borrowing to maturities of 7 years or less. To state our position most
directly, we believe this restriction poses severe risks to the capital markets and provides
nothing in the way of economic benefits.
Objectives of Treasury debt management
It is clear to all of us that the national debt cannot be managed without careful
consideration of its impact. Because Federal borrowing now accounts for almost 80 percent
of all financing in our Nation's capital markets, all other markets, all other financial assets
are directly influenced by the structure of the Federal debt. As a result, the structure of the
debt has an impact ori our economy; it can contribute to economic stabilization or detract
from it.
What are the implications of this tremendous infiuence? In my view, it means that we must
use every available tool to insure that Federal borrowing needs are met in such a way that
the resulting debt structure permits financing at the lowest cost, both in terms of interest rates
and economic and financial dislocation. Given these objectives, it is no longer possible to
justify severe and anachronistic constraints that result in a debt structure that has been very
expensive in an economic, as well as a financial, sense. Moreover, in light of our massive
borrowing needs, these constraints are destined to have an even greater adverse impact in
the future. The extensive economic work which has been done in the area of debt structure
has not only confirmed the potential for harm, but has also demonstrated conclusively that
there are no countervailing benefits.
Consequences of the current restrictions
We know what the current restrictions have meant in absolute terms: a decline of m ; ^
than 33 percent in the average maturity of the publicly held debt in the last 3 years aloitfe
and more frequent and larger Treasury borrowings. But the question I want to concentrate
on today is why we care: why we believe there are serious dangers in confining Treasury
borrowing to only the short end of the market.
We care primarily because overreliance on short-term financing, as reflected in a short and
shortening maturity structure and the resulting lack of balance in the overall debt structure,
exposes us to adverse financial and economic effects:
EXHIBITS
•
•
•
363
First, it poses the risk of higher Federal borrowing costs and imposes unnecessary
transaction costs;
Second, it contributes to a more volatile market environment, placing substantial
burdens on financial intermediaries and threatening the ability of the private
sector—and particularly small and medium-sized businesses^to meet financing
needs;
Finally, it poses an unmeasurable and uncontrollable threat to sound fiscal and
monetary policies.
Cost
Our concerns begin with the fact that unless the Treasury is authorized to balance its
borrbwing throughout the maturity ranges, the taxpayer will be vulnerable to shortrun
changes in interest rates. Moreover, whatever may happen with respect to interest rates, a
debt structure weighted heavily to the short end imposes unnecessary transaction costs.
In periods of unexpected rises in interest rates, such as we have experienced during most
of the last decade, the average cost of borrowing in the short-term market, and subsequent
refunding in this market, may well exceed the rate for borrowing long-term in the first place.
But in pursuing these proposals, it is not our purpbse to suggest that interest rates are headed
higher, or that any such estimates—guesses may be more accurate—ought to play a role in
our consideration of these statutory limitations. Rather, I am suggesting that, from the
standpoint of costs, it is imprudent to have statutory limitations that in effect mandate further
dramatic shortening in the maturity structure ofthe debt. We need a balanced debt structure,
not an extreme one.
In addition to possible interest rate costs, there are heavy transaction costs, which must
be borne by the taxpayer. When Treasury borrowings are confined to the short-term area,
obviously a large amount of debt rollover is necessary, relative to what would be necessary
if we could borrow more in the long-term area. Each time there is a rollover, there are
inevitable direct transaction costs. Moreover, the proliferation of short-term borrowings
means that dealers have to carry larger inventories of securities. The cost of carrying such
larger inventories adds further to the transaction price, increasing the overall cost which is
ultimately borne by the taxpayer.
Effect on private borrowers
A concentration of Treasury financing in the short-term area also has potentially adverse
effects on private users of short-term credit. With the Treasury constantly tapping the shortterm market for substantial funds, both short-term interest rates and the availability of shortterm financing become vulnerable to episodes of market congestion and to changes in the
general monetary environment.
To understand the potential risks involved, we must first examine the enormous change
in the magnitude of the Treasury's demands upon the market. Just in the last 2 years, the
overall amount of privately held marketable Federal debt outstanding has grown from $ 171
billion to $263 billion. When this overall growth is viewed in the context of a shortening
maturity structure—occasioned primarily by the limitations which concern us today—the
results are even more disturbing. For the first 2 months of this year. Treasury borrowed an
average $9 1/2 billion per week. For the comparable period in 1974, the figure was $5 1/2
billion.
Part of this increase is, of course, due to our large new money requirements, primarily to
finance the deficits. But the bulk ofthe borrowing is to finance the rollover of maturing debt.
And the shorter the debt structure, the greater the rollover burden.
From the market's standpoint, there is virtually no difference between the two
components. Each type of borrowing requires a new underwriting and investment decision.
Rollovers are not automatic; a holder of a maturing bill must make the choice between
lending to the Treasury, lending to another borrower, or spending the proceeds. Accordingly,
all of the costs and pressures of borrowing are there, irrespective of the purpose of the
borrowing. \
Let's be clear about the implications.
First, there are substantia] pressures on intermediaries: Given a greater amount of
securities outstanding and a sharp growth in periodic refunding, dealers must take larger and
larger positions. To the degree that dealers cannot or will not increase their position-taking
capacity, the breadth, depth, and resiliency ofthe market is reduced. In everyday terms, the
market becomes thinner, and prices—that is, interest rates—become more volatile.
Volatility is also enhanced by other factors. The enormous supply of riskless, liquid
Treasury securities provides a tempting alternative for investors with psychological concerns
about other assets—e.g., commercial paper, certificates of deposits. Thus, in effect our debt
structure facihtates large-scale and highly disruptive shifts of funds from one short-term
sector to another, irrespective of whether such shifts are economically justifiable.
364
1976 REPORT OF THE SECRETARY OF THE TREASURY
Finally, the sheer increase in the number of decisions the market must make enhances the
possibility of distortions.
Consider the process. The dealers on which we depend to distribute our securities must
decide, separately, the amount they will purchase from us, and the price thereof, as well as
the terms on which they will sell to their customers. Holders of maturing instruments have
to decide whether and where to reinvest the proceeds, giving them an opportunity to rethink
their needs in terms of the type of security to purchase as well as the maturity. And other
investors have to decide whether they are going to buy our new securities, how much, and
at what price. In terms of volatility versus stability, what kind of debt structure would we
prefer: one that causes this unsettling process to occur less than 100 times a year, as was the
case only a few years ago? Or today's, under which the process occurs, on average, nearly
every business day.
What are volafility's ultimate byproducts? At a minimum, we are likely to see an increase
in rates on new short-term debt and a higher dealer markup on debt trading in the secondary
market. These phenomena are the natural reaction of investors and dealers to a condition
markets do not tolerate well: uncertainty.
If the uncertainty reaches greater levels—for example, as might be the case if market
disruption is accompanied by perceptions of change in Federal Reserve policy—many
market participants may temporarily withdraw from the market altogether.
In such circumstances. Treasury's ability to finance is obviously impaired. But, more
importantly, the non-Federal portion ofthe market may feel far more serious repercussions.
Local governmental units, small and medium-sized business—indeed all but the top-rated
credits—may find themselves facing serious difficulties as they are cut off from sources of
funds to roll over maturing short-term debt.
Moreover, these shocks are not confined to the short-term market. They spread rapidly
into the intermediate and longer term markets and begin to interfere with orderly financing
plans of business corporations and State and municipal governments, as well as with the
growing volume of mortgage financing which is handled through securities markets.
Again, the impact is particularly acute on the smaller or lower rated issuers. Because of
the risks set forth above, investors know that such entities are especially vulnerable to even
normal changes in the business cycle, especially when they have substantial short-term debt
outstanding.
In the final analysis, therefore, perhaps the most dangerous consequence is a further
reluctance on the part of investors to make long-term commitments to our Nation's capital
growth. This reaction, which accentuates the pressures on long-term investment caused by
fears of future inflation, has grave implications for our future economic growth. It
discourages outlays for new expansion, it discourages risk-taking, and it discourages
entrepreneurship at precisely the time in our Nation's economic history when such conduct
is needed most.
Impact on economic policy
Another aspect of this continued trend toward a shorter and shorter debt maturity—which
if carried to an extreme could give us a national debt with zero maturity, i.e., a huge stock
of green pieces of paper called money—is growing liquidity in the economy. By pumping
more and more liquidity into the system, spending may be increased at the expense of savings
and investment.
Even more disturbing is the fact that these consequences are unmeasurable and
uncontrollable. Such spending effects could come at any time, irrespective of the course of
fiscal and monetary policy at the time. And if the dam bursts, so to speak, in a period of
growing inflation, the resulting sharp acceleration of the inflationary trend may be
invulnerable to fiscal and monetary efforts.
We believe debt management should complement longrun economic and financial
stabilization goals. An unbalanced debt structure poses the risk that policy efforts to control
cyclical excesses—such as might be appropriate at a future time when the economy is
expanding rapidly—will be thwarted by an accumulation of liquidity; and accumulation in
the form of short-term Treasury securities. Given the debt structure in effect mandated by
the size of recent deficits and the maturity limitations, this risk is serious.
Impact on interest rate structure
The old argument against these proposals is that more long-term Federal borrowing would
drive up long-term interest rates; in other words, that a balanced debt structure and judicious
borrowing in all maturities would somehow be harmful to the long-term market. This
argument, taken at face value, would imply that the Government should always finance in
the short-term markets—a conclusion which not only is wrong in concept but, as we have
shown, has in the past been extremely costly in both financial and economic terms.
EXHIBITS
365
Long-term interest rate levels respond primarily to investors' views regarding inflation and
the future course of inflation. If inflation is expected to persist, investors demand to be
compensated not only for the use of their money, but also for the fact that when the money
is repaid, it is worth less, as a consequence of inflation, than when it was lent out. The result
is higher long-term rates.
In addition, inflation makes all borrowers—but particularly the smaller or lower rated
firms—more vulnerable to economic reversals. Accordingly, it tends to enhance the
investment risk, with respect to many long-term investments. Again, this higher investment
risk will be reflected in the interest rate, providing another source of upward pressure on longterm rate levels.
Other factors in the level of long-term interest rates include expectations about the future
course of short-term rates and existing short-term rates. If short-term interest rates are
expected to rise, a potential long-term investor will demand a rate which compensates him
not only for the principal risk presented by the investment, but also for the lost opportunity
to roll over short-term debt at higher and higher returns.
Current short-term rate levels also play a role because many financial intermediaries rely
on short-term credit as a principal source of funds. Thus, for example, if a savings and loan
association is forced to pay higher rates on short-term deposits, the higher costs must
ultimately be refiected in the rate at which it is willing to make long-term mortgage loans,
and in the amount of long-term credit it is able to supply.
By contrast, there is no evidence that greater Treasury access to the longer maturities—
if judiciously employed—would play any role whatsoever in the determination of long-term
rates.
Indeed, for at least two reasons, just the contrary is likely to be the case. First, as we have
shown, concentration of Federal borrowing in the short-term area can lead to greater
uncertainty and, at some point, infiation in the economy. This leads to an increase both in
short-term rate expectations and in the infiation premium demanded by long-term investors
and, hence, to an increase in long-term interest rates.
Second, as heavy Treasury short-term borrowing drives up short-term rates, disintermediation takes place. As outflows occur, the ability of intermediaries to make long-term loans
is curtailed and what loans are made are at higher rates, reflecting the relative scarcity of
this form of credit.
In short, as we would expect, the distortion of the market mechanism caused by the
artificial maturity limitations has no demonstrable benefits in terms of long-term interest
rates or any other legitimate objective.
Debt management in 1976-77
I have dwelled at length on the principles involved because they are crucial to an
understanding of the issues. But let me turn now to the very real practical problems we face
in the immediate future.
Our Government securities market is an immensely fiexible, immensely capable market.
Perhaps a good comparison is a freeway. With all lanes open, a freeway can handle a
tremendous volume of traffic at the most efficient speeds. But when overloaded, either
because traffic volume is simply too high, or because an accident or construction has closed
some of the lanes, efficiency drops precipitously. Not only is traffic on the freeway slowed,
but the effects spill over on to other roads.
The capital markets today are hampered by the fact that, in effect, two of the four lanes
are blocked off, insofar as the Treasury is concerned. We are forced to confine ourselves to
the below 2-year and 2- to 7-year ranges and these lanes, Mr. Chairman, have become
severely congested.
Congestion exists not only because we must enter the market to raise new funds to finance
our deficits and meet other new needs, but also because we must borrow to retire maturing
debt. Looking first at new borrowing alone, by the end of this month, the Treasury will have
borrowed nearly $16 billion in the market in 1976. And during the remainder ofthe fiscal
year, through June, we will need to borrow an additional $19-$24 billion of new funds; a
total of $35-$40 billion in the first 6 months of 1976.
In later periods, we will need to borrow nearly $20 billion in the transition quarter, and
some $50 billion of new money in the market in fiscal year 1977.
All in all, our new money market borrowing needs in the next 19 months, based on the
President's budget, will total upwards of $90 billion. This is nearly $5 billion a month and
more than $1 billion every week.
On top of these new money borrowing requirements, we also have an immense refunding
job to do. In the same 19-month period, over $51 billion of privately held coupon debt will
mature. Our weekly issues of 13- and 26-week bills are now in the $7 billion range and will
inevitably increase. And our issues of 52-week bills, every 4 weeks, are now in the $3 billion
range and may well be in the $4 billion range by the end of fiscal year 1977. In short, our
366
1976 REPORT OF THE SECRETARY OF THE TREASURY
total requirements for both purposes are some 10 tiriies our new money needs: approaching
$2 billion of borrowing every day.
To meet these needs, since 1972, we have relied primarily on the auction technique; that
is, the yield on a particular issue is determined by public bids. While the auction technique
has resulted in substantial savings to the taxpayer, it has one important limitation. We have
found from experience that, given the absorptive capacity of the market, auctions of much
more than $2.5 billion at one time result in disproportionately high interest costs.
All in all, we face a formidable financing job. It is one that can be managed, but there are
severe costs and serious risks. And I hope, in my testimony this morning, 1 have conveyed
some of these concerns to you.
Let me add that there is another legacy in this dilemma, one that will be faced by my
successor, and yours as well. Even if we are successful in reducing the size of our deficits
and the consequent need for new money financing, the enormous concentration of shortterm financing will require similar magnitudes of financing, just for refunding, week after
week, far into the future.
Accordingly, I must urge this committee, as strongly as I can, to respond to these immediate
needs. What is done in managing the public debt this month, and this year, will have a direct
effect on the strength and sustainability ofthe economic recovery. Treasury must promptly
minimize its reliance on short-term bills and maximize its use ofthe longer intermediate and
longer terrii markets. If, instead, we are forced to rely on short-term financing, we will be
obliged to come to the market more frequently and for larger amounts. The excessive
liquidity injected into the economy as a result of such shorter term financing, when coupled
with these more frequent incursions, will destabilize the overall market environment and will
pose a continuing threat to all other borrowers and to the financial institutions on which the
housing iridustry, small business, and all of us must rely.
Savings Bond Rate Ceiling
Finally, let me also urge that Congress act to remove the current 6-percent interest rate
ceiling on savings bonds. Since saving^ bonds account for approximately one-fourth of the
total privately held Treasury debt, greater fiexibility in this area can make a significant
contribution to our overall debt management objectives. Savings bonds provide a stable and
important source of credit for the Government and we must have the flexibility to insure that
the return to savers is a fair one—one that reflects financial and economic conditions as they
may change from time to time.
Authority to vary the rate on savings bonds would, of course, be exercised with due regard
for the impact of rate changes on depositary institutions. In this connection, I would note
that we have consistently supported legislation such as the Financial Institutions Act which
would allow all forms of institutions to compete, on an equal basis, in a free market
environment. Freedom to compete and competitive equality, in our view, will contribute far
more to the health of all institutions than artificial constraints such as the 6-percent
limitation.
It is in no one's interest to price savings bonds at rates which would significantly erode
depositary institutions' sources of funds. But it would be equally undesirable to deny the
Government a stable source of credit by artificial constraints. We need the fiexibility to strike
the balance.
Ladies and gentlemen, we are not faced with a Gordian knot which can be cut only with
Herculean effort. It's a slipknot that can be undone by a simjjle pull from the Congress. As
Winston Churchill once said, "Give us the tools and we will do the job." Give us in the
Treasury the tools and we will do our job of debt management in a manner in which the
Congress can take pride.
Exhibit 19.—Statement by Assistant Secretary Gerard, June 1, 1976, before the House
Ways and Means Committee, on the public debt limit
As the committee is aware, the temporary increase in the public debt limit enacted in
March will expire on June 30. We are here this moming, therefore, to provide the committee
with our views as to provisions for meeting the financing needs of the Federal Govemment
during the transition quarter and fiscal year 1977.
There are two essential aspects to this process. First, a new dollar limit must be established
at a level consistent with the expected imbalance between receipts and outlays and with the
level of debt above the $400 billion limit already outstanding. Second, we must have adequate
flexibility in our available debt management techniques to insure that the substantial deficits
anticipated over the 15-month period are financed with the least possible disruption of
financial markets. Specifically, we believe an increase in the amount of bonds which may be
issued without regard for the 4 1 /4-percent ceiling and a grant bf authority to change the rate
of return on savings bonds to reflect changing financial conditions are required.
367
EXHIBITS
The debt limit
The first concurrent budget resolution, adopted in May, established the unified budget
deficit for the transition quarter at $ 16.2 billion and provided for an increase in the temporary
statutory debt limit of $20.2 billion: an overall limitation of $647.2 billion. The resolution
also called for a budget resulting in a unified budget deficit of $50.8 billion in fiscal year 1977
and an increase in the temporary statutory debt limit of $65.9 billion over the amount
specified for the transifion quarter: a $713 billion limit through September 30, 1977.
Consistent with the committee's procedures, we have provided the committee with an
array of tables relating to the debt limit and the management of the public debt. The tables
showing the debt subject to limit by month through the end of fiscal year 1977 are based on
the President's proposals as amended by subsequent legislation. Based on this premise, we
believe our debt requirements—with a $6 billion cash balance and a $3 billion contingency
allowance—will be $711 billion at September 30, 1977. Our peak need, however, is $716
billion at June 15, 1977.
Since the permanent limit is now $400 billion, implementation ofthe concurrent resolution
would require a temporary limitation of $247 billion for the period from July 1, 1976, through
September 30, 1976, and a temporary limitation of $313 billion for the period from October
1, 1976, through September 30, 1977. Based on our figures, and assuming a cash balance
of $6 billion and a $3 billion contingency allowance, these limits would be slightly below our
estimated peak need on June 15..Assuming we can clarify this point, we would have no
difficulty in accepting the limits in the resolution.
I would like to turn now to the question ofthe debt management tools I mentioned earlier:
flexibility with respect to the rate of interest payable on savings bonds and the additional bond
authority.
Public debt subject to limitation, fiscal year 1976, based on budget receipts of $298 billion,
budget outlays of $372 billion, off budget outlays of $9 hillion
[In billions of dollars]
Operating
cash balance
1975
June 30
July 31
Aug. 31
Sept. 30
Oct. 31
Nov. 30
Dec. 31
Public debt
subject to limit
With $3 billion margin for
contmgencies
ACTUAL
7.6
4.2
3.6
10.5
10.3
6.5
8.5
534.2
539.2
548.7
554.3
563.1
567.9
577.8
12.0
12.1
5.9
8.0
2.7
11.5
8.8
585.5
595.0
597.0
601.6
604.9
603.1
608.9
1976
Jan. 31
Feb. 29
Mar. 15
Mar. 31
Apr. 15
Apr. 30
May 27
ESTIMATED
June 15 (peak)..
June 30
617
616
6
6
620
619
Public debt subject to limitation, transition quarter, July-September 1976, based on budget
receipts of $84 hillion, budget outlays of $99 billion, off budget outlays of $5 hillion
[In billions of dollars]
Operating
cash balance
1976
June 30
July 31
Aug. 31 ....
Sept. 30....
Public debt
subject to limit
With $3 billion margin for
contingencies
ESTIMATED
616
627
637
636
619
630
640
639
368
1976 REPORT OF THE SECRETARY OF THE TREASURY
Public debt subject to limitation, fiscal year 1977, based on budget receipts of $352 hillion,
budget outlays of $397 hillion, off-budget outlays o f $ l l hillion
[In billions of dollars]
Operating
cash balance
1976
Sept. 30
Oct. 31
Nov. 30
Dec. 31
7977
Jan. 31
Feb. 28
Mar. 31
Apr. 15
Apr. 30
May 31
June 15 (peak)..
June 30
July 31
Aug. 31
Sept. 30
Public debt
subject to limit
With $3 bilhon margin for
contingencies
ESTIMATED
636
646
656
660
639
649
659
663
663
678
693
701
690
706
713
696
701
706
708
666
681
696
704
693
709
716
699
704
709
711
Savings bonds
We have, as the committee knows, several times recommended that the Secretary, with
the approval of the President, be given full discretion to vary the terms and conditions
applying to savings bonds, including the rate of return. 1 want to repeat that recommendation,
because I feel that flexibility in altering the terms of savings bonds may, at times, be
important, not only for the continued success of the savings bonds program, but for Treasury
debt management in the broad sense.
I will not take the time now to reiterate all ofthe arguments that have been brought forward
in the past to support this recommendation. Previous hearings before this committee have
gone into the matter in some detail. I would be pleased, however, to respond to any questions
the committee may have with respect to the savings bonds program. I should emphasize,
however, that if the savings bonds program is to remain viable—and this is important for
Treasury debt management—the purchasers and holders of savings bonds must continue to
believe that it is a fair program that provides them with a reasonable rate of return. That is
the basic purpose of our recommendation: to give that continuing assurance.
Bond authority
At the time of its last consideration ofthe debt limit, the Congress provided an additional
$2 billion exception to the 4 1/4-percent ceiling. Although the 4 1/4-percent ceiling is an
anomaly, the exception provided by the Congress has prevented the ceiling from seriously
affecting the financing ofthe Government. However, as recently as the February 15 quarterly
refunding, it was necessary to restrict the amount of new long bonds to $400 million at a time
when a larger amount could have been sold without adverse effects on the market for agency,
corporate, or municipal securities.
We presently have $ 1.25 billion ofthe $2 billion exemption remaining. In the period ahead,
it would seem reasonable that we may have the opportunity to issue additional long-term
debt, without adverse consequences for other borrowers and with great benefit to the
maturity structure of the public debt.
I am sure I need not reiterate in detail the position expressed to this committee by Secretary
Simon last February. We believe it is in the long-term best interests of our economy to have
a well-balanced national debt structure.
For this reason, we need the fiexibility to seize all opportunities to achieve greater balance
in our debt as they arise. If the committee agrees, we would urge you to raise the exception
to the 4 1/4-percent limit to a total of $22 billion.
Mr. Chairman, the Treasury Department has several times in great detail discussed the
importance which it attaches to the ability to finance in all sectors ofthe market, including
the longest term sector. In this we have had the support ofthe vast majority ofthe participants
in our financial markets. I am glad to say that we now also have the support ofthe Comptroller
General. In his letterof transmittal of his report on the 4 1/4-percent ceiling, Mr. Staats said:
The inability to at least partially finance these deficits with long-term debt means that
the Federal Government will become an increasingly active participant, and a
potentially disruptive infiuence, in private capital markets and in the short segment of
the capital market.
EXHIBITS
369
I commend the report in its entirety to you. Indeed, I feel it is of such great importance
that I would like to read here the four interrelated conclusions reached by the General
Accounting Office along with the recommendations suggested for consideration by the
Congress:
1. Considering the apparent rationale for the original legislation—that is, to minimize the
costs of Treasury borrowing operations, given market conditions, in a national emergency—
one cannot argue for either the current level or the continued existence ofthe 4 1/4-percent
interest limitation. It no longer serves to reduce the cost of borrowing; instead, it simply keeps
the Treasury from any further borrowing in the long-term securities market.
2. The limitation (and the exhaustion of the $10 billion exclusion) encourages a
shortening of the maturity ofthe national debt. This shortening tendency may, in turn, place
the Treasury in a more vulnerable position with respect to the interest rate terms that it
accepts on borrowings. That is, the Treasury may find itself in the unfavorable position (1)
of having to refinance massive amounts of short-term debt at very high interest rates and (2)
of being a potentially destabilizing influence on money and capital markets.
3. Aside from an overriding concern with lengthening the maturity of the public debt,
there are three differing philosophies regarding the objectives of debt management: avoiding
disruption through more systematized securities flotations, stabilizing economic activity, and
minimizing interest costs. Given contemporary and foreseeable levels of interest rates,
achieving any of these objectives will not be possible as long as the 4 1/4-percent interest
limitation on long-term Treasury debt remains in effect.
4. A theoretical basis and some supporting practical experience indicate that the
limitation has at times distorted the term structure of interest rates, thus causing a
reallocation of credit among various sectors ofthe economy and increased costs of servicing
the Government debt. On the other hand, the relevant empirical evidence suggests that
neither the current existence nor the repeal of the limitation causes, or would cause, much
distortion in the term structure of interest rates and, hence, would not affect the relative costs
of borrowing in various maturity sectors. Weighing theory and the experience of Treasury
officials and market practitioners against the available empirical evidence (and its
shortcomings), we can reasonably conclude that (1) at worst, the ceiling should be repealed
because it may disrupt credit markets and raise the costs of Government borrowing, (2) at
best, it is neither harmful nor beneficial to credit market stability and borrowing costs and
is therefore unnecessary, and (3) it does not reduce the costs of Government borrowing and
may in fact raise those costs.
Matters for consideration by the Congress
In view of our conclusions, the Congress should consider immediately repealing the
4 1/4-percent interest limitation. Alternatives which would have essentially the same
long-term effects are systematically phasing out the limitation through annual
redefinition of the maximum maturity of securities whose flotation is subject to the
ceiling and/or annual increases in the dollar volume of long-term securities which may
be floated without regard to the ceiling.
Summary
In conclusion, Mr. Chairman, we would urge the committee to adopt the debt limit figures
for the transition quarter and fiscal year 1977 we have proposed today. On the other hand,
we would have no serious objection if the committee chooses to adopt different figures. In
either case, there will be appropriate opportunities in the sequence of events to amend the
limits if such action should appear desirable or necessary.
Second, we believe it desirable, Mr. Chairman, that the Secretary of the Treasury have
flexibility over the setting of rates and other terms in the savings bonds program. We are
aware ofthe relationship of rates in the savings bonds program with rates paid by depositary
institutions. Indeed, the Secretary ofthe Treasury is an actively participating member ofthe
Coordinating Committee when changes in Regulation Q ceilings are under consideration.
Moreover, changes in savings bonds rates have always been undertaken with due regard to
the consequences for depositary institutions as well as fairness to savers.
Third, Mr. Chairman, it is essential that the Treasury have adequate authority to issue longterm securities when the opportunity affords. The redevelopment of the long-term Treasury
market has been constructive, not only for Treasury financing but for other debt markets for
which outstanding long-term Treasury obligations have served as a benchmark. From the
viewpoint of Treasury debt management, however, the development of a long-term market
offers the possibility of reversing the steady decline in the average length of outstanding
Treasury debt and reducing the buildup in very short-term, highly liquid securities that has
resulted from the necessity of financing the immense deficits of recent years. We are as much
concerned by the threat to future economic and financial stability, posed by this immense
370
1976 REPORT OF THE SECRETARY OF THE TREASURY
liquidity buildup, as you are. We need, therefore, to have the tools that will allow us to do
the most responsible job possible of debt management, one that will contribute to economic
and financial stability. An increase in the exception to the 4 1/4-percent ceiling by an
aclditional $10 billion will go far in that direction.
Domestic Economic Policy
Exhibit 20.—Excerpt from statement by Assistant Secretary Jones, August 19,1975, before
the American Accounting Association, Tucson, Ariz., on the economic recovery and future
fiscal and monetary policies
The famous author George Sanfayana once wrote: "Those who cannot remember the past
are condemned to repeat it." Analysis indicates that each repetition requires a higher price
to be paid.
While public attention is focused on current developments, as the economy moves from
severe recession into moderate recbvery, the major challenge is to plan beyond existing
problems and uncertainties. Economic policies at this tuming point must concentrate on the
persistent problems of inflation, excessive unemployment, low productivity, capital
formation, energy resource development and conservation, and intemational economic
instability.
The United States has generally experienced rising output, expanding personal cbnsumption, relatively low levels of inflation, and growing employment opportunities. At the same
time, the dominant influence of rising expectations has created a cbnfrontation between two
basic economic tmths: (I) The list of claims against the national output of goods and services
is literally endless; and (2) human, material, and capital resources are limited even in the
advanced U.S. economy.
This obvious contradiction requires a more careful ranking of claim priorities and effective
management of economic policies. In particular, we need more stable fiscal and monetary
programs which do not overreact to fluctuating economic developments. Over the past
decade recession and expansion trends have too often been exaggerated by frequent finetuning policy adjustments. It is not so much a problem of deciding what to do as it is one
of sustaining basic policies long enough to encourage stable growth and longer term planning.
While there is widespread agreement that a moderate-to-strong economic recovery has
begun, there is justified concern about its sustainability. The severe recession just
experienced clearly demonstrated that the U.S. economy can be constrained by shortages
of oil and other industrial raw materials. Consumer sentiment is still fragile and directly
dependent upon future employment developments. Business capital investment must be
increased if the near-term expansion is to continue and needed productive capacity and
future jobs are to be created.
Because the immediate pattem of business investment will be largely determined by the
strength of persortal consumption, it is cmcial at this stage of the recovery that a surge of
new inflation pressures be avoided. Prices are still increasing at an unsatisfactory seasonally
adjusted annual rate of 6 to 7 percent. An escalation of current prices- or of inflationary
expectations- during the next few months would quickly dismpt both personal and business
spending plans which would, in tum, curtail both the strength and sustainability of the
recovery. Therefore, current policies must guard against fiscal and monetary excesses which
would disrupt the current expansion and complicate the problems of creating a more stable
economy.
The fiscal dilemma of rapidly increasing Govemment expenditures and lagging revenues
continues to distort economic planning. During the past decade, fiscal policies have had to
adapt to the surge of spending for the Vietnam war and various social spending programs,
the major impact of inflation, and the sharp erosion of revenues and increased transfer
payments caused by two recessions. From fiscal year 1966 through fiscal year 1975, Federal
budget outlays increased from $134.6 billion to $325.1 billion. During that decade, the
cumulative budget deficit totaled $148.7 billion and the "net increase" in borrowing for
various off-budget programs excluded from the Federal budget totaled an additional $149.7
billion.
In attempting to respond to the severe recession, the President originally submitted a
proposed Federal budget for fiscal year 1976 which called for outlays of $349.4 billion and
a deficit of $51.9 billion. The midsession review published May 30 subsequenfly increased
the expected outlays to $358.9 billion and the deficit to $59.9 billion. In a separate action
by Congress, their first concurrent resolution on the budget, published May 9, recommended
outlays of $367 billion and a deficit of $68.8 billion. Whatever the final figures tum out to
EXHIBITS
371
be, it is obvious that another large increase in spending and a record-level budget deficit will
occur.
The President also asked for a temporary cut in taxes to help stimulate the economic
recovery expected by midyear. In March the Tax Reduction Act of 1975 was finally passed
which provided approximately $20 billion of net tax relief About $ 17 billion of the total was
allocated to individuals in the form ofa rebate on 1974 taxes and temporary reductions for
1975 were provided by increasing the standard deductions, an additional $30 exemption
credit, a 5-percent housing credit, and an earned income credit for eligible low-income
families.
Business tax relief was provided by increasing the investment tax credit to 10 percent and
by raising the surtax exemption for small firms. At the same time, the depletion allowance
for oil and natural gas was phased out and limitations added in the use of foreign tax credits
associated with foreign oil and gas operations. During the next few months, important
decisions about possible extension of parts ofthe 1975 tax cuts must be made as the pattern
of economic recovery becomes clearer.
The rapid growth of Federal spending during the past decade has increasingly eroded our
fiscal fiexibility. Many Government programs involve an "entitlement authority" which
makes the actual outlays open ended, depending upon the eligibility rules and benefit levels
established. There has been a tendency to liberalize both guidelines, and benefits for Federal
retirement, social security, and other income maintenance programs are now indexed so that
they rise automatically as inflation occurs. Other outlays are required by specific legislation
and contractual agreements. As a result, the Federal budget is increasingly committed to the
priorities of the past, which makes it difficult to respond to current problems and future
claims.
Approximately three-fourths of the Federal budget is now considered to be "uncontrollable" because of existing entitlement and contractual obligations. In theory, there is no such
thing as an "uncontrollable" budget commitment since Congress controls the annual
appropriations process. In reality, existing programs are rarely eliminated or reduced and
new claims are typically "added on" to current outlays. The near-term prospects are for
continued increases in outlays and more Federal budget deficits. This trend can either be
modified by congressional action or resources can be transferred from the private sector,
which would mean a further increase in the role of Government in the economy.
A second important problem concerns the proper role ofthe Federal budget. In preparing
the budget plan, Government officials are actually allocating the human and material
resources available and determining the division of responsibilities between the public and
private sectors. This is clearly a proper function.
However, since the 1930's the Federal budget has been used more and more as a tool for
economic stabilization. Increased outlays and resultant deficits are defended by claiming that
Federal spending is required to replace private demand during periods of slack. The size of
the Federal budget is then manipulated to meet current economic stabilization goals in this
system of economic management. Unfortunately, the balance turns out to be asymmetrical,
because deficits usually occur during periods of both strong and weak economic activity.
Federal budget deficits have been recorded in 14 out ofthe last 15 fiscal years—or 40 ofthe
last 48 years—and more are expected according to our current 5-year projections.
The overall results of using the budget for stabilization purposes are not clear because of
the complexity ofthe total economy and the lagged impact of such policies. But one specific
result does seem obvious: The creation of new spending programs during periods of economic
slack typically creates a permanent sequence of outlays that continues far beyond the
immediate need for stabilization.
Hopefully, increased realism in determining future fiscal policies will result from the recent
creation ofa Congressional Budget Office which is required to provide overall Federal budget
targets for receipts and outlays for the guidance ofthe new congressional budget committees.
In the past, appropriations have been approved by individual committees so that it was
impossible to develop a comprehensive overview ofthe total impact ofthe specific legislative
actions. Under the new procedures, the two congressional budget committees prepare
concurrent resolutions establishing the basic budget goals and identifying their impact on the
entire economy. The actions of each appropriation committee will then be combined and
compared with the budget committee recommendations before preparing a second
concurrent resolution for Congress to approve. A trial run using these procedures over the
past few months for coordinating spending decisions has been encouraging, and a new sense
of priorities and discipline may well result from this new approach.
A combination of increased Government spending and tax reductions has provided
extensive stimulus for the economy in moving back to a recovery pattern- Given the severity
of the recession, particularly the large increase in unemployment, a sizable budget deficit
during the past year was a suitable response.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
But such fiscal actions must be carefully controlled, even during difficult periods, to avoid
more permanent erosion of our future fiexibility.
Fiscal responsibility is particularly important in providing a necessary balance with
monetary policies.
Extensive criticism was directed at monetary authorities during the last few months of 1974
and early 1975 because of the very low rate of growth of the money supply at an annual rate
of only 1 percent during the 6 months ending January 15, 1975. Since late January the money
stock has increased at a seasonally adjusted annual rate of 9.4 percent. Combining these two
periods indicates that the money supply has increased about 5 percent over the past year with
almost all of the growth occurring during the last few months. Given the volatile nature of
short-term monetary developments, a longer term perspective of monetary policy indicates
that officials are moving toward the policy commitment of keeping the money supply growth
in the 5- to 7.5-percent zone while also giving careful attention to interest rates and other
monetary measures. This policy goal appears to be a reasonable target when combined with
the existing stimulus being provided by fiscal actions.
Although the recbvery is apparently well underway, the next few months are likely to be
a turbulent period as fiscal and monetary policies will probably be under intense pressure
to respond to specific inflation and unemployment developments. In such a volatile
environment, those who advocate more stable economic policies will be considered naive
at best and insensitive at worst. Nevertheless, there must be a longer term perspective in
determining policies if we are to ever avoid the "stop-go" results of the past.
Recent events clearly demonstrate that the U.S. economy will not function properly with
high single- or double-digit inflation just as it cannot survive for very long with such excessive
levels of unemployment. The constant shifting of policies and resulting uncertainties about
the lagged impact of such actions have too often frustrated the basic goal of promoting
maximum employment, production, and purchasing power.
Exhibit 21.— Excerpt from statement of Secretary Simon, August 25,1975, before the Senate
Committee on Banking, Housing, and Urban Affairs, concerning the implications of
Lockheed Aircraft Corp.'s foreign sales activities on the Government's emergency loan
guarantee program
My testimony concems the emergency loan guarantee program, and in particular the
recent disclosures of secret payments made by Lockheed Aircraft Corp., the sole borrower
under the program, to officials of foreign govemments.
Let there be no misunderstanding: The Emergency Loan Guarantee Board does not, and
will not, condone illegal or unethical activities by American business, here or abroad. The
Board condemns such actions in the strongest terms and is deeply concemed about the
possible improper use of Lockheed's corporate funds and its impact on the guarantee
program.
We are disturbed that Lockheed's apparent longstanding practice of resorting to bribery
to sell its products in foreign markets has escaped detection by the Board and others
monitoring the company's activities. We are distressed that Lockheed's management has
apparently not been forthright with the Board and with Congress.
As a Government official who has spoken out about the importance of maintaining the free
enterprise system, I find Lockheed's actions deplorable. Lockheed's executives in making
application for a Govemment benefit- a guarantee of some of their borrowings- have not
disclosed what may prove to be material information to the administration and the Congress.
We recognize that very serious consequences are involved for Lockheed, for the aerospace
industry, and for the loan guarantee program.
Let me summarize briefly the steps the Board is taking:
•
The Board has requested by letter that Lockheed: confirm its oral understanding
with the Board that it is to provide all material information concerning the bribes;
will request its auditor to furnish separately to the Board additional information
regarding the transactions; and furnish any additional information regarding the
payments that the Board may deem necessary.
•
The Board has notified Lockheed that the guarantee agreement does not provide
for any waiver ofthe Board's rights or remedies unless expressly waived in a writing
signed by the Board. In addition, the acceptance of any certificates, representations, or other documents required to be furnished by Lockheed, under the
agreement, should not be deemed to constitute a waiver of any ofthe Board's rights.
•
As part of the ongoing monitoring activities by the fiscal agent (the Federal Reserve
Bank of New York), the Board has requested that it prepare a current assessment
of the Government's collateral under the credit agreement.
EXHIBITS
373
•
The Board has asked the fiscal agent to carefully consider the expenditure plans
which Lockheed furnished to the Board in connection with eacn drawdown of
guarantee funds, to determine whether the expenditure plans should be regarded
as false or incomplete in that no information regarding the bribes was provided.
•
The Board's staff has questioned past officials associated with the guarantee
program. None can recall any information coming to his attenfion which indicated
that Lockheed was paying bribes to foreign officials.
•
The Board has requested that Lockheed's agent banks review the information in
their possession to advise whether it indicates that Lockheed has been paying
bribes.
•
The Board's staff is in the process of undertaking a complete review of its files, and
has asked its fiscal agent to do the same, in order to confirm that the Board had
no information about Lockheed's payments of bribes until June of this year.
•
The Board has requested that the General Accounting Office (GAO), which is
required to audit any borrowers under the emergency loan guarantee program and
to report its findings to the Board, search its files to determine whether or not they
contain any inforriiation regarding the payment of bribes by Lockheed.
•
The Board's staff met with the GAO staff on August 19 for the purpose of creating
a cooperative program whereby the Board may obtain whatever additional
information it deems necessary to assess its position under the Guarantee Act and
the agreements.
There are difficult questions for the Board to resolve. Among them:
1.
2.
3.
How can the Board distinguish between proper commissions to sales consultants and
instances where consultants use a portion of their fees to bribe foreign governmental
officials?
With the purpose of the guarantee program being the preservation of Lockheed's
viability, should the Board take action which (a) might put the company at a
competitive disadvantage with respect to both other U.S. corporations and foreign
competitors, or (b) might cause Lockheed to fail, especially where rules have yet
to be prescribed?
Would Board action have broad application affecting the ability of U.S. corporations to compete in certain parts of the world, given local business practices and
customs?
From Lockheed's public statements, as well as from information which we received from
Lockheed, it is clear that bribes had been paid prior to the guarantee program.
A broad policy is at stake here. The Emergency Loan Guarantee Board has been put in
the position of seeking to protect the Government's interest as guarantor for creditors of
Lockheed. In so doing, it finds itself working with a company that alleges that foreign
payments of this nature are a normal and necessary method of doing business abroad in the
highly competitive aerospace market.
While the Board does not believe it is the appropriate agency to develop rules or standards
of general applicability, it is formulating its own assessment of what has transpired in order
to determine an appropriate course of action under the Guarantee Act. This assessment will
include a balance of competing interests between the public's right to know and the alleged
potential adverse impact of detailed disclosure on Lockheed's outstanding orders. Congress
likewise has a responsibility to determine what actions it should take in connection with the
Government guarantee of loans to Lockheed.
When the Board has completed its review, it will then be in a position to recommend
whether a change in the guarantee legislation is desirable.
A crucial challenge facing us today is the preservation of the free enterprise system.
Practices such as bribes made to secure foreign business can only increase the distrust and
suspicion that is straining our national institutions. To argue that bribes to foreign officials
are necessary for effective competition is contrary to every principle under the free market
system. The Emergency Loan Guarantee Board wants to go on record as condemning these
practices.
Exhibit 22.— Excerpt of statement by Under Secretary Schmults, September 24,1975, before
the House Budget Committee's Community and General Govemment Task Force, urging
renewal of the general revenue sharing program
A vital federalism capable of guarding against the overcentralization of power and of
providing responsive govemment in a large and diverse nation is as much a priority today
as il was 200 years ago. In an age when a large and distant Federal Govemment must
concentrate on foreign affairs, defense, and other nalional issues, there is a pressing need
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1976 REPORT OF THE SECRETARY OF THE TREASURY
to make sure that governments close to our citizens have the fiscal strength to carry out those
local tasks they can best accomplish.
While revenue sharing has been a success, the needs which the Congress originally
intended that it address continue to exist. President Ford feels that this approach to Federal
domestic assistance claims a top priority in competition with other important claims on our
national tax dollars. The goals which revenue sharing works toward—a strong Federal
system, a balanced system of intergovernmental aid, and an effort to better relate local needs
to local resources—are all irnportant national priorities.
Resources drawn from the relatively more efficient and equitable Federal tax system have
been made available to States and localities through revenue sharing, for use as they see fit,
without the redtape associated with most other Federal assistance.
We have not proposed major amendments for several reasons. We feel that the existing
program has done a very creditable job of m.eeting its priorities. At the same time, we do not
think that general revenue sharing can be designed to solve all the political and social
problems of our society. To attempt to make it do so will reduce its contribution as flexible,
unencumbered Federal assistance.
The existing revenue sharing allocation formulas have performed well in directing
eelatively more resources per capita into needier jurisdictions.
A way in which to assess revenue sharing's response to need is through the manner in which
recipient governments utilize the funds they receive under the program. There does not seem
to be much doubt that allocations have been widely used to maintain existing vital services,
to make possible needed capital expenditures, and to lessen the burden of State and local
taxatipn.
These broad impacts of revenue sharing clearly result in benefits to all citizens. Yet, some
commentators have felt that general revenue sharing plays too small a role in solving the
numerous social problems of our Nation and directs too little money to meeting the needs
of the poor, aged, and minorities. Again, I must point out that other programs are targeted
onto these important issues. Revenue sharing seeks primarily to respond to the institutional
needs of our Federal system and the governments which are within that system. We as
individuals all benefit from the greater effectiveness of our governments.
However, revenue sharing has rriore direct impact in solving social problems than is evident
at first glance. Some of the ways it does so are:
•
Local resources are freed for social expenditure.
•
Education is the main use reported by States.
•
Capital expenditures are often for schools, hospitals, low-cost housing, et cetera.
•
Funds reported as spent in functional categories other than for the poor and aged
often can be of benefit to the underprivileged—e.g., health, transportation, law
enforcement, environmental, arid recreational expenditures.
•
Some jurisdictions use allocations to redress past discrimination.
•
Revenue sharirig shifts the financing of activities away from relatively more
regressive State and local taxes to the relatively more progressive Federalincome
tax.
•
As recipients become more certain about the program's future and perhaps more
financially pressed, they are spending more money on recurring program costs than
on capital expenditures.
The funding levels for revenue sharing proposed by the administration—a continuation of
the annual $150 million increase in funds—represent a compromise between the national
necessity to keep down Federal budgetary deficits, the need to adequately fund competing
priorities and the real fiscal needs of States and communities. Similarly, the manner of
funding we are recommending, i.e., a single appropriation of 5 3/4 years, balances the need
for Congress and the President to control and regularly review expenditures against the very
real need which States and localities have for the certainty and predictability of Federal
support.
We applaud the efforts that Congress has recenfly made to strengthen its budgetary
process. These improvements should increase the predictability of much of the Federal
funding going to State arid local activities by providing more timely appropriations, as well
as appropriations that are in line with authorizations.
At the same time, we feel that adequate planning for wise use of shared funds requires
sufficient advanced knowledge of funding levels by recipient governments. Clearly, annual
appropriations for revenue sharing would not provide such.
Ineffective and hasty planning, expensive construction delays, and delays in important
people-oriented services all result from such uncertainty. These developments can mean that
citizens receive less than maximum benetit from revenue sharing dollars. The capital projects
on which small governments spend considerable portions of their shared revenues require
especially long leadtimes.
An important reality of State and local budgeting that further iricreases the need to know
how much Federal funding will be available is the fact that most State and local execufives
EXHIBITS
375
must present a balanced budget to their legislative bodies. Officials are aided by the fact that
borrowing is normally counted on the receipt side of these budgets. However, the fiexibility
of non-Federal governments to borrow and tax to meet short-term deficits varies and, on the
whole, is more restricted than that of the Federal Government.
Many of these problems are immediate in that States and localities are currently beginning
to put together budgets for fiscal year 1977. In a matter of weeks, most State budget offices
will begin to evaluate agency requests for fiscal year 1977 and weigh them against possible
revenues. Fiscal year 1977 budget planning will often begin this fall at the local government
level, too.
So it is extremely important to both States and local governments that Congress act upon
the renewal of the State and Local Fiscal Assistance Act as soon as possible.
In summary, revenue sharing contributes to a vital Federal system, provides a more
balanced and effective array of Federal intergovernmental assistance, and successfully
responds to pressing governmental and human needs in our States and localities. We hope
that Congress will agree with our assessment and see fit to extend this essential program.
Exhibit 23.—Excerpt of remarks by Secretary Simon, October 22, 1975, at Pepperdine
University in Los Angeles, urging business leaders to put their "own house in order" as part
of an effort to restore public confidence in the American economic system
There is a lesson of recent years that we may not have leamed well. Unless we heed it,
our stmggle to preserve and strengthen the private enterprise system in America is doomed
to fail.
The lesson is simply this: To restore public faith in the American economic system we must
not only make basic changes in the way that govemment behaves but the business community
must also undertake a far-reaching effort to put its own house in order.
The fact is that the public has almost as little faith in business today as il has in govemment.
All of you are familiar with the opinion polls showing a sharply plunging loss of confidence
in most of our major instilutions. The govemment, the church, the courts- all have suffered.
Bul the percentage decline has been larger and more precipitous for business than for anyone
else. According to the polls, confidence in business has slipped from more than two-thirds
of the people to less than one-fifth.
Clearly we must be concerned with what lies behind this collapse. Earlier this year, Daniel
Yankelovich, a respected polling figure and a professor of psychology, offered several
insights into the problem.
The Yankelovich data reveal a remarkable degree of public support for free enterprise
itself. Fully 91 percent of the public feels that the Govemment should not own or mn big
business in the same way that business is run in Socialist countries. And about 6 out of every
10 people say they're prepared lo sacrifice, if necessary, lo preserve the free enterprise
system.
What has been lost, he finds, is not public faith in free enterprise principles bul in the
practices of those who are now part of that system. The mles of the game still make sense
lo people, bul there is a deepening sense that the mles are being violated. In the terms of
Mr. Yankelovich, while business retains ils ideological legitimacy, il is losing ils moral
legitimacy.
And the heart of the matter is a belief that business has become not only loo powerful bul
also loo greedy. Instead of serving the public interesi, business is now regarded as serving
ils own selfish privaie interest- and at the public's expense. The public outcry that the oil
companies manipulated the energy crisis lo line their own pockets is perhaps the most
obvious example, bul there have been many other illustrations, extending from Govemment
subsidies for big corporations lo the well-publicized corporate bribery of public officials. In
theory al least, the public does not object to profitmaking. Bul il does object lo what it
perceives lo be widespread profiteering.
These objections could have a decisive impact on the future of the privaie enterprise
system. History has shown us lime and again that the public attitudes of one era become the
public statutes of the next. Thus, it is entirely possible in coming years that we will see not
less govemmenlal regulation of business- as the administration is now advocating- but far
more govemmenlal regulation. In fact, the Yankelovich polls showing high popularity for
free enterprise also find that three-quarters of the American people want more regulation.
They want the Federal Government to "regulate major companies, industries and institutions
to be sure they don't take advantage of the public."
Given these circumstances, I would suggest that business leaders who care about the future
of free enterprise- and indeed, of freedom itself- have an urgent responsibility to set about
restoring greater public tmst and confidence in the institutions they mn. And there are, I
would suggest, three major steps that must be taken as rapidly and as aggressively as possible.
376
1976 REPORT OF THE SECRETARY OF THE TREASURY
The first and most obvious step is that the business community must set a high moral
standard. We all recognize, of course, that corporate corruption is limited. But we must also
recognize that instances of corruption have been highly publicized and the reputation ofthe
entire business community is now being stained with them. Specifically, each of you must
hold yourself and your colleagues to the highest possible standard of business ethics.
In the post-Watergate environment, when a relentless, almost obsessive search goes on to
find new villains, it is hardly surprising that unwholesome business practices have attracted
widespread attention. Rather than hiding from the publicity or denying that anything ever
goes wrong, businessmen should welcome this opportunity to put an end to the corporate
abuses that do exist so that they will regain the public confidence that they deserve. If
corporate leaders will only take it upon themselves to examine their own organizations and
get rid of all practices that they believe to be questionable, they will do far more to improve
the environment for the business community than any number of pious speeches extolling
the virtues of free enterprise. And let us be clear: If business is unsuccessful in policing itself,
we can expect that the public will insist upon doing it for them—through the heavy hand of
Government.
The second major step that must be taken logically follows the first: I believe it is absolutely
necessary for the business community to begin squaring its practices with its principles. One
of my saddest experiences in public life has been to see businessmen—the public champions
of free enterprise—come trooping into Washington, hat in hand, whenever they need shelter
from an economic storm.
Franklin Roosevelt used to take great delight in needling businessmen who sought out the
protection of the New Deal. "I know how the knees of all our rugged individualists were
trembling 4 years ago," he said toward the end of his first term. "They came to Washington
in great numbers. Washington did not look like a dangerous bureaucracy to them then. Oh,
no! It looked like an emergency hospital. All of the distinguished patients wanted two
things—a quick hypodermic to end the pain and a course of treatment to cure the disease.
They wanted them in a hurry; we gave them both."
Unfortunately, what those businessmen took had a narcotic effect, and we've never shaken
the habit. I can well remember George Shultz telling me ofa meeting with business leaders.
They were strenuously urging that the Government impose wage and price controls, and they
were impatient with him. Business learned soon enough why he opposed controls, and within
2 years after controls were imposed those same leaders were begging him to help get the
Government out of the marketplace. Controls have been tried throughout history; not once
have they worked. And much the same can be said of other forms ofgovernment intervention
and protection. Tariffs, subsidies, quotas, handouts, bailouts—I've seen them all and not one
is worth its ultimate price. They all offer a hollow, empty promise of security, and they all
lead in the end to a sacrifice of freedom.
The third obvious step the business community must take is to initiate a far more energetic
program of basic public education in the economic as well as political values of freedom. We
must ensure that the lessons of recent years sink in at the grassroots levels—that people
clearly understand where we're headed.
Let us begin by teaching everyone the fundamentals again—about profits, capital
investment, and productivity. A majority of Americans now believe that 33 cents out of every
dollar of sales is recorded as corporate profits. In reality, profits are less than 5 cents out of
every dollar. This gap in public understanding speaks voluities about the task ahead.
But the argument for free enterprise must not rest on fundamentals alone. It must also be
cast in human terms. Being pro-business is the same as being pro-people. You must make
it clear what the fundamentals mean: That economic growth yields direct benefits to wage
earners, consumers, and producers—more jobs, higher wages, and less infiation. Our painful
experience with the deep recession should put the lie once and for all to the notion that zero
growth would be good for America.
Those who practice free enterprise—more than anyone else—should be responsible for
getting its success story across to the American people. Over the years, the U.S. economy
has created the highest standard of living in the world. The average family income
approached $13,000 in 1974; poverty has been sharply reduced to 13 percent of the
population; jobs have been created for over 86 million people; and we continue to spend
about 90 percent of our personal disposable income on ourselves. This is not a "trickle down"
system. It is the most effective "flow through" system of benefits and personal gains ever
devised, and no sarcastic slogans will ever refute that reality.
In a free economy, the products which people are willing to pay for will be produced, just
as an adequate price will ensure an adequate return. Things for which the people are not
willing to pay an adequate price, we will not get. That is not only the essence but the genius
of the American economic system. The principal difficulty today is not that our economic
system will not work, biit rather that our polifical system is subverting it.
It is up to all of us here to combat the false belief that the Government can identify, solve,
and somehow pay for all ofthe problems of society. That belief has no validity in either fact
EXHIBITS
377
or theory. What it has produced instead is one ofthe worst cases of infiation in our history—
inflation that has far-reaching social and political implications.
A continuation of this inflation will place this country's entire private enterprise system
in jeopardy. If our financial markets remain under their current strains, if utilities have
trouble obtaining necessary financing to keep up with infiation, if money fiows out of the
thrift institutions because of inflation, if the housing industry suffers along with the thrifts,
and if the airlines, the real estate investment trusts, and others go to the wall, who will be
called into the rescue? If the retired people of this country cannot protect themselves against
inflation, who is it that can serve as a rescuer? You know the answer: The Government.
Clearly, continued inflation would bring a massive expansion ofthe public sector and would
threaten the very survival of large areas of the private sector. And what I am talking about
tonight is not big business, not the Fortune 500, but all business—small, medium, and large.
The American economic system today is under attack as it never has been before. And
that attack comes as the country is drifting dangerously down the path toward a centralized
economy. Now it is time for leaders of the business community to come to the defense of
our economic system. It's time to lay it on the line for the American people. We have reached
a watershed. Either we continue down the path of recent years—a path that will inevitably
lead to socialism in the United States of America—or we fight now to preserve our economic
and political freedoms.
Let us make it clear to the American people that the choice is between those who believe
that government should make the choices for individuals and those who believe that
individuals should choose for themselves. And let us make it equally clear where the so-called
liberalism of today really leads: To the destruction of our liberty.
America is still incredibly strong. Its mainspring is the largest and most dynamic
marketplace in the world. We have the resources, and we know how to rebuild our economy.
The central question is whether we have the will and the courage to rescue ourselves from
the relentless drift we have experienced in recent years. As leaders of the business
community, each of you will have an important voice in deciding our country's direction and
fate. Let there be no doubt of your choice for a free America.
Exhibit 24.— Excerpt from statement by Secretary Simon, February 4,1976, before the Joint
Economic Committee, regarding the impact of government regulation on the private sector
Without question, this country has developed the most efficient and creative economic
system the world has ever known. It has been particularly responsive in satisfying the
consumption demands of our large population, and the real standard of living for most
Americans has risen sharply during the postwar era.
Yet, as I take soundings of people throughout our country, I sense a growing concem about
the long-term outlook for continued economic development. America seenis to be on a path
that may not hold the same promise for the future. There appears to be decHning recognition
of the fundamental importance of markets and a narrowing of the boundaries in which
individual Americans can make personal economic decisions.
Of course, the market system adapts to change. The population has grown, the availability
of resources has fluctuated, concems about the environment have increased, and the United
States has become a major part of an increasingly integrated world economy. As our economy
has become more complex, new approaches to difficult problems have been needed to
achieve our general economic goals, to prevent specific abuses, and to stimulate and preserve
competition in the markets. I believe that free, competitive markets are the most effective
way to provide for increased output and the equitable distribution of the results of economic
activity.
We do need govemment regulations and other safeguards to protect the public interest.
But I am disturbed by my discussions with individual consumers and businessmen which
indicate that the govemment at all levels is increasingly constraining innovation, entrepreneurship, and individual spending decisions. In particular, the small businessman attempting
to create a new enterprise today is curtailed at almost every tum.
He must comply with thousands of govemment regulations on health, safety, pollution
control, hiring practices, product liability, tax reporting, employee pensions and compensation, advertising, distribution practices, and other requirements too numerous to list. This
compliance burden is costly to large and small businesses alike. These costs ultimately niust
be passed on to consumers in the form of higher prices. Moreover, such costs are particularly
heavy for the smaller businessman because of the fixed-cost nature of many of the
regulations. If profits are eamed- and that is obviously the basic reason for creating most
new businesses- they are taxed by the Federal Govemment, usually by the States, and
increasingly by local govemments, to support the enormous growth of govemment spending
at all levels.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Just the paperwork burden ofgovernment regulation is staggering. Individuals and business
firms spend over 130 million persori-hours a year filling out over 5,000 government forms.
Even more costly is the paperwork burden within government itself. The Commission on
Federal Paperwork estimates that Federal spending to process forms totals an incredible $ 15
billion a year. In fact, just the cost for forms themselves runs to a billion dollars annually,
and one department—Agriculture—maintains nearly a million cubic feet of records and
spends $150 million yearly on reporting systems. When government and businesses are so
burdened, it is not just they who pay the penalty. Everyone pays—the taxpayer and the
consumer alike.
Small businessmen are increasingly questioning the desirability of working so hard and
bearing so much risk when others are able to claim virtually the same financial rewards in
our society with shorter hours, far fewer headaches, much less responsibility, and little risk.
Is it any wonder that the entrepreneurial spirit in this country is fading?
Employees also have growing concerns about the future as they see an increasing share
of their financial resources eroded by personal income taxes^ paid to several layers of
government, payroll taxes, property taxes, sales taxes on most ofthe goods and services they
purchase and many other indirect taxes. Although earnings continue to rise rapidly, the real
purchasing power of these higher incomes is quickly erased by higher taxes and inflation.
These personal concerns raise fundamental questions about the proper allocation of
resources and decisionmaking between the public and private sectors. Determining the
proper functions ofgovernment and the means of financing those activities is a critical issue
facing our society. The key, of course, is, what is the appropriate balance?
If the balance is almost entirely in the private sector, the public's interest may not be
properly safeguarded. There would be little or no nafional defense, national parks, or other
public goods of this sort, and we would still have the difficult challenge of providing a basic
level of income and services for those Americans who are currently not able to pay for their
basic needs. Clearly, there is an important role for government.
However, when resource allocation and other economic decisions become dominated by
a government bureaucracy, innovation and productivity are too often restricted. Moreover,
the individual finds he has less freedom of economic choice as greater portions of his
paycheck go to support growing government outlays at all levels, as prices rise, and as the
total economy becomes less productive. The potential entrepreneur considering a new
business because he has an idea he thinks is really good finds himself stymied at almost every
turn. The danger of all of this is that in many cases he concludes that the risks and
inconvenience far outweigh the potential rewards and he drops the idea. At the extreme,
economic decisionmaking by people in the market is supplanted by people in government,
individual incentives evaporate, and the economy deteriorates into conditions of stagflation.
Reasonable people will agree that we do not want either extreme. Too little government
results in an absence of public goods and safeguards of the public interest. Too much
government, on the other hand, stymies the workings of efficient and competitive markets
and reduces the individual's freedom of economic choice. We obviously must have a balance.
But what is the appropriate mix of public and private decisionmaking? There is no exact
answer to this question, but I do believe that we can make a reasoned assessment.
We must recognize that the resources of this great country—the number of people, their
education and skills, the amount and types of capital goods, the abundance of raw materials,
and the infrastructure of transportation, communication, utility, and other services—are
limited, particularly in the short run. Yet, as we all know, there are numerous claims on these
resources. Each special interest group assumes that its claim is somewhat unique and deserves
satisfaction. When we total all of the worthwhile claims, we find that they far exceed our
The recovery—actual and projected
[Growth in percentages]
Economic results for 1975
Actual
Gross national product
(current dollars)
Gross national product
(constant dollars)
GNP price deflator
(yearly average)
Consumer Price Index
(yearly average)
Unemployment rate
(yearly average)
Economic forecast for
1976
Forecast
January 1976
6.5
12.4
-2.0
6.2
8.7
5.9
9.1
6.3
8.5
7.7
Secretary Simon's testimony to the Joint Economic Committee contained the above measurements of the pace of the
U.S. economic recovery.
EXHIBITS
379
ability as a Nation to satisfy them, particularly in the unrealistically short time frames that
are sometimes expected. Obviously, hard choices must be made.
1 believe that the balance has tipped too far in the direction of bigger and bigger
government at the relative expense ofthe private sector. The American people are beginning
to resent this growth, for many of them know that ultimately it must be paid for directly with
their taxes and/or indirectly by accelerating inflation.
Regulatory agencies have come to exercise direct control over transportation, energy,
communications, and the securities market—industries that account for almost 10 percent
ofthe value of everything made and sold—and to exercise indirect control over much ofthe
rest of our private economy. Business activities have become more controlled in areas of
environmental protection, job safety, consumer requirements, hiring practices and
information reporting, and much more.
To be sure, many of these regulations are necessary and important in safeguarding the
public interest. For example, regulations to prevent monopolistic pricing, to assure product
safety, to provide reasonable and effective standards for environmental protection and
worker safety, to make possible fair employment and other things of this sort are important
to us all. However, too many regulations are overlapping, inefficiently administered with long
delays, or obsolete. Others are actually anticompetitive. Regulators regulate with a frenzy
and in so doing hamper the basic efficiency of competitive markets.
An underlying problem is that many regulations have never been subjected to a true costbenefit type of analysis. The benefits are always cited, but very seldom are they documented
by evidence showing that the regulation proposed is really going to make a difference. In
other words, is there going to be a measurable and significant benefit which will exceed the
combined cost of administering the regulations and the costs resulting from reduced
efficiency of the U.S. economic system—costs which ultimately must be borne by the
consumer?
In cases where the benefits are less than the total costs, we should consider changing or
eliminating the government regulations and administrative actions that have caused the
problems. Many regulations designed to cope with yesterday's problems are obsolete today.
Frequently these regulations impede innovation by creating barriers to entry which preserve
the status quo and limit competition. Other regulations simply are ineffectively administered,
creating needless redtape and delays.
By eliminating unnecessary regulations and streamlining others, the negative impact of
government actions that restrain the economic decisionmaking ability of the private sector
would be reduced. The consumer would benefit in being able to purchase the product or
service at a lower price and/or with less inconvenience than would otherwise be the case.
The reform of government regulation is a principal goal of the administration and many
Members of Congress as well. I know of no issue that has the agreement of so many people—
from liberals to conservatives, from business to labor. Yet the special interest groups are
vociferous and tenacious. Witness the reactions of airline and trucking executives to the
President's reform proposals for these industries. We should all recognize that we have an
enormous stake in restoring competition to the marketplace.
Exhibit 25.—Remarks of Assistant Secretary Jones, June 26, 1976, before the Western
Economic Association and the Westem Finance Association, San Francisco, Calif., on the
^^Challenge of Economic Leadership"
The challenge of leadership is to look beyond the current expansion to consider the longterm ouflook for the U.S. economy. My good friend Paul W. McCracken once described this
process as looking across the valley to see what is on the other side. His message was: "What
will be different on the other side of the valley is far more relevant to business planning than
the valley i t s e i f i Such advice is particularly meaningful at this time because of the basic
need for more stabihty in our economic policies.
I. Background of current decisions
In the mid-1960's the United States began an unfortunate series of economic booms and
recessions: Serious overheating of the economy created severe price pressures; accelerating
inflation caused recessions by restricting housing constrnction, personal spending, and
business investment; the recessions created unwanted unemployment which wastes resources
and causes personal suffering; rising unemployment too often triggered well-intentioned but
poorly planned and ill-timed Govemment fiscal and monetary policies setting off another
round of excessive stimulus leading once again to overheating- inflation- recessioniPaul W. McCracken, "The Other Side of That Valley," White House Briefing for Businessmen, Washington, D . C , Nov.
21. 1969.
380
1976 REPORT OF THE SECRETARY OF THE TREASURY
unemployment—and even more Government intervention. To break this unfortunate cycle
and return the U.S. economy to full output, four guidelines are required:
First, the complete range of economic difficulties must be recognized to avoid policy
myopia. Infiation, unemployment, declining output, the adequacy of productive resources,
and international trade and investment are interrelated problems.
Second, policy initiatives should solve more problems than they create. During a period
of difficulty it is often expedient to respond to strident calls to "do something—anything—
to demonstrate leadership." But this naively activist approach is a basic source of problems,
not the desired solution. Courage and wisdom are necessary to avoid actions offering the
illusion of short-term benefits in exchange for further erosion ofthe long-term creativity and
productivity of the U.S. economic system. There is, of course, an important role for
governments in protecting public interests but I strongly disagree with the claim that they
can or should control the economy.
Third, to restore economic stability the infiation which began in the mid-1960's and
accelerated rapidly in the 1970's must be significanfly reduced. From 1890 to 1970, prices
in the United States increased at an annual rate of 1.8 percent. From December 1973 to
December 1974, they jumped 12.2 percent. It is obvious that any long-term solution to our
economic problems will be impossible as long as inflation continues to distort spending and
investment decisions. Inflation should be recognized for what it is: The greatest threat to the
sustained progress of our economy and the ultimate survival of all of our basic institutions.
Fourth, the transitional problems of moving through different stages ofthe business cycle
require further improvement in the automatic stabilizers built into many Government
programs, particularly the response to unemployment and declining personal income.
Since the turning point in the spring of 1975 a relatively strong and balanced recovery has
occurred: Real output has increased 7.2 percent over the last four quarters while inflation
has declined to an average annual rate of 5.5 percent; erriployment has increased sharply by
3.6 million persons and the unemployment rate has dropped from a peak of 8.9 to 7.3 percent
by May; and international trade and investment have continued despite the serious
disruptions caused by unexpected increases in oil prices and a worldwide recession. These
are impressive achievements but focusing on the current economic situation would leave us
vulnerable to a repetition ofthe policy errors ofthe past. I believe that we can achieve longterm progress—with less inflation and unemployment—if Government policies facilitate,
rather than restrict, the efficiency of the private sectors.
II. Economic policy views
Despite the turnaround in economic activity there is still considerable concern about the
long-term economic outlook. Part of this apprehension is the result of misconceptions about
economic policies.
Myth Number 1: ''We don't know how we got here."—Americans are used to strong
economic growth, not recessions; to abundance, not shortages; to moderate inflation, not a
double-digit pace. The economic distortions of the last decade have been puzzling—even
frightening—but it is possible to identify the factors that have led to unacceptable inflation
and unemployment. Even more important, such understanding is necessary for restoring
public confidence.
One reason we have had so much instability is the excessive stimulus provided by
Government fiscal policies. For many years political leaders have tried to convince the
electorate that a central government can identify, solve, and pay for the problems of society—
right now. In fiscal year 1966 Federal outlays totaled $135 billion; by fiscal year 1974
expenditures had doubled to a level of $268 billion. During the next 2 fiscal years—1974 to
1976—Federal spending increased 39 percent to a level in excess of $370 billion. Another
large increase will occur in fiscal year 1977 as the President has proposed a budget of $396
billion and the concurrent resolution of Congress calls for spending of $413 billion. Part of
this sharp increase in outlays is the result of "automatic stabilizers" related to recession
problems such as unemployment compensation benefits, but most ofthe added spending has
become part of the permanent programs of Government. Government spending, for both
temporary stimulus and permanent programs, has increased at a rate that is creating serious
resource allocation problems which will not conveniently disappear as the current economic
expansion continues.
Unfortunately, debates about setting national economic policies are too often limited to
disputes about the proper distribution of functions between the public and private sectors.
In considering nafional economic priorities a much broader perspective is required. The total
productive capability ofthe entire economy must be considered before attempting to identify
specific claims against that potential output. Estimating the total capacity of the system
avoids the simplistic arguments that additional Government programs can be continuously
created merely by increasing total output or by shifting resources from the private to the
public sector. Honest differences of opinion can exist about the proper functions of
381
EXHIBITS
Government but simply adding new Government commitments is not feasible if the total
productive capacity ofthe economy is exceeded. This guideline has been frequently violated
as the momentum of Government spending combined with expanding private demand has
gone beyond the capacity of the system. The results of such excesses persist long after the
initiation ofthe original spending program because Government activities are rarely curtailed
or eliminated.
A study of total capacity was prepared in 1969 by the Council of Economic Advisers and
published in the Economic Report of the President for 1970. The pattern of real increases
in gross national product was projected for 1976 using trend estimates of the growth of the
labor force, national productivity gains, expected unemployment, and the annual average
number of hours worked per person. Existing claims against the projected GNP were then
identified, including personal consumption, business investment, housing, and Government
spending. All of these claims were adjusted to reflect demographic and economic
assumptions. Federal spending was projected to include only existing programs plus new
proposals for revenue sharing, welfare reform, and pollution abatement outlays. As
summarized in table 1, the fulfillment ofthe total claims already identified in 1969 required
a relatively rapid expansion of output to keep pace:
* * * the existing, visible, and strongly supported claims already exhaust the national output
for some years ahead. This is not to say that no other claims will be satisfied, or that claims
included in these calculations should have preference over claims not recognized here. The
basic point is that if other claims are to be satisfied some of those recognized here will have
The projections prepared by the Council of Economic Advisers are hypothetical
estimates based on somewhat arbitrary assumptions and actual results have varied
during the intervening years since the study was completed. Nevertheless, a crucial point
is evident: Decisions on national economic priorities must reflect total output potential
and all existing claims rather than focusing only on Federal budget outlays. Whenever
resources are limited, recommendations to add new Government programs must
TABLE I.—Real gross national product—1955, 1966, and 1969, and pro jections for
1975-76
Projections
Actuals
1%9
1976
1975
1955
1966
569.0
569.0
69.8
53.8
344.3
%.9
55.1
34.5
7.3
4.2
.0
845.5
845.5
88.3
94.4
519.2
137.5
92.0
29.4
16.1
6.1
.0
931.4
931.4
101.3
110.8
577.5
139.8
99.3
32.0
8.5
1.9
.0
1,199
1,188
83
140
768
192
128
52
12
5
11
5.6
-.2
9.3
25
Billions
Gross national product available
Claims on available GNP
Federal Govemment purchases
State and local govemment purchases
Personal consumption expenditures
Gross private domestic investment
Business fixed investment
Residential structures
Change in business inventories
Net exports of goods and services
Unallocated resources
Addendum: Federal surplus or deficit ( - ) , national
income accounts basis
Per capita personal consumption expenditures
ofdollars, 1969 prices
2,083
1.251
1,232
83
144
802
198
134
52
13
5
19
32
3,641
Percent of total G N P a v a i l a b l e
Gross national product available
Claims on avaUable GNP
Federal Govemment purchases
State and local govemment purchases
Personal consumption expenditures
Gross private domestic investment
Business fixed investment
Residential structures
Change in business inventories
Net exports of goods and services
UnaUocated resources
Addendum: Federal surplus or deficit ( - ) , national
income accounts basis
1(X).0
100.0
12.3
9.5
60.5
17.0
9.7
6.1
1.3
.8
.0
100.0
lOO.O
100.0
100.0
10.4
11.2
61.4
16.3
10.9
11.9
62.0
15.0
10.9
10.7
3.5
1.9
.7
.0
3.4
.9
.2
.0
100
99
7
12
64
16
11
4
1
100
99
7
12
64
16
11
4
1
(0
(•)
1
2
1.0
> L e s s t h a n 0.5 p e r c e n t .
N O T E : — P r o j e c t i o n s a r e b a s e d o n p r o j e c t e d F e d e r a l e x p e n d i t u r e s a n d t h e i r i n f l u e n c e o n v a r i o u s c o m p o n e n t s of G N P .
382
1976 REPORT OF THE SECRETARY OF THE TREASURY
consider the prospective impact on the private sector. In short, the creation of new
priorities, or expansion of existing commitments at an accelerated rate, will require
giving up or curtailing some existing claim. Once it is recognized that the potential GNP
has already been committed to existing claims, the consideration of new outlay requests
should become more realistic. Spending decisions should then concentrate on realining
claims rather than merely adding commitments to satisfy diverse interest groups.
The rapid growth of Federal spending during the past decade has increasingly eroded our
fiscal flexibility. Many Government programs involve an entitlement authority which makes
the actual outlays open ended, depending upon the eligibility rules and benefit levels
established. For example, there has been a tendency to liberalize both guidelines and benefits
for various income maintenance programs which are now indexed so that they rise
automatically as inflation occurs. Other outlays are required by specific legislation and
contractual agreements. As a result, the Federal budget is increasingly committed to the
priorities of the past which makes it difficult to respond to current problems and future
claims. Approximately three-fourths of the Federal budget is now considered to be
"uncontrollable" because of existing entitlement and contractual obligations. In theory,
there is no such thing as an "uncontrollable" budget commitment since Congress controls
the annual appropriations process. In reality, existing programs are rarely eliminated or
reduced and new claims are typically added on to current outlays. The near-term prospects
are fof continued increases in outlays and more Federal budget deficits. This trend can either
be modified by congressional action or resources can be transferred from the private sector
which would mean a further increase in the role of Government in the economy.
A second important issue concerns the proper role ofthe Federal budget. In preparing the
budget plan. Government officials are actually allocating the human and material resources
available and determining the division of responsibilities between the public and private
sectors. This is clearly a proper function. However, the Federal budget has been used more
and more as a tool for economic stabilization. Increased outlays and resultant deficits are
defended by claiming that Federal spending is required to replace private demand during
periods of reduced private demand. The size of the Federal budget is then manipulated to
meet current economic stabilization goals. Unfortunately, the balance turns out to be
asymmetrical because deficits usually occur during periods of both strong and weak
economic activity. The upward momentum of subsequent Government spending is
accelerated by such short-term decisions, and the resulting deficits disrupt the capital market
and create heavy interest burdens for the future.
Another problem involves the negative impact of Federal deficits on the stability of
financial markets and the formation of capital. The Federal Government will have reported
a deficit in 16 of the past 17 fiscal years—or 39 of the last 47—at yearend fiscal year 1977.
During the single decade, fiscal year 1968 through fiscal year 1977, the cumulative Federal
deficits will total over $265 billion. In addition, net borrowings to support over 100 off-budget
programs, not even included in the Federal budget, will total at least another $230 billion
That means that Federal demands on the financial miarkets will total one-half of a trillion
dollars in a single decade. The reality of these chronic Federal deficits must be compared
with the consensus view that the budget must be balanced over time if we are to achieve the
levels of capital investment considered necessary to return to and sustain full employment.
The strong underlying growth trends in the U.S. economy will provide for economic progress
but the basic challenge of allocating total resources is becoming even more difficult.
The course of monetary policies is a second important factor affecting the Nation's
economic performance. Unfortunately, the stop-and-go pattern of economic activity and the
effects of fiscal policy excesses have made it difficult to pursue stable monetary policies. In
addition, the rateofgrowthinthemoney supply has increased over time. From 1956 to 1965,
the narrowly defined money supply expanded at an average annual rate of 2.3 percent; from
1966 to 1975, a period of rapidly increasing Government spending and large Federal deficits,
the average annual growth rate was 5.8 percent. The publicly announced target for expansion
of the money supply is currently a range extending from 4 1/2 to 7 percent. In his recent
testimony before the Joint Economic Committee, Chairman Arthur F. Burns emphasized the
importance of reducing the underlying rate of inflation and repeated the strong intent ofthe
Federal Reserve System to avoid excessive growth of the monetary aggregates which would
aggravate inflation and create even more problems in the future.
The third reason for our current inflation and restricted productivity is that we have been
unwilling or unable to eliminate the hundreds of Government policies that inhibit the
efficiency and effectiveness of our economic system. Basic common sense, certainly a
beginning course in economics, tells us that unless we use our resources efficiently, we will
either produce fewer goods and services with those same resources or we will have to devote
still more valuable resources to produce the same volume of goods and services. Examples
EXHIBITS
383
of wasted resources include the restrictions on agricultural production, controlled labor
productivity, trade barriers, subsidies to inefficient industries, and so forth.
The Federal Government has unnecessarily restricted the operation of our entire economic
system. This policy might have been tolerable for another time—perhaps the 1930's when
economic stagnafion existed—but in today's world, even in a country as affluent, creative,
and productive as America, we clearly cannot continue to waste our valuable human and
material resources. We need to stimulate competition and innovaUon rather than artificially
protecting the status quo through a maze of regulations and administrative rulings. This
process should include development of dynamic new industries to replace those that have
become obsolete or noncompetitive in an integrated world economy. This more aggressive
approach will create jobs, not destroy them, and it will moderate price pressures. It will
improve the use of available capital resources. Best of all, it will make our entire system more
efficient in contribufing to the welfare of all 215 million Americans.
The fourth reason we are in our current position is that we have had an unfortunate series
of international and national agricultural difficulties, which have combined to create serious
worldwide food shortages. The Rome World Food Conference in 1974 originally was planned
to discuss the long-term future of agriculture. Instead, the meeting was dominated by
discussions of existing shortages. The worldwide disruptions of food output have had a
particularly serious impact on infiation. In 1973 retail food price gains accounted for over
50 percent of the increase in the Consumer Price Index.
Fifth, we have experienced an unreasonable and largely unexpected quadrupling of prices
of crude petroleum. The average American recognizes the impact of this change on gasoline
and home heating fuel prices, but he often ignores the pervasive effects on chemicals, plastics,
transportation, manmade fibers, petrochemicals, and many other products.
The sixth reason for the surge of inflation was the international overlapping of demand in
1972 and 1973 which occurred when most industrialized nations overheated their economies
at the same time. At that time, many industrialized countries were chasing the same raw
materials and the same markets, creating excessive output pressures and accompanying
inflation.
Seventh, the inflation explosion of 1973 and 1974 was partially the result of the
accumulated distortions caused by 3 years of wage and price controls. Such controls are most
unfortunate. They create shortages and distort the proper operation of an economy such as
ours, which depends upon flexible price and wage adjustments to allocate resources. In
specific terms, such controls divert capital investment, create artificial motivations for
exports, disrupt competitive relations, and in general reduce economic efficiency. In
addition, they don't work. The inflation figures for the 3 years covered by controls and the
record of World War II and Korean war experiences indicate that artificial restrictions only
suppress but cannot stop the underlying wage and price pressures. When the controls are
eliminated there is usually a surge of price increases.
There are at least seven major variables that have contributed to the disappointing
economic performance of the last decade. The myth that we don't know how we got here
is false. Too much Federal, State, and local government spending, fluctuating monetary
policies, our unwillingness to attack governmental policies that inhibit economic efficiency,
the agricultural difficulties of recent years, the quadrupling of petroleum prices, the
international overlapping of demand, and the accumulated distortions caused by wage and
price controls—all of these forces contributed to the disruption of economic activity.
Myth Number 2: " We don't know how to get out of here."—This particular myth is just as
false as the first one but it is equally widespread. The return to economic stability is entirely
within our capability but policy initiatives have too often been contrary to achievement of
that goal. The Federal Government has a crucial role because its actions shape the overall
environment within which the private economy must function! The beginning point is to
regain control over the upward momentum of Federal spending. In fiscal years 1966, 1967,
and 1968, Federal outlays increased 13.8, 17.5, and 13.0percentrespectively (table 2). From
fiscal year 1974 to fiscal year 1976, Federal spending increased 39 percent. These increases
are not compatible with a noninflationary environment in the U.S. economy which now has
a potential for real growth of approximately 3 1 /2 percent each year. For example, from 1965
through 1975 the GNP increased from $753 to $1,499 billion, an increase of 99 percent.
From fiscal year 1966 through fiscal year 1976, Federal spending increased from $ 135 billion
to approximately $372 billion, an increase of 175 percent. The President has proposed that
the rate of increase be brought back into alinement with the underlying capability of the
economy. Similarly, the new congressional budget committees have attempted to apply more
discipline in the development of Government spending bills. This correction process will not
be quick or easy but the President has put forth a specific program for bringing the Federal
budget back into balance.
384
1976 REPORT OF THE SECRETARY OF THE TREASURY
TABLE 2.—Federal budgets, changes in the unified budget outlays hy fiscal year, 1961-77
[Dollars in billions]
Fiscal year over preceding
year
1961
l%2
1%3
1964
1%5
1966
1%7
1%8
1%9
1970
1971
1972
1973
1974
1975
1976 (est)
1977 (est)
Federal outlays
Dollar increase
Percentage increase
Surplus or deficit
(-)
TWs
sTZ
n
^T4
106.8
111.3
118.6
118.4
134.7
158.3
178.8
184.5
1%.6
211.4
231.9
246.5
268.4
324.6
372.2
397.2
9.0
4.5
7.3
-.2
16.3
23.6
20.5
5.7
12.1
14.8
20.5
14.6
21.9
56.2
47.6
25.0
9.2
4.2
6.1
—
13.8
17.5
13.0
3.2
6.6
7.5
9.7
6.3
8.8
20.9
14.7
6.7
-7.1
-4.8
-5.9
-1.6
-3.8
-8.7
-25.2
3.2
-2.8
-23.0
-23.2
-14.3
-3.5
-43.6
-72.6
-45.7
Source: Economic Report of the President, January 1976, Table B-63, p. 245, for 1961-75. Estimates for 1976 and 1977
from testimony of Office of Management and Budget before the Senate Committee on Finance on the Public Debt, June
24, 1976, Attachment B.
The outlook for sustained economic expansion will also be aided by policy actions ofthe
Federal Reserve System which are intended to support the continued expansion of output
and employment while preventing a new acceleration of inflation which would once again
disrupt the entire U.S. economy. While it is sometimes difficult to identify the course of
monetary policies because of volatile weekly changes in the aggregate measures and
technical adjustments in the financial markets, a longer term perspective indicates that the
Federal Reserve has been able to bring the growth rate ofthe monetary aggregates into the
desired range. Hopefully, fiscal policies will be consistent with the goal of sustaining
economic expansion while continuing the necessary anti-inflation effort so that monetary
policies will not be forced to bear a disproportionate share of the responsibility.
The third policy involves a more aggressive effort to reduce government policies that waste
our human and material resources through unnecessary regulations and administrative
practices. A couple of years ago, I met with senior officials of many government agencies
to solicit their ideas. Their recommendations were then summarized in a list of 86 specific
policy initiatives for immediate action and over 200 additional suggestions for future action.
The administration has moved ahead with numerous legislafive initiatives and internal efforts
to improve the regulatory and administrative practices that influence our transportation
system, agricultural programs, environmental policies, labor practices, business competition,
development of energy resources, and almost every other phase of our economy. However,
these desirable corrections will not occur until there is more widespread recognition ofthe
problems and support for remedial efforts.
The fourth policy focuses on achieving maximum output of food. It can be simply stated:
all-out production. After 40 years of curtailing agricultural output through artificial
restrictions, new farm legislation was finally passed in 1973 that emphasizes production.
Millions of acres that previously were set aside to curtail output now have been returned to
production. Other restrictive practices which inhibit the efficiency of operations and the
distribufion of agricultural products have been changed.
The fifth policy area concerns the energy problems that were unfortunately ignored until
the oil embargo and the sharp jump in gasoline prices. There are basically two energy-policy
options: To expand efforts to conserve energy and to accelerate development of domestic
resources. The experience of the temporary oil import embargo demonstrated what can be
accomplished by conservation efforts. Conservation of energy is possible—and it is good
economics for consumers and businessmen.
As to the development of additional energy resources, we need to emphasize the immediate
use of available technology and known energy reserves. Once again. Government
intervention has restricted the development of these resources by disrupting the market
forces. In terms of meeting our oil needs we already know about Alaska's North Slope
reserves, offshore drilling, oil shale deposits, improved recovery from existing producing
wells, accelerated exploration efforts, and the potential of nuclear and solar sources of
energy. We are not helpless. But we need to act. We also should give increased attention to
our coal resources, which far exceed the oil holdings ofthe current oil-producing countries.
We need to move ahead with the necessary technology for the mining and utilization of coal
in ways that will be consistent with environmental and safety standards.
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On the international side the United States has a particular responsibility to provide
leadership for the devetopment of a more open and efficient international system of trade
and investment. First, we should follow more stable fiscal and monetary policies at home.
The strength of the U.S. economic system is a basic factor in the continued progress and
stability of other nations. Second, in shaping our international economic policies we must
emphasize the same principles of open markets and competition that have served America
so well. The current monetary and trade reform efforts will determine the world economic
system far into the future. We can either promote increased competition, the reduction of
tariffs and nontariff barriers, equitable trading rules, and open access to markets and raw
materials; or the world economy will develop unwanted cartels to control prices and supplies,
and protectionism will once again disrupt the flow of trade and capital.
Finally, we must guard against a renewal of wage and price controls which are ineffective
at best and counterproductive at worst. Controls simply do not solve the underlying problems
and their ultimate effect is to disrupt real economic progress.
Myth Number 3 : The Federal Government has heen able to refine its economic tools to the
point where "fine tuning" of policies can avoid business cycles.—Part ofthe unfortunate "stopand-go" economic performance during the last decade must be attributed to the effects of
constantly changing economic policies to concentrate on short-term stabilization goals. In
particular, when unemployment begins to rise there is typically pressure to increase fiscal
and monetary stimulus in the hope that some of the benefits will trickle down to the
unemployed workers. Many government officials and economists evidently believe that the
Federal budget is an effective short-term economic stabilization tool. To the contrary, the
Federal budget should focus on the long-term allocation of resources and the mix of public
and private-sector responsibilities. When it is used as a stabilization tool its real long-term
function is disrupted and short-term results are disappointing because of the long timelags
involved. In too many cases, the stimulus arrives too late to alleviate the economic slowdown
but in time to exaggerate the subsequent boom and inflation.
Periods of rapid expansion of Government programs have been followed by the
impoundment of specific funds and temporary spending limits; occasional tax increases have
been interspersed with a series of tax cuts while Federal deficits will have been recorded in
16 ofthe past 17 fiscal years by the end of fiscal year 1977, and State and local government
debt has increased sharply; expansion of the money supply has vacillated between periods
of little growth to levels well above the amount required for stable economic expansion;
pervasive Government regulatory practices have been developed and frequent changes have
confused the private sector; a necessary national energy policy has not been developed; and
the Federal Government has sporadically resorted to wage and price controls and arbitrary
export and import restrictions to seek temporary relief for economic problems caused by
basic fiscal and monetary actions.
The historical concentration on short-term policy adjustments is based on planning
horizons that typically stretch only to the next election. That economic policies would be so
responsive to each new "crisis" and to fears of being labeled a "do nothing" government is
understandable in a democratic political economy. But this short-term approach is
inadequate for directing the affairs of the world's largest and most complicated economy.
We have already suffered two repetitions of the boom-recession sequence during the past
decade and each time we have ratcheted upward to higher levels of infiation and
unemployment. Such distortions are an excessive price to pay for creating so much economic
instability.
Myth Number 4: There is some unique solution that will provide a quick and painless end
to these problems.—Such rhetoric usually has a political appeal but little economic substance.
It should be emphasized that it is a myth that there is an easy solution, that we can complete
the difficult adjustment quickly, or that the process will be painless. It is not easy. It is not
quick. And it is certainly not painless. Nevertheless, I have increasing confidence in the
effectiveness of monetary and fiscal policies if they are responsible, consistent, and sustained.
The only basic change in my economic expectations has been to stretch out the duration of
the adjustment process. The current problems are the results of many years of policy errors
and it will take considerable time to correct them.
While I have discussed a series of policy issues I would like to close with one fundamental
personal observation: The American economy is the most creative and productive system
in the world. It has provided our people with an unparalleled standard of living and has
contributed to the economic development of the rest of the world. While some critics may
decry such measures of progress, I believe that economic growth is desired by most people.
I am confident that this progress will continue and form the basis for an even higher standard
for the quality of life in the future. Our existing economic system is certainly not perfect, but
it should not be discarded in favor of unproven experiments or alternative approaches that
have clearly failed to serve the real interests of people in other nations. Those of us who want
to improve the U.S. economic system must coritinue to emphasize the importance of granting
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1976 REPORT OF THE SECRETARY OF THE TREASURY
it the freedom to function efficiently. If such freedom is provided, the U.S. economic system
will continue to contribute to the well-being of Americans and the rest of the world.
Exhibit 26.—Other Treasury testimony published in hearings before congressional
committees, July 1, 1975-September 30, 1976
Secretary Simon
Statement before the Joint Economic Committee, on New York City's financial situation,
September 24, 1975.
Statement before the Senate Committee on Banking, Housing, and Urban Affairs, on New
York City's financial situation, October 9, 1975.
Statement before the Joint Economic Committee, to review current economic conditions
and policies, November 7, 1975.
Statement before the Joint Economic Committee and the Senate Select Committee on
Small Business, to discuss the capital formation and financing problems of small business
firms, November 2 1 , 1975.
Statement before the House Committee on Appropriations, on budget planning, January
27 and 28, 1976.
Statements before the House Committee on the Budget, Febmary 3,1976, and the Senate
Committee on the Budget, Febmary 5, 1976, to discuss the President's economic program.
Statement before the Subcommittee on Aviation of the Senate Commerce Committee, to
discuss S. 2551, the Aviation Act, April 7, 1976.
Statement before the Senate Finarice Committee, dn major tax revisions and extension of
expiring tax cut provisions, April 13, 1976.
Deputy Secretary Gardner
Statement before the Senate Finance Committee, to urge prompt action to increase the
temporary limit on the public debt, November 12, 1975.
Statement before the Senate Committee on Banking, Housing, and Urban Affairs, on the
Federal Bank Commission Act, S. 2298, December 8, 1975.
Statement before the Subcommittee on Financial Institutions Supervision, Regulation and
Insurance of the House Committee on Banking, Curren<iy and Housing, on the "Discussion
Principles" of the Financial Institutions and the Nation's Economy (FINE) Study, December
9,1975.
Statement before the Subcommittee on Financial Institutions of the Senate Committee on
Banking, Housing, and Urban Affairs, to discuss S. 958, the Foreign Bank Act of 1975,
January 28, 1976.
Deputy Secretary Dixon
Statement before the Subcommittee on Financial Institutions Supervision, Regulation and
Insurance of the House Committee on Banking, Currency and Housing, concerning financial
institutional reform, March 11, 1976.
Statement before the Subcommittee on Financial Institutions of the Senate Banking
Committee, on S. 2631, which would establish a National Consumer Cooperative Bank and
a new independent agency to supervise the bank, March 16, 1976.
Assistant Secretary Jones
Statement before the Subcommittee on Financial Markets of the Senate Finance
Committee, to discuss the process of capital formation, financial institutions, and possible
incentives for encouraging capital investment, Febmary 19, 1976.
Enforcement, Operations, and Tariff Affairs
Exhibit 27.—Statement by Assistant Secretary Macdonald, November 18, 1975, before the
Subcommittee on Trade of the House Ways and Means Committee, on Customs
appraisement of imports of automobiles
It is a pleasure to appear before the relatively new Subcommittee on Trade of the Ways
and Means Committee.
The subject of today's hearing concerns Customs appraisement of imports of automobiles
as it relates to the pending investigations of automobile imports under the Antidumping Act
EXHIBITS
387
of 1921 (19 U.S.C. 160). As you know, there are eight such cases pending, involving imports
from Belgium, Canada, France, Italy, Japan, Sweden, the United Kingdom, and West
Germany, which include products of 31 different manufacturers. In 1974 imports of these
products amounted to $7.5 billion.
Two petitions were received which resulted in the initiation of these investigations. One
was received on July 8, 1975, and covered all of the eight countries mentioned above. A
second, received on July 11, 1975, concerned importations from the United Kingdom, Italy,
and West Germany.
Because ofthe position taken at that time by various spokesmen for the domestic industry,
to the effect that imports were not a contributing cause of the then-depressed state of the
U.S. auto industry, we found that substantial doubt existed with respect to injury and the
matter was referred to the International Trade Commission (ITC) on August 8, 1975 (as
provided for in sec. 321 of the Trade Act of 1974, which amended sec. 201(c)(2) of the
Antidumping Act). A determination was made by the ITC on September 8, 1975, that it was
not able to find "no reasonable indication of injury." Our investigations therefore continue.
At this point it might be useful for me to explain in some detail how antidumping
procedures work. The Treasury has 30 days after receipt ofa valid petition within which to
make a preliminary inquiry and decide whether or not to initiate a formal investigation (sec.
201(c)( 1) of the act, as amended). Regulations promulgated under the act set forth what
information is necessary to constitute such a petition. The law requires that for "dumping"
to occur there must be present both sales at less than fair value, and injury or threat thereof
to a U.S. industry. Therefore, a petition must give evidence both as to differential pricing
and injury or threat thereof as a result. Once we are safisfied that sufficient informafion on
both these factors has been presented, an antidumping proceeding nofice is published, which
marks the opening of a formal investigation.
Treasury conducts only the inquiry into the alleged sales at less than fair value. The ITC,
under the act, must decide on the question of injury and that is why the Treasury refers the
case to the ITC during the preliminary stage if the information on hand during this first 30day period creates a substantial doubt as to the existence of injury. Treasury has no other
role in the injury phase of the case other than to ensure that evidence of injury is present,
and the full injury inquiry by the ITC follows the Treasury price investigation.
The price investigation usually takes 6 months to reach a preliminary determination
following publication of the proceeding notice. In complicated cases we may take up to 9
months to complete this part of the inquiry (sec. 201(b)(2) of the act, as amended).
As I mentioned, our purpose is to determine whether sales at less than fair value are or
have been occurring. A determination of sales at less than fair value does not require a
comparison of import prices with the prices of competing domestically manufactured goods.
What is compared normally is the home market price ofthe goods with the price ofthe same
merchandise for export to the United States. In certain circumstances where home market
prices are nonexistent or inappropriate, either export prices to third markets or constructed
value is used. All of these prices are of course subject to various adjustments so that the two
are comparable—we back out differences in transportation costs, tariffs, taxes, levels of
trade, and so forth so as not to be comparing apples and oranges. What we want is the exfactory price for both sales.
At the conclusion of this 6- (or 9-) month period in normal cases a tentative decision as
to the existence of sales at less than fair value is made. If it is positive, an order is issued
withholding appraisement on the merchandise entered on or after the date of publication of
the order. (Sec. 201(b)(1)(B), as amended.) This means that additional duties may be
assessable on imports as of that date if the final finding is affirmative, even though the final
dumping finding may be some months off. There is then a 3-month period during which an
opportunity is afforded interested parties to submit views on Treasury's tentative finding. At
the end of that 3 months, if the final sales at less than fair value determination is positive,
then the case goes to the ITC for a 3-month injury inquiry. If the ITC finds the existence of
injury, or the threat thereof, a final dumping finding is published and dumping duties are
assessable on all unappraised entries entered "not more than one hundred and twenty days
before the question of dumping was * * * presented to the Secretary * * *" (sec. 202(a) of
the act, 19 U.S.C. 161). This is a very important provision for the issue under discussion here
and I shall return to it shortly.
The auto cases are presently in the 6- or 9-month price investigation phase. Notice ofthe
investigation was published on August 8, and our tentative sales at less than fair value decision
is due in either February or at the latest May, depending upon whether complications
develop. Customs Service personnel iri the field are just now receiving pricing data from the
manufacturers concerned, and will shortly begin on-the-spot verification procedures so that
we can begin to analyze the information. It is obviously too early for me to have any basis
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1976 REPORT OF THE SECRETARY OF THE TREASURY
for a judgment as to what that data will show, nor would it be appropriate for me to voice
any opinion on the matter.
While these anfidumping inquiries are proceeding, the liquidation of entries of autos from
all major manufacturers has been suspended, for unrelated reasons for some fime. These
reasons concern (1) cost of production verification, (2) the resolution of certain legal issues,
and (3) with respect to imports from Canada, the receipt of certain documentation in
connection with duty-free importations under the Automotive Products Trade Act. The cost
of production verifications involve extensive foreign inquiries. These inquiries have been
underway for some months and are expected to be completed by November 30, 1975.
The major legal issue to be resolved with respect to all automobile entries is the manner
of determining the amount of profit to be used in calculating the cost of production (the
agreed basis of appraisement). In the past the record has not established as a matter of fact
that there was a profit usual in the trade that was different than that realized by the individual
manufacturers. This matter has now been raised again and is under study.
The so-called "old law" or "final list" (19 U.S.C. 1402) provides the statutory basis for
making these calculations. Automobile imports are valued for Customs purposes under this
statute. 1402(f) states that the cost of production of imported merchandise shall include "(4)
an addition for profit * * * equal to the profit which ordinarily is added, in the case of
merchandise ofthe same general character," if such exists and is different than that added
by the given manufacturer, and ifit is not less than 8 percent. Resolution of this issue at this
time necessitates findings on a country-by-country basis, of which automobiles are of the
"same general character." Although we have been appraising automobiles for years, this
issue continues to arise for various reasons. For instance, while there is information on
automobiles which are imported into the United States, section 1402(f)(4) requires that we
also consider automobiles that are not produced for export in the country of manufacture.
Also, the number of models and the volume of production constantly vary. It is further
possible that this problem may defy total solution in some instances and that we may have
to use individual company profits. To reiterate, it is not an easy task to establish a "usual
profit" in the automobile industry of a particular country.
The valuation statute requires that value be determined as of a point in time before entry
which would allow for the manufacture of the automobiles and their subsequent shipment
to the United States. There are daily importations of automobiles arriving in the United
States. It is obvious that information required to appraise these entries cannot be updated
on a daily basis. It is doubtful that any manufacturer could supply this information and certain
that the Customs Service could not assimilate it in any meaningful manner which would allow
for the orderly liquidation of entries. These periods of time in which cost data are to be
updated must be established, which would not place an unreasonable burden on either
manufacturers or Customs and still adequately protect the revenue. To further complicate
matters, it appears that these updating periods will not necessarily be the same for each
manufacturer of automobiles. In the past, updafing of information was usually done on an
annual basis. We are in the process of determining whether this is the best way to adequately
protect the interests of the United States.
With respect to one manufacturer, Volkswagen, it must also be determined whether
certain labor-related costs are unusual. Unusual costs are not included in a determination
of cost of production.
At this time we cannot speculate with respect to other issues which may arise as a result
of foreign inquiries which> are still open. However, inasmuch as we expect to complete all
foreign inquiries by the end of this month, we will shortly be in a position to attempt to resolve
outstanding issues with the importers and exporters concerned.
At this point I believe it would be useful to relate these two ongoing procedures to each
other and see how they can impact imports of autos.
As I've already mentioned, under the Antidumping Act, section 201(b)(1)(B) as
amended, withholding of appraisement is usually ordered at the time a tentative SLFV
determination is made, affecting entries on or after that date. However, the Secretary may
order withholding to affect entries up to 120 days before the date of publication of a
proceeding notice. This would mean that duties would be assessable on entries in these cases
beginning about April 8, 1975, instead of February or May 1976.
As a matter of policy, the Treasury has not used this retroactive authority. Withholding
has always been effective as of the date of publication of the notice ordering withholding of
appraisement. This is the practice followed today by all our major trading partners.
A separate issue is raised by section 202(a) ofthe Antidumping Act, which provides that
dumping duties be assessed, where appropriate, on imports unappraised at the time of any
final dumping finding, which were entered up to 120 days "before the question of dumping
was * * * presented to the Secretary" (in this case March 8, 1975). I want to make clear
EXHIBITS
389
that this provision operates independently of the discretionary authority in section 201.
Automatically under 202, all unappraised entries on the date of a dumping finding are subject
to additional duties if they entered on or after that day 120 days prior to receipt of the
petition. It is because of the operation of this provision that the pending inquiries under
section 1402 could result in assessment of dumping duties on up to an additional 14 months
of entries.
Two questions are therefore present: First, should the Secretary exercise his discretion and
make any eventual withholding order retroactive to all entries beginning on April 8, 1975?
Second, should the Customs and Treasury intentionally delay liquidations by leaving
unresolved these unrelated valuation issues so as to have affected automatically all entries
after March 8, 1975, by any dumping finding?
We presently believe the answer to both the questions ought to be no, but at the same time
I am grateful for the opportunity presented by these hearings so that we can engage in a useful
exchange of views on this complex yet extremely important matter.
As a matter of pure self-interest for the United States, it appears to us that the Secretary
ought not to exercise the discretionary "retroactive" authority of section 201. Neither the
United States nor our trading partners have ever initiated the practice of imposing dumping
duties retroactively, even though both we and they have the authority to do so. Other nations
would construe such an action as a change in U.S. policy toward a more restrictive use of
our antidumping law and would in all probability feel released from the restraint they have
heretofore exercised not to apply their remedies against our exports retroactively. And, of
course, their reactions might go beyond modification of their antidumping procedures.
Furthermore, I would question whether it would be consistent with traditional American
ideas of fair play to suddenly change the rules for the taxpayers concerned—it is the importers
who are liable here—without prior communication of such a radical departure from past
policies. Taxpayers should be able to reasonably anticipate their liabilities.
With regard to the second alternative, intentional delay in liquidating entries subject to
1402 inquiries, the same points apply. Intentional withholding of liquidation would be viewed
as a discretionary action, creating an unjustified impediment to trade. It has always been our
policy to liquidate entries in an orderly and expeditious manner. There is no reason to deviate
from this policy at this time. The difficulties that resulted in suspension of liquidation in this
instance had nothing to do with dumping, but with the endemic vagaries of the valuation
statutes, and we should not exact unexpected duties for statutory difficulties which we allow
to exist.
Certain points regarding our tentative thinking ought to be clear.
First, liquidation will not affect any possible Customs penalty situations. The statute of
limitations for assessment of applicable penalties runs from the date of entry or "discovery,"
whichever is later.
Second, we would be prepared to appraise and liquidate in a manner which would protect
the revenue and yet be reasonable and defensible under the statute. If outstanding valuation
issues are not resolved, we would of course not liquidate.
Third, speedy resolution of these issues will largely depend upon acceptance by the
taxpayers here, that is, the importers, ofthe Government's position interpreting the statute
and applying it to the facts. We feel that any U.S. taxpayer ought to have the option of settling
an outstanding tax matter by accepting the Government's position.
Fourth, in large part resolution is dependent upon the receipt and verification by Customs
ofthe data necessary to calculate "cost of production." To the extent foreign manufacturers
drag their heels in producing that data, the possibility of liquidating these entries before any
dumping finding is lessened. We would, of course, not proceed in any case where the full
disclosure necessary is withheld.
One final point. If this case illustrates nothing else, it is that the old valuafion statute, 19
U.S.C. 1402, the "final list," has outlived its usefulness. In the case of automobile
appraisements, were it not for the existence of the old value law and the final list, in no case
would these appraisements have been less than invoice value. Under the old law, where
related party transactions occur we must use the cost of production to determine value.
Under the new law, 19 U.S.C. 1401, if the transaction price fairly reflects the true market
value, we can accept that price. Therefore, we would avoid this anomalous situation where
the invoice price exceeds the value for Customs purposes, the cost of production. Under the
new law, we would use the higher, invoice price. Furthermore, the tremendous informationgathering burden on Customs, often not related to the transactions involved, and often
resulting in the collection of less revenue would be removed.
At an appropriate time, I believe it would be useful for this subcommittee to address itself
to the issue of devising an up-to-date valuation system. We stand ready to engage in any such
study with you and other interested parties.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 28.—Address by Assistant Secretary Macdonald, March 11, 1976, before the
International Trade Club of Chicago, Chicago, III., on international unfair trade practices
As one of the trustees over the administration of a portion of U.S. intemational trade
policy, I would like to submit to you, as fellow shareholders in the Common Weal, an annual
report concerning international unfair trade proceedings which have been or are now being
processed by the Federal Government. As you know, there are four major laws designed to
protect U.S. industry from foreign exporters who engage in unfair trade practices: The
countervailing duty law; the Antidumping Act (which we administer at Treasury); section
301 ofthe Trade Act of 1974, relating to "unreasonable" and "unjustifiable" practices; and
section 337 of the Tariff Act of 1930, prohibiting unfair practices in import trade.
The efforts of this administration have been directed at effecting the most favorable
atmosphere for international trade, while at the same time acting expeditiously to provide
relief for trade-distorting practices which can be harmful to domestic industry and labor.
Furthermore, we operate on the premises that—
(1)
(2)
(3)
There is no inconsistency between free trade and fair trade.
Meaningful remedies must be provided for injury caused by unfair trade practices,
and the failure to provide such remedies actually is harmful to broader efforts to
expand and liberalize trade generally.
If voluntary discontinuance by governments of an unfair trade practice can be
attained, it is preferable to achieve our ends in this manner than to impose
unilaterally the remedies available under existing legislation.
With these principles in mind, 1 would like to report the following for calendar 1975:
A.
B.
Antidumping.—The sale of products into the United States at discriminatorily low prices,
causing injury.
(1) The Trade Act of 1974 amended the antidumping law (19 U.S.C. 160) to bring
it into accord with preexisting Treasury practice and time schedules. It did not
materially change Treasury's method of operation.
(2) In 1975, 25 cases were initiated (compared with 10 cases initiated in 1974, and
20 in 1973).
13 preliminary decisions
12 final decisions on complaints of sales at less than fair value, 8 affirmative,
4 negative.
Of the seven cases referred to the International Trade Commission (ITC) in 1975
for injury determination, the Commission found injury in two cases and no injury
in five cases.
(3) Of the cases initiated in 1975, probably most significant from a trade standpoint
are the allegations that automobiles from eight countries have been dumped.
These cases involve total imports of $7.5 billion.
(4) There is one new procedure initiated by reason of the enactment of the Trade Act
of 1974 which deserves comment. This is a provision allowing the referral of an
antidumping petition to the International Trade Commission for an initial
determination whether there is "no reasonable indication that industry is being
injured, or likely to be injured." The idea is to terminate early those cases in which
there is no likelihood of injury. Pursuant to this provision, three referrals were
made to the International Trade Commission by Treasury and all were returned
to the Treasury for investigation, the ITC being unable to determine that there was
no probability of injury.
(5) My only observation regarding 1975's increase in antidumping activity is that
antidumping petitions appear to be a lagging economic indicator. That is to say,
an increase in dumping petitions begins to occur about 6 months after a downturn
in the economy, later decreasing during recovery. So far in 1976, we have received
no new dumping petitions. I can therefore affirm that we are definitely past the
bottom of the recession!
Countervailing duty law.—The assessment of additional duties equal to bounties or
grants bestowed upon exports from foreign governments or associations.
(1) The Trade Act of 1974 did impose substantial practical changes in the
administration of the countervailing duty law. First, it placed time limits on the
processing of petitions for relief—6 months for a preliminary determination
whether a bounty or grant exists, and 12 months for a final determination and
assessment ofthe duty. It also empowered the Secretary ofthe Treasury to waive
the assessment of countervailing duties if three conditions are met:
(a) Adequate steps are taken to eliminate or substantially reduce the adverse
effect of the bounty or grant.
EXHIBITS
C.
D.
391
(b) There is a reasonable prospect of success of MTN negotiation.
(c) To countervail would likely seriously jeopardize this chance of success.
(2) In 1975, Treasury initiated 38 cases under the countervailing duty law, including
30 which were pending from prior years. This set a record for these cases, since
the total number of cases processed from the enactment ofthe act in 1897 to 1974
is approximately 65.
(3) Of the 38 in vestigations—
(a) Thirteen were terminated at the request of the petitioners.
(b) Twenty-five preliminary determinations were issued.
(c) In addition, 20 final determinations were issued, ofwhich 10 were affirmative
and 10 negative.
(4) These numbers, however, do not tell the entire story. Of the 10 negative
determinations, several were decided in the negative only after the foreign country
in quesfion discontinued the bounties or grants due to the threat of countervailing
duties. Of the 10 positive decisions, 4 resulted in countervailing duties with no
waiver. Six waivers were granted, but of the six waivers, four were granted only
after substantial reductions in the subsidies occurred. For example, on EC cheese,
all subsidies on cheese for further processing or manufacture were removed and
substantial percentage reductions were made on the export of table cheeses. In the
case of canned hams from, the EC, a 20-percent reduction was effected before the
waiver was granted, and further reductions will be required in the event that the
hog/corn ratio drops below 15 to 1.
(5) I should add that in the vast majority of cases, the domestic industry and interested
Members of Congress are consulted prior to the issuance of any waivers.
Section 301 ofthe Trade Act of 1974.—"Unreasonable and unjusfifiable" trade practices
of foreign countries.
(1) Of five complaints received under this new section, one case, involving
discriminatory treatment of non-Guatemalan shipping companies, has been
determined to be an unjustifiable trade practice. An appropriate remedy is still
under study. A second case, involving a quota placed by Canada on eggs exported
from the United States, has been resolved with a largely increased quota for U.S.
eggs.
Section 337 cases.—Unfair competition in import trade.
(1) Seventeen cases are under consideration by the International Trade Commission,
the agency with primary jurisdiction. The bulk of these cases relate to patent
infringement, in which the complainant intends to exclude the infringing product,
but some cases involving tying arrangements and exclusive dealing arrangements
are pending before the International Trade Commission.
In addition to the administration of existing unfair trade legislation, the administration is
working in the General Agreement on Tariffs and Trade (GATT) to harmonize each
country's practices in order tp avoid trade confrontations and yet protect American interests
from harmful and unjustifiable practices. The principal effort is taking place in the subsidies
area.
The first meeting of the Subsidies/Countervailing Group of the GATT Tokyo Round
negotiations took place last November; the next meeting is scheduled for April 5. The United
States has submitted a position paper regarding a proposed Subsidy Code which would be
binding upon subscribing countries.
Under the U.S. position paper, all subsidization which tends to promote exports would be
prohibited, whether or not it causes injury to a domestic industry and whether or not the
exports are destined for the United States or a third country. Those subsidies, on the other
hand, which apply equally to domestic and foreign sales such as regional aid programs, would
only be prohibited if injury resulted to an American industry. Finally, certain practices which
technically may be regarded as subsidies such as export financing arrangements and trade
fairs would be allowable, with appropriate limitations, without regard to injury.
The basic trade-off envisaged by the U.S. position paper would be that certain subsidized
exports to the United States would be subjected to an injury test or would be allowable, while
other subsidized exports to third countries as to which the United States can presently do
very little would be effectively prohibited without an injury test. Up to this point, much of
the discussion in Geneva has revolved around the fact that the United States applies its
countervailing duties on the basis of foreign subsidies only, without being required to find
injury to domestic industry. Although the GATT requires an injury determination before
countervailing duties can be imposed, the United States is not subject to this requirement
by reason o f a "grandfather clause," which allows U.S. legislation antedating our accession
to the GATT to stand. This is not, however, as much a derogation from the GATT
requirement as may appear at first blush, since the Treasury Department will not initiate a
countervailing duty investigation unless it has received a petition on behalf of an aggrieved
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1976 REPORT OF THE SECRETARY OF THE TREASURY
industry. Our experience has been that when an industry is willing to go to the expense of
acquiring information to file a complaint, it certainly feels it has been injured. In any case,
it is our position that the GATT should be revised to eliminate the injury test in cases of an
export-tilted subsidy. We analyze the export-tilted subsidy as nothing more than a unilateral
negativing by one country of the legitimate tariff rate of the country to which the exported
goods are shipped.
Finally, I should point out that the job of our special trade representatives in the Tokyo
Round of negotiations is many times more difficult than it has been in the past. In prior
negotiations, tariff reductions were the primary objective. These are quantifiable and
measurable impediments which lend themselves to negotiated reductions. The present round
of negotiations, on the other hand, is designed primarily to eliminate nontariff trade barriers.
Oftentimes these trade barriers are found in the domestic practices of the negotiating
country; they are not easily measured or compared; and they are the subject of sensitive
"country interests." To dismantle as many of these barriers as possible is the ambition ofthe
Tokyo Round.
At Rambouillet, the President gave new impetus to the Geneva negotiations by urging that
the bulk of the agreements in many areas be completed by the end of 1977. This does not
mean, of course, that our negotiators will be inclined to reach an agreement merely for
agreement's sake. That mentality, as every businessman knows, causes disastrous results. If
no arrangement advantageous to the United States and to the harmony of mutually beneficial
trade can be made in the multilateral trade negotiations, no agreement will be made at all.
Exhibit 29.—Statement by Assistant Secretary Macdonald, March 24, 1976, before the
Subcommittee on Trade of the House Ways and Means Committee, on the duty-free
importation of U.S.-made materials
I am here today at your invitation to provide the administration's views on a number of
bills introduced to repeal or amend items 807 and 806.30 of the Tariff Schedules of the
United States. These items have continued to be matters of controversy over the years due
to the allegations that they permit the transfer of American jobs abroad.
I would like to begin with a technical discussion of how the provision works. Item 807 is
a duty exemption for U.S. components of any manufactured article assembled abroad. It was
incorporated in the TSUS in 1963, after having been developed over the years as a Customs
administrative practice, known as the doctrine of "constmctive segregation." This doctrine
allowed free entry for American-made components in articles assembled abroad if such
components were capable of being identified and removed without injury to themselves or
to the foreign-made components with which they had been assembled. Tariff Schedule item
807 adopted this administrative practice but eliminated the requirement that the American
components not be advanced in value or condition.
In order to determine the dutiable value of item 807 merchandise, the value of the
domestically produced components is subtracted from the full value of the imported article.
The value of the domestically produced components is determined by their cost at the time
of last purchase, their value at the time of export, their constructed value, or their cost of
production, depending upon the information available and Customs judgment as to which
method is most appropriate. We estimate that at least 95 percent of these imports are valued
by constructed value or cost of production methods.
Administration of 807 is complicated by the requirements of determining such things as
"usual general expenses," "profit," and the costs of manufacture when using constmcted
value and cost of production methods of valuation. As a result, liquidation of 807 entries is
often delayed. Recently, however. Customs has adopted regulations which clarify the
application of sections 806.30 and 807 to particular fact situations. Moreover, Customs has
clarified its advance mling process through which importers can determine the applicability
of 806.30-807 to proposed assembly operations.
Item 806.30 was originally enacted into law in 1956 (as par. 1615(g) of the Tariff Act of
1930) in order to facilitate the processing of U.S. metal articles in contiguous areas of Canada
during breakdowns and emergencies at nearby plants in the United States. It permits dutyfree entry of metal products manufactured in the United States which are imported after
having undergone further processing abroad. Duty is paid only on the cost or value of
processing outside the United States.
Generally speaking, the administration of item 806.30 is simpler than that of 807 since it
is not necessary to determine the full value of the imported article. However, it is often
necessary to use the cost of production or constmcted value methods in valuing the foreign
processing and consequently many of the same problems in valuation exist under both 806.30
and 807.
EXHIBITS
393
An interesting question arises as to what would happen if these two provisions were
renealed. So far as Customs workload is concerned, we anticipate that there would be little
efiect, assuming the volume of imports remains constant, since this merchandise would still
be appraised under constructed value or cost of production methods.
Insofar as the dutiable status of U.S. components presenfly duty free under 806.30 and 807
is concerned, a determination would be necessary as to whether the doctrine of constructive
segregation were still effective. There are judicial decisions which would need to be studied,
along with the legislative history of the repeal action, before such a ruling could be made.
Should the doctrine stand, there would of course continue to be some duty-free treatment
for U.S. components.
The practice of permitting duty-free entry for domestically produced components of
foreign-assembled articles is quite widespread among developed countries. While we do not
have precise figures, we do know that Western European countries make extensive use of
foreign assembly of goods in Eastern Europe. This practice seems to be increasing. Textiles
form a considerably larger proportion of such goods reimported into EC countries than into
the United States.
The European schemes are somewhat more restrictive than ours in that they generally
require the domestically produced products to be exported, processed, and reimported for
the accoiint of a specific single domestic firm. The United States permits foreign-based firms
to buy our components for such processing.
Since the Tariff Commission (now the U.S. International Trade Commission) study of
1970, statistics indicate that imports under these two items have risen relatively only slightly
more than our total imports. For example, the total of such imports utilizing 806.30 or 807
amounted to 5.1 percent of our to^al imports in 1969, rose to around 6.2 percent in 1972
and 1973, and declined to 5.4 percent in 1974 and 1975. Related to manufactured goods
alone, such imports under 807 and 806.30 amounted to about 10 percent in 1975 compared
to about 8 percent in 1969. The American components of such imports have increased more
than the value added abroad. The volume of foreign components of such imports is large,
primarily because of the incorporation of American parts in foreign-made automobiles
entered under item 807. We do not have individual product data for 1975, but for 1974, autos
comprised about 40 percent of the total value of imports under 807. A total of 74 percent
of 807 imports consists of manufactures of metal, including the automobiles mentioned
previously, imported under schedule 6 of the TSUS.
In 1974, 806.30 imports totaled $554 million and 807, $4.83 billion. For 806.30,
nondutiable U.S. components comprised 55.7 percent ofthe total ($303 million). For 807,
the comparable figure was 20.9 percent ($1 billion).
Given these considerations, and we can supply more statistics for the committee if you
wish, we do not consider that repeal of these two provisions is in the best interest ofthe United
States. On the contrary, we continue to hold the views expressed to the committee in a letter
from the Special Trade Representative to the chairman of the committee on October 27,
1971. To quote one ofthe concluding paragraphs, that letter says: "In summary, the facts
at hand do not, in our view, indicate a need for special action by Congress at this time on
items 807.00 and 806.30. However, the Administration will continue to keep under review
developments in the level and patterns of trade under items 807.00 and 806.30, with a view
to appropriate inclusion in its trade legislation program of suitable safeguards for those cases
in which domestic industry or labor may be injured."
We continue to hold these views and wish to note that the administration recommended
and the Congress approved legislation which would provide relief under the escape clause
procedures of the Trade Act of 1974 by providing among the remedies available to the
President suspension of these two provisions of the tariff in import injury cases. So far under
the Trade Act of 1974 we are not aware that any ofthe petitions filed have claimed that either
of these two items are a source of difficulty.
To the extent that provisions 806.30 and 807 permit components which U.S. manufacturers can produce efficiently to be included in labor-intensive imported goods, where such
producers could not compete in producing these finished goods, the U.S. economy benefits.
There, is doubtful validity to the assumption that repealing these provisions would result
in a return of production of the finished product to the United States. A more likely result
would be that the entire manufacturing and assembly process would be driven abroad with
U.S. components replaced by similar articles from other industrial suppliers, or there would
be a fall in domestic demand for the product as a result of price increases, with little or no
increase in U.S. production. It would appear to us, therefore, that the net result of repeal
of 806.30 and 807 would probably be a loss in U.S. jobs and production, as exports of
components fall off, as well as an increase in the price of the products to the American
consumer. If that analysis is correct, nobody benefits, least of all American labor, which
suffers both job loss and higher prices. I note that the 1970 Tariff Commission report
estimated that repeal would cause a $150-$200 million deterioration in the U.S. trade
394
1976 REPORT OF THE SECRETARY OF THE TREASURY
balance. While we continue to hold the belief that repeal of these items would result in a net
economic loss, we think it might be desirable to update the extensive study made of these
two items to determine if events since 1970 have changed the situation in any significant
degree.
Exhibit 30.—Excerpt from statement by Deputy Assistant Secretary Featherstone, April
22, 1976, before the Privacy Protection Study Commission, on the Bank Secrecy Act
The Treasury Department appreciates this opportunity to comment upon its role and
responsibilities with respect to titles I and n of Public Law 91-508, commonly referred to
as the Bank Secrecy Act. We are grateful to the Commission for having scheduled hearings
at this time to enable us to develop the underlying history and purposes of the law and the
implementing regulations, and to clear up some misunderstandings about Govemment access
to bank records.
The Treasury Department finnly supports the purpose of the act now just as it did when
Chairman Patman introduced the initial legislation. The bank recordkeeping requirements
and the reporting provisions contained in the regulations issued to implement the act have
assured the public that the basic financial records essential to the proper investigation of
white collar crime, corruption, apd tax evasion will generally be available when the
appropriate Govemment authorities need them. Furthermore, we believe that we have been
able to accomplish this primary objective without sacrificing our interest in observing the
constitutional prohibition against unreasonable searches and seizures and in avoiding
unnecessary incursions into the privacy of individuals. Our desire to attain these goals is well
documented in the legislative history of the act.
*
*
*
*
*
«
*
Mr. Chairman, since the enactment of the Bank Secrecy Act we have been confronted with
various legislative proposals to amend substantively not only Public Law 91 -§08 but also the
entire body of Federal law regarding law enforcement access to records. Our foremost
concerns have been the pbssible legislative creation of a probable cause standard where it
has never before existed and the establishing of a business customer's standing to receive
notice of requests for access to records and to intervene ih the criminal investigative process
which seeks such records.
The creation of a probable cause standard for access to the financial records of a banking
institution would have a very detrimental impact upon law enforcement, interfering with
quite ordinary investigative techniques, and leaving investigators with a scarcity of
preliminary informational resources. What is involved in the investigative process was
described succinctly by the Department of Justice in testimony concerning H.R. 214, the Bill
of Rights Procedures Act, before the House Judiciary Committee's Subcommittee on Courts,
Civil Liberties, and the Administration of Justice:
A criminal investigation must begin somewhere. Many, if not most, criminal investigations are instituted upon the basis of allegations and suspicions. Federal agents do not
usually start out with probable cause to believe that a certain person committed a certain
offense, and that certain items of real evidence, or the fruits of crime, or contraband
can likely be found at a certain location. Investigations ordinarily proceed by inquiring
of a large number of people in the hope of developing evidence amounting to probable
cause. When investigators go to written records, they are not doing anything essentially
different from when they ask questions of the persons who made or were involved in
making the records, except that the records preserve memories that may be lost.
The financial records maintained by banks regarding their accountholders are often
reviewed as an essential preliminary step in criminal investigations and are likely to be of
particular significance in investigations of organized crime figures, narcotics traffickers,
corrupt public officials, and other white collar criminals. A probable cause standard for
examination of bank records would be a shield for criminals with large movements of money
and complex financial maneuvers but would constitute a crucial impediment to the public's
right to protection from criminal enterprises flourishing through predations concealed in our
financial system.
Basic to the legislative initiatives for a probable cause standard for access to financial
records is the presumption that a customer of a financial institution has a fourth amendment
right, enforceable by him, in records of his financial transactions with others, when those
records are the property of another party to the transaction. Yet nearly every Federal court
to consider this issue has declined to recognize any proprietary interest by a customer in such
records and has mled that a bank customer has no standing to challenge, reasonable access
by Federal investigators to such records. Harris v. United States, 413 F2d 316 (9th Cir. 1969);
EXHIBITS
395
Dosek\. U nited States, A05¥2dA05{%\\\C\T. \96S), Galbraith v. United States, 3S1 F 2 d 6 \ l
(10th Cir. 1968); DeMasters v. Arend, 313 F2d 79 (9th Cir. 1963); and Foster v. United
States, 265 F2d 183 (2d Cir. 1959).
Again, Mr. Chairman, I direct the Commission's attention to the Justice Department's
testimony on H.R. 214:
The fourth amendment protection to which a person is entitled ought not to be extended
solely because the person wishes something to be private. As the Supreme Court said
in Katz v. United States, 389 U.S. 347, 351-52 (1967), the fourth amendment—
* * * protects people, not places. What a person knowingly exposes to the public, even
in his own home or office, is not a subject of fourth amendment protection. [Citations
omitted.] But what he seeks to preserve as private, even in an area accessible to the
public, may be constitutionally protected. The Katz case then raised the matter ofthe
person's reasonable expectation of privacy. Many ofthe kinds of transactions that would
be covered under [such legislative proposals] are indeed "private" transactions, in that
they are not displayed for general public consumption. But they are hardly "private"
transactions in any other sense. Records kept of these transactions, especially when
owned and maintained and used by the other parties to the transactions, are records that
are commonly inspected by or at least exposed to a number of people. For instance, one
expects that when a check is written, records of its progress through the clearinghouses
and eventually on the books of the drawee bank will be seen by many people. No
expectation of privacy in such records, at least as the phrase is used in Katz, would appear
to exist.
It is our view that a warrantless search is not unreasonable unless the Government,
without probable cause or exigent circumstances, intrudes into an area in which the
"proprietor" has a reasonable expectation of privacy. See Katz v. United States 389 U.S.
347 (1967). Those things which an individual exposes td public scrutiny, things which
he does not himself safeguard from third parties, are not protected by the Fourth
Amendment. It follows that records of transactions of an individual which, in the normal
course of events, can be viewed or obtained by persons whom that individual evidences
no desire to select or restrict are not items in which the individual has an expectation
of privacy."
Those legislative proposals which envision notification of and standing to oppose requests
by law enforcement officials for access to financial records are clearly in conflict with the
cases and would make records sacrosanct far beyond what is now the law. We cannot find
a reasonable justification for granting such privileges to accountholders.
Certainly, before creation through legislation of rights which may adversely impact on the
alleged beneficiaries of such rights is undertaken, the proponents of such "rights" should
present clear and convincing examples of actual abuses of the access process. Equally
essential would be proof that the demonstrated wrongs are of such volume and impact that
the public interest in a remedy will clearly outweigh the advantages to the public which
already inhere in the present system of access. We are confident that the advocates of such
changes cannot sustain their burden of proof.
We are unaware of any record of measurable abuse by law enforcement officials resulting
from their undisclosed access to financial records even though such access has been
employed routinely over many years. However, we believe it is abundantly clear that the
American public will suffer substantially from these unnecessary hindrances to criminal
investigations. Clearly, notice to an accountholder that law enforcement officials wish to
review bank records concerning him will frequently sabotage the ongoing investigation. Since
access to financial records is commonly an initial element in developing a criminal case,
exposure of the Government's interest in those records will allow a suspect to alter his
operations, to falsify or destroy evidence (including witnesses), or to flee thejurisdiction even
before an indictable case can be developed or an arrest made.
Even if an investigation survived notice to the accountholder, it would be equally
vulnerable from the delay caused by the accountholder's "right" to contest the disclosure.
Delay would be much more than a time-consuming burden upon and an additional physical
hazard for a Federal agent; it would be another opportunity for a criminal suspect to alter
his operations or take other evasive and escape actions as described above.
The duty to give evidence
This brief exposition of the case law has shown that bank customers have no proprietary
interest within the scope of the fourth amendment in records maintained and owned by
financial institutions simply because information about the customers is physically embodied
in them. The records are the property ofthe financial institutions maintaining them, and the
fourth and fifth amendments do npt bar reasonable inspections of those records by law
enforcement officials. Federal cases also hold that whatever duty, if any, a financial
396
1976 REPORT OF THE SECRETARY OF THE TREASURY
institution has to keep customers' account records confidential, it is outweighed by the
greater duty to give evidence.
This obligation to give evidence is deeply rooted in the common law as imperative to the
administration of justice, and it underlies the rejection ofa "right of privacy" for customers
regarding the records of financial institutions. Professor Wigmore has cogently stated the
rule, thus: "For more than three centuries it has now been recognized as a fundamental
maxim that the public (in the words sanctioned by Lord Hardwicke) has a right to every man's
evidence." And while claims are made for exemption from this duty, those few which are
recognized "are distinctly exceptional, being so many derogations from a positive general
rule.^'
The duty to give evidence flows from fundamental requirements of justice in a society of
ordered liberty. The administration of justice must be a search for truth regarding which men
can, hopefully, exercise wisdom. From Hellenic antecedents, through the history of the
English common law, to our own Constitution, men have recognized that civilized society
must be more than an amalgam of free individuals but, on the other hand, it is not merely
an ordered community. Justice has, thus, been made an institution of our society requiring
that the knowledge of all men be made available to its instruments with allowance for only
the most clearly drawn and strongly reasoned exceptions. Without the imposition of such an
obligation, truth cannot be sought and justice cannot be done.
That special interests in some States have managed to achieve some legislative immunity
from the duty to give evidence does not diminish the wisdom ofthe common law obligation
or its recognition by the courts. Nor has its concomitant, that privileges are "derogations from
a positive general rule * * * [and] therefore, to be discountenanced" lost its standing before
the courts. Rather, the principles of the testimonial duty and the rejection of insufficiently
based privileges have received recent reinforcement by two history-making decisions ofthe
Supreme Court, Branzburg v. Hayes, 408 U.S. 665 (1972) and United States v. Nixon, 418
U.S. 683 (1974).
Branzburg dealt with a group of appeals from different journalists who had been
subpoenaed by grand juries to provide information regarding criminals and extremist groups
with whom the reporters had met, in one manner or another, in gathering material for
exclusive stories. Various claims were made by the appellants including first amendment
assertions that a privilege necessarily attached to communication between newsmen and
their "confidential news sources." In addressing the case of one petitioner who had asserted
a claim of a "newsman's" privilege, the Court cited with approval Professor Wigmore's
description and analysis of the duty to give evidence and the strong argument against
exemptions (408 U.S. at 690). In flatly rejecting the concept of a first amendment reporter's
privilege, the Court stated:
Until now the only testimonial privilege for unofficial witnesses that is rooted in the
Federal Constitution is the Fifth Amendment privilege against compelled selfincrimination. We are asked to create another by interpreting the First Amendment to
grant newsmen a testimonial privilege that other citizens do not enjoy. This we decline
to do. Fair and effective law enforcement aimed at providing security for the person and
property ofthe individual is a fundamental function ofgovernment and * * * we perceive
no basis for holding that the public interest in law enforcement and in ensuring effective
grand jury proceedings is insufficient to override the consequential, but uncertain,
burden on news gathering that is said to result from insisting that reporters, like other
citizens, respond to relevant questions * * * of a valid grand jury investigation or criminal
trial. (408 U.S. at 689.)
More recent, of course, is the Supreme Court's discussion in United States v. Nixon ofthe
presumptive privilege of the President described therein as having "all the values to which
we accord deference for the privacy of all citizens [as well as] the necessity for protection
ofthe public interest in candid, objective, and even blunt or harsh opinions in Presidential
decision-making." (418 U.S. at 682.) Stated succincfly, the Presidential privilege is
"fundamental to the operation of government and inextricably rooted in the separation of
powers under the Constitution."
Yet despite the impelling bases for the Presidential privilege, the Supreme Court balanced
it against "our historic commitment to the rule of law," and found that the "very integrity
of the judicial system and public confidence in the system depend on full disclosure of all
the facts * * *" (418 U.S. at 683). In reciting for comparison some ofthe other "weighty
and legitimate competing interests" protected by privileges—fifth amendment selfincrimination protection, attorney-client and priest-penitent communications—the Court
restated the rule that "exceptions to the demand for every man's evidence are not lighfly
created nor expansively construed, for they are in derogation ofthe search for truth." (418
U.S. at 7 10.) Following this principle, the Court then found that, in the absence of military,
diplomatic, or national security secrets, even the extraordinary presumptive privilege ofthe
President was outweighed by the need for information in the fair administration of justice.
EXHIBITS
397
These two landmark cases have again emphasized the compelling claim to "every man's
evidence" which inheres in our Constitution and the precepts of justice. Strong arguments
were made in Branzburg that the first amendment guarantee of a free press demands the
recognition of a "reporter's privilege" and in Nixon that the separation of powers doctrine
and the need for confidentiality of high-level communications establish privileges transcending the needs of our criminal justice system. In each instance the Court recognized the
historically preferred status of the asserted privilege; and in each case the Court rejected the
incursion on the criminal justice system. Should we, in the face of such decisions, now accept
a claim of privilege for records of a business relationship which is, at best, tenuously
associated with another person's expectation of privacy? Let us examine this further.
If a privilege were to be recognized for protecting the banker-customer association against
examination of transactional records, it would have to meet the four fundamental conditions
described by Wigmore as the recognized prerequisites to establishment of a communications
privilege:
(1) The communications must originate in a confidence that they will not be disclosed.
(2) This element of confidentiality must he essential to the full and satisfactory
maintenance of the relations between the parties.
(3) The relation must be one which in the opinion of the community ought to be
sedulously fostered.
(4) The injury that would inure to the relation by the disclosure ofthe communication
must be greater than the henefit thereby gained for the correct disposal of litigation.
[Emphasis in original.]
Test Number One is certainly debatable since neither American case law nor Public Law
91-508 can reasonably serve as a predicate for banks to offer customers any assurance of
confidentiality from authorized law enforcement officials. Furthermore, the movement of
financial papers through ordinary channels of commerce necessarily involves the imposition
of others into the association between customer and financial institution. An expectation of
nondisclosure would be less than reasonable in the circumstances of today's business
practices.
Test Number Two clearly cannot be met by the relationship of financial institution to
customer. Confidentiality is patenfly not essential to the full and satisfactory maintenance
of such a relationship. This is demonstrated by the practice ofthe financial community itself
which, as a business convenience and precaution, exchanges information from records of
customers seeking services from different institutions. Today's booming credit industry also
involves intrusion by credit bureaus and other businesses upon bank information about
customers. Yet no diminution in the public's use of checking accounts and credit
arrangements has resulted.
Number Three is controverted by the line of court decisions holding against the assignment
to financial records of a confidential status from Federal law enforcement officials. In
addition, our credit-oriented society has continuously fostered more expeditious and
accurate mechanisms for financial transactions rather than the confidentiality of information
concerning the bank-customer relationship.
Test Number Four cannot be met because the public suffers no measurable injury from
law enforcement access to records of financial institutions while it benefits greatly in the
administration of justice. As I hope this testimony and the record of previous hearings on
bank secrecy have made clear, society gains significantly from the availability to law
enforcement authorities of relevant financial records but forfeits no rights.
Thus, limited in the nianner in which the Government can bring a suspected criminal to
account, we must rely upon each citizen for evidence and must be able to examine bits and
pieces of information which are not constitutionally imbued under the fourth and fifth
amendments with confidentiality. Only by this process of sifting and examining information
which often proves to be irrelevant can we develop cases against criminals involved in
complex illegal schemes.
Furthermore, under our fifth amendment a citizen is secure against compulsion to appear
before police authorities and account for himself. We must develop our case from witnesses
and physical evidence. But the civil law system will demand a personal explanation of charges
even if the result is self-incriminatory.
For civil law countries, therefore, the investigatory-accusatory process is simpler. An
individual under suspicion bears the burden of proof to justify his actions and, thus, to prove
himself innocent. Under such circumstances, the liberty of "bank secrecy" need not be
breached to achieve the Government's end, a prosecutable case against a criminal, since the
suspect himself is bound to produce his own refutation of accusations against him.
The point here is that the recurring calls for "bank secrecy," like that of some civil law
398
1976 REPORT OF THE SECRETARY OF THE TREASURY
countries, ignore the crucial distinctions between our common law traditions of criminal
justice and the civil law systems of most of Europe.
I am certain that none of us wish to exchange our form of criminal justice for the possible
enhancement of a privacy interest in records of financial institutions. Yet if financial records
were to be accorded a confidential privilege regarding law enforcement officials, it would
encourage a system like that of the civil law nations in order to continue to enforce the
criminal laws against major organized crime figures, narcotic traffickers, and white collar
criminals engaging in sophisticated and complex illegal financial maneuvers.
Conclusion
Mr. Chairman, under current case law and Public Law 91-508, we have the means in our
free society for the reasonable examination of records of financial institutions without undue
burdening of the institutions possessing such records or unfair intrusions upon the persons
to whom such records may relate. The availability of such information is a logical companion
to our country's goal of achieving justice for all. Were we now to create a "right of privacy"
where it has never existed, which strongly conflicts with society's right to evidence, and which
has not been demonstrated to be needed, we will have taken a significant step toward
inducing atrophy in the criminal investigative process. If expanded to other related business
contexts such as hotel records or gasoline stations receipts, effective law enforcement would
cease:
We urge the Commission to balance the strong need for law enforcement officials to gain
evidence from financial institutions against the manufactured right of privacy in such
information which the courts have rejected. Having done so, we are confident that you will
join us in strong support of the Financial Transactions and Currency Reporting Act.
Exhibit 31.—Excerpt from statement by Assistant Secretary Macdonald, June 28, 1976,
before the Commerce, Consumer, and Monetary Affairs Subcommittee of the House
Committee on Government Operations, on the Bank Secrecy Act
I would like to thank you for this opportunity to testify today concerning the history and
implementation of titles I and II of Public Law 91-508, which is commonly referred to as
the Bank Secrecy Act. In my opinion, the act is playing a key, but unobtrusive, role in law
enforcement activities directed against tax evasion, political and commercial corruption, and
other white collar crime.
Foreign bank accounts
Obviously, one ofthe principal purposes ofthe regulations issued to implement the Bank
Secrecy Act was to discourage the use of secret foreign bank accounts for illegal purposes
by making the ownership of an unreported foreign bank account a crime in itself. In addition,
the failure to report a foreign account that was used to further another violation might also
be cited as an indication of the willfulness of that violation. This would be especially true
in tax cases. Finally, it was intended that the information obtained as a result of the
regulations would be compared with other related information and, in some instances, used
as a basis for IRS investigations.
In 1970, the IRS had a substantial amount of information concerning the ownership of
foreign bank accounts by U.S. persons. I understand that the Postal Service, with the approval
ofthe Treasury Department, had conducted mail watches in 1968 and 1969 to help the IRS
to identify those persons in the United States who had Swiss bank accounts and were using
them in the evasion of U.S. taxes. At the time the Bank Secrecy Act was being considered
for enactment, the IRS had another such survey in the planning stage.
It was intended that the information gathered from the mail surveys would be compared
with the responses to the foreign bank account question on the tax returns. Those persons
who appeared to have foreign bank accounts but who failed to disclose them to the IRS
obviously would be of special interest to the IRS.
In addition, it was intended that the IRS select for audit a substantial sample of those
taxpayers in the higher income brackets who had failed to answer the foreign bank account
question. The theory was that a person in the higher income groups would be more likely
to consider all of the questions on a tax return and to have professional help in preparing
his tax return. Therefore, his failure to answer the question should be more indicative ofa
deliberate violation than the failure of a person who took a standard deduction.
To my knowledge. Federal law enforcement personnel had no specific plans for utilizing
the IRS forms 4683 that were required to be filed by those persons who had foreign accounts.
EXHIBITS
399
The forms were to serve as simply another source of information to be considered when
income tax returns were being screened for examination. The form 4683 was a followup to
the question on the tax return itself; it required the taxpayer to identify and to provide
specifics regarding his foreign bank account.
Apparently the IRS made a"sfafis^tic^l analysis of a sample ofthe forms 4683 filed in 1970
for the Office ofthe Assistant Secretary (Tax Policy). We understaridthatbeeauseLXifLthe
relatively small sample, about 3,300 forms, and the somewhat indefinite form of some ofthe
questions on form 4683, the statisticians and economists were dissatisfied with the results.
Our recent review of that analysis indicates that although it may have been inadequate for
the use of economists, it contained some interesting information for law enforcement
officials. The study shows that only 2,607 taxpayers disclosed that they had a financial
interest in one or more but less than 25 Swiss bank accounts exceeding $10,000 in value.
The total number of accounts involved was 3,031. Based on this data, rough estimates can
be made concerning the total number of Swiss accounts reported and the number of
taxpayers involved. The number of taxpayers who reported Swiss bank accounts appears to
have been in the neighborhood of 17,500. This is significant because the mail survey covering
the same period, I am told, disclosed that more than 40,000 persons appeared to have had
Swiss bank accounts during that period. From these statistics, it seems that about 20,000
persons failed to report Swiss bank accounts and, consequently, violated the regulations.
It is difficult to evaluate the effectiveness of the foreign bank account reporting
requirement in combating white collar crime, narcotics trafficking, and other organized
crime. Much of its effectiveness could not be measured. Its deterrent effect would be
intangible. Obviously, since the IRS did not undertake the programs that had been planned,
a great deal of the yalue of the question was lost.
We are unable to comment on the general availability ofthe IRS forms 4683 to the SEC,
DEA, BATE, U.S. Customs Service, or other Federal agencies. To my knowledge, we have
not received any requests for the forms. The information appearing on the income tax returns
or the forms 4683 would, of course, be available to such agencies if they have a specific
legitimate need and make a request for it.
It appears to me that, perhaps, the information that the IRS currently has available from
the 1973 and 1974 tax year returns could be analyzed and utilized in much the same manner
that the data from the 1970 returns was supposed to have been used. A suggestion to that
effect has been sent to the IRS.
While other agencies very well could have an interest in learning about secret foreign
accounts, the IRS would normally have the greatest interest in them. It is generally recognized
that persons who use secret foreign bank accounts are usually violating the Federal tax laws
in some way even if they are primarily interested in accomplishing some other illegal purpose.
That is why the IRS and the Treasury Department had been trying for so many years prior
to 1970 to overcome the obstacles presented by foreign bank secrecy. The IRS's very strong
support for the Bank Secrecy Act and former Commissioner Thrower's action in putting the
foreign bank account question on the tax returns, even before the Treasury regulations
required it, demonstrated that desire.
While the IRS must be the lead agency in finding secret foreign accounts if the public is
to obtain this maximum benefit from the legislation, there is no reason why other agencies
should not receive under legal limitations IRS efforts in this area. As a matter of fact, I believe
that I arn only echoing the opinion of some recent IRS Commissioners when I say that the
IRS should take the lead in the investigation of large international and domestic financial
transactions and should assist and cooperate with the SEC, DEA, U.S. Customs Service, the
FBI, and other Federal agencies in such inquiries to the full extent permitted by law. In order
to fulfill that role, however, the IRS would have to take a more affirmative approach to its
responsibilities under the Bank Secrecy Act regulations. Consequently, we have asked the
Commissioner to participate in a program that would give the IRS a better opportunity to
play a more meaningful part;
Disclosure under the act
One ofthe issues raised by any proposal that attempts to cause agencies to cooperate and
to share information is the problem of unauthorized disclosure. It is the Department's view
that the information required under the Bank Secrecy Act can be freely shared by agencies
within Treasury, under guidelines appropriate for such confidential information, even though
the information is filed on IRS forms 4683, 4789, and 4790.
Disclosure outside of the Department must be effected in accordance with the law and
regulations. Section 212 ofthe act states:
'
The Secretary shall, upon such conditions and pursuant to such procedures as he may
by regulation prescribe, make any information set forth in reports filed pursuant to this
title available for a purpose consistent with the provisions of this title to any other
K..
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1976 REPORT OF THE SECRETARY OF THE TREASURY
department or agency of the Federal Government on the request of the head of such
department or agency.
Obviously the Congress, for good reason, did not authorize full and uninhibited distribution
of this sensitive data. Nevertheless, we believe that, with some effort on our part and the
cooperation of DEA and other agencies that appear to have a legitimate need, the
information can be made available to them on a timely basis. We are especially concerned
about getting relevant financial information to DEA promptly so that it will be of maximum
to drug enforcement agents.
Background on secret bank account question
The record clearly indicates that the Office ofthe Assistant Secretary (EOTA) has been
very interested in having the IRS make use of the Secretary's authority to require members
ofthe public to disclose their interests in foreign financial accounts. In February 1970, thenAssistant Secretary Eugene Rossides advised the Secretary that he was planning to include
a proposal for such a question in his March 2, 1970, testimony before the House Committee
on Banking and Currency, which was then considering the Bank Secrecy Act.
Later, in the summer of 1970, when it was determined that the IRS had authority under
the Internal Revenue Code to put the foreign bank account question on tax returns, the
wording to be used was carefully reviewed before it was approved by Treasury officials.
On November 4, 1970,.the Deputy Commissioner, IRS, sent a memorandum to the Deputy
Assistant Secretary (Tax Policy) which referred to several conversations and attached a
description of the IRS program for dealing with the tax return question and forms 4683
related to foreign accounts. That program included the following actions:
1. Taxpayers who indicated that they had a foreign bank account, but who failed to
attach a form 4683, were to be contacted and asked to file the form.
2. An indication was to be made on the computerized record tax returns, the IRS
"master file," as to whether a taxpayer answered "Yes" or " N o " or failed to respond
to the question on the form 1040.
3. Forms 4683 were to be detached and the files of the original forms were to be
centralized in one IRS service center.
4. A register containing all or a portion of the names of those persons who disclosed
an interest in a foreign financial account was to be extracted from the master file.
This computer tape was to be used to produce a printout and to match against other
information concerning foreign financial transactions. (The other information
referred to was, in large part, the data obtained from the Swiss bank mail survey.)
5. A statistical analysis of the distribution ofthe answers to the question was to be made
as part of IRS's statistics of income program. A subsample of those returns on which
the question was not answered was to be selected for followup with the possibility
that a program for the examination of other such returns was to be developed,
especially if a large number of taxpayers failed to respond.
6. A scientifically selected group of returns with "Yes" responses was to be examined
for analytical purposes.
7. An IRS statistical study ofthe forms 4683 was to be designed to accommodate the
needs ofthe Office of International Tax Affairs and the Office of Balance of Payment
Programs—both within Treasury.
To our knowledge, the IRS made few, if any, of the field examinations that would be
required to carry out the law enforcement part of the program.
On October 16, 1972, following the issuance of the regulations in July, the Assistant
Secretary (EOTA) sent the Commissioner of Internal Revenue a memorandum outlining a
suggested compliance program for the IRS. That memorandum contained the following
paragraph:
With respect to the requirement that persons report and keep records of their foreign
financial accounts on their income tax returns, in addition to the compliance checks that
examiners would make in the course of normal audits, the IRS should examine a sample
of the individuals who failed to answer the question. The IRS should also examine all
individuals who failed to answer or who answered in the negative where the IRS has
information that there should have been an affirmative answer.
As the above paragraph clearly indicates, the Assistant Secretary had a great interest in
securing taxpayer compliance in this area.
Incidentally, the Commissioner's response of January 3, 1973, indicated that the IRS was,
in general, receptive to the suggested program. The principal disagreement appeared to be
over the size ofthe program, the number of returns to be examined. The Treasury program
would have required about 20,000 examinations and the IRS was not willing to commit the
manpower necessary for that large a project.
..-Vl
EXHIBITS
401
Although we did not send additional memoranda to the IRS to follow up on the apparent
failure to implement the program outlined in the Commissioner's January 3 memorandum,
we did maintain contact, at the staff level, until April or May 1973. From January to May,
we received a number of IRS papers that indicated IRS would eventually establish a program
to investigate noncompliance with the requirement to disclose foreign bank accounts. It was
not until June 1973 that we learned informally that the Commissioner was considering
removing the question from the form 1040 and began to speculate about IRS intentions.
On July 6, 1973, the Assistant Secretary (EOTA) wrote the Commissioner and requested
that the question remain on the form 1040. That memorandum pointed to the fact that the
regulations "virtually" require the question to appear on the form. Perhaps it would have
been better if the memorandum had emphasized the fact that, under the governing
regulations (3 1 CFR 103), the Assistant Secretary is responsible for the overall coordination
of the compliance agencies and for assuring compliance with the regulations and that,
consequently, the IRS should have referred the matter to him before making any changes.
Nevertheless, the IRS did agree to leave the question on the form 1040 and indicated some
interest in the program. The Commissioner's September 24, 1973, memorandum to Deputy
Assistant Secretary for Enforcement concerning the placement ofthe question on the return
ends as follows:
We share your concern and interest in this important program and we will remain alert
to the' most effective way of highlighting the question on the Form 1040, within the limits
of space, based on our experience with the 1973 Form 1040.
Although the Office ofthe Assistant Secretary (EOTA) received no further communications from the Commissioner concerning the removal of the question from the tax returns,
I understand that the Office of the Assistant Secretary (Tax Policy) reviewed the 1975 tax
form before it was approved for publication; but that office apparently was not aware of our
interest.
It has been the position of my office that, currentiy, 31 CFR 103.24, in effect, requires
the question to appear on tax returns used by persons who must report their interest in foreign
financial accounts. The language is as follows:
Each person subject to the jurisdiction ofthe United States (except a foreign subsidiary
of a U.S. person) having a financial interest in, or signature or other authority over, a
bank, securities or other financial account in a foreign country shall report such
relationship as required on his Federal income tax return for each year in which such
relationship exists, and shall provide such information concerning each such account as
shall be specified in a special tax form to be filed by such persons. [Emphasis supplied.]
Obviously, unless as required is construed to mean if required, the question is required
under the regulations. The regulations, however, could be amended by the Secretary if he
believed that to be necessary in order to permit the deletion ofthe question. It is my opinion
that the Secretary has informally ratified the IRS actions in this matter, and that, perhaps,
the regulations should be changed accordingly.
Since the reporting requirement was imposed under section 241 ofthe act, which does not
discuss the methods by which the Secretary will gather information pertaining to foreign bank
accounts, the act would not prohibit such a change.
If I had been consulted with respect to the removal of the question from form 1040,1 would
have pointed out the fact that having the question on the form 1040 greatly facilitated the
enforcement ofthe reporting requirement. Under that arrangement, every person who filed
a form 1040 had a good opportunity to become aware ofthe requirement. A person who had
a foreign bank account during the years 1970 through 1974 and failed to report it would have
difficulty pleading ignorance ofthe law. If he has answered the question " N o " and his account
is discovered later, the element of willfulness will be clearly indicated. If he has failed to
answer the question at all, he may attract attention to himself by the oversight.
The information on the form 4683 is not nearly as valuable from an investigative point of
view as is the response to the question on the return. If a person has failed to file a form 4683,
it will be quite difficult to prove that his omission was willful. The form is not related to the
computation of the tax. He might argue that he failed to read the instruction booklet and,
consequently, was unaware of the requirement to file the additional form.
Current developments
In recent months, the Department has taken steps to improve the effecfiveness of the
implementation of the act and the current regulations. For example, last year we began to
get strong indications that the bank examiners were not detecting some serious violations.
Certain of these violations involved the failure to report large currency transactions that were
alleged to have stemmed from illegal drug operations. For a small commission, certain bank
employees would exchange a drug dealer's smaller bills for $50 and $ 100 bills and agree not
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1976 REPORT OF THE SEt:RETARY OF THE TREASURY
to file the required currency transaction report with the IRS. The bank examiners, who had
been relying very heavily on the internal auditors of the banks to catch violations, were
generally unaware of this typle of violation until the IRS and other law enforcement units
^brought them to our attention.
When it became apparent that a number of banks were not doing an adequate job in
policing their currency activities, we met with the FDIC, the Federal Reserve System, and
the Office of the Comptroller of the Currency to develop more detailed guidelines for the
bank examiners. The new guidelines, which we believe will noticeably improve the
effectiveness ofthe examiners, were aipproved on February 17, 1976, for distribution to the
field organizations of the bank supervisory agencies.
As a result of the inquiries made by your staff in connection with these hearings, we also
became aware of a need for an improvement in the utilization of the reports that the
regulations require to be filed with the IRS and the U.S. Customs Service. In our opinion,
they are not being utilized as fully as the Congress intended when it directed the Secretary
to initiate them.
To overcome this deficiency, we have developed a system for processing the reports that
would assure the close cooperation of the IRS and Customs and facilitate the timely
disclosure of pertinent information from the reports to other Federal law enforcement
agencies that have a legitimate interest in them. If the IRS reacts favorably to this proposal,
we believe that we will be able to develop information concerning large currency transactions
and movements that will be especially valuable to DEA and IRS.
We also intend to take the following actions to improve the administration of the
regulations:
1.
2.
3.
Meet with the bank supervisory agencies to review certain areas of what appears
to be chronic noncompliance with the regulations. This would include such matters
as the failure of large numbers of banks to record the purpose or nature of certain
loans, and the failure of banks to request customers to supply taxpayer identification
numbers when a new account is opened.
Issue a major revision of the regulations that would clarify the compliance
responsibilities and eliminate recordkeeping and reporting requirements in certain
instances where they do not appear to be useful.
Propose that some type of foreign financial accounts question be reinstated on form
1040.
Additional legislation
As you may be aware, President Ford has requested legislation that would amend the Bank
Secrecy Act so that it would be more effective against international narcotic dealers. He has
proposed that Customs be given specific authority, under certain conditions, to search
travelers departing the United States. We would be grateful for any support the members of
the subcommittee would be inclined to give the President's proposal.
Comments on the need for the act
It appears to me that in recent years the news media have reported many investigations
that have illustrated a continuing need for the act. There have been a great many cases,
involving corruption and organized crime, in which bank records played a vital role. In
addition, each year there are more than a thousand criminal tax investigations in which bank
records must be reviewed. It is also obvious that, while records of bank transactions are often
obtained from sources outside the bank, the fact that the regulations require banks to retain
records encourages the public to be forthcoming. People will often be cooperative when they
realize that the information being requested is also available from another source. The
recordkeeping regulations serve as an insurance policy to make certain that records of
financial transactions will be available when they are needed.
The reporting provisions of the act serve two purposes. They direct the attention of
Treasury law enforcement authorities to unusual financial behavior and provide a record of
transactions or transfers that are not usually documented.
Although travelers enter and leave the United States more than 200 million times each
year, only about 15,000 reports ofthe international movement ofcurrency and monetary
instruments are filed. The fact that less than 1 traveler in 10,000 files a report clearly shows
that the international transportation of $5,000 in currency or its equivalent is unusual in
today's world. Therefore, it is logical to assume that they would be a good source of leads
to certain criminal operations, and it is not surprising that the Customs Service has found
that several hundred ofthe reports appear to have been filed by persons who are on record
with Customs as being related to som6 type of illegal activity.
The domestic currency transactions that are required to be reported are also very
uncommon. Although there are tens of billions of banking transactions in this country each
year, only about 20,000 of them are reported under the provisions ofthe regulations. Because
EXHIBITS
403
these reports describe extremely unusual financial activity, they have proven useful to the
IRS in its tax function, and we believe that they should also be useful to DEA and other
enforcement agencies.
Since the reporting requirements make it more hazardous for criminals to deal in large
amounts ofcurrency, carry currency abroad, and operate a foreign bank account, we believe
that the requirements must have a general deterrent effect on many persons who might be
tempted to engage in illegal schemes that require such activities.
The arguments in IRS Commissioner Thrower's testimony, referred to earlier in this
statement, concerning the connection between secret foreign bank accounts and tax fraud,
are still valid today. In addition, it should be emphasized that, since domestic bank records
are very important in all phases of tax enforcement and collection, the bank recordkeeping
provisions in the regulations are needed to help maintain the integrity of the tax system.
The regulations serve to inhibit the laundering of money obtained from illegal sources.
Financial institutions must keep records of transactions. Banks are required to report unusual
currency transactions. Foreign bank accounts must be reported. Customs is on the alert for
large international movements ofcurrency. All of these conditions make it more difficult to
move money without leaving a trail that law enforcement officers can follow.
The creation and retention of that audit trail is the basic benefit that is being obtained from
the act. Whether the illegal activity involves commercial or political corruption, tax evasion,
securities fraud or theft, smuggling, drug trafficking, or some other form of organized crime,
the common ingredient is usually money; and, if the money can be traced, the criminals are
likely to be apprehended.
In closing, Mr. Chairman, I would like to note that we in the United States pride ourselves
on having a voluntary tax system which is designed to assess, equitably, upon all members
of our society, the cost burdens ofgovernment. I believe that nothing so effectively promotes
the voluntary acceptance of our tax system by the public than seeing those who flout the
system brought to justice. The fact is that the hard-working wage.earners find their income
taxes withheld and paid into the Treasury without any further voluntary act on their part.
Even the bulk of corporate taxpayers find their latitude in avoiding their tax liabilities quite
restricted by the discipline and control imposed by independent public accountants and the
necessity of reporting income to their shareholders.
The individual "entrepreneur" who is engaged in questionable or illegal activities, such
as narcotics trafficking or securities fraud, however, finds his tax obligations to be truly
"voluntary." This individual often files no tax return whatsoever or a false return that is
concocted in such a way that it avoids those characteristics which would precipitate an audit.
Illicit transfers of funds abroad and movements of large sums in currency are this man's stock
in trade.
In order to have a tax system which does not truly discriminate in favor of illegal sources
of income, special law enforcement efforts are necessary to identify illegal income and tax
it. The Bank Secrecy Act was intended to support those efforts. It not only assists in locating
illegal income, it encourages those who have such income to "voluntarily" pay their taxes.
Exhibit 32.—Statement by Assistant Secretary Macdonald, July 28, 1976, before the
Subcommittee to Investigate Juvenile Delinquency of the Committee on the Judiciary, on
President Ford's Narcotic Sentencing and Seizure Act of 1976
I am pleased to have the opportunity to appear before the subcommittee to testify
concerning S.3411, President Ford's Narcotic Sentencing and Seizure Act of 1976 and
Treasury's efforts to implement certain ofthe President's other antinarcotics initiatives. Iwill
confine my comments on S.3411 to Title IV: Illegal Export of Cash. I understand that
Commissioner Acree, U.S. Customs Service, will cover Title V: Prompt Reporting of Vessels
in his remarks.
Before dealing with the specifics of the measure under consideration, I believe it would
be useful to place the commercial aspects of dmg trafficking into perspective. President Ford
stated in his April 27 message that dmg abuse costs us up to $17 billion a year. The retail
value of the heroin sold in the United States each year has been estimated to be in the
neighborhood of $6 or $7 billion. This is big business. Iri terms of dollars, it is one of the larger
industries in the United States and exceeds the gross sales of many multinational
corporations.
Since illegal drugs are big business, they generate large flows of money, both domestically
and internationally. The heroin, cocaine, and marijuana consumed in the United States is,
by and large, imported from other countries. The people who grow and refine these noxious
substances do so to make a profit. Consequently, they must be paid. It is my understanding
that hundreds of millions of dollars, usually in the form of currency, are moved out of the
United States annually to pay foreign producers and processors for their services. Within the
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1976 REPORT OF THE SECRETARY OF THE TREASURY
United States, drugs are also a cash-and-carry business. At the retail level, it generates a large
volume of currency. We have had reports that traffickers have carried shopping bags full of
currency into banks to convert them into larger bills or have simply deposited them in a bank
account.
I believe that attacking drug smugglers and traffickers through the currency and profits
generated by their illegal activity could have greater impact than by concentrating solely on
the drug transactions themselves. High-level traffickers, who may be insulated from drugs
and consequently cannot readily be convicted on drug charges, are often vulnerable to
financial investigations. Frequently, they have violated Federal income tax laws and can be
prosecuted on tax charges.
I also believe that more attention must be paid to the trafficker's fiscal resources
internationally as well as domestically, as a means of reducing the smuggling and trafficking
in narcotics, and steps to this end are already underway.
In February 1976, the U.N. Commission on Narcotics Drugs meeting in Geneva adopted
unanimously a U.S. (Treasury) proposed resolution urging governments which have not
already done so to make the financing of narcotics trafficking a punishable offense and, in
addition, to exchange information to identify persons committing such offenses. Subsequenfly, the resolution was adopted unanimously by the U.N. Economic and Social Council
meeting in New York, and the U.N. Secretary General is now notifying U.N. members ofthe
action taken. The law enforcement agencies of more than 100 foreign countries could be
affected by that resolution.
Again on the international front, Treasury played a vital role in the negotiation of the
United States-Swiss Mutual Assistance Treaty in Criminal Matters. That treaty, which was
recently ratified by the Senate, should also prove to be a significant step forward in
international cooperation in narcotics investigations. It will expedite the exchange of
information concerning alleged drug traffickers even while a case is still in the investigatory
state. U.S. authorities should be able to obtain bank information with much less difficulty
than they have experienced at times in the past.
Moreover, since most of the drug traffickers of interest to Federal law enforcement
agencies are in fact engaged in organized criminal activity, the treaty can be used to facilitate
criminal tax investigations of those traffickers when information from Switzerland is
required. It will permit the Internal Revenue Service to request the Swiss, through our
Department of Justice, to provide bank records and other financial information essential to
such investigations.
The enactment of title IV of S.3411 would also have a very positive effect on Treasury's
efforts against international drug trafficking. It contains two badly needed amendments to
chapter 3 of the Currency and Foreign Transactions Reporting Act. That chapter, which
requires reports of the international transportation of currency and certain other monetary
instruments in excess of $5,000, has been useful in combating drug trafficking. If the defects
in it are remedied, the law will enable Customs to be of more assistance in the drug area.
If the Drug Enforcement Administration (DEA) identifies someone it has good reason to
believe is an international money courier for a drug ring. Customs should be able to stop
them, and, if they are carrying unreported currency, arrest them for that violation. In
addition. Customs can seize the money. The following examples illustrate my point.
Early this year, two individuals arrived in the United States by automobile at Blaine, Wash.
In response to routine questioning, both subjects stated they were not carrying currency or
other monetary instruments in excess of $5,000. A patdown search of both individuals,
however, revealed that they were each carrying approximately $30,000 in U.S. currency in
money belts they were wearing. This money was seized by customs officers. Further
investigation disclosed that their suitcases had false bottoms. Although nothing was found
in the suitcases, it appeared from the response of a Customs detector dog that they had been
used to transport narcotics. The subjects also had a paper describing what appeared to be
a chemical process used to purify heroin or cocaine. Additional inquiries revealed that one
of the individuals had previously been arrested in New York for a drug violation and DEA
had information that the other suspect was trafficking in cocaine and expected a shipment
shortly.
Another recent ca.se resulted in the indictment of 13 individuals, in May of this year, for
the illegal importation of controlled substances. Five of the defendants were charged with
the failure to report the transportation ofcurrency. A task force, consisting of personnel from
Customs, DEA, Bureau of Alcohol, Tobacco and Firearms, IRS, and the Royal Canadian
Mounted Police, conducted the investigation which disclosed the smuggling of more than
25,000 pounds of marijuana from Mexico and the transportation of more than $ 1 million in
unreported currency over U.S. borders to and from Mexico and Canada. The investigation
also led to the seizure of two multiengined aircraft. This investigation illustrates not only the
tie-in between currency reporting violations and narcotics violations, but also shows how
productive the cooperative efforts of law enforcement agencies can be.
EXHIBITS
405
In August 1975, Mexican police searched a vehicle in Tijuana and found $102,000 in cash.
A subsequent investigation revealed that the money was not reported to U.S. Customs and
was to be used for a narcotics purchase. Five persons have already been arrested in the United
States and indicted for conspiracy and the failure to report the transportation ofcurrency,
and the investigation is continuing.
In 1974, a U.S. vessel was boarded in the Windward passage between Cuba and Haiti by
a joint Customs-Coast Guard-DEA team. A search of the vessel revealed some handguns,
a small quantity of marijuana, and $43,000 in currency. A subsequent investigation disclosed
that the individuals aboard were conspiring to purchase and import into the United States
more than 5 tons of marijuana. Indictments were obtained in late 1975 and, as a result, four
men were convicted of conspiracy to import marijuana from Colombia and to violate the
currency reporting requirements. Their cases are now on appeal.
Although, as the above examples indicate, the currency reporting provisions have been an
effective law enforcement tool, a recent court decision threatens to undermine their
usefulness in the future. In March of this year, a Federal judge dismissed a criminal
proceeding against a person who was discovered departing the United States with $250,000
in U.S. currency which he had failed to report. The defendant admitted knowledge of the
requirement and made an offer to plead nolo contendere, which was rejected by the U.S.
attorney's office. During the trial, however, the judge reasoned that no violation had occurred
because the law is violated only after a person has actually left the United States without filing
the required report. Obviously, if this view is adopted by other Federal judges, the law will
be of little value in most narcotics cases. The currency flow in international narcotics
operations is usually outgoing.
The provisions in section 401 of title IV of S.3411 would remedy this apparent defect in
the law by requiring a traveler who intends to transport monetary instruments exceeding
$5,000 to file a report prior to his departure. The implementing regulations could then
authorize the Customs Service to issue more specific requirements, which would be related
to the traveler's method of transportation. They might require a report to be filed no later
than 30 minutes prior to scheduled departure of an aircraft or vessel, or before approaching
within a certain distance of a land border. Although such instructions have not as yet been
drafted, the possibilities are obvious.
In my opinion, if the proposed amendment is not enacted, it is likely-that seizures of
unreported currency leaving the United States, as well as the related criminal charges, will
be increasingly challenged in court.
Currently, section 235 ofthe Currency and Foreign Transactions Reporting Act states that
application may be made for a search warrant authorizing the search of any person, place,
vehicle, or physical object wh«n the Secretary has reason to believe that there will be a
violation of certain reporting provisions of the act. The implication is that if there is reason
to believe, for example, that there will be an attempt to transport a substantial amount of
currency out of the country without filing the required report, a search may be conducted
only after a search warrant is obtained. Decisions ofthe U.S. Supreme Court, however, have
made it clear that in certain "exigent circumstances" warrantless searches can be conducted
where there is probable cause to believe that a law has been violated. Section 402 of the
proposed bill would remove any doubt as to the application ofthe "exigent circumstances"
exception to currency reporting cases by authorizing warrantless searches to be made for
violation ofthe Reporting Act where exigent circumstances can be shown. In many instances
this may prove critical. Frequently, circumstances leading to probable cause do not surface
until just before the departure of an aircraft or boat, and subsequent enforcement action by
the Federal Government is severely restricted.
Under the proposed amendment. Customs would still have to show that probable cause
as well as exigent circumstances existed at the time of any warrantless search.
As you can see, Mr. Chairman, both of the amendments contained in titie IV of S.3411
are necessary in order for Customs to maximize its contribution to the antidrug effort.
In closing, I would like to reemphasize my belief that one of the more, if not the most,
effective ways to apprehend major drug traffickers is through the analysis and investigation
ofthe enormous cash flows and profits that are an inherent part ofthe business. In my opinion,
the passage of S.3411 would significanfly improve our capability in such investigations.
Tax Policy
Exhibit 33.—Statement of Secretary Simon, July 3 1 , 1975, before the House Ways and
Means Committee, on a tax program for increased national savings
I am pleased to be here this moming to present a tax program for increased national
savings.
406
1976 REPORT OF THE SECRETARY OF THE TREASURY
Reinvestment in America
We are about to enter the third century of our national existence. What I am proposing
today will make a great deal of difference in how we live in the next century—whether there
will be jobs to support an expanding population and whether we can continue the rising levels
of prosperity we have enjoyed in recent decades.
The century which is drawing to a close has witnessed the most spectacular economic
progress in history. During that century, our citizens have risen to levels of income which
are unparalleled elsewhere in the world and have risen steadily over time. That prosperity
has been directly attributable to the enormous investment in productive capacity we have
made—a total which far exceeds that of any other nation. Without that investment we would
be an economy of the most primitive sort, with only what we could turn out with our bare
hands.
We got the investment we have and we will get future investment only by saving. And it
is the saving and investment process with which today's proposals deal. Saving and
investment concepts have many theoretical aspects for economists, and I don't want to get
mired in those today. I want to try to explain what we need to do in as practical everyday
language as I can, even at the risk of oversimplifying some of the theoretical niceties.
We have been hearing economists debate the question of whether, in a total sense, there
-is a need for a greater rate of investment to induce economic growth and create jobs. Whether
we can find the academic answer or not, there is no question in my mind that the chief
executive officers of corporations in this country know that there is a shortage of investment
funds which is hampering expansion, creating unemployment, and threatening to snarl an
orderly economic recovery.
These chief executive officers have been forced to the wall with low retained earnings and
have had to turn increasingly to debt to finance modernization and expansion. Many have
reached their limit in this area and that spells trouble for the economy ahead.
We have always been a rich country, and in dividing up our economic pie we find that we
have bargained away more of the pie than is really available. For years we've been most
worried about the second television set, a bigger boat, or a second car. Today, we need to
shift our attention a little. The American people are faced with 8 1/2 million people
unemployed, and, in addition, 10 million more coming into the work force by 1980. To take
care of these men and women, we're going to have to make a studied decision to embark
on a program of reinvestment in America.
We've let the engine of this great productive country get rusty. Workers and managers alike
know that our equipment is becoming obsolete, and that many industries are short in
capacity. We need to direct our attention to the massive job of rebuilding our economic
engine and providing productive jobs for American workers.
Our proposal today is not to drastically change our economic principles—not a planned
economy where we direct expenditures, but rather, a program that recognizes the need for
capital to create jobs, and provides an opportunity for more people to invest in the American
system.
There are risks involved in the program we propose, just as there were risks in funding the
program of putting a man on the Moon. But knowing the Arnerican people and the American
industry, we feel that the risks are minimal. Given the investment needed to expand our
economy, we feel certain that jobs can be created and we can return our Nation to a position
of full employment.
To accomplish these objectives, we are asking the Congress to moderately revise our tax
laws to permit industry the funds needed for industrial expansion. In addition, we wish to
provide an incentive for more Americans to invest and become partners in our free enterprise
system. We feel strongly that a return to a more enterprising attitude is essential. There has
to be a national desire and willingness to take risks for rewards, and unless we take this
position, the United States cannot maintain its place, let alone improve its position, in the
world economy.
The goals
The proposals for more savings have the following goals:
Jobs.—Increased saving is the quickest and most direct way to put resources at the disposal
of those persons who will use them to expand business operations and jobs. Placing equal
amounts at the disposal of individuals who will simply spend them would in due course—as
they spent it—increase the incomes of business, but would do so less quickly, and with much
less assurance that the proceeds would be used for new investment.
Debt-equity ratios.—Additional saving must be made available for equity investments.
Steeply climbing debt ratios have left our businesses highly vulnerable to any adverse change
in the business climate and handcuffed them in their ability to expand and modernize. This
has become a very serious problem in the last several years and something must be done.
Productivity.—Increased savings will make possible the increased investment in capacity
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that enables workers to turn out more goods and services. Without modernization and new
investment, that will not happen. In turn, increased productivity permits wages to increase—
in real terms, not just dollars—and helps suppress inflation.
Real wages.—As increased savings and investment permits workers to turn out more goods
and services, there is more to share and real wages can increase. On the other hand, if goods
and services do not increase, then increased wages for one group means they get a larger slice
of an economic pie that has not grown. That, in turn, means the slices of others will be
reduced, either through inflation or unemployment.
Inflation.—Increased saving and investment, by increasing productivity and the amount
of goods and services produced, helps keep prices down. Increased productivity also lets an
employer raise wages without also raising prices to his customers. It is our chief insurance
against wage demands turning into a wage-price spiral.
Efficiency.—To the extent we can make the investment that we already have work more
efficiently, that is as good as getting more saving. We should remove those features of the
tax system that cause saving flows to be channeled away from more productive investment
and into less productive investment.
Proposals for increased saving—in general
After many months of deliberation, we have concluded that the most important step we
can take to achieve greater savings through the tax system is to move towards the elimination
of the double tax which presently is imposed on income from assets used in the corporate
form of business. We propose to make that change as part of a total program that (1) will
not subvert the progressivity of our income tax system, nor (2) create increases in budget
deficits that would subtract from the pool of private savings even as tax measures are causing
additions to it.
At the same time, we believe it is of prime importance to encourage greater savings by
individual taxpayers, and, in particular, to broaden the ownership of stocks by middle and
lower income persons. I have additional suggestions to accomplish that result.
The proposals rest on sound and fundamental economic principles. But all of those
principles are not immediately apparent, and it will be very important to enlarge public
understanding. It would be extraordinarily helpful to the art ofgovernment in times like these
if economic principles were better understood. Unfortunately, our economy has become so
complex that the job of education is a difficult one. It is critical that both Congress and the
executive make every effort to seek wide public understanding ofthe factors underlying the
savings problem, even if there is not total agreement on the solutions.
The proposals may seem to some to be "big business" proposals. But they are not. They
are proposals to provide additional incentives for the individuals and businesses—large and
small—that save. It is important to distinguish between the form ofthe proposals and their
effect. The form of the proposal dealing with corporate double tax is such that it appears
primarily to affect stockholders. But its effect will, in reality, be general. Just as the doctor
may inject medicine in a patient's arm in order to cure a problem in his abdomen, so it is
with our economic system. It is sometimes necessary to appear to deal with one segment in
order to get at an ailment somewhere else. The proposal deals immediately with stock and
stockholders, but the medicine injected at that point will be quickly disseminated through
all of the persons and institutions in the system, large or small, who are saving. An existing
bias against all such persons will be lessened and the system will work more productively for
everyone by providing more jobs and larger incomes.
A reduction in taxes applicable directly or indirectly to shareholders will in the first
instance be helpful to shareholders, but we mu.st not stop thinking at the first step. We have
to look to see what happens next if the returns on stock are increased. If stock sells at $100
and returns $5 to its shareholders, that is a 5-percent return. What happens if the return rises
to $7, or 7 percent? The answer is that more people want to buy the stock. At the same time,
bank deposits that pay 5 percent seem less attractive, and fewer people are willing to deposit.
The price of stock goes up and the $7 return is no longer 7 percent, but maybe only 5 1/2
percent. And the banks have to pay more—maybe 5 1/2 percent—to keep depositors. Thus,
what started initially as an increase in the return to stockholders is transformed quickly into
a somewhat smaller increase for everybody. Just as nature fills a vacuum, the market levels
an abnormal return; returns, like air pressures, are "equalized" by natural forces. Thus, a
change which is in form addressed to those who have their savings in stock in the end
increases the returns for all kinds of saving.
Recap of economic points on the need for more savings
The reasons why we need more savings were developed at length in the statement which
I presented here on July 8. Additional aspects ofthe savings question were addressed in detail
in a statement which I made to the Senate Finance Committee on May 7. Copies of both these
statements have been distributed to you this moming.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
I do not wish to review the materials in those statements in any detail this morning, but
it may be helpful if I briefly recap the principal economic points in order that you can more
readily see how our proposal would deal with the problem at hand. The important points to
keep in mind are:
1. The total amount of savings in our economy measures the amount that will be invested,
and we will get more investment only if we get more savings. It does not matter who saves.
A dollar of savings by a low-bracket wage earner in a thrift account is as useful as a dollar
set aside by a high-bracket investor to purchase stock. A dollar of saving by the Government
is equally useful. Our financial system is extremely competitive and efficient, and, in the
absence of interference, the dollars will get to the places where they are most useful.
2. The single most effective thing we can do to increase the total amount of savings in our
system is to observe sound fiscal policies. Government deficits use up other people's savings,
for the Government must dip into the private savings pool to finance those deficits.* But,
it is foolhardy to rely on fiscal policy to increase national savings unless we are confident that
there will be continued Federal surpluses in the future of a magnitude unknown in the recent
past. Do we have any reason to expect that the leopard can change its spots?
3. In fact, most of our national savings occur in the business sector of our economy, and
that is where special problems inhibiting savings have appeared. Sound changes in that area
will produce the greatest results and must, therefore, be given top priority. We should, at the
same time, however, undertake to encourage savings in individual households at all income
levels.
4. The best estimates are that we will need additional savings if we are to maintain the
rates of economic growth and prosperity to which our citizens and institutions are attuned.
The need for additional savings is not an absolute need in the sense that the country will
disappear if we fail to achieve it. The danger is rather that the economy will not grow in a
stable, noninflationary manner and that we won't be able to maintain the number of existing
jobs and create the new jobs that will be needed to employ the growing work force. We must
employ at least 3 million more people to get back to full employment and when that is done
we will need to create still another 2 million jobs a year on into the future to take care of
new workers.
5. There appears to be a wide consensus among professionals of all political persuasions
that in the absence of persistent Government surpluses we will need some additional degree
of private savings in order to sustain the degree of growth and job creation which is desirable.
Total private saving has been running about 15 percent of GNP and we need to increase that
number to about 16 percent. While the increase is only 1 percent of GNP, or about $ 15 billion
a year, it is an increase of about 7 percent in the amount which is saved. Furthermore, of
the 15 percent of GNP which constitutes private savings, 55 percent represents depreciation
(the amount necessary just to keep our capital stock at current levels) and the remaining 45
percent, or about $95 billion, represents the savings used for net new investment. Thus, the
additional saving required represents an increase of nearly 16 percent in the rate of net new
investment.
In sum, the desired increase in total savings seems quite reasonable in terms of the total
economy, and surely within the range of accomplishment without radical change in our
institutions and organizations. Nonetheless, it is a significant increase in current saving
patterns and we won't get it by wishful thinking or half-hearted measures.
6. Additional savings is not the only factor contributing to economic growth but it is
clearly an important factor and one that we can do something about.
Economic growth is important for several reasons: (1) It helps provide the employment
necessary for a growing work force. (2) Growth accompanied by increased productivity
permits real wages to increase and helps suppress inflation. (3) Growth is a critical element
in increasing the upward economic mobility of the less advantaged individuals in our system.
Without economic growth the less advantaged can rise only if they succeed in taking part
ofthe economic pie away from those who are presently advantaged, a process which is always
strenuously resisted by those whose share is threatened. It is much easier and surer if everyone
shares in increases and the disadvantaged can move up relatively by having their shares
increase faster than others. In this way, economic growth is a major political lubricant and
contributes enormously to the lessening of social and political tensions.
7. Additional investment is the engine which produces additional productivity; i.e.,
greater output per worker. Without the business institutions, the technologies, and the
facilities which past investment has provided, a worker's output would be limited to what he
could turn out with his bare hands. In order to turn out our enormous national product,
workers must be and are backed up with an enormous amount of investment. A worker who
works all day and turns out 100 widgets is unlikely to turn out 110 widgets without new
* In limited circumstances, Government deficits can increase private incomes and thereby private savings by an amount
sufficient to substantially offset the deficit. As we move back toward full employment, however, that will increasingly not
be the case.
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409
backup investment, and it is turning out the extra 10 widgets which permits real wages to rise.
8. Workers will continue to seeK regular increases in their real wages. Higher real wages
have been possible in our economy over the last three decades and our citizens have come
to expect them. But we can't pay more real wages unless there is more output. Increased
productivity is, therefore, critical.
Whether or not there is more output, workers will seek higher wages. That is the way the
system works. But if wage demands exceed increased productivity, one of three things will
happen:
(i) Management will resist the demands, workers may fail to secure higher wages, and
there will, in any event, be labor strife.
(ii) Some will secure high real wages—i.e., a larger share of the pie—but only at the
expense of others. That usually results in unemployment, as higher wages unaccompanied
by increases in productivity eat into profits and cause employers to cut back hiring.
(iii) The Government will try to prevent the unemployment by fiscal and monetary
policies. This is a politically attractive but essentially impossible goal of letting people have
more when there is no more. Unfortunately, we have a tried and true method of seeming
to achieve it. It is called inflation. We issue more money which permits money incomes
to rise. That does not increase total real incomes but only permits the strong to take from
the less strong in a manner which is sufficiently indirect that the latter do not usually realize
what is happening. The process also creates the kinds of structural problems and
instabilities which we have been experiencing.
All three of these alternatives are unattractive. If any one of them should occur, it would be
the occasion for congressional alarm and cries for action to "do something." What is needed
is preventive medicine. We must keep productivity increasing at a reasonable rate. Saving
and investment are the surest way to do that.
9. Taxes may not be the sole cause of the problem, but tax changes hold the greatest
practical promise of helping to increase saving and investment. It is sometimes argued that
tax changes are less effective than budget surpluses, but given our existing institutions tax
changes are more likely to be achievable than surpluses. We need both.
10. Our tax system—like any tax system which relies on an income tax—is biased against
saving. The reasons why that is so are explained at pages 15 to 16 of my July 8 statement.
In general, our tax system inhibits savings because it promises to take away a substantial part
ofthe income from any amounts saved, thus reducing the incentive for saving. Tax changes
will increase savings only to the extent they remove the disincentive created by existing taxes.
Thus, the fundamental element in any tax proposal to increase saving is a net reduction in
the tax on the income from savings. There are different mechanisms for achieving that net
reduction and they have different advantages and disadvantages. But the active ingredient
is the final net reduction, and there is no way to escape that fact.
11. Corporate profits, when stated in realistic terms, have been severely squeezed in the
last few years. That has seriously impaired the ability of business to make new investment.
Let me now turn to the specific proposals.
I. A National Program for Personal Saving
I have, first, proposals to help individual Americans save.
It is true that business saving has been quantitatively much more important than personal
savings in the United States, as in most other countries. But I am confident there is a great
untapped reservoir of potential personal saving out there among our individual citizens. And
apart from the dollars of additional saving immediately involved, we will be doing a great
service for our citizens individually if we can help them save and help them understand how
much better off they will individually be if they do. In our great country everybody can be
a "capitalist"—maybe not great big ones, but big enough to improve their own standards of
living. But they will get there only if they start saving and continue to save. I, for one, think
we should help them. But we must be careful to approach the project on the basis of providing
"seed money" and avoid any temptation to just distribute largesse which is likely to exceed
the amount of additional saving that will be achieved.
Make adequate retirement saving available to all
Funded retirement plans are a significant source of savings in our economy. The assets in
private retirement plans were estimated at nearly $200 billion at the end of 1974. These funds
are invested primarily in American industry. They provide much of the capital which is
necessary to achieve and maintain our standard of living.
As a matter ofnational policy, we encourage funded retirement plans. A major incentive
to establish these plans is provided by our tax system. The Internal Revenue Code provides
two major incentives for "qualified" plans which meet a set of special requirements: First,
employer contributions are deductible by the employer, but are not taxed to participants until
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1976 REPORT OF THE SECRETARY OF THE TREASURY
retirement benefits are paid; and, second, earnings on plan assets are exempt from tax until
retirement benefits are paid.
Despite these tax incentives, half of the American work force is not covered by employersponsored retirement plans. Many employers cannot afford to establish a retirement plan
/without reducing wages, and those workers who need money currently more than they need
retirement income prefer wages over future pensions. Before this year, a worker who was
not covered byan employer-sponsored plan could not establish a retirement plan for himself
The 1974 pension legislation changed that. Workers who are not covered by existing plans
are now permitted to set up their own individual retirement accounts (IRA's), and to enjoy
substantially the same tax benefits available under qualified retirement plans.
The primary purpose of IRA's was to allow the uncovered half of our workers to have a
chance to accumulate retirement benefits. The bias in our tax system against savings makes
it difficult for ordinary individuals to save for their retirement without special tax benefits.
IRA's were designed to achieve greater equity between covered employees and noncovered
employees and to assure American workers an opportunity to supplement social security and
thus secure more adequate security and dignity in their retirement years. However, another
very important feature of the IRA's is that they increase savings. The IRA lessens the bias
in our tax system against saving, and thereby encourages greater saving by individual
taxpayers. Every day we see articles or advertisements in the newspaper explaining the
advantages and benefits of an IRA, and people are responding to those advertisements. They
are increasing their retirement savings.
IRA's also tend to broaden the base of corporate stock ownership. IRA investments are
not limited to corporate stock. A broad range of investment media are available. However,
a significant portion of IRA investments will be in corporate stocks.
Although the IRA provides a giant leap forward in providing an opportunity for retirement
savings, there is a basic defect in the program. IRA's are not available to persons covered
by a regular retirement plan promising low benefits. The administration had proposed a
broader program to include these employees as well, but last year Congress was not ready
to enact the whole program. This is understandable. IRA's are new, and many felt that it was
better to test the water before plunging in. The consequence, however, is that we only have
half a program. Now is the time to enact the other half.
The basic proposal is simple in concept. IRA's should be made available to persons covered
by a regular retirement plan at a level below the IRA limit. Under current law, contributions
to IRA's are limited to $1,500 per year. Persons covered by a regular retirement plan at a
level below $ 1,500 should be allowed to make sufficient contributions to an IRA to bring
these total retirement savings up to the $1,500 maximum. It is not only the individual with
no employer retirement plan that needs help from the tax system. The individual with an
inadequate plan is also deserving of our attention.
Increase the IRA limit
The $1,500 limit on contributions to an IRA is too low. This limit was proposed by the
administration in December of 1971. It is now time to raise it. The precise level which is now
appropriate should be worked out as the tax reform package takes shape. However, I would
like to point out that since; 197 1 inflation alone, which increased 32 percent, would raise the
limit to about $2,000.
I also recommend the addition of a cost-of-living adjustment in order to maintain the level
which is now appropriate. The 1974 pension legislation put limitations on the maximum
pensions which could be paid by qualified pension and profit-sharing plans established by
corporations. The dollar limits were set at 1974 levels, but were subject to automatic costof-living adjustments. Logically, the IRA limits should be subject to the same adjustments,
as should the limits for plans of self-employed individuals.
Individual savings account program
In addition to making IRA's available to those covered by inadequate plans and raising the
IRA limits, we would like to explore with the committee the possibility of establishing an IRAlike vehicle which would serve to encourage savings generally, rather than being specifically
aimed at retirement savings. As with the IRA, contributions to an individual savings account
(ISA) would be tax deductible up to some maximum, at least in part, and investment income
would be free of current income tax. There might be restrictions on how long the individual
was required to leave savings in the account and perhaps a threshold or floor on the amount
deductible in order to be sure, to the extent possible, that the contributions represented extra
savings and not just something the employee would have saved anyway. However, unlike the
IRA there would be no penalty on withdrawals if made after the specified period of time,
or for specified purposes. Funds would not have to be held until retirement.
Although retirement saving is probably the most important goal of an individual saver,
there are many other iniportant goals. Typically, individuals save to purchase a home or a
EXHIBITS
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car. They save to provide education for their children, and they save to provide for unknown
contingencies. These are important individual goals. And, from the standpoint of our
economy as a whole, any saving is important. The IRA does not encourage any saving other
than retirement saving.
The individual savings account could fill a real void. It would be similar in its basic structure
to the individual retirement account, but it would meet a broader need. We are now familiar
with IRA's and the ISA would be similar.
There are real technical problems in designing such a plan which will increase what would
have been saved anyway and still not be too complicated for ordinary taxpayers to deal with
on their returns. However, the goal seems very desirable. The ISA would be a highly visible
incentive and the up-front feature of a deduction for additions to savings should be a very
strong inducement to save. I hope that we can explore the feasibility of this together.
Revenue estimates
Of course, as a tax reform package is put together, revenue considerations must be taken
into account. Making the IRA available to those covered by inadequate plans would cost
roughly $500 million. Increasing the IRA limit might increase the cost by an additional $300
million. The cost of an individual saving account program would depend on the details of
the program. These proposals, too, could take effect in 1977.
II. Proposal to Eliminate the Double Tax on Distributed Corporate Benefit
Roughly 75 percent of our total national investment, other than housing, is in the corporate
sector. The small saver has no conception of what a large part of his saving ends up working
in the corporate sector.
Under our system of taxation, income earned by corporations is taxed twice: First to the
corporation and then again to the shareholder, if and when it is distributed as a dividend or
realized on sale. If a saver in a 20-percent tax bracket invests $100 in corporate stock, the
gross income earned by the corporation with that $100—let us say, $20—is taxed to the
corporation at 48 percent, producing a tax liability of $9.60, leaving the corporation with
a $ 10.40 after taxes. If that is distributed to the shareholder in a 20-percent bracket, he will
pay another 20 percent tax, or $2.08, on the distribution. Thus, the total tax paid on the
income from the investment is $11.68. That is a 58-percent tax rate, notwithstanding that
the individual investor is in only a 20-percent bracket—an increase in rates of almost 200
percent. A similar though much smaller disparity occurs in the case of an investor in the top
70-percent bracket. The $20 of income from $ 100 invested by him would produce $9.60 of
tax at the corporate level and $7.28 of tax upon distribution ofthe remainder, for a total tax
of $16.88 on the $20. That is equivalent to an 84-percent tax rate, compared with the
investor's 70-percent tax bracket—an increase in rate of approximately 20 percent.*
The existence of the two-tier tax has a number of perverse results:
1. It creates double taxation which is inherently inequitable when other kinds of income
are taxed only once.
2. The system tends to inhibit savings from fiowing into corporate equity investments
because they will have to earn a higher level of income there in order to produce the same
return. This causes an efficiency loss for everyone. It erects an extra cost barrier for
consumers because the prices they pay for the goods the corporation produces must be
sufficiently higher to cover two taxes rather than one, and causes them to end up with a
different mix of goods and services than they would otherwise prefer in the absence ofthe
additional cost barrier. Professor Harberger, who did the pioneer work in this area, estimates
that the loss of efficiency is roughly equivalent to a decrease of 0.5 percent in our national
income.
3. The two-tier tax creates a systematic bias against lower bracket taxpayers owning
corporate stock. This seems generally undesirable both economically and socially. The
experience in West Germany is relevant in this respect. Germany has for a number of years
had a system which partially eliminates the two-tier tax. It was adopted in part in the hope
that it would increase stock ownership by lower and middle income persons. In our recent
discussions with officials of their government, we have been told that serious consideration
is being given to complete elimination of the double tax, again with a principal objective of
encouraging investments by small savers.
4. The double tax on corporate profits applies only to the income attributable to equity
investment. Corporations must earn enough gross income to cover the interest payments
made to compensate bondholders and other creditors for the savings which they have
supplied. But interest payments are deductible at the corporate level and thus are not
* One must be careful not to draw simplistic conclusions from these numbers, for, as in so many other economic matters,
they are only the first step to be considered. The fact that such tax burdens exist cause the prices of corporate investments
to change relative to other investments with the result that the ultimate after-tax yields are, on an average basis, equaUzed.
However, the situation may be different for individual investors, who will be affected differently depending upon their tax
brackets.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
included in the net income which is taxable to the corporation. The fact that interest income
on debt is taxed only once, while income on equity investments is taxed twice, creates a very
heavy bias toward debt financing. The double corporate tax thus is a very major contributor
to the steep and dangerous increase in debt-equity ratios in recent years discussed at pages
28-29 and 34 of my July 8 statement. High debt ratios make business highly vulnerable to
business cycle changes. As each additional borrowing leaves the business more vulnerable,
potential new investors become more anxious. Thus, the growth in high debt ratios is a very
undesirable development which tends to cause bankruptcies and other structural dislocations
and generally suppresses economic growth.
5. A double corporate tax creates a market bias against high dividend stocks. So long as
earnings are retained, the second tax on dividends need not be paid. If the stock is ultimately
sold, the sales price will be greater because of the retained earnings (unless those earnings
have been unwisely invested by the corporation), but that tax is imposed at half rates. It may
be avoided entirely if the asset is held until death and in any event can be postponed
indefinitely by the simple device of not selling. Either way the second tax may be substantially
discounted. Thus, stocks like utilities, which have traditionally relied on high dividend
payouts, are placed at a substantial disadvantage because the double tax imposed on their
income (corporate tax + ordinary income tax on dividends) is greater than the double tax
on companies which retain earnings and do not distribute (corporate tax -I- capital gains or
no tax). Elimination of the second tax would greatly assist utilities and other companies
similarly situated in raising equity money. Given our energy problems this is a particularly
important point.
6. The double tax places a heavy penalty on corporate decisions to distribute earnings.
In an ideal, free market, the tax system would be neutral with respect to retaining or
distributing. Corporation managers would retain earnings if they could use them productively. But stockholders would call for larger distributions when it appeared that the money
could be invested for a better return in some other company or enterprise. Corporation
managers would thus be required to justify retention of earnings by demonstrating that they
could do a better job of investing profits than the shareholders could do for themselves, and
capital markets would be generally more competitive. At present the tax penalty on paying
out earnings puts corporate managers under great pressure to do almost anything productive
with retained earnings rather than pay them out. The double corporate tax thus "locks in"
in corporate capital and keeps it out of the capital markets.
Mechanisms to remove the double tax
For many years our system of imposing a double tax on corporate profits by taxing them
at each of two tiers was also widely used abroad, and it is often referred to as the "classical"
system of corporate taxation. So long as tax rates at the coiporate level remained relatively
low, the system did not create undue mischief In the United States, the corporate tax rate
was less than 15 percent as late as 1935; it rose to 40 percent during World War II, dropped
back to 38 percent in the last ofthe 1940's, and rose again to 52 percent during the Korean
war. The current 48-percent rate was enacted in 1965. Thus, basically, it was only as recently
as the Korean war in the early 1950's that corporate rates reached their present high levels.
Similarly, corporate rates have been rising in other countries, but not so fast as in the United
States. As rates have risen abroad and as the need for economic development and investment
increased in other countries, changes were made in their corporate tax system. Today,
virtually all of our major trading partners have a system which eliminates much of the double
tax. Such systems are in effect in Canada, the United Kingdom, France, Germany, Belgium,
Italy, Japan, and Iran. The European Economic Community has adopted a resolution urging
all of its members to adopt such a system and is presently engaged in an effort to promote
greater uniformity of existing systems and to harmonize the differences that remain.
The existing systems all operate with one or the other of two basic mechanisms: A
stockholder credit or a dividend deduction (including its variant, the "split rate" system).
Under both mechanisms, taxes are imposed at both the corporate and individual level, but
an adjustment to prevent doubling up is made at the time the income is distributed to
shareholders. It would be theoretically possible to tax all earnings initially and directly to the
ultimate owners, the stockholders, regardless of whether or not the earnings were distributed.
However desirable such a system might theoretically be, it would present practical problems
which are probably insuperable, and while Canada considered such a system, no other
country has, in fact, adopted one.
Under the dividend deduction system, the corporation is allowed a deduction for all or part
of any dividend distributions which it makes. The deduction in effect reverses the tax which
the corporation previously paid on such income. Assume, for example, that a corporation
earned $ 100 and is subject to a corporate tax rate of 48 percent. If it pays a dividend of $ 100,
a full deduction will completely eliminate taxable income. Stockholders will pay tax on the
$100 distributed but the corporation, having distributed everything, will pay no tax. If the
corporation distributes $60, the $60 deduction will cause it to pay tax on $40; i.e., on the
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earnings not distributed. The stockholders will pay tax on the $60 which is distributed. Note
that if such a system were to be adopted, the initial effect would be to increase the after-tax
dollars in the hands of the corporation, for it would get a deduction for the dividends it is
presently paying. The corporation might or might not use that additional cash to increase
further the amount of dividends paid. Thus, whether the tax reduction dollars actually end
up in the hands of the corporation or its shareholders will depend upon the corporation's
subsequent distribution policies.
Under the stockholder credit method, the corporation gets no deduction, but the
shareholder is given a credit to compensate for the tax which the corporation has already
paid. Taking the same corporation as an example, it earns $ 100, pays a $48 tax, and has $52
left. If the entire $52 is distributed, the stockholder is treated as if he had originally received
the same amount of gross income as the corporation, i.e., $100, and is given a credit for the
tax the corporation has already paid, i.e., $48. If that $52 is distributed to the shareholder,
he "grosses it up" by the amount of tax attributable to the $52 he received, i.e., by $48. That
produces a "grossed-up" amount equal to the gross income which was earned by the
corporation. He then reports that $ 100 in his income and is allowed a credit for the $48 which
the corporation paid. If he is in a 50-percent tax bracket, he will have a gross tax liability
of $50, a credit of $48 for the tax paid by the corporation, and a tax bill of $2. On the other
hand, if he is in a 20-percent bracket, he will have a gross tax liability of $20, the same credit
of $48, and will get a refund of the difference, $28.
If the stockholder credit system were instituted, the initial result would be to put all the
cash tax savings in the hands of shareholders, as the corporation would continue to pay
corporate tax and the adjustment mechanism is a credit which goes to the shareholders. This,
too, could be adjusted by a change in distribution patterns; i.e., the corporation could decide
to decrease the actual dollars which it distributed because the shareholders would be getting
supplementary amounts through the tax system.
You will note that in the case of a total distribution the two systems produce the same
result: The corporation has nothing left and the entire $ 100 has, in effect, been taxed at the
shareholders' rates. With less than total distributions, there are "first instance" differences.
In the first instance, the dividend deduction is an adjustment at the corporate level and is
refiected in increased cash flow at the corporate level; while the stockholder credit is an
adjustment at the stockholder level and is reflected in increased cash flow to stockholders.
However, by appropriate changes in the levels of dividend declaration, either mechanism can
be tailored to produce the same result vis-a-vis the corporation and its shareholders—i.e.,
the same tax benefit can be divided in the same manner between the corporation and its
shareholder in either case.
Thus, the two systems are economically the same. The differences between them are
practical differences, of which there are principally three:
First, there may be a difference in public perception about where the benefits go depending
upon which form is adopted. While any such difference in perceptions would be erroneous,
it may, nonetheless, be a real factor to be reckoned with.
Second, the fact that the benefit of the tax reduction initially occurs at different places
under the two methods may be important, particularly if corporations are required to give
up other items at the corporate level in exchange. While it is always possible for the
corporation to use changes in dividend declaration to get to the same place under either
method, those changes may present practical problems. Just as it is easier for Congress to
cut taxes than to increase them, so also it is easier for corporate managers to increase
dividends than to cut them.
Third, the stockholder credit system permits greater flexibility in dealing with tax-exempt
organizations and foreign stockholders. Under the dividend deduction method, whatever the
benefit is, it accrues automatically to all stockholders. Under the stockholder credit method,
however, it is possible to reduce or eliminate the credit for tax-exempt institutions or foreign
stockholders. In the case of tax-exempt stockholders, the double tax has been eliminated
under present law because there is only one tax at the corporate level and no tax whatever
at the stockholder level. Under the dividend deduction method, tax would also be eliminated
at the corporate level, with the result that there would be a total elimination of tax and not
just an elimination of the double tax. The situation in the case of foreign stockholders is
similar as they do not presently pay regular income tax on dividends received, although they
do pay, in lieu of an income tax, withholding taxes at rates ranging from 5 percent to 30
percent.
Revenue implications of eliminating the double corporate tax
We clearly cannot afford to eliminate the double corporate tax completely in any short
period of years, for the revenue losses are too great. At 1977 revenue levels, a complete
deduction for dividends paid would create a revenue loss of approximately $15 billion.
Alternatively, a stockholder credit would produce a revenue loss of approximately $ 19 billion
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1976 REPORT OF THE SECRETARY OF THE TREASURY
if the credit were extended to tax-exempt and foreign stockholders, and approximately $ 12.5
billion if the credit were not extended to such stockholders.
The larger revenue loss for the stockholder credit method is attributable to the "first
instance" effects described above and the fact that the adjustment mechanism operates at
the stockholder level. As explained, the stockholder credit method initially puts more cash
at the stockholder level, which has the same effect as if the total distributions were larger,
thus creating a larger revenue loss. Under the dividend deduction method, it is the
corporation which will have more cash. If it distributed all that additional cash, the result
would be the same as the stockholder credit method (i.e., the cash benefit would appear at
the stockholder level in the form of larger dividends), the revenue loss would increase to the
$ 19 billion figure indicated for the stockholder credit method. Over time, it is probable that
there will be some increase in the level of dividends under the deduction method and,
therefore, a somewhat greater loss than the $15 billion indicated.
Recommended mechanism: combination of dividend deductions and stockholder credits
Specifically, I recommend that your committee eliminate the double tax on income from
savings invested in assets held in corporate form and do so in six phases, with the first phase
effective January 1, 1977. The remainder would phase in equally over the succeeding 5 years.
Since there is a substantial lag between the time when tax changes become legally effective
and the time that their effects show up in collections, the proposal would have only a very
minor effect on the budget for FY 1977, and the revenue effects would show up gradually
in the budget beginning with fiscal years after 1977.
We recommend that you eliminate the double tax by combining the dividend deduction
and stockholder credit mechanisms, with part of the duplicate tax being eliminated by one
mechanism and part by the other. This will have two major advantages:
(1) Use of the dividend deduction will create additional cash fiow at the corporate level,
which is probably the most immediate need.
(2) Use of the stockholder credit mechanism permits flexibility with respect to tax-exempt
and foreign stockholders. We do not believe the stockholder credit should be extended to
them. Like other stockholders, they will receive indirectiy the benefits of the dividend
deduction at the corporate level. Thus, the tax burden on income going to such stockholders
will be reduced, but will not be totally eliminated. That seems an appropriate way to deal
with such stockholders and it significantly reduces the revenue loss.
The dividend deduction
Approximately half of the total deduction would be accomplished by a dividend deduction.
Thus, ultimately there would be a deduction for roughly 50 percent of the dividends
distributed. The reason that I say "roughly 50 percent," rather than exactly 50 percent, is
that by making it slightly less, it is possible to make the stockholder credit mechanism very
much simpler for individual stockholders.
The dividend deduction provided for the first year, 1977, would be that percentage which
produces a net reduction of approximately $2.5 billion in corporate tax liabilities for that
year.
Additional dividend deductions required to bring the total deduction up to approximately
50 percent of dividends distributed would be phased in from 1978 through 1982, causing the
revenue loss to increase at a rate of about $1 billion a year (at 1977 levels).
The stockholder credit
The balance of the double tax would be eliminated by a stockholder credit to be phased
in equally over the 5-year period from 1978 to 1982 inclusive. This would cause a revenue
loss in eachof those years, increasing at the rate ofabout $ 1.25 billion a year (at 1977 levels).
The stockholder credit would not be available with respect to tax-exempt or foreign
stockholders, for giving the credit would completely eliminate the tax on the income accruing
to those classes.
The credit mechanism would be extremely simple. The taxpayer would "gross up" his
dividend by adding to his taxable income an amount equal to 50 percent of the dividends
he receives and would then take a tax credit equal to the gross-up. As a matter of arithmetic,
the combination of a 50-percent dividends paid deduction and a 50-percent gross-up and
credit, when combined with a 48-percent corporate rate, would more than eliminate the
double tax. One or the other must be adjusted slightly. In terms of tax return simplicity, it
is obviously very desirable for tens of millions of shareholders to use a gross-up and credit
of 50 percent rather than an odd percentage which requires more complicated arithmetic.
Therefore, we recommend that the required compensating adjustment be made by reducing
somewhat the percentage of dividends which are deductible. It is for that reason that I
suggested earlier that the dividend deduction might ultimately be for slightly less than 50
percent of the deduction.
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415
Other options
Variations in the arithmetic and percentages are obviously possible. Thus, for example,
the portions of benefits going under either mechanism could be altered. Much will depend
upon what the total tax reform package looks like.
As always, a number of subsidiary questions will require attention in the drafting sessions—
just as in the case of the other options on which our respective staffs have been working in
preparation for your return in September. We need to agree, for example, on how to handle
the intercorporate dividend deduction, the foreign tax credit, and similar items. Our Treasury
staff has given careful thought to these aspects, and I suggest that we ask our staffs mutually
to decide upon the best way to handle these matters.
Distribution of the tax burden
Considered in isolation, the proposal to eliminate the double tax will tend to produce
reduction in the tax burden which is greater at the top and at the bottom of the economic
scale than in the middle. The reason for the larger reduction at the bottom is that there are
a large number of retired persons with low incomes of which a substantial part consists of
income from savings.
But it is unrealistic, of course, to consider this element or any other element in isolation.
We must keep our eye on the entire package of tax changes that you enact. The ultimate
effect on distribution of the tax burden will depend upon whether or not overall individual
income tax reductions are decided upon for individuals generally, and also upon whether
other changes are made in the tax burdens on income from savings.
Given all the variables, it is not possible to arrive at clear conclusions at this point, except
to say that given the gradual nature of the proposed phase-in and the likelihood of at least
some changes in other tax provisions, we do not anticipate a major change in the progressivity
of the tax burden.
Proposal is relief for all savers, not just for stockholders
At the outset of my statement, I made the point that the elimination of the double tax on
corporate income would produce a benefit which will be quickly distributed by market forces
across the income from all forms of saving and investment. The benefits do not come to rest
in the hands of stockholders. This is not a program for big business. It is a program to benefit
all savers. This is an absolutely fundamental point and one on which we all have an obligation
to educate the public. Because it is so important, I want to restate that part of my July 8
statement which explains why that occurs. I said:
In the case of corporations, net income is taxed once at the corporate level and again
at the shareholder level. The existence of this double tax has a major effect on the
manner in which capital is used. Regardless of who ultimately bears the tax—which is
a separate question—two taxes are actually paid by somebody. That means either that
prices must increase or that profits will be lower. Most economists believe that the result
is some combination of higher prices and lower profits.
However, viewing the economy in the aggregate, it is not just corporate shareholders
who have lower profits. If that were the case—if corporate stock investments provided
a lower rate of return than other kinds of investment—no one would invest in stock.
What happens in a competitive capital market is that there are constant flows of capital
from one kind of investment to another until the after-tax rates of return are comparable.
If investment in corporate equities is less profitable, then capital will flow out of such
investment (or less capital will flow in). If there is less demand for stock on the stock
exchange, the price of stock will fall and yields will rise. For example, if a $100 stock
pays a $5 dividend, the return is 5 percent. But if the demand for stock declines and the
price falls to $80, the $5 dividend provides a yield of better than 6 percent. At the same
time, the capital which is diverted from corporate stock will flow into other kinds of
investment. Money in savings accounts will increase and there will be a greater demand
for bonds and other debt instruments and a greater demand for investments in assets and
enterprises not held in corporate form. That greater demand for that kind of investment
will in turn depress the return on it. For example, when more people wish to have money
in savings accounts, the interest rates which banks are willing to pay falls.
Thus, the market operates to equalize rates of return between different kinds of
investment. In the end, a part of the corporate tax is a net additional burden on
consumers, and a part is a burden distributed across the owners of all kinds of capital,
not just corporate shareholders. I believe it is fair to say that while economists differ in
their estimates of the proportions of the tax which ultimately are borne by different
classes of people, those economists who specialize in this aspect of their science are
today in near unanimous agreement on the analysis I have outlined.
All of this has major implications for the efficient use of capital and for tax purposes.
There are several observations which should be made.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
First, it is erroneous to think of the corporate tax as primarily affecting stockholders.
For example, a significant increase in the corporate tax will, in the first instance,
significantly affect existing stockholders. But in the longer run, the equalization process
will come into play and depositors in savings accounts and other kinds of investors will
help bear the economic incidence ofthe tax. Similarly, other investors, too, will benefit
by decreases in the corporate tax.
Second, the price charged by corporations to their customers must be adequate to
provide funds to cover the two-tier tax and still leave investors with a competitive return.
Otherwise, no one will invest and the company will go out of business. That necessarily
means that prices for goods produced by corporations must be relatively higher than
prices of goods produced in the noncorporate sector, which means, in turn, that
consumers are discouraged from purchasing goods in the corporate sector and spend
less of their money on such goods than they would if taxes were neutral with respect to
different kinds of investment. If the extra tax burden on corporate investment were
eliminated, that bias would disappear and there would be a greater demand for corporate
goods and services. People would be able to have more of the things which they prefer,
and the efficiency of our stock of capital would be increased. The real income of the
Nation would rise significantly, as more desired output was substituted for less desired
output. Thus, the double tax is a barrier to the most efficient use of existing capital.
Getting more out of the capital we already have is as good as having more capital. In
fact, it is better because in order to get more capital we must give up some current
consumption, which need not be the case if we are only increasing the efficiency of what
we already have.
Third, the existence of the two-tier tax is directly responsible for much of the
dangerous growth in debt-equity ratios. If a company wishes to expand, it must consider
what goods it can sell and what prices it will be able to charge in order to provide an
adequate return on its new investment. To the extent net expansion is financed with debt,
after the costs have been covered, $ 1 of additional price will provide $ 1 of return to the
investor. In the case of equity, however, the company must charge $2 to provide $1 of
return. With that kind of a tax premium on debt as compared with equity, the pressure
for greater debt is tremendous. This phenomenon can be observed in dramatic form in
the case ofpublic utilities. Regulatory commissions are very conscious ofthe fact that
if they are to increase the return to equity investors by $ 1, they must increase prices to
consumers by $2. The very difficult choice which that presents to a politically oriented
commission is a significant part of the utility problem.
Benefits of the proposed change
The change recommended will, if adopted, have the following advantages.
(1) The net tax reductions on the income from saving will increase the rewards for saving
and will thus increase the total amount which people and institutions will be willing and able
to save. That will produce benefits not just for savers, but for everybody in the form of
increased growth, more jobs, and greater prosperity generally.
(2) It would ultimately eliminate a double tax which is unfair and inefficient.
(3) It will eliminate the existing tax discrimination in favor of debt as compared with
equity financing and strike at the heart of the debt-equity problem.
(4) American businesses will be better able to compete against foreign companies for
whom the cost of capital has already been reduced by elimination ofthe double tax. Increased
returns on saving in the United States will help attract additional foreign savings.
(5) It will greatly improve the efficiency of the process by which capital is allocated and
produce the equivalent of an increase of perhaps 0.5 percent in our national income.
(6) It will make the capital markets more competitive. Corporate managers will have to
demonstrate to stockholders that they can do a better job of investing profits than the
shareholders can do for themselves. It would eliminate the tax penalty which presently
induces corporate managers to "lock in" corporate capital and keep it out of the capital
markets.
(7) It will be an immediate and major assist for equity financing. Businesses which have
lost access to equity markets will again be able to compete.
(8) It will be a great help to utilities and to other industries whose investors rely upon
steady dividends.
(9) It will greatly reduce the tensions and distortions which follow from the present large
differential between the rates of tax on capital gain and on other income. This should be
viewed as a major step forward by anyone who objects to the present favorable treatment
of capital gains. Since it achieves this result without increasing taxes on capital gains, it should
also make happy those who advocate the present favorable treatment of capital gains.
III. Other Actions Affecting National Savings
I have already emphasized the central effect ofthe Federal budget on the amount of savings
in the economy. Federal surpluses will produce additional savings; but Federal deficits
EXHIBITS
417
require the Treasury to borrow, thus depleting the pool of savings available for private
investment. Thus, as we try to get a larger and more efficient amount of savings and
investment through changes in the tax system, we must keep constantly in mind the pressing
need also to continue to hold down the level of Federal expenditures.
You should also have clearly in mind that some ofthe other tax changes which have from
time to time been suggested by various members of your committee would also increase the
tax on the income from savings, and would thereby discourage savings and work contrary
to the proposals which I have presented today. Here, again, it is important to understand that
tax provisions relating to selected kinds of investments ultimately are distributed across all
kinds of investment. 1 have explained how the burden of the corporate income tax is
ultimately distributed across the income from corporate and noncorporate investments alike.
The same economic principles operate in the case of such items as the domestic international
sales corporation (DISC) and the investment credit. There is a tendency to think that those
provisions affect only selected narrow areas and do not apply in a general fashion. But that
is an erroneous conclusion, which confuses the form of the provisions with their effect. It
is true that such provisions operate as incentives to selected kinds of investment rather than
to investment generally. By being selective, they increase the flow of savings from less favored
to more favored kinds of activities, just as the effect of the corporate tax is to allocate
investment flows away from corporations. However, the benefits from such provisions are
ultimately distributed across all kinds of savings, just as the burden of the corporate income
tax is ultimately distributed across corporate and noncorporate savings alike. In the end, any
increased tax from cutting back such items would deerease the income from and the incentive
for saving generally.
Conclusion
This testimony completes the presentation ofthe administration's proposals in the area of
tax reform. On July 8, I outlined a series of proposals for tax change consisting primarily of
tax reform proposals first advanced in 1973, on which your committee worked last year. In
a separate statement 1 also presented tax proposals dealing with the special problems of
utilities.
The new proposals today go to the fundamentals of our economic system. All of these
proposals interrelate with each other, and their effects must be determined as a whole.
Looking at all provisions together will be important for purposes of determining the effects
on the Federal budget—which goes to the heart of the savings problem I have been
discussing—and will also be indispensable in assessing the net implications for distribution
of the total tax burden.
We look forward, as always, to working with your distinguished committee.
Exhibit 34.—Statement by Secretary Simon, December 3, 1975, at the Tax Foundation's
27th National Conference, New York City, setting forth a proposal for basic tax reform
Since history has a habit of repeating itself, I'm sure I'm not the first Secretary of the
Treasury who has reached the conclusions I want to discuss with you tonight. And no doubt,
I will not be the last. But the time has come for a little plain talk about a subject that is
important to all of us: our taxes.
The system of Federal taxation which has evolved since the early days of the Republic is
in trouble today.
And after several years of seeking to reform the system, I am increasingly persuaded that
tinkering may no longer be the answer.
Let me elaborate for a moment about the difficulties of the tax system.
First, it is readily apparent that the Federal tax system is poorly stmctured for a period
of rampant inflation. Millions of taxpayers now legitimately complain that the extraordinarily
high rates of inflation we have experienced recently have hit them with a double whammy:
At the same time that inflation is eroding their real purchasing power, it is also pushing them
into higher tax brackets.
Secondly, because of the rapid growth in the size of govemment at all levels since the early
1960's, the portion of personal income that must be paid into Federal, State, and local tax
coffers is rising steadily. Many of you are familiar with the Conference Board study pubhshed
this spring showing that the item which rose the fastest in the American family budget during
the last 6 years was taxes. While the general cost of living climbed about 40 percent during
that period, the total bill for taxes- Federal, State, and local- jumped by 65 percent.
Thirdly, it is becoming more widely recognized now that the Federal tax system is
discouraging savings and investment when we need three times as much investment in the
next decade as the last decade. By taxing corporate profits twice- once at the corporate level
and then at the level of the shareholder- the United States is imposing a heavier tax burden
on its business enterprises than in most other major industrialized nations of the free world.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
And by allowing corporations to deduct interest payments on their debt but refusing to allow
deductions for their dividends, the tax system is encouraging businesses to rely too heavily
upon the debt markets, so that the corporate financial structure is increasingly unbalanced.
Economists are properly cautious in saying that the way we collect taxes may not totally
(^etermine how much we save and invest. But the fact is that the share of our GNP devoted
to capital investment over the last 15 years has been lower than in the economies of any of
our major competitors. We have also had one ofthe poorest records in terms of productivity
gains and in terms of real income growth. Furthermore, our recent unhappy experience in
terms of high inflation is in part attributable to past inadequate capital formation. The Federal
tax system has been a. major influence on all of these developments.
Finally, it has become painfully obvious to most taxpayers that the present tax system is
so riddled with exceptions and complexities that it almost defies human understanding. No
one can adequately assess its basic fairness. The complexities have reached a point where
I'm not even sure the IRS experts fully understand the system anymore. How can they when
they are dealing with a tax code and regulations that now exceeds 6,000 pages of fine print?
You may remember the informal survey conducted a few years ago by an executive in
Atlanta, working in conjunction with the Wall Street Journal. This executive visited five
different IRS Centers around the country, presenting to each of them the same set of facts
about his income and possible deductions and then asking how much tax he should pay. The
result? Five different answers, varying by as much as $300 in how much he owed. The offices
could not even agree on how many forms he should fill out.
In these circumstances, it is hardly surprising that two taxpayers out of every five now seek
outside assistance, usually at some expense, to complete their tax forms. It is even less
surprising that more than three-quarters of the American people now want the tax code
changed, and some 50 percent want major changes. There is a widespread feeling that the
system favors the rich at the expense of working families.
As everyone in this chamber knows, the success of our tax system rests upon the voluntary
compliance of our taxpayers. If there were widespread abuses of the system, we could not
possibly police them. Yet, when people lose faith in the basic fairness ofthe system, it almost
inevitably follows that the system itself will falter. In fact, the rate of compliance has begun
to drop in recent years. We are faced, as former Treasury Secretary Joseph Barr first observed
almost 10 years ago, with an incipient taxpayers revolt.
The fear of a revolt has not been lost upon Washington, but so far, I'm afraid, attempts
to reform the tax system have fallen far short of the mark. I say this with full appreciation
ofthe herculean labors performed by the House Ways and Means Committee under Wilbur
Mills and by the administration in securing passage of the 1969 Tax Reform Act. That act
did help to simplify the tax system: Some 8 million low-income taxpayers (poverty level or
below) were removed from the tax rolls altogether, and another 11 million taxpayers were
offered greater incentives to use the standard deduction, avoiding the time and trouble of
itemizing their deductions. Nonetheless, considering all the labors that went into that bill,
it was a great disappointment to those who were seriously interested in tax reform. If anything,
the 1969 act, like the Revenue Act of 1971, was really more ofa lawyers' and accountants'
relief bill. There is still a decisive need to overhaul the code. I speak with some feeling on
this because nearly 3 years have passed since the executive branch proposed a comprehensive
series of changes, and most of them are still awaiting final congressional action. I know that
many Members of the Congress have shared my frustrations this year as they have watched
the House Ways and Means Committee spend literally thousands of man-hours on a complex
series of changes in the code, only to have their efforts watered down at the last minute. As
of tonight, there is a strong possibility that serious attempts to change the system will be put
off until 1976, and possibly until after the election.
Given these circumstances, I would suggest three major steps must be considered.
First and foremost, it is now incumbent upon elected leaders at every level ofgovernment
to halt the relentless upward spiral in public spending. By cutting back on the growth in
spending, we can also cut back on the growth in taxes and thus do as much to alleviate the
distress ofthe taxpayer as any single reform could ever accomplish. We do not have financial
resources to afford all ofthe bold new programs that have traditionally gotten people elected,
and a large portion of our body politic now believes that government has already assumed
too much responsibility within our society. Clearly, as the government has become more
pervasive, the vitality ofthe private sector has diminished. In an illuminating article published
this fall, the president of Stanford University argues that the Government has preempted so
many responsibilities in education that it is now forcing many private universities and colleges
to the wall. That same trend prevails elsewhere, and it is the taxpayer—victimized by the very
system that supposedly represents him—who is forced to pay the bill, either through higher
taxes, higher inflation, or both.
Restraining the growth of public spending is essential if we are to defuse the taxpayers'
discontent. Equally important, by holding down spending, we will begin to return to the
taxpayer the ability to control more ofthe economic decisions that affect his life. The choice
EXHIBITS
4 19
about how to spend his earnings will not be made so often in Washington but in his own home.
That is the essence of economic freedom, and in a very real sense it is also at the heart of
our political and social freedom.
The proposal that President Ford has made to the Congress to cut projected spending for
next year's budget by $28 billion and to return the savings dollar-for-dollar to the American
taxpayer is a clear recognition ofthe linkage between spending and taxes. We have tried every
other technique to restrain spending, and the Congress has turned a deaf ear. This one, the
President believes, may be our last best hope. Moreover, by lowering taxes, it would help
most taxpayers overcome the effects of past inflation on their tax liability.
Some economists are arguing that the President should sign tax cut legislation regardless
of what the Congress does about spending. I am not persuaded by their argument. Whether
or not we enact another tax cut immediately may not have a significant impact upon our
immediate economic hopes; however, whether or not we bring spending under control and
work our way out of horrendous budget deficits will most assuredly have a significant impact
upon our hopes for the future. We must finally say no to the apologists for big spending,
rejecting their misguided notions that the Government can identify, analyse, and solve every
problem by throwing more money at it.
A second step that I believe essential is to achieve fundamental reforms in the way we tax
business profits—reforms that will provide a stronger bulwark against future economic
contractions; reforms that will help to redress the imbalances in corporate balance sheets and
broaden equity ownership; and reforms that will encourage the levels of savings and capital
investment that are so vitally needed for our future.
Toward these ends, the administration this summer proposed to the Congress a "Tax
Program for Increased National Saving." This proposal would eliminate the double taxation
of corporate earnings which I mentioned earlier. I strongly believe that this proposal—which
has already been adopted in one form or another in most of the other major industrialized
countries—would make a significant contribution toward financing our capital investment
needs of the future. Moreover, it is the only major tax proposal of which I am aware that
comes to grips with the growing imbalance between corporate debt and equity.
Some observers have asked whether the President's subsequent request for a cut in taxes,
linked to a cut in projected spending, means that the administration has shelved its tax
integration proposal. Let me set the record straight: The administration stands foursquare
behind both measures. We regard the tax cut/spending cut as an item on the immediate
agenda, and we remain hopeful that the Congress will act favorably on it this year. The tax
integration measure is much more complicated and will require extensive hearings and
debates so that, while we would like to have it passed quickly, we recognize that in reality
it will require more time to enact. But both proposals still have our wholehearted support.
Let me turn now to the third and final step that I personally believe we should begin
considering with regard to our tax system. This is a concept that has been suggested from
time to time but it has rarely been given serious consideration. It is simply this: To wipe the
slate clean of personal tax preferences, special deductions and credits, exclusions from
income, and the like, imposing instead a single, progressive tax on all individuals.
I am increasingly attracted to the idea because of its simple elegance and its basic equity
toward all taxpayers.
For years, politicians have been telling us that the tax system should be used to promote
certain economic and social goals. But should it really? Isn't this precisely the kind of social
engineering that lies behind so many of our troubles today? What has caused more
disillusionment with government than the failure ofgovernment to deliver on so many of its
promises? What has caused more bewilderment and distrust among taxpayers than the
myriad of so-called loopholes which now litter our tax code?
There have been many studies by responsible organizations which indicate that if the
special deductions and credits, exclusions from income, et cetera are eliminated or drasti-^ally
curtailed, we could revise the individual tax rates substantially downwards and keep our total
income tax revenues at present levels. Generally, it is suggested that rates could be set at
10-12 percent at the low end and 35-40 percent at the high end. Thus a family of four with
income of $15,000 might have an annual Federal tax bill of $1,200; the lowest income
families would continue to pay no Federal income taxes at all; and wealthier individuals
would pay a tax of 35 percent on their income over $50,000—no ifs, ands, or buts. Everyone
would pay his or her fair share.
Looking at it another way, if every taxpayer was allowed the standard deduction under the
1975 law but all other deductions were disallowed and capital gains and tax preferences were
taxed as ordinary income, revenues from the personal income tax would increase by about
$50 billion. Thus, even under this partial step, personal income tax rates could be cut across
the board by about 30 percent without any loss of revenue.
Obviously, the wealthy taxpayer with income of $100,000 or more who is presentiy able
to "shelter" his income will stand to lose from this proposal. As noted before, all of this
income would be subjected to taxation at some significant rate rising to 35-40 percent. On
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1976 REPORT OF THE SECRETARY OF THE TREASURY
the other hand, the working men and women of the country—families who earn $ 10,000 and
$20,000 per year—should benefit through reduced tax burdens. And let us not overlook the
fact that all citizens will benefit through increased public confidence in the tax system.
Developing the precise details of such a program would clearly involve hard work.
Significant political decisions would also have to be made in establishing the tax rate
schedules which would be applied to the broadened tax base. But innovation should be
encouraged. For example, the idea of a consumption-type income tax discussed by Assistant
Secretary Walker here today clearly merits further examination.
If we imposed a single, progressive tax on individual taxpayers, what should be done with
corporate taxes? There are, of course, several alternatives that could be considered. My own
predilection would be to press forward with the tax integration plan 1 mentioned earlier, and
then to simplify the corporate tax itself in much the same way as we would the individual
tax. By eliminating preferences and closing loopholes—that is, by broadening the corporate
tax base—we should be able to effect a meaningful cut in corporate income tax rates without
any loss in postintegration revenues from this source. Regardless of what form the corporate
tax may take, we must bear in mind that ultimately corporations do not pay taxes: people
do. It is axiomatic that corporations are simply legal entities. The revenues they turn over
to the IRS come either from their customers in the form of higher prices or from their
employees and shareholders in the form of lower salaries and lower dividends. In the end,
the corporate tax always comes out of somebody's personal pocket. It never ceases to surprise
me how often that point is misunderstood.
For years we have been talking about tax reform, and the executive branch continually
sends up ad hoc measures that predictably draw the fire of special interest groups and are
eventually overrun or changed beyond recognition by political opponents. If we truly want
tax reform, I say that here's a place to start.
Let me emphasize that I am not trying to float a trial balloon for the administration. I am
speaking here tonight strictly as a Secretary of the Treasury who shares the frustrations of
so many Americans who want to bring greater equity and rationality to our tax system and
who believe that we must now begin giving much more serious consideration to a tax system
that rests upon the twin pillars of fairness and simplicity.
And I must say that I think I am also speaking for millions of Americans who are fed up
with the current tax system and want it replaced by one that they can both understand and
trust. Indeed, I doubt there is anyone in this audience who believes that if we could start over
again, we would build a tax structure similar to the one we have today. As they say, if we
didn't have it already, nobody would ever invent it.
Americans have habitually complained about taxes. Tax rebellions extend far back in our
history. But during most of our history, the majority of our people have agreed with Justice
Holmes that "Taxes are what we pay for civilized society."
Let me reemphasize: The success of the American tax system—and we should always
remember that it has been one of the most successful in the world—is that our citizens
voluntarily comply with its requirements. They pay their taxes because they believe that
others are also paying their fair share, and because they are getting their money's worth.
Over the years, as one new wrinkle has been placed on top of another, the Federal tax
system has come under increasing jeopardy.
We are threatening to erode basic faith in the fairness of the system because many people
feel that taxes are being imposed upon them without their consent, that too many of their
fellow taxpayers are escaping their responsibilities through dozens of loopholes, and that the
code itself has become a labyrinth of legal doubletalk. In short, for the average taxpayers,
the New Deal has given way to the "Raw Deal," and they don't like it one bit.
I think the time has come for some fundamental changes and far more imagination about
what we can accomplish as a Nation if we only overcome our hesitations and fears. Some
critics will tell you that what I am suggesting should be dismissed as pure politics. The charge
of politics is a poor substitute for thinking. We have been talking and talking about tax reforrri
for years, but we have yet to act in a comprehensive way. The question I leave with yoii tonight
is this: Do we or do we not have the courage to act on our convictions? It's that simple.
Exhibit 35.— Statement of Secretary Simon, March 17, 1976, before the Senate Finance
Committee, on major tax revisions and extension of expiring tax cut provisions
I am pleased to be here this moming as you begin your deliberations on major tax revisions
and the extension of expiring tax cut provisions. You have before you an extremely
challenging agenda.
This morning I will discuss H.R. 10612—the House-passed tax reform bill. While many of
the provisions of H.R. 10612 incorporate proposals initiated by the administration in 1973,
more work remains to be done.
EXHIBITS
421
I will also discuss the President's proposals to cut individual and business taxes and to
reduce the rate of growth of Federal spending. I will present proposals to encourage capital
formation. These proposals include integration ofthe corporate and personal income taxes;
a job creation incentive proposal; the six-point utilities tax program; a proposal to reduce
the tax on capital gains and alleviate the burden of taxation on inflationary gains by the
mechanism of a sliding scale; and elimination of the withholding system on foreign
investments. In addition, I will discuss general and specific estate tax revisions, as well as the
relationship of the administration's energy policy and tax policy.
The overall objectives ofthe administration's tax policy are simple and fundamental. First,
and foremost, our tax system must be fair. Its fairness and integrity rest upon three premises:
equity, simplicity, and efficiency. A tax system not built on this foundation erodes both the
confidence of taxpayers and the incentive required for economic progress and well-being.
Second, our tax policy must complement and supplement our basic economic goal of
achieving a growing, vigorous, and noninflationary economy. We achieve this by removing
the tax barriers which impede our growth and prevent the most efficient use of our economic
resources.
Third, our tax policy must contribute to a sound energy policy. Here, again, I must
emphasize that allowing market incentives to operate would be the most efficient and
effective means of achieving energy independence. As long as we are unwilling to rely on
the market, we should retain the tax incentives we now have in place and by no means erect
further impediments by increasing the tax burden on oil and gas investments.
The administration has already proposed the following measures:
•
Permanent personal and business income tax reductions coupled with corresponding reductions in the size of the Federal budget. This is the proposal which the
President first made last October and reiterated in his 1976 state of the Union
message.
•
A plan to integrate corporate and personal income taxes and thereby eliminate the
perverse effects of the current double tax on equity investments. This is the
proposal I presented last July before the House Ways and Means Committee.
•
A six-point utilities tax program to stimulate construction of additional facilities by
electric utilities, to reduce imports of foreign oil, and to insure adequate electric
generating capacity in the years ahead.
•
A proposal to repeal the undesirable and inefficient present withholding system on
portfolio dividends and interest earned by foreign investors on U.S. securities.
The administration has also taken new initiatives to maintain and improve the health and
vigor of the economy. These proposals are:
•
A job creation incentive program which provides for accelerated depreciation of
new plant facilities and equipment in areas which experienced unemployment of
7 percent or more in 1975.
•
A tax incentive to encourage broadened stock ownership by low- and middleincome working Americans by allowing deferral of taxes on certain funds invested
in common stocks.
•
Estate tax relief which will alleviate the effect of inflation by increasing the estate
tax exemption from $60,000 to $150,000. The current exemption level has been
in effect since 1942.
•
Estate tax relief for farmers and owners of small businesses to make it easier to
continue the family ownership ofa small farm or business after the owner's death.
•
A proposal to encourage capital formation and the efficient allocation of
investment resources by the introduction of a sliding scale for the taxation of capital
gains which will, in addition, alleviate the burden of taxation on inflationary gains.
The administration is also committed to an energy policy that will achieve our goal of
energy self-sufficiency.
In January 1975, the President proposed measures to conserve energy, increase domestic
production and provide for strategic reserves. Although the Energy Policy and Conservation
Act contemplates eventual decontrol of oil prices, its immediate effect is to roll back the
average price of oil. Prices of natural gas are still controlled in interstate markets. As long
as we refuse to remove these Government-imposed controls, and thereby prevent free market
incentives from increasing domestic energy supplies, we will continue our dependence on
foreign imports and our vulnerability to political blackmail. For these reasons, we are
opposed to the provisions of H.R. 10612 which would erect further impediments by
increasing the tax burden on investments in oil and gas.
Further, in order to accelerate the replacement of obsolete oil- and gas-fired electric
generating capacity, we are proposing that you enact the six-point electric utilities program
recommended by the President's Labor-Management Advisory Committee.
With respect to tax reform, the administration's goals are to—
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Improve the equity of our tax system at all income levels. This principle goes beyond
the concept of vertical equity or progressivity which holds that those with higher incomes
should pay a larger share. It extends to the more basic idea that the tax system of a
democratic society must be fair to all taxpayers and must be widely recognized as such;
Simplify many of the tax provisions of the Code which seriously affect the taxpayer's
ability to cope with the preparation of his income tax return;
Make improvements in the ways in which our tax law is administered.
At the same time, of course, our tax system must be conducive to the stable growth of our
domestic economy and the longrun improvement of our position in world markets.
In 1973, the administration made a number of tax reform proposals. In the nearly 3 years
that have elapsed, much has been done by the House Ways and Means Committee. H.R.
10612 incorporates to varying degrees many of our 1973 proposals. We are, therefore,
renewing the following proposals:
•
LAL (limitation on artificial losses) to deal effectively with the problems associated
with tax shelters by a solution which reaches their most common feature: Bad tax
accounting rules which mismatch expenses and revenues and thereby produce
artificial accounting losses. While we continue to endorse the LAL concept, under
current circumstances we find its application to oil and gas investments to be
inappropriate and inefficient.
•
MTI (minimum taxable income) which, in combination with LAL, deals with the
problem of taxpayers with high economic income who pay little or no Federal
income tax. H.R. 10612 rejects this proposal in favor of an expansion ofthe current
minimum tax which does not subject taxpayers with high economic income to
progressive tax rates.
•
A simplification package designed to alleviate the intolerable reporting burden
imposed upon the average taxpayer.
We also have a number of specific recommendations on various aspects of the House bill
and I shall therefore devote a substantial portion of my time to H.R. 10612.
I. CONTEXT FOR TAX POLICY
Maintaining and Improving the Health and Vigor of the Economy
The administration's economic policies, as outiined by the President in his state of the
Union message, are designed to keep the economy on an upward path toward two central
long-term objectives: Increasing steadily the number of real, rewarding, permanent jobs, and
sustained noninflationary economic growth.
The most immediate concern, of course, has been to support the recovery ofthe economy
from the most severe recession in the post-World War II period in a manner which will
achieve full employment as rapidly as possible without rekindling inflationary pressures and
expectations. Achievement of this objective will not only provide jobs for all who wish to
work but, equally important, will reestablish the basic economic conditions necessary to
sustain strong and continuous real economic growth which can provide permanent
employment gains and a rising standard of living for all Americans.
Status of economy
I am pleased to be able to report substantial progress in the recovery ofthe U.S. economy.
Gross national product in real terms has increased by 5 percent since the trough of the first
quarter of 1975 and is rapidly approaching the peak level ofthe fourth quarter of 1973. At
the same time, the rate of increase in consumer prices has continued to diminish. During the
last 3 months of 1975, the rate of inflation fell to 6.6 percent on an annual basis. January
data are even more favorable, showing a seasonally adjusted annual rise of only 5 percent
in the Consumer Price Index. The recent declines in the Wholesale Price Index augur well
for continuing progress on the inflation front.
Civilian employment continues to improve, showing an increase, seasonally adjusted, of
over 900,000 in January and February to 86.3 million, the highest level since mid-1974. This
improvement is reflected in unemployment rates which dropped seven-tenths of a percentage
point in January and February to 7.6 percent—substantially below the peak unemployrrient
rate of 8.9 percent in May of last year. Furthermore, improvements in employnient have been
accompanied by greater labor productivity which increased over 4 percent frorii the first
quarter to the last quarter of 1975.
Short-term policies
Despite this advance of the economy, the overall rate of utilization of physical and
particularly human resources remains unacceptably low relative to long-term objectives.
EXHIBITS
423
Many advocate a highly stimulative fiscal and monetary policy to cure this problem quickly.
However, the risk in ^reatiy stimulating the economy at this time is that this will set off
another round of inflation, thereby undermining the economic recovery underway. Thus, our
policies for the short term must be to keep the present recovery on track in order to provide
a steady and sustainable increase in productive jobs. While employment might be raised
somewhat more rapidly in the short run with massive fiscal and monetary stimulation, such
stimulus would lead to renewed inflation, an eventual decline in the pace of economic
activity, and renewed unemployment.
There is still an important role for tax policy for the short term. Thus, as discussed in more
detail later, the administration proposed special temporary tax incentives to encourage
construction of new facilities and purchases of equipment in areas in which unemployment
exceeds 7 percent. The objective of this program is twofold. First, it will provide immediate
relief to the unemployment problem ofthe construction industry, one ofthe most depressed
industries in our economy. Second, the incentive will be provided in areas of high
unemployment where new jobs are most needed.
Long-term policies
Our policies for the long term must be to create an economic environment which
encourages individuals to save and businesses tp invest, and thereby to restore the dynamism
of our economy. The administration has long and continuously emphasized the need for a
higher rate of capital formation, and I shall have more to say on this topic in a moment. At
this point, I simply note that we cannot expect businessmen to assume the risks of business
expansion unless the Federal Government does its share to provide a stable climate in which
sound business decisions can be made. This means stable prices, ready access to financial
markets, and the certainty that the Federal Government will not make increasing tax claims
on the returns flowing from these investments.
Two conditions are essential if we are to make substantial progress toward achieving our
long-term goals:
First, the rate of growth of Federal spending must be reduced and we must move to a
position of budgetary balance. The administration's program of spending restraint coupled
with tax reductions will help us meet the first condition. The Federal deficit will be reduced
from an estimated $76 billion in fiscal 1976 to $43 billion in fiscal 1977 and to budgetary
balance by fiscal 1979.
Second, economic incentives must be provided for saving and investment in order to
increase the rate of capital formation. Several ofthe tax proposals which the administration
recommends are designed to promote such saving and investment. More precisely, these
recommendations are designed to remove some ofthe disincentives to saving and investment
which are inherent in our existing tax structure. Thus, as I will discuss in greater detail later,
we recommend the following tax measures:
•
A permanent reduction in corporate income tax rates from 48 percent to 46
percent and a permanent reduction ofthe tax rate on the first $50,000 of corporate
income to replace the current temporary provisions,
•
A permanent 10-percent investment tax credit,
•
Elimination of the double tax on corporate dividends,
•
Revisions in the taxation of capital gains,
•
Tax incentives to broaden stock ownership,
•
Tax incentives to expand the use of individual retirement accounts.
We also recommend the elimination of withholding taxes on foreign investment to
encourage the inflow of capital from abroad.
All of these recommendations are made out of a deep concern that the failure to increase
the rate of capital formation can have profound consequences for our economy for years to
come.
The dangers that can arise from inadequate capital investment over a period of years are
best illustrated by the 1973 production botfleneck. In that year, industries that process such
materials as steel, paper, fertilizers, chemicals, cement, nonferrous metals, and textiles were
operating at the limits of their physical capacity. But they still were not producing enough
goods and services to meet the demands from industries that manufacture automobiles,
clothing, machine tools, and other finished products. This situation contributed to the rapid
rise in inflation and ultimately to the recession of 1974-75.
Another consequence of inadequate saving and investment is that annual gains in
productivity, that is, total output per worker, have significantly slowed during the post-World
War II period. As shown in the figures below, the growth rate of productivity, which had
averaged between 2.0 and 3.3 percent per year until the mid-sixties, decreased to an average
of 1.5 percent over the past 10 years.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
U.S. productivity growth, 1950-74
[Average annual rate over 5-year intervals]
Period
1950-54
1955-59
l%0-64
l%5-69
1970-74
Gross domestic product
per employed person
2^44
2.13
3.27
1.73
1.33
The diminishing of U.S. productivity gains takes on added significance when compared
with the experience of our major trading partners. Over the past 15 years, Japan, West
Germany, France, Canada, Italy, and the United Kingdom have all experienced more rapid
rates of productivity growth than the United States; and, taken together, their rate of
productivity growth is more than double ours.
The rate of capital formation is a major determinant of the growth of productivity.
Therefore, an increased rate of capital formation is required to maintain the competitive
positioning of U.S. business in world markets.
Increased productivity also means that higher wages need not be passed forward as higher
prices so that real income can rise for all. This point should be emphasized. In a world where
yearly increases in money wages are customarily expected, our main line of defense against
inflation is an economy with growing productivity. Wage increases need not lead to higher
per unit costs of production as long as output per worker, or productivity, rises sufficiently.
This can happen if we provide workers with more and better equipment, that is, if we maintain
high rates of capital formation.
However, as I have noted on other occasions, our investment performance has not been
satisfactory. The share of our national output which goes to investment has been below that
of other major industrialized countries. When we look at the future, we find little grounds
for believing that our capital needs will become any less intense. Indeed, all studies on this
subject conclude that if we are to realize our economic goals, we must commit an even higher
portion of our income to national saving and investment in the future than we have in the past.
Consider, for example, a recent study by the Bureau of Economic Analysis of the
Department of Commerce on projected capital needs ofthe country in 1980—only 4 years
away. That study concluded that in order to achieve our goals of full employment, greater
energy independence, and pollution abatement, the ratio of business fixed investment to GNP
for the decade of the seventies must be increased.
Several other studies have also concluded that to meet employment and growth objectives,
the demands for investment as a proportion of GNP will increase very substantially beyond
what had been experienced in the recent past. To finance the shift in resources toward more
investment, more private savings and sharp reversals of Government deficits will be required.
Results of these studies, taken together, imply a need for an increase in the rate of private
savings from 15 percent to 16 percent of GNP.
Sources of demand for capital
The sources of demand for capital should be carefully identified.
First, there are enormous investment demands generated just in maintaining a growing
labor force properly equipped with capital. Between now and 1985, the labor force will
expand by approximately 16 million persons. When we add to this the 3 to 4 million
unemployed today, the total is nearly half again the 13 million jobs generated during the past
decade.
Second, capital is needed to achieve specific public policy objectives: Accelerated
development of new energy resources to make us more self-sufficient; improvement of
environmental quality; safer working conditions; better housing. In the energy field alone,
estimated investment needs for the next decade total $1 trillion.
Third, and most important, is the economic necessity to increase our production efficiency
to raise the real standard of living enjoyed by Americans. If anything has been clearly
established by economic studies over the years, it is the close relationship between capital
investment and productivity. Capital investment is a key factor in increasing productivity,
economic growth, and real earnings.
I do not mean to imply that investment in plant and equipment is the only factor that affects
productivity. There are, of course, other factors such as new technology, the skills and growth
ofthe labor force, access to raw materials, and the stage ofthe business cycle. But the more
capital investment we have, the more these other factors can increase productivity.
The tax proposals which I have already mentioned and will discuss in considerably more
EXHIBITS
425
detail are directed towards stimulating more saving and investment to meet our long-term
capital needs. They will operate through increasing the after-tax profitability of investment
and thereby encourage businessmen to undertake more capital projects. The proposals will
also provide a higher after-tax return to those who save, thereby encouraging them to reduce
somewhat the customary amount of consumption. Along with the reduction in the growth
of Federal spending, these proposals should help tilt slightly the overall allocation of our total
income in favor of investment.
Other capital formation problems
There are a number of related problems concerning capital formation which our tax
policies address. These problems are: The tax bias against savings and investment, the
inefficiency with which the present capital stock is used, the overstatement of profits as a
result of inflation, and the problems of corporate finance. Let me comment on each of these
in turn.
Tax bias against savings and investment.—The willingness of people to save and invest
depends in large part on the financial reward which flows from the investment. Thus, to the
extent the income tax system takes away the reward, it lessens the incentive to save and invest.
Our income tax system is heavily biased against investments producing financial returns that
constitute taxable income.
A simple example illustrates this point: Assume you have $5,000 and that the question is
whether to spend it on consumption items or to save it and buy a bond. In weighing the
consumption alternative, you would not take income taxes into account, but in weighing the
bond alternative, you would have to consider the fact that some percentage of the interest
income on the bond would go to the Government in the form of income taxes. While this
result is not necessarily improper, it does mean that the existence ofthe income tax system,
or any income tax system, tilts the scale significantly when people are deciding whether to
save or consume.
Moreover, it is frequently forgotten that income from capital is not only included in our
income tax base, it is also taxed more than once in our Federal tax system—as corporate
income, as personal income, and when transferred at death or by gift under the estate and
gift taxes—and that such income is also taxed in State and local tax systems.
In sum, the existing tax system—the combination of income, estate and gift, and State and
local property and income taxes—imposes a heavy burden on capital. Obviously, if we wish
to increase saving and investment, a lessening of this tax burden is the logical place to begin.
Inefficiency in the use of capital.—While 1 have emphasized the need to increase the total
volume of investment, we should be concerned as well about the tax system's effect on
efficient allocation of investment among competing uses. In fact, to the extent that existing
investment may be made to work more efficiently, we would be reaching much the same
results as we would from additional investment. We should, therefore, work to remove those
features of the tax system which cause the flow of savings to be channeled away from more
productive investment and into less productive investment. The most important such
distortion in the existing tax system is the two-tiered tax upon corporate income.
Moreover, viewing the economy in the aggregate, it is not just corporate shareholders who
have lower earnings as a result of this tax. If that were the case, that is, if corporate stock
investments provided a lower rate of return than other kinds of investment, no one would
invest in stock. In a competitive capital market, capital is constantly flowing from one kind
of investment to another until the after-tax rates of return are comparable. If investment in
corporate equities is less profitable, then capital will flow out of such investment, or less
capital will flow in. If there is less demand for stock on the stock exchange, the price of stock
will fall and yields will rise. For example, if a $100 stock pays a $5 dividend, the return is
5 percent. But if the demand for stock declines and the price falls to $80, the $5 dividend
provides a yield of better than 6 percent. At the same time, capital which is diverted from
corporate stock accounts will increase and result in a greater demand for bonds and other
debt instruments as well as a greater demand for investments in assets and enterprises not
held in corporate form. The greater demand for that kind of investment will in turn depress
the return on that investment.
The market, therefore, operates to equalize rates of return between different kinds of
investment. In the end, a part ofthe corporate tax is a net additional burden on wage earners
and consumers, and a part is a burden distributed across the owners of all kinds of capital,
not just corporate shareholders.
The factors I have just described have major implications for the efficient use of capital
and for tax policy. The price charged by corporations to their customers must be adequate
to provide funds to cover the return. This necessarily means that prices for goods produced
by corporations must be relatively higher than prices of goods produced in the noncorporate
sector. In turn, consumers are discouraged from purchasing goods from the corporate sector
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1976 REPORT OF THE SECRETARY OF THE TREASURY
and spend less of their money on such goods than they would if taxes were neutral with respect
to dilferent kinds of investment. If the extra tax burden on corporate investment were
eliminated, this bias would disappear and there would be increased demand for corporate
goods and services. People would be able to have more ofthe things which they prefer, and
the efficiency of our stock of capital would be increased. The real income ofthe Nation would
rise significantly as more desired output is substituted for less desired output. Thus, the twotier tax on corporate income is a barrier to the most efficient use of existing capital.
Getting more out ofthe capital we already have is as good as having more capital. In fact,
it is better because in order to get more capital we must give up some current consumption,
Nvhich need not be the case if we are only increasing the efficiency of what we already have.
Overstatement of profits as a result of inflation.—Inventories and depreciation are two
major elements which substantially overstate profits in periods of inflation.
The inventory situation may be illustrated by assuming a company that normally maintains
an inventory of 100,000 widgets. Under traditional FIFO accounting, if inflation causes the
price of widgets to increase by $ 1, from $2 to $3, the $ 100,000 increase in the value of the
inventories is reported as profits, even though the company is no better off in real terms than
it was before the inflation. Economists have long recognized that this increase is not a true
"profit" and the Department of Commerce national income accounts have, from the
inception of those accounts in the 1940's, separated it from profit figures.
A similar situation exists with respect to depreciation. In a period of rapid inflation,
depreciation deductions based on historical cost result in reporting as income amounts which
do not represent an increase in wealth but which are required merely to stay even.
These inventory and depreciation effects produce a dramatic overstatement of real
income: Nonfinancial corporations reported profits after taxes in 1975 of $60.1 billion as
compared to $37.2 billion in 1965, an apparent 62-percent increase. But, when depreciation
is calculated (under the double declining balance method) on a basis that provides a more
realistic accounting for the current value of the capital used in production, and when the
effect of infiation on inventory values is eliminated, after-tax profits actually were constant:
$35.8 billion in 1975 and $35.6 billion in 1965. However, income taxes were payable on the
fictitious profit element. In effect, then, there has been a rise in the effective tax rate on true
profits from about 43 percent in 1965 to 51 percent in 1975.
The overstatement and overtaxation of operating profits caused by inflation is a problem
for all business which represents yet another barrier to our goal of stimulating a higher rate
of capital formation. Our recommendations to reduce business taxes should be considered
in this context.
Problems of corporate finance
One of the factors which can inhibit the future growth of needed capital formation is the
financial condition of American corporations. Analysis of debt-equity ratios indicates that
corporate balance sheets have shown signs of deterioration over the past decade, which is
a break from the pattern which persisted in earlier periods. Debt has increased dramatically,
both in absolute terms and relative to assets and income. Interest costs have risen appreciably,
roughly doubling over the past 10 years. The combination of increased debt financing and
higher interest rates has resulted in k decline in the coverage ratios reported by American
corporations; that is, the ratio of earnings to interest charges. The ratio of liquid assets to
debt has shrunk. As a result of these developments, there is a serious question about the
potential capability of companies to be able to finance the capital investment that will be
required to achieve our basic economic goals of reducing unemployment and inflation as I
outlined earlier in my testimony.
For many years there has been a discernible trend toward growing dependence by business
on outside funds to finance their growth. The percent of business financing needs raised
externally by nonfinancial corporations declined from 1958 to 1964 and averaged about 30
percent of total needs during that period. However, that trend was reversed beginning in the
mid-1960's and the proportion of external financing rose to over 60 percent in 1974. The
growing dependence on external financing really began in the mid-1960's and has risen
steadily since then. This shift in financing methods from reliance on internal to external
sources of funds follows the pattern of inflation pressures which also began to accelerate in
the mid-1960's. Inflation rapidly increases the costs of new investments and erodes corporate
profits which are a major internal source of capital for financing new projects. The distorting
effects of inflation force companies to rely more heavily on external sources of funds.
Another, and perhaps more important, change appearing on corporate balance sheets is
that the increased emphasis on external financing has been dependent on debt rather than
equity sources of funds. There are several fundamental reasons for the shift toward debt: (1)
Corporate treasurers have been reluctant to raise new equity capital because the sale of
additional shares of ownership dilutes the earnings per share and ownership rights of existing
EXHIBITS
427
Stockholders; (2) in the 1950's and throughout most ofthe 1960's, the cost of debt was low
relative to the cost of equity; (3) because ofthe depressed level of stock prices in recent years,
the shares of many companies have had historically low price earnings ratios—indeed many
stocks are selling at prices below their book values which discourages new equity financing;
(4) the financing costs of arranging new debt issues or loans are usually much less than the
costs of selling new shares of stock and there is less uncertainty about placement of the
securities; and (5) the use of debt enables the borrower to deduct the interest payments from
earnings before determining the amount of taxes to be paid. The tax deductibility of interest
payments creates a major advantage in favor of debt financing and has encouraged the sharp
shift in the debt-equity relationship. Unfortunately, the emphasis on debt commitments has
made our financial system more rigid and more vulnerable to economic shocks.
From 1965 to 1974 nonfinancial corporations raised a total of $267.4 billion of long-term
funds. Long-term debt accounted for 83 percent of that total. This means that the
incremental debt-equity ratio for external funds was an extremely high 4 to 1. The balance
sheet impact of this change was to cause long-term debt outstanding to rise from $141.4
billion to $362.3 billion over the same timespan—a 2 1/2-fold increase in just 10 years' time.
What this means, of course, is that there has been a significant rise in debt-equity ratios over
the past decade. These have roughly doubled for manufacturing firms.
The implication of these fundamental shifts in the patterns of financing is that the structure
of corporate balance sheets is much more brittie and less liquid than it was 10 years ago.
Obviously there is no single level where the corporate financial structure suddenly becomes
too illiquid and inflexible, but at the same time an ever higher burden of debt commitments
relative both to financial assets and to income is a matter for some concern. Coverage ratios
have dropped sharply over the past decade and operating break-even points have risen. This
makes companies less able to withstand even modest-sized recessions. Accordingly, the
potential for bankruptcy has greatly increased across the entire spectrum of U.S. business.
This potential in and of itself will discourage future investment as lenders become more
reluctant to make long-term commitments and companies become less willing to take on
fixed payments of interest and repayment of debt obligations. Some investments which would
have been undertaken in earlier periods will be passed over in the future.
We must achieve fundamental reforms in our tax system to redress the imbalances in
corporate balance sheets and broaden equity ownership—reforms that will encourage the
levels of savings and capital investment that are so vitally needed for our future. The
increasing aversion to risk taking in the lending and investing process must be arrested.
Toward these ends, the administration is proposing to integrate corporate and personal
income taxes. This proposal would eliminate the double taxation of corporate earnings which
results from first taxing corporate incomes and then taxing individuals who receive dividends.
I strongly believe that this proposal—which has already been adopted in most of the other
major industrialized countries—would make a significant contribution toward meeting our
capital needs ofthe future. Moreover, it is the only major tax proposal ofwhich I am aware
that comes to grips with the growing imbalances between corporate debt and equity.
Energy Policy
No subject is more basic to the future of our economic prosperity than energy.
Unfortunately, we have been without a comprehensive energy policy for too long. The oil
embargo of 1973 and subsequent price increases demonstrate how vulnerable we have
become. Neither the supply nor the price of a central ingredient in our economy is under
our control. Our well-being and progress have become subject to the will of others. If there
is a major lesson to be learned from our past energy policies, or the lack of them, it is that
a system of patchwork Government regulations and shortrun measures designed to head off
specific crises leads to more patchwork regulations and short-term measures—not to a viable
energy policy that will produce energy efficiently at the lowest prices to consumers.
The President is committed to ensuring an energy policy that will achieve our goals. In
January 1975, he submitted a set of measures to conserve energy, increase domestic
production and provide for strategic reserves. The Energy Policy and Conservation Act
contains important steps in the right direction, but the penalty for ultimately ending oil
decontrol is first to roll back the average oil price. This action, coupled with the action taken
by Congress to effectively repeal 70 percent ofthe depletion allowance for oil and gas, cannot
help but have a retarding effect on exploration and development. The President is committed
to bringing about decontrol as rapidly as possible, and we must make sure that the 40-month
period for decontrol is not extended.
This legislation is certainly not the end of our efforts to bring about a more rational energy
policy. Prices of our natural gas are still prohibited from rising to their market level in
interstate markets, and shortages will continually plague us unless price is allowed to rise.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Domestic marketed natural gas production has declined by approximately 11 percent in the
last 2 years—a trend that must be reversed.
We have the resources to change this if we will only adopt policies that will develop these
resources. As long as we refuse to remove these Government-imposed controls, and thereby
prevent free market incentives from increasing domestic energy supplies, we will continue
our dependence on foreign imports and our vulnerability to political blackmail. For these
reasons, we are opposed to the provisions of H.R. 10612 which would erect further
impediments by increasing the tax burden on investments in oil and gas.
Further, in order to accelerate the replacement of obsolete oil- and gas-fired electric
generating capacity, I am once more urging this committee to enact the six-point electric
utilities program recommended by the President's Labor-Management Advisory Committee.
Tax Reform
The third major issue before you concerns the ways to enhance the fairness and simplicity
of the tax system.
Over the years, the continuing efforts by various groups to achieve narrow, but often
worthy, objectives through the use of special provisions in the Code have led us to a situation
in which the confidence of the American taxpayer in the very foundation of the Federal
revenue system—the individual income tax—is being seriously threatened.
We are fortunate to have a highly successful tax system, one which has over the years
commanded widespread respect and a high degree of voluntary compliance. We can be sure
that Americans will continue to support this system so long as they have confidence that all
are paying their fair share and as long as they feel they are getting their money's worth.
However, as the system has become increasingly complex, we have begun to erode that basic
faith in the fairness ofthe system. Many people today feel that taxes are being imposed upon
them without their consent, that too many of their fellow taxpayers are escaping their
responsibility through dozens of loopholes, and that the Code itself has become a Byzantine
labyrinth of legal doubletalk.
To be sure, reasonable persons will differ on the importance of particular bits or pieces
of the income tax law. Broad agreement can be reached on the overall objectives toward
which meaningful tax reform strive: The tax system should be fair and equitable, the tax
system should be simple, the tax system should promote efficient use of the Nation's
resources.
I have addressed earlier some of the critical ways in which the tax system needs to be
improved in the interests of efficient allocation of resources. When we focus instead on the
fairness or equity ofthe tax system, we must be concerned with the relationship of tax burdens
borne by households to their ability to pay. Tax burdens should be similar for taxpayers whose
opportunities and capabilities of supporting a standard of living are the same. Further, the
tax burdens of those relatively better off should also be relatively larger. Because of some
of the provisions in the Code, we have reached a situation in which there is a widespread
perception that neither of these criteria is sufficiently well satisfied by our tax law.
As I shall subsequently develop in greater detail, the administration's tax cuts will also
promote fairness and simplicity. Thus, the proposed permanent increases in the standard
deduction and personal exemptions as well as the reduction of the tax rates will more
equitably relate tax burdens to the ability to pay and simplify considerably the preparation
of tax returns. These tax cuts also continue the pattern of reducing the tax burdens of lowincome families—removing many from the tax rolls—while moving to restore the eroded
position of the middle-income group.
The House bill contains many provisions designed to limit the benefits which high-income
individuals receive from certain investment incentives provided in the Code. These
incentives include preferential capital cost recovery deductions to encourage investment in
such activities as real estate, minerals, and farming. The effect of these incentives is a deferral
of taxes which is worth more to taxpayers in the highest marginal tax brackets. Individuals
responding to these incentives are not acting illegally and represent a small fraction of all
taxpayers. However, excessive use of such incentives by high-income individuals may
undermine the progressivity of the income tax as well as its perceived fairness.
In 1973, the administration originated the LAL (limitation on artificial losses) proposal
which limits the benefits of these tax incentives—often called tax shelters. We are pleased
that the House bill generally follows our proposal, and we continue to support the broad
objectives toward which LAL is directed.
Further, to deal with the problem of high-income taxpayers who do not pay their fair share
of tax, the administration is renewing, in modified form, its 1973 MTI (minimum taxable
income) proposal. MTI is an alternative tax which will subject taxpayers to progressive
income tax rates. We continue to feel that this approach is superior to the minimum tax which
is an additional flat rate tax on tax preferences, primarily capital gains. H.R. 10612 would
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429
increase the minimum tax rate and would leave intact its structural deficiency as an additional
tax.
The objectives of equity., simplicity, and efficiency can best be served by appropriate
broadening of the base for the income tax, moving toward a more inclusive concept, and
ultimately leading to a lower structure of rates for all. Whereas the minimum tax represents
an additional layer of complexity in the system, the minimum taxable income concept is
consistent with the long-term program of developing an alternative and more comprehensive
tax base and taxing that new base at lower rates.
While the House bill contains some measures to improve the simplicity ofthe tax system
as it is encountered by the average taxpayer, it need hardly be pointed out that the overall
effect of H.R. 10612 is to add another substantial dose of complexity to the Code. In my view,
we have reached the situation in which the objective of simplicity, which might ordinarily
be viewed as merely a minor or supporting objective ofthe fundamental objectives of fairness
and efficiency, has to be raiised to a level of first importance.
Much ofthe complexity ofthe tax system is encountered by relatively affluent households
or by business firms. Yet, the number of taxpayers affected by such complexities as the
computation of the retirement income credit or the sick pay exclusion has steadily grown.
Furthermore, the complexity of the Code as it confronts the relatively affluent must be of
concern to all taxpayers since it is this very impenetrability of the law which leads to the
feeling of the average taxpayer that his neighbor who can afford highly talented tax advisers
is able to manipulate the system to his advantage. We are, therefore, renewing many of our
1973 simplification proposals including the miscellaneous deduction allowance to substitute
for hard-to-itemize deductions, repeal of the sick pay exclusion, and revision of the
retirement income credit.
Having set the context for our approach to the issues before this committee, let me turn
now to some of the specifics. I shall take up first the main elements of the administration's
tax proposals, discuss the relationship of energy policy and tax policy, and close with a
discussion of tax reform, focusing specifically on H.R. 10612.
II. ADMINISTRATION PROPOSALS
Permanent Tax Reductions
Last October, President Ford proposed that permanent large tax reductions be made
possible for American taxpayers by Congress joining with him to limit the rate of growth of
Federal expenditures. Specifically, the President proposed a $28 billion tax cut linked to the
adoption by the Congress of a spending ceiling of $395 billion for fiscal 1977. That spending
ceiling, and the budget presented to the Congress this January, represent a reduction ofabout
$28 billion from the projected levels of spending that would have applied for fiscal 1977 had
actions to limit Federal spending not been taken.
In my testimony before this committee last December 9,1 set forth in detail the budgetary
and economic trends that had caused the President to conclude that decisive action to regain
control over the budget was immediately required. Today I will summarize briefly the
objectives underlying the administration's proposal for permanent tax reductions. I will also
describe the details of that proposal, as modified to take account of the temporary tax cuts
enacted last December.
Administration objectives
The proposed dollar-for-dollar reduction in Federal taxes and Federal expenditures has
two fundamental objectives. The first is to restore fiscal discipline in the consideration of tax
and expenditure measures; the second is to return more decisionmaking discretion to
individuals and families to determine how they will allocate their incomes and personal
financial resources.
Fiscal discipline.—Our recent fiscal history demonstrates that the failure to link tax cuts
with expenditure cuts, and expenditure increases with tax increases, has resulted in
substituting the capricious tax of inflation for the more equitable, but politically difficult,
legislated tax increase.
In fiscal 1962 the Federal budget exceeded $100 billion for the first time in history. By
fiscal 1971 it exceeded $200 billion. By fiscal 1975 it exceeded $300 billion, and a figure
of $425 billion was in prospect for fiscal 1977 without some restraint—a fourfold increase
in just 15 years! Federal Government outlays increased at an annual rate of 6.6 percent during
the period 1961-66, at 9.4 percent per year during the next 5 years, and at 1 1.8 percent per
year from 1971 to 1976. If fiscal 1977 expenditures should be permitted to grow to $423
billion, the rate of growth will reach 14.3 percent.
Furthermore, the growth in spending has far exceeded the growth in revenues. During
these same years we have posted a string of budget deficits that are unprecedented in
peacetime. The Federal Government (including its agencies) will have been forced to borrow
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1976 REPORT OF THE SECRETARY OF THE TREASURY
over $350 billion from our private money markets over the decade ending with the current
fiscal year. That is over a third of a trillion dollars that might otherwise have been used to
build new plants and to create new jobs in the private sector.
It is no wonder that inflation has been such a severe problem and that interest rates have
risen to historic levels as a natural consequence of these policies. Moreover, an even worse
result of such budgetary practices is that continuing deficits tend to undermine the
confidence of the public in the capacity of our Government to deal with inflation.
Thus, a principal goal of the President's program is to restore the Federal budget to
balance. Reducing the projected fiscal 1977 deficit to $43 billion will make possible a
balanced budget by fiscal 1979. We are, of course, extremely pleased that your committee,
in its budget recommendations for fiscal 1977, has substantially agreed with the President's
target for that year's deficit and, as provided in section 1A of the Revenue Adjustment Act
of 1975, has accepted the basic premise underlying the President's program that expenditure
increases reduce, dollar-for-dollar, the total tax reductions that may be enacted.
Decisionmaking process.—The second objective of the President's program is to return
more decisionmaking discretion to individuals and families to determine how they will
allocate their incomes and personal financial resources. The growth of Federal expenditures
has brought with it increasing Government dominance in basic decisions respecting the use
of our Nation's resources and a corresponding diminution in the role of private decisionmaking.
Over the past 10 fiscal years. Federal expenditures have grown 175 percent while total
GNP has increased about 120 percent—that is, the rate of growth in Government outlays
was nearly 50 percent greater than that of the economy itself
Some analysts have claimed that the surge of Government spending and deficits is only
temporary and that more moderate outlay growth rates and budget balance will return as
soon as economic conditions stabilize. It is true that part ofthe increases in the budget outlays
can be traced to the "automatic stabilizers" that should respond to recession problems. For
example, unemployment compensation benefits have increased from $6 billion in fiscal 1974
to over $19 billion in fiscal 1976. However, a review of the actual budget figures clearly
indicates that large spending increases have been occurring across the traditional programs
ofthe entire Federal Government. These spending increases cannot realistically be regarded
as "temporary" since Government programs are rarely eliminated or curtailed.
Our choice, then, is clear. We can regain control over Federal spending, stop the trend
toward the Federal Government's direction of the use of an ever increasing portion of our
national wealth, and restore a greater share in decisionmaking to individuals and families
through large permanent tax cuts. Or, we can continue down the road ofthe past which leads
toward even larger budgets, continuous deficits, and increasing domination of Government
over our economic affairs.
Description of administration proposal
Let me turn now to the specifics of the administration proposal for permanent tax
reductions. The enactment of the Revenue Adjustment Act of 1975 has made it impossible
to apply the President's full proposed tax cuts for all of 1976. We are, thus, proposing distinct
liability changes for 1976 and 1977, which have the combined effect of applying the
administration's permanent tax reductions effective July 1, 1976.
Calendar year 1977 and beyond.—The administration's permanent program has the
following major features: An increase in the personal exemption from $750 to $1,000;
substitution of a single standard deduction—$2,500 for married couples filing jointly and
$ 1,800 for single taxpayers—for the existing low-income allowance and percentage standard
deduction; a reduction in individual income tax rates; a permanent 10-percent investment
tax credit; a reduction in the maximum corporate income tax rate from 48 percent to 46
percent and making permanent the current temporary tax cuts on the first $50,000 of
corporate income; a program to stimulate construction of new electric utility facilities to
insure that longrun economic growth is not limited by capacity shortages in the production
of electricity.
Calendar year 1976.—Since taxpayers compute their taxes on a calendar year basis, the
administration is proposing tax liability changes for calendar year 1976 that mesh the
permanent proposal with the Revenue Adjustment Act of 1975 and approximate the effect
of applying in 1976 the current temporary tax cuts for 6 months and the administration's
permanent tax cuts for 6 months. The administration's full proposed tax liability changes will
apply for 1977 and subsequent years.
The administration's proposals would result in lower withholding tax rates (and higher
take-home pay) effective July 1, 1976. The lower withholding tax rates would reflect the full
impact of the tax cuts proposed by the President last October and would remain constant
in 1977.
The specific tax liability provisions that will apply in calendar year 1976 are:
EXHIBITS
431
Tax cuts (compared to 1974
law)
For individuals:
A personal exemption of $875
A per capita exemption credit of $17.50, with alternative taxable income credit
equal to 1 percent of the first $9,000 of taxable income (i.e., maximum credit
equals $90)
Standard deduction changes
A low-income allowance of $2,3(K> for joint retums and $1,750 for singles; a
percentage standard deduction of 16 percent of adjusted gross income with a
maximum of $2,650 for joint retums and $2,100 for singles; an average of the
rate structures under present law and the President's permanent tax cut
program
An eamed income credit equal to 5 percent of eamed income with a maximum
of $200, phasing out at $8,000 of eamed income or adjusted gross income,
whichever is greater
Total individual cuts
$ 5.4 billion
4.9 bilUon
3.9 billion
3.6 billion
.7 billion
18.5 billion
For business:
A reduction in corporate rates
(The rates will be 20 percent for the first $25,000 of taxable income, 22
percent for the second $25,000 of taxable income, and 47 percent for taxable
income above $50,000.)
The program to stimulate constrnction of electric facilities, effective July 1,
1976
Total individual and business tax cuts
Individual tax cuts.—The recently adopted budget recommendations of your committee
and of the House Ways and Means Committee contemplate that reductions in taxes from
1974 law will be provided through calendar year 1977, without specifying the details of those
reductions. Consistent with that approach, and in recognition that the so-called temporary
tax reductions are in fact in process of becoming permanent, we believe it is essential to face
the necessity for making fundamental decisions regarding the permanent structure of the
individual income tax, as opposed to the patchwork approach that has prevailed to date.
The administration's proposed individual tax reductions are designed to achieve two
important goals. The first goal is to simplify the existing tax structure by providing a single
standard deduction as a substitute for the present low-income allowance and maximum
standard deduction. The second goal is to begin the difficult, but most vital, task of realining
the tax rate structure to relieve the middle-income taxpayer from the onerous tax burden
imposed as a result of industriousness and thrift.
Let me elaborate: Simplification should begin with those provisions that affect the greatest
number of taxpayers. The provision of a single standard deduction would in itself be a major
simplification. In contrast, the addition of the per capita exemption credit has been a major
complication, and many taxpayers are failing to claim the credit. The situation will be
worsened by the addition ofthe alternative taxable income credit by the Revenue Adjustment
Actof 1975.
Because of rising productivity, but more particularly because of the effect of inflation on
nominal money incomes, families comprising the middle and upper-middle classes of society
have been moved up the tax scales to positions previously occupied by only the top 1 or 2
percent of American families. As a result, the middle-income taxpayers find that larger and
larger tax bites are being taken from their paychecks and entrepreneurial incomes. For this
particular group of taxpayers, the rewards of enterprise, of sustained effort, and of the
accumulation of capital have been eroded. As we all benefit from the vigor of this group,
so are we hurt when its vitaliity is threatened. The administration's proposals are designed
to reverse the trend, by providing relief to the middle-income taxpayer while more than
preserving the gains of the lower income taxpayer.
Business tax cuts.—The Tax Reduction Act of 1975 increased the nominal rate of the
investment credit to 10 percent from 7 (4 percent in the case of utilities) for the years 1975
and 1976. The President's proposal would make the increase permanent. It is well known
that any tax provision intended to encourage investment is most effective when investors may
regard it as permanent, for then they may take it into account over the full riange of their
investment planning horizons, which are frequently 10 years or longer. As part of a program
of structural fiscal change, the investment credit helps offset the anti-capital-formation bias
of the Federal tax system and should have permanent status.
The Tax Reduction Act, for the year 1975, raised the corporation surtax exemption to
$50,000 from $25,000, and lowered the tax rate on the first $25,000 of taxable income from
22 to 20 percent. The Revenue Adjustment Act of 1975 extended this tax reduction an
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1976 REPORT OF THE SECRETARY OF THE TREASURY
additional 6 months. Again, the President's proposal would make this change permanent.
In addition to this modification of the corporation tax schedule, the President proposes
to reduce the top rate 2 points so that the maximum applicable tax rate would be 46 percent.
Until we, working with the committees of Congress, can effect integration ofthe corporation
and personal income taxes, this modest relief of the extra burden of tax should cause
beneficial increases in the rate of capital formation.
Finally, the President's proposals include a six-part tax incentive program for electric
utilities to accelerate the replacement of facilities now made obsolete by the higher costs of
fossil fuels and to encourage the application of more adequate capital cost pricing formulas
by utility commissions.
Job creation incentives
As I mentioned earlier, this administration is committed to two fundamental economic
policies: Sustained noninflationary economic growth and jobs for all who seek work. The
proposed tax cuts, coupled with the corresponding reduction in the growth of Federal
spending which I have just described, go a long way toward achieving our goal over the long
run. But tax cuts alone are not enough. There is a pressing need for more immediate measures
to alleviate the unemployment problem that is particularly severe in certain segments of our
industry and in certain areas of our Nation. What we need and must do.is to create a favorable
climate for private industry to create more jobs. This, we believe, can best be accomplished
by the adoption of tax incentives. As the President stated in his state ofthe Union message,
"One test of a healthy economy is a job for every American who wants to work.
Government—our kind of government—cannot create that many jobs. But the Federal
Government can create conditions and incentives for private business and industry to make
more and more jobs."
The administration has proposed just such a job creation incentive. Introduced in the
House as H.R. 11854, the proposal will permit rapid depreciation for businesses which
construct new plants or expand existing facilities in areas where the unemployment rate
exceeds 7 percent, or purchase equipment for use in these new or expanded facilities. The
tax incentive approach to provide jobs through the private sector is preferable to creating
public service jobs. Public service jobs typically are temporary, often not productive, and
subsequently require the recipient to find permanent employment after the program has been
terminated. Public service jobs also typically require bureaucracies that are difficult to
establish and difficult to liquidate. The purpose ofthe administration's proposal is to establish
rewarding, permanent employment opportunities through the private sector.
The administration's proposal has the following advantages:
First, the stimulation of plant construction and expansion, and equipment purchases will
lead to the creation of new and permanent jobs, in the private sector, in areas where they
are needed most.
Second, we expect the proposed tax incentive will provide substantial impetus for
businesses to embark upon projects now deferred and to undertake new projects which
otherwise might not get started.
Third, the administration proposal will provide immediate benefit to the construction
industry, one ofthe most depressed in the economy. The plan will stimulate construction in
areas where that industry has been hardest hit by the recession and thereby provide jobs for
unemployed persons concentrated in those areas.
Fourth, the proposal will also encourage capital investment. While not directly affecting
the overall supply of capital, the plan will provide an incentive for capital spending to create
jobs. By improving the cash flow of companies, it will encourage investment in 1976.
Let me turn now to some ofthe specifics ofthe administration's proposal.
Timing of plan
The plan is proposed as a temporary measure, pending return to full employment in an
economy that is steadily recovering from the recession. Therefore, investment projects must
begin during the year beginning on January 19, 1976, and must be completed within 36
months; that is, facility construction must be commenced, or production equipment ordered,'
on or after January 19, 1976, and before January 20, 1977, and must be completed and
placed in service within 36 months thereafter.
This time period has been chosen for several reasons. The requirement that projects be
begun in the year starting January 19, 1976, will result in immediate employment
opportunities—particularly in the construction sector. The plan will also have immediate
employment effects in the capital goods industries, which also have been badly hit in the
current recession and are operating at well below normal utilization rates throughout the
country. Furthermore, requiring projects to be completed and placed in service within 3 years
will avoid the risk of unduly extending the temporary relief measure. The bulk of construction
EXHIBITS
433
and equipment manufacture will take place in 1976 and 1977, when capacity will be
available. Moreover, because of its short time period, the plan will not threaten the relocation
of projects already planned.
Qualifying location
Facilities and equipment will qualify for rapid depreciation under the plan only if
constructed and placed in service in areas which had an average unemployment rate of 7
percent or more for calendar year 1975. Geographic areas with high unemployment will be
defined by the Department of Labor in accordance with the functional definition of labor
market areas (LMA's) presently used by the Department of Labor in the development of
unemployment statistics. Areas ofa State that are outside defined LMA's will be considered
as a whole, and if this portion of a State had an unemployment rate of 7 percent or more
in 1975, it also will be eligible.
With the 7-percent trigger, about two-thirds ofthe metropolitan areas ofthe country will
be eligible for the plan. Eligible areas are found in 42 States, plus the District ofColumbia
and the Virgin Islands, and include about 80 percent of the labor force.
According to the Department of Labor, since the middle 1960's there has been a dramatic
shift toward greater regional variation in unemployment. Pockets of high unemployment are
not only persisting but increasing. By focusing our efforts on pockets of high unemployment,
we hope to provide stimulus to areas with the greatest need. A desirable byproduct of these
efforts is the potential benefit to the Nation as a whole because equipment orders will flow
to productive areas, whether or not they also may be an area eligible for relief
Application to real estate
The administration proposal will apply to any commercial or industrial facility located in
a qualifying area, the construction of which is started and finished within the time period
previously described. Commiercial and industrial facilities include factories, warehouses,
shopping centers, and office buildings. Distinct additions to existing facilities will also qualify,
but not mere alterations or improvements.
Certain limitations will be applicable to the proposal. Thus, the tax incentive will not be
applied to facilities used for lodging or to governmental facilities or facilities of certain taxexempt organizations. Moreover, the proposal will not apply to any residential real estate
activities. Housing and residential construction have received substantial stimulus from
recent actions by the Department of Housing and Urban Development and will receive
additional stimulus from other proposals made by the President in his state of the Union
message. This particular proposal seeks comparable incentives for the nonresidential sector.
Amortization of qualified real estate will be allowed over a period equal to one-half the
shortest life which a taxpayer may now claim under the provisions of the Internal Revenue
Code and the regulations. This is a very substantial tax incentive. For example, in the case
ofa building with a 30-year useful life, the taxpayer will be able to write off one-third ofthe
cost in the first 5 years as cornpared with 23 percent under the most accelerated method of
depreciation now available. Recapture of depreciation upon a disposition of qualified real
estate, under the rules of Code section 1250, will apply.
Application to equipment
The proposal will also apply to equipment which is ordered during the year beginning
January 19, 1976, and placed in service within 36 months thereafter in a facility or addition
which also qualifies for the incentives under the administration's proposal. Equipment placed
in existing facilities in areas of high unemployment will not qualify. Nor will over-the-road
equipment or rolling stock.
Under the proposal, at the taxpayer's election, straight line amortization of qualified
equipment will be allowed over 60 months commencing on the date the equipment is placed
in service. For example, the amortizable cost of equipment with a 10-year useful life could
be written off in 5 years compared to about 67 percent under the double declining balance
method which would now be available. For this purpose, the definition of equipment—as
distinguished from real estate—will be the same as is used in the investment credit provisions.
Here, too, the depreciation recapture rules will apply upon a disposition of the property.
Notwithstanding the election to amortize qualified equipment over 5 years, the full
investment tax credit will still be allowed if the useful life of such equipment is 7 years or
more. This is a most significant benefit which will make the election to amortize much more
attractive than if the electing taxpayer were limited to two-thirds of the investment credit
as is the case under current law with respect to property with a useful life of 5 years.
This proposal will not apply to those electric utilities covered by the administration's sixpoint utility program which I will discuss later.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Revenue estimates
The revenue cost of the proposed job creation tax incentive is estimated at $300 million
f6r fiscal year 1977, $650 million for 1978, $900 million for 1979, and $1 billion for 1980.
However, over the long run, the same amount of taxes will be paid because, generally,
accelerating depreciation of capital investment simply defers taxes.
Broadened Stock Ownership Proposal
I would like to turn now to the subject of broadened stock ownership in the United States.
The administration believes that broadening the private ownership of business will further
an American tradition, and thereby strengthen the economic, social, and political base of
support for our free enterprise system. In this respect, it is important to encourage
participiation by low- and middle-income working Americans in private ownership.
Widespread stock ownership among all Americans will promote stability in the financial
markets, provide individuals with a greater sense of participation in the free market system,
and give them an opportunity to build a reasonable estate for themselves and their heirs.
There are many approaches which can foster broadened stock ownership through the tax
system. In his state ofthe Union address, the President proposed the adoption of a broadened
stock ownership plan (BSOP). This plan would have three principal characteristics which
the administration deems important to any program designed to encourage broadened stock
ownership. First, the plan should be available to all Americans, whether self-employed,
employed by a corporation, or employed by the government. Federal, State, or local. Second,
participation should be voluntary, but the plan can be established by individuals or by their
employers through payroll deductions. Third, participants in a BSOP should have a choice
as to their investment in common stocks.
Other aspects of the plan include the following:
First, contributions should be deductible from taxable income, with participation being
restricted to individuals in the low- and middle-income ranges and limited to the maximum
amount eligible for deduction. In addition, there would be a phaseout of the amount
deductible at the higher income levels. For example, a taxpayer might be allowed to deduct
$ 1,500 a year or, if less, 15 percent of his compensation, subject to a phaseout in the case
of compensation between $20,000 and $40,000.
Second, income earned by a BSOP would be exempt from income taxation until
withdrawn from the plan. Upon withdrawal, a participant would be subject to a current
tax at capital gain rates to provide participants with the benefits normally associated with
the accumulation of capital values. However, there would be a holding period requirement.
Thus, funds held in a BSOP would have to remain invested for at least 7 years. Premature
withdrawals would be subject to a penalty tax in order to discourage early withdrawals.
Third, the contributions made to a BSOP would have to be invested in common stocks,
the selection ofwhich would be entirely up to the participant. He could, for example, select
individual stocks or mutual funds.
Under the administration's proposal, taxpayers could establish a BSOP on or after July 1,
1976, and qualify for a full tax deduction for calendar year 1976. Further details of the BSOP
proposal will be worked out with Congress.
It should be noted that BSOP's would have no effect upon a taxpayer's ability to participate
in any pension or profit-sharing plan established by his employer, or to establish his own
individual retirement account or Keogh plan. The contemplated statutory pattern for BSOP's
would be unrelated to deferred compensation, retirement, or employee benefit plans.
Electric Utilities Tax Program
The electric utilities tax program is another important part ofthe administration's program.
It not only will serve as a stimulus to construction of additional facilities by electric utilities,
but will also provide a means to minimize imports of foreign oil and to insure adequate
electric generating capacity in the several years ahead. The construction activity will help
put many people back to work in the near term and, in the longer run, will help insure that
economic expansion will not be limited by energy shortages. In sum, the program is highly
important to the national economy.
Background
The.proposal I presented last July 8 before the House Ways and Means Committee, and
before your committee on December 9, represents the recommendations of the President's
...abor-Management Committee, and the President has endorsed them. The need for this
legislation has not lessened since I last urged its adoption. In summary, the reasons for this
legislation are:
1. Financing difficulties have prevented the construction, or completion, of badly
needed nuclear and coal-fired plants.
EXHIBITS
435
2. The need to minimize our dependence on foreign oil demands adoption of means to
increase electric generating facilities fueled otherwise than by petroleum products.
3. The energy shortage must be met. Insufficient electric power will inhibit construction
of new manufacturing and commercial facilities. This cannot be allowed to happen.
This committee is acutely aware of the nature of our overall energy shortage and the
adjustments that our economy must make. We will never again want to rely on foreign oil
as we did for so many years. We must greatly increase our domestic capacity for the
generation of energy, and we must begin to make progress immediately. The indispensable
core of any sensible energy program is the construction of electric power facilities which do
not operate on petroleum products which, today, means primarily coal, nuclear, and
hydroelectric. But these electric power facilities will not come off the shelf in someone's
store. The leadtimes required to construct these generating plants range up to 7 or 8 years.
Generating plants are complex and their construction cannot be turned on and off without
incurring major expense and causing great delay. The coal- and nuclear-fueled electric power
plants that we defer today will be missing tomorrow and will prolong our dependence on
foreign oil imports.
A recapitulation ofthe problems ofthe electric power industry may be helpful. When fossil
fuel prices started their rapid rise in mid-1973, the consequence for electric utilities, whose
rates are regulated, was a shrinkage in the residual cash flow. This reduced the return to
equity and made increasingly difficult the simultaneous (1) maintenance of dividend
payments which were needed to continue to attract and hold equity capital, (2) payment of
interest on obligations to bondholders, and (3) carrying out of investment programs to
replace existing capacity as well as to add additional capacity needed to meet forecast growth
in demand for electric power.
This squeeze on the electric power industry, resulting from what is cornmonly called
regulatory lag or the slow adjustment of allowable prices to reflect changed cost conditions,
was exacerbated by two other factors: The actual costs of replacement capital were pushed
up by inflation while the allowances for this portion of capital cost embedded in utility rate
structures remained unchanged; and interest rates on refunding and new issues ofbonds rose
to incorporate the inflation premium. For many utility companies the resultant drop in
realized return to equity owners was so severe that dividend payments were suspended and/or
construction programs were canceled or suspended.
It is true that the problems visited on the utility sector differed only in degree from those
faced by the entire private sector. Unregulated businesses were also caught in a cash-flow
squeeze as their costs rose more rapidly than the prices they could recapture in the market.
But, in the unregulated sector, restoration of balance between prices and costs has been
quicker, not only because price regulation procedural lags are generally absent, but also
because their capital costs are generally a smaller fraction of total costs.
Specifics of program
I would now like to turn to the specifics of the six-point proposal.
First, the proposal would increase the investment tax credit permanently to 12 percent for
all electric utility property except generating facilities fueled by petroleum products. Under
current law, utilities, like other taxpayers, are eligible for a maximum investment tax credit
of 10 percent. Although the 10-percent credit is scheduled to revert to lower rates at the end
of this year, the administration has proposed the higher rates be made permanent.
Second, the proposal would give electric utilities full, immediate investment tax credits on
construction progress payments for construction of property that takes 2 years or more to
build, except generating facilities fueled by petroleum products. Under present law, utilities,
like other taxpayers, are entitled to investment tax credits as they make progress payments
on long-term construction projects. However, the Tax Reduction Act of 1975 provided a 5year phase-in of construction progress payment credits so that entitlement to the full
investment credit at the time a progress payment is made will not occur until 1980.
These proposed changes with respect to the investment credit would be limited to those
utilities which normalize the increase in the investment credit for ratemaking purposes and
which are permitted by their respective State regulatory agencies to include construction
work in progress in their rate base for ratemaking purposes. "Normalization" means
reflecting the tax benefit for ratemaking purposes pro rata over the life of the asset which
generates the benefit instead of recognizing the entire tax benefit in the year the utility's taxes
are actually reduced. In the absence of normalization, the entire tax benefit would flow
through immediately in the form of reduced utility rates for consumers, and no real economic
benefit would result for the utility.
Third, the proposal would permit electric utilities to begin depreciation of major
construction projects during the construction period. Under present law, a deduction for
depreciation is allowed commencing when a depreciation asset is placed in service. The
depreciation deduction would be based on;the accumulated construction costs which qualify
436
1976 REPORT OF THE SECRETARY OF THE TREASURY
for the investment credit under the construction progress payment system enacted as part
ofthe Tax Reduction Act of 1975. Accelerated methods of depreciation would be permitted,
and the depreciation deduction would be based on an assumed useful life which would
include the remaining construction period plus the estimated useful life (or asset depreciation
range period) attributable to the property as ofthe time it is placed in service. Depreciation
after the property is placed in service would be reduced by depreciation taken during the
construction period.
Electric generating facilities fueled by petroleum products would not qualify for this
construction period depreciation. Further, construction period depreciation would be
conditioned on the utility's normalizing the benefits ofthe provision for ratemaking purposes
and upon the agreement of the relevant State regulatory agency to include construction work
in progress in the utility's rate base for ratemaking purposes.
Fourth, the proposal would provide for extending to January 1, 1981, the period during
which pollution control equipment installed in a pre-1969 plant or facility will qualify for
rapid 5-year straight-line amortization in lieu of normal depreciation and qualification for
the investment credit. Section 169 of the Internal Revenue Code, which provides for this
treatment of pollution control equipment, expired December 31, 1975, and the proposal is
to extend the qualification period an additional 5 years.
Fifth, the proposal would provide an election of 5-year amortization in lieu of normal
depreciation and the investment credit for the costs of converting an electric power
generating facility fueled by petroleum products into a facility fueled by nonpetroleum
products, or for the cost of replacing petroleum product-fueled facilities.
Sixth, the proposal would permit a shareholder ofa regulated electric utility to postpone
tax on dividends paid by the utility on its common stock by electing to take additional
common stock ofthe utility in lieu of a cash dividend. The receipt ofthe stock dividend would
not be taxed. The amount of the dividend would be taxed as ordinary income when the
shareholder sells the dividend stock, and the amount of capital gain realized on the sale would
be decreased (or the amount of capital loss increased) accordingly. Dividend stock would
be deemed sold by the shareholder before any other stock of the same utility.
Revenue estimates
Altogether, the six-point electric utilities tax program will reduce tax revenues by an
estimated $200 million in the transition quarter of 1976 and $800 million in fiscal 1977. The
longrun benefits are an orderly restructuring of the American electric utility plant to
deemphasize the use of petroleum-based fuels and an acceleration of annual investment to
meet future electric power needs of the economy.
Proposal For Integration of Corporate and Personal Income Taxes
I would like to turn now to a specific proposal to integrate corporate and personal income
taxes. In my testimony before the House Ways and Means Committee last July, I discussed
the details of such a proposal. Much of what 1 will present today is drawn from that testimony.
I will also attempt to answer some of the criticism which has been leveled at the proposal.
Perverse effects of the double tax on corporate dividends
Under our system of taxation, income earned by corporations is taxed twice: first to the
corporation and then again to the shareholder, if and when it is distributed as a dividend or
realized on sale. The existence of this two-tier tax has a number of perverse results:
1. The system reduces rates of return for all savers. Viewing the economy in the aggregate,
it is not just corporate shareholders who have lower profits because of the double tax on
dividends.
With due allowance for risk, no one would invest in corporate equities if the return to him,
after payment of tax at the corporate level, differed from that which he could earn from
investment in real estate, bonds, or other assets. In a competitive capital market, there are
constant flows of capital from one kind of investment to another until the after-tax rates of
return are comparable. If investment in corporate equities is less profitable, then capital will
flow out of such investment (or less capital will flow in). If there is less demand for stock
on the stock exchange, the price of stock will fall and yields will rise. At the same time, capital
which is diverted from corporate stock will flow into other kinds of investment. Money in
savings accounts will increase and there will be a greater demand for bonds and other debt
instruments and a greater demand for investments in assets and enterprises not held in
corporate form. That greater demand for that kind of investment will in turn depress the
return on it. For example, when more people wish to have money in savings accounts, the
interest rates which banks are willing to pay falls.
Since investors have had 25 years to accommodate to the nearly 50-percent rate of
corporate tax, yields to investors after the tax have surely been equalized with those
elsewhere. This means that the corporate tax has reduced the yields on all forms of saving.
EXHIBITS
437
and that eliminating the extra tax on dividends will reverse the process, raising rates of return
to all savers.
2. By imposing an extra penalty on the rewards for saving, the existing system restrains
the capital expansion needed to meet our economic goals. I have already detailed the crucial
importance of increased capital formation. Integration will help to achieve our needed
increases in the capital stock in three ways:
First, domestic savings will respond to the increased return. The response may be small,
but even a modest change in savings habits would lead to a substantial savings increase
in the aggregate. Several recent econometric studies of savings behavior have shown this
saving response to be positive and significant.
Second, with a higher return to capital in the United States, relatively more ofthe world's
investment will take place here. Less domestic savings will flow abroad, and more
investment by foreigners will be undertaken here.
Third, the method of integration which we propose allows deductions to the corporation
for a portion of dividends currently paid. This makes available additional cash flow to
businesses for immediate investment. While in the long run this aspect ofthe policy is less
important for capital formation than is increased profitability, additional cash flow may
help to speed the adjustment to the larger volumes of capital investment.
3. The extra tax on corporate income leads to economic inefficiency by requiring that
prices of corporate sector products be relatively higher than prices of products produced by
unincorporated business. The products of corporations must sell at prices high enough to
cover the additional burden of the corporation income tax or else corporations would be
unable to attract and hold the capital needed to produce those goods.
This tilting of prices makes corporate products relatively less in demand than they would
be in the absence of the extra corporate tax. Economic activity will, of course, be carried
on in the corporate form in order to aggregate the large amounts of capital required and to
assure continuity of managemient. Heavy manufacture, minerals development and production, and the utilities could operate in no other way, and there are many other activities for
which the sheer economies of scale outweigh the advantages of personal management and
the tax savings possible in a proprietorship or partnership. But, the.inefficiency of the
corporation income tax is that it makes it more expensive to realize these advantages of
corporate organization.
Consequently, as measured by the prices we are willing to pay in the marketplace, we have
too little output from the corporate sector and too much from elsewhere. If we could
eliminate the cause of this misallocation of resources, we would clearly be better off: We
would have more of the things we currently value more highly, fewer of the things we value
less. Professor Harberger, who has pioneered the analysis of this waste, has estimated that
the value of this loss to society is equal to 0.5 percent of our national product annually.
4. The double tax is an extra inducement for corporations to seek debt financing, rather
than increased equity capital, because the tax applies only to the income attributable to
equity investment. Corporations must earn enough gross income to cover the interest
payments made to compensate bondholders and other creditors for the savings which they
have supplied. But interest payments are deductible at the corporate level and thus—unlike
dividends—are not included in the net income which is taxable to the corporation. If we were
able to remove the extra tax on dividends, we would make equity financing much more
attractive and would reverse the steep and dangerous increase in debt-equity ratios of recent
years. I have already indicated how high debt-equity ratios make businesses extremely
vulnerable to business cycle changes and that a high proportion of debt in the financial
structure will further discourage investment by introducing added uncertainty for lenders and
borrowers. This is just another example of how the tax structure hinders the efficient
operation of markets, in this case by increasing the cost of equity compared to debt capital.
We must remove this tax impediment to business expansion and economic growth.
5. A double corporate tax creates a market bias against dividend yielding stocks. So long
as earnings are retained, the second tax on dividends need not be paid. If the stock is
ultimately sold, its value will generally be higher because of the retained earnings, but the
capital gains tax on the increase in value is imposed at preferential rates. Thus, the second
tax in the case of retained earnings may be substantially lower than in the case of dividends.
Consequently, companies like utilities which have traditionally relied on high dividend
payouts to attract the capital needed for expansion are placed at a substantial disadvantage
because the double tax imposed on their income is greater than the double tax on companies
which retain earnings and do not distribute them. Moreover, moderate income investors who
prefer dividends to capital gains are discouraged from stock ownership. Elimination of the
second tax would greafly assist utilities and other companies similarly situated in raising
equity money. Given our energy problems, this is a particularly important point.
6. The double tax places a heavy penalty on corporate decisions to distribute earnings.
In an ideal free market, the tax system would be neutral with respect to retention or
438
1976 REPORT OF THE SECRETARY OF THE TREASURY
distribution of earnings. Corporate managers would be led to retain earnings only if they
would use them more productively in their businesses than their stockholders might use them
in other investments. Integration would remove the tax reasons for retaining rather than
distributing earnings. At present, the tax penalty on paying out earnings puts corporate
managers under great pressure to do almost anything that might be productive with retained
earnings rather than pay them out. The double corporate tax thus tends to "lock in"
corporate capital and keep it out ofthe capital markets which allocate capital more efficiently
among uses.
International comparisons
For many years our system of imposing a double tax on corporate profits by taxing them
at each of two tiers was also widely used abroad, and it is often referred to as the classical
system of corporate taxation. So long as tax rates at the corporate level remained relatively
low, the system did not create undue mischief In the United States, the corporate tax rate
was less than 15 percent as late as 1935; it rose to 40 percent during World War II, dropped
back to 38 percent in the last ofthe 1940's, and rose again to 52 percent during the Korean
war. The current 48-percent rate was enacted in 1965. Thus, basically, it was only as recenfly
as the Korean war in the early 1950's that corporate rates reached their present high levels.
. Similarly, corporate rates have been rising in other countries, but not so fast as in the
United States. As rates have risen abroad and as the need for economic development and
investment increased in other countries, changes were made in their corporate tax system.
Today, virtually all of our major trading partners eliminate much of the double tax. Such
systems are in effect in Canada,.the United Kingdom, France, Germany, Belgium, and Japan.
The European Economic Community has adopted a resolution urging all of its members
to adopt such a system and is presently engaged in an effort to promote greater uniformity
of existing systems and to harmonize the differences that remain. Since our two-tier tax
system results in higher prices for corporate products, and our major trading partners have
taken steps to eliminate this extra tax burden, we have placed U.S. corporations at a
competitive disadvantage in international markets.
The administration's integration proposal: combination of dividend deductions and
stockholder credits
We propose eliminating the double tax on income from savings invested in corporate
equity and to do so in six phases, with the first phase effective January 1, 1978. The remainder
would phase in equally over the succeeding 5 years. The proposal would, thus, have no effect
on the budget for fiscal 1977.
We propose to eliminate the double tax by combining the two mechanisms ofa dividend
deduction and a stockholder credit. When fully effective, the credit at the stockholder level
in combination with the dividend deduction at the corporate level will completely remove
the double tax on dividends.
The dividend deduction.—Approximately half of the total relief would be accomplished by
a dividend deduction. Thus, ultimately there would be a deduction from corporate taxable
income of roughly 50 percent of the dividends distributed. The reason that I say "roughly
50 percent," rather than exactly 50 percent, is that in order for the mechanism to achieve
its objective with the maximum simplicity, the fraction deductible at the corporate level must
be geared to the stockholder credit procedure.
The accompanying table illustrates the effect of dividend deductibility at the corporate
level.
Illustrative computation of 50 percent corporate dividend deduction
Proposed law with
-
Present
lawl
A. Corporate income subject to tax
B. Dividend paid
C. 50 percent dividend deduction (50
percent of line B)
D. Taxable corporate income (line A lineC)
E. Corporate income tax (50 percent of
line D)
F. Corporate income after tax (line A
- line E)
G. Retained Eamings (line F - line B)..
Same
dividend payout
Maximum
dividend payout
$100
50
$100.00
50.00
$100.00
66.67
-
25.00
33.33
100
75.00
66.67
50
37.50
33.33
50
0
62.50
12.50
66.67
0
I Assumes, for simplicity, a 50-percent corporate tax rate.
EXHIBITS
439
For simplicity, we assume the corporation earns $ 100, that the corporation tax rate is 50
percent, and that 50 percent of the dividends are deductible at the corporate level in
computing the corporation income tax. Under present law, as is shown in the table, the
corporation pays $50 in tax and has $50 left over, to retain or pay out in dividends. Under
the proposed dividend deductibility procedure, if the corporation merely continues to pay
out $50, its tax payment is reduced to $37.50, for its taxable income is $100 less 50 percent
of $50, or $75, and the tax rate is 50 percent. Without changing its dividend payout, the
corporation has $12.50 of additional retained earnings. On the other hand, if the corporation
wishes to pay out the maximum amount of its earnings and retain nothing, it may pay out
$66.67 in dividends and pay tax of $33.33. In this instance, the taxable income at the
corporate level is $66.67—$100 less half the $66.67 in dividends paid—and it pays $33.33
in tax. Thus, the dividend deductibility feature ofthe administration's proposal provides great
fiexibility to corporate management in adjusting its financial policy to the overall reduction
in corporate tax burden realized by integration.
The dividend deduction provided for the first year, 1978, would be that percentage which
produces a net reduction of approximately $2.4 billion in corporate tax liabilities for that
year.
Additional dividend deductions required to bring the total deduction up to approximately
50 percent of dividends distributed would be phased in from 1979 through 1983, causing the
revenue loss to increase at a rate of about 1 billion per year (at 1978 levels).
The stockholder credit.—The balance of the double tax on dividends would be eliminated
by a stockholder credit to be phased in equally over the 5-year period from 1979 to 1983
inclusive. This would cause a revenue loss in each of those years, increasing at the rate of
about $1.5 to $2 billion a year (at 1978 levels).
The credit mechanism would be quite simple. The taxpayer would "gross u p " his dividend
by adding to his taxable income an amount equal to 50 percent ofthe dividends he receives
and would then take a tax credit equal to the gross-up. This is precisely the same procedure
as the taxpayer follows with labor income subject to withholding. The taxpayer adds the
withheld income tax to his take-home pay, calculates the tax on the gross amount, then
subtracts the taxes withheld. In the case ofthe proposed stockholder credit, the taxpayer adds
to his take-home dividends corporate taxes paid by the corporation on his behalf, calculates
his tax liability on the gross amount, and then takes a credit for the tax withheld for him by
the corporation.
We may illustrate the operation of this portion of the proposal by extending the prior
example to the cases of stockholders subject to personal tax at 20 to 50 percent in the
following table.
Under present law, the 20-percent stockholder receives $50 in dividends, pays $ 10 in tax,
and retains $40. In effect, the combined corporate and personal tax rate he has paid is 60
percent. If the corporation still pays out $50 under the proposed integration procedure, the
stockholder would add $25 to the $50—that is, he could gross up for the 50-percent
corporation income tax—and compute a $15 tax liability on the entire $75. He would then
be permitted to take a tax credit for $25, receiving a net refund of $10. Altogether, this
stockholder would net $60 after tax, 50 percent more than under present law, and
additionally have a claim to $12.50 of retained earnings. And if the corporation maintains
its policy of paying out all income possible, the 20-percent stockholder would receive a
dividend of $66.67 which he would gross up to $100 to include the $33.33 tax paid by the
corporation, and compute his tax at $20 which would entitle him to a refund of $ 13.33. This
refund plus the $66.67 in dividends received yield the 20-percent taxpayer a total return of
$80. This is exactly what he should net from a $ 100 income, given that he is subject to a 20percent tax rate: and this is twice his yield from such an income under present law. In effect,
this taxpayer's burden on income earned by the corporate enterprise has been reduced from
60 to 20 percent, and his return has doubled.
The table shows similar results for the stockholder who is a 50-percent taxpayer. Under
present law, he nets $25 of the original $100 income, a tax rate of 75 percent. Under
integration, with the same $50 dividend payment, he nets $37.50 plus retaining a claim to
the $ 12.50 of retained earnings; and with maximum payout, he nets $50 after taxes. Again,
the proposal imposes only the stockholder's own tax rate on the income of the corporation
he owns, so that with full payout of corporate income the reduction in his tax rate is from
75 to 50 percent, and his return is also doubled.
As a matter of arithmetic, a 50-percent dividends paid deduction and a 50 percent grossup and credit, when combined with a 50-percent corporate rate, exactiy eliminates the
double tax. With a 46- or 48-percent corporate tax rate, either the 50-percent dividends paid
deduction or the 50-percent gross-up and credit must be adjusted slightly. In terms of tax
return simplicity, it is obviously very desirable for tens of millions of shareholders to use a
gross-up and credit of 50 percent rather than an odd percentage which requires more
complicated arithmetic. Therefore, we recommend that the required compensating
4:^
O
73
m
o
70
H
Illustrative computation of 5 0 percent individual dividend gross-up a n d credit
Case I—taxpayer in 20 percent marginal tax bracket
Case 11—taxpayer in 50 percent marginal tax bracket
Proposed law with—
Present
law
A. Dividend income received
B. Gross-up of dividend (50 percent of line A)...
C. Dividend income plus gross-up (line A
+ line B)
D. Tentative tax (lax rate x line C)
E. Dividend tax credit (equals line B)
F. Tax liability or refund ( - ) (line D - line E)...
G. Total income after tax (line A - line F)
Present
law
Proposed law withMaximum
$50
dividend
dividend
40
Maximum
dividend
$50
. 25
10
$50
dividend
$ 66.67
33.33
$50.00
25.00
$ 66.67
33.33
75
15
25
-10
60
100.00
75.00
37.50
25.00
12.50
37.50
100.00
50.00
33.33
16.67
50.00
20.00
33.33
-13.33
80.00
25
25
o
H
X
m
m
o
73
m
H
>
73
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X
m
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EXHIBITS
441
adjustment be made by reducing somewhat the percentage of dividends which are deductible.
It IS for that reason that I suggested earlier that the dividend deduction might ultimately be
for slightly less than 50 percent of the deduction.
The combination of the dividend deduction and the stockholder gross-up and credit has
two major advantages:
First, use of the dividend deduction will initially create additional cash flow at the
corporate level, which provides an immediate increase in funds available for investment.
Second, use ofthe stockholder credit mechanism permits flexibility with respect to taxexempt organizations and foreign stockholders in U.S. corporations. We do not believe the
stockholder credit should be extended automatically to them. Like other stockholders,
they will receive indirectly the benefits of the dividend deduction at the corporate level.
Thus, the tax burden on income going to such stockholders will be reduced, but will not
be totally eliminated. That seems an appropriate way to deal generally with such
stockholders and it significantly reduces the revenue loss. Of course, it may be appropriate
in particular cases to extend the benefit of the stockholder credit to foreign stockholderr
by means of an income tax treaty.
Answering the critics
Four major arguments have been mounted against the integration plan. Let me answer
these arguments.
1. Plan favors big husiness.—The first argument is that the plan is heavily weighted toward
big business and high-income individuals at the expense of the "little guy."
This argument first ignores the fact that all Americans would benefit from the plan as
higher levels of real income are generated by higher levels of productivity. As indicated
earlier, our experience has been that we achieve greater productivity through increased
capital investment. Greater productivity means more jobs, greater price stability, and more
goods and services to fill rising demands. In short, it means a higher standard of living for all.
Second, the ownership of corporate capital is much more widespread than many may
realize. In addition to the gains to direct owners of corporate stock, benefits will flow to
people who receive corporate income indirectly through participation in pension funds,
insurance companies, and other financial institutions. These institutions have been increasing
their ownership of stock and now own about a quarter of all outstanding corporate shares.
About half of our work force is now covered by private pension plans. Eighty-four percent
of American adults are covered by some type of life insurance policy, according to the
Institute of Life Insurance. Other Americans have other types of insurance or participate in
mutual funds, trust funds, and other types of dividend income. Thus, most American families
have some direct or indirect dividend income, and they all would benefit from our program.
Third, the integrated nature of our Nation's capital markets assures that benefits will spread
to people who receive all types of capital income, from bonds, notes, and savings accounts,
as well as from stocks. Because in our competitive economic system investment flows to those
opportunities with the highest after-tax returns, after-tax returns tend to be equalized. As
more investment flows to the corporate sector, and corporate earnings before-tax will be
reduced, the rates of return on other assets will rise until stockholding will again confer no
differential advantage relative to other forms of capital people own. Thus, an initial buoyant
effect of integration on rates of return to stockholders will be dispersed to all capital
ownership, to higher money wages, and to higher real incomes for all, not just rich
stockholders as the critics assert.
If corporations had it in their power to make their rates of return higher than others, they
would now be exercising that power. If they do not have that power under present tax law,
I am at a loss to see how the proposal I have outlined for you will confer that power.
Finally, I should like to note that the lengthy period which is proposed for phasing in this
fundamental change in the tax law is calculated to mesh the changes in rates of return to
feasible adjustment rates in the structure ofthe economy. There will be no sharp increases
in rates of return, no stimulation of speculative activities in the capital markets. By 1983,
when the plan is fully phased in, no financial evidence of full integration will be apparent.
The economic gains of a more efficient use of our capital stock will, in fact, be realized
although, since we always wish we had more, we may not then recognize how much better
off we will have become.
2. Cost of program.—The second argument is that the cost of the program is too high in
proportion to the benefits.
This argument fails to note that the whole thrust ofthe program will be to encourage people
to save and invest more now as well as to make new capital more productive so that we will
have more real output in the future to meet our economic needs. We can effect this reform
by restraining growth in Federal expenditures. The cost, in this event, is merely the marginal
programs which are abandoned. Or, if we regard these expenditure programs as more worthy
than the benefits to be gained from this necessary reform ofthe tax system, we might consider
442
1976 REPORT OF THE SECRETARY OF THE TREASURY
moderate increases in other taxes which have less deleterious effects on our productivity and
welfare.
But this program would be a good investment even if we had to increase other taxes to
cover the revenue loss. For if efforts to improve capital formation and increase the efficiency
of capital use are not undertaken, Americans will pay in the future through lower standards
of living and poorer employment opportunities.
In either case, I fail to see how retaining a tax system which incurs for us a current loss
of economic welfare and consigns us to a lower growth rate can be less costly than reforming
it.
3. The plan favors dividend-paying corporations.—Plainly, the present unintegrated
corporation income tax favors corporate retentions over dividend distributions, particularly
for wealthy stockholders in tax brackets substantially above the corporate tax rate. For such
stockholders, retained earnings are translated into enhanced stock values which may be
cashed at favorable capital gains rates at some distant time, or never. This makes retention
for them preferable to current receipt of dividend income. As I noted before, this has two
consequences, both harmful to efficient use of our resources: Corporate managers are
induced to retain more than they otherwise might, leading them to make poorer investment
decisions, and those classes of stockholders who need to hold securities which yield them
current income flow have fewer opportunities left to them to invest in stocks.
If we were to propose to so distort private choices by some tax scheme, we justifiably would
be criticized. I am, therefore^ puzzled when critics chastise me for proposing to neutralize
the present distorting effect of tax policy on corporate financial management policies.
As to the corollary argument that integration penalizes growth companies, it should be
noted that true growth companies have unusually good investment opportunities. Such
companies will still find it easier to raise capital than nongrowth companies, for stockholders
will always prefer shares which promise higher future earnings to those with stable or
declining earnings.
4. Reduction of corporate tax rates as an alternative.—The fourth argument is that reducing
the corporate income tax would be simpler and just as effective a means to stimulate capital
formation.
1 agree that this alternative is sound and would help achieve the overall objective. However,
simply reducing corporate rates would fail to confront the inherent inequity and inefficiency
of maintaining higher tax rates against income from corporate as compared to noncorporate
capital. To make most productive use of savings available for investment, we must assure that
all investment opportunities meet the same test for profitability before taxes. This requires
that, as nearly as practicable, tax rates on capital income be equalized regardless ofthe form
of business organization or method of financing.
Reducing the corporate tax rate by itself would also do nothing about the grave problem
of tax bias in favor of debt financing. The corporate debt-equity ratio has risen dramatically
in the past decade. Together with higher interest rates resulting from inflation, lower
corporate profitability, and a serious recession, we have created a situation where suppliers
of capital are increasingly concerned with the safety of their investments. New companies
and new enterprises particularly are experiencing difficulties attracting venture capital.
Finally, reductions in the corporate rate unaccompanied by integration serve only to
increase the effective tax differential favoring corporate retention of profits rather than
payment of dividends. This encourages corporations to use retained earnings for projects
which may be less profitable than the investments shareholders would make for themselves.
Also, potential stockholders who prefer income will choose investments other than stocks.
Lowering corporate tax rates would lead to increased capital formation, but integration
will improve corporate financial structures and bring about more effective use of that capital
as well.
Benefits of the proposed change
First, the net tax reductions on the income from saving will increase the rewards for saving
and will thus increase the total amount which people and institutions will be willing and able
to save. That will produce benefits not just for savers, but for everybody in the form of
increased growth, higher paying jobs, and greater prosperity generally.
Second, it would ultimately eliminate a double tax which is unfair and inefficient.
Third, it will eliminate the existing tax discrimination in favor of debt as compared with
equity financing and strike at the heart of the debt-equity problem.
Fourth, American businesses will be better able to compete against foreign companies for
whom the cost of capital has already been reduced by elimination ofthe double tax. At the
same time, increased returns on saving in the United States will help attract additional foreign
capital. Both of these consequences will help to maintain the stability of U.S. exports and
employment and the strength of the dollar abroad.
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443
Fifth, it will greatly improve the efficiency ofthe process by which capital is allocated and
produce the equivalent of an increase of at least 0.5 percent in our national income.
Sixth, it will make the capital markets more competitive. Corporate managers will have
to demonstrate to stockholders that they can do a better job of investing profits than the
shareholders can do for themselves. It would eliminate the tax penalty which presently
induces corporate managers to "lock in" corporate capital and keep it out of the capital
markets.
Seventh, it will be an immediate and major assist for equity financing. Businesses which
have lost access to equity markets will again be able to compete.
Eighth, it will be a great help to utilities and to other industries whose investors rely upon
steady dividends.
Capital Gains and Losses
I would like to turn now to capital gains and losses.
H.R. 10612 contains two relevant provisions dealing with the taxation of capital gains. The
first provides for an extension of the holding period requirement to qualify for long-term
capital gains. Under this proviision, the holding period requirement is increased from 6
months to 12 months over a 3-year period (1976, 8 months; 1977, 10 months; 1978 and
thereafter, 12 months). The second provision increases from $1,000 to $4,000 the amount
of net capital losses which may be used to offset ordinary income, also over a 3-year period
(1976, $2,000; 1977, $3,000; 1978 and thereafter, $4,000).
We support both provisions of the House bill. The increase of the holding period
requirement is warranted because the reasons for distinguishing between long-term and
short-term capital gains—"bunching" and distinguishing between assets held for investment
and those held for speculative profits—suggest that the holding period should be 1 full year.
The increase in the amount of losses allowable as an offset against ordinary income is also
warranted because the present law $ 1,000 limitation has not been changed since 1942 despite
substantial increases in the Consumer Price Index.
Further, we are today proposing the adoption of a sliding-scale approach for the taxation
of capital gains and losses. Under our proposal, the tax burdens on capital gains will be
reduced the longer the asset has been held by a taxpayer. This will promote capital formation
and the efficient allocation of investments. The proposal is a sensible rule-of-thumb to avoid
converting the income tax into a capital levy on shifts in investments. In addition, we believe
the sliding-scale mechanism will reduce the unwarranted taxation of inflationary gains.
The principal features of our proposal are:
•
The amount of capital gain which may be deducted in computing adjusted gross
income will be based on the holding period of the asset, as follows:
Holding period
Deduction
Up to 1 year (phased in)
1 year to 5 years
5 years to 25 years
None
50 percent
50-70 percent
(additional deduction of 1 percent for
each year)
•
•
Capital losses will also be subject to the sliding-scale proposal.
All transactions which presently generate capital gains and losses will be subject
to the sliding scale.
•
The 25-percent alternative tax on the first $50,000 of the excess of net long-term
capital gains over net short-term capital losses will be repealed.
•
The portion of any capital gain which is deductible under this proposal will be
added back to a taxpayer's taxable income in order to compute his minimum
taxable income.
•
The House-adopted capital gains provisions are effective January 1, 1976. For
reasons spelled out below, we recommend the following effective dates:
House provisions: January 1, 1977
Sliding scale for gains: January 1, 1976
Sliding scale for losses: January 1, 1977
Repeal of alternative tax: January 1, 1976
Effect on minimum taxable income: January 1, 1976
Let me elaborate:
Sliding-scale period.—We propose that the sliding-scale period commence after the
taxpayer has held a capital asset for 5 years and that the percentage increase in the amount
deductible be set at 1 percent for each additional year through the 25th year.
In the short run, adoption of a sliding-scale approach will cause a burst of unlocking; in
the long run, it may result in a new lock-in, at least insofar as appreciated assets are
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1976 REPORT OF THE SECRETARY OF THE TREASURY
concerned. To soften the impact of this potential lock-in effect, the sliding-scale intervals
have been pegged at 1 year, rather than at longer intervals.
Treatment of capital losses. — Under present law, a net long-term capital loss may first offset
short-term capital gains on a 1 for 1 basis and then offset ordinary income (up to $1,000)
on a 2 for 1 basis. Thus, under present law, it takes a $2 net long-term capital loss to offset
$ 1 of ordinary income. An elaborate carryover system is provided to preserve the character
(long-term or short-term) of carryover losses.
Under our recommended proposal, capital losses as well as gains will be subject to the
sliding scale. Thus, for example, a $ 100 realized gain on a capital asset held for 15 years will
result in a taxable gain of $40. A $100 realized loss on a capital asset held for 15 years will
result in a $40 deductible loss, which may be offset against other capital gains, or against
ordinary income (subject to the dollar limitation previously discussed).
The symmetrical treatment of gains and losses generally accords with the trend set by the
Tax Reform Act of 1969 which introduced the 2 for 1 rule. A further advantage of applying
a symmetrical rule for gains and losses, and computing reportable gain or loss on an assetby-asset basis, is that the present law complex loss carryover system would be simplified
considerably.
Qualifying assets.—The sliding-scale proposal will apply to all assets which are presently
accorded capital asset status. Thus, all transactions which presently generate capital gains
and losses will be treated in the same fashion without arbitrary distinctions.
Repeal of alternative tax.—We propose repeal ofthe 25-percent alternative capital gains
tax on the first $50,000 ofthe excess of net long-term capital gains over net short-term capital
losses. Repeal of the alternative tax is a necessary first step in enacting a sliding scale.
Coupling a sliding scale with the alternative tax would require complex "stacking" and
allocation rules.
Relationship to minimum taxable income.—Under our minimum taxable income (MTI)
proposal, a taxpayer will be required to pay a tax at the regular rates of 14 to 70 percent on
the greater of his minimum taxable income or his regular taxable income. We propose that
the amount of the entire capital gain deduction be included in computing a taxpayer's MTI
base, thus assuring that each taxpayer will bear a fair share of the tax burden.
Effective dates and revenue estimates.—The effective dates of January 1, 1976, for gains
and January 1, 1977, for losses will have a maximum impact on unlocking both gains and
losses in calendar year 1976. Gains will be unlocked because ofthe lower tax rates on realized
gains. Losses will be unlocked because ofthe desire to realize losses in the current year rather
than in 1977 when the sliding scale begins to impact on losses. The net effect will be that
gain and loss transactions will, to a considerable degree, offset each other in calendar 1976.
Personally, I believe that the unlocking will be substantial and generate significant revenue
increases in fiscal 1977. However, we are assuming that the sliding-scale proposal will
produce no material change for budget purposes in fiscal 1977 receipts.
In the long run, when fully effective, the four capital gains provisions—(1) a sliding scale
on gains and losses; (2) a holding period requirement of 1 year to qualify for long-term capital
gain treatment; (3) an annual limitation of $4,000 on capital losses which may offset ordinary
income; and (4) repeal of the 25-percent alternative tax—will generate revenue losses of
about $800-$900 million per year.
Estate and Gift Tax Proposals
I would like to turn now to estate and gift taxes. As you know, the House Ways and Means
Committee is now holding hearings on the major issues of estate and gift tax revisions, and
Treasury Department officials will be testifying on that subject next Monday, March 22. We
believe that a complete reexamination of estate and gift taxes is long overdue, and we look
forward to cooperating with the tax-writing committees in this undertaking. As you also
know, the President has already recommended an increase ofthe estate tax exemption from
$60,000 to $150,000.
Estate tax exemptions and rates
The basic structure ofthe estate and gift tax has remained fundamentally unchanged since
1932, and the estate and gift tax exemptions were last changed in 1942. Since that time, the
ravages of inflation have substantially eroded the value ofthe $60,000 estate tax exemption.
No longer does the tax impact principally on the relatively larger estates. Rather, the estate
tax now has shifted to a more broadly based tax on the private capital accumulations of more
moderate estates.
Let me elaborate on these two points.
First, adjusting the $60,000 estate tax exemption for inflation since 1942 would require
an estate tax exemption of $210,000. Moreover, while a person with a $60,000 estate in 1942
could leave it to his family without tax, today an individual must have an estate of $260,000,
EXHIBITS
445
on which an estate tax of $50,700 will be levied, in order to leave the equivalent amount,
$210,000, to his family.
Second, during the 1920's, 1930's, and 1940's, the estate tax reached about 1 to 2 percent
of all estates. Thus, in 1950 there were 27,144 estate tax returns filed (1.9 percentof estates)
and 18,697 taxable returns (1.3 percent of estates). By 1973 the number of estates filing tax
returns had reached 174,899 (8.9 percent of all estates), ofwhich 120,761 (6.1 percent)
were taxable. And in the fiscal year ending June 30, 1974, there were 211,540 estates filing
returns (10.7 percent of all estates) and 146,000 taxable estates (7.6 percent).
We believe that an increase in the estate tax exemption is clearly wiarranted. Indeed, such
an increase is essential if the estate tax is to be returned to its historic role as an excise on
the transfer of relatively larger wealth accumulations. At the same time, we cannot ignore
the significant revenue consequences that would result from increasing the estate tax
exemption. Thus, we recommend that the estate tax exemption be increased to $150,000
over a 5-year transition period and that the lower bracket estate tax rates on the first $90,000
of taxable estate be eliminated. Limiting the increase to $150,000 (with the proposed
restructuring of rates) will permit the revenue loss to be held to an acceptable amount, which
can be absorbed gradually during the phase-in period.
Our specific recommendations regarding the estate tax rates and exemptions are:
•
Increase the estate tax exemption to $150,000 in equal $18,000 increments over
5 years.
•
Eliminate the lower estate tax rate brackets so that the beginning estate tax rate
would be 30 percent. The estate tax rate changes would be phased in over 5 years
along with the increased exemption.
We estimate that the combination of the increased estate tax exemption and the
restructuring of estate tax rates will result in a revenue loss of $ 1.1 to $ 1.2 billion when fully
effective and a revenue loss of less than $100 million in fiscal year 1977. At the same time,
much-needed relief will be provided for moderate estates.
Liberalized payment provisions for family farms and businesses
Inflation has had a particularly serious impact upon the family farm or business. Property
values have risen dramatically with the result that owners have been faced with higher estate
taxes. This has created a greater liquidity need than faced by many other taxpayers, because
family farms or businesses generally tend to represent a significant portion of the owners'
estates in terms of dollar values. Therefore, many families have found it necessary to sell the
family farm or business to obtain cash to pay Federal estate taxes.
To meet these problems, the administration has proposed a.change in the Federal estate
tax laws to make it easier to continue the family ownership of a small farm or business
following a substantial owner's death. In summary fashion, the details are as follows:
•
At the estate's option, a 5-year moratorium will apply to payment of that portion
of the tax liability attributable to an ownership interest in a family farm or other
closely held business qualifying for 10-year installment payments under present
section 6166 of the Internal Revenue Code. No interest will accrue during the 5year moratorium period and no principal or interest payments will be required
during that period.
•
At the end of the 5-year period, the deferred tax will, at the estate's option, be
payable in equal annual installments over the next 20 years.
•
Interest ori the installments will be reduced to 4 percent per annum from the 7percent rate generally applicable to deferred tax payments.
•
The 5-year moratorium and 20-year extended payment provisions will apply only
to the estate tax liability attributable to the first $300,000 in value of the family
farm or business. Between $300,000 and $600,000 there will be a dollar for dollar
reduction in the value of the farm or business qualifying for the moratorium and
extended payment provisions. That portion of the tax not qualifying will continue
to be subject to 10~year installment payments with the 7-percent interest rate.
We believe that enactment of the administration's proposal would be a positive and
essential step toward ensuring the survival of smaller farms and businesses for future
generations.
Foreign Withholding
Let me turn briefly to the subject of foreign withholding. The administration strongly
supports the elimination of the existing withholding taxes on dividends and interest paid by
U.S. persons on nonresident alieris and foreign corporations.
Under present law, and subject to numerous exceptions, a 30-percent withholding tax is
imposed on the gross amount of dividends and interest paid to foreign investors. This tax
should be eliminated and it should be done now. Elimination of this tax is desirable because—
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Removal of the tax will increase investment by foreigners in the United States. It will
make investing more profitable and less difficult for investors, and will make it easier
for U.S. companies to seek funds in international capital markets.
It will improve the relative attractiveness of long-term securities and reduce the present
imbalance favoring short-term securities and bank deposits (which are presently
exempt from withholding). Access to foreign funds will permit the United States to
continue its role as a capital exporter, including the recycling of funds flowing into
and out of the oil-producing countries.
It will put the U.S. financial community back in the center of international capital
markets and help them to regain competitive ground lost.
It is consistent with principles of tax equity and other rules relative to source of income.
It will eliminate what has become a complex patchwork of legislative and treaty
provisions and simplify one area of tax law.
The basic point is that the many benefits of eliminating the tax outweigh the small revenue
loss.
The desirability of increased foreign investment
Increased investment by foreigners in the United States is desirable anytime. Proposals to
remove^ impediments to investment have been under consideration for several years.
Increased investment is especially important today when we are faced with a massive outflow
of funds to pay for very expensive oil.
To the extent that dollars piling up abroad are used to buy goods and services produced
in the United States—say, wheat, for example^we are exporting real wealth from our
economy and are the poorer for it. Further, as dollars simply pile up abroad, their value falls
in the foreign exchange market. The increased number of dollars that we must then pay for
imports becomes a potential claim on an even larger part of our national production. For
example, as the value of the U.S. dollar falls, every Mercedes we buy gives some German
a potential claim on more bushels of our wheat than previously.
In contrast, dollars which are reinvested in the United States stay here and do not involve
exporting our real wealth—at least initially. Furthermore, increased foreign investment here ,
keeps dollars from simply piling up abroad and helps forestall further devaluation.
We have for years preached to other countries the value to them of foreign investment in
their countries. It is time we took our own preaching seriously. Investment in the United
States by foreigners provides capital needed by this country.
The existence of additional investment here is desirable for three reasons: First, it increases
the productivity of labor within our country, which in turn increases the real income of our
residents. That increased productivity is critical in the battle against inflation. Second, as
capital investment located here wears out and depreciates, it tends to be replaced by
machinery and equipment and other assets that are manufactured here; and that too helps
our economy. Third, as the investment generates income here, we get the tax on that income.
This happens whether the corporation is directly controlled by foreigners, or the corporation
simply sells bonds and other securities to foreign investors.
It is true that the after-tax profits on investments by foreigners may eventually be removed
from our economy and repatriated by the foreign investor. But repatriation of income is
usually only partial. And even when it is total, it usually occurs gradually over time.
In sum, we are much better off to have the investment, even if the after-tax profits are
ultimately lost to us, than not to have the investment at all.
Enhanced market efficiency
The statutory elimination of withholding will greatly increase market efficiency for
investments in the United States.
There have been so many ways—all complicated—around the U.S. withholding tax that
the tax is as imaginary as it is real. However, even an imaginary tax can have detrimental
effects. While certain foreign investors enjoy exemption or reduced rates by statute or treaty,
the tax remains an impediment to broader foreign ownership of U.S. investments.
The present withholding tax system handicaps U.S. companies seeking foreign capital by
narrowing the market in which potential foreign investors operate. Those who are unable or
unwilling to deal with the complexities are discouraged from investing. Since most of the
exemptions depend on the status or residence of the investor, the investor cannot freely
market this investment. Securities which are not freely marketable throughout the world are
not competitively attractive investments.
U.S. borrowers seeking long-terrii funds are at a competitive disadvantage compared to
borrowers of other major countries which do not impose withholding taxes on investments
by nonresidents. U.S. withholding taxes increase the capital costs of American companies.
They either deter borrowing abroad or cause the U.S. company to bear the burden of the
tax. For example, an American borrower who would otherwise borrow at 9 percent may be
required to pay a nonresident as much as 13 percent to secure the same loan.
EXHIBITS
447
Other countries that have recently taken legislative action to eliminate their withholding
on long-term international bonds in order to give their borrowers greater access to
international capital markets include Australia in 1973, Japan in 1975, and Canada in 1975.
They have thus joined other countries such as Austria, France, the Scandinavian countries,
and the United Kingdom that provide exemption of international issues from withholding tax.
Short-term debt investments rather than long-term debt or equity investments are favored
by the present withholding tax system. This bias arises as a result of the present exemptions
from withholding for interest on bank deposits and certain other short-term obligations.
We urge elimination of withholding not only with respect to interest income, where a 30percent tax on gross payments of interest is a clear impediment, but also for dividend
payments. There is no reason to perpetuate favorable tax treatment for debt investment over
equity investment. Many foreign investors are interested not solely in capital appreciation,
which we do not tax in the case of a foreign investor, but in yield. The 30-percent tax on
portfolio dividends is clearly a deterrent to those relying on the investment yield. This
deprives many of our businesses of access to a form of capital they urgently require.
Free capital markets and free capital flows are in the best interests of everyone. In early
1974, capital controls were eliminated, and it again became possible for American capital
to move abroad. The repeal of withholding taxes on dividends and interest would be a further
move toward unimpeded flows of capital.
The question of tax equity
The repeal of these taxes is consistent with generally accepted tax principles, and is a part
of tax reform. Jurisdiction tO' tax dividend and interest income was considered more than 50
years ago by a commission of tax experts established by the League of Nations. They
concluded, back in 1923, that the right to tax investment income properly belongs to the state
of the taxpayer's residence. This principle has been reaffirmed in the commentaries to the
OECD Model Convention, while recognizing that some states may wish to maintain some
minimal withholding tax solely on revenue grounds.
Revenue
The present withholding tax system does not raise significant revenue, due to a patchwork
of statutory and treaty provisions. For 1973, the withholding taxes collected on dividends
and nonbank interest were less than 10 percent of the gross payments, despite a basic
statutory rate of 30 percent. In 1973, only $210 million of withholding tax was collected, $20
million with respect to interest and $190 million with respect to dividends.
The House bill
H.R. 10612, as reported by the House Ways and Means Committee, repealed the
withholding tax on portfolio dividends and interest, but a floor amendment struck the
provision. This floor action v^as an unfortunate error which should be corrected. At the time,
the House seemed to be focusing on the immediate revenue loss and to be ignoring the large
potential benefits from the proposal, including the fact that increased foreign investment will
produce increased domestic revenues to offset any immediate loss. In fact, the administration
strongly believes that the repeal should be broader than the Ways and Means Committee
provision; that is, withholding taxes on direct as well as portfolio investments should be
repealed. In the case of direct investments the United States would continue to collect the
corporate tax on the underlying profits.
H.R. 10612 as passed by the House contains a provision which makes permanent the
temporary provision removing the tax on bank deposit interest until December 31, 1976.
While we are very pleased that this provision was adopted by the House, there is a particular
timing problem which requires your committee's attention. Foreign investors have already
begun to withdraw their funds, or switch to shorter term investments, to remove any risk of
withholding taxes being imposed next year. It is, therefore, essential that that particular
provision be passed immediately.
To summarize, our present withholding system is counterproductive. It hampers our
economy, denies access to foreign capital markets, favors short-term foreign debt
investment, and needlessly complicates our tax law, in order to raise an insignificant amount
of revenue. It should be repealed promptly.
Taxable Bond Option
The efficiency ofthe municipal bond market is a matter of major importance to the Nation
and to government at all levels. While the municipal market is basically sound, there is an
artificial and unnecessary constraint on its efficient operation—State and local borrowers are
limited to only one group of potential lenders, those who can use tax-exempt income. This
means that the interest rates for municipal debt are critically influenced by changes in the
tax and financial situation of such lenders. In addition, the municipal market is experiencing
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1976 REPORT OF THE SECRETARY OF THE TREASURY
important changes in supply/demand patterns. On average, commercial banks are absorbing
smaller percentages of new municipal issues, particularly in the longer maturities.
Consequenfly, other sources of financing must be found if the volume of municipal borrowing
is to be maintained.
In order to broaden the municipal market. Treasury strongly recommends legislation
giving State and local issuers the option to borrow on a taxable basis and obtain a Federal
subsidy of 30 percent of the borrowing cost. For electing issuers of longer term debt, a 30percent subsidy will restore the customary "spread" in interest rates between municipal
bonds and other debt issues.
The taxable bond option will introduce a much-needed element of flexibility by permitting
State and local borrowers to tap the investment resources of foundations, pension funds, and
other tax-exempt institutions. The Federal subsidy will enable municipal borrowers to go to
the taxable market to secure lower net interest costs. As municipal bonds are issued on a
taxable basis, the borrowing costs fpr governments which continue to issue tax-exempts will
also be reduced, since there will be a smaller supply of tax-exempt bonds to be absorbed.
State and local governments can thus achieve lower interest costs regardless of whether they
choose to issue debt on a taxable or a tax-exempt basis.
In making this proposal, we are not suggesting that State and local governments have need
for higher subsidies from the Federal Government. Our objective is not to provide more in
the way of a direct subsidy but rather to make the tax-exempt market itself more effective.
The taxable bond option will ensure that all municipal borrowers receive a subsidy of at least
30 percent below taxable rates regardless of underlying credit conditions or the needs of
particular institutions for tax-exempt income; and it will do this in a manner which maintains
the viability of the tax-exempt market.
We are working to devise procedures that will minimize Federal involvement in the subsidy
process. We firmly believe that State and local governments should retain their traditional
rights to determine whether and when to borrow and the terms of the borrowing.
We estimate that the cost of the 30-percent subsidy, after allowance for estimated revenue
gains, will be $7 million for the first full year of operation. This net cost will rise to about
$80 million by the 10th year.
Social Security and Unemployment Taxes
To assist in protecting the financial integrity of the social security system, the President
has proposed a slight increase in the payroll tax effective in January 1977.
The old-age and survivors and disability insurance trust funds are paying out more in
benefits than their current payroll tax receipts. This is largely due to increased benefits in
the past few years and payroll tax receipts which have lagged because of unemployment and
slowed wage growth.
Presently the amount of trust funds is equal to about 7 months of expenditures. Under
present law, the question is not whether the trust fund will be depleted; rather, it is a question
of when it will be depleted. Recent estimates by the social security system show that if the
recovery should proceed more slowly than expected, the combined trust fund would be
depleted by 1981. If a recession were to develop, it would be depleted even sooner. I am not
suggesting that I expect a recession, or a slow recovery. I am suggesting, however, that the
rapidly diminishing trust fund affords us precious little cushion for adverse events.
To prevent the rapid decline of the social security trust funds over the next few years, the
choices are either to restrain increases in retirement and disability benefits or to increase
revenues. It is clear that we need to increase social security receipts.
The President has included a full cost-of-living increase in social security benefits in his
fiscal 1977 budget. To assure the future financial stability ofthe social security system, the
President proposed, effective January 1, 1977, a payroll tax increase of 0.3 percent of
covered wages for employees and employers.
The current social security tax rate is 5.85 percent for each employee and employer of
covered wages. Under this proposal, in 1977 the tax rate would be 6.15 percent on a
maximum wage base of $ 16,500. This increase will cost workers with the maximum taxable
income less than $ 1 a week and will help stabilize the trust funds so that current and future
recipients can be assured of the benefits that they have earned.
The increase is in the form of a modest rate increase as opposed to a further increase in
the maximum wage base. The base is already scheduled to rise in progressive steps. Increasing
the base even further to solve our shortrun financial problem will lead to greater
complications because of the increased benefits to which the social security system will be
committed. Consequently, an increase in the tax rate is the responsible course of action.
Let me turn briefly to unemployment taxes.
The unemployment compensation program is no longer self-supported and the financial
structure of the system at both the State and Federal levels is seriously threatened: As of
March 15, 1976, 20 States have depleted their unemployment compensation funds and as
EXHIBITS
449
many as 10 additional States will be forced to borrow from the Federal Government by the
end of calendar year 1976. Also, as of March 15, $2 billion has been borrowed from the
Federal loan fund. The Department of Labor estimates that under the present financing
provisions, the State unemployment compensation trust fund will have deficits amounting
to $16.5 billion in 1978, $19.3 billion in 198.2, and $24.1 billion in 1984.
The Federal unemployment account (from which the States with depleted trust funds
borrow money) and the extended unemployment compensation account (which finances the
Federal share ofthe extended benefits program) are both depleted and borrowing Federal
general revenues. The Department of Labor also projects that under the existing tax base
and net Federal tax rate, the Federal unemployment compensation trust funds will have a
deficit of $6.2 billion in 1978, increasing to $8.2 billion in 1982, and $9.6 billion in 1984.
To alleviate the urgent problem before us, the administration has proposed an increase to
$6,000 in the amount of wages subject to the Federal unemployment tax, beginning calendar
year 1977. We also propose to increase the net Federal tax rate from 0.5 percent to 0.65
percent as of January 1, 1977, and reduce it to 0.45 percent in the calendar year following
the year in which all advances to the extended unemployrnent compensation account have
been repaid. Since many States tie their State unemployment taxes to the Federal rate base,
State unemployment tax receipts will increase as well.
Ill ENERGY POLICY AND TAX POLICY
I would like to turn now to the topic of energy and the relationship of energy policy with
tax policy. Let me note at the very outset that there are four provisions in H.R. 10612 which
relate to oil and gas which we believe will have a negative jmpact on our efforts to deal with
the Nation's energy problem. It is just as important to avoid programs that aggravate the
problem as it is to implement programs to resolve the problem. This bill seems to assume
that we have solved the problem of declining oil production in this country. It signals a return
to the complacency that prevailed before 1973. Have we forgotten so quickly the effects of
the embargo on the American people or the effects of OPEC's price increases on our
economy?
Nature of the problem
Let's be clear about what the problem is. Forty out of every 100 barrels of oil we consume
in the United States are imported from foreign sources. Unless we take actions to increase
the portion of our consumption from domestic sources, the number of imported barrels will
increase as a result of increasing demand and declining domestic production.
The price of foreign oil paid by consumers is nominally about $12.50 per barrel. However,
we must recognize that there are additional costs involved in each barrel of foreign oil; for
we increase our dependence and vulnerability to OPEC and hurt our balance of payments.
Therefore, each barrel of domestic oil which could be produced for $12.50 is worth a
premium to this Nation if it replaces a barrel of foreign oil. Tax measures which encourage
domestic exploration, in effect, pay for this premium and are justifiable to the extent they
make it possible to replace imported oil with domestic oil. Ariy provisions ofthe House bill
which reduce the effectiveness of those tax measures would, along with other recent actions,
discourage domestic production. The cost ofthe resulting increased dependence on imported
oil outweighs any revenue gain from those provisions.
Administration efforts
Let's review what we've done that affects our dependence on imports since the embargo.
In January 1975, the President sent to Congress a comprehensive energy program. The thrust
of that program was to limit our dependence on foreign oil by seeking both an increased
domestic oil and gas supply and an elimination of wasteful demand. If the free market were
permitted to work, without obstruction by Govemment interference, these goals could be
achieved.
The major aspects ofthe President's package included immediate decontrol of oil and gas
prices, an import fee on foreign crude oil, a windfall profits tax on domestic producers, a
residential insulation credit, and return of the revenue from the new taxes to consumers to
compensate them for higher prices. Under this program, energy would cost more, but
consumers would have no reduction in their spendable income. Oil producers would have
an incentive to find and produce the more costly domestic reserves that, under current world
market conditions, would be competitive with expensive foreign oil. However, they would
realize no windfall profits on the lower cost oil produced from preexisting capacity.
The President's program was not accepted by the Congress. What have we achieved
instead in terms of either conservation or increasing our supply of oil and gas?
Price decontrol
In the case of natural gas, interstate sales remain subject to price regulation. Some initial
steps in the right direction have been taken by the Congress with respect to small producers.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Unfortunately, however, the House has voted to extend controls for large producers to cover
intrastate, as well as interstate, sales. I urge the Congress to avoid this backward step and
recognize the high priority of full decontrol of new natural gas.
'' In the case of crude oil prices. Congress agreed to a decontrol program after numerous
compromise offers by the President. Last D.ecember, the President signed the Energy Policy
and Conservation Act, under which controls will be removed after 40 months. It is expected
that such action will increase domestic production by a million barrels a day by 1985.
However, production of new reserves will occur only after a 5-year leadtime for exploration
and development. This means that the industry needs capital today to search for and develop
the higher cost, harder to find domestic reserves that we expect to be produced 40 months
from now.
Delay in decontrol will certainly have an impact on the ability of the industry to generate
the needed revenues. Further, we must not forget that in March 1975, the Congress repealed
percentage depletion for that sector ofthe oil industry which accounts for 75 to 80 percent
of expenditures made to discover, develop, and produce from new reserves. For the small
producers, percentage depletion was retained for a small, and declining, amount of
production. What remains is subject to rules which are so complex that the uricertainty and
confusion in some cases may outweigh the tax benefit. In any event, the repeal of percentage
depletion took from the industry $ 1.6 billion of after-tax revenues for 1976 that could have
been reinvested in exploration and development of new reserves.
H.R. 10612 oil and gas provisions
Now, we have before us the proposals of H.R. 10612 which would further jeopardize
sources of capital needed for exploration and development. Under this bill, the limitations
on artificial losses would be applied to all but exploratory wells on every oil and gas property.
Intangible drilling cost deductions would be included as a tax preference for minimum tax
purposes, along with percentage depletion which is already included under present law. The
deduction for intangible drilling costs would be denied where nonrecourse loans are used to
finance drilling. Finally, the tax burden would be increased on dispositions of oil and gas
properties with respect to which intangible drilling costs have been deducted.
The combined effect of these measures would be a further reduction of the after-tax
revenues from oil investment by almost $300 million in 1976. The problem will be
compounded if outside investors, an important source of capital, become disenchanted by
these actions and redirect their investments to other businesses. With the reduction of net
revenues available for internal financing, the dependence on sources of outside financing
becomes more acute. This is not the time to create more uncertainty or eliminate those
incentives which influence potential investors in oil and gas ventures. Potential investors in
a business which is inherently very risky can certainly be expected to turn to other
investments if we continue to make oil investment less attractive.
We believe that your committee should take affirmative steps to eliminate these measures
from H.R. 10612, as well as the present treatment of percentage depletion as an item of tax
preference, if we are to fully achieve the objectives of increased domestic oil supply and
reduced dependence on imports. It was this mutual objective which, after months of giveand-take by the Congress and the President, led to a decontrol program. To enact these
measures and dry up a significant source of capital needed today to start finding and
producing those additional reserves would be patently counterproductive. Almost as
detrimental is the uncertainty created by the existence of such proposals. They should be
disposed of quickly.
H.R. 6860
Your committee is now considering H.R. 6860, the energy tax bill, a product of an effort
by the House to solve the energy problem with oil import quotas and tax measures to
encourage conservation of oil and gas and conversion to alternative sources of energy.
Although the effort was well intentioned, the result is a list of provisions which would have
only a modest energy savings at the cost of significant economic distortion induced by
discriminatory excise taxes, amortization, and investment credit provisions. Let me give you
just a few illustrations of the problems we perceive with H.R. 6860:
The bill includes a proposed excise tax on business use of oil and gas which is objectionable
on several grounds. First, it imposes the conservation burden selectively on a few members
of one economic sector and only on certain kinds of uses of energy. We all need to conserve
the whole barrel of oil. Second, it would produce an undesirable distortion in petroleum usage
by tilting prices of products in favor of nonbusiness uses. Third, it will be extremely difficult
to administer because of the multitude of exceptions, even within the business.sector.
The bill would repeal excise taxes on radial tires and buses. This would be an unwise
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reshaping of the sole function of such user taxes which is to raise revenue for highway
maintenance uniformly from highway users.
It also would allow tax credits for installation of insulation and solar energy equipment and
the purchase of electric cars. Such credits would make some sense in the case of residential
insulation, the energy-saving facilities of which have been proven for use on a broad scale.
However, solar energy and electric cars, early in their development, are available and useful
for only a few taxpayers for whom such credits would be a windfall. Little, if any, additional
use of solar energy equipment or electric cars would result from such credits at this time.
Finally, the bill includes several provisions which employ rapid amortization or a selective
increase or denial of the investment credit to induce the business sector to either conserve
oil and gas or convert to alternative sources. Wherever economics are favorable, there is no
need for special public subsidies to induce private business decisions. When oil is sold at a
given price, energy users will convert to alternative sources which are competitive at that
given price. It is wasteful to subsidize conversion to alternative sources which are riot
competitive at that price.
Thus, there are very few provisions of H.R. 6860 that we could support.
IV TAX REFORM—H.R. 10612
As I stated earlier, another major item before your committee is H.R. 10612—the tax
reform bill. In 1973 the administration presented to the House Ways and Means Committee
specific proposals to improve significantly the fairness, equity, simplicity, and efficiency of
our tax system. Our three principal proposals were:
•
LAL (limitation on artificial losses) to deal effectively with the problems associated
with tax shelters by a solution which reaches their most common feature: Bad tax
accounting rules which mismatch expenses and revenues and thereby produce
artificial accounting losses.
•
MTI (minimum taxable income) which, in combination with LAL, deals with the
problem of taxpayers with high economic income who pay little or no Federal
income tax.
•
A simplification package designed to alleviate the intolerable reporting burden
imposed upon the average taxpayer.
After nearly 3 years of labor on the House side, you now have before you H.R. 10612. In
broad outline, the bill deals with the same problems we identified in 1973. Overall, it is clearly
a step in the right direction. However, in a limited number of cases, we believe that certain
features should be strengthened or deleted.
Because of our crowded agenda this morning, I will limit my comments only to certain
aspects of the bill. With your permission, we will submit shortly a technical memorandum
of Treasury position on the bill. The specific areas I will address are: The limitation on
artificial losses and other tax shelter amendments, the minimum taxable income proposal,
the simplification provisions, the provisions affecting the taxation of foreign income and
DISC, and certain administrative provisions.
Limitation on Artificial Losses and Other Shelter Provisions of the House Bill
LAL background
LAL was first proposed by the administration in 1973. It was designed to eliminate "tax
shelters" which introduce substantial distortions into the income tax system. Under the
proposal, tax accounting rules would no longer be permitted to create from a profitable
enterprise an artificial tax loss to be deducted against (and shelter from tax) other unrelated
income. Under present law, such losses reduce adjusted gross income and make tax shelters
possible.
Artificial accounting losses limited by LAL would neither be permanently disallowed nor
capitalized. Instead, they would be suspended and carried forward to be deducted in full
against net related income in a future taxable year, thus more correctly matching income with
the expense of earning it.
Because LAL was carefully directed at a narrow, but significant, problem under present
law, it would affect relatively few taxpayers. LAL would apply only where there are artificial
losses. While such losses are frequently generated in the real estate and agricultural
industries, LAL would normally not affect either the ordinary farmer or the ordinary real
estate developer, but rather the outsider who buys into those industries in search of tax losses.
Artificial losses from such sources as accelerated depreciation, the current deduction of
preopening costs, and prepaid feed deals would no longer be permitted to shelter unrelated
income.
LAL would apply to individuals but not to corporations. In combination with the proposal
for a MTI provision, LAL would be substituted for the present minimum tax on individuals.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
The House bill contains a modified version ofthe administration's 1973 LAL proposal.
In addition, the bill also contains other provisions dealing with tax shelters. I will comment
briefly on LAL and the other tax shelter provisions.
Real estate
With respect to real estate, the House bill applies LAL to commercial and residential real
estate. The accelerated deductions subject to LAL are limited to the deductions for (1)
construction period interest and taxes, and (2) accelerated depreciation in excess of straightline depreciation. A taxpayer may aggregate all income from real estate activities in
determining the accelerated deductions on real property which are currently allowable.
Although our 1973 proposals would have allowed aggregation of all income from
residential real estate, and applied a property-by-property rule for commercial real estate,
we favor the provision of the House bill. Aggregation will lessen the impact of LAL on the
professional real estate developer and thereby have no significant adverse effect on new
construction. It will also tend to isolate the impact of LAL to the one-time passive investor.
Moreover, the aggregation rule will simplify the LAL computations.
Farming activities
Under the House bill, LAL applies to losses generated by accelerated deductions
attributable to farm operations. Subject to numerous exceptions, LAL applies to (1)
preproductive period expenses attributable to any property having a crop or yield, (2)
prepaid feed, seed, fertilizer, and similar farm supply expenses, and (3) accelerated
depreciation on any property having a crop or yield (which may be taken after the property
begins to be productive). LAL should have little impact on the ordinary farmer who works
during the off-season to supplement his income since farmers are permitted to deduct up to
$20,000 of farm losses against nonfarm income.
Although aggregation is generally permitted for farming activities, LAL applies separately
to each farm interest in the case of farming syndicates.
We generally support the application of LAL to farming activities but do not favor the
application of more stringent rules to farm syndicates. Instead, we propose that syndicates
be required to use the accrual and inventory method of accounting. In this way, the tax shelter
abuses resulting from the cash method of accounting are dealt with directly. These syndicates
should be treated in the same manner as farm corporations (other than family corporations)
which, under the House bill, are required to use the accrual method of accounting. Existing
income tax regulations have long exempted farmers from the accrual method of accounting
because of the difficulty of maintaining the books and records required for accrual
accounting. However, today's nonfamily farm corporations and syndicates are sophisticated
business ventures with ready access to the necessary expertise to maintain these records.
Oil and gas
Under the House bill, LAL does not apply to exploratory wells but it does apply to
development wells. The House bill also provides that gain on the disposition of oil and gas
interests will be treated as ordinary income to the extent ofthe excess intangible drilling cost
deductions over the amount that would be allowed had the costs been capitalized.
We strongly oppose the apphcation of LAL to any oil and gas activities. We also strongly
oppose the recapture of intangible drilling cost deductions. Admittedly, our position on LAL
is a change from our 1973 proposal. However, the situation has changed markedly. We have
witnessed a sharp decline in domestic sources of oil and gas. We have experienced the painful
dislocations caused by our dependence on foreign sources for oil. Energy exploration and
development activities have already been severely hampered by the repeal of percentage
depletion, the limitations on the foreign tax credit, and the continuation of price controls.
For reasons I spelled out earlier, the existence of Government-imposed controls will prevent
the market incentives from increasing domestic energy supplies. Surely, now is not the time
to erect further impediments by increasing the tax burden on oil and gas.
Sports franchises
The House bill applies LAL to sports franchises. While LAL is a sound concept, this is an
unwarranted extension ofthe rules the administration proposed in 1973. These rules did not
contemplate that LAL would apply to sports franchises.
The Internal Revenue Code contains no special tax benefits for sports franchises. In this
area, abuses arise only when too high a value is placed on player contracts, or when they are
written off over too short a period of time. However, abuses of this type are possible in the
case of any business property which may be amortized or depreciated. These abuses can be
dealt with adequately by the Internal Revenue Service. Although the disputes surrounding
the value and life of player contracts are the subject of litigation, resolution of these disputes
should eliminate the tax controversies in this area.
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The House bill also applies special rules for the allocation of the. purchase price on the
purchase and sale of sports franchises. It also provides that single sale of a player contract
will trigger depreciation recapture on previously unrecaptured depreciation and abandonment losses taken on all other player contracts.
These proposals are arbitrary since they apply only to sports franchises. Allocating the
purchase price among the assets of a sports franchise is no different from allocating the
purchase price among the assets of any other business. Applying special rules to sports
franchises to deal with a problem that the Internal Revenue Service can handle adequately
is not warranted. Further, the unique depreciation recapture rule goes far beyond the usual
asset-by-asset depreciation recapture rules in the Code. Here, too, there is no apparent
reason to isolate sports franchises for special treatment.
Limitation on nonbusiness interest
The House bill imposes a $ 12,000-a-year limitation on the amount of personal interest,
and investment interest in excess of investment income, that an individual may deduct.
Unused investment interest, but not unused personal interest, would be available as a
carryforward and be deductible in future years to the extent of related investment income
in those years.
We oppose the $12,000 limitation since it is an arbitrary limit on the interest deduction.
It would deter individuals from purchasing assets with borrowed funds. Moreover, the
$12,000 limitation can have the effect of disallowing permanently deductions for home
mortgage interest. This is a fundamental change from current law since home mortgage
interest will be subject for the first time to a dollar limitation and, in some cases, will be
disallowed permanently. The permanent disallowance can occur because of the absence of
a carryover for unused personal interest.
We believe that the problem presented by taxpayers who use the interest deduction and
other itemized deductions to reduce their tax liability will be handled adequately by treating
the amount of itemized deductions in excess of 70 percent of adjusted gross income as an
item of tax preference includable in the minimum taxable income base. I will discuss this point
in detail shortly.
^^At risk'* limitation
The House bill limits deductions to the amount of capital which a taxpayer has "at risk"
in a venture in the case of motion picture films, livestock, certain 1-year crops (grain, oil seed,
fiber, and others), and oil and gas wells. The at risk limitation is intended to prevent a
taxpayer from deducting losses where the deductions are attributable to property acquired
with borrowed funds for which he has no personal liability, that is, nonrecourse financing.
The losses would be suspended and become deductible only in the future as the taxpayer
increases his at risk capital.
The at risk limitation is premised on the assumption that the present tax treatment of
nonrecourse financing is unsound. The present law is based on the Supreme Court's decision
in Crane V. United States,33\ U.S. 1 (1947), which held that nonrecourse financing is treated
in the same manner, for tax purposes, as financing for which taxpayers are personally liable.
The Supreme Court's decision in Crane recognizes that nonrecourse financing is an accepted
financing medium in many industries. It is a valuable method of encouraging individuals to
invest in ventures with a high degree of risk. An at risk limitation would overturn more than
20 years of established commercial practice, and adversely affect the general business
community as well as passive investors.
We believe that LAL is a better remedy to the tax shelter problem than the at risk
limitation. The limitation—applicable to corporations as well as to individuals—can result
in distortions of income. Taxpayers would include income from ventures but would not have
the benefit of offsetting deductions. Moreover, taxpayers will be able to control the timing
of their deductions merely by electing to increase their capital at risk in those years in which
the deductions yield the greatest tax benefit. Further, the scope ofthe definition of "at risk"
is not clear. The House Ways and Means Committee report accompanying H.R. 10612
adopted an expansive definition ofthe term which would include within its scope many types
of insurance arrangements obtained in the normal course of business. Thus, the reach of at
risk may be far greater and affect far more transactions than necessary or desirable to cure
the potential abuse of nonrecourse financing.
Minimum Taxable Income
In 1973, the administration recomrriended a proposal which would require each individual
to pay tax at regular rates on a minimum amount of taxable income. Last July, in testimony
before the House Ways and Means Committee, I recommended that the House follow our
1973 proposal with some modifications. Today, I am renewing our MTI proposal.
MTI was formulated with a view to balancing two competing considerations. First,
Congress has provided various tax incentives designed to encourage specific economic
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1976 REPORT OF THE SECRETARY OF THE TREASURY
activities. Second, excessive use of these tax incentives by some taxpayers with large
economic incomes enables them to avoid paying a reasonable amount of tax, or in some cases,
any tax at all. This conflicts directly with the basic tenets of equity and fairness—the income
tax should be based on ability to pay; the income tax should be fair and should be perceived
as such by all taxpayers.
The House did not adopt MTI. Instead, it perpetuates the minimum tax. Let me review
briefly the defects of the minimum tax.
Defects of present minimum tax
The minimum tax is a flat 10-percent tax on certain preference items such as the excluded
portion of capital gains, accelerated depreciation on real property, and thie excess of
percentage over cost depletion. An exemption for the first $30,000 of preferences and a full
offset for regular income taxes paid are applied to reduce the amount subject to the minimuni
tax.
The minimum tax is defective in two critical respects:
First, since it is an additional tax, it penalizes the use of preferences, or incentives, even
where an individual has paid significant amounts of regular tax. By contrast, MTI comes into
play only if the taxpayer's taxable income is not sufficiently large, in relation to his economic
income, to assure that he is paying his fair share of taxes.
Second, because minimum tax is imposed at a flat rate, it serves merely to "slap the wrist"
of those taxpayers who are able to shelter large amounts of income from regular tax. By
contrast, MTI is predicated on the proposition that taxpayers should not be permitted to
avoid the graduated rates through exclusion preferences, itemized deductions, or the
payment of a 10-percent surcharge.
Previous proposals
Because of the deficiencies of the current minimum tax, the administration proposed in
1973, and again in 1975, repeal ofthe minimum tax and the substitution of MTI and LAL.
M T I would prevent individuals from avoiding tax on high economic income by the use of
exclusions or large itemized deductions. LAL would prevent individuals from deducting
artificial losses against unrelated salary or investment income.
The prior MTI proposal called for taxing an individual at regular rates on one-half of an
expanded income base if the expanded base exceeded his regular taxable income. The
expanded base consisted of adjusted gross income plus the excluded half of net long-term
capital gains, the bargain element in stock options, the excess of percentage over cost
depletion, and excludible income earned abroad. The expanded income base was then
reduced by personal exempfions, certain deductions, and a $10,000 exemption.
House action
Instead of adopting MTI, the House merely restructured the minimum tax. The rate of tax
is increased from 10 to 14 percent, the $30,000 exemption is reduced to $20,000 and is
subject to a phaseout. Moreover, new items of tax preference are added. A most serious
consequence of the House action is the denialof any offset for regular income taxes paid.
This means that individuals who have paid significant amounts of regular tax will now be
subject for the first time to an additional minimum tax.
The House bill also treats as preferences certain accelerated deductions which result in
deferral of tax rather than a permanent exemption from tax. To illustrate, as an incentive
for real estate development, taxpayers may elect to deduct taxes and interest during the
construction period. To prevent the mismatching of income and deductions, the House
adopted the administration's LAL proposal, which allows these deductions only to the extent
of related real estate incoriie. Having closed the potential abuse, the House proceeded to treat
construction period interest and taxes not hmited by LAL as items of tax preference for
minimum tax purposes. We believe this action is conceptually unsound since the deductions,
when allowed, are offsetting income from a related activity. Furthermore, HUD and Treasury
are convinced that this treatment can have an adverse effect on real estate development.
Revised MTI proposal
We are convinced that neither the current minimum tax nor the amendments made by the
House bill properly deal with the problem of high economic income taxpayers who pay littie
or no income tax. We propose that your committee repeal the minimum tax and adopt an
alternative tax along the lines of our prior MTI proposal. We have modified our MTI proposal
somewhat in light of concerns expressed since it was first proposed in 1973.
Adjusted gross income was the starting point for computations under the original MTI
proposal. A taxpayer with large, but legitimate, itemized deductions and little taxable income
EXHIBITS
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might have been taxable under MTI. We have reconsidered this aspect ofthe proposal and
have concluded that this result is not warranted. We recommend, therefore, that the starting
point for MTI calculations should be taxable income.
Permit me to review how MTI will work. MTI will be an alternative tax. Under MTI, a
taxpayer will pay tax at the regular rates on the larger of his taxable income or on his MTI
base. The MTI base is calculated by (1) adding items of tax preference to a taxpayer's taxable
income, and (2) taking 60 percent of that expanded base. A $10,000 exclusion is allowed
(before applying the 60-percent factor) to assure that MTI does not affect either low-income
taxpayers or taxpayers with only a small amount of tax preferences. For MTI purposes, there
are only two tax preferences: (1) The excluded portion of net long-term capital gains, and
(2) itemized deductions (other than charitable contributions) to the extent that they exceed
70 percent of the taxpayer's adjusted gross income.
There are several preference items which are included under the present minimum tax
which are not included as preference items under our MTI proposal. Our tax shelter program
consists of two parts: LAL takes care of some shelters; MTI will take care of others. Thus,
to the extent that LAL deals with an item of preference, there is no reason to include it under
MTI. Most ofthe preference items under the minimum tax are handled under LAL. We have
not included percentage depletion in excess of basis as an item of tax preference since
percentage depletion has been virtually eliminated. The remaining preferences are excessive
itemized deductions and capital gains. Therefore, they are the only two included under MTI.
Under our present proposal, the alternative tax will be computed on 60 percent of the MTI
base instead ofthe 50 percent which the administration recommended in 1973. The increase
from 50 to 60 percent will make MTI more effective in insuring that individuals with large
economic incomes pay a tax which is significant in relation to that income.
Charitable contributions under MTI
In 1974, when the House Ways and Means Committee in its tentative decisions adopted
the MTI concept, one of the controversial issues \yas the impact of MTI on charitable
contributions. After considerable discussion, the committee decided to put charitable
deductions entirely outside the scope of MTI. In view ofthe dire financial position in which
inflation has left so many private charities, we became persuaded that the committee decision
was appropriate and we supported it in our July 1975 testimony.
Accordingly, we have carefully structured our present MTI proposal to avoid completely
all impact on charitable contributions. Under our proposal, charitable contributions, no
matter how large, will not be an item of preference. We will exclude contributions in
computing the extent to which itemized deductions will be a preference item.
In short, we have treated charitable contributions very generously. Under no circumstances can MTI adversely affect contributions.
Overall, we believe that MTI is superior to the minimum tax as a way of dealing with the
problem of taxpayers who make excessive use of tax preferences. MTI will not affect
taxpayers who use tax preferences—which the Congress has provided to encourage various
economic activities—and who otherwise pay substantial ordinary tax. At the same time, MTI
will assure that every taxpayer bears a fair share of the tax burden. The idea of fair share
is related to the taxpayer's ability to pay. Whereas the minimum tax is an additional tax at
a flat rate, our minimum taxable income proposal involves an alternative tax, at progressive
rates, based directly on a measure of ability to pay. Not only is this in itself a desirable feature,
it is compatible with long-term tax reform in the direction of a more inclusive definition of
income, taxed at a lower structure of rates.
Simplification Provisions
As I mentioned earlier, simplification of the tax law must be a major objective of any
meaningful tax reform.
Much of the complexity faced by the average taxpayer is in itemizing deductions.
Expansion and revision of the standard deduction under the administration's current tax
proposal will result iri substantial tax simplification by increasing the number of taxpayers
who will use the standard deduction. However, it is also necessary to simplify the tax law
directly, and thereby enhance its fairness, through the elimination or restructuring of certain
provisions which require complex recordkeeping by taxpayers.
In 1973, the administration made specific proposals to achieve simplification. H.R. 10612
generally follows our proposals by expanding the optional tax tables and by revising the sick
pay exclusion, the retirement income credit, and the child care deduction. Overall, the
changes are in the right direction. However, the House did not adopt the miscellaneous
deduction allowance proposal recoriimended by the administration in 1973. We believe that
further action is required and that certain aspects of H.R. 10612 relating to simplification
should be revised.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Miscellaneous deduction allowance
The administration recommends the adoption of a miscellaneous deduction allowance of
$400 ($200 in the case of a married individual filing a separate return) for taxpayers who
itemize their deductions. This simplification deduction will replace or modify the following
hard-to-itemize deductions:
•
The deduction for State and local gasoline taxes.
•
Medical expenses and casualty losses.
•
Certain miscellaneous investment expenses and employee business expenses.
These deductions are sources of complexity in the present tax law. While they are used
by many taxpayers, they generally do not significantly affect a taxpayer's ability to pay or
provide substantial incentives. They require taxpayers to keep track of numerous small bills
and receipts which are difficult to classify, summarize, and correctly reflect on the tax return.
These items also cause substantial problems on the administrative side at the audit level.
Let me discuss briefly some of the specific deductions which will be affected by our
proposal.
First, we propose repeal of the deduction for State and local gasoline taxes. The gasoline
tax deduction involves complications out of proportion to any benefit to the taxpayer. There
is a substantial amount of guessing in the computation ofthe deduction (where the tax tables
are not utilized) and the amount ofthe tax saving to the average taxpayer is generally small.
In addition. State and local gasoline taxes, like the nondeductible Federal gasoline tax, are
in essence charged by the State for the use of its highways. They are in the nature of personal
expenses for automobile travel rather than a tax, and therefore, like such expenses, they
should not be deductible. Further, their deductibility is inconsistent with the character of the
taxes as use charges since they serve to shift part ofthe cost ofthe highway user to the general
taxpayer.
The gasoline tax deduction is also iriconsistent with our current national energy policy. The
deduction lowers the price of gasoline to taxpayers who itemize deductions. Repeal of this
provision should result in the reduction of gasoline consumption.
Second, we propose to revise the medical expense and casualty loss deductions. Under
current law, there is a complex three-tier system for determining allowable medical expense
deductions. First, a medical expense deduction is allowed for one-half of medical insurance
premiums (up to $150) without regard to a 3-percent fioor applicable to other medical
expenses. Second, a taxpayer must compute amounts paid for medicine and drugs to the
extent they exceed 1 percent of his adjusted gross income. This excess is then added to the
remainder of the cost of his medical insurance (which was not deductible in the manner
described above) and to general medical expenses not otherwise compensated by insurance.
If the total of these items exceeds 3 percent of the taxpayer's adjusted gross income, then
that excess is deductible as a medical expense.
Nonbusiness casualty and theft losses are deductible under present law only to the extent
that the loss in each case exceeds $100.
We propose to apply a floor of 5 percent of adjusted gross income on medical expenses
and casualty losses. Further, we propose repeal of the deduction for one-half of medical
insurance premiums (up to $150) allowable without regard to the current 3-percent floor.
The 1-percent floor with respect to medicine and drugs would also be eliminated. Expenses
for drugs would be covered under the proposed 5-percent floor, but the deduction would
apply only to prescription drugs.
Aggregation of medical and casualty deductions is desirable because they are quite similar.
Both are based on the theory that they reduce a taxpayer's ability to pay because of
unfortunate circumstances generally beyond his control. The 5-percent level is where these
expenses become extraordinary and affect substantially a taxpayer's ability to pay taxes.
Third, we prppose a $200 floor on the deduction of the following expenses:
•
Employee business expenses such as union dues, work clothes, small tools,
educational expenses, and home office expenses; and
•
Expenses such as tax return preparation expenses, and investment expenses such
as the cost of financial newspapers, financial periodicals, investment advisory
services, and.safe-deposit boxes.
We propose a $200 floor on these expenses because of the considerable difficulty
experienced by taxpayers in keeping records of a number of relatively small items. By limiting
these deductions to cases where a taxpayer incurs a significant aniount of such expenditures,
some difficulty in completing tax returns will be eliminated for many taxpayers.
We propose the adoption of a miscellaneous deduction allowance of $400 ($200 in the
case of a married individual filing a separate return) for taxpayers who itemize their
deductions to replace the itemized deductions eliminated or restructured by our proposal.
This deduction would be in addition to a taxpayer's other itemized deductions which are
unaffected by this proposal.
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Child care provision
The child care provision of H.R. 10612 converts the current treatment of household and
dependent care expenses from an itemized deduction to a nonrefundable tax credit. The
revenue loss from adoption of a credit is estimated to be $325 million for 1976, $355 million
for 1977, and $393 million for 1978, with the amounts projected to increase substantially
for the years 1979-81. Such high cost for the child care credit is entirely unjustified in terms
of the resultant benefits.
Simplification and expansion ofthe provision can be provided adequately by retaining the
existing deduction without substantial revenue loss. We continue to emphasize that the child
care deduction should be made available only to low- and moderate-income taxpayers whose
economic situation is such that it compels both spouses to work and who thus have no spouse
at home to care for dependents. There can be no justification for allowing the tax system to
subsidize high-income taxpayers in discharging a personal obligation to care for dependents
and thereby depart from what is the proper basis for the provision.
We generally support the other revisions of the child care deduction made by H.R. 10612.
Thus, we support those measures which make it fairer and simpler such as its extension to
married couples where the husband or wife, or both, work part time, or where one is a fulltime student and the other works. Similarly, we support elimination ofthe monthly limitation
on the deduction in favor of an annual deduction.
We also support elimination ofthe current distinction between care outside the home and
care in the home, making the deduction available to a divorced or separated parent with
custody of a child, and to a deserted spouse.
Sick pay exclusion
Another prime candidate for simplification is the sick pay exclusion provisions ofthe Code.
Under present law, sick pay is excluded from gross income and, therefore, not subject to tax.
However, these provisions are complicated by special rules turning on the amount of the
weekly sick pay, the number of days the employee has been absent from work, the
relationship between the sick pay and the employee's regular wages, and whether the
taxpayer has been hospitalized.
H.R. 10612 repeals the present sick pay exclusion and the complicated time and
percentage rules. A maximum annual exclusion of $5,200 ($100 a week) is provided only
for taxpayers under age 65 who are permanently and totally disabled. After age 65, these
individuals are eligible for a retirement income credit. The provision requires a reduction
ofthe exclusion on a dollar-for-dollar basis by the amount ofthe taxpayer's income, including
disability income, in excess of $15,000.
While the House modifications ofthe sick pay provisions are a step in the right direction,
we believe that complete repeal of these provisions is essential to the goal of simplification
and equity. The sick pay provisions were enacted with worthwhile objectives in mind.
However, limitations, conditions, and exceptions had to be grafted onto them to prevent
abuses and substantial revenue losses. As a result, these provisions are now incomprehensible
to the average taxpayer. More fundamentally, no justification exists for treating sick pay any
differently than other wages. Taxpayers who have comparable ability to pay should be taxed
in a similar manner.
Retirement income credit
There is a need to redesign the present retirement income credit for several basic reasons:
First, the complexity of the present retirement income credit prevents it from providing
the full measure of relief it was intended to grant to elderly people. Individuals who receive
little or no social security benefits should be subject to a tax treatment roughly comparable
to that accorded those who receive tax-exempt social security benefits. However, difficult
compliance burdens have been imposed on large numbers of elderly people, many of whom
are not skillful in preparing tax returns. These individuals must now compute their retirement
income credit on a separate schedule which involves 19 separate items, some ofwhich require
computations in three separate columns. Further, the special provisions for public retirees
under age 65 also add substantially to this complexity.
It is these complexities which undoubtedly account for the fact that some of the
organizations representing retired people have estimated that as many as one-half of all
elderly individuals eligible to use the retirement income credit do not claim this credit on
their tax returns.
Second, the credit needs revision because most of its basic features have not been revised
since 1962 when the maximum level of income and the current earnings limits were
established. Since that time, social security benefits have been substantially liberalized. As
a result, the present maximum amount of income eligible for the credit is considerably below
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1976 REPORT OF THE SECRETARY OF THE TREASURY
the average annual social security primary and supplementary benefits received by retired
workers.
Third, the present credit discriminates among individuals with modest incomes, depending
on the source of their income. The credit is available only to those with retirement income^—
that is, some form of investment or pension income in the taxable year. Elderly individuals
who must support themselves by earning modest wages, and who have no investment or
pension income, are not eligible for any relief under the present credit.
This feature of present law is unfair. Elderly individuals who rely on earned income should
be allowed the same retirement income credit as those who live on investment income.
In 1973, we recommended a revision of the retirement income credit. With one exception,
H.R. 10612 follows our recommendations. The retirement credit is converted to an age
credit, available to all taxpayers age 65 or over regardless of whether they have retirement*
income or earned income. Further, the maximum amount on which the credit is computed
was increased and much of the complexity reduced or eliminated.
One further step is necessary. The separate treatment of the retirement income of public
employees under age 65 should be eliminated. The continuation of this treatment perpetuates
the extraordinary complexity of this provision. This would be contrary to the goal of
simplification and fairness which was the major purpose of amending the existing retirement
income credit in the first instance.
Foreign Income Provisions
The House bill has several provisions dealing with the taxation of foreign income. I would
like to comment briefly on a few of these provisions.
Foreign tax credit
The United States employs a foreign tax credit to avoid double taxation of income. The
basic concept of a foreign tax credit system is that, when an enterprise of one country does
business in another country, the country in which the business is carried on has the first right
to tax the income of the business. The home country also taxes the income, but only to the
extent that the home tax does not duplicate the tax ofthe country where the income is earned.
The duplication is eliminated by the foreign tax credit.
The basic concept of the foreign tax credit is sound, and has the full support of the
administration. The foreign tax credit is neither a tax loophole nor an incentive to invest
abroad. It is merely part of a system of allocating primary taxing jurisdiction to the country
within whose borders the income is earned. U.S. companies are taxable on their worldwide
income. Our tax credit system does not reduce the total tax bill of U.S. companies below the
amount they would have paid if the income had been earned here. The effect is that the total
tax is limited to the higher of the U.S. tax or the foreign tax.
Despite the basic soundness of the foreign tax credit, there are technical problems with
our present system. H.R. 10612 contains several provisions which deal with these problems.
At present, taxpayers may compute their foreign tax credit under either the per-country
limitation or the overall limitation. Under the per-country limitation, the foreign tax credit
is applied to the taxes and the income of each country separately. Where taxes in a given
foreign country exceed the U.S. tax on the income from that country, that excess is not
creditable. Where another foreign country's taxes are less than the U.S. tax on the foreign
income from that other country, the taxpayer will have additional tax to pay to the United
States. When there is a loss in a particular country, that loss can reduce U.S. taxes on U.S.
income, even if there is income in other countries with respect to which no U.S. tax is payable
because of the foreign tax credit.
Under the overall limitation, the taxpayer aggregates all his foreign income and all his
foreign taxes. If the foreign taxes do not exceed the U.S. tax on the foreign income, then the
entire amount of foreign tax may be taken as a credit. The overall limitation permits the
taxpayer to average out high foreign taxes with low foreign taxes, but does not allow foreign
losses to reduce U.S. taxes on U.S. income, unless there is an overall foreign loss.
The opportunity that taxpayers now have either to offset foreign losses against domestic
income or to average high and low foreign taxes has given rise to demands for revision of
our foreign tax credit system. In response to these demands, the House bill eliminates the
per-country limitation.
The Ways and Means Committee report explains that the elimination of the per-country
limitation is necessary to prevent foreign losses from offsetting domestic income, except in
the case of an overall foreign loss. In addition, the per-country limitation creates difficult
administrative problems. The primary problem is the difficulty of providing adequate source
rules. Because of these problems with the per-country limitation, the administration has not
objected to its repeal.
The House bill also includes a foreign loss recapture provision. This provision was
proposed by Treasury in slightly different form in 1973, but we support it in its present form.
We view this as a technical change to eliminate an unintended benefit. Under present law.
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a U.S. taxpayer can use foreign startup losses to reduce U.S. tax and then pay no U.S. tax
on subsequent foreign gains because of the foreign tax credit. In such a case it is only fair
for the United States to recapture the tax lost during the startup period.
The House bill provides a capital gain adjustment to the foreign tax credit. We view this
as a technical improvement, and we support it. Capital gains are subject to lower U.S. tax,
and it is logical that foreign capital gains should receive a correspondingly lower foreign tax
credit limitation. Similarly, we view the full gross-up for less developed country dividends
as a desirable simplification, eliminating an inefficient preference in our tax laws.
Domestic international sales corporation (DISC)
The House bill has introduced an incremental export rule for U.S. exporters through DISC
and has provided that certain goods are not eligible for DISC benefits. The administration
supports DISC and opposes the House cutbacks in the program.
DISC stimulates exports. During the time DISC has been in existence, U.S. exports have
grown from $44 billion in 1971 to some $118 billion in 1975. Obviously, all of this growth
cannot be attributed to DISC. The growth reflects worldwide trade expansion, exchange rate
adjustments, varying inflationary movements, and so on. But part ofthe growth is due to the
incentive of DISC. Most estimates ofthe DISC part of the growth range between $4 billion
and $6 billion per year.
DISC creates jobs. With more goods exported, more goods must be produced, and more
people are employed to produce them. DISC tends to neutralize the provisions in foreign tax
laws which encourage U.S. businesses to establish plants abroad or encourage foreign export
efforts in competition with U.S. exports.
Any curtailment of DISC would be particularly unfortunate at this time, when the economy
is in the midst ofa recovery. It would increase our present problem of capital formation by
raising the taxes on capital at a time when they should be lowered. It would hit hardest those
companies who have been doing the most to help our export efforts. We shouldn't alter DISC
until there is agreement in the multilateral trade negotiations concerning uniform rules for
taxation of exports.
The House moved to restrict DISC benefits in two ways:
First, the bill takes away DISC benefits for the export of certain goods. The Tax Reduction
Act of 1975 has already made natural resources ineligible for DISC. The current bill would
add to the disqualified list agricultural products not in excess supply and military equipment.
Second, for companies with profits in excess of $100,000, the House bill restricts DISC
benefits to income on sales in excess of 75 percent of average sales during a base period.
The first change, the disqualification of certain items from DISC, reflects a desire to
remove the export stimulus from the export of goods believed to be undeserving of stimulus.
This effort produces hardship for companies exporting those items. The hardship is made
particularly difficult by the lack of adequate transitional rules for those companies previously
exporting the now-disqualified items.
The second change, the incremental approach, was considered seriously during the
development ofthe DISC legislation in 1971, at a time when income on incremental DISC
sales would have been 100 percent deferred, rather than 50 percent deferred. This committee
judged an incremental approach unsatisfactory, and the legislation emerged with an
alternative of a 50-percent deferral. The reasons valid in 1971 for rejecting an incremental
approach remain valid today. The problem is similar to that posed by excess profits tax
legislation. Inevitably, any base period will lead to unfairness. The new entrant will have an
undue advantage, and the company with declining sales will have no incentive to slow the
trend. An already complex statute will be rendered increasingly unworkable to the detriment
of U.S. exports and jobs.
DISC has been in place for only a short time. And, it is working. Many companies have
made significant investments in reliance on it, but the legislative tinkering with the DISC can
only weaken the program. DISC, like the investment credit, should not be turned on and off
depending on the whim of the moment. We must resist the temptation to adopt stop-andgo policies, which create a climate of great uncertainty for business planning.
Other foreign income items
The House bill contains a number of other changes in the tax treatment of foreign income.
In general, we either support, or do not oppose, these changes. I wbuld like to mention in
particular only two of these items.
First, the foreign trust provision: The House bill would end the tax loophole whereby many
wealthy individuals avoid U.S. tax through the creation of foreign trusts. We strongly support
this provision and, in particular, would oppose any attempt to weaken the provision or to
postpone its effective date.
Second, the changes in the ruling requirements with respect to tax-free reorganizations of
foreign corporations: These changes are very technical but, in general, would allow taxpayers
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1976 REPORT OF THE SECRETARY OF THE TREASURY
either to determine the effects of a transaction from the regulations rather than applying for
a ruling or to apply for a ruling after the event takes place rather than being required, as under
present law, to obtain an advance ruling. We strongly support this provision.
Administrative Provisions
The House bill contains numerous changes affecting the administrative provisions of the
Code. Most of these provisions would directly benefit the cause of sound tax administration
and the Treasury welcomes their enactment. For example, the provisions dealing with income
tax return preparers, declaratory judgments in section 501(c)(3) cases, assessments in the
cases of mathematical or clerical errors, and minimum exemptions from levy for wages, et
cetera would all have the effect of improving our tax system, and we hope these provisions,
with certain minor drafting changes, will be enacted into law.
Jeopardy and termination assessments; administrative summons
We believe, however, that extensive revisions are required in two provisions ofthe House
bill, those dealing with jeopardy and termination assessments and with administrative
summons. Whenever the Congress makes changes in the area ofthe capability ofthe Service
to perform its tax administration responsibilities, great care must be taken to provide that
such changes do not diminish the ability ofthe Service to effectively and fairly carry out these
responsibilities. While we share fully the concern underlying the House bill for the protection
of taxpayers' rights, we believe these provisions go too far in imposing burdensome
administrative procedures on the Service that unduly handicap its ability to collect taxes.
For example, the Internal Revenue Service uses administrative summons to obtain needed
information from third parties concerning the tax liability of taxpayers. This important
investigatory tool, which has been provided by modern revenue laws since at least 1926, is
essential to investigating cases in which there is a substantial probability of serious
noncompliance with the revenue laws. Although the Department believes that legislative
review of the entire administrative summons procedure is desirable at this time, it opposes
the particular amendments passed by the House. If enacted, they would enable a taxpayer,
by simple notice, to prevent a third party from giving the IRS information from the third
party's records relevant to the,liability of the taxpayer and compel the Government to
institute a court action (to which the taxpayer will be a party) for the release of that
information. This will mean that in every case in which there is a high probability of
noncompliance with the tax laws, IRS investigations will, from their inception, be frequently
tied up for extended periods of time without any investigatory progress.
As regards jeopardy and termination assessments, the Laing case, decided by the Supreme
Court after the House bill was passed, will plainly alter procedures which the Service must
follow in termination assessment cases, and the effect of this decision should be taken into
account when your committee considers these provisions.
Employment taxes
'•
There are two important areas affecting tax administration which are not dealt with in the
House bill that we would hope the committee will give its serious consideration. The first
deals with the Service's administration ofthe employment tax area. Despite vigorous actions
by the Internal Revenue Service, the tools available under present law are simply not
adequate to cope with mounting delinquencies in unpaid employment taxes. Our experience
shows that this overall deterioration in compliance requires a thorough revision of the basic
definition of the employer-employee relationship and the penalty structure for failures to file,
collect, withhold, account for, and pay over employment taxes. Accordingly, we would like
to work with your committee in developing clearer and more uniform statutory guidelines
with respect to when an employer-employee relationship exists. Such guidelines would have
the beneficial effect of making clear the types of relationships that would be subject to the
various employment taxes. This would provide greater certainty for taxpayers and eliminate
the necessity for the Service to devote a vast amount of administrative time and resources
to determining responsibility for payment of employment taxes.
Interest on delinquent taxes
The second area relates to the amount of interest charged and paid by the Service on
underpayments and overpayments of tax. Under present law (enacted last year), the rate of
interest for tax purposes is to be fixed, not more frequently than every 2 years, at 90 percent
of the average predominant prime rate quoted by commercial banks as determined by the
Board of Governors of the Federal Reserve System. To make the tax rate of interest more
realistic when compared with interest rates in the money markets, we recommend that it be
raised from 90 percent to 125 percent of the prime interest rate charged by commercial
EXHIBITS
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banks. With this revision, the interest rate on underpayments and overpayments of tax would
conform more nearly to the interest rates that the average taxpayer could obtain in the money
markets and, thus, make it less attractive for taxpayers to "borrow" from the Government
by being delinquent in their tax payments. In addition, we recommend that provision be made
for an annual, rather than a biennial, adjustment in the tax interest rate.
I would like to comment, now, on two other administrative provisions in more detail.
Disclosure of private letter rulings
The House bill contains a detailed set of rules providing for public disclosure of the
substance of private letter rulings issued by the Internal Revenue Service to taxpayers and
of National Office technical advice memoranda issued to District Directors, if disclosed to
the taxpayer involved. We enthusiastically endorse this basic concept of making public what
has come to be considered a body of "secret law."
While the structure ofthe section is elaborate in describing what must be disclosed under
its terms, it fails to provide sufficient safeguards for the legitimate confidentiality of materials
involved. This deficiency results from the fact that the section does not provide that it is the
exclusive means ofpublic access to the material encompassed in its scope. Thus, the section
leaves unresolved the basic issue as to what information contained in a ruling or a technical
advice memorandum, or the related background file, is subject to public disclosure under
other provisions of the law, principally the Freedom of Information Act. Nor does the section
resolve the issue of what portions of such information are protected from disclosure by the
confidentiality principles underlying our self-assessment tax system.
The section also provides that, in general, the identity ofthe recipient ofa private letter
ruling will be made public as part ofthe ruling itself. As a result, it is likely that a complicated
and cumbersome procedure will have to be established by the Service to insure that other
significant information will be deleted from the public text of the ruling in order to protect
the confidential affairs of the taxpayer.
We believe that the "secret law" is best understood when disclosure includes as many of
the relevant facts as possible and, moreover, that broad-scale disclosure of the identity of
ruling recipients serves no useful public function, particularly when compared to the
potential damage it may do to the basic confidentiality of the tax system. We urge the
committee, therefore, to attempt to find a method under which identities of ruling recipients
would be disclosed when there is compelling cause for the disclosure but under which, as
a general rule, such identities would remain confldential. If a successful solution to this
problem is found, the need to delete other information from the ruling in order to protect
a taxpayer's personal or financial privacy would be reduced.
Certainly it will remain necessary for a procedure to exist to permit the taxpayer and the
Internal Revenue Service to agree, before the issuance of a ruling, as to what information
may be disclosed. The taxpayer should be entitled to protect trade secrets and other sensitive
material, even if his identity will not be disclosed, by withdrawing his ruling request. But so
long as his identity will not be disclosed, this agreement procedure should be facilitated, and
public disclosure should not interfere with the basic ruling and technical advice issuance
programs.
I do want to emphasize, amid these comments, our basic support of many concepts
embodied in the House bill. It preserves the confidentiality principles of the Freedom of
Information Act; it recognizes the repetitiveness of certain rulings by permitting disclosures
of certain rulings in summary form; it acknowledges the need of the Service for judicial
uniformity on the scope of disclosure by limiting disclosure and confidentiality actions to the
Tax Court and the District Court for the District of Columbia with appeal to the Court of
Appeals for the District of Columbia Circuit; and it permits delay of disclosure when
premature disclosure would interfere with a pending transaction.
We also believe it critical to have an effective date for disclosure of future rulings to
commence upon the expiration of a reasonable time, say 90 days, after enactment of the
precise statutory rules governing disclosure. The taxpayer has a right to know, at the time
he requests his ruling, the degree of publicity to which his affairs may be subject; and the
Internal Revenue Service will have a massive gearing-up task to face.
In addition, consideration should be given as to the best manner in which to make public
rulings requested in the past. First, we think that the most recent rulings are likely to be the
most informative to the public so that a last-in, first-out (LIFO) order should be used. And,
second, we believe that the rulings already designated by the Service for its own internal
purposes as important, or reference, rulings will be the most useful and should be disclosed
prior to any past routine rulings.
Most important in your consideration of this issue is the preservation ofthe concept in the
House bill that the process of disclosure of past rulings is expensive and should not be
required without additional appropriation of funds by Congress for this specific purpose.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Confidentiality of tax returns
As you are well aware, another matter related to the confidentiality of our tax system has
been the subject of recent congressional concern; that is, the degree to which tax returns and
tax return information are made available to governmental agencies outside the Treasury
Department. Several Members of Congress, including Senators Weicker, Bentsen, Montoya,
and Dole, have introduced legislation to make section 6103, the section governing tax return
confidentiality, more specific and restrictive—replacing the present broad grant of authority
to the President to authorize disclosure by Executive order.
In this Congress and the last, the administration sent to the Congress a bill which, in our
view, constitutes an appropriate statutory balancing of the need for confidentiality in the selfassessment tax system and privacy for the taxpayer with the legitimate needs of relevant
governmental agencies for access to a data source of unparalleled detail and completeness.
At the end of January of this year, the General Counsel ofthe Treasury, Mr. Albrecht, and
the Commissioner of Internal Revenue, Mr. Alexander, presented the Treasury Department's
and the Service's views on this subject to the House Ways and Means Committee. Such a
complete discussion would be inappropriate in the general context of my remarks and this
hearing; but we are ready and eager to meet with your committee to review in detail the
factors which we believe must be taken into consideration in the legislative resolution of this
complex issue.
Let me, nonetheless, raise a few of the most pressing issues for your review.
First, there is substantial similarity among the majority of the proposals presently before
the Congress on the basic issues. There must be a comprehensive set of statutory rules to
replace the open-ended Executive order system of present law. This system should cover not
only the tax return itself but also other tax data concerning a taxpayer gathered by the
Service.
There are entities outside the Treasury Department which most proposals agree have
legitimate need for access to tax return information. These include the Justice Department
when it acts as the Internal Reveriue Service's attorney in litigating tax cases; the staff of the
Congressional Joint Committee on Internal Revenue Taxation and the tax-writing
committees of the Congress, themselves, when considering changes in the tax laws or
performing theif oversight function; the President and his specifically designated assistants
when he is acting in his capacity as the constitutional Chief Executive; and State tax
administrators when trying to verify the correctness of income reported on a State income
tax return. On most of these issues, there is almost unanimous agreement.
Second, the principal area of contention seems to relate to the use of tax data in nontax
law enforcement investigations and court proceedings. We believe that the Internal Revenue
Service has all the necessary incentive to protect the confidentiality of returns if given a set
of statutory rules permitting it to resist demands for disclosure. The administration's bill
requires that the Service be satisfied that the information sought for nontax law enforcement
use "cannot reasonably be obtained from another source" and that the disclosure of the
information will not "seriously impair the administration of the Federal tax law."
A further requirement that the information have a direct bearing on the investigation or
proceeding applies in the case of so-called third party returns. We strongly feel that such a
system of administrative control should be tested in use before a cumbersome court order
or search warrant procedure is established to govern access by non-Treasury personnel to
tax returns.
Third, we believe that analysis of the degree of publicity involved in a disclosure and the
relationship of the taxpayer to the matter under investigation or litigation is necessary to
determine the standards for disclosure. Thus, a public courtroom disclosure must be justified
by a stronger showing of necessity or relevance than must a disclosure within the Federal
Government. And the disclosure of a third party's return should be permitted only on a
showing of a degree of directness of relevance specified in the statute.
Fourth, we have concluded, based primarily on the absence of past abuse and on
convincing claims of need, that the statistical agencies of the Federal Government—
specifically the Census Bureau, the Bureau of Economic Affairs, and the Federal Trade
Commission's Bureau of Economics—should have access to individualized tax data for
statistical purposes under strict confidentiality controls.
Fifth, any amendment should permit the taxpayer to designate agents to inspect his own
tax information and to consent to any otherwise unauthorized disclosure of information by
the Internal Revenue Service.
Finally, we believe that non-tax-writing congressional committees should have access to
returns if authorized by a specific resolution ofthe appropriate House and that the President,
similarly, should not be limited to tax-administration-only access to tax data. There should,
however, be a written record of accountability for each disclosure (in the form of the
resolution on one hand and a personally signed request on the other), and a specification
EXHIBITS
463
ofthe staff assistants who are to be entitled to act as agents for the President and the Congress
in carrying out their constitutional functions.
Clearly, there are many detailed provisions to be worked out. But we are optimistic that
there is a solid foundation of agreement on which a final and practical structure can be
erected which will protect the privacy of taxpayers and enable the Government to function
effectively.
Conclusion
In this testimony I have addressed a long and seemingly disparate list of tax provisions. As
the members of this committee well know, when we attempt to embody policy in concrete
provisions of the law, it is difficult to avoid becoming entangled in a web of complexity. But
let us keep before us the long-term objectives of this administration and, I believe, of all of
you. The tax system should be fair. The tax system should be simple. The tax system should
promote efficient use of resources.
Inevitably we are going to take some steps backward as we take other steps forward and
often we are going to move sideways. I believe that the positions I have urged upon you today
represent the direction of improvement. However, I must candidly say to you that I see a vast
potential for further improvement. As I have said earlier and as I have said many times
elsewhere, I believe that the extraordinary complexity of our tax system has begun to threaten
public confidence in it, and I do not believe that this complexity is required to serve the
objectives of fairness and efficiency. Quite to the contrary.
Let us then, by all means, take the steps I have urged upon you in the direction of a better
income tax code, but let us not stop there. Let us have these steps represent a part of a process
of continuing true tax reform which will take us eventually to a tax system which looks as
though someone had constructed it on purpose, a simple progressive tax on a broad base
which adequately reflects individual taxpayer's ability to pay. That is the tax break all
Americans are waiting for.
Thank you.
Exhibit 36.—Statement by Secretary Simon, March 22, 1976, before the House Ways and
Means Committee, on proposed estate and gift tax revision
I am pleased to be here today to present to you the administration's position on the major
issues of estate and gift tax revision you will be addressing during the coming weeks.
Except for the introduction of the marital deduction in 1948, the basic structure of the
estate and gift taxes has remained fundamentally unchanged since 1932. The present estate
and gift tax rates were adopted in 1941, and the estate and gift tax exemptions were last
changed in 1942. A complete reexamination of the estate and gift taxes is, thus, long overdue,
and we look forward to cooperating with you in this undertaking.
Objectives of estate and gift taxation
Before discussing specific issues, I would like to set forth some general considerations
underlying the estate and gift taxes.
Historically, the estate and gift taxes were prompted primarily by a desire to raise revenue.
They were raised in wartime or periods of economic depression when governmental needs
for revenue were most intense. Once the immediate emergency was past, estate and gift taxes
were lowered again or were eliminated. And even the maximum rates were relatively low by
present standards: The top estate tax rate during the 1920's was 25 percent (a 40-percent
top rate was enacted in 1924 but was retroactively repealed in 1926).
But the emphasis of estate and gift taxation gradually shifted during the twenties and
thirties amid increasing social concem over unreasonable accumulations of wealth. This
development culminated in 1941 with the enactment of the present estate tax rate stmcture
that rises from 3 percent on the first $5,000 of taxable estate to 77 percent on taxable estate
in excess of $10 million. Since then, a major effect of the estate and gift taxes has been to
prevent or moderate the unreasonable accumulation of wealth and its transmission from
generation to generation. At the same time, the importance of estate and gift taxes to Federal
revenues has progressively diminished, so that these taxes now produce less than 2 percent
of Federal revenues.
Until recent years, the estate and gift taxes did not affect a large segment of taxpayers. The
limited impact of the taxes was consistent with their role as devices to restrain the undue
accumulation of wealth. Thus, the annual number of estate tax retums filed during the period
1923-45 never exceeded 18,000.1938 was the peak year, with 17,642 retums; and 1932 wias
the low point, with 8,507 returns. This meant that the percentage of estates filing estate tax
retums during the period varied between approximately two-thirds of 1 percent and 11/4
percent (0.65-1.25%).
464
1976 REPORT OF THE SECRETARY OF THE TREASURY
During the 30 years since 1945, the situation has changed dramatically. In 1975,
approximately 216,000 estates, or 11.2 percent of all estates, filed estate tax returns.
Approximately 150,000 estates, or 7.7 percent of estates, paid estate tax. This development
is summarized in the following table:
Year
1945
1950
1955
1959
I%3
1966
1970
1973
1975*
Deaths in
preceding year
1,411,338
1,443,607
1,481,091
1,647,886
1,756,720
1,828,136
1,922.000
1,964,000
1,936,000
Estate tax retums
filed
16,550
27,144
36,595
55,685
78,393
97,339
133,944
174,899
215,918
Percentage of
estates filing
Taxable retums
Percentage of
estates taxable
1.2
1.9
2.5
3.4
4.5
5.3
7.0
8.9
11.2
14,521
18,697
25,143
38;515
55,207
67,404
93,424
120,761
**150,000
1.0
1.3
1.7
2.33.1
3.7
4.9
6.1
7.7
* Fiscal year ending June 30, 1975.
** Estimated
In brief, the past 30 years have seen a tenfold increase in the impact of the estate tax in
terms ofthe percentage of estates affected. No longer does the tax impact principally on the
relatively larger estates. Rather, the estate tax has shifted to a more broadly based tax on the
private capital accumulations of more moderate estates. It is, thus, time to reexamine whether
the existing estate tax structure is harmonious with the basic objectives of the estate tax.
It should be emphasized that the question is not whether the wealthy should pay taxes.
Obviously, an individual should surely count himself fortunate to be among the 8- or lOpercent most wealthy. And such individuals are rightly held accountable by our progressive
tax system for defraying a greater share of the costs of government.
Rather, the question is: What combination of income taxes and estate and gift taxes is most
appropriate for ensuring the desired degree of progressivity in our tax system? From this
standpoint, I would urge the committee to emphasize that the estate tax has the limited
function of restraining the undue accumulation of wealth. It should not be viewed as a device
to raise revenue nor to achieve progressivity in the tax system, per se. Rather, we should rely
primarily on the progressive income tax for the orderly collection of revenues from the
income stream as it is generated. It is inappropriate, therefore, to continue down the present
path to a broad-based estate tax that imposes heavy burdens on moderate estates at a time
when financial demands on the widow and children of a decedent may be most heavy and
when the chief revenue producer has been lost to the family.
Estate and gift tax exemptions and rates
As should be evident from the preceding discussion, the most pressing single issue of estate
and gift taxation today is whether, and how much, to increase the estate tax exemption.
The estate tax has reached out to more and more estates in part because of an increase
in average real family wealth. But the widening impact of the estate tax is also attributable
in large part to inflation. Adjusting the $60,000 estate tax exemption for inflation since 1942
would require an estate tax exemption of $210,000. While a person with a $60,000 estate
in 1942 could leave it to his family without tax, today an individual must have an estate of
$260,000, on which an estate tax of $50,700 will be levied, in order to leave the equivalent
amount, $210,000, to his family.
We believe that an increase in the estate tax exemption is clearly warranted. Indeed, such
an increase is essential if the estate tax is to be returned to its historic role as an excise on
the transfer of relatively larger wealth accumulations. At the same time, we cannot ignore
the significant revenue consequences that would result from increasing the estate tax
exemption. Thus, we recommend that the estate tax exemption be increased to $150,000
over a 5-year transition period and that the lower bracket estate tax rates on the first $90,000
of taxable estate be eliminated. Limiting the increase of $150,000 (with the proposed rate
changes) will permit the revenue loss to be held to an acceptable amount, which can be
absorbed gradually during the phase-in period.
We are not recommending any change in the gift tax exemption or rates. In general, it is
only those persons with relatively large estates who make substantial lifetime gifts. Individuals
with an estate of $250,000 to $500,000 are unlikely to exceed the present $30,000 lifetime
exemption and there is less pressing need for an increased gift tax exemption than for an
increased estate tax exemption.
While the proposal to eliminate the lower estate tax rate brackets is prompted in part by
revenue considerations, it will also achieve a needed simplification and restructuring ofthe
present estate tax rates, which are set out in table I below.
465
EXHIBITS
TABLE I.—Estate tax rates
Taxable net estate
(or taxable gifts)
Oto $5,000
$5,000 to $10,000
$10,000 to $20,000
$20,000 to $30,000
$30 000 to $40 000
$40 000 to $50 000
$50 000 to $60 000
$60,000 to $100,000
$100,000 to $250 000
$250 000 to $500 000
$500 000 to $750 000
$750 000 to $1 000 000
$1,000,000 to $1.250,000
Present estate tax
rates
Percent
3
7
11
14
18
22
25
28
30
32
35
37
39
Taxable net estate
(or taxable gifts)
$1,250,000 to $1,500,000
$1,500 000 to $2 000 000
$2,000,000 to $2 500,000
$2 500 000 to $3 000 000
$3 000 000 to $3 500 000
$3 500 000 lo $4 000 000
$4 000 000 to $5 000 000
$5 000 000 to $6 000 000
$6 000 000 to $7 000 000
$7 000 000 to $8 000 000
$8,000,000 to $10,000,000
$10,000,000 and over
Present estate tax
rates
Percent
42
45
49
53
56
59
63
67
70
73
76
77
As can readily be observed, the lower estate tax rates are in a sense illusory. Thus, the
beginning rate is 3 percent for the first $5,000 of taxable estate, but the lower rate brackets
are so narrow that the marginal rate quickly reaches 25 percent at $50-$60,000 of taxable
estate. Thereafter, the rate progression slows dramatically. Once an adequate exemption is
provided, the lower rate brackets should simply be eliminated. This will mean a higher initial
rate but a smoother rate progression. The proposed estate tax rates are set out in table II
below. Table III illustrates the effect ofthe exemption and rate changes on estates of varying
sizes.
Liberalized payment provisions for family farms and businesses
An issue on which attention has increasingly focused concerns the provisions for
installment payment of estate taxes.
Inflation has had a particularly serious impact upon the family farm or business. Property
values have risen dramatically with the result that owners have been faced with higher estate
taxes. This has created a greater need for liquidity than is faced by many other taxpayers,
because family farms or businesses generally tend to represent a significant portion of the
owners' estates in terms of dollar values. Therefore, many families have found it necessary
to sell the family farm or business to obtain cash to pay Federal estate taxes.
These liquidity problems will be alleviated by the adoption ofthe proposed increase in the
estate tax exemption, but they will still exist for estates over $150,000.
To meet the specific liquidity problems of family farms and small businesses, the
administration has proposed a change in the present provisions for 10-year installment
payments of estate tax to make it easier to continue the family ownership of a small farm
or business following a substantial owner's death. In summary fashion, the details are as
follows:
•
At the estate's option, a 5-year moratorium will apply to payment of that portion
of the tax liability attributable to an ownership interest in a family farm or other
closely held business qualifying for 10-year installment payments under present
section 6166 of the Internal Revenue Code. No interest will accrue during the 5year moratorium period and no principal or interest payments will be required
during that period.
•
At the end of the 5-year period, the deferred tax will, at the estate's option, be
payable in equal annual installments over the next 20 years.
•
Interest on the installments will be reduced to 4 percent per annum from the 7percent rate generally applicable to deferred tax payments.
TABLE II.—Proposed estate tax rates
Taxable net estate
(or taxable gifts)
$0 to $100 000
.. .
$100 000 to $250 000
$250,000 to $500 000
$500 000 to $750 000
$750 000 to $1 000 000
$1 000 000 to $1 250 000
$1 250 000 to $1 500 000
$1,500,000 to $2,000,000
$2,000,000 to $2,500,000
Proposed
rates
Percent
30
32
34
36
38
41
44
47
50
Taxable net estate
(or taxable gifts)
$2,500,000 tb $3,000,000
$3 000 000 to $3 500 000
$3,500,000 to $4,000,000
$4,000,000 to $5.000.000
$5,000,000 to $6,000,000
$6 000 000 to $7 000,000
$7 000 000 to $8 000,000
$8,000,000 to $10,000,000
$10,000,000 and over
Proposed
rates
Percent
54
57
60
64
67
70
73
76
77
4^
ON
ON
73
m
O
T A B L E III.—Estate tax b u r d e n s
[Exemption only; no credits or deductions from adjusted gross estate]
73
Proposed law
Current law
Adjusted gross estate
Taxable estate
Tax burden
Taxable estate
Tax burden
Change in tax burden
$60 000
100,000
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
5,000,000
6,000,000
7.000,000
8.000.000
10,000.000
$40 000
190.000
440,000
690,000
940,000
1.190,000
1.440,000
1.940,000
2.440.000
2.940.000
3.440,000
3.940,000
4,940,000
5,940.000
6.940.000
7.940,000
9,940,000
$4 800
47,700
126,500
212,200
303,500
399.800
503.000
726.200
%8.800
1.231,400
1,509.600
1.802.800
2.430.400
3,098.000
3.796.200
4,524.400
6.042.600
$100,000
350.000
600.000
850,000
1,100,000
1,350,000
1,850.000
2,350,000
2,850.000
3.350.000
3.850.000
4,850,000
5.850,000
6,850,000
7,850.000
9,850,000
$30,000
112,000
199.000
291.000
389.000
494.500
725,000
970,500
1,234,500
1,515,000
1,810,500
2.444,500
3,110,000
3,805,500
4,531,000
6,046,500
-$4,800
-17,700
-14,500
-13.200
-12.500
-10.800
- 8.500
- 1.200
+ 1,700
+ 3,100
+ 5.400
4- 7.700
+ 14.100
+ 12.000
+ 9.300
+ 6,600
+ 3,900
Percentag ;e change in
tax \Durden
- 1100.0
37.1
11.5
6.2
4.1
2.7
1.7
+
+
+
+
+
+
+
+
+
H
O
H
X
CO
m
n
73
m
H
>
73
<
O
H
X
m
H
73
m
>
C
73
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EXHIBITS
467
•
The 5-year moratorium and 20-year extended payment provisions will apply only
to the estate tax liability attributable to the first $300,000 in value of the family
farm or business. Between $300,000 and $600,000 there will be a dollar-for-dollar
reduction in the value of the farm or business qualifying for the moratorium and
extended payment provisions. That portion of the tax not qualifying will continue
to be subject to 10-year installment payments with the 7-percent interest rate.
We believe that enactment of the administration's proposals would be a positive and
essential step toward ensuring the survival of small farms and businesses for future
generations.
Marital deduction
Let me turn now to the question of liberalizing the estate and gift tax marital deduction
provisions.
The marital deduction was introduced in 1948 to equalize the estate and gift tax treatment
of couples in common law property States with that of couples in community property States.
The property of community property couples is, in general, split 50-50 between the spouses
by operation of law without imposition of estate or gift taxes; and the objective of the marital
deduction provisions was to provide equivalent tax treatment for common law property
couples.
Under the gift tax, a marital deduction may be claimed for one-half the amount transferred
to a spouse. Under the estate tax, a marital deduction may be claimed for up to one-half of
the acljusted gross estate (gross estate less administrative expenses ofthe estate, debts ofthe
decedent, and the value of any community property included in the estate). Under both the
estate tax and the gift tax, transfers of certain "terminable interests" are nondeductible; the
deduction is generally limited to gifts of outright ownership and gifts that will result in the
transferred property being included in the estate of the surviving spouse.
The present marital deduction provisions are subject to criticism on several grounds.
First, under the existing provisions it is still not possible for couples in common law
property States to obtain a tax-free division of their property in all cases. Whereas the
community property laws operate automatically to split the spouses' property between two
estates, the estate tax marital deduction may be utilized to split a family's wealth
accumulation only in the event the wealthier spouse dies first. And the division of property
may not be accomplished free of tax during life since the gift tax marital deduction equals
only one-half of the property transferred.
Secondly, many families rightfully regard their property as being generated by their
combined efforts and, thus, "ours" rather than "his" and "hers" (this is likely to be
particularly true of checking and savings accounts, stocks registered in joint names, and the
family residence). As a result, they often transfer property from separate ownership, to joint
ownership or community ownership without paying much attention to the legal change in
ownership. There is a serious question whether it is appropriate to tax such transfers that are
basically just incidents in the common management of the family's pooled resources
Finally, the present 50-percent deduction has created complicated administrative
problems for many estates. In some estates, tax savings may be achieved through use of a
marital gift provision precisely limited to exactly 50 percent ofthe adjusted gross estate. Since
the exact amount of the adjusted gross estate cannot be predicted when a will is drawn, will
draftsmen have resorted to formula provisions which have increased the administrative
problems of executors and have required fiduciary accounting which is a mystery to widows
and children.
We recommend the adoption of a free interspousal transfer rule, or unlimited marital
deduction, under which all transfers between spouses would be completely excluded from
the estate and gift taxes. Such a rule best comports with the way most couples manage their
property and would substantially simplify the estate tax law and the administration of estates.
We estimate that this unlimited marital deduction, when fully effective, will reduce Federal
estate and gift tax revenues by $500 million annually, if adopted in combination with the
proposed $150,000 estate tax exemption, and $700 million annually if combined with the
present $60,000 estate tax exemption. This is obviously a major sum in terms of the total
Federal budget, and the loss ought ideally to be phased in gradually over a period of years.
In practice, however, such a phase-in is not feasible because the initial steps in liberalizing
the deduction produce the greatest portion ofthe total revenue loss. For example, a minimum
marital deduction of $ 100,000 plus one-half of the adjusted gross estate in excess of $ 100,000
would reduce revenues about $350 million if adopted together with the $78,000 exemption
proposed for the first year under the 5-year phase-in period for the proposed $150,000
exemption. Moreover, a phase-in of the increased marital deduction would create a veritable
nightmare for will draftsmen who would have to consider contingent provisions to match
each increase in the allowable deduction. We are accordingly recommending that the
effective date for the unlimited marital deduction be postponed, so that it would be effective
468
1976 REPORT OF THE SECRETARY OF THE TREASURY
for estates of persons dying after December 31, 1976. The first estate tax returns to which
the provision would apply would, thus, not be due until October 1, 1977; and there would
be no significant revenue impact until fiscal year 1978.
Tax on unrealized appreciation
Another major issue before your committee concerns the treatment of unrealized
appreciation in property transferred at death. Under present law, the heirs receive a new fair
market basis in such property, so that any unrealized gain or loss permanently escapes income
tax. This rule is sometimes called the stepped-up basis rule. In contrast, if appreciated
property is given away during life, the donor's tax basis is carried over to the recipients and
any unrealized gain will be taxed on their later sale of the property.
The fact that present law does not tax unrealized appreciation in property transferred at
death is said by some critics of the system to create an inequity between taxpayers who
accumulate wealth mainly from previously taxed income (e.g., wages and realized
appreciation) and those whose accumulated wealth consists largely of unrealized appreciation in the value of their property. Both groups are subject to the estate and gift taxes, but
it is argued that the latter group escapes payment of its fair share of income taxes because
the unrealized appreciation had not been taxed before death. Moreover, present law is
thought to create a "lock-in" effect—a tendency of taxpayers (particularly older taxpayers)
to retain highly appreciated property so that they may avoid'payment of capital gains tax and
pass on a larger estate to their families.
These concerns have led to recurrent, serious proposals to change the rules. The main
alternatives that have been suggested at various times are: (1) To impose a capital gains tax
on unrealized appreciation in an estate; (2) to extend to property transferred at death the
carryover basis provision now applicable to gifts; and (3) an additional estate tax on the
amount of unrealized appreciation in an estate.
1. Capital gains tax.—Proposals to impose a capital gains tax on unrealized appreciation
in an estate would, in effect, treat the estate as if it had been sold at death. If the property
in the estate had in fact been sold immediately before death, tax would have been paid by
the executor with the decedent's final income tax return, and that tax would have been
deductible from the gross estate subject to estate tax. Accordingly, proposals to impose a
capital gains tax similarly provide for the deduction of such tax from the gross estate.
The basic assumption of the capital gains tax, which treats the estate as if it was all sold
at death, is obviously unrealistic. The concept ofa capital gains tax has been to tax realized
gains. The event of death hardly qualifies as a tax realization transaction. During his lifetime,
a taxpayer has a choice of realizing gain on sale of an asset, paying the tax, and keeping the
net proceeds, or of retaining the asset and not realizing a gain on it. The occurrence of his
death is hardly a voluntarily chosen event upon which to base the realization of gain.
Moreover, the tax will really fall on the heirs in any event. We cannot tax a dead man for
a sale he did not make no matter how hard we try. Proposals to impose a capital gains tax
at death can, thus, be viewed as proposals to tax some individuals who inherit property
differently from others who also inherit property solely because ofthe decedent's investment
decisions during his lifetime. It is by no means self-evident that such a system would be more
equitable than present law.
Moreover, because ofthe deductibility ofthe capital gains tax against the gross estate, the
net effect of a capital gains tax would be more severe for smaller estates than for larger
estates. As an example, consider two estates that both have $ 1,000 of appreciation taxed at
a 25-percent capital gains rate but with marginal estate tax rates of 30 percent and 70 percent.
For both estates the initial capital gains tax would be $250. But the reduction in estate taxes
resulting from the deductibility of that $250 would be $75 for the smaller estate with the 30percent marginal rate and $ 175 for the larger estate with the 70-percent marginal rate. The
net tax on appreciation would be 17.5 percent for the smaller estate and 7.5 percent for the
larger estate. Certainly many people would instinctively question the justice of a proposal
that would tax small estates more heavily than large ones.
2. Carryover hasis.—The second approach that has sometimes been suggested as an
alternative to present law is the carryover basis approach, under which the decedent's basis
in property transferred at death would be carried over to his heirs. The unrealized
appreciation would be taxed when and if the property is sold by the heirs. Your committee
tentatively approved the carryover basis provision in 1963 but deleted that provision from
the bill reported to the House.
The carryover basis approach is consistent with the tax treatment that would have resulted
had the decedent not died but had continued to retain the property. However, the carryover
basis approach suffers from a number of major disadvantages.
The first is administrative complexity for both taxpayers and the Internal Revenue Service
in determining the decedent's basis in the property, particularly for property that passes to
several successive generations. In many cases, records concerning the original basis ofthe
EXHIBITS
469
property will have been lost by the time the property is sold. Many of us have undoubtedly
nad the experience of selling stock or a house and then, at tax return time, having to search
through various files, receipts, and check stubs to determine the original cost ofthe property
and the amount of any required adjustments to basis. Often the key to reconstructing the tax
basis of property is one's personal recollection ofthe transactions in question. The carryover
basis approach, and to a lesser degree any tax on appreciation transferred at death, will put
an even greater premium on careful records, and a greater penalty for carelessness, than
normally exists.
Further administrative complexity would be created by carryover basis adjustments. Thus,
most carryover basis proposals, such as your committee's tentative decision in 1963 and
section 106 of H.R. 1040 (introduced by Mr. Corman), provide for increasing the decedent's
basis by the amount of State and Federal death taxes attributable to the unrealized
appreciation in an estate. Such a basis adjustment tends to equalize the treatment of estates
of persons who realize their gains during life and estates of persons with large unrealized
gains. When property is sold and tax paid on the gain, the tax is deductible from that person's
estate (or if not formally deducted, is excluded as a practical matter from the estate) and
the estate tax is thereby reduced. The basis adjustment for death taxes allocable to unrealized
appreciation in an estate has the effect of deducting such taxes from the gain that ultimately
will be subject to income tax, with a consequent reduction in income tax liability. While never
exactly equivalent, the income tax reduction provided by the basis adjustment for estates with
unrealized appreciation roughly corresponds to the estate tax reduction provided to estates
with taxed appreciation.
Allowance of an increase in the carryover basis for a portion of death taxes means that
the exact amount of gain realized on sales made during administration of the estate cannot
be computed until final determination of State inheritance and Federal estate tax liability,
including the final calculation of the total value of the estate and the amount of unrealized
appreciation. As a result, income tax returns filed prior to such final determination of death
tax liability may have to be reopened and the tax recomputed.
Under the carryover basis approach, there would also be a number of thorny questions
regarding the allocation among specific assets ofthe total appreciation in the estate and the
increase in basis for a portion of death taxes. For example, the tax basis of property
transferred to a charity is ordinarily of little moment, since the charity will be exempt from
tax on any gain it realizes upon disposition ofthe property. Thus, taxes could be minimized
by directing highly appreciated property to charity and less highly appreciated property to
others. In your committee's 1963 tentative decision, this problem was resolved by requiring
a pro rata allocation of the total unrealized appreciation in an estate among all the assets in
the estate, obviously a complicating provision. Similarly, questions will be raised concerning
whether the increased basis on account of death taxes should be allocated ratably among all
estate assets (by value or by amount of unrealized appreciation) or only among assets
included in the taxable estate (excluding, that is, deductible marital and charitable transfers).
Or it might be questioned whether the basis increase should be allocated to those persons
who, because of a specific direction in the will or because of State law, are actually held liable
to pay the tax.
Finally, the carryover basis approach does little to eliminate the lock-in of investment
resulting from the present law stepped-up basis rule. Rather, it perpetuates that lock-in effect
even after a property owner's death.
3. Additional estate tax.—The American Bankers Association has developed a third
approach, which it calls an additional estate tax, or AET. This would be a flat rate tax; the
ABA suggests a 14-percent rate, on the unrealized appreciation in an estate. Unlike a capital
gains tax."
The rationale for imposition of a flat rate, nondeductible tax is the phenomenon I discussed
earlier, that a capital gains tax falls more heavily on small estates than on large ones. That
phenomenon, which is asserted to demonstrate that the capital gains approach is
"regressive," is simply a natural consequence ofthe deductibility of income taxes against the
estate. It is equally true of all income taxes paid during life, a fact that can most clearly be
observed with respect to the income taxes paid on the decedent's final return. For example,
suppose two individuals pay income tax at an average rate of 40 percent in their final returns
and that the marginal estate bracket for one is 30 percent and for the other is 70 percent.
Allowing for the reduced estate tax due to the deductibility of income taxes, the net tax on
the income of the first individual with the smaller estate will be 28 percent, and the net tax
for the second individual with the larger estate will be 12 percent. This obviously does not
mean that either the income tax or the estate tax is regressive. Nor does it mean that we should
deny the estate tax deduction; the funds used to pay the decedent's income taxes are not
available for transfer to his heirs and should not be subjected to estate tax.
Nevertheless, the AET proposal is far simpler than either of the other two approaches.
Moreover, when viewed in isolation as most changes are viewed by taxpayers, it will not
increase effective taxes more for small estates than for large ones. Also, it is a direct excise
470
1976 REPORT OF THE SECRETARY OF THE TREASURY
tax on trarisfer of unrealized appreciation in an estate and is not an attempt to use income
tax concepts in an inappropriate setting. To that extent, therefore, it does not answer the
objective of some critics of the present system; namely, redressing the income tax inequity
alleged to be created by the stepped-up basis rule.
In short, when the rhetoric is cut away, the AET proposal gives credence to what many
of us have long suspected: Proposals to tax capital gains at death are not fundamentally
grounded in income tax concerns but are essentially an effort to increase death tax burdens.
That being the case, the threshold question is whether those burdens should be increased.
In our view, they should not be increased. Indeed, the extent of the present burden has
become so severe that the administration has recommended measures to alleviate the burden
by increasing the exemption and providing for a deferral of payment of tax in certain
situations.
4. Exemptions.—Under all three approaches for taxirig unrealized appreciation in an
estate, there would be a number of difficult questions respecting the allowance of exemptions
and exclusions. For example, most proposals for changing the present stepped-up basis rule
would exempt estates that are not required to file an estate tax return (estates of $60,000
or less under present law). We quite agree that such an exemption would be a requisite of
any such change. It would be inappropriate to impose on those smaller estates a substantial
tax burden (under the capital gains or AET approaches) or the great complexity inherent
in the carryover basis approach.
- Many proposals to impose a capital gains tax at death would also exempt marital deduction
and charitable deduction transfers. Such an attempt to harmonize the principle of taxing
unrealized gains with the estate tax policies underlying the estate tax marital and charitable
deductions is quite understandable, but it would combine the disadvantages of the capital
gains and carryover basis approaches, and would cause the greatest of complexity for the tax
system and family estate planning.
5. Administrative recommendation—We oppose these proposals to change the present tax
treatment of unrealized appreciation in property transferred at death. We are unable to
discern any consistent rationale underlying such proposals other than a desire to increase
death taxes; and we believe that decisions regarding the proper level of death taxes should
be made through a review of estate and gift tax rates and exemptions, rather than through
the device of a tax on appreciation in an estate. Moreover, the pressing need today is for estate
tax relief rather than an increase in death.tax burdens. It would be wholly inappropriate to
hold forth the promise of such relief through an increased estate tax exemption and then to
make that promise illusory through a tax on unrealized appreciation that will fall particularly
heavily on the owners of farms and small businesses.
Miscellaneous changes
In my testimony, I have addressed only the major issues of estate and gift tax reform. There
are a number of other issues your committee may want to examine. If so, and if time permits,
I will be glad to discuss them with you. I would, however, like to mention one problem in
particular because remedial action concerning it could significantly simplify the administration and application of the present gift tax law.
In the Excise, Estate, and Gift Tax Adjustment Act of 1970, Congress accelerated the
collection of estate and gift taxes by requiring earlier filing of returns. The principal objective
ofthe legislation was to accelerate the collection of estate taxes. Because the timing of gifts,
unlike deathtime transfers, is subject to the volition ofthe donor, shortening the return period
for gifts would not necessarily accelerate collections. Nevertheless, the most recent statistics
(1966 returns for 1965 gifts) indicate that $100 million (or more than one-quarter of total
gift tax collections in 1966) was collected from 10 donors who each made more than $10
million in gifts. In the expectation that shortening the return period would accelerate
collections from such large donors, it was decided to require earlier filing of returns for both
gift and estate taxes.
The annual filing system for gift tax returns was therefore changed to a quarterly filing
system (under which a return i^ required for the first calendar quarter in which total gifts
for the year exceed $3,000, and for each succeeding calendar quarter of the year).
Two problems have arisen under the quarterly gift tax return provisions. First, although
Congress did not intend any changes in the rules regarding the computation of the gift tax,
because of the structure of the gift tax provisions a taxpayer may now lose a portion of the
gift tax marital deduction. It is clear that this effect of the 1970 changes was unintended.
Second, the number of gift tax returns filed annually has increased dramatically, imposing
additional administrative burdens on taxpayers and the Internal Revenue Service. During
fiscal years 1968-70, the number of gift tax retums filed annually ranged from 139,000 to
151,000; in fiscal 1974, 260,000 gift tax returns were filed.
We recommend that the quarterly gift tax return requirement be amended by adding a
$100,000 threshold, so that a quarterly return would be required only when, by the end of
EXHIBITS
471
a calendar quarter, total gifts for the year exceed $ 100,000. In other cases, an annual return
would be filed, as under prior law. The suggested change would remedy the technical
difficulty created under the marital deduction provisions by the 1970 changes, and also would
eliminate the quarterly return requirement for most taxpayers, while retaining the intended
effect of the 1970 changes of putting donors of very large gifts on a more current basis
respecting payment of gift tax.
Thank you for this opportunity to address your committee on these very important estate
and gift tax issues.
Trade and Raw Materials Policy
Exhibit 37.—Statement by Secretary Simon, December 11, 1975, before the Senate
Committee on Commerce, on American participation in East-West trade
I welcome the opportunity to join in this review of the prospects and problems of American
participation in East-West trade and economic relationships during the next 5 years. As
Chairman of the East-West Foreign Trade Board, I believe that these hearings will provide
an opportunity to assess current policies that affect East-West trade, and to develop more
open public discussion and understanding of this important subject, at an appropriate
moment.
During the cold war period, U.S. participation in trade with the Communist countries was
virtually nonexistent. Our contacts with these countries in the cultural and in other areas were
isolated events. No cooperative efforts were undertaken either in the economic and
commercial fields or in science and technology. It was difficult to speak of bilateral
relationships with these countries in any meaningful way. As a result, there was no
inducement toward cooperation and little incentive for restraint.
The era of confrontation during the years of cold war demonstrated that the imposition
of economic sanctions against Communist coiintries neither altered the nature of their
systems nor materially improved their policies toward the Western World. In this decade,
the U.S. Govemment has sought to develop a policy in which the attempt to normalize U.S.
commercial relationships with the U.S.S.R., Eastem Europe, and the People's Republic of
China is a cornerstone.
We have pursued this policy with the firm conviction that accelerated development of
strong economic ties between the United States and the Communist countries will give each
side a more solid stake in the parallel improvement of our political relations. I believe these
ties create a foundation of mutual interest which in tum improves the environment for
progress in the relaxation of political tensions.
From its beginning, the new approach to the Communist countries has received broad
public support. The flow of goods and an exchange of people between our country and those
expanded at an extraordinary rate. The developing momentum in the expansion of our
relations with the Soviet Union led to the conclusion, in 1972, of several important
agreements with that country- the Trade Agreement, the Lend-Lease Settlement, and the
Maritime Agreement. Since 1974, this momentum has slowed. We believe that this slowdown
has cost our economy exports and export-related jobs. But it has also impaired U.S. political
and humanitarian objectives.
Let me stress at the outset a fact of which this committee is no doubt already aware.
Normalizing our relations with the Communist countries in no way implies a grant of special
favors not provided to other countries. Quite the contrary. Recognizing that East-West trade
is a two-way street which will bring mutual benefits to both sides, we seek to eliminate the
aspects of our policy toward the Communist countries that discriminate against them. By
extending most-favored-nation treatment to the Communist countries, we would give our
imports from them the treatment we now accord to our imports from other countries.
Nor has it ever been our purpose to bargain away the Nation's security simply to see our
trade statistics rise. We maintain controls on the export of products and technology of
strategic significance, and we would continue to maintain them even under normalized
trading conditions.
In addition, the executive branch carefully examines exports that might involve national
security considerations through two Cabinet-level boards.
To insure that our national security is not jeopardized, the Export Administration Review
Board (EARB), which is chaired by the Secretary of Commerce, reviews particular export
license matters involving questions of national security or other policy issues. As Chairman
of the East-West Foreign Trade Board, I have attended EARB meetings, and will shortly be
formally designated a member ofthe EARB by Executive order. The Secretaries of State and
Defense are also members of this important body. The EARB was established by Executive
472
1976 REPORT OF THE SECRETARY OF THE TREASURY
order in 1970 to assure the highest level of consideration of difficult export license cases,
and to obtain agreed action among the departments chiefly concerned with advising the
Secretary of Commerce in administering U.S. export controls.
The East-West Foreign Trade Board
But the major East-West economic policy body of the executive branch is the East-West
Foreign Trade Board. The Board was created by the Trade Act of 1974 to monitor East-West
trade in the national interest. The Board is comprised of the Secretaries of State, Treasury
(who is Chairman), Agriculture, Commerce, the Special Representative for Trade
Negotiations, the Director ofthe Office of Management and Budget, the Executive Director
ofthe Council on International Economic Policy, the President ofthe Export-Import Bank,
and the Assistant to the President for Economic Affairs, who is Vice-Chairman ofthe Board.
Recognizing the important role of the Department of Defense in the national security aspects
of our trade with the Communist countries, the Board has recently recommended to the
President that the Secretary of Defense be added to the Board's membership.
A working group of the East-West Foreign Trade Board, consisting of representatives of
the member agencies, usually meets twice monthly to coordinate the development and
implementation of East-West trade policies and to refer issues to the Board for decision. The
working group also reviews exports of technology to nonmarket economy countries which
is essential for the protection of our security, and receives reports from U.S. Government
agencies which provide credits, guarantees, or insurance for exports to nonmarket economy
countries.
As required by the Trade Act, the East-West Foreign Trade Board publishes a quarterly
report on U.S. trade with the nonmarket economy countries. The report reviews (a) the status
of negotiations of bilateral trade agreements, (b) activities of joint trade commissions, (c)
commercial disputes and problems of market disruption, (d) East-West trade promotion
activities, and (e) recommendations for the promotion of East-West trade in our national
interest.
Current status of East-West trade
Prior to 1974, the United States was making remarkable progress in developing trade with
the East. Secretary Morton will discuss trade flows in more detail, but I would like to mention
a few highlights.
In 1971, total U.S. exports to the Communist countries i amounted to less than $400
million. In 1974, exports were $2.3 billion, a more than 475-percent increase in 3 years. By
contrast, in 1971, U.S. imports were $230 million, and in 1974, they were $1 billion. Thus,
our total trade surplus with these countries grew to $1.3 billion in 1974, an increase of 665
percent in only 3 years. The favorable impact of this trade on our balance of payments and
on the U.S. economy is obvious.
The expansion of trade with the Soviet Union has been particularly striking, as can be seen
in the following table:
U.S. trade with the U.S.S.R.
[Millions of U.S. dollars]
1971
U.S. exports
Nonagricultural
U.S. imports
Total trade turnover
Trade balance
• Estimated.
Source: U.S. Department of Commerce.
1972
161
118
57
218
547
102
95
642
-104
+ 452
1^73
1.187
265
215
1.402
+ 972
i974
607
293
350
957
+ 257
F975*
1,800
700
250
2,050
+ 1,550
,
_
Our estimates indicate that, because of very substantial grain sales, two-way trade with the
Soviet Union will reach a new high this year of over $2 billion, with 70 percent of our
shipments consisting of grains.
Although most of our exports to the Soviet Union and the other Eastern countries are now
agricultural products, our manufactured-goOds exports have the greater growth potential in
the longer term. Shipments in 1974 of nonagricultural commodities to Eastern Europe
totaled nearly $300 million, with almost one-half of these products going to Poland and onethird to Romania.
Manufactured goods and other nonagricultural items accounted for about $300 million of
our exports to the Soviet Union in 1974, and are expected to account for about $700 million
IFor this purpose the Communist countries are defined to include Albania. Bulgaria. Czechoslovakia, German
Democratic Republic, Hungary, Poland, Romania, U.S.S.R., People's Republic of China, and Mongolian People's Republic.
EXHIBITS
473
in 1975. However, this increase reflects shipments which continue to be made on contracts
signed in past years. Projects now underway involving major amounts of U.S. exports include
the Kama River truck plant, entailing over $340 million in exports of U.S. goods and services
over a period of several years; the Moscow Trade Center, involving an estimated $80 million
in U.S. exports; a chemical fertilizer project, involving $400 million in U.S. exports; an acetic
acid plant, involving $44 million; and an iron ore pellet plant, involving $36 million. All these
and other current projects together totaling over $ 1 billion are being financed in part by the
Export-Import Bank. Eximbank commitments to the U.S.S.R. currently total $469 million.
East-West trade and the Trade Act of 1974
The passage of the Trade Act of 1974 last December was a milestone in the development
of our international trade relations. The new trade legislation has given the President, for the
first time in 8 years, the authority to participate in the far-reaching multilateral trade talks
which began in February of this year. Countries accounting for most ofthe world's trade are
participating in these negotiations which focus on the reduction of all types of tariff and
nontariff barriers that affect both agricultural and industrial trade. The mandate given the
President by the legislation enables the United States to play a leading role in the expansion
of world trade based on clearer ground rules for fair trade practice.
Notwithstanding the importance of the Trade Act for multilateral trade negotiations, this
administration has consisteritly established its objection to the provisions of this act, and the
1974 Eximbank Act amendments, which adversely affect our trade with the Soviet Union,
the nonmarket economy countries of Eastern Europe, and the People's Republic of China,
and which do not serve our political and humanitarian interests.
During my trip to Moscow in April for the annual meeting ofthe U.S.-U.S.S.R. Commerical
Commission, the President asked me to discuss the recent legislation, and our future trade
relations with the Soviets. My talks with Soviet leaders convinced me that it is in our interest
to find a way to unblock the impediments to increased trade which now face us.
In the past several months, we have consulted with Members of the Congress on this
problem. During the summer. Secretary Kissinger, other members ofthe Board, and I met
with the members ofthe Senate delegation to the U.S.-U.S.S.R. Parliamentary Conference
before and after their visit to Moscow. The Senators had an extremely frank exchange of
views with top Soviet officials on the impact of the Trade Act on United States-Soviet
relations. I believe their visit was extremely useful as was the visit of the House delegation
which took place in August.
Additional consultations with several congressional leaders have been undertaken more
recently. I have been encouraged by a common appreciation that we must move ahead. We
approach this task with the sure knowledge that it is in our national interest.
The normalization of our commercial relations with the U.S.S.R., Eastern Europe, and the
People's Republic of China is an integral part of our policy of expanding our relationships
with these countries. The administration continues to believe that improvement in our
commercial relations is a necessary element in the improvement in our overall relations with
these countries. In an interdependent world in which economics and politics intertwine,
commercial relations influence the conditions ofthe larger political environment. What we
do in the economic field could have a significant impact on what we are attempting to achieve
in the political sphere.
A solution to the impasse we now face would also materially enhance our business
community's efforts to expand trade with the East. We have had many indications that the
lack of official credits from the United States is causing the U.S.S.R. and some ofthe Eastern
European countries to direct their purchases elsewhere. Lost U.S. exports mean lost jobs in
our export industries, a lost benefit to our balance of payments, and to our competitive
position in world markets.
The inability to extend most-favored-nation treatment to imports from the Eastern bloc
countries is also holding back major joint projects between our firms and the U.S.S.R. and
other countries of Eastern Europe. This is because these projects often involve the eventual
export of products to the United States that are now affected by high U.S. non-most-favorednation tariffs. These projects could eventually supply us with products in limited supply in
our own market, such as energy sources and products from energy-consuming projects.
Losing these major joint projects is, therefore, a net loss to the United States.
Prospects for East-West trade
The potential for U.S. exports of goods and services, particularly to the U.S.S.R., remains
great. The Soviets plan to boost foreign trade with the Western World by 9 percent in 1976
over the level planned for this year. U.S. agricultural exports have been and will continue
to be very significant, in part as a result of the U.S.S.R.'s agreement to buy annually a
minimum of 6 million metric tons of wheat and corn. But future growth, we believe, will be
mainly in manufactured goods. Moreover, the enormous scale on which the Soviet projects
474
1976 REPORT OF THE SECRETARY OF THE TREASURY
are planned makes the United States in many cases a favored trading partner, since few
European firms are well equipped for such huge undertakings.
The Soviet Union possesses greater energy reserves than the United States, but faces
increasing technological problems as it moves to energy sources deeper in the ground,
offshore, and in the Arctic. The U.S.S.R. can obtain much of the necessary technology
elsewhere, but in many cases would prefer to deal with U.S. companies. It is manifestly in
our interest to participate in the expansion of the world supply of energy. In addition, the
cooperative projects that would be undertaken to develop these energy sources could provide
additional jobs to our economy, supply us with some energy products, and strengthen our
balance of payments. Deputy Secretary Ingersoll in his testimony tomorrow will elaborate
on the administration's efforts to negotiate a petroleum agreement with the U.S.S.R.
The potential for trade with the other Eastern European countries not now receiving MEN,
and the People's Republic of China, is also significant.
The U.S.S.R. and many ofthe Eastern European countries are currently signing contracts
with our Western competitors that benefit from government-backed credits. The major
European countries and Japan have agreements with the U.S.S.R. under which $10 billion
of government-backed credits will be available to finance export sales to the Soviet Union.
During my April visit to Moscow, the Soviets told me that contracts involving over $700
million in credits which might have been placed in our country had gone to European
suppliers because of the lack of Eximbank credits.
Soviet Deputy Minister of Foreign Trade Alkhimov has recently indicated that in the last
9 months, $ 1.6 billion in contracts which the Soviets were ready to sign with U.S. firms have
gone to Western Europe and Japan because of the U.S. restrictions on Eximbank credits.
Many of these contracts were negotiated as part of the Soviet 1976-80 plan and therefore
represent business opportunities that are not likely to appear again until the next 5-year plan
period. Because ofthe present impasse, U.S. firms have faced the possibility of being virtually
excluded from projects in the forthcoming Soviet plan period. The only contracts that they
might still win involve projects for which the U.S. companies have no significant competition.
It is my hope, however, that competition among Western industrial nations for exports
through government-subsidized credits will end. There was discussion of the problem at
Rambouillet, and I am pleased that the six leaders agreed to intensify their efforts to achieve
prompt conclusion of the negotiations concerning export credits. Governments should
reduce government competition on credit terms offered to all countries. There is simply no
point in this subsidized competition.
There is one change in U.S. law that would facilitate the contribution of private financial
markets to financing East-West trade. The Johnson Debt Default Act of 1934 is a criminal
statute which provides penalties for any individual who, within the United States, purchases
or sells bonds or any other financial obligations of any foreign government which is in default
in the payment of its obligations to the United States. The act has not served its initial purpose,
which was to protect American investors against the purchase of obligations of countries
likely to default. Instead, it has had the effect of deterring creative methods of financing EastWest trade by the private market. The repeal of the act would, in my opinion, remove an
unnecessary barrier to the private financing of East-West trade, and increase our efforts to
expand trade and commerce with nonmarket economy countries on commercial credit
terms.
Misconceptions about East-West trade
Finally, Mr. Chairman, I would like to respond to some misconceptions about East-West
trade. Granting most-favored-nation status to the nonmarket economy countries of Eastern
Europe, the U.S.S.R., and the People's Republic of China would give them no special
privilege. The Soviets, the East Europeans, and the Chinese nevertheless consider the
granting of nondiscriminatory tariff treatment as significant for the improvement of our
political and commercial relations. Granting MEN would therefore have a positive impact
on the growth of our exports to the East. It is our hope that this expansion would encompass
industrial and consumer goods, as well as agricultural commodities.
If we confer most-favored-nation treatment to imports from these countries, ultimately
U.S. purchases of a variety of their manufactured products will result. I certainly do not
predict a flood of manufactured products to enter our market and displace domestically
produced goods, however. In most cases, these countries are not now able to manufacture
goods of sufficient quality and consumer appeal to displace products from our domestic
industries. A large portion of these imports would, in any case, simply compete with and
displace our imports from other foreign sources. Iri addition, in the Trade Act of 1974,
Congress provided adequate safeguards against market disruption to protect our domestic
industries, if necessary, and American consumers would benefit from competition for our
market and the lower prices it would produce.
With regard to the legislation protecting our domestic industries from dumping, some of
our Communist trading partners have expressed their concern that the Antidumping Act, as
EXHIBITS
475
amended by the Trade Act of 1974, may unfairly hinder their ability to export to the United
States. The ariiendment requires that export prices from a Communist country to the United
States be compared with the prices or a manufacturer of a similar product in a market
economy country if I, as Secretary ofthe Treasury, determine that the home market prices
in the Communist country cannot reflect actual costs and prices due to the structure of that
economy.
Treasury is studying whether alternative methods of comparison are available under the
act for conducting investigations and whether revisions to our procedures or to the act would
be appropriate. For the present, we have no recommendation in that regard.
There is a second misconception which I would also like to address.
Eximbank credits for exports to the Communist countries do not represent either special
treatment or "foreign aid" for these countries. The potential flow of credits from the United
States represents only a small fraction ofthe capital available to the East for East-West trade.
While the potential credit flow may be relatively small, the availability of credits is
nonetheless an important factor in the purchasing decisions of the Communist countries.
Until we succeed in reducing competition for exports through government-backed credits,
Eximbank credits are necessary to put our firms on a competitive footing with their industrial
competitors in doing business with Eastern Europe and the Soviet Union, as, with other
countries.
I would further stress that in making any decision on extending Eximbank loans to the
Communist countries, each loan application would be judged on its merits on a case-by-case
basis, just as the loans are judged for exports to other countries. Each project must be
economically justified according to the criteria enunciated in the Eximbank Act, and must
also bring a net economic benefit to the United States in order to be approved.
Thirdly, as I described at the outset, when we trade with the Communist countries, we
recognize that the technology that we permit to flow to them might sometimes have limited
and indirect uses for military production. Not trading with the Communist countries will
frequently not prevent them from acquiring this technology, because it often is and will be
available from other Western sources. Excluding ourselves from this trade, therefore,
represents foregone economic opportunities and commercial gain for America for no real
purpose. Nonetheless, we are always acutely aware of the need to maintain the delicate
balance between U.S. economic opportunity on the one hand, and national security on the
other. The latter must be given full weight.
Conclusion
Mr. Chairman, I have attempted to be as frank and as candid as I can in expressing the
administration's views on the status of East-West trade and our current policies affecting it.
I hope that my testimony, and that of my distinguished colleagues, is responsive to your
request in your invitation to testify.
It is an opportunity that I personally have welcomed. I believe that it is very healthy to have
an intensive public airing, based on the facts about trade and the issues surrounding it. The
current climate is still too much instilled with the emotion surrounding the passage of the
Trade Act's provisions relating to MEN and credits. I believe—and indeed I fervently hope—
that full public ventilation ofthe issues will be the basis for reestablishing an atmosphere of
credibility and trust.
This committee has always been at the forefront in the development of East-West trade
policy. Its concern has been constructive and therefore productive of useful dialog. These
hearings demonstrate your continuing leadership. I commend you for this initiative and look
forward to working as closely as possible with you and your able staffs, and with other
appropriate Senators and Congressmen as our policy evolves.
Exhibit 38.—Joint State/Treasury press release, January 16, 1976, on U.S. commodity
policy
We have been asked for a restatement of U.S. commodity poHcy. Our policy, as set forth
in Secretary Kissinger's statement at the Seventh Special Session of the U.N. General
Assembly, is based on the following main interests: (1) We seek assured supplies at
reasonable prices. This requires not only supply commitments from exporting countries but
adequate investment in new production capacity. (2) We are concemed about excessive
price fluctuations since, on the one hand, this can impede adequate investment and, on the
other hand, can contribute to severe inflationary pressures. (3) We recognize the importance
of commodity eamings to producing countries and especially to developing countries who
are significantly dependent on raw material exports.
476
1976 REPORT OF THE SECRETARY OF THE TREASURY
For these reasons we have proposed a number of measures in the commodity field:
(1) We have proposed that the World Bank group, especially the International Finance
Corporation, take the lead in bringing together private and public capital as well as technical,
managerial, and financial expertise to finance new minerals development.
(2) We are seeking supply access commitments in the multilateral trade negotiations.
(3) Because no one formula will apply to all commodities, we propose to discuss new
arrangements for individual commodities on a case-by-case basis.
(4) We have expressed our intention to participate actively in negotiations for new
commodity agreements in tin, cocoa, coffee, and sugar.
•
We will sign the new Tin Agreement and it will be submitted to the Senate for advice
and consent.
•
We do not propose to sign the new International Cocoa Agreement in its present
form. We consider the agreement to be deficient in a number of respects and have
suggested that certain of its provisions be renegotiated. We are awaiting the
reaction of other countries.
•
We are reviewing the new International Coffee Agreement which contains
substantial improvements. An analysis of the new agreement and a recommendation for the President is being prepared.
•
Negotiations for a new International Sugar Agreement will commence in
September of this year.
(5) We proposed a substantial improvement in the IMF's compensatory finance facility.
At the recent IMF meeting in Jamaica a substantial improvement was agreed upon to help
stabilize the earnings from commodity trade.
(6) We are supporting in the IMF an improvement of its arrangements for financing buffer
stocks.
As this enumeration of measures demonstrates there is no one single approach to
commodity trade problems. We reject price-fixing arrangements that distort the market,
restrict production, and waste resources. But this should not be the central issue. The main
point is that we are prepared to consider measures that will improve the functioning of
markets and will directly meet the problems of raw material producers and consumers. In
this regard, we seek the establishment of consumer-producer forums for each key commodity
to promote efficiency, growth, and stability of particular markets.
Exhibit 39.— Statement by Secretary Simon, January 29, 1976, before the Senate Finance
Committee, on a review of the administration of the Trade Act of 1974 and U.S. international
trade policy
I welcome the opportunity to join in this review of the administration of the Trade Act of
1974 and U.S. international trade policy, with special emphasis on the multilateral trade
negotiations.
During this period of continuing worldwide economic difficulty and change, world trade
has taken on even greater importance as a central ingredient in our economic relations with
foreign countries. Maintaining and improving an open trade environment is crucial to our
efforts to prevent widespread restrictive trade actions that could seriously harm world
economic stability and cooperation.
Before turning to a discussion of our trade policy, I would like to say a few words about
the world economic outlook, which will play a major role in determining the world trade
climate in the months to come.
International economic outlook
The world is now recovering from the most severe economic recession since the 1930's.
The recession saw real output in the industrial countries fall sharply and suddenly, a decline
of 5 percent in the first half of last year. It saw the first reduction in the volume of world trade
since World War n, a reduction of 6 percent in 1975. And it was associated with the most
violent inventory-adjustment in more than 50 years.
The outlook for recovery from the worldwide recession of 1974-75 is now good. Solid
progress toward recovery has been made particularly here and in Japan and Germany. The
outlook for real growth in the major industrial countries is on the order of 5 percent during
1976. During 1976, the United States is expected to experience a rate of real growth in the
6- to 6 1 /2-percent range, which is above the average ofthe last decade. Uptum in the smaller
industrial countries, whose economies tumed down some 6 months later than the larger
countries, will occur more slowly.
EXHIBITS
477
At the same time the economies have turned around, progress had been made in curbing
inflation. Inflation rates in the industrial countries are forecast to average about 8 percent
during 1976. This is too high—but the trend is welcome.
Unemployment levels at the end of 1975 remain too high. The absolute number of workers
unemployed is at or near postwar record levels in most of the industrial countries. The
relatively modest recovery foreseen during 1976 in some countries will not significantly
reduce unemployment rates during 1976—given normal work force growth—although
progress is likely during the latter part of the year.
Most less developed countries (LDC's) experienced reduced growth rates later than
industrial countries and, while growth rates for nonoil LDC's as a group will probably be
lower than in 1975, their balance of payments position will improve in 1976. For many of
these poor countries economic growth will not keep up with population growth in 1976.
The pattern of international payments last year was determined by two major factors—
the continued massive surpluses of the oil-exporting nations, and the widespread economic
recession. A clear pattern of payments balances among three major country groups can be
distinguished—
For the oil exporters, the OPEC countries, large surpluses ofabout $40 billion on current
account;
For the developed world, the OECD countries, approximate halance, with roughly
offsetting surpluses and deficits within the group; and
For the rest of the world, large deficits, particularly on the part of the less developed
countries.
The centrally planned economies of East Europe and Asia also experienced deficits.
As a result ofthe firmly based recovery now underway in the industrial world, the pattern
of payments imbalances will shift importantly this year toward more balance.
The collective current account deficit ofthe oil-importing countries should be more evenly
distributed between developed and developing countries during 1976, representing a partial
reversal ofthe 1975 patterns of current balances which were highly skewed against the nonoil
developing countries. The dramatic improvements in the external positions of major
industrial countries in 1975 were to a large extent the result of inventory adjustments and.
recession-induced reductions in import demand. With recovery, the external positions ofthe
industrial countries will adjust accordingly, and this should prove to be an important factor
in reducing the external deficits of nonoil LDC's.
During 1975, the recession reduced demands for commodity imports as a result of both
inventory adjustments and lower production levels in the industrial countries. Commodity
prices declined in the presence of slack demand. The nonoil developing countries faced
reductions in both the volume and price of their primary product exports during 1975. This
process will be reversed during 1976, with resumption of recovery in the industrial countries.
Unfortunately, a sizable portion of this improvement in the nonoil-producing developing
countries' positions will be eroded by the higher crude oil prices announced in October.
The continuation ofthe current solid recovery will depend on continued sound economic
policies by all countries. For the industrial countries, sound policies mean policies to assure
a continued strong noninflationary recovery in world demand; they mean the avoidance of
measures which would frustrate an adjustment in their payments positions, particularly the
avoidance of beggar-thy-neighbor trade actions. For the LDC's, sound policies mean realistic
investment, growth, and development programs. For the OPEC, sound policies mean
reasonable investment policies, without excessive liquidity preference, increased aid to
LDC's, and restraint in oil pricing.
But the industrial countries do bear a special responsibility. Simultaneous reflationary
measures in 1972-73 led to worldwide inflation. Simultaneous deflationary policies in
1973-74 led to cumulative recession. The major countries must become more aware ofthe
cumulative effects of their policies; economic policy cooperation among them must be
improved. Rambouillet made progress toward that goal, particularly in the trade area.
The worldwide recovery, the commitment at Rambouillet to sound economic policies, the
comprehensive monetary agreements of Jamaica—all create a positive environment for the
multilateral trade negotiations.
Principles of U.S. international economic policy
In approaching the problems of the world economy, the United States has formulated a
consistent international economic policy. No nation is mOre intimately involved in shaping
a cooperative international economic system. The core of our international economic policy
is dedication to certain fundamental principles, the most important of which is our
commitment to a free and open environment for world trade and investment. Within this
context it is essential that we seek to achieve certain basic objectives. We must—
478
1976 REPORT OF THE SECRETARY OF THE TREASURY
Maintain a sound U.S. economy;
Eliminate or reduce barriers to and distortions of trade on a reciprocal basis;
Establish fair trade rules and improve the structure ofthe General Agreement on Tariffs
and Trade;
Permit the free flow of capital in order to allow its most productive use;
Assist the developing world to grow and become economically self-sufficient through
fair and reasonable access to developed nations' markets; and
Cooperate with other nations in resolving problems and responding to change in the
international economy on a mutually beneficial basis.
Coordination of U.S. policy
The policy guidelines and decisions to implement these principles are coordinated through
the Economic Policy Board (EPB) and the Council on International Economic Policy
(CIEP).
The President established the Economic Policy Board by Executive order in September
1974. This Board consists of the Secretary of the Treasury, who is Chairman, and 12 other
members. The Executive order provides that the Economic Policy Board "shall provide
advice to the President concerning all aspects ofnational and international economic policy,
while overseeing the formulation, coordination and implementation of all economic policy
ofthe United States, and will serve as the focal point for economic policy decision making."
The Executive order also provided that the Assistant to the President for Economic Affairs
should be a member ofthe Economic Policy Board and its Executive Director. The Secretary
of the Treasury was designated Chairman ofthe Council on International Economic Policy
and the Assistant to the President for Economic Affairs became a member of the Council
and its Deputy Chairman.
The membership of the EPB and CIEP differ somewhat. The EPB includes the Secretary
of the Interior, the Secretary of Health, Education, and Welfare, the Secretary of Housing
and Urban Development, and the Executive Director ofthe CIEP. EPB does not include the
Secretary of Defense, who is a member of the CIEP.
This organizational structure reflects the increasingly close intertwining of domestic and
international economic policies which led, first, to the appointment of the Cabinet officer
most intimately concerned with these issues, the Secretary of the Treasury, to chair the
Council and, second, following the establishment ofthe Economic Policy Board, led to a very
close and intimate relationship between the EPB and the Council.
This relationship is focused in the Executive Committee ofthe EPB, ofwhich the Executive
Director of CIEP is a member, which was established to meet daily to consider issues relating
to international and domestic economic policy. The fact that there is a Cabinet-level meeting
daily considering these issues is tremendously important. It has given the executive branch
the capability to respond rapidly to changing conditions, and it has provided an institutional
focus for decisionmaking on matters relating to economic policy. Participation in the
Executive Committee has not been limited just to the designated members. Other agencies
and departments have participated on a regular basis in areas where it is felt they could
contribute to economic policy decisions.
In the international trade area, the Trade Act of 1974 provides the legislative framework
for the development and implementation of policy. Responsibility for the multilateral trade
negotiations rests with the special trade representative. Ambassador Dent, who is a member
of CIEP, and is chairman ofthe Cabinet-level Trade Policy Committee (TPC). The special
trade representative joins the deliberations of the EPB on matters of interest to him and is
able to bring to the EPB matters for attention or decision.
In addition to these formal mechanisms. Secretary Kissinger and I meet frequently on an
informal basis to discuss economic and foreign policy issues to assure coordination in our
approach.
Pursuing our international economic objectives
The principles of our intei-national trade policy are embodied in the Trade Act of 1974,
and we are actively pursuing them in the multilateral trade negotiations. Our successin these
negotiations will in large measure determine the future of our international trading system.
Progress is therefore essential. We are encouraged by the strong impetus which the MTN
received from the agreement at Rambouillet in November to accelerate the pace of the
negotiations, with the goal of completing them in 1977. Specifically, the Rambouillet
Declaration affirrned that we "should aim at achieving substantial tariff cuts, even eUminating
tariffs in some areas, at significantly expanding agricultural trade and at reducing non-tariff
measures" in order to achieve the maximum possible level of trade liberalization.
A healthy international, economic and financial system is, of course, an essential
underpinning for trade relations.
Recognizing the close interrelationship between international trade and economic
policies, the six participants at Rambouillet agreed to work in the monetary area to create
EXHIBITS
479
in
and financial conditions
world economy,
ftoreater stability thethe economic decisionimplemented in theunderlying the the IMF relating
hey also made
fundamental
to reach specific agreements in
exchange rates. This commitment was
recent agreements achieved at
the Interim Committee meeting in Jamaica. Because these understandings are so important
to the future of our international monetary system, and, thereby, to the environment in which
international trade will take place, I would like to comment briefly on the Jamaica accords.
The Jamaica agreements
The Jamaica meeting marked the successful conclusion of several years of negotiations,
resulting in the first general revision of our international monetary arrangements since the
basic framework for the postwar economic system was established at the 1944 Bretton
Woods conference. The package that has been developed combines longer term structural
reforms with measures to meet current financing needs. They consist of four major elements:
New provisions governing exchange rate practices which nations can follow in the future;
measures to phase gold out of the monetary system; steps to increase the resources of the
IMF and to strengthen the Fund's ability to meet the balance of payments financing problems
of member countries; and proposals to amend the IMF Articles, the "constitution" of the
monetary system, so as to streamline its operation, and to conform the institution to the
different world which has developed since the 1940's and which will evolve in the 1970's and
beyond. Together, these agreements lay a foundation of impressive strength on which we may
base our efforts in the multilateral trade negotiations.
The agreement to reduce the role of gold in the monetary system removes an important
disruptive factor from the system. Its private uses conflict with its monetary uses. Its extreme
price volatility can be very destabilizing to a monetary asset. Its relatively fixed supply means
that new output cannot be expanded or contracted in line with requirements for more, or
less, international liquidity.
Action to update and streamline the IMF Articles, relating to the operations ofthe General
Account and the SDR (special drawing right) account, provides a flexible basis for future
evolution of the rules of the system.
In the third area, steps are being taken to enhance the IMF's capacity to provide its
members medium-term financing for balance of payments problems while adjustment
measures become effective. These actions include an increase in IMF quotas, an immediate
increase in members' potential access to IMF credit, the establishment of a trust fund to assist
the poorest countries, and a major liberalization ofthe IMF's compensatory financing facility
to assist primary producers. All of these actions demonstrate a commitment to maintaining
a payments system which supports the free fiow of trade and capital.
A final area where agreement was reached involves exchange rate practices. In sharp
contrast to the rigid system of exchange rates established at Bretton Woods, which sought
stability by requiring adherence to a specific exchange rate regime—par values—the new
provisions focus on achieving the underlying economic stability that is a prerequisite for
exchange rate stability. The provisions legalize the various exchange arrangements presently
applied by countries; provide a flexible framework for future adaptation ofthe exchange rate
system; and provide wide latitude for countries to adopt specific exchange arrangements of
their own choosing so long as they fulfill certain general obligations relating to the
maintenance of internationally appropriate economic policies. Of particular importance in
this respect for the trade negotiations is the obligation to avoid manipulating exchange rates
to gain an unfair competitive advantage.
Those who criticize the present system of semifloating exchange rates state their case in
terms of the volatility of the system and the impact exchange rate variability has on
internatiorial merchants. Such arguments are just not supportable. The floating exchange rate
system did not produce exchange rate variability. The variability that characterized the past
several years is the result of the violent financial pressures generated by boom and recession,
by the sharp rise in infiation rates, and by the increase in the price of oil. Central to the
agreement reached in Jamaica was the recognition that instability was not caused by the
exchange rate regime but rather by underlying economic and financial conditions.
The agreed new provisions relating to exchange rates provide for a floating system and,
upon an 85-percent majority vote, a par value system. In either case, the exchange rate system
is not viewed as producing stability. Rather, underlying factors, relative rates of economic
expansion, congruent rates of price increases are recognized as the true source of stability.
This means that the exchange rate system can facilitate stability but that the basic impetus
has to come from domestic economic and financial policies.
Treasury responsibilities under the Trade Act
Let me now turn to the multilateral trade negotiations, where we are attempting to
implement our important commitment to an open international trading system under the
mandate ofthe 1974 Trade Act. I would like to devote particular attention to two areas where
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1976 REPORT OF THE SECRETARY OFTHE TREASURY
the Treasury Department has special responsibilities: The enforcement of our antidumping
and countervailing duty legislation and our trade relations with nonmarket economy
countries. I would then like to discuss an area of special importance: Our commodity policy
and our efforts to actively involve the developing nations in the MTN.
As you know, the Trade Act of 1974 made significant changes in both the countervailing
duty and antidumping statutes. The act and the congressional hearings which preceded its
passage made clear that it was the intent of the Congress that these remedies be vigorously
but fairly applied so that international trade could flourish in a freer but fairer environment.
At the tirne of my confirmation as Secretary of the Treasury, I pledged to you that these laws
would be efficiently and effectively administered. In the year since passage of the act, the
Treasury has carried out that pledge.
Antidumping Act
The act did not substantially amend the Antidumping Act but, for the most part, codified
various Treasury practices and policies previously established by administrative action.
During 1975, 25 cases were initiated, preliminary actions were taken on 13 cases, and final
decisions including referrals to the International Trade Commission (ITC) were made on 12
cases. (I have attached to my statement a summary of all these actions.) The cases initiated
include the initiation of an investigation of all imported automobiles from eight foreign
countries—the largest inquiry in terms of trade volume ever undertaken by Treasury.
Under new Trade Act procedures. Treasury on three occasions referred antidumping
petitions to the ITC at the outset of investigations when it was determined that there was
substantial doubt as to the existence of injury. The Commission determined in each instance
that it was unable to find "no reasonable indication of injury," and therefore full
investigations were or are being conducted in these cases.
1 believe the Department has continued to demonstrate its determination to admiriister
effectively the Antidumping Act, and this committee can be assured that these high standards
will be maintained.
Countervailing duty law
The Trade Act of 1974 made significant changes in the countervailing duty law with the
addition of time limits for completion of investigations and the inclusion of a provision for
the temporary waiver of countervailing duties to aid the multilateral trade negotiations. You
will recall that section 331 of the act authorizes the Secretary of the Treasury to waive the
assessment of countervailing duties otherwise assessable until January 3, 1979, if all of the
following three conditions have been met:
(1)
(2)
(3)
Adequate steps have been taken to reduce substantially or eliminate the adverse
effect of the bounty or grant;
There is a reasonable prospect that successful trade agreements will be entered
into reducing or eliminating distortions of international trade; and
The imposition of additional duties would be likely to seriously jeopardize those
negotiations.
Either House of Congress may override a waiver, and the Secretary may revoke it at any
time.
There was a dramatic increase in our countervailing duty caseload during 1975 as a result
of our stepped-up efforts to resolve all pending and legitimate complaints expeditiously. All
the cases outstanding at the time of the passage of the Trade Act have now been resolved.
The eight cases still pending were all initiated in 1975. During the year. Treasury initiated
38 countervailing duty investigations—a record number. This included those cases
outstanding as of the date of enactment of the Trade Act. Thirteen investigations were
terminated at the request of petitioners, 25 preliminary determinations were reached, and
20 final determinations were made, ofwhich 9 were affirmative and 10 were negative. A
temporary waiver of countervailing duties as provided in the act was granted in six of those
cases. Summaries of these cases are appended to my testimony.
These figures alone do not tell the full story concerning the effectiveness of our efforts to
protect U.S. markets. In several ofthe cases which resulted in negative findings, substantial
"countervailable" programs existed at the time the inquiries began. Discussions with
Treasury officials during the course of the proceedings or the mere pendency of the actions
themselves convinced the responsible officials of the governments concerned to eliminate
the subsidies. Furthermore, in each ofthe six cases where duties were waived the exporting
country had taken significant action which in our judgment eliminated or substantially
reduced any threat posed by the subsidy programs. In four ofthe six cases this action involved
the elimination of substantial portions of the subsidies. In the other two cases, we believed
that while potential existed for adversely affecting the domestic industry concerned, that
EXHIBITS
481
potential was removed by other price or export policy guarantees obtained from the
exporting countries.
As I have indicated. Treasury exercised its authority to waive the imposition of
countervailing duties in six instances during 1975. In all cases of substantial subsidization.
Treasury worked closely with interested Members of Congress, representatives of the
concerned domestic industry, and appropriate executive branch agencies in reaching
decisions concerning the exercise of the temporary waiver authority. This process led to
decisions reflecting the variety of concerns that must be considered in determining whether
the criteria established by the Trade Act have been met. This provision was not designed to
be used loosely or indiscriminately but in limited instances where circumstances warrant it.
In my opinion, we have by our actions thus far fulfilled the basic purpose for which the waiver
provision was added to the law. We have avoided unnecessary friction with our trading
partners while negotiations continue in Geneva, while at the same time protecting the
interests of our farms, factories, and workers.
Let me now turn to the need for those negotiations to arrive at a new set of international
guidelines to limit the use of subsidies in international trade.
Subsidies and countervailing
Section 331 ofthe Trade Act provides a specific mandate to. negotiate on subsidies and
countervailing:
It is the sense of Congress that the President, to the extent practicable and consistent
with United States interest, seek through negotiations the establishment of internationally agreed rules and procedures governing the use of subsidies (and other export
incentives) and the application of countervailing duties:
Mr. Chairman, as you know, the special trade representative is charged with negotiating
a subsidy/countervailing duty code within the multilateral trade negotiations. I am certain
Ambassador Dent will wish to address this issue. Treasury has worked very closely with STR
and other agencies in carrying out the mandate of the Trade Act in this area. As a result,
the U.S. Government has proposed.a framework for negotiation of international rules on
subsidies and countervailing. We submitted a concepts paper on the elements that should
be included in a subsidies and countervailing code. Our proposal is on the negotiating table
along with proposals of other countries. Our proposal would establish three categories
encompassing all subsidies, and would establish treatment for subsidies in each category. The
"prohibited" category would include all blatant export subsidy practices including direct
export subsidies and domestic subsidies expressly intended to promote export performance.
These would be subject to countervailing without any conditions. The "conditional" category
would generally cover programs, the intent and effect ofwhich are to accomplish a country's
domestic policy objectives, but which may also affect international trade. These would be
subject to countervailing duties only when certain conditions of injury are met. The
"permitted" category would consist of practices agreed to have a minimal impact on
international trade such as overseas trade fairs. These would be exempt from countervailing
action.
The Trade Negotiations Committee meeting in December decided that one of the MTN
goals for 1976 would be to reach agreement on an approach to negotiations on subsidies and
countervailing.
Effective international rules are needed in this area both to deal with the widespread use
of subsidies and to cover the application of countervailing duties against subsidies.
Present GATT rules do not now provide adequate controls on the use of subsidies that
distort international trade. The multilateral trade negotiations provide the opportunity for
developing clear and effective controls on subsidies and linking subsidy controls with rules
on countervailing action.
The thrust of the U.S. approach is to obtain, for the first time, a change in existing
international practices which clearly commits both the United States and our trading partners
to refrain from the use of export subsidies in international trade, whether or not injury has
or will occur. The framework we have proposed for such an agreement provides the
possibility for negotiating separate protocols for special problems when we find it necessary
and desirable to do so.
In view of the fact that such an agreement will be extremely difficult to negotiate, some
might ask why we need it. After all, we can unilaterally offset subsidies in the U.S. market
by countervailing action. There are several reasons.
First, we need to prevent subsidized exports from capturing the third country markets for
American exports.
Secondly, subsidized products moving in international trade cause diversion of goods
produced in third countries and, further, they distort investment decisions.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Finally, the use of unilateral remedies inevitably cause friction between trading partners
and are, therefore, subject to appeals on political and other nongermane grounds.
Our objective, then, is to gain agreement on the prohibition of subsidies, the intention and
effect of which is to promote exports, whether to the United States or to third countries. To
gain this objective we must realistically be willing to accept some limitations on our unilateral
use of countervailing duties. What we have proposed is that where the programs complained
of are purely domestic in nature—that is, where they apply equally to domestically consumed
products and from the evidence available have neither the intent nor effect of stimulating
exports—countervailing action by the importing country^i.e., the United States—would be
conditioned upon a showing that the imports iri question are actually or potentially injurious
to domestic industry. I would point out that all countries, including our own, maintain an
array of programs for legitimate domestic purposes, which can be judged to be bounties or
grants under the broadest interpretation of those words. A typical example is the investment
incentive programs maintained by the individual States to attract new industries. Some of
those industries inevitably export some of their production.
Our experience has been that programs such as these, maintained for legitimate domestic
purposes, generally have only an incidental effect on trade. We need to establish better
guidelines for determining when the impact of these programs on trade is significant enough
to warrant offsetting action.
This area is one which is in great need of a negotiated solution, and we have accordingly
given it high priority in the Geneva negotiations.
I would like to turn now to the second area of special Treasury responsibility under the
Trade Act: the operation of the East-West Foreign Trade Board.
The East-West Foreign Trade Board
In aijcordance with section 41 i ofthe Trade Act of 1974, President Ford established the
East-West Foreign Trade Board by Executive order on March 27, 1975. The organization
ofthe Board follows the organization of its predecessor—the President's Committee on EastWest Trade Policy.
The President designated me as Chairman ofthe Board; the Assistant to the President for
Economic Affairs, William Seidman, was named Vice Chairman. Other members are the
Secretaries of State, Agriculture, and Commerce, the Special Representative for Trade
Negotiations, the Director of the Office of Management and Budget, the Executive Director
of the Council on International Economic Policy, and the President of the Export-Import
Bank. Treasury Assistant Secretary Parsky is Executive Secretary.
In addition, in response to a suggestion by the distinguished chairman of this committee,
and recognizing the important role of the Department of Defense in the national security
aspects of trade with the Communist countries, the Board unanimously recommended to the
President that the Secretary of Defense be added to the Board's membership. On January
3, President Ford, by Executive order, amended the membership ofthe Board to include the
Secretary of Defense.
Among its statutory functions, the East-West Foreign Trade Board is directed in the Trade
Act to—
(1)
(2)
(3)
Monitor trade between persons and agencies of the U.S. Government and
nonmarket economy countries to ensure that such trade will be in the national
interest of the United States;
Receive reports on the nature and terms of transactions from (a) any person who
exports technology to a nonmarket country which is vital to the U.S. national
interest, and (b) any U.S. Government agency which provides credits, guarantees,
or insurance to a nonmarket country in excess of $5 million during any calendar
year;
Submit to Congress quarterly reports on trade between the United States and
nonmarket countries.
Since its establishment, the Board has functioned as a policy formulating and coordinating
body. Its working group, consisting of representatives of the member agencies, usually meets
twice monthly to coordinate the development and implementation of East-West trade
policies and to refer issues to the Board for decision.
With regard to the Board's responsibility to monitor credits, guarantees, and insurance
provided under Government programs, the working group is carrying out its responsibilities
through oral and written reports from Eximbank, the Commodity Credit Corporation, and
the Overseas Private Investment Corporation on such extensions to the nonmarket economy
countries. There is also coordination between the working group and the National Advisory
Council (NAC). Data from these agencies are summarized in the Board's quarterly reports.
Control of exports of technology to nonmarket economy countries is.maintained by the
Commerce Department under the authority of the Export Administration Act. To fulfill the
requirement that persons who export technology to nonmarket economy countries report to
EXHIBITS
483
the Board, the Board decided to use the export control mechanism maintained by the
Commerce Department. Notice was given in the Federal Register of July 14, 1975, that the
Board had promulgated a regulation concerning the exporting requirements of section 411
relating to the export of technology to a nonmarket economy country. Exporters of such
technology will have complied with these requirements by complying with the applicable
provisions of the export control regulations of the Department of Commerce.
The Board decided to use Commerce's well-established administrative mechanism, rather
than establish a new one, because it did not wish to create yet. another bureaucracy to levy
additional requirements on businessmen. In order to do this, the Board has interpreted
section 411(b) to require that licenses for export of technical data applied for and granted
be reported to the Board by the Commerce Department. In addition, the Board and working
group have continued the practice ofthe predecessor Committee by reviewing export license
cases of major policy significance.
To date, the Board has submitted to Congress a quarterly report for each of the first three
quarters of 1975. The fourth quarterly report will be submitted in February, when detailed
1975 statistics are available.
Notwithstanding the importance ofthe Trade Act in creating the East-West Foreign Trade
Board, this administration has consistently established its objection to the provisions of this
act which adversely affect our trade with the Soviet Union and other nonmarket economy
countries, and which do not serve our political and humanitarian interest. My contacts with
Soviet leaders and with American businessmen during the past year have firmly convinced
me that it is in pur interest to find a way to unblock these impediments to increased trade.
In consultations with congressional leaders, 1 have been encouraged by a common
appreciation that we must move ahead. Last summer, I met with the members ofthe Senate
delegation to the U.S.-U.S.S.R. Parliamentary Conference before and after their visit to*
Moscow. The Senators had an extremely frank exchange of views with top Soviet officials
on the impact of the Trade Act on United States-Soviet relations. I believe their visit was
extremely useful as was the visit of the House delegation which took place in August.
The normalization and improvement of our commercial relations with the U.S.S.R. and
other nonmarket economy countries is a necessary element in the improvement of our overall
relations with these countries. We believe strong economic ties tend to create a foundation
of mutual interest which in turn can improve the environment for progress in the relaxation
of political tensions.
A solution to the legislative impasse we now face would materially enhance our business
community's efforts to expand trade with the East. We have had many indications that the
lack of official credits from the United States is causing the U.S.S.R. and some ofthe eastern
European countries to direct their purchases elsewhere. The major European countries and
Japan have agreements with the U.S.S.R. under which $10 billion of government-backed
credits will be available to finance export sales to the Soviet Union. This total is in sharp
contrast to the $469 million in credits extended by the Eximbank before lending to the
U.S.S.R. was suspended in May 1974.
At Treasury's request, the Commerce Department is now conducting an inquiry to
determine how much business this country has in fact lost. The Soviets have given us their
estimate that for January through October 1975, as much as $ 1.6 billion in contracts which
the Soviets were ready to sign with U.S. firms have gone to Western Europe and Japan
because of the U.S. restrictions on Eximbank credits. Many of these contracts are being
negotiated as part ofthe Soviet 1976-80 plan and therefore represent business opportunities
that are not likely to appear again until the next 5-year plan period.
I expect that much of the competition among Western industrial nations for exports
through government-subsidized credits will soon be constrained through the establishment
of guidelines on credit terms to be followed by the larger industrial countries. However, such
arrangements will not mean that other countries will not continue to provide large amounts
of credit to the East. Our firms will continue to be seriously disadvantaged by not having
access to Eximbank credits in trading with these countries.
The developing countries and U.S. commodity policy
I would also like to discuss the related issues of commodity policy, U.S. relations with the
developing countries, and the MTN. Commodity policy is a major element bf our
relationships with the non-oil-producing LDC's. For the foreseeable future many of these
countries will largely depend upon commodity trade for their economic well-being and for
their hard currency earnings. Our commodity policy decisions are therefore crucial to the
ongoing dialog with the developing nations. Moreover, our actions now in setting forth clearly
and forcefully our views will play a pivotal role in the evolution of the world's system of
commodity trade.
As you are well aware, the worldwide economic boom of 2 years ago created concern in
developed countries about the long-range availability and dependability of supplies of raw
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1976 REPORT OF THE SECRETARY OF THE TREASURY
materials, particularly those from developing countries. At the same time, worldwide
inflation and high oil prices played havoc with developing country economics. The success
of OPEC led many of these countries to believe that they could resolve their economic
problems by emulating OPEC. Several producer associations for other commodities were
created in an attempt to raise export prices and export earnings.
These efforts have not been successful. Responding to market signals, prices for most
commodities, particularly minerals, have fallen dramatically from the 1974 highs. Yet many
developing country spokesmen still pin their hopes for improving their economic lot on
mechanisms which would artificially maintain or raise the prices of their commodities. This
distracts them from increasing output which could more quickly and surely advance their
economies.
Over the next few months the United States will be involved in discussions in several
international forums of a variety of such proposals involving export controls, widespread
commodity agreements, price indexation, and new international financial institutions.
1 believe more fruitful approaches are envisioned in the Trade Act of 1974. 1 would argue
that both our own economic interests and those of the developing countries can best be
served, not by putting new controls on the free market for raw materials and their products,
but by working to dismantle those that exist.
The United States has put forth its own set of proposals on commodity policy which we
believe would constructively and positively come to grips with the basic economic problems
faced by the developing countries within the context of our fundamental commitment to free
markets. I would like to summarize these proposals for you briefly and then discuss more fully
those particular proposals which relate closely to the Trade Act.
The United States has important interests in the raw materials field. As an importer of raw
materials, the United States seeks assured supplies at reasonable prices. This will require
adequate investment in raw materials production, and supply commitments from exporting
countries. As a major exporter of raw materials, we wish to improve our access to other
countries' markets for our exports and convince other countries that we are a dependable
supplier. Excessively volatile price fluctuations are a niatter of concern both to developing
and developed countries. They can distort investment patterns and contribute to inflationary
pressure. We also recognize the significant dependence of many developing countries on
earnings from raw materials exports, and we wish to help increase the security and stability
of those earnings.
To accomplish those goals, we have put forward specific proposals.
•
To help assure adequate investment, we have proposed that the World Bank group,
especially the International Finance Corporatiori, take the lead in bringing together
private and public capital as well as technical, managerial, and financial expertise
to finance new minerals development.
•
To assure our access to supplies at reasonable prices, and to convince other
countries of our dependability as a supplier of raw materials, we are seeking supply
access commitments in the multilateral trade negotiations.
•
Because no one approach can apply to all commodities, we propose to discuss new
arrangements for individual commodities on a case-by-case approach. We have
participated actively in negotiations for new commodity arrangements in tin,
cocoa, and coffee, and will participate in talks on sugar this fall. We will sign the
new Tin Agreement, which will be submitted to the Senate for advice and consent,
because it operates with a minimum of market interference and permits full latitude
for the operation of our own tin stockpile.
•
However, we do not propose to sign the new International Cocoa Agreement in its
present form because it sets rigid price ranges, does not adequately protect
consumers, and relies excessively on export quotas as a central operational feature.
We have suggested that the agreement be renegotiated and are awaiting the
reactions of other countries.
•
We are currently reviewing the new International Coffee Agreement, which
contains substantial improvements. Our review is focusing on the adequacy ofthe
consumer safeguards and the possible future price impacts of the new agreement.
•
To help primary producing countries stabilize earnings from commodity trade, the
United States proposed a substantial improvement in the IMF's compensatory
financing facility. The IMF has now agreed that such countries could draw more
freely on the IMF to offset export earnings shortfalls. Under the new rules, members
can draw up to 75 percent of quota, and up to 50 percent in any one year.
•
We are also supporting an improvement of the IMF's arrangements for national
financing of buffer stocks by amending the Articles of Agreement to remove any
effect of buffer stock drawings on member-country access to other IMF resources.
We have determined that we will support financing for national contributions to
buffer stocks from only one of the international financial institutions—the IMF.
EXHIBITS
485
•
To provide even longer run stability and security of export earnings for the LDC's,
we nave urged that in the MTN particular attention be paid to the issue of tariff
escalation. Tf LDC's are given improved access to developed country markets for
processed forms of their raw materials, they will be able to diversify their economies
and decrease dependence on exports of raw materials.
As this enumeration of measures demonstrates, there is no single approach to commodity
trade problems. We reject price-fixing arrangements that distort the market, restrict
production, and waste resources, and we have made clear we will not join such agreements.
On the other hand, we are prepared to consider measures that will improve the functioning
of markets and will directly meet the problems of raw material producers and consumers.
In this regard, we seek the establishment of consumer-producer forurris for each key
commodity to promote efficiency, growth, and stability of particular markets.
Two of these issues are particularly related to the Trade Act—supply access and tariff
escalation.
Section 108 of the Trade Act specifically directs the U.S. negotiators to work toward
agreements which "assure the United States of fair and equitable access at reasonable prices
to supplies." Countries may wish to offer or request specific supply access commitments in
exchange for similar supply commitments or improved market access for processed products.
The feasibility and desirability of such commitments need to be examined. The idea of a
general code of conduct on export restraints also would seem to hold promise, in which
countries might agree to general principles governing the circumstances and methods under
which export restraints would be justified. Finally, we believe that this field offers one area
in which developing countries might make some commitments in the MTN in exchange for
the benefits they have requested.
The United States has also stated that we wish to examine carefully the issue of tariff
escalation and possible remedies. Most countries, including the United States, have tariff
systems which favor the imports of raw materials over processed goods. Raw materials
producers argue that this is uneconomical and provides them with justification for export
restraints on their raw materials in order to protect and stimulate their own processing
industries. Thus there is clearly a link between the issues of supply access and tariff escalation.
In general, this administration has consistently argued that we believe all countries benefit
from freer trade. We must work to decrease the insecurity caused by unpredictable
government intervention in raw materials markets. If countries can be assured that
governments will only limit exports of raw materials under clearly defined emergency
circumstances, and will not attempt to set prices arbitrarily, importing countries will be less
hesitant to become more dependent on imports of those materials and will be more likely
to reduce their own barriers to those products. In turn, if importers reduce the levels of tariff
escalation so that processing can take place where it is most economical to do so, raw
materials producers will be able to increase the value added to products in their countries,
further industrialize their economies, and enhance their export.earnings without tampering
with raw material prices.
I would thus suggest that by using the mandate and authority in the Trade Act of 1974,
we can improve our access to needed raw material imports, increase other countries'
confidence in us as a supplier of raw materials which we export, and assist the developing
countries in their drive to improve export earnings and develop their economies. This can
best be done by reducing and restricting Government interference in the free market for raw
materials and their products, rather than adding new mechanisms and controls.
Border tax adjustments
I would now like to turn to another section of the Trade Act which raises a subject of
immediate interest to the Treasury—tax adjustments made at the border on imports and
exports.
The Trade Act directs the President to revise the present GATT rules on border tax
adjustments. The rules ofthe GATT provide, generally, for the adjustment on traded goods
of internal indirect taxes—those bearing on consumption such as sales taxes and value-added
taxes. Adjustment means the relief of such taxes on exports and their assessment on imports.
The GATT does not provide for any such adjustment at the border of direct taxes—those
bearing on factor earnings such as corporation and personal income taxes.
The administration is now hard at work on this problem. We are examining how the present
rules actually affect trade today. Economic opinion on this point is divided. Some believe
that U.S. exports are hurt by the current rules while the exports of others obtain an advantage.
On the other hand, it is argued that, taking into account all factors such as more flexible
exchange rates, border tax rules have little, if any, lasting effect on trade. We are coming
to grips with these separate views and are considering the basic options for improving the
current rules. Our work is still in progress but it is becoming very apparent that there are
no easy answers.
486
1976 REPORT OF THE SECRETARY OF THE TREASURY
Antidumping and countervailing duty actions—CY1973-75
i973
AntidumpinK:
Petitions received
Negative decisions
Affirmative decisions
Injury or hkelihood of injury
Discontinuances
Countervailing duty:
Proceedings initiated
Negative decisions
Affirmative decisions
Terminations
Waivers
20
9
25
13
5
:
•.
'.
[974
10
2
5
3
3
25
4
8
2
0
1
0
0
0
N.A.
5
1
4
0
N.A.
*38
*10
*10
*15
*6
* Includes first week 1976.
N.A. Not available.
We are very aware of the concern of Congress, U.S. businessmen, and labor about this
issue, which we will address in the multilateral trade negotiations. I hope the Special
Representative for Trade Negotiations will be able to report more progress on this to you
soon.
Conclusion
It is my firm belief that progress in negotiating a more open and equitable world trading
environment is essential to a world beset with economic difficulty and unprecedented
change. The need for meaningful progress in the Geneva negotiations was clearly recognized
by the major industrialized nations at Rambouillet. Our agreement there to aim for
completion of the MTN during 1977 has won the support of the Trade Negotiations
Committee in Geneva, which has set specific concrete tasks for the negotiations this year to
enable use to meet that deadline.
In carrying out the mandate ofthe Trade Act of 1974, our efforts in the multilateral trade
negotiations will—
(1)
(2)
(3)
Help move us toward our fundamental goals of freer markets, improved rules and
regulations governing the conduct of trade, and a more efficient allocation of world
resources for the benefit of producer arid consumers alike;
Provide a positive counter to the threat of a potentially hazardous slide into world
protectionism; and
Enable us to better meet the justifiable needs of the developing countries, while
providing that they gradually assume equivalent responsibilities as their economic
situation improves.
The negotiations are a vital element of our international economic policy. Upon the
success of our efforts rests in large measure the nature of our future world trading system.
I am confident that if we approach these negotiations with the aim of preserving and
broadening the freedom ofthe private sector to conduct international transactions, with a
minimum of Government intervention, the future economic system will be one with which
we can all live and from which we will all benefit.
Exhibit 40.—Statement by Assistant Secretary Parsky, April 26, 1976, before the Subcommittees on International Resources, Food, and Energy; Intemational Economic Policy;
International Organizations; and Intemational Trade and Commerce of the House
Committee on International Relations, entitled "UNCTAD IV: The U.S. Approach to
Current Economic Issues"
Mr. Chairman, members of the committee, I welcome this opportunity to discuss the range
of intemational economic issues that will be the subject of intense debate and negotiations
during the fourth session of the United Nations Conference on Trade and Development
(UNCTAD IV).
We approach this meeting sympathetic with the aspirations of the developing countries.
We want to work with them in seeking practical, realistic solutions to their problems.
Although each country is different, presenting unique problems which require individual
solutions, there are certain needs that are shared and in tum there are certain principles
which should apply to all.
EXHIBITS
487
All ofthe developing countries want to improve the economic conditions of their peoples,
and they want the help ofthe developed countries in undertaking this effort. We wish to see
the growth and stability ofthe economies of these countries. It is clear to us all that this world
cannot indefinitely endure half rich and half poor. The United States has played and must
continue to play a leadership role. We haye given significantly of our resources, both financial
and human, to help in this process, and we will continue to do so. I believe the basic question
is not one of commitment to help, but rather one of process. How can we best get the job
done? As such, I believe there are several basic principles that we should bear in mind:
A country's economic growth rate will be determined by the skill with which it utilizes its
own resources, not its status as an industrial or less developed country. Foreign aid can make
an important contribution to development, but what developing countries do for themselves
will determine how they will grow.
Investment is the central propellant behind economic development. While we must be
sensitive to the need to provide direct aid to those who face drastic immediate problems, over
the long run the best way to assist developing countries significantly is by helping them to
create a better climate for increased investment in their country. We must keep this goal in
mind when initiating new programs of bilateral and multilateral assistance.
The development of a strong private sector is essential. In the United States and other
industrial countries, the private sector has the technology and management expertise to help
developing countries. We must not adopt policies that will undermine maximum use of this
sector.
The free market may not be perfect but no other system has been devised which will
increase production, improve efficiency, and stimulate growth in a better way. Our efforts
should be aimed at helping other countries improve conditions for the better operation of
the market system by removing government controls. We must resist the erection of
additional impediments to market forces.
With these principles in mind, I believe the United States must continue to lead others away
from political rhetoric to practical solutions. Simplistic analysis and overstatement, no matter
how well intended, will simply not help move us forward. I do not believe that calls for
controlled commodity markets, massive transfers of resources, and wholesale debt
rescheduling or moratoria are either realistic, or indeed necessary.
As we approach the problems of the developing countries, we must not let the emotions
of the international political arena distort the economic realities. For example, some have
expressed the view that "all of the developing countries" are facing disastrous balance of
payments difficulties requiring blanket solutions by the developed countries. The recent
\yorldwide recession has certainly impacted the developing countries severely, but they are
not all teetering on the brink of economic disaster, nor do they all share the same problems.
In fact, although a large number of developing countries have been experiencing abnormally
large current account deficits as the result of the increased prices of their oil imports and
weakened export markets, the deficits have been financed without disrupting existing
institutional arrangements. A number of developing countries have proven creditworthy for
substantial borrowings of private capital, while other countries have benefited from increased
aid flows. There is reason to be optimistic that financing will again be adequate in 1976,
particularly in view of lower requirements as a result of increased exports and the new
resources provided for by the Jamaica meetings. Some individual developing countries will
ericounter particularly difficult problems meeting their balance of payments financing
requirements, and we must find ways to properly assist them, but we do not.believe that this
will be a general problem requiring blanket solutions.
This brief discussion ofthe realities ofthe LDC balance of payments situation is only meant
to illustrate the dangers of oversimplification, and I will more thoroughly discuss this issue
later. But I want to make clear that we have attempted to shape our policies and proposals
on an objective analysis ofthe realities ofthe economic situations ofthe individual developing
countries, not on the basis of misleading generalities that could result in inappropriate, even
harmful solutions.
UNCTAD IV in perspective
Before turning to the specific issues which will ariseat UNCTAD IV, let me briefly review
the events leading up to this Conference. The past 2 years have seen a considerable change
in the relations between the developed and developing world. In 1974, elements of
confrontation dominated the scene and certain relations became strained, as the LDC's put
forward their initial proposals for a "new international economic order," which was
elaborated in the Charter of Economic Rights and Duties of States adopted in December
1974, over the strong opposition, and negative votes, ofthe United States and several other
industrial countries.
488
1976 REPORT OF THE SECRETARY OF THE TREASURY
Such an atmosphere was truly counterproductive for all, and in 1975 there was a major
change in our relations with the developing world. At the Seventh Special Session of the
United Nations last September, Secretary Kissinger put forth a broad range of positive
proposals, and consensus was reached on an approach to a number of major economic issues
that will be dealt with at UNCTAD IV. Agreement was also reached last fall to begin a serious
dialog between the Western industrial nations, the oil-producing developing countries, and
the oil-importing developing countries at the Conference on International Economic
Cooperation (CIEC).
The CIEC has resulted in an unparalleled, intense dialog between the developed and
developing world. Representatives from 8 industrialized and 19 OPEC (Organization of
Petroleum Exporting Countries), and nonoil developing nations are meeting each month in
Paris in the 4 commissions on energy, raw materials, development, and financial affairs which
form the CIEC.
UNCTAD IV will be another important part of this dialog. This meeting, which brings
together almost all countries, including Socialist States, will help determine whether or not
the North and South can continue a serious joint effort to identify and solve problems relating
to our economic relations and avoid the nonproductive confrontation of the past.
A broad range of vitally important issues will be discussed at UNCTAD IV, including
commodities, trade, debt, official development assistance, transfer of technology, and the
future role of UNCTAD. A primary focus will certainly be on commodities, where UNCTAD
advocates an "integrated program" that includes many features we find unacceptable, and
on the financing problems of the developing countries, where UNCTAD seeks generalized
relief measures.
I would now like to describe our approach to these two important areas, as well as the other
important issues with which UNCTAD IV will be concerned.
Commodities
We expect that the commodities issue will be one ofthe most important issues at UNCTAD
IV
It's difficult to predict precisely what the developing countries really want, but if we look
at the Manila declaration formulated last February and the UNCTAD Secretariat's
documentation for UNCTAD IV, I think we can get a pretty good idea. It would appear that
they are seeking endorsement ofa so-called integrated program—a series of simultaneously
negotiated commodity agreements which would use buffer stocks as a price regulating
mechanism. The buffer stocks would be financed by a "common fund," which would at the
outset command about $3 billion in resources, with $1 billion from governments, ofwhich
UNCTAD suggests roughly 10 percent be contributed by the United States. In addition, the
LDC's want prices of their raw materials to be indexed to the prices of manufactured goods,
they want the availability and concessionality of compensatory finance improved, and they
are anxious to improve their access to developed country markets for raw materials and
processed and semiprocessed goods.
The most controversial aspect of the UNCTAD commodity program is the integrated
program and its central mechanism, the common fund. The UNCTAD Secretariat and many
developing countries appear to be seeking at UNCTAD IV an agreement with the developed
countries to—
Hold a series of individual commodity negotiations between producers and consumers
which would lead to commodity agreements for those commodities. At a minimum
UNCTAD would hope to get such negotiations underway for a "core" of 10 products,
including cocoa, copper, cotton, hard fibers, iron ore, jute, rubber, sugar, tea, tin.
Agree in principle to the creation of a common fund and establish a negotiating
conference to determine the precise structure and modalities of such a fund.
The common fund is the glue which holds the integrated program together. It is intended
to be more than a buffer stock financing mechanism. UNCTAD hopes that such an institution
would actively perform the role ofa catalytic agent to prod producers and consumers to agree
on specific commodity agreements. UNCTAD envisages that producers in particular would
be stimulated by the availability of funding for buffer stocks to overcome their own
differences and push hard for an agreement.
The United States has made clear in the past that we cannot endorse this aspect of the
UNCTAD approach to commodity problems, and we will do so again at UNCTAD IV. We
do not believe that a generalized commitment can be made to form commodity agreements,
particularly agreements based on a specific market intervention mechanism such as a buffer
stock. We believe that each commodity has its own unique characteristics of production,
transport, storability, marketing, and consumption, and thus that commodity problems can
only be dealt with on a case-by-case basis.
EXHIBITS
489
We will also not support the concept of a common fund for buffer stocks, particularly as
a new independent international institution which would play an activist role in attempting
to form agreements fdr individual commodities. While we generally believe buffer stocks to
be a price stabilization technique that is preferable to alternative market intervention devices
such as export controls, which may build rigidities into the market, the applicability of buffer
stocks must be determined only on a case-by-case basis. We have carefully reviewed the 10
commodities which UNCTAD has proposed as the core of its integrated program and we are
skeptical of the viability or utility of buffer stocks as a stabilizing tool for most of those
products.
We also believe that the appropriate method and sources of financing to support the
mechanisms of a commodity agreement must vary with the circumstances of each
commodity. These methods might include such techniques as commercial borrowing, direct
contributions by participants, export taxes, or loans from existing international institutions.
If there is sufficient consensus among major producers and consumers of a given commodity
that an agreement is necessary, and agreement is also reached that a buffer stock is the
appropriate technique to stabilize prices for that commodity, we are willing to support a
variety of different avenues of financing the stock; but although we cannot support aspects
of the integrated program nor the common fund, we do believe that a positive approach to
commodity problems is needed. It's for this reason that over the past year and a half we have
conducted an intense review of U.S. commodity policy. We created an interagency
Commodity Policy Coordinating Committee, reporting directly to the Economic Policy
Board and the National Security Council, to undertake this task. Through this mechanism,
the United States has reviewed the UNCTAD proposals and formulated our own
comprehensive approach.
In this review, we have found that we could support a number of the objectives the
UNCTAD program is intended to achieve. These would include a reduction in excessive
fluctuations in prices and supplies; the expansion of efficient processing of primary
commodities and diversification of productive capacity in developing countries; increased
stability in developing countries' export earnings; and a lowering of trade barriers against
processed and semiprocessed forms of raw materials.
We believe the best means to accomplish these goals, however, are different from the
UNCTAD approach. It is our firm conviction that the market mechanism is on the whole
the most efficient method of assuring that supply and demand of commodities are kept in
balance in a dynamic world. Although markets do not always operate efficiently, the
appropriate remedy is to strengthen their functioning, not intervene or further impede
market operations.
At UNCTAD IV the United States will stress its own proposals in the commodity field:
•
We believe that the most fundamental solution to problems of wide swings in export
earnings as a result of changes in prices and demand for commodities is to be found
in compensatory finance. The recent reform of the IMF compensatory finance
facility, in line with U.S. recommendations at the Seventh Special Session, provides
very substantial additional balance of payments support to those developing
countries that experience fluctuations in their export earnings, while avoiding
direct intervention in commodity markets. We have also proposed to broaden the
proposed trust fund to include additional compensatory financing to developing
countries that are particularly dependent on commodity exports, where there is a
balance of payments need. A decision on this proposal depends on the creation of
the trust fund and some experience with its operations.
•
Commodity problems should be analyzed on a case-by-case basis in forums
composed of interested producers and consumers. Where specific problems are
identified, we will examine proposed solutions and make suggestions of our own.
Those proposed solutions may range from research and development measures to
promote consumption and improve market distribution systems and production
efficiency, to the creation of buffer stocks to stabilize prices and enhance supply
security. In most cases, we believe that commodity problems will best be solved
through strengthening the market mechanism, not by circumventing or thwarting
it.
•
We support the creation of producer-consumer groups for all major traded
commodities where these do not now exist. We will seriously study specific
commodity problems in such forums in order to improve the operation of markets
in those commodities. We are moving toward such a forum for copper and we are
willing to look at others such as bauxite or iron ore.
•
We continue to be concemed that the investment climate in many developing
countries may result in discouraging needed investment altogether or in forcing
investment in less productive but safer locations in developed countries. We have
490
1976 REPORT OF THE SECRETARY OF THE TREASURY
urged that the World Bank group increase its role in raw materials investment by
combining its resources and technical expertise with those ofthe private sector. We
are also discussing the possibility of proposing the creation of a new investment
institution which could be associated with the World Bank to promote such
investment.
In this way, we believe the United States has a positive, comjrrehensive, and workable
program to deal with comrnodity issues. We believe the solutions we propose meet the real
needs ofthe developing countries. We hope that all participants in UNCTAD IV will maintain
a constructive and realistic attitude in the commodity discussions, and that agreement will
be reached on a realistic, viable program for further action in this field.
Development issues
Aside from commodity issues, the other major concern at UNCTAD IV will involve
problems of developing country finance, particularly debt. Before discussing this issue in
depth, however, I would like to make some observations on development issues in general,
as debt is only one aspect of the larger question of how developing countries obtain the
external resources they need for development purposes. Development is a process requiring
the infusion of capital, technology, and management skills on a sustained and substantial
scale. While we believe that the developing country itself is the main source for most of these
resources and must therefore make the effort necessary to hold down present consumption
in the interest of higher living standards in the future, international support is also
indispensable.
At UNCTAD IV, the most sensitive issue related to the general question of aid flows is
expected to be the demand by developing countries that the industrial countries increase
their concessionary aid flows in order to achieve the so-called U.N. second development
decade target of 0.7 percent of GNP. This compares with actual aid flows from industrial
countries of 0.33 percent of GNP in 1974, the latest year for which such data are available.
The United States supports a substantial increase in such flows to the developing countries
and has been increasing its own development assistance. We do not, however, support the
0.7 percent target—which is clearly unrealistic for the United States—since it would require
over $1 1 billion annually in bilateral aid as compared with the $3.4 billion (0.25 percent of
GNP) provided in 1974. A numberof DAC (Development Assistance Committee) countries
have accepted the target in principle but only seven have committed themselves to achieve
the target by 1980. Sweden actually achieved 0.7 percent in 1974—the first DAC country
to do so.
Concessionary aid flows are important for development of poorer countries but not as
important for the other developing countries as export promotion and other types of capital
flows. For this reason, the United States made a number of initiatives at the U.N. Seventh
Special Session last fall in the areas of capital market access, transfer of technology, and
direct investment.
Private capital markets are already a major source of development funds, either directly
or through intermediaries. The World Bank and regional development banks borrow
extensively to lend to developing countries. We have requests before Congress or will soon
be making requests to expand the callable capital of several of these institutions. As you
know, such capital serves to guarantee IFI borrowings in the private markets.
The more successful developing countries are the ones that rely heavily on borrowing in
private capital markets. It is estimated that the developing countries borrowed roughly $10
billion from private sector sources in 1975, mainly in the form of commercial bank lending.
The United States has, therefore—
Contributed actively to the work ofthe IMF/IBRD Development Committee to explore
ways to improve access for developing countries.
Supported a major expansion of the resources of the IFC (International Finance
Corporation)—the World Bank affiliated investment broker with the widest experience in
supporting private enterprise in developing countries.
Proposed creation of an "international investment trust" to mobilize portfolio capital
for investment in local enterprises.
Reviewed our own conditions for LDC access to our capital markets and developed a
technical assistance program within AID to facilitate LDC knowledge of and access to the
U.S. capital market.
The other two areas of concern—transfer of technology and private investment—are
closely related. Technology is vital to development, and internatiorial transfer of technology
to the developing countries is necessary in view ofthe cost and skills required to develop it.
Private investment is an important source of technology as well as a source of managerial
talent and capital.
Among the initiatives we have supported in these areas are—
EXHIBITS
491
An international industrialization institute, to sponsor and conduct research on
industrial technology.
An international center for the exchange of technological information.
Voluntary and nonbinding guidelines for technology transfer to guide governments arid
enterprises in this area, including the element of restrictive business practices.
A voluntary and nonbinding code of conduct for multinational corporations to improve
the understanding of all parties regarding their mutual obligations.
We believe that the United States is in a position to play a very forthcoming and
constructive role at UNCTAD IV in these three areas vital to the development of developing
countries—capital market access, technology, and investment.
The financing difficulties of developing countries
Having briefly covered general development issues, including the various proposals the
United States has made to deal with the development needs ofthe developing countries, let
me turn to the finance question in greater detail, with particular attention to debt. UNCTAD
IV comes at a period after the non-oil-exporting developing countries have experienced 2
years of abnormally large balance of payments deficits as the result of increased oil prices,
the accompanying recession in the industrial countries, and worldwide inflation. Deficits on
current account, which had averaged $9 billion annually in the early 1970's, jumped to $28
billion in 1974 and an estimated $35-$37 billion in 1975. These increased deficits have been
largely financed by borrowings which of course will increase debt service payments in future
years.
Because of these circumstances, many of the developing countries have focused all their
attention on debt, whereas we believe that the primary issue is really the balance of paynients.
In this regard, we believe that the balance of payments situation for the developing countries
as a whole is beginning to improve. We project that the aggregate deficit of the nonoil
developing countries will decline by perhaps $5 billion in 1976, and that as a result new
external borrowing will also decline.
Projections of debt-servicing prospects are difficult, particularly in view of the wide
diversity of debt situations and the fact that the capacity of individual countries to respond
to debt problems varies widely. It should be noted that a relatively small number of countries
account for the bulk of the debt and, in particular, of the borrowings ori commercial terms.
Furthermore, the poorer developing countries most affected by recent economic events
cannot resort to private market borrowings to offset the higher prices of oil and other imports
and have to depend upon concessional capital. In view of low interest rates and grace periods,
such capital has a limited impact on debt servicing, particularly in the short run.
Debt servicing is only one of the elements of the balance of payments problems, but of
course any sustained deterioration in a country's balance of payments position makes debt
service more difficult. It is encouraging, therefore, that improvement in the current account
positions of developing countries is anticipated as the pace of recovery quickens in the
industrial world and commodity exports and prices increase. Despite this, many countries
see no way to finance their desired development programs without substantial further
borrowings over the next several years.
This situation has led the developing countries, with the strong backing of the UNCTAD
Secretariat, to set forth a number of sweeping proposals to alleviate their internal debt
situation. These proposals are based on the premise that debt rescheduling would provide
fast-acting relief for their balance of payments situation and supplement what they consider
to be inadequate flows of development assistance. The proposals include:
•
For public development credits—waiving diebt service payments by the most
seriously affected countries for the remainder of the decade; and converting such
credits to grants for the least developed countries.
•
For private credits—an international fund to refinance service payments over a
period of 15-25 years at commercial rates of interest.
•
In addition—a conference of major developed creditors and interested debtor
countries to be convened in 1976 under UNCTAD auspices; a shift in the forum
and chairmanship for debt rescheduling from the traditional creditor club
arrangements to the IMF.
The United States is deeply sympathetic with the balance of payments position of the
nonoil developing countries and, together with other creditor countries, has taken a number
of steps to make available funds supplemental to normal aid flows to meet the financial strain
of the developing countries erected by the oil price increase and the onset of worldwide
recession. The United States will continue its efforts, in cooperation with other creditor
nations, to increase and direct aid flows to those countries in greatest need and to improve
the access of developing countries to private capital markets. However, we cannot agree to
proposals for generalized debt relief, debt moratorium, and new institutions for refinancing
commercial debt and the like for a number of reasons:
492
1976 REPORT OF THE SECRETARY OF THE TREASURY
The proposals assume there is a debt problem per se for all nonoil developing countries;
we believe that focusing on debt alone obscures the overall balance of payments situation,
which for many countries is improving.
The proposals assume that all nonoil developing countries or groups of nonoil developing
countries are encountering extreme problems in meeting their debt service payments; we
believe that debt service problems are limited to very few countries.
The proposals assume that financing through debt rescheduling should be based on the
amount of past debt or debt service payments incurred. We believe finance needs must be
evaluated on a case-by-case basis, taking into account a country's present circumstances and
future prospects.
The proposals assume that commercial credit can be rolled over for extended periods of
time; we believe that commercial institutions cannot be relied upon to provide increasing
amounts of private capital if the ultimate timing of repayment is continually subject to
question.
They assume that proposals for debt relief can be undertaken without any adverse effects
on developing country creditworthiness and new capital flows; we believe rescheduling
adversely affects developing countries' creditworthiness and new capital flows.
In short, we believe that adoption of these proposals could lead to a severe deterioration
in international credit relationships. We strongly believe that these proposals are not in the
best interest ofthe debtor countries because they will destroy their creditworthiness and the
ability to borrow from public and private sources in the future.
With regard to institutional arrangements for debt rescheduling, the United States is willing
to recommend that the IMF play a greater role analyzing technical issues related to
rescheduling exercises than it has in the past. That would be in addition to its traditional task
of negotiating standby agreements that give the creditors some assurance that the country
requesting debt rescheduling will follow policies that will turn its economic situation around.
However, we firmly believe that actual negotiations to reschedule a country's external
debts should remain in the creditor club context. A debt rescheduhng is a very delicate
process. Debtors want a lenient rescheduling; creditors wish to be repaid as soon as possible.
To shift the forum and chair from the creditor club arrangements—which has served both
debtor and creditor countries well over the years through a series of extremely difficult debt
rescheduling exercises—to the IMF would expose the IMF to the conflicting views of debtor
and creditor countries and thereby threaten to undermine the basis of its neutrality which
is of paramount importance to the continued success of the Fund. It could also lead to
pressures to reschedule IMF drawings, thereby undermining the monetary character ofthe
Fund.
We have recently appraised the nature and extent of the external debt situation of the
developing countries, and have found the external debt situation of the great majority of
nonoil developing countries.to be manageable. The details of these findings were contained
in our "Report on Developing Countries External Debt Relief Provided by the United
States," submitted by Secretary Simon to this committee on January 30, 1976. Since the
report was prepared, the economic situation in several ofthe countries has improved. Thus,
for example, some countries such as Bolivia, Peru, and Uruguay now appear in a more
favorable light, due to the rise in economic activity of OECD countries and higher commodity
and metal prices. Countries such as Chile and Zambia, which rely heavily on copper exports
for foreign exchange earnings, now face a somewhat more manageable situation, as the price
of copper has risen from 55 cents a pound in early January of this year to close to 70 cents.
As for countries such as Brazil and Mexico, which the report noted have large private sector
debts but also have productive and diversified economies, the anticipated strong pickup in
their exports to developed countries reinforces our earlier conclusion that they will be able
to finance their projected deficits and avoid debt-servicing difficulties in 1976.
As for the most seriously affected (MSA) countries, it is significant to note that two MSA's,
India and Pakistan, account for over one-half of the debt service of all MSA's. It is our
perception that the economies of both India and Pakistan are performing much better than
most people realize.
For example, India is expected to attain a real growth rate on the order of 5 to 6 percent
this year and next, and its trade deficit should narrow somewhat next year. India's
international reserves have increased from $ 1.4 billion in December 1975 to over $2 billion
in March. This amount is sufficient to cover about 5 months' imports which is quite good
for a developing country. Pakistan's growth rate is also projected at about 5 percent, its
reserves are sufficient to cover almost 3 months' imports, and Pakistan will continue to
benefit through at least 1978 from the debt rescheduling arrangement of 1974.
As for the other MSA's, the picture is mixed. Some countries such as Bangladesh have
contracted large amounts of external debt mainly from multilateral and bilateral institutions.
Since most of these credits carry extremely low interest rates, the actual debt service
payments falling due this year and next are relatively small.
EXHIBITS
493
To conclude, U.S. policy has been, and will continue to be, to extend credit on the explicit
understanding that it will be repaid according to the schedule agreed upon by the borrower
at the time the credit is authorized and signed. The United States does not consider general
debt relief to be appropriate for providing official economic assistance to the developing
countries.
Our policy on debt rescheduling is to evaluate the merits of each debt reorganization
proposal on a case-by-case basis, predicated on the principle of basic adherence to scheduled
terms of credit payment. Within this framework, our objective is to encourage countries to
undertake appropriate corrective policies in order to minimize the incidence of debt
rescheduling and relief operations.
Monetary issues
In view of the comprehensive monetary reform package that was agreed at Jamaica, I
would not anticipate extended debate on longstanding proposals by developing countries to
restructure the monetary system or an effort to reopen a settled agreement. While some may
feel that the reforms do not go far enough, I believe that most recognize that the package
as a whole—involving important amendments to the IMF Articles of Agreement, quota
increases, and expansion of access to IMF resources—achieves the desired balance and
provides substantial benefits for all countries. Without attempting to comment in depth on
all the complex provisions of the agreement, I would like to note the most significant
elements.
The new more flexible exchange arrangements focus on achieving the underlying economic
stability that is a prerequisite for true exchange rate stability. Countries are given wide
latitude in choosing those particular exchange rate practices best suited to their own needs
so long as they fulfill certain obligations calling for, among other things, the promotion of
stable underlying economic conditions and nonmanipulation of exchange rates to gain unfair
competitive advantage. Past efforts to mandate stability by requiring maintenance of fixed
rates provided only the appearance of stability and often required extensive controls and
restrictions to sustain them. Such measures disrupted development efforts by impeding trade,
limiting investment flows, and forcing cutbacks in aid.
Concrete steps have been initiated to phase gold out of a central role in the monetary
system. The IMF Articles will be amended to eliminate any important monetary role for gold
in the Fund and to provide for the future disposition of IMF gold holdings. In addition, the
IMF will begin disposal, under existing authority, of 50 million ounces of gold owned by the
Fund (about one-third of its total holdings), 25 million ounces to be sold for the benefit of
developing countries—I already mentioned the trust fund—and 25 million ounces to be sold
to IMF members in proportion to quotas. The developing countries will clearly obtain
substantial benefits from these steps, including the major share of the benefits from the
agreed Fund gold sales. I am aware of some concerns of developing countries that abolition
ofthe official price might result in a strengthened role for gold and in increases in liquidity
primarily for developed countries. I do not believe these concerns are warranted. The
comprehensive actions being taken genuinely place gold on a one-way street out of the
monetary system.
The special drawing right (SDR) will be made a more usable asset under the amendments,
thereby increasing its potential to become the principal reserve asset in the system, a longsought objective of the developing countries. Proposals for an SDR-aid link were dropped
from the monetary negotiations at an early stage ofthe Interim Committee discussions, and
the United States will continue to oppose an SDR-aid link should the proposals resurface in
UNCTAD. The link would be an inappropriate means of providing aid and is inconsistent
with the monetary functions of the SDR.
In addition to amendments, IMF quotas will be increased by about one-third, thus ensuring
that the Fund is in a position to meet members' future financing needs. The quota share, and
thus the voting share, of developing countries has also been increased, thereby enhancing
their voice in IMF decisionmaking.
Monetary issues raised at UNCTAD IV may be introduced in the context of the effort to
find international financing to meet the balance of payments problems of developing
countries. Thus there may be efforts to use the IMF for this purpose.
The Fund is the sole international institution with responsibility for promoting the needed
economic adjustments that represent the only lasting solution to a country's payments
difficulties. The importance of IMF financing therefore transcends the actual amounts
involved, crucial as they may often be, because it is closely linked to adoption of economic
policies designed to correct the underlying cause of countries' problems.
The IMF has greafly expanded access to its resources to help meet the enlarged balance
of payments financing needs of its members in the present period. In the past year, developing
countries have borrowed nearly $2 1/2 billion from the IMF, nearly four times the peak
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1976 REPORT OF THE SECRETARY OF THE TREASURY
annual drawings prior to the oil price rise. And, with agreement on a comprehensive
monetary package in Jamaica in January, the Fund's capacity to deal with members'
payments problems has been strengthened importantly.
A trust fund managed by the IMF as trustee will be established and begin operations in
the very near future to provide balance of payments support on concessional terms for the
poorest countries. Resources will be obtained by utilizing part ofthe gold owned by the IMF,
through market sales over a 4-year period. Thus an asset which has not been used in recent
years will be mobilized to assist needy countries in meeting their current balance of payments
difficulties. Other financial contributions to the trust fund will be welcomed.
A major liberalization of the IMF compensatory financing facility has been implemented
that will be especially useful in dealing with payments problems in this period of recessioninduced falloff in export earnings. It is noteworthy that in the first quarter of this year, the
liberalized facility has already provided nearly $500 million in loans, an amount that is more
than 40 percent above the previous peak annual level of loans.
Access to the IMF's regular credit facilities has been temporarily expanded by 45 percent,
pending implementation of the agreed increase in quotas.
The IMF buffer stock facility has also been liberalized.
These measures represent a vigorous effort by the IMF to help its members, developed and
developing, to deal with their immediate financing problems. They also represent a reasoned
response, and we do not feel it is desirable, indeed possible, for the IMF to attempt to do
more. It is clear that the IMF cannot meet all the financing needs ofthe developing countries
and that its design, as a monetary institution, is inappropriate to meeting development
financing requirements. The resources available to the IMF are finite, and steps to increase
access further could seriously impair the Fund's liquidity, to the detriment of developed and
developing countries alike.
A major strength of the IMF, and the basis of its international prestige and support, is its
unique monetary character. The private markets frequently rely on the Fund's "discipline"
to ensure that countries experiencing balance of payments problems adopt the sound
domestic policies that are the essential prerequisites for maintenance of creditworthiness.
The policy conditions applied by the IMF thus provide an important safeguard for private
lenders in that they know IMF involvement will entail the adoption of policies by borrowers
that will strengthen their external positions and enable them to repay their loans. Should the
market's perception of this role for the IMF be weakened by an erosion of IMF conditionality,
it is quite possible that a resulting reduction in private credit availability would more than
offset any potential increase in IMF financing. This is one ofthe basic reasons why we cannot
support a further allocation of SDR's according to the principle of an SDR-aid link. A further
weakening of conditionality would seriously disrupt the flow of private credit to the
developing countries, and make achievement of their development objectives even more
difficult.
Trade
Although noncommodity trade issues will not be a central theme at UNCTAD IV, some
developing countries may seek greater commitments from the developed countries on special
and differential treatment in the multilateral trade negotiations and for improvements on the
various systems of tariff preferences now in existence.
The developing countries are impatient over progress in the MTN, and have argued that
little progress has beenrriade toward granting them the kind of special trade treatment
suggested in the Tokyo Declaration of 1973, which launched the current negotiations in
Geneva. They are particularly interested in being exempted from limitations on the use of
export subsidies and in receiving special treatment or exemptions in safeguard actions such
as the recent U.S. escape clause actions on specialty steel and footwear. They are interested
in rapid action on the tropical products negotiations in Geneva.
We are sympathetic with interests of developing countries in securing additional benefits
for their international trade, in increasing their foreign exchange earnings, diversifying their
exports, and accelerating the growth of their trade. The MTN will provide great benefits to
the developing countries. The tariff-cutting formula we have introduced will help the LDC's
by increasing their general access to the U.S. market, and by reducing the degree of tariff
escalation on semiprocessed and processed products. The United States has made a sound
proposal in the tropical products negotiations, and we too hope for rapid progress. We do
believe that some kind of special and differential treatment for developing countries will
prove feasible in certain areas of the MTN such as negotiation of general rules on subsidies
and countervailing. However, we believe that the issue of special and differential treatment
for developing countries can only be dealt with in the context of particular codes on other
specific areas being negotiated, and cannot be moved at a faster pace than the discussions
on these issues.
EXHIBITS
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We will also stress at UNCTAD IV, as we have in the MTN, that the developing countries
themselves can and must make contributions to the MTN, consistent with their levels of
development. This issue of supply access is a case in point. Furthermore, we believe that
special treatment for developing countries must be linked with a phaseout mechanism, so
that as a developing country becomes more advanced and competitive on the world market,
its special treatment will be phased out and it will begin to assume the same responsibilities
as other developed members of the world trade community.
As for generalized systems of preferences, the developing countries would like to see these
systems made a permanent part ofthe world trading system and considerably liberalized. We
believe that as preferences are unilateral voluntary actions by the developed countries, they
are not subject to negotiations, either in UNCTAD or at the MTN. We believe the new U.S.
system is a good one, and as we gain experience with it we will examine possibilities of
improving it. While we will certainly listen to the suggestions of others as to what
improvements might be useful, actual decisions are strictly an internal U.S. Government
affair.
Conclusion
I hope that my testimony has made clear that the U.S. Government has expended a great
deal of effort in carefully analyzing the problems identified by UNCTAD and the solutions
proposed by the Secretariat and by developing countries. It should be clear that we believe
that today's world calls for cooperation among countries. In that regard we feel that we can
agree with much of the articulation of the problems and long-range goals identified by
UNCTAD and the developing countries. There are differences of opinion with respect to the
solutions to these problems. We will not reject any proposed solutions out of hand, but
explain why we do not believe certain approaches would be in the interest of the world.
Further we have developed proposals of our own which we believe will accomplish the same
objectives more effectively. It will be our task at Nairobi to lay these various proposals on
the table and begin the process of arriving at a consensus on where to go next. If 1976 can
be characterized as a year of dialog, perhaps the work accomplished over the next months
will make 1977 the year of consensus.
Exhibit 41.—Statement by Deputy Assistant Secretary Vastine, May 19, 1976, at joint
hearings of the Senate Committees on Armed Services, Commerce, and Foreign Relations,
on S. 713, the Deep Seabed Hard Minerals Act
•
The Treasury Department welcomes this opportunity to discuss with you S. 713, the Deep
Seabed Hard Minerals Act and its relation to the Law of the Sea negotiations.
The Deep Seabed Hard Minerals Act seeks to encourage the development of the hard
mineral resources of the deep seabed, pending adoption of an intemational seabed regime
pursuant to treaty. Before such legislative proposals are acted on, we believe their impact
on the following factors must be carefully weighed: (1) The Law of the Sea negotiations, (2)
the precedent that this legislation could create for treatment of investment in other sectors
of the economy, and (3) the financial obligations it would create for the Federal Govemment
if present negotiations fail.
The bill contains five major provisions: (1) A system for licensing ehgible firms that intend
to develop mineral resources in the deep seabed, (2) a system of mles and regulations
goveming eligibility and operations in the seabed and Hcensing procedures, (3) minimum
annual expenditures by firms engaged in exploration and development of resources until
commercial recovery begins, (4) U.S. Govemment guarantees for reduction in value of firms'
investments because of a future intemational agreement, and (5) insurance against damages
to a firm's investment for which it has no legal remedy. Treasury is interested in all of these
provisions; the first three would affect access to the seabed and the performance of firms
which are developing the seabed resources, and the last two could affect the competitive
relationship between land-based and seabed minerals and could involve costly Govemment
funding of guarantee and insurance programs. The Department would be directly responsible
for maintaining the guaranty and insurance fund, created in section 15. Treasury is also
concemed about the customs and tax provisions contained in the legislation.
Treasury concems
The Department supports the principle that regulations are necessary to ensure orderly
access to seabed resources by mining firms. These principles would be embodied iri a
successfully negotiated Law of the Sea treaty. However, we cannot support S. 713 because
it goes far beyond these principles with its guarantee and insurance program, and because
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1976 REPORT OF THE SECRETARY OF THE TREASURY
now is not the time to install a regulatory licensing and potentially costly guarantee system.
We also believe that the use of investment insurance and guaranty programs could establish
an important policy precedent whereby U.S. firms expect the U.S. Government itself to
protect them from unforeseen political and institutional changes that affect their operations.
The time is indeed approaching when some firms command the technology to explore and
develop seabed mineral resources on a commercial basis. We understand that these firms are
concerned about the commercial and political risks of such exploitation. Nonetheless, we
believe that these risks can best be addressed through an appropriate and timely international
treaty rather than through domestic action by individual countries. And we are determined
that no provision of such a treaty will effectively inhibit development of mineral supplies.
Treasury is strongly committed to ensuring that new supplies of raw materials come on stream
during future decades to meet market demand and to avoid disrupting shortages.
The Federal Government has pursued a policy of equitable treatment of mineral industries,
except for the special case of energy. Treasury believes there is no need to change that policy
at this time and give special incentives to a limited segment ofthe nonfuel minerals industry.
We depend uppn the market to allocate capital resources efficiently. In some cases the
market mechanism is frustrated from performing its role. This occurs when threats of
expropriation, or adverse political climates in some countries, deter investments that would
otherwise be made. We have relied upon general, not selective solutions to this problem. The
Overseas Private Investment Corporation is our basic Government insurance program
against political risks. It operates virtually worldwide and covers almost all types of
investments. And Secretary Kissinger recently proposed at UNCTAD IV a new investmentfacilitating mechanism, called the International Resources Bank, which would help reduce
political risks of direct foreign investments in all types of mineral and energy projects.
In the case of investment in seabed mining we recognize that there are now substantial
commercial and political inhibitions against private investment. We believe these inhibitions
should be removed, but that the vehicle for removal should be a Law ofthe Sea treaty which
provides a secure economic and political environrnent to promote investment which is also
consistent with sound environmental practices. Treasury is strongly committed to obtaining
a treaty which does provide an environment for successful mining operations. If that treaty
is successfully negotiated this year, there will be no need for many ofthe provisions in S. 713.
If a treaty is not successfully negotiated, we can then consider appropriate action to protect
our national interests.
Law of the Sea negotiations
During the last session of Law of the Sea negotiations, I participated in the interagency
discussions to obtain an acceptable U.S. position on various deep seabed issues. Some issues
are successfully resolved in the single negotiating text but several issues remain for resolution
during the intersessional period and at the next session of the Conference in order to secure
our economic interests. Proposals for legislation now could affect the momentum of the
negotiations, impair the spirit of compromise which we have tried for such a long period to
build, and erode the gains that indeed have been made fqr the U.S. national interest in all
three committees of the Law of the Sea Conference.
Secretary Simon has personally followed the developments in these negotiations. If at the
end of the summer session their results do not meet U.S. objectives, I can assure you that
he will immediately recommend that the administration review its policy and recommend
appropriate action to protect these objectives.
Meanwhile the Treasury will continue to monitor the relationship between the negotiations
and the uncertainty which now affects investments in seabed mining activity. It is important
that the United States pursue policies in the negotiations that preserve our basic commitment
to the market as an efficient allocator of resources in minerals development and exploitation.
In the long run, provisions that would likely lead to an inefficient allocation of resources and
any provisions that would deter the development of seabed resources would benefit no one.
They would lead to unnecessarily high prices for the American consumer and to inefficient
industrial production, thus retarding economic growth in both industrial and developing
countries. The administration believes that the United Stiates must, in the forthcoming
negotiations, maintain its determination to resist efforts to restrict access to the seabed or
to impose restrictive controls on levels of production of its mineral resources.
U.S. objectives in seabed negotiations
We are determined to obtain certain key objectives in the seabed negotiation. In brief,
these are:
A voting system in the Council which adequately reflects the economic interest of producers
and consumers of the deep seabed minerals.—In his major address on Law of the Sea issues
in April, Secretary Kissinger expressed a policy which has been very strongly supported by
the Treasury: He said that the United States was dissatisfied with the previous proposal for
EXHIBITS
497
the Council voting system, and that "voting machinery must be balanced, and equitable, and
must insure that the relative economic interests of countries with activities in the deep
seabeds be protected, even though these countries may be a numerical minority." This is now
the most important unresolved issue in the deep seabed negotiations.
Open, unobstructed access to deep ocean resources.—A cardinal tenet of the U.S. position
has been to insist on nondiscriminatory guaranteed access, with security of tenure, for U.S.
and other national firms. In his April speech. Secretary Kissinger emphasized this point when
he said, "What the United States cannot accept is that the right of access to seabed minerals
be given exclusively to an international authority, or be so severely restricted as effectively
to deny access to the firms of any individual nation including our own." The authority should
not have ariy discretionary power with respect to the issuance of contracts, nor should it have
the power to deny contracts for political ends. Therefore, we are inalterably opposed to
attempts to impose a system which would arbitrarily restrict U.S. access to the seabed, or
which would arbitrarily limit the number of sites that firms of any one signatory can exploit.
Such attempts appear to be merely an effort by other industrial countries to constrain the
U.S. competitive edge in seabed technology and activity.
There are certain other proposals with which we are deeply concerned:
Price and production controls.—Treasury continues to oppose price and production
controls that would effectively inhibit development of supplies of seabed minerals. We intend
to give continuing close attention to this issue during the remainder of the negotiations.
Revenue sharing with the authority.—The United States can accept revenue sharing with
the international authority. However, we are opposed to an onerous burden of payments that
would impede deep seabed mining activity.
The enterprise.—The United States has agreed to the creation of an operating arm of the
authority, the "enterprise," which can exploit the deep seabeds under the same conditions
that would apply to all mining. At issue is how the enterprise will be financed, especially
during the initial period. Mandatory contributions on the part ofStates parties would be an
unreasonable burden on the U.S. taxpayers.
Throughout the coming months constant congressional consultations are essential. If both
branches work closely together, the United States will be in a better position to negotiate
an acceptable treaty, or if necessary, it will be in a better position to take appropriate action
to preserve U.S. economic interests in deep-sea mining.
Problems in S. 713
I would like to record some of the Treasury's difficulties with the substance of S. 713.
Our greatest concern is with the potential liability with which the U.S. Government would
be faced pursuant to the guarantee and the investment provisions of this bill. No one knows
accurately how much investment will be committed by U.S. firms, though there are estimates
of several billion dollars for which the United States under the bill could be liable. Neither
does anyone know the probability of, or the potential extent of, damages that could occur
under section 14.
The provisions for investment guarantees, in section 13, could compromise the U.S.
Government's ability to negotiate freely a satisfactory treaty. For example, we may feel it
imperative to negotiate a particular economic provision in the treaty, but this same provision
could also make the Federal Government liable to claims under the act. The existence of such
claims could prevent U.S. agreement to the treaty provision even though all might agree that
it is in the best interest of the United States.
We are seriously concerned about the effects of both the guarantee and insurance
provisions on the behavior of foreign-based firms and foreign governments. The bill could
create a meaningful incentive for foreign firms to set up U.S. subsidiaries simply in order to
qualify for potential benefits under U.S. law. Foreign governments, in response to the U.S.
initiative, could respond with similar schemes to prevent the loss of prestige and financial
benefits associated with pioneering efforts in seabed mining. Thus, by this bill, the United
States could initiate an increase of foreign competition with U.S. firms and a possible influx
of foreign seabed miners that would have to be regulated, at cost to the United States. The
United States has recently been involved in discussions with other industrial nations to limit
competitive programs thatpromote exports through subsidies. It would be ironic, and highly
inappropriate, to create another such competition among governments in a new field.
Treasury is greatly concerned about the enactment of any legislation that would establish
more than the minimum degree of regulation necessary for deep seabed mining. We believe
that further study of the regulatory issues raised by S. 713 is required.
Treasury has objections to the tax and customs provisions contained in the bill. We believe
that the customs provisions are difficult to enforce. Moreover, they place traditional Customs
Service duties within the Department of the Interior.
We are also concerned about the tax provisions of S. 713. Treating deep-sea recovery as
though it were recovery within the United States, as in section 16, does nothing to settle the
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1976 REPORT OF THE SECRETARY OF THE TREASURY
basic question of whether deep-sea minerals are eligible for the depletion allowance. This
is because in order to claim the depletion allowance, the claimant must have an economic
interest in the minerals in place. The bill does not confer this interest. Conferring access to
s e ^ e d resources for purposes of exploitation does not confer an economic interest in the
conventional sense.
Because of these important shortcomings and objections, we believe more study of this
legislation is required. The administration will consult closely with Congress. After the next
session ofthe Law ofthe Sea Conference, this summer, we will be in a better position to make
the appropriate recomriiendations.
Mr: Chairman, you requested that we address a number of more detailed questions. Our
responses to those questions are attached, which we will be pleased to submit for the record, i
'For questions and answers, see full text of statement published in joint hearings, 94th Congress, 1st Session, May 19,
1976, pp. 101-103.
Exhibit 42.—Excerpt of joint statement by Secretary Simon and Minister of Finance Kisiel
on the occasion of the Secretary's visit to the Polish People's Republic, June 22-23, 1976,
issued by the U.S. Embassy in Warsaw
Atthe invitation of the Minister of Finance ofthe Polish People's Republic, Henryk Kisiel,
the Secretary ofthe Treasury ofthe United States, William E. Simon, and Mrs. Simon visited
the Polish People's Republic on June 22-23, 1976.
* * * The talks covered economic, financial, and trade issues of mutual interest, with
particular attention given to ways of broadening the economic and commercial relationships
between the two countries.
During the visit. Secretary Simon and Minister Kisiel participated in the exchange of
instruments of ratification ofthe convention on the avoidance of double taxation. The two
officials declared that the convention should facilitate the expansion of bilateral economic
relations and contribute to strengthening them.
The Secretary's talks and meetings with First Secretary E. Gierek, Chairman ofthe Council
of Ministers P. Jaroszewicz, and representatives of the Government of the Polish People's
Republic were held in a friendly and businesslike atmosphere, and were.characterized by a
mutual desire to expand and strengthen economic cooperation between the United States
and Poland.
Both sides noted with satisfaction the growth in bilateral trade, which reached a level of
about $850 million in 1975, and agreed to further develop industrial, technological, and trade
cooperation between the two countries. Both sides expressed the conviction that these would
serve, among other goals, the achievement of $1 billion in trade turnover in 1976.
They also agreed that the work ofthe Polish-United States Economic Council, which held
its second session in Washington on May 24-25, 1976, is contributing to the development
of industrial, technological, and commercial cooperation between the two countries. Both
sides expressed their encouragement for the further work ofthe Economic Council and for
other forms of direct cooperation between the businessmen of both countries.
The U.S. side noted that the role ofthe Export-Import Bank in facilitating the development
of trade through the extension of credits reflects a positive assessment by the U.S.
Government of the further prospects for economic cooperation with Poland.
A broad and useful exchange of views took place on the subject of the various forms of
economic cooperation, including more advanced forms of industrial cooperation. The
importance of these for the intensification of economic relations between the two countries
.was emphasized, and a positive evaluation was given to progress in developing them.
Both sides exchanged information on the prospects for the economic development of both
countries and discussed the projects in which the firms and irivestors of both sides might
participate.
In concluding the visit to Poland, Secretary Simon and Minister Kisiel stated that the
progress they had made in their discussions should permit a broadening of mutually profitable
cooperation between the United States and Poland in the spirit ofthe understandings which
emerged from the visit ofthe President of the United States, Gerald Ford, to Poland in 1975
and the First Secretary of the Central Committee of the United Polish Workers' Party, E.
Gierek, to the United States in 1974.
EXHIBITS
499
Exhibit 43.—Excerpt of statement by Assistant Secretary Parsky, July 27, 1976, before the
Senate Committee on Foreign Relations, regarding U.S. participation in the renegotiated
international coffee and tin agreements and in the extended wheat agreement i
U.S. participation in current commodity agreements
International agreements on coffee, wheat, and tin date back to 1962, 1949, and 1956,
respectively. We have participated in the coffee and wheat agreements since their inception.
We first signed the tin agreement this year. Our support for U.S. membership in the coffee
and tin agreements is based on an extensive study during the last 18 months of our overall
commodity policy and these 2 agreements in particular.
We are convinced that the provisions of these agreements are such that they will have no
harmful impact on the market for these commodities. The coffee and tin agreements are
aimed at short-term price stabilization, rather than the long-term fixing of prices above
market levels. And the current wheat agreement serves largely as a forum for the exchange
of information and coordination of food aid, rather than as a mechanism to intervene in the
market.
I would like to discuss the provisions of these agreements in more detail as examples of
commodity agreements structured in a way that is compatible with market conditions.
International Coffee Agreement
The original International Coffee Agreement (ICA) was negotiated in 1962 during a period
in which world coffee stocks were large. Production had been in excess of consumption for
several years. Coffee prices were below 20 cents a pound (as compared to 50 cents to over
90 cents during the early fifties). The Alliance for Progress was in full swing. Not surprisingly,
the focus of the first agreement was on putting a floor under coffee prices while the market
adjusted to new levels of supply and demand. Prices were reasonably stable over the
remainder of the sixties, ranging from 35 to 45 cents a pound, and stocks were gradually
drawn down. Then in 1969 a series of frosts and disease hit Brazil and prices rose sharply.
The ICA, which had been renegotiated with only minor changes in 1968, had functioned
reasonably well when coffee was in surplus. The agreement proved unable to cope with the
new situation of a tight market, however, and prices rose rapidly to over 50 cents a pound
by 1972. The agreement may have actually helped raise prices in 1971-72 because it
permitted exporters to continue to limit their exports during a period of short supply. With
producers and consumers unable to reach agreement on a price range or quotas, economic
provisions of the agreement were suspended in 1972. Prices continued to rise.
By early 1975 coffee prices were on the decline. As prices moved back into the 50-cent
range, producers expressed a strong interest in negotiating a new ICA which would again have
operative economic provisions. As part ofthe preparation for entering into such negotiations,
an interagency analysis was undertaken ofthe old agreements. A consensus was reached that
the United States should only join a new agreement which incorporated new consumer
safeguards. A new agreement would have to clearly be designed to moderate short-term price
fluctuations on the upside as well as the downside.
The old agreements used as their basic operative mechanism a set of country export quotas.
Each year the International Coffee Council (ICO) set a price range with a median price which
reflected current market conditions. A global quota for world coffee exports was set which
was thought consistent with the median price. This global quota was distributed to member
producer countries based on a percentage share which had been negotiated at the beginning
ofthe agreement. During the coffee year, if prices moved by a predetermined amount above
the median price, quotas would be uniformly enlarged by a preset percentage. If prices
declined, quotas were tightened.
There were several problems from the consumer country point Of view. The country quotas
were inflexible and made it impossible for new, more efficient producers to enlarge their
share of the market. There were no penalties against a country which did not announce that
it would fall short of its quota so that other countries might have their quotas enlarged to
fill the void. If prices began to rise rapidly, the mechanism to enlarge quotas was cumbersome
and often involved a confrontation between producers and consumers. There was no
mechanism to suspend the economic provisions automatically if prices broke through the
price range ceiling.
In general we managed to obtain new consumer safeguards in the third ICO which remedy
these shortcomings:
•Forexcerpted material, see testimony to the committee, 94th Congress, 2d session. Available for reading in committee
files only.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
•
The new agreement contains no specific price objectives, and will not operate in
such a way as to sustain coffee prices above the long-term market trend.
•
The agreement will begin with quotas suspended, so as to assure that during the
current shortage period the agreement will not work to maintain high prices.
•
When and if quotas come into effect, they can automatically be suspended by
certain increases in prices.
•
Individual country quotas are assigned on a flexible basis reflecting export
performance prior to the imposition of quotas and on levels of stocks held by each
country.
•
When quotas are in effect, countries which cannot ship their quotas are obliged to
notify the Council at least 6 months before the end of the coffee year, so that the
export shares of other countries can be increased to cover the deficit, thus assuring
that a certain level of supply will enter the market.
•
A provision was added whereby after 3 years' operation, countries must affirm their
intention to continue their membership for the final 3 years.
Although we believe the new ICA is improved in these aspects, it is by no means perfect.
We would have liked a tougher penalty against countries which undership their quotas,
whereas the new agreement simply obliges them to do so and provides them with a slightly
larger quota the year following an announced shortfall. We would have preferred a penalty
for undershipments rather than an inducement to ship.
More fundamentally, we continue to have strong reservations about commodity
agreements based on export controls, which generally discriminate against new and efficient
producers in favor of the status quo. However, in the case of coffee, a buffer stock system
would be both complex, because of the different coffee grades and storage problems, and
very expensive. A buffer stock of 10 million bags, equal to less than one-fifth bf annual world
trade, would cost $800 million with coffee prices at 60 cents a pound. By comparison, when
prices took off in 1972, world stocks were around 40 million bags.
It is important to ask at what point economic provisions ofthe new agreement would come
into effect. According to the formula, quotas would be reimposed when prices drop below
the average level of 1975, or about 63 cents a pound, or when for 20 market days prices drop
by 15 percent below the previous coffee year. The latter provision is operative only if prices
are below a price 22.5 percent above the 1975 average, or about 77 cents a pound. We
produced a series of price forecasts for coffee in order to ascertain when these conditions
might be met. Even making conservative estimates on inflation over the next few years and
assuming no new natural or political disruptions to coffee supplies, we concluded that prices
will not fall below 77 cents a pound until the 1979-80 coffee year at the earliest.
One new feature ofthe new agreement which has raised questions is a provision for a coffee
promotion fund. Producing countries will be assessed between 10 and 25 cents per exported
bag of coffee (the rate depends on how large the exporter is). The approximately $ 15 million
per year raised through the levy will be offered to consuming countries as matching funds
for national coffee promotion programs. Countries will most likely obtain this revenue from
current or new export taxes on coffee. The idea of taxing coffee exports to entice the
consumer to drink more is somewhat disconcerting. However, if the whole tax were to be
taken out of new export taxes, it would amount to between 0.07 and 0.1 cents a pound, as
compared to current export taxes which are often in excess of 40 cents a pound. Furthermore,
we have often encouraged producing countries to concentrate on increasing demand, rather
than restricting supply.
An important feature of the new ICA is that any member which fails formally to reaffirm
its continued adherence to the ICA after 3 years (by September 30, 1979) will cease to be
a member. This will give our Government the opportunity to again review the situation in
the coffee market before making such an affirmative declaration.
A final safeguard is the U.S. voting strength in the ICO. Producers and consumers each
have 1,000 votes, with the United States holding 397 of the consumer votes. Major decisions
by the ICO, such as setting quotas and a price range, or imposing economic provisions even
when formula conditions are not met, must be taken with a two-thirds distributed vote. That
is, at least two-thirds of the producer and consumer votes must be cast in favor of an action.
Though the United States has well over one-third of the consumer votes and would therefore
appear to have a veto, the agreement provides that no one country can block an action by
the ICO.
To summarize, the new ICA is a better agreement than the previous ones. It has new
consumer protections. Its economic provisions are unlikely to come into force until 1979-80
at the earliest. Before then, the U.S. Government will once again have to make a positive
determination to stay in the agreement. The United States has near veto power over any ICO
action. The risks in joining are thus slight, while the ICO does provide a useful forum for
producers and consumers to discuss the world coffee market, and the ICO secretariat does
a most professional job of gathering and distributing data on world coffee market conditions.
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501
International Tin Agreement
The first International Tin Agreement (ITA) came into effect on July 1, 1956. The fifth
International Tin Agreement came into effect on July 1, 1976, and for the first time the
United States was a signatory. With U.S. participation, the ITA membership now comprises
virtually all of the world's major consumers and approximately 90 percent of free world
production.
The primary objectives ofthe ITA are to provide for an efficient adjustment between world
production and world consumption of tin, and to prevent excessive fluctuations in tin prices.
Efficient adjustment between production and consumption is facilitated by the ITA Statistics
Committee's extensive data collection operation which reports quarterly on world tin
production and consumption, trade, stocks, and other data important to both producers and
consumers. The United States has for some time participated in meetings ofthe ITA Statistics
Committee to report on trends of tin consumption in the United States.
To reduce excessive fluctuations in tin prices, the ITA utilizes a tin buffer stock which buys
and sells tin on world markets. As opposed to the Coffee Agreement, the Tin Agreement
relies primarily on a buffer stock, and secondarily on export quotas. The tin buffer stock is
the only operating buffer stock.
The buffer stock manager operates with a three-tiered price range. When tin prices are
in the lower tier ofthe range, he buys tin to support tin prices; when prices are in the middle
tier, he stays out of the tin market; and when prices are in the upper tier, he sells tin to put
downward pressure on prices. The price range is set by the International Tin Council, the
operating body ofthe ITA. Producers and consumers each have 1,000 ofthe 2,000 votes in
the ITC and the United States has 259 votes.
The tin in the buffer stock is contributed by producers whose contributions are mandatory
and by consumers whose contributions are voluntary. Voluntary consumer contributions
accounted for only a small fraction of the tin in the fourth ITA with France and the
Netherlands being the only contributors. However, consumer voluntary contributions are
expected to increase significantly in the fifth ITA because three additional countries, the
United Kingdom, Canada, and Belgium, have already pledged contributions. * * *
We have informed the ITC that we do not intend to make a voluntary contribution to the
buffer stock. However, the fifth ITA does provide that at the end of 30 months the Tin
Council can review the amount of voluntary contributions and after such a review can decide
by a simple distributed majority—i.e., more than half of the producer votes and more than
half of the consumer votes—to renegotiate the agreement. Should such a renegotiation result
in required consumer contributions, and should our policy remain opposed to such
contributions, we would have the option of not ratifying the renegotiated agreement and
would simply drop out of the ITA.
In August 1975, prior to deciding to sign the ITA and seeking ratification, the executive
branch undertook an extensive review which considered the previous tin agreements, U.S.
tin consumption patterns, the implications of joining the ITA for sales from our surplus
strategic stockpiles, and whether our participation would have a negative or a positive
economic impact. The forum for the review was a special EPB/NSC Commodities Task Force
cochaired by Treasury and State. As part of this effort. Treasury staff reviewed the first four
tin agreements and concluded that they had had only a minor impact on tin prices and that
there was no evidence that the first four agreements had increased the long-term price of
tin. This review did demonstrate the positive role the ITA could play in improving the
efficiency of the world tin market by its extensive data collection and distribution function.
A review of U.S. consumptionof tin indicated an actual decline in consumption from 1968
to 1972. While apparent consumption increased in 1973, this was thought to be largely due
to stocking in anticipation of price increases. The decline in tin consumption reflected
technological developments which enabled tin plate producers to use 50 percent less tin in
tinplate production. It also reflected competition from other materials—mainly aluminum,
glass, and chemically treated steel—for use by the container industry, which accounts for
over a third of total U.S. consumption and is the largest market for tin. This leveling off of
tin consumption is also related to the low income elasticity of tin, indicating that tin
consumption responds only slowly to income growth.
There has been some fear that our joining the ITA will restrict our freedom of action in
sales of surplus tin from our own strategic stockpiles. But the only constraint placed on our
tin disposals by the ITA is to consult with the Tin Council before making sales. We have done
this even before the fifth agreement and would expect to do so in the future even if we are
not members ofthe agreement. Such consultations are consistent with legislation requiring
that sales of surplus strategic materials should not disrupt markets. Therefore, consistent with
our policy and with our stockpile law, we have made it clear that in joining the ITA we reserve
the right to continue our own stockpile sales.
Finally there is the quesfion whether U.S. participation would have a negative or a positive
economic impact. In considering this matter it is important to realize that there can be no
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1976 REPORT OF THE SECRETARY OF THE TREASURY
doubt that the ITA will continue, with or without U.S. participation. Participation, however,
will give the United States an important role in the operation ofthe economic provisions of
the agreement including the determination of the price range to be defended by the buffer
stock, the operation of the buffer stock, contributions tp the buffer stock account, and
decisions on export controls. With more than 25 percent ofthe consumer country votes we
are assured of a prominent voice in these decisions. I might add that at the first session of
the fifth ITA held in London earlier this month, the United States, with the support of West
Germany and Japan, was successful in fending off producer efforts to increase the floor and
ceiling price of the buffer stock price range, a move we judged to be unwarranted by current
market conditions. We would expect that decisions on the price range will continue to reflect
our views.
In summary, the Treasury Department has carefully reviewed the ITA and has concluded
that there are no significant economic costs t6 American consumers implied by U.S.
membership in the agreement. We also conclude that to the degree that our participation
insures that the interests of U.S. industrial consumers are represented in Tin Council
decisions, U.S. membership can haye a positive impact on the way in which the Tin
Agreement operates in the international tin market.
li.cernational Wheat Agreement
Iri contrast to the coffee and tin agreements, we are seeking simply to extend the existing
International Wheat Agreement which has had no price provisions since 1971. International
wheat agreements of one form or another have been in operation longer than either coffee
or tin agreements. Formal international agreements on wheat were first initiated in the
1930's, but the participating countries, were unable to achieve full cooperation so their
economic provisions were never really effective. The first successful agreement went into
effect in 1949 and there have been agreements continuously in effect since then.
The major economic provision in past agreements has been a set of minimum and
maximum export prices. Until the late 1960's, market prices stayed within the price range.
The 1968 agreement, which was called the International Grain Arrangement, was developed
in the Kennedy round trade negotiations. It had been conceived as an instrument to deal with
grain shortages, but grain surpluses instead proved to be the major problem. These surpluses,
coupled with severe competition among exporters, resulted in prices dropping below the
price floor. The 1971 agreement, which is the basis of the agreement currently in effect,
dropped the minimum and maximum price provisions. As a result, there are no price
provisions in the agreement which we are seeking to extend, and it has little economic effect.
The International Wheat Agreement consists of two instruments, a Wheat Trade
Convention and a Food Aid Convention.
The Wheat Trade Convention has four objectives: (1) To increase cooperation among
countries with respect to wheat problems, (2) to promote expansion of wheat trade, (3) to
contribute to stability in the international wheat market, and (4) to provide a framework for
negotiation of provisions relating to wheat prices. The convention provides several vehicles
for accomplishing these objectives, including periodic meetings to exchange information on
the world wheat situation and a system of consultations when instability threatens the market
or when disputes and complaints need to be addressed. In addition, guidelines have been
agreed relating to concessional transactions in world wheat trade.
The Wheat Trade Convention is administered by the International Wheat Council which
is composed of exporters and importers. Decisions of the Council are made by a majority
of votes of exporting members and of importing members. The United States has 28 percent
ofthe total 1,000 exporting member votes. Canada also has 28 percent of this total, and the
Soviet Union has 10 percent.
The Food Aid Convention is aimed at carrying out a program of food aid with the help
of contributions from members. This instrument provides for sharing by developed country
grain exporters and importers, the obligation of furnishing food aid.
The major points of interest in this convention include the following: (1) The United States
is one of nine countries which are committed to annual contributions; (2) the U.S.
commitment is 1.9 million metric tons out of a tptal of 4.2 million tons; and (3) contributions
can be in the form of wheat, coarse grain for food, or cash. The Food Aid Convention has
been a very useful means for obtaining a specific commitment from other countries in a
manner which ensures a sharing of the food aid burden.
Thirteen major exporting countries, representing 85 percent of world exports during the
1974-75 crop year, and nearly 50 importing countries are members of the International
Wheat Agreement and its 2 component conventions. To date more than enough couritries
have signed the extension of the agreement to make it effective.
We believe that the International Wheat Council is a useful and desirable forum which
should be maintained. The continuing exchange of information on the world supply-demand
situation that has taken place in the Council has been particularly useful in providing early
EXHIBITS
503
warning of crop shortfalls or major surges in world import demands. This information has
helped reduce spurious volatility in wheat markets and has led to more orderly supply and
demand adjustments.
The Council recently has been engaged in discussions concerning the terms of a new wheat
agreement. The major focus has been on the question of a nationally held, internationally
coordinated grains reserve. The United States has put forth a proposal on grain reserves that
would deal both with short supplies and surpluses. Other countries have expressed more
interest in price stabilization measures requiring price floors and ceilings.
We oppose price stabilization arrangements in wheat markets as an objective per se
because we think they are unworkable. We have argued that our objective is world food
security and that the introduction of a workable system of grain reserves such as proposed
by the United States would indirectly provide an element pf price stability as it also operated
to provide world food security.
Some countries have proposed that the discussions of price stabilization and grain reserves
should be carried out in the context ofthe multilateral trade negotiations (MTN) in Geneva.
The United States favors continuation ofthe grain reserves discussions in the Wheat Council
in London, where all the major wheat exporters and importers, including the Soviet Union,
can participate. After those discussions are completed, we believe the results can be taken
account of in the MTN.
In summary, we strongly recorinmend the ratification ofthe extension ofthe International
Wheat Agreement until June 30, 1978, so that the discussions on wheat trade arrangements
and reserves can continue and so that the valuable and desirable commitments of the Food
Aid Convention are retained.
Conclusion
Mr. Chairman, I hope that the preceding discussion has accomplished at least the following
objectives. 1 hope that it has shown that the U.S. response to these specific negotiations is
closely integrated into a broader international economic policy framework; that our
decisions to sign and seek ratification of these agreements are the result of careful analyses
of the effects of each agreernent, sufficient to convince us that they are useful responses to
the problems ofthe trade and markets in each commodity, and that they will have no harmful
impact on the U.S. consumer; and finally that our commodity policy is the result of an
effective coordination process. Individual agencies. Treasury and others, have individual
points of view. The policy process would be weak and ineffectual without these differences. But we also have a means of resolving differences of view, and once resolved, we stand by
agreed positions.
I believe the three agreements before the committee are worthy of positive action by the
Senate. They reflect a strong consensus within the executive branch, and they are well
founded upon the underlying principles of U.S. commodity policy. They demonstrate,
moreover, that in pledging itself in international forums to a meaningful case-by-case
approach to commodities the United States means what it says, and implements its promises.
Investment and Energy Policy
Exhibit 44.—Communique of the Conference on International Economic Cooperation,
December 1 6 ^ 9 , 1975, Paris, France
1. The Conference on International Economic Cooperation met in Paris, at ministerial
level, from December 16 to December 19. Representatives of the following 27 members of
the Conference took part: Algeria, Argentina, Austraha, Brazil, Cameroon, Canada, EEC,
Egypt, India, Indonesia, Iran, Iraq, Jamaica, Japan, Mexico, Nigeria, Pakistan, Pem, Saudi
Arabia, Spain, Sweden, Switzerland, United States, Venezuela, Yugoslavia, Zaire, Zambia.
The ministerial representatives who attended the Conference welcomed the presence of the
Secretary-General of the United Nations.
2. The work of the Conference was opened by H.E. the President of the French Republic,
Mr. Valery Giscard d'Estaing.
3. The Hon. Allan J. Macieachen, Secretary of State for Extemal Affairs of Canada, and
Dr. Manuel Perez-Guerrero, Minister of State for Intemational Economic Affairs of
Venezuela, Co-Chairmen of the Conference on Intemational Economic Cooperation,
presided at the ministerial meeting.
4. The ministerial representatives at the Conference expressed their views with regard to
the intemational economic situation. They made suggestions as to how the problems which
they had identified might be resolved. Attention was drawn to the plight ofthe most seriously
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1976 REPORT OF THE SECRETARY OF THE TREASURY
affected countries. They recognized that the Conference on International Economic
Cooperation provides a unique opportunity to address these problems and to further
international economic cooperation for the benefit of all countries and peoples.
5. The Conference decided to initiate an intensified international dialogue. To this end,
it established four commissions (on energy, raw materials, development, and financial
affairs) which will meet periodically through the coming year. It was agreed that each ofthe
four commissions would consist of 15 members, ten of them representing developing
countries, five of them representing industrialized countries.
6. The commissions shall start their work on February 11,1976. Preparation for the work
ofthe four commissions shall be reviewed at a meeting ofthe Co-Chairmen ofthe Conference
and of the four commissions after consultation with the other participants in the Conference.
This meeting will take place on January 26, 1976 within the framework of the general
guidelines contained in paragraphs 10-14 ofthe final declaration ofthe second preparatory
meeting which are approved by the Conference.
7.. The Conference agreed that the following participants should serve on the commissions:
Energy: Algeria, Brazil, Canada, Egypt, EEC, India, Iran, Iraq, Jamaica, Japan, Saudi
Arabia, Switzerland, United States, Venezuela, Zaire
Raw Materials: Argentina, Australia, Cameroon, EEC, Indonesia, Japan, Mexico, Nigeria,
Peru, Spain, United States, Venezuela, Yugoslavia, Zaire, Zambia
Development: Algeria, Argentina, Cameroon, Canada, EEC, India, Jamaica, Japan,
Nigeria, Pakistan, Peru, Sweden, United States, Yugoslavia, Zaire
^ Finance: Brazil, EEC, Egypt, India, Indonesia, Iran, Iraq, Japan, Mexico, Pakistan, Saudi
Arabia, Sweden, Switzerland, United States, Zambia
The Co-Chairmen of the commissions will be:
Energy: Saudi Arabia and United States
Raw Materials: Japan and Peru
Development: Algeria and the EEC
Finance: EEC and Iran
Joint meetings of the Co-Chairmen of the Conference and of the commissions may be held
if the rieed arises.
8. It was agreed that members of the Conference who wish to follow the work of a
commission to which they do not belong should be entitled to appoint a representative in
the capacity of auditor without the right to speak.
9. The Conference decided that a number of intergovernmental functional organizations
which are directly concerned with the problems to be considered would be able to make a
useful contribution to their consideration. It therefore invited these organizations (United
Nations Secretariat, OPEC, lEA, UNCTAD, OECD, FAO, GATT, UNDP, UNIDO, IMF,
IBRD, SELA) to be represented on a permanent basis in the relevant commissions. Their
observers will have the right to speak but not the right to vote and hence will not participate
in the formation of a consensus. Each commission may, in addition, invite appropriate
intergovernmental functional organizations to participate as observers ad hoc (underline
two) in the examination of specific questions.
10. The Conference decided to establish an international secretariat with an exclusively
administrative and technical function on the basis of proposals put forward by the two CoChairmen. It named Mr. Bernard Guitton as head ofthe secretariat and approved plans for
its organization and operational procedures. The financial costs arising from the establishmentof the secretariat and from future meetings of the Conference will be borne by members
of the Conference on the basis of a formula agreed by the Conference.
1 1. It was agreed that the four commissions should meet in Paris. Subsequent meetings
of the commissions will be convened by their Co-Chairmen.
12. One or several meetings of the Conference at the level ofgovernment officiials may
be held at least six months after this ministerial meeting. The Ministerial Conference agreed
to meet again at ministerial level in about twelve months time.
13. The Conference adopted the rules of procedure recommended by the preparatory
meeting which are based on the principle of consensus, according to which decisions and
recommendations are adopted when the chair has established that no member delegation had
made any objection. English, Arabic, Spanish and French are the official and working
languages of the Conference. The rules of procedure apply to all the bodies of the
Conference.
14. The Conference took note of the Resolution of the General Assembly entitled
"Conference on International Economic Cooperation" (Resolution 3515 (XXX) ) and
agreed to make reports available to the 31st Session of the U.N. General Assembly.
15. The members ofthe Conference paid special tribute to President Giscard d'Estaing
for the action he had taken to bring about the dialogue which is now engaged and expressed
EXHIBITS
505
their warm appreciation to the Government of France for its hospitality and for the efforts
and obligations it had undertaken in order to make the Ministerial Conference a success.
Exhibit 45.— Statement by Assistant Secretary Parsky, February 17,1976, before the Senate
Committee on Interior and Insular Affairs and the Senate Commerce Committee, regarding
financing an Alaskan natural gas transportation system
I am pleased to testify before you today conceming the proposed Alaskan natural gas
transportation systems. I will concentrate my remarks on the questions of the feasibility of
financing this large project in the private capital markets.
At the outset, I should note that we believe that it is possible to arrange a financing without
Federal financial assistance. Although the unprecedented size and the risks of the project
make private financing a difficult task, we are convinced that with the proper regulatory
actions as well as participation by the various parties benefiting directly from the project,
a private financing could be accomplished.
Federal financial assistance should not be used as a substitute for proper regulatory action
as this would surely result in inefficiencies and unnecessary increases in the already excessive
role of the Federal Government in our economy. The actions that are needed involve taking
steps to require the major beneficiaries of the project to pay the cost and bear the risk, on
an equitable basis, of delivering this gas. Decisions to bring this about may not be easy but
are needed if the Alaska Gas Transportation System is to be financed in the most efficient
and, in the long mn, least costly way.
As you are aware, for the Interior Department's December 1975 report to Congress on
"Alaskan Natural Gas Transportation Systems," the Treasury Department prepared a
section dealing with "Financing Problems and Issues." I am submitting for the record a copy
of that section. >
In my testimony today, I would like to highlight a few of the major conclusions we reached
in this analysis and, in particular, point out areas where we feel proper regulatory actions
will facilitate a private financing of the project. After discussing the overall capacity of the
capital markets to handle a project of this size, I would like to outline the major financial
risks perceived by potential investors in the project and point out the ways such risks can
be handled if appropriate regulatory actions are taken. Finally, I will consider the general
question of Federal financial assistance.
Capacity of the capital markets to finance such a large project
The Interior Department has estimated that construction costs for a 2.5-billion-cubic-feetper-day (BCFD) gas flow range from $9 to $ 11 billion for the Alaska-LNG System and from
$10 to $12 billion for the Alaska-Canada System, depending on such variables as interest
on debt during constrnction and cost overrun contingencies as well as estimates for inflation.
If financed by private capital, this project would be the largest single project so financed. By
comparison, the cost of the trans-Alaska oil pipeline is now estimated to be in excess of $7
billion- excluding field development costs and the tanker fleet.
Despite the unprecedented size of this project, we believe that the U.S. capital markets
have the capacity to finance this gas transportation system and that private capital markets,
including the intemational markets, will finance it if it is shown to be a viable and
creditworthy project. Let us look at what this will entail.
Nature of the financial risks
The sponsors of both projects propose to finance them through what is commonly called
project financing. This type of financing involves creation of a separate project entity which
issues securities stmctured so that the debt service and equity retums are provided by the
revenues generated by the project. The prehminary financing plans involve capitalization of
25 percent equity and 75 percent debt.
Before they will provide funds to either of the proposed projects, both equity and debt
investors must be satisfied that the project is creditwort:hy and that the level and certainty
of their expected retum on investment is adequate to compensate them for the risks they
assume. The bulk of the equity will be provided by the project sponsors, and the debt will
be sought mainly from financial institutions.
Although debt investors generally assume some amount of risk in retum for higher interest
rates, the large amounts of capital required for this project probably cannot be raised if there
is any substantial perceived risk to the timely repayment of principal and interest. Thus, a
prerequisite to financing this project is to establish that payment of debt service could be
iNot included in this exhibit.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
expected regardless of what other events occur. The two major financial risks faced by
investors are (1) the risk of noncompletion of the project and (2) the risk that, once
completed, revenues will be insufficient to cover all project costs—including debt service.
Noncompletion could result from unforeseen construction difficulties, excessive cost
overruns that make the project uneconomic, environmental suits, and other legal br political
difficulties. Insufficient revenues could result from (a) the failure of regulatory agencies to
allow tariffs which recover the full project costs or (b) interruption of gas flow due to natural
disaster, mechanical failure, or other force majeure events.
The noncompletion risk
In the event of noncompletion, the fundarriental concept of project financing (i.e., service
of debt through project revenues) is frustrated and, in the absence of other protection, the
lender loses his investment. Therefore, before committing funds to an Alaskan gas
transportation system, lenders will seek (a) assurances that there are adequate funds to
finance completion and (b) protection in the event of noncompletion for reasons other than
lack of funds.
The first noncompletion risk of major concern to investors involves large cost overruns
which could result from such things as delays in the construction schedule or errors in
engineering estimates. In addition, construction delays would add to debt-interest costs.
The second major noncorripletion risk of concern to potential lenders is the fact that their
debt might not be repaid if the project never goes into operation to generate the revenues
they are looking to as the primary source of their debt service. As in the case of cost overruns,
investors must have adequate assurances that their debt will be repaid in the event of
noncompletion before they will advance funds to the project.
Thus, the key question is: Who will finance cost overruns and bear the other risks of
noncompletion of the project? At this point in time, the question remains unanswered. If a
private financing is to be arranged, these risks must be borne by one or more ofthe various
parties standing to benefit directiy from the project, including:
Equity investors.
Other gas pipeline and distribution companies receiving gas.
Gas consumers receiving gas,
.. Owners of Alaskan gas reserves, or
State of Alaska.
We believe that these potential project beneficiaries collectively have the capacity to
provide lenders the necessary assurances against noncompletion risks. The financing
capabilities of these main project beneficiaries are discussed at some length in our
contribution to the Interior Department report. I refer you to that report for oiir detailed
analysis, but I would like to summarize for you briefly our analysis ofthe various categories
of beneficiaries.
Equity investors.—As discussed in the Interior report, it appears that, considering both
internally generated cash flow and external financing possibilities, the current group of
project sponsors could provide the requisite equity capital—although this would clearly be
a large undertaking for a group of companies of this size, and some problems could arise for
particular companies.
However, the lenders will also be looking to the project sponsors to provide part of any
cost overrun financing that might be required or possibly assist in repaying debt in the event
of noncompletion. While such commitments do not require the immediate generation of
cash, they do result in a contingent liability of an indeterminate and conceivably quite large
amount. As they themselves have indicated, the current sponsors apparently do not have the
capacity to assume fully the risk of repayment of the project's debt.
Gas pipeline and utility companies.—There are a number of interstate gas pipeline and
distribution companies, other than El Paso and those in the Arctic Gas group, who could be
considered as potential project sponsors. For example, the 10 largest of these other interstate
gas pipeline companies (in terms of natural gas sales) had a combined internal net cash flow
of about $1.5. billion in fiscal year 1974. Were the 1974 cash flow levels to continue, the
combined internal cash flow of these companies over a 6-year period would be around $9
billion. Thus, they could make a substantial contribution toward financing and bearing the
cost overrun and noncompletion risks of this project.
Owners of Alaskan gas.—Another potential source of financing would be the owners ofthe
gas reserves. They recognize that without a transportation system the large proven gas
reserves and poteritial future gas discoveries are virtually worthless. However, it must be
recognized that any decision by the producers to help finance the project would have to take
into account other competing demands for funds, the rates of return on alternative projects,
and the fact that they are already committed to provide substantial additional amounts of
capital in order to produce North Slope oil and gas. One action which could affect the
EXHIBITS
507
willingness and ability of these companies to participate in the financing would be the
deregulation of wellhead price for Alaskan gas.
Gas consumers.—A third additional source of financing is gas consumers. The large
benefits that are expected to accrue to consumers of Alaskan gas would appear to justify the
adoption of regulatory procedures which would involve.them more directly in financing and
bearing the risks of this project. With respect to the cost overrun and noncompletion risks,
a surcharge on current gas consumption might be used to help finance cost overruns and/or
repay project debt in the case of noncompletion.
Very large amounts of capital could be raised in this way. One form of surcharge would
be a direct add-on to the current utility bill which would be used to finance cost overruns.
Another, somewhat more indirect form would be the inclusion of work in progress in the rate
base so that consumers would pay the interest charges on project debt and return on equity
investment while the project is under construction. A consumer surcharge mechanism, in
effect, increases the current cost of gas to consumers but reduceSifuture costs to a level lower
than would prevail if consumers did not help finance the project. This reduction in future,
costs comes about because the amount of debt service (i.e., principal and interest payments)
that would have to be recovered through transportation tariff charges would be reduced.
State of Alaska.—The State of Alaska is another potential source of financing. Alaska
would receive significant benefits if production of Alaskan gas were assured by the building
of a transportation system since it would receive a 12 1/2-percent royalty and approximately
a 4-percent production tax. Thus, the State of Alaska, as a direct beneficiary of a
transportation system for gas, might decide to finance a portion ofthe pipeline or help finance
cost overruns or guarantee a portion of the debt to insure its repayment in the event of
noncompletion.
Other.—Other potential project beneficiaries who might bear some ofthe cost overrun and
noncompletion risks include (1) large industrial.gas customers who could provide substantial
amounts of capital through advance payments in exchange for an assured supply of gas and
(2) the financial institutions providing debt capital who might be willing to commit to finance
some level of cost overruns.
As this summary indicates, there are direct beneficiaries of the project who together have
the capacity to finance substantial cost overruns or repay the project's debt in the case of
noncompletion.
The risk of insufficient project revenues
Even if the various project beneficiaries were able to provide adequate assurances to the
prospective lenders with respect to noncompletion risks, the difficult question of whp would
bear the risks of inadequate project revenues would remain. With projects of this size and
complexity, even a low risk of interruption or diminution of revenues is of concern to lenders.
As in the case of noncompletion, if a private financing is to be arranged, this risk must be
borne by the various parties standing to benefit directly from the project.
There are two major ways of satisfying the lender's need to have some mechanism to insure
debt repayment in the unlikely event of a long-term service interruption. First, the lender
might be satisfied by a clearly creditworthy party, or parties, agreeing to guararitee
repayments of the project's debt. In many projects, this type of guarantee is provided by the
project sponsors. However, in the present case, the proposed projects are so large that the
current group of gas pipeline and utility sponsors have indicated that they do not have
sufficient aggregate credit to satisfy the lenders. Therefore, if a private financing is to be
achieved, it may be necessary to strengthen thecombined credit ofthe sponsoring group by
adding new members (for example, additional gas pipelines and utilities, and/or the State of
Alaska and/or the gas producers). As I noted earlier, this could also assist in covering .the
risks of project overruns or noncompletion.
Second, users ofthe project's output or service might enter into what are called all events
full cost of service contracts. Under such a contract, the purchaser is obligated to pay a
minimum amount sufficient to service the project's debt and cover certain other project costs
even if he does not receive output from the project. In short, he.pays regardless of what other
events may occur. Thus, lenders might be satisfied with an all events full cost of service
contract which would require gas shippers to pay the full cost of operating the transportation
system (including debt service), regardless of whether gas was flowing or not.-Iri theory, this
type of tariff would assure lenders that, once the project is completed, revenues would always
be adequate to cover the project's expenses. Under such a contract, the costs could be passed
on to the local gas utilities, who in turn, assuming approval by relevant State regulatory
authorities, would pass on the cost to gas consumers.
,
Such a tariff would be essentially an insurance program underwritten by consumers to
cover whatever risks commercial insurance companies will not underwrite, or do not chPose
to underwrite, at reasonable costs. By accepting these risks, consumers would not only assist
in arranging a private financing, but would also benefit from lower gas transportation charges
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1976 REPORT OF THE SECRETARY OF THE TREASURY
from two sources: First, the insurance premiums associated with an unconventional
commercial insurance program would be avoided. Second, the debt-interest costs would be
lower, reflecting the increased creditworthiness of the project.
Thus, an all events full cost of service tariff could provide substantial assurances to lenders
with regard to the adequacy of revenues to repay the project's debt. If, in addition, there were
a wide distribution of Alaskan gas, this could minimize any contingent price increase which
consumers might face under such a tariff were there to be a service interruption. Taken
together, a clearly enforceable all events full cost of service tariff and a wide distribution of
Alaskan gas do offer one way of handling the risk of insufficient project revenues.
Nevertheless, it should be clearly recognized that an all events full cost of service tariff
implies that gas consumers would bear much ofthe project's postcompletion risks, including
force majeure service interruptions or even costs resulting from management error. Whether
it is reasonable to ask certain gas consumers to bear this level of risk must be judged in relation
to the benefits those gas consumers could expect to receive, and whether such risk bearing
is required in order to get the project financed. Apparently, the gas consumers receiving
Alaskan gas could expect to receive substantial economic benefits. I believe that under the
present system of regulated wellhead natural gas prices, gas consumers are in a favored
position and could receive the bulk of the net economic benefits made available by a gas
transportation system.
From the standpoint of arranging private financing, I believe that an all events full cost
of service tariff could be needed. Nevertheless, it would be premature to rule out the
possibility that the level of risk which gas consumers would bear under an all events tariff
could be reduced by adopting something less than the full cost of service feature. This might
be accomplished by carefully defining in the tariff which categories of costs are allowed to
be passed on in all events. In addition, provision might even be made for a reduction in the
return on, or a partial loss of, stockholders' equity in the case of management error. Through
specially designed tariff formulas^ we believe the risks associated with an Alaskan gas
transportation system can be equitably shared between project sponsors and consumers.
In any event, such a tariff would have to be approved by the Federal Power Commission—
a decision that has not yet been made. If approval does occur, it may be necessary to consider
ways of assuring both the gas pipeline and gas distribution companies and the lenders who
are relying on this tariff that the tariff will be maintained and enforced over the life of the
project.
Feasibility of a private financing
On the basis of this analysis, we believe that the various private parties standing to benefit
directly have the capacity to finance the project and bear its risks. Since the project seems
to be economic on current price/cost estimates, there is sufficient incentive for these parties
to arrange a private financing provided the needed regulatory actions are taken, including
steps to involve gas consumers in sharing the risk of the project. Certainly the extent of
involvement of gas pipeline and distribution companies, as well as the extent of participation
of the owners of the reserves, will be important. However, the regulatory conditions under
which the project will operate will be critical to determining whether the project will, be
financed privately.
Government financial assistance
Whether a totally private financing is achievable will remain a matter of speculation until
one ofthe projects is selected and its sponsors are able to determine further the capabilities
and intentions of the potential financial participants and to determine the regulatory
conditions under which the project would be constructed arid operated. If the needed
regulatory actions are not taken and a private financing cannot be arranged, then we believe
that the economics and risks of the project raise serious questions as to whether it should
be undertaken at the present time. On that basis, I think it would be premature to consider
legislation providing Federal financial assistance to the project.
Despite this, if the Congress eventually determines that some form of Federal financial
assistance to the project is both necessary and desirable, then the following important
considerations should be kept in mind. First, any Federal financial assistance granted should
be kept to the absolute minimum needed to achieve the desired result: Construction ofthe
gas transportation system. Federal assistance should supplement and facilitate the maximum
feasible amount of private financing for the project; it should not substitute for available
private financing or for appropriate regulatory actions.
Second, any legislation providing such assistance should give the administrator of this
assistance adequate flexibility to tailor the form of financial assistance to the needs of the
project. At this time, we, of course, do not know which of the particular financial risks of
this project which I have discussed may prove insurmountable without Federal assistance and
it would seem desirable to defer legislation until the problems ofthe project are sufficiently
EXHIBITS
509
well understood to allow identification of why the private market cannot respond. However,
possible forms of such assistance would include Federal guarantees of the project's debt
against certain specific risks such as noncompletion of the project or long-term service
interruptions. Federal insurance against the service interruption risk, or the financing of cost
overruns above some determined level. The exact type, amount, and terms of any Federal
assistance would have to be worked out through detailed negotiations with the project's
sponsors.
Third, it is important to minimize the impact on our capital markets and on the
management ofthe Federal debt of any Federal financial assistance program. Any type of
Federal financial assistance resulting in the undertaking of investments that would not
otherwise have been made leads to some redirection of resources in our capital markets. Such
incentives increase the demand for capital while having little or no effect on the overall supply
of capital and thus tend to cause interest rates to rise. Accordingly, we believe it is essential
that the Secretary of the Treasury have the authority to approve the timing, terms, and
conditions of any Federal guaranteed securities that might be issued.
Conclusion
In conclusion, I would like to stress again our belief that if appropriate regulatory and
administrative actions are taken, Federal financial assistance to an Alaskan gas transportation system will not be necessary and, therefore, I would urge that no such Federal assistance
be provided at this time. Instead, I would recommend that one or more of the following
actions be taken:
1. Prompt selection of a specific gas transportation system;
2. Grant of all necessary governmental authorizations including timely resolution of
all environmental and legal questions regarding the project;
3. Approval of all events tariffs which permit shippers to pass on a substantial portion
of the costs, if not the full costs, of the project to the ultimate consumer coupled
with strong assurances that they will be maintained in effect and enforced over the
life of the project;
4. Approval of a mechanism (such as inclusion of work in progress in the rate base)
by which the principal and interest payments on some part, if not all, of the debt
funds used during construction could be passed on to gas consumers even in the
remote contingency of noncompletion of the project;
5. Approval of a consumer surcharge mechanism which would provide funds to help
finance the project;
6. Decontrol of natural gas prices or setting the wellhead price of Alaskan gas at a level
high enough to attract the financial participation in the project ofthe owners ofthe
gas.
These actions would clarify the present regulatory and administrative uncertainties that
are now holding up this project and would provide equitable means whereby the private
beneficiaries of the project can assist in its financing and a sharing of the risks without the
unnecessary and undesirable financial involvement ofthe Federal Government. In my view,
there are great longrun dangers if we continue to substitute Government financial assistance
for difficult regulatory decisions which equitably apportion the costs and risks of large energy
projects. 1 believe that this project affords us an opportunity to show that, through innovative
governmental action, we can create the conditions necessary for the private capital markets
to finance this project.
Thank you, Mr. Chairmen, and I would be happy to answer any questions you and the
committees may have at this time.
Exhibit 46.—Statement by Assistant Secretary Parsky, March 3 1 , 1976, before the House
Committee on Science and Technology, concerning Federal financial incentives to encourage
synthetic fuels production
I am pleased to appear before you today to discuss H.R. 12112 and, in particular, the
question of Federal financial incentives to encourage the commercial demonstration of
various types of energy facilities. Although the proposed bill would provide Federal
guarantees for synthetic fuels production, energy conservation, renewable energy resources,
and geothermal development, I would like to focus my remarks today on the synthetic fuels
area. I will concentrate on (1) an assessment of the reasons for Federal assistance, (2) the
proper stmcture of such assistance, and (3) the impact of Federal incentives on the capital
markets.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
The administration program
In his January 15, 1975, state ofthe Union message the President proposed a number of
measures designed to help achieve energy independence and reduce our vulnerability to the
OPEC (Organization of Petroleum Exporting Countries) cartel. A key measure was a
program accelerating the advent of synthetic fuels. In proposing this program the President
specifically endorsed the use of Federal financial incentives where necessary to encourage
commercialization. The President reaffirmed the importance of this activity in his February
26 energy message of this year.
An interagency Task Force on Synthetic Fuels last year undertook a comprehensive study
of how best to assure early initiation of the commercial demonstration program. One of the
major tasks of the task force was to identify and evaluate the need for various types of
financial assistance to assure commercial development of synthetic fuels. The draft report
of the task force concluded:
In the absence of Federally provided economic incentives or other policies creating
a stable and favorable investment environment, significant amounts of synthetic fuels
are not likely to be produced by 1985.
We believe that it is important to proceed with a significant commercial demonstration
program as part of a national effort aimed at reducing our vulnerability to a cutoff in imports
of oil. Further, we concur in the task force conclusion that incentives are needed to
accomplish the basic objectives of this program.
However, in carrying out the incentives program, we believe that special care should be
taken to (1) keep the use of Federal assistance for commercial demonstration facilities to
a minimum level necessary, (2) ensure that the impact of Federal incentives on the capital
markets is minimized, and (3) ensure that the adoption of a Federal incentives program does
not impede movement toward the fundamental actions needed to improve the climate for
private investment in the energy sector—that is, regulatory reform, continued emphasis on
research and development, and decontrol of energy prices. We believe that these more basic
actions are the most cost-effective longrun solutions to the problem of attracting private
capital to develop synthetic fuels. In order to understand how a proper balance can beachieved between providing needed incentives now and ensuring that longer term actions
are taken, I would like to explore each of those areas.
Type of Federal assistance needed
First, let's look at the type of Federal assistance that is needed. The exact type of financial
incentive needed to achieve the President's goals will vary from situation to situation
depending on the technology, the regulatory environment, the nature of the companies
involved, and competitive market considerations. For example, in the case of projects which
would provide fuel to a nonregulated sector of the energy industry, the major uncertainty
is the future course of prices of competitive fuels. In such cases, some form of price guarantee
may be needed to protect the large capital investment should market prices of competitive
fuels fall to a low level. In contrast, for projects which will operate in a regulated environment,
price guarantees may not be needed but loan guarantees may be necessary to secure financing
for the first commercial-size plants to overcome the technological risk, concerns over the
large size ofthe projects in relation to the net worth ofthe participating companies, and the
regulatory uncertainties involved. The Energy Research and Development Administration
(ERDA) should, therefore, have a number of incentives available to it and should also have,
administrative flexibility to choose the appropriate incentive based ori specific situations.
Different technologies or industries might require different incentives at different times, and
it cannot now be predicted with certainty which form of incentive will be best. Accordingly,
a range of incentives, including loan guarantees, are necessary to achieve the early
commercialization of synthetic fuels.
We continue to believe, however, that every effort must be made to minimize the cost of
such a program to the American people. Therefore, it is important that whatever financial
incentives are deemed necessary be granted by competitive bidding to the extent possible.
By using competitively bid loan and price guarantees wherever possible, the Government will
be able to minimize the amount of Federal subsidy involved.
Minimizing the impact on capital markets
Furthermore, as the proposed program is implemented, we must minimize the impact on
our capital markets. Any type of Federal financial assistance resulting in the undertaking ofenergy projects which would not otherwise have been undertaken will lead to spme
redirection of resources in our capital markets. Such incentives increase the derriand for
capital while having little or no effect on the overall supply of capital. They tend to cause
interest rates to rise and channel capital away from more economic to less economic uses.
EXHIBITS
511
In short, the proposed program of Federal incentives will direct capital from other areas of
our economy into syntnetic fuels production.
This diversion, however, is the intended objective of the incentives program which is
specifically designed to attract capital into projects for the commercial demonstration of
synthetic fuel technologies. The magnitude ofthe impact of such diversion will, of course,
depend on the amount of money involved and the length of time over which such money is
raised. Between $8 and $9 billion in investment may be neeeded to develop the President's
recommended 350,000-barrel-per-day oil equivalent synthetic fuels capacity. This amount
would be on a phased basis over 5 to 10 years as plants are constructed. The incentives
program designed to induce such investment should, therefore, not Cause a great disruption
in the capital markets. Given the fact that the annual U.S. investment rate in 1975 was over
$200 billion, the program is not likely to have a major impact on the general cost or
availability of capital. In addition, the Federal Energy Administration estimates that as much
as $600 to $800 billion will be invested in the energy sector over the next 10 years. When
viewed in relation to this amount, the capital investment expected to be induced into the
initial phase of the synfuels program is not large.
However, almost 50 percent ofthe: $200 billion net flow of funds in U.S. credit markets
is already being taken to finance existing Federal, State, and local programs. These heavy
government borrowing pressures will continue. Therefore, in order to help minimize the
impact of ERDA guarantees and price supports in our capital markets, we believe that it is
essential that the Secretary of the Treasury have the authority to approve the timing and
substantial terms and conditions of each loan and price guarantee and any other financial
incentive that would have a similar impact. Loan and price guarantees result in new issues
of bonds, notes, or other Government-backed obligations in the capital markets which
impinge upon Treasury and other Federal agency financings and which can have significant
market impact. Prior approval ofthe timing and terms by the Treasury will ensure effective
coordination with the management of the Federal debt and will help minimize the impact
of such incentives on the capital markets. H.R. 12112 contains the necessary authority with
respect to guarantees for synthetic fuels, conservation equipment, and impact assistance.
However, H.R. 12112 is incomplete in its treatment of the Treasury role with respect to
geothermal energy projects. We strongly urge an amendment making the geothermal loan
program conform to the remainder of the loan guarantee programs by requiring Treasury
approval of the issuance of guarantees and by making the interest on guaranteed obligations
of public bodies taxable. The amendment was submitted last year by ERDA but evidently
not adopted during your final conference deliberations.
Treatment of foreign investors
In addition, we are concerned by the fact that, with some exceptions, the legislation
prevents non-U.S. citizens from obtaining guarantees under the program. This prohibition
is contrary to our traditional policy of nondiscrimination against foreign investors. We follow
an open-door policy towards foreign investment, and once foreign investors are established
here they are afforded national treatment—that is, treated equally with domestic investors.
This policy is based on the premise that the benefits of investments are not dependent on
the nationality of investors. We should maximize our opportunity for obtaining capital and
technology from whatever source rather than making discriminations on the basis of
nationality which serve no economic purpose.
This is especially true in the present case where the purpose is to encourage the
development of plants to demonstrate the commercial viability of new energy technologies
at the least cost to the U.S. taxpayers. It follows that we should seek the most promising
technology from those firms most capable of undertaking such projects. To completely
prohibit foreign investors from taking advantage ofthe program would deny the United States
the benefits of their technologies without obtaining any compensating benefits and with
possible additional costs for American taxpayers.
We do recognize that the legislation gives the Administrator of ERDA the discretion to
grant guarantees for investments by citizens from countries who are participants in the
International Energy Agreement. While this is an improvement over a blanket prohibition
on foreign investment, it is still contrary to our basic policy of natiorial treatment for foreign
investors. Therefore, we suggest that the restrictions with respect to the nationality of
program participants be eliminated and that all foreign investors who otherwise meet the
qualifications established by ERDA be eligible for guarantees under the program.
Necessity for regulatory reform
The proposed incentives program, Mr. Chairman, is important but should not be seen as
a siibstitute for needed regulatory reform. The level of Federal financial assistance that will
be required to bring about certain types of first-generation synthetic fuels plants and, more
importantly, the ability of the synthetic fuels industry to free itself from Federal financial
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1976 REPORT OF THE SECRETARY OF THE TREASURY
assistance will be determined to a great extent by how rapidly we develop a more favorable
regulatory climate. Energy prices should reflect the real costs of producing energy if we are
to achieve the needed increases in supplies of energy and to discourage the wasteful uses of
energy. With respect to synthetic fuels in particular, the difficult problem of arranging private
financing for high BTU coal gasification plants has been handicapped because of regulatory
commission policies which refuse to allow an all events full cost of service tariff for firstgeneration synthetic fuels plants. I would hope this barrier will be removed so that once
demonstration plants are proven to operate satisfactorily, the financing of future plants can
be handled completely by the private markets.
Likewise, the interagency Synthetic Fuels Task Force report indicated that a major barrier
to electric utilities undertaking medium BTU coal gasification projects is the inability of these
companies to attract capital due to their low level of profitability resulting from regulatory
policies. Again, the best longrun answer is regulatory reform. In addition, expediting various
environmental and other regulatory procedures would significantly assist the private capital
market in responding to our Nation's energy needs. The faster we can move on these needed
improvements in the regulatory environment, the less will be the need for Federal
Government financial assistance. We do, however, recognize that these improvements will
take time and that there is currently a clear need for carefully chosen and implemented
incentives in order to assure the private financing of demonstration facilities in the interim.
Therefore, we urge enactment of H.R. 12112 so ERDA can proceed in this important effort.
Mr. Chairman, that concludes my prepared statement, and I will be gald to respond to any
questions you might have.
Exhibit 47.— Statement by Assistant Secretary Parsky, May 3,1976, before the Subcommittee
on Foreign Commerce and Tourism of the Senate Committee on Commerce, regarding the
Treasury study of foreign portfolio investment in the United States
It is a pleasure for me to be here to present to you the findings of the Treasury Department's
study of foreign portfolio investment in the United States. It is certainly fitting, Mr. Chairman,
that the results of this study be presented to your subcommittee, for this represents the
culmination of a process of consultation and cooperation between the Treasury and you and
your staff that has extended over a period of more than 2 years- beginning with your
introduction of the Foreign Investment Study Act of 1974, which provided the authority for
us to undertake the study.
The idea for this study originated in 1973, at a time when concem was being expressed
over the possible implications of the rise in investments here by European and Japanese
interests. Later, the accumulations of funds by the oil-producing countries added to this
concem and a number of bills were introduced in the Congress which would impose
restrictions on investments from abroad.
The President has resisted these proposals and we have opposed new restrictions on foreign
investment in the United States. We continue to believe that the operation of market forces
will direct worldwide investment flows in the most productive way. Thus, we have sought to
maintain our traditional policy of freedom for investments here by foreigners. At the same
time, we did share the view of this committee and others in Congress that adequate
information on intemational investment should be available to all branches of Govemment
and to the public. Consequently, we strongly supported the Foreign Investment Study Act
of 1974 which called upon the Commerce and Treasury Departments to undertake
comprehensive overall studies of foreign direct and portfolio investments in the United States
and to report their findings within 18 months. We did not view such legislation as in any way
weakening our commitment to the free flow of investment capital. Rather, we saw it as a
desire to ensure that the necessary facts were available so that sound policy could be
developed.
As you are well aware, the act was passed in October of 1974. Before that, however, in
anticipation of its passage, the Treasury had begun laying the groundwork. First, we had to
design a questionnaire form for business firms which would supply us with all the statistical
data required. We then had to consult with representatives of the reporting community to
assure that the information called for could be supplied at a reasonable cost and in time to
allow us to assimilate it and analyze it within the time frame of the act. This process was
completed in late 1974, and in January 1975 forms were mailed out to business firms.
For the research on some of the nonquantitative parts of the study- why and by what
means foreigners invest in the United States and the legal aspects involved- we decided to
contract for the services of a private research firm. After reviewing the numerous responses
to our solicitation for bids, we awarded the contract to R. Shriver and Associates on the basis
of its qualifications, work plan, and price.
EXHIBITS
513
The collection, review, and analysis of all the information we have gathered has been a
substantial undertaking. We have received some 10,000 completed forms from business
firms. In addition, Shriver and Associates has submitted to us reports on its interviews with
over 100 persons in this country and abroad who are involved in foreign portfolio investment,
and very extensive material on the purpose and effect of U.S. and foreign laws relating to
foreign portfolio investment.
A completely thorough review and analysis of this wealth of information takes much longer
than the few months which have passed since it became available to us and we will continue
to review it for some time to come. However, the Congress, quite understandably, wanted
a timely report on our findings which I am happy to submit at this time. Attached to my
statement is a summary of our findings, i Later this month we will print and distribute to the
Congress and the public a more detailed report. 21 would now like to give you the highlights
of our findings and our major conclusions and recommendations.
Highlights of the Treasury study
The comprehensive benchmark survey which we undertook under the study shows that
foreign portfolio investment in the United States was approximately $67 billion as ofthe end
of 1974. This consisted of about $25 billion in stocks, $16 billion in corporate bonds and
other private debt, and $26 billion in government bonds and notes.
The total derived from the benchmark survey was about $10 billion higher than our
previous estimate; most of this difference, nearly $7 billion, was in the stock figure. This is
not surprising since our previous estimate was based on a survey done for 1941 and both the
composition and the value of this pprtfolio obviously could have changed substantially over
a period of 33 years.
Special factors, not directly related to market forces, accounted for most of the foreign
holdings of debt instruments in 1974. First, practically all ofthe holdings of U.S. Government
securities were held by foreign official institutions such as central banks because of their
policies of holding a major part of their international reserves in dollars. Secondly, nearly
all of the recorded foreign holdings of U.S. corporate bonds are the result of the U.S.
Government balance of payments programs in previous years when U.S. companies were
encouraged to finance their overseas investments through Eurobonds, even if they had to pay
a higher interest rate than on borrowings in the United States.
When these special factors are taken into account, it becomes apparent that marketrelated foreign portfolio investment in this country is primarily in the form of corporate
stocks. This is seen more clearly if we examine the estimates of foreign portfolio holdings
as of the end of 1975, which are based on the 1974 survey and our monthly data on foreign
portfolio transactions plus estimates of the changes in market values of foreign-held
securities. These estimates indicate that the total foreign portfolio as of end-1975 was $86
billion, of which $37 billion, or 43 percent, consisted of stocks. Since stocks play such a
dominant role in foreign portfolio investment in this country, I think it is important to
comment in a little more detail about these holdings.
The survey showed that virtually every country in the world held some U.S. stocks but the
holdings were heavily concentrated in a few countries. Switzerland, the United Kingdom, and
Canada alone accounted for nearly 60 percent of the total and when the Netherlands and
France are added, these five countries represented nearly 75 percent of total foreign
holdings.
Slightly over half of the total was in the names of foreign banks, brokers, and nominees
who were holding these securities in part on behalf of other persons. This was particularly
true in the case of Switzerland where nearly 90 percent ofthe holdings were in this category,
a considerable proportion of which represented holdings for beneficial owners in other
countries.
The other categories of major holders were: Individuals, holding $4.5 billion, about half
of which was held by U.S. nationals residing overseas; institutional investors such as
investment trusts with $3.7 billion; other private institutions, $2.5 billion; and foreign official
institutions, $1 billion.
The distribution of these holdings by industry was fairly widely diversified and did not differ
significantly from that of American investors. Foreign holdings of U.S. stocks were equal to
about 5 percent of the value of all publicly traded stocks.
Through interviews with foreign portfolio managers here and abroad, we assessed the
reasons for foreign portfolio investment activities in the United States. The principal
motivations include:
INot included in this exhibit.
X:opies of the "Report to the Congress on Foreign Portfolio Investment in the United States" are available from the
Superintendent of Documents, U.S. Govemment Printing Office. Washington, D.C. 20420.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
1. Expectations of long-term capital gains.
2. The relative economic and political stability ofthe United States. Many European
investors, for instance, see the United States as offering more profit potential and
less risk of nationalization than other major countries.
3. The large size and liquidity of U.S. capital markets. The lack of depth and liquidity
associated with smaller capital markets elsewhere make it difficult to place large
amounts of funds in a relatively short period of time.
4. Close regulation and organization of U.S. securities markets. This serves as a
desirable safeguard.
5. Great range of investment choices.
6. Sales efforts of U.S. securities dealers.
7. Greater efficiency of U.S. markets.
In addition to seeking to determine the reasons behind investment activity, we' also
attempted to identify the processes and mechanisms through which investment is made in
the United States. We found that foreign portfolio investors use the same investment channels
as U.S. investors for the most part, i.e., the New York and American Exchanges, the regional
exchanges, and the. over-the-counter market. Many of the major U.S. companies are also
listed on foreign exchanges. Foreigners rely heavily on U.S. brokers and dealers for placing
orders and obtaining information on U.S. securities.
The heterogeneous nature of the numerous foreign investors in U.S. securities makes it
difficult to isolate the effects they have on our financial markets and on our economy.
Nevertheless, it is true that any additional demand for securities in any segment of a capital
market tends to raise prices and reduce yields on the type of securities dernanded. Thus,
foreign purchases of U.S. stocks and bonds have a tendency to reduce yields and therefore
make raising of capital relatively easier for domestic borrowers. This in turn will tend to
stimulate real investment and increase the output and productivity ofthe economy. We did
find that foreign holdings of U.S. stocks are turned over somewhat more frequently than U.S.
holdings. On the other hand, foreigners as a whole have been net purchasers of U.S. stocks
in every year since 1959 except for the years 1964-66; thus they have on balance tended
to strengthen stock prices. Generally, our conclusion is that more participation in our
markets tends to make them deeper and more efficient. Thus, foreign participation is
beneficial.
The Treasury study also involved comprehensive research into the legal aspects of foreign
portfolio investment. While the U.S. legal structure is generally viewed favorably by foreign
investors, particularly our securities laws, some aspects are viewed as a deterrent to
investments here. The U.S. withholding tax on dividends and interest payments and the fact
that the U.S. estate tax is levied on the U.S. securities holdings of foreign investors are two
illustrations of such negative factors.
OPEC investments
Mr. Chairman, that provides you with the general outlines of our study. Since one ofthe
major reasons for undertaking this study was the concern expressed by some over the
potential ofthe oil-producing countries to acquire large amounts of assets in this country,
before concluding, I would like to make some observations about these investors in
particular.
In the early period of the large accumulations by the OPEC (Organization of Petroleum
Exporting Countries) countries, almost all of their investments in the United States were in
the form of short-term assets such as Treasury bills and short-term bank C.D.'s. Being
cautious and conservative investors it was natural for them tp confine their investments to
the safest and most liquid forms at the outset. This is one ofthe reasons why our benchmark
survey, which was taken as of the end of 1974, shows relatively small holdings for these
countries—$2.4 billion, which was less than 4 percent of total foreign portfolio investment
in this country.
In 1975 and early 1976, these countries shifted substantial amounts into longer term assets,
primarily Treasury and other Federal agency bonds and notes and corporate stocks; lesser,
but not insignificant, amounts were also invested in long-term bank C.D.'s and corporate
bonds. In 1975, OPEC countries made portfolio investments in the United States ofabout
$5.7 billion, and in January and February of this year they purchased another $1 billion.
Looking ahead, we believe that the oil-producing countries will place an increasing
proportion of their investments in longer term debt and equity instruments. Although
investments will continue to be placed in the United States, we must recognize the fact that
the rate of new investment by many of the oil producers outside their own countries will
decline as they are able to absorb more internally.
With respect to the policies these countries are pursuing, enough time has now passed for
us to have a clear picture of their approach to investment.
EXHIBITS
515
First, they are cautious and conservative investors. I have spoken to the managers of funds
in most of the OPEC countries and in particular in those countries that are now accounting
for the great bulk of the oil surpluses; namely, Saudi Arabia, Kuwait, and the United Arab
Emirates. Although their internal development objectives differ, they all are following
diversified investment objectives similar to any institutional investor.
Secondly, they are almost entirely portfolio investors and none of them has a desire to
acquire and/or control major U.S. companies. The Saudi Arabian Government, for instance,
has told me that it will not invest more than 5 percent in any particular company, and recently
indicated to us that it currently does not own more than 1 percent of any company. Further,
a country like Kuwait has participated in our markets for years and has always been a most
responsible investor.
These characteristics come through quite clearly both in the record of OPEC investments
in the United States and in the numerous discussions which I have personally had with their
leaders. I do not believe that these countries would consider investments here which would
be against our national interest. I am also confident that they would consult with us before
undertaking any significant direct investments. In sum, they have been and will continue to
be good, sound investors; and I think we should continue to welcome their investments just
as we do those of other countries.
Conclusions and recommendations
Our final tasks under the act were to study the adequacy of our information and reporting
programs on foreign portfolio investment and to recommend means whereby this information
can be kept current.
The benchmark survey which we have just completed gives us a comprehensive and
detailed inventory of foreign portfolio investment as ofthe end of 1974. The magnitude and
composition of this inventory will, of course, change as foreigners continue to buy and sell
U.S. securities in the years after 1974. We will be able to update the major categories of this
inventory reasonably accurately for some time to come by adding (or subtracting) our
monthly data on transactions to the 1974 benchmark figures and applying estimated changes
in the market values of foreign holdings.
The results of the survey suggest that there is some underreporting bias in these monthly
data. This was not unexpected and the differences between the totals reported by the survey
and those which had previously been estimated do not appear unduly large, in view of the
long period of time that has elapsed since the previous benchmark in 1941 and the
significance of the nontransaction factors affecting the investment position totals. It is
noteworthy that the difference is substantially larger in the figures on equity holdings, where
the valuation adjustment problem is greatest, than it is for holdings of debt instruments.
The survey results, therefore, do not appear to raise major questions about the current
reporting system and we believe that the conceptual and institutional structure of this system
is adequate. Nevertheless, it will be necessary to constantly monitor the reports and to
maintain close communication with the reporting firms to ensure that there are no major gaps
in our reporting network.
Although it might be desirable to undertake another benchmark survey at some time in
the future, I think that this decision should be left for the future. The desirability of another
survey can then be determined on the basis of how much the increased accuracy ofthe data
would be worth as compared to the costs involved to both the Government and the private
sector in undertaking a survey.
One important step toward improving our data-gathering capability has already been taken
by you, Mr. Chairman, in introducing the International Investment Survey Act of 1975, S.
2839. Thus far, we have been relying on a patchwork of laws to collect data on foreign
portfolio investment, laws which are either clearly lacking in some respects or ambiguous
as to our authority to collect such data. S. 2839 would give us broad and permanent authority
to collect data on all forms of international investment, and we again strongly support its
passage with the amendments I proposed in my testimony of February 23, 1976.
My final observations go to the basic question which gave rise to this study over 2 years
ago: Is the magnitude and nature of foreign investment in this country such that a change
in our basic policy toward this investment should be made?
As you know, this country has traditionally had an open-door policy toward foreign
investment. We do not impose special barriers to such investment, except for a few
longstanding and internationally recognized restrictions, nor do we offer special incentives
for such investment. Furthermore, foreign investors are generally treated equally with
domestic investors once they are established here; that is, they are accorded "national
treatment." This policy is based on the premise that investment in this country from foreign
sources is generally beneficial to our economy just as is investrnent from domestic sources,
and that the allocation of investment capital will be most productive if decisions on
investment are left to the marketplace.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
There is nothing in the findings of our study to indicate that this policy should be changed
in any way. On the contrary, the study has reinforced our view that foreign investment is
beneficial to our economy and that we should continue to welcome it. As long as our national
security is protected, and as long as the company is willing to abide by our laws and compete
in our marketplace, we should not object as to whether its owner is from the United States,
or France, or Abu Dhabi.
The benefits of foreign investment are readily apparent when they are made directly in the
form of new plants and equipment—so-called "bricks and mortar" investment. In the case
of portfolio investnients by foreigners, however, it is sometimes thought that we get nothing
of substance, that only "paper transfers" are involved since foreigners are merely converting
their holdings of liquid dollars into other forms of paper assets such as stocks and bonds.
This notion overlooks the fact that in the capital investment process there are many
different kinds of investors and all of them play a vital role. Portfolio investors, domestic and
foreign, broaden the market for U.S. securities, and thereby the opportunities for American
firms to acquire the financing needed for new investments in "bricks and mortar." Even if
foreigners never injected capital directly into U.S. firms by buying new security issues, their
role would be no less beneficial since the market for new issues is directly dependent on a
broad and lively secondary market.
The more participation we have in our capital market, the more efficient it is in serving
the needs of our economy for investment capital. The participation of foreign investors serves
this purpose just as that of American investors does, and distinctions made pn the basis of
the nationality of investors have no economic rationale.
The American capital market is the largest and most efficient capital market in the world.
Unrestricted access of foreigners to. our market—both as lenders and borrowers of portfolio
capital—is beneficial to this market. It is also beneficial to the interchange of goods, services,
and capital between nations, which is vital to the growth ofthe United States and the world
economy.
Rather than contemplating new restrictions on foreign capital inflows, we should seek to
assure that impediments to these healthy additions to our economy are minimized. The
administration's proposial to remove the withholding tax on dividend and interest payments
to foreigners is an important step in this direction. We should continue to look for other
measures we can take to assure that our capital market continues to grow as the world's major
international financial center.
Exhibit 48.— Statement by Assistant Secretary Parsky, submitted for the record to the Senate
Judiciary Committee in connection with S. 2387, June 9, 1976, entitled "Oil Company
Divestiture"
Due to the cancellation of the June 8, 1976, hearings on the Petroleum Industry
Competition Act of 1976 (S. 2387), I am, pursuant to the committee's request, submitting
this written statement for the record.
My statement is concentrated on the financial aspects of divestiture- with particular
emphasis on the effects on capital formation in the energy industry. However, in order to
determine whether divestiture is in our national interest, we also examined the probable
effects on the supply and price of energy, the effect on overall industry efficiency, the impact
on our ability to deal with the OPEC (Organization of Petroleum Exporting Countries) cartel,
and the legal aspects of divestiture. All of these factors are important because in one way
or another, they enable us to answer what should be our ultimate question: whether oil
company divestiture will enhance or impede our energy objectives.
A. Basic reasons for opposing divestiture legislation
At the outset, I should make it clear that the Treasury Department has concluded that
divestiture would be contrary to U.S. national interests and severely handicap the
achievement of our national energy goals. Our reasons include the following:
F irst, divestiture would create uncertainties, inefficiencies, and new entry barriers, which
would seriously hamper the development of additional energy supplies and in all likelihood
put upward pressure on energy prices. The uncertainty which would be inevitable in the
transition period and the eventual loss of economic efficiencies which now exist in integrated
oil operations will reduce the ability and efforts of the energy industry to develop additional
sources of supply. Given the fact that one of the critical parts of our national energy program
must be to increase domestic energy supplies, it would be contrary to our national interest
to embark on a course which will, in all Hkelihood, lead to lesser supply and greater imports.
EXHIBITS
517
Second, the financial uncertainties resulting from divestiture will increase the cost of
capital to affected firms and reduce their ability to raise external capital for investment in
alternative energy supply sources.
Third, divestiture would in all probability increase OPEC's influence in the international
oil market, thus increasing our vulnerability to a cutoff in supply by OPEC. Divested U.S.
firms would probably be less able to develop non-OPEC foreign sources of supply, and a
divested U.S. international energy industry would complicate the operation of the
International Energy Agency (IE A) emergency oil sharing program—one of our main lines
of defense in case of another embargo.
The proponents of divestiture claim that it will increase competition, lead to lower energy
prices, greater energy supplies, and a reduced influence and dominance ofthe oil-producing
countries. Our analysis shows why we believe the opposite effects would take place, and I
believe that the burden of proof should be on those who are calling for this costly
restructuring of the energy industry to establish the benefits that would result. The
proponents of divestiture have simply not demonstrated that there will be substantial benefits
from divestiture. They have produced nd convincing evidence that it will lead to lower prices
and increased or more secure supplies Pf energy.
By enacting a divestiture bill. Congress would be circumventing norrrtal antitrust
procedure and substituting its judgment for the judgment of the judicial system. The
preambles of most of the recenfly introduced energy divestiture bills imply (1) that our
antitrust agencies have been dilatory and ineffective because they have not found sufficient
evidence of monopoly power in the oil industry to support a national antitrust complaint
under existing law, and (2) that Congress needs to take independent action. As such, by
enacting divestiture legislation. Congress would be legislating a guilty verdict and a harsh
penalty without a trial based on carefully accumulated evidence.
Our antitrust laws are sufficient to cure any of the alleged problems resulting from the
present structure and operation of the petroleum industry, and, in our view, we should rely
on them rather than rushing into the broad restructuring implied by divestiture legislation.
These are the fundamental reasons why we strongly oppose divestiture. In the balance of
my testimony, I will outline in more detail the basis for our position.
B. Uncertainty created by implementation of divestiture
Clearly, one ofthe significant effects of divestiture will be the uncertainty created by the
administrative and legal problems associated with the actual implementation of divestiture.
This uncertainty will, in our view, have a major impact on the ability and incentive of the
industry to develop new energy supplies.
Method of implementation.—^ Divestiture has been used as an antitrust remedy in the past,
and the resulting legal and administrative problems, while complex, have been manageable.
What is different in this case is the scope ofthe undertaking, the nature and structure ofthe
affected industry, and the critical time at which divestiture of this vital industry would be
ordered.
Under vertical divestiture, 1 8 affected companies would be allowed to continue operating
in only one ofthe following sectors ofthe petroleum industry: Production, transportation (by
domestic pipeline), or refining/marketing. Analysis ofthe breakdown in investment by these
companies in each area indicates that typically 40 percent to 60 percent of their assets would
have to be divested.
Divestiture could be implemented by outright sales of assets. However, it is doubtful that
the sale of assets alternative would be used extensively because of (1) the large volume of
assets to be divested ($70-$80 billion), which may drive down the values received upon sale,
and (2) questions about the availability of buyers capable of purchasing the assets for cash
and their acceptability from an antitrust and national interest standpoint. Divestiture could
also be implemented by spinoffs—the transfer of assets to a new corporate entity owned by
existing stockholders. However, spinoffs, because they dispose of assets without direct return
of value, reduce the asset and earning power backing for the divesting company's outstanding
debt.
Legal problems.—Although S. 2387 calls for a transition period of 5 years, legal challenges
to the constitutionality ofthe legislation and to the fairness of specific divestiture plans could
suspend or impede full implementation of divestiture until due process is given and the legal
issues resolved. Thus, it is possible that the transition period would extend for 10 or more
years.
In addition, the question of whether existing loan covenants and indenture agreements are
actually violated by divestiture plans is likely to lead to litigation and add to the uncertainty
of the transition period. Lenders who are relying on a company's overall creditworthiness
as security for investments may believe that their interests are adversely affected under
divestiture and might litigate or attempt to enforce their rights under existing loan agreements
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1976 REPORT OF THE SECRETARY OF THE TREASURY
which generally place restrictions on the sale or spinoff of assets. While negotiated solutions
to such problems with lenders will eventually be arranged in most cases, the results which
are achieved may entail shorter repayment schedules, security against some of the
corporation assets and higher interest rates.
In some situations, negotiations with lenders might solve such problems by allocating the
outstanding debt among the divested companies. In other situations, negotiated solutions
might be achieved by use of cross guarantees, under which each entity created from the
former corporation would guarantee the full amount ofthe outstanding debt. However, that
approach poses several legal and practical problems with respect to enforceability of such
guarantees and may even be prohibited as constituting a form of "control" impermissible
under the legislation.
Lastly, there are particularly difficult problems relating to foreign entities and the
treatment of the foreign assets and liabilities of U.S. companies. For example, foreign
government or entities whose interests are harmed by divestiture might bring legal
proceedings urider their own laws and courts and thus enjoy the possibility of enforcing their
claims and executing judgrnents against assets located outside the United States before
divestiture is actually implemented. Laws in countries requiring the government's approval
of foreign investments may operate to prevent certain planned dispositions of foreign assets
or, by limiting potential purchasers, to deny U.S. sellers the highest market value for the assets
being sold. Analysis of the location of the assets and liabilities of the major international
petroleum companies indicates that these problems are potentially very significant for some
firms.
Substantial differences from previous divestiture experience.—The foregoing discussion
indicates a number of significant legal and administrative problems in implementing
divestiture. The types of problems encountered have, of course, been faced before in other
divestitures, both judicial and legislative, as well as in voluntary corporate spinoffs. However,
there are substantial differences in the proposed vertical divestiture and previous divestiture
experiences.
First, much judicially ordered prior divestiture experience hasbeen in connection with
Clayton Act antimerger cases, making divestiture easier since the divested components are
already relatively independent. This is also true for the legislated divestitures involving the
banking and the public utility industry (i.e., the Glass-Steagall Act, mandating separation of
commercial and investment banking; the Bank Holding Company Act of 1956, requiring
bank holding companies to divest nonbanking operations; and the Public Utility Holding
Company Act of 1935, which broke up utility holding companies). Vertical divestiture of
the functional components of an integrated company is substantially different and more
difficult.
Second, as contrasted to the proposed vertical divestiture, the amount of assets divested
in other situations has frequentiy been quite small relative to the assets of the ongoing
corporations, thus reducing the problems in negotiating satisfactory agreements with existing
lenders and attracting new external financing during the transition period.
Third, in no previous divestiture case have the problems involved in the treatment of
foreign assets and liabilities even approached the ones created by the proposed vertical
divestiture.
Fourth, the absolute size ofthe undertaking in terms ofthe amount of assets to be divested
($70-$80 billion) substantially exceeds that of previous divestitures, including the Public
Utility Holding Company Act. This act required the divestiture of assets valued, in current
dollars, at about one-half that involved in the proposed divestiture. The simultaneous
divestment of such a large amount of similar assets may create significant problems in finding
acceptable buyers at reasonable prices.
Clearly, the combination of these problems and the high probability ofextended litigation
will create substantial uncertainty in the minds of existing and potential investors.
C. Financial implications of uncertainty
Capital needs.—This uncertainty will, in turn, create significant financial and capital
formation problems for the domestic petroleum industry as it tries to meet its substantial
capital investment and external financing requirements. Forecasted capital requirements for
the U.S. domestic petroleum industry for the 1976-85 period approach $250 billion (in 1974
dollars). It is clear that substantial amounts of external financing will be required if that
overall level of capital investment is to be achieved. For exiample, between 1965 and 1974,
a group of 30 large petroleum companies producing oil and gas in the United States raised
external financing of $38.3 billion (ofwhich $35.1 billion was long-term debt). This external
financing represents approximately 28 percent of those companies' $ 139 billion in worldwide
capital expenditures, investment, and increases in.working capital. The impact of vertical
divestiture on the ability of affected petroleum companies to raise new external capital is thus
of critical concern, especially since the industry's future proportion of external financing is
EXHIBITS
519
expected to rise even higher than the historical level due to the need for sharply higher
amounts of capital investment.
Raising external capital.—When assessing the ability of the affected conipanies to raise
external financing during the transition period, three important factors must be weighted and
balanced. First, many, although not all, of the affected companies rank among the largest
and most creditworthy firms in the Nation. Such firms must be assumed to have a
considerable capacity to adjust to and cope with the problems created by divestiture. Second,
both existing and potential investors face a situation where the company in which they have
an interest will undergo a radical alteration; and they would, in many cases, end up with
smaller investments in several new companies. Third, the great bulk of external financing is
debt financing provided by financial institutions such as commercial banks, life insurance
companies, and pension funds, which, as a matter of policy and/or as required by law,
generally follow conservative investment practices.
In the normal course of business operations, both equity and debt investors are accustomed
to assuming certain risks. However, with vertical divestiture—particularly in the early stages
ofthe transition period—investors will be faced with a multitude of uncertainties for which
the ultimate resolution is essentially unpredictable. For example, there will be a lengthy
period of uncertainty about the structure of the new firms, their relationships with existing
creditors and equity owners, their future creditworthiness, and the treatment of foreign assets
and liabilities. All of these factors will have a detrimental effect on the availability of external
eapital to these firms. With a significant increase in uncertainty, it can be expected that the
cost of new external financing would rise, and in certain cases, supplies of capital would
discontinue making investments until the divestiture uncertainties are resolved.
More specifically, we believe that the financial effects of divestiture upon the affected
companies during the transition would include the following:
The sale of new unsecured long-term debt issues, including the refinancing of maturing
issues, would probably not be possible until lenders could ascertain what.corporate entity
would be responsible for debt repayment. Under current bills, this hiatus could run 1-1 1/2
years or longer if delays are encountered. In addition, should the FTC or some other body
be given the power to rewrite loan covenants, problems in attracting significant amounts
of new debt investments could persist for many years unless such investments are exempted
from FTC reformation, and thus possibly given a preferred position over existing creditors'
rights.
Some amount of secured long-term debt, such as mortgages on specific buildings, may
be possible since the basic security of the loans would be the asset rather than the
creditworthiness ofthe parent company. However, the potential volume of such financing,
with the possible exception of loans secured by future oil production, may be limited by
the speciahzed nature of many of the oil companies' assets.
It is unclear what the impact on the availability of unsecured short-term seasonal loans
would be. However, such short-term lenders would have many ofthe same concerns as
long-term lenders if it appeared that their loans might not be repaid prior to actual
divestiture. Some amount of short-term credit secured by accounts receivables and/or
inventories probably could be arranged during the transition period.
Judgments about the availability of new equity capital during the transition period are
particularly speculative. However, it is likely that the huge uncertainties prevailing during
that period will have a temporary freezing effect on equity investors.
Conclusion.—The financial problems associated with divestiture will clearly vary from firm
to firm and will depend not only on the availability of external capital but also on the
company's ability to generate and use internal funds. However, it is clear that as long as the
uncertainties associated with implementing divestiture exist, the cost of capital for most
companies would rise and the ability of some to attract external capital and finance energy
investments would be adversely affected. In addition, the firm's incentive to make such new
investments would be adversely affected by such uncertainties.
Although it is difficult to forecast with precision the exact size ofthe shortfall in investment,
given all the above factors, we believe that the magnitude could be substantial.
D. Long-term financial effects
These transition period effects on investment and the development of new energy supplies
are particularly significant. This transition period, which I would emphasize could extend for
the next 10 years or more, is the same period during which the domestic energy industry must
make massive investments if the Nation is to reduce its dependence on foreign oil. However,
in addition to these transition effects, there may also be adverse post-transition-period
financial effects of divestiture.
First, the existing integrated companies would, in all probability, have a greater debt
capacity than the aggregate debt capacity of the divested component companies since an
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1976 REPORT OF THE SECRETARY OF THE TREASURY
integrated company has greater stability in its level of cash flow and is viewed as offering a
greater likelihood for principal and interest payments on debt to be met. Second, in the case
of vertical divestiture, the required levels of working capital probably would also rise. Finally,
the size and output thresholds imposed by divestiture would effectively place growth ceiling
on firms approaching those limits and dampen incentives to invest in those firms.
E. Supply and price implications of divestiture
A major expectation of divestiture proponents is that it would increase competition, thus
resulting in increased supplies and lower prices. Even if we ignore OPEC market dominance
in the near term, no evidence has been presented to support such a conclusion. In fact, we
believe the reverse is far more likely: that divestiture will lead to a rise in domestic prices
and a decline in domestic supplies.
We believe that this result will occur because of a number of factors, including the
following:
First, in response to short-term uncertainties, firms will be reluctant to commit internally
generated funds to new projects and external financing will, as I noted previously, be more
difficult and/or more costly to raise. Moreover, corporate management will have to direct
. a significant amount of its effort and attention to preserving or realizing the value of existing
assets rather than expanding energy supplies. As a result, priorities for the vigorous expansion
of domestic oil and gas resources will be downgraded, which will delay the development of
these resources and result in domestic supply being less than it would have been in the
absence of divestiture. The gap would, of course, be made up by increased imports from
OPEC. Lower investment in new supplies would, therefore, result in upward pressure on
price and tend to strengthen OPEC market power.
Second, divestiture introduces new barriers to the flow of investment resources. For
example, entry barriers in crude production, and refining-marketing will be raised by vertical
divestiture, since divested firms would be prohibited from reentering divested segments.
Hence, new entry by firms that otherwise would rank among the most likely potential entrants
and have both the capability and incentives to enter would be prohibited by law. Moreoever,
since divestiture specifies a minimum-size operation that would be subject to the divestiture
law, firms not currently affected by this legislation could not grow beyond that specified limit.
As markets and technology change over time, the legislated limitations on size could lead
to some companies being trapped in relatively inefficient operating modes. Introduction of
barriers to the flow of resources usually results in decreased efficiency of production and
consumption of goods and services.
Third, we have found no evidence to suggest that divestiture would produce an increase
in operating efficiency and, consequently, place downward pressure on prices. On the
contrary, there appear to be logistical, managerial, and risk-avoidance efficiencies associated
especially with vertical integration which would be lost under divestiture. As a minimum,
inefficiencies attributable to the need to build more fiexibility into refineries and
transportation systems, maintain larger inventories, and duplicate managerial and administrative functions will result. The added costs associated with these new inefficiencies would
tend to create upward pressure on price.
On balance, the uncertainties, new entry barriers, and potential inefficiencies introduced
by divestiture would most likely result in greater costs and lower production.
F. Effects on relations with OPEC
Proponents of divestiture also argue that it will lead to lower world oil prices and a
weakening of the market power of OPEC over our petroleum imports. We have reached
different conclusions. We believe that the proposed divestiture legislation (1) would not
reduce our vulnerability to continued OPEC price fixing, (2) would likely seriously impact
on U.S. control of delivery of our essential petroleum imports, and (3) seriously complicate
our efforts to minimize the impact of any future oil embargo by means of the emergency
sharing program of the International Energy Agency. In addition, we believe that the
divestiture of the foreign portion of the activities of our U.S. oil companies implied by the
legislation under consideration could seriously retard development of non-OPEC foreign
sources of oil. Clearly, this would have an adverse impact on our efforts, and those of our
lEA partners, to reduce our dangerous overdependence on OPEC oil.
While recognizing that the impact of divestiture on the international operations of U.S.
oil companies will depend on the specific language ofthe legislation and the course of action
elected by each company, it appears that they must either divorce their international
operations from their U.S. operations or fragment their international operations along the
same lines as they elect domestically.
Clearly, fragmentation ofthe existing U.S. oil companies into many independent units will
offer the OPEC the advantage of dealing with an increase in the number of companies who
must compete with each other for whatever crude oil OPEC chooses to make available.
EXHIBITS
521
Confronting a cartel with an increase in the number of alternative purchasers of its oil will
certainly not weaken its market power. In fact, by fragmenting whatever bargaining power
and flexibility our integrated companies now have vis-a-vis the OPEC, the reverse is clearly
much more likely to be the case.
As I have already pointed out in discussing the financial implications of divestiture, a likely
consequence will be an increase in costs of capital. In addition, we have pointed out that
fragmentation of companies could not only eliminate existing efficiencies but introduce
inefficiencies. We believe that these factors could significantly raise the cost of development
of non-OPEC foreign sources of oil, thus reducing the likelihood that such investments will
be made. In addition, we believe that divestiture, by creating barriers to investment activities
of U.S. energy companies, is likely to eliminate one ofthe strongest motives for worldwide
exploration and development of new sources of oil by our companies—the assurance of
secure supplies of crude oil for their downstream activities.
In short, we have concluded that divestiture appears likely to retard significantly our
progress toward elimination of the dangerous vulnerability to price increase and embargo
which results from our overreliance on OPEC oil.
Conclusion
I have concentrated my statement today on a rather technical analysis of the effects of
divestiture. However, in order to appreciate fully the consequences of divestiture, it is
important to view the proposed legislative actions as part of a general policy choice that faces
us today. Although legislated divestiture of the oil industry is not a new idea, I believe the
present level of support for this proposal is part of a growing willingness by many people to
inject the Government into the activities in our private sector in a counterproductive and
inappropriate manner.
We seem tempted to turn more and more to superficial political solutions to complex
economic problems. Not enough people seem to have recognized that more often than not.
Government "solutions" lead to further problems and yet more Government involvement
to undo the effects of earlier "solutions." For example, the expected shortfall in the level
of capital investment during the transition period could create substantial pressure for
increased Federal financial assistance to the petroleum industry. Unfortunately, we have not
yet learned that the appealing solution politically often yields poor economic results. The
divestiture proposals now before Congress are an extraordinary example of this unfortunate
situation, and for the reasons I have outlined for you today, the Treasury Department strongly
opposes enactment of S. 2387.
International Monetary Affairs
Exhibit 49.—Communique of the Interim Committee of the Board of Govemors of the
International Monetary Fund on the International Monetary System, issued after its fourth,
meeting, Washington, D . C , August 3 1 , 1975
1. The Interim Committee of the Board of Govemors of the Intemational Monetary Fund
held its fourth meeting in Washington, D.C. on August 31,1975 under the chairmanship of
Mr. John N. Tumer, Minister of Finance of Canada. Mr. H. Johannes Witteveen, Managing
Director of the Intemational Monetary Fund, participated in the meeting. The following
observers attended during the Committee's discussions: Mr. Henri Konan Bedie, Chairman,
Bank-Fund Development Committee, Mr. Gamani Corea, Secretary General, UNCTAD,
Mr. Wilhelm Haferkamp, Vice President, EC Commission, Mr. Rene Larre, General
Manager, BIS, Mr. Emile van Lennep, Secretary General, OECD, Mr. F. Leutvriler,
President, National Bank of Switzerland, Mr. Robert S. McNamara, President, IBRD, and
Mr. Gardner Patterson, Deputy Director General, GATT.
2. The Committee had a discussion of the world economic situation and outlook, and
expressed its concem about the current severe problems of recession and unemployment,
balance of payments disequilibria, and inflation. The Committee felt that industrial countries
which have slack domestic demand conditions and relatively strong balance of payments
positions, and which have made progress in reducing inflation, should lead in the promotion
of a satisfactory rate of expansion in world trade and activity. The Committee believed that,
on the basis of such a coordinated policy approach, a resumption of economic growth might
be expected for the industrial world during the latter part of 1975 or the first half of 1976.
Although rates of price increase in industrial countries have generally been subsiding, the
Committee noted the disturbing fact that economic recovery in the industrial world will get
under way with rates of inflation still unacceptably high.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Throughout the Committee's discussion, particular concern was expressed for the many
primary producing countries, and especially the developing countries, whose current account
deficits have been greatly enlarged by the increase in import costs and the downturn in global
demand. Resumption of growth in world trade is urgenfly needed to alleviate the plight of
such countries. Moreover, the Committee feared that, unless they were able to obtain
adequate financing, many primary producing countries might have difficulty in fending off
pressures to restrain imports, either through deflationary demand measures that would
undermine their development efforts or through resort to trade restrictions. In view of these
dangers, the Committee expressed the hope that the Executive Board would consider various
steps that might be taken by the Fund to meet the present urgent need for a greater volume
of financing.
3. The Committee noted the improvements in the 1975 Oil Facility iritroduced as a result
of the July review by the Executive Directors and endorsed the efforts now in progress to
raise the amount of resources that the Fund would be able to borrow for the financing of
purchases under that facility to the total of SDR 5 billion that was agreed at the meeting of
the Committee in January 1975. The Committee also endorsed the intention ofthe Executive
Directors to have another review of the 1975 Oil Facility at an early date, one purpose of
which would be to determine what action needs to be taken in the best interests of the
international community, and also to undertake at about the same time a broader
examination of the Fund's policies on the use of its resources.
4. The Committee welcomed the establishment of a Subsidy Account to assist those
members that have been most seriously affected by the current situation to meet the cost of
using the Oil Facility and commended those members that have already stated their
willingness to make contributions to that account. At the same time, the Committee
expressed concern at the fact that the total amount of the contributions by members that have
already stated their willingness to contribute is substantially short of the total support that
was contemplated and urged those members that have not yet pledged their support to make
every effort to do so as soon as possible.
5. The Committee noted the progress made by the Executive Directors on the Sixth
General Review of quotas within the framework of the understandings reached at previous
meetings ofthe Committee. The Committee noted the agreement on increases in the quotas
of almost all members. In particular, the increases for the industrial countries and for the
major oil exporting members have been agreed. The differences that remain among the other
members are few and are expected to be resolved soon. The Committee asked the Executive
Directors to prepare and submit to the Board of Governors a resolution on increases in the
quotas of individual members. The Committee also asked the Executive Directors to
complete their work on the mode of payment of the increases in quotas on the basis of the
understandings already reached in the Committee so that appropriate recommendations can
be submitted to the Board of Governors at the same time as the resolution on increases in
quotas. The Committee reiterated its view that all ofthe Fund's holdings ofcurrency should
be usable in its transactions. The Committee agreed that on the question of majorities for
the adoption of decisions ofthe Fund on important matters, a majority of eighty-five per cent
should be required under the amended Articles for those decisions that can now be taken
by an eighty per cent majority. It also agreed that amendments ofthe Articles should become
effective when accepted by three-fifths of the members having eighty-five per cent of the total
voting power.
6. The Committee discussed the problem of gold, including the disposition of the gold
holdings ofthe Fund. The elements ofthe consensus reached are described in this paragraph.
At the meeting of the Interim Committee on January 16, 1975, it was decided to move
"toward a complete set of agreed amendments on gold, including the abolition ofthe official
price and freedom for national monetary authorities to enter into gold transactions under
certain specific arrangements, outside the Articles ofthe Fund, entered into between national
monetary authorities in order to ensure that the role of gold in the international rrionetary
system would be gradually reduced."
To implement this general undertaking, provision should be made for:
1.
2.
Abolition of an official price for gold.
Elimination of the obligation to use gold in transactions with the Fund, and
, elimination of the Fund's authority to accept gold in transactions unless the Fund
so decides by an 85 per cent majority. This understanding would be without
prejudice to the study of a Gold Substitution Account.
3. Sale of 1/6 of the Fund's gold (25 million ounces) for the benefit of developing
countries without resulting in a reduction of other resources for their benefit, and
restitution of 1/6 of the Fund's gold to members. The proportion of any profits or
surplus value of the gold sold for the benefit of developing countries that would
correspond to the share of quotas of these countries would be transferred directly
EXHIBITS
523
to each developing country in proportion to its quota. The rest of the Fund's gold
would be subject to provisions in an amendment of the Articles that would create
enabling powers exercisable by an 85 per cent majority of the total voting power.
The Committee noted that, in order to give effect to the understandings arrived at in this
Committee, the countries in the Group of Ten have agreed to observe during the period
referred to below the following arrangements, which could be subscribed to by any other
member country of the Fund that wishes to do so. Other members might adhere to these
arrangements, and on such occasions the necessary modifications in them would be made:
1. That there be no action tP peg the price of gold.
2. That the total stock of gold how in the hands of the Fund and the monetary
authorities of the Group of Ten will not be increased.
3. That the parties to these arrangements agree that they will respect any further
condition governing gold trading that may be agreed to by their central bank
representatives at regular meetings.
4. That each party to these arrangements will report semi-annually to the Fund and
to the BIS the total amount of gold that has been bought or sold.
5. That each party agree that these arrangements will be reviewed by the participants
at the end of two years and then continued, modified or terminated. Any party to
these arrangements may terminate adherence to them after the initial two-year
period.
Many members from developing countries expressed concern that the proposed
arrangements for gold would give rise to a highly arbitrary distribution of new liquidity, with
the bulk of gains accruing to developed countries. This would greatly reduce the chances of
further allocations of SDRs, thereby detracting from the agreed objective of making the SDR
the principal reserve asset and phasing out the monetary role of gold. This aspect should be
studied, and measures explored to avoid these distortions.
7. The Committee noted the work done so far by the Executive Directors on the subject
of the establishment of a trust fund and the possible sources of its financing in response to
the request of the Development Committee. It was agreed to ask the Executive Directors to
pursue their work with a view to completing it at an early date, taking into account the
understandings reached in the Committee with regard to the use of profits from the sale of
part of the Fund's gold for the benefit of developing countries, without neglecting the
consideration of other possible sources of financing.
8. It was agreed that acceptable solutions must be found on the subject of the exchange
rate system under the amended Articles, so that these agreed solutions can be combined with
those on quotas and gold. The Executive Directors were requested to continue their work
in order to arrive at acceptable solutions and to prepare for submission to the Board pf
Governors, after examination by the Committee at its next meeting, appropriate proposals
for amendment of the Fund's Articles on all aspects that have been under consideration.
9. The Committee noted that the Executive Directors are in the process of conducting a
review of the Fund's facility on compensatory financing with a view to improving a number
of its aspects. It was agreed to urge the Executive Directors to complete their work on this
subject as soon as possible, taking into account the various proposals that have been made
by members of the Committee.
Exhibit 50.— Statement by Secretary Simon as Governor for the United States, September 2,
1975, at the joint annual meetings of the Boards of Govemors of the International Bank
for Reconstruction and Development and its affiliates and the Intemational Monetary Fund,
Washington, D.C.
It is a privilege to address this distinguished audience once again and to share with ypu
today the views of the United States on the major economic issues facing the world.
In general, the outlook for the intemational economy is now more hopeful than it was
earlier this year. Most of the major industrial countries have adopted vigorous expansionary
policies. Several nations, including the United States, have begun the process of recovery.
Despite serious strains, the level of intemational cooperation remains undiminished. Few
countries have resorted to policies which might yield domestic gains at the expense pf their
neighbors. And the more affluent nations are strengthening their efforts to assist those who
are less fortunate.
Yet there can be no doubt that the pattem pf progress is highly uneven. In a number of
countries, the downward economic spiral continues still, becoming more prolonged and
severe than once expected. The hardships created by an inflation of unparalleled strength.
524
1976 REPORT OF THE SECRETARY OF THE TREASURY
brutally sharp and unanticipated increases in the cost of energy, and a harsh recession—all
of these remain a painful, living reality in too many parts ofthe world. Thus, the urgent task
still before us is to work together in restoring a broadly based, forward momentum to the
world economy which will provide the foundation for sustained, noninflationary growth in
every nation.
As we press forward, it is essential that we maintain our bearings:
We must carefully support and encourage the forces of recovery without yielding to the
temptations of excessive stimulation.
We must persevere in our efforts to control inflation without disrupting the process of
recovery. A durable recovery will be possible only if we master the causes of inflation.
We must reach a better accommodation on the problems of energy while continuing to
support the oil-exporting nations in their quest for economic advancement.
We must encourage economic development among poorer nations.
We must ensure that we have a smoothly functioning monetary system.
Let me turn now to a more detailed consideration of each of these issues.
Prospects for economic growth
The United States is acutely aware that its own economic policies bear heavily not only
upon the livelihoods of our own citizens but upon those in other nations as well. While our
economy is no longer as predominant in the world economy as it once was, our gross national
product still amounts to over one-quarter of the world total and we represent the world's
largest import market. Therefore, the single most important contribution we can make to the
health of the world economy is to achieve durable, noninflationary growth within our own
borders.
Fortunately, there is now abundant evidence that an economic recovery is well underway
in the United States. My Government is determined to sustain this recovery while also
bringing inflation under control and adopting those policy measures necessary for lasting
growth. We need not, and we should not, seek to choose among these objectives. We have
learned from hard experience that all of our economic goals must be pursued simultaneously.
We will not provide excessive stimulation that would only intensify inflationary pressures,
preempt the capital that is needed to sustain the recovery, and run the risk of setting off
another vicious cycle of inflation and recession. Nor will we allow our concern with inflation
to prevent us from actively supporting the natural forces of recovery or taking additional
expansionary measures if they should be needed. We are not ready to acquiesce in either
stagnation or inflation as a way of life.
Sorne have suggested that in order to help other riations out of recession, the United States
should embark upon much more stimulative fiscal and monetary policies. We respectfully
disagree. Too many of our current domestic troubles are rooted in such excesses in the past.
Since 1965, the average U.S. Federal budget deficit and the average annual growth in our
money supply have been about three times as large as in the preceding decade. It is no
accident that during the earlier period our country enjoyed reasonable price stability while
in recent years we have had increasing difficulty in containing inflation. And inflationary
expectations are now so deeply embedded in our society that they will not disappear quickly.
The financial sins of a decade cannot be forgiven by a day of penance. Our policies in the
United States must be designed to attack the causes of inflation, not their results. In the long
run, that will bring the most lasting benefits to us all.
While the revival of the U.S. economy will help to bolster both the economic prospects
and the confidence of other nations, it would be unrealistic to expect that any single country
could lead the rest of the world out of recession. Expanded world trade should not be
regarded as the source but as the product of recovery. Indeed, let us recognize that the
process of solving our economic troubles must begin at home with each country acting on
its own to make the tough decisions that are essential for sound, durable growth. As that
process spreads from one nation to the next, it will become mutually reinforcing and all
nations will realize greater benefits. In addition to the expansionary efforts undertaiken by
the United States earlier this year, several other major industrialized nations have now
adopted more stimulative policies. Taken together, these actions should provide a forward
thrust to the world economy.
As our policies of expansion gradually take effect, we ask ourselves: Have we done enough?
Should we do more to speed up the effects? To the extent that some of our people believe
we are not moving rapidly enough to create jobs and to restore our standard of living, there
may be adverse social and political pressures. Yet it is equally clear that if we overheat our
economies, we will reignite the fires of inflation and create another recession with more
serious economic and social consequences. Our highest responsibility as Finance Ministers,
I would respectfully suggest, is to pursue sound, balanced policies which promote economic
growth without encouraging renewed inflation. That often proves to be politically unpopular
in the short run, but in the long run it will do far more to create jobs and serve the best interests
EXHIBITS
525
of our people than the palliatives so often urged upon us. History is littered with the wreckage
of governments that have refused to face up to tne ravages of inflation, and none of us can
afford, either through shortsightedness or lack of determination, to yield to these
temptations.
Beyond the problems of determining fiscal and monetary policies, nations must also deal
with the difficulties created by high oil prices.
Almost 2 years after the first oil price shock, it is evident that we are only beginning to
understand the full impact as well as the threat to our future which is posed by escalating
oil prices. It is now obvious that the most serious consequences are not financial but political
and economic. While we must and will continue to devote special attention to the problems
of the financial system in adjusting to new realities, we can be confident of our capacity to
manage such problems. But the economic consequences of these oil policies—the higher
costs that have come not just in energy but in many other vital commodities such as food,
the structural adjustments that have been necessary, the loss of jobs, and the obstacles to
economic growth—cannot be so easily managed.
In our view, current price levels for international oil can be justified on neither economic
nor financial grounds. The present pricing policies ofthe OPEC (Organization of Petroleum
Exporting Countries) countries mean that cheap energy remains in the ground and that the
prosperity of all nations is diminished. Moreover, high oil prices lie at the root of much of
the world's recent inflation and the recession that followed. Yet now the possibility of another
increase in oil prices looms on the horizon. Let there be no misunderstanding about the resultof another major price increase: it would seriously jeopardize the balance upon which global
economic recovery now depends.
We urge the OPEC nations to recognize, as others have done in the past, that the prosperity
of each nation is deeply intertwined with the prosperity of all nations.
Another price increase seems especially inappropriate in light of our efforts to address the
legitimate problems facing the oil-exporting nations as well as other developing countries.
We have taken significant steps to bring about a dialog between producers and consumers.
We have proposed the establishment of commissions to deal with critical problems in the
areas of energy, raw materials, development, and related financial questions. Special bilateral
programs have been set up with the oil-exporting countries and considerable progress has
been recorded. All of these measures reflect our sincere desire to work cooperatively with
the oil exporters as they strive for higher standards of living and more diversified economies.
In turn, we urge that they work cooperatively with us and with other nations to enhance the
prospects for a world economic recovery.
Let me add that the substantial financing requirements of industrial countries in this period
of OPEC surpluses dictate that we continue to keep the adequacy of international financing
arrangements under review. I. am confident that in the future, as in the past 2 years, private
financing mechanisms will continue to play the dominant role in channeling OPEC funds to
various borrowers. At the same time, we welcome the prospective establishment of the
Financial Support Fund agreed upon among the member countries of the Organization for
Economic Cooperation and Development. That fund will supplement IMF resources and
provide needed insurance in an uncertain period. Particularly important in present
circumstances is the assurance thereby provided that, if needed, financing will be available
to facilitate the pursuit of sound expansionary policies by the industrial countries.
Problems of the developing countries
Those who have suffered the most from higher oil prices and the deterioration in world
economic conditions have been those who least deserve to suffer and are least able to protect
themselves—the poor and the needy of the developing countries. In the industrialized
nations, the problems of inflation, exorbitant energy prices, and the resulting recession have
often meant hardships, but they have not brought large numbers of people to the edge of
desperation. Hopes for the future may have been dampened but they have not been crushed.
Sadly, the same cannot be said of the less fortunate nations ofthe world, where hunger and
illness are the immediate result of reduced incomes. In these circumstances, the United States
and other industrial nations are determined to make special efforts to assist developing
nations in their efforts to sustain the momentum of their economic and social progress. We
do so from a sense of compassion, and out of a realization that the prosperity of the
developing world also serves to support our own continued prosperity.
The World Bank and the International Monetary Fund have already proven that they are
highly effective instruments for working with developing countries in devising the most
promising plans for economic growth. But we believe that more must now be done within
the framework of those institutions to assist the developing countries..
Yesterday, in a speech read on his behalf at the United Nations, Secretary Kissinger set
forth a range of proposals that he and I, under the leadership of President Ford, have
developed together. Three of those proposals are of particular importance for the Fund and
the Bank.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
First, the United States proposes as a matter of high priority that a development security
facility be created in the IMF to meet the needs of those developing nations suffering from
sharp fluctuations in export earnings. It would replace the existing compensatory finance
facility. We fully recognize that excessive fluctuations in export earnings can disrupt
development efforts and that many producing nations lack sufficient financial reserves to
cushion themselves against sharp drops in their earnings. We believe that compensatory
facilities to finance shortfalls in export earnings would be both more effective and more
efficient in reducing such disruptions than commodity pricing arrangerrients. Shortly after
the conipletion of these meetings, we will submit detailed proposals to the Executive Board
of the IMF calling for the creation of the facility. They will also call for broadening the
purposes of the proposed trust fund, enabling it to provide grants to the poorest countries
experiencing export shortfalls and allowing some use of the trust fund resources to
supplement the proposed facility.
Secondly, we pledge our support to a major expansion of the International Finance
Corporation (IFC), permitting that organization to serve as a more effective catalyst for
growth ofthe private sector in developing countries. We agree with Mr. McNamara that the
role ofthe IFC in mobilizing additional private investment is now more important than ever.
There can be little doubt that much of the increase in living standards within developing
cpuntries must come from increased private sector production of goods and services. .
Arrangements should be made in the next few months to give the IFC better tools to assist
the domestic private sector and to make the IFC a full partner in the Bank group. Moreover,
the IFC should play an active part in bringing together foreign and domestic investors. It
should act aggressively to arrange financing for mineral production in developing countries
where, as an impartial international F)arty, it can help to smooth relationships between
international companies with technology and markets and national authorities who
understandably wish to strike, the best bargain for their countries. The IFC should also
develop imaginative financial arrangements, including a new investment trust, so that equity
shares in joint ventures can gradually be purchased by private individuals and firms in
developing countries. All of these activities will complement the ongoing work ofthe World
Bank, which must continue to assist in financing related infrastructure such as ports and roads
and will, we expect, give higher priority to the most important aspect of identifying obstacles
to private savings and domestic private investment in developing countries.
Thirdly, the United States once again urges that agreement be promptly reached on the
establishment of a trust fund managed by the IMF in order to provide highly concessional
balance of payments financing for the poorest developing countries. Nearly a year has passed
since my Government first proposed the trust fund and urged that a portion ofthe IMF gold
be sold to help finance this worthy cause. We are pleased that there has been increasing
recognition that the trust fund concept represents the most effective means of providing fastdisbursing financial support. This is one way we can move ahead immediately to respond to
the severe financing needs faced by the developing countries; we can agree now to see a
portion of IMF gold used without waiting for time-consuming amendments of the Articles.
Even as we have delayed in establishing this fund, the need for it has grown. Let us resolve
to act promptly.
In addition to these major initiatives, other steps should be taken so that the Bank and the
Fund can more adequately meet today's needs. As the oil facility ofthe IMF phases out this
year, we should take action to assure the immediate usability of all currencies held by the
IMF. We also need to direct early attention to a review ofthe tranche policies ofthe Fund
and to consider whether changes shpuld be introduced in these policies in order to provide
increased access to the Fund's regular drawing facilities. This would enable the Fund to play
the expanded and more active role required of it in today's world.
The World Bank is by far the largest and most influential development lending institution
and as such has a major role to play in assisting developing nations achieve their development
goals. It is of the greatest importance that the quality of this work and the soundness of its
financial position be sustained. Since the lending program now being implemented by the
Bank carries with it demanding assumptions about the Bank's long-term ability to borrow
funds, it is important that the management and Executive Directors of the Bank work
together to assess carefully the role the Bank should play in the development process in the
next decade and to examine the implications of this for the capital ofthe Bank and the nature
of its programs. With capital an increasingly scarce resource, critical for the growth ofthe
developed as well as the developing countries, it is essential that we have a clear
understanding of the priorities which should govern the lending of an institution whose
borrowing now approaches $5 billion per year. The United States will continue to provide
strong support to the Bank, and we will assist in helping it maintain a sound financial position.
As I said last year, we support a substantial increase in World Bank share ownership and
voting power for countries newly able to make a major coritribution to development through
the Bank group. Such an increase should be determined country-by-country and increases
in capital should be accompanied by commensurate contributions to the International
EXHIBITS
527
Development Association (IDA) to help the poorest countries as well as the middle-level
countries.
I stress the importance of IDA contributions because of the association's central role in
meeting the needs of the poorest and least developed countries. They have the least ability
to deal with the impact of economic events on their development, and only a combined effort
of present members and nations newly able to contribute will enable IDA to assist those
countries adequately in the future. Mr. McNamara has announced that negotiations for the
next replenishment of IDA will commence in November. A satisfactory agreement on
extending IDA's resources will be possible only with the full collaboration of all countries
in a position to contribute.
Beyond these measures, developed nations must also support the longstanding development efforts such as the regional development banks and our bilateral assistance programs.
These programs have shown their effectiveness over the years and deserve to be strongly
supported. It is also important for all countries to open their capital markets to the borrowing
of the Bank and of the developing countries themselves.
In setting forth these proposals today and reviewing the activities of the World Bank and
the International Monetary Fund, I would be less than candid if I did not add that in and of
themselves, the measures I have outlined will not be sufficient to ensure economic
development. We must not mislead ourselves on this matter. Far more important to the
developing nations than the financial assistance that industrialized countries may provide to
them is the restoration of stable, noninflationary growth around the world. And, in the long
run, the policies and efforts of the developing countries themselves will be the most decisive.
History has shown that no matter how generous others may be, those who have been helped
the most are those who have helped themselves.
While the developed nations must provide financing and open up their markets, the
effectiveness of such assistance depends heavily upon the ability ofthe developing countries
themselves to assure the best use of all resources, domestic as well as foreign. Development
assistance should be thought of not as an international welfare program to redistribute the
world's wealth but as an important element of an international investment program to
increase the rate of economic growth in developing nations and to provide higher living
standards for people of every nation. The effectiveness of international investment, private
and public, depends fundamentally on the policies and efforts ofeach developing country.
I am particularly struck by the impressive economic and social progress made by countries
which participate fully in the world market, which rely on market forces to provide incentives
for efficient use of resources, and which maintain a favorable climate for foreign and
domestic private investment.
In short, the process of economic development requires the cooperation and full efforts
of each of us in pursuing economic policies to maximize production, income, and trade for
all countries.
International monetary arrangements
Let me turn now to a discussion of international monetary issues.
We have achieved a significant breakthrough in our meetings this week in resolving many
of the most difficult international monetary issues before us and in paving the way for a final
comprehensive agreement in January. The technically complex—and politically sensitivequestion of arranging a major quota increase and allocating national shares is substantially
resolved. We have also succeeded in settling the thorny issues involved in phasing gold out
of the international monetary system. Both of these agreements required concessions by
many, but the result provides concrete evidence of the continuing spirit of cooperation and
good will on which these institutions are founded. Once again we have demonstrated that
through patient negotiation it is possible to arrive at an accommodation of conflicting views
which is acceptable to each of us and beneficial to all of us.
Let us now proceed to the final component of our negotiations—an agreement on
amendment ofthe exchange rate provisions ofthe Articles—which will enable us to put into
practice the accords reached here this week. Amended provisions are needed which give
legal recognition to the realities of today's world and reflect the evolution ofthe system that
has occurred in recent years.
Two and a half years ago the par value system gave way to a voluntary system of exchange
rate practices under which some countries float independently, some float jointly, and some
use pegged rates. We are fortunate that this system was actually in place before the oil crisis
hit, and its flexibility has served us well in difficult circumstances.
Let those who see stability in par values review again the chaos and disorder of the closing
years of the Bretton Woods system. Think back to those days of market closures which
disrupted trade and commerce. Recall that the only sure winners were the speculators, who
could be assured that with time and persistence they would inevitably carry the day.
Remember, too, the hurried international conferences to try to patch together some solution
so that markets might open again. Think back to the duration and difficulty of the
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Smithsonian negotiations and the tensions associated with those negotiations. Those were the
days when our political cohesion was threatened by monetary difficulties.
The basic logic of the par value system implies a world which does not now exist—one in
which prices are reasonably stable, and in which current account balances adjust to capital
flows that are relatively slow to change. But the world has changed and we need a system
that is adaptable and is appropriate for the world as it is today, not as it once was or as we
might like it to be.
Today we have a system which is flexible and resilient. It has enabled exchange markets
to remain open and viable in the face of pressures that would have previously been
overwhelming. Even the massive accumulations by the OPEC countries and occasional
significant fluctuatipns in particular exchange rates have not unsettled the system. It has been
possible to relax or eliminate many of the extensive restrictions on capital movements and
to find viable alternatives to restrictive current account measures. The large payments
deficits of today have provoked fewer import restrictions by major countries than did the
comparatively minor payments difficulties of earlier years. Although rates of inflation have
varied enormously, from 6 percent in some countries to 25 percent in others, the flexibility
of our system has allowed exchange rates to move so as to reflect these divergences in costs
and prices. Attempts to maintain fixed exchange rates under these circumstances would have
quickly and inevitably collapsed under the strain.
Some contend that the abandonment of par values is one of the causes of the tidal wave
of inflation which has swept the world and that the voluntary system fails to provide the
discipline needed to induce countries to restrain their inflation. I cannot agree. It was inflation
which made floating necessary. Of course, floating does not prevent home-grown inflation
or protect a country from drastic real changes from abroad such as the sudden jump in oil
prices. It can, however, shield a country from imported inflation that results from overly
expansive fiscal and monetary policies abroad. As for floating as an instrument of discipline,
I believe that when a depreciating exchange rate in a free market directly increases the costs
of imported goods, that has more meaning to the general public and political leaders than
the level of central bank reserves or official borrowing.
U.S. policy is to have our own exchange rate determined essentially by market forces, and
not by arbitrary official actions. We do not propose to object if foreign countries elect to
establish fixed exchange rates among themselves—the essence of a voluntary system is to
permit a free choice—so long as our own desire for essential freedom ofthe dollar exchange
rate is respected. We are prepared to intervene whenever necessary to maintain orderly
exchange market conditions. However, sizable movements in exchange rates over a period
of several months are not necessarily indicators of disorderly markets—and the fact that such
movements are sometimes reversed does not demonstrate that it would have been possible
for governments to prevent the initial movement in rates, nor desirable to try.
When the pressures of inflation subside and economies recover, when periods of calm
between unexpected shocks become longer, then the behavior of exchange rates will become
more stable. The greater exchange stability we all would like to see can only be achieved
through sound economic policies which result in greater domestic stability in all of our
economies.
We believe strongly that countries must be free to choose their own exchange rate system
and that all countries, whatever choice they make, must be subject to the same agreed-upon
principles of international behavior. The right to float must be clear and unencumbered. In
view of the great diversity in political systems, institutional arrangements, size of national
economies, and degree of dependence on foreign trade and investment, our present world
requires an open mind about the future.
I do not pretend to have the wisdom or the clairvoyance to predict the precise exchange
arrangements the world may desire or require far in the future. Experience with the present
Articles provides clear evidence ofthe difficulty of specifying in rigid detail an exchange rate
system that can be expected to last forever. We must deal with the world as it is today, and
that now requires a system that can easily adapt to rapid change. I know this can be done.
Our agreements this week on gold and quotas show that we can find answers to difficult
problems—and that a mutually acceptable accommodation on exchange rates can be
achieved. The United States will approach the search for a resolution of this problem with
imagination and an appreciation of others' views. We know that others will do the same.
Conclusion
Ladies and gentlemen, it is apparent that the agenda for the future is formidable:
To achieve lasting, noninflationary growth;
To reach an accommodation on energy;
To encourage economic development; and
To maintain a monetary system adapted to today's needs.
EXHIBITS
529
Each of these demands our full attention. The agreements we have reached this week
demonstrate that through cooperation and perseverance, we can succeed. It is in that spirit
that we must continue to move forward. I pledge to you that the United States will remain
a reliable partner in this journey.
Exhibit 5 1 . ^ Text of the ^^Declaration of Rambouillet" following meeting of heads of states and
governments of France, Federal Republic of Germany, Italy, Japan, the United Kingdom
of Great Britain and Northern Ireland, and the United States of America, November 17,
1975
The Heads of States and Governments of France, Federal Republic of Germany, Italy,
Japan, the United Kingdom of Great Britain and Northem Ireland and the United States of
America, met in the Chateau de Rambouillet from 15th to 17th of November, 1975, and
agreed to declare as follows:
1. In these three days we held a searching and productive exchange of views on the world
economic situation, on economic problems common to our countries, on their human, social
and political implications, and on plans for resolving them.
2. We came together because of shared beliefs and shared responsibilities. We are each
responsible for the government of an open, democratic society, dedicated to individual
liberty and social advancement. Our success will strengthen, indeed is essential to democratic
societies everywhere. We are each responsible for assuring the prosperity of a major
industrial economy. The growth and stability of our economies will help the entire industrial
world and developing countries to prosper.
3. To assure in a world of growing interdependence the success of the objectives set out
in this declaration, we intend to play our ovm full part and strengthen our efforts for closer
intemational cooperation and constmctive dialogue among all countries, transcending
differences in stages of economic development, degrees of resource endovsnnent and political
and social systems.
4. The industrial democracies are determined to overcome high unemployment,
continuing inflation and serious energy problems. The purpose of our meeting was to review
our progress, identify more clearly the problems that we must overcome in the future, and
to set a course that we will follow in the period ahead.
5. The most urgent task is to assure the recovery of our economies and to reduce the waste
of human resources involved in unemployment. 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. In this way, consumer and business
confidence will be restored.
6. We are confident that our present policies are compatible and complementary and that
recovery is under way. Nevertheless, we recognize the need for vigilance and adaptability
in our policies. We will not allow the recovery to falter. We will not accept another outburst
of inflation.
7. We also concentrated on the need for new efforts in the areas of world trade, monetary
matters and raw materials, including energy.
8. As domestic recovery and economic expansion proceed, we must seek to restore growth
in the volume of world trade. Growth and price stability will be fostered by maintenance of
an open trading system. In a period where pressures are developing for a retum to
protectionism, it is essential for the main trading nations to confirm their commitment to the
principles of the OECD pledge and to avoid resorting to measures by which they could try
to solve their problems at the expense of others, with damaging consequences in the
economic, social and political fields. There isa responsibihty on all countries, especially those
with strong balance of payments positions and on those with current deficits to pursue
policies which will permit the expansion of world trade to their mutual advantage.
9. We believe that the multilateral trade negotiations should be accelerated. In
accordance with the principles laid down in the Tokyo declaration, they should aim at
substantial tariff cuts, even eliminating tariffs in some areas, at significantly expanding
agricultural trade and at reducing nontariff measures. They should aim at achieving the
maximum possible level of trade liberalization therefrom. We propose as our goal completion
of the negotiations in 1977.
10. We look to an orderly and fmitful increase in our economic relations with socialist
countries as an important element in progress in detente, and in world economic growth.
We will also intensify our efforts to achieve a prompt conclusion of the negotiations now
underway conceming export credits.
11. With regard to monetary problems, we affirm our intention to work for greater
stability. This involves efforts to restore greater stability in underlying economic and financial
conditions in the world economy. At the same time, our monetary authorities will act to
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1976 REPORT OF THE SECRETARY OF THE TREASURY
counter disorderly market conditions, or erratic fluctuations, in exchange rates. We welcome
the rapprochement, reached at the request of many other countries, between the views of
the U.S. and France on the need for stability that the reform ofthe international monetary
system must promote. This rapprochement will facilitate agreement through the IMF at the
next session of the Interim Committee in Jamaica on the outstanding issues of international
monetary reform.
12. A cooperative relationship and improved understanding between the developing
nations and the industrial world is fundamental to the prosperity of each. Sustained growth
in our economies is necessary to growth in developing countries: and their growth contributes
significantly to health in our own economies.
The present large deficits in the current accounts of the developing countries represent
a critical problem for them and also for the rest of the world. This must be dealt with in a
number of complementary ways. Recent proposals in several international meetings have
already improved the atmosphere pf the discussion between developed and developing
countries. But early practical action is needed to assist the developing couritries.
Accordingly, we will play our part, through the IMF and other appropriate international fora,
in making urgent improvements in international arrangements for the stabilization of the
export earnings of developing countries and in measures to assist them in financing their
deficits. In this context, priority should be given to the poorest developing countries.
13. World economic growth is clearly linked to the increasing availability of energy
sources. We are determined to secure for our economies the energy sources needed for their
growth. Our common interests require that we continue to cooperate in order to reduce our
dependence on imported energy through conservation and the development of alternative
sources. Through these measures as well as international cooperation between producer and
consumer countries responding to the long-term interest of both, we shall spare no effort in
order to ensure more balanced conditions and a harmonious and steady development in the
world energy market.
14. We welcome the convening of the conference on international economic cooperation
scheduled for December 16. We will conduct this dialogue in a positive spirit to assure that
the interests of all concerned are protected and advanced. We believe that industrialized and
developing countries alike have a critical stake in the future success of the world economy
and in the cooperative political relationships on which it must be based.
15. We intend to intensify our cooperation on all these problems in the framework of
existing institutions as well as in all the relevant international organizations.
Exhibit 52.—Communique of the Ministerial Meeting of the Group of Ten, December 19,
1975, Paris, France
1. The Ministers and Central Bank Governors of the ten countries participating in the
General Arrangements to Borrow met in Paris on December 19, 1975 under the
chairmanship of Mr. W. F. Duisenberg, Minister of Finance of the Netherlands.
The Managing Director of the Intemational Monetary Fund, Mr. H. J. Witteveen, took part
in the meeting, which was also attended by the President of the Swdss National Bank, Mr.
F. Leutwiler, the Secretary-General of the OECD, Mr. E. Van Lennep, the General Manager
of the Bank for International Settlements, Mr. R. Larre, and Mr. U. Mosca, representing the
President of the Commission of the European Communities, Mr. F.-X. Ortoli.
2. After hearing a report from the Chairman of their Deputies, Mr. R. Ossola, on the
Deputies' preparatory discussions, the Ministers and Governors agreed as follows:
Exchange Rate Regime
3. The Ministers and Governors examined the amendments to Article IV proposed by the
United States and French Ministers. They agreed on these proposals which they will support
at the Interim Committee Meeting in Jamaica. They noted the statement of the Managing
Director of the IMF that the Board of Executive Directors will examine these amendments
in the coming week.
4. The Ministers and Govemors discussed the United States-French proposals to intensify
consultation procedures on exchange rate movements and underlying factors. They noted
that their central banks were in the process of deepening and broadening their consultations
and considered that these consultations will make an important contribution toward
countering erratic fluctuations in exchange rates. They agreed that the organization of
consultation procedures among Finance Ministers and their Deputies should be conducted
on a pragmatic basis. They have also agreed to keep in close consultation with the Managing
Director of the IMF.
EXHIBITS
531
Arrangements Concerning Gold
5. The Ministers and Governors agreed on the need for simultaneity in the iriiplementation
of the various elements in the arrangements concerning gold referred to in paragraph 6 of
the press communique of the meeting of the Interim Committee on August 31, 1975.
6. The amended Articles of Agreement should include a clause by which the members of
the IMF undertake to collaborate with the Fund and with other members in order to ensure
that their policies with respect to reserve assets shall be consistent with the objectives of
promoting better international surveillance of international liquidity and making the special
drawing right the principal reserve asset in the international morietary system.
Relations with Developing Countries
7. The Ministers discussed questions related to the need of the members of the Fund, and
in particular the developing countries, for additional access to the Fund's resources. They
agreed to consider these matters further before the meeting of the Interim Committee at
Jamaica. In this connection the Ministers and Governors noted with satisfaction that the
Executive Board of the IMF had reached agreement on an important liberalization of the
compensatory financing facility. They also confirmed their agreement on the urgent need to
establish a trust fund for the benefit of the low income countries.
Exhibit 53.—Communique of the Interim Committee of the Board of Governors of the
International Monetary Fund on the International Monetary System, issued after its. fifth
meeting, Kingston, Jamaica, January 7-8, 1976
1. The Interim Committee of the Board of Govemors of the Intemational Monetary Fund
held its fifth meeting in Kingston, Jamaica on January 7-8,1976 under the chairmanship of
Mr. Willy de Clercq, Minister of Finance of Belgium, who was selected by the Committee
to succeed Mr. John Tumer of Canada as Chairman. Mr. H. Johannes Witteveen, Managing
Director of the Fund, participated in the meeting. The following observers attended during
the Committee's discussions: Mr. Henri Konan Bedie, Chairman, Bank-Fund Development
Committee, Mr. G. D. Arsenis representing the Secretary-General, UNCTAD, Mr. Wilhelm
Haferkamp, Vice-President, EC Commission, Mr. Mahjoob A. Hassanain, Chief, Economics
Department, OPEC, Mr. Rene Larre, General Manager, BIS, Mr. Emile Van Lennep,
Secretary-General, OECD, Mr. F. Leutwiler, President, National Bank of Switzerland, Mr.
Olivier Long, Director General, GATT, and Mr. Robert S. McNamara, President, EBRD.
2. The Committee endorsed the recommendations contained in the report of the
Executive Directors on the Sixth General Review of Quotas and the proposed resolution on
increases in the quotas of individual members to be submitted to the Board of Govemors for
its approval. In this connection, the Committee reaffirmed its view that the Fund's holdings
of each currency should be usable in the Fund's operations and transactions in accordance
with its policies. "Appropriate provisions for this purpose will be included in the draft
amendments of the Fund's Articles. To give effect to the Committee's view in the period
before the amendments become effective, it was agreed that, within six months after the date
of the adoption of this resolution, each member shall make arrangements satisfactory to the
Fund for the use of the member's currency in the operations and transactions of the Fund
in accordance with its policies, provided that the Executive Directors may extend the period
within which such arrangements shall be made.
3. The Committee considered the question of the implementation of the agreement
reached at its fourth meeting regarding the disposition of a part of the Fund's holdings of
gold. It was agreed that action should be taken to start without delay the simultaneous
implementation of the arrangements referred to in paragraph 6 of the press communique
issued by the Committee on August 31,1975. The sales of gold by the Fund should be made
in public auctions according to an appropriate timetable over a four-year period. It is
understood that the Bank for Intemational Settlements would be able to bid in these auctions.
4. In its discussion of the world economic situation and outlook, the Committee noted that
recovery from the severe international recession of 1974-75 was now under way in much
of the industrial world. Nevertheless, current rates of both unemployment and inflation were
still unacceptably high. The Committee called on the industrial countries, especially those
in relatively strong balance of payments positions, to conduct their policies so as to ensure
a satisfactory and sustained rate of economic expansion in the period ahead while continuing
to combat inflation.
A special source of concem to the Committee was the deterioration in the extemal position
of the primary producing countries, especially the developing ones. The general picture for
the developing countries in 1975 was again one of large balance of payments deficits on
532
1976 REPORT OF THE SECRETARY OF THE TREASURY
current account, financed through heavy external borrowing and through the use of reserves
already eroded by the inflation in recent years. With large current account deficits still in
prospect this year, the Committee felt that the ability of many developing countries to
maintain an adequate flow of imports in 1976, and to follow appropriate adjustment policies,
would also depend on the availability of adequate credit from the Fund.
5. The Committee welcomed the recent decision ofthe Executive Directors liberalizing
the Compensatory Financing Facility. Under the new decision the Fund will be prepared to
authorize drawings up to 75 per cent ofa member's quota, as against 50 per cent under the
1966 decision. Maximum drawings in any one year are raised from 25 per cent to 50 per cent
of quota. Moreover, the decision enables the Fund to render assistance under the facility at
an earlier stage of the development of a shortfall.
6. The Committee noted the report of the Executive Directors on their review of the
Fund's policies on the use of its resources, and also on the Trust Fund for the benefit of the
low income members. After consideration ofthe issues involved, the Committee reached the
following conclusions:
(a) It was agreed that the necessary steps should be taken to establish the Trust Fund
without delay. Its resources would be derived from the profits ofthe sales ofthe Fund's gold,
which should be augmented by voluntary national contributions. It was agreed that the
amount of gold available for sale in accordance with the agreement reached by the
Committee at its fourth meeting should be disposed of over a four-year period. The resources
ofthe Trust Fund should be used to provide balance of payments assistance on concessionary
terms to members with low per capita incomes. Initially, eligible members would be those
with per capita incomes in 1973 not in excess of SDR 300.
(b) It was further agreed that, until the effective date of the amendment of the Articles,
the size of each credit tranche should be increased by 45 per cent, which would mean that
total access under the credit tranches would be increased from 100 per cent to 145 per cent
of quota, with the possibility of further assistance in exceptional circumstances. The present
kinds of conditionality for the tranches would remain unchanged. The Fund will in due course
consider again the question of access to the Fund's resources if it becomes evident that the
needs of members make it advisable to re-examine this question.
7. The Committee noted the report ofthe Executive Directors on amendment, welcomed
the progress made toward the solution ofthe outstanding issues, and commended them for
the voluminous and successful work that they had done in order to achieve a major revision
ofthe Articles. In particular, it welcomed the agreement that has been reached on provisions
concerning the important problem of exchange rates. In this respect, it has endorsed a new
Article IV of the Articles of Agreement which establishes a system of exchange
arrangements. The new system recognizes an objective of stability and relates it to
achievement of greater underlying stability in economic and financial factors. The
Committee considered the remaining issues on which its guidance has been requested by the
Executive Directors and agreed as follows:
(a) The amended Articles of Agreement should include a provision by which the members
of the Fund would undertake to collaborate with the Fund and with other members in order
to ensure that their policies with respect to reserve assets would be consistent with the
objectives of promoting better international surveillance of international liquidity and
making the special drawing right the principal reserve asset in the international monetary
system.
(b) The amended Articles would contain an enabling provision under which the Fund
would be able to sell any part of the gold left after the distribution of 50 million ounces in
accordance with the arrangements referred to in paragraph 3 above, and use the profits (1)
to augment the general resources of the Fund for immediate use in its ordinary operations
and transactions, or (2) to make balance of payments assistance available on special terms
to developing members in difficult circumstances. On the occasion of such sales the Fund
would have the power to distribute to developing members a portion of the profits on the
basis of their quotas or to make a similar distribution by the direct sale of gold to them at
the present official price. Any decision on such a distribution should be taken by an 85 per
cent majority of the total voting power. These powers of the Fund would be in addition to
the power that the Fund would have under another enabling provision to restitute to all
members, on the basis of present quotas and at the present official price, any part ofthe gold
left after the disposition of the 50 million ounces referred to above.
(c) Decisions of the Fund on the use of the profits from the sale of its gold in the regular
operations and transactions of the Fund should be taken by a 70 per cent majority of the total
voting power and on decisions on use ofthe profits in other operations and transactions by
an 85 per cent majority of the total voting power.
(d) The Executive Directors are urged to review, during the final stage of their work on
the draft amendments, the majorities for operational decisions that do not reflect
compromises of a political character with a view to considering the reduction, if possible,
of the number and size of the special majorities that would be required under the amended
EXHIBITS
533
Articles for such operational decisions. Such a review should be completed within the coming
weeks and should not delay the completion of the comprehensive draft amendment.
(e) The majority required for the adoption of decisions on the method of valuation of the
SDR under the amended Articles should be 70 per cent of the total voting power, with the
exception of decisions involving a change in the principle of valuation or a fundamental
change in the application ofthe principle in effect, which should be taken by an 85 per cent
majority of the total voting power.
'- (f) The Executive Directors should continue their consideration of the subject of a
substitution account without delaying completion of the comprehensive draft amendment.
(g) With respect to the obligation of participants in the Special Drawing Account to
reconstitute their holdings of special drawing rights, it was agreed that the amended Articles
should authorize the Fund to review the rules for reconstitution at any time and to adopt,
modify, or abrogate these rules by a 70 per cent majority of the total voting power.
8. The Committee requested the Executive Directors to complete their work on
amendment in the light of the guidance given by the Committee, and expects that the
Executive Directors will be able to submit a comprehensive draft amendment for the
approval of the Board of Governors, together with a report, within the coming weeks.
Exhibit 54.— Address by Under Secretary for Monetary Affairs Yeo, January 24,1976, to the
10th Annual Conference on "Wall Street and the Economy" at the New School for Social
Research, New York, N.Y., regarding the effect of world economic recovery on international
payments
The world is now recovering from the most severe economic recession since the 1930's.
The recession saw real output in the industrial countries fall sharply and suddenly, a decline
of 5 percent in the first half of last year. It saw the first reduction in the volume of world trade
since World War n, a reduction of 6 percent in 1975. And it was associated with the most
violent inventory adjustment in more than 50 years.
Broadly speaking, the pattern of intemational payments last year was determined by two
major factors- the continued massive surpluses of the oil-exporting nations and the
widespread economic recession. A clear pattem of payments balances among three major
country groups can be distinguished: For the oil exporters, the OPEC (Organization of
Petroleum Exporting Countries) countries, large surpluses of nearly $40 billion on current
account; for the developed world, the OECD countries, approximate balance, with surpluses
and deficits within the group roughly offsetting; and for the rest of the world, large deficits,
particularly on the part of the less developed countries (LDC's), but also on the part of the
centrally planned economies of East Europe and Asia.
In looking at the pattem of intemational payments for 1975, the effects of the high oil
prices and the recession can be seen. The high oil prices resulted in a large deficit for the
oil-importing countries as a group. With recession in the industrial countries, a very large
share of the total deficit of the oil-importing countries fell on the less developed countries.
Thus the OECD countries as a group were in approximate balance, while the nonoil less
developed countries ran deficits totaling $23 billion, even after receiving official transfers
of $11 billion.
Why was the balance of payments impact of the recession so uneven, and why was so much
of the deficit shifted away from the developed countries of OECD and bome by the less
developed countries? The answer lies in understanding the nature of the recession we
experienced, and in understanding the ways in which individual nations responded to that
recession.
The recession of 1975 was not only severe and pervasive. It was characterized by the most
pronounced inventory cycle since 1921. The stage for this acute inventory shift was set in
the boom years leading up to 1973 and early 1974. Once again for the first time in decades,
simultaneous boom converged in all the major industrial countries and was coupled with
unprecedented inflationary pressures. In those conditions- strong worldwide boom, most
economies operating at close to capacity, pervasive and virulent inflation, fears of shortages
of goods, commodity speculation- there was a powerful incentive to build up inventories.
With a strong desire to accumulate inventories superimposed on a vigorous worldwide boom,
the resulting demand led to pressures on both volume and prices. As typically happens, this
process amplifies as it works back through the productiori process, with the result that the
most extreme pressures in an inventory buildup of this character are seen in the commodity
markets and on commodity prices- including the primary commodities which account for
a large share of the exports of the less developed countries.
The force of such an inventory cycle cannot be measured simply by chariges in output, or
statistics on stocks, though the movement of stocks has indeed been dramatic. But to a large
extent, the incidence of the adjustment is on new orders and unfilled orders. Just as the
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1976 REPORT OF THE SECRETARY OF THE TREASURY
pressure on an exchange rate is not simply a function of the momentary spot market, but also
reflects the forward book, so do other markets, including commodity markets, reflect the
pressures of new orders and unfilled orders in the pipeline. There is evidence that new and
unfilled orders were extremely high during the last days of the 1973-74 boom, befpre the
recession came.
But when the economic situation turns, when world boom swings into recession, the
exaggerated upward pressure on inventories reverses into exaggerated downward pressures
on inventories. Initially, order books collapse. A sellers' market becomes a buyers' market.
Businessmen who were trying to stock up on goods to be sure they could meet any requests
begin to worry about what to do with amounts they have already ordered. Manufacturers of
those goods cut back on orders of their own components, and the process works back to the
producers of primary commodities, where the swings and the oscillations in demand tend to
be greatest.
As the inventory cycle, in the larger sense ofthe term, moves into the building phase, its
impact will again be felt abroad. It is very difficult to measure statistically the force of a major
inventory adjustment because so much of the impact is reflected in the order books, and
information on orders is sparse in most countries. Nonetheless, there is evidence that the
recent inventory adjustment has been an extreme one and that we are now moving into a
recovery phase that should go far in correcting the skewed pattern of payments imbalances
experienced in 1975. To illustrate, let me cite a few figures for the United States and
Germany.
First, the United States. The change in the book value of manufacturing and trading
inventories, at an annual rate, reached a peak positive figure of $57 billion in the summer
of 1974, and swung to a negative figure of about $ 15 billion a year in the second quarter of
1975, when smoothed by a 6-month moving average. By the end of October, the figure had
recovered to a positive change of about $20 billion—that is, about half of the abrupt
recession-induced fall in the rate of change had been reversed. There was still further
rebound to be expected.
Over the same period, new orders in durable goods manufacturing industries reached a
peak of nearly $50 billion a month in the third quarter of 1974, or an annual rate of $600
billion. They then fell quite sharply to about $35 billion a month at the low point in the first
quarter of 1975, or an annual rate of about $420 billion. Again, the recovery phase since
then has raised the figure part way up the scale to the previous peak, at about $41 billion
a month (annual rate ofabout $490 billion). Thus the swing in new orders for durable goods
alone, on an annual basis, amounted to a multiple of about 2 1 /2 times the swing in the book
value of the larger category of inventories per se that I cited earlier.
It is worth noting that both the U.S. inventory and new orders data are all measured in
dollar terms. Given the upward trend in prices, the physical volume, if data were available,
would show a much more severe dechne from the cyclical peak than the value data record.
With inflation now diminishing, the recovery in orders, in real physical terms, should be less
affected than in the past by such price adjustments.
German data on the physical volume of new orders (domestic and foreign) in
manufacturing industries show a sharp fall in the recession. From its peak, the index for new
orders fell 18 percent by the last quarter of 1974, and was still 25 percent belOw the peak
in the third quarter of 1975. In value terms, however, the decline is much less sharp; by the
third quarter of 1975 the value of new orders was only 6 percent below the peak level
achieved in the second quarter of 1974.
If I have labored this discussion ofthe worldwide inventory adjustment, it is because that
factor has played such a major role in influencing the world balance of payments patterns
in 1975—and because, with recovery, a change in the inventory cycle will lead to a greatly
different balance of payments pattern in 1975 and beyond.
With the effects of the recession last year, compounded by the inventory adjustment, the
developed countries recorded a massive improvement in their current account balance,
shifting from large deficit to approximate balance. This was accomplished in larger part by
a very sharp reduction in the imports of these developed countries, resulting from the
recession. Not every developed country recorded a smaller deficit (or larger surplus) last
year, but many registered major shifts in that direction—in particular, the United States, the
United Kingdom, France, Japan, and Italy.
The less developed countries, on the other hand, showed larger deficits in 1975. These
countries were, in many cases primary producers, at the end of the line in terms of the
inventory cycle and absorbing through their exports a major part of its impact. In many cases,
their imports were maintained at high levels—as high rates of economic growth arid
development were maintained despite the loss of export eamings. In some cases, patterns of
consumption and economic development plans which were established during the
imrnediately preceding period of high commodity prices and favorable terms of trade were
not adjusted when economic cpnditions became less favorable.
EXHIBITS
535
Thus, while there were major differences among individual countries, for the nonoil less
developed countries as a group, the pattern was one of large deficits—in a sense maintaining
growth rates despite recession in the industrial countries—and financing consequent deficits
primarily by borrowing.
The large deficits which the nonoil less developed countries recorded last year were
financed in a number of ways. Direct investment provided a part ofthe financing, and longterm loans (both private and official) represented a major source. The remaining shortfall
was covered by use of reserves (about $3 billion), IMF credit (about $2 billion), and other
short-term borrowing (about $5 billion). Questions have been raised as to whether this
pattern of financing—and particularly the reliance on short-term borrowing—is sustainable
for the future.
It was of course not only the less developed countries which maintained and financed their
deficits rather than adjusting. A number of the developed countries in the OECD—again,
particularly the primary producers—also ran substantial deficits and borrowed, although the
OECD as a whole was in approximate balance. While the oil-importing countries as a whole
had to absorb the large deficit which was the reciprocal of the OPEC surplus, decisions of
individual countries as to the extent to which to finance deficits and the extent to which to
adjust influenced the sizes and distribution of that deficit among the oil-importing countries.
A different pattern of relative emphasis in deficit countries on measures for adjusting rather
than financing deficits would have led to different distribution of deficits among the nonOPEC countries. Some nations did not let exchange rates move enough to play their full part.
Nonetheless, if there was perhaps inadequate attention paid to adjustment and to allowing
exchange rates to move, the world can take credit that moves toward increased import
restrictions and excessive competition in export credits were generally avoided. All in all,
nations behaved in a responsible manner.
Some analysts have made dark and ominous predictions about the financial position ofthe
less developed countries in the period ahead. They have projected continued very large
payments deficits on the part of the less developed nations, on the assumption of a weak
recovery in the industrial world, and a continuation of high LDC growth rates. Accordingly,
they see a need for large LDC financing resources, and, given high debts in some countries
had limits in private credit facilities, call for vast new resources for public financing—for
example, by freer access to IMF resources, a large expansion ofpublic credits, or allocations
of reserve assets.
I disagree with the assumption of weak recovery in the industrial world; I believe that
projections based on a continuation of boom-level growth rates in the LDC's are
unsupportable. I am convinced that the recent agreements in Jamaica—including the
establishment of a trust fund to provide balance of payments assistance to the poorest
countries, an increase in potential access to IMF resources, and a major liberalization ofthe
compensatory finance facility—represent an appropriate and adequate response to the
financing needs of the fpreseeable future.
In my view, to assume a need.for much larger financing would be a serious mistake, one
which could lead in the end to serious adjustment problems and distortion of the world
economic structure. A large part ofthe current account deficit ofthe developing countries
in 1975 occurred because they attempted to maintain high domestic growth rates in the face
of a softening of export markets that had been unsustainably strong at the crest ofthe boom.
Caught between falling export reveriues and rising import levels, these countries experienced
rising current account deficits financed in large part by heavy borrowing from private capital
markets—much of which took the form of short-term trade credit.
But the pattern of imbalances will shift and shift importantly this year. A firmly based
economic recovery is presently underway in the industrial world. Just as last year's recession
and inventory adjustment had an amplified adverse impact on primary producers and less
developed countries, this year's recovery and inventory adjustment will have an amplified
beneficial impact on those same countries. We can only add to inflationary pressure and
displace private markets if we panic and try to respond to present and future conditions by
throwing official money at yesterday's problem. Perhaps more fundamentally, the developing
countries cannot continue indefinitely to base their growth program and expectations on the
artificial prosperity and unsustainable terms pf trade that they experienced in the crest of
the commodity boom. Their development programs must be adapted to their financial
realities. Adjustment must be begun.
Attempts to avoid this adjustment by estabhshing commodity pacts that seek to restore the
inflated prices ofthe commodity boom despite changed economic conditions will not work.
Efforts by commodity producers to maintain uneconomic prices, will lead to shifts to new
sources of supply and (stimulate a spur to) production of substitutes..
Thus a more balanced payments structure is in prospect. To pump more money into the
system would simply sustain an artificial situation for a time—exacerbating world infiation
and making the ultimate adjustment more difficult politically and economically. OPEC will
continue in large surplus—in fact larger in 1976 than in 1975 because of cyclical changes.
536
1976 REPORT OF THE SECRETARY OF THE TREASURY
These oil surpluses will, by definition, be financed as long as they last, but the payments
structure among the oil-importing countries can be improved and maintained on a
sustainable basis.
In my view, we have an important choice to make. If nations fail to perceive developments
in the world payments structure, or to follow appropriate economic policies, there will be
strains in the private credit markets or pressure for excessive and irresponsible measures to
expand official credit.
But there is an alternative. The hope is that nations will perceive and take full account of
the changing structure of international payments—most importantly the shift back to the
industrial countries of a major share ofthe oil deficit as the inventory cycle turns—and that
all nations will pursue sensible policies. For the industrial countries, sensible policies means
policies to assure a continued strong noninflationary recovery in world demand, the
avoidance of measures which would frustrate an adjustment in their payments positions, and
thus a shift back to the industrial countries of a larger share of the deficit. For the LDC's,
sensible policies means realistic growth and development programs and progress toward
payments adjustment. For the OPEC, sensible policies means reasonable investment policies,
without excessive liquidity preference, increased aid, and continuing progress toward
adjustment and elimination of large surpluses.
Even with sound policies generally, there may be financing problems—difficult financing
problems—for individual countries, both developed and less developed. But we can hope to
avoid severe problems for whole categories of countries—such as the nonoil less developed
countries—and we can hope to avoid excessive strains on our private credit markets and
public credit institutions. We can expect a reasonable and sustainable distribution of
payments deficits.
Let me close by mentioning one other reason for optimism that we will in the future see
a more balanced pattern of world payments. That reason is that, with the agreements recently
reached in Jamaica, we are taking steps to assure that we have a monetary system that will
facilitate this development. Without commenting in detail about the Jamaica agreements, let
me note some of the important steps that have been agreed:
There is now a shared analysis of the problem of instability in the world economy, and
agreement that that problem must be dealt with not by the form of exchange rate
system but by creating underlying conditions of stability in the world economy.
There is recognition that present flexible exchange rate arrangements represent a
sensible and effective system for dealing with the economic realities which the world
now faces and will face in the future.
There is acceptance ofthe need for firm surveillance ofthe policies which nations follow
to assure compatibility with the needs of responsible international behavior.
Such steps, and the additional measures which have been agreed to, improve the ability
ofthe International Monetary Fund to meet members' financing needs in the period ahead,
reinforce the ability of nations, following sound and sensible policies, to pass through an
admittedly difficult period.
Exhibit 55.—Remarks by Secretary Simon, March 10, 1976, for the Distinguished Lecture
Series, Mainz, Federal Republic of Germany, on economic policy in a changing world
economy
As America celebrates its Bicentennial this year, it is interesting to note that Mainz had
already been a famous university city for 300 years when the United States declared its
independence in 1776. The proud traditions of both America and Mainz certainly deserve
recognition, but my comments this evening will concentrate on the challenges of the future,
particularly the need for continued creativity and efficiency in our economic systems which
must provide the foundation for stable societies.
The United States and the Federal Republic of Germany have experienced remarkable
economic development. The severe recession of 1974-75 has ended and both nations are
once again expanding real output. But despite the impressive record of economic gains and
the current progress of the cyclical recovery, many people remain pessimistic about current
events and the future. There is a national tendency for public opinion to swing from euphoric
optimism to abject pessimism while missing the middle-ground of moderate judgments and
realistic expectations. If we are to overcome this widespread skepticism, govemment policies
in the future must be increasingly based on realism. Over the years govemment leaders have
tended to make exaggerated claims about the potential benefits of new policies to gain
current political favor. When govemment officials promise more than can be dehvered,
general disillusionment and resentment eventually develop. Decisions about the allocation
of national resources and distributions of the output of goods and services are the most basic
EXHIBITS
537
of all economic issues and greater realism is required in determining national priorities.
Longer term "planning horizons and economic policies that would give increased attention
to longer term goals which extend beyond the solution of current problems are needed.
Government pplicies are too often simply individual responses to special interest pressures
rather than a carefully integrated set of goals for the future.
The repetition of excessive fiscal and monetary stimulus followed by extreme restraint has
caused a volatile pattern of economic development. The difficulty of predicting economic
activity and the lagged impact of frequent policy adjustments have frustrated the fine-tuning
efforts of government planners and exaggerated the extremes of economic booms and
recessions.
To achieve the desired improvement in economic decisions based on realism, longer term
perspectives, and stability, the United States has established the following goals: Sustained
responsible fiscal and monetary policies which will contribute to domestic and economic
progress; continue the liberalization of world trade and investment based on the principles
of open and competitive markets; assist developing nations to grow toward economic selfsufficiency; and maximize the benefits from the world's resources.
These basic objectives are shared by many other nations, including the Federal Republic
of Germany. This is a union based on a realistic recognition that we share mutual national
interests in promoting economic development and stability. A strong American domestic
economy is vital to your interests. Similarly, your impressive economic development is
important to us. Nevertheless, each country has specific national interests and this desirable
diversity will occasionally cause disagreements about the technical details and procedures
of international trade and finance. While it would be naive to expect consensus on every
policy issue, serious discord need not occur. As long as we approach these specific problems
with a cooperative attitude based on mutual respect and the underlying strength provided
by healthy domestic economies we will find workable solutions. Also, meaningful alliances
do not require that all differences be eliminated but it does mean that our independent
policies be directed toward the mutual goals of: (1) Sustaining responsible fiscal and
monetary policies within our domestic economies as the necessary foundation of real
strength; and (2) continuing progress toward a more open and efficient interriational
economic environment.
I. Domestic economic policies
It is increasingly recognized that the pace of domestic economic activity, including
employment and inflation, is directly affected by international economic developments.
Although issues of national concern continue to dominate economic policies, advanced
nations have a definite responsibility to manage their domestic monetary and fiscal affairs
with regard to international obligations. The most significant contribution the United States
can make to international economic progress is to strive to keep the pattern of growth in our
domestic economy more balanced so that it does not disrupt the world economy.
Unfortunately, U.S. economic policies have not provided the desired stability over the past
decade. One result has been alternating booms and recessions. Another result involved the
loss of price stability which characterized the American economy for almost 200 years.
Fortunately, the recession of 1974-75 apparently ended by April 1975 and a relatively
strong cyclical recovery has occurred since then which has improved employment conditions
in general and specifically reduced the unemployment rate without causing an acceleration
of price increases as inflation has remained in the 6-percent zone for several months. Looking
ahead, our GNP forecast indicates that 1976 will be a good year with real output gains of
more than 6 percent. Personal consumption expenditures will provide a solid base for
continued growth, and business spending for plant and equipment should improve as the year
progresses, which will provide the necessary thrust to sustain the recovery beyond 1976. Of
particular interest to other nations is our expectation that U.S. imports will increase in 1976
following a 4-percent decline in 1975. This acceleration of imports by the United States will
contribute to the general recovery in other nations. This basic turnaround in the U.S.
economy and relatively strong recovery over the past year is the direct result of three
fundamental adjustments: (1) The unwanted accumulation of inventories was eliminated and
new orders stimulated industrial output gains; (2) the "real incomes" of consumers were
restored by reducing the double-digit level of inflation and initiating tax reductions and
rebates to increase personal disposable incomes; and (3) employment conditions improved
rapidly enough to reduce unemployment and strengthen consumer confidence.
The near-term prospects for economic growth in the United States are encouraging.
However, there are still several important policy issues which must be resolved to successfully
sustain the recovery well beyond 1976. This policy debate will undoubtedly continue during
the coming months and the ultimate decisions will likely determine the course ofthe U.S.
economy for many years to come.
538
1976 REPORT OF THE SECRETARY OF THE TREASURY
The basic issue concerns the prpper amount of stimulus needed to achieve the
interdependent goals of sustaining the economic recovery and reducing unemployment
without creating a new surge of inflation which would lead to another sequence of boom and
recession. This same issue confronts other industrial nations as they attempt to achieve stable
economic recoveries during the coming months. In the United States, the administration has
proposed a set of policies which we believe will lead to output gains well above the long-term
sustainable pace of the U.S. economy in order to reduce the unacceptable level of
unemployment. Critics contend thdt this goal is inadequate and that added stimulus is
necessary to sustain the current recovery and reduce unemployment. Those who argue for
increased stimulus apparently believe that the Government can directly accelerate the pace
of the entire economy by adjusting its policies and that such stimulus can be effectively
eliminated when the private sector recovers. They represent the remnarits ofthe fine-tuning
school who believed, at least until recently, that fiscal stimulus was amenable to precise
adjustments. Incredible as it seems, in the context ofthe unfortunate events of 1970-74 there
are still some who believe in this concept.
Then there are some who have not believed that the American economy would recover
or that ifit did it would be an extremely lethargic, almost imperceptible advance. Fortunately,
the record to date reveals a vigorous though nonetheless orderly cyclical revival.
There is a third group, small but still vocal. For them it is an issue of the public sector vs.
the private sector; Government direction vs. the market economy. In short, the debate is
between those who believe in the basic superiority ofthe private enterprise system, when it
is allowed to function properly without overbearing Government interference, and those who
believe that the Government must fill a permanent and increasing role if the economy is to
progress.
My own conclusion is that, within recognized limits, the market system is the most efficient
and creative approach since it is more flexible in responding to changing economic
conditions. This does not mean that the Government does not have an important role in
economic affairs: Nor does it mean that the existing institutional arrangements will always
exist. The market system will continue to evolve and this flexibility will enable it to remain
creative and productive.
It should also be emphasized that the administration believes that its recommendations will
lead to a more sustainable durable recovery as opposed to the disappointing results of the
past decade when cyclical booms and recessions have dominated the economy. Considerable
stimulus has already been injected into the U.S. economy. The Federal budget has increased
40 percent from $268 billion in fiscal year 1974 to approximately $374 billion in fiscal year
1976 and a large additional stimulus would create risks of once again overheating the U.S.
economy. Businessmen and consumers would react negatively to the prospects of
accelerating inflation if that stimulus were to occur because the anticipation of inflation is
now deeply ingrained in our society. It should also be recognized that more stable economic
policies are required to avoid the unnecessary distortions of the past decade. Increased
Government spending programs have proven to be a cumbersome tool for short-term
economic stabilization purposes. Moreover, experience has shown that programs initiated
in a period of economic slack tend to become a permanent part ofthe budget. It is extremely
difficult to reduce or eliminate even the obviously ineffective or obsolete programs and to
scale down existing programs for countercyclical purposes has been, for all practical
purposes, impossible. This is particularly true when the sizable outlays ofthe many State and
local governments are added'to the total.
This implies that we must avoid abrupt and excessive changes in government expenditures.
No matter how well intentioned, such sharp swings in spending tend to accentuate rather than
stabilize the business cycle and serve to increase the uncertainty of developing policies to
meet future needs. In turn, this uncertainty is felt in the consumer markets.
II. International economic policy
As we strive to improve the domestic economy, it is equally important to recognize the
significance of international monetary, trade, and investmerit relations.
International monetary issues.—The patterns of exports and imports, the location of
production facilities, and international capital flows are directly influenced by currency
exchange rates. Under the Bretton Woods system created in 1944, exchange rate stability
was expected to be based on a comprehensive set of rules which would specify a fixed rate
for each national currency. However, that system could not adapt to extreme variations in
domestic economic policies, sharply differing rates of inflation, wide variance in interest
rates, and the resultant large capital flows which became characteristic of this period.
Disruptive currency devaluations occurred, typically under crisis conditions. The familiar
postwar monetary system based on fixed exchange rates finally collapsed in 1971 and
multilateral exchange rate adjustments were agreed to at the Smithsonian meetings at
yearend, but the dollar had to be devalued again in February 1973 and a period of floating
EXHIBITS
539
exchange rates was initiated in March 1973. Since then a series of reform efforts, under the
direction of the International Monetary Fund (IMF), has moved steadily ahead leading up
to the Interim Cpmmittee agreements in Jamaica last January.
In participating in the reform efforts since 1973, the United States has emphasized the
following basic goals:
1. The monetary system should be flexible.
2. Each nation should retain authority to select its own preferred solutions to economic
disequilibrium, including changes in fiscal and monetary policies.
3. Competitive currency devaluations should be prevented.
4. The new system should provide a meaningful surveillance authority to enforce the
rules adopted,
5. The basic goal of international monetary reform is to restore stability to the system.
At meetings 2 months ago in Jamaica, the world's Finance Ministers agreed on a series
of far-reaching structural reforms in the international monetary system. That agreement
represented the first general revision of our international monetary arrangements since the
basic framework for the postwar economic system was created at the 1944 Bretton Wopds.
We live in a different world from that which existed at the time of Bretton Woods. The
Jamaica compact reflects fundamental shifts in thinking from the ideas which underlay the
Bretton Woods system. It is widely acknowledged that the change in thinking—which focuses
attention on underlying economic factors—calls for a new and different attitude with respect
to exchange rates, gold, and other aspects ofthe monetary system. It is perhaps less generally
noted that it calls also for a new perspective on the question of international liquidity.
The new monetary system agreed to at Jamaica differs fundamentally from the BrettOn
Woods system in the provisions setting forth exchange rate rules, and in the provisions on
gold—two of the basic components of the Bretton Woods system. Both changes stem from
a common idea: The view that monetary stability cannot be imposed on a heterogeneous
world by imposing a rigid monetary system—that monetary stability can be achieved only
by developing underlying conditions of stability in the major economies. That is to say the
new reforms recognize that lasting stability cannot be superimposed on the world economy
by forcing countries into the mold of a rigid system, but must develop and grow through the
maintenance of proper pohcies in the national economies making up the system.
First, consider the reform dealing with exchange rates. The Bretton Woods system
recognized as legitimate only one exchange rate regime—par values. It assumed that
exchange stability could be achieved by requiring adherence to a more or less fixed structure
of exchange' rates. On the one hand, the threat of reserve loss or the eventual share of a forced
devaluation was the leverage to influence domestic policies in deficit countries. For surplus
countries, it was imagined that they would act, in terrris of policies, to maintain the symmetry
of the system. These assumptions proved wrong. Countries did not respond as expected.
The assumptions of the framers of Bretton Woods proved mistaken in another respect.
They had assumed a world in which relative price stability and equilibrium would be the
norm—disequilibrium and inflation abnormal. In the first half of this decade exactly the
opposite has been the case and the tensions resulting from pervasive inflation resulted in
overriding distortions which could not be accommodated within the par value system.
A final note about their assumptions and the realities of today. As a logical corrollary of
their views, they tended to assume minimal capital flows. Surely they would be surprised at
the circumstances of today when billions of dollars can move across the exchanges in a matter
of a few days.
The exchange rate arrangements agreed upon at Jamaica take a different approach, and
have a different focus. The new provisions focus on underlying economic and financial
conditions and acknowledge that exchange stability can prevail only if nations achieve
stability in those underlyirig economic conditions.
A second important step involves the continued phasing out of gold from the international
monetary systeni and an increased reserve asset and unit of account role for the special
drawing right (SDR). The official price of gold will be terminated, and gold will no longer
be used by the IMF for official transactions. One-sixth of the IMF's gold stock will be sold
with the proceeds ofthe sale, including any profit resulting from the transaction price being
above the official price, to be used by the new trust fund for assisting developing nations
experiencing balance of payments difficulties. It is anticipated that the trust fund will handle
the sale through periodic auctions, spread out over 4 years. Another one-sixth ofthe IMF's
gold holdings will be sold to member governments in proportion tp their quota subscriptions!
In addition, members ofthe Group of Ten have agreed among themselves that (1) they willnot engage in efforts to peg the price of gold; (2) that the total stock of gold held by the IMF
and Group of Ten countries will not increase; and (3) that G-10 countries will respect the
conditions on gold trading agreed to by central banks.
The third action agreed to will increase the current quotas for members of the IMF by
approximately one-third from 29 billion SDR's to 39 billion SDR's ($35 to $47 billion). The
540
1976 REPORT OF THE SECRETARY OF THE TREASURY
quotas for OPEC (Organization of Petroleum Exporting Countries) members will rise even
more so that their total share of IMF voting power will jump from 5 to 10 percent. Other
developing nations will maintain their existing proportionate shares and the relative voting
position of industrial nations will decline. For example, the U.S. quota will rise from $8 to
$ 10 billion but our relative share of total voting rights will decline from 22.1 to 21.5 percent.
The increase in IMF quotas and amendments to the Articles will require formal ratification
by member governments once the Executive Board clears up the remaining details. This
ratification process is expected to take 18 to 24 months. The United States strongly supports
the agreements and anticipates a rapid response from Congress.
Another important development associated with the exchange rate agreements involves
the creation of an improved consultation process to monitor currency fluctuations. The
arrangements will evolve over time but it is a fact that Finance Ministers and their deputies
and central banks have been in frequent contact to review underlying economic and financial
conditions and circumstances in the exchange markets. The United States does not envision
this continuous consultation process as a means of creating specific targets for exchange rate
relationships involving the dollar nor will central bank intervention be used except when
necessary to correct disorderly market conditions.
The attention which all nations are now committed to giving to underlying economic
conditions augurs well for the future management of our ecoriomic affairs and the control
of infiation. If each nation, individually, can manage its affairs soundly and responsibly, and
if all nations cooperate in the same vein, we will have made a great stride toward the stability
in our economic affairs that we all desire. The Jamaica agreements represent an important
benchmark that will enable the broad reform measures to move ahead. The United States
supports these agreements as a basis for reducing instability in exchange rates.
International trade issues.—One ofthe most significant postwar economic developments
has been the rapid expansion of trade amorig market economies from a level of $55 billion
in 1950 to over $800 billion in 1975. The United States strongly supports the growth of a
free and open world trading and investment order. The case for free trade is based on the
general concept of comparative advantage. Trade barriers typically reduce or eliminate the
exchange of goods that would benefit all countries. Similarly, trade restrictions which insulate
domestic producers from foreign competition reduce the pressures for controlling price
increases and for stimulating creative product development. Although foreign trade has
historically comprised a relatively small share of total economic activity in the United States,
we have remained the world's largest exporter and importer. However, during the 1960's the
historical U.S. merchandise trade surplus slowly eroded because ofthe overvalued dollar,
disadvantageous cost developments, and the effective export promotion efforts of other
nations. By 1971 a small trade deficit was reported and the shortfall increased in 1972. A
small trade surplus was reported in 1973, following our adjustment ofcurrency exchange
rates, but record inventory accumulations and the sharp increase in the cost of oil imports
resulted in a swing back to deficit in 1974. In 1975 the United States recorded a record trade
surplus in excess of $11 billion as exports increased 9.5 percent and imports declined 4.1
percent. During the coming year, we expect the current trade surplus to diminish as the pace
of economic recovery in the United States increases and the demand for imports increases
more rapidly than the continued growth of our exports.
Looking into the future the European Community represents a major economic power
which operates a common external tariff and an expanding network of preferential trading
arrangements with other countries in Europe, Africa, and Asia. Fortunately, most ofthe
abrasive problems that have developed in trading relations have been worked out through
extended periods of negotiations. However, examples of protectionist agricultural policies,
administrative barriers, and discriminatory public procurement practices persist and the
expansion of preferential trading arrangements is a serious concern. Since trade issues
directly affect the number and quality of jobs in each country, such actions quickly become
the basis for domestic protectionist pressures. The benefits of free trade are general for the
entire population, but the costs of economic disruptions caused by irnport competition are
very specific and affect individual workers and companies. The continuation of the great
benefits from free trade can never be taken for granted, particularly during periods of
economic recession when individual nations struggle to avoid current account deficits and
further loss of domestic output and jobs.
The United States has strongly supported the new round of GATT (General Agreement
on Tariffs and Trade) negotiations which officially began in 1973. Within the general
framework of creating a more open world trading system the United States has the following
goals:
1. Reducing, harmonizing, or eliminating tariffs on a broad scale.
2. Reducing or harmonizing nontariff barriers. These measures have proliferated in
recent years and have Often reduced or nullified the benefits of tariff cuts or have
completely prevented trading. Because nontariff barriers are difficult to identify and
EXHIBITS
541
quantify, they have become a major negotiating problem. Guidelines for controlling export
restraints, limiting the use of subsidies, product and safety standards, public procurement,
administrative restrictions, and quantitative quotas must be improved.
3. Strengthening the enforcement of international trade rules to minimize conflicts
among trading nations.
4. Providing for the special trade needs of developing nations.
5. Preserving equitable access to supplies at reasonable prices. In dealing with
commodity issues, the United States continues to believe that a case-by-case approach is
essential and that restrictive agreements and pricing formulas are not useful for most
commodities.
The United States has been encouraged by the relatively successful OECD trade pledge
to avoid discriminatory trading practices during the difficult period of growing current
account deficits for most industrial nations resulting from the serious international
disruptions caused by the quadrupling of oil prices and the effects of the widespread
economic recession. We also support the use of prior consultations within the OECD as a
means of avoiding trade measures which violate the terms and spirit of the agreement.
Similarly, we have supported the long negotiations attempting to develop limitations on
official export credit subsidies. These issues demonstrate the difficulty of preserving an open
trading system during periods of unusual economic strain and domestic pressures to protect
markets and jobs.
The major thrust of U.S. trade policies was summarized in the important trade legislation
finally approved in January 1975 following several years of internal debate. That benchmark
legislation was a necessary prerequisite for U.S. participation in the current multilateral trade
negotiations and provides the U.S. Government with the necessary flexibility for conducting
its trade policies. Basic provisions include:
1. Authority to negotiate for more open access to markets and supplies with emphasis
on equity and reciprocity;
2. Increased flexibility in providing escape clause relief and adjustment assistance for
American industries, workers, and individual firms suffering injury from import
competitions,
3. Provisions for diversifying the types of actions the United States can take in
responding to unfair international trade practices;
4. Authority to expand normal commercial relationships with the nonmarket economies; and
5. Authority to fulfull the pledge to establish a plan of generalized tariff preferences for
certain trade with developing nations.
We believe that the trade reform legislation is a further step in promoting a more liberal
trade policy. However, some critics have described it as being potentially a restrictive
measure and there have been expressions of concern in Europe about the possible growth
of protectionist sentiment in the United States. This is frankly a puzzling viewpoint which
is not supported by actual developments. The Treasury Department is required by law to
investigate all formal complaints of alleged "dumping" of foreign products in the U.S.
markets and institute countervailing duty investigations when there is a complaint ofa bounty
or grant on a particular commodity. However, there has been no evidence of any overt effort
to tighten the existing restrictions, nor is there any indication of any growing protectionist
movement. To the contrary, the protectionist pressures appear to be moderating as the major
swing in trade continues. The increase in investigations is due to the fact that all pending cases
received over the past few years must be completed in a very short time frame under the
Trade Act limit. Major changes are occurring in comparative unit labor costs, energy costs,
and other competitive factors to improve significantly the outlook for U.S. exporters. We will
continue to strive for the elimination of barriers to trade and the expectations and successful
conclusion of the multilateral trade negotiations.
International investment issues.—Member nations of the Atlantic community have
fortunately avoided the widespread adoption of capital controls despite the distortions
created by economic recession and oil price changes. Foreign direct investment and shortterm credit to finance trade have played an important role in the economic development of
the entire region during the postwar period. Unfortunately, short-term capital flows can also
be disruptive if they are contrary to domestic stabilization goals or create significant balance
of payments problems. Most short-term capital flows are temporary and self-reversing.
However, it is occasionally necessary to neutralize these flows. For example, a basic role of
the IMF is to provide official financing to assist members in overcoming short-term payments
deficits. Other examples can be given in which individual countries have adjusted their fiscal
and monetary policies. A third approach is to limit capital movements directly. The United
States^, for balance of payments purposes, instituted three such programs in the 1960's. The
interest equalization tax was applied to securities sold in U.S. capital markets by developed
542
1976 REPORT OF THE SECRETARY OF THE TREASURY
countries (except new Canadian issues) and long-term bank loans beginning in 1963. In 1965
the Federal Reserve voluntary credit restraint program created voluntary guidelines for
capital flows from banks and other financial institutions. At the same time voluntary
restraints on direct investment were established. This program became mandatory in 1968,
but unfortunately, such programs also create serious distortions in the efficient allocation of
resources. The relaxation of capital controls began in 1969 and they were finally revoked
in January 1974. Since then the United States has avoided controls and our financial markets
have been open to foreign borrowers.
The U.S. Government has reaffirmed its intention to avoid restrictions on foreign
investments in America. There have always been specific requirements that foreign investors
conform to U.S. laws, and certain types of investments—such as ownership of communications companies, nuclear energy facilities, mineral resources on Federal properties, certain
transportation companies, and a few others—are prohibited but in general, foreign investors
receive the same treatment as domestic investors. During the period of concern about the
possibility that OPEC funds would flow into America to buy up basic industries, various bills
were submitted in the Congress to restrict foreign investment. The administration strongly
opposed such actions, and no additional barriers were created. The OPEC nations have given
no evidence of any effort to buy up American firms or disrupt the U.S. economy. At the same
time, the inflow of investments from Europe continue at a somewhat moderate pace. On the
one hand, as ofthe end of 1974, the total book value of U.S. foreign direct investments totaled
$119 billion. Of the total amount $45 billion, or 38 percent, was committed to Western
Europe. From the opposite viewpoint, foreign direct investment in the United States was $22
billion, of which $14 billion, or 64 percent, was by European investors.
The near-term economic outlook is favorable and the longer term problems can be
overcome if responsible policies are sustained. But our responsibilities are not completed by
merely identifying desirable goals. It remains as true today as ever that the economic
performance of each nation will depend upon the effectiveness of its domestic fiscal and
monetary policies and how well it adjusts to the competitive environment created by the
increasing integration of the world's economic system. The United States and the Federal
Republic of Germany share mutual goals in seeking stable economic progress. The disruptive
experiences ofthe past, when cooperation failed, provide strong incentives for cooperating
in the future to achieve an open and competitive international monetary, trade, and
investment system. The specific day-to-day reform efforts will often be slow and occasionally
abrasive. However, these temporary frustrations will not cause us to lower our goals but to
use more realism and determination in achieving them.
Exhibit 56.—Remarks by Under Secretary for Monetary Affairs Yeo, March 30,1976, before
the Institutional Bond Club of New York at the City Midday Club, New York, N.Y., on
international liquidity
Discussions of financial affairs tum frequently to the role international liquidity
developments have played in causing the world's economic ills, particularly the vimlent
inflation of recent years. An inevitable corollary is that collective management or control
of intemational liquidity is necessary if we are to alleviate those ills. The popularity of these
themes leads me to devote my remarks this evening to the subject of intemational liquidity.
Specifically, I would like to respond to three common lines of thought on the subject: That
the recently agreed intemational monetary reforms are somehow incomplete because they
do not bring control over intemational liquidity; that excessive intemational liquidity has
been largely responsible for the severe worldwide surge of inflation; and that excessive
intemational liquidity is permitting countries to avoid adjusting to payments imbalances as
rapidly as they should.
These are important issues. But there is a serious danger that excessive attention to the
problems of intemational Hquidity will divert our attention from the basic causes of our
economic problems, and lead us down the wrong paths in the search for the required
solutions. Intemational liquidity developments do influence nations' economic welfare, but
they are not major determinants of that welfare. Even if the tightest controls of intemational
liquidity could be devised, they would assure us neither an ideal monetary system, nor success
in our efforts against inflation, nor equiUbrium in our intemational payments relationships.
I am particularly concemed that our efforts to contain inflation succeed. But to succeed we
must concentrate our efforts in the right direction. Control of intemational liquidity is not
the answer.
These issues must, in my judgment, be examined against the background of the profound
change which has taken place in thinking about the world's monetary system and the mles
goveming that system.
EXHIBITS
543
At meetings last January in Jamaica of the International Monetary Fund's Interim
Committee, the world's Finance Ministers agreed on a series of far-reaching structural
reforms in the international monetary system. That agreement represented the first general
revision of our international monetary arrangements since the basic framework for the
postwar economic system was created at the 1944 Bretton Woods Conference.
There are some who charge that, while the Jamaica agreement has introduced important
changes with respect to parts of the monetary system, reform is incomplete in that it does
not bring any central control over the aggregate of international liquidity. Such charges
reflect, in my view, a failure to perceive the evolution which has taken place in the
international monetary system and in the framework within which liquidity issues should be
considered.
We live in a different world from that which existed at the time of Bretton Woods. The
Jamaica compact reflects fundamental shifts in thinking from the ideas which underlay the
Bretton Woods system. It is widely acknowledged that the change in thinking—which focuses
attention on underlying economic factors—calls for a new and different attitude with respect
to exchange rates, gold, and other aspects of the monetary system. It is less generally
recognized that it calls also for a new perspective on the question of international liquidity.
The new monetary system agreed at Jamaica differs fundamentally from the Bretton
Woods system in the provisions setting forth exchange rate rules, and in the provisions on
gold—two of the basic components of the Bretton Woods system. Both changes stem from
a common idea: the view that monetary stability cannot be imposed on a heterogeneous world
by imposing a rigid monetary system—that monetary stability can be achieved only by
developing underlying conditions of stability in the major economies.
The reform dealing with exchange rates reflects that focus. The Bretton Woods system
recognized as legitimate only one exchange rate regime—par values. It assumed that
exchange stability could be achieved by requiring adherence to a more or less fixed structure
of exchange rates, using the threat of reserve loss or the eventual shame of a forced
devaluation as the leverage to influence domestic policies. That assumption proved wrong—
particularly in the conditions of the 1960's and 1970's, when extreme variations among
nations' economic policies, external shocks, widely disparate inflation rates, and the capacity
for massive capital flows ultimately led to collapse of the system.
The exchange rate arrangements agreed upon at Jamaica take a different approach. The
new provisions focus on underlying economic and financial conditions and acknowledge that
exchange stability can prevail only if nations achieve stability in those underlying economic
conditions. The new arrangements do not insist on a particular kind of exchange rate regime
such as par values. They provide wide latitude for an individual country to adopt specific
exchange arrangements of its choice, including floating, so long as that country fulfills certain
general obligations to follow internationally appropriate economic policies. This is the
reverse of the Bretton Woods focus.
Similarly, the new provisions for reducing the role of gold in the monetary system reflect
a shift in thinking about the effectiveness of that metal in fostering international monetary
stability. In placing gold at the center of the system, the founders of Bretton Woods were
merely reaffirming gold's traditional role as a disciplinary agent in a world of fixed exchange
rates. In practice, gold failed in that role. Instead, it became a contributor to instability—
its commodity uses conflicted with monetary needs; its supply limitations did not meet the
needs ofa vigorous and expanding world economy; and it proved to be an inherently unstable
foundation for the international monetary system. Accordingly, nations have agreed to
reduce the international monetary role of gold.
It remains for us tb adjust our thinking with respect to the role of international liquidity
in our economic and financial system. Though the Bretton Woods system has been replaced,
the question of international liquidity is still too often addressed in the terms ofthe past, and
we continue to hear widespread calls for international control over liquidity in the manner
of the past.
When I hear a call for some form of aggregate control over international liquidity, I wonder
what is meant. Is it proposed to substitute decisions of an intemational bureaucracy for
market mechanisms, and give some international group or institution the power to allocate
both international public credit and private credit among individual countries on one basis
or another? Is it proposed that all international private capital flows be prohibited, except
as licensed or authorized by an international control group? Is the intent to impose a system
of pure floating among all currencies—which would mean no country's official reserves
would change—or would a system of rigid exchange rates be established, with strict rules for
settling imbalances in particular assets? I can see many unattractive possibilities.
One thing is certain. Control over official reserves alone does not establish control over
the means of international payment. During the 1960's when the par value system of Bretton
Woods began to come under severe strain, much of the discussion of the problems of the
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1976 REPORT OF THE SECRETARY OF THE TREASURY
international monetary system was in terms ofthe issue of "international liquidity." Such
attention was understandable. The stresses of the par value system often showed up as
liquidity or reserve pressures on monetary authorities. The problem of deficit countries was
to obtain adequate liquidity; the problem of surplus countries was to absorb excessive
amounts of liquidity; the problem of the reserve center was to maintain a credible balance
between liquid liabilities and assets. And for the monetary system as a whole, there was the
serious problem of operating a rapidly expanding world economy with steadily expanding
liquidity needs within the constraints of a more or less fixed monetary base—gold.
Even in those days the concept of international liquidity was an elusive one. Traditionally
liquidity was measured in terms of countries' official reserves—gold, SDR, IMF reserve
positions, and national currencies—and attention was focused on the worldwide aggregate
of these official reserves. In today's world, the concept of liquidity, and the means of payment
for international transactions, are far broader. There is unprecedented capacity for
international credit and capital flows. An imbalance in world payments of $60 billion can
emerge over night and be financed virtually without declines in nations' official reserves. A
meaningful concept of liquidity almost has to include not only official reserves, but also
official borrowing power, private financial assets, and private borrowing power. Admittedly
the broader concept of liquidity not only vastly increases the magnitude ofthe figure to be
considered but also is vastly more difficult to measure.
In this context, the traditional measure of international liquidity—gross official reserves—
is of limited utility. For some countries—and not only the United States—the level of official
reserves has little or no relevance in determining economic policy. The concept of an
optimum level of world reserves was tenuous even in a world of par values. In the present
environment of flexible exchange rates, it is doubtful that the concept of an appropriate
aggregate stock of official liquidity is a useful guide to policy.
What, then, is the proper approach to international liquidity questions in this reformed
world, if it is not a focus on governing official reserves? My answer is that we must focus on
doing those things called for by the Jamaica agreements. And, I would argue that these
reforms in the international monetary system in fact greatly improve the prospects for less
violent fluctuations in international liquidity, however one defines it.
Certainly each step away from a central monetary role for gold constitutes a step away from
dependence upon that most erratic source of liquidity creation. That process must be
continued.
The Jamaica commitments to promote stability by fostering orderly underlying economic
conditions and to avoid manipulating exchange rates have perhaps even more important
implications for future patterns of liquidity creation. The new system does not focus on
aggregate international liquidity. But, by stressing more prompt and effective actions to
eliminate the international payments imbalances which have been a major source of liquidity
in recent years, the Jamaica system will yield not only greater stability generally but also
reduce the fluctuations in levels of international liquidity which have concerned some
observers.
Those who seek ways of restraining the growth of international reserves are troubled—as
we all are troubled—by the inflationary pressures that still threaten economic and social
stability in much of the world. They see a relationship between the relatively high rate of
growth in global reserves in 1970-74, and the relative ease with which many countries have
financed the large payments deficits that corresponded to the payment surpluses of the oil
producers and of other surplus countries. They ask themselves whether such large payments
deficits have not contributed to world inflation, and whether some sort of control on
international reserve growth or on international credit in the wider sense would have helped
the world's financial authorities to restrain the universally unwanted inflation.
The issue is whether financirig through borrowing has been preferable to attempted
adjustment through policies aimed at eliminating the deficit. The United States has been
deeply troubled about inflation and has worked hard to reduce the rate of price increases
from the double-digit level of 1974 to the present 6-percent zone. We fully agree that it is
essential to reduce inflation in other countries. But there are practical limits on the speed
with which adjustment to drastic changes can and should be made. In 1974 decisions to
finance the sudden cartel-imposed oil deficits entirely by reserve transfers rather than by
reserve creation undoubtedly would have meant a reduction in world demand and in world
inflationary pressures. The drawdown of existing reserves would no doubt have caused
governments to take more forceful measures to reduce their external deficits than they in
fact did. This would just as surely have meant futher major cutbacks in world production and
an even more severe recession than the one we have just experienced. It would probably also
have led to restrictions on world trade.
In the period after the oil price increases, nations had a choice between financing through
borrowing and attempted adjustment through elimination of the deficits—recognizing that
collectively the deficit could not have been eliminated without a totally infeasible reduction
in imports of oil. Had there been a strict international control over liquidity creation—public
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545
and private—during that period, one wonders whether those charged with that control would
have had the courage and foresight to provide for expansion of official reserves in the
magnitudes needed.
The desire to finance oil deficits was also a key factor in the recent expansion of
Eurocurrency markets. Indeed, the bulk of the funds required to finance oil deficits came
from the private financial markets—not only in Europe but notably also in the United States.
And if there remains any doubt that allowance for financing of these deficits for a time was
the desirable thing to do, consider what the implications ofa sharp cutback in international
credit availability would have meant to the depth and breadth of what was already the deepest
world recession in 40 years.
Clearly our banking institutions, whether offshore or onshore, require a proper degree of
regulation, to protect the public interest as well as to safeguard depositors. Events in several
countries have reemphasized the importance of bank regulation. But I see an important
distinction between regulation by individual governments of the national and international
banking activities of institutions under their jurisdiction and close international control over
the aggregate of nations' official reserves and private financial flows from one nation to
another.
While it is worthwhile to try to place international liquidity developments in perspective,
I think it is even more important to step back and reflect about the common sense causes
of the inflation we have experienced. It is, for example, difficult to exaggerate the impact
on inflation of the massive oil price increases over the past 2 years. Another uncomfortably
obvious shock was delivered at about the same juncture by crop shortfalls around the world
which resulted in sharp increases in food prices. There have been also highly synchronized
swings in economic activity among the industrial countries, which sometimes contributed to
too rapid expansion, and at others to a deep and widespread recession. But most
fundamentally, for a decade or more, too many nations have erred on the side of excessive
stimulus in their fiscal and monetary policies. I know that is true ofthe United States; I suspect
others around the world would also consider it true of their countries.
We would be ill-advised to expend our efforts in a misguided and unfruitful attempt to
manipulate the aggregate of official reserves—or some broader liquidity concept—as the
solution to the problems of worldwide inflation. That inflation had its roots in unwise national
fiscal and monetary policies. It will yield only to sound, determined domestic fiscal and
monetary policies. These policies are the most powerful and effective tools governments have
to manage their economic affairs. The basic key to containment of inflation is for individual
governments, by consistent adherence to sound domestic policies, to demonstrate to their
people that they do not have to accept inflation as a way of life.
In expressing doubts about undue attention to aggregate world liquidity, and in questioning
the wisdom of attempts to impose international administrative control over that aggregate,
I do not wish to suggest that liquidity growth and disciplines on liquidity growth are not
important. They are very important. What I am challenging is the mistaken presumption that
a market not subject to external administrative control is undisciplined. International
liquidity, in the present market-oriented world economy, is mainly created in the market, and
is mainly disciplined by the market.
It can be argued that in a free world economy, certain countries will not make an adequate
effort to adjust to their external imbalances. Indeed, it can be argued that some countries
have in recent periods not made such an effort—though this judgment cannot rest simply on
the observation that official borrowing has been high, but must reflect persistent maintenance
of exchange rates not in line with underlying economic and financial conditions. In such
cases, when a country is failing to adjust adequately to its external circumstances, the remedy
is not to impose administrative barriers to that country's official and private borrowing. It
is to seek a prompt implementation of the arrangements for IMF surveillance and
collaboration that are an important part of the monetary reform agreed in Jamaica, and to
encourge the adoption of the proper policies.
The financial markets impose their own form of liquidity discipline on borrowers where
those disciplines are called for. Lenders in the market, the suppliers of liquidity, will impose
borrowing limits on deficit countries whose debt problems appear difficult and whose
prospects are uncertain. Such discipline is an integral and proper part of adjustment.
We are now hearing charges that the international capital markets will not function
adequately in the period immediately ahead, and that private international credit will be cut
off abruptly, particularly for the developing countries which have borne a large share ofthe
world payments deficits in recent periods. There are calls for expansion of official credit
either in new forms, such as an allocation of SDR's, or through sharp expansion of credit
through the International Monetary Fund and the other multilateral lending institutions.
There is no reason to expect a widespread, abrupt decline in foreign private lending,
although the flow of market liquidity to some major borrowers, including some of the
developing countries, can be expected to shrink. But, more importantly, the time has come
for less emphasis on financing and more on adjustment—more domestic action to control
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1976 REPORT OF THE SECRETARY OF THE TREASURY
inflation and less accumulation of debt. Fortunately, there are indications that more
adjustment is in prospect. The need for credit by the developing countries as a group is
beginning to decline, as the sharp downward trend in LDC (less developed country) export
earnings associated with the world recession and inventory adjustment begins to move in the
opposite direction with world recovery. Certain ofthe developing nations will face financing
problems, because of structural difficulties in adjustment, or too weak an adjustment effort.
But a limited number of countries fall in this category. We do not foresee major liquidity
problems for the developing countries as a group. The measures taken recently in the IMF
to expand financing capabilities are fully adequate to meet the needs for official credit of
the developing nations. Indiscriminate creation of additional sources of official liquidity
would only serve to undermine the viability of the international financing institutions
themselves.
For developed and developing countries alike, controls on global levels of international
liquidity will have only a limited influence on their prospects for prosperity and stability.
Sound management of domestic economies is the key.
In the United States, economic developments are most encouraging. Our domestic
economy is experiencing a strong and sustainable recovery. A strong domestic economy is
the greatest single contribution the United States can make to international economic
progress.
Fortunately, the turning point in the U.S. economy occurred somewhat earlier than
anticipated and the pace of recovery during the transition period has been stronger than
expected. Economic historians will likely identify last April as the low point for the U.S.
recession. Since then, real final sales have increased at an annual rate of 5 percent and
industrial output has risen at an annual pace of 1 1 percent. The aggregate pattern of this
recovery has matched the growth rate of earlier cyclical upturns. Significant progress has also
been made in reducing the rate of inflation, in expanding employment opportunities, and in
significantly reducing the overall unemployment rate.
The forecast for real economic growth calls for continued expansion in the U.S. economy
throughout this year and into 1977. Real output will rise more than 6 percent as most ofthe
basic sectors ofthe economy experience solid gains. The major strength ofthe U.S. economy
will continue to be personal spending which represents approximately two-thirds ofthe gross
national product. As personal consumption expenditures provide the necessary foundation
for the economic recovery, the incremental thrust for growth will be provided by accelerated
private domestic investment. Business spending for new plant and equipment tends to lag
behind other sectors during an economic recovery, but the drop in such outlays bottomed
out during the fourth quarter of 1975 and new reports indicate that capital investment
appropriations have increased sharply. The quarterly pattern of business spending is
expected to accelerate throughout the year as rising corporate profits provide additional
incentive and improved corporate financial positions increase business confidence. Added
strength from inventory investment and the strengthing of construction activity will also
contribute to the strong economic growth expected in 1976. Finally, the cyclical expansion
in the United States will contribute to worldwide recovery as our demands for imports
accelerate throughout the year.
The sustainability of economic recovery around the world depends upon sound fiscal and
monetary policies. It also depends heavily on correction of the distortions in financial
structures which have been associated with the sharp cyclical changes and the strong
inflationary pressures that have occurred during the past 5 years. This is the real liquidity
problem which should concern us—the domestic liquidity problem in individual countries
arising from the recent cycle.
In the early part of that period, inflationary pressures developed as a result of the rapid
and, by most standards, unsustainable expansion in real economic activity together with too
rapid an expansion of money. These phenomena, strengthened by the quadrupling of oil
prices and sharp rises in food prices, culminated in the deepest recession in a generation. In
turn the severe recession led to a massive inventory adjustment. Expressed in nominal or
money terms, these swings in economic activity have been more pronounced.
A large portion of the monetary expansion that characterized those years was financed in
short-term financial markets. This led to a large buildup in short-term assets and liabilities,
and was further reflected in the reduced availability of funds in the long-term markets.
Inflation reduced the willingness of savers to commit their funds at long-term. As short-term
debts increased, business firms became more vulnerable to cyclical fluctuations because of
the fixed interest charges and the frequency of principal repayments.
A precondition for a more balanced market situation is a full return to conditions of
underlying economic stability which would facilitate the funding out of the maturities of a
large part of the short-term assets and liabilities. In the United States, there is evidence that
we are making real progress in this effort. In 1973 and 1974, U.S. corporate financing had
shifted heavily toward increasing dependence on short-term debt, and our commercial
banking system, drawn upon extensively in meeting corporate requirements, drew down its
EXHIBITS
547
own liquidity and borrowed extensively in the money market, in the form of certificates of
deposit. But last year, a recovery in operating profits and the inventory runoff allowed
corporations to reduce their dependence on outside financing and on short-term indebtedness, while increasing long-term borrowing. The improved corporate position was refiected
in reduced demands upon the banking system, which allowed the volume of its certificates
of deposit to decline, while rebuilding its own liquidity. With the end in the United States
of an era of undue dependence upon short-term borrowing, the task now is to assure that
financing patterns around the world are similarly healthy.
Ladies and gentlemen, I will conclude on an optimistic note. The attention of all nations
appears to be properly turning to the fundamental importance of longer term economic
stability. This shift augurs well for the future management of our domestic and international
economic affairs, particularly the control of inflation. If each nation will individually manage
its affairs responsibly, and if we all remain firm in our commitment to international
cooperation in monetary and trade matters, we can look forward to future progress without
concern about excessive international liquidity. The Jamaica agreement provides the
necessary framework for an improved monetary system. Our challenge is to make it work.
Exhibit 57.—Remarks by Deputy Assistant Secretary Widman, May 24,1976, at the World
Trade Institute, World Trade Center, New York, N.Y., on U.S. balance of payments policy
It is quite a pri^/ilege to open the World Trade Institute seminar on "Operating in an
Environment of Variable Exchange Rates." I see from the program that you plan to move
swiftly into some of the very specific practical problems with which a corporation engaged
in international trade or financial transactions must deal. I hope that riiy remarks will provide
a useful setting for your examination of these important questions and assist you in arriving
at conclusions.
You are meeting just at the close of what has been designated as "World Trade Week,"
a time when there is special emphasis on the transactions that cross national political
boundaries and necessitate the pricing of one currency in terms of another. With U.S.
intemational transactions in goods and services alone mnning at more than $300 billion a
year, there is ample reason for such emphasis.
You asked me, as a representative of the Treasury Department, to talk about the balance
of payments policy of the United States. I want to interpret that phrasing rather broadly
because balance of payments policy is inextricably linked with intemational monetary policy
which, in turn, is inextricably linked to domestic economic policy. Actually, the key to an
understanding of current balance of payments policy is an understanding of agreements
concluded at Rambouillet, France, last November and at Kingston, Jamaica, in January 1976
which provide for a new international monetary system. Thus I think it may be best to begin
with a bit of history and a brief explanation of the Rambouillet and Jamaica agreements.
Thirty-two years ago, in 1944, most of the world's trading nations met in a monetary
conference at Bretton Woods, N.H., and agreed on a set of mles to serve as the basis of the
postwar international monetary system. Their basic objectives were to promote intemational
monetary cooperation, to promote intemational exchange stability, to eHminate restrictions
on foreign exchange transactions, and to encourage the growth of world trade. They
established the Intemational Monetary Fund as the institutional focus for the operation of
the system, gave it financial resources with which to provide medium-term balance of
payments support and induce balance of payments adjustment, and they wrote out a very
detailed operational charter which became known as the Articles of Agreement of the IMF.
The fundamental approach incorporated in the Bretton Woods system was one of seeking
to promote stability through the maintenance of relatively fixed rates of exchange among the
currencies of member countries. All countries were expected to designate par values for their
currencies, expressed in terms of gold and U.S. dollars- which were presumed to be related
at the immutable figure of $35 per fine troy ounce. Monetary authorities were to keep the
exchange rates within 1 percent of the par value by buying or selling their currencies against
gold or a currency such as the dollar which was convertible into gold. Countries were
expected to pursue domestic policies that would facilitate the maintenance of these par
values, borrowing from the IMF where necessary in order to provide time to reap the lagged
benefits of changes in policy. The par value itself was not altered unless and until it became
abundantly clear that a fundamental change in economic relationships had occurred and it
was clearly impractical to restore the original relationship.
For many years the world economy was sufficiently stable to allow this system to work
reasonably well. The world experienced an unprecedented period of growth and progress;
trade and payments restrictions were materially reduced; the volume of world trade jumped
dramatically and world financial markets underwent a simultaneous process of expansion and
integration.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
But other changes occurred as well. The economies of Europe and Japan rose up from the
ashes of war while we ourselves were drawn into wars. Both tne magnitude and the pace of
change quickened. The goals of preserving official par values for currencies were
overshadowed by more powerful political and economic forces, by governmental mismanagement, or by sheer political weakness. The par value system was not flexible enough to
adapt to these pressures. In particular, currency adjustments were primarily on the
downside—often agonizingly and belatedly, countries with payments surpluses felt no
incentive to appreciate their currencies, the world became dependent on U.S. payments
deficits, and the United States could no longer afford to maintain an overvalued currency
at the expense of its own economic welfare. In 1971 the par value system, which had in fact
already failed, came to an end when the United States officially suspended the convertibility
of the dollar into gold.
After the breakdown of Bretton Woods, it took the world 4 years to build a consensus
around a new system. Not until the Rambouillet conference ofthe heads of state of 6 major
nations was there agreement among the large industrial nations, and it was at the Kingston,
Jamaica, meeting of the Interim Committee of the IMF last January that this consensus was
broadened to include all of the 127 countries which are members of the IMF.
The Governors of the IMF have now approved major changes in the original Articles.
These changes are currently being put before the parliaments of the world for formal
ratification. They will come into effect when that process has been completed. The proposals
were formally put before the Congress on May 15, and we expect the first hearings to be held
next week. Our goal is to achieve complete and final action at this session ofthe Congress.
The new system does not alter or weaken the basic objectives of Bretton Woods, but it
differs fundamentally on the method of achieving those objectives. It is this conceptual
difference which is particularly significant. Under the old system, the monetary authorities
of a country set a par value for their currency, accepting an implied obligation to pursue
whatever domestic policies might be needed to maintain that rate, whatever happened at
home or abroad. The new system does not focus on exchange rates directly, but on the
achievement of stability in underlying economic and financial conditions in individual
countries. It is based ori the recognition that you cannot—indeed, should not try to—maintain
an unchanged exchange rate relationship between two currencies if the basic trends in the
two domestic economies are moving in different directions. Thus it reflects the conclusion
that the way to stabilize exchange rates—the only way to stabilize exchange rates—is to
stabilize underlying economic and financial conditions.
This becomes very explicit when one looks at the policies for intervention by monetary
authorities. The potential for a contribution to exchange rate stability by monetary
authorities is expressly recognized. But the purpose of such intervention is limited to
transactions designed to counter disorderly market conditions—conditions which would be
likely to cause erratic fluctuations in rates of exchange. Intervention to affect trends in
exchange rates which result from changes in underlying conditions would not meet this
standard.
This approach—this concept—is fundamental to our understanding of current balance of
payments policy. Under the par value system, any imbalance in a country's international
transactions which tended to cause its exchange rate to fall led instead to a loss of official
reserves. When market pressure brought the exchange rate to the edge of the accepted
margin around the par value the monetary authorities were obliged to step in and use their
reserves to buy a sufficient quantity of their currency to prevent the rate from falling further.
In balance of payments statistical presentations great emphasis was placed on what was
called the official settlements or official reserve transactions balance. This balance indicated
the gain or loss in official reserves and thus in the resources available to defend the exchange
rate. Much attention was focused on this balance. When it signaled trouble, governments
looked for ways to alter their international transactions so as to change that balance.
Sometimes governments recognized that the proper response was a change in domestic
fiscal and monetary policies; sometimes they did not. Sometimes the primary cause lay not
in the policies of the country in deficit, but in the levels at which its trading partners had set
their par values. Sometimes efforts were made to correct the balance through solutions or
specific balance of payments policies which were in basic conflict both with the objectives
of an open trade and payments system and with long-range progress in the domestic economy.
In the 1960's, for instance, the United States, in an effort to reduce a balance of payments
"deficit," (1) imposed restrictions on investments abroad by Americans, (2) put limits on
bank lending to foreigners, (3) expanded subsidized export credit, (4) reduced duty-free
allowances for tourists, (5) deliberately "twisted" the yield curve on debt instruments, (6)
increased preferences accorded domestic suppliers in Government procurement, and (7)
took a number of other specific actions in an effort to maintain a fixed exchange rate which
was not consistent with the underlying economic and financial factors prevailing in the
American economy and in those of our major trading partners. Yet many countries were
reluctant to face up to the need for change. It was not until the failure of this policy became
EXHIBITS
549
obvious, when the unsustainability of the rate became so apparent that companies found it
essential to hedge all their foreign currency liabilities and speculators moved in for the easy
kill that the United States was able to insist on basic modifications.
The new system obviates the necessity for this type of balance of payments policy. We do
not want limitations on capital transactions any more than on transactions in merchandise
trade. The subsidization of export credit has no defense beyond a plea to match the subsidy
of a competitor; domestic preferences for government procurement can be justified, if at all,
only by the argument that other nations do the same or by the contention that there is inequity
in too abrupt a change of rules. Balance of payments policies under today's system can be
expressed quite simply: pursue fiscal and monetary policies which will lead to sustainable
economic expansion with reasonable stability of prices and accept the balance of payments
results.
You may have noted that just last week the Office of Management and Budget announced
a major change in the statistical presentation ofthe U.S. balance of payments designed to
reflect the new monetary system. The tables in the Survey of Current Business will no longer
contain any balances. Memorandum items will be shown which give several partial balances:
On merchandise trade, on goods and services, on goods, services, and remittances, and on
current account. Nowhere, however, will the tables show the previous overall balances on
current and long-term capital account, net liquidity, or oftlcial reserve assets transactions.
These balances have no particular meaning under the new system, and it is wrong to try to
characterize the strength or weakness of the U.S. payments position by referring to any of
them.
As the Advisory Committee on the Presentation of the Balance of Payments Statistics
concludes in its report, "A meaningful picture of U.S. international transactions can be
obtained only from an analysis of information on several if not all of the categories of
transactions, rather than by concentrating on one or more of several overall balances."
Though the partial balances which will continue to be shown as memorandum items are valid
and significant for particular purposes, it is important that they not be misused.
There are those who feel that the United States might appropriately have objectives or aims
as to the structure of its payments positions even if there is no meaningful overall balance.
Some have contended that the United States should seek a surplus on current account—
attempt to be a net exporter of goods and services—in the belief that such a surplus will mean
more jobs for Americans and less unemployment.
On the other hand, some have contended that the United States should attempt to alleviate
the shortage of domestic capital by importing funds from abroad.
Obviously we cannot do both at the same time. When we have a surplus on current account
we are exporting capital, net. We are providing goods currently in exchange for a financial
claim which can only be paid off at some future date by a net import of goods and services
to the United States. Thus those who advocate the net borrowing of funds from abroad to
alleviate a domestic capital shortage are arguing for a deficit on current account—an excess
of imports over exports. They are saying that the United States should seek to receive a net
infiow of goods currentiy, giving in exchange an I O U to be paid in goods at some later date.
Who is to say which of these situations would best serve the economy at any particular
moment in time? The economic advantage could shift with changing circumstances. And so
we say, "Let the marketplace decide." Let the outcome be the net result ofthe millions of
individual transactions in goods, services, and financial assets, responding to price and other
normal commercial considerations and without official interference on the exchange rate.
The price of the currency will rise or fall until a balance is struck between supply and demand,
and the striking of that balance will not turn on whether the funds are sought to pay for goods
or to pay for a financial asset. If the balance is struck at a level which involves an excess of
exports of goods and services with a net export of capital, so be it; or if an excess of imports
of goods and services with an inflow of capital, so be it.
This policy—this system—has significant implications for individual firms—and for the
individuals within firms who must make decisions about procurement and sales and
investments. Later in your seminar you will examine the factors which influence exchange
rates and discuss forecasting techniques. Let me say quite frankly that the U.S. Government
does not believe it possible to calculate in advance the exchange rates which would reflect
underlying economic and financial sectors in any particular situation. We do not believe it
possible to quantify and relate all ofthe many factors which influence rates day to day, week
to week, and month to month. The techniques are not even available to measure
competitiveness of goods, let alone services and capital transactions. We are not able to
measure and incorporate in a rate determination exercise all the effects of income elasticities,
of expectations with respect to inflation rates and interest rate differentials, of the market
appraisal ofthe prospect of changes in governmental policy in an important country, or the
impact of unexpected political developments.
This impossibility of determining the "right rate" is being recognized increasingly by
monetary authorities, although some are still reluctant to abandon the attempt. Occasionally
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1976 REPORT OF THE SECRETARY OF THE TREASURY
we still see some government attempting to maintain through central bank intervention what
it believes to be an appropriate rate. Sooner or later, however, these attempts fail. There have
been occasions when efforts to maintain a particular rate actually disrupted the market and
cost the government involved a pretty sum of cash.
The United States holds no illusions whatsoever about the capability to determine the right
rate. The Treasury has given clear and firm assurance that the United States will intervene
only when it appears necessary to counter disorderly conditions in the foreign exchange
markets or to acquire foreign exchange to repay debts. Under this policy, we will not attempt
to keep the exchange rate at any particular figure or within any particular zone or range. We
will leave the exchange risk where it belongs: with the employer of venture capital.
I should qualify this statement by noting that if the structure of our payments position were
being sharply affected as a result of the manipulation of the system by one of our trading
partners, we would be very much concerned. We would be concerned by any form of either
active or passive resistance to needed payments adjustment. An interdependent world will
only prosper in an open trade and payments framework, not with myriad restrictions and
controls on trade or investment. This is why we are pressing strongly for further liberalization
of trade in the multilateral trade negotiations and why we are working for a consensus or
"code of conduct" on investment.
It is also why there is a specific prohibition in the proposed new text of the IMF Articles
of Agreement against manipulation of the monetary system. One of the principal
responsibilities of the IMF under the new system will be to monitor the operation of the
system so as to ensure that there is no manipulation. We ourselves will be on the lookout
constantly to ensure that this does not happen.
A second point I would add is that if the oil cartel succeeds in maintaining an artificially
high price level, it is likely that several of the major oil producers with relatively small
populations will, for several years, continue to receive foreign exchange income far beyond
their needs—or, indeed, their physical capacity to absorb imported goods. For them there
is no practical alternative to a surplus on current account. In 1976 the surplus of these few
countries could total as much as $45 billion. That means that for the rest of the world
collectively there must be current account deficits totaling an equal sum.
When a country has a current account deficit the excess of imports is paid for by borrowing.
The surplus oil producers will be lending—somewhere in the world—even if some of that
lending is no more than unspent barik deposits in foreign banks. The countries in current
account deficit will have to borrow externally, not necessarily directly from the oil producers
but from someone, somewhere. An increasing number of countries are approaching the limits
ofthe amounts which they can afford to borrow—or which creditors will lend to them. These
countries are thus faced with the necessity of pursuing policies which will eliminate their
current account deficits.
If the system is to work, if there are not to be breakdowns or the spread of restrictions on
trade and payments, those countries which have the strength to attract foreign capital must
be prepared to accept substantial current account deficits. They must not resist or counter
the efforts of the weaker nations to adjust. The United States is one of quite a number of
countries in that position.
Our current account position has shifted dramatically in the last 2 years. We had a small
deficit, $500 million, in 1974, when for most of the year the economy was straining at
capacity and there was a huge speculative buildup of inventories. In 1975 we had a current
account surplus of nearly $ 12 billion as our economy wallowed in recession and we went
through perhaps the sharpest reduction in inventories in 50 years. Now that pattern has
changed again. The U.S. economy is expanding strongly—a few months ahead of its major
trading partners. Prices of industrial raw materials are rising. Some rebuilding of inventories
may be underway.
In the first 3 months of the year our trade deficit—measured on a balance of payments
basis—was $ 1.6 billion. While the data are not yet available, it is probable that our current
account was in deficit during the first quarter by several hundred million dollars. That
situation seems likely to continue for some time. If it does, we will be borrowing, net, to
supplement the domestic funds available for investment and consumption. We will be making
it easier for some of the developing countries and weaker industrial countries to avoid
restrictions or further curtailment of their domestic economies. If this happens, it will be
through the operation of market forces and a U.S. balance of payments policy which is good
for the Nation and good for the world.
There is one very important a.spect of the Rambouillet agreement which I have not
mentioned; that is, the intensification of cooperation among the finance ministries and
central banks of the major nations. The "spirit of Rambouillet" is very much alive.
Consultations among the major nations are much more satisfactory now than they have ever
been—more frequent, more open and frank, more comprehensive in their coverage than
ever. We are learning a great deal about each other's economies, about each other's policies,
and about the implications of those policies for the rest of the world. We are learning to
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understand how the concepts ofthe new monetary system apply in practice. We are learning
that we do not know what tne exchange rates ought to be at any particular time and that there
is no valid way to calculate in advance a "right exchange rate' on the basis ofwhich a central
bank could recognize and counter an "erratic fluctuation."
No one should have been surprised at changes in exchange rates since Rambouillet, and
no one should be surprised if other rate changes occur. Rambouillet did not promise instant
stability of rates. In fact, it warned that rate stability could not be expected until underlying
conditions had been stabilized. At this point underlying economic and financial conditions
around the world are not stable—but very unstable. For example, consumer prices in 1975
rose 4 percent in Germany, 9 percent in the United States, 12 percent in France and Japan,
17 percent in Italy, and over 24 percerit in the United Kingdom. In most cases the differentials
have narrowed somewhat in the past few months, but they remain substantial and it will
require all the skill and all the courage which governments can muster to bring inflation rates
down to the level needed for sustained economic expansion and stability of rates of exchange.
For the United States, that stability is the goal both of domestic policy and of balance of
payments policy.
To sum up very briefly: U.S. balance of payments policy is directed toward: (a) Fostering
economic and financial stability in our own economy, (b) preserving an open trade and
payments system, (c) guarding against the manipulation ofthe system by other nations, (d)
cooperating closely with others in the pursuit of stability in underlying economic and
financial conditions, and (e) allowing market forces to determine both the standard of our
balance of payments positions and the rate of exchange at which balance is achieved.
We firmly believe that this policy will provide a framework within which international trade
and payments can flourish to the benefit of this Nation and the world at large.
Exhibit 58.—Statement of Secretary Simon, June 1, 1976, before the Subcommittee on
Intemational Trade, Investment, and Monetary Policy of the House Committee on Banking,
Currency and Housing, on amendment of the Articles of Agreement of the International
Monetary Fund and an increase in the U.S. quota
Agreement has now been reached on the main elements of a new intemational monetary
system. Since the breakdown of the Bretton Woods par value system 5 years ago,
intemational exchange arrangements have of necessity been operating outside the rule of
law. Lengthy intemational debate, negotiation, and experimentation have brought consensus
on a new flexible and resilient system, replacing the exchange rate rigidity and gold emphasis
of Bretton Woods.
Throughout the period when the new system was being formed, the Congress- and in
particular this subcommittee- have played an active and highly constmctive role. My
colleagues and I have had profitable and productive discussions with subcommittee members
on themes, concepts, and directions the new system should take. Your counsel has been of
enormous value in the formation of U.S. policies. I want to acknowledge your contribution
and express my thanks.
The foundations of the new system are embodied in the legislation before you. Specifically,
that legislation would authorize two related actions: U.S. acceptance of an extensive
amendment of the Articles of Agreement of the Intemational Monetary Fund, and U.S.
consent to a proposed increase in its quota in the Fund. My purpose today is to discuss the
concepts of the new system and the thinking on which it is based; to tell you why I regard
its introduction as essential to the interests of the United States; and to urge that you give
your strong support to the legislation authorizing its adoption, in order that we can move
promptly to restore an effective legal framework that will reduce the risk that nations will
be tempted to follow selfish policies which pay too little regard to the effects on others.
Reaffirmation of IMF role and Bretton Woods objectives
The new monetary system, the main lines of which were formulated in Jamaica last
January, differs fundamentally, in philosophy and in operation, from the Bretton Woods
system it replaces. But the new system will retain and build on two important basic features
of the Bretton Woods framework:
F irst, the central pivotal role of the International Monetary Fund as the institutional
heart and monitor of the system will be continued, and indeed strengthened.
Second, the essential aims of Bretton Woods, which give cohesion and direction to the
monetary system, will be reaffirmed. Those aims, identified in article I of the present IMF
charter, include: Fostering intemational monetary cooperation and the balanced growth
of trade; promoting exchange stability and the elimination of exchange restrictions; and
providing temporary balance of payments financing to allow members an opportunity tP
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1976 REPORT OF THE SECRETARY OF THE TREASURY
correct maladjustments without resorting to measures destructive of national or
international prosperity.
Taken as a whole, these purposes represent a solemn commitment to the philosophy of
a liberal world monetary order. The decision by the international community in 1944 to
dedicate itself to these aims niarked a turning point—from the selfishness and destructiveness
ofthe 1930's, when each nation sought to lift itself from the morass of world depression at
the expense of its neighbors, to the cooperative approach to international monetary problems
which has since prevailed.
That is the guiding spirit of Bretton Woods and a part we must not lose: The commitment
to international cooperation and responsible international behavior. The continued validity
of, and need for, the Bretton Woods objectives are not questioned, and IMF article I is
accordingly being reaffirmed.
Conceptual framework of the new system
But while the new system provides the same aims as the Bretton Woods system and
continues to rely primarily on the IMF as the institution for achieving its purposes, it differs
in other critical respects.
The Bretton Woods system was created against the backdrop of a different world—the
world ofthe 1930's and 1940's, in which levels of international trade were very low; in which
capital fiows had virtually dried up and the value of international investment to international
prosperity was not recognized; in which reliance on direct controls was widespread; in which
interest rate and monetary policy instruments had fallen into relative disuse; in which the
attention of policy officials was directed single-mindedly toward jobs and employment goals.
Structurally the world of Bretton Woods was very different because the number of sovereign
nations participating in the international system was perhaps one-third the present number;
and because there was a single strong currency—the dollar—and a dominant economy—the
United States—which could absorb the combined impact of adjustment policies and reserve
changes of the rest of the world.
It is understandable that features of a monetary system designed to meet the problems of
that world could become obsolete and anachronistic in the conditions of today, where the
structure ofthe world economy has changed and the problems have changed—where nations
are struggling to get below double-digit inflation and are living with levels of unemployment
far in excess of those prevailing in the early postwar years.
The proposed new system differs most importantly on how best to bring stability to the
international monetary system. Bretton Woods sought to impose stability on countries from
without, through the operation of international monetary mechanisms; the new system seeks
to develop stability from within, through attention to responsible management of underlying
economic and financial policies in individual member countries.
Bretton Woods was based on the idea that stability could be imposed on a heterogeneous
world by a structure of par values, supported by financing from the Fund. That system,
developed at a time when the competitive depreciations of the 1930's were fresh in mind,
recognized as legitimate only one exchange rate practice—par values. It assumed that if
countries were required to adhere to fixed exchange rates, to be altered only after
fundamental economic changes had occurred, and were supplied with moderate amounts of
Fund credit, that arrangement would provide adequate leverage—at least on deficit
members—to encourage stable economic policies. But as this subcommittee well knows, it
proved incapable of dealing with the changed world ofthe 1960's and 1970's, when external
shocks of unprecedented magnitude, widely diverging inflation rates, extreme variations
among nations' economic policies, and the capacity for massive capital flows relative to
limited fund resources led ultimately to breakdown of the par value system.
The new system takes a different approach. It does not rely on the system to force stability
on member countries, but looks to the policies of member countries to bring stability to the
system. In the exchange markets, the new system does not seek to forestall change by
imposing rate rigidity, but recognizes that countries' competitive positions do and will
change, and that it is far less destabilizing to permit rates to move in response to market forces
than to hold out until the abandonment of costly large financing efforts brings abrupt jumps.
It recognizes that the only valid path to international monetary stability is the pursuit of
policies in the member countries that converge toward stability rather than diverge into
instability. It acknowledges that we can never assure lasting stability in exchange rates
between the dollar and yen, or mark, for example, if the underlying trends in the economies
of the United States and Japan or Germany are sharply different in pace or direction.
This is much truer today than 30 years ago because of the progress we have made in
liberalizing the world economy and the growth of economic interdependence. The move to
a liberal and integrated world economy has brought greater prosperity and major benefits
to all nations. But allowing wider scope for international commerce also means greater
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potential for disruption from that commerce. With freedom for expanded trade and capital
flows, market responses to changing conditions can be swift and massive. In today's
integrated world economy, action to manage or fix exchange rates in contradiction to basic
market forces will fail. In recent years, nations have learned this lesson time and again, and
those who challange it do so at their peril.
The new monetary system is therefore a more flexible, pragmatic, market-oriented system,
better suited to the highly integrated world economy of the present. It recognizes that
countries cannot define their obligations in terms of measures to be adopted only after the
strains occur. It looks to prevention, whereas the old system applied only cures, often too
late and with ineffective doses. It concentrates on the real determinants of monetary
stability—stability in underlying economic and financial conditions—rather than on the
exchange rate consequences which were the focus of Bretton Woods.
Obligations regarding exchange arrangements
That philosophy underlies the new Article IV: Obligations Regarding Exchange
Arrangements. This critical part of the Articles provides the legal framework and nucleus
of a new system. The new article IV contains five major provisions:
One, the article provides for specific obligations of each member to promote underlying
stability. In the words of the article, each member must, with due regard to its
circumstances, "endeavor to direct its economic and financial policies toward the
objective of fostering orderly economic growth with reasonable price stability," and "seek
to promote stability by fostering orderly underlying economic and financial conditions."
Two, the article provides wide latitude for a member country to adopt specific exchange
arrangements of its choice. Each member must collaborate with the Fund and with other
members to assure orderly exchange arrangements, but the article does not insist on par
values or any particular exchange rate regime. It permits a range of exchange rate
practices—including floating: EC "snake-type" arrangements; and pegging to another
currency, to a basket of currencies, or to the special drawing right (SDR).
Three, the article requires that members avoid manipulating exchange rates or, more
generally, the international monetary system to prevent effective halance of payments
adjustment or to gain an unfair competitive advantage. This requirement is aimed at
promoting responsible exchange rate behavior, the avoidance of competitive undervaluation, and beggar-thy-neighbor policies. It can, moreover, yield a major improvement over
Bretton Woods in providing for symmetrical Fund examination of surplus as well as deficit
countries—since a surplus country which refused to allow its currency to appreciate and
accumulated excessive reserves would be "preventing effective balance of payments
adjustment."
Four, the article provides authority for the IMF to oversee the compliance ofeach member
with its ohligations—the undertakings to promote stability, to avoid manipulation that
prevents adjustment or gives an unfair advantage, and to collaborate with the Fund and
with other members to assure orderly exchange arrangements. This authority for Fund
surveillance gives the Fund the task of applying a global perspective to actions of those
members that cause adjustment or other problems for other members.
Five, the article provides the means with high majority vote, for future evolution ofthe
system, if modification is called for to meet future needs.
In summary, the new article IV contains the essential elements of a balanced, realistic, and
workable system, monitored by the IMF. Member countries have freedom to pursue
exchange practices of their choice—individual floating, or joint floating, or tied to a currency,
or otherwise—but undertake important commitments for responsible international behavior—to follow stable economic and financial policies; and to avoid actions that distort world
production, trade, and investment to the harm of others. The IMF for its part will pay less
attention to such procedural questions as whether a currency is floating or fixed, but will have
broad new authority to oversee the system to promote its effective operation and to oversee
the compliance of members with their obligations. These obligations are designed to
minimize international tensions in exchange matters, while at the same time giving member
countries greater freedom to choose the exchange procedure they wish to utilize.
The IMF is in a very real sense the focal point, the core ofthe system. Members are obhged
to provide the Fund with the information necessary for intelligent surveillance of their
exchange rate policies. In addition, the Fund is called upon to adopt "specific principles",
for the guidance of members with respect to those exchange rate policies to assure that
manipulative practices are avoided. In the Bretton Woods system the Fund's attention was
more likely to be directed toward a member in times of crisis, and more narrowly focused
toward exchange markets. By contrast, under the new system. Fund consultations with
members are likely to be more continuous, more broadly based, more concerned with the
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1976 REPORT OF THE SECRETARY OF THE TREASURY
/ •
real international impact ofa country's actions, and directed to all countries, not just those
in deficit.
Fund surveillance and oversight of members' exchange rate policies does not mean that
the Fund can determine the policies of sovereign countries. This would be totally impractical
and unacceptable to the United States and all Fund members. But one member's behavior
should not be at the expense of other members' well-being. Within that context, the Fund
can develop general principles interacting with a type of common law based on application
of these principles to individual cases, aimed at assuring that members' exchange policies
promote stability and adjustment and are not designed to gain an unfair competitive
advantage.
In developing specific principles, the Fund will need to proceed cautiously. Such principles
must have very broad acceptance by Fund members. Their development cannot be forced,
but they can be expected to emerge over time in the light of general and specific consultations
with members. In this way, the general principles of acceptable behavior will evolve,
grounded on the agreed objectives and obligations of article IV.
Fund surveillance of members' policies should not be aimed at trying to calculate a zone,
or target, or "right rate" for individual currencies toward which exchange rate policies should
be directed. Such an approach is, in my view, inconsistent with the new article IV and is
neither conceptually sound nor technically feasible. It suffers from the same basic flaw as
the par value system—it assumes that we know, or can determine, what should be at least
approximately the equilibrium rate for each currency. It is, in attenuated form, a throwback
to Bretton Woods, a fixed-rate psychology, a search for "fundamental equilibrium." Even
in theory there is no single right rate in a world of large capital flows in which inflation rates,
domestic objectives, monetary and fiscal policies, to name but a few infiuences, not only
differ among countries but can change rather rapidly.
The technical difficulties of calculating a proper exchange rate zone or right rate are so
formidable as to render this approach impractical as a guide to policy. The approach assumes
that we can compare one country's inflation rate against other countries' and thereby
determine what its exchange rate should be. There are problems of obtaining the right
indices—knowing what weights and base periods to use; problems of obtaining proper data—
which are inadequate in most countries; and problems of measuring price and income
elasticities. Perhaps more importanfly, these calculations look only at the impact of
merchandise trade on exchange rates and pay no account to capital movements, which loom
so large in determining the exchange rates of so many currencies. With the present state of
the art, such attempts on the part of monetary authorities to calculate the right rate and then
use the results as the basis for exchange rate policy are tantamount to a daily renegotiation
of a par value system on the basis of limited and inadequate data underpinned by flawed
concepts. Moreover, the data used all relate to past periods and are entirely backward
looking, whereas exchange rates are partly forward and partly backw ard looking, anticipating
future economic and financial trends as well as recording past developments.
The reaction to the exchange arrangements in the new article IV by the general public,
industry, and the academic community has been favorable. Some who may feel that
amendment is of little urgency because present de facto exchange arrangements have worked
satisfactorily should perhaps reflect on the dangerous consequences for all nations if, in
present extra-legal circumstances, there should be substantial moves toward exchange rate
manipulation. And those who have expressed concern that the new arrangement lacks the
elements ofa "system" have perhaps paid inadequate attention to the obligations of article
IV and the importance of those obligations to the structure ofthe new system. Certainly the
new arrangements are less of a grand design than Bretton Woods—and appropriately so. The
Bretton Woods system was created when war had destroyed all vestiges of an international
monetary order, and a universal, complete new structure had to be developed. But much of
the Bretton Woods system remains valid—I stressed earlier that the objectives would be
reaffirmed—and those parts have been retained as a foundation.
The allowance for possible future evolution of the exchange system is a noteworthy
provision. The experience of Bretton Woods shows the difficulty of trying to foresee just what
exchange arrangements may be required to meet the needs of a world 15 or 20 years ahead.
The new article IV provides that with broad consensus the system can be adapted. The Fund
can decide, by 85 percent majority, to establish general exchange arrangements which might
be appropriate to evolving circumstances, or to introduce a system based on "stable but
adjustable" par values. But any introduction of a general par value system under the amended
Articles would require a determination that certain specified conditions existed to assure that
such a system would be workable—conditions related to the existence of stability in the world
economy, effective balance of payments adjustment arrangements, sources of liquidity, and
other factors. It is further provided that if a new par value system were established, it would
be rnore flexible than the Bretton Woods arrangements in certain important respects:
Individual countries would not be required to establish par values but could adopt other
exchange arrangements; a country having adopted a par value could terminate it and
EXHIBITS
555
reestablish it under certain conditions; par values could be changed more readily; and
provision would be made for wider margins and for decisions to change margins.
Since future adaptation of the system, either to general exchange arrangements or to
general par values, requires an 85-percent majority vote, the United States, with nearly 20
percent, will have a controlling vote. In any event, the United States cannot be required to
establish or maintain a par value for the dollar.
The amended Articles will terminate for IMF purposes existing par values of all IMF
members. The legislation before you would repeal the par value of the dollar. Prior
congressional approval would be required to authorize any future establishment of a par
value for the dollar in the Fund and to authorize any change in the par value if one were
established.
The legal standard for the dollar of $42.22 per fine troy ounce of gold would be retained
solely with respect to gold certificates held by the Federal Reserve System—the only
domestic purpose for which a value of the dollar in terms of gold is needed. Approximately
$ 11 1/2 billion of these certificates are now outstanding and are being retired by the Treasury
as its gold holdings are sold.
This subcommittee knows well the importance to the United States of safeguards with
respect to future modification ofthe international monetary system. You are well aware of
the difficulties which arose under the Bretton Woods arrangements when the dollar was
pinned down at the center of the system and could not adequately move in response to
underlying market forces. The results, in the late 1960's and early 1970's, were severely
adverse for the U.S. economy—not just in increased debts, but in the loss of jobs, productive
capacity, and the transfer of our industry abroad. We must be able to avoid any such situation
in the future. It is not just a matter of academic theory, it is a matter critical to the strength
of our economy and prosperity of our citizens.
Rambouillet and recent market developments
Let me comment for a moment on recent market developments, in the light of the
proposals for the new monetary system, and the related understandings reached by the
United States and other major industrial nations at the Rambouillet summit meeting last
November.
At Rambouillet broad understandings were reached on structural reform—these
understandings were reflected in the proposed new Article IV, which I have just described.
Understandings were also reached on more immediate operational issues to further and to
implement the concept that stability of underlying economic conditions is a prerequisite to
exchange stability. As a product of the understanding, the United States and others agreed
to improved consultations—deepened, broadened, more frequent consultations—among
treasuries and among central banks. These consultations are an indispensable element ofthe
understandings. It is only through such consultations, by the responsible senior policy officers
in treasuries and central banks, that we can gain the comprehensive knowledge needed for
a valid assessment of trends and policy moves and for a better understanding of both the
underlying causes of instability and the exchange market manifestations of that instability.
Since Rambouillet there have indeed been large movements in the exchange rates of some
of the participants. The mark and the French franc have diverged, and the pound and the
lira have from time to time been subject to sharp downward pressures. Some have asked
whether that meant we had failed, and that the "spirit of Rambouillet" was dead.
No one should be misled—Rambouillet never promised that stability in exchange rates
would come instantly or easily. Quite the contrary. The premise of Rambouillet, fully
reflected in the proposed article IV, is that exchange stability depends not on market
intervention but on stability of underlying conditions. The market experience of the past
months is confirmation of that premise—intervention, sometimes very heavy, has failed to
assure rate stability in the absence of stability in underlying economic and financial
conditions, and plainly that required underlying stability has not yet been achieved.
I can report that in an institutional as well as substantive sense, the spirit of Rambouillet
is not only alive but thriving. Consultations have become far more frequent, more
comprehensive, and certainly more candid than before. Analysis has become more thorough.
I am convinced that the resulting increased knowledge and improved understanding we have
of each other's problems have already proved helpful in that the instabilities which have
appeared in recent months would have been far more dangerous. Such consultations
undoubtedly facilitate our dealing with these problems in the future. This is one ofthe most
encouraging results of Rambouillet, and the framework on which we must build.
Reducing the role of gold and expanding the role of the SDR
Complementing the move to new exchange arrangements, and the shift away from par
values, is a shift away from gold, which was intended to serve as the link for holding together
the par value system. In theory, gold was the base ofthe Bretton Woods monetary system.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
the ultimate reserve asset, the creator and regulator of international liquidity, the basic unit
of account, the linchpin supporting convertibility and enforcing discipline. But, in fact, gold
never fully performed these international monetary functions, and over time it became
increasingly apparent that gold was unsuitable for them—just as it had earlier proved
unsuitable as a base for U.S. and other domestic monetary systems. With new gold production
strictly limited and industrial demand growing rapidly, residual supplies available for
monetary use were both inadequate for and unrelated to the liquidity needs of an expanding
world economy. Pressures and price differences inevitably emerged between the controlled
official market and the highly volatile private market, leading to concerted official efforts
to alleviate or suppress the pressures by sales of gold on private markets—further reducing
monetary stocks—and to widespread speculation and pressures for change in the official
price which would have had a capricious and destabilizing effect on the monetary system.
With monetary gold stocks so limited, the world became dependent on and promoted U.S.
balance of payments deficits to meet increasing liquidity needs. The result was that gold
convertibility of the dollar grew less and less credible and in 1971 was suspended.
In recognition of these inadequacies, the new system promotes a reduction in gold's
monetary role in three ways:
First, gold's legal position is changed. Under the amended Articles, gold will no longer have
an official price. It will no longer be the unit of account for expressing the value of currencies,
for determining the value ofthe SDR, and for calculating rights and obligations in the Fund.
Second, the required use of gold in IMF transactions will be eliminated, for example, in
quota subscriptions and in payment of charges. In fact, the Fund will be prohibited from
accepting gold except by specific decision, by an 85-percent vote.
Third, the Fund will be empowered to dispose of its remaining gold holdings in a variety
of ways and by an 85-percent vote in each case.
Agreement has already been reached—prior to the amendment, under the authority ofthe
existing Articles—for the disposal of one-third ofthe Fund's gold, or 50 million ounces. Of
that amount, 25 million ounces will be "restituted" or sold back to IMF members in
proportion to IMF quotas and at the official price of 35 SDR, or approximately $42 per
ounce. The other 25 million ounces is to be used for the benefit of developing countries,
through gold auctions with the profits accruing to a new trust fund.
This trust fund, recently established at U.S. initiative, meets two objectives: Helping to
phase gold out ofthe system, and using some ofthe profits on gold sales to help finance the
severe balance of payments problems currently facing some of the poorest developing
country members ofthe IMF. This is an appropriate use by the IMF of its gold. The technique
used—whereby the IMF exchanges gold to replenish its holdings of usable currencies—is
familiar and well precedented in IMF experience. Just how much the trust fund will receive
from these gold sales cannot be forecast—that's one of the problems of using gold as a
monetary asset. The purpose of the trust fund's gold sales is not to obtain a predetermined
sum, or to affect the price of gold one way or another, but rather to dispose of the gold, to
convert it into usable currencies for the benefit of developing countries.
Establishment ofthe trust fund does not mean the IMF is becoming an "aid agency." The
trust fund will be an entirely separate entity, in no way subjecting the IMF to liability, but
controlled and managed by the IMF, thus taking advantage of the technical expertise and
sound practices ofthe institution. The trust fund will provide the same kind of financing as
the IMF—balance of payments loans—though the trust fund's credit terms will be more
concessional than those of the IMF, as appropriate to the present needs of the trust fund
recipients. Loans will be subject to standard IMF requirements that the recipient has a
legitimate need, based on assessment of its balance of payments and reserve position. To
qualify, a borrower must also meet conditionality requirements of a first credit tranche
drawing in the IMF regular facilities—that is, it must have a program by which the Fund
deems the member is making a reasonable effort to resolve its payments difficulties. Thus,
there is much that is similar to regular IMF procedures. The trust fund provides an
appropriate and sensible way to mobilize what essentially has become a sterile asset of the
IMF. It does not represent a subversion ofthe IMF's monetary character. It represents instead
an important and innovative way to meet a critical need on the part of a particular segment
of the IMF's membership.
Apart from the 50 million ounces of gold for which disposal has already been agreed, under
the amended Articles the Fund will be able, by 85 percent vote, to dispose of any part of
its remaining 100 million ounces in any of three ways: Sales at market-related prices, sales
at the book value of approximately $42 per ounce to present Fund members in relation to
quotas, and sales at the book value to developing country members.
The profits from any sales at market-related prices can be used in any of four ways: They
may be transferred back to the Fund's general resources and "capitalized" with members'
Fund quotas being increased commensurately; they may be placed in the IMF's investment
account; they may be used for operations not expressly authorized by the Articles but
EXHIBITS
557
consistent with the Fund's purposes, such as the trust fund; or they may be distributed to
developing country members.
All but the first of these four uses—transferring the proceeds back to the IMF's general
resources—require an 85-percent vote. In all its gold dealings, the Fund is required to avoid
the management of the price or establishment of a fixed price for gold.
Views have been expressed in the Congress that the Congress should participate in any
U.S. decision to support further disposal of IMF gold. I recognize the Congress' interest in
this matter. I agree that there-should be full and close consultations with the Congress in this
sphere. While it would seem unnecessary and inappropriate to consult if the Fund were
merely exchanging its gold at market price for currency to be used in its regular operations,
it would seem not only appropriate but desirable to consult about proposals to use the IMF's
gold or gold profits in such ways as the trust fund which benefit a particular group of
countries. I am certainly prepared to consult in this way, in a complete and timely manner,
in order that the Congress has an opportunity to make known its views.
With dismantling of many IMF rules and restraints on official gold transactions, important
side arrangements have been agreed among the Group of Ten—the major gold-holding
nations—to assure that gold does not reemerge as a major international monetary asset. This
understanding, which is not part of the amended Articles, but is consistent with and
supportive of the policies of the amended Articles, provides that participating nations will
not act to peg the price of gold, will agree not to increase the total stock of monetary gold,
will respect any further conditions governing gold trading to which their central banks may
agree, and will report regularly on gold sales and purchases.
The arrangement took effect February 1,1976, and will be reviewed after 2 years and then
continued, modified, or terminated. It is, in our view, an important and necessary safeguard
during this transitional period, although I am firmly convinced that in any case gold's role
in the monetary system will continue progressively to decline.
In parallel with phasing down gold's monetary role, the new system provides an expanded
role for the SDR and modifies certain of the rules governing that new asset.
When the SDR was originally created in 1968, its value was established in terms of gold
and linked to currencies through their par values, essentially through the par value of the
dollar. With the suspension of gold convertibility ofthe dollar and the widespread move away
from par values to floating, it became unrealistic to value the SDR in terms of par values,
and difficult to determine the rates to be used in IMF transactions. To overcome this problem,
agreement was reached on an interim basis to value the SDR in terms of a weighted basket
of the market exchange rates of 16 major currencies, with the dollar representing
approximately one-third ofthe basket. Such a basket valuation technique is particularly well
suited to a world of widespread floating of exchange rates, and the Fund has subsequently
operated without difficulty.
Under the amended Articles, the link between the SDR and gold is severed. The SDR
replaces gold as the common denominator of the system and is the unit for measuring IMF
rights and obligations. The SDR's value will continue to be determined by the present basket
technique. The possibility is provided for future modification in the valuation technique in
the event there is a widespread view that a different technique is needed. A majority of 85
percent is required for a change in the valuation principle or a fundamental change in the
application of the valuation principle. Other, nonfundamental or technical changes require
a 70-percent vote. Such an ability to modify the SDR valuation technique is needed, because
the present basket was introduced on an interim, somewhat experimental basis, and because
an evolution in exchange arrangements could make it appropriate to shift to a different
valuation technique.
The SDR is expected to take on an increasingly important role, not only as a unit of account
used in measurements, but also as an asset used in transactions. With respect to its asset use,
there is an obligation on members to collaborate with the Fund toward the objective of
making the SDR the principal reserve asset of the international monetary system. Also the
SDR takes over from gold the preferred status as asset to be received by the Fund in payment
of charges, in meeting repurchase obligations, and to be accepted by members in exchange
for currencies replenished by the Fund.
A number of technical steps have been taken to improve the SDR's quality and usability
so that it may better fulfill its purposes. Thus countries will have greater freedom to enter
into SDR transactions with each other on a voluntary basis; the possible uses have been
expanded; and the Fund may broaden the categories of holders—though not beyond official
entities—and the operations in which they engage. Also, the decisions for altering certain
policies governing SDRs are made easier—such as the terms and conditions governing
approved transactions, and the rules that require countries to "reconstitute" or buy back
after a certain period some of the SDRs they have spent.
At the same time these rules governing use of the SDRs are being eased, important
safeguards have been retained which help assure that the SDR will remain a widely accepted
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1976 REPORT OF THE SECRETARY OF THE TREASURY
and valued asset. Thus, the limit on members' obligation to accept SDR's is retained, and
IMF quotas remain the basis for new SDR allocations.
The reduction in the monetary role of gold in these agreements represents real progress
toward an objective held for many years by the United States and many other countries. Gold
is a valued commodity, but clearly not a sound basis for an international monetary system.
The provisions in the new system reducing gold's role and expanding that of the SDR
represent a move toward realism and stability.
IMF quotas and the provision of Fund credit
The legislation before the subcommittee would authorize U.S. consent to an increase equal
to SDR 1,705 million in the U.S. quota in the Fund. A member's quota determines its
obligation to provide resources to the Fund, its ability to draw resources from the Fund, its
share of SDR allocations, and its voting rights. The quota increase proposed for the United
States represents our negotiated portion of the general quota increase agreed to in a regular
periodic review required under the Articles. The quota increase would take effect after the
amended Articles take effect. It will have no effect on the budget: in keeping with the
recommendation of the Commission on Budget Concepts, the transaction will be effected
through an exchange of assets, and the United States will receive a reserve position in the
Fund—an automatic drawing right akin to a bank deposit—^for dollars drawn down by the
Fund to lend to other members. Congressional approval is required for consent to this change
in the U.S. quota—and in fact for any change in the U.S. quota, other than that which might
result from a "capitalized" increase in quotas which could result from and be financed by
a future sale of IMF gold at market prices, and for which no payment would be required from
the United States.
When Bretton Woods was established in the mid-1940's and international banking was at
a rudimentary stage of development, the ratio of potential IMF credit to the levels of
international trade and investment may have seemed impressive. Today it is far, far less so.
As the monetary system has developed, it has become increasingly clear that while IMF
resources can finance deficits and help bring about orderly economic adjustment, the Fund
cannot be the only device. There has been a much more rapid increase in use of private credit
for financing payments deficits, and also a move toward more flexible exchange rates and
other means of adjusting for imbalances.
While member countries will and should continue to rely mainly on credit from private
capital markets for financing needs, the IMF has a unique and indispensable function. It
provides balance of payments credit under clearly specified conditions, whereby borrowing
countries undertake sound economic programs of corrective measures—fiscal, monetary,
and exchange measures—designed to bring about the necessary adjustments, eliminate the
problems which caused the need for borrowing, and enable the debts incurred to be serviced.
IMF credit expands the availability of private credit very significantly. Markets are more
willing to lend in the knowledge that in the event of difficulty in a borrowing country the IMF
can be counted on not just to provide supplementary resources, but, more importantly, to
provide those resources in association with soundly based corrective programs.
The disciplines of the private market can be harsh and abrupt. A country that gets into
difficulty, whose creditworthiness becomes suspect, can find that private financing dries up
overnight. Such a country will adjust—it must adjust. But the choice may be between an
adjustment that is internationally harmful and one that is internationally constructive—that
is, an adjustment involving restrictions on others' exports, or exchange and capital controls,
versus an adjustment based on Fund financing and an associated Fund program keyed to
corrective fiscal and monetary measures. The Fund can encourage those forces in deficit
countries which favor adjustment via internationally responsible means, and it can provide
a forum where those affected by a country's actions can be heard. In dealing with these cases
the Fund can perform a crucial role that no other institution can carry out. It can help to
prevent a gradual erosion ofthe entire payments system through the distortions to world trade
and investment that result from restrictions on trade and payments imposed by these deficit
countries. Action by the Fund to isolate and assist such countries can help to secure the entire
system, by halting the contagion of restrictionism. This aspect ofthe Fund's responsibilities
for the monetary system is a crucial one. The Fund's record in helping to bring about
adjustments through its conditional financing is good, and its repayment record is
unblemished.
The U.S. quota increase would be part of a proposed increase in overall IMF quotas of
33.6 percent. In assessing this overall increase in quotas ofabout one-third it is worth noting
that since 1970, when IMF quotas were last increased, world trade has approximately trebled,
inflation has eroded the real value of Fund resources, and the imbalance in world payments
has multiplied as a result of oil price increases and other problems. I think the increase
proposed for the United States and for the general IMF membership is fully justified.
Reaching agreement on sharing the quota increase among countries was difficult. It was
generally acknowledged that the oil-exporting countries should have a larger share, reflecting
EXHIBITS
559
their increased role in the world economy, and their combined share was doubled, from
almost 5 percent to almost 10 percent. It was also agreed that the nonoil developing members
should not suffer a reduction of their combined share. Thus, the full impact of the oil
exporters' increase had to be shared by the developed countries. The U.S. quota share will
decline from 22.93 to 21.53 percent of total, and our voting share will drop from 20.75 to
19.96 percent of total. Since the U.S. vote is dropping below 20 percent, the United States
accepted this reduction within the framework of an increase from 80 to 85 percent in the
vote needed for major Fund decisions.
Updating IMF operations and organization
The negotiation of a comprehensive amendment of the IMF Articles provided an
opportunity for introducing needed operational changes. The original Articles were heavily
focused on the mechanics of the monetary system—on the trappings of convertibility and
par values. The Articles were more like a contract than a constitution. They contained
detailed rules and regulations—many of which became obsolete with the passage of time—
and did not contain either scope for flexibility in day-to-day operations or scope for adaption
over time.
In light of these problems, a large number of changes are proposed affecting IMF
operations. These modifications are described in the Special Report ofthe National Advisory
Council and the Report of the IMF Executive Directors submitted to the Congress in April.
The purpose is to modify obsolete provisions, to simplify operations and introduce needed
flexibility to remedy past anomalies, and to adopt structural changes. Among the
modifications are the following:
Usability of currencies is assured. The United States has consistenfly argued that all
member countries should permit the IMF to use its holdings of their currencies to provide
balance of payments financing to other members, which is a basic purpose of quota
subscriptions. But under the present Articles, regardless of the strength of their external
positions, countries can effectively prevent the Fund's use of their currencies for loans to
others. Agreement to the usability of IMF currency holdings was considered essential, in
part because quota subscriptions can be paid in full in national currencies under the
amended Articles—and there is no reason for the IMF to accumulate more of a country's
currency if it is not permitted to use that currency. Under the amended Articles, there are
provisions to ensure that the Fund's holdings of all currencies will be usable by the Fund
in accordance with its policies. Similarly, members will be required to provide their
currency to other members when that currency has been specified by the Fund for
repurchase. This agreement will add substantially to the Fund's usable resources at present
and in the future and will strengthen its ability to provide balance of payments assistance
to members.
The Fund's authority to invest is made explicit. Currencies, not in excess ofthe Fund's
reserves (presently about $800 million), can be invested in income-producing and
marketable obligations of international financial organizations or of the members whose
currencies are used for investment. Investment can be made only if authorized by 70
percent majority and only with the concurrence of the members whose currency is used
for the investment. No maintenance of value obligations would apply to invested funds.
The Fund's policy on repurchases is modified. The provisions in the present Articles were
obsolete and cumbersome, based on a detailed formula and on a calculation of "monetary
reserves" more appropriate to a par value system than to present arrangements. The
amendment provides that the Fund be given authority to establish policies on repurchases
appropriate to the needs of the system.
In addition to such operational changes, organizational changes are also proposed. Most
importantly, there is an enabling provision which would permit, by 85 percent majority vote,
the establishment of a Council, with decisionmaking power, to replace the present Interim
Committee, which is an advisory body. As in the Interim Committee, the U.S. Govemor to
the IMF would serve as the U.S. representative. The Council would be charged with
supervising the management and adaptation ofthe international monetary system, including
the continuing operation of the adjustment process, and development in global liquidity.
These provisions are also described in the special report ofthe National Advisory Council.
Summary comment
Mr. Chairman, the subcommittee has before it the single most important piece of
legislation in the international .monetary sphere since the Bretton Woods legislation itself
The world monetary system has been without legal form since the Bretton Woods system fell
apart 5 years ago. To many people, international finance has been regarded as an arcane and
abstract subject, but with the experience of the past decade, the relevance of a smoothly
functioning international monetary system to American jobs, production, and growth is
plainly seen. This subcommittee knows the necessity of having an effective legal structure.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
and knows the importance of having our international rules attuned to the realities of the
day. Without agreed rules, the temptations are strong for governments, deluged daily by the
demands of interest groups, to follow narrow national interests at the expense of others and
to pay inadequate regard, or even to abandon, the broad view of international interdependence which has so successfully guided the world community since World War II. As the
world's main trading nation and a prime architect ofa liberal world trade and monetary order,
we should move promptly to show to the world that we remain committed to the rule of law
and reason among nations.
The new international monetary system is sound in structure and right in approach—with
firmness in the commitment to policies which promote underlying stability, flexibility in
procedures and exchange practices; and careful surveillance by the IMF to assure that
obligations are fulfilled. We have sought to retain the good features of Bretton Woods, and
to replace the obsolete. Members of this subcommittee have long endorsed two ofthe main
themes in the new arrangements—a reduction in the monetary role of gold, and exchange
arrangements that respond to market forces rather than trying to counter those forces. The
U.S. approach to the negotiations has been strongly influenced by your views.
I urge, on behalf of the administration, prompt and affirmative action by the subcommittee
and by the Congress. It is important, for the United States and for all IMF member countries,
that we end the present extra-legal character of our international monetary system and
restore the structure of a workable, lawful system. The arrangements before us will
accomplish that, in a way which is balanced and fair, and which safeguards the interests of
the United States and all countries. The United States has played a leading role in bringing
about the acceptance of the new arrangements. Prompt action by the Congress will
encourage similar actions by other IMF members, and enable the implementation of these
measures with a minimum of delay.
Exhibit 59.—Statement of Secretary Simon, June 22,1976, at the OECD ministerial meeting
in Paris
As we meet today to strengthen the spirit of cooperation and consultation, we do so with
heightened confidence. We can reflect with satisfaction on the improved pattem of growth
and employment within the industrial world. The strong economic recovery in the United
States and other industrial nations is beginning to improve worldwide economic prospects
as trade increases. We have also reached agreement on the main elements of a new
intemational monetary system which, when ratified by our parliaments, will provide the legal
stmcture for flexible and resilient arrangements pattemed to the needs of today's world.
Yet the tasks before us remain formidable:
F irst, we must seek to convert the current recovery into sustainable economic expansion.
The industrial countries have recovered from the worst recession in 40 years. Our challenge
riow is to achieve sustained growth through the implementation of prudent economic and
financial policies aimed at reducing inflation. Because conditions vary from country to
country, different though compatible strategies will be required.
Second, we must achieve a pattem of intemational payments which reflects the realities
of the exchange market. There can be no stability in exchange rates or in intemational
payments pattems until stability has been restored in underlying economic and financial
conditions. Substantial and in some cases difficult adjustments are required for both deficit
and surplus countries.
T hird, we must adopt poHcies that will assure a free and open world trade and investment
order.
F ourth, we must realistically address the legitimate concems ofthe developing world. But,
we must avoid promising what cannot be delivered and reject policies which would distort
the proper functioning of our market-oriented economic system.
We must face these challenges together. History has taught us that no country or group
of nations can solve economic problems in isolation. Economic progress and prosperity
cannot be achieved if countries seek to exact an exorbitant price from others or export their
economic difficulties. Our future depends on our willingness to cooperate and our abihty to
lead.
Let us examine in more detail the tasks before us.
The prerequisite to sustained expansion
We are in the midst of a healthy and balanced recovery. However, we must exercise
caution, for we have left the deepest of postwar recessions with inflation rates that remain
high in historical terms and unacceptable over any extended period. Sustained expansion
requires a further reduction in inflation.
EXHIBITS
561
In the United States the recovery is now well into the second year of a relatively strong
and balanced expansion: Real output has increased 7.1 percent over the last four quarters
while inflation has declined to an average annual rate of 5.5 percent; employment has risen
sharply by 3.6 million workers and the unemployment rate has dropped from almost 9
percent to 7.3 percent in May; and our trade balance has declined from record surplus to
deficit as the pace of economic expansion and the end ofthe inventory adjustment increases
our demand for imports. While personal consumption provided the basic thrust for the
recovery, more recently business spending for inventories and a gradual turnaround in the
housing sector have added momentum. Business spending for plant and equipment which
appeared to bottom out late last year is accelerating and it now appears that the improvement
now expected to begin by late 1976 and early 1977 will occur on schedule.
There are, of course, problem areas which we are closely monitoring: (1) The behavior
of raw material prices which can be expected to rise as the expansion continues; (2) the major
labor contract negotiations scheduled for this year; and (3) the perennial concern about the
impact of weather on the crop harvests. Fortunately, wholesale industrial commodity price
increases have remained relatively moderate to date with such prices rising at an annual rate
of 3.7 percent during the last 6 months. Average compensation gains have been rising at an
8-percent annual rate and most contract settlements have continued the process of slowly
reducing cost pressures. With productivity gains somewhat above the historical average at
this stage ofthe cycle, the increase in unit labor costs is moderate. Finally, the crop situation
looks relatively favorable.
Our economic projections for 1976 have been revised. Our new projections anticipate
output near 7 percent, well above the original estimate of 6 percent; the inflation rate near
5 percent, well below the original estimate of 6 percent; and the unemployment rate to
decline below 7 percent by yearend. Moreover, we are confident that the expansion can be
sustained well beyond 1976.
Virtually all ofthe economies ofthe OECD area are either experiencing recovery or, like
the United States, have moved beyond the recovery stage to solid expansion. The concern
today is no longer one of recovery but of sustaining our growth. Some believe that demand
will not be strong enough to support further expansion. I do not see major near-term
distortions in the continued expansion from the demand side. To the contrary, the greatest
threat to the sustained expansion is the risk of a resurgence of inflation.
On the basis of present policies, the OECD Secretariat expects an average inflation rate
in OECD countries of 8.2 percent in 1976. In some countries prices are expected to increase
15 percent or more. Unless these inflation rates are significantly reduced we cannot achieve
a lasting worldwide expansion.
The policy errors of the past and our hopes for the future force us to recognize a basic
reality: Inflation is the greatest threat to sustained economic development and the ultimate
survival of all of our basic institutions. The lessons of history clearly indicate that when
inflation distorts the economic system and destroys incentives the people will no longer
support that system and society disintegrates. Our uniquely creative and productive societies
will be severely damaged if inflation continues to dominate economic affairs. Our recent
experience demonstrates the fallibility ofthe old conventional wisdom that a tradeoff exists
between the goals of price stability and low unemployment. To the contrary, the achievement
of both goals is interdependent. If we are to sustain the output of goods and services and
reduce unemployment, we must first control inflation. Inflation restricts the housing industry
by increasing the prices of homes and interest costs on mortgage loans. It is inflation which
undermines the purchasing power of our people as they strive—too often in a losing
struggle—to provide the basic necessities of food, housing, clothing, transportation, and
medical attention. Inflation erodes the pace of new business investment in plant and
equipment needed to create additional jobs. Inflation is also the greatest enemy of savings
and investment.
We want to avoid the recessions that so cruelly waste human and material resources and
the tragic unemployment that leaves serious economic and psychological scars long after
economic recovery occurs, but we sometimes forget that it is inflation which leads to those
recessions. Inflation should be identified for what it is: The crudest hoax ever perpetrated
for the expedient purposes of a few at the cost of many. There should be no uncertainty about
its devastating impact, particularly for low-income families, the elderly dependent upon
accumulated financial resources and pensions, and the majority of working people who do
not have the political or economic leverage to keep their income rising even more rapidly
than prices. When inflation dominates an economy the people suffer. Leaders must recognize
this basic fact.
We must do everything possible to build a public understanding of the tragic effects of
inflation. We must create widespread support for the sound economic and financial policies
which offer the only path to lasfing stability. We must establish greater understanding that
wage and price controls cannot substitute for sound economic and financial policies in
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1976 REPORT OF THE SECRETARY OF THE TREASURY
eradicating or controlling inflation. Controls simply do not solve underlying problems and
their ultimate effect is to disrupt economic progress.
We all desire high employment and improved personal living standards. But these goals
cannot be realized and maintained over time unless there is adequate investment in the plant
and equipment needed to create job opportunities and produce the goods and services a
higher standard of living requires. Needed investment cannot be achieved in a climate of
inflation. Industry must have adequate profitability to make investment worthwhile and to
provide resources to finance investment. There is vastly more promise of higher employment
and improved living standards for all in the pursuit of increased total production than in a
struggle for income redistribution.
The need for balance of payments adjustment
Inflation is also a threat to economic prosperity through its impact on the trade and
payments system. We have seen what inflation has done to the currencies of some of our
member states and it has become glaringly obvious that there can be no stability in exchange
rates without reasonable stability in domestic prices. The failure to control inflation will
damage not only the country which inflates, but ultimately its trading partners as well. If there
is no confidence in a government's anti-inflation policies, the downward pressures on rates
of exchange may reach levels which tempt governments to resort to restrictive actions.
In the effort to avoid—or to postpone—exchange rate changes, countries may look for
credits from abroad to help finance their deficit, and pursue a policy of intervention to
support their currencies artificially in exchange markets. Lenders will become increasingly
reluctant to finance expanding current account deficits unless borrowing nations make
fundamental changes in their domestic economic policies.
The lesson we have learned—the fundamental concept which the Jamaica agreement
incorporates in the monetary system—is the recognition that we must attack the causes of
our problems, instead of the results. When an industrial country encounters difficulty in
borrowing from the private markets, it is a clear and unmistakable sign that more
fundamental measures are needed that will effectively deal with the underlying economic
conditions and that will eliminate the need to rely on special external financing. The IMF
and other multilateral balance of payments lending institutions have limited resources. The
Financial Support Fund—for which we are strongly urging affirmative congressional action—
will hopefully soon be in a position to provide supplemental financing in the present
transitional period. But none of these devices either can or should do more than provide a
kind of "bridge" financing to tide a country over the period between the initiation of the
necessary economic and financial policies and the delayed impact on the payments balance.
If the open trade and payments system is to survive, countries in a weak position must
recognize the need to adjust and put the necessary policies in place quickly—before they find
themselves in a crisis position from which there is no escape other than restrictions. Countries
may then be forced to make political decisions which are not consistent with sound
economics.
Countries in a relatively strong position have an equally important responsibility—to work
toward the elimination of inflation, to promote sustainable economic expansion, to keep their
markets open to imports, to allow their exchange rates to appreciate in response to market
forces, and to accept the decline in their current account positions without which it is
impossible for the weaker countries to adjust. The economic health ofthe world depends on
our abilities to make these adjustments.
A free and fair trading system
J
Two years ago when faced with the difficult task of adjusting to rapidly increasing oil prices,
we demonstrated both courage and foresight by joining together in a cooperative effort to
refrain from adopting trade-distorting protectionist measures which would have had
disastrous consequences. We have won that battle; but the war remains. Now that economic
expansion is well underway, we must renew our commitment to avoid the adoption of any
restrictive trade measures. That is why I so strongly support the renewal ofthe trade pledge
we made 2 years ago and continued last year.
But it is not enough to agree on what we will not do—important though this may be to help
avoid slipping backward. We shpuld also agree on what positive steps we will take. Only in
a fully free and open world trading and investment system can our individual national
economies achieve our goal of sustained noninflationary growth. We need an open world
market to allocate the raw material and capital resources in order to supply abundant goods
and services to our people at noninflationary prices.
We have found that opening our markets to imports has often restored healthy competition
at home—to the longrun benefit of consumers and producers alike.
This competition, however, must be fair. There is no inconsistency between free trade and
fair trade, and the assurance of the latter is what enables us to progress in achieving the
EXHIBITS
563
former. Unfair trade practices such as artificial export subsidies are detrimental for several
reasons. First, they distort the market forces and interfere with the proper allocation of
capital. Second, they are an expensive use of limited government resources which are
transferred from the exporting nation to its trading partners in the form ofthe export subsidy.
Finally, the use of export subsidies may force other nations to raise tariffs or create
quantitative limits to provide relief.
Let me assure you that the United States is as firm as ever in its commitment to a free and
fair trading system. I am proud of our record over the past year—despite fears from abroad
that we were drifting towards a policy of protectionism. Although there has been concern
about recent determinations of the International Trade Commission in favor of import relief
and specific countervailing duty and antidumping investigations, we have maintained, with
minor exceptions, an open market for imports from our trading partners. The Treasury
Department is required by law to investigate all formal countervailing duty and antidumping
complaints. Industries in every nation are protected from injury caused by international
dumping of marginal or excess production. Nor should domestic companies be required to
compete against government-subsidized imports. The antidumping and countervailing duty
laws are designed to prevent such abuses. The current number of investigations is the result
of procedural requirements that all pending cases received over the past few years be
completed within a very short time frame under the Trade Act. But ofthe over 80 petitioners
whose cases have been processed under the antidumping and countervailing duty laws in
1975, only about 10 percent have been awarded relief. These facts clearly refute any charges
that America is turning protectionist.
On behalf of the United States, I renew our pledge to pursue a liberal and fair trade policy.
We will continue to work to see that the spirit of free and open markets becomes an integral
and more permanent feature of the world trading system.
The fulfillment of these objectives will require the cooperation of both industrial and
developing nations. We will strive in the multilateral trade negotiations (MTN) to reduce
tariff and nontariff barriers to trade in order to improve the international trading system. We
have agreed that these negotiations will be concluded in 1977. Both in this organization and
in the General Agreement on Tariffs and Trade the United States will work for the complete
liberalization of trade for the benefit of all nations.
Progress on international investment
Just as liberal trade is crucial to world economic progress, so is a hospitable climate for
international investment. We must work together to dispel the impression that multinational
corporations are harmful. Such corporations, and the investment they bring, should be
welcome because of the positive contribution they make to economic prosperity. In that
regard, I am particularly pleased by our action yesterday in approving the "National
Treatment and Incentives/Disincentives" agreements and the "Guidelines for Multinational
Enterprises" that have been negotiated over the past 3 years by the OECD. In approving this
package, we have acknowledged our dedication to the maintenance of a liberal climate for
international investment and thereby made a significant contribution to its improvement.
Particularly helpful in improving the investment climate is the fact that the package makes
it clear that governments have obligations toward investors just as investors have obligations
toward the countries in which they operate. In particular, I was encouraged that the package
recognizes the fact that member countries should grant national treatment consistent with
international law to foreign investors and that the Guidelines for Multinational Enterprises
recognize that member countries have the responsibility to treat foreign investors equitably
and in accordance with international law and contractual obligations and to cooperate to
resolve any conflicting requirements that may be placed on international investors.
Looking beyond this to the broader context of international investment, I think we should
also undertake new efforts to liberalize the international flow of capital. Specifically, I
propose that the Committee on Financial Markets be charged with identifying the various
impediments to international flows of portfolio capital and establishing a procedure for
consultations with a view toward reducing such impediments.
Regarding direct investment, I believe that it is particularly important that we stem any
erosion ofpublic confidence in multinational enterprises. The Guidelines we have approved
are an important step in that direction. Multinational enterprises have mobilized capital on
an unprecedented scale and have channeled it together with new technology and
management know-how to countries where they operate. Their actions have increased
economic output and created employment in these countries while their home countries have
benefited directly from increased exports and a return flow of dividend and royalty payments.
As a result, the whole international economy has benefited from the greater efficiency with
which international resources are utilized. There are many factors that contribute to
economic progress, but in the final analysis, capital investment is the source of increased
productivity and higher standards of living for all.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
As we gain experience with implementation of the Guidelines and with procedures for
consultations witnin the OECD, we should keep in mind that their success depends on their
voluntary acceptance by multinational enterprises. Any temptation to turn the consultation
procedures into a complaint or quasi-judicial procedure against multinational enterprises
must be avoided.
The Guidelines also incorporate a provision relating to bribery and illegal political
activities. Bribery is not only ethically abhorrent, but it also distorts the operations of
markets, undermines the investment climate, and threatens the free enterprise system. We
are confident that the vast majority of American businessmen have conducted themselves
properly. Nevertheless, the actions of a few have clouded the conduct of business in general.
The provision on bribery in the Guidelines is an important step in addressing this problem.
However, this is not enough. The United States has proposed the establishment of a working
group under the auspices ofthe United Nations Economic and Social Council to develop an
international agreement to deal with this problem. I urge that governments join us in building
the consensus necessary for the early negotiation of such an agreement.
Progress in developing countries
Finally, let us discuss the subject of relations with developing countries. The dialog
between developed and developing countries is now moving from highly political and visible
forums such as the Seventh Special Session and UNCTAD IV to what we hope will be
technical work in specialized forums and the CIEC commissions. As Secretary Kissinger
emphasized yesterday, it is crucial that the Western developed countries maintain unity as
we consider concrete issues. I would suggest several basic principles that should guide our
work.
First, we must be realistic. It does no good to raise false expectations regarding what can
be done. We must make clear to the developing countries that their future ultimately depends
on their own efforts. We industrialized nations can, through constructive policies on trade
and technical and financial assistance, help them to help themselves. But what will ultimately
determine their rate of development is the degree to which they utilize their own human
creativity and invest their resources, not one-time transfers of wealth.
Second, we must enlarge the world economic pie. The strongest external stimulus to
developing countries will come through the economic resurgence of our own economies. As
OECD countries' industrial production rises and as employment and personal incomes
improve, our economies will create renewed demand for the mineral, agricultural, and
manufactured products of developing countries.
Third, we should not be hesitant about defending the use of free markets to allocate
resources, both domestically and internationally. If we look at the developing country
economic success stories, Singapore, Brazil, Mexico, Hong Kong, Taiwan, and South Korea,
we note that all have emphasized their private sectors in achieving consumption and
investment goals. These same countries have also actively engaged in world commerce. In
a world of rapid technological change and shifting consumer demand, national economies
risk obsolescence and stagnation if they insist on turning all decisionmaking over to
government. On the international level, we must resist the temptation to replace free markets
by decisionmaking through international bureaucracies or government organizations. We
want to help the developing world but there are no instant solutions. Real progress depends
on maximizing the use of their human and natural resources, through strengthening their
private sector.
Fourth, in addressing the problems ofthe developing countries, we must avoid simplistic
generalizations. Each developing country, each commodity, each industry is unique.
Ultimately the debt or balance of payments problem of a developing country, the market
structure of a specific commodity, the establishment of a particular industry must be
considered on a case-by-case basis.
It is on the basis of these principles that the United States has made specific proposals of
our own and responded to the recommendations of others.
In order to improve the stability of export earnings for countries particularly dependent
on exports of raw materials, we urged major changes in the IMF compensatory financing
facility.
We also recommended a substantial increase in the availability of IMF credit, the
establishment of a trust fund for the benefit of the poorest developing countries, and the
substantial expansion ofthe World Bank's International Finance Corporation. Many of these
suggestions have already been implemented. For instance, this year, through the end of May,
countries have drawn $815 million from the liberalized compensatory finance facility, more
than twice drawings in any previous whole year. We are thus attacking the root problem of
disruption in development efforts caused by fluctuations in export earnings while allowing
markets to continue their function of determining commodity prices.
We also believe that the long-term answer to many of the problems of the developing
countries lies in foreign investment. We have put forward proposals to increase such
EXHIBITS
565
investment, such as the International Resources Bank. We regret that other countries refused
to study this proposal because we believe it would be beneficial to all countries. In this regard,
there may be some public misunderstanding about the Bank, and it is important to understand
what it would do and what it would not do. The Bank is designed to reduce the
noncommercial, or political, risks related to investment in some developing countries. The
market risk inherent in any investment would remain. As such, it is an insurance vehicle to
protect against such occurrences as expropriation or nationalization. It is not a lender of
money, and would not be a financing vehicle to substitute for the private sector. Further, it
is not intended to become involved in ongoing investments but to encourage additional
investment. Seen in this way, we believe it can make an important contribution to the need
to increase investment in the developing world, and Secretary Kissinger and I will continue
to seek consideration of such a concept.
We have also proposed that there should be producer-consumer forums for all key
commodities, so that where problems exist, they can appropriately be addressed on a caseby-case basis. In these forums, we will be proposing and seeking constructive solutions based
upon improvement of markets and trade expansion, rather than restrictive iarrangements
designed to fix prices. As such, we have made clear our rejection of the proposal for a
common fund to finance and manage a series of buffer stock arrangements which we believe
is unnecessary, unworkable, and not a correct utilization of scarce resources.
We have also pursued policies in the United States and made specific proposals in the trade
area which would benefit developing countries. We have adopted a generalized system of
preferences that will greatly assist developing countries to expand their exports. In the MTN
we have proposed a tariff-cutting formula which would decrease tariff escalation, and urged
that special treatment be provided for developing countries in new codes on safeguards and
on subsidies and countervailing duties.
In these circumstances, the United States has agreed to give quick and constructive
consideration to requests from the developing nations for the discussion of their debt status
in a multilateral framework. We have also agreed that common features to be used in debt
rescheduling procedures be studied in an international forum.
There has been a good deal of publicity on the debt problems of developing countries.
Because of high oil prices and slower activity in the OECD, the rate of debt increase has been
higher than in years of high commodity prices and growing markets. This situation, however,
is now undergoing change, and we should be sure that the solutions we seek are aimed at
the problems that exist today, not those that existed a year or two ago. The economic upturn
in the industrialized countries is bringing increased income to the developing countries
through greater export volume and firming of export prices. As a result, the debt burdens
will diminish. Individual countries will continue to face debt problems, but the answer does
not lie in generalized debt rescheduling. Such an approach is unnecessary and would be
inequitable, and harmful to the long-term interests of the recipients. It would call into
question the creditworthiness of the less developed countries as a group, and would be
counterproductive to our efforts to encourage countries to adopt appropriate economic
policies. We will continue to evaluate the merits of each debt reorganization proposal,
predicated on the principle that countries should adhere to scheduled terms of credit
payments.
Finally, mindful of the need to strengthen the technological capacity of developing
countries, the United States has made a series of proposals to stimulate the development and
transfer of technology needed by developing countries.
Over the next few months the developed countries will be participating in a dialog with
developing countries on commodities, debt, transfer of technology, trade, and multinational
corporations. We must continue to respond to the legitimate proposals of these countries and
make our own proposals as well. But we owe it to the developing countries, as well as to
ourselves, to assure that our responses are not geared to short-term political considerations,
but rather reflect what we believe is practicable, deliverable, and will enhance the longrun
economic interests Of all nations.
Conclusion
Mr. Chairman, fellow Ministers, we have in the past year made great strides in coping with
the complex of problems we face. If we look forward to as much progress in the year ahead,
we can indeed take an optimistic view. But progress will only come if we can build a
worldwide framework of cooperation. As such, we need not distort oiir economic system in
order to satisfy one or two interests at home or to appease a few abroad. Instead, we must
avail ourselves of a rare opportunity to fight for a policy which is both principled and in the
economic interest of the world. Let us renew our commitment to cohtinued vigilance and
cooperative effort, which is the road to the maintenance of an equitable, free, and prosperous
world economy.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 60.—Text of the Joint Declaration following meeting at Dorado Beach, P.R., June
27-28, 1976
The heads of state and government of Canada, France, the Federal Republic of Germany,
Italy, Japan, the United Kingdom of Great Britain and Northern Ireland and the United States
of America met at Dorado Beach, Puerto Rico, on the 27th and 28th of June, 1976, and
agreed to the following declaration:
The interdependence of our destinies makes it necessary for us to approach common
economic problems with a sense of common purpose and to work toward mutually consistent
economic strategies through better cooperation.
We consider it essential to take into account the interests of other nations. And this is most
particularly true with respect to the developing countries of the world.
It was for these purposes that we held a broad and productive exchange of views on a wide
range of issues. This meeting provided a welcome opportunity to improve our mutual
understanding and to intensify our cooperation in a number of areas. Those among us whose
countries are members ofthe European Economic Community intend to make their efforts
within its framework.
At Rambouillet, economic recovery was established as a primary goal and it was agreed
that the desired stability depends upon the underlying economic and financial conditions in
each of our countries.
Significant progress has been achieved since Rambouillet, During the recession there was
widespread concern regarding the longer-run vitality of our economies. These concerns have
proved to be unwarranted. Renewed confidence in the future has replaced doubts about the
economic and financial outlook. Economic recovery is well under way and in many of our
countries there has been substantial progress in combatting inflation and reducing
unemployment. This has improved the situation in those countries where economic recovery
is still relatively weak.
Our determination in recent months to avpid excessive stimulation of our economies and
new impediments to trade and capital movements has contributed to the soundness and
breadth of this recovery. As a result, restoration of balanced growth is within our grasp. We
do not intend to lose this opportunity.
Our objective now is to manage effectively a transition to expansion which will be
sustainable, which will reduce the high level of unemployment which persists in many
countries and will not jeopardize our common aim of avoiding a new wave of inflation. That
will call for an increase in productive investment and for partnership among all groups within
our spcieties. This will involve acceptance, in accordance with our individual needs and
circumstances, of a restoration of better balance in public finance, as well as of disciplined
measures in the fiscal area and in the field of monetary policy and in some cases
supplementary policies, including incomes policy. The formulation of such policies, in the
context of growing interdependence, is not possible without taking into account the course
of economic activity in other countries. With the right combination of policies we believe
that we can achieve our objectives of orderly and sustained expansion, reducing unemployment and renewed progress toward our common goal of eliminating the problem of inflation.
Sustairied economic expansion and the resultant increase in individual well-being cannot be
achieved in the context of high rates of inflation.
The meeting last November, we resolved differences on structural reform of the
international monetary system and agreed to promote a stable system of exchange rates
which emphasized the prerequisite of developing stable underlying economic financial
conditions.
With, those objectives in mind, we reached specific understandings, which made a
substantial contribution to the IMF meeting in Jamaica. Early legislative ratification of these
agreements by all concerned is desirable. We agreed to improve cooperation in order to
further our ability to counter disorderly market conditions and increase our understanding
of economic problems and the corrective policies that are needed. We will continue to build
on this structure of consultations.
Since November, the relationship between the dollar and most ofthe main currencies has
been remarkably stable. However, some currencies have suffered substantial fluctuations.
The needed stability in underlying economic and financial conditions clearly has not yet
been restored. Our commitment to deliberate, orderly and sustained expansion, and to the
indispensable companion goal of defeating infiation provides the basis for increased stability.
Our objective of mpnetary stability must not be undermined by the strains of financing
international payments imbalances. We thus recognize the importance of each nation
managing its economy and its international monetary affairs so as to correct or avoid
persistent or structural international payments imbalances. Accordingly, each of us affirms
his intention to work toward a more stable and durable payments structure through the
application of appropriate internal and external policies.
EXHIBITS
567
Imbalances in world payments may continue in the period ahead. We recognize that
problems may arise for a few developed countries which have special needs, which have not
yet restored domestic economic stability, and which face major payments deficits. We agree
to continue to cooperate with others in the appropriate bodies on further analysis of these
problems with a view to their resolution. If assistance in financing transitory balance of
payments deficits is necessary to avoid general disruptions in economic growth, then it can
best be provided by multilateral means coupled with a firm program for restoring underlying
equilibrium.
In the trade area, despite the recent recession, we have been generally successful in
maintaining an open trading system. At the OECD we reaffirmed our pledge to avoid the
imposition of new trade barriers.
Countries yielding to the temptation to resort to commercial protectionism would leave
themselves open to a subsequent deterioration in their competitive standing; the vigor of their
economies would be affected while at the same time chain reactions would be set in motion
and the volume of world trade would shrink, hurting all countries. Wherever departures from
the policy set forth in the recently renewed OECD trade pledge occur, elimination of the
restrictions involved is essential and urgent. Also, it is important to avoid deliberate exchange
rate policies which would create severe distortions in trade and lead to a resurgence of
protectionism.
We have all set ourselves the objective of completing the Multilateral Trade Negotiations
by the end of 1977. We hereby reaffirm that objective and commit ourselves to make every
effort through the appropriate bodies to achieve it in accordance with the Tokyo Declaration.
Beyond the conclusion of the trade negotiations we recognize the desirability of
intensifying and strengthening relationships among the major trading areas with a view to the
long-term goal of a maximum expansion of trade.
We discussed East/West economic relations. We welcpmed in this context the steady
growth of East/West trade, and expressed the hope that economic relations between East and
West would develop their full potential on a sound financial and reciprocal commercial basis.
We agreed that this process warrants our careful examination, as well as efforts on our part
to ensure that these economic ties enhance overall East/West relationships.
We welcome the adoption, by the participating countries, of converging guidelines with
regard to export credits. We hope that these guidelines will be adopted as soon as possible
by as many countries as possible.
In the pursuit of our goal of sustained expansion, the flow of capital facilitates the efficient
allocation of resources and thereby enhances our economic well-being. We, therefore, agree
on the importance ofa liberal climate for international investment flows. In this regard, we
view as a constructive development the declaration which was announced last week when
the OECD Council met at the Ministerial level.
In the field of energy, we intend to make efforts to develop, conserve and use rationally
the various energy resources and to assist the energy development objectives of developing
countries.
We support the aspirations ofthe developing nations to improve the lives of their peoples.
The role of the industrialized democracies is crucial to the success of their efforts.
Cooperation between the two groups must be based on mutual respect, take into
consideratiori the interests of all parties and reject unproductive confrontation in favor of
sustained and concerted efforts to find constructive solutions to the problems of
development.
The industrialized democracies can be most successful in helping the developing countries
meet their aspirations by agreeing on, and cooperating to implement, sound solutions to their
problems which enhance the efficient operation of the international economy. Close
collaboration and better coordination are necessary among the industrialized democracies.
Our efforts must be mutually supportive, not competitive. Oui" efforts for international
economic cooperation must be considered as complementary to the policies of the
developing countries themselves to achieve sustainable growth and rising standards of living.
At Rambouillet, the importance ofa cooperative relationship between the developed and
developing nations was affirmed; particular attention was directed to following up the results
ofthe Seventh Special Session ofthe UN General Assembly, and especially to addressing the
balance of payments problems of some developing countries. Since then, substantial progress
has been made. We welcome the constructive spirit which prevails in the work carried out
in the framework of the Conference pn International Economic Cooperation, and also by
the positive results achieved in some areas at UNCTAD IV in Nairobi. New measures taken
in the IMF have made a substantial contribution to stabilizing the export earnings of the
developing countries and to helping them finarice their deficits.
We attach the greatest importance to the dialogue between developed and developing
nations in the expectation that it will achieve concrete results in areas of mutualinterest. And
we reaffirm our countries' determination to participate in this process in the competent
568
1976 REPORT OF THE SECRETARY OF THE TREASURY
bodies, with a political will to succeed, looking toward negotiations, in appropriate cases. Our
common goal is to find practical solutions which contribute to an equitable and productive
relationship among all peoples.
Exhibit 61.— Remarks by Under Secretary for Monetary Affairs Yeo, July 14, 1976, before
the German-American Chamber of Commerce, New York, N.Y., entitled "Promoting
Growth with Stabihty"
It is appropriate that we talk about promoting growth with stability in a group that has as
its title the German-American Chamber of Commerce. I think that it is appropriate because
of the responsibilities that involve both of these countries, because of the record, and finally,
the close friendship that we enjoy as two countries and two people and the many shared
traditions.
I have participated in two summits, and I don't know how many conferences of one type
or another. There is an additional fora called the G ^ , made up of the Finance Ministers and
their deputies of five countries: The United States, Germany, Japan, France, and the United
Kingdom.
I would like to talk to you today about three things. One involves the monetary system as
it has developed over the last 6 to 9 months, a period that has been loaded with events, loaded
with the development of a new monetary system. I want to talk about the institutional
arrangements, strengths and potential weaknesses. Second, I want to talk a little bit about
the context, the environment, in which we are operating. And third, I want to talk a little
bit about public pohcy here and elsewhere. I think it is a particularly opportune time to take
a look at the developing monetary system and its underpinnings, as we so recently left Puerto
Rico, which was an integral part of the development of the system.
We have before us and we can look with a little perspective- not enough- but a little
perspective, at what was done at Rambouillet, the G-l-0 meeting in Paris, Jamaica, the
Intemational Monetary Fund meeting, and Puerto Rico. All form an overall system, an
overall pattern. At Rambouillet, the outlines were developed, the philosophy was articulated.
Bretton Woods was tumed on its head. Bretton Woods was a par value system that was
designed to impose stability. That stability was supposed to occur because political leaders
would react to changes in reserves. If they were adding reserves, if they were eaming more,
they would reflate, and if they were losing reserves, they would deflate. But the system did
not work- everyone inflated.
Rambouillet recognized the priority to be put on stability. But it said that you cannot get
stability out of a mechanical system. You can only get stability out of a good public pohcy
in country after country after country. It pointed to the substantial signs of instability that
characterized the latter part of the Bretton Woods system, of that par value system.
I think you can all remember, or most of you can remember, those grand currency crises,
the old single-winged monsters, with Charlie Coombs at the desk here, and Roy Bridges at
the desk over there, and massive single-wing swaps put together. Officialdom would stack
our money on the table and glare across and say we have this much money, how much do
you have? A premise of Rambouillet, essentially, was that they have more than we have,
because the fact of the matter is that we have substantial capital flows. We have the capacity
for large and rapid capital movements, which cannot be legislated out of existence. You put
exchange controls in the United States, and you facilitate the development of an offshore
dollar market.
A premise that was embedded in the original Bretton Woods- put together by Harry
Dexter White and John Maynard Keynes- was that of minimal capital movements. The
system was attempting to clear transactions essentially in trade, real things, goods and
services and not clear transactions where a billion dollars could cross over the transom of
a given currency in a matter of an hour or two.
Rambouillet recognized first the priority that ought to be placed on stability. Secondly, it
recognized that stability cannot be superimposed, that it had to come from, in the jargon of
that agreement, underlying economic and financial factors. Thirdly, it recognized that the
world had changed and that the kind of monetary system we had to have was a system that
could handle the kinds of capital flows which are an everyday part of your life and my life.
Out of Rambouillet came a design- article IV for the technical people like me. Article IV
outlines a type of a monetary system based on the philosophy that I have just described. It
is a floating system. But, the agreement at Rambouillet also contained the design of a par
value system. The world has a choice between a par value system that is more flexible than
the Bretton Woods design, and I think probably better, and the floating system. What we
moved to in Jamaica was to adopt the thinking that came out of Rambouillet. One hundred
and twenty-eight nations agreed on article IV, which serves as the basis for the present
monetary system.
EXHIBITS
569
There are several things in article IV that I would like to comment on.
Part 3 of section 1 is known colloauially as the "thou shalt not manipulate" section.
Frankly, one of the concerns of the authors of article IV was the possibility of manipulation
ofthe monetary system to gain competitive advantage. And the counter to that is contained
in part 3 of section 1. In section 3, the International Monetary Fund is given the authority
to supervise the language and maintain firm surveillance over the exchange rate practices
of member countries.
So what we have here is a design of a floating system with a structure, with an umpire, if
you wish. You could think in terms of Rambouillet and Jamaica as dealing with the exchange
rate mechanism, and you can think of the events since then culminating at Puerto Rico as
dealing with the adjustment part ofthe system. There has been a popular misconception that
floating-rate systems do not require individual country adjustments. I guess an example of
that misconception is what is called the vicious circle, or vicious cycle theory.
What this says is that in a floating-rate system, if country A is experiencing inflation, the
price of country A's currency in exchange markets will go down and the cost of imports will
go up. It is a type of vicious circle.
The fact that this would even be dignified with the word "theory" reflects the recognition,
or lack of it, that adjustment has to proceed in a floating system just as it has to in a par value
system.
What do I mean by adjustment? I mean that countries have to conduct their affairs in such
a way—if you want to maximize the potential of the system—in such a way that they are
tending to counter structural disequilibrium; i.e., structural deficits or structural surpluses.
Put another way, a floating-rate system is like a pair of scissors; One blade is the rate and
the other is the old Bretton Woods concept ofpublic policy adjustment. In a par value system
you have only one blade, you don't have the rate mechanism.
What was agreed to at Puerto Rico, and what is its significance? In the monetary area, it
was agreed that stability was our ultimate objective. It was agreed that in cases of structural
disequilibrium there would be financing required or, in the words ofthe communique which
no one ever reads, transitory financing. It was also agreed that such financing would be
conditional, and explicitly stated—conditional in terms ofthe extension of credit related to
the adoption of policies.
Finally, it was agreed that the extension of credit would be multilateral, through such
institutions as the International Monetary Fund. Putting Rambouillet and Puerto Rico
together, you have an exchange rate mechanism, and you have some general precepts under
which the system might operate. One premise deals with the original blueprint, the other with
operation of the system with a high priority on adjustment. Fortunately, or unfortunately,
there is one premise that runs throughout, and this is what I would like to talk about
principally—the premise that we have to do a better job of managing our individual
economies.
A great deal of the thinking that went into Rambouillet and Puerto Rico came off the
backboard ofthe experience of 1972 through 1975. It comes in a variety of forms, in terms
of underlying economic and financial stability, and in terms of an orientation toward price
stability and reducing inflation.
What exactly did Puerto Rico say? It has not been read very carefully, I am afraid.
Seven leaders are assembled and what do they say? They say that inflation threatens
employment. They say that if you want to reduce unemployment, you have to get at inflation.
They say that their goal is the elimination of inflation. That is not 3 percent; that is not 5
percent. That is not 9 percent. That is elimination.
They say that in order to reduce inflationary pressures, we need more investment. And they
even infer that more investment means more savings, and the availability of savings, savings
that are not absorbed by financing large deficits. This is an incredible thing. In this country
just 2 1/2 years ago, we had something called the Phillips Curve.
What did the Phillips Curve say? It said, what I read in the New York Times this morning,
abbut a leading contender for the Democratic Presidential nomination, that you have a
choice. You can opt for less inflation, or you can opt for more employment, and less
unemployment. That is what the Phillips Curve in its politicized form says.
What was said at Puerto Rico? If you want less unemployment, if you want more
employment, you have to reduce inflation. Now here is a curious juxtaposition. I was
surprised when I read this in the Times. I was surprised that this idea could continue to persist.
After all we have been through, after the chasm that we all looked down in 1974 and 1975.
After you get seven leaders of the world together in one spot and they say just the opposite,
we still have to my absolute amazement people who believe in the fraud ofthe Phillips Curve.
It is a very dangerous idea. We almost lost our ear once, betting on the Phillips Curve, and
we do not have the capacity to try it a second time. Now, not only is the Phillips Curve still
around, but national economic planning is still around. It comes today in the form of the
Humphrey-Hawkins bill. The Humphrey-Hawkins bill has two ideas. Two old, stale, wornout, disreputable ideas.
570
1976 REPORT OF THE SECRETARY OF THE TREASURY
One is that in a country like the United States economic plannirig is the way to produce
more, to produce a more efficient economic system. Look at the record of the last 4 or 5
years. Remember in 1972, when we all thought, or most of us thought, that we had lots of
excess capacity? Remember in 1968 and '69 when we thought we had a surplus of steel
capacity? Remember the explanations of what would happen to productivity which would
serve as an antidote for inflationary pressures?
Remember what we said about the beginnings ofthe great comrriodity price boom? Well,
that it was just a problem of the weather and agriculture, we all knew that. We carinot even
forecast with any degree of precision as a business and financial community. Do we know
enough to allocate factors of production, to be able to forecast where the capacity shortages
are going to be, the 4 or 5 years out that are required to get them into place, to build the
plants and put the facilities there? No. Do we have the capacity to allocate labor, and is it
an efficient allocation of labor, good for the people involved as well as good for the overall
economy to try and create jobs? I do not think so.
What is the price tag? Who is mentioning the price tag? How much does it cost, and who
is going to pay for it? It is very simple. You are going to pay for it.
I think that rather than the Humphrey-Hawkins approach, the sort of rejuvenated Phillips
Curve, we ought to recognize that we have an opportunity this time to get it right, that we
have made a reasonably good start at getting it right. We have an enormous responsibility
to ourselves and to others, because the premise ofthe monetary system that we are operating
with is that countries—like the two countries represented here today—will in the end be able
to manage their affairs in such a way as to have the basis for stability. Not a con job stability
that you simply lay on, like icing on a cake. But stability that comes from within, and that
is the opportunity, that is the responsibility.
I am confident that the American people have looked down the chasm of 1974-75 and
come to a very, very wise conclusion, that inflation produces unemployment, and as a result
they do not want anything to do with inflation.
The most recent example is the reaction of consumer demand in May, as price expectations
rose a little bit. I think we saw how deep the feeling is in terms of a desire to avoid inflat'on.
I think we've got another littie insight into the fear that inflation occasions in all of us, whether
we are bankers or businessmen or just individuals.
On that basis l a m personally optimistic. I think that we will recognize our responsibility
in this country to ourselves and to others. I think that the kind of ideas, the kind of philosophy
which really is 15 to 25 years old, and finds a sort of reincarnation such as in the HumphreyHawkins bill, will be seen to have been a transitory manifestation of the past.
Developing Nations
Exhibit 62.— Communique of the Joint Ministerial Committee of the Boards of Governors of
the International Bank for Reconstruction and Development and the International
Monetary Fund on the Transfer of Real Resources to Developing Countries (the
Development Committee), January 9, 1976, issued at the close of its fifth meeting in
Kingston, Jamaica
1. The Joint Ministerial Committee of the Boards of Govemors of the Bank and the Fund
on the Transfer of Real Resources to Developing Countries (the Development Committee)
held its fifth meeting in Kingston, Jamaica, on January 9, 1976, under the chairmanship of
Mr. Henri Konan Bedie, Minister of Economy and Finance for the Ivory Coast. Mr. Robert
S. McNamara, President of the World Bank, Mr. H. Johannes Witteveen, Managing Director
of the Intemational Monetary Fund, and Mr. Henry J. Costanzo, Executive Secretary, took
part in the meeting, which was also attended by representatives from a number of
international and regional organizations and Switzerland as observers.
2. The Committee reviewed the current situation and prospects of the developing
countries and noted with concem that the non-oil developing countries in 1976 are hkely
to incur extraordinarily large current account deficits for the third siiccessive year. The
Committee also noted with grave concem that the minimum 6 per cent growth target of the
Second Development Decade appears not likely to be met for the non-oil developing
countries and that substantial amounts of additional extemal capital are still required if the
shortfall from this target is to be held to modest proportions. The Committee also discussed
the means of improving the current situation affecting resource transfers, aid targets and their
implementation, current under-utilization of productive capacity in industrial countries in
relation to their aid effort, and the status of current commodity issues. It was against this
background that the Committee considered various measures to increase the flow of
resources to the developing countries.
EXHIBITS
571
3. The Committee noted the decision ofthe Interim Committee to establish the Trust Fund
to prPvide balance of payments assistance to low-income countries as well as understandings
reached regarding increased access to IMF resources. The Committee discussed the use of
Trust Fund resources and indicated various considerations to be taken into account by the
Executive Directors of the IMF in completing their work on establishment ofthe Trust Fund.
The Committee noted that the Third Window for loans on intermediate terms by the World
Bank had become operational, that contributions received and expected would permit Third
Window loans of $600 million and urged those countries which have not already contributed
to help to increase its resources.
4. The Committee received an interim progress report from its Working Group on Access
to Capital Markets, discussed the proposed work program on the review of regulatory and
other constraints on access to capital markets by developing countries, and recommended
the completion of studies on other appropriate mechanisms which might improve access to
capital markets, including the possible use of multilateral guarantees, the strengthening of
secondary markets, and the possible creation of an international investment fund.
5. The Committee noted the progress being made in regard to cofinancing arrangements
by international and regional development banks and urged that these arrangements be
expanded.
6. The Committee was presented with an initial survey of programs and capital resource
situations of major international and regional lending institutions. The Committee expressed
its full support for an adequate increase in capital financing of these institutions. In this
context, the Committee requested the World Bank's Executive Directors to place before the
Board of Governors at an early date a proposal for an increase in the Bank's capital. The
Committee also supported an early increase in the capital of the International Finance
Corporation. The Committee noted the particularly urgent need for assistance to low-income
countries, and in this connection expressed its strong support of a substantially enlarged Fifth
Replenishment ofthe International Development Association, which, in the opinion of many
members, should be in real terms. The Committee noted that negotiations were under way
to secure agreement in time to permit continuity of operations. The Committee urged timely
action to replenish the resources of regional banks, including their soft-loan windows.
7. The Committee gave special attention to the question of commodity price fluctuations
and to their consequences on the export earnings of developing countries. The Committee
agreed to give priority attention to these questions, including especially possible measures
for the financing of buffer stocks, for the stabilization of export earnings, and other efforts
to assist the developing countries in the area of trade.
8. The Committee expressed its unanimous appreciation ofthe excellent arrangements
made for the meeting and the hospitality extended by the Government of Jamaica.
Exhibit 63.—Summary of Statement by Acting Assistant Secretary Bushnell, January 28,
1976, before the Subcommittee on Foreign Assistance and Economic Policy of the Senate
Foreign Relations Committee, on proposed replenishment and expansion of membership of
the Inter-American Development Bank and U.S. membership in the African Development
Fund
Mr. Chairman and members ofthe subcommittee, today you have before you key measures
to strengthen and expand the economies of countries in Latin America and Africa and thus
help enhance the living standards of millions of the poorest people in the world.
Although complex, this package deserves your prompt action because it will increase
substantially U.S. support of multilateral development assistance while at the same time
reducing budget outlays, and thus supporting our objective of holding down U.S.
Government expenditures. The proposed replenishment ofthe Inter-American Development
Bank (IDB) will be accompanied by an expansion of membership to include at least 12
nonregional donor countries. Because of the entry of these nonregional countries and
emerging donor status for seyeral of the more advanced Latin countries, the U.S. share of
total new IDB resources will drop to 30 percent under this replenishment from 48 percent
under the 1970 replenishment. Moreover, while total U.S. funding would amount to $2.25
billion, actual budgetary putlay would be only $720 million, compared to $ 1.15 billion in the
1970 IDB replenishment. The rest would be in the form of callable capital—a contingent
liability that would entail budgetary outlays only in extremely unlikely circumstances.
U.S. membership in the African Development Fund (AFDF), the concessional loan
affiliate of the African Developjnent Bank, which the Senate approved initially in 1974,
would be particularly appropriate at this time when nonregional donor countries are joining
the EDB. Our contribution would be modest—less than 10 percent of the fund's resources.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
U.S. support for development banks
The United States has been an active participant in the international development banks
since the establishment of the World Bank just after World War II. We were instrumental
in the creation ofthe Inter-American Development Bank in 1959 and the Asian Development
Bank in 1966, and participated in discussions leading to establishment of the African
Development Fund in 1973.
We believe these banks provide important extra dimensions to development assistance.
Economic development is not primarily a matter of money. While money is needed, the key
factors determining the success of development efforts are the policies and priorities followed
by each country. The development banks make important contributions in precisely such
areas, and in institution building. In recent years the banks have accelerated the process of
spreading development benefits to the poorer people by placing greater emphasis on
agriculture, the family farm, and cooperatives—an emphasis we have encouraged and
supported. The regional banks in particular have an important role to play, because they
reflect the desires and needs of their regional members and have an expertise and
understanding of local conditions and problems.
From the U.S. national point of view, these banks encourage development along lines
compatible with our own economy. They stress the role of market forces in the effective
allocation of resources and the development of outward-looking trading economies. Through
contact with the international development banks, developing countries are learning to
administer large procurement programs effectively and honestly. These programs will result
in increased procurement of goods and services in the United States, expanded future
markets for our products, and thus increasing employment in our country. Our participation
in the international development banks will also provide more assured access to essential raw
materials, and a better climate for U.S. private investment in the developing world. Finally,
the development banks provide both the developed and developing countries with an
established and systematic framework for consultations on economic policies, development
needs, and economic performance. They are not debating societies which engage in
seemingly endless rhetpric about restructuring of the world economy—they are working
institutions that get things done.
Latin America and U.S. interests
Now let me turn to our specific interests in Latin America. Despite differences in levels
of development and cultural roots, the Americas have been remarkably free of conflict and
have had a truly unique history of cooperation in the management of intraregional
relationships. We have a vital interest in preserving this long and close association with the
countries of Latin America and the Caribbean.
Our economic interests in Latin America may be viewed at two levels. First are our obvious
interests in trade, investment, and access to raw materials. U.S. exports to Latin America
were $16 billion in 1975. Our direct investment in Latin America is $15 billion, 60 percent
of U.S. direct investment in the development countries and 14 percent of total direct
investment abroad. Latin America is also an important source of supply for many
commodities essential to the U.S. economy such as petroleum, copper, iron ore, and bauxite.
The Latin American countries are also important to us in a less obvious but, in the long
run, perhaps a more significant sense. The existing international economic arrangements are
being challenged by radical demands for change from some Third World spokesmen. Many
influential Latin leaders have taken moderate and constructive positions on Third World
demands, and most Latin countries continue to support open free market arrangements in
the areas of international trade, investment, and monetary affairs. The economic success of
our Latin American neighbors and their allegiance to market-oriented economies and an
open world trading system will, in an important way, affect prospects for our own free niarket
economy. Our economy is likely to prosper most in an international environment of similarly
organized economies.
Fortunately, economic development in Latin America is succeeding and the IDB is playing
an important role in that success and in orienting that growth in directions compatible with
the U.S. economy. Since 1960, installed electrical capacity has tripled, primary school
enrollments have quadrupled, and the number of rural families with access to potable water
has tripled. Although the GNP in Latin America as a whole was growing at almost 7 percent
per annum in real terms before the oil price shock and the ensuing worldwide recession, much
of Latin America remains poor. More than a third of the primary school-age population is
without education facilities or unable to attend school; 40 percent of urban households lack
potable water; and infant mortality in Latin America is 80 per 1,000 live births as compared
with 19 in the United States.
'
I believe Latin America will be able to resume its rapid economic growth in the next few
years, but it will require increased capital inflows to approach the growth rates of the early
EXHIBITS
573
1970's. The proposed replenishment of the IDB will make a major contribution as it will
permit the Bank to increase lending at a rate of 7 percent a year in real terms.
Action requested on IDB
The IDB is the central financial institution ofthe inter-American system. It has proven in
its 15-year history to be a well-managed organization and an innovative lender continually
finding new ways to improve its development impact by concentrating on the key
development bottlenecks.
The Bank's Ordinary Capital commitment authority was virtually exhausted with the
approval of the last loans at the end of 1975, and the loan commitment authority of the
concessionary Fund for Special Operations (FSO) will be exhausted by mid-1976. To allow
the IDB to continue to play a key role in Latin American development, we are asking the
Congress to approve—
An increase in the Bank's capital of $5.3 billion, of which the United States would
contribute $1,650 million.
An increase in the Fund for Special Operations, which makes highly concessional loans,
of $1,045 million, of which the United States would contribute $600 million.
Membership in the Bank by other donors, consisting initially of 10 European countries,
Japan, and Israel, to convert the Bank from a hemispheric institution into an institution
with worldwide donor membership.
Technical amendments to the Bank charter to make additional regional countries
eligible for membership and permit unrestricted lending to the subregional Caribbean
Development Bank.
The Latin Americans are doing more for themselves in the current replenishment.
Argentina, Brazil, Mexico, Venezuela, and Trinidad and Tobago are prepared to guarantee
the convertibility of part or all of their contributions to the FSO. They have also agreed to
refrain from borrowing convertible currencies from the FSO, thus significantly increasing the
scarce concessional resources available to the poorest borrowing countries. In addition,
Venezuela already has made available to the IDB$500 million as a trust fund to be used for
Latin American economic development, and is expected to make convertible an additional
$ 100 million of its local currency now held in the FSO. This shift toward effective donor status
by the Latin American countries able to do so was one of our principal objectives in the
negotiations. It converts the Bank into a more truly inter-American organization as several
Latin American countries become donors in financing economic and social development in
the poorer countries.
The entry of our friends from other parts of the world as full members and donors in the
Inter-American Development Bank with an initial contribution of $745 million is also most
welcome. The increased contributions ofthe Latins plus the nonregionals' contributions will
permit a shift in the composition of the U.S. contribution to a greater emphasis on Ordinary
Capital, largely consisting of callable capital subscriptions which do not require actual
budgetary outlays. Another result ofthe burden-sharing is that U.S. voting power in the IDB
will decline from 40 percent to 35 percent. This, however, is sufficient to preserve our veto .
over FSO operations.
Africa and the African Development Fund
I would now like to discuss the implications of U.S. participation in the African
Development Fund.
Africa has a growing economic significance for the United States. During the last 10 years,
U.S. exports to Africa have grown from $1 billion to more than $5 billion, and U.S.
investment in Africa has quadrupled. Investment and trade in minerals and petroleum
account for the largest share of U.S. economic activity in Africa. In 1975, we imported a large
part of our minerals, coffee, and cocoa from Africa, including one-third of ourforeign crude
oil supplies.
Africa is the least developed continent. Over half of the 25 poorest, least developed
countries in the world are in Africa. About 75 percent ofthe African population is engaged
in subsistence agriculture, and iri half of the countries per capita income is less than $100
per year. Many of these African countries cannot afford the 6-percent interest rate which
the African Development Bank must charge. The African Development Fund was established
in 1973 as a concessional affiliate of the Bank to complement its lending activities by
concentrating on the poorest of the African states.
The creation of the fund has involved nonregional countries more intimately in African
development. Canada, Japan, Brazil, Saudi Arabia, and 12 Europeari countries are members
ofthe fund along with the AFDB, representing all of its members. The administration believes
that the United States should also become a member pfthe fund and requested authorization
of a $15 million contribution to be made available to the fund in fiscal years 1976 through
1978.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
Conclusions
In conclusion, I urge your early and full support for this legislative package, which would
provide for major restructuring and strengthening ofthe Inter-American Development Bank
and for U.S. membership in the African Development Fund. These measures will provide a
substantial part ofthe external funding for continued rapid economic development in Latin
America with programs increasingly directed to improving the abysmal daily living
conditions of the poorest people in our hemisphere and will build cooperative economic
relations with the African nations that are growing increasingly significant for U.S. foreign
trade and investment.
Secretary Simon urges you to support this package of measures because they provide.major
international benefits without conflicting with our own requirements for budget restraint or
infringing on our own very large requirements for investment capital over the next few years.
Action on your part is truly urgent. The IDB can now make new loans from Ordinary
Capital only to the extent of repayments on outstanding loans. The new donors cannot join
the IDB until this legislation is approved. Also, other donors are close to agreement on the
first replenishment ofthe AFDF, while we have not yet joined. The House of Representatives
approved legislation encompassing these proposals in H.R. 9721 on December 9, 1975.
Authorization action must be completed quickly if funding for the IDB and AFDF is to be
- included in final congressional action on fiscal year 1976 appropriations. Lack of fiscal year
1976 appropriations would force the IDB virtually to halt its Ordinary Capital lending during
1976 and delay yet again our entry into the AFDF.
Exhibit 64.—Joint Communique on the Second Session of the United States-Saudi Arabian
Joint Commission on Economic Cooperation, February 29, 1976, Riyadh, Saudi Arabia
The United States-Saudi Arabian Joint Commission on Economic Cooperation concluded
its second formal session today with major attention given to the ways in which the Joint
Commission could be helpful in the realization of Saudi Arabia's economic and social
development.
The Joint Commission assessed the progress achieved since the last Commission meeting
and concluded agreements and understandings on a number of technical cooperation
programs including electrical services, science and technology, and vocational training.
The United States-Saudi Arabian Joint Commission on Economic Cooperation was
established in accordance with the joint statement issued by Crown Prince Fahd and
Secretary of State Kissinger on June 8,1974. The Joint Commission meeting, held in Riyadh,
Febmary 29, 1976, was chaired by Minister Muhammad al-AH Aba al-Khail, Minister of
Finance and National Economy. Secretary of the Treasury William E. Simon, Chairman of
the U.S. side ofthe Commission, led the American delegation. Prince Muhammad Al-Faisel,
Governor of the Saline Water Conversion Corporation, attended the session, as did other
high Saudi officials from the Ministries of Finance and National Economy, Labor and Social
Affairs, Agriculture and Water, Planning, Industry and Electricity, Commerce, Education,
and Higher Education.
The American delegation included William Seidman, Special Assistant to the President for
Economic Affairs; Gerald L. Parsky, Treasury Assistant Secretary for Intemational Affairs
and U.S. coordinator of the Joint Commission; Charge d'Affaires Hume A. Horan and visiting
American officials from the U.S. Departments of Treasury, State, Agriculture, Commerce,
Health, Education, and Welfare, Interior, and Labor, and the National Science Foundation.
In reviewing the atmosphere within which economic relations between the two countries
have been progressing, the Saudi side reiterated the Saudi Govemment's position conceming
the League of Arab States' boycott of Israel, it reaffirmed that this boycott is a nonviolent
economic measure which is a product of the absence of a just and lasting peace in the Middle
East; that it is not based on any form of discrimination relating to race, color, religion,
national origin, sex, or age; and that ever since it was started in the late 1940's, this boycott
was not- and is not today- intended against the United States. The Saudi side further
expressed its hope that the existing and potential economic cooperation between the two
countries will not be disrupted by any misinterpretation of the Arab boycott of Israel. The
American side was pleased with the reaffirmation of this policy of not discriminating on the
basis of race, color, religion, sex, and national origin. The American side further noted that
President Ford's statement of November 20, 1975, with respect to discrimination and the
subsequent executive actions were not directed against any particular country. Both sides
agreed to make these policies more widely understood and further agreed that any action
based on misinterpretation of this policy coiild hinder cooperation between both countries.
Secretary Simon and his colleagues also had meetings outside the Commission framework
with Minister of Finance and National Economy Aba Al-Khail and Govemor of the Saudi
Arabian Monetary Agency Abd Al-Aziz Al-Quraishi; Minister of Industry and Electricity
EXHIBITS
575
Ghazi Al-Gosaibi; Minister of Commerce Soliman Solaim; Minister of Petroleum and
Mineral Resources Zaki Yamani; Minister of Foreign Affairs Prince Saud Ibn Faisel; and
representatives of various Saudi Arabian Charribers of Commerce. These meetings provided
an opportunity for the United States to reaffirm its commitment to cooperate closely with
Saudi Arabia in the realization of its economic and social development plan goals. The United
States also reaffirmed its intention to continue its efforts looking toward a just and durable
peace in the Middle East and noted the constructive support it has received from the
Kingdom in these efforts.
The members of the Commission exchanged views on the development of United StatesSaudi Arabian economic cooperation since the last meeting, noting that the administrative
and financial mechanisms relating to projects were now in place and will permit more rapid
project implementation. Specifically, a trust account has been established in the U.S.
Treasury Department, in accordance with the February 13, 1975, Technical Cooperation
Agreement (TCA) to fund Joint Commission technical cooperation programs on a
reimbursable basis. On the administrative side, the Commission noted that the U.S.
representation to the Joint Economic Cooperation Commission office is fully staffed and
collaborating on a daily basis with its Saudi Arabian counterpart to develop and implement
projects.
A large number of other possibilities for technical and financial cooperation between our
two countries were also explored. The United States and Saudi Arabia expressed both a desire
to have the United States play a major role in the development of key sectors of the Saudi
economy and both also expressed a wish to investigate methods of increasing mutual trade
and private business activity.
Industrialization and trade
Saudi development plan.—The Saudi delegation reaffirmed its interest in U.S. private sector
participation in the realization of the goals of its 5-year development plan. The U.S.
delegation pointed out that it has undertaken a number of initiatives in support of further
active participation by private U.S. firms and institutions in the Saudi economic development
programs.
Following the promulgation ofthe plan in Saudi Arabia, the U.S. coordinator for the Joint
Commission, Treasury Assistant Secretary Gerald Parsky, held a press conference in
Washington, D . C , devoted to the plan. A Treasury-produced condensation ofthe plan has
been distributed to date to more than 5,000 U.S. business firms. The complete text ofthe
663-page summary of the Saudi development plan is also being made available to the
American public at a nominal cost through the U.S. Department of Commerce.
To further increase business cooperation between the two countries in Saudi Arabia's
industrial effort, the United States has invited leading Saudi officials and private businessmen
to visit the United States to meet with U.S. business firms and groups, especially in the
electrical field.
The Saudi Arabian Government outlined its anticipated needs for imported grain, rice, and
flour; and the American delegation stated that the United States is committed to satisfy the
requirements of its historical customers such as Saudi Arabia.
Electricity
Procurement of electrical equipment.—An agreement was signed between the United States
and the Saudi Arabian Governments on November 23, 1975, providing for the procurement
of nearly 200 million riyals ($60 million) worth of electrical equipment through the Joint
Economic Commission.
The U.S. General Services Administration is.responsible for the actual procurement. It is
expected that the first items delivered under this procurement will arrive in Saudi Arabia by
early summer this year. The equipment is to be part of a stockpile both for projects now being
planned and to meet any unexpected power emergencies.
Electrical planning project.—In December 1975, the Saudi Arabian Government formally
asked the U.S. Government, through the Joint Economic Commission, for assistance in
upgrading the Kingdom's electrical systems and planning for the future. A project agreement
signed today provides that the U.S. Treasury, on behalf of the Saudi Arabian Governrnent,
will contract with U.S. firms to prepare a comprehensive 25-year electrification plan to
include the conduct of a national power survey, and offer advisory assistance to improve the
capacity of existing systems to meet Saudi Arabia's rapidly changing demands for power.
Statistics and data processing
The Commission received a report on the status ofthe project agreement on statistics and
data processing which was signed on Septeinber 27, 1975. Under the agreement, the U.S.
Bureau of Census and its National Computer Center is assisting the Ministry of Finance and
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1976 REPORT OF THE SECRETARY OF THE TREASURY
National Economy in achieving an effective statistics and data processing capability.
The team leader and two senior specialists are now in Riyadh. The remaining specialists
will arrive by June 1976.
Standards system
The Saudi Arabian Government also agreed to consider a U.S. National Bureau of
Standards (NBS) proposal for technical cooperation in further developing the capabilities
ofthe Saudi Arabian Standards Organization (SASO), particularly in the areas of food and
building materials standards and program informational services. The Saudi request for
collaborating follows reports on food and building materials standards and on general
requirements for the creation of industrial standards which were prepared by the American
Food and Drug Administration and NBS technicians who visited Saudi Arabia in the spring
of 1975.
Communications
The United States has agreed to send a three-man team to provide some short- and longterm collaboration with the Ministry of Information with regard to the development of
systems for broadcast equipment maintenance, a communications and documentation
library, and radio and TV for the entire Kingdom. The United States also agreed to
collaborate with the Ministry in the development of a National Information Center.
Agriculture and water resources
The most significant development in this field since the Commission's first meeting in
February 1975 was the signing ofa project agreement on November 23, 1975, under which
the United States will provide 34 agriculture and water specialists to the Saudi Arabian
Ministry of AgricuUure and Water for collaboration in implementing that Ministry's
development plans.
The work of the team leader and senior specialist who have arrived in Riyadh has resulted
in (a) agreements on short-term study projects in fruit and vegetable packaging and in park
development in the Kingdom; and (b) discussions of long-term projects to develop the Wadi
Dawasin area in accordance with the recommendations of a previous U.S. study, and to
evaluate the water and agricultural resources of the Arabian Shield.
The Commission reviewed the progress ofthe six-man U.S. team that is in the process of
doing a comparative assessment of alternatives for the future water supply for Riyadh.
Manpower and education
Vocational training.—A project agreement was finalized which looks to further developing
the Manpower Training and Development Program under the Saudi Ministry of Labor and
Social Affairs. This project will involve a wide range of advisory services to be provided by
20 U.S. Labor Department specialists. The project will also provide labor market analyses,
the development and implementation of capital-intensive training methodologies, and the
purchase and installation of vocational training equipment.
In a related development, the Saudi and U.S. representatives also finalized a memorandum
of agreement which will supplement this project agreement. The memorandum provides that
the U.S. Department of Labor will be responsible for making arrangements, on a
reimbursable basis, for architectural and engineering services and for the construction of
vocational training facilities in the Kingdom on a turnkey basis.
Education and higher education.—As a result of discussions held during the first Joint
Commission meeting, a team of U.S. educators traveled to Saudi Arabia to undertake an
evaluation of the higher education system and to provide recommendations.
A team of U.S. educational specialists has been proposed to work, on a long-term basis,
with the supreme council of universities to develop implementation strategies to further
improve the higher education system. Part of this strategy will involve the development of
a community college system in the Kingdom. A proposal for U.S. collaboration in this
endeavor is under active consideration. The American side agreed to provide Saudi Arabia
with evaluative reports respecting the community college system in the United States.
Science and technology
The United States and Saudi Arabia today signed a project agreement under which the U.S.
National Science Foundation will provide technical assistance to the Saudi Arabian National
Center for Science and Technology. The agreement calls for extensive cooperation between
the two countries designed to develop the Kingdom's scientific resources in a manner that
is responsive to its economic and social goals.
Work on the project will begin immediately with priority being given to developing an
analysis ofthe Kingdom's scientific resources and undertaking a variety of scientific projects
between Saudi Arabian and American counterparts.
EXHIBITS
577
The Commission also exchanged views on the current status of a number of possible
technical cooperation projects in the fields of housing, ports, desalination, and communications.
Overall assessment
The Commission considered the results of its second session as very useful and noted that
the understandings and project agreements entered into are positive and constructive
contributions toward strengthening United States-Saudi bilateral economic and trade
relationships as intended by his Royal Highness and Crown Prince Fahd and Secretary of
State Kissinger in establishing the Commission. The Commission commended all participating departments and agencies on both sides for their efforts to date and directed them to
continue exploring possible new areas of cooperatiori in the economic field.
The cochairmen agreed to hold the next Joint Commission meeting in Washington at the
end of this year or early 1977.
Exhibit 65.—Joint Statement of the United States-Israel Joint Committee for Investment
and Trade, March 3, 1976, Jerusalem
The United States-Israel Joint Committee for Investment and Trade met in Jemsalem on
March 1 and 2 for its second regular meeting. The meeting was chaired jointly by Minister
of Finance Yehoshua Rabinowitz and Secretary William Simon. Other senior officials of the
two Governments also participated. (A list of senior participants is attached.) During the
meeting, the Committee reviewed the implementation of the statement of May 13,1975, and
discussed ways and means to expand economic cooperation between the United States and
Israel.
During the meeting, the Israeli members of the Joint Committee briefed the U.S. delegation
on the current economic situation in Israel, the measures taken to curb inflation, reduce
consumption, increase exports, and slow the drain of foreign exchange reserves, as well as
recently enacted tax reforms. Proposals announced by the Govemment of Israel to encourage
investment and increase productivity were also reviewed. The U.S. members reviewed
current economic developments in the United States and the administration's economic
policy.
The Committee received a report on the implementation of the joint statement of May 13,
1975, and expressed its satisfaction with the achievements and the work performed by the
Joint Steering Group, which coordinated the activities and prepared the material that served
as a basis for the Committee's deliberations.
At the conclusion of the Committee's session, the Minister of Finance and the Secretary
of the Treasury approved a program for further cooperation, intended to expand economic
and financial ties between the two countries, and, in particular, to support the economic
development of Israel through an increase in investment and trade flows between the two
countries. The Committee expressed its desire that this program will contribute, as direct aid
does, to a just and lasting peace in the Middle East. The strengthening and stabilizing of the
economy of Israel will also aid in decreasing Israel's dependence on direct aid, although such
assistance may still be needed in the near future.
To facilitate and expand economic cooperation between the two countries, the
cochairmen signed an agreement for the establishment of the Binational United States-Israel
Industrial Research and Development Foundation. The Committee noted with satisfaction
that the United States-Israel Treaty to Avoid Double Taxation was now before the Senate.
The Committee noted with satisfaction that the United States-Israel Industrial Research
and Development Council held its first plenary meeting in Israel on December 7-1-2, 1975,
and that the U.S. section of the Israel-United States Business Council will have its first
meeting in Washington on March 17 at the Chamber of Commerce ofthe United States. Plans
are now underway to hold the Business Council's first plenary session in Israel.
Principles and programs agreed upon are:
I. Economic cooperation
The Committee indicated that an important objective of the cooperative efforts between
the two countries is to assist Israel in increasing its production and improving its efficiency,
so as to enable Israel's economy to progress. The Committee believes that such progress can
be achieved by continued reliance upon free economic riiarkets, by promotion of a free,
cooperative, and open order of world trade and investment and accordingly by continued
resistance to the application of restrictive trade practices in intemational commerce.
Members of the Committee also agreed on the impprtance of ensuring against discrimination
in intemational economic relations on the basis of race, religion, or national origin. The U.S.
578
1976 REPORT OF THE SECRETARY OF THE TREASURY
members reaffirmed the U.S. policy of opposition to restrictive trade practices or boycotts
fostered or imposed against countries friendly to the United States.
II. Encouragement of investment
The Committee noted the incentives to be introduced in Israel to encourage investment
and the additional opportunities for foreign investment resulting from the agreement
between Israel and the European Economic Community. The Committee welcomed these
steps which would enhance the climate in Israel for foreign investment.
The Committee encouraged U.S. and Israeli business to seek out joint business
opportunities as part of their interest in achieving a stronger world economy, peace, and
international cooperation. It was agreed that the Israel-United States Joint Business Council
could make a major contribution iri this area.
Within the general framework of activities to facilitate investment in Israel, the United
States expressed its willingness to—
1. Organize this year a mission of high-level U.S. business executives to Israel, under
the sponsorship of the Overseas Private Investment Corporation (OPIC). In this
connection, OPIC will continue and renew its efforts fo identify potential U.S.
partners for ventures in Israel.
2. Provide appropriate assistance to Israeli industrialists visiting the United States to
seek out ties with U.S. firms.
3. Continue to publicize investment opportunities offered in Israel and assist U.S.
businessmen in exploring these opportunities and helping to develop additional
ones. Such investment could be a source to Israel for technology to improve
industrial efficiency and increase production. This could improve the climate for
further investment.
4.- Cooperate closely with the Business Council in its efforts to promote investment
opportunities in Israel and expand and strengthen the ties between the business
communities of the two countries.
In carrying out these activities, the U.S. Governrnent will bring to the attention ofthe U.S.
private sector the fact that the rapid industrial development of Israel creates opportunities
that can benefit U.S. business as well as the economy of Israel.
III. Trade development
1. The Committee noted the special effort made by the Government of Israel to increase
exports and expressed its satisfaction that trade between Israel and the United States has
expanded since its last meeting. The Committee agreed that a further expansion of bilateral
trade is an important objective of both countries and a major task to be undertaken under
the guidance of the Committee. The United States agreed to—
(a)
(b)
(c)
(d)
Disseminate information to trade and business on opportunities in Israel;
Organize trade missions to Israel under the auspices of the Department of
Commerce for exploration of business opportunities. In this respect it was noted
that missions dealing with electronic data processing and building and construction are presently being organized;
Provide appropriate assistance to Israeli businessmen who visit the United States
seeking to expand mutual trade;
Assist Israel by work ing with trade and business organizations in theUnited States
and to encourage their members to visit Israel and explore the various
opportunities offered.
2. The Committee noted with satisfaction that since its last meeting and as a result of
discussions held between the two countries, Israel has been declared eligible to receive tariff
preferences under GSP (generalized system of preferences), which should enhance the
opportunity for increased exports frbm Israel to the United States.
3. The Committee reviewed the progress achieved in implementing a program, to enable
Israeli producers to sell their products to DOD suppliers and noted the importance of this
effort to Israel. To this end—
(a)
Israeli members indicated their intention to appoint a special representative ofthe
Government of Israel to help Israeli suppliers explore business opportunities with
. DOD and its primary suppliers.
(b) It was agreed that potential Israeli suppliers will visit the United States in the near
future to bring to the attention of DOD military department procurement offices
and their primary suppliers the range of products that Israeli producers can offer.
DOD will facilitate their visits by providing them with appropriate assistance and
guidance.
EXHIBITS
(c)
579
DOD has in the past assisted and will continue to assist Israeli producers in making
contacts with DOD purchasing offices and suppliers in order to help Israeli
producers ascertain the purchasing requirements of the DOD purchasing offices
and suppliers, with the aim of facilitating the special efforts of Israel to expand
its exports.
Both sides expressed the hope that these measures will help maximize the opportunities
for the sale of Israeli products to DOD and its suppliers.
IV. Supply and storage of raw materials
The United States noted that in accordance with the Joint Statement of May 13, 1975, the
Government of Israel has submitted to it plans for its grain and raw material purchases in
the United States. The U.S. members reaffirm that in the event that it becomes necessary
for the U.S. Government to impose short-supply export controls, these purchase plans will
enable the United States to give sympathetic consideration to Israel's situation arid allow
Israel equitable access to U.S. supplies of commodities and raw materials during the period
of short supply.
V. Scientific cooperation
The Committee noted the resolution ofthe Board of Governors ofthe United States-Israel
Binational Science Foundation (BSF) passed on February 18, 1976, which states as follows:
The BSF has been allocating grants since mid-1974. Although most of the research
projects supported by the Foundation have not yet reached completion, it can be stated
that the projects supported by the Foundation are in areas of interest to both the U.S.
and Israeli Governments. These projects were selected on the basis of high scientific
and/or technological merit and of potential benefit to both countries. The BSF plays a
vital role in encouraging and fostering scientific cooperation between both countries.
The aim of the Foundation is to support research which will develop cooperative
arrangements such as single programs carried out in each country with full coordination
and exchange of scientists.
To a greater extent than in former years, highly rated research proposals worthwhile
supporting because of their potential benefit to both countries cannot be activated due
to lack of funds. The Board wishes to recommend to both governments that they examine
the possibility of increasing the funds available to the BSF to support its activities.
The Committee agreed to follow closely the activities ofthe Foundation and to determine
as soon as possible whether additional funds may be desirable to increase its utilization for
the benefit of both nations.
VI. Future work
The Committee noted the usefulness of its periodic meetings and of the exchange of
information on the economic developments in both countries, and decided to continue them
on a regular basis. In the period between the meetings, regular exchanges of information
should continue within the Steering Group and through visits of senior officials of each
country to the other and meetings with counterparts. Until the next meeting of the Joint
Committee, it was agreed that a study should be undertaken under the coordination of the
Steering Group of further areas of cooperation as well as the advisability of providing
appropriate formal arrangements for the joint cooperation activities, which is on the agenda
for the Steering Group.
SENIOR PARTICIPANTS
UNITED STATES-ISRAEL JOINT COMMITTEE FOR INVESTMENT AND TRADE
March 1-2, 1976, Jerusalem
Israel
H. E. Yehoshua Rabinowitz, Minister of Finance, Cochairman
Arnon Gafni, Director-General, Ministry of Finance
Dr. Moshe Mandelbaum, Director-General, Ministry of Trade and Industry
Avraham Agmon, Special Advisor to the Minister of Finance, Ministry of Finance
Haim Stoessel, Accountant General, Ministry of Finance
Moshe Neudorfer, Director, State Revenue Administration
Sar Shalom Shiran, Head, Budget Department, Ministry of Finance
Dov Kantorowitz, Controller of Foreign Exchange, Ministry of Finance
Gen. (Res.) Moshe Goren, Director, Israel Investment Authority
580
1976 REPORT OF THE SECRETARY OF THE TREASURY
Prof. Yitzhak Yaacov, Chief Scientist, Ministry of Trade and Industry
Ze'ev Sher, Economic Minister, Embassy of Israel, Washington
Gad Elron, Head, Economic Division, Ministry of Foreign Affairs
United States
William E. Simon, Secretary of the Treasury, Cochairman
The Honorable Malcolm Toon, Ambassador
L. William Seidman, Assistant to the President for Economic Affairs
Gerald L. Parsky, Assistant Secretary for International Affairs, Department of the
Treasury
Travis E. Reed, Assistant Secretary for Domestic and International Business, Department of Commerce
Joel W. Biller, Deputy Assistant Secretary for Commercial Affairs and Business
Activities, Department of State
Roger E. Shields, Deputy Assistant Secretary for International Economic Affairs,
Department of Defense
Charles W. Hostler, Deputy Assistant Secretary for International Commerce, Department of Commerce
David Gregg, Executive Vice President, Overseas Private Investment Corporation
(OPIC)
Exhibit 66.—Statement by Acting Assistant Secretary Bushnell, March 4, 1976, before the
Subcommittee on Legislation and National Security of the House Government Operations
Committee, on the payment of foreign debts owed the U.S. Government
Mr. Chairman, I am pleased to be here today to explain how seriously Treasury, other U.S.
Government agencies, and the borrower governments consider the prompt, ontime payment
of foreign debts owed the U.S. Government. Delinquencies in the payment of debts by foreign
obligors is taken very seriously by Treasury, and we have taken a number of steps during the
past 2 years to insure that debts are paid on schedule. As I shall explain later, payment on
only a small portion of the debt owed to the United States is in arrears and for the great bulk
of these arrears there are special circumstances which limit our ability to remedy the
situation.
This is the first time I have testified on this important subject. Therefore, I think it would
be appropriate to review past congressional and executive action on this matter.
Congressional and executive actions and Treasury responsibiUties
As you are aware, the Foreign Operations and Govemment Information Subcommittee of
the House Committee on Government Operations began holding hearings on delinquent
debts owed the U.S. Govemment in 1970. In an effort to improve the Govemment's
performance in collection of debts, and in response to timely and useful suggestions from
the subcommittee, the executive branch has developed a complete reporting system on
foreign debts owed the U.S. Government and has instituted procedures for the periodic
review of outstanding delinquencies.
Under section 634(f) of the Foreign Assistance Act, as amended. Treasury is responsible
for compilation of data on foreign debt owed to the U.S. Government and arrearages on such
debts. We receive from all U.S. Govemment agencies semiannual statements of long-term
foreign debt owed (those with original maturities of over 1 year), short-term debts (maturities
of 90 days to 1 year), and accounts receivable (maturities of less than 90 days).
Information is also compiled on debts in each category which are due and unpaid 90 days
or more. This information is used in taking appropriate steps to insure prompt collection,
as well as in assisting the Congress in its work.
Treasury also oversees the review of individual debt problems through its chairmanship
of the National Advisory Council on Intemational Monetary and Financial Policies (NAC).
The NAC in its consideration of new loans to foreign countries reviews the status of those
countries' debts to the United States. The NAC has adopted a formal procedure for the
deferral or disapproval of loans to countries with delinquent debts.
In all of its activities in the debt collection area. Treasury works closely with the
Department of State and the agencies to which the debts are owed. The responsibility for
collection lies initially with the creditor agency. In cases where the creditor agency's efforts
are unsuccessful, the Department of State is asked to provide its assistance.
The Treasury Department is also responsible for compiling an annual report dn the
extemal debt situation of the less developed countries and debt rescheduling. This report.
EXHIBITS
581
which is required by section 634(g) ofthe Foreign Assistance Act of 1961, as amended, is
comprehensive in nature, containing detailed information on the external debt of developing
countries, including debt-servicing problems of major debtor countries and the steps wnich
debtor and creditor countries have taken in dealing with these problems. Copies ofthe second
annual report, dated January 30, 1976, have been proyided to members of this subcommittee.
I shall comment on this report later in my statement.
Treasury also chairs an NAC working group which is developing an early-warning system
to identify in advance those countries which may incur debt-servicing difficulties. Another
Treasury-chaired NAC working group, which works closely with the debt early-warning
group, examines in detail the debt-servicing problems of countries which may inclir debtservicing difficulties.
Foreign debts owed to the U.S. Government
All foreign debts owed the U.S. Government arise from congressionally mandated
programs undertaken in this century. Foreign debt owed the United States falls into two
broad categories: Debts contracted for the most part after World War II and debts relating
to our activities during and immediately after World War I. Since collections on some debts,
particularly those under lend-lease during the Second World War, were deferred until the
war had ended, I would prefer, for convenience sake, to refer to these as post-World War
II debts.
The total principal outstanding on these post-World War II debts was $35.2 billion on June
30, 1975. Of this total, $34.5 billion was on long-term credits, $93.8 million short-term
credits, and $527.9 million accounts receivable. The vast majority of this debt is a result of
U.S. Government foreign aid and export credit programs undertaken during the last 30 years.
Some $15 billion was contracted under the Foreign Assistance Act, and predecessor
legislation, and the Foreign Military Sales Act, $5.6 billion under Public Law 480, and about
$9 billion under the Export-Import Bank Act. Another $ 1.6 billion arose from activities
related to World War II, primarily lend-lease and surplus property disposal.
Given the aid and export support objectives of these loans, it is not surprising that most
of them, nearly 85 percent by value, are owed by non-oil-exporting developing countries. The
largest individual debtors are: India, $3.6 billion; Pakistan, $2.4 billion; Brazil, $2.1 billion;
Israel, $1.7 billion; Turkey, $1.5 billion; Indonesia, $1.2 billion; and Korea, $1.2 billion.
In the vast majority of instances, debts due to the United States have been paid on time.
During the 18 months December 31, 1973, to June 30, 1975, the United States collected
some $3.1 billion in principal due on long-term credits, and the equivalent of about $700
million in principal on foreign currency loans. During this period of time, long-term
arrearages declined by about $130 million. While a portion of this reduction in arrearages
reflects debt rescheduling agreements, the amount of money actually collected on foreign
debts far exceeded new arrearages incurred. Foreign debt arrearages constitute a very small
portion of total debts falling due to and being collected by agencies of the United States.
Let me turn now to a discussion of post-World War II debt delinquencies and describe our
efforts to deal with these delinquencies.
As I indicated earlier. Treasury compiles information from the U.S. Government agencies
on all debts which are overdue and unpaid 90 days or more. As of June 30, 1975, the latest
date for which complete data are available, the total principal and interest delinquent was
$636 million. This compares with $753 million on December 31, 1973.. On the whole, I
believe our performance in reducing debt arrearages has been good. With continued effort,
I would expect this underlying favorable trend to continue.
However, there are certain cases which are extremely difficult to resolve through normal
collection procedures. The table attached to my statement classifies arrearages according to
the nature of the problem underlying the arrearage. For example, those arrearages which fall
under the heading "extraordinary political arrearages" account for nearly 60 percent of total
arrearages asof June 30, 1975. Special problems, particularly problems of apolitical nature,
impede our ability to collect these debts. Mr. Boeker of the State Department will be
addressing the nature of the political problems underlying these arrearages with respect to
China and Cuba.
By far the largest arrearage in this group, $ 199 million, relates to military logistical support
provided by the United States to other nations during the Korean conflict. While the United
States has reached formal agreement with most countries for payment for such assistance,
no such agreements have been reached with six developing countries: Colombia, Ethiopia,
Greece, the Philippines, Thailand, and Turkey. The policy to be followed in seeking
disposition of these matters is under intensive review within the administration. Mr. Boeker
will provide background information on this problem. Without going into the details, I would
like to note that the 1 Oth report ofthe Moorhead subcommittee (December 1973) concluded
that:
582
1976 REPORT OF THE SECRETARY OF THE TREASURY
Arrearages of 90 days or more on foreign credits and loans of U.S. government agencies*
[Dollar amounts in millions]
Dec. 3 1 , 1973
I.
Subtotal
B.
134.8
II.
Major arrearages—public long-term:
I- Egypt
.;
2. Iran (payments initiated, 1974)
3. Pakistan (rescheduling agreed)
,
:
Total major arrearages
372.9
59
$ 50.8
35.3
4.3
$ 13.2
35.8
59.5
90.4
Percent of overall total
228.4
47
;
20.2
8.4
199.8
357.7
Subtotal
Total political..:
144.5
222.9
:
1$ 79.6
64.9
20.2
2.9
199.8
,
Short-term and accounts receivable, of which:
1. China
2. Vietnam and Cambodia
3. Unresolved Korean War logistical support
June 30, 1975
1$ 76.5
58.3
Extraordinary political arrearages:
A. Long-term, of which:
1. China
2. Cuba
108.5
Percent of overall total
III.
Other arrearages:
A. Public:
1. Long-term
2. Short-term and accounts receivable, of which:
FMS, MAAG, and Logistical support
Lend-lease
Eximbank
Other
:
39.9
4.9
19.1
15.1
67.7
4.9
3.8
13.8
79.0
90.3
238.2
125.1
57.4
20.7
9.9
67.3
9.5
30.1
Total other arrearages
305.5
155.2
Percent of overall total
41
24
753.6
636.6
Subtotal
B.
Pn vate:
A. Private:
1. Long-term
2. Short-term and accounts receivable, of which:
Eximbank
Other
,
Subtotal........'
IV. Overall Total—groups I, II, III
8.5
1.4
8.9
0.6 .
• Excludes World War I Debt. .
1 Excludes $45.1 million of principal and interest due from the Republicof China for assets left on the Asian Continent,
for which Export-Import Bank by agreement with that Govemment has deferred from pressing.
MARCH 19,
1976.
It is improbable that as less developed nations they (the six nations) ever implied a
willingness or ability to pay. There is no reason for continuing to carry these claims as
debts on U.S. Treasury records.
The second category, "major arrearages," includes Egypt, Iran, and Pakistan. Together,
these arrearages totaled $108 million as of June 30, 1975.
Secretary Simon raised the matter of debt arrearages when he visited Egypt in July 1974;
At that time, Egyptian arrearages totaled nearly $60 million, a large portion of which was
on local currency loans. Since that time, we were pleased to see that these arrearages were
virtually eliminated. Unfortunately, new arrearages have occurred which total $13 million
as of June 30, 1975. Subsequenfly, this amount was reduced by nearly $5 million at yearend
1975.
•
.
. '
Secretary Simon is visiting Egypt later this week to discuss a number of economic and
financial issues. He will raise the question ofthe remaining debt arrearages with appropriate
Egyptian officials. Given the excellent cooperation which Egyptian officials have demonstrated in the past, we are confident that this arrearage can be cleared up in the near future.
The Pakistan arrearage relates to a debt rescheduling agreement which the United States
and Pakistan are signing this morning. This agreement, which will be submitted to Congress
for appropriate review, will implement a June 28, 1974, understanding reached between
EXHIBITS
583
Pakistan and members of the World Bank Aid-to-Pakistan Consortium. When the debt
agreement is implemented, the amounts, which are now carried as arrearages, will be
rescheduled, and Pakistan will be current on its obligations to the United States.
For the past 4 years, the United States has been in regular communication with Iran in an
effort to collect arrearages of $35 million on several lend-lease and surplus property
agreements signed in the period 1945-48. This arrearage is receiving priority attention and
some payment has been received. Mr. Boeker will discuss the matter in detail.
The remaining category of other long-term, short-term, and accounts receivable
arrearages total just over $155 million as of June 30, 1975. This compares to $306 million
for December 31, 1973. During this period, arrearages on long-term debts owed by foreign
public sector entities declined about $ 125 million, while those arrearages from private sector
entities fell about $35 million. Many of these arrearages refiect technical and administrative
problems, rather than hardcore delinquencies.
Efforts to improve collection of delinquent debts
During the past year, several steps have been taken to improve the debt collection
procedures of agencies of the Government. At a meeting of the National Advisory Council
on International Monetary and Financial Policies which I chaired on August 7, 1975,
agencies reviewed measures they were taking to improve their debt collection procedures.
At that time, Eximbank, whose defaults amount to less than 1 percent of Exim's portfolio,
reported that the Bank was in the process of establishing a computerized program for
automatically billing debtors 45 days prior to due date of paymerit. This program is in the
process of being implemented, and when fully implemented, the end of fiscal year 1976, it
will help to limit the level of delinquent accounts on Exim transactions.
The Department of Defense established a task force to develop standardized procedures
for all the armed services on foreign military sales program transactions to include uniform
billing, cash collection, and delivery reporting. Mr Welsch will comment on how these
measures should help to control delinquent accounts on DOD transactions.
In addition to these technical improvements. Treasury and State have intensified their
efforts to reduce the level of delinquencies. Treasury stepped up its efforts in the weekly staff
meetings ofthe National Advisory Council to call attention of creditor agencies to delinquent
debts of particular countries and to seek their increased cooperation in collecting these
delinquencies. While the results have obviously not eliminated all debt delinquencies, there
are several instances where our consideration of loans to these countries was deferred
pending a satisfactory response from the debtor country. In most cases prompt payment or
at least a schedule for early payment to bring payments up to date have resulted.
World War I debt
The other part of our debt is World War I debt. The question of the delinquent principal
and accrued interest on World War I debt owed to this Government by our European allies,
and related debts owed by Germany, is extremely complex and has remained unresolved for
over 40 years.
U.S. allies during World War I borrowed $ 12 billion to purchase war material. After taking
into account interest charges of $14.6 billion, an amount which exceeds principal, and
repayments of $2.8 billion, the outstanding debt totaled approximately $24 billion as of June
30, 1975.
These debts present special problems. Most debtor countries fulfilled their commitments
under the debt agreements until the Depression. Aside from a few countries, however, the
debtor governments have made no payments since the Depression of 1933-34. The principal
debtor governments (except the Soviet Union, which repudiated all foreign debts in January
1918) have never denied the validity of the debts. Despite their clear legal validity, the debts
are, as a practical matter, inextricably bound up with the entire question of German war
reparations and the intra-European debts generated during the First World War. Many
European nations are net creditors on World War I indebtedness, with Germany owing them
more than they in turn owe. These nations have since the early 1930's steadfastiy maintained
that they would only resume payments on their war debts to the United States on the
condition that the issue of Germany's World War I reparations was satisfactorily settled.
Resolution ofthe problem ofgovernment claims against Germany arising from World War
I was deferred "until a final general settlement of this matter" by the 1953 London agreement
on German external debts, to which the United States is a party. This agreement was ratified
by the U.S. Senate and has the status of a treaty.
While the United States has never recognized any legal connection between World War
I obligations owed to this country and reparation claims on Germany, there is a linkage in
reality. A National Advisory Council working group has this complex matter under study but
thus far has not found any feasible way to resolve this problem.
584
1976 REPORT OF THE SECRETARY OF THE TREASURY
LDC debt, debt rescheduhng and U.S. policy
The question of increased LDC (less developed country) balance of payments deficits and
the concomitant rise in LDC external debt is attracting considerable attention in
international fora such as the United Nations Committee on Trade and Development
(UNCTAD) and the Organization for Economic Cooperation and Development (OECD).
The magnitude of these balance of payments deficits and the pattern of past and projected
financing is analyzed in considerable detail in the second annual "Report on Developing
Countries' External Debt and Debt Relief Provided by the United States," which was sent
to Congress on January 30, 1976.
The sharp jump in oil prices and a combination of other factors such as higher prices for
food and fertilizer in 1974 and the worldwide recession of 1974-75 impaired significanfly
the economic prospects for many ofthe nonoil LDC's. However, the report concludes that
most LDC's will be able to manage the financing of their current account deficits in 1976,
even though many countries will continue to borrow beyond normal levels. If there are LDC
debt problems in calendar year 1976, it is expected that these problems will be associated
with individual countries—perhaps three or four—rather than with the LDC's as a whole.
The report sets forth in unequivocable terms the U.S. position on U.S. participation in a
generalized debt rescheduling or debt moratorium as advocated by some countries. The
United States opposes a generalized debt rescheduling or moratorium as these are not
considered to be appropriate instruments to alleviate the balance of payments financing
difficulties of these LDC's. Moreover, proposals which have been advanced along these lines
would be inequitable, providing only mirior assistance to the poorest countries and windfall
benefits to others.
U.S. policy on debt rescheduling is to evaluate the merits of debt reorganization on a caseby-case basis, predicated on the principle of basic adherence to scheduled terms of credit
payment. Within this framework, the U.S. objective is to encourage countries to undertake
appropriate corrective policies in order to minimize the incidence of debt rescheduling.
In summary, Mr. Chairman, let me repeat that most debts by foreign governments to the
United States are being repaid on time. In the fiscal years 1974 and 1975, we have collected
over $5.6 billion in principal and interest on Government long-term credits. Collections on
short-term credits are also substantial. During the same 2 years, we have reduced the total
of delinquent debt. About 60 percent of total debt arrearages on post-World War II debt and
almost all arrearages on World War I debt are subject to special political or other factors,
which make prompt payment unlikely at this time.
Mr. Chairman, I will be happy to answer any questions which you br members of the
committee may have.
Exhibit 67.— Statement of Assistant Secretary Parsky, April 8,1976, before the Subcommittee
on Foreign Operations of the Senate Appropriations Committee, regarding U.S. contributions to the intemational development banks
Mr. Chairman, last year the four international development banks made commitments for
new loans totaling $8.5 billion for 377 projects in 84 countries. This total is far more than
the bilateral economic development program of the United States or any other country. For
most developing countries outside the Middle East the programs of the intemational
development banks have become the core of their extemal financing. Most aid donors from
both Europe and the Middle East build their bilateral programs around, and in cooperation
with, the banks' progranis. The U.S. contribution to this tmly mammoth development effort
requires appropriations of a little over a billion dollars in FY-77. About $300 million of this
total is for callable capital which is unlikely to result in any outlays ever from the U.S.
Treasury. Callable capital is a guarantee facilitating the sale of bonds by the banks in the
capital markets of the world.
Mr. Chairman, Treasury has testified each year about these banks and I would presume
not to repeat the basic details on their creation and growth which you and the committee
know so well. I shall try to focus on a few of the key reasons why continued support for the.
banks at the level requested is in the national interest, despite the many competing domestic
demands for funds, and review the current funding situation and recent developments in each
bank. Detailed statements on the Intemational Development Association (IDA), the
Intemational Firiance Corporation (IFC), the Inter-American Development Bank (IDB), the
Asian Development Bank (ADB), and the African Development Fund (AFDF) are annexes
to this statement. 11 shall do my best to answer questions on any of these institutions as well
•Annexes 1 through 5 are not included iri this exhibit but are available in subcommittee files.
EXHIBITS
585
as any general questions you may have on the banks. Mr. Charles A. Cooper, U.S. Executive
Director for the World Bank group, Mr. John M. Porges, U.S. Executive Director at the IDB,
and Mr. John A. Bushnell, my deputy at the Treasury for developing nations finance are here
with me today and are also available for questions.
We believe that the World Bank group and the three regional banks provide important
extra dimensions to development assistance. Economic development is not primarily a matter
of external funding. While money is needed, the key factors determining the success of
development efforts are the policies and priorities followed by each country. The
development banks make important contributions in precisely such areas by encouraging the
adoption of sound economic policies, by assisting in institution building, and by supporting
successful development efforts made by the countries themselves.
The banks have developed highly competent professional international staffs which help
the developing countries with the complex problems of priority setting and institution
building. These international staffs bring together outstanding professionals from both
developed and developing countries. In both the World Bank and the Inter-American
Development Bank there are more Americans than any other nationality; and, overall,
Americans make up about 25 percent of the development bank staffs.
The banks are cost efficient institutions. For example, the combined administrative
budgets of the banks in 1975 accounted for only 3 percent of the $8.5 billion lent out that
year. Moreover, included in the administrative budgets are expenses for technical assistance,
training centers, et cetera, which are not directly associated with the cost of making loans.
From the U.S. national point of view, these banks encourage development along lines
compatible with our own economy. They stress the role of market forces in the effective
allocation of resources and the deyelopment of outward-looking trading economies. Through
contact with the international development banks, developing countries are learning to
administer large procurement programs effectively and honestly. These programs will result
in increased procurement of goods and services in the United States, expanded future
markets for our products, thus increasing employment in our country. Our participation in
the international development banks will also provide more assured access to essential raw
materials and a better climate for U.S. private investment in the developing world.
There is clear evidence that in all of the international development banks increasing
attention is being given to, and a greater volume of loans are being made for, the direct benefit
ofthe urban and rural poor. Assistance is being directed increasingly to the poorest countries
and to low-income groups in all borrowing countries.
About 92 percent of IDA credits are made to countries with per capita incomes below
$200, and the ADB makes loans on concessional terms only to member countries with per
capita incomes of less than $300. About 50 percent of IDB's concessional loans are being
made to the nine poorest countries in Latin America, and this percentage is expected to
continue rising steadily in the future.
All ofthe international development banks are increasing their lending for projects which
directly assist the rural and urban poor. In recent years the banks have placed greater
emphasis on agriculture, the family farm, and cooperatives—an emphasis we have
encouraged and supported. The IDB has been the leader, for example, in lending for
integrated rural development, cooperatives, farm-to-market roads, and rural water supply.
The World Bank and IDA have made several loans for population projects and for sites and
services to improve living conditions for the poorest groups. The IDA, as well as the African
Development Fund, have made loans for the drought-stricken Sahel region of Africa. The
ADB is taking the lead in loans involving light and intermediate technology which benefit
the poor.
I would emphasize that the change in emphasis toward direct assistance to the poor is
slower than some of us would like and we continue to press within the banks for a greater
concentration to reach directly the poorest groups in each borrowing member. We must also
not lose sight ofthe fact that basic infrastructure projects—roads, ports, electric power, and
major irrigation—are still necessary to provide the basis for overall growth ofthe developing
country economies.
The development banks are part of an international structure in which the developed and
developing countries work together to solve problems. The development banks are not
debating societies which engage in seemingly endless rhetoric about restructuring of the
world economy; they are working institutions that get things done. By cooperating with other
developed countries in funding these institutions we improve the effectiveness of our own
efforts. Other donor countries strongly support this cooperative approach and multilateral
institutions are being used for an increasing share ofthe total development assistance of other
industrial donor countries. The United States is no longer the leader in directing assistance
through the development banks; the constraints on our support are a principal limitation on
their growth as other countries, in general, are prepared to multilateralize a greater part of
their assistance.
586
1976 REPORT OF THE SECRETARY OF THE TREASURY
Bilateral aid remains, of course, of major importance. There are special aspects of
economic assistance that require bilateral programs, especially where we have special
techniques or products to impart, where we have special interests in individual projects or
programs, or where security considerations are heavily involved. But U.S. support for the
multilateral institutions is essential if we are to meet today's and tomorrow's challenges of
improving the prospects for the millions in developing countries which our bilateral programs
do not reach.
In our contributions to the international development banks, we have been trying to reduce
U.S. budgetary outlays by making relatively less available to the soft-loan windows of these
institutions and relying more on U.S. contributions of callable Ordinary Capital. Callable
capital does not involve budgetary outlays; thus, emphasizing callable capital fits in well with
the administration's strong efforts to achieve budgetary constraint. Moreover, since our
private capital market is a major source of borrowing by the international development
banks, it is appropriate that the United States provide an increased proportion of its overall
contributions to these banks in the form of callable capital, while other donors with less welldeveloped capital markets undertake a greater share of funding for the soft-loan windows
of the banks. This shift in burderi-sharing is illustrated by the recent trends in U.S.
contributions to the concessional funds of the banks. Our contribution to the fourth
replenishment of IDA is one-third of the total, as compared with 43 percent in our initial
contribution in 1961, 42 percent of the first IDA replenishment, and 40 percent of both IDA
II and IDA III. In the case of the new IDB replenishment, our contribution to the Bank's
concessional resources would be reduced to $600 million, or 57 percent of the total, as
compared with $1 billion, or 67 percent of the total in the 1970 replenishment.
In the IFC, our share in the proposed total capital replenishment for FY 1977-79 would
fall to about 25 percent as compared with 32 percent in the initial capitalization. And in the
Asian Fund the U.S. share will also decline, although we want to maintain our share ofthe
ordinary ADB capital through full appropriation of the amount requested for FY-77.
One of the advantages to the United States of burden-sharing in the international
development banks is that it provides us with substantial leverage in the use of our foreign
assistance funds. Thus our appropriations request of about $1 billion in FY 1977 will be
associated with nearly $10 billion of total lending by these banks.
Because of burden-sharing by the other donor countries, and their consequent sharing of
the role in the decisionmaking process as members of these institutions, we do not—as we
do in our bilateral aid programs—have complete control over the activities of the banks.
These institutions, as you know, are clearly not part of the U.S. Government. What we have
to weigh, therefore, is whether, on balance, the international development banks generally
perform in ways which meet U.S. objectives even if, for example, they make some loans or
lend to some countries that do not meet with our approval. In this connection, most of the
total lending by the international development banks is to countries—such as South Korea,
the Philippines, Pakistan, Tunisia, Brazil, Egypt, and Colombia—where we have strong
interests and where we now have or recently have had substantial bilateral aid programs.
Appropriations requests
To provide for continued U.S. support ofthe international development banks in FY-77,
we are requesting appropriations of $1,030.6 million of which $734.1 million will require
Treasury outlays and $296:5 million is callable capital—guarantees unlikely to require
expenditures. The administration is seeking—
$375 million for the second U.S. installment of the fourth replenishment of IDA;
$45 million as the first U.S. installment in the first replenishment in 20 years for the
International Finance Corporation;
$240 million for the second installment of the fourth replenishment of IDB Ordinary
Capital ($40 million of paid-in capital and $200 million of callable capital);
$200 million for the first installment ofthe replenishment ofthe resources ofthe IDB's
soft-loan window, the Fund for Special Operations (FSO);
$120.6 million for the third installment of the first capital replenishment ofthe ADB
($24.1 million paid-in and $96.5 million callable);
$50 million for the initial U.S. contribution to the first replenishment of the resources
of the soft-loan window of the ADB, the Asian Development Fund (ADF).
In addition, the President has just transmitted to the Congress a request for supplemental
appropriations for FY 1976. In this supplemental request the administration is seeking—
EXHIBITS
587
$240 million for the first installment ofthe fourth replenishrnent of IDB Ordinary Capital
($40 million of paid-in capital and $20.0 million of callable capital);
$15 million for the initial U.S. contribution to the African Development Fund.(AFDF).
These U.S. contributions are part of the multilateral effort in funding the international
development banks in which the United States contributes only a part—and an increasingly
smaller part as can be seen in the table attached to this statement (annex 6). If other donors
are to continue supporting these banks, we must do our part by delivering on the amounts
we agree to contribute.
The administration is not seeking a contribution for the "third window" ofthe World Bank
which lends at an interest roughly halfway between that of the World Barik and that of IDA
because we believe priority should be given to IDA and IFC appropriations.
Our participation in the fourth IDA replenishment was authorized by Public Law 93-373
and our participation in the replenishment ofthe capital resources ofthe Asian Development
Bank in Public Law 93-537. Authorizing legislation for participation in the replenishment
ofthe IDB passed the House of Representatives as H.R. 9721 on December 9, 1975, and the
Senate on March 30. A conference, necessitated by differences in the House and Senate
versions of the bill, is pxpected to be held soon. Legislation authorizing U.S. participation
in the replenishment of the IFC and ADF was transmitted to the Congress in February.
H.R. 9721 provides for the United States to make three contributions of $400 million per
year to the replenishment of thecapital resources of the IDB beginnirig in FY 1976 iand $450
million (all callable) in FY 1979. The bill also provides for U.S. membership in the African
Development Fund with an appropriation in FY 1976.
In the IDB a new class of shares, known as interregional capital, will be created to facilitate
the entry of nonregional members. We are not requesting appropriation of the callable
interregional capital because covenants limiting IDB borrowing to the amount of appropriated U.S. ordinary callable capital would not apply to interregional callable capital. This
matter is explained in more detail in annex 3 on the IDB.
We signed up for IDA IV in January 1975 without appropriations because we knew that,
while other donors had made advanced contributions to allow IDA to continue making
commitments, they would contribute no additional funds until the United States formally
agreed to the replenishment. Such action by the other donors would have forced IDA to stop
lending to the world's poorest countries. By agreeing to contribute one-third of the funds for
IDA IV, we assured that others would contribute the other two-thirds ofthe funds and IDA
has continued to make commitments for projects and programs in the poorest countries.
. The nature of our current arrangements concerning IDA, frankly, give me a great deal of
concern. We should be aware of the implications of the procedure under which we are
beginning our contributions 1 year late and spreading our contribution to IDA IV over 4 years
while IDA commits the funds in 3 years. Under the present schedule, IDA will have
committed all IDA IV resources 3 months before the end of FY-77..Yet we shall have half
of our contribution still awaiting appropriation in FY-78 and FY-79.
As you know, the conference committee on April 1 recommended $320 million for the
first installment of the U.S. contribution to IDA IV. We will need to have the $55 million
appropriated in FY 1977 in addition to the full $375 million requested if we are not to fall
further behind other donors in providing funds to IDA.
To complicate matters, negotiations have already started on the next IDA replenishment.
IDA hopes that the fifth replenishment will take effect by July 1977 so that there is no period
during which IDA commitments must stop. Some of you have suggested that we provide
commitment authority to IDA subject to appropriation. This procedure would mean that in
FY-78 appropriations would be necessary to meet not only the $375 million third payment
for IDA IV but also for the first payment for IDA V. Such appropriations would total more
than double the current request even if the U.S. share of IDA V is substantially reduced.
Although I would welcome your views on this problem, I do not belie;ve we can resolve it
this morning. However, this situation does emphasize the great importance of full
appropriation ofthe $375 million plus any shortfall from FY-76 and FY-77 if the United
States is to continue as an active supporter of IDA's key development role in the poorest
countries. The administration believes that for the United States to turn its back on IDA is
unthinkable.
The need for funds in the other banks is also urgent. The IDB ran out of commitment
authority to make new loans in late 1975 and would have had to cease lending except for
a change in its regulations that allowed it to itiake new commitments against loan reflows
and certain reserves on a temporary basis until the new replenishment becomes effective.
Even after doing this the IDB had only $73 milhon in remaining commitment authority from
Ordinary Capital at the end of 1975; these furids have already been allocated for a couple
of pending loans. Thus the IDB is now unable to make new Ordinary Capital loans. The
588
1976 REPORT OF THE SECRETARY OF THE TREASURY
supplemental FY-76 appropriations which are obviously urgently needed will be used in part
to reverse this temporary accounting change made last year. Thus the Bank will again have
exhausted its commitment authority by about the beginning of FY-77. The FSO will also run
out of commitment authority by the beginning of FY-77.
The Asian Development Bank has only $41 million of commitment authority remaining
for soft funds, and these funds remain only because it reduced its soft lending in CY-75 to
$166 million from $173 million in CY-74. The Bank has made no soft loans so far in 1976.
During 1975, the United States participated in negotiations on an ADF replenishment but
did not commit itself concerning the specific timing or amount of any U.S. contribution. Last
December, the ADB Governors approved a resolution providing for an $830 million
replenishment with a suggested U.S. share of $231 million. The United States abstained on
the resolution and no final decision has yet been taken on the full amount to be requested
from the Congress for a 3-year U.S. contribution. We are, however, requesting $50 million
as the U.S. contribution to the ADF for FY-77 to continue the level of U.S. support ofthe
ADF in recent years.
The pipeline of available funds for concessional lending has been reduced below minimum
levels by the delays in U.S. contributions. Soft convertible funds of the regional banks
available for commitment declined from $285 million at the beginning of 1975 to only $ 100
million by the end of the year. The inability to make new commitments not only delays the
financing of good projects but also weakens the morale and dedication of the banks' staffs.
The $45 million appropriation request for the IFC is part ofa $480 million capital increase
for the Corporation. The total U.S. share is about $112 million.
We regard the IFC expansion as a major element in our program for aiding the developing
countries. IFC, a member of the World Bank group, is the only multilateral agency
specifically designed to encourage private sector growth in the developing countries. It is
unique among international development institutions in that it purchases equity and operates
without government guarantees.
The United States has taken the lead in publicly supporting a major expansion of IFC
capital through statements made by Secretary Simon at the annual meeting ofthe IBRD/IMF
in September 1975 and by Secretary Kissinger at the U.N. Seventh Special Session in the
same month. The proposal has since received widespread support from other countries and
international negotiations are expected to be completed soon.
The United States has always stressed that the development process involves a cooperative
effort between the public and private sectors—domestic and foreign. The task is too big and
resources too scarce to permit a dependence on one or the other. A high level of private
investment has been a common factor behind the growth experience of three of the most
successful LDC's—Brazil, South Korea, and Taiwan. Low rates of private investment have
tended to be associated with low rates of economic growth. Public investments in
infrastructure yield low returns if not followed up by further investment in more directly
productive activities. The private sector has proven its effectiveness relative to the public
sector, both in seeking out the investment opportunities that are most profitable and in using
available resources efficiently.
IFC taps the private sector, both domestic and foreign, for the bulk of the investment
capital in its projects while applying a development orientation to the utilization of that
capital.
The country shares of IFC's current capital represent the relative economic strength ofthe
members in the 1950's when the Corporation was established. By using an up-to-date formula
reflecting conditions in the 1970's the relative share ofthe U.S. subscription declines while
those of Germany and Japan, as well as bf the newly rich OPEC countries, rise.
This capital increase is the first since IFC's founding in 1956. The proposed increase is
ambitious—more than quadrupling the IFC's small capital base of $108 million. IFC's small
capital base has impeded its equity operations, restricted its ability to borrow IBRD funds
for relending, and resulted in IFC becoming a much more junior member ofthe World Bank
than was contemplated when it was established 20 years ago. The capital increase will enable
the IFC to play a more substantial role in the development process in association with private
capital. The United States, as the largest private enterprise economy in the world, is expected
to be the leader in support ofthe IFC. Frankly, I wonder if we have done justice to our strongly
held beliefs in the advantages of private enterprise by delaying a replenishment of the IFC
in recent years while giving priority to the organizations lending mainly to governments. It
is time to put the IFC at the top of our priority list.
Mr. Chairman, I must take note at this point ofthe actions ofthe conference cornmittee
ofthe Senate and House on April 1. The committee has reduced our requests by $ 130 million.
I should state for the record that it is present administration thinking that we would amend
the FY-77 request to include this $130 million requested but not appropriated in FY-76.
EXHIBITS
589
This procedure would also apply to the supplemental requests in FY-76 for the IDB and for
the African Development Fund recently submitted to the Congress.
Before closing I would like to address briefly five additional issues which are of interest
to the Congress and the administration. First, let me comment on why it is important for the
United States to contribute to four international development banks.
Our past experience with the regional banks leads us to believe that smaller institutions
with a predominance of local citizens can do a better job of meeting certain requirements
than the much larger World Bank group. Countries in the regions—Latin America, Africa,
and Asia—concur in this belief since the regional institutions give them more control over
the course of their own development. Moreover, the work of these institutions and that of
the World Bank group are complementary. The World Bank concentrates on larger, more
complex projects utilizing expertise gained from worldwide operations. The regional banks
focus on smaller scale projects and call upon the firsthand knowledge and experience of their
staffs to meet problems unique to their areas.
Let me now address the effect of the international development banks on our balance of
payments. Excluding short-term funds held by the development banks in U.S. financial
markets, the total of all inflows and outflows ofdollars resulting from transactions from their
inception through December 1975 has resulted in a net deficit of only about $200 million
for the U.S. balance of payments. Moreover, the banks maintain substantial investments in
U.S. short-term financial assets.
The absolute magnitudes ofthe various types of flows are, of course, much larger; the total
net outflow of capital (subscriptions paid-in plus net sales ofbonds, loan participations, etc.,
in the United States) totaled almost $ 11 billion as of end-1975, while the development banks'
purchases of U.S. goods and services, direct expenditures and long-term investments in the
United States totaled over $ 10 billion.
Because of our overall favorable payments situation in 1975 we opened our capital markets
freely to the banks for the first time in several years. As a result, they raised $1.8 billion in
net long-term capital. Consequently the cumulative effect on U.S. international payments
was less favorable at the end of 1975 than at the end of 1974. However, at the end of 1975,
the banks held about $5 billion in short-term U.S. financial assets which, if included in the
above figure, would make the effect on total, inflows and outflows from the United States
positive by a large margin.
Let me turn now to procurement. One of the major benefits we derive from our
membership in the international development banks is the opportunity it affords U.S.
exporters to compete for procurement financed by the banks. The rules ofthe banks require
international competitive bidding and other safeguards which give our exporters a fair chance
to compete for business in the developing countries. One of the advantages in joining the
African Development Fund is that U.S. companies will become eligible to compete for
contracts financed by the AFDF and thus will have a greater incentive to compete for
business in Africa, which has not been a traditional market for many U.S. suppliers.
We have increased efforts in the last year to obtain a larger share of procurement in the
development banks. During the past 10 months. Treasury has had on loan from the State
Department a senior foreign service officer who has concentrated on improving the U.S.
procurement record at the banks. This record, I might add, is not bad at all. Although the
U.S. share of world exports of goods and services in recent years has been approximately 17
percent, our share of bank-financed procurement has been running at 25 percent. Every $ 1
billion of procurement in the United States for bank-financed projects generates 47,500 manyears of employment in this country.
I know you are also interested in the foreign assistance activities of the oil-exporting
countries as they relate to the international development banks. The vast increase in oil
export earnings ofthe OPEC countries has made it possible for sbme of them to take on part
ofthe development financing burden and to borrow substantially less from the international
development banks thus permitting more lending to the poorer developing countries.
OPEC countries have provided cofinancing totaling some $1 billion to cbmplement 36
IBRD and IDA projects in 16 countries—most of them over the past year or so. These projects
are listed in a table attached (annex 8). A substantial amount of IBRD/IDA resources was
freed up for other projects and countries by this OPEC cofinancing.
The pattern of lending by the development banks to OPEC countries has changed as a
result of the higher incomes of these countries (annex 7). Lending of soft funds from IDA,
the FSO, and the Asian Development Fund to these countries has been stopped with the
exception of limited amounts of FSO funding for Ecuador. These FSO loans to Ecuador have
been financed from sources other than the U.S. contribution, including Ecuador's own
contribution to the FSO. Lending to the OPEC countries with the highest incomes such as
Venezuela and Iran has stopped. However, lending to the poorer countries such as Indonesia
and Nigeria has increased, parfly as a result of proceeding with loans on which work had
590
1976 REPORT OF THE SECRETARY OF THE TREASURY
already started before the oil price increase. We have urged the banks to concentrate their
limited resources on those countries with the greatest need.
My. final point deals with our procedures to examine the work of these banks. We are
continuously working at improving our oversight activities in regard to the banks' lending
programs and project implementation. Embassy, AID, and Treasury officials make visits to
projects as frequently as possible. At every opportunity we encourage and facilitate project
visits by Members of Congress.
The primary mechanism through which the administration sets policy on the international
development banks, both on general policy questions and on each individual loan, is the
National Advisory Council on International Monetary and Financial Policies (NAC). Every
loan and borrowing operation and every substantial technical assistance operation is
reviewed in detail by the interested U.S. agencies in the NAC before instructions are given
to our Executive Directors. Through this process we assist these institutions to do an even
better development job by bringing the very considerable expertise found in the Federal
Government to bear in reviewing their projects. I would especially like to mention the
outstanding technical work of the Department of Agriculture and the Department of
Transportation in contributing highly useful inputs to these reviews. AID is one ofthe most
active agencies participating in the NAC and contributes its immense development
experience as well as its knowledge of current conditions in developing countries. The
Department of Commerce and the Export-Import Barik help us to be continually vigilant that
American exporters have the fullest opportunity for business. The Federal Reserve provides
extremely useful analysis ofthe monetary and financial situation in the borrowing countries.
The State Department contributes its detailed knowledge of conditions in the borrowing
countries and provides the key foreign policy element in NAC deliberations. In addition to
chairing the NAC, we in Treasury are particularly concerned with general bank policies such
as assurance of adequate self-help, avoiding financing of cost overruns, a consistent approach
to maturities and grace periods, and increased efforts to reach the agricultural sector and
the poorer people in ways that will increase output. The NAC also reviews such general U.S.
concerns as expropriation of U.S. investment and arrears on debts to the United States in
connection with each loan.
The annual report ofthe NAC should be an integral part ofthe documents you consider
in determining appropriations for the development banks. In particular; I would call your
attention to chapter IV of the FY-75 report which reviews developments in the banks and
includes tables covering such matters as the sectoral breakdown ofiending and membership
in the regional banks and appendix C which includes the NAC evaluation of all the loans
approved during the year. If this appendix were not so long—a hundred fine-print pages—
I would suggest you might include it in your report because it brings put the real life benefits
for millions of people around the world made possible through the work ofthe development
banks. The purpose and benefits ofeach loan are given. Let me quote just one example of
the sort of information in the NAC report. For a $ 15 million loan to Kenya, half from the
IBRD and half from IDA, the following is part of the analysis of benefits:
The major quantifiable benefits stemming from the project are substantial increases in
marketed production of wheat, maize, milk and coffee estimated at $10.1 million per
year after full development. The project should also ensure employment—either
permanent or seasonal and depending on the number of group owners involved—for
about 13,000 group farm owners, and will benefit fai-m families comprising 80,000
persons. These families are from the lower income levels of Kenya's rural population,
most of which would be landless and unemployed if steps were not taken to protect their
investments. At full development, the annual income of each family should have
gained—in addition to its subsistence income—$84 on the mixed farms, and $420 on
the coffee estates. Currently, the average per capita income ofthe rural family in Kenya,
including subsistence produce, is only about $70 per annum.
I know that some of you have felt the United States, especially the Congress, cannot make
a sufficient review of the lending operations of the development banks in advance of loan
approval. Unlike the situation for the bilateral aid program, we cannot present you with a
list of specific projects that will be financed with the appropriations before you today. This
situation is inherent in the nature of these multilateral institutions where the United States
provides only one dollar out of every three, four, or five they lend. It would obviously be
infeasible for them to present their programs in advance to the governments and parliaments
of all their members, or even to the 20 to 25 donOr members. However, these institutions
do not make sharp changes in the pattern and nature of their lending from year to year. Thus
a review of last year's lending program will indicate quite accurately the nature and direction
of their lending programs this year and next year.
In conclusion, Mr. Chairman, I would like to apologize for having dealt so much with
figures, procedures, and burden-sharing. Underlying all these aspects we must keep in mind
591
EXHIBITS
that the fundamental purpose of these institutions and of all the funds you appropriate for
them is to help the people in developing countries improve their miserable living conditions.
Support for the development banks is important in building and maintaining the broad
framework of international cooperation that is important to continued U.S. prosperity. But
this is an additional benefit. The basic justification for the appropriations has to be that these
banks do a good job in using the money to help the developing countries help themselves
and that this development reaches the people in these countries in a way that justifies U.S.
taxpayer support.
We have not asked for the amounts of money that these institutions could use to accelerate
development worldwide. Given the need for budget stringency, which we in Treasury know
is so essential in the United States today, we have asked for the minimum amounts necessary
to keep these institutions going in a manner consistent with the highest priority needs ofthe
poor countries and contributions being made by others. The decisions you will make on these
appropriations may receive much attention in the capitals of the world. But the practical
effects of the appropriations will be spread to the poorest villages, slums, and isolated areas
where little is known of the United States, burden-sharing, or these institutions, but where
improved seed, a well, a visiting health team, availability of credit, or a road to the market
can make—at small cost—an immense difference in the quality of life.
ANNEX 6
Trends in share of international development bank resources provided hy the United States
[Percent of contributed resources]
Initial contribution
First replenishment
Second replenishment..
Third replenishment
Fourth replenishment...
Fifth replenishment
IBRD
41.4
32.9
28.0
IDA
42.6
41.9
40.0
39.9
33.3
OC
43.1
43.1
43.1
41.2
• 32.4 •
FSO
68.5
»68.5
83.3
75.0
66.7
57.4
OC
20.0
18.2
Cumulative U.S. share..
I If the SPTF is included, the United States provides a total of 90.7 percent of IDB concessional resources through
the first replenishment.
ANNEX 7
73
..
m
O
International development bank loans to OPEC countries—FY 1974 through FY 1976
[In millions of dollars]
73
FY 1974
ADB/IDB
Country
Abu Dhabi
Algeria
Ecuador
Indonesia
Iran
Iraq
Kuwait
Libya.
Nigeria
Qatar
Saudi Arabia
Venezuela
Total
SF
FSO
Bank
—
157.5
23.2
48.0
265.0
—
—
—
75.0
—
—
22.0
IDA
—
—
5.5
84.0
—
—
—
—
—
—
—
OC
-
-
-
22.0
-
590.7
89.5
11.78
77.24
769.22
609.5
55.7
21.54
Bank
157.5
84.4
165.32
48.0
4.0
332.0
35.0
77.1
23.5
14.2
Grand
total
SF
FSO
SF
FSO
IDA
48.0
62.5
423.3
52.5
46.0
—
68.0
-
46.0
40.7
134.05
*40.7
66.05
251.5
187.6
722.67
317.5
Tl
H
X
m
CO
m
n
73
m
H
>
O
* Includes $29.6 million from Venezuelan trust fund.
• Through Mar. 1, 1976.
H
O
World Bank
—
-
-
-
-
112.1
37.7
759.3
114.0
—
106.75
—
220.75
22.0
1,749.27
Tl
H
X
m
H
m
GO
C
593
EXHIBITS
ANNEX 8
Cofinancing operations het ween Bank/IDA and Arab development hanks
[In U.S. $ millions equivalent]
IBRD
loan
Country and project
5.2
9.3
9.5
42.0
20.0
Burundi—coffee improvement... 76
Rwanda—Highways
70
76
Sudan—Irrigation
73
supplemental
75
Tanzania—Textiles
Maize
Zaire—Mining
Water supply
Ghana—Cocoa
Mauritania—Ports
Highways
Nepal—Hydroelectric
Algeria—Ports
Cement
Egypt—Fertilizer
IDA
credit
Amount
lent
1.2
5.0
7.5
25.7
96.0
148.0
75
73
76
74
75
25.0
8.6
71
73
75
7.5
23.3
28.0
Kuwait Fund
Kuwait Fund
Saudi Fund
2.5
6.9
30.0
14.3
64.2
86.1
75
76
75
76
76
76
75
76
74
76
74
15.0
"i^'.b
100.0
21.5
14.0
8.0
3.0
26.0
70.0
46.0
20.0
74
75
50.0
Cement
Railways
Telecommunications
Jordan—Thermal power
Power
Syria—Thermal power
75
75
40.0
37.0
10.2
5.0
11.0
39.0
14.5
28.0
15.0
5.0
100.7
10.0
5.0
8.3
3.8
17.5
20.0
60.0
89.8
22.1
23.8
10.2
10.1
3.4
25.6
34.5
50.0
34.5
10.0
23.0
65.0
23.0
10.2
13.4
33.0
15.0
Total
project
cost
Kuwait Fund
Kuwait Fund
Arab Fund
Saudi Fund
Kuwait Fund
BADEAl
Libyan-Arab Foreign Bank
BADEAl
BADEAl
Kuwait Fund
Kuwait Fund
Kuwait Fund
Arab Fund
Kuwait Investment Company ..
Local Algerian Banks
Arab Fund
Kuwait Fund
Abu Dhabi Fund
Libyan-Arab Foreign Bank
Qatar
Saudi Fund
Kuwait Fund.'
Saudi Fund
Abu Dhabi
Qatar
Arab Fund
Saudi Fund
Saudi Fund
Kuwait Fund
Arab Fund
Kuwait Fund
Abu Dhabi Fund
Cotton ginning
Suez Canal
Tunisia—
Gas pipeline
Phosphate
Sewerage
Yemen, A. R.—
Agriculture
Water supply
Agriculture
Highways
Water and sewerage
Yemen, P.D.R.—
Highways....;
Ports
YugoslaviaOil pipeline
Cofinancing institution
Kuwait Fund
Saudi Fund
44.3
38.0
435.0
70.4
27.5
13.7
68.0
293.2
214.4
132.4
40.4
288.0
84.0
296.3
25.0
22.0
73
74
75
75
75
10.9
6.25
10.0
9.0
8.1
Kuwait Fund
Abu Dhabi Fund
Abu Dhabi Fund
Kuwait Fund
Arab Fund..
5.9
1.0
10.0
5.0
21.0
17.5
6.8
23.2
15.7
31.2
75
76
15.5
3.2
Kuwait Fund
Arab Fund.
15.3
13.6
31.8
17.6
Kuwait Fund
Libya
125.0
70.0
76
Totals.,
485.9
336.65
1,146.8
3,321.2
$240 million for the first installment of the fourth replenishment of IDB ordinary capital ($40 million of paid-in capital
and $200 million of callable capital);
$15 million for the initial U.S. contribution to the African Development Fund.
1 Arab Bank for Economic Development in Africa.
Exhibit 68.—Statement of Deputy Assistant Secretary Bushnell as Temporary Alternate
Governor for the United States, April 23,1976, before the ninth annual meeting of the Asian
Development Bank Board of Governors, Jakarta, Indonesia
On behalf of President Ford and Secretary Simon, my delegation wants to stress our
continuing deep concern with accelerating development in Asia. We also want to repeat our
wholehearted support for the Asian Development Bank—the key regional development
finance institution. As a nation of the Pacific as well as the Atlantic, the United States has
594
1976 REPORT OF THE SECRETARY OF THE TREASURY
a vital interest in continued development and improved living standards for all the people
of Asia. In our increasingly interdependent world increased peaceful cooperation among
nations erihances the welfare of all.
International economic situation
/
At the eighth annual meeting ofthe Bank last year Secretary Simon identified three central
economic issues facing the world in 1975:
First, to restore economic growth and price stability around the world;
Second, to adapt to the energy shock in ways that will provide more secure sources of
energy and will support a pattern for orderly growth; and
Third, to adjust our financial policies to accommodate massive shifts in international
flows of funds.
Fortunately, today we can already see substantial progress on each of these economic
problems. The pace of ecoriomic activity is already picking up rapidly in a number of
countries. In the United States our economy has now been growing for nearly a year and we
are already seeing the effects of this growth on the demand for the imports of the regional
members of the ADB. With the completibn of the downward adjustment of inventories in
the United States along with similar favorable indications from other countries, we expect
the faster growth in the developed couritries will have a much more apparent effect on
demand for the exports of developing countries.
Most countries have also made substantial progress in reducing price inflation. Some
regional members of the ADB have set.an example for all of us in bringing price inflation
under control. However, for many countries, including the United States, inflation rates are
still higher than we would expect during a period when productive capacity is not strained.
Clearly continuing progress in reducing inflation rates is one ofthe greatest challenges we
face over the next year as productive capacity is more fully utilized throughout the world.
Considerable progress has been made in many countries in adapting to the energy shock.
In the United States we still have much to do to supply our energy needs more fully from
domestic sources. As our oil consumption rises and production falls, we expect the increase
in our oil import bill in 1976 to be almost as large as our currerit account surplus in 1975,
assuming no change in oil prices.
We welcome; the greatly increased eriiphasis the ADB has given to helping member
countries develop indigenous energy sources as a major contribution to their own
development and to a better energy balance in the world. Over 20 percent of ADB lending
was in the energy field last year and most of this was for domestic energy sources such as
the power project in Thailand based on lignite and the Garung hydroelectric project here
in Indonesia. Just last month the Bank approved a project to expand Korean coal productiori.
This ADB emphasis should continue.
Finaily, private financial markets have done an outstanding job of moving funds from
surplus to deficit countries. We expect that the private markets will continue to play this
critical role. We tend to look only at the net borrowing or lending of countries. Thus we
overlook the fact that many countries have both large inflows and large outflows of long-term
capital. Many ofthe countries which provide support for the Asian Development Bank have
been large net borrowers in recent years even while they have been providing capital to the
Bank. This year the United States will be in a similar position as it is unlikely that our current
account surplus will be nearly as large as our capital outflows to support development in the
poorer countries. It should be recognized that this situation makes it harder to build popular
support for development assistance. In most cases the interest and other terms on the
borrowing of donors are far harder than the terms of our support to the ADB and other
development programs.
Despite the many strains of the past year I believe we can all take pride in the fact that
most countries have maintained their commitment to open trading arrangements and a
relatively free international flow of funds. I am particularly impressed by the fact that
developing countries have relied heavily on aggregate monetary, fiscal, and exchange policies
in adjusting to recent difficulties. They have also made excellent efforts to maintain relatively
open markets for imports. These policies suggest that most developing countries are
increasingly understanding the advantages to their development of more intensive
participation in an interdependent world connected by increasing links of trade and financial
flows.
Moreover, we have made substantial progress in improvirig the international system to deal
with the sort pf problems faced in the past couple of years as well as to assist with longer
term development problems.
The IMF has agreed on amendments to provide for improved longer term stability in
international trade and payments and for a substantial increase in quotas, particularly for
developing countries.
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The compensatory financing facility ofthe IMF has been enlarged to assist in financing
shortfalls in export earnings for reasons beyond a country's control.
A trust fund is being estaolished in the IMF that will use profits from the sale of a portion
of the IMF's gold to provide concessional assistance to overcome temporary balance of
payments problems.
Agreement appears to be near on the creation ofthe International Fund for Agricultural
Development to help increase food production in developing countries.
My own country has initiated a system of generalized tariff preferences as part of our
efforts to liberalize imports from developing countries.
Negotiations are virtually completed for a World Bank capital increase, and discussions
have started on the fifth replenishment ofthe International Development Association. We
expect agreement within the next few days on a fivefold increase in the capitalization of
the International Finance Corporation (IFC). This general increase—the first since IFC
was founded in 1956—will permit substantial additional capital assistance to private firms
in Asia. With an increase in capital, the IFC can play an everi more important role than
in the past in helping to build a strong private sector which is essential to economic growth
in developing countries.
The role of the international development banks
The international development banks remain the primary multilateral source of capital for
long-term economic growth. These banks last year made new commitments of $8.5 billion
for nearly 400 projects in over 80 countries. However, economic development is not
primarily a matter of money. While money is needed, the key factors determining the success
of development efforts are the policies and priorities followed by each country. The
development banks make important contributions in precisely such areas, and in institution
building. In recent years the banks have accelerated the process of spreading development
benefits to the poorer people by placing greater emphasis on agriculture, the family farm,
and cooperatives—an emphasis we encourage and support. The regional banks in particular
have an important role to play because they reflect the desires and needs of their regional
members and have an expertise and understanding of local conditions and problems.
Role of ADB
The role of the ADB is to bring its special expertise and local knowledge to the
development problems of Asia. The Bank has done this well, due in large part to the
leadership of President Inbue. I would like to take this occasion to express my country's
appreciation for his dedicated service to the Bank.
The Bank's growing impact on Asian economic progress is reflected in its activities last
year:
Lending for agriculture and agro-industry was over 37. percent of total ADB/ADF
lending in 1975 compared with 24.5 percent in 1974; we believe the 1975 proportion is
about the right emphasis on agriculture.
The Bank has given greater emphasis to the use of intermediate technology in Bankfinanced projects. Recognizing that traditional capital-intensive projects are often neither
the most cost effective nor the most appropriate, the Bank has focused attention on the
basic use of labor, combined with less capital-intensive technology, by supplying labor with
appropriate tools^be it a wheelbarrow, a 4- or 5-horsepbwer hand tiller, or a handoperated water pump. In this way the Bank is able to make use of idle manpower in its
developing member countries and, at the same time, spread its limited resources such that
it reaches many more people. We hope the Bank will greatly expand its use of appropriate
intermediate technology in the future.
The Bank also deserves credit for its efforts to mobilize cofinancing for development
projects. The Bank's cooperation with OPEC (Organization of Petroleum Exporting
Countries) nations in financing fertilizer projects is well known. Cofinancing in
cooperation with private banks and other private financial institutions has the potential
to be a major source of developnient finance. Such arrangements increase private sector
involvement in the development process and stretch the Bank's scarce resources. We
congratulate the Bank on opening a nevy horizon through the recent water supply loan to
Singapore in which the ADB arranged cofinancing with a private financial institution. We
hope there will soon be many such loans involving cofinancing. Such arrangements also
help to introduce developing countries to the international capital market and thereby
initiate the process of establishing ongoing financial relations for further access.to private
financial markets. Through the mechanism of cofinancing, smaller banks and other
financial institutions may also begin to lend to developing nations by benefiting from the
project appraisals carried out by the development banks.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
In order to maximize the development impact of ADB operations, we continue to believe
that it should reduce its financing of cost overruns. The Bank should use its financial and
human resources to develop new projects, instead of allocating additional scarce resources
to projects already underway.
With the rapid growth in lending from $254 million in 1971 to $660 million in 1975 it would
be prudent in the period immediately ahead for the Bank to concentrate on improving the
quality of new loans and on continuing to seek more effective implementation of loans
underway. To further this effort, the Bank must work toward a system of more intensive
project supervision. As the Bank becomes stronger it should also become more active in the
difficult sectors where innovative lending is needed such as in rural developmerit and other
projects to reach lower income groups.
Another area to consider should be equity investments by the Bank in productive,
employment-creating enterprises. Such investments could, encourage policies and institutions which would further promote and broaden participation in the development process.
The Articles of Agreement of the Bank authorize the Bank to make equity investments. I
would urge that the Bank activity study how it might make,equity investments and that the
Board of Directors consider the matter in the near future.
To finance its rapidly rising disbursements on loans, the Bank borrowed more in 1975 than
in all previous years combined. In 1976 it has already borrowed more than in all of 1975.
However, much ofthe Bank's borrowing is still relatively short term in comparison with the
maturities of its lending. Greater effort may be needed to increase the average maturity of
the Bank's borrowing. The confidence the markets are now showing in Bank obligations
suggests that longer terms are becoming feasible.
During the past year there appear to have been more interruptions in meeting financial
obligations to the ADB and the proportion of Asian Development Fund resources tied up
in inactive loans has increased. My Government feels that the Bank should exercise its normal
responsibility by taking action to collect amounts due and to assure that funds which are not
being used are reprogrammed where appropriate so that the 1976 ADF program can be
implemented to the maximum extent possibie.
U.S. support for the ADB
Speaking for my Government, I want to emphasize that the administration will continue
its strong support for the ADB. Subject to final congressional action we will soon subscribe
our second installment of $120.6 million to the first replenishment of the Bank's Ordinary
Capital and make a further contribution of $25 million to the initial resource mobilization
ofthe ADF. I hope we will complete this financing commitment to ADF and also subscribe
to the remainder of our share ofthe capital increase by October or November after approval
of our FY-77 budget.
The United States supports the replenishment ofthe ADF. I would hope shortly to be able
to announce a U.S. contribution target for the replenishment which will be higher than our
previous contribution.
The United States also supports a replenishment of the Bank's Ordinary Capital. We
believe that in laying out the criteria for replenishment it is appropriate for the Bank to review
its lending, borrowing, and financial policies. The ADB is entering a stage of rapidly
increasing loan disbursement and borrowing requirements. It is a period when the ADB must
move from financing its loans from paid-in capital to relying primarily on private capital
markets.
The increased reliance ofthe Bank on private capital markets, in turn, makes it all the more
important for the Bank to maintain a solid financial position. An improvement in its financial
indicators and its general creditworthiness will reduce the cost of money to the Bank and
help lengthen the maturities of its issues. The Bank's financial position could be strengthened
by some modifications in various ADB financial policies. This is important because bond
purchasers will look nbt only at the degree of governmental support for the Bank, whether
through paid-in or callable capital, but also at the financial operations and management of
the Bank itself. In this regard I note with concern that the Bank's income in 1975 did not
increase from the level in 1974, even though the scale ofthe Bank's operations increased
substantially. The Bank's financial statements for 1975 indicate that this was due to sharply
increased borrowing and administrative costs, changes in currency values, and increased
funding of grant technical assistance.
Specific policies which we believe are necessary to improve the financial strength of the
Bank include: (1) That the Bank's lending rate more fully cover the costs of its borrowings
and operations, (2) that the effective commitment fee charged on undisbursed loans more
closely parallel the practices in the other international development banks, (3) that the Bank
make efforts to find ways other than use of Bank income to fund grant technical assistance,
and (4) that the Bank restrain the growth of administrative expenses.
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Our goal, and the goal of all friends ofthe Bank, is a financially viable and strong regional
institution that is secure in international capital markets, requiring decreasing amounts of
paid-in capital, and building reserves sufficient to set aside portions to help finance ADF
operations. It is our hope these can be achieved over the course of the next few years.
Before I close I want to express our great appreciation to the Government of Indonesia
for hosting this ninth annual meeting of the Asian Development Bank. We have looked
forward to visiting this dynamic and growirig city of Jakarta and to this opportunity to discuss
the challenges and opportunities facing Asia and the ADB.
In closing, I think it is worth remembering that the fundamental purpose ofthe ADB, and
of all the development lending institutions, is to help the people in developing countries
improve their living conditions. The basic justification for U.S. support of the ADB and of
the other development banks has to be that they do a good job in using money to help the
developing countries help themselves and that this development reaches the people in these
countries in a way that justifies U.S. taxpayer support. The practical effects of our
contribution will be spread to the poorest villages, slums, and isolated areas in Asia where
little is known ofthe United States or the ADB, but where improved seed, a well, a visiting
health team, availability of credit, or a road to the market can make—at small cost—an
immense difference in the quality of life.
Exhibit 69.—Statement by Secretary Simon, May 7, 1976, on his visit to Chile
The discussions I have had today with Finance Minister Cauas and other Chilean ministers
have been both informative and promising. In our meetings, we discussed a wide range of
economic and financial subjects of interest to our two countries. I was impressed by the
resolve of the Chilean Government to take forceful steps to reduce its balance of payments
deficits, control domestic inflation, and accelerate the rate of growth ofthe economy. These
constitute an impressive list of challenges, but I feel that the Chilean Govemment has adopted
economic policies such as the removal of most price, exchange, and other economic controls,
which should greatly enhance the prospects for stability and economic growth. There are
already positive signs of improvement. There has been a significant increase in noncopper
exports and a substantial increase in agricultural production. Further, the Government has
emphasized its desire to meet its responsibilities to its creditors, and this year Chile
anticipates repaying over $500 million of foreign debts. These economic developments are
most promising, and the United States wants to support these efforts to correct the economic
imbalances of the past.
However, increasing restraint is being felt in the United States because of the human rights
issue. In order for the United States-Chilean economic and financial relationships to grow
and in order for other countries also to support Chile's economic programs, the United States
believes that greater understanding has to be reached about what the Chilean Govemment
is doing to ensure that human rights are respected. In our meetings, the Chilean Govemment
described the steps it has taken to ensure the rights of individuals and to prevent abuses, and
emphasized its firm commitment to these principles.
In this regard, I am pleased to note that in the past few days a number of individuals have
been released from prison and given exit decrees. I have attached to my statement a hst of
the names of these people, i In addition, the Govemment informed me that it will be
announcing shortly amendments to Chile's Constitution and additional measures that will
provide further guarantees against human rights violations.
The Government of Chile has agreed to:
1. The Govemment of Chile will meet shortly with the working group of the United
Nations Commission on Human Rights to establish mles of procedure so that a review of
the measures underway to ensure human rights can take place in Chile. The desire to have
all American countries view what is taking place in Chile was the basis for the
Govemment's invitation to the General Assembly of the Organization of American States.
2. The Govemment of Chile will continue to process the release of persons under the
parole program and under other programs, shortly announcing the release of a number of
such persons; and, in the future, the momentum of this program will increase.
3. The Government of Chile has and will continue to vigorously prosecute those officials
who inflicted abuses on the persons detained in Chile. It informed me of the prosecution
and sentencing of a number of such persons.
I think these steps offer significant promise, and I have encouraged the Govemment to
accelerate the release of individuals and the adoption of necessary legal reforms.
INot included in this exhibit.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
With this in mind, the United States is prepared to work closely with Chile in the months
ahead. We are prepared to assist Chile in its efforts to establish economic stability and
promote economic prosperity but we can only do so within the framework of a system that
ensures personal and political freedom. The elimination of public concern in the United
States and elsewhere that will result from this process will pave the way for a dynamic joint
effort to move Chile's economic development programs to a new level of achievement.
As this process evolves, we will look toward ways of increasing public and private help.
In particular, we will look toward a major program of encouraging U.S. private investment
in Chile through activation of our OPIC investment insurance program, promotion in the
United States of the investment opportunities in Chile, and through an agreement to avoid
double taxation in order to provide the security and stability investors require.
The potential for joint cooperation between our two countries is substantial and I
personally intend to make sure that every avenue is fully explored and every effort made to
ensure that these opportunities are not neglected. I intend to continue the dialog we have
opened, for I firmly believe that the adoption of giving stronger constitutional guarantees and
the release of persons still under detention for political reasons will ensure the development
of strong economic ties between the United States and Chile, in support of Chile's
development aspirations and for the benefit of both countries.
Exhibit 70.—Joint communique on May 11, 1976, of Mario Henrique Simonsen, Minister
of Finance of Brazil, and Secretary Simon
The Secretary of the Treasury, William E. Simon, concluded today his visit to Brasilia.
During his visit, the Secretary met with President Geisel, Finance Minister Simonsen and with
Ministers Silveira, Velloso, PaulineUi, Ueki and with the Secretary General for Trade and
Commerce Belotti. Secretary Simon's discussions with Brazilian leaders covered a broad
range of economic topics of major interest to the two Govemments and were marked by a
spirit of cordiality.
At the conclusion of their meeting in Brasilia, the Secretary and Minister Simonsen
announced a number of specific results which are a practical demonstration of the close ties
between the United States and Brazil and open significant opportunities for future
collaborative efforts of major benefit to the two countries.
Secretary Simon and Minister Simonsen agreed that a resolution of key bilateral trade
issues would provide major impetus to an expansion of trade and investment between the
United States and Brazil and deepen the relationship between them. They agreed, therefore,
that this goal should be given their personal and priority attention. After a series of meetings
they reached agreement on a number of important measures in achievement of this important
goal.
Minister Simonsen announced his Govemment's intention to adjust export incentives in
order to avoid barriers to the increase of Brazilian exports.
With respect to footwear, Minister Simonsen welcomed the recent decision taken by the
President of the United States not to increase import barriers on footwear from Brazil. The
Minister confirmed that no more export incentives on footwear are being provided than there
were in 1974 and that the noted adjustments in the export incentives of Brazil assure that
the utilization of tax credits is no higher than in 1973. Secretary Simon welcomed these
developments and agreed that the present countervaihng duties on footwear would not be
reevaluated until the last quarter of next year.
Minister Simonsen indicated that the Brazilian Govemment would also adjust its tax credit
program on exports of leather handbagis. Secretary Simon indicated that this action would
enable the United States to waive countervailing duties imposed on imports of leather
handbags from Brazil and agreed to take such action effective July 1, 1976.
Minister Simonsen expressed his concern to Secretary Simon over the possibihty of trade
restrictions against Brazilian exports to the United States because of tax credits granted by
the Brazilian Govemment on exports of soybean oil. He agreed with Secretary Simon on the
importance of avoiding such action.
Toward this objective. Minister Simonsen informed Secretary Simon of the Brazilian
Government's decision to adjust export incentives on soybean oil exports. As a result of this
action, Secretary Simon indicated he did not believe that a complaint by U.S. producers
would be filed under section 301 of the Trade Act and that the issue has been satisfactorily
resolved.
Recognizing the importance to relations between the United States and Brazil of avoiding
disagreements over incentives and countervailing policy. Minister Simonsen and Secretary
Simon agreed to consult fully on incentive-countervail issues. As for any U.S. investigations
of countervailing complaints conceming Brazilian exports, Secretary Simon indicated that
the United States will consult with the Brazilian Govemment on all aspects of any such cases.
EXHIBITS
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The Minister and the Secretary also agreed that both Governments should discusss
marketing and ways to promote demand and usage of soybeans, soybean meal, and soybean
oil.
Minister Simonsen and Secretary Simon agreed that the above measures represent a major
contribution toward the development of a sound and dynamic trading relationship between
the United States and Brazil. They agreed that a hospitable climate for investment and capital
flows was also of great importance. In this connection, the Secretary and the Minister agreed
on the importance ofa treaty between the two countries to avoid double taxation, and agreed
that their tax experts should meet in the near future to discuss the provisions that might be
incorporated in such a tax treaty.
Secretary Simon discussed with the Brazilian Ministers Brazil's development plans and
prospects, and in particular, capital projects under consideration in Brazil which could be
facilitated by U.S. investment. Secretary Simon expressed his belief that U.S. investment in
Brazil, which now exceeds over $3 billion, will continue to grow and make a significant
contribution to Brazil's development efforts. He agreed to bring key Brazilian projects to the
attention of the private sector in the United States.
Secretary Simon noted that the sharp increase in oil prices has shifted the pattern of the
world's surplus investment funds. He expressed his belief that this shift has created important
opportunities for countries such as Brazil, as it seeks capital to develop a viable rapidly
growing industrial/agricultural economy. Secretary Simon and Minister Simonsen agreed on
the importance of close collaboration to maximize these opportunities. They agreed to work
together to facilitate tripartite investments, joining United States and Brazilian enterprises
in partnership with the oil-producing countries for productive investments in Brazil, for the
benefit of each of the parties. The Secretary and the Minister agreed that the opportunities
for bilateral and tripartite investment in Brazil were extensive.
Minister Simonsen explained to Secretary Simon the programs and policies Brazil has
undertaken to consolidate its economic accomplishments and to attain internal and external
equilibrium for the long term. The Minister expressed his concern about the existing deficit
for Brazil in the trade balance with the United States, and his desire that trade equilibrium
be achieved through the increase of Brazilian exports to the U.S. market. Secretary Simon
expressed his view that Brazil's economic prospects remained highly favorable. Secretary
Simon felt that Brazilian economic policies should be effective in achieving greater price
stability and equilibrium in Brazil's balance of payments position, and that these efforts
merited the confidence of foreign investors and lending institutions.
During their meetings. Secretary Simon and Minister Simonsen also exchanged views on
conditions prevailing in the major foreign exchange markets ofthe world and on other topics
of current interest in the international monetary area. They also discussed the policies and
prospects of the international financial institutions.
Secretary Simon and Minister Simonsen agreed on the importance of continuing the dialog
between them on issues of major significance in the economic and financial area. Within the
framework of the memorandum of understanding sigried in Brasilia February 21, 1976, and
to underscore the importance of continued consultations and to provide a more formal
mechanism in which these discussions can take place, the Ministers agreed to establish and
cochair a consultative group on trade, investment, and financial issues within the area of
responsibility ofthe Department of Treasury and ofthe Ministry of Finance. The Ministers
will designate coexecutive secretaries for support of the consultative group.
In concluding his visit to Brasilia, Secretary Simon indicated to Minister Simonsen that in
his view the measures that he and Minister Simonsen had agreed upon during his visit
represented a significant development in the overall relationship between the two countries,
heralding the prospect for broader and more intensive ties between the United States and
Brazil that would prove of substantial benefit to the two countries. Secretary Simon expressed
his government's determination to build on the impressive framework of the current
relationship between the United States and Brazil and to add to the accomplishments which
had resulted from his visit and the visit of Secretary Kissinger earlier this year. Minister
Simonsen agreed that the economic relationship between the United States and Brazil had
been enhanced as a result of Secretary Simon's visit and expressed his conviction that the
measures they have announced today will be of major benefit to both countries.
Exhibit 71.—Address by Assistant Secretary Parsky as Temporary Governor for the United
States, May 18,1976, at the Inter-American Development Bank meeting in Cancun, Mexico
The Inter-American Development Bank is about to enter a vital new period in its history.
The last 18-54 months have been a period of uncertainty and hesitation for the world
economy, for the economies of most member countries, and for the Bank. This period of great
uncertainty for both the world economy and the Bank now appears to be over. The economies
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1976 REPORT OF THE SECRETARY OF THE TREASURY
of most developed countries have been expanding rapidly for several quarters and the effects
of this expansion on world trade and developing country exports are already being seen. With
exports again growing rapidly, most developing countries should be able to reduce their
unusually large payments deficits of the past couple years and at the same time increase
growth rates. Nevertheless, as a result of the events of the past 2 years, the world has
undergone basic change. With the development of natural resources by some countries and
with the transfer of financial resources to others, the world today is truly interdependent. We
need not fear this fact. Instead, as the proper response to interdependence, we must build
a worldwide framework of cooperation. Development problems remain; but they too can be
overcome if we approach them together—seeking realistic solutions that will benefit all
countries.
The period of great uncertainty is also over for the Inter-American Bank as final action
on replenishment of its resources and the entry ofthe nonregional members is clearly in sight.
I am pleased to say that we expect the Congress of the Uriited States to complete action this
week on the bill authorizing a U.S. vote for the replenishment as well as for the amendments
permitting nonregional membership. President Ford will then sign the bill into law and
Governor Simon will vote prompfly. Everyone in the Bank, especially President Ortiz Mena,
deserves a great deal of credit for facilitating the agreement on the replenishment in record
time. Negotiations were initiated at our annual meeting last year, and only formal steps now
remain to place it into effect by the end of this month.
Another major development of great significance to the Bank's future is the expansion of
the membership to include countries from outside this hemisphere. We have all worked hard
to make it possible for these countries to join the Bank. 1 hope the nonregional countries
which have not yet completed their formal processes will move forward as quickly as possible
so that we may be able to welcome them as active participants in this institution. Moreover,
I would hope that the nonregional countries which have not yet indicated an interest in joining
the Bank will soon do so with contributions appropriate to their economic potential.
This annual meeting gives us a unique opportunity to demonstrate to the representatives
of these countries which are about to become full members what the Bank does. We are
meeting here in an impressive new city sponsored by the Government of Mexico, with the
assistance of loans from the Bank for infrastructure such as water supply, housing, and roads.
Thus, we can all see at first hand how the Bank helps member countries even in an area where
there was previously virtually no economic activity or population. On behalf of the United
States, I want to thank the Government of Mexico for hosting this 17th annual meeting of
the Inter-American Development Bank.
International economic outlook
The hopes for rapid economic development of each member country depend in large
measure on participation in an international economy which itself is growing rapidly.
Fortunately the world is now well on the way to recovering from the most severe economic
recession since the 1930's. Industrial production in the major industrial countries has been
on the rise for several months. For the larger developed countries as a group the rate of real
growth in 1976 seems likely to exceed 5 percent. At the same time, however, inflation and
unemployment are still unacceptably high in many countries, including the United States.
We must increase our efforts to solve these problems through the pursuit of fiscal and
monetary policies aimed at achieving a balanced expansion.
During the past 2 years, the non-oil-exporting developing countries have experienced
abnormally large balance of payments deficits as a result of increased oil prices and the
accompanying recession in the industrial countries. These deficits on current account were
about $28 billion in 1974, and an estimated $35-$37 billion in 1975. Normal long-term
financing covered only $20-$25 million of the gaps in 1974 and 1975, and developing
countries have increased their short- and medium-term borrowings from commercial banks.
A continuation of such borrowing would increase debt service payments in future years in
a way which might create major problems. Fortunately, we are beginning to see a turnaround
in the payments positions of many of the developing countries. Just as last year's recession
and inventory adjustment had an amplified adverse impact on primary products and
developing countries, the strong economic recovery underway in the industrial countries will
have an amplified beneficial impact. Our latest estimates are that the deficits of the nonoil
developing countries will be reduced to about $28 billion in 1976 with further improvement
continuing in 1977.
Recognizing that the adjustment process is not as rapid for all countries, the United States
has made a series of constructive proposals to assist the developing countries. Agreements
reached 4 months ago in Jamaica are specifically aimed at the balance of payments needs
of developed and developing countries alike. Already it is clear that there will be increased
use of International Monetary Fund resources, especially compensatory financing, in 1976.
Despite the many strains of the past year, I believe we can all take pride in the fact that
EXHIBITS
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most countries have maintained their commitment to open trading arrangements and
relatively free international flows of funds. 1 am particularly impressed by the fact that
developing countries have relied heavily on aggregate monetary, fiscal, and exchange policies
in adjusting to recent difficulties. They have also made excellent efforts to maintain relatively
open markets for imports. These policies suggest that most developing countries are
increasingly recognizing the advantage to their development of more intensive participation
in an interdependent world. We must continue our efforts to increase trade and financial
flows directed by market forces.
There's no question that the international economic system can be improved. We in the
United States will continue to suggest changes in the monetary, trade, commodities, and
technology areas which are aimed at strengthening the functioning of market forces. We do
not believe that a new institutional framework to deal with developing countries' economic
concerns would be practical or helpful. Instead, we feel that we can bring about effective
action within the existing international institutions such as the IMF and the international
development banks. We will certainly do our part.
The United States fully recognizes the concerns of Latin American exporters over the wide
fluctuations in some commodity export prices and the impact such fluctuations have on their
export earnings. We believe progress on raw material problems can be achieved in several
ways: Through commodity-by-commodity dialogs between interested producers and
consumers, through strengthening the market mechanism, and through adequate investment
in raw materials production to assure availability of supplies. We have put forward proposals
to accomplish these objectives. Further, as part of our efforts to liberalize access to the U.S.
market for developing country exports, the United States introduced a generalized system
of preferences on January 1 of this year. This system covers over 2,700 products of which
our imports were approximately $2.6 billion from eligible developing countries in 1974.
At the same time, the most significant contribution the United States can make to
international economic progress is to sustain rapid growth in our domestic economy while
keeping open our markets for growing imports of the products of other countries.
Fortunately, the American economy is experiencing a strong recovery. Real output will grow
by more than 6 percent in 1976. Given our close trade ties with Latin America and the end
of our inventory adjustment, an acceleration of imports by the United States will contribute
to general recovery in Latin America.
For the economic recovery to be sustained, world trade must continue to expand. The
benefits of expanding trade are familiar: Greater efficiency, more and higher quality jobs,
and lower consumer prices. We are hopeful that the new round of multilateral trade
negotiations will reduce trade barriers on a broad scale, provide for the special trade needs
of the developing nations, and preserve equitable access to supplies at reasonable prices.
U.S. commitment to Latin America
The Americas have had a unique history of cooperation in the peaceful management of
intraregional relationships for the mutual benefit of all countries in the hemisphere. We
support Latin American economic integration efforts and are ready to consider proposals
for strengthening intraregional cooperation.
The United States has a vital national interest in our long and close association with Latin
America, and we continue to give high priority to the development of the economies of all
IDB member countries. Thus, our support for the work ofthe Inter-American Development
Bank is unwavering.
Joining us here today are several distinguished representatives from the U.S. Congress.
Their presence here and in visiting the Bank's projects evidences the continued interest in
the economic development of Latin America by the U.S. Government and our people.
Economic development in Latin America is succeeding because ofthe talent, hard work,
and perseverance of people throughout the hemisphere. While external assistance makes an
important contribution to development, a country's ultimate achievement depends upon the
efforts of the nation itself. Many of the development success stories of the past quarter
century are in Latin America. Latin American countries, as a whole, have been growing at
a very impressive rate of almost 7 percent per annum in real terms. Since 1960, value added
in manufacturing in the region and installed electrical capacity have tripled while primary
school enrollments have quadrupled. Adult literacy increased from about 52 percent in 1950
to about 73 percent in 1970, and the number of rural families with access to potable water
has tripled. The IDB has been a major factor contributing to most of these accomplishments.
Although the development task in Latin America is well underway, much remains to be
done. In particular, Latin America requires an expanded flow of external capital over the
next several years to maintain its development momentum.
My fellow delegates will appreciate the fact that, like many Latin American countries, the
United States is faced in the next decade with the task of finding enough capital to meet the
need for urban renewal, to revitalize our transportation systems, to expand our energy
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1976 REPORT OF THE SECRETARY OF THE TREASURY
resources, and to modernize our industrial plants. The shortage of capital is a problem in your
countries as it is in mine. Capital is an important and scarce resource. Nevertheless, my
country is committed to continue to supply substantial amounts of capital to Latin America
as long as capital continues to be used efficiently to expand living standards in Latin America.
In connection with the shortage of capital, it seems to me highly appropriate that greater
efforts /be made to take advantage of light capital or intermediate technologies. The
productive use of idle labor with new methods and less costly tools should allow more
effective utilization of scarce capital resources. The IDB has begun to take advantage of
intermediate technologies in some of its agriculture projects. We hope to see extension of
this approach to other projects and other sectors.
IDB's role in Latin America
Turning to the IDB's record and its policies for the future, I want to commend the Bank
for its achievements over the past year under the impressive leadership of its President, Mr.
Antonio Ortiz Mena:
•
Agreement was reached on increasing the Bank's total resources by $6.3 billion—
$5.3 billion in capital and $1 billion in the Fund for Special Operations (FSO).
•
Arrangements have recently been completed to permit 12 or more countries from
outside the region to become donor members.
•
The Bank began development lending from the $500 million fund entrusted by the
Government of Venezuela.
•
The Bank initiated a program of complementary financing to increase the flow of
private financial resources to development projects in Latin America.
•
The Group of Controllers has continued to make objective and astute evaluation
ofthe Bank's programs and operations. We look forward to the Group's being used
more actively to assist the Board of Directors.
In 1975 the IDB authorized $ 1.4 billion for 70 loans, the highest annual volume ofiending
in the Bank's 15-year history. New commitments in 1975 were three times the 1968 level.
While this is impressive, it is important to remember that the level of new loan commitments
is not in itself an adequate measure of the Bank's performance. The key measure of a
development bank's success is the extent of development that actually takes place as a result
of its efforts.
We believe that the Bank should devote more attention to the implementation aspects of
its lending operations. Both management and the Board of Directors should concentrate on
improving the quality of loans, improving estimates and control of project costs, and
increasing supervision of projects underway. The timelag between approval of loans and their
implementation could be reduced if the Board of Directors were to insist that projects be
sufficiently well prepared before they are brought forward for approval. The Board should
also consider canceling balances in old loans which have not been properly used in order to
free up scarce resources:
While more attention to improve procedures and administration is important, we do not
believe that more decentralization of the Bank's functions is the answer. Management
controls and clear procedures have to be worked out by the management and the Executive
Directors. Many important policies, including those detailing procurement, need continuous
review, as Minister Beteta properly pointed out yesterday. As we undertake such a review,
we should bear in mind that foreign exchange disbursements should be generally for
procurement outside the borrowing countries. I also urge the Bank to pursue ex post project
evaluation studies to determine where improvement in project implementation can be made.
We continue to believe that the limited resources of the FSO should be reserved for
countries that have a genuine pressing need for concessional assistance and have
demonstrated by their own self-help efforts that such assistance is justified. It is a sign of basic
economic strength that some member countries agreed to discontinue borrowing convertible
currencies from the FSO. We applaud their intention to make a portion of their new
contributions to the FSO in convertible currencies.
While these are important steps in the right direction, more can be done to concentrate
the Bank's concessional resources where they are most needed over the next few years. We
believe that the middle-income countries should increasingly switch their borrowing to
Ordinary Capital and the Venezuelan trust fund. In addition, more Ordinary Capital loans
should be made to the poorest countries for income-generating projects. The use of FSO
convertible currencies to meet local costs financing needs in the wealthier countries decline
as their ability to mobilize internal resources increases. These measures will free the scarce
concessional convertible currencies for the use of the poorest members of the Bank. We
strongly support the Bank's efforts to expand its lending for agriculture and commend the
Bank for directing the largest share of its 1975 lending to the agricultural sector. It is most
gratifying to note that the International Group on Agricultural Development in Latin
America, established at the initiative ofthe Bank, concluded its first formal meeting here in
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Cancun this past weekend. We look forward to a very useful role for this group in
coordinating efforts to increase agricultural productivity and improve nutrition in the region.
While increased production should remain the chief objective of agricultural loans, we
believe the Bank should place special emphasis on projects containing benefits which will
be widely shared among rural populations. We are pleased that the Bank has increased its
lending to agricultural cooperatives. In addition, the Bank has made significant advances in
financing projects for potable water supply, rural electricity, education, and health, of which
pre- and post-natal maternal care are key elements. We urge the Bank to continue its efforts
in these areas. It is these rural development projects and loans to cooperatives and rural credit
unions which tend to have the greatest direct benefit to the quality of life of lower income
groups.
The Bank's loan commitments financed by borrowing backed by its capital have increased
sharply in recent years and further increases are projected for the replenishment period.
These commitments will result in a rise in the annual level of disbursement and borrowing.
Thus it is more important now than ever before to assure the Bank's creditworthiness in
international capital markets is enhanced. Accordingly, consideration should be given to
structuring the Bank's lending rate so that it moves automatically with the cost of capital to
the Bank and with a sufficient spread above the borrowing costs to cover administrative and
liquidity costs. This would have the added benefit of removing the setting of the Bank's
interest rate from the political arena and of providing substantial profits to add to reserves
as the Bank grows. Assured income and increasing reserves will make it possible for the Bank
to sell its bonds at the most favorable rate and thereby itself lend at the lowest cost to
developing countries.
Although we are focusing in this meeting on intergovernmental relations and affairs of an
official lending institution, we should not lose sight ofthe overwhelming importance ofthe
private sector to Latin American development. Most Latin American countries have a
dynamic private sector. We believe that market forces are instrumental in effectively
allocating resources and producing a climate which favors individual initiative. A healthy
private sector is the most effective means of allocating resources, speeding economic
development, and distributing the fruits of economic growth among all the people. The
International Finance Corporation (IFC), which supports private sector activities in
developing countries, lends more in Latin America than any other region. Earlier this month
the IFC's Board of Directors approved a major capital increase for the organization. The
United States strongly supports this increase because we believe that the IFC is making a
notable contribution to the pace of development. For the same reason we believe that the
IDB should increase its support to the private sector, through greater lending to productive
enterprise outside the public sphere and to domestic development finance companies, which
both raise additional domestic capital and relend to local industry, commerce, and
agribusiness. The Bank should also support the growth of savings and loan institutions which
can be effective in increasing the mobilization of domestic savings.
While we believe the Bank should support the private sector through its lending operations,
we do not think it appropriate for the Bank, a's a development lending institution, to use a
significant part of its new resources to finance exports. Export financing should be left to the
marketplace and to private businessmen and bankers.
The private sector is the most important source of external capital for Latin America.
Approximately three-fourths of net capital flows to Latin America came from private souces
last year. We applaud the Bank for its initiative in launching a complementary financing
program to channel resources from private investors and banks to its development projects.
We are all New World countries settled and developed by colonists and refugees, from
across the Atlantic and Pacific Oceans, both adventuresome and idealistic. In July the United
States will celebrate the 200th anniversary ofthe declaration of our independence. Since our
shores were first settled we've experienced a major socioeconomic transformation from a
pioneer society to an industrial nation. We recognize in the development goals of our Latin
American neighbors the same historical imperative which directed our own development.
We share your hope for a better life for all your people and we pledge to continue to assist
the economic development of this region.
Exhibit 72.—Joint statement of Secretary Simon and Secretary of State Kissinger, June 1,
1976, on UNCTAD IV at Nairobi, Kenya
The United States went to UNCTAD IV at Nairobi in a serious and cooperative spirit. In
preparation for the Conference, we conducted a thorough review of U.S. intemational
economic policies in which all agencies of the Govemment participated. There was
agreement on a series of proposals of special relevance to the developing countries, which
we presented at UNCTAD. We were represented bythe most senior delegation in the history
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1976 REPORT OF THE SECRETARY OF THE TREASURY
of UNCTAD meetings, and, for the first time, the U.S. position was set forth in an opening
statement by the Secretary of State. In that statement, the United States put forward its
proposals to deal with the problems of the developing world, including proposals directly
related to commodities, and at the same time indicated that there were certain proposals that
we could not accept. Throughout the 4-week meeting, the United States cooperated with
other nations and important progress was made on a number of matters before the
Conference.
In our review of international commodity policies in preparation for the UNCTAD
meeting, and otherwise, we have tried to find ways of meeting the concerns ofthe developing
countries, within the framework of an efficient international market system. As we have made
clear at the U.N. Conference, we are prepared to participate in a case-by-case examination
of arrangements to improve the functioning ofthe international commodity markets through
a broad range of measures appropriate to specific commodities, but we have opposed
mechanisms to fix prices or limit production by intergovernmental action.
One of the most significant of the U.S. proposals addressed the problem of increasing
investment in mineral development. For that reason, the United States, in an effort to meet
the interests of the developing countries and the world economy at large, proposed an
International Resources Bank to facilitate the continued flow of essential capital,
management, and technology for the development of new resources in the less developed
countries (LDC's).
As the Conference progressed, a senior interagency group in Washington reviewed all
proposals before the Conference with a view to accepting as many as possible of the
suggestions being made by the LDC's and other countries consistent with our basic principles.
At the final plenary session an LDC resolution on commodities was adopted by consensus.
The interagency group authorized reservations about parts of this resolution, which were
read at the Conference. Nevertheless, we joined the consensus because we wanted to
contribute to the spirit of harmony in the closing sessions ofthe Conference and because the
resolution contained a number of elements of our own comprehensive approach which had
been agreed within the Government and advanced by Secretary Kissinger in his address to
the Conference 3 weeks earlier. As our reservations indicated, we did not believe that all
aspects ofthe LDC proposals were practical and feasible. However, we committed ourselves
to the search for concrete, practical solutions to commodity problems that will be in the
interests of both producers and consumers.
It is all the more regrettable, therefore, that the resolution proposing further study ofthe
International Resources Bank was defeated by 2 votes with 31 votes in favor. Ninety countries
at the last minute abstained or absented themselves.
A substantial number of the 33 votes against were the Socialist countries, whose
contribution to the development of the poorer countries of the world is negligible.
Forty-four countries cooperated in this effort by abstaining on the International Resources
Bank and 46 absented themselves—almost all ofwhich were the developing countries. This
does not augur well for the future of the dialog of the worldwide development effort. The
United States, whose role is so vital, does not expect when it makes major efforts to cooperate
that its proposals will be subject to accidental majorities.
If the dialog between the developing and developed countries, to which we attach great
importance, is to succeed, suggestions put forward by the developed nations, such as the IRB
at UNCTAD, must be treated on the merits and with serious consideration. The LDC's must
not lend themselves to parliamentary manipulation by those states who contribute nothing
to the development of the poor nations of the world.
We will be addressing the problems of resource development financing again in later
meetings, including the preparatory conferences contemplated by the commodities
resolution of UNCTAD IV. We will advance the IRB proposal again, and we expect that it
will be considered with the same respect and care which the United States will lend to the
study of the proposals which the LDC's will table.
The United States went to Nairobi with a wide range of other proposals aimed at dealing
constructively and pragmatically with the urgent problems ofthe developing world. We are
gratified that the Conference embraced a number of these suggestions, dealing with resource
and technology transfer and trade expansion. We will continue to elaborate these proposals—
as well as the proposal for the Resources Bank—in appropriate fora, because they are right
for the profound problems we are addressing.
The reservations and explanations of the U.S. delegation, made at the final plenary meeting
of the Conference with respect to the resolution on commodities, is quoted below:
With regard to section FV of this resolution, our understanding of the request to the
Secretary-General to convene preparatory meetings is that the purpose of such meetings
is to determine the nature of the problems affecting particular commodities and to
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determine, without commitment, the measures which might be appropriate to each
product. Such meetings will show us the cases where we could enter into negotiation
of agreements or other arrangements which could encompass a broad range of measures
to improve trade in commodites.
It is our further understanding that the Secretary-General in convening preparatory
meetings will utilize existing commodity bodies. Where there are no such bodies, ad hoc
groups will be convened. We interpret this section to mean that preparatory meetings
will be convened on individual products and that the preparatory meetings are
consultations prior to a decision whether to enter negotiations.
A decision on a financial relationship among buffer stocks will need to be considered
in the light of developments on individual funds. However, since there may be
advantages in linking the financial resources of individual buffer stocks, we will
participate without any commitment in preparatory meetings to examine whether
further arrangements for financing of buffer stocks including common funding are
desirable. After these preparatory discussions we will decide on participation in any
negotiating conference.
We have accepted this resolution on the understanding that its various positions,
including those on commodity arrangements and compensatory financing, do not alter
our reservations on the concept of indexation.
We should just add two final points. First, we are not indicating in this or other
resolutions of this conference any change in our known views on the new international
economic order and its basic documents.
Second, we would emphasize the difficulties related to the concept that production
of synthetics and substitutes should be harmonized with supplies of natural resources.
We regret that this resolution, which is supposed to deal with commodity problems
in an overall sense, does not address the problem of supporting development of resources
in developing countries. Failure to adopt the proposed resolutions regarding the
International Resources Bank represents a similar lack of attention to this task. We
accept this resolution with these reservations and explanations.
Exhibit 73.—Statement by Secretary Simon, June 9, 1976, before the House Committee on
International Relations, presenting the views of the administration on H.R. 11463, the
proposed amendment to the Export Administration Act that deals with foreign boycotts of
countries friendly to the United States
Mr. Chairman, I am pleased to have the opportunity to present the views of the
administration on H.R. 11463, proposed amendment to the Export Administration Act that
deals with foreign boycotts of countries friendly to the United States, specifically the Arab
boycott of Israel. I would also like to take this opportunity to review with you our concems
over other legislative proposals now pending before the Congress.
Mr. Chairman, let me begin by stating unequivocally the administration's opposition to the
boycott. We share the concerns underlying H.R. 11463 (the Koch bill) and other proposed
legislation. We believe, however, that the approach reflected in these proposals would be
counterproductive to the resolution of the boycott problem. In my presentation, I would like
to provide you with the administration's reasons for believing that present U.S. legislation
and regulations provide a forceful and balanced approach which best serves U.S. interests
by meeting the challenge posed by the Arab boycott, while at the same time enabling us to
progress toward a Middle East peace settlement.
In so doing, I am aware that some people believe our approach to the problem of the Arab
boycott has not been forceful enough and that our belief in the need for measured restraint
has not been based on the weight of evidence. In this regard, we clearly have a disagreement;
for I believe that we have taken extensive steps in the past year to address the Arab boycott
issue and that additional legislation now would be counterproductive to our shared desire
to end the boycott.
In this regard, I believe it is important to understand that the policy that underlies the Arab
boycott arose out of the state of belligerency that exists between Israel and the Arab nations.
According to its governing principles, the Arab boycott of Israel is not based on
discrimination against U.S. firms or citizens on ethnic or religious grounds. The primary
boycott, which dates from 1946, involves the Arab countries' refusal to do business with
Israel. It was designed to prevent entry of certain products into Arab countries from territory
now part of Israel. The secondary boycott, introduced in 1951, operates to prevent firms
anywhere in the world from doing business in Arab countries or from entering into business
undertakings with Arab firms if they have especially close economic ties with Israel, or if they
contribute to the Israeli defense capability. It was designed to inhibit third parties from
assisting in Israel's economic and military development. Both aspects of the boycott are
considered by the Arab League States to be legitimate acts of economic warfare.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
U.S. action to deal with discrimination and the Arab boycott
At the outset 1 would like to review some of the major steps that have been taken to deal
both with respect to the boycott and with respect to discrimination.
In February 1975, President Ford issued a clear statement that the United States will not
tolerate discriminatory acts based on race, religion, or national origin.
The President followed this in November 1975 with an announcement of a series of specific
measures on discrimination:
•
He directed the heads of all departments and agencies to forbid any Federal agency
in making selections for overseas assignments to take into account exclusionary
policies of foreign governments based on race, religion, or national origin.
•
He instructed the Secretary of Labor to require Federal contractors and
subcontractors not to discriminate in hiring or assignments because of any
exclusionary policies of a foreign country and to inform the Department of State
of any visa rejections based on such exclusionary policies.
•
He instructed the Secretary of Commerce to issue regulations under the Export
Administration Act to prohibit U.S. exporters and related service organizations
from answering or complying in any way with boycott requests that would cause
discrimination against U.S. citizens or firms on the basis of race, color, religion, sex,
or national origin.
•
Also, in January 1976, the administration submitted legislation to prohibit a
business enterprise from using economic means to coerce any person or entity to
discriminate against any U.S. person or entity on the basis of race, color, religion,
sex, age, or national origin.
•
In March 1976, the President signed into law the Equal Credit Opportunity Act,
which amended the Consumer Credit Protection Act making it unlawful for any
creditor to discriminate against any applicant with respect to a credit transaction
on the basis of race, color, religion, national origin, sex, marital status, or age.
•
The Comptroller of the Currency, the Securities and Exchange Commission, and
the Federal Home Loan Bank Board have all issued statements to the institutions
under their jurisdiction against discriminatory practices.
In recent months, the administration has also taken the following actions to make clear
that it does not support boycotts of friendly countries.
1. In November 1975, the President instructed the Commerce Department to require
U.S. firms to indicate whether or not they supply information on their dealings with Israel
to Arab countries.
2. In December 1975, the Commerce Department announced that it would refuse to
accept or circulate documents or information on trade opportunities obtained from
materials known to contain boycott conditions.
3. The State Department instructed all Foreign Service posts not to forward any
documents or information on trade opportunities obtained from documents or other
materials which were known to contain such boycott provisions.
4. In December 1975 and January 1976, the Federal Reserve Board issued circulars to
member banks warning them against discriminatory practices and reiterating the Board's
opposition to adherence to the Arab boycott.
5. In January 1976, the Justice Department instituted the first civil action against a
major U.S. firm for violation of antitrust laws arising out of boycott restrictions by Arab
countries. The Justice Department has a continuing investigation in this area.
This record indicates clearly that the administration has not ignored the problem of the
Arab bbycott, but has taken vigorous action to address the issue. But equally important we
have dbne so in a manner that would not be injurious to our broad, fundamental interests
in the Middle East, or counterproductive to our objective of bringing about the liberalization
and ultimate termination of Arab boycott practices.
Despite our efforts there has been considerable pressure on the administration to mount
a confrontational attack on the Arab boycott. Each step we have taken has immediately been
met with demands for additional action.
We have strongly opposed such confrontation and intend to continue to do so because we
are convinced that such a course would fail to achieve its stated objectives. The ultimate
effect of such an approach is to tell Arab nations that either they must eliminate the Arab
boycott entirely, irrespective of a settlement in the Middle East, or cease doing business with
American firms. NVe have seen no evidence that such a policy would result in elimination
ofthe boycott. In fact we believe that the effect of such pressure would harden Arab attitudes
and potentially destroy the progress we have already made.
The argument is made that the Arab world when faced with such a choice will recognize
the importance of continued access to U.S. goods and services and therefore eliminate what
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they consider one of their principal weapons in the political struggle against the State of
Israel. Unfortunately, this argument fails to reflect several basic facts.
The United States alone among industrial countries has a clearly established policy and
program of opposition to foreign boycotts of friendly countries, including the boycott of
Israel. Other countries already supply a full 80 percent of the goods and services imported
by the Arab world. There is no evidence that these nations are prepared to lose that $50
billion-a-year market or to jeopardize their stake in the rapidly expanding economies of the
Arab nations. Further, there is precious litfle that the United States presently supplies to Arab
nations that is not available from sources in other countries and they are eager to take our
place. The major Arab States have the funds and the will to incur any costs such a switch
might entail. They see that the United States has frequently engaged in economic boycotts
for political purposes, for example, in Cuba, Rhodesia, North Korea, and Vietnam, so they
cannot accept the argument that they are not entitled to do the same.
Mr. Chairman, I believe that we must face an essential and widely recognized fact. The
Arab boycott has its roots in the broad Israel-Arab conflict and will best be resolved by
dealing with the underlying conditions of that conflict.
Problems with a legislative approach
For these and other reasons which I will mention, it is the position of the administration
that no additional legislation is necessary or desirable at this time and that in fact new
legislation would be detrimental to the totality of U.S. interests both here and in the Middle
East.
Present U.S. policy and antiboycott measures already are quite effective. Further, a
number of Arab governments are now negotiating or considering contracts with U.S. firms
notwithstanding the public commitment of these firms to maintain investment, licensing, or
other special economic relationships with Israel. Other U.S. firms are making some progress
in working boycott clauses out of the various stages of their transactions, for example,
contracts, letters of credit, and shipping instructions. Although the pattern is not uniform as
to company, transaction, or country, this reflects a gradual easing of enforcement practices
over the past 6 months.
A number of firms do business with both Israel and the Arab countries. Recently, a
prominent U.S. business leader informed me that he had successfully concluded a
commercial contract with an Arab country even though he maintains extensive ties with
Israel. The Arab countries, in fact, are considering the adoption of a standard policy of
exempting from the boycott list any firms which make as significant a contribution to them
as to Israel.
New legislation at this time could alter these favorable developments regarding
enforcement practices. As you know, boycott rules are not uniformly enforced throughout
the Arab world. Each country has the right to maintain its own national boycott legislation
and has exercised this right. Some countries have chosen not to follow stringent boycott
practices. Other countries are continuously reviewing their policies to ensure that any actions
they take with respect to the boycott do not conflict with their own national interests. I am
concerned that new legislation could raise the issue to a higher political and emotional plane
and thereby become a major negative factor as these countries assess the advantages and
disadvantages of applying a boycott as they review individual trade and investment proposals
by U.S. firms.
Finally, legislation, as evidenced by the several bills now pending, tends to involve an allor-nothing approach, and fails to take into account the fact that a broad range of measures
to deal with specific aspects of the boycott have already been adopted during the last year
and a half
Opposition to specific legislation before the Congress
Mr. Chairman, 1 would like to turn to the specific legislation that is now before the
Congress. I would like to discuss first the antiboycott amendments contained in the Koch bill
(H.R. 11463).
The provisions of these bills would: (1) mandate disclosure of required reports by U.S.
firms to the Commerce Department of their responses to boycott-related requests; (2)
prohibit U.S. firms from furnishing, pursuant to a boycott request, any information regarding
the race, religion, sex, or national origin of their or other firms' directors, officers, employees,
or shareholders; and (3) prohibit a refusal by a U.S. firm to deal with other U.S. firms
pursuant to foreign boycott requirements or requests.
The administration is concerned about each of these provisions.
With respect to disclosure of reports of U.S. firms, by publicizing information about their
compliance with boycott requests, the disclosure provision will also make available
information concerning noncompliance. This disclosure would give boycott officials an
enforcement tool and make it more difficult for Arab business partners to tolerate de facto
noncompliance by U.S. businesses.
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1976 REPORT OF THE SECRETARY OF THE TREASURY
In addition, although a firm might disclose that it has indicated to Arab governments, for
example, that it does not ship on Israeli vessels, or have other specified business dealings with
Israel, such a disclosure would not and could not provide evidence as to whether this was
the result of Arab pressures or an autonomous, voluntary business decision. Firms wishing
to avoid the risk of adverse domestic reaction to their disclosure might then decide it
necessary to cease doing business in the Arab world, even though they would continue to
have no business dealings with Israel.
With respect to the provision of these bills barring the furnishing of information on race,
religion, sex, or national origin, sought for boycott purposes, we believe that adequate and
effective measures have been taken by the President and the respective agencies which make
such a provision unnecessary.
With respect to the prohibition of refusal to deal among U.S. firms pursuant to foreign
boycott requirements or requests, U.S. antitrust laws already prohibit agreements or
conspiracies to engage in anticompetitive, boycott activities and the Justice Department has
one suit pending in this area. It is not clear whether the refusal-to-deal provision in H.R.
1 1463 is intended to go beyond existing antitrust laws. If the bill is intended to cover cases
where a firm unilaterally—without any agreement—chose not to do business with another
firm, it could, in our view, place the Government and the courts in a very difficult situation
of assessing the motives behind the choice of one's business associates or his other business
decisions.
Even if the provisions could be altered to make them enforceable, other serious problems
would remain. U.S. firms might well be able to meet the new legal requirements by sales and
shipments via parties in third countries and thus avoid, for example, having to refuse use of
ships or insurance companies which are on boycott lists. The provisions could also have the
unintended and undesirable effect of encouraging some firms to make general use of
nonboycotted suppliers in their worldwide trade. The reason for this would be a fear that if
they used boycotted firms except for projects in boycotting countries, it might be considered
prima facie evidence of refusal to deal. Finally, responsible enforcement would require
extensive staffing and funding resources going well beyond the requirements for enforcement
of existing Export Administration Act provisions directly related to national security
interests.
Other legislative proposals
While the Stevenson-Williams and Koch bills do not prohibit the provision of information
to Arab governments by U.S. firms on their business dealings with Israel, H.R. 4967, the
Bingham bill, does impose this requirement. The administration continues to oppose this bill
both because it is inequitable and could well be self-defeating. We do not believe that Arab
governments will abandon their policy of not dealing with firms which may be assisting Israel
in a significant economic and/or military way simply because ofa requirement that prohibits
such firms from indicating either the existence or the extent of their relationship with Israel.
There are a variety of other sources which Arab governments could use to attempt to develop
such information. Many of these sources would probably be unreliable and could thus
erroneously place U.S. firms on the Arab boycott list. Moreover, even firms which for reasons
that have nothing to do with the boycott have no business or commercial connections with
Israel would be prohibited from acknowledging this fact.
Former Under Secretary of Commerce James Baker outlined in great detail the
administration's opposition to this bill before your Subcommittee on International Trade and
Commerce on December 1 1, 1975, and I want to reiterate the administration's continued
opposition to this bill.
Mr. Chairman, we must proceed in this entire area with great caution not only because
existing legislative proposals place us in a confrontational stance with the Arab nations but
also because in at least some instances, they could seriously distort major economic forces
in this country and around the world. Proposals such as the Ribicoff bill (S. 3138) would go
so far as to alter a number of major tax provisions. This bill would restrict use ofthe foreign
tax credit, the DISC (domestic international sales corporation) provisions, and the earned
income exclusion of the Internal Revenue Code and tax on a current basis the earnings of
foreign subsidiaries of taxpayers who participate in the Arab boycott. Such changes in our
tax laws would significantly impact U.S. companies, employees, and investors alike, while
imposing new and onerous burdens on the Revenue Service that would impair its capacity
to fulfill its basic function as a collector of tax revenue by creating an administrative
nightmare.
Complicated and delicate questions of foreign policy are not susceptible to rigid solutions
which are prescribed through the Internal Revenue Code. Such actions are contrary to the
resolution of the boycott problem, contrary to the efficient administration of the fair laws,
and contrary to sound principles of tax policy. For these reasons. Assistant Secretary Walker
of the Treasury Department in a letter to Chairman Long of the Senate Finance Committee
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expounded at some length on the serious problems we have with this type of legislative
approach. 1 would like to include a copy ot that letter for the record, i
Constructive approach to the boycott question
Mr. Chairman, we are determined to solve this difficult and complex problem. Any
approach inherently involves a certain degree of subjective judgment. We believe that peace
in the Middle East is the only ultimate answer. In the administration's view, heavyhanded
measures which could result in direct confrontation with the Arab world will not work. A
far more constructive approach, we believe, is to work through our growing economic and
political relations with the Arab States as well as our close relations with Israel and the broad
range of contacts which the executive branch and the regulatory agencies maintain with the
U.S. business community to achieve progress on the boycott issue.
As administration witnesses have indicated in testimony during the past year, all of the
agencies concerned with the boycott and discrimination issues have kept these important
questions under continuing review and are prepared to take whatever steps they consider
necessary to deal with those problems.
Many ofthe administration's actions have dealt with discrimination which, as the President
said in a statement early last year, is totally contrary to the American tradition and repugnant
to American principles. We have wanted to leave no misunderstanding here and abroad of
our determination to eliminate discrimination on racial, religious, and other grounds. At the
same time, we have taken a number of steps as I have outlined to lessen the impact of boycott
practices on American firms. In our contacts with the U.S. business community, we have also
found that a number of firms are working on their own to eliminate boycott conditions from
their commercial transactions or have announced that they will not comply with boycott
requirements.
We consider these to be healthy signs from our business community, and, in my view, we
should encourage this kind of movement rather than rush into coercive legislation that would
be disruptive and damaging to the business community, cause widespread uncertainty in our
commercial relations with the Middle East, and have the other adverse effects I have
described.
In addition to these developments, our approaches to the Arab governments have brought
a greater awareness of the economic cost to them of the boycott and a better understanding
of the obstacle it imposes in the path of better relations with the United States.
I and my colleagues have had a number of conversations with the leaders of Arab
governments including Saudi Arabia, Kuwait, Egypt, and Syria to make very clear to them
our opposition to the boycott and all discriminatory practices. We have also emphasized that
the boycott is a significant impediment to greater U.S. private sector participation in the
economic development of these countries. From my own conversations and reports that have
come to my attention, 1 believe that Arab governments are beginning to recognize that this
issue is prejudicial to their own economic interests.
The meeting of the United States-Saudi Arabian Joint Commission on Economic
Cooperation last February provided an occasion for further discussion of these issues. 1 was
able to make representations at the highest levels of the Saudi Arabian Government on the
question of discrimination against Americans on racial, religious, and other grounds, and the
joint communique issued on February 29 contains a public affirmation by the Saudi Arabian
Government disavowing such discrimination. In fact, many Arab leaders have stated to us
that it is against Islamic tenets to engage in such discrimination.
At the same time, Mr. Chairman, I would like to make clear that our opposition to
legislation or other confrontation in dealing with the boycott problem in no way suggests a
diminution of our concern for Israel's welfare and our desire to help overcome obstacles to
more rapid economic development and prosperity in that country. We remain committed to
a free and independent State of Israel. As you know, we have been, and will continue to be,
generous in our aid to Israel. In addition, we have taken significant steps to assist Israel's
economy in other ways. As Cochairman of the United States-Israel Joint Committee for
Investment and Trade, I have met on numerous occasions with Israel's economic leadership
and have worked out practical means to meet Israeli needs and to cooperate on a wide range
of economic and commercial matters.
The Joint Committee has also been instrumental in helping organize the Israel-United
States Business Council, which is now holding its inaugural joint session in Israel. We look
to the Council to help develop closer relations between the two business communities and
to make practical contributions to expansion of direct trade and investment ties. The
activities of the Joint Committee and the Business Council are constructive efforts in our
continued support of Israel and are part of our broader bilateral economic program to help
deal with all of the economic problems of the Middle East.
INot included in this exhibit.
610
1976 REPORT OF THE SECRETARY OF THE TREASURY
In conclusion, Mr. Chairman, I would note that we have had talks with Arab and Israeli
leaders and with leaders of the American Jewish community on boycott issues and on ways
to eliminate racial, religious, and other discrimination. We have made the point that our basic
goal must be to encourage progress toward peace. It is our considered judgment that
confrontational policies will not work to remove the boycott and could undermine the
delicate search for peace in that troubled region ofthe world. The administration sought and
continues to seek effective ways to eliminate this divisive policy and simultaneously achieve
a just and lasting peace in the Middle East.
I can assure the committee that we will continue these efforts as well as our strong policy
of combating any form of racial, religious, and other discrimination against and arriong
Americans. The Congress and the administration share the goals of a just Middle East peace
and an end to boycotts and discriminatory practices. I hope we can agree that the legislative
proposals now before the Congress are not the best measures to achieve these goals.
Exhibit 74.—Press release, June 17,1976, announcing meeting between Secretary Simon and
Argentine Minister of Economy Martinez de Hoz, for discussion of the new Argentine
economic program
Secretary of the Treasury William E. Simon and Argentine Minister of Economy Martinez
de Hoz met at the Treasury Department on June 16 for a wide-ranging discussion of the new
economic program adopted by the Govemment of Argentina. They discussed relations
between Argentina and U.S. financial institutions. They emphasized the contribution that
foreign investment could make to Argentina's economic growth and discussed the policies
in both countries that would enhance the climate for such investment. The Minister was
accompanied by the president of Argentina's central bank, Adolfo Cesar Diz, AmbassadorDesignate to the United States, Amaldo Tomas Musich, and other senior Argentine officials.
Assistant Secretary Gerald L. Parsky and Deputy Assistant Secretary John A. Bushnell also
participated for the United States. Minister Martinez de Hoz was also the guest of honor at
a luncheon hosted today by Assistant Secretary Parsky at the Treasury Department.
In the meeting with Secretary Simon, Minister Martinez de Hoz reviewed the program
Argentina has adopted to restore equilibrium to the Argentine economy, to bring about a
major improvement in Argentina's extemal payments position, and to reduce inflation. He
indicated that the program incorporated a broad range of economic policies including
measures to increase agricultural production, improve tax collection, establish a realistic
exchange rate, reduce excessive liquidity and attract foreign investment. The Minister
informed Secretary Simon that the actions the Govemment instituted beginning in March
1976 have already begun to take effect. He noted that so far this year Argentina's gross
foreign exchange reserves have nearly doubled to $1.2 billion. The Minister also noted the
rate of inflation which had reached a peak of 38 percent a month in March 1976 and has
dropped sharply to 13 percent a month in May. Minister Martinez de Hoz indicated that
major progress had also been made in reducing the budget deficit which prior to the
stabilization program was equal to 13 percent of Argentina's gross domestic product.
Minister Martinez de Hoz informed Secretary Simon that missions from the IMF and the
World Bank have been in Argentina assessing the economic situation and that he was looking
forward to meeting with IMF officials in Washington later this week to discuss arrangements
with the IMF in support of Argentina's economic program.
Secretary Simon welcomed the major efforts that Minister Martinez de Hoz and the
Argentine Government have taken to stabilize and strengthen Argentina's economy. He
indicated that this bold program merited support. Although such a major restmcturing of an
economy takes time, the recent data demonstrate that the program is working. The Secretary
and the Minister agreed that their officials will remain in close contact both in Washington
and in Buenos Aires to follow the progress under Argentina's stabilization efforts.
TESTIMONY ON INTERNATIONAL MATTERS
Exhibit 75.—Other Treasury testimony in hearings before congressional committees
Secretary Simon
Statement published in hearings before the Committee on Finance, U.S. Senate, 94th
Congress, first session, on a comprehensive national energy conservation and conversion
program, July 14, 1975, pp. 363-75.
Statement published in hearings before the Subcommittee on International Trade,
Investment and Monetary Policy of the Committee on Banking, Currency and Housing,
EXHIBITS
611
House of Representatives, and the Subcommittee on International Economics, Joint
Economic Committee, 94th Congress, first session, on the status of international monetary
negotiations and the experience with floating exchange rates, July 21, 1975, pp. 140-94.
Statement published in hearings before the Subcommittee on International Development
Institutions and Finance of the Committee on Banking, Currency and Housing, House of
Representatives, 94th Congress, first session, on proposed replenishment and expansion of
membership ofthe Inter-American Development Bank, July 29, 1975, pp. 9-17.
Statement published in hearings before the Subcommittee on International Finance ofthe
Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 94th Congress, first
session, on S. 1262, a bill to amend sections 208-210 ofthe International Economic Policy
Act of 1972, July 18, 1975, pp. 51-60.
^ Statement published in hearing before the Committee on Foreign Relations, U.S. Senate,
94th Congress, first session, on U.S. participation in the Financial Support Fund of the
Organization for Economic Cooperation and Development, July 30, 1975, pp. 3-11.
Statement published in hearing before the Subcommittee on International Trade,
Investment and Monetary Policy of the Committee on Banking, Currency and Housing,
House of Representatives, 94th Congress, first session, on U.S. participation in the Financial
Support Fund ofthe Organization for Economic Cooperation and Development, September
18, 1975, pp. 14-25.
Statement before the Committee on Foreign Relations, U.S. Senate, on international
economic policy, October 22, 1975.
Statement published in hearings before the Committee on Foreign Relations, U.S. Senate,
94th Congress, first session, on U.S. participation in the Financial Support Fund of the
Organization for Economic Cooperation and Development, March 26, 1976, pp. 119-23.
Statement published in hearings before the Senate Committee on Banking, Housing and
Urban Affairs, 94th Congress, 2d session, on questionable foreign payments abroad by U.S.
corporations, April 8, 1976, pp. 84-96.
Statement published in hearings before the Committee on Banking, Housing, and Urban
Affairs, U.S. Senate, 94th Congress, 2d session, on U.S. participation in the Financial Support
Fund of the Organization for Economic Cooperation and Development, June 4, 1976, pp.
8-12.
Deputy Secretary Dixon
Statement published in hearings before the Subcommittee on Financial Institutions,
Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 94th Congress, 2d session,
on the proposed International Banking Actof 1976 (H.R. 13876), August 3 1, 1976, pp. 1-3.
Under Secretary for Monetary Affairs Yeo
Statement published in hearing before the Task Force on Tax Expenditures and Off-Budget
Agencies ofthe Committee on the Budget, House of Representatives, 94th Congress, second
session, on the Exchange Stabilization Fund, February 18, 1976, pp. 33-7.
Statement published in hearings before the Committee on Foreign Relations, U.S. Senate,
94th Congress, second session, on IMF amendment and quota increase, June 22, 1976, pp.
12-23.
Statement published in hearings before the Subcommittee on International Finance,
Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 94th Congress, 2d session,
on amendment of the IMF Articles of Agreement and increase in IMF quota, August 27,
1976, pp. 131-39.
Assistant Secretary Cooper
Statement published in hearing before the Subcommittee on International Development
Institutions and Finance of the Committee on Banking, Currency and Housing, House of
Representatives, 94th Congress, first session, on U.S. participation in multilateral development lending institutions, July 8, 1975, pp. 97-106.
Statement published in hearing before the Subcommittee on International Development
Institutions and Finance of the Committee on Banking, Currency and Housing, House of
Representatives, 94th Congress, first session, on proposed U.S. contribution to the African
Development Fund, July 15, 1975, pp. 74-88.
Assistant Secretary Parsky
Statement published in hearings before the Subcommittee on International Finance ofthe
Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 94th Congress, first
session, on the administration's policy with respect to foreign investment in the United States
and the Arab boycott, July 22, 1975, pp. 79-103.
Statement published in a hearing before the Subcomrriittee on International Trade,
Investment and Monetary Policy of the Committee on Banking, Currency and Housing,
612
1976 REPORT OF THE SECRETARY OF THE TREASURY
House of Representatives, 94th Congress, first session, on U.S. policy with respect to foreign
investment and Treasury's role in foreign investments in the United States, September 24,
1975, pp. 161-75.
Statement published in hearings before the Subcommittee on Foreign Commerce and
Tourism of the Committee on Commerce, U.S. Senate, 94th Congress, second session, on
the International Investment Survey Act of 1975, February 23, 1976, pp. 21-30.
Statement published in hearings before the Committee on Banking, Housing, and Urban
Affairs, U.S. Senate, 94th Congress, second session, on the President's proposal for an Energy
Independence Authority, April 14, 1976, pp. 335-40.
Statement before the Foreign Relations Committee, U.S. Senate, on increased participation by the United States in the Asian Development Fund, April 27, 1976. (See Senate Report
94-773.)
Statement before the Subcommittee on International Trade ofthe Committee on Finance,
U.S. Senate, on the United States-Romania Trade Agreement, September 8, 1976.
Statement before the Subcommittee on Consumer Protection and Finance of the House
Committee on Interstate and Foreign Commerce, on questionable payments abroad by U.S.
corporations, September 21, 1976.
Acting Assistant Secretary Bushnell
Statement published in hearing before the Subcommittee on Foreign Assistance of the
Committee on Foreign Relations, U.S. Senate, 94th Congress, first session, on proposed
replenishment and expansion of membership ofthe Inter-American Development Bank and
U.S. membership in the African Development Fund, January 28, 1976, pp. 18-37.
Statement published in hearings before the Subcommittee on International Development
Institutions and Finance of the Committee on Banking, Currency and Housing, House of
Representatives, 94th Congress, second session, on increased participation by the United
States in the Asian Development Fund, May 12, 1976, pp. 5-17.
Deputy Assistant Secretary Bushnell
Statement published in hearing before the Subcommittee on International Development
Institutions and Finance of the Committee on Banking, Currency and Housing, House of
Representatives, 94th Congress, first session, on proposed replenishment and expansion of
membership of the Inter-American Development Bank, and lending to the Caribbean
Development Bank, July 29, 1975, pp. 75-95.
Statement published in hearings before the Subcommittee on Foreign Operations and
Related Agencies of the Committee on Appropriations, House of Representatives, 94th
Congress, second session, on contributions to the international development banks, March
16, 1976, pp. 163-79.
Statement published in hearings before the Subcommittee on Oilseeds and Rice and
Subcommittee on Cotton ofthe Committee on Agriculture, House of Representatives, 94th
Congress, second session, on international bank lending for palm-oil projects, March 18,
1976, pp. 29-37.
Deputy Assistant Secretary Niehuss
Statement published in hearings before the Subcommittee on Economic Stabilization of
the Committee on Banking, Currency and Housing, House of Representatives, 94th
Congress, second session, on financial incentives for synthetic fuels. May 26, 1976, pp.
184-6.
Organization and Procedure
Exhibit 76.—Treasury Department orders relating to organization and procedure
No. 240, SEPTEMBER 27, 1975.—LIAISON BETWEEN SUBORDINATE ORGANIZATIONAL
UNITS OF THE TREASURY AND THE CENTRAL INTELLIGENCE AGENCY
In order to assure proper coordination of arrangements for all Treasury support ofthe CIA
and for any CIA activity in support of one or more operating units of the Treasury
Department, I have directed the Special Assistant to the Secretary (National Security) to
review in my behalf all such agreements and arrangements now in effect and all proposals
for new arrangements, to consult with the General Counsel conceming them, and to report
all such arrangements to me on a continuing basis.
613
EXHIBITS
Any agreement between Treasury agencies and the CIA dealing with arrangements of a
continuing nature shall be reduced to writing, reviewed by the General Counsel and
submitted for my review and approval before being adopted.
In each instance in which either the CIA or a Treasury agency wishes to request the other
to provide support and there is no current written agreement which is applicable, the request
shall be transmitted between the agencies through the Special Assistant to the Secretary
(National Security) who shall consult with the General Counsel.
This directive shall apply to similar arrangements for support or assistance with all other
intelligence agencies ofthe Federal Government except the Federal Bureau of Investigation.
Coordination of such arrangements with the FBI shall, in the case of the Internal Revenue
Service, be the responsibility of the Commissioner of Internal Revenue, and in the case of
all other Treasury units, the responsibility of the Assistant Secretary (Enforcement,
Operations, and Tariff Affairs) in consultation with the General Counsel.
All arrangements proposed pursuant to this directive shall be submitted to me for my
personal review and approval. This directive is intended to assure proper coordination and
legal review of all such agreements and arrangements but shall not affect in any way the
normal reporting relationships and operational responsibilities of Treasury officials. This
directive does not apply to the routine exchange between the intelligence community and
Treasury of substantive intelligence information and reports on a continuing basis.
I have sent a copy of this order to the Director ofthe CIA with the request that he establish
appropriate procedures within his agency to assure that this order is observed.
WILLIAM E . SIMON,
Secretary ofthe Treasury.
No. 234-3, OCTOBER 7, 1975.—DIRECTIVE T O SELL GOLD
By virtue of the authority vested in me as Secretary of the Treasury by Section 9 of the
Gold Reserve Act of 1934 (31 U.S.C. 733) and Reorganization Plan No. 26 of 1950, Ihereby
authorize and direct the Under Secretary for Monetary Affairs to take all necessary and
proper measures, including direction of other officials of the Department, for the sale of
approximately 14,100 fine troy ounces of gold from the United States' gold stocks to the
American Revolution Bicentennial Administration from October 1975 through July 1976.
Any actions heretofore taken by the Under Secretary for Monetary Affairs in connection with
such sales are hereby ratified and confirmed as the actions of the Secretary.
WILLIAM E . SIMON,
Secretary of the Treasury.
N O . 241, FEBRUARY 1, 1976.—TRANSFER OF FUNCTIONS TO THE OFFICE OF THE
ASSISTANT SECRETARY FOR TRADE, ENERGY, AND FINANCIAL RESOURCES POLICY
COORDINATION: REDESIGNATION OF OFFICE
By authority vested in me as Secretary of the Treasury, including the authority of
Reorganization Plan No. 26 of 1950, it is hereby ordered that:
1.
2.
3.
4.
All programs, functions, personnel, records, personal property, and funds,
heretofore assigned to the Office ofthe Assistant Secretary for International Affairs
are transferred to the supervision and control of the Assistant Secretary for Trade,
Energy, and Financial Resources Policy Coordination.
The Assistant Secretary and the Office of Trade, Energy, and Financial Resources
Policy Coordination are hereby redesignated the Assistant Secretary and the Office
of the Assistant Secretary for International Affairs, respectively.
The Assistant Secretary for International Affairs is hereby delegated all the
responsibilities and is authorized to perform all the duties previously performed by
the Assistant Secretary for Trade, Energy, and Financial Resources Policy
Coordination and the Assistant Secretary for Intemational Affairs, pursuant to:
Treasury Department Order No. 202 (Revision I), March 26, 1973
Treasury Department Order No. 232, June 23, 1974
Treasury Department Order No. 237, April 7, 1975
However, each of these Orders is modified to the extent inconsistent herewith.
The organizations and all intemal rules, regulations, and instructions adopted for
the administration ofthe Offices ofthe Assistant Secretary for International Affairs
and the Assistant Secretary for Trade, Energy, and Financial Resources Policy
614
1976 REPORT OF THE SECRETARY OF THE TREASURY
Coordination, which are in effect on the date of this Order, shall continue in effect
until superseded or revised.
WILLIAM E . SIMON,
Secretary of the Treasury.
No. 221-3 (REVISION 1), FEBRUARY 21, 1976.—TRANSFER OF FUNCTIONS TO THE
BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
By virtue of the authority vested in me as Secretary of the Treasury, including the authority
in Reorganization Plan No. 26 of 1950, it is ordered that:
1. There is hereby transferred, as specified herein, the functions, powers and duties
of the Comnlissioner of Intemal Revenue arising under laws relating to wagering to
the Director of the Bureau of Alcohol, Tobacco and Firearms (hereinafter referred
to as the Director).
2. The Director shall perform the functions, exercise the powers, and carry out the
duties of the Secretary under Subtitle F of the Intemal Revenue Code of 1954,
insofar as the provisions of Subtitle F relate to forfeitures and criminal violations
of the provisions of Chapter 3 5 - Taxes on Wagering and Chapter 4 0 - General
Provisions Relating to Occupational Taxes. Regulations for the purpose of carrying
out the functions, powers and duties specified in this paragraph may be issued by
the Director with the approval of the Secretary.
3. All regulations prescribed, all mles and instrnctions issued, and all forms adopted
for carrying out the functions, powers and duties specified in paragraph 2 hereof,
which are in effect or in use on the effective date of this Order, shall continue in
effect as regulations, rules, instructions and forms of the Bureau until superseded
or revised.
4. All activities relating to the discovery of civil hability, determination, assessment,
collection, processing, depositing, or accounting for taxes (including penalties and
interest), under Chapter 3 5 - Taxes on Wagering shall continue to be performed by
the Commissioner of Intemal Revenue. The Commissioner may call upon the
Director for assistance when it is necessary to exercise any of the enforcement
authority described in section 7608 of the Intemal Revenue Code.
5. (a) The term "Commissioner of Intemal Revenue" wherever used in regulations,
rules, instructions and forms, issued or adopted for carrying out the functions,
powers and duties specified in paragraph 2 hereof, which are in effect or in
use on the effective date of this Order, shall be held to mean the Director.
(b) The terms "intemal revenue officer" and "officer, employee or agent of the
intemal revenue" wherever used in such regulations, mles, instructions and forms,
in any law specified in paragraph 2 above, and in 18 U.S.C § 1114, shall include
all officers and employees of the United States engaged in the administration and
enforcement of the laws administered by the Bureau, who are appointed or
employed by, or pursuant to the authority of, or who are subject to the directions,
instructions or orders of, the Secretary.
6. To the extent that any action taken by the Commissioner of Internal Revenue or
his delegates or the Director of the Bureau or his delegates under Treasury
Department Order 221-3, prior to the effective date of this Order, may require
ratification, such action is hereby affirmed and ratified.
7. Each wagering tax case and investigation open or otherwise in process as of the date
of this Order shall be pursued to conclusion by the agency processing the same on
such date. The Commissioner shall be responsible for issuing rulings and regulations
with respect to the administration of the wagering tax laws other than those
described in paragraph 2.
8. This Order is effective immediately. Any prior orders or instructions in conflict with
the provisions of this Order are hereby amended accordingly.
WILLIAM E . SIMON,
Secretary of the Treasury.
No. 242, MARCH 27, 1976.—ESTABLISHMENT OFTHE OFFICE OF ASSISTANT SECRETARY
(CAPITAL MARKETS AND DEBT MANAGEMENT)
By virtue of the authority vested in me as Secretary of the Treasury, including the authority
of Reorganization Plan No. 26 of 1950, it is ordered that:
EXHIBITS
615
1. The position of Assistant Secretary (Capital Markets and Debt Management) is
hereby established, the incumbent of which shall report to the Secretary through
the Under Secretary for Monetary Affairs. Such Assistant Secretary shall serve as
principal advisor to the Secretary, Deputy Secretary, and Under Secretary for
Monetary Affairs on debt management, federal financing affairs, the financing of
non-federal sectors of the economy, and general capital markets policy, and shall
exercise policy direction and control over:
• Treasury operations related to, and the relationship between Treasury and,
the Federal Financing Bank;
• Treasury staff work on the substance of proposed legislation relating to the
regulation of, and the lending, investment, and deposit powers of, private
financial institutions as well as the operations of other private financial
intermediaries;
• development of legislative and administrative principles and standards for
federal credit programs, working closely with federal credit agencies in the
design of new credit programs and legislations;
• determination of interest rates for various federal borrowing, lending, and
investment purposes under pertinent statutes;
• determination of interest rates for the sale of special Treasury issues to
foreign central banks; and
• Treasury operations under the New York City Seasonal Financing Act of
1975 (P.L. 94-143).
2. The Deputy Assistant Secretary (Financial Resources Policy), his immediate office,
and his subordinate Office of Capital Markets Policy with assigned positions,
personnel, records, and property are transferred from the supervision of the
Assistant Secretary (International Affairs) to the supervision of the Assistant
Secretary (Capital Markets and Debt Management) and retitled Office of the
Deputy Assistant Secretary (Capital Markets Policy). The Office of Financial
Resources Policy and its employees remains with the Assistant Secretary (International Affairs).
3. The Office of the Deputy Assistant Secretary (Debt Financing) is hereby created.
Supervision of the Office of Debt Analysis, and the functions, personnel, records,
and property relating to the operations of the Federal Financing Bank, are
transferred from the Special Assistant to the Secretairy (Debt Management) to the
Office ofthe Deputy Assistant Secretary (Debt Financing).
4. The Special Assistant to the Secretary (Debt Management) is hereby placed under
the supervision ofthe Assistant Secretary (Capital Markets and Debt Management).
5. The Deputy to the Assistant Secretary for New York City Finances is hereby created
to discharge the Secretary's responsibilities under the New York City Seasonal
Financing Act of 1975 (P.L. 94-143).
6. The Senior Advisor to the Assistant Secretary for Debt Research is hereby created
to conduct long-range research on the economic and financial impact of federal debt
operations.
This order amends Treasury Department Order No. 241 (dated February 1, 1976) and
supersedes Treasury Department Order No. 170-12 (dated January 15, 1972). Treasury
Department Order No. 190-3 (dated January 3, 1975) is hereby rescinded.
WILLIAM E . SIMON,
Secretary of the Treasury.
N O . 243, AUGUST 27, 1976.—DELEGATION OF AUTHORITY UNDER TITLE II OF THE PUBLIC
WORKS EMPLOYMENT ACT OF 1976
Pursuant to the authority vested in me. as Secretary of the Treasury by Reorganization Plan
No. 26 of 1950, there is hereby delegated to the Director of the Office of Revenue Sharing
in the Office of the Secretary the authority to perform the functions, exercise the powers and
carry out the duties vested in the Secretary of the Treasury by the Public Works Employment
Act of 1976, Title II, Public Law94-^69. The Director shall perform those functions, powers
and duties under the direct supervision of the Under Secretary of the Treasury. The Director
may issue regulations for the purposes of carrying out the above functions, powers and duties
under the Director's own name and title with the approval of the Under Secretary.
EDWIN H . YEO III,
Acting Secretary ofthe Treasury.
616
1976 REPORT OF THE SECRETARY OF THE TREASURY
No. 190 (REVISION 12), SEPTEMBER14, 1976.—SUPERVISION OF BUREAUS AND OFFICES,
DELEGATION OF AUTHORITY, AND ORDER OF SUCCESSION IN THE TREASURY DEPARTMENT
1. The following officials shall be under the direct supervision of the Secretary:
The Deputy Secretary
Adviser to the Secretary
The Executive Assistant to the Secretary
Staff Assistants to the Secretary
2. The following officials shall be under the supervision ofthe Secretary, and shall report
to him through the Deputy Secretary:
Under Secretary for Monetary Affairs
Under Secretary
General Counsel
Assistant Secretary (Tax Policy)
Commissioner, Internal Revenue Service
Comptroller of the Currency
3. The following officials shall be under the supervision of the Under Secretary for
Monetary Affairs, and shall exercise supervision over those organizational entities indicated
thereunder:
Assistant Secretary (International Affairs)
Deputy Assistant Secretary for Trade and Raw Materials Policy
Deputy Assistant Secretary for Energy and Investment Policy
Deputy Assistant Secretary for International Monetary Affairs
Deputy Assistant Secretary for Developing Nations
Deputy Assistant Secretary for Research and Planning
Deputy to the Assistant Secretary for Saudi Arabian Affairs
Inspector General for International Finance
Assistant Secretary (Capital Markets and Debt Management)
Deputy Assistant Secretary for Capital Markets Policy
Deputy Assistant Secretary for Debt Financing
Senior Adviser (Debt Research) i
Special Assistant to the Secretary (Debt Management)
Deputy to the Assistant Secretary for New York Finances
Assistant Secretary (Economic Policy)
Office of Financial Analysis
Fiscal Assistant Secretary
Bureau of Government Financial Operations
Bureau of the Public Debt
Treasurer of the United States
Special Assistant to the Secretary (National Security)
U.S. Savings Bond Division
4. The following officials shall be under the supervision ofthe Under Secretary, and shall
exercise supervision over those organizational entities indicated thereunder:
Assistant Secretary (Administration)
Office of Administrative Programs
Office of Audit
Office of Budget and Program Analysis
Office of Computer Science
Office of Equal Opportunity Program
Office of Management and Organization
Office of Personnel
Assistant Secretary (Legislative Affairs)
Assistant Secretary (Enforcement, Operations, and Tariff Affairs)
Office of Law Enforcement
Office of Operations
Office of Tariff Affairs
Office of Foreign Assets Control
Bureau of Alcohol, Tobacco and Firearms
U.S. Customs Service
Bureau of Engraving and Printing
Bureau of the Mint
U.S. Secret Service
Federal Law Enforcement Training Center
Special Assistant to the Secretary (Public Affairs)
Office of Revenue Sharing
IThe insertion of this line was the only change from Revision 11. dated May 5, 1976. That revision, therefore, is not
included in this exhibit.
617
EXHIBITS
5. The following officials shall exercise supervision over those organizational entities
indicated thereunder:
General Counsel
Legal Division
Office of Director of Practice
Assistant Secretary (Tax Policy)
Office of Tax Analysis
\,
Office of Tax Legislative Counsel (also part of Legal Division)
Office of International Tax Counsel (also part of Legal Division)
Office of Industrial Economics
Commissioner, Internal Revenue Service
Assistant Commissioner (Accounts, Collection, and Taxpayer Service)
Assistant Commissioner (Administration)
Assistant Commissioner (Compliance)
Assistant Commissioner (Employee Plans and Exempt Organizations)
Assistant Commissioner (Inspection)
Assistant Commissioner (Planning and Research)
Assistant Commissioner (Technical)
Comptroller of the Currency
First Deputy Comptrollers
Deputy Comptrollers
6. The Deputy Secretary, the Under Secretary for Monetary Affairs, the Under Secretary,
the General Counsel, and the Assistant Secretaries are authorized to perform any functions
the Secretary is authorized to perform. Each of these officials shall perform functions under
this authority in his own capacity and under his own title and shall be responsible for referring
to the Secretary any matter on which actions should appropriately be taken by the Secretary.
Each of these officials will ordinarily perform under this authority only functions which arise
out of, relate to, or concern the activities or functions of or the laws administered by or
relating to the bureaus, offices, or other organizational units over which he has supervision.
Any action heretofore taken by any of these officials in his own capacity and under his own
title is hereby affirmed and ratified as the action of the Secretary.
7. The following officers shall, in the order of succession indicated, act as Secretary of
the Treasury in case of the death, resignation, absence, or sickness of the Secretary and other
officers succeeding him, until a successor is appointed, or until the absence or sickness shall
cease:
A. Deputy Secretary
B. Under Secretary for Monetary Affairs
C. Under Secretary
D. General Counsel
E. Commissioner of Internal Revenue
F. Assistant Secretaries, or Deputy Under Secretaries, appointed by the President
with Senate confirmation, in the order in which they took the oath of office as
Assistant Secretary, or Deputy Under Secretary.
8. Treasury Department Order No. 190 (Revision 11) is rescinded, effective this date.
WILLIAM E. SIMON,
Secretary ofthe Treasury.
V-
STATISTICAL APPENDIX
:)
TABLES
The statistical tables to this Annual Report will be published in the separate Statistical
Appendix.
V
INDEX
Page
Accounting and reporting
168-70
Account of the U.S. Treasury
6-7, 170-1
Administrative management
127-39
Advisory committees
129, 169
African Development Bank/Fund
105, 113, 571-4, 584-93
Agency for International Development
119, 129, 204
Alaskan natural gas transportation
78-9, 505-9
Alcohol, Tobacco and Firearms, Bureau of,administrative report
139-49
Antidumping
50-1, 239-40, 386-92, 480
Antinarcotics program
43
Anti-terrorism
:
44
Arab boycott
122^ 605-10
Articles of Agreement, IMF
39, 84, 88-95, 522-3, 551-8
Asian Development Bank
105, 111-12, 584-97
Automated merchandise processing system
237-8, 242
B
Balance of payments
82-3, 97-100, 103-4, 533-6, 547-51
Banking and cash management
173-6
Bank Secrecy Act
44-5, 394-403
Bicentennial observances
41-2, 49, 50, 149, 160, 170, 215-18, 242, 244, 246
Bills, Treasury:
Operations
12-29
Press releases
273-5
Bonds, Treasury:
Operations
12-29
Summary, issues
272
Bonds, U.S. Savings:
Forgery
255-6
Issuance and redemption
180-3
Promotional activities
244-8
Regulations, revised and amended
279-325
Capital investment
57, 425-6
Capital markets policy..
10, 330-9
Cargo processing
235-8
Cargo security program
47-8, 233-4
Cash and monetary assets
6-7
Charts:
Budget 1966-76
4
Market yields at constant maturities, 1971-76
12
Organization of the Department of the Treasury
XVII
Ownership of Federal securities, June 30 and September 30, 1976
32
Private holdings of marketable Federal securities, fiscal year 1971 to date...
31
Checks, Treasury:
Claims
;
:
168
Forgery
253-5
Issued
166
Unit cost
166
Circulars, Department
263-328
Claims against foreign governments, payment of
178-9
Coins, production of
50, 128, 215-18
Committee of Twenty
88
Committee on Foreign Investment in the United States
72-3
623
624
I
INDEX
'
Page
Commodity policy
,j
64-8, 97-8, 475-6, 483-5, 488-90, 499-503
Comptroller ofthe Currency, Office ofthe, administrative report
149-52
Computer Science, Office of, administrative report
153
Conference on Internation<il Economic Cooperation
64, 76-8, 503-5
Conscience fund
'../.}
178
Consumer protection
142-3
Corporation income taxes. See Taxation: Income and profits taxes.
Corporations and other business-type activities of the Federal Government,
review
i
7-8
Counterfeiting
45, 252-3
Countervailing duty
'
239-40, 390-2, 480-2
Criminal enforcement
1
140-2
Criminal investigator training
164
Currency:
'
Issuing and redeeming
172
Production
49, 156
Customs {see also Law enfprcement and operations):
International operations
232-3, 386-92
Modernization and sirhplification
237-9
Receipts
5
U.S. Customs Service^ administrative report
223-43
D
Debt management. See Federal debt: Management.
Deficit, budget
3
Depositary services
171, 173
Deposits, withdrawals, and balances in U.S. Treasury account
171
Developing nations
finance
105-23, 490-3, 570-610
Development Committee .i
88-9, 115-16, 570-1
Director of Practice, Office of, administrative report
153-5
Disbursing operations
166-8
Domestic international sales corporation
54, 61, 459
Drug seizures
\
224
East-West Foreign Trade Board
70, 471-2, 482-3
East-West trade
69-70, 471-5
Economic policy
37-8, 370-86, 536-42
Electronic funds transfer.:
166-8, 180, 220
Emergency Loan Guarantee Board
9-10, 372-3
Emergency preparedness .;.
128-9
Employee plans
193
Employee Retirement Income Security Act of 1974
155, 185, 189, 193-5
Energy policy
71, 78-9, 427-8, 449-51, 503-12
Enforcement activities {see also Law enforcement and operations):
Alcohol, Tobacco and Firearms, Bureau of
140-4
Foreign Assets Control, Office of
183-4
Internal Revenue Service
195-8, 201-2
U.S. Customs Service
224-33
Enforcement, operations, and tariff affairs, review
42-51
Engraving and Printing, Bureau of, administrative report
155-60
Environmental quality program
138
Equal Opportunity Program:
Office of, administrative report
160-3
Other reports
147, 213
Estate and gift taxes. See Taxation.
Expenditures. See Outlays.
Explosives control program
46-7, 140-2, 144, 146
Federal debt {see also Public debt):
Changes in Federal securities
Disposition of marketable Treasury securities
29-30
28
INDEX
625
Page
Financing operations
12-29
Government-sponsored agency debt
30
Management, review
11-34
Offerings of marketable Treasury securities
14-15
Ownership of public debt securities
.(
30-4
Policy
V^y
361-70
Federal Financing Bank
:
7, 10, 34-6, 177
Federal Law Enforcement Training Center, administrative report
163-6
Federal tax deposit system
174-5
Financial Institutions Act of 1975
10
Financial operations, review
3-10
Financial recordkeeping—Public Law 91-508
44-5, 394-403
Financial Support Fund
100-1
Firearms control program
46-7, 140-2, 144-6
Food coupon production
157
Foreign Assets Control, Office of, administrative report
183-4
Foreign currency management and reporting
105, 118, 174
Foreign exchange developments and operations
83-7
Foreign indebtedness
117-18, 178-9, 580-4
Foreign portfolio investment
71-2, 512-16
Fraud investigation
200-1, 228-9
Freedom of information
149, 155, 208, 241, 257, 259
General Agreement on Tariffs and Trade (GATT)
62, 391-2, 485-6
General Counsel, Office of the, review
38-41
Gold
50, 90, 92-3, 99, 170, 177, 215, 493, 522-3, 531-2, 555-8, 613
Government corporations. See Corporations and other business-type activities
of the Federal Government.
Government Financial Operations, Bureau of, administrative report
166-80
Government losses in shipment
178
Government-wide financial management
8-9
H
Historical Association, Treasury
131, 138-9
I
Income taxes. See Taxation.
Indebtedness of foreign governments to the United States
117-18, 178-9, 580-4
Inter-American Development Bank
39, 105, 109-11, 571-4, 584-93, 599-603
Interim Committee
84, 87-9, 531-3
Internal revenue, collections and refunds
185-6
Internal Revenue Service {see also Director of Practice):
Administrative report
185-214
Advisory panel
209
Taxpayer service
186-8
International affairs, review
62-123, 471-612
International Bank for Reconstruction and Development
106-9, 523-9
International Banking Act of 1976
72
International Development Association
105-9, 584-93
International Energy Agency
75-6, 103, 517
International Finance Corporation
106-9, 117
International investment
70-5, 116-17
International Investment Survey Act of 1976
72
International Monetary Fund
9, 87-100, 493-4, 521-9
International Resources Bank
66, 496
International tax matters
61-2, 202-5
Interpol
47, 232
Introduction
XIX-XXXVI
Investigative activities:
Alcohol, Tobacco and Firearms, Bureau of
148
Internal Revenue Service
195-7, 200-1, 209-11
U.S. Customs Service
228-9, 241
U.S. Secret Service
252-6
626
INDEX
Page
Jamaica agreements
89-90, 479, 493, 531-3, 543-7, 547-51
Joint Financial Management Improvement Program
9
Law enforcement and operations, review
Law ofthe Sea
Legislative Reorganization Act of 1970
Letters of credit
42-50
69, 495-8
8
175-6
M
Management by objectives
Middle East policy
Mint, Bureau ofthe, administrative report
Multilateral trade negotiations
128, 211
121-2
214-18
63, 476-86, 503
N
Narcotic Sentencing and Seizure Act of 1976
Narcotics trafficker program
New York City financial situation, review
North-South dialog
Notes, U.S. Government {see also Currency):
Operations
Summary, issues
Numismatic services
403-5
43, 201
36-7, 330-9
65, 101, 488, 564-5
12-29
268
216
o
Officers, administrative and staff of the Department of the Treasury
XII-XV
Oil company divestiture
79, 516-21
Oil facility, IMF
89, 96-7
Operation Concentrated Urban Enforcement (CUE)
46-7, 140, 144, 146, 148
Orders, Department of the Treasury
612-17
Organization chart of the Department of the Treasury
XVII
Organization for Economic Cooperation and Development
64, 7 0 - 1 , 73-4, 100-2,
560-6
Organization of Petroleum Exporting Countries... 114-15, 120-1, 514-15, 520-1, 525
Organized crime. See Law enforcement and operations.
Outlays:
1966-76 budget (chart)
4
By major agency
6
Overseas Private Investment Corporation
119-20
Paperwork nianagement program
Pension plans
Police training
Postage stamp production
Postal Savings System, liquidation
Privacy Act of 1974
Project Identification
Protectionism
Protective operations
Public Law 480
Public debt {see also Federal Debt):
Bureau of the, administrative report
Donations toward reduction of
Legislation
Regulations, amended and revised
Statutory limit
137, 148, 257
193
45-6, 164
156-7
177-8
137, 149, 155, 189, 208, 241, 257, 259
141
63-4
45, 229, 250-1 ,
119
180-3
178
328-9
263-328
361-70
INDEX
627
<
'
Page
Rambouillet economic summit
Receipts:
1966-76 budget (chart)
Budget
Customs
Internal Revenue
Reconstruction Finance Corporation
Regulatory enforcement
Revenue Sharing, Office of, administrative report
63, 84, 89, 529-30, 547-51, 555
:.
...-.
k.....:.,
.'.
4
3-5
5
4-5, 185-6
177
142-4
219-23
s
Safety program
Significant Criminal Enforcement Project
Strike force program
Supplemental security income program
138, 158
140-1
44, 200-1, 256
254
Tariff affairs....
Taxation {see also Internal Revenue Service):
Employment taxes, receipts
Energy tax proposals
Estate and gift taxes, receipts
Excise taxes, receipts
Federal tax deposits
Income and profits taxes:
Corporation, receipts
Individual, receipts
International activities
Policy, review
Proposal for basic tax reform
Revenue Adjustment Act of 1975
Tax Reduction Actof 1975
Tax Reform Act of 1976
Tax treaties
Trade Act of 1974
Trade and raw materials policy
Treasury enforcement communications system
Treasury payroll/personnel information system
Troika
Trust fund, IMF
50-1, 392-4
4-5
56-7
4-5
4-5
174-5
4-5
4-5
62, 202-5
51-62, 405-71
56, 417-20
52-3, 185, 189, 430-1
52, 185, 191, 371
53, 55-6, 58, 60, 206-7
:
61-2, 203-4
51, 63, 70, 239, 390-2, 473, 476-86
62-70, 471-503
48, 147, 226, 230
129-30, 21837-8
99-100, 494, 526
u
UNCTAD IV
Upward mobility program
U.S. Customs Service, administrative report
U.S. savings bonds. See Bonds, U.S. Savings.
U.S. Savings Bonds Division, administrative report
U.S. Secret Service, administrative report
U S . Treasurer, Office of the, review
U.S.-U.S.S.R. Trade and Economic Council
65-6, 77, 486-95, 603-5
159, 180, 249
223-43
244-9
249-59
41-2
70
w
Wagering
World Bank group
World economic and financial developments
o
140, 192
106-9
79-87, 536-42, 568-70
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