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of the Secretary of the Treasury
on the State of the Finances




FISCAL YEAR 1978

DEPARTMENT OF THE TREASURY
DOCUMENT NO. 3276
Secretary

For sale by the Superintendent of Documents, U.S. Govemment Printhig Offlce, Washington, D.C. 20402
Stock number 048-000-00325-7



THE SECRETARY OF THE TREASURY
WASHINGTON

January 17, 1979

Dear Sirs:
I have tlie honor to transmit to you
a

report

on

the state of the finances

of the

United States Government for the

fiscal

year

This

ended

September 30, 1978.

submission is in

accordance

with

31 UoS.C. 1027o
Sincerely yours.

Wo Michael Blumenthal

President of the Senate
Speaker of the House of Representatives







CONTENTS
Page

Introduction

XIX

REVIEW OF TREASURY OPERATIONS
Financial Operations
Domestic Finance
Economic Policy
General Counsel, Office of the
Enforcement and Operations
Tax Policy
Intemational Affairs

3
8
39
49
52
57
68

ADMINISTRATIVE REPORTS
Administrative Management
Alcohol, Tobacco and Firearms, Bureau of
Comptroller of the Currency, Office of the
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:
Govemment Financial Operations, Bureau of
Public Debt, Bureau of the
Foreign Assets Control, Office of
Intemal Revenue Service
Mint, Bureau of the
Revenue Sharing, Office of
Tariff Affairs, Officeof
United States Customs Service
United States Savings Bonds Division
United States Secret Service

117
131
150
154
155
156
163
165
169
181
184
186
213
218
224
224
241
244

EXHIBITS
1.
2.
3.
4.
5.
6.
7.
8.

Public Debt Operations, Regulations, and Legislation
Treasury notes
Treasury bonds
Treasury bills
Department Circular No. 653, Ninth Revision, April 23, 1974, amended,
offering of United States savings bonds. Series E
Department Circular No. 905, Sixth Revision, April 19, 1974, amended,
offering of United States savings bonds. Series H
An act to increase the temporary debt hmit, and for other purposes
An act to extend the existing temporary debt limit
An act to provide for a temporary increase in the public debt limit

255
260
265
268
280
285
285
285

Domestic Finance
9. Statement by Assistant Secretary Altman, Febmary 6, 1978, before the
Subcommittee on Taxation and. Debt Management of the Senate Finance
Committee, on the public debt limit




V

285

VI

CONTENTS
Page

10. Statement bvAssistant Secretary Altman, June 27, 1978, before the Subcommittee on Domestic Monetary Pohcy ofthe House Committee on Banking,
Finance and Urban Affairs, on extension of the authority of Federal
Reserve banks to purchase pubhc debt obUgations directly from the
Treasury
11. Statement by Assistant Secretary Altman, April 3, 1978, before the House
Budget Committee, on the administration's urban policy proposals
12. Statement by Assistant Secretary Altman, October 12, 1977, before the
Senate Committee on Energy and Natural Resources, on the financing of
an Alaska natural gas transportation system
13. Statement b^ Assistant Secretary Altman, August 1, 1978, before the
Subcommittee on Economic Stabilization of the House Committee on
Banking, Finance and Urban Affairs, on the proposed National Development Bank
14. Other Treasury testimony pubhshed in hearings before congressional committees
Ecomomic Policy
15. Excerpt from remarks by Secretary Blumenthal, October 19,1977, before the
annual convention ofthe American Bankers Association, Houston, Tex.,
on the economic plans of the Carter administration
16. Remarks by Assistant Secretary Brill, April 6,1978, before the conference on
"The Midyear Economic Outlook" of the Conference Board, San Francisco, Calif., on economic policies to reduce inflation
17. Statement by Deputy Assistant Secretary Karlik, April 25, 1978, before the
Subcommittee on Intemational Economic Policy and Trade of the House
Committee on Intemational Relations, on the Intemational Investment
Survey Act of 1976
18. Remarks by Secretary Blumenthal, May 8, 1978, before the Financial
Analysts Federation, Bal Harbour, Fla., on capital formation
19. Other Treasury testimony pubhshed in hearings oefore congressional committees
20.

21.
11.
23.
24.
25.

26.
27.

EnaforcemeEBt auBci Operatlosis
Statement by Assistant Secretary Davis, January 31, 1978, before the
Subcommittee on Alcohohsm and Dmg Abuse of the Senate Committee
on Human Resources, conceming warning labels on alcohohc beverage
containers
Statement by Assistant Secretary Davis, April 19, 1978, for Xhe Library of
Congress Fomm, "Terrorism: Information as a Tool for Control"
Statement by Assistant Secretary Davis, May 3, 1978, at the 35th annual
convention of The Wine and Spirits Wholesalers of America, Las Vegas,
Nev., on "Liquor Regulations: Current Issues and Future Options"
Statement by Assistant Secretary Davis, May 4,1978, before the Subcommittee on Crime of the House Judiciary Committee, on proposed firearms
regulations
Press release, June 9, 1978, conceming revocation of ban on melting 1-cent
coins
Statement by Assistant Secretary Davis, July 20, 1978, before the Subcommittee on Courts, Civil Liberties, and the Administration of Justice ofthe
House Committee on the Judiciary, conceming H.R. 214, the Bill of Rights
Procedures Act
Statement by Assistant Secretary Davis, July 25, 1978, before the Subcommittee on Aviation of the House Committee on Pubhc Works and
Transportation, on explosives tagging
Excerpt from statement by Under Secretary Anderson, August 7, 1978,
before the School for Bank Administration, Madison, Wise, entitled "The
Bank Secrecy Act: Challenge for American Banking"




289 >
290 294

297

<
,
x
307

307 '
310

*

313
314
319

'

319
321 t
323
325
330 \

330
335
340

CONTENTS

VII
Page

28. Statement by Assistant Secretary Davis, September 14, 1978, before the
Permanent Subcommittee on Investigations of the Senate Committee on
Govemmental Affairs, on the problem of arson for profit and Treasury's
investigative role
Tax Policy
29. Statement of Secretary Blumenthal, January 30, 1978, before the House
Ways and Means Conimittee, on the President's tax program
30. Statement of Acting Assistant Secretary Lubick, April 7, 1978, before the
House Ways and Means Committee, on integration of the corporate and
individual income tax
31. Statement of Deputy Assistant Secretary Sunley, April 24, 1978, before the
Subcommittee on Taxation and Debt Management of the Senate Finance
Coinmittee, on tax indexing
32. Statement by Deputy Assistant Secretary Sunley, May 22, 1978, before the
Senate Committee on Banking, Housing and Urban Affairs, on tax-based
incomes pohcy
33. Statement of Secretary Blumenthal, June 28, 1978, before the Subcommittee
on Taxation and Debt Management ofthe Senate Finance Committee, on
capital gains taxation
34. Statement by Secretary Blumenthal, August 17, 1978, before the Senate
Finance Committee, on the Revenue Act of 1978

342

344
373
380
386
392
400

Trade and Investment
35. Excerpts from press releases dated October 31, 1977, May 15, 1978, June 22,
1978, and July 14, 1978, respectively, regarding new projects ofthe United
States-Saudi Arabian Joint Commission on Economic Cooperation
36. Remarks by Secretary Blumenthal, November 14, 1977, to the National
Foreign Trade Convention, New York, N.Y., on the foreign trade position
of the United States
37. Remarks by Secretary Blumenthal, November 14, 1977, to the U.S.-U.S.S.R.
Trade and Economic Council, Los Angeles, Calif., on expansion of United
States-Soviet trade and economic relations
38. Remarks by Under Secretary for Monetary Affairs Solomon, December 2,
1977, before the United Steelworkers of America, Washington, D.C, on
the current steel crisis....
39. Excerpt from address by Secretary Blumenthal, Febmary 16, 1978, to the
Puget Sound Chamber of Commerce, Seattle, Wash., entitled "The
Economic Challenge Ahead: A View from Washington, D.C."
40. Excerpt from statement by Assistant Secretary Bergsten, March 20, 1978,
before the Subcommittee on Intemational Finance ofthe Senate Committee on Banking, Housing and Urban Affairs, regarding a 5-year extension
and an increased authon2:ation to $40 billion for the Export-Import Bank...
41. Excerpt from remarks by Secretary Blumenthal, April 21, 1978, before the
U.S.-Arab Chamber of Conmierce, Inc., Intemational Business Conference in Washington, D.C, on United States-Arab economic relations and
cooperation
42. Remarks by Assistant Secretary Bergsten, May 9, 1978, before the BrazilianAmerican Chamber of Commerce, New York, N.Y., entitled "Economic
Relations Between the United States and Brazil: A Focus on Trade"
43. Excerpt from remarks by Assistant Secretary Bergsten, June 20, 1978, before
the French-American Chamber of Commerce, New York, N.Y., entitled
"Trade and Money: The Need for Parallel Progress"
44. Statement by Deputy Assistant Secretary Hufbauer, July 14,1978, before the
Subcommittee on Trade ofthe House Committee on Ways and Means, on
the intemational trade aspects of recent A-300 Airbus and Rolls-Royce
engine sales to U.S. airlines



420
421
425
428
432

433

437
439
444

446

VIII

CONTENTS
Page

45. Excerpt from statement by Assistant Secretary Bergsten, August 1, 1978,
before the Subcommittee on Intemational Trade, investment, and Monetary Pohcy of the House Committee on Banking, Finance and Urban
Affairs, on current issues in intemational trade policy

449

Conunodities and Natural Resources
46. Statement by Assistant Secretary Bergsten, March 9, 1978, before the
Subcommittee on Energy ofthe Joint Economic Committee, on the impact
of higher energy costs on the U.S. balance of payments, and expanded
investment in worldwide energy production
47. Excerpts from remarks by Assistant Secretary Bergsten, April 7, 1978, before
the 1978 Financial Conference ofthe American Mining Congress, Phoenix,
Ariz., entitled "U.S. Commodity Policy: The Integration of Domestic and
Intemational Requirements"
48. Statement by Peputy Assistant Secretary Junz, August 17, 1978, before the
Subcommittee on Oceanography of the House Committee on Merchant
Marine and Fisheries, on the relationship between U.S. international
economic policy and the seabed negotiations at the U.N. Law of the Sea
Conference

451

^

455

^

457

International Monetary Affairs
49. Press release, January 4, 1978, on utilization ofthe Exchange Stabilization
Fund under a swap agreement between the Treasury and the Deutsche
Bundesbank
50. Text of statements by Minister of Economy Gosta Bohman of Sweden,
January 23, 1978, in his capacity as Chairman of the Group of Ten,
released in Stockholm, Sweden, and Under Secretary for Monetary Affairs
Solomon, on G-10 gold arrangements
51. Press release, March 13, 1978, on a joint statement by Secretary Blumenthal
and Minister Matthoefer of the Federal Republic of Germany
52. Statement by Under Secretary for Monetary Affairs Solomon, April 19,T978,
before the Subcommittee on Intemational Trade, Investment, and Monetary Policy of the House Committee on Banking, Currency and Housing,
on H.R. 9066, a bill to place the administrative expenses of the Treasury
in the intemational affairs area on an appropriated basis and to discontinue the funding of those expenses from the ESF
53. Press release, April 19, 1978, announcing the sale ofgold for dollars by the
U.S. Treasury
54. Communique of the Interim Committee of the Board of Govemors of the
Intemational Monetary Fuiid on the Intemational Monetary System,
April 29-30, 1978, issued after its 10th meeting in Mexico City,
Mexico
55. Remarks by Under Secretary for Monetary Affairs Solomon, May 15, 1978,
before the Intemational Herald Tribune/Forex Research Ltd. conference
on "Managing Foreign Exchange Risk," New York, N.Y., entitled "Exchange Market Developments and U.S. Policy"
56. Remarks by Secretary Blumenthal, June 15, 1978, at the Ministerial meeting
of OECD, Paris, France, on shared problems in the economically interdependent world
57. Text of the declaration issued following the meeting of heads of state or
govemment of Canada, the Federal Republic of Germany, France, Italy,
Japan, the United Kingdom of Great Britain and Northem Ireland, and
the United States of America, July 16-17, 1978, in Bonn, West Germany
(official English version)
,
58. Statement by Assistant Secretary Bergsten, July 19, 1978, before the Joint
Economic Committee, entitled "Intemational Economic Policy—Where
We Stand"



460

460
461

462
465

465

469
474

478
482

CONTENTS

IX
Page

^

^

59. Statement by Under Secretary for Monetary Affairs Solomon, July 24, 1978,
before the Subcommittee on Economic Pohcy ofthe Senate Committee on
Foreign Relations, on the role of the dollar and other currencies in the
intemational monetary system
60. Press release, August 22, 1978, entitled "Increase in the Amount of Gold
Sales by the U.S. Treasury"
61. Statement by Assistant Secretary Bergsten, August 25, 1978, before the
Senate Committee on Banking, Housing and Urban Affairs, on the
question of Treasury gold sales and on S. 2843, a bill to provide for the
issuance ofgold medallions by the Treasury
62. Communique of the Interim Committee of the Board of Govemors of the
Intemational Monetary Fund on the Intemational Monetary System,
September 24, 1978, issued after its llth meeting in Washington, D.C...
63. Statement by Secretary Blumenthal as Govemor for the United States,
September 26, 1978, at the joint annual meetings of the Boards of
Govemors of the Intemational Monetary Fund and the Intemational
Bank for Reconstruction and Development and its affihates, Washington,
DC
Developing Nations
64. Remarks by Under Secretary for Monetary Affairs Solomon, December 5,
1977, to the Council of Americas at its XIII Annual Membership Meeting,
New York, N.Y., on Latin America's role in the world economy
65. Remarks by Assistant Secretary Bergsten, Febmary 7, 1978, before the
Intemational Development Conference, Washington, D.C, entitled "The
United States and World Development"
66. Excerpts from statement by Deputy Assistant Secretary Nachmanoff, March
14, 1978, before the Subcommittee on International Development Institutions and Finance of the House Committee on Banking, Finance and
Urban Affairs, on the congressional pohcy directives in Public Law 95-118

487
491

491
503

506

510
515

521

Testimony on Intemational Matters
67. Other Treasury testimony in hearings before congressional committees

527

Organization and Procedure
68. Treasury Department orders relating to organization and procedure

530

INDEX

537

NOTE.—Details of figures may not add to totals because of rounding.
^

The tables to this Annual Report will be published in the separate Statistical Appendix.







Secretary, Depmitty Secretaries, Unader Secretaries, Gemeral CosimseS, Assistant Secretaries,
ffiiiid Treasurer of tlie Usalted States serviMg Im tlie Departmesst ©f tine Treasairy from
• Jamuary 21, 1977, tisroMgla September 3®, 197Si'
Term of service
From
To

Officials

Jan. 23, 1977

W. Michael Blumenthal, Michigan.
Deputy Secretaries:
Mar. 3, 1976 Jan. 23, 1977
George H. Dixon, Minnesota.
May 3, 1977
Robert Carswell, New York.
Unader Secretary for Mosnetary Affalrsi
Mar. 30, 1977
Anthony M. Solomon, Virginia.
Under Secretary (CouMselor):
Mar. 30, 1977
Bette B. Anderson, Georgia.
Gesaeral Counsel;
Aug. 4, 1977
Robert H. Mundheim, Pennsylvania.
Assistant Secretaries:
Apr. 11, 1972 Apr. 28, 1977
Warren F. Brecht, Connecticut.
Feb. 28, 1977 Dec. 7, 1977
Laurence N. Woodworth, Maryland.
Mar. 30, 1977
Gene E. Godley, District of Columbia. 2
Mar. 31, 1977
C Fred Bergsten, New York. 2
Apr. 29, 1977
Roger C Altman, New York.
Apr. 29, 1977
William J. Beckham, Jr., Michigan.,
Apr. 29, 1977
Joseph Laitin, Maryland.
May 16, 1977
Darnel H. Brill, Maryland.
Jan. 30, 1978
Richard J. Davis, New York.
June 26, 1978
Donald C Lubick, Maryland.
July 29, 1975 Dec. 31, 1977
July 5, 1978
Aug. 3, 1977

David Mosso, Virginia.
Paul H. Taylor, Maryland.
Treasurer of tlie Umted States:
Azie T. Morton, Virginia.

• For officials from Sept. 11, 1789, to Jan. 20, 1977, see exhibit 62, 1977 Annual Report.
2 Act of May 18, 1972, provided for two Deputy Under Secretaries, to be designated Assistant Secretari^ by the President as
desired.




XI

PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS OF THE
DEPARTMENT OF THE TREASURY AS OF SEPTEMBER 30, 1978
Secretary of the Treasury
Deputy Secretary of the Treasury
Under Secretary for Monetary Affairs
Under Secretary
General Counsel
Office, Secretary of the Treasury:
Executive Assistant to the Secretary
Executive Assistant to the Secretary
Confidential Assistant to the Secretary
Office, Deputy Secretary of the Treasury:
Inspector General
Executive Assistant to the Deputy Secretary
Executive Secretary
Deputy Executive Secretary
Special Assistant to the secretary (National
Security)
Office, Under Secretary for Monetary Affairs:
Assistant Secretary (Intemational Affairs)
Deputy Assistant Secretary for Trade and Investment Policy
Deputy Assistant Secretary for Commodities
and Natural Resources
Deputy Assistant Secretary for International
Monetary Affairs
Deputy Assistant Secretary for Developing Nations
Deputy to the Assistant Secretary for Saudi
Arabian Affairs
Deputy to the Assistant Secretary and Secretary
of IMG (Intemational Monetary Group)
Inspector General
;
Fiscal Assistant Secretary
Deputy Fiscal Assistant Secretary
Assistant Fiscal Assistant Secretary (Banking)
Assistant Fiscal Assistant Secretary (Financing)
Assistant Fiscal Assistant Secretary
Office, Under Secretary:
Special Assistant to the Under Secretary
Assistant Secretary (Administration)
Deputy Assistant Secretary (Administration)...
Director, Office of Admimstrative Programs...
Director, Office of Audit
Director, Office of Budget and Program Analysis
Director, Office of Computer Science
Director, Office of EqualOpportunity Program
Director, Office of Management and Organization
Director, Office of Personnel
XII




W. Michael Blumenthal
Robert Carswell
Anthony M. Solomon
Bette B. Anderson
Robert H. Mundheim
Curtis A. Hessler
Richard W. Fisher
Lisa Astudillo
Leon Wigrizer
David W! Heleniak
(Vacancy)
Steven L. Skancke
J. Foster Collins
C Fred Bergsten
Gary C Hufbauer
Helen B. Junz
F. Lisle Widman
Arnold Nachmanoff
Lewis W. Bowden
George H. Wilhs
Weir M. Brown
Paul H. Taylor
(Vacancy)
John A. Kilcoyne
Philip J. Fitzpatrick
Lester W. Plumly
Faye P. Hewlett
Wilham J. Beckham, Jr.
Patricia M. Harvey
Robert R. Fredlund
Wilbur R. DeZeme
Arthur D. Kallen
Francis A. McDonough
David A. Sawyer
J. Elton Greenlee
Morris A. Simms

PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS

Assistant Secretary (Enforcement and Operations).
Deputy Assistant Secretary (Operations)
Deputy (Regulatory and Trade Affairs)...
Director, Office of Operations
Deputy Assistant Secretary (Enforcement)
Director, Foreign Assets Control

XIII

Richard J. Davis
Wilham T. Archey
Stephen M. Creskoff
John W. Mangels (acting)
Arthur Sinai
Stanley L. Sommerfield (acting)
Director, Interpol (National Central Bureau).. Louis B. Sims
Treasurer ofthe United States
Azie T. Morton
Assistant to the Treasurer ofthe United States... Joan T. Thomell
Office, General Counsel:
Deputy General Counsel
Henry C Stockell, Jr.
Assistant General Counsel and Chief Counsel,
Internal Revenue Service
Stuart E. Seigel
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
Deputy to the General Counsel for Tariff Affairs... Peter D. Ehrenhaft
Assistant Secretary (Tax Pohcy)
Donald C Lubick
Deputy Assistant Secretary (Tax Pohcy)
Daniel I. Halperin
Deputy Assistant Secretary (Tax Policy) (Tax
Analysis)
Emil M. Sunley
Associate Director, Office of Tax Analysis
Harvey Galper
Tax Legislative Counsel
John M. Samuels
Intemational Tax Counsel
H. David Rosenbloom
Director, Office of Industrial Economics
Karl Ruhe
Assistant Secretary (Legislative Affairs)
Gene E. Godley
Deputy Assistant Secretary (Legislative Affairs)
Lawrence M. Baskir
Deputy Assistant Secretary (Legislative Affairs)
Colbert I. King
Special Assistant to Assistant Secretary
B. Alexander Kress
Special Assistant to Assistant Secretary
Lawrence F. O'Brien III
Special Assistant to Assistant Secretary
Leshe J. BanAssistant Secretary (Economic Policy)
Daniel H. Brill
Deputy Assistant Secretary for Domestic Economic
Analysis
Beatrice N. Vaccara
Director, Office of Financial Analysis
John H. Auten
Deputy Assistant Secretary for Intemational Economic Analysis
John R. Karlik
Assistant Secretary (Domestic Finance)
Roger C Altman
Deputy Assistant Secretary for Capital Markets
Policy
Stephen J. Friedman
Director, Office of Securities Markets Policy... (Vacancy)
Director, Office of Capital Markets Legislation. Gordon Eastbum
Deputy Assistant Secretary for State and Local
Finance
Donald H. Haider
Director, Office of Municipal Finance
(Vacancy)
Director, Office of New York Finance
John J. McLaughlin
Deputy Assistant Secretary (Debt Management).... Richard M. Kelly
Senior Adviser (Debt Research)
Edward P. Snyder
Director, Office of Govemment Financing
Francis X. Cavanaugh
Director, Office of Market Analysis ana Agency
Finance
Roland H. Cook
Director, Office of Revenue Sharing
Bemadine N. Denning
Assistant Secretary (Public Affairs)
Joseph Laitin
Deputy Assistant Secretary
Everard Munsey



XIV

.

P R I N C I P A L ADMINISTRATIVE A N D STAFF OFFICERS
BUREAU OF ALCOHOL, TOBACCO AND FIREARMS

Director
Deputy Director
Assistant Director
Assistant Director
Assistant Director
Assistant Director
Assistant Director
Chief Counsel

(Vacancy)
John G. Krogman
(Administration)
William J. Rnodes
(Criminal Enforcement)
Miles Keathley
(Inspection)
Jarvis L. Brewer
(Regulatory Enforcement)
Stephen E. Higgins
(Technical and Scientific Services).... Michael Hoffman
Marvin J. Dessler
OFFICE OF THE COMPTROLLER OF THE CURRENCY

Comptroller ofthe Currency
First Deputy Comptroller
Deputy Comptroller for Operations
Deputy Comptroller for Policy Planning
:
Deputy Comptroller for Bank Supervision
Deputy Comptroller (Special Surveillance)
Deputy Comptroller for Administration
Deputy Comptroller for Specialized Examinations
Deputy Comptroller (Research and Economic Programs)
Deputy Comptroller for Interagency Coordination
Chief National Bank Examiner
Special Assistant to the Comptroller...
Special Assistant to the Comptroller
Special Assistant to the Comptroller (Congressional Affairs)
Special Assistant to the Comptroller (Communications)
Associate Deputy Comptroller—Bank Organization and
Structure
Associate Deputy Comptroller (Consumer Programs)....
Director, Customer ana Community Programs

John G. Heimann
(Vacancy)
H. Joe Selby
Cantwell Muckenfuss
Paul M. Homan
(Vacancy)
James T. Keefe
Dean E. Miller
(Vacancy)
David C Motter
Charles B. Hall
Charles Van Hom
Stuart Gordon
Donald A. Melbye
Samuel Kaplan
(Vacancy)
Thomas W. Taylor
Jo Aim Barefoot

BUREAU OF ENGRAVING AND PRINTING

Director
Deputy Director
Assistant Director (Administration)
Assistant Director (Operations)
Assistant Director (Research and Engineering)

Seymour Berry
Everett J. Prescott
(Vacancy)
Sadie Mitchell (acting)
(Vacancy)

FEDERAL LAW ENFORCEMENT TRAINING CENTER

Director
Deputy Director
Associate Director for Administration
Associate Director for Training
Assistant Director (Criminal Investigator Training Division)
,
Assistant Director (Police Training Division)
Assistant Director (Special Training Division)
Assistant Director (Washington Liaison Office)

Arthur F. Brandstatter
(Vacan^)
David w. McKinley
Dale C Mitchum
Wilham H. McClarin
Alvin C Tumer
Robert T. Lacey
John C Dooher

BUREAU OF GOVERNMENT FINANCIAL OPERATIONS

Commissioner
Deputy Commissioner
Assistant Commissioner, Administration
Assistant Commissioner, Banking and Cash Management
Assistant Commissioner, Comptroller
Assistant Commissioner, Disbursements and Claims
Assistant Commissioner, Govemment-wide Accounting



Dario A. Paghai
Gerald Murphy
George L. McConville
Lloyd L. Morgan
Steve L. Comings
Michael D. Serlin
John O. Tumer

P R I N C I P A L ADMINISTRATIVE A N D STAFF OFFICERS
INTERNAL REVENUE SERVICE

Commissioner
Deputy Commissioner
Assistant Commissioner (Taxpayer Service and Retums
Processing)
Assistant Commissioner (Resources Management)
Assistant Commissioner (Comphance)
Assistant Commissioner (Employee Plans and Exempt
Organizations)
Assistant Commissioner (Inspection)
Assistant Commissioner (Planning and Research)
Assistant Commissioner (Technical)
Assistant Commissioner (Data Services)
Chief Counsel

Jerome Kurtz
William E. Williams
James I. Owens
Joseph T. Davis
Singleton B. Wolfe
Sidney A. Winbome
(Vacancy)
Anita F. Alpem
John L. Witners
Donald J. Porter
Stuart E. Seigel

BUREAU OF THE MINT

Director
Assistant Director for Administration
Assistant Director for Marketing and Statistical Services.
Assistant Director for Production
Assistant Director for Technology
Assistant Director for Personnel.

Stella B. Hackel
Chadwick B. Pierce
Francis B. Frere
George G. Ambrose
Alan J. Goldman
James J. Mulcahy

BUREAU OF THE PUBLIC DEBT

Commissioner
Deputy Commissioner
Assistant Commissioner (Washington)
Assistant Commissioner (Field)
Chief Counsel

Hubert J. Hintgen
Wilham M. Gregg
Kenneth W. Ram
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 (Intemal Affairs)
Assistant Commissioner (Enforcement Support)
Chief Counsel

Robert Chasen
G. R Dickerson
Vemon V. Harm
Leonard Lehman
Jack Lacy
George C Corcoran, Jr.
Perry Martin (acting)
Alfred R DeAngelus
Thaddeus Rojek

UNITED STATES SAVINGS BONDS DIVISION

National Director
Deputy National Director
Director of Sales
Director of Advertising and Promotion

Azie T. Morton
Jesse L. Adams, Jr.
Walter R. Niles
Louis F. Perrinello

UNITED STATES SECRET SERVICE

Director
Deputy Director
Assistant Director
Assistant Director
Assistant Director
Assistant Director
Assistant Director

(Protective Research)
(Investigations)
(Protective Operations)
(Inspection)
(Administration)




H. Stuart Knight
Lilbum E. Boggs
Myron I. Weinstein
James T. Burke
Robert E. Powis
Amold J. Lau
Francis A. Long

XV




ORGANIZATION OF THE DEPARTMENT OF THE TREASURY
SECRETARY
• DEPUTY SECRETARY

UNDER SECRETARY
FOR MONETARY
AFFAIRS

UNDER SECRETARY

ComptraDer of

Assistant SecrstarY

Assistant Secretary

the Currency

(Legislative Affairs)

Deputy Asst. Sec.

Deputy Asst. Sec.

for Domestic

for Debt

Econ. Poficy

Management

Deputy Asst Sec.
for Capital
Markets Policy

Deputy Asst. Sec.

Deputy Asst. Sec.
for Developing

Bureau of
Government
financial

Legal Division

Otfice ol
Administrative
Programs

• Dffice of Director
of Practice

Deputy AssL Sec
for Trade and
Policy

Deputy Asst. Sec.

Bureau of Alcohol,

fot Intemational

for State and

Tobacco and

Econ. Analysis

Local Finance

firearms

Officeof
Revenue Sharing

Officeof
Equal Opportunity
Program

Office of
Industrial
Economics

^ s t . (^missioner
ITaipayer Service
and Retums




Deputy to the
Asst Sec and Sec
of tha Intemational
Monetary Group

Officeof
Management and
Organization

Federal
Law Enforcement
Training Center

Inspector General

Officeof

for Intemational
finance

Foreign Assets

'

NOTE: Dotted Ene encloses officials serviced by ttte Executive Secretariat

Control




This introduction reviews developments which affected areas of Treasury interest and responsibility during fiscal 1978. Only major domestic and
international developments are covered since detailed information on the
operating and administrative activities of the Department is provided in
the body of the report. Statistical information is presented in the separate
Statistical Appendix.

Tine Economic ExpanisioE
The economic upswing which began at the end of the first quarter of
.1975 continued through fiscal 1978. The pace of growth moderated somewhat during the course of the year, and the expansion remained remarkably well balanced although inflationary pressures did intensify. The level
of economic activity (measured in terms of real GNP) at the close of fiscal 1978 was up 3.5 percent from a year earlier. A 5.3-percent increase
had been recorded during fiscal 1977. During 1978, the pace of growth
was interrupted in the first quarter of calendar 1978 by severe winter
weather and a lengthy coal strike, but the economy rebounded during the
following quarter. In the final quarter of the fiscal year real GNP registered an annua! growth rate of 2.6 percent, somewhat below the average
growth rate for the year but definitely not a cause for concern. The Department of Commerce estimated that if the strike and weather effects are
set aside, real GNP probably would have increased at about a 3Vi-percent
annual rate in each of the three quarters of calendar 1978. This was a
remarkably steady and satisfactory pace for such an advanced stage of
the economic expansion.
During the course of the fiscal year, economic policy began to shift
from the promotion of rapid rates of real growth toward the control of
inflation. This resulted in large part from two developments. First, the
decline in the rate of unemployment was much more rapid than expected
during the first half of the fiscal year and this was combined with a very
slow rate of advance in productivity which, in turn, added to cost pressures. Second, the economy began to move into a zone of high utilization
within which demand pressures were more easily translated into rising
prices. The result was a relatively unsatisfactory price performance which
acted adversely on the value of the dollar abroad. By the close of the
fiscal year, control of inflation became the primary economic policy
objective of the administration in recognition of the fact that accelerating
rates of inflation would imperil the continuation of the expansion itself
and would further undermine the foreign exchange value of the dollar.
Employment continued to register strong gains during the year which
even outpaced the exceptionally large increases in the labor force. Total




XIX

XX

1978 REPORT OF THE SECRETARY OF THE TREASURY

employment increased by 3.8 million persons (4.2 percent) from September to September, significantly faster than the increase of 3.2 million persons (3.2 percent) in the labor force. The consequence of this rapid rate
was a drop in the unemployment rate from 6.8 percent at the beginning of
the fiscal year to 5.9 percent at the end. Most of the improvement in the
unemployment rate occurred during the first half of the fiscal year. After
April of 1978, the overall rate generally remained in the vicinity of 6.0
percent but did go as low as 5.8 percent for one month (June).
The improvements in the unemployment picture affected all labor force
groups more or less equally in fiscal 1978, somewhat in contrast with the
previous year. For adult men, the unemployment rate dropped from 4.7
percent to 4.1 percent from September 1977 to September 1978, while the
corresponding figure for adult women was a drop from 6.9 to 5.9 percent
and for teenagers a drop from 18.3 to 16.3 percent. In the previous fiscal
year, adult women had experienced a decline in the unemployment rate
only half as large as that for adult males. While the rate for teenagers
declined somewhat in fiscal 1978, the absolute number of unemployed
teenagers remained relatively constant.
Personal consumption spending was a key element in the economic
developments of fiscal 1978. In a pattern reminiscent of the cold-weatherrelated stop-and-go movements of a year earlier, retail sales sagged during
the first quarter of calendar 1978, recovered briskly, and then entered a
period of relatively slow growth which continued until fall. The weakness
in retail sales at the end of the fiscal year occurred in conjunction with a
relatively low personal saving rate (5.2 percent) and some tightening in
credit conditions, as reflected primarily in rising interest rates. The latter
development was potentially important since it appeared that some consumption spending during the year had been financed by converting equity
in existing homes into cash and this source of funds was presumably
being made less attractive by rising interest rates. However, there was
very little direct evidence that any seriously restraining effect on consumption spending was being exerted through this or other avenues. The
ratio of consumer debt repayments to disposable income moved up during
the fiscal year, but demographic and other factors have probably been
raising the level of what constitutes an acceptable debt ratio for consumers. Therefore, the fiscal year closed without any obvious signs of weakness in the consumer spending picture.
Investment also played a key role in the economic developments which
occurred during fiscal 1978. Nonresidential fixed investment in real terms
increased at about a 4-percent annual rate in three out of the four quarters of the fiscal year. The second quarter of 1978 was the exception,
however, and it witnessed a sharp jump in investment spending, particularly for nonresidential structures. The second quarter 1978 increase contributed substantially to the increase of 8.3 percent recorded for the fiscal
year as a whole. Residential investment, on the other hand, stabilized at a



INTRODUCTION

XXI

high level but did not provide much further net contribution to real
growth, rising by only 1.5 percent for the year as a whole and posting
small declines in the first and third quarters of calendar 1978.
The important fact was that the high levels of activity in the homebuilding industry which had been reached by the end of fiscal 1977 were
essentially maintained in fiscal 1978, despite rising interest rates. This was
accomplished, in large part, by the regulatory authorities allowing thrift
institutions to issue money market certificates with yields geared to the 6month Treasury bill rate. Inflows into thrift institutions were well maintained and mortgage lending continued at high levels. This was in marked
contrast to earlier postwar experience when monetary restraint and high
interest rates led to sharp contractions in mortgage lending and residential
construction activity.
Business inventories were relatively stable over the course of the fiscal
year and reflected the somewhat cautious behavior evident in this area
after the inventory corrections of the beginning of fiscal 1977. In manufacturing, inventories came under increasingly tight control as evidenced
by the steadily declining inventory-sales ratios for most industries. At the
retail level, the only significant aberration was in the early cold-weatherrelated months and the inventory-sales ratio was little different from a
year earlier as fiscal 1978 drew to a close. Wholesale inventories were
only slightly tighter at the end of the fiscal year than they were at the beginning and also showed unusual stability during the period. Inventorysales ratios in some general merchandising levels were relatively high by
historical standards at the close of the fiscal year, but this was the exception, with most industries holding very low inventories relative to sales.
The absence of inventory imbalance was a favorable development, suggesting that the expansion might well continue, rather than move into a
recessionary phase. Indeed, by the close of the fiscal year, there were
few signs that the expansion was running into its late stages. Growth had
moderated but few of the traditional signs of cyclical imbalance had
emerged. The main flaw in economic performance was an excessively
high rate of inflation.
Inflation
The need to control inflation became an increasingly urgent task during
fiscal 1978. At the beginning of the fiscal year, the Consumer Price Index
for all urban workers was increasing at an annual rate slightly under 5
percent, a rate which represented substantial improvement from only 6
months earlier.
Following the fiscal 1977 pattern, however, prices again accelerated until mid-1978, when once again a moderating phase set in. Before the moderation occurred, however, the inflation rate had accelerated to a doubledigit pace, reaching 11.4 percent (annual rate) for the 3 months ending in
June. In the final quarter of the fiscal year the rate eased to 7.8 percent.



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1978 REPORT OF THE SECRETARY OF THE TREASURY

Also in a replay of 1977, the driving forces of the monthly price movements were concentrated in the behavior of food prices, and to a lesser
extent in energy and services. Producer prices tended to exhibit somewhat the same pattern for the year except that both the acceleration and
deceleration turning points in the index tended to occur a few months in
advance of the equivalent movements in the Consumer Price Index. At
the producer level, food prices were again the major contributor to the
volatility of the quarter-to-quarter changes.
The behavior of industrial prices at the close of the fiscal year suggested that the recently observed moderation in price performance might
prove to be short lived. Crude materials prices declined for 2 of the 3
months of the fina! quarter of fiscal 1978, but the final month recorded a
1.6-percent monthly rate of increase. The disturbing element here was
that the earlier declines were largely due to decreasing prices of foodstuffs and feeds while the prices of other crude items continued showing a
definite tendency to accelerate, a tendency which had been evident for
several months.
Productivity in the private business sector was virtually unchanged in
the final quarter of fiscal 1978 from the level which had prevailed a year
earlier. Within the year the quarterly pattern was quite erratic, reflecting
the influence of severe weather and the coal strike on the economy during
the first half of calendar 1978.'Increases in compensation per man-hour
accelerated from the already rapid pace of fiscal 1977, going up at an
annual rate of 9.3 percent for fiscal 1978. The net result of the productivity and compensation movements was a rapid acceleration in unit labor
costs, which went up at a worrisome 9.1 percent for the year. Thus inflation which had been a major problem in fiscal 1977 became the most critical economic issue as fiscal 1978 drew to a close. Significant improvement
on the price front was imperative to prevent distortions in consumption,
saving, and investment patterns. Furthermore, the absence of progress in
controlling inflation at home was beginning to undercut the dollar abroad.

Tlie Bedget aed Fiscai DevelopiMeMts
The budget estimates for fiscal 1978 presented in January 1978 called
for outlays of $462.2 billion and revenues of $400.4 billion, leaving a deficit of $61.8 billion. Outlays for the fiscal year actually turned out to be
$450.8 billion and receipts $402 billion, producing a deficit of $48.8 billion.
The major reason for the difference between the expected and realized
budgetary outlays was the continued occurrence of outlay underruns.
Much of the shortfall which occurred in the actual outlays figure was evident by the middle of calendar 1978. By that time it was becoming increasingly clear that as a result of accelerating inflationary pressures a
shift in fiscal stance was in order and steps were not taken to combat or
offset these shortfalls.



INTRODUCTION

XXIII

The slight addition to budgeted revenues in fiscal 1978 reflected legislative changes and higher receipts under existing tax statutes. Congressional
action brought about slightly higher individual and corporate income taxes
which were only partly offset by lower excise taxes. These changes accounted for about half of the gain in receipts compared with the January
estimates, while higher receipts under existing legislation accounted for
the other half.
Off-budget net outlays for fiscal 1978 were also somewhat lower than
had been anticipated. In the January budget submission such outlays were
expected to amount to $11.5 billion, including an offset of net revenues
amounting to $78 million from the Exchange Stabilization Fund which,
beginning in July, became a budget item (meaning, for comparison purposes, the January off-budget estimate should have been considered to be
$11.6 billion). In the midsession review issued on July 1, off-budget outlays were estimated to amount to $11 billion. At the conclusion of fiscal
1978, total off-budget outlays were reported to have been $10.3 billion,
with most of the decline from expectations attributable to a shift by the
Postal Service from an expected deficit in excess of $800 million to a net
revenue position just slightly below $500 million.
Doinestic Finances
The financing of the record volume of funds raised in the financial markets in fiscal 1978 was facilitated by substantial inflows of funds to depository institutions, assisted by the introduction of the new money market
certificates on June 1, 1978. These permitted savings and loan associations, mutual savings banks, and commercial banks to offer higher yields
on 6-month certificates based on the yield on 6-month Treasury bills.
Some $37 billion of these certificates were outstanding at the close of the
fiscal year. The successful introduction of these certificates helped maintain the flow of funds into mortgage markets and supported a high level of
residential construction activity.
Total funds raised aggregated some $453 billion during the fiscal year,
up about 19 percent from $380 billion in fiscal 1977. Business—nonfinancial and financial institutions—moved into first place as the largest borrowing sector. Its borrowings increased by 32 percent, rising from $129
billion in fiscal 1977 to $170 billion in fiscal 1978, with the increase accounting for about 56 percent of the higher total borrowings. The nonfinancial corporate portion of the business sector raised about $91 billion,
up from $71 billion in fiscal 1977, as the margin between corporate capital
expenditures and internally generated funds widened. The greater share of
the increase in corporate debt—about 57 percent—was funded at long
term. Households, which had been the largest borrowing sector in fiscal
1977, raised $151 billion during fiscal 1978, for an increase of 13!^ percent. Home mortgages accounted for nearly two-thirds of household borrowing and consumer credit for nearly one-third, with other borrowings



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1978 REPORT OF THE SECRETARY OF THE TREASURY

relatively small. Federal Government (Treasury) borrowings accounted
for a slightly smaller percentage (13 percent) than in the year before, but
a substantial rise in Federal agency borrowings resulted in a slight increase in the share of the Federal sector (including Federal agencies) in
total borrowings. State and local government net borrowing, on the other
hand, virtually leveled off, at about $25 billion.
The large volume of funds was raised in an environment of rising interest rates and some shift toward monetary restraint. Credit became more
expensive during the course of the fiscal year but remained readily available. As is typical of periods of strong credit demand, the potential gap
between funds raised and supplied was bridged by an increase in direct
household purchases of market securities induced by rising interest rates.
Thus, even though the ratio of financial intermediation to total funds
raised declined from the levels of the previous 2 years, the credit markets
functioned smoothly.
Short-term money market rates increased over the 12-month period,
with most of the rise occurring in the second half of the year. By late
September 1978, private short-term interest rates had climbed by 2 to 2Vi
percentage points to levels of SVi to 8% percent, not seen in nearly 4
years. The prime lending rate to corporate borrowers at commercial banks
rose from IV2 percent to 9% percent during the fiscal year. In the capital
markets, yields on Treasury coupon issues and on corporate bonds
climbed over most of the fiscal year, but dipped slightly towards the end.
Intermediate-term issues rose about Wi points over the fiscal year as a
whole, while longer term Treasury and corporate bonds rose about 1
point. Municipal bond yields, on the other hand, adyanced only about
one-half of a percentage point. Even so, by the end of the fiscal year, all
long-term yields were generally high by historical standards.
Federal Reserve policy moved in a restraining direction during fiscal
1978. The discount rate was raised in six steps from 5% percent to 8 percent by the end of the fiscal year. Federal funds, which had been trading
close to 6 percent at the end of fiscal 1977, rose to the SYs range by the
end of fiscal 1978. Restraint was not as clearly reflected in the behavior of
the monetary aggregates. The money supply on a narrow definition, consisting of currency and demand deposits ( M - 1 ) , rose by 8.4 percent during
the fiscal year, up slightly from 8.2 percent in fiscal 1977. On a slightly
broader definition, including time deposits at commercial banks other than
large certificates of deposit ( M - 2 ) , the rise was 8.5 percent, down from
nearly 11 percent in fiscal 1977.
Federal financing proceeded smoothly during the course of the fiscal
year. Treasury net cash borrowing (excluding Government account transactions) totaled $60.2 billion, up from $54.8 billion in fiscal 1977. The bulk
of Treasury financing was done in the intermediate area, with only a slight
expansion over the period in Treasury bills outstanding in the market, following a net paydown of bills in fiscal 1977. A high priority continued to



INTRODUCTION

XXV

be placed upon the issuance of longer term notes and bonds. As a result,
the average length of the privately held marketable debt was increased
from 2 years 11 months at the beginning of the fiscal year to 3 years 3
months at the end.
Of the $60 billion increase in public debt securities held by the public
during the fiscal year, the Federal Reserve banks absorbed $11.6 billion.
(Publicly held securities include nonmarketable issues as well as the market financing discussed above.) Commercial banks reduced their holdings
by about $2.8 billion in the face of strong loan demand—a usual adjustment during a cyclical expansion. Household net purchases equaled $15.6
billion, of which savings bonds held by individuals accounted for $4^/^ billion. State and local holdings rose about $15 billion, in large part reflecting
special nonmarketable issues, and foreign and international issues rose
$26.3 billion. Corporations reduced their holdings by $6.7 billion, and
nonbank financial and other investors increased theirs by $1 billion.
Taxation Developments
Tax policy developments reflected tax proposals to reduce tax burdens
and provide economic stimulus coupled with tax reform to make the tax
system fairer. Social security, energy, and urban matters were also reflected in tax policy.
In January 1978, President Carter proposed a $25 billion net tax reduction program for fiscal 1979. It provided for a gross reduction of $30.4 billion in fiscal 1979 offset, in part, by tax reform that would have increased
tax liabilities by $5.4 billion.
The proposal also included: (1) Net cut, in individual income tax liabilities of $18.3 billion, comprising gross cuts of $22.6 billion and tax-raising
reforms of $4.3 billion; (2) net business income tax cuts of $5.1 billion,
reflecting gross tax cuts of $6.3 billion combined with $1.2 billion of reform; and (3) cuts in excise taxes and payroll taxes of $1.6 billion in fiscal
1979.
In May 1978, the administration trimmed the proposed tax cut from $25
billion in fiscal 1979 to $14.3 billion. The administration recognized that
economic conditions had changed substantially since January 1978 and
there was a need to get a better balance between monetary and fiscal policy. Inflationary pressures were mounting; employment was increasing, the
unemployment rate was falling. Under these circumstances, a smaller
budget deficit in fiscal 1979 was appropriate.
Congress gave immediate consideration to the President's proposals but
had not enacted a tax program by the close of the fiscal year.
In March 1978, the administration proposed several tax incentives related to urban policy: An employment tax credit for the hiring of young and
handicapped persons to replace the existing ''new jobs" credit and an
additional investment credit for certain investments made in distressed
areas. "Small issue" industrial development bonds were to be limited to



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1978 REPORT OF THE SECRETARY OF THE TREASURY

distressed areas but the dollar limit on an issue increased. No final congressional action had been taken by the end of the fiscal year.
Acting on the President's proposals of May 1977 to resolve both shortand long-term financing problems in the social security system. Congress
passed and the President signed on December 20, 1977, the Social Security Amendments of 1977. The amendments included the President's recommendation to correct a serious inflation-indexing flaw and to change the
relationship of the self-employment tax rate to the employee rate.
Subsequent to the approval of the 1977 amendments and during congressional consideration of the President's 1978 tax program, various legislative efforts were made to modify or reduce the social security tax increases in the 1977 act. These actions were opposed by the administration, and the Congress did not approve any change.
The Congress continued to consider President Carter's comprehensive
long-term national energy program proposed in April 1977 which included
a number of tax penalty and tax incentive recommendations. At the close
of the fiscal year, congressional consideration of these proposals and alternatives was proceeding with the nature of the eventual legislative outcome in doubt.

INTERNATIONAL DEVELOPMENTS
InternationaB Cooperation on Paynients Problems
The central feature in the international monetary and payments sphere
was the recurrent periods of pressure on dollar exchange rates that were
associated with the continuing imbalances in international payments.
Overall payments surpluses were especially prominent in Japan, Germany, and Switzerland, while the United States, Canada, and a number of
other countries were in deficit. The recurrent periods of strain in the exchange market led to appreciation of the currencies of surplus countries in
terms of the dollar. At times the exchange markets became nervous, uncertain, and disorderly, leading to substantial purchases of dollars by foreign
central banks.
In the month of October 1978, in particular, very heavy sales of dollars
took place, leading to rapid declines in dollar exchange rates against major currencies that were exaggerated by a seriously deteriorating market
psychology. This situation was met by an important series of actions culminating in the announcements made by the President, the Treasury, and
the Federal Reserve System on November 1, 1978. U.S. monetary policy
was tightened, and major foreign exchange resources were arranged to
finance participation by U.S. authorities in internationally coordinated
market intervention. These announcements were followed by a rise in dollar exchange rates and by more balanced and orderly exchange market
conditions.



INTRODUCTION

XXVII

Faced with the problems presented by these imbalances of payments,
the United States and the major industrial nations took action during the
year along three broad and interrelated lines of approach.
The first of these three aspects was a series of policy measures of fundamental importance taken by the United States to deal with underlying
economic factors that exerted a powerful influence on both the external
and internal value of the dollar. In the sphere of energy, the Congress,
after long and arduous deliberations, enacted an energy bill, designed to
reduce dependence on imports of oil by an amount estimated at up to
500,000 barrels per day from the level otherwise expected, as early as 1979,
with further import reductions in later years. These reductions would decrease the anticipated deficit in the current accounts and thus contribute to
correcting the imbalance in world payments.
As the year progressed, and output and employment continued to advance closer to the economy's potential, prices began to move upward in
the United States, with consumer prices rising at an annual rate of 8.0
percent in July-September 1978, as against 6.7 percent a year earlier. By
contrast, in Germany and Japan, consumer prices were rising only about
21^ and 4 percent, respectively, in the third quarter of 1978, and the rate
of growth had been declining during the year. Slower growth relative to
potential in those countries was considered to be one factor in their divergence from U.S. price behavior, which contributed to the strength of
their currencies vis-a-vis the dollar in the exchange market.
To cope with the resurgent inflationary pressures, fiscal policy in the
United States was modified during the year, resulting in a budget deficit
estimated at $33.2 billion for fiscal 1979, as compared with $48.8 billion
in fiscal 1978. For fiscal 1980, the President has proposed that the deficit
be reduced to $29 billion. This is roughly 1 percent of gross national product, and it compares with a deficit of $66 billion in fiscal 1976, which was
about 4 percent of gross national product.
Monetary policy also became progressively more restrictive during the
year, with the average Federal funds rate rising from 5.82 percent in the
third quarter of 1977 to 8.45 percent in September 1978 and later to 9%
percent or more after the Federal Reserve's discount rate was raised from
SV2 to 9V^ percent on November 1, 1978. Some reserve requirements were
also tightened at that time. The uncovered margin between short-term dollar rates and German and Japanese rates widened markedly, providing an
interest incentive to international investors.
In October 1978, the President announced a broad, tough, and determined anti-inflation program designed to slow down the rate of change in
wages and prices.
To promote exports, the President also announced on September 26,
1978, a series of measures committing the administration to placing a
higher priority on exports. Congress will be asked to increase the loan
authorization of the Export-Import Bank; intensified efforts were an


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1978 REPORT OF THE SECRETARY OF THE TREASURY

nounced to reduce domestic governmental barriers to U.S. sales abroad;
and the Treasury was directed to negotiate more effective international
arrangements to restrain excessive subsidies through export credit procedures.
The second of the three broad approaches to the problem of international imbalance was encouragement of policy measures that would stimulate domestic-led economic growth in the major surplus countries. Responding to international consultations, including meetings of Ministers
and heads of government, Germany and Japan adopted programs designed
to maintain or expand rates of growth, and thus to reduce their excessively large trade and current account surpluses. Comparing the third quarter
of 1978 with the third quarter of 1977, the German rate of real growth had
risen from about 2 percent per annum to 4 percent, but the Japanese rate
had advanced only from about SVi percent to nearly 6 percent.
The appreciation of the currencies of these countries, together with
their increased growth rates, began to have an impact on physical volumes of exports and imports of Germany, Japan, and Switzerland in 1978.
However, dollar prices of exports rose more rapidly than dollar prices for
imports, including oil, and this caused the combined current account surpluses of these three countries, in dollar terms, to rise from about $18 billion in calendar 1977 to an estimated $30 billion in calendar 1978.
From a longer term perspective, compound annual rates of real economic growth in the decade 1962-72 were substantially higher in other
industrial countries than the figure of 3.9 percent for the United States.
Corresponding figures were 10.3 percent in Japan, 5.5 percent in Canada,
and 4.5 percent in industrial European countries. In 1977, by contrast,
foreign growth rates on average were well below the U.S. figure of 4.9
percent. Corresponding figures were 5.3 percent in Japan, 2.7 percent in
Canada, and 2.1 percent in European industrial countries in that year.
This sizable shift in relative economic progress had affected the U.S.
trade position adversely in 1977. The movement towards a narrower divergence in real growth rates that has occurred in 1978, and that is expected to continue in 1979, should over time have a favorable impact on the
trade and current account positions.
In the nonoil developing countries, the growth in output was relatively
well sustained at about 5 percent in both 1976-77 and 1977-78, a level
somewhat higher than in the major industrial countries.
The third major line of approach to international cooperation in correcting imbalances was the response to disturbed and increasingly disorderly
market conditions through evolving intervention policies. During the year,
U.S. intervention became more forceful as market conditions changed.
At the beginning of the fiscal year, the dollar encountered generalized
and continuing selling pressure in increasingly unsettled foreign exchange
market conditions. These conditions reflected, in particular, the sharply
rising U.S. trade deficit, the delays in completion of U.S. energy legislation, and concerns that growth rates among major industrialized nations



INTRODUCTION

XXIX

would not soon converge. In January 1978, the Treasury began to use the
Exchange Stabilization Fund actively, along with the resources of the
Federal Reserve System, in foreign exchange market operations. Treasury
operations were financed by drawings of German marks against a swap
agreement concluded with the Bundesbank on January 4, 1978.
In March, Secretary Blumenthal and the German Finance Minister reaffirmed that forceful action would be continued to counter disorderly market conditions. In this connection, in order to provide further foreign currency resources if needed, the Treasury announced that arrangements had
been made for the sale of SDR 600 million to purchase German marks,
that the United States was prepared to draw against its reserve position in
the International Monetary Fund, and that the Federal Reserve and Bundesbank had agreed to double the amount of their swap arrangement from
$2 billion to $4 billion.
In early April, selling pressure on the dollar intensified following the
release of U.S. trade figures showing a record $4.5 billion deficit in February. Later in April the Treasury announced that a series of monthly public auctions of gold would be initiated in May, amounting to 300,000
ounces at each of the first six auctions, which would reduce net imports
of gold.
In August, the Treasury announced that the amount of gold offered
would be increased to 750,000 ounces beginning with the November auction. At that time, a congressional compromise on the natural gas bill was
achieved, paving the way for passage of energy legislation. The Federal
Reserve moved to increase U.S. interest rates further and reduced reserve requirements on Eurodollar borrowings by U.S. banks.
Swap indebtedness to the Bundesbank, incurred by the Treasury and
Federal Reserve to finance foreign exchange market operations in German
marks, reached a peak in early April 1978 of $2,284 million. However, by
the end of the fiscal year, this indebtedness had been reduced to $1,031
million.
During October, it became evident that the severe and persistent disorder and excessive decline in the dollar were undermining U.S. efforts to
control inflation and adversely affecting the climate for continued investment and growth in the United States. The market did not respond favorably to the President's comprehensive anti-inflation program and was failing to take account of the improvements that were being made in the
underlying conditions that determine the dollar's value.
Accordingly, on November 1, 1978, the President, the Secretary of the
Treasury, and the Chairman of the Board of Governors of the Federal
Reserve System announced a series of major corrective actions. The Federal Reserve raised the discount rate from SVi to 9Vi percent and imposed
a supplementary reserve requirement on large time deposits. The U.S.
authorities joined Germany, Switzerland, and Japan in closely coordinated
exchange market intervention. To finance the U.S. participation in the



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1978 REPORT OF THE SECRETARY OF THE TREASURY

coordinated market intervention, the United States announced that it
would mobilize up to $30 billion in the currencies of those three countries. These resources were to be obtained by drawings on the IMF, sales
of special drawing rights (SDR's) to foreign monetary authorities, increases in Federal Reserve swap lines, and by the issuance abroad by the
Treasury of up to $10 billion in securities denominated in foreign currencies. The Treasury also increased its monthly sales of gold to at least V/i
million ounces per month, starting with the December auction.
The market responded favorably to these measures, dollar exchange
rates rose from the October lows, and more orderly conditions resulted.
Changes in Dollar Exchange Rates, Gold Market Prices, and Global
Reserves
Persistent large current account surpluses of Japan, Germany, and
Switzerland reached a combined total of nearly $30 billion during the 12
months ending September 30, 1978. These surpluses were not fully offset
by outward nonofficial capital movements. The currencies of those countries appreciated by 40, 19, and 50 percent, respectively, in terms of the
U.S. dollar, from September 30, 1977, to the end of September 1978.
There were also substantial accumulations of reserves by the three countries, amounting to about $20 billion during fiscal 1978, which absorbed a
substantial amount of market pressure on their currencies.
Overall, during the fiscal year, the dollar depreciated by 12.5 percent on
a trade-weighted basis, as against the other Organization for Economic
Cooperation and Development (OECD) currencies, and by 9.2 percent in
terms of the SDR.
Gold market prices rose from about $155 per ounce at the beginning of
the fiscal year to about $188 per ounce in March 1978. After declining to
about $168 per ounce in the latter part of April, the gold price resumed
rising in May. The price was about $218 per ounce at the end of the fiscal
year, representing an increase of about 40 percent during the fiscal year.
Under the Treasury's monthly program, sales of gold to the public were
conducted by the General Services Administration on a competitive bid
basis. Through September 30, 1978, proceeds of the sales totaled nearly
$300 million.
The oil-exporting group of countries, for the first time in several years,
reported to the IMF a decline of about SDR 15 billion (nearly $19 billion)
in reserves during the fiscal year, though part of this appears to be accounted for by reclassification of some assets into a nonreserve and unreported category. Other developing countries continued to build up their
aggregate reserves at a somewhat faster rate than the industrial country
group. For the world as a whole, reported reserves increased to SDR 264
billion ($338 billion) at the end of September 1978, as compared with SDR
249 billion ($290 billion) a year earlier, an increase of about 6 percent in
SDR terms, and 17 percent measured in dollars.



INTRODUCTION

XXXI

The International Monetary System and the International Monetary Fund
The entry into force of the second amendment of the IMF Articles of
Agreement, on April 1, 1978, represents the most fundamental change in
the international monetary order since the Bretton Woods system was
established in 1944. The United States had earlier accepted the amendment pursuant to Public Law 94-564, effective October 19, 1976.
The central features of the new international monetary system, as embodied in the amended IMF Articles, are:
• Members are given wide latitude in the choice of exchange rate
practices, subject to specific undertakings regarding promotion of
orderly underlying economic and financial conditions and avoidance of unfair exchange rate practices. The IMF is given expanded authority for surveillance over exchange rate policies to ensure
that members comply with their obligations;
• Concrete steps to reduce the monetary role of gold, including the
abolition of the official price of gold, the elimination of gold's
function as the "numeraire" of the system and as an important
instrument in IMF transactions, and provision for continued disposal of the IMF's gold holdings;
9 Changes in the characteristics and expansion of the uses of the
SDR, designed to enhance its role in the system;
• Changes in the IMF's operation and organization to modify obsolete provisions, simplify operations, and adopt structural changes.
The increase in IMF quotas agreed in 1976 also became effective on
April 1, 1978. Total Fund quotas were raised from SDR 29.2 billion to
SDR 39 billion (about $50 billion). The U.S. quota was increased from
SDR 6,700 million to SDR 8,405 million, pursuant to Public Law 94-564.;
Legislation required for U.S. participation in the Supplementary Financing Facility was passed by Congress and signed by the President. The
facility will temporarily supplement the IMF's resources by credit lines
from members of approximately $11 billion, and should enable it to provide more financing to members experiencing particularly difficult payments problems. The U.S. share in the facility is approximately $1.8 billion, 17 percent of the total.
At the September 1978 meeting of the IMF's Interim Committee, a consensus was reached in support of two major additional measures to
strengthen the International Monetary Fund and the monetary system: A
50-percent increase in IMF quotas and new allocations of SDR's totaling
approximately SDR 12 billion, to be issued over 3 years.
The continued uncertainties in the world economy—and the associated
wide range of world payments patterns which could develop—argued for
a substantial increase in Fund quotas. The 50-percent increase was the
result of the seventh periodic review of quotas, and is intended to cover
the next 5 years. It is mainly equiproportional; i.e., equal percentage in


XXXII

1978 REPORT OF THE SECRETARY OF THE TREASURY

creases for most countries, with only 11 developing countries receiving
selective quota increases.
The consensus on SDR allocations reflects the view that SDR allocations should provide a part of the growth of reserves as international
transactions continue to expand in value, and that such allocations will
help to assure the viability and credibility of the SDR as a reserve asset
and will assist the SDR in fulfilling its longrun potential in the international monetary system.
Financial Relations with Non-OPEC Developing Countries
The overall economic situation of the non-OPEC developing countries
in 1977-78 was mixed with significant improvments being made in some
indicators and less progress in others. Current account deficits for the
group, which declined significantly to $26 billion (excluding official transfers of funds) in calendar 1976 and fell further to $22 billion in calendar
1977, have been projected to rise in calendar 1978 to about $28 billion.*
This nominal increase is not significantly different from historical averages
when world inflation and economic growth are factored in, and it should
not pose financing difficulties for the group as a whole.
Total official and private flows to non-OPEC developing countries have
been more than adequate to cover the aggregate current account deficits.
Official development assistance (grants and loans) from Development Assistance Committee countries and multilateral institutions to less developed countries (LDC's) as a group increased in 1977 to about $15 billion;
concessional and nonconcessional flows from OPEC countries to nonOPEC LDC's were about $5 billion. Gross foreign exchange reserves of
the non-OPEC LDC's increased 29 percent to about $53 billion by the end
of calendar 1977. Data for December 1978 showed slower growth in aggregate reserves although it is estimated that import coverage did not decline.
During 1978, the United States continued its policy of placing increased
emphasis on the role of the multilateral development banks in providing
financing for sound projects and programs in developing countries. These
institutions, including the World Bank group, the Inter-American Development Bank, the Asian Development Bank, and the African Development Fund, provided almost $12 billion in loans during the year, of which
nearly $4 billion was on concessional terms for the poorest countries.
A paramount objective of U.S. policy in the banks has been to encourage projects which reach poor people in recipient countries and which
help meet the basic human needs of these people. For this reason, the
United States has favored greater priority in bank lending for the agricultural sector and for those projects which improve health, education, and
nutrition. In working toward this objective, the United States has also
*Including official transfers of funds (grants only) to these countries, their deficits were approximately $17 billion in 1976,
$12 billion in 1977, and are projected at about $16 billion for 1978.




INTRODUCTION

XXXIII

proposed the channeling of more assistance to small-scale enterprises and
the development and use of labor-intensive and capital-saving technologies. During 1978, significant progress was made in reaching the poor
through changes in the sectoral composition of lending to meet basic
human needs, modifications in the design of projects to pass greater benefit to poorer people, and increased use of aid leverage to encourage policy
changes in developing countries.
Improvement of human rights conditions in recipient countries has also
been an important policy objective of the United States. Accordingly,
during 1978, the United States used its voice and vote on a number of
occasions in the multilateral development banks to advance these rights.
Other issues within the banks on which substantial progress was made in
1978 included greater availability of information concerning the operations
of the banks, improved audit procedures, and reduction of administrative
costs including travel and compensation.
The Congress appropriated $2,514 million for U.S. subscriptions and
contributions to the multilateral development banks for fiscal 1979, up
from $1,925.5 million in fiscal 1978. Of this amount, $1,258 million represented contributions to the International Development Association, including $800 million for the second installment of the fifth replenishment
of resources and $458 million for the fourth replenishment of resources.
Under the same appropriation, $265 million was made available to the
Asian Development Bank; $763 million to the Inter-American Development Bank; $163 million to the International Bank for Reconstruction and
Development; $40 million to the International Finance Corporation; and
$25 million to the African Development Fund.
The appropriations legislation enacted by the Congress also included
the following provisions: That the U.S. Governors of the banks propose
and seek the adoption of amendments to the Articles of Agreement to
establish human rights standards to be considered in connection with each
application for assistance; that international consultations be initiated to
develop a viable standard for allocation of development assistance for
production and export of commodities; and that the United States oppose
loan proposals for the production for export of surplus commodities
which would cause substantial injury to U.S. suppliers of similar or competing commodities.
The IMF/IBRD Development Committee, which was established in
1974 to maintain an overview of the development process especially regarding the transfer of resources to developing countries, continued to
provide a forum for discussion of important issues. The United States is
represented on the Committee by the Secretary of the Treasury.
The Department of the Treasury participated actively in the formulation
of U.S. development assistance policy through its membership in the National Advisory Council on International Monetary and Financial Policies,
in the Development Coordination Committee (DCC), and in various other



XXXIV

1978 REPORT OF THE SECRETARY OF THE TREASURY

interagency committees designed to coordinate economic assistance programs. Under the reorganization of the DCC, four new subcommittees
were established to treat issues in the specific areas of multilateral assistance, bilateral assistance, food aid, and international organizations. Treasury assumed responsibility for chairing the Subcommittee on Multilateral
Assistance.
Treasury continued to follow developments in international indebtedness. In January 1978, Treasury submitted to Congress the administration's fourth annual report on developing countries' external debt and
debt relief provided by the United States. 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 programs. During fiscal 1978, the
United States participated in multilateral debt reschedulings for Zaire and
Turkey.

Trade
Treasury activities in the trade area during the fiscal year centered on
continuing efforts to secure significant trade liberalization and reform of
the international trading system, as well as on specific trade problems and
new efforts to reduce our record trade deficit.
Treasury continued to participate actively in drafting proposals for a
subsidy/countervailing duty code within the multilateral trade negotiations
in Geneva, as a prerequisite for U.S. adherence to the final package of
agreements. The Department also participated actively in the adoption of
positions with respect to tariffs, safeguards, customs matters, and special
treatment to developing countries. In July 1978, the major trading nations
agreed upon a basic "framework of understanding" for these negotiations, which the Bonn economic summit agreed should be completed by
December 15.
A number of special import problems also developed during the year,
the most important relating to steel imports allegedly dumped in the U.S.
market. To assure prompt investigation of potential dumping in the future, an interagency steel task force chaired by Under Secretary Solomon
proposed, and the administration adopted, a trigger price mechanism
(TPM) for steel imports. The TPM is part of a comprehensive steel program to modernize and improve the competitive position of the U.S. steel
industry.
A new International Arrangement on Export Credits was negotiated.
This constituted a useful, if limited, instrument of international discipline
in the provision of officially supported export credits. The clear need for
substantive improvements in the Arrangement caused the Secretary to
undertake renewed consultations with major trading nations in the fall of
1978 to strengthen and broaden the Arrangement.



INTRODUCTION

XXXV

In September 1978, the United States adopted a new national export
policy to encourage U.S. exports, as one means of helping to reduce the
record U.S. trade deficit. The new program includes efforts to assure fully
competitive financing through the Export-Import Bank and to minimize
Government disincentives to exports. Export expansion should also assist
our broader efforts to maintain confidence in the dollar and stimulate continued domestic economic growth.
The East-West Foreign Trade Board, chaired by the Secretary of the
Treasury, continued to monitor trade with the nonmarket economy countries to insure that it remained consistent with the national interests of the
United States. Secretary Blumenthal participated in the meeting of the
U.S.-U.S.S.R. Trade and Economic Council in Los Angeles on November 14, 1977. In I>ecember 1978, Secretary Blumenthal served as Cochairman of the Joint U.S.-U.S.S.R. Commercial Commission during its Seventh Session at Moscow. He also conferred with Chairman Brezhnev and
other Soviet leaders, and addressed a meeting of the U.S.-U.S.S.R.
Trade and Economic Council. He subsequently visited Bucharest, where
he met with President Ceausescu and other Romanian officials.

Investment
In the international investment area the U.S. Government placed special emphasis during the past fiscal year on the problems associated with
governments' use of (1) subsidies to induce investors to locate in their
territories and (2) other measures to tilt the benefits of such investments
their way. Several initiatives, which the Treasury played a key part in
developing, were taken in international organizations and on a bilateral
basis. In the OECD the Committee on International Investment and Multinational Enterprises (CIME) has agreed, at the suggestion of the United
States, to undertake a comprehensive examination of the effects of investment incentives, performance requirements, and other measures on international economic relations. This work will begin after the CIME's review
of the 1976 OECD Investment Declaration, a part of which covers investment incentives and disincentives. Bilateral consultations between the
U.S. and Canadian Governments were also begun, and will continue in
fiscal 1979, on governments' use of investment incentives. These consultations were initiated after the Canadian Government gave a subsidy to an
American automobile manufacturer to induce it to locate a new plant in the
Province of Ontario.
The incentives issue was also among those relating to the role of foreign investment in development that were pursued in a working group of
the IMF/IBRD Development Committee. The group completed its work in
December 1978, with the preparation of a report to the Development
Committee regarding appropriate policies for developed and developing
countries. Discussions are now underway to establish a small task force



XXXVI

1978 REPORT OF THE SECRETARY OF THE TREASURY

consisting of policy-level officials from a few countries to continue and
give added emphasis to this work.
Regarding inward investment, the Committee on Foreign Investment in
the United States, an interagency group chaired by Treasury, met during
the fiscal year to review current trends in and coordinate U.S. policy on^
such investment. One of the Committee's major concerns was foreign
investment in U.S. farmland. It served as a forum for coordinating the
positions taken by executive branch agencies in congressional discussions
of the issues and legislative proposals relating to it.
The House and Senate committees with legislative responsibility approved plans submitted by Treasury for a survey of foreign residents')
portfolio investment in the United States and authorized the funds required to initiate this project. The last such survey conducted by Treasury
was in 1974. Questionnaires were to be mailed in November, the reporting or "as of" date being December 31, 1978, and respondents are being
requested to file their reports by the end of March 1979. Up to a year will
be required to tabulate and check the roughly 10,000 expected responses.
Treasury plans to file a report with the Congress by the end of 1980. In
addition, the feasibility of surveying U.S. residents' portfolio investment
abroad is being studied. If such an outward survey is conducted, its outcome will be reported in 1981.

Energy
In the energy area, the key issues continued to be price, supply, and
development of indigenous energy resources in the United States itself
and also in the oil importing developing countries. The Bonn economic
summit gave major attention to these issues, as well as to the growing
dependence of the United States on imported oil. In this regard. President
Carter committed the United States to adoption of a comprehensive ener-,
gy program by the end of the year that would result in oil import savings
of 2.5 million barrels per day by 1985.
During the year, the U.S. current account deficit, the national energy
program, and oil prices became intimately linked. Our deficit was increasingly a result of excessive oil imports, while the depreciation of the dollar
led to renewed pressure within OPEC for an oil price increase.
s.
In their relations with the developing countries, the developed countries
took steps to intensify cooperation in energy research and development,
with special attention to renewable energy resources and technologies.
The United States continued to stress the importance of adequate investment in indigenous energy resources and the role of the multilateral development banks and the private sector in fostering energy development.
The World Bank adopted new policies in July of 1977 which significantly enlarged its participation in the development of energy resources of the
developing nations. A Petroleum Projects Division was established to



INTRODUCTION

XXXVII

coordinate this. In 1978, missions were sent to a dozen developing countries to identify and prepare projects aimed at oil and gas production.
Loans have been approved by the World Bank group to India ($150 million), to Zaire ($4.1 million), Turkey ($2.5 million), and Pakistan ($30 million) for training of technicians and for petroleum development.
In response to the Bonn summit request, the World Bank sent a report
to the Board in November of 1978 on the first year of this program, together with proposals to extend the group's activities into energy exploration in the oil-importing LDC's.
Commodity Policy
During fiscal 1978, the United States continued to develop and refine its
basic initiatives in commodity policy. In these discussions, the United
States has advocated commodity proposals that would work to the mutual
benefit of producers and consumers.
Foremost among commodity problems is the sharp fluctuation of prices
which is detrimental to stable economic growth in both developed and
developing countries, by giving rise to near-term inflationary pressures
and by discouraging investment in commodity industries. To remedy the
situation in the most volatile markets, the United States has supported,
where feasible, the negotiation of international commodity agreements.
These agreements, operating to the maximum possible extent through
buffer stocks, are aimed at stabilizing prices within a broad range around
their long-term trends while at the same time allowing for the play of
market forces to promote an efficient allocation of resources. Currently,
international commodity agreements are in effect for tin, coffee, and cocoa (though the United States is not a member of the latter); a sugar
agreement was negotiated in fiscal 1978, but has not as yet been acted
upon by Congress. Discussions which may eventually lead to agreements
have been undertaken for wheat, natural rubber, and copper. Proposed
negotiation of a tungsten agreement was rejected as technically infeasible
by the United States and other industrial countries.
To assist in financing buffer stock activities designed to reduce instability in commodity prices, the United States actively participated in the
November 1977 negotiating conference on a common fund. The industrial
countries presented a proposal at that session for the consolidation of individual international commodity agreement financial resources in a common fund that would lower the paid-in financial requirements for each
agreement. To provide for more equitable sharing of financial responsibility for the agreements, the proposal implicitly assumes participation of
consuming and producing countries in their financing. The developing
countries presented their own proposal for a common fund which would
be financed by mandatory direct government contributions and which
would contain a second window to finance non-buffer-stocking measures
for commodities and a voting structure which would give developing
countries a controlling voice in decisions.



XXXVIII

1978 REPORT OF THE SECRETARY OF THE TREASURY

The differences between the two approaches prevented agreement in
the November 1977 session. Subsequent informal discussions took place
in Geneva in an attempt to narrow the differences. These discussions led
to a resumption of the negotiations in November 1978. The resumed negotiations saw some convergence of views, with the developed countries /
indicating a willingness to accept an element of direct contributions in the
financial structure of the fund and some possible activities which the second window might finance. However, developing countries insisted on a
larger role for direct government contributions in the financial structure of
the fund, and a broader scope for the second window, than developed
countries could accept. These differences between the developed and )
developing countries reflected different conceptions of the nature and role
of the fund, and the negotiating session concluded without reaching agreement. Another conference is scheduled for early 1979.
The administration undertook a commitment to contribute tin to the
International Tin Agreement buffer stock. Although considerable support
for it developed in Congress, legislation faltered late in the session because of Congress's inability to settle policy with respect to disposals
from the U.S. strategic stockpiles.
The United States participated in the Third United Nations Conference
on the Law of the Sea which met twice in 1978 and will reconvene in the
spring of 1979. Much of the discussion at these two sessions centered on
the deep seabed mining regime, as serious differences persist between the
industrialized and the developing countries on the scope, nature, and organization of this regime.
The Congress considered seabed mining legislation in 1978 which would
have authorized the licensing of private firms to begin mining the seabeds.
The legislation passed the House of Representatives, but was not acted
on by the full Senate. It is expected that such legislation will again be
considered at the next session of Congress.
The staffs of the International Monetary Fund and World Bank under- '
took an examination of the provisions of and possible changes in the
compensatory financing facility of the International Monetary Fund. Their
analysis showed heavy use of the facility in 1975-76 and indicated the
effects of possible changes. Action on the need for any changes will await
the results of the full-scale review now scheduled for the spring of 1979.
Major International Meetings and Consultations
During the spring and summer of 1978, the Secretary took part in the
meeting of the Interim Committee of Governors of the International Monetary Fund in Mexico at the end of April, the OECD Ministerial meeting
in Paris in mid-June, and the Bonn meeting of heads of government of
seven industrial countries in July. Through these meetings a consensus
was reached on the major policy adaptations needed for achieving further
progress toward better balanced growth among major industrial countries.




INTRODUCTION

XXXIX

A meeting of the IMF/IBRD Development Committee in September 1978
was held at the time of the annual meeting of the Boards of Governors of
the two institutions. The Committee commented favorably on the Bank's
World Development Report, reviewed the Committee's work program,
and agreed to establish a Task Force on Foreign Direct Investment.
Secretary Blumenthal visited the Middle East twice over the past 2
years to discuss U.S. economic and financial concerns with the leaders of
important countries in that area. In October 1977, he visited Egypt, Israel,
Kuwait, Iran, and Saudi Arabia. In November 1978, he met with the leaders of Saudi Arabia, the United Arab Emirates, Iran, and Kuwait.
United States/Saudi Arabian Joint Commission
While in Saudi Arabia, Secretary Blumenthal headed the U.S. delegation and served as Cochairman of the Fourth Session of the Commission,
held in Riyadh November 18-19, 1978. Three new technical cooperation
agreements were signed, in the areas of transportation, agricultural bank
operations, and executive management development.
The Joint Commission now is implementing 20 major projects, with a
total ultimate value of over $850 million.
Funding of the International Affairs Function of Treasury
The Congress, in early October 1978, terminated the financing of administrative expenses by the Exchange Stabilization Fund, to become
effective when appropriations become available.







REVIEW OF TREASURY OPERATIONS







FINANCIAL OPERATIONS
Summary

On the unified budget basis the deficit for fiscal 1978 was $48.8 billion. Net
receipts for fiscal 1978 amounted to $402.0 billion ($44.2 billion over fiscal
1977), and outlays totaled $450.8 billion ($48.0 billion over fiscal 1977).
Fiscal 1978 borrowing from the public amounted to $59.1 billion as a result
of (1) the $48.8 billion deficit, (2) a $3.0 billion increase in cash and monetary
assets, and (3) a $7.3 billion decrease in other means of financing.
As of September 30, 1978, Federal securities outstanding totaled $780.4
billion, comprised of $771.5 billion in public debt securities and $8.9 billion
in agency securities. Of the $780.4 billion, $610.9 billion represented
borrowing from the public.
The Government's fiscal operations for fiscal years 1977 and 1978 are
summarized below. The receipts and outlays figures reflect the reclassification
of earned income credit from an income tax refund to a budget outlay.
[In billions of dollars]
. 1977

1978

Budget receipts and outlays:
Receipts
Outlays

357.8
402.8

402.0
450.8

Budget deficit

-45.0

-48.8

53.5
-2.2

B9.1
-3.0

.4
—8.7
2.0

.4
— 10.3
2.6

45.0

48.8

Means of fmancing:
Borrowing from the public
Increase in cash and other monetary assets
Other means:
Increment on sold and seigniorage
Outlays of off-Dudget Federal agencies
Other
Total budget fmancing




1978 REPORT OF THE SECRETARY OF THE TREASURY

THE BUDGET
$Bil.

400

300

200

100

1969

1970

1971

1972

1973 1974
Fiscal Years

1975

1976

1977

1978

Receipts

Total budget receipts amounted to $402.0 billion in fiscal 1978, an increase
of $44.2 billion over fiscal 1977. Net budget receipts by major source for fiscal
years 1977 and 1978 are shown below.
[In millions of dollars]
Source
Individual income taxes
Corporation income taxes
Employment taxes and contributions
Unemployment insurance
O^ntrioutions for other insurance and retirement
Excise taxes
Estate and gift taxes
Customs duties
Miscellaneous receipts
Total budget receipts

1977

1978

157,626
54,892
92,210
11,312
5,167
17,548
7,327
5,150
6,531

180,988
59,952
103,893
13,850
5,668
18,376
5,285
6,573
7,413

357,762

401,997

Projected estimates of receipts to future years, required of the Secretary of
the Treasury, are shown and explained in the President's budget.
Individual income taxes.—Individual income taxes rose to $ 181.0 billion in
fiscal 1978, an increase of $23.4 billion. Substantially all ofthe increase was
due to higher personal incomes.
Corporation income taxes.—Corporation income taxes increased by $5.1
billion over the prior year to reach $60.0 billion. This modest increase (9
percent) reflects in part unusually high final payments in fiscal 1977 on 1976
liability.




REVIEW OF TREASURY O P E R A T I O N S

3

Employment taxes and contributions.—Receipts from this source totaled
$103.9 billion, reflecting in part an increase in the social security taxable
earnings base from $16,500 effective January 1, 1977, to $17,700 effective
January 1, 1978.
Unemployment insurance.—Unemployment insurance receipts increased by
22 percent to reach $13.8 billion in fiscal 1978. State tax deposits at the
Treasury, the largest component in this category, increased by $1.8 billion,
reflecting continued high financing of past unemployment benefits. In
addition, the Federal Unemployment Tax Act base was raised from $4,200 to
$6,000 effective January 1,1978, and receipts from this source increased from
$1.9 billion in fiscal 1977 to $2.6 billion in fiscal 1978, a 39-percent increase.
Contributions for other insurance and retirement.—Receipts in this category
increased by $0.5 billion to a total of $5.7 billion in fiscal 1978.
Excise taxes.—Receipts of excise taxes in fiscal 1978 were $18.4 billion, an
increase of $0.8 billion over the prior year. These receipts reflect continued
phaseout of the telephone excise tax from 5 percent in 1977 to 4 percent in
1978.
Estate and gift taxes.—Receipts in this category declined by $2.0 billion in
fiscal 1978 to reach $5.3 billion. Much of the decline can be attributed to
substantially increased gifts in fiscal 1977 in anticipation ofthe estate and gift
tax provisions of the Tax Reform Act of 1976.
Customs duties.—Customs duties increased by $1.4 billion in fiscal 1978 to
reach $6.6 billion.
Miscellaneous receipts.—These receipts totaled $7.4 billion in fiscal 1978,
an increase of $0.9 billion. Deposits by the Federal Reserve System, the largest
component of this category, increased by $0.7 billion to reach $6.6 billion.
Outlays

Total outlays in fiscal 1978 were $450.8 billion (compared with $402.8
billion for 1977). Outlays by major agency for fiscal years 1977 and 1978 are
presented in the following table. For details see the Statistical Appendix.
[In millions of dollars]
Funds appropriated to the President
Agriculture Department
Defense Department
Energy Department i
Health, Ediication, and Welfare Department
Housing and Urban Development Department
Labor Department
Transportation Department
Treasury Department
National Aeronautics and Space Administration
Veterans Administration..
Other
Undistributed offsetting receipts
Totaloutlays
1 Created Oct. 1, 1977.




1977

1978

2,487
16,738
97,930
5,252
147,455
5,838
22,374
12,514
50,461
3,944
18,019
34,843
- 15,053

4,475
20,368
105,677
6,430
162,809
7,761
22,90?
13,452
56,309
3,980
18,962
43,405
- 15,773

402,802

450,758

6

1978 R E P O R T OF THE SECRETARY OF THE TREASURY

C a s h a n d monetary assets

On September 30, 1978, cash and monetary assets amounted to $31.9
billion. The balance consisted of U.S. Treasury operating cash of $22.4 billion
($3.3 billion more than September 30, 1977); $1.6 billion held in special
drawing rights ($0.4 billion more than September 30, 1977); a net $3.5 billion
with the International Monetary Fund ($0.6 billion less than September 30,
1977); $0.7 billion in loans to International Monetary Fund (a slight increase
over September 30, 1977); and $3.6 billion of other cash and monetary assets
($0.1 billion less than September 30, 1977).
For a discussion of the assets and liabilities in the Treasury's account, see
page 173. Transactions affecting the account in fiscal 1978 are shown in the
following table:

Transactions affecting the account o f t h e U.S. Treasury, fiscal 1978
[In millions of dollars]
Operating balance Sept. 30, 1977
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 on new issues
Interest increment on savings and retirement plan securities
Net pubhc debt transactions included in budget, trust, and other
Govemment accounts

19,104
465,672
506,526

-40,854

72,704
11,603
4,136
12,764

Net deductions
operating balance Sept. 30, 1978

28,503

44,201
22,444

C o r p o r a t i o n s a n d o t h e r business-type activities of the Federal G o v e r n m e n t

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. Many Federal
agencies finance programs through this bank that would otherwise involve the
sale or issuance of credit market instruments, including agency securities,
guaranteed obligations, participation agreements, and sales of assets.
Corporations or agencies having legislative authority to borrow from the
Treasury issue their formal securities to the Secretary of the Treasury.
Outstanding borrowings are reported as liabilities in the periodic financial
statements of the Government corporations and agencies. In fiscal 1978
borrowings from the Treasury, exclusive of refinancing transactions, totaled




REVIEW OF TREASURY OPERATIONS

/

$32.5 billion, repayments were $13.2 million, and outstanding loans on
September 30, 1978, totaled $85.7 billion.
Agencies having legislative authority to borrow from the public must either
consult with the Secretary ofthe 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
fees to provide for expenses and reserves. During fiscal 1978, all funds loaned
by the bank have been borrowed from the Treasury.
During fiscal 1978, Congress granted new authority to borrow from the
Treasury in the total amount of $ 14.4 billion, adjustments increased borrowing
authority by $1.8 billion, making a total increase of $16.2 billion. The status
of borrowings and borrowing authority and the amount of corporation and
agency securities outstanding as of September 30, 1978, 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 September 30, 1978, is shown in the Statistical Appendix.
During fiscal 1978, the Treasury received $4.4 billion 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 are 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 of the financial condition of Government corporations
and other business-type activities, as of September 30, 1978, are shown in the
Statistical Appendix.
Government'wide financial management

Joint Financial Management Improvement Program.—During fiscal 1978,
JFMIP continued to concentrate on Government-wide improvements in
accounting, auditing, cash management, and financial management. A study



8

1978 REPORT OF THE SECRETARY OF THE TREASURY

on various aspects of auditing federally assisted programs was made and
tentative findings and recommendations were released in an exposure draft.
Draft statements were developed on the objectives of Federal agency financial
statements. A project was initiated to prepare a financial and administrative
checklist for new agencies to assure that all necessary actions in financial
management matters are properly performed within a timely manner. A
project on accounting for ADP costs and charging users for computer services
was also initiated.
As a continuing process, JFMIP engaged in sharing information on new
techniques and new technology with Federal, State, and local governments
through liaison meetings and various publications. In addition, JFMIP
sponsored cash management workshops on letters of credit, in Washington,
D . C , and in Boston. The seventh annual Financial Management Conference
was held in February 1978, on the 'Tmpact of New Initiatives on Financial
Management."

DOMESTIC FINANCE
Federal Debt Management
In fiscal 1978, Treasury debt management operations continued to have a
major impact on the Nation's credit markets as the Treasury refunded its
maturing debt and raised a large amount of new cash. The bulk of this financing
was accomplished in a period of rising prices and interest rates as inflation
dominated the economic and financial scene during fiscal 1978. An added
depressing factor was the decline of the dollar in foreign exchange markets.
Over the course of the fiscal year both the Producer Price Index and the
Consumer Price Index rose more than 8 percent. Likewise, both short and long
interest rates moved steadily upward. In addition, the Federal Reserve, in
tightening monetary policy in order to strengthen the international position of
the dollar and to slow the growth in the money supply, increased the discount
rate 6 times in fiscal 1978, while commercial banks increased the prime rate
10 times.
In conducting its debt management operations, the Treasury had to make
sure (1) that the extensive fundraising was done in the most efficient manner
possible; (2) that the borrowings were done in such a way that fosters, rather
than inhibits, economic stability and sustained growth of the economy; and
(3) that new issues were geared toward creating a more balanced maturity
structure, which in turn would facilitate the orderly managing of the debt in
future years. Consistent with these principles, the Treasury's financing
requirements were met primarily by auctions of regularized coupon securities.




REVIEW OF TREASURY OPERATIONS

V

The auction technique allowed the price ofthe new securities to be determined
by competitive bidding and thereby minimized the Treasury's financing costs
and the underwriting pressures on primary dealer organizations. The regularized offerings of cycle notes and bonds provided the Treasury with regular
access to the various maturity sectors of the market and, at the same time,
allowed investors to plan on these expected offerings for their investment
needs because of the reduction in market uncertainty concerning Treasury
financing plans.
Excluding bills, total Treasury financing amounted to $99.3 billion. This
included nearly $43.2 billion to refund privately held maturing securities and
$13.2 billion of new issues allotted to Federal Reserve banks and Govemment
accounts. Total new cash raised from marketable and nonmarketable issues
amounted to $63 billion, which was $ 10 billion more than in fiscal 1977. About
$17 billion ofthe $63 billion in new cash was from nonmarketable issues with
State and local government series sales providing a record $12.8 billion and
E and H savings bonds another $4.4 billion. Other nonmarketable securities
declined $0.2 billion.

MARKET YIELDS AT CONSTANT MATURITIES 1973-1978^

1973

1974

1975

1976

1977

1978

1/Monthly averages of daily market yields of public debt securities. Bank discount rates of Treasury bills.




10

1978 REPORT OF THE SECRETARY OF THE TREASURY
Federal debt and Government-sponsored agency debt
[In billions of dollars]

Class of debt

Increase, or
decrease

Sept. 30,
1976

Sept. 30,
1977

Sept. 30,
1978 .

206.1
131.1
57.3
13.2

217.9
148.4
58.9
18.3

225.4
168.5
65.9
25.4

7.5
20.1
7.0
7.1

407.7

443.5

485.2

41.7

70.8
.4
2.3

75.4
.4
2.2

79.8
.4
2.2

4.4

19.2
1.6
2.9
.1

20.5
1.3
11.4
2.8

20.9
.8
24.2
.1

.4
-.5
12.8
-2.7

97.3

114.0

128.4

14.4

128.6
1.1
634.7

140.1
1,2
698.8

153.3
4.6
771.5

13.2
3.4

4.1
3.6
2.0
1.1
.8

3.8
2.9
1.8
1.0
.8

3.2
2.1
1.8
.9
.9

.1

11.7

10.3

8.9

-1.4

646.4

709.1

780.4

71.3

19.1
30.7
16.6
10.8
3.9
.7

19.2
31.5
18.7
11.7
4.1
1.0
1.0

27.4
38.4
20.2
11.6
4.3
2.8
2.3

8.2
6.9
1.5
-.1
.2
1.8
1.3

81.8

87.2

107,0

\9.l

(-)

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 notes •
Investment series bonds
Foreign govemment series:
Dollar denominated
Foreign currency denominated
State and local goverimient series
Other nonmarketable debt
Total nonmarketable public issues
Goverimient account 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 VaUey 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
Farm Credit discount notes
Farm Credit consolidated bonds
Govemment-sponsored agency debt

72.7

1 U.S. savings notes fu-st offered in May 1967; sales discontinued after June 30, 1970.

C h a n g e s in Federal securities

The public debt issues ofthe Treasury, both marketable and nonmarketable,
as well as the obligations issued by those Federal agencies in which there is an
element of Federal ownership are known as Federal securities. The Federal
agency securities included are the participation certificates ofthe Government
National Mortgage Associatipn, 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.




REVIEW O F TREASURY

11

OPERATIONS

At the close of fiscal 1978 there were $780.4 billion of Federal securities
outstanding, compared with $709.1 billion a year ago. The public debt issues
of the Treasury amounted to $771.5 billion, an increase of $72.7 billion for
the fiscal year. Outstanding Federal agency securities totaling $8.9 billion were
down $ 1.4 billion from the end of fiscal 1977. Treasury marketable securities
outstanding amounted to $485.2 billion, an increase of $41.7 billion for the
fiscal year, compared with the $35.8 billion increase in fiscal 1977. Treasury
nonmarketable public issues rose by $ 14.4 billion to a level of $ 128.4 billion.
The increase in fiscal 1978 was $2.3 billion less than in fiscal 1977. Special
nonmarketable securities issued to State and local governments increased
$12.8 billion, or 111 percent, while special nonmarketables issued to foreign
official accounts declined $0.1 billion, or less than 1 percent. Savings bonds
and notes increased $4.4 billion, compared with $4.6 billion a year earlier. The
Government account series, or special nonmarketables issued only to
Government accounts and trust funds such as the Federal old-age and
survivors insurance trust fund, increased $13.2 billion, or 9 percent. Total
nonmarketable Treasury securities increased $27.7 billion to a level of $281.8
billion at the end of fiscal 1978.
In fiscal 1978, the securities issued by Government-sponsored agencies
increased by $19.8 billion to a level of $107 billion. The $8.2 billion increase

PRIVATE HOLDINGS OF MARKETABLE FEDERAL SECURITIES

Federal Agency Securities

1973 1974 1975

1976




1977 1978
1973 1974 1975
Fiscal Years

Jacket No.

,„

>.^lM^

illus.

Width _ _ i i J _ _ _ Depth - i " D Sq. Ht. D Line D Broad
D Paster

Fi3 %

D Duo Tone D Rescreen

1976

1977; 1978

12

1978 REPORT OF THE SECRETARY OF THE TREASURY

in Federal Home Loan Bank securities and the $6.9 billion rise in Federal
National Mortgage Association issues accounted for 76 percent ofthe increase
in sponsored agencies' issues outstanding.
The securities issued by Government-sponsored agencies are not included
in Federal securities since these agencies are not owned in whole or in part by
the Government. However, these privately owned and managed agencies are
subject to some degree of Federal supervision. At the end of fiscal 1978 private
investors held $99 billion of Government-sponsored agency securities. This
accounted for $ 18.8 billion, or 95 percent, ofthe $ 19.8 billion increase in these
agencies' outstanding issues. Holdings by the Federal Reserve System
increased by $1 billion to a level of $8 billion. Nearly $46 billion in new cash
was raised through marketable issues. Excluding the $20.5 billion of cash
management bills issued and redeemed in the fiscal year, over $4.8 billion of
the new cash was raised with Treasury bill issues. Regular issues of 13- and 26week bills accounted for $2 billion and 52-week bill issues raised $2.8 billion,
close to $ 1.5 billion ofwhich was foreign add-ons. Coupon securities provided
$41.1 billion of new cash, including a record $9.4 billion of foreign add-ons.
Eleven 2-year cycle notes accounted for $12.5 billion while the four 4-year
cycle notes brought in $ 11.4 billion. Two 5-year cycle note issues raised $5.3
billion and two issues of 15-year bonds raised almost $3.3 billion ofthe new
cash. The quarterly refundings accounted for the remaining $8.6 billion of new
money.
In fiscal 1978, the Treasury took advantage of two increases in its "bond
authority" to sell $8.8 billion of new bonds to the public. The bond authority
applies to the limit on the amount of marketable Treasury bonds with coupon
rates exceeding 4 1/4 percent held by private investors. Congress raised the
ceiling from $17 to $27 billion in October 1977 and to $32 billion in August
1978. By the end of the fiscal year, the amount of bonds held by private
investors rose by only $7.9 billion because of market purchases by the Federal
Reserve of issues originally sold to the public. The increase in bond authority
gave the Treasury more flexibility in its financing options and was a factor in
the Treasury's successful efforts to lengthen the average maturity of the
Treasury marketable debt held by private investors, which had increased by
over 3 months to a level of 3 years 3 months by the end of the fiscal year.
Estimated ownership

Private investors held $495.5 billion of the $780.4 billion of Federal
securities outstanding at the end of fiscal 1978. The remaining $285 billion was
held by the Federal Reserve banks and Govemment accounts. Borrowings
from the public, which includes the Federal Reserve as well as foreign and
international investors, amounted to a net $59.1 billion, cpmpared with $53.3
billion in fiscal 1977. Private investors accounted for $48.7 billion, or 82
percent, of the $59.1 billion borrowed from the public while the Federal
Reserve System absorbed the remaining $10.4 billion, or 18 percent.



REVIEW O F TREASURY

13

OPERATIONS

Individuals.—Public debt securities held by individuals increased by $5.5
billion in fiscal 1978, compared with $4.2 billion in fiscal 1977. Savings bonds
accounted for $4.4 billion ofthe increase while marketable holdings rose $1.1
billion. On September 30, 1978, individuals held $109.3 billion ofpublic debt
securities, of which $79.9 billion were savings bonds and notes and $29.4
billion were marketable and other Treasury securities. Individuals' holdings of
Federal agency securities totaling $0.4 billion remained unchanged.
Estimated ownership ofpublic debt securities on selected dates 1976-78
[Dollar a m o u n t s in billions]
Change
during
fiscal
1978

June 30,
1976

Sept. 30,
1976

Sept. 30,
1977

Sept. 30,
1978

Estimated ownership by:
Private nonbank mvestors:
Individuals: '
Series E and H savings bonds
U.S. savings notes 2
Other securities

$69.2
.4
26.8

$70.5
.4
28.8

$75.2
.4
28.3

$79.5
.4
29.4

$4.4

Total individuals.

96.4

99.7

103.9

109.3

5.5

10.6
5.4
8.0
r39.3
69.8
24.3
30.0

11.7
5.7
8.3
38.7
74.6
25.3
32.8

r 14.3
^d.2
^9.7
r53.o
r95.5
r23.3
r32.9

15.1
5.4
8.2
67.8
121.0
21.5
44.7

.8
—.8
—1.5
14.8
25.4
-1.8
11.8

283.8

296.9

r 338.8

393.0

54.2

92.5
94.4
149.6

r95.2
96.4
146.1

r99.8
104.7
155.5

95.3
115.3
168.0

-4.5
10.6
12.5

620.4

634.7

698.8

771.5

72.7

Insurance companies
Mutual savings banks
Savings and loan associations
State and local govemments
Foreign and intemational
Corporations
Miscellaneous investors 3
Total private nonbank investors
Commercial banks
Federal Reserve banks.
Government accounts...
Total gross debt outstanding

1.1

Percent
Percent owned by:
Individuals
Foreign and intemational
Other private nonbank investors..
Conunercial banks
Federal Reserve banks
Goverimient accounts
Total gross debt outstanding..

16
11
19
15
15
24

16
12
19
15
15
23

15
14
20
14
15
22

14
16
21
12
15
22

100

100

100

100

r Revised.
* Less than $50 milhon.
1 Including partnerships and personal trust accounts.
2 U.S. savmgs notes first offered in May 1967; sales discontinued after June 30, 1970.
3 Includes nonprofit institutions, corporate pension trust funds, nonbank Govemment security dealers, certain
Govemment deposit accounts, and Govemment-sponsored agencies.

Insurance companies.—Insurance companies' holdings of public debt
securities increased by $0.8 billion in fiscal 1978. This compares with a $2.7
billion increase in fiscal 1977. At the end of the fiscal year insurance
companies held $15.1 billion of public debt securities. Federal agency
securities held by insurance companies decreased $0.2 billion to a level of $0.3
billion.



14

1978 REPORT OF THE SECRETARY OF THE TREASURY

Savings institutions.—In fiscal 1978, savings and loan associations liquidated
$1.5 billion ofpublic debt securities, compared with a $1.5 billion increase in
holdings in fiscal 1977. Holdings of Federal agency securities increased $0.2
billion. On September 30, savings and loan associations held $8.2 billion of
public debt securities and $0.4 billion of Federal agency securities.
Mutual savings banks also decreased their holdings ofpublic debt securities
as they liquidated $0.8 billion in fiscal 1978, compared with a $0.5 billion
increase in fiscal 1977. Holdings of Federal agency securities amounted to $0.5
billion, an increase of $0.1 billion for the year.
State and local governments.—PubMc debt securities held by State and local
governments increased by $14.8 billion in fiscal 1978. This was $0.5 billion
more than the increase in fiscal 1977. Most ofthe increase was concentrated
in their holdings of special nonmarketable issues designed especially for these
governmental units to invest the proceeds from the sale of lower coupon issues
that are to be used to "advance refund" higher coupon securities. Holdings of
these special issues increased by a record $ 12.8 billion as State and local units
stepped up their "advance refunding" issues to beat the September 1 deadline
when new Treasury regulations restricting arbitrage opportunities would go
into effect. Holdings of Federal agency issues fell by $0.9 billion to a level of
$2.1 billion. Over $0.4 billion of the decline was in Government National
Mortgage Association participation certificates.
Foreign and international.—Foreign investors increased their holdings of
public debt securities by a record $25.4 billion after posting a $20.5 billion
increase a year earlier. The increase in holdings was all due to acquisitions of
marketable securities, $10.8 billion of which was from foreign add-ons.

OWNERSHIP OF FEDERAL SECURITIES
September 30, 1978
$Bil.
800

Total

Government Accounts

700
600
500

Federal Reserve
Commercial Banks

400
^121.3

300
200
100
0



Foreign & International ^ ^

Private Domestic
Nonbank Investors
A
P 109.7;^

Individuals
Savings Institutions \//)//A 9.91'P^K'21 9!^

All Other H J

REVIEW O F TREASURY

OPERATIONS

15

Foreign add-ons represent additional amounts of publicly offered marketable
securities sold to foreign official accounts at the average price.
Actually, over the first half of the fiscal year foreign and intemational
investors acquired $29 billion of public debt securities, part of which was
acquired in foreign central bank support operations of the dollar. Holdings
peaked in March at $ 124.5 billion and since then have declined to $ 121 billion
by the end of fiscal 1978. At that level foreign and international investors
became the largest holders of public debt securities among private investors.
Federal agency securities held by foreign investors declined by $0.2 billion to
a level of $0.4 billion.
Nonfinancial corporations.—Corporations continued to liquidate public
debt securities in fiscal 1978 and reduced their holdings by $1.8 billion,
compared with a reduction of $2 billion in fiscal 1977. On September 30,1978,
corporations held $21.5 billion of public debt securities. Federal agency
securities held by corporations amounted to $0.4 billion after a decline of $0.2
billion in fiscal 1978.
Other private nonbank investors.—Public debt securities held by other
private nonbank investors increased by $ 11.8 billion in fiscal 1978, compared
with an increase of $0.1 billion in fiscal 1977. By contrast, holdings of Federal
agency issues increased by $0.4 billion to an end of fiscal year level of $1.4
billion.
Commercial banks.—Unlike fiscal 1977, when bank loan demand was low
and banks had an incentive to take longer maturities, commercial banks
liquidated $4.5 billion of public debt securities to help meet the high loan
demand from business and consumers. By contrast, in fiscal 1977 commercial
banks added $4.6 billion ofpublic debt securities. On September 30, 1978,
commercial banks held $95.3 billion ofpublic debt securities. Federal agency
securities held by commercial banks fell by $0.3 billion to a level of $ 1.4 billion
at the end of fiscal 1978.
Federal Reserve System.—The Federal Reserve System increased its
holdings ofpublic debt securities $10.6 billion in fiscal 1978, compared with
$8.3 billion in fiscal 1977. Holdings of Federal agency securities declined $0.1
billion. On September 30, 1978, the System held $115.3 billion ofpublic debt
securities and $0.2 billion of Federal agency securities.
Government accounts.—Holdings of public debt securities by Government
accounts increased $12.5 billion in fiscal 1978, compared with an increase of
$9.4 billion in fiscal 1977. Special nonmarketable securities (Govemment
account series) held by these accounts increased $13.2 billion while holdings
of marketable securities decreased $0.7 billion. Federal agency securities held
by Government accounts declined $0.3 billion. At the end of fiscal 1978,
Government accounts held $168 billion of public debt securities and $1.5
billion of Federal agency securities.




16

1978 REPORT OF THE SECRETARY OF THE TREASURY

Financing operations

On September 30, 1977, the temporary debt limit of $700 billion expired,
leaving the Treasury without the authority to issue new debt obligations. In the
absence of new debt legislation, the debt ceiling reverted to its "permanent"
statutory limit of $400 billion until October 4, when Congress passed
legislation increasing the temporary debt limit to $752 billion through March
31, 1978.' During the interim, the Treasury was able to handle its short-term
cash needs without difficulty because ofthe large $19.1 billion operating cash
balance at the end of fiscal 1977.
The economy looked strong at the start of fiscal 1978. Early October reports
of a decline in unemployment and an increase in the index of leading economic
indicators for September provided evidence of a vigorous economy. In
addition, industrial production and housing continued to move along at a brisk
pace. Nevertheless, inflation and recent large increases in the money supply
were the major worries of market participants.
On September 27 the Treasury announced plans to sell a 5-year 1-month
note to raise $2.5 billion of new cash. The October 5 auction drew over $3.7
billion of tenders from the public including $0.2 billion submitted on a
noncompetitive basis. Foreign add-ons of $0.2 billion increased the issue size
to $2.7 billion and made it the largest amount of 5-year notes sold since the
Treasury instituted this cycle at the beginning of 1976. Commercial banks
received $1 billion, or 37 percent, of the notes and dealers received $0.8
billion, or 30 percent. A slightly higher than expected 7.18-percent average
yield led to the assignment of a 7 1/8 percent coupon. The issue declined in
price in the secondary market and by the time the notes were issued on October
17, they were bid at a price yielding 7.33 percent.
Meanwhile, on October 12, the Treasury announced it would sell $3.5
billion of 2-year notes to refund $2.9 billion of privately held notes due
October 31 and raise $0.6 billion of new cash. The issue was well received at
the auction on October 18. Almost $0.6 billion of noncompetitive tenders were
included in the $6.2 billion of tenders received from the public and $0.6 billion
of foreign add-ons brought the issue size up to $4.1 billion and new cash to
$1.2 billion. Commercial banks took $1.8 billion, or 44 percent, ofthe issue
while dealers took $0.8 billion, or 20 percent. The average yield of 7.27
percent was 53 basis points above the yield at the previous 2-year note sale
and resulted in a 7 1/4 percent coupon. The new notes moved to a premium
in when-issued trading activity.
Both short- and long-term rates moved higher during October. The effective
Federal funds rate rose about 35 basis points to almost 6 1/2 percent as the
Federal Reserve attempted to slow monetary growth. The prime rate was
increased twice in October, first to 7 1/2 percent and then to 7 3/4 percent;
and in late October, the Federal Reserve raised the discount rate 1/4 percent
t See exhibit 6.




REVIEW OF TREASURY OPERATIONS

17

to the 6-percent level. In the Treasury bill market, 3-month bill rates rose
above 6 percent to reach their highest levels since late 1975. In the coupon
market, intermediate and long Treasury rates rose from about 15 to 40 basis
points in terms of monthly averages, with the larger increases recorded for the
shorter maturities causing a flattening of the yield curve. Corporate and
municipal bond rates climbed about 10 basis points during the month.
Data released covering the month of October revealed the basically healthy
performance of the economy. Personal income rose by a large $20.2 billion
seasonally adjusted annual rate, while industrial production rose 0.3 percent
seasonally adjusted. Housing starts posted a healthy rise along with retail sales.
Employment was up but unemployment rose as well. However, inflationary
pressures persisted as wholesale prices rose a rather high 0.8 percent,
seasonally adjusted, while consumer prices rose by a moderate 0.3 percent.
The large increase in business loans by commercial banks was indicative ofthe
strength of credit demands.
Within this framework of strong economic activity, on October 21, a slightly
larger than expected quarterly refunding package of three securities totaling
$6.5 billion was announced by the Treasury. The new securities offered were:
$3 1/4 billion of 3-year notes, $2.0 billion of 10-year notes, and $1 1/4 billion
of 30-year bonds. The Treasury sought to raise $4.1 billion in new cash while
refunding $2.4 billion of privately held notes due November 15. The 10-year
note represented the first time such an issue was sold in a yield auction. The
two previous 10-year note issues were sold at fixed prices by the subscription
method in the May and August 1976 quarterly refunding operations.
The 3-year note auction on October 28 attracted strong bidding interest.
About $8.6 billion of tenders were submitted by the public including over $1.1
billion of noncompetitive tenders. The issue size grew to almost $4 billion when
$0.7 billion of add-ons were sold to foreign accounts. The average yield was
7.24 percent and the Treasury assigned a 7 1/8 percent coupon to the issue.
Commercial banks took $1.9 billion, or 47 percent, of the notes; dealers
received $0.7 billion, or 18 percent; and individual investors received $0.3
billion, or 7 percent.
Since the Federal Reserve usually remains neutral during a refunding, some
confusion and apprehension existed over the Federal Reserve's apparent
tightening maneuvers at the time ofthe refunding. Nevertheless, the 10-year
notes auctioned on November 1 attracted strong bidding interest. This was the
Treasury's first use of this maturity length since August 1976. About $4.3
billion of tenders from the public were received for the $2 billion of notes,
including $0.3 billion of noncompetitive tenders. A 7 5/8 percent coupon was
set on the basis of an average yield of 7.69 percent for the notes. Dealers
received $0.8 billion, or 39 percent, of the issue; commercial banks were
allotted $0.6 billion, or 32 percent; and State and local pension and retirement
funds took $0.2 billion, or 10 percent.




18

1978 REPORT OF THE SECRETARY OF THE TREASURY

The 30-year bond auction on November 2 also attracted a good level of
interest with tenders totaling $2.9 billion received from the public. Of the
almost $1.3 billion accepted, $0.1 billion were noncompetitive tenders. The
average yield was 7.94 percent which resulted in setting a 7 7/8 percent coupon
on the issue. Dealers and commercial banks each received $0.5 billion which
accounted for 82 percent ofthe bonds. In all, over $7.2 billion of new securities
were sold to the public in this quarterly financing. Of this total, almost $4.9
billion represented new cash.
The Treasury's announcement, on November 3, of an 8-day issue of cash
management bills was expected by the market as the Treasury had announced
earlier that it anticipated an offering of cash management bills to get by a low
cash point in early November. Moreover, the Treasury also announced that
it might raise new cash by additions to the regular bills. About $2.5 billion of
cash management bills were issued on November 7 as an addition to 52-week
bills maturing November 15. The minimum acceptable tender was $ 10 million.
With good demand, evidenced by the $6.4 billion of tenders received at the
November 4 auction, an average rate of 6.39 percent evolved.
Around midmonth an offering of $3 3/4 billion of 2-year notes to refund $2.5
billion of privately held notes due November 30 and raise $ 1 1/4 billion of new
money was announced by the Treasury on November 14. This was the largest
2-year note offering since the cycle was started in late 1972. Although the
amount of new cash was above market expectations, the November 22 auction
encountered good bidding interest. Almost $3.8 billion ofthe $8.7 billion of
tenders from the public was accepted including $0.7 billion tendered
noncompetitively. In addition, official foreign and intemational accounts were
allotted an unprecedented $0.9 billion of add-ons, raising the size ofthe issue
to $4.7 billion and the new cash figure to $2.2 billion. Commercial banks were
allotted $1.8 billion, or 39 percent, ofthe notes while dealers took $1.1 billion,
or 23 percent. A 7.13-percent average auction yield led the Treasury to assign
a 7 1/8 percent coupon rate to the issue.
November 23 brought the expected announcement of the offering of $3
billion in 139-day Treasury bills to be issued as an addition to the outstanding
26-week bills due April 20, 1978. The minimum acceptable tender was
$10,000 for the bills which were auctioned on November 29. About $7.4
billion of tenders were received and $3 billion were accepted including $14
million of noncompetitive bids. Good demand for the bills resulted in an
average discount rate of 6.27 percent, just below the bid rate on the
outstanding 26-week bills of the same maturity.
As a result ofthe financing operations during November, the average length
of the privately held portion of the marketable Treasury debt rose by nearly
2 months to a level of 3 years by the end of the month.
On November 30, the Treasury auctioned $2 3/4 billion of 4-year 1-month
notes, to be dated December 7. This was the largest offering for a 4-year cycle




19

REVIEW OF TREASURY OPERATIONS

note to date. The auction attracted $5.4 billion of tenders from the public, of
which $2.8 billion was accepted including $0.4 billion of noncompetitive
tenders. Almost $0.7 billion of foreign add-ons, also a historic high for a 4-year
cycle note, were accepted and this brought total new cash raised to almost $3.5
billion. Commercial banks received $1.4 billion, or 41 percent, ofthe issue
while dealers accounted for $0.6 billion, or 18 percent. A 7.31 -percent average
yield, almost 50 basis points above the previous 4-year note auctioned in
August 1977, led to a 7 1/4 percent coupon rate.
The new cash raised with this latest 4-year cycle note brought the total raised
by the Treasury in the coupon sector to $14.4 billion for the first quarter of
fiscal 1978. About $3.3 billion was from 2-year cycle notes, while $6.2 billion
was from 4- and 5-year cycle notes. In addition, $4.9 billion of new cash was
raised in the quarterly refunding. Over the course ofthe quarter, $7.8 billion
of maturing coupons were refunded.
Offerings of marketable Treasury securities excluding refunding of regular bills, fiscal 1978
[In millions of dollars]
Allotted to private
investors
Date

Description

1977

NOTES AND BONDS

Oct. 1
...1
Oct. 17 ...7
Oct. 31 ...7
Nov. 15... ...7
Nov. 15... ...7
Nov. 15... ...7

1/2 percent
1/8 percent
1/4 percent
1/8 percent
5/8 percent
7/8 percent
2002-2007
Nov. 30... ...7 1/8 percent
...7 1/4 percent
Dec. 7

note, Oct. 1, 19821
note, Nov. 15, 1982
note, Oct. 31, 1979
note, Nov. 15, 1980
note, Nov. 15, 1987
bond, Nov. 15,
:
note, Nov. 30, 1979
note, Dec. 31, 1981

For
cash

For
refunding

Allotted to
Federal
Reserve and
Govemment
Total
accounts

2
....
....
....
....

2,737
1,178
2,664
1,350

....
....

Average
auction
yield
(percent)

2
2,737
4,334
4,600
2,387

7.18
7.27
7.24
7.69

2,938
1,311
664

218
625
373

841
2,163
3,452

414
2,516

240
112

1,495
4,791
3,452

7.94
7.13
7.31

1,164
1,501
1,364
857
890

2,428

328

2,239
2,036
2,113

272
1,000
1,200

3,920
1,501
3,875
3,893
4,203

7.20
7.95
7.55
7.53
7.88

372
1,705
2,853
845

882
2,062

771
53

2,850

312

2,025
3,820
2,853
4,007

8.23
7.70
7.89
7.56

2,146
2,548

428
1,600

3,180
4,148

7.94
7.80
8.29

1,502
2,390

895
177

2,537

794

2,480
1,630
1,908

375
1,200
1,434

2,397
3,099
2,594
4,407
1,768
4,164
4,110
4,838

8.47
8.09
8.27
8.32
8.63
8.61
8.46
8.36

661
595
2,501

842
2,749

600
200

2,103
3,544
2,501

8.43
8.38
8.41

42 927

43,187

13,207

99,321

1978
...7 1/8 percent note, Dec. 31, 1979
Jan. 3
....7 7/8 percent bond, Feb. 15, 1993
Jan. 6
Jan.31 ...7 1/2 percent note, Jan. 31, 1980
Feb. 15.... ...7 1/2 percent note. May 15, 1981
Feb. 15.... ...8 percent note, Feb. 15, 1985
Feb. 15...,....8 1/4 percent bond. May 15,
2006-2005
Feb. 28... ....7 5/8 percent note, Feb. 29, 1980
Mar. 6 ....7 7/8 percent note. Mar. 31, 1982
M a r . 3 1 . . ....7 1/2 percent note, Mar. 31, 1980
Apr. 1 ....1 1/2 percent note, Apr. 1, 1983 i
Apr. 5 ....7 7/8 percent note, May 15, 1983
....7 3/4 percent note, Apr. 30, 1980
Mayl
May 15... ....8 1/4 percent note. May 15, 1988
May 15... ....8 3/8 percent bond, Aug. 15,
1995-2000.
May 31... ....8 percent note. May 31, 1980
June 7 ....8 1/4 percent note, June 30, 1982
June 30... ....8 1/4 percent note, June 30, 1980
July 11.... ....8 5/8 percent bond, Aug. 15, 1993
July 31.... ....8 1/2 percent note, July 31, 1980
Aug. 15.. ....8 3/8 percent note, Aug. 15, 1981
Aug. 15 .. ....8 1/4 percent note, Aug. 15, 1985
Aug. 15 .. ....8 3/8 percent bond, Aug. 15,
2003-2008
Aug. 31 .. ....8 3/8 percent note, Aug. 31, 1980
Sept. 6.... ....8 3/8 percent note, Sept. 30, 1982
Total notes and bonds




....
....
....

....
....
....

2,573
606

532
2,594
1.076
1,768
1,309
1,280
1,496

C)

20

1978 REPORT OF THE SECRETARY OF THE TREASURY

Offerings of marketable Treasury securities excluding refunding of regular bills, fiscal 1 9 7 8 — C o n .
[In millions of dollars]
Allotted to private
investors
Date

Description

For
cash

For
refunding

Allotted to
Federal
Reserve and
Govemment
accounts
Total

Average
auction
yield
(percent)

BILLS (MATURITY VALUE)

Change in offerings of regular bills:
1977
October-December

1,986

1,986

laryil-Jui
April-June
July-September

1,567
113
1,179

1,567
113
1,179

4,845

4,845

2,505

2,505

3,004

3,004

1978

Total change in regular bills
Other bill offerings:
1977
Nov. 7....
Dec. 2

6.390 percent, 8-day, maturing
Nov. 15, 1977
6.273 percent, 139-day, maturing
Apr. 20, 1978

1978
Mar. 8
Apr. 3
June 6

6.346 percent, 43-day, maturing
Apr. 20, 1978
6.645 percent, 24-day, maturing
Apr. 27, 1978
7.110 percent, 20-day, maturing
June 22, 1978

3,004

3,004

6,006

6,006

6,005

6,005

Total other bill offerings

20,524

20,524

Total offerings

68,296

43,187

13,207

124,690

I Issued in exchange for 2 3/4 percent Treasury bonds, investment series B-1975-80.
• Less than $500,000.

In the bill market, the Treasury raised $5 billion of net new cash during the
first quarter of fiscal 1978; $3 billion from 139-day bills and $0.6 billion from
three 52-week bill auctions, all of which was from foreign add-ons. Finally,
$1.4 billion of new cash was raised from regular weekly 13- and 26-week bill
auctions. The November 5 issues of 13- and 26-week bills marked the first time
since March 1976 that the Treasury had used the weekly bill auctions as a
source of new cash.
The total amount of net new money, $19.4 billion, raised from marketable
securities during the October-December quarter was the highest since the
January-March 1976 quarter when the Treasury raised $22.8 billion. Included
in the $19.4 billion of new cash for the quarter was $3.7 billion of foreign addons, $3.1 billion of which was the most ever raised from coupon issues.




REVIEW OF TREASURY OPERATIONS

2 1

From nonmarketable sources, about $4.1 billion of additional new cash was
raised during the quarter, nearly $2.4 billion was from State and local series,
while foreign nonmarketables provided $0.5 billion and savings bonds $1.2
billion.
The signs of economic strength exhibited in October continued to improve
during November and December. The seasonally adjusted unemployment rate
fell in both months and stood at 6.4 percent by yearend—the lowest level in
3 years. Consumer spending provided a boost throughout the quarter as
personal income posted large gains. Residential construction continued to be
another source of strength, and demand for credit was high in almost all areas
including commercial bank loans.
Most short-term rates rose only slightly during November and December.
Intermediate- and long-term rates eased slightly lower in November but rose
in December. Intermediate and long Treasury security yields ended the
calendar year about 20 basis points higher than late October levels. Corporate
bond rates also rose 20 basis points during the period while municipal bond
rates climbed by 5 to 10 basis points. Rates on new conventional mortgages
edged higher also.
The first two coupon issues in January had been announced and sold during
December. On December 13, the Treasury had announced an offering of $3
billion of 2-year notes to be dated January 3, 1978, to refund $2.4 billion of
privately held maturing notes and raise $0.6 billion of new cash. Expectations
of higher rates ahead contributed to the weakness of bidding interest at the
December 21 auction as only $4.2 billion of tenders from the public were
received. About $3 billion was accepted including $0.5 billion in noncompetitive tenders. A 7 1 /8 percent coupon was assigned to the notes following the
7.20-percent average yield result in the auction. New cash totaled almost $1.2
billion with the addition of $0.6 billion of foreign add-ons. Commercial banks
were allotted $1.4 billion, or 39 percent, ofthe notes and dealers took $0.9
billion, or 26 percent.
Market uncertainty as to whether the Treasury would use a 5-year or 15year issue to fill the early January slot was resolved in favor of the latter with
the announcement on December 19 of an offering of 15-year 1-month bonds
to raise $1.5 billion of new cash. Market reaction was mild and a cautious
market atmosphere prevailed up to the December 27 auction in anticipation
of further interest rate increases, the appointment of a new Chairman of the
Federal Reserve Board, and uncertainty conceming the yield needed to attract
investors to this maturity area which was seldom used by the Treasury.
However, a good interest did surface for the auction as $3 billion of tenders
were received from the public including $0.1 billion submitted noncompetitively. Dealers were awarded $0.6 billion, or 40 percent, of the bonds while
commercial banks took another $0.6 billion, or 37 percent. Corporations took
$0.3 billion, or 18 percent. This was about three times what they received in
the June 1977 15-year bond auction. The average yield was 7.95 percent and
a 7 7/8 percent coupon was assigned to the issue compared with a 7.29 percent




22

1978 REPORT OF THE SECRETARY OF THE TREASURY

coupon on an issue identical in size and maturity auctioned 6 months earlier.
Later, on January 12, the Treasury announced a $3 1/4 billion 2-year note
to refund $2.2 billion of similar notes privately held and to raise new cash. The
note was to be dated January 31. A good bidding interest developed at the
January 18 auction as $6.7 billion of tenders from the public were submitted
and $3.3 billion were accepted including $0.7 billion of noncompetitive
tenders. About $0.3 billion of foreign add-ons increased the issue to $3.6
billion and net new money to $1.4 billion. Commercial banks received $1.7
billion, or 48 percent, ofthe notes and dealers took $0.9 billion, or 24 percent.
The 7.55-percent average yield was the highest for a 2-year note since the
October 16, 1975, auction which produced an identical yield. The notes were
assigned a 7 1/2 percent coupon.
One of the biggest concems at the start of the new year was the decline of
the dollar in foreign exchange markets caused mainly by the large trade and
current account deficits posted by the United States in recent months. So, early
in January the Treasury and Federal Reserve jointly announced that the
Treasury's Exchange Stabilization Fund and a $20 billion currency swap
network of agreements among the Federal Reserve and other central banks
would be utilized to keep the foreign exchange markets orderly. Market
participants reacted favorably to this news.
Also in early January the Federal Reserve raised the discount rate 1/2
percent to 6 1/2 percent, a move motivated in part by the disorders in the
foreign exchange markets. Other short-term rates moved up as well, as the
Federal funds rate rose to 6 3/4 percent and the prime rate increased to 8
percent. Also, rates on commercial paper due in 90 to 119 days rose about 15
basis points in January while 3-month Treasury bill rates climbed about 40
basis points. In the coupon area, intermediate- and long-term Treasury rates
rose 20 to 30 basis points above the levels prevailing at the end of 1977.
Municipal bond yields edged slightly higher while new Aa corporate bonds
yielded about 20 basis points higher in late January than the month before.
Meanwhile, the economy had slowed up slightly in January due, in part, to
the severe winter weather. Residential construction and industrial production
fell but the drop in unemployment indicated underlying strength in the
economy. The major economic problems were the renewed weakness of the
dollar in foreign exchange markets and the outlook of increased inflation.
Nevertheless, the January 25 announcement of the Treasury's quarterly
refunding package was received quite favorably. The amount of new cash to
be raised, $1.7 billion, was modest and $5 billion of privately held maturing
notes were to be refunded. The inclusion of a $2.5 billion, 3 1/4-year note
represented a departure from the usual 3-year length as the short note issue.
This was done because of the sizable amount of notes already maturing on
February 15, 1981. The intermediate issue was $3 billion of 8 percent 7-year
notes to be sold at a price auction, the first of this kind since November 1974.
The Treasury opted for this auction technique to elicit broader investor
interest to what was considered a slightly larger intermediate issue than usual.




REVIEW OF TREASURY OPERATIONS

23

This was the first time since August 1976 that the intermediate-term note issue
size was larger than the short anchor issue in a quarterly refunding. Finally,
the 8 1/4 percent bonds of May 15, 2000-05 were to be reopened in the
amount of $1 1/4 billion, also in a price auction. The objective in enlarging
this issue was to improve its currently limited tradability. Only about $0.9
billion of the bonds were in private hands.
Market participants were optimistic approaching the auctions due to the
market's good technical position and the relative stability of interest rates and
Federal Reserve System policy at the time. The 7.53-percent average in the
3 1 /4-year note auction was a little below yields available on some outstanding
issues in this maturity range. A 7 1/2 percent coupon was set in the January
31 yield auction. About $2.6 billion ofthe $5.1 billion ofpublic tenders was
accepted, including $1.2 billion of noncompetitive tenders. Foreign add-ons
totaling $0.3 billion increased the issue size to $2.9 billion. Investor classes
taking the largest portions of the notes were commercial banks with $ 1.4
billion, or 50 percent; dealers with $0.5 billion, or 16 percent; and individuals
with $0.3 billion, or 10 percent.
Bidding interest at the February 1 price auction of 8 percent notes was
routine. Of the $4.9 billion of tenders submitted by the public, $3 billion was
accepted including $1.1 billion of noncompetitive tenders. Commercial banks
were allotted $1.3 billion, or 42 percent, ofthe notes and dealers received $0.9
billion, or 31 percent. In addition, individuals, apparently attracted by the 8
percent coupon, took $0.5 billion, or 16 percent, of the issue. The average
auction price of 100 21/32 corresponded to a yield of 7.88 percent.
The 8 1 /4 percent bonds of 2000-05 sold at the February 2 price auction
at an average yield of 8.23 percent, close to the yield available on this issue
in the secondary market. Almost $1.3 billion of the $3.4 billion of public
tenders was accepted including less than $0.2 billion of noncompetitive
tenders. Dealers took $0.7 billion, or 57 percent, of the bonds while
commercial banks took $0.2 billion, or 19 percent, and State and local pension
funds took $0.1 billion, or 8 percent. Including the $0.3 billion of foreign addons to the 3 1/4-year note, over $2.1 billion of new cash was raised in the
quarterly refunding. The prices of all three new issues moved to a discount in
when-issued trading as investor demand for the issues proved less than
anticipated by some and caution surfaced over the possibility of a firmer policy
stance by the Federal Reserve System.
February 10 brought the expected announcement of a 3 1/4 billion, 2-year
note offering to be issued February 28. The notes were to refund $2.1 billion
of maturing privately held 2-year notes and raise $ 1.2 billion of new cash. The
February 16 auction drew $5.2 billion of tenders of which $3.3 billion was
accepted including $0.5 billion of noncompetitive tenders. About $0.5 billion
of foreign add-ons increased the issue size to $3.8 billion and the new cash
figure to $ 1.7 billion. Commercial banks received $ 1.6 billion, or 42 percent,
ofthe issue while dealers were allotted $0.8 billion, or 21 percent. A 7.70percent average yield, 15 basis points above the yield in January's 2-year note




24

1978 REPORT OF THE SECRETARY OF THE TREASURY

auction, led to the assignment of a 7 5/8 percent coupon. Demand was good
for the notes, so in when-issued trading the notes sold at a premium.
Earlier, on February 15, the Treasury had announced its regular 4-year cycle
note auction which \vas to be dated March 31, 1982. The February 22 auction
for $2.5 billion of new cash drew good bidding interest with over $5.8 billion
of tenders submitted by the public including $0.3 billion of noncompetitive
tenders. An additional $0.3 billion of foreign add-ons increased the size ofthe
issue to nearly $2.9 billion. Commercial banks took $ 1.3 billion, or 46 percent,
ofthe notes and dealers picked up $0.8 billion, or 29 percent, in the auction.
The 7.89-percent average yield was almost 60 basis points higher than the yield
at the most recent 4-year cycle note auction 3 months back. A 7 7/8 percent
coupon was set on the issue, which immediately traded at higher price levels
in when-issued trading.
Disposition of marketable Treasury securities excluding regular bills, fiscal 1978
[In millions of dollars]
Securities

Date of .
retirement

Description and maturing date

1977
Oct. 1
Oct. 31
Nov. 15
Nov. 30
Dec. 31

Issue date

Redeemed Exchanged
for cash or
for new
carried to
issue at
matured debt maturity

Total

NOTES AND BONDS

1 1/2
7 1/2
7 3/4
6 5/8
7 1/4

percent
percent
percent
percent
percent

note,
note,
note,
note,
note,

Oct. 1, 1977
Oct. 31, 1977
Nov. 15, 1977
Nov. 30, 1977
Dec. 31, 1977

Oct. 1, 1972
Oct. 31, 1975...
Nov. 15, 1974..
Mar. 3, 1976....
Dec. 31, 1975 ..

17
2,938
2,392
2,516
2,437

3/8 percent note, Jan. 31, 1978
1/4 percent note, Feb. 15, 1978
percent note, Feb. 28, 1978
3/4 percent note. Mar. 31, 1978
l/2percent note, Apr. 1, 1978
1/2 percent note, Apr. 30, 1978
1/8 percent note. May 15, 1978
7/8 percent note. May 15, 1978
1/8 percent note, May 31, 1978
7/8 percent note, June 30, 1978
7/8 percent note, July 31, 1978
3/4 percent note, Aug. 15, 1978
5/8 percent note, Aug. 15, 1978
5/8 percent note, Aug. 31, 1978
1/4 percent note, Sept. 30, 1978

Feb. 2, 1976
Feb. 15, 1971..,
Oct. 7, 1975
Mar. 31, 1976.,
Apr. 1, 1973...,
Niay 17, 1976.,
Feb. 18, 1975..,
Aug. 15, 1975.,
June 1, 1976...,
June 30, 1976.,
July 30, 1976...
May 15, 1974.,
May 15, 1975.,
Aug. 31, 1976.,
Sept. 30, 1976.,

2,239
5,418
2,062
2,850

218
1,238
112
328

17
3,156
3,630
2,628
2,765

1978
Jan.31
Feb. 15
Feb. 28
Mar.31
Apr. 1
Apr. 30
May 15
May 15
May 31
June 30
July 31
Aug. 15
Aug. 15
Aug. 31
Sept 30

6
6
8
6
1
6
7
7
7
6
6
8
7
6
6

Total coupon securities

15
2,146
3,006
2,882
2,390
2,537
2,480
1,825
2,558
2,749
2,684
48,141

272

200
511

2,511
8,389
2,115
3,162
15
2,574
3,960
4,423
2,567
3,331
2,855
2,462
5,155
2,949
3,195

13,718

61,859

2,971

53
312

428
954
1,541

177
794
375
637
2,597

BILLS

1977
Nov. 15..

Other:
6.390 percent (8-day)

Nov. 7, 1977..

2,505

2,505

6.273
6.346
6.645
7.110

Dec. 2,
Mar. 8,
Apr. 3,
June 2,

3,004
3,004
6,006
6,005

3,004
3,004
6,006
6,005

1978
Apr.
Apr.
Apr.
June

20..
20..
27..
22.,

percent
percent
percent
percent

(139-day)
(43-day)
(24-day)
(20-day)

Total other bills..
Total securities..




1977 ..
1978..
1978 ..
1978 ..

20,524

20,524
68,665 ,

13,718

82,383

REVIEW OF TREASURY OPERATIONS

25

The harsh winter weather continued into February but its impact on the
economy did not appear too drastic. Industrial production showed a small
increase, but was not enough to offset January's decline. The seasonally
adjusted annual rate of housing starts was also higher than the January rate but
was much lower than the rates of other recent months. The same was true with
retail sales. However, credit demands continued high as commercial bank
loans and consumer installment credit posted increases. The unemployment
rate fell to 6.1 percent despite the long coal miners strike. Probably the worst
news for the month of February was the record $5.5 billion U.S. balance of
trade deficit.
To help meet its seasonal cash needs, the Treasury announced the offering
of a 43-day cash management bill of $3 billion. There was very little market
reaction to the March 1 announcement. The bills were to be issued March 8
as an addition to the outstanding bills maturing on April 20. This raised the
total amount of bills maturing on that date to $ 11.7 billion. Only competitive
tenders totaling $3 billion in minimum amounts of $1 million were accepted
from the $7.3 billion ofpublic tenders received in the March 3 auction. A 6.35percent average discount rate resulted in the auction.
Subsequently, on March 15, the Treasury announced a $3 billion issue of
2-year notes to refund $2.8 billion of privately held notes due March 31 and
raise $0.2 billion of new cash. Ofthe $6.1 billion of tenders from the public,
$3 billion was accepted including $0.7 billion of noncompetitive tenders.
Another $0.7 billion of foreign add-ons increased the size ofthe issue to $3.7
billion. Commercial banks were allotted $1.9 billion, or 51 percent, of the
notes. Dealers took only $0.3 billion, or 8 percent, while individuals and
corporations each received $0.2 billion, or 6 percent. The good bidding
interest in the March 22 auction resulted in a 7.56-percent average yield, 14
basis points below the last 2-year note auction. A 7 1/2 percent coupon was
set. Since this coupon was identical to that of an outstanding 4-year note issue
also maturing on March 31, 1980, the new issue was considered an addition
to the 4-year notes. The Treasury had anticipated this possibility and had
indicated in the original announcement that the two issues would be
consolidated effective March 31, 1978, if a 7 1/2 percent coupon resulted in
the auction. The auction of this 7 1/2 percent 2-year note was the last coupon
issued in the first quarter of 1978.
For the quarter as a whole, the Treasury raised $11.6 billion of new cash with
coupons, $5.1 billion ofwhich came from four 2-year cycle notes issued during
the quarter. The quarterly 4-year cycle note raised $2.9 billion while the 15year bond issue accounted for $1.5 billion. The quarterly refunding issues
raised an additional $2.1 billion of new cash. The total of foreign add-ons
included in the notes and bonds issued during the quarter amounted to $2.7
billion.
Looking at the bill market in the January-March quarter, $4.6 billion of new
cash was raised including $3 billion from the March 1, 43-day cash
management bill. About $ 1.2 billion was raised from regular 13- and 26-week




26

1978 REPORT OF THE SECRETARY OF THE TREASURY

issues during the second half of February and the month of March. Foreign
add-ons to 52-week bills accounted for $0.4 billion of new cash during the
quarter.
In all, the Treasury raised $16.1 billion from marketable issues during this
period compared with $ 19.4 billion in the previous quarter. In addition, about
$14.6 billion of privately held coupon maturities was refunded during the
quarter.
New cash raised in the nonmarketable sector in the January-March quarter
amounted to $5.1 billion, $2.5 billion of which was in the State and local
government series, while $1.4 billion was received from the foreign government series. Series E and H savings bonds accounted for another $1.2 billion.
After their initial rise in January, most short-term interest rates fluctuated
within fairly narrow ranges during February and March. The Federal funds rate
continued to hover around 6 3/4 percent, its level since mid-January. Rates
on commercial paper due in 90 to 119 days also remained at the level of 6 3/4
percent. However, short-term Treasury bill rates actually declined since
January, reflecting in part the strong demand by foreign investors seeking to
halt the appreciation of their currencies against the U.S. dollar. Intermediateand long-term Treasury rates posted net increases of from 10 to 15 basis points
between late January and the end of March. These rates rose through most of
February and then declined in early and mid-March, only to begin climbing
again in late March. Corporate and municipal bonds ended March trading at
about the same price levels as in late January, but mortgage rates continued
to climb steadily during the January-March period.
Around the end ofthe month, on March 28, the Treasury auctioned a 5-year
1-month note that had been announced on March 21. This announcement to
raise $2.5 billion of new cash had been expected. About $2.5 billion of the
notes, which were to be dated April 5, was accepted from the $5.6 billion of
public tenders. Nearly $0.4 billion was noncompetitive tenders. Foreign addons of $50 million increased the issue size to almost $2.6 billion. Commercial
banks took $1.3 billion, or 49 percent, ofthe issue while dealers' allotments
totaled $0.6 billion, or 25 percent. Routine bidding interest resulted in an
average yield of 7.94 percent and a 7 7/8 percent coupon rate was assigned
to the notes. Both the average yield and the coupon were the highest since the
Treasury began selling 5-year cycle notes early in 1976. The issue traded at
about the same price levels as the auction average in when-issued activity.,
On March 28, the Treasury announced a slightly larger than expected issue
of 24-day cash management bills to raise $6 billion in new cash. The bills,
available only by competitive tender in $ 1 million minimums, were to be dated
April 3 and due April 27. About $5.7 billion of outstanding 13- and 26-week
bills were also maturing on April 27. Almost $10.9 billion of tenders were
received from the public for the $6 billion of bills and an average discount rate
of 6.64 percent resulted in the auction on March 30.
March economic data showed that the adverse effects of the harsh winter
were not lingering. Industrial production, sales, employment, and both




REVIEW O F TREASURY

OPERATIONS

27

commercial and residential construction rose. At the same time, however,
inflationary fears were fueled by further large increases in the Consumer Price
Index and the Producer Price Index, formerly known as the Wholesale Price
Index. Commercial bank lending also continued to expand in March, and the
United States continued to run a balance of trade deficit.
The Treasury's offering of its regular monthly 2-year note was announced
on April 12. This cycle note was to refund $2.2 billion of notes maturing April
30, with a new 2-year note dated May 1. The auction was held on April 19,
1978. About $2.2 billion of the $5.3 billion of tenders from the public was
accepted including $0.4 billion of noncompetitive tenders. Foreign add-ons
totaling nearly $0.6 billion increased the issue size to $2.8 billion. Commercial
banks received $1.3 billion, or 48 percent, ofthe notes while dealers received
$0.6 billion, or 22 percent. Despite good demand for the notes, the 7.80percent average yield was higher than expected and almost 25 basis points
above the most recent 2-year note auction in March. A 7 3/4 percent coupon
was placed on the issue.
As the quarterly refunding approached, a cautious atmosphere developed
in the market due mainly to fears of accelerating inflationary pressures.
Nevertheless, a favorable reaction greeted the Treasury's April 26 announcement concerning the May quarterly refunding. The refunding package
included a paydown of $1.9 billion to be achieved by issuing $2.5 billion of
10-year notes and $1.5 billion of 22 1/4-year bonds to partially refund $5.9
billion of privately held notes due May 15. The bond issue represented a
reopening of the outstanding 8 3/8 percent bonds maturing in August 2000.
The 10-year note issue was the fourth since March of 1976, when the Treasury
was granted authority to sell notes up to 10 years in length instead of the
previous 7-year maximum.
The 10-year notes were well received at the auction on May 2 as slightly
more than $2.5 billion of tenders were accepted from the $5 billion submitted
by the public, including a higher than expected $0.6 billion of noncompetitive
tenders. Dealers received $1 billion, or 40 percent, of the notes while
commercial banks took $0.8 billion, or 32 percent; and allotments to
nonfinancial corporations totaled almost $0.3 billion, or 11 percent. The
average auction yield was 8.29 percent, and an 8 1/4 percent coupon was
placed on the issue.
The May 3 price auction for the $1.5 billion of reopened 8 3/8 percent bonds
attracted $3.1 billion of tenders from the public. Noncompetitive tenders
totaled almost $0.2 billion. This reopening raised the amount of these bonds
in the hands of the public to $2.7 billion. Dealers took $0.6 billion, or 40
percent, of the bonds while commercial banks were awarded $0.4 billion, or
27 percent. State and local governments accounted for $0.3 billion, or 20
percent, ofthe issue including $0.2 billion, or 12 percent, taken by the general
funds. Routine interest in the auction resulted in an 8.47-percent average yield
which was a bit higher than anticipated.




28

1978 REPORT OF THE SECRETARY OF THE TREASURY

The paydown resulting from the refunding was over $1.8 billion but slightly
less than originally announced. Due mainly to the refunding, the average
length of the marketable debt held by private investors reached 3 years 1
month at the end of May, representing a gain of about 1 1/2 months over the
April figure.
Concem over disintermediation was heightened in May when savings flows
figures in thrift institutions for April showed a sharp decline in savings.
Subsequently, a joint statement by the Federal Reserve Board, Federal Deposit
Insurance Corporation, and Federal Home Loan Bank Board announced the
authorization of two new types of time certificates designed to boost savings
inflows. The first was a 6-month money market certificate with a ceiling
interest rate tied to the average auction yield for the most recently auctioned
6-month Treasury bill. Thrift institutions could pay 1/4 percent above the
Treasury bill rate while commercial banks could pay a rate equal to that on
the Treasury bill. The second instrument was a certificate maturing in 8 years
or more on which thrift institutions would pay 8 percent and commercial banks
7 3/4 percent. The 6-month issues had a $ 10,000 minimum, and the long-term
certificates had a $1,000 minimum. Both new instruments were to be offered
beginning on June 1.
At the time the Treasury announced its intention to refund $2.4 billion of
privately held notes due May 31 by selling an identical amount of 2-year notes,
there were several factors contributing to the gloomy market atmosphere that
prevailed. There was evidence of a strong economy with high inflationary
pressures and, also, the fear of a tightening in Federal Reserve monetary
policy. This was enough to overshadow the good technical position of the
market. In the auction, $2.5 billion of the $5.8 billion of tenders from the
public was accepted including $1 billion of noncompetitive tenders. The
amount of noncompetitive tenders was the highest in a 2-year cycle note sale
since September 1975. The size ofthe issue was increased to $2.9 billion with
the addition of almost $0.5 billion of foreign add-ons. Commercial banks
received $0.8 billion, or 27 percent, of the notes and dealers received $0.6
billion, or 20 percent, while individuals took $0.3 billion, or 11 percent. The
8.09-percent average yield in the May 23 auction marked the first time since
September 1975 that a 2-year cycle note was auctioned at a yield above 8
percent. The coupon rate was set at 8 percent.
Later in the month, on May 22, the Treasury announced plans to auction
$2 1/4 billion of 4-year 1-month notes for new cash on the last day of the
month. Almost $2.3 billion of tenders was accepted from the $5 billion
submitted by the public including $0.5 billion of noncompetitive tenders. The
$0.3 billion of foreign add-ons increased the size ofthe issue to $2.6 billion.
Commercial banks took $1.2 billion, or 47 percent, ofthe total and dealers
took $0.6 billion, or 25 percent. Routine interest in the auction led to an 8.27percent average yield, almost 40 basis points higher than the previous quarter's
4-year cycle note issue. The assignment of an 8 1/4 percent coupon followed.
By the time of issue date, the notes were selling at a premium.




REVIEW OF TREASURY OPERATIONS

29

Meanwhile, some Treasury bill yields increased in reaction to the Treasury's
May 26 announcement of a larger than expected $6 billion issue of 20-day cash
management bills. The bills were sold June 1, and were to mature on the same
day as the $5.6 billion of 13- and 26-week bills. Only competitive bids in
minimum amounts of $1 million were accepted. About $6 billion ofthe $12.3
billion of public tenders was accepted at an average discount rate of 7.11
percent.
The regular monthly 2-year cycle note offering was announced on June 14,
when the Treasury invited tenders for $3 billion of notes to refund $2.5 billion
of privately held maturing notes and raise $0.5 billion of new cash. Almost $3.1
billion ofthe $4.9 billion ofpublic tenders was accepted in the June 20 auction,
including $0.7 billion of noncompetitive tenders. Foreign add-ons of $0.6
billion brought the new cash figure for this issue up to $ 1.1 billion. Allotments
to commercial banks totaled $1.5 billion, or 41 percent, of the notes while
dealers were allotted $0.9 billion, or 24 percent. The average auction yield of
8.32 percent was 23 basis points above the May 2-year cycle note. The coupon
set on the issue was 8 1/4 percent.
Unlike the previous two quarters, a net paydown of $0.3 billion was achieved
through issues of marketable Treasury securities to private investors during the
April-June quarter. The paydown in Treasury bills was $5.9 billion, excluding
$6 billion each of April and June cash management bills issued and redeemed
during the quarter. Marketable coupon issues provided $5.5 billion of new
cash including $ 1.9 billion of foreign add-ons. The new cash consisted of $2.2
billion from 2-year cycle notes, $2.6 billion each from the 4- and 5-year cycle
notes and a paydown of $1.8 billion in the quarterly refunding. In addition to
the new cash raised, $13 billion of maturing coupons were refunded.
In the nonmarketable area, a record $4.2 billion of new cash was raised with
State and local government series issues. This was partially offset by a more
than $2.1 billion paydown of foreign government series securities; however,
E and H bonds provided $1.2 billion in new money which raised the total to
a net $3.2 billion.
During the quarter, interest rates rose rather sharply. Federal funds moved
up by 1/4 percent to a 2.7-percent trading level in late April and then to 7 1/4
percent in early May. For most of June, funds traded at 7 1/2 percent but, by
the end ofthe month, a further 1/4-percent boost to 7 3/4 percent took place.
Commercial paper rates tended to lag behind the rising Federal funds rate for
most of the quarter, but by late June a 7 3/4-percent rate also prevailed on
these 90 to 119 day money market instruments. Three-month Treasury bill
rates actually declined in April and did not begin rising until late May. In the
last weekly auction in June, the average yields on both 13- and 26-week bills
were the highest since December 1974. A 6.97-percent yield was realized on
13-week bills, and the companion 26-week bill yielded 7.40 percent in the June
26 auction. Commercial banks raised their prime lending rate three times
between early May and late June, bringing the level from 8 percent to 8 3/4



30

1978 REPORT OF THE SECRETARY OF THE TREASURY

percent. In early May, the Federal Reserve raised the discount rate 1 /2 percent
to a 7-percent level.
Likewise, the intermediate- and long-term interest rates rose consistently
during the April-June period. Rates on Treasury securities maturing in 1 year
rose almost a full percentage point to about 8.30 percent on the basis of weekly
averages. Rates on Treasury issues due in 7 to 10 years increased by about 1/2
percent to 8 1/2 percent or higher while longer term issues rose by 35 to 40
basis points. Aa-rated corporate bond rates rose by 1/2 percent to almost 9.20
percent while long-term municipal bond yields rose at a steady clip from about
5.70 percent at the end ofMarch to 6.30 percent at the end of June. Mortgage
rates also continued their steady climb during the quarter.
Most economic data reported for the April-June quarter indicated underlying strength. Industrial production, for example, increased during all 3
months. Residential and commercial construction activity were robust
throughout the period. In June, seasonally adjusted employment increased by
over 700,000, pushing unemployment down to 5.7 percent. This was the first
time this rate had fallen below 6 percent since October 1974. Personal income
continued to gain while at the same time consumer borrowing was on the rise,
as evidenced by the strong increases in consumer installment credit. Commercial bank lending was also brisk. Inflation worries continued to be justified as
the Producer Price Index posted successive large increases. The rise in April
was about 12 percent on a seasonally adjusted annual basis due in large part
to food price increases. Consumer prices rose at a double-digit pace
throughout the quarter led by very sharp increases in food prices and, more
specifically, in meat prices. While the U.S. trade and current account deficits
were smaller than the previous quarter, the deficits were still very large.
When the time came for the Treasury's regular 5-year cycle offering for the
first month after the quarter, the market expected the Treasury's June 19
announcement of $1 3/4 billion of 15-year 1-month bonds for new cash;
however, the amount was higher than some anticipated. This marked the third
time, beginning with July 1977, that the Treasury substituted a 15-year bond
in the previously established 5-year note cycle slot. About $1.8 billion ofthe
$4.1 billion of public tenders for the new bonds due in August 1993 was
accepted, including $0.4 billion of noncompetitive tenders. Commercial banks
and dealers combined to take $ 1.4 billion, or 80 percent, of the bonds with
the latter group accounting for $0.8 billion, or 47 percent. The good bidding
interest in the June 28 auction resulted in an average yield of 8.63 percent.
This represented an increase of almost 70 basis points over the similar maturity
sold 6 months earlier. The 8 5/8 percent coupon placed on the new security
was a record for a Treasury bond. The bonds traded at a discount and were
bid at a yield of 8.70 percent when issued on July 11.
The next day after the settlement day for the 15-year 1-month bond, the
Treasury announced a $3 1/4 billion 2-year note to be dated July 31 to refund
$2.5 billion of privately held maturing notes and raise $0.8 billion of new cash.




REVIEW OF TREASURY OPERATIONS

31

Almost $5 billion of tenders were received from the public in the July 20
auction, including $0.8 billion of noncompetitive tenders. A total of $3.3
billion of tenders was accepted and foreign add-ons of $0.5 billion increased
the issue size to $3.8 billion. Commercial banks received $1.5 billion, or 39
percent, of the notes and dealers were allotted $1.2 billion, or 31 percent.
Routine bidding interest resulted in an 8.61-percent average yield, 29 basis
points higher than the previous 2-year note auction for June and the highest
yield for this maturity length since the May 1974 auction. An 8 1/2 percent
coupon was assigned to this new issue which traded at a premium throughout
the when-issued period.
Most short-term rates rose slightly in July. Federal funds, for example, rose
from 7 3/4 percent to about 7 7/8 percent. Treasury bill rates rose in early and
mid-July but fell later in the month, as the market rallied. On balance, only
a small 5 to 10 basis point increase was realized during July. Ninety-119-day
commercial paper rates posted an increase of about 1/8 percent and reached
the 7 7/8-percent level. During the first week of July, the Federal Reserve
raised its discount rate 1/4 percent to 7 1/4 percent, and banks raised their
prime rate 1/4 percent to 9 percent. Rates on most intermediate and long
Treasury issues increased about 5 basis points from the end of June to late July.
Corporate bond yields rose by about the same amount while rates on long-term
municipal issues declined slightly.
On July 26, the Treasury announced the terms of its August quarterly
refunding in which $4.4 billion of privately held notes maturing August 15
were to be refunded, and $2.6 billion of new cash was to be raised. The
refunding package consisted of offerings of $2.5 billion of 3-year notes, $3
billion of 7-year notes, and $1.5 billion of 30-year bonds. Market reaction to
the announcement was favorable, as the amounts of the new securities were
considered quite manageable given the market's good technical position.
The 3-year notes attracted $5.4 billion of public tenders at the August 1
auction. Almost $2.6 billion was accepted, including $1.1 billion of noncompetitive tenders. Over $0.3 billion of foreign add-ons increased the issue size
to $2.9 billion. Commercial banks received $0.8 billion, or 30 percent, ofthe
notes and dealers took $1.2 billion, or 46 percent. Strong bidding interest
resulted in an 8.46-percent average yield and an 8 3/8 percent coupon.
Nearly $3.1 billion of the $4.1 billion ofpublic tenders was accepted at the
August 2 auction of 7-year notes, including $0.7 billion of noncompetitive
tenders. The $0.3 billion of foreign add-ons, a new high for an issue of this
length, brought the issue size up to $3.4 billion. Commercial banks' allotments
totaled $0.7 billion, or 22 percent, of the notes and dealers received $1.9
billion, or 1.3 percent. An 8.36-percent average auction yield led to the
placement of an 8 1/4 percent coupon.
The 30-year bond auction on August 3 attracted $2.6 billion of tenders, and
ofthe $1.5 billion accepted, over $0.1 billion was noncompetitive. Dealers
took $0.8 billion, or 56 percent, ofthe bonds while commercial banks received



32

1978 REPORT OF THE SECRETARY OF THE TREASURY

$0.4 billion, or 29 percent. An average auction yield of 8.43 percent, lower
than anticipated, led to the setting of an 8 3/8-percent coupon rate. In whenissued trading, the 3-year notes, which were fairly widely distributed, were
selling at a premium while the two longer issues moved to a discount by the
August 15 issue date. All three auctions resulted in record average yields for
the specific maturities sold. Including add-ons, a total of $3.4 billion of new
cash was raised in this quarterly refunding. Largely due to the three new issues,
the average length of the privately held marketable debt rose to 3 years 3
months by the end of August, its highest level in almost 6 years.
Following its successful August refunding, the Treasury announced, on
August 17, the sale of $3 billion of 2-year notes to refund $2.7 billion of notes
maturing on August 31 and raise $0.3 billion of new cash. About $6.1 billion
of tenders were submitted by the public and $0.6 billion of the nearly $3.1
billion of accepted tenders were noncompetitive. Including $0.3 billion of
foreign add-ons, $0.6 billion of new cash was raised. Investor groups receiving
the largest amounts ofthe new notes were commercial banks with $1.3 billion,
or 44 percent, and dealers who took $0.7 billion, or 22 percent. A favorable
reception to the auction led to an 8.38-percent average yield, 23 basis points
below the 2-year sale 1 month earlier. An 8 3/8 percent coupon was set on the
new notes which traded below the average auction price during when-issued
trading.
The market rally which began in late July lasted, approximately, through the
first half of August. It was fueled by a good technical position and favorable
reception to the Treasury's August refunding package, as well as a favorable
report that farm prices had dropped in July for the first time in 10 months.
However, in late August the market began to view the situation less
optimistically. The Federal funds rate jumped from about 7 7/8 percent in early
August to 8 1/8 percent and then to 8 1/4 percent. At midmonth, 90-119-day
commercial paper rates had declined to 7 3/4 percent but late in the month
rates rose to about 8 percent. Also in late August the Federal Reserve
increased the discount rate by 1/2 percent to 7 3/4 percent. Three-month
Treasury bills were bid up to about 7.35 percent in the last week of August
compared with about 6.75 percent earlier in the month.
Intermediate-term Treasury rates near the shorter end of the maturity
spectrum also fell in the early part of the month and then climbed later on.
Longer term rates moved within a narrow range over the month, showing a
decline on balance. As a result, by late August, the Treasury yield curve was
almost perfectly flat from I to 20 years at a level of about 8.40 percent. Aarated corporate bond yields declined by about 1/4 percent in August, while
municipal bond rates fell slightly. New conventional mortgage rates remained
at their July level of 7.80 percent.
Meanwhile, the introduction ofthe two new savings certificates back in June
had helped to improve the flow of savings to thrift institutions, and thus
mitigate worries concerning disintermediation. As the popularity of the 6


REVIEW OF TREASURY OPERATIONS

33

month certificates grew, however, many in the thrift industry expressed
concern over the high cost of these funds and the resulting squeeze on profit
margins, as interest rates on the 6-month Treasjury bills to which the 6-month
certificates were tied, continued to climb.
Interest rates continued to advance in September and approached their
1974 highs. Short-term rates posted significant increases as the Federal funds
rate rose steadily from about 8 1/4 percent to an average of 8 5/8 percent
during the final week, while 90-119-day commercial paper rates climbed
about 1/2 percent to 8 1/2 percent and commercial banks increased their
prime lending rate in three successive 1/4-percent steps to 9 3/4 percent, the
highest since early 1974. In mid-September, the Federal Reserve raised its
discount rate to 8 percent from 7 3/4 percent. This equaled the previous high
reached during 1974. Three-month Treasury bills rose by over 40 basis points
to a bid-yield above 8 percent. In the last bill auctions in fiscal 1978, the 13-,
26-, and 52-week bills recorded the highest average yields since September
1974. Larger increases in short- and intermediate-term Treasury coupon issues
relative to longer maturities gave the Treasury yield curve a negative slope as
1-year maturities yielded about 8.80 percent by the end of September while
20-year maturities yielded about 8.50 percent. Aa-rated corporate bonds
ended the month yielding almost 9 percent representing a 1 /4-percent increase
over the month while municipal bond and mortgage rates remained relatively
unchanged during September.
The last coupon security issued in fiscal 1978 was a 4-year cycle note that
had been announced on August 22 and was to be issued on September 6, 1978.
The smaller than expected $2 1/4 billion issue of 4-year 1-month notes for new
cash was well received. Due to a mistake in recording competitive tenders, less
than $2.2 billion was accepted from the $3.9 billion of tenders submitted by
the public in the August 29 auction. With foreign add-ons of slightly over $0.3
billion the issue size was increased to $2.5 billion. About $0.4 billion of
noncompetitive tenders was accepted. Commercial banks were allotted $1.1
billion, or 53 percent, of the notes while dealers' allotments totaled $0.5
billion, or 23 percent. The 8.41-percent average auction yield was the highest
in 3 years for a similar maturity and an 8 3/8 percent coupon was assigned to
the notes. Though the issue began trading at a discount it moved to a slight
premium by the September 6 issue date.
In the last quarter of fiscal 1978, the Treasury raised $10.8 billion of new
cash through issues of marketable securities to private investors. Slightly more
than $9.6 billion of new cash was raised in the coupon sector and an identical
amount of maturing notes held by private investors was also refunded. The new
cash raised was as follows: $1.9 billion from the two 2-year cycle notes; $2.5
billion in the 4-year cycle note sale; $1.8 billion from the 15-year bond; and
$3.4 billion in the August quarterly financing. Foreign add-ons to coupon
issues included in the above figures totaled more than $1.7 billion. All ofthe
new money from Treasury bills came from the 52-week bills. The net bill issues
was $1.2 billion, $0.4 billion ofwhich was foreign add-ons.



34

1978 REPORT OF THE SECRETARY OF THE TREASURY

In the nonmarketable area $4.6 billion of new cash was raised in the final
quarter. Over $3.6 billion was from State and local government series issues,
of which $3.4 billion was raised in August alone as many State and local
governments invested the proceeds from advance refunded issues in Treasury
State and local series as they rushed to beat the September 1 deadline, when
new Treasury regulations would restrict arbitrage opportunities created by
investing in higher yielding taxable securities through sinking funds set up for
this purpose. Another $0.2 billion of new cash was raised through sales ofthe
foreign government series securities while the $0.8 billion raised through sales
of E and H savings bonds was the smallest amount for this category in almost
4 years.
Most economic measures continued to give off strong signals during the last
quarter of fiscal 1978, although some indicated a slower pace than in the
previous quarter. The unemployment rate fluctuated up and down during the
period and stood at 6 percent in September, representing a 0.3-percent
increase since June but still a rather low rate for recent years. Industrial
production posted steady increases though not as large as during the previous
quarter. The housing market was just slightly below the booming April-June
quarter. Credit demands appeared to be undaunted by rising interest rates as
commercial bank loans rose, reflecting a rise in business loans and the very
strong demand for real estate and consumer loans. The extension of consumer
installment credit remained at a high rate. Inflation still loomed as a major
problem although the pace of both producer and consumer price increases had
slowed from the previous quarter. The U.S. merchandise trade balance
continued to show large monthly deficits and the dollar was still moving to new
lows against some foreign currencies at the end ofthe fourth quarter of fiscal
1978.
Federal Financing Bank
The Federal Financing Bank (FFB), a corporate instrumentality of the U.S.
Government managed and operated by Treasury employees, ended fiscal 1978
with holdings of $48.08 billion in U.S. agency and U.S. agency-guaranteed
obligations, an increase of $12.66 billion over the year. Net income for fiscal
1978 totaled $86.3 million; there were no operating losses, and administrative
expenses were $403,273. Accumulated surplus reached $117.4 million on
September 30, 1978; a motion to transfer this surplus, less an operating
reserve, to the Treasury will be considered at the next FFB Board of Directors
meeting.
The FFB was established by the Federal Financing Bank Act of 1973 to
reduce the costs of Federal and federally assisted borrowing programs, and to
finance these programs in a manner least disruptive of private financial
markets and institutions. The act authorizes the FFB to purchase obligations
issued, sold, or guaranteed by a Federal agency, and to finance these purchases
by borrowing either directly in the private market or through the Secretary of



REVIEW OF TREASURY OPERATIONS

35

the Treasury. Since it began operations in 1974, the FFB has become the
vehicle for most Federal agency financing; major eligible programs still not
financed by the FFB are: Department of Commerce guaranteed ship mortgage
bonds. Department of Housing and Urban Development guaranteed taxexempt housing and urban renewal notes and bonds, and Govemment
National Mortgage Association guaranteed passthrough securities. Currently,
the FFB finances each of its loans by a borrowing from the Treasury with
identical terms other than the interest rate; currently the FFB lends at oneeighth percent above its borrowing rate, which is Treasury's cost of money.
This one-eighth-percent spread, and the FFB's investment of cash surplus in
Treasury market-based short-term special issues, produce the FFB's income.
Fiscal 1978 was a period of FFB growth through existing, rather than new,
lending programs, and of increased congressional interest in the FFB role in
foreign military sales financing and in Federal credit assistance generally.
During fiscal 1978, for example, holdings of Farmers Home Administration
certificates of beneficial ownership in pools of insured loans increased by
$7.66 billion; loans to electric and telephone systems guaranteed by the Rural
Electrification Administration increased by $1.8 billion; and holdings ofthe
Tennessee Valley Authority notes and bonds increased by $1.34 billion. The
FFB began the year holding New York City revenue anticipation notes having
a book value of $ 1.16 billion purchased with recourse from the Secretary of
the Treasury pursuant to the New York City Seasonal Financing Act of 1975.
These notes, plus $0.73 billion in additional notes purchased in 1978, were
repaid by June 30, 1978, when the Secretary's lending authority under this act
expired. The FFB will have no role in the new assistance legislation: the New
York City Financial Assistance Act of 1978.
FFB loans to foreign govemments guaranteed by the Department of Defense
pursuant to the Arms Export Control Act grew by $ 1.46 billion in fiscal 1978.
This program was the subject of an oversight hearing on January 30, 1978, by
the Senate Banking Committee with Roger Altman, Assistant Secretary ofthe
Treasury and Vice President ofthe FFB, testifying on behalf of Treasury and
the FFB. After this hearing. Senator Proxmire introduced S. 2545, which
would prohibit the FFB from any further foreign military sales financing. No
action was taken on the bill during the 95th Congress.
In an attempt to control the overall level of Federal loan guarantees, several
bills were introduced in the 95th Congress (e.g., H.R. 10416, H.R. 7416)
which would utilize the FFB as the instrument for control. Generally, the bills
would (1) place the FFB on budget, (2) limit annual FFB lending to an amount
approved in appropriations acts, and (3) require guarantee programs ofthe
marketable-security type to be financed through the FFB. In commenting on
these proposals, Treasury agreed that greater congressional control is needed,
that loan guarantee programs should be subject to appropriation process
review and that if the FFB is included in the budget, a requirement that certain



36

1978 REPORT OF THE SECRETARY OF THE TREASURY

guarantee programs be financed through the FFB was necessary to counter
budgetary pressures for returning these programs to market financing.
Treasury also promised to work with the Congress to clarify the technical
issues raised by the bills. None of these bills was enacted; however, an
administration proposal on Federal credit program control is being prepared.
Capital Markets Policy
The Office of the Deputy Assistant Secretary for Capital Markets Policy
includes the Office of Capital Markets Legislation (which is responsible for the
development of administration policy on legislation affecting banks and other
fmancial institutions) and the Office of Securities Markets Policy (which is
primarily concerned with the corporate securities markets and with equity
capital formation).
In the area of capital markets legislation, the Office played an important role
for the administration in shaping the Financial Institutions Regulatory Act of
1978, the first major piece of banking legislation since 1970. It was also
responsible for the development of the administration's views on proposed
legislation to stem the attrition in membership in the Federal Reserve System,
to regulate the rights of consumers of banking services in the area of electronic
funds transfer, and to establish a central liquidity facility for credit unions. It
continued to advance the Treasury's work as lead member ofthe Interagency
Task Force on Regulation Q and other aspects of deposit interest rate controls.
In the securities markets area, the Office has continued its review of
proposed changes in the restrictions governing the securities activities of
commercial banks, commenced an investigation of the effects on the capitalraising process of structural changes in the securities markets and the securities
industry, and initiated a broad-ranging inquiry into problems experienced by
small and medium-sized enterprises in raising equity capital. The Office of
Securities Markets Policy has also undertaken part of the Treasury's
responsibility for the Industrial Innovation Domestic Policy Review.
Finally, the Office has continued to represent the Treasury in performing the
Secretary's statutory role as a Director of the U.S. Railway Association and
the Pension Benefit Guaranty Corporation. In the former capacity, the Office
has been the lead negotiator of the terms of an additional $1.3 billion
investment in the Consolidated Rail Corporation (ConRail) authorized by the
95th Congress.
State and Local Finance
The Office of the Deputy Assistant Secretary for State and Local Finance
serves as the point of coordination for the Offices of New York Finance, Urban
and Regional Economics, and Municipal Finance.
This Office provides policy guidance within Treasury and without on
financial and economic matters relating to State and local finance. It works
closely with the Office of Revenue Sharing, a separate agency within Treasury,



REVIEW OF TREASURY OPERATIONS

37

in reviewing various policy options with respect to general revenue sharing, a
major Federal assistance program to State and local governments which
expires September 30, 1980. This Office will continue its close relationship
with the Office of Revenue Sharing during 1979-80 as the administration's
position on the program is developed and transmitted to the Congress.
Further, the Office serves as the Department's liaison to several interagency
groups designed to coordinate administration policies and programs directed
at the State and local sector including the Assistant Secretaries' Working
Group for Rural Development and the Interagency Coordinating Council. The
latter was established as part of the President's urban program announced in
March 1978. The Office also deals with State and local governments directly
or through their interest groups in Washington.
Office of New York Finance

During fiscal 1978, the Department had oversight responsibility for the loan
program to New York City pursuant to the provisions of the New York City
Seasonal Financing Act of 1975 (Public Law 94-143). That act authorized the
Secretary to extend up to $2.3 billion in annual seasonal financing to New York
City until the end ofthe city's 1978 fiscal year. It expired on June 30, 1978.
The Federal Government provided $725 million in loans to New York City
in fiscal 1978. This amount, along with another $1.15 billion it had lent the
city in Federal fiscal 1977, was repaid in the April-June 1978 quarter. These
were the final loans authorized under the act. While Public Law 94-143 was
in existence, the Department lent the city a total of $5.2 billion ($1.26 billion
in city FY 1976, $2.1 billion in FY 1977, and $1,875 billion in FY 1978). All
loans were repayed on time or ahead of schedule with interest. The
Department estimates it returned some $30 million less administrative
expenses to the general Treasury as a result of the 1 -percent fee charged to
the city above the Treasury cost of borrowed funds.
The seasonal financing legislation was intended to assist the city's successful
return to the credit markets. The city attempted a sale of notes in the public
markets in November 1977, as required under section 6.11 ofthe Department's credit agreement with the city. However, this offering failed. It became
clear that the city would not be able to regain market access in fiscal 1979
either for its short-term or long-term needs.
Consequently, the administration introduced legislation in 1977 to assist the
city in fulfilling its financing needs. The bill was adopted on August 8, 1978,
as the New York City Loan Guarantee Act of 1978 (Public Law 95-339). It
authorizes the Secretary to guarantee up to $ 1.65 billion in long-term city debt
as a means of assembling financing necessary to carry the city through fiscal
1982. During this period, the city is required to achieve a balanced budget in
accordance with generally accepted accounting principles and to complete
other budget and financial reforms. These actions should enable the city to
regain access to conventional borrowing sources so that, by the end of the




38

1978 REPORT OF THE SECRETARY OF THE TREASURY

period (fiscal 1982), it will be able to meet its short- and long-term financing
needs in the public credit markets.
Under the terms of the Loan Guarantee Act, the Secretary of the Treasury
may make guarantees only if there is a reasonable prospect of repayment of
the city indebtedness and if the city is unable to obtain credit in the public
markets or elsewhere. Accordingly, the Office of New York Finance has major
responsibilities and functions under this act for overseeing the city's finances
and in assisting the Secretary of the Treasury in making the findings pursuant
to extension of Federal loan guarantees.
Office of Municipal Finance

In fiscal 1978, the Office established a comprehensive data base which
proved to be useful in evaluating the fiscal effects of the administration's
economic stimulus programs on 48 large city governments. A final report was
released in January 1978 and will be updated periodically. Early in 1978 this
data base was again drawn upon for assessing the antirecession fiscal assistance
(ARFA) program scheduled for expiration on September 30, 1978.
Based upon research and evaluation provided by this Office, the administration proposed a supplementary fiscal assistance program to replace the
existing ARFA program. The major feature of the proposed legislation was a
formula which targeted funds to economically distressed areas, excluding
States. [Although a compromise proposal was passed by the Senate, the House
failed to pass the proposal and Congress adjourned sine die October 15, 1978,
without passing on the legislation.]
The Office continues in its duties to review developments and proposals in
the field of fiscal management and financial administration of State and local
governments. It will give particular attention to State-local government
budgetary and accounting practices. In addition, the Office will be reviewing
impact of newly imposed tax and/or expenditure controls on State and local
governments.
The Office also is giving significant attention to current issues which may
affect the municipal credit market, in particular those issues relating to
governmental accounting principles, the development of uniform financial
disclosure in the sale of State and local securities, the impact on credit markets
of new Federal bankruptcy laws for municipalities, and related issues.
Office of Urban and Regional Economics

The Office of Urban and Regional Economics was established to evaluate
local and regional economic trends and their impact on the financial condition
of State and local governments. In addition, it will assess the impact of Federal
economic policies on local economies.
In 1978, the Office assumed the lead role in drafting and introducing to
Congress the President's proposal to establish the National Development
Bank.' The bank would provide a package of long-term financing incentives
ISee exhibit 13.




REVIEW OF TREASURY OPERATIONS

39

to influence private businesses to invest in economically distressed communities. Related to the bank legislation, this Office reviewed the impact of existing
Federal economic development programs on rural and urban areas and has
worked closely with the Office of Management and Budget in developing the
administration's policies in the economic development area.

ECONOMIC POLICY
The Office of the Assistant Secretary for Economic Policy (OASEP) is
responsible for advising and informing the Secretary and other senior policy
officials of the Department on current and prospective economic developments, and for assisting in the development of appropriate domestic economic
policies.' The Office of Economic Policy also has responsibility for macroeconomic analyses relevant to the formulation of international economic policies,
including analyses of the longer term effects of policies—both U.S. and
foreign—on U.S. domestic activity and foreign trade and capital flows. The
office participates in the interagency group that produces the official domestic
economic projections which serve as the basis for budgetary planning and for
choices among alternative courses of economic policy. The staff support for
these activities is provided by the Office of Financial Analysis and the Office
of Special Studies.
A series of biweekly briefings for the Secretary and other senior policy
officials were initiated in 1977 and continued during 1978. These briefings
present analyses of important economic and financial developments, both
domestic and international, on a timely basis designed to supplement the flow
of information provided through other channels.
In addition, OASEP participated with the Council of Economic Advisers,
Office of Management and Budget, Domestic Policy Staff, and various other
agencies in the analysis and formulation of a number of specific policy
initiatives. The work included a review of the trustees report on the social
security system, including an analysis of proposals for changes in the financing
and benefit structure; an analysis of the economic aspects of the national
health insurance proposals; monitoring and evaluating the economic impact
ofthe coal strike; participation in the work ofthe Regulatory Analysis Review
Group; work on the interagency task force on industrial innovation; review of
energy issues and of alternative measures for reducing oil imports; evaluations
of the economic aspects of the capital gains taxes; and the general revenue
sharing program. Other, more general projects undertaken during the year
centered on the President's programs for controlling and reducing inflation,
analysis related to the budget, and the development of policies directed at
youth employment.
ISee exhibit IS.




40

1978 REPORT OF THE SECRETARY OF THE TREASURY

Office of Special Studies

The Office of Special Studies provided a number of analyses and evaluations
of economic issues. A sample of some ofthe major policy issues that this office
was concerned with are as follows:
Social security.—The Social Security Amendments of 1977 restored the
financial soundness of the cash benefit program throughout the remainder of
this century ahd into the early years of the next one. The tax increases
mandated under the amendments have important economic implications,
including their impact on inflation and the tax burden of employers and
employees. Treasury undertook analyses of proposals for changes in the
financing and benefit structure and their impact on the economy. In addition.
Treasury staff participated in the review of the economic assumptions and
estimates underlying the trustees annual report on the social security system.
Health insurance.—The President announced his national health insurance
(NHI) principles on June 30, 1978, following several months of intensive staff
work within the administration. The Secretary ofthe Treasury is a key adviser
to the President on NHI as this issue has important implications for the Nation's
economic and budget policies. The Office of Special Studies participated in
interdepartmental work groups on various aspects of NHI and economic
analyses that included examinations of cost estimates for various NHI program
options.
Capital gains tax treatment.—The tax treatment of capital gains came under
considerable discussion and debate prior to passage of the Revenue Act of
1978 and the reduction in capital gains taxation. The Office of Special Studies
analyzed the impact of capital gains tax reductions upon the stock market and
the U.S. economy in general. This study was prepared in connection with the
testimony ofthe Assistant Secretary for Economic Policy before the Subcommittee on Taxation and Debt Management of the Senate Finance Committee
in June 1978.
Coal strike.—In late 1977 and early 1978, a prolonged strike of coal miners
threatened to impose a serious economic hardship and burden on the U.S.
economy. Treasury participated in an interagency task force established to
monitor and analyze the economic impact of the strike and to evaluate the
potential threat to the Nation's health and security. The strike was eventually
settled before serious damage was inflicted on the economy.
Government regulations.—Government regulations impose a sizable cost
burden on business, taxpayers, and consumers and contribute directly to
raising prices. Under Executive Order 12044, President Carter established a
high-level interagency committee—the Regulatory Analysis Review Group
(RARG)—to review the economic effects of major regulations. The RARG,
which includes Treasury as well as other economic and regulatory agencies,
seeks to assure that the costs ofeach regulation have been carefully considered
and that all alternatives have been explored so that the least costly means of
achieving the regulatory objectives are applied. Several Government regula-




REVIEW O F TREASURY

OPERATIONS

41

tions were reviewed, including the Occupational Safety and Health Administration's (OSHA) generic carcinogen regulations, the Department of Transportation's proposed regulations to prevent discrimination on the basis of
handicap, and OSHA's proposed standards for acrylonitrile.
Industrial innovation.—There has been a generally perceived decline in
industrial innovation in the United States, both in spending on pure research
and development and in the translation of such research and development
findings into commercially feasible and profitable products or processes. This
decline appears to have had an impact on capital formation, productivity, and
inflation.2 The Department of Commerce is coordinating an interagency
Domestic Policy Review of Industrial Innovation, and Treasury is chairing and
coordinating an interagency task force investigating the impact of economic
and trade policies on industrial innovation. This task force, along with several
others, is preparing for the President's consideration policy options that will
stimulate increased innovation. Some of the areas of concern are tax policy,
availability of venture capital, the impact of Government regulations, the role
of research and development, and the impact of foreign trade policies on
industrial innovation.
Anti-inflation.—Inflation is recognized as the Nation's top priority economic
problem.3 After decelerating substantially in 1976, the Consumer Price Index
started to rise more rapidly in 1977 and by 1978 was accelerating at a
disturbing pace. During the first 10 months of 1978, consumer prices increased
9.5 percent at an annual rate. Treasury, along with economists from the other
economic agencies, analyzed and evaluated intensively many alternatives for
controlling and reducing inflation.
General revenue sharing.—Title I of the State and Local Fiscal Assistance
Act of 1972 provides for the distribution of general revenue sharing funds to
approximately 40,000 State and local governments. The authorizing legislation for the general revenue sharing program expires at the end of fiscal 1980.
As part of an overall assessment and evaluation of the existing program.
Treasury staff undertook a review of the research conducted to date on the
macroeconomic and aggregate fiscal effects of revenue sharing; analyzed the
estimated impact of general revenue sharing on aggregate State and local
expenditures, revenues, and surpluses; and evaluated its effects on the gross
national product and on public and private employment. In addition, the
macroeconomic effects of general revenue sharing were compared with the
effects of alternative uses of Federal resources such as increased Federal
purchases, transfer payments, categorical grants-in-aid, and Federal tax cuts.
Employment tax credits.—^he Tax Reduction and Simplification Act of
1977 contained the new jobs tax credit for calendar year 1977 and 1978. The
Office of Special Studies provided analyses for the interagency task force
evaluating the effect of that credit. The Revenue Act of 1978 allowed the new
2See exhibit 18.
3 See exhibit 16.




42

1978 REPORT OF THE SECRETARY OF THE TREASURY

jobs tax credit to expire and replaced it with a targeted employment tax credit
that the administration had proposed to the Congress. The Office of Special
Studies staff participated in the interdepartmental task force that designed the
new targeted credit.
Private sector employment initiative.—The fiscal 1979 budget includes a
major effort to increase the orientation of training and employment programs
toward preparing and placing disadvantaged and unemployed persons in
private sector jobs. Treasury played a major role in designing this initiative and
provided the economic analyses upon which many of the interdepartmental
discussions were based.
Energy issues.—Treasury staff participated in the analytical work on the
energy proposals submitted to the Congress by the administration. The Office
of Special Studies collaborated with other U.S. Government agencies in
assessing the impact of these proposals on U.S. energy use, energy prices, and
economic activity. The office devoted a substantial effort to develop an
understanding of the economic impacts of U.S. crude oil price regulations,
especially as these regulations affected the level of domestic crude oil
production and import requirements. The office evaluated adjustments in the
regulations which could increase the production of domestic crude oil and thus
reduce import requirements.
This office also monitored movements in domestic energy markets. During
1978, this office made projections of short- and long-term levels of U.S. energy
consumption and production, and projected movements in the mix of fuels
consumed. One output of these exercises, a forecast of the quantity and cost
of U.S. oil imports, was regularly used by the Treasury Office of Balance of
Payments in its short- and long-term forecasts.
Office of Financial Analysis

The Assistant Secretary for Economic Policy represents Treasury on an
interagency group charged with developing the official economic forecasts on
which the administration's budgetary and economic policy decisions are
based. Other agencies represented on this group are the Council of Economic
Advisers, OMB, and the Departments of Commerce and Labor. Staff of the
Office of Financial Analysis provided support for the Assistant Secretary in this
role and regularly attended meetings of the forecasting group.
An essential element in the formulation of economic policy is the
compilation and evaluation of current economic data and information. In
order to support the Department's economic policy function, the office
prepares an Economic Briefing Book for use by the Secretary ofthe Treasury
and other high-level Treasury officials. The briefing material covers the data
for all the major economic statistics and provides historical perspective on
these series. Memoranda prepared for the Briefing Book on latest economic
developments circulate throughout Treasury and provide a vehicle for keeping
Treasury officials informed of current economic developments.




REVIEW OF TREASURY OPERATIONS

43

Supplementing the Briefing Book, the office prepares a weekly Summary of
Economic Developments, which gives an overview of current economic
performance and evaluates prospects for the future course ofthe economy. In
addition, the office has primary responsibility for a biweekly economic and
financial briefing for top Treasury officials.
As a principal participant in the formulation of economic policy. Treasury
is requested by congressional committees to explain and elaborate upon the
economic goals and objectives of the administration. In support of this
function, the office prepares briefing and background material for the
Secretary and Assistant Secretary for Economic Policy to use in testimony
before the Joint Economic Committee, congressional budget committees, and
other committees concerned with economic and financial policies.
Public awareness of economic developments and acceptance of Government policies are important for achieving stated goals and objectives. The
Office of Financial Analysis conducts periodic briefings for private groups and
organizations on the current economic performance and the economic
outlook.
Officials of Treasury serve as attaches in the embassies and missions to
several foreign nations. In order to keep these officials, as well as members of
the Treasury staff in this country, well informed about current economic
developments, the office prepares a periodic review of economic and financial
developments.
Office of Trade Research

The Office of Trade Research is responsible for performing substantive
economic analysis of issues confronting the Department of the Treasury
related to international trade and U.S. commercial policies. Thus, the Office
of Trade Research could be requested to analyze the effects on U.S. trade, or
on the U.S. economy as a whole, of various developments in international
markets for traded goods such as U.S. or foreign measures to protect domestic
industries and their workers from foreign competition, changes of exchange
rates, and new international agreements to reduce tariffs and other barriers to
trade, or to establish multilateral buffer stocks for commodity price stabilization.
During fiscal 1978, the Office of Trade Research undertook and completed
a number of research projects and activities. To aid U.S. negotiators at
international forums, one important analysis sought to identify factors
contributing to successful outcomes at previous multilateral negotiations to
liberalize trade among countries, while another study developed and proposed
operating rules for internationally held commodity buffer stocks. Contributions by this office to interagency task forces included an analysis ofthe impact
on U.S. exports of the 1977-78 decline of the U.S. dollar in world money
markets, and the development of procedures by which the U.S. Export-Import
Bank might judge the competitiveness of U.S. commercial jet aircraft as




44

1978 REPORT OF THE SECRETARY OF THE TREASURY

opposed to foreign-produced planes. This analysis was designed to help the
Eximbank determine whether or not its financing was critical to obtaining an
export sale for a U.S. manufacturer.
The office also responded directly to needs for economic research within
Treasury. To aid the Inspector General's Office, an index was developed for
measuring the advancement of basic human needs in developing countries.
Since these countries borrow from institutions such as the World Bank, whose
operations Treasury must monitor according to the instructions of the
Congress, an evaluation of human needs performance is required. For the
Office of International Monetary Affairs, an analysis of the economic
foundations and relative performance of different effective exchange rate
measures was also completed. To support congressional testimony by the
Assistant Secretary of the Treasury for International Affairs that favored the
extension ofthe U.S. Export-Import Bank Charter, an empirical analysis was
prepared ofthe effectiveness of major Eximbank programs. The success of that
institution in overcoming imperfections in private capital markets was
evaluated, along with a comparison of Eximbank programs relative to the
activities of similar foreign official lending institutions.
In addition to its normal research activities, the Office of Trade Research
assisted in the calculation of trigger prices for U.S. imports of steel mill
products until a full-time staff could be assembled to administer this new
Treasury program protecting domestic steel manufacturers from dumping by
foreign steel producers. As a part of this effort, the inflationary effect on the
U.S. economy ofthe trigger price mechanism and the magnitude ofthe fall in
aggregate demand that would be necessary to offset the inflationary effect
were estimated.
Office of Monetary Research

The primary function of the Office of Monetary Research is to conduct
technical analyses of various aspects of international financial and monetary
relations, especially in terms of their consequences for the United States. A
variety of quantitative techniques are used to evaluate and predict the
performance of major foreign economies as they affect the U.S. economy.
The day-to-day activities of the Office of Monetary Research are geared
towards providing: (a) Background analyses on particular issues faced by
senior Treasury officials in their conduct of international economic policy, (b)
quantitative assessments of effects of unexpected developments abroad, and
(c) specific forecasts of various foreign economic variables.
Major projects undertaken by the Office of Monetary Research included:
(a) Development of a framework for investigating the global distribution of
current-account payments surpluses and deficits among the United States,
Organization of Petroleum Exporting Countries (OPEC), and the rest ofthe
world; (b) construction o f a model of German economy; (c) analysis of the
'effects of new accounting standards for U.S. corporations on foreign exchange




REVIEW OF TREASURY OPERATIONS

45

markets; (d) setting up a large computerized data bank containing basic
economic information on all less developed countries; (e) developing a
methodology for comparing domestic and export prices of major product
categories in other industrial countries.
Office of International Energy Research

The Office of International Energy Research provides two kinds of
analysis—general reports covering energy developments throughout the
world, and those specialized studies that focus on particular issues.
The office analyzed the relationship between energy demand and economic
growth to. help formulate alternative options for U.S. energy policy. Also
examined in detail was the question of energy prices and their effect on
exports. Further issues examined included OPEC financial holdings and the
future international coal market factors influencing the foreign exchange value
ofthe dollar. Treasury officials were given advice on the impact that the export
of energy and other technology could have on tax revenues and economic
development abroad.
Oil imports and oil pricing policy have been a continuous subject of
attention. Various options for curbing oil imports were examined. This office
also provided Treasury officials with nuclear and Sino-Soviet energy expertise;
these studies were frequently consulted by other agencies. The office
participated in a White House review of solar energy and pointed out the need
for an initial international market analysis, a thorough survey of existing
Federal programs, and budgetary restraint.
Office of Balance of Paynients

The Office of Balance of Payments has staff responsibility for briefing and
advising the Secretary and other policy officials on the current situation and
outlook for our intemational payments, including the merchandise trade
balance, other current account transactions, and official and private international capital flows. This office also represents the Treasury in technical
meetings of various interagency groups and international organizations such
as the International Monetary Fund and the Organization for Economic
Cooperation and Development.
During the fiscal year the merchandise trade balance suffered a substantial
further deterioration in the first half, followed by a sharp improvement in the
second. Starting from a $28 billion seasonally adjusted annual rate in the
second (April-September) half of fiscal 1977, the trade deficit rose to a $43
billion annual rate in the first (October 1977-March 1978) half of fiscal 1978
before declining again to a $32 billion rate in the second half.
This worsening of the trade balance in the first half of the fiscal year reflected
a nearly 34-percent annual rate increase in nonpetroleum imports over the
preceding half year, compounded by a 5-percent decline in nonagricultural
exports. In the second (April-September) half, however, that adverse pattern



46

1978 REPORT OF THE SECRETARY OF THE TREASURY

was reversed—with nonagricultural exports rising at a 37-percent annual rate
from the previous half, while nonpetroleum imports slowed to an 18-percent
growth rate.
Agricultural exports in fiscal 1978 totaled about $3 1/2 billion more, and
petroleum imports about $1 1/2 billion less, than in fiscal 1977.
The current account deficit in the first (October-March) half of the fiscal
year rose to a $28 billion annual rate—more than double the $11 billion rate
in the second half of fiscal 1977—before declining sharply again in the second
half to a $14 billion annual rate. Also in the first half of fiscal 1978, the
recorded net outflow on private capital transactions rose to a $43 billion
annual rate (not seasonally adjusted) from a $10 billion rate in the previous
half year.
The main source of financing for these very large deficits, on both current
account and private capital transactions, in the first half of the fiscal year was
an annual rate inflow of more than $60 billion (not seasonally adjusted) of
foreign official capital, predominantly from other industrial countries.
In the second (April-September) half of the fiscal year, official assets
declined at an annual rate of $1.6 billion. Since only $1.6 billion of private
capital inflow could be identified in this period, an unusually large (not
seasonally adjusted) statistical discrepancy resulted, amounting to almost $23
billion.
U.S. current account transactions, October 1977-September 1978
[Seasonally adjusted; $ billion]
Fiscal 1978*
Fiscal 1977
(quarterly
averages)
Exports
Agriculture
Other
Imports
Petroleum and products
Other (including other fuels)
Trade balance
Net services and remittances
Government economic grants
Net invisibles
Balance on current account

Oct.-Dec.
1977

Jan.-Mar.
1978

Apr.-June
1978

July-Sept,
1978

30.2

29.5

30.7

35.1

36.9

6.2
24.0
-36.3

5.7
23.8
-39.7

6.5
24.2
-41.9

8.0
27.1
-42.9

7.9
29.0
-45.0

-10.9
-25.4

-10.6
-29.1

-9.9
-31.9

-10.8
-32.1

-10.8
-34.2

-6.1

-10.2

-11.2

-7.8

-8.0

4.8
-.7

3.8
-.6

5.1
-.8

5.5
-.8

5.0
-.8

4.1

3.2

4.3

4.7

4.2

—2.0

—7.0

—6.9

—3.1

—3.8

* Due to seasonal adjustment on calendar-year basis, quarterly data will not add precisely to fiscal year totals.
Source: Survey of Current Business, June and December 1978, pubhshed by U.S. Department of Commerce,
Bureau of Economic Analysis.




REVIEW O F TREASURY

47

OPERATIONS

Financing of U.S. current account balances, October 1977-September 1978*
[Inflows ( + ) a n d outflows ( - ) ; $ billion]
Fiscal 1978
Fiscal 1977
(quarterly
averages)

Oct.-Dec.
1977

Jan.-Mar.
1^78

Apr.-June
1^78

July-Sept.
1978

-2.2

-5.2

-6.4

-2.7

-6.3

-1.0

-.7

-;1.1

-1.2

-1.4

7.2

15.5

15.8

-5.7

4.9

5.0
1.7
.5

13.9
1.0
.6

13.2
2.0
.6

-2.2
-2.8
-.7

6.4
-1.6
.1

U.S. banks, net

-1.0

-5^6

-6^6

13

.9

Claims
Liabilities2
Securities, net

-3.1
2.1
-1.0

-8.7
3.1
-.2

-6.3
-.3
.4

-.5
1.8
1.1

-7.1
8.0
-1.1

Foreign securities
U.S. securitiesa
Direct investment, net

—1.7
.7
—2.0

—.7
.5
—2.3

^.9
1.3
—4.3

—1.1
2.2
—2.5

—.5
-.6
—.5

-2.9

-2.8

-5.1

-4.4

-2.3

Current account balance*
U.S. reserve assets (increase ( — ) )
Other U.S. Govemment assets*
Foreign official assets
Industrial countries
OPEC members
Other countries

U.S. investment abroad*
Foreign investment in United
States*

I .2

.3

.2

.9

.4

.8

1.9

1.8

Other U.S. corporate capital, net

-.5

-.8

-1.7

.5

.8

Claims
Liabilities
Statistical discrepancy*

-.4
-.1
.4

-1.2
.4
—.7

-2.2
.5
3.6

.3
.2
8.8

.3
.5
2.6

* All data are seasonally unadjusted, because capital flows except U.S. Govemment lending and reinvested
eamings component of direct investment income are not available on seasonally adjusted basis.
a Excluding foreign official assets.
Source: Survey of Current Business, June and December 1978, pubhshed by U.S. Department of Commerce,
Bureau of Economic Analysis.

Office of Statistical R e p o r t s

The Office of Statistical Reports manages two international financial
Statistics collection systems—the Treasury international capital (TIC) reporting system, and the Treasury foreign currency (TFC) reporting system.
The TIC system collects weekly, monthly, quarterly, and semiannual data
on U.S. banks' foreign assets and liabilities (the TIC/B subsystem); U.S.
commercial firms' claims on and liabilities to unaffiliated foreigners (the
TIC/C subsystem); and securities transactions with foreign residents (the
TIC/S subsystem). These data provide information on all movements of capital
between the United States and foreign countries other than direct investment
flows and Government transfers. During fiscal 1978, the TIC staff produced
a dozen brief analyses of monthly flows of U.S. bank credits to foreign
residents, in addition to supplying the capital movement data for monthly
publication in the Treasury Bulletin, the Federal Reserve Bulletin, and
quarterly in the Department of Commerce's Survey of Current Business.



48

1978 REPORT OF THE SECRETARY OF THE TREASURY

The TFC system collects weekly, monthly, and quarterly data on the foreign
currency positions of U.S. banks and commercial firms, publishing these data
in the Treasury Bulletin monthly; these data provide the Government's only
information on foreign exchange market positions, and are collected under
title II ofthe Par Value Modification Act of 1973. During fiscal 1978, the TFC
staff produced seven analyses ofthe banks' weekly data for internal Treasury
use.
Office of Data Services

The Office of Data Services provides computer and data processing facilities
for the intemational affairs areas within the Office of the Secretary. Data
Services also maintains and operates a computerized system for the collection
and reporting of information on U.S. Government loans to foreigners.
This office fumishes computer programming and technical advice services
to other offices to enable them to efficiently process and analyse the large
volumes of information associated with research in such areas as international
capital flows, balance of payments forecasting, trade and international
economic competition, and aid to the less developed countries.
Foreign portfolio investnient survey project

The foreign portfolio investment survey project is responsible for the
collection and analysis of data relating to international portfolio investment
and its effect upon the national security, commerce, employment, inflation,
general welfare, and foreign policy ofthe United States. The Secretary ofthe
Treasury was designated by the President as the Federal executive responsible
for collecting these data pursuant to the Intemational Survey Act of 1976
(Public Law 94-472). The act requires comprehensive surveys of both foreign
portfolio investment in the United States and U.S. portfolio investment
abroad. •
On August 9, 1978, the Office of Management and Budget approved a
survey of foreign portfolio investment in domestic securities as of December
31, 1978. A report is required to be filed by every U.S. issuer of securities
which, as ofthe latest available closing data of its accounting records, had total
consolidated assets of $50 million if a nonbanking enterprise, or $ 100 million
if a bank. However, a firm falling below these asset levels, but with assets of
$2 million or more, is required to report if there is evidence of foreign
ownership of its securities. Firms with assets less than $2 million are exempt
from filing a report. In addition, a report is required from every U.S. entity
acting as a holder of record of domestic securities on behalf of foreign persons
if the combined market value of these securities, held for all foreign accounts,
exceeded $50,000 as of December 31, 1978.
I See exhibit 17.




REVIEW OF TREASURY OPERATIONS

49

Completed survey forms are required to be filed on or before March 31,
1979. Approximately 10,000 U.S. businesses are expected to meet the
reporting requirements. The data collection, processing, and analyses are
scheduled to be completed in the fall of 1980 with the submission of a report
to the Congress.

OFFICE OF THE GENERAL COUNSEL
The General Counsel, appointed by the President by and with the advice and
consent of the Senate, 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 ofthe legal activities ofthe Department. This includes
the legal staffs of all subordinate offices, bureaus, and agencies.
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, he 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 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
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.
In addition, the Office of Director of Practice (which regulates practice
before the Internal Revenue Service) and the Office of Tariff Affairs (which
administers the U.S. antidumping and countervailing duty laws) are under the
supervision of the General Counsel.
The General Counsel manages the Legal Division through the Deputy
General Counsel, the Assistant General Counsel for the Department, and the
Chief Counsel and Legal Counsel of the various bureaus.
Legislation

During fiscal 1978, the General Counsel provided the Department's views
to the Congress and the Office of Management and Budget on more than 1,000
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:



50

1978 REPORT OF THE SECRETARY OF THE TREASURY

On October 3, 1978, President Carter signed into law the Customs
Procedural Reform and Simplification Act of 1978. This law permits
Customs to establish more efficient and flexible procedures for handling
documents and the financial aspects of import transactions; revises the
Customs penalty provision dealing with the false entry of merchandise so
that the penalty is limited to the culpability of the violator; and modifies
numerous customs procedures to expedite the processing of goods and
travelers while reducing administrative costs.
On December 28, 1977, the President signed Public Law 95-223, revising
certain wartime and emergency powers of the President. The act confines
the powers of section 5(b) of the Trading with the Enemy Act to wartime
use and recodifies the emergency powers in a new International Emergency
Economic Powers Act subject to new procedural restrictions on the use of
emergency authority. However, the act permits the continued use of section
5(b) authorities with respect to all countries subject to regulations
administered by the Office of Foreign Assets Control as of July 1, 1977.
These emergency authorities were to expire on September 14, 1978, in
accordance with the National Emergencies Act unless the President made
a determination (which he did on September 8, 1978) that an extension for
1 year was in the national interest. The act authorizes additional 1-year
extensions.
The Legal Division also participated in drafting the following major
legislation:
1. Financial Institutions Regulatory and Interest Rate Control Act of 1978
(Public Law 95-630).
2. Authority for Treasury to invest for cash management purposes (public
funds deposited in banks will draw interest under this legislation. Public Law
95-147).
3. Providing for increased U.S. participation in multilateral development
banks (Public Law 95-118).
4. Amendment to Bretton Woods Agreements Act authorizing U.S.
participation in the Supplementary Financing Facility of the International
Monetary Fund (Public Law 95-435).
5. Susan B. Anthony Dollar Coin Act of 1978 (Public Law 95-447).
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 thousand individual cases pending in the Customs Court,
the Tax Court, and other Federal courts pertaining to Treasury functions.
In Zenith Radio Corporation v. United States, the Supreme Court affirmed
the U.S. Court of Customs and Patent Appeals and sustained the longstanding




REVIEW OF TREASURY OPERATIONS

51

Treasury position that the nonexcessive remission upon export of an excise tax
was not a bounty or grant as a matter of law and did not require that
countervailing duties be levied.
In Davis Walker v. Blumenthal, an independent producer of wire and wire
products challenged the legality ofthe Department's trigger price mechanism
(TPM) for monitoring imports of steel mill products under the Antidumping
Act. The plaintiff claimed that the TPM was beyond the Secretary's authority
under the Antidumping Act, was adopted without following the procedures of
the Administrative Procedures Act, and was arbitrary and capricious in its
effect on independent producers of wire and wire products. On the Government's motion for summary judgment, the U.S. District Court for the District
of Columbia ruled for the Govemment on all three elements of the complaint.
Plaintiff's motion for an injunction pending appeal was denied by the Court
of Appeals and subsequently the appeal was withdrawn.
Regulations

During the fiscal year, the Chief Counsel for the Office of Foreign Assets
Control prepared final regulations authorizing persons in the United States to
send periodic support remittances to close relatives in Cuba and Vietnam.
Additional one-time remittances were authorized to assist relatives in
emigrating to the United States. Regulations were also promulgated which
authorize transactions ordinarily incident to travel to, from, and within the
United States by Cuban nationals holding U.S. visas.
The Chief Counsel of the Customs Service prepared a final regulation
amending the Customs Regulations relating to antidumping investigations
which involve merchandise from state-controlled-economy countries. The
new regulation provides that when the foreign market value of merchandise
from a state-controlled-economy country is based upon the price or constructed value of like merchandise in a free-market-economy country, the freemarket-economy country selected for comparison purposes should be at a
level of economic development comparable to that of the state-controlledeconomy country.
Other matters

The General Counsel's Office held primary staff responsibility for the
Emergency Loan Guarantee Board, which was established by Congress in
1971. The Board administered the Government guarantee of private bank
loans of up to $250 million to Lockheed Aircraft Corp. The guarantee was
terminated by the mutual agreement ofthe parties on October 14, 1977, and
the Board transferred all residual authority and responsibility for matters
related to the program to the General Counsel on January 31, 1978.
The Office participated in the negotiations concerning the settlement ofthe
Government's claims against the bankrupt Penn Central Railroad, and advised
the Secretary on the legal and financial aspects thereof.



52

1978 REPORT OF THE SECRETARY OF THE TREASURY

ENFORCEMENT AND OPERATIONS
At the beginning of fiscal 1978, four operating bureaus ofthe Department
of the Treasury were organized under a Chief Deputy to the Under Secretary
(Enforcement and Operations), who was assisted by two deputies and two staff
offices. The bureaus were U.S. Customs Service, 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
were also under the purview of the Chief Deputy to the Under Secretary.
On January 20, 1978, by Executive Order 12035, the position of Assistant
Secretary, disestablished during the fiscal 1977 reorganization, was reestablished in the Office of Enforcement and Operations.
The Office of Operations, in conjunction with other Office of the Secretary
staff offices, established an objective adjunct to the zero-base budget system
(zero-base budget objectives). The zero-base budget objectives link desired
goals for the current year to available resources with interim progress
measured at quarterly review sessions. This has been a useful tool in the review
and support of bureau activities. The Office of Operations continued to be
concerned with cost-effective execution of programs, productivity improvements, equal employment opportunities, and various policy issues regarding
the bureaus. The Office of Operations continues to provide staff support to the
Under Secretary in the supervision ofthe Bureaus ofthe Mint and Engraving
and Printing. This is done through the Deputy Assistant Secretary (Operations).
The Office of Law Enforcement continued its oversight and coordination of
Treasury's law enforcement policies and programs, and initiated programs to
maximize their effectiveness. The staff of the Deputy Assistant Secretary
(Enforcement) has begun a review of particular policies and standards under
which Treasury law enforcement personnel perform their duties. The Office
reviewed legislation affecting the enforcement bureaus and strongly supported
the enactment of Public Law 95-575, which relates to trafficking in
contraband cigarettes. The Office was abolished at the end of the fiscal year,
and the staff report directly to the Deputy Assistant Secretary (Enforcement).
Reorganization studies were continued in the U.S. Customs Service and the
Bureau of Alcohol, Tobacco and Firearms.
The activities of each of the bureaus are recorded in the **Administrative
Reports" section of this volume.
Alcohol

A comprehensive review of legislation and regulations for the alcoholic
beverage industry was conducted in fiscal 1978.' As a result, some significant
policy changes were implemented. These include more involvement by trained
criminal enforcement agents in Federal Alcohol Administration Act cases;
I See exhibit 22.




REVIEW OF TREASURY OPERATIONS

53

new procedures for referring criminal cases to the Department of Justice and
for processing offers-in-compromise within the Bureau of Alcohol, Tobacco
and Firearms; review of trade practice regulations, largely unchanged since
1935, with a view toward modernization; and closer scrutiny and review of
important regulatory changes, particularly in wine labeling. A partial ingredient labeling proposal has also been developed in collaboration with the Federal
Drug Administration, and three expert consultants were hired to review
research and scientific materials relating to possible labels on liquor bottles,
warning pregnant women of possible harm drinking can cause to unborn
children. 2
Arson

Treasury in the past year has sought to develop new and more effective
strategies within the Department to deal with arson for profit. ^ The Office of
Enforcement coordinated the activities ofthe Bureau of Alcohol, Tobacco and
Firearms (ATF) in conjunction with the Organized Crime and Racketeering
Section ofthe Department of Justice in establishing arson task forces in certain
strike force locations. Specific investigative standards and guidelines were
developed to determine when an arson-related organized crime or white collar
crime should be investigated.
ATF made arrangements to assume teaching duties at the National Fire
Academy in order to assist in the training of State and local law enforcement
and firefighting personnel in the detection and investigation of arson.
Contraband cigarettes

Evidence submitted to Congress established that the States are now losing
an estimated $400 million per year in evaded State cigarette taxes, and that
cigarette bootlegging has become a major source of income for organized
crime. Treasury strongly supported the enactment of Public Law 95-575
concerning the trafficking in contraband cigarettes. The new law is designed
to enable the Treasury and Justice Departments to assist the States in
combating the practice of purchasing large quantities of cigarettes in low-tax
States and transporting them to high-tax States for resale without payment of
the second State's tax. The Bureau of Alcohol, Tobacco and Firearms has been
delegated the authority to administer the provisions of 18 U.S.C. 114.
Counterterrorism 4

The continuing involvement of the Department of the Treasury in U.S.
planning for combating terrorism was intensified under the new interagency
structure established by President Carter. The Assistant Secretary (Enforce2 See exhibit 20.
3 See exhibit 28.
4 See exhibit 21.




54

1978 REPORT OF THE SECRETARY OF THE TREASURY

ment and Operations) and his staff actively participate on the Executive
Committee and the Working Group on Terrorism of the National Security
Council's Special Coordination Committee. Under this guidance. Treasury's
principal enforcement agencies—ATF, Customs, and Secret Service— also
participate in the topical committees of the Working Group on Terrorism
seeking to solve various problems caused by the threat of terrorism. One of
these topical committees is chaired by the Assistant Secretary's staff officer
for terrorism matters.
Financial recordkeeping and reporting

Treasury regulations (31 CFR 103) issued under the authority of the
(Foreign) Bank Secrecy Act provide financial recordkeeping and reporting
requirements for the general public, as well as for financial institutions.^ The
regulations require banks and other financial institutions to keep certain basic
records that have a high degree of usefulness in the investigation of tax,
regulatory, or criminal matters. They also contain the following reporting
requirements:
(1) Financial institutions must report to the IRS any unusual domestic
currency transaction in excess of $10,000. (IRS form 4789)
(2) Travelers and others must report to the Customs Service the international transportation of currency and certain other monetary instruments in
excess of $5,000. (Customs form 4790)
(3) U.S. firms and individuals must report their financial interest in or their
control over foreign bank and other financial accounts. (Treasury form
90-22.1)
The Federal bank supervisory agencies, the National Credit Union Administration, the Securities and Exchange Commission, the Internal Revenue
Service, and the Customs Service have all been given specific compliance
responsibilities under the regulations. In addition, Treasury has the overall
responsibility for administering the act and coordinating the activities of the
compliance agencies.
The Department has taken additional actions this year to implement the
recommendations of the Commerce, Consumer, and Monetary Affairs
Subcommittee of the House Committee on Government Operations as
reflected in House Report 95-246, dated May 5, 1977. First, IRS Form 4683
(Report of Foreign Bank, Securities, or Other Financial Accounts) was
converted to Treasury Department Form 90-22.1, now required to be filed
directly with the Office of the Secretary rather than with the IRS as an
attachment to an income tax return. This change has made it possible for
Treasury to provide information from these reports to other Federal agencies
when they have a legitimate need for it.
5 See exhibit 27.




REVIEW OF TREASURY OPERATIONS

5 5

Then, on July 1, 1978, the Reports Analysis Unit was established, operating
at the Customs Service, under the direction ofthe Deputy Assistant Secretary
(Enforcement), to analyze and disseminate information from the reports filed
on forms 4789, 4790, and 90-22.1, already described. The Customs Service
and the IRS have made major contributions of manpower and other resources
to the Unit, which at the fiscal yearend had a staff of 13 persons.
In order to reduce the reporting burden on the public and eliminate
paperwork of marginal value to the Department, the Under Secretary modified
the requirement to report foreign financial accounts. Employees of banks
subject to Federal supervision are no longer required to report accounts they
have signature authority over if they have no financial interest in them. A
similar exemption was also granted to employees of certain corporations if the
corporation reports the account. In addition, corporations were permitted to
file a consolidated report covering all of their subsidiaries, as well as the parent
corporation.
The bank supervisory agencies are continuing to check the compliance of
every financial institution that is normally subject to Federal supervision.
While all violations are reported periodically to the Department in statistical
reports, the supervisory agencies have been asked to provide the names of
institutions that have failed to comply with the reporting requirements. In fiscal
1978, Treasury began requesting the bank supervisory agencies to provide
information concerning the violations when there appears to have been
repeated violations at a bank.
The IRS, in cooperation with U.S. attorneys in various judicial districts, has
undertaken a number of investigations of alleged criminal violations of the
requirement that financial institutions report large currency transactions. The
majority of the investigations appear to be related to the efforts of drug
traffickers to "launder" their money.
During fiscal 1978, Treasury transmitted to the Drug Enforcement Administration 1,394 reports pertaining to $157.5 million in currency transactions
and 83 reports pertaining to the international transportation of $6.5 million
in currency and other monetary instruments that appeared to be related to
drug activity. A large number of reports were also provided to other offices
within the Department of Justice, as well as to certain congressional
committees.
The Customs Service, with the establishment ofthe Currency Investigations
Division in its Office of Investigations, has continued to increase its efforts to
enforce the requirement to report the international transportation of monetary
instruments. During the fiscal year. Customs made 639 seizures totaling more
than $12.9 million. The related criminal investigations resulted in 36
convictions.




56

1978 REPORT OF THE SECRETARY OF THE TREASURY

Firearms

Proposed regulations were published which would amend regulations ofthe
Gun Control Act of 1968 to require new reports of dispositions of firearms to
licensees, reports of guns stolen from licensees, and placing unique serial
numbers on all guns manufactured or imported into the United States.^ Over
340,000 written comments were received and analyzed by ATF, and a decision
on the final rules is pending.
This Office also worked with the Bureau to develop new strategies to more
effectively enforce the Gun Control Act. More emphasis is being placed on
those illegal activities which, because of their interstate nature, ATF has a
greater capability to successfully investigate than State and local law
enforcement agencies such as illegal interstate firearms traffic, and interdiction of major illegal sources of weapons. In addition, this Office worked with
the Bureau of Alcohol, Tobacco and Firearms to eliminate unannounced
routine compliance inspections of firearms licensees, and to limit its investigations of gun shows to those instances where there are specific allegations that
significant violations have occurred or will occur.
Narcotics

The Assistant Secretary chaired a subgroup of the President's Strategy
Council on Drug Abuse which examined the subject of economic assistance
for narcotics-producing regions. The final report recommended an interagency agreement to institutionalize a formal Justice-State-Treasury reporting
system to assure that all agencies are aware of narcotics-growing regions,
developmental projects which might be relevant to reducing narcotics
cultivation, and the actions being taken by each agency.
Regulatory policy and trade affairs

During the year there was an increased focus on regulatory policy and trade
affairs. Executive Order 12044 (March 23, 1978) and the Treasury plan
implementing that order established new procedures for agency rulemaking,
and mandated that regulations be as simple and clear as possible, that they
achieve legislative goals effectively and efficiently, and not impose unnecessary burdens on the economy, on individuals, or private or public sector
organizations. The Office of the Assistant Secretary (Enforcement and
Operations) worked with the bureaus supervised to implement these new
procedures and policy directives.
Substantively, major regulatory activity included the review of regulations
implementing the Customs Procedural Reform and Simplification Act of 197 8
(Public Law 95-410, October 3, 1978), and major revisions to the Bureau of
Alcohol, Tobacco and Firearms' wine-labeling regulations. All Customs and
ATF regulatory proposals, as well as major civil penalty cases, were reviewed
for consistency with established policies.
6 See exhibit 23.




REVIEW OF TREASURY OPERATIONS

57

TAX POLICY
Legislation

During fiscal 1978, the Carter administration proposed extensive tax reform
to make the tax system efficient, equitable, and simple. The administration also
recommended substantial tax reductions to stimulate economic activity and to
reduce tax burdens of individuals and businesses. In addition, tax incentives
were proposed related to urban policy. The administration also continued to
pursue enactment of tax aspects of the President's energy program related to
gas pricing, utility rates, and energy conservation and continued to pursue
social security tax changes directed at solving short- and long-term financing
problems.
Tax cuts, incentives, and reforms

President's proposals.—On January 21, 1978, the President proposed major
tax reform to make the tax system more efficient, tax burdens more equitable,
and tax rules simpler.' In addition, tax reductions were proposed to sustain
purchasing power and to provide business with incentives to invest in more and
better facilities and to create jobs.
The President's recommendations were in a balanced tax program.
Recommendations for tax cuts and incentives were designed in conjunction
with tax reform. The Congress was informed that enactment of proposed tax
cuts and incentives by themselves would be unacceptable. The revenue drain
would be too great and tax burdens would be misallocated among the income
groups.
Under the program, net tax liabilities would be reduced by $24.5 billion net
for calendar 1979. Gross reductions would be $33.9 billion. Tax reform,
however, would raise tax liabilities by $9.4 billion.
Net individual income tax liabilities would be cut by $16.8 billion,
comprising gross cuts of $23.5 billion and tax-raising reforms of $6.8 billion.
Net business income tax cuts would be $5.7 billion, reflecting gross tax cuts
of $8.3 billion combined with $2.6 billion of tax increases resulting from
various reforms.
Cuts in excise taxes and payroll taxes would be $2 billion.
The tax cut proposals are summarized as follows:
Individuals.—T^x rates would be reduced from the present range of 14 to
70 percent to a range of 12 to 68 percent. In each bracket, there would be a
cut of up to 5 percentage points on joint returns, and up to 7 percentage points
on returns of single people.
The existing $750 personal exemption and the general tax credit (which
equals the greater of $35 per exemption or 2 percent of the first $9,000 of
taxable income) would be replaced by a $240 tax credit for each personal
exemption.
1 See exhibit 29.




58

1978 REPORT OF THE SECRETARY OF THE TREASURY

The above tax cuts would take effect on October 1,1978. For calendar 1978,
there would be a tax cut approximately one-fourth the size ofthe full year cuts.
The tax cut would be reflected in withholding rates in the last 3 months of 197 8,
Businesses.—The present corporate income tax rate schedule would be
reduced as follows:
Taxable income

Proposed
rates

New rates
Percent

Oto $25,000
$25,000 to $50,000
Above $50,000

20
22
48

18
20
44

However, the rate on income in excess of $50,000 would be reduced initially
to 45 percent and to 44 percent beginning in 1980.
Other.—The telephone excise tax, scheduled under present law to be phased
out by January 1, 1982, would be repealed as of October 1, 1978.
The Federal unemployment insurance tax, which applies to the first $6,000
of earnings, would be reduced from 0.7 percent to 0.5 percent as of January
1, 1979.
Tax incentive and reform proposals related to individuals are summarized
as follows:
Itemized deductions.—Deductions for nonbusiness State and local sales
taxes, gasoline taxes, personal property taxes, and State levies for disability
insurance would be repealed.
Deductions for up to $100 of political contributions (or $200 on a joint
return) would be repealed. The credit for 50 percent of the first $50 of
contributions (or $100 on a joint return) would be retained.
Medical expenses and casualty losses would be deductible only to the extent
that, combined, they exceed 10 percent of adjusted gross income. Medical
insurance premiums would be treated in the same manner as other medical
expenses. The rule limiting deductible casualty losses to the extent that each
loss individually exceeds $100 would be retained.
Capital gains.—The 25-percent alternative tax ceiling on the first $50,000
of an individual's capital gains would be repealed. Capital gains of individuals
would continue to be taxed at one-half the regular tax rates.
Fringe benefits.—The present employee tax exemption for premiums paid
and benefits received under employer health, accident, disability, and group
life insurance plans would be limited to those plans which do not discriminate
in favor of shareholders, officers, and higher paid employees.
The $5,000 employee death benefit exclusion would be repealed. A limit
would be imposed on the extent to which qualified pension plans may be
integrated with social security. Generally, there would have to be at least 1
percent in contributions or benefits on compensation below the social security
wage base for every 1.8 percent in contributions or benefits provided on
compensation above the wage base.




REVIEW OF TREASURY OPERATIONS

59

Employer contributions under a nondiscriminatory "cafeteria plan" would
be taxable to participants only to the extent the contributions are used to
provide an otherwise taxable benefit.
Transfer payments.—The current exclusion for unemployment compensation benefits would be phased out for income above $20,000 for single persons
and $25,000 for married couples.
Tax shelters.—The deduction under the minimum tax for one-half of an
individual's regular income tax liability would be eliminated. Capital gains on
the sale of a home would be exempt from the minimum tax.
The "at-risk" provision, which denies the deduction of a taxpayer's losses
in an investment except to the extent the taxpayer is personally liable, would
be extended to cover all activities other than real estate and to cover closely
held corporations (controlled by five or fewer shareholders).
The current method of determining useful lives of buildings for depreciation,
which is based on the facts and circumstances of the individual cases, would
be replaced by a system of guideline lives based on the average lives now used
by all taxpayers. The method of depreciation for buildings would generally be
limited to straight-line depreciation, instead of the accelerated depreciation
methods used under current law. However, new multifamily housing would be
able to be depreciated using the 150-percent declining balance depreciation
(instead of the present law 200-percent declining balance method) through
1982. Also low-income housing would continue to be depreciated using the
200-percent declining balance method of depreciation through 1982. After
1982, only new low-income housing would be eligible for accelerated
depreciation methods, and the maximum allowable depreciation would be
based upon the 150-percent declining balance method.
New limited partnerships with more than 15 limited partners would be taxed
as corporations so that they could not pass through their losses to the partners.
Residential real estate partnerships would be exempt through 1982, and lowincome housing would continue exempted as long as 150 percent declining
balance depreciation was allowed.
The IRS would be authorized to conduct audits at the partnership level and
apply any adjustments to returns of individual partners.
Taxes would be imposed currently on the earnings of most deferred
annuities not purchased under qualified retirement plans.
All farming syndicates and all farm corporations, except nurseries, subchapter S corporations, and those with receipts of $1 million or less would be
required to use accrual accounting and to capitalize preproductive period
expenses.
Tax-exempt bonds.—State and local governments would have the option of
issuing subsidized taxable bonds. The subsidy rate would be 35 percent of
interest costs for bonds issued in 1979 and 1980 and 40 percent for bonds
issued thereafter.




60

1978 REPORT OF THE SECRETARY OF THE TREASURY

Interest on industrial development bonds for pollution control facilities,
industrial parks, and hospital construction would no longer be tax exempt
unless, in the case of hospitals, there is a certification by the State that those
new hospitals are needed.
The $5 million small issue exemption for industrial development bonds
would be eliminated except for economically depressed areas, for which the
limit would be increased to $10 million. This proposal was modified in the
administration's urban policy proposals made in March 1978. (See below.)
Tax incentive and reform proposals related to business are summarized as
follows:
Investment credit and depreciation.—The 10-percent investment credit
would be made permanent. The credit, which now applies only to equipment
and certain special purposes structures, would be extended to all new industrial
buildings and to investment made to rehabilitate existing buildings for
construction costs incurred after 1977. Investment credits would be allowed
to offset up to 90 percent of tax liability, instead of 100 percent of the first
$25,000 of tax liability and 50 percent of tax liability in excess of $25,000 as
under present law. The full 10-percent investment credit (instead of 5 percent)
would be extended to pollution control equipment qualifying for 5-year
amortization which is placed in service after 1977.
Tax administrators would be given legislative authority to issue new asset
depreciation range (ADR) regulations to simplify and revise the present
regulations for all electing businesses.
Small business.—Subchapter S provisions, which generally allow electing
small business corporations to be taxed in a manner similar to partnerships,
would be expanded and simplified.
The provision in present law which allows losses from stock in a small
business corporation as a deduction against ordinary income would be
broadened by allowing business to double (to $1 million) the amount of their
stock issues which may qualify, increasing the aggregate amount of losses
which may be/claimed on individual tax returns to $50,000 ($100,000 on a
joint return) and by eliminating some restrictions on the use of the provision.
Business deductions.—Deductions would be disallowed for entertainment
facilities such as yachts, hunting lodges, and club dues, as well as for such
entertainment activities as tickets to theater and sporting events.
Deductions would be disallowed for one-half of the cost of meals which
otherwise would be deductible. However, meals consumed while traveling on
business away from home overnight would continue to be deductible fully.
Expenses incurred to attend foreign conventions would be disallowed unless
it is as reasonable for the meeting to be held outside as within the United States.
Deductions for first-class airfare would be disallowed to the extent they
exceed coach fare for similar flights.
Financial institutions.—The excess additions to the bad debt reserves of
commercial banks, now being phased out through 1987, would be disallowed




REVIEW OF TREASURY OPERATIONS

61

as of 1979, at which time banks would compute their bad debt reserves based
on actual experience.
The excess additions to the bad debt reserves of savings and loan
associations and mutual savings banks would be phased down from 40 percent
of taxable income to 30 percent of net income over a 5-year period.
The tax exemption for credit unions would be phased out over a 4-year
period, and after 1982, they would be taxed on the same basis as savings and
loan associations.
On May 12, 1978, the administration decided to trim the proposed $24.5
billion tax cut to $19.5 billion and to postpone the effective date 3 months to
January 1, 1979. The administration recognized that economic conditions had
changed substantially since January 1978 and there was a need to get a better
balance between monetary and fiscal policy. Inflationary pressures were
mounting. Employment was increasing. Under these circumstances, a smaller
budget deficit in fiscal 1979 would be highly desirable.
Congressional consideration.—The Congress gave immediate consideration
to the President's proposals. However, by the end ofthe fiscal year. Congress
had not taken final action.
The House Ways and Means Committee began hearings on January 30 and
reported its bill, H.R. 13511 (the Revenue Act of 1978), on August 4. The
House approved H.R. 13511 on August 10.
The House-approved bill would provide a $ 15.6 billion cut in calendar 1979
tax liabilities. The cut would include $10.5 billion in personal tax cuts, $4
billion in business tax cuts, and $1.1 billion in capital gains tax reductions.
The House bill, however, excluded a number ofthe President's proposed tax
reforms and directed a larger share of tax cut benefits to people in the middle
and upper income ranges, rather than to people lower down the income scale,
as recommended by the President. In addition, the House bill contained capital
gains tax reductions directed largely at wealthy individuals.
The administration sought Senate modification when the Senate Finance
Committee began hearings on the House-approved bill on August 17. While
accepting the size ofthe House tax cut, the administration recommended that
the personal tax cut be focused more toward lower and middle income groups.
In addition, the administration objected to the large capital gains tax cuts
which would be less than in the House bill and opposed the House's weakening
of the minimum tax. The administration also continued to seek proposed
reforms which the House had failed to approve.^
The Senate Finance Committee reported an amended H.R. 13511 on
September 28. The calendar 1979 cut in tax liabilities would be considerably
larger than the $ 15.6 billion cut in the House bill which included a $2.5 billion
revenue gain from repeal ofthe general jobs credit and the $ 19.5 billion in the
administration's proposals revised in May 1978.
2 See exhibit 34.




62

1978 REPORT OF THE SECRETARY OF THE TREASURY

Most notably, the Finance Committee's bill enlarged the tax cuts for
individuals, businesses, and capital gains. Individual income tax cuts in the
House were enlarged primarily to benefit individuals within the $10,000 to
$50,000 income range. The committee also added business tax cuts to the
House-approved reduction in corporate income tax rates, most notably more
rapid writeoffs for new plant and equipment. In addition, the committee
expanded the capital gains tax reduction in the House bill and provided a new
alternative minimum tax to replace the add-on minimum tax.
While indicating that in some respects the Finance Committee's bill
improved the House version, the administration still had serious objections to
the Finance Committee's decisions. The size ofthe tax cuts in the committee
bill would be excessive not orily for calendar 1979 but also for 1980, 1981, and
beyond. Such tax cuts would be inflationary and would compromise the
flexibility and discretion of the Government to reduce the budget deficit
currently and in the future. Moreover, while the committee's distribution of
personal tax cuts would be an improvement over the House version, the
committee's tax cut share going to middle incomes would be inadequate. The
committee's skewing of cuts to upper income individuals was attributable
primarily to objectionable capital gains tax cuts. Further, the committee's bill
would encourage excessive tax sheltering. The bill would permit very highincome taxpayers to shelter more of their income than they do under present
law. Finally, the administration found that not only did the committee's action
ignore many ofthe President's reform proposals but would add inappropriately
new and inequitable tax preferences.
At the end of the fiscal year, the Finance Committee's bill was awaiting
Senate floor action.
Overseas taxation.—The President proposed in his 1978 tax package a 3year phaseout of the domestic international sales corporation (DISC)
provision. DISC'S were typically wholly owned subsidiaries of large manufacturing corporations through which export profits could be channeled. Tax on
one-half of a DISC's profits attributable to "incremental" exports was
indefinitely deferred so long as the profits were invested in export-related
assets. The primary purpose of DISC was to stimulate exports. But analysis
indicated that DISC was more costly and less effective than expected. ^ The
administration preferred more cost-effective and fairer means of stimulating
exports than DISC. Moreover, DISC was enacted in 1971, when exchange
rates were fixed. But subsequent adoption of flexible exchange rates provided
a more direct method of compensating for changes in the U.S. trade balance.
The President also proposed as part of the tax reform program the
termination over 3 years ofthe deferral of U.S. tax on the unremitted income
of controlled foreign corporations. Under current law, a U.S. parent corporation typically did not pay tax on the earnings of its foreign subsidiaries unless,
and until, those earnings were repatriated. When the earnings were repatri3See Treasury's Sth annual report to Congress, "The Operation and Effect of the DISC Legislation," Apr. 14, 1978.




REVIEW OF TREASURY OPERATIONS

63

ated, a credit was allowed against U.S. tax for foreign taxes paid on the
earnings. The excess ofthe U.S. tax over foreign taxes on unremitted earnings
of foreign subsidiaries was therefore indefinitely deferred. This deferral
created an incentive for U.S. companies to invest overseas in low-tax countries
rather than in the United States, and to shift artificially profits from their U.S.
to their low-tax foreign subsidiary operations. Consequently, deferral rested
entirely on the artifact of a foreign corporate charter interposed between the
U.S. parent company and its foreign operations. In addition, terminating
deferral would permit the rationalization and simplification of U.S. taxation
of foreign income, and would promote competition between large multinational companies and their smaller, more domestic, competitors operating only
in domestic markets.
The administration also proposed to amend the taxation of income eamed
by Americans working overseas. The proposal would have postponed the
amendments already enacted in the Tax Reform Act of 1976 until 1978 and
would then replace the exclusion of a fixed amount of foreign earned income
with a series of special deductions for added costs of housing, education, and
home leave travel incurred by Americans working overseas, plus more
generous rules for deducting expenses of foreign moves.
The Senate Finance Committee had already introduced a bill with
essentially these provisions which was subsequently approved by the full
Senate.
The House approved a more generous system of special deductions plus, in
the case of Americans living abroad other than in Canada or Western Europe,
an additional $20,000 or $25,000 exclusion. The House bill also provided an
extension of pre-1976 law through 1977.
The matter was in House-Senate conference at the close of the fiscal year.
Urban tax policy.—In March 1978, the administration proposed an employment tax credit for employers of young persons aged 18 to 24 from low-income
households and handicapped individuals referred by vocational rehabilitation
programs. The credit would replace the current law "new jobs" credit
scheduled to expire on December 31, 1978. The credit would be equal to onethird of each employee's wages up to a maximum of $2,000 the first year and
equal to one-fourth of each employee's wages up to a maximum of $ 1,500 the
second year. The credit would be limited to 20 percent of the total Federal
Unemployment Tax Act (FUTA) wage base for any employer and could not
exceed more than 90 percent of tax liability in any year.
The administration also proposed to limit tax-exempt "small issue"
industrial development bonds (IDB's) solely to the acquisition or construction
of land or depreciable property in "distressed" areas but to increase the size
of projects that may be financed with tax-exempt IDB's from a maximum of
$5 million to $20 million.
The administration also proposed an additional investment credit of 5
percent beyond the current 10-percent credit if certain investments are made




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1978 REPORT OF THE SECRETARY OF THE TREASURY

in "distressed" areas. The additional credit wou4d be allowed only for those
investments or portions of investments for which the Department of Commerce has issued a certificate of necessity.
Social security taxation.—On December 20, 1977, President Carter approved and signed Public Law 95-216, the Social Security Amendments of
1977. The law is primarily directed at counteracting short- and long-term
financing problems in the social security system. In recent years, the
combination of inflation and recession had raised benefits and reduced tax
receipts, respectively, and created excessive drains on trust fund reserves. Also
the projected reduction in worker-to-beneficiaries ratio in the population in
the next century and the existence of a flaw in a benefit adjustment formula
to compensate for inflation endangered long-term solvency of the trust fund.
On May 9, 1977, the President had proposed to the Congress revision ofthe'
social security laws to solve these financing problems. The President called for
higher payroll taxes into the 1980's, supplemented by general revenues in
times of high unemployment. Higher payroll taxes would come from proposed,
increases in the taxable wage base ceiling. Tax rates would not be increased.]
However, to provide relatively lower burdens for workers, the President^
recommended a higher taxable wage base for the employers' tax than for the
employees' tax. In addition, he recommended that the tax rate for the selfemployed be raised to 1 1/2 times the tax rate for employees, returning to the
relationship which existed in 1972 and earlier years. Correction ofthe inflation
indexing flaw was also proposed.
The 1977 act included the administration's recommendation to correct the
indexing flaw and to change the relationship ofthe self-employment tax rate.
However, the act featured higher payroll taxes than recommended by the*
President because the act did not make any provision for general revenue
financing of social security. Also, differential wage base ceilings for employees!
and employers proposed by the administration were not accepted.
:
The 1977 act provided annual increases beginning in 1979 in both tax ratesj
and wage base ceilings. By 1982, employees and employers will each pay a taxj
of 6.70 percent on eamings up to $31,000. In 1977, the tax on each was 5.85
percent on eamings up to $ 16,000. After 1982, the law provides that the wage
base ceiling keep pace with inflation by automatic annual adjustment.
Miscellaneous tax provisions in the act dealt with contributions by
employers of workers receiving tip incomes, exclusion from social security
coverage of certain income of limited partnerships, tax treatment if anj
individual is employed simultaneously by related companies, and options for
nonprofit organizations to pay payroll taxes.
Subsequent to the approval of Public Law 95-216 and during congressional
consideration ofthe President's 1978 tax program, various legislative effortsl
were made to modify or reduce the social security tax increases in the 1977
act. The actions were opposed by the administration and the Congress did not|
approve any change.




REVIEW OF TREASURY OPERATIONS

65

Energy taxation.—President Carter had proposed a comprehensive longterm national energy program on April 20, 1977, which included a number of
tax penalty and tax incentive recommendations. Briefly they were: A
graduated excise tax on new "gas guzzling" automobiles; a standby tax on
gasoline consumption if an annual conservation target were not met; an
equalization tax on domestic crude oil based on the difference between the
controlled domestic price and the wond price of oil; a natural gas and
petroleum usage tax in trade or business; an increase in excise tax on fuel for
general aviation; an additional 10-percent credit for additional investment in
"business energy property"; a tax deduction for intangible geothermal drilling
costs comparable to intangible drilling costs available in oil and gas drilling;
a tax credit for installation of residential solar energy equipment; a tax credit
for the installation pf insulation and other energy conservation items in
residences; and others. Also recommended were: Rebate ofthe gas-guzzler tax
to buyers of gas-efficient motor vehicles; rebate of the gasoline consumption
tax to income taxpayers on a per capita basis (with direct payments to
nontaxpayers); and rebate of the crude oil equalization tax to home heating
oil retailers if passed through to consumers in the form of lower prices.^
The energy legislation became the principal work ofthe Congress in 1977
and 1978. By the end of fiscal 1978, two versions of an energy program were
before the House-Senate conferees. The House had passed an omnibus energy
program (H.R. 8444) on August 5, 1977. H.R. 8444 contained a gas-guzzler
tax but no rebate. The bill provided for a tax on crude oil and a tax on utility
and industrial use of oil and natural gas. The bill provided also for a tax credit
for home insulation. The bill, however, did not have a standby gasoline
consumption tax.
The Senate had not considered an omnibus bill but had broken the package
into six separate bills. By October 31, 1977, the Senate had passed each bill,
much of which differed from the President's proposals and the House-passed
H.R. 8444. The Senate rejected a gas-guzzler tax and preferred a ban on
production of gas guzzlers instead. The Senate also did not pass the gasoline
consumption tax and the crude oil equalization tax. It approved, however, a
tax credit for home insulation and a tax on utility and industrial use of oil and
natural gas.
,
Other legislation.—Additional tax legislation was enacted during fiscal 197 Sj.
Public Law 95-147, approved October 28, 1977, expands authorized tax
depositaries.
Public Law 95-170, approved November 12, 1977, provides an extension
of transitional rules postponing the applicability of private foundation selfdealing rules for certain pre-October 9, 1969, leases.
Public Law 95-171, also approved November 12, 1977, provides an
extension for certain child care programs and affects the WIN credit and
withholding by employment agencies placing companion sitters; extends
4 For more details on the President's program, see 1977 Annual Report of the Secretary of the Treasury, pp. 48-50.




66

1978 REPORT OF THE SECRETARY OF THE TREASURY

amortization of low-income housing rehabilitation expenses; and extends the
exclusion for Armed Forces Health Professional Scholarships.
Public Law 95-172, again approved November 12, 1977, provides for the
deletion of amounts paid as State and local sales or excise taxes from the
Federal excise tax base related to communications services.
Public Law 95-176, approved November 14, 1977, made technical
amendments to provisions of the tax on distilled spirits relating to withdrawals
for export, storage procedures, production of gin, etc.
Public Law 95-210, approved December 13, 1977, provides for the
disclosure of tax retum information to the National Institute for Occupational
Safety and Health for the purpose of locating individuals exposed to an
occupational hazard.
Public Law 95-227, approved February 10, 1978, provides for an excise tax
on coal to finance black lung benefit programs, exempt self-insurance trust
funds, and allow business deductions for contributions to such funds.
Public Law 95-258, approved April 7, 1978, provides for the inclusion of
certain disaster crop payments received in 1978, but attributable to 1977, in
the 1977 income of cash basis taxpayers and extends for 1 year the existing
treatment of State legislators' travel expenses away from home.
Public Law 95-339, approved August 8, 1978, authorizes the Secretary of
the Treasury to provide financial assistance for the city of New York and
provides for the taxability of certain federally guaranteed obligations.
Public Law 95-345, approved August 15, 1978, permits exempt organizations and mutual funds to loan their portfolio securities to brokers without
harmful tax effects.
Public Law 95-372, approved September 18, 1978, established in the
Treasury an offshore oil spill pollution compensation fund to be financed by
a fee per barrel on oil obtained from the Outer Continental Shelf and to be
collected by the Treasury.
Administration, interpretation, and clarification of tax laws

During fiscal 1978, 46 final Treasury decisions, 11 temporary Treasury
decisions, and 53 Treasury notices of proposed rulemaking were published in
the Federal Register. A substantial number of these publications implemented
provisions ofthe Tax Reform Act of 1976, including regulations relating to the
investment tax credit for movie films; public inspection of IRS determinations;
requirements to obtain a ruling from the IRS under Code section 367 and
information regarding carryover basis property acquired from a decedent.
In addition, regulations implementing the Employee Retirement Income
Security Act of 1974 and the Tax Reduction and Simplification Act of 1977
were published.
Guidelines were issued to govern the arbitrage profit allowable on the
refunding of certain tax-exempt bonds.




I

REVIEW OF TREASURY OPERATIONS

67

Tax reports

I

High-income taxpayers.—Pursuant to the Tax Reform Act of 1976, the
Treasury published in August 1978 its second annual report, "High Income
Tax Returns—1975-1976." The 1976 act requires the annual publication of
a report containing data on high-income taxpayers including the number of
taxpayers who do not pay any taxes and the importance of various tax
provisions which permit individuals to be nontaxable.
Domestic international sales corporation (DISC).—Pursuant to the Revenue
Act of 1971, the Treasury submitted to the Congress on April 14, 1978, its fifth
annual report, "The Operation and Effect ofthe DISC Legislation." The report
covered DISC year 1976 (essentially calendar 1975).
Americans working overseas.—The Treasury issued a report in February
1978 on the taxation of Americans working overseas including law and
legislative proposals, general characteristics of such taxpayers, and the impact
ofthe tax rules. The report covered calendar 1977.
Taxation of U.S. corporations.—Pursuant to the request of the chairman of
the Joint Economic Committee and the Senate Select Committee on Small
Business, the Treasury issued a report to the Congress in May 1978 on the
estimated effective income tax rates paid by U.S. corporations in 1972.
Possessions corporation system of taxation.—Pursuant to the Tax Reform Act
of 1976, the Treasury submitted to the Congress on June 29, 1978, the first
annual report, entitled "The Operation and Effect of the Possessions
Corporation System of Taxation." The report covered calendar 1976.
Tax research.—The Treasury published in "The 1978 Compendium of Tax
Research" a series of studies sponsored by the Office of Tax Policy on the
effects of the tax system on the economy.
Tax treaties

: Negotiations and technical discussions on income tax treaties were
continued with Bangladesh, Canada, Cyprus, India, and Jamaica. The tax
tieaty with the United Kingdom was approved by the Senate with a reservation
on article 9(4) dealing with State taxation of multinational corporations.
Further discussions were held with the British on how to proceed, following
the Senate reservation. The Senate Foreign Relations Committee reported out
favorably the tax treaty with Korea, which was not approved by the Senate.
The Foreign Relations Committee also considered, but has not yet acted on,
the tax treaty with the Philippines. The income tax treaty with Morocco was
submitted to the Senate for its advice and consent.
The estate and gift tax treaty with the United Kingdom was prepared for
signature. Negotiations for an estate and gift tax treaty were continued with
Germany and Denmark. Discussions also continued with France, and a treaty
draft was revised to include taxes on gifts as well as estates.




68

1978 REPORT OF THE SECRETARY OF THE TREASURY

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 ofthe
Committee. Treasury representatives also attended meetings of the InterAmerican Center of Tax Administrators (CIAT), the UNESCO conference on
the taxation of copyright royalties, and the U.N. Group of Experts on Tax
Treaties between Developed and Developing Countries.

INTERNATIONAL AFFAIRS
Trade and Investment Policy
Trade negotiations

During fiscal 1978, primary efforts in the trade area were directed at the
achievement of substantive progress in the multilateral trade negotiations
(MTN), in support o f further trade liberalization and the reform of the
international trading rules,' aiming toward the creation of a new international
trading framework which will address a wide variety of major problems:
Injurious import competition, government subsidization, government procurement, the use of export controls, the role of the developing countries, and
methods of dispute settlement.
By July 1978, we were able to achieve a "framework of understanding" on
most major issues in the negotiations. ^ This should enable a final political levelj
agreement by December 15, 1978, the deadline set by the Bonn summit!
participants for conclusion of detailed negotiations.
j
Major progress was achieved especially in the negotiation of a code Qn
subsidies and countervailing duties, one ofthe most difficult issues in the M T N
and a matter of special interest to Treasury. The United States indicated its
willingness to accept inclusion of an injury test in our countervailing duty law
as part of a comprehensive agreement which brings needed additional
discipline to this area. This has been an issue of major importance to our
trading partners and clearly demonstrates our great interest in avoiding trade
disputes in this area in the future.
Current Treasury authority to waive the imposition of countervailing duties
expires in January 1979. Although this factor has complicated the negotiations, the administration has indicated its confidence that it can secure an
extension of the waiver authority from the new Congress, which convenes in
January 1979, or take other measures which would equally mitigate the
possible adverse effects of the expiration of this authority.

i

1 See exhibit 43.
2 See exhibit 4S.




i

REVIEW OF TREASURY OPERATIONS

69

Trade issues

During the fiscal year, the Department was also actively involved in a
number of issues relating to imports. In a major test case in June 1978, the
Supreme Cburt in Zenith Radio Corporation v. United States unanimously
upheld the Treasury decision that the Japanese rebate or remission of its
commodity tax on consumer electronics exports is not a countervailable
"bounty or grant" under section 303 ofthe Tariff Act of 1930. Had Treasury
lost the case, billions of dollars of imports from virtually every major trading
nation could potentially have been affected.
In December 1977, the interagency steel task force chaired by Treasury
Under Secretary Solomon proposed a comprehensive steel program to help
meet the industry's problems in competing with foreign imports and modernizing the industry.3 As part of this program, the administration adopted a
"trigger price mechanism" (TPM) for steel imports to facilitate prompt
Treasury investigation of potential cases of steel dumping in the U.S. market
and to help prevent destructive, unfair price-cutting competition. The TPM
became fully operational in May 1978.
Through bilateral and multilateral discussions, the United States and other
major steel trading nations made significant progress during the fiscal year in
reaching a cooperative international approach to steel problems. The Ad Hoc
Steel Group ofthe Organization for Economic Cooperation and Development
(OECD) agreed to establish a standing steel committee ofthe OECD to act
as a monitoring and consultative body to address future problems in steel trade
before they become crises.
Export policy

Finally, in an effort to help reduce the U.S. trade deficit, which reached a
Tecord $31 billion in calendar 1977,^ the President in September 1978
i^nnounced the adoption of a new national export policy to encourage exports.
The program includes a number of measures to increase Government
ajssistance to exports, through expanded budget support for the Export-Import
Bank ofthe United States (Eximbank), loan guarantees by the Small Business
-Administration to help small exporters, increased export development
programs, and other measures to reduce unnecessary government regulations
which adversely affect U.S. exports.
East-West trade

U.S. trade with Communist countries decreased in 1977 to $3.83 billion,
down from $4.70 billion in 1976. This reflected a decline in U.S. exports of
agricultural goods, as a result of better harvests in the Soviet Union and other
countries, to $1.6 billion, from $2.4 billion in 1976. The United States had a
3See exhibit 38.
4 See exhibits 36 and 39.




70

1978 REPORT OF THE SECRETARY OF THE TREASURY

positive balance of trade with these countries of $1.58 billion in 1977, down
from $2.56 billion in 1976.
Trade trended up again in 1978, totaling $4.39 billion for the first 8 months,
ofwhich $2.44 billion represented U.S. agricultural commodities.
Secretary Blumenthal, an honorary Director ofthe U.S.-U.S.S.R. Trade and
Economic Council, addressed a session of the Council in Los Angeles on
November 14, 1977.5
On April 7, 1978, President Carter issued a waiver of the application of
subsections (a) and (c) of section 402 ofthe Trade Act of 1974 with respect
to Hungary. This prepared the way for the exchange on July 7, 1978, of notes
which brought into effect the agreement on trade relations between the United
States and Hungary.
On June 2, 1978, President Carter recommended to the Congress extension
of the waiver authority as provided in section 402 of the Trade Act of 1974,
allowing the United States-Romanian trade agreement to remain in force for
another year.^ By not voting in either House against extension. Congress
permitted the agreement to remain in force until at least July 1979.
Export credits

Treasury led a U.S. effort to negotiate the Intemational Arrangement on
Export Credits, which became effective April 1, 1978. Secretary Blumenthal,
in a subsequent effort to strengthen and improve that agreement, called for
new negotiations during the OECD Ministerial meeting in June and met with
Ministers of participating countries in September 1978 to emphasize the U.S.
view. A series of sessions were held at the official level in the continuing effort
to place effective limits on subsidized financing of exports. The dangers of
competitive official export financing have become particularly acute in
connection with aircraft sales—a subject on which Deputy Assistant Secretary
Hufbauer testified before a House subcommittee July 14, 1978.^
/
Assistant Secretary Bergsten testified March 13 and 20 before congressional
committees in support of a 5-year extension and expansion of authority of the
Export-Import Bank, which has become highly useful in meeting foreign
official competition in the financing of exports. ^ Treasury advises Eximbanks,.
on a variety of matters pertaining to U.S. international financial and economic
policy. President Carter's program to expand exports will require an increase
of Eximbank's budget by $500 million in fiscal 1980,
Treasury also continued to review the export program of the Commodity
Credit Corporation (CCC), providing advice to the Agriculture Department
both directly and through the National Advisory Council on International
Monetary and Financial Policies. The CCC budget for assisting in the financing
of agricultural exports was $1.7 billion in fiscal 1978.
5 See exhibit 37.
6 See exhibit 67.
7 See exhibit 44.
8 See exhibits 67 and 40.




REVIEW OF TREASURY OPERATIONS

71

Treasury was active on the Arms Export Control Board which was
concerned with the foreign security assistance program. Treasury concem was
directed primarily toward ensuring that U.S. Government financing of foreign
military sales was offered under terms and conditions which were consistent
with other U.S. Government financial policies. Agreements extending more
than $2.1 billion in foreign military sales credit were signed during fiscal 1978,
ofwhich some $ 1.5 billion was placed by the Federal Financing Bank with 22
different countries.
United States-Saudi Arabian Joint Commission on Economic Cooperation

Since Secretary Blumenthal's visit to Saudi Arabia in October 1977, three
additional project agreements, for technical cooperation in the areas of
auditing, customs, and central procurement, have been signed. The Joint
Commission now is implementing 16 major projects with a total ultimate value
of over $800 million.^ [Additional agreements signed on November 18, 1978,
at the conclusion ofthe Fourth Session ofthe Commission, bring the number
of projects to 20 and the total ultimate value to over $850 million.]
There are presently over 135 American specialists working in Saudi Arabia
under the auspices of the Joint Commission. This number is expected to
increase during the coming year.
Overseas Private Investment Corporation (OPIC)

In mobilizing and facilitating the participation of U.S. private capital and
skills in the economic and social progress of friendly less developed countries
(LDC's) as a complement to our development assistance to these countries,
OPIC gives preferential consideration to investment projects in LDC's that
have per capita incomes of $520 or less in 1975 U.S. dollars, and restricts its
activities in LDC's that have per capita incomes of $1,000 or more in 1975
• U.S. dollars.
/ Maximum insured amounts as of September 30, 1978, were (1) $3.3 billion
jfor expropriation; (2) $2.8 billion for inconvertibility; and (3) $2.8 billion for
jwar, revolution, and insurrection.
'^ As of September 30, 1978, outstanding commitments under the investment
guarantee program were $134.4 million and outstanding commitments under
the direct loan program were $31.7 million.
Although OPIC's authority to write insurance lapsed for a 4-month period
beginning in January, OPIC wrote as much insurance in fiscal 1978 as in fiscal
1977. Thus dollar volume (maximum insured amount) remained constant at
approximately $700 million.
On April 24, 1978, the President signed the Overseas Private Investment
Corporation Amendments Act of 1978. This act extends OPIC's insurance and
guarantee authority, which lapsed at the end of December, until September
9See exhibit 35.




72

1978 REPORT OF THE SECRETARY OF THE TREASURY

30, 1981. Key amendments strengthened OPIC's development mandate by
requiring, inter alia, that it refocus its efforts on the poorer countries which
have the greatest difficulty in attracting adequate flows of public and private
development resources; dropped the mandatory privatization targets under
which OPIC would have had to transfer its insurance underwriting to the
private sector by 1981; and strengthened OPIC's small business mandate by
requiring OPIC to seek to increase the number of projects sponsored by or
significantly involving small businesses to at least 30 percent of all projects
insured, guaranteed, or reinsured by OPIC. The legislative history supports
development by OPIC of innovative, risk-reducing coverage for investments
in energy and raw materials.
Expropriations

Beginning in January and February 1975, when the Ethiopian Provisional
Military Govemment (EPMG) announced widespread nationalizations, the
EPMG nationalized the property of 22 U.S. citizens and firms. In November
1976 and October 1977, the EPMG invited the U.S. firms to file claims, which
they did on both occasions.
In October 1977, the United States abstained on an African Development
Fund loan to Ethiopia because ofthe lack of progress toward settlement ofthe
outstanding expropriation claims. Although the Executive Director's statement and Embassy discussions with the EPMG made clear that the U.S.
Government hoped and expected that the announced willingness of the
Compensation Commission to discuss the claims by telephone would produce '
meaningful negotiations toward settlements in the near future, no such
negotiations have taken place. Thus, on April 4, 1978, the United States
abstained on an International Development Association (IDA) loan, advising ;
both IDA and the EPMG that it would vote " n o " the next time a loan to i
Ethiopia was brought forward in a multilateral development bank, unless ]
significant progress has been made toward settlement.
(
International Center for the Settlement of Investment Disputes (ICSID)

During its annual meeting on September 27, 1978, the Administrative
Council of ICSID, with strong support from the United States, represented by
Treasury, created an additional facility within the ICSID Secretariat for certain
categories of proceedings for conciliation, arbitration, and factfinding which
had not been governed by the convention establishing ICSID. The additional
facility will allow states which are not members of ICSID and their nationals
the opportunity to make use of the services of the Secretariat and will allow
the Secretariat to help settle certain types of noninvestment disputes which fall
outside the jurisdiction of the convention itself.




REVIEW OF TREASURY OPERATIONS

73

UNCTAD discussions on restrictive business practices

The Ad Hoc Group of Experts on Restrictive Business Practices met in
March and July 1978 in a continuing effort to reach agreement on principles
and rules for controlling restrictive business practices. No agreement on
principles was reached, in large part because the LDC's sought a set of legally
binding principles while the United States and some other developed countries
took the view that any set of principles should be voluntary for both
corporations and governments. Nevertheless, there was substantial progress in
the areas of information exchanges and technical assistance. The group will
meet again in March 1979 for a further attempt to agree on a set of
multilaterally agreed principles and rules on restrictive business practices and
to discuss the text of the model law that was drafted by the United Nations
Conference on Trade and Development (UNCTAD) Secretariat.
Commodities and Natural Resources Policy
U.S. commodity policy

During fiscal 1978, the United States continued to develop and refine its
basic initiatives in commodity policy. Over the past 2 years of North-South
dialog, commodity issues have been high on the agenda in exchanges between
developed and developing countries, and in these discussions, the United
States has advocated a commodity policy that would work to the benefit of
both producers and consumers. The U.S. approach has been—
• To promote commodity price stability through the creation of
international commodity agreements;
• To support the stabilization of export earnings for producing
countries through the compensatory financing facility of the International
Monetary Fund;
• To remove existing barriers to investment and trade in commodities,
and discourage imposition of new ones, to assure efficient and secure
; sources of supply.'®
/ Foremost among commodity problems in recent years has been the sharp
^^fluctuation of prices, which has been caused by changes in worldwide
economic activity or changes in crop production. The high rate of growth in
t the world economy during 1973-74 drove commodity prices sharply higher,
I only to be followed by the deep recession of 1975-76 which resulted in a
decline in most prices. In 1977 commodity prices were mixed, but by mid-1978
prices, both industrial and food, had established a new uptrend. While some
fluctuation in prices must be expected, extreme fluctuations are detrimental
to stable economic growth in both developed and developing countries as they
give rise to near-term inflationary pressures and discourage investment in
commodity industries.
10 See exhibit 47.




74

1978 REPORT OF THE SECRETARY OF THE TREASURY

To remedy the situation in the most volatile markets, the United States has
supported, where feasible, the negotiation of international commodity
agreements (ICA's). These agreements, operating preferably through buffer
stocks, are aimed at stabilizing prices within a broad band around their longrun
trend. Properly designed, commodity agreements can moderate price fluctuations while at the same time allowing for an efficient allocation of resources.
This stability contributes to an easing of inflation, greater stability in economic
growth, a smoother pattem of investment in raw materials industries, and more
reliable income to producers. At the same time, such agreements provide for
closer coordination between producers and consumers in maintaining acceptable supply-demand balances. Currently, international commodity agreements are in effect for tin, coffee, and cocoa (though the United States is not
a member); a sugar agreement was negotiated in 1977 but has not yet received
final ratification. Discussions which may eventually lead to negotiations have
been undertaken for wheat, natural rubber, and copper. The administration
made a commitment to contribute tin to the buffer stock ofthe Intemational
Tin Agreement, but Congress failed to complete action on legislation.
After considerable study, the Government has concluded that agreements
are not feasible for some commodities. Lack of an acceptable reference price,
stability problems, nonhomogeneous grades, lack of interest, and chronically
depressed markets will likely preclude ICA's for tungsten, jute, manganese,
and several other commodities originally proposed by developing countries.
Common fund.—To assist ICA's in financing buffer stock activities, the
United States has supported the Group B (mainly OECD countries) proposal
for a common fund (CF) presented at the negotiating conference in November
1977. It calls for a consolidation of individual ICA financial resources in a
common fund which would lower the paid-in financial requirements for each
agreement. If the paid-in resources are exhausted, the CF would supplement
the deposits with commercial market borrowings secured by negotiable
warehouse receipts (stock warrants) ofthe ICA's and by the remaining capital
assets ofthe ICA's (callable capital or government guarantees). To provide fof
more equitable sharing of financial responsibility for agreements, the proposa\[
implicitly assumes participation of consuming and producing countries in the^
financing of ICA's.
Developing countries continued to insist on a common fund which relies
heavily on direct mandatory contributions which would be used to finance
buffer stocks. Their common fund would also include a second window to
finance a wide range of non-buffer-stock measures for commodities, a
pirovision which the United States was unable to support.
Wide differences between the Group B proposal and the common fund
proposal by the G-77 prevented successful conclusion of negotiations at the
November conference. During much of 1978 both Group B and Group of 77
sought to narrow their differences so as to raise the prospects of a successful




REVIEW OF TREASURY OPERATIONS

75

negotiation of the common fund. The administration, particularly the
Departments of Treasury and State, participated in numerous consultations
with Congress and other countries—both developed and developing. The
developed countries maintained that direct governmental contributions would
undermine the autonomy of ICA's and that a second window, as proposed by
the developing countries, would essentially duplicate activities ofthe multilateral development banks. A third negotiating conference is scheduled for
November 1978.
Commodity developments

Sugar.—Delay in ratification ofthe Intemational Sugar Agreement (ISA)
was caused by the failure of Congress to enact ne\y domestic sugar legislation,
which also contained necessary ISA implementing legislation. A new domestic
sugar program is expected to be signed into law early in 1979, after which the
Senate is expected to ratify the ISA. The administration believes U.S. sugar
policy should be compatible with and built on an effective ISA; together these
sugar programs will help stabilize both international and U.S. sugar markets.
During the year, the ISA imposed, on a provisional basis, export quotas and
most exporters indicated they would abide by them, thus helping to strengthen
prices. Nevertheless, there is some concem that in the absence of early U.S.
ratification, some exporters may abandon any commitment to restrict exports,
causing increased sugar supplies and lower prices. With the expected U.S.
ratification, however, the ISA should function effectively, thereby raising
market prices to the agreement's 11-cent floor.
Cotton.—During fiscal 1978, world cotton production increased to 64
million bales, the highest level in 3 years. However, cotton prices rose steadily
throughout the year because of an expansion in demand. The Cotton Outlook
Index for strict middling 1 1/6-inch quality, CIF North Europe, climbed from
around 55 cents a pound early in fiscal 1978 to close to 75 cents at year's end.
In early spring, a second preparatory meeting on cotton was held under the
auspices of UNCTAD. While the discussions were constructively directed
toward the problems in cotton markets, no conclusive evidence was presented
to support the need for international stabilization. Two studies prepared by the
UNCTAD Secretariat on the marketing and distribution of cotton and on the
fluctuations in cotton prices in world markets will be presented at the next
preparatory meeting scheduled for early November 1978.
Cocoa.—The United States attended, as an observer, an ad hoc meeting on
renegotiation ofthe International Cocoa Agreement in June 1978. In July, the
Cocoa Council tentatively scheduled a negotiating conference for January
1979 as well as two more preparatory meetings in late 1978. The United States
plans to participate actively in the preparatory meetings and the negotiating
conference.
Coffee.—Prices of coffee continued to fluctuate in fiscal 1978, first dropping
from about $2.00 per pound in August 1977 to $1.35 in January 1978, then




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1978 REPORT OF THE SECRETARY OF THE TREASURY

rising to $ 1.53 in March, dropping off again in the summer, and rising sharply
once more to around $1.60 at the end of the fiscal year. Sharp changes in
supply in 1977 together with gyrating demand from U.S. crushers were the
chief reasons for the price changes. As required by provisions of the 1975
International Coffee Agreement, the International Coffee Council met in
September to review the agreement's price triggers for implementing export
quotas and to consider a possible revision. The maximum price at which quotas
can currently be triggered under the agreement is 77 U.S. cents. The Council
was unable to agree upon a revision of the triggers, but it did agree that the
Executive Board would meet to consider possible action if prices should
change substantially in the coming months.
Wheat.—Progress toward a new Intemational Wheat Agreement (IWA) was
achieved, though it was slow in coming. The United States effected a major
shift in its position by supporting price-triggered stocking actions with respect
to the proposed wheat reserve to be included in a new IWA. Following three
preparatory conferences in 1977 and 1978, an UNCTAD-sponsored negotiating conference was convened in Geneva in March. The participants were
unable to reach consensus on a new agreement because of differences over
several major issues including: (1) The actions to be taken when triggers are
tripped; (2) the level of the price triggers; (3) the shape of a coarse grains
agreement; (4) supply and purchase commitments in critical market situations; and (5) financing of LDC reserves. Considerable progress was made
subsequently in a series of three Interim Committee meetings. Although some
major issues—supply and purchase commitments, size of reserve, and LDC
financing—have yet to be settled, agreement has essentially been reached on
several other issues.
Grain sales to U.S.S.R.-Sales of U.S. grain to the U.S.S.R. totaled 14.8
million metric tons during fiscal 1978, the second full year ofthe U.S.-U.S.S.R.
grain agreement. This amount virtually equaled the amount offered without
further consultations by the United States during regular bilateral consultations in the fall of 1977 and included 3.5 million tons of wheat (just over the
minimum commitment) and 11.3 million tons of corn. Soviet purchases
jumped from 6.1 million tons in the previous year because of a shortfall in 197 7
grain production. In addition to the wide fluctuations in annual purchases, a
major concern ofthe United States has been the "bunched" purchases of grain
by the Soviets. In the October 1977-September 1978 period, U.S.S.R.
purchases occurred in all but one month. This pattern was an improvement
over that for the previous year, but the month-to-month variations were still
somewhat greater than the United States believes necessary.
Tm.—Tin prices reached an alltime high in October at $7.00 per pound, well
above the fifth International Tin Agreement's (ITA) ceiling price of $5.90 per
pound. The ITA has had little success in the 1970's in moderating tin price
increases, partly because its buffer stock is too small and partly because of
variable production and export taxes in producing countries which have




REVIEW O F TREASURY

OPERATIONS

77

discouraged investment and production. An administration request for
congressional authorization for a voluntary contribution of nearly 5,000 tons
of tin from the United States to the ITA buffer stock was passed by the House,
but not the Senate. Moreover, the Congress also failed to authorize disposal
of 30,000 tons of tin from the surplus in the strategic stockpile. The
administration is expected to request authorizations again in 1979 which
would enable the Federal Government to benefit from sales of tin at favorable
prices and, at the same time, provide much-needed tin to the international
market.
Copper.—Intergovernmental discussions on copper under the UNCTAD
Integrated Program for Commodities reached an impasse in July over the
establishment of an independent producer-consumer forum (PCF) for copper
to examine various possible arrangements for stabilizing the copper market
and to decide whether to move to negotiation of an ICA for copper. In October
1978, therefore, the governments participating in the discussions agreed to lay
aside the PCF issue at least temporarily and to return to a series of
intergovernmental meetings under UNCTAD auspices to consider stabilization measures. The governments must meet again, probably in January 1979,
to spell out their work program on such measures, including any new
proposals.
Rubber.—In February 1978, the major natural rubber producing and
consuming countries, meeting under UNCTAD auspices, agreed to negotiate
a buffer stock arrangement to stabilize prices in the international market. Their
decision was based on intensive, technical work during 1977 which indicated
that measures to stabilize natural rubber prices were feasible and in the
interests of both groups. In preparation for the negotiations, consuming
countries held further technical discussions with producers in May, then met
among themselves in June and July to design a consumer proposal. In
September, both groups drafted a text which will serve as a basis for
negotiations under UNCTAD auspices in November. An appropriately
designed agreement could benefit the United States by bringing forth
additional supplies of natural rubber by the mid-1980's, when a tight market
is widely forecast.
Tungsten.—In February, an expert group of the UNCTAD Committee on
Tungsten (COT) reached a stalemate over the issue of whether to negotiate
an international commodity agreement for tungsten or establish an institutionally autonomous producer-consumer forum (PCF) to discuss problems in the
tungsten market and alternative procedures for solving them. Australia and
Bolivia, on behalf of the producers, tabled a proposal for an ICA; the United
States and four other major consumers of tungsten backed the PCF concept.
The issue was referred to the April session of the UNCTAD Trade and
Development Board, but was not resolved there. Consequently it was
remanded to a special preparatory working group of the COT which met in
June. This group did not resolve the issue but did agree to meet again, probably




78

1978 REPORT OF THE SECRETARY OF THE TREASURY

in April 1979. The consuming countries opposed negotiations of an ICA
because they believe the structure of the market and the heterogeneity of
tungsten-containing raw materials would likely make any price-stabilizing
agreement unworkable.
Energy policy

The administration has given high priority to development, adoption, and
implementation of a national energy program. Key aspects of this program are
embodied in the National Energy Act, passed by the Congress on October 15,
1978. Treasury's interests in the program center on its tax, financial, and
economic implications. It is estimated that the Energy Act will result in oil
import savings of 2.5 million barrels per day over what they would have been
otherwise in 1985.
During the year. Treasury staff participated in the evaluation of various
issues affecting domestic and international energy policy. Among these.
Treasury gave particular attention to the effects of Organization of Petroleum
Exporting Countries (OPEC)-pricing decisions on the U.S. and the world
economy and to policy options which would encourage the development of
indigenous resources in oil-importing developing countries.'^ In addition.
Treasury officials responded to numerous inquiries and invitations by the
Congress and the public to speak on a wide range of energy issues, energyrelated legislation, and energy regulatory policy.
Oil prices

Oil import costs were a major burden on the U.S. trade and current account
balances, even though the volume of U.S. oil imports was somewhat below that
of the previous year. As a result, the U.S. current account deficit, national
energy program, and oil prices became intimately linked—although official oil
prices remained stable during the year. Our deficit continued to be attributed
in large part to excessive oil imports, while the declining value of the dollar
led to renewed pressure within OPEC for an immediate oil price increase that
would have further exacerbated our trade problem, by adding roughly $0.4
billion to our import costs for each 1 -percent increase. This pressure, however,
was successfully resisted by Saudi Arabia and Iran throughout fiscal 1978.
LDC energy development

In its relations with the developing countries, the United States was guided
by the belief that reducing the dependence of developing countries on
expensive oil imports would both further their development and improve the
world energy balance. As a result, the United States took further steps to assist
these countries in developing their own energy resources, such as:
• The Agency for International Development and Department of
11 See exhibit 46.




REVIEW OF TREASURY OPERATIONS

79

Energy adopted new programs to assist the LDC's to develop renewable
energy technologies.
• We proposed and gained a Bonn summit commitment to coordinate
national efforts to bring renewable energy technologies into use in the
developing countries. The scope and details ofthe effort will be worked out
over the next year.
• We endorsed the effort already underway within the World Bank
(responding to proposals by the previous summit in London) to expand the
financing of LDC energy development and agreed to the suggestion that it
examine whether new approaches would be useful, particularly in the
exploration area.
• OPIC introduced a program to develop coverage for new types of
energy investments—joint ventures, service contracts, and the like.
International Energy Agency (lEA)

As a result ofthe 1973 Arab oil embargo, 19 industrialized oil-consuming
countries established the lEA to help coordinate their international energy
policies. The goal is to reduce dependence upon imported oil through
conservation, accelerated development of indigenous resources, and shared
research and development. In addition, the lEA has developed methods to
restrain demand and share existing supplies equitably so as to meet supply
emergencies. Treasury participated in meetings of the Governing Board and
its several subordinate bodies.
Standing Group on Emergency Questions (SEQ).—The Standing Group has
developed a program which establishes procedures to implement the sharing
of fuel assets in emergencies. This program is embodied in an Emergency
Management Manual, which includes basic decisions, goals, and procedures
for emergency operations in the event of an oil embargo. A successful test of
the emergency oil allocation system was conducted during the spring of 1978.
Standing Group on Long-Term Cooperation (SLT).—Largely as the result of
Standing Group action, lEA participants agreed in an October 1977 Ministerial session to a 1985 objective for group dependence on imported oil of 26
mmb/d (millions of barrels per day) and pledged individual country action on
energy policies designed to achieve this goal. The SLT also makes an annual
assessment of the energy programs of lEA member countries.
Standing Group on Oil Markets (SOM).—Treasury has participated mainly
in the SOM's Ad Hoc Group on Capital Investment and Financial Structure.
This group is attempting to forecast energy industry capital requirements for
OECD countries and to assess the ability ofthe industry to finance such capital
investments.
Ad Hoc Group on International Energy Relations.—This group is concemed
with energy relations with the oil-importing developing countries and the
OPEC countries. It has been considering activity in the area of energy resource




80

1978 REPORT OF THE SECRETARY OF THE TREASURY

development in the developing countries, including energy balances, supply
requirements, investment needs, and the adequacy of existing programs. Its
Secretariat maintains contacts with OPEC spokesmen.
Oceans policy

Treasury continued to play an important role in two major areas of oceans
policy in 1978: (1) The seabed mining negotiations within the U.N. Law ofthe
Sea Conference,'2 and (2) the economic provisions in ocean mining legislation. Legislation only narrowly missed passage by the Congress in the rush to
adjournment. Limited progress was made in specific areas at the Law of the
Sea Conference, but wide gaps still separate the United States from other
countries on a number of issues.
Ocean mining legislation.—The House (H.R. 3350) and Senate (S. 2053)
bills were primarily aimed at setting up a Federal administrative structure
which would give guidelines to prospective ocean mining firms as they make
their investment and development decisions. The Department of Commerce
and/or Interior are expected to play the lead role in administering the domestic
ocean mining regime. Treasury was most interested in the provisions to protect
industry investment in the transition from a national deep seabed mining
regime to an international regime. During the legislative process, the
protection mechanism was changed from one of investment guarantees and
insurance by the Federal Government to one of seeking grandfather rights for
operating seabed miners in the Law of the Sea treaty.
A second major issue of interest to Treasury and other agencies was
establishment of an escrow "revenue sharing" fund and the tax treatment of
payments by firms to the fund. This fund could be used later to meet certain
obligations the United States might agree to in a final Law of the Sea treaty.
The Department sought to have these payments treated as a business
deduction, while industry representatives initially asked for them to be treated
as tax credits. In the final versions ofthe bill, the industry and Federal agencies
supported a small payment on the mining activities in the seabed which would
be a busiriess deduction.
Other issues of interest to Treasury included: U.S. flag requirements for the
construction and operation of mining and transportation vessels (the administration favors no flag requirements except for the operation of mining vessels
to facilitate law enforcement in the event of criminal actions); requirements
to locate plants to process seabed minerals in the United States (the
administration opposed any such requirements); a Treasury-sponsored
provision to avoid any impact ofthe law on existing tax and tariff regulations
Treasury, working with other agencies, will develop legislation describing
tax treatment of ocean mining income. Under present law, such income would
be ineligible for benefits such as investment tax credits, rapid depreciation
expensing of exploration costs, and perhaps depletion allowances. Also, the
12See exhibit 48.




REVIEW OF TREASURY OPERATIONS

81

treatment of any payments by seabed mining firms to an "international
revenue sharing fund," under a Law ofthe Sea treaty, will need to be decided
by the administration.
Law of the Sea Conference.—The seventh session of the third U.N.
Conference on the Law of the Sea met in Geneva from March 28 to May 19,
1978, and resumed in New York from August 21 to September 15, 1978.
Discussions and redrafting of texts were undertaken on a number of issues
including: Transfer of technology to the Enterprise, the seabed mining
organization ofthe Authority; a limitation on production from the seabed area
according to a formula which would allocate a position of future growth in the
nickel market to seabed miners and the rest to land-based producers; a system
whereby the private and national entities mining the area would share part of
their income with the intemational community; composition and voting on the
Council of the Seabed Authority; a review conference to be convened in 20
to 25 years to examine the success ofthe regime and prospective alternatives
to govern seabed operations thereafter.
These issues have been discussed in several sessions ofthe Conference, yet
wide gaps between the positions of developed and developing countries still
exist. At stake is whether the development of deep ocean mining will be
governed exclusively by the International Seabed Authority or whether private
and national firms will have assured access to sites if they agree to reasonable
terms and conditions in a negotiated contract.
In preparation for the next session of the Law of the Sea Conference in the
spring of 1979, the U.S. Govemment has undertaken a review of U.S. positions
on all major issues in the seabed negotiations. The redrafted texts, as well as
alternative approaches to the issues, will be examined closely before
reaffirming old positions or developing new ones.
International Monetary Affairs
World economic and financial developments

The world economy.—The world economy is continuing its steady but
historically slow recovery from the 1974-75 recession, the proximate cause of
which was the OPEC embargo and oil price hikes. The basic impact of the
sharp rise in oil prices on underlying inflation rates remains an important factor
in international relations. OECD inflation rates are slowly declining during
1978 and should average about 7.3 percent for calendar 1978 as opposed to
8.1 percent in 1977.
The rate of real economic growth in the 24 developed countries of the
OECD in calendar 1978 is expected to be about 3 1/2 percent, compared with
3.7 percent in calendar 1977. These rates, while representing substantial
progress, are far below the real growth rates experienced before the oil price
hike. Real growth rates for the OECD averaged about 5 111 percent in the years
1960-73.




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1978 REPORT OF THE SECRETARY OF THE TREASURY

During calendar 1978, the pattern of real growth was shifting among the
leading industrial nations. In the aftermath ofthe recession, the United States
grew substantially faster than the six other major industrial countries (Japan,
Canada, United Kingdom, France, Germany, and Italy). This higher than
average U.S. real growth represented a sharp change from the decade ofthe
sixties and the early seventies when U.S. growth averaged 4.2 percent while
the other OECD members grew at about 6.8 percent. In 1977 the U.S. growth
was 4.9 percent, compared with 3.3 percent for other major countries. In 197 8,
however, the real growth rates of both the United States and the "Big-6" are
expected to converge to the 3 1/2-4-percent range.
Also during 1978, the structure of growth became more balanced in the
major countries. Both real private consumption and real investment have
picked up in most ofthe major industrial countries during 1978. The United
States is expected to be the sole exception to both of these trends during
calendar 1978. The growth rate of real investment in the "Big-6" is expected
to be about 5 percent during 1978—up from 1 1/2 percent in 1977. U.S. real
investment growth is expected to fall from a spectacular 13 1 /2-percent growth
rate in calendar 1977 to a still very rapid 8.1 percent in 1978. Private
consumption is expected to grow at about 4 percent in the "Big-6" during
calendar 1978, as opposed to a 2.3-percent growth in 1977. American private
consumption, on the other hand, is expected to grow more slowly—a 3.4percent growth is projected for 1978, compared with 4.7 percent in 1977.
The pickup in real growth in the major foreign industrial nations has not had
a significant impact on reducing unemployment rates. The seriousness of the
unemployment problem was demonstrated by the fact that it was designated
as the primary economic problem facing the developed nations at the Bonn
economic summit meeting in July 1978.^^ NO major foreign nation has
achieved much success in fighting unemployment. Canada, Italy, and the
United Kingdom have all had serious rises in measured unemployment rates
since 1975. The United Kingdom and Italy have had the consolation of seeing
their current account move from deficit to surplus during this period, but
Canada has suffered a stubborn current account deficit as well as rising
unemployment. The fall in the American unemployment rate from 6.8 percent
in September 1977 to 6.0 percent in September 1978 was the only substantial
fall in unemployment in the group.
The international balance of payments situation.—The most significant
development in the world international payments pattem in 1978 is the
reduction in the OPEC current account surplus from about $32 billion in
calendar 1977 (including official transfers) to about $10 billion. The
developed nations of the OECD have gone from a current account deficit of
$28 billion in calendar 1977 (including official transfers) to an estimated
current account deficit of only $2 billion in 1978. The American current
account deficit, however, is expected to rise from $15.2 billion to about $17
13 See exhibit 57.




REVIEW OF TREASURY OPERATIONS

8 3

billion over the same period. Japan, on the other hand, has increased its surplus
on current account from $11.1 billion in calendar 1977 to at least $ 18 billion
in 1978.
The persistence of the Japanese current account surplus in the face of the
very large appreciation of the yen remains one of the key international
economic problems of 1978. The yen rose 22 percent against the U.S. dollar
in calendar 1977 and had risen another 27 percent in 1978 as of September
30. In spite of this huge appreciation, the Japanese current account surplus had
not at the end ofthe U.S. fiscal year shown clear signs of falling in dollar terms.
Trade flows, however, in volume terms were reflecting the exchange rate
changes as import volumes increased while export volumes declined. It is
expected, however, that the economic stimulus package promised by Prime
Minister Fukuda at the Bonn summit, together with the appreciation of the
yen, will bring down the surplus in the near future.
Taken as a group, the current account deficit of the nonoil LDC's, which
are traditionally net capital importers, is expected to rise to about $16 billion
in calendar 1978 (including official transfers), compared with $12 billion in
1977. If official transfers are omitted, the year-over-year rise is from $22 to
$27 billion. Because of improved access to private capital markets, the total
intemational reserves of the nonoil LDC's have risen slightly in 1978 despite
the current account difficulties of a few individual countries.
Role of private banks.—Private banks have continued to play a central role
in the world financial system. Despite a narrowing of current account
imbalances among countries, a substantial need for intermediation between
surplus and deficit countries remained. Most of this intermediation fell to the
private financial markets, and especially to the banks. Increased competition
among lenders has facilitated this financing on substantially improved terms
to borrowers. Loans have been extended for longer maturities while interest
rates have dropped significantly relative to the cost of funds to banks. Many
borrowers took advantage of the sharp improvement in terms to refinance
higher cost obligations. Some countries used the opportunity to rebuild their
reserves.
While welcoming the role played by banks in facilitating the "recycling"
process, U.S. authorities have recognized the need to ensure adequate
continuing surveillance of banks' activities in the face of the greater volume
and changed nature of international lending.
The U.S. Government is now collecting more comprehensive data on the
exposure of U.S. banks in foreign countries and has improved its other
reporting systems. Development of a new uniform system for assessing the
creditworthiness of U.S. banks' loans to individual countries is underway. In
January 1978 the Comptroller of the Currency issued for comment an
interpretive ruling on the application ofthe legal lending limit stipulated in 12
U.S.C. 84 to U.S. banks' loans to foreign governments and their instrumentalities.




84

1978 REPORT OF THE SECRETARY OF THE TREASURY

Foreign exchange market developments and operations.—During the fiscal
year, the dollar depreciated sharply against all major foreign currencies with
the exception of the Canadian dollar. Exchange market conditions deteriorated, and a general lack of confidence in the dollar tended to develop,
aggravating efforts in the United States and abroad to narrow payments
imbalances, growth rates, and rates of inflation. The dollar depreciated by 34
percent against the Swiss franc, 28 percent against the Japanese yen, and 16
percent against the German mark. It appreciated by 10 percent against the
Canadian dollar. On a trade-weighted basis against OECD currencies, the
dollar depreciated by 12.5 percent. The currencies ofthe United Kingdom,
France, and Italy also appreciated against the dollar but remained relatively
stable on a trade-weighted basis. They were able to rebuild reserves, and
Britain and Italy were able to reduce external indebtedness.
By late September 1977, the foreign exchange market was reacting
increasingly to the disparities in rates of growth, inflation, and payments
imbalances among major industrialized nations. Forecasts of U.S. trade and
current account deficits for 1977 and 1978 contrasted sharply with the
surpluses in Japan, Germany, and Switzerland, in particular. Uncertainty was
increasing over prospects for an effective U.S. energy policy. Concern over the
growing U.S. dependence on petroleum imports, low rates of growth in major
U.S. export markets, U.S. inflation, and the implications of these factors for
future exchange rate movements unsettled the market. The dollar had been
depreciating against a number of major foreign currencies, particularly the
German mark and Swiss franc, for several months, but market conditions had
warranted only small and occasional U.S. intervention operations.
Early in October, market conditions began to deteriorate as doubts grew that
policies in the United States and in the major surplus countries would be
sufficient to meet the fundamental factors causing the imbalances. While U.S.
authorities stressed that further depreciation ofthe dollar was not requited or
sought as a means of curing the U.S. deficit, the delays in the consideration
ofthe energy legislation and some uncertainties concerning the course of U.S.
nionetary and fiscal policies added to the unsettled market conditions. In order
to counter these conditions, the U.S. authorities, through the Federal Reserve,
began intervening in the market from time to time, selling German marks
drawn under the Federal Reserve swap arrangement with the Bundesbank.
During October such sales totaled the equivalent of $223 million. Operations
were smaller and less frequent in November, but toward the end of November
the speculative atmosphere deepened. The German mark, Swiss franc, and
Japanese yen were appreciating sharply, and the movement in the DM
stimulated additional speculative inflows on expectations of a realignment of
currency parities among the participants of the European common margins
("snake") arrangement. Accordingly, the Federal Reserve increased substantially the extent of its market operations.




REVIEW OF TREASURY OPERATIONS

85

On December 21, President Carter expressed his concern about the disorder
in the exchange markets and the rapid movement in exchange rates. He
stressed the necessity to adopt an effective energy program and to stimulate
U.S. exports, and indicated that the United States would continue to intervene
to counter disorderly conditions in the foreign exchange market. During this
period, Japan, Switzerland, and Germany each adopted measures to restrict
capital inflows. However, market conditions deteriorated further. By the end
of December, the Federal Reserve indebtedness under the Bundesbank swap
arrangement, used to finance intervention during the 3 months, had increased
to $803 million. During the 3 months, the dollar had depreciated by 15 percent
in terms of the Swiss franc, 9 percent in terms of the DM and the yen, and by
over 5 percent on a trade-weighted basis in terms of OECD currencies.
On January 4, 1978, the Treasury and Federal Reserve Board announced
that henceforth the Treasury's Exchange Stabilization Fund (ESF) would be
utilized actively together with the Federal Reserve swap facilities and that the
Treasury had entered into a swap agreement with the Bundesbank.''* Joint
Treasury-Federal Reserve intervention operations in DM, conducted through
the Federal Reserve Bank of New York, commenced immediately. Also,
within a few days, the Federal Reserve discount rate was increased from 6 to
6 1/2 percent. Market conditions gradually improved, and the dollar appreciated. In combined operations, the U.S. authorities made net sales of $749
million of DM in the market during January 4-13. Thereafter, operations were
infrequent and small until mid-February, when selling pressure on the dollar
intensified. Flows into German marks were stimulated by the latest reports of
the German trade surplus and speculation on a realignment of the DM and
other currencies within the snake, despite the devaluation of the Norwegian
crown within the arrangement on February 13. During February 10-28,
Treasury and Federal Reserve operations resulted in net sales of $715 million
of DM; in addition, the Federal Reserve commenced market operations in
Swiss francs, selling francs drawn under its swap arrangement with the Swiss
National Bank.
U.S. operations were generally light during most of March, though the
market was unsettled from time to time, and selling pressure on the dollar
intensified following release ofthe U.S. trade figures for February showing a
record deficit of $4.5 billion. By the end ofMarch, the outstanding swap debts
to the Bundesbank had increased to $2.8 billion, ofwhich $1.8 billion was
owed by the Federal Reserve and $1 billion by the Treasury. During
January-March, the dollar had depreciated further by 8 percent in terms of
the Swiss franc and the yen, by 5 percent in terms ofthe DM, and by 1.5 percent
on a trade-weighted basis.
On March 13, Secretary Blumenthal and Finance Minister Matthoefer ofthe
Federal Republic of Germany issued a joint statement, following discussions
14 See exhibit 49.




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1978 REPORT OF THE SECRETARY OF THE TREASURY

between the two Governments and between the Federal Reserve and the
Bundesbank.'5 In connection with these discussions, they affirmed that close
cooperation in countering disorderly exchange market conditions would be
maintained. They announced that the swap agreement between the Federal
Reserve and the Bundesbank would be doubled to $4 billion, that the Treasury
had arranged for the sale of SDR 600 million to purchase DM, and that the
United States would draw against its reserve position in the IMF if and as
necessary to acquire additional foreign exchange.
By early April, market conditions appeared to be improving. The dollar
began to appreciate, and the Treasury and Federal Reserve commenced
purchasing DM in market and nonmarket transactions forthe payment of swap
debts to the Bundesbank. Few further sales of foreign currencies in the market
were made until late in July. The U.S. stock market rallied. Agreements within
Congress were reported on major sections ofthe energy legislation. On April
11, the President announced new measures to counter inflation and called
upon the Congress to act on the energy legislation. On April 19, the Treasury
announced the initiation of a series of monthly public auctions of gold, to
commence in May, to help reduce the U.S. trade deficit.'^ On May 11, the
Federal Reserve increased the discount rate from 6 1 /2 to 7 percent. By late
that month, the dollar was trading 4 to 8 percent above its levels at the end
of March.
However, the demand for dollars was not sustained. The market again
tumed its focus to the persisting payments imbalances and inflation differentials. Moreover, foreign monetary authorities were perceived to have shifted
from a stance of net dollar purchases to dollar sales as the effects of recent
dollar intervention were unwound. The dollar began to depreciate again,
especially in terms of the Japanese yen. The discussions in Europe about
establishment of a European Monetary System added to market uncertainties.
The further increase in the Federal Reserve discount rate from 7 to 7 1/4
percent on July 3 did not stimulate a demand for dollars in the market.
Discussions at the Bonn summit'^ highlighted the U.S. commitment to
reduce energy consumption, but consideration of possible future OPEC
pricing actions remained a factor encouraging dollar sales. The German
economic stimulus measures announced after the summit meeting were
generally viewed as likely to have only a modest effect. Dollar selling
accelerated, and the dollar depreciated sharply in terms ofthe German mark
and other European continental currencies.
On August 16, the President announced that he had asked Secretary
Blumenthal and the Chairman ofthe Federal Reserve Board to consider what
actions might be appropriate on their part, and to recommend any future

15 See exhibit 51.
16See exhibit 53.
17 See exhibit 57.




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actions on his part, to deal with the foreign exchange market situation. He said
that the sharp decline in the dollar and disorderly market conditions, at a time
when the U.S. trade position was showing signs of real improvement, could
threaten progress toward dealing with inflation and achieving orderly growth
in the United States and abroad. On the next day. Secretary Blumenthal
announced that he and the Chairman were giving urgent attention to proposals
in a number of areas and expected a series of continuing actions to be
announced as decisions were reached over the next few weeks. On August 18,
the Federal Reserve announced an increase in the discount rate from 7 1 /4 to
7 3/4 percent and a reduction in reserve requirements on Eurodollar
borrowings. On August 22, the Treasury announced an increase in the amount
of gold offered at the monthly auctions from 300,000 ounces to 750,000
ounces, beginning with the November auction.'^
Market conditions continued to deteriorate gradually during August and
September, despite the actions taken and the increasing consensus that
payments imbalances and growth rate differences were narrowing. Concern
about U.S. inflation was growing. Exchange rates moved in a wide range as the
market awaited new actions. The $2.99 billion July U.S. trade deficit,
announced late in August, surprised the market and fortified market
skepticism regarding trends. Moreover, speculation grew on the possibility of
a realignment of the snake currencies, in advance of or in connection with a
new European monetary arrangement. The Federal Reserve increased the
discount rate from 7 3/4 to 8 percent on September 22, the Senate passed the
natural gas bill, and a sharp decline to $1.62 billion was reported in the U.S.
July trade deficit, but market conditions remained unsatisfactory. The dollar,
from its levels at the end of May, had depreciated by 7 percent in terms ofthe
DM and on a trade-weighted basis, 14 percent against the yen^ and 17 percent
against the Swiss franc by the end of the fiscal year.
The Treasury and Federal Reserve had resumed sales of DM in market
operations late in July. By that time, total swap indebtedness to the
Bundesbank had been reduced to $847 million, of which $650 million
represented Federal Reserve and $197 million Treasury debts, utilizing for
repayment DM purchased in market and nonmarket transactions since early
in April. As the result of further operations in DM during August and
September, however, at the end ofthe fiscal year the swap indebtedness to the
Bundesbank had risen to $690 million and $341 million, respectively, to total
$1,031 million. In addition, the Federal Reserve's swap debt to the Swiss
National Bank, resulting from current operations in Swiss francs, amounted to
$170 million.
The Treasury and Federal Reserve continued to make regular payments
against pre-1971 Swiss franc indebtedness under the 3-year program agreed
with the Swiss authorities in 1976. During the fiscal year, the Treasury's
18 See exhibit 60.




88

1978 REPORT OF THE SECRETARY OF THE TREASURY

outstanding securities denominated in Swiss francs were reduced by $521.9
million to $767.5 million; the Federal Reserve's swap indebtedness was
reduced by $395.8 million to $219.6 million.
Gold prices rose sharply during the fiscal year from $152 1/2 to $218 per
fine troy ounce. Movements were frequently sharp and volatile, responding to
increased industrial and investor demand, foreign exchange market developments, inflation, and political developments. Initiation of Treasury gold sales,
and continued auctions by the IMF, had some effect on investor demand, but
market volatility continued. In December, after prices rose steadily throughout
the autumn to around $ 170, investor demand accelerated, and by early April,
gold traded near $ 183 1/2. Prices eased over the following month to the $ 169
level, reflecting the improved foreign exchange market conditions and market
reaction to the announcement of gold sales by the Treasury. Subsequently,
however, gold prices rose steadily in a speculative market atmosphere.
Implementing changes in the international monetary system i9

A new phase of international monetary relations began this year with the
entry into force ofthe second amendment ofthe Articles of Agreement ofthe
Intemational Monetary Fund. This amendment, on which agreement was
reached in January 1976, after nearly 5 years of international monetary
negotiations, represents the most fundamental change in the intemational
monetary order since the Bretton Woods system was established in 1944. The
amendment became effective on April 1 when the required three-fifths ofthe
Fund's members representing four-fifths of the Fund's total voting power
accepted it. The United States accepted the amendment pursuant to Public
Law 94-564, approved October 19, 1976.
The 1976 and 1977 Annual Reports described in detail the central features
ofthe new intemational monetary system, as embodied in the amended IMF
Articles. The Fund has begun to implement the new provisions ofthe Articles,
including new policies and procedures for its surveillance over members'
exchange rate policies, ^o Consultation procedures and practices were adapted
to take account of the Fund's surveillance responsibilities under Article IV,
with Article IV consultations comprehending the traditional consultations
under Articles VIII and XIV.
Meeting official financing needs

During fiscal 1978, major steps were taken to strengthen the ability of the
IMF to promote economic stabilization and balance of payments adjustment
in member countries through the provision of official balance of payments
financing in support of programs to correct their balance of payments
difficulties. These m^'^sures, which should significantly strengthen the
19See exhibit 58.
20 See exhibit 54.




REVIEW OF TREASURY OPERATIONS

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international monetary system during the years ahead, include progress toward
activation of the Supplementary Financing Facility, implementation of the
increase in IMF quotas under the sixth general review of quotas, and general
agreement on a further increase in IMF quotas under the seventh general
review of quotas and on new allocations of special drawing rights (SDR's).^^
Supplementary Financing Facility.—The 1977 Annual Report described in
detail this arrangement designed to reinforce the IMF's ability to meet world
balance of payments financing needs and to promote economic stabilization
by member countries experiencing particularly serious payments difficulties
over the next 2 to 3 years. This facility will total approximately SDR 8.5 billion
($10.7 billion),22 with financing shared roughly equally by the oil-exporting
and industrial countries. The United States, which played an important
leadership role in the negotiation of the facility, has agreed to provide up to
SDR 1,450 million23 under the facility, approximately 17 percent ofthe total.
Legislation authorizing U.S. participation in the facility which was submitted
to Congress on September 16, 1977, was passed by Congress and signed into
law on October 10, 1978 [Public Law 95-435]. A request for appropriations
to permit U.S. participation in the facility was submitted to Congress on
September 12, 1978, and was passed as part of the foreign assistance
appropriations bill for fiscal 1979. [Public Law 95-481, October 18, 1978,
appropriates $ 1,831,640,000 for U.S. participation in the facility.] The facility
is expected to begin operations early in fiscal 1979, and will temporarily
strengthen the IMF's capacity to provide balance of payments financing to
members during a period of particular strain on the international monetary
system and pending a further increase in the IMF's permanent resources.
IMF quotas.—As part of the overall agreements on monetary reform
reached at Jamaica in January 1976, it was agreed to increase IMF quotas—
the permanent base of IMF resources—by approximately one-third under the
sixth general review of quotas. This increase in quotas became effective on
April 1, 1978, raising total Fund quotas from SDR 29.2 billion to SDR 39
billion (approximately $50 billion). The U.S. quota was increased from SDR
6,700 million to SDR 8,405 million (approximately $ 10,767 million), pursuant
to Public Law 94-564.
A further review of IMF quotas—the seventh general review—was initiated
during the fiscal year. The Interim Committee of the IMF agreed in principle
in April 1977 to a further increase in quotas under this review. Discussions on
the major issues relating to the quota increase continued in the IMF Executive
Board during fiscal 1978, and a consensus was reached on the following major
issues at the September 1978 meeting ofthe Interim Committee:
1. 5/z^.—The Committee took the view that a 50-percent increase in
quotas—from SDR 39 billion to SDR 58.6 billion (approximately $76
2ISee exhibit 63.
22 All conversions from SDR's to dollars in this section are based on exchange rates as of Sept. 30, 1978.
23 Subject to the dollar limitation placed by Public Laws 95-435 and 95-481.




90

1978 REPORT OF THE SECRETARY OF THE TREASURY

2.

3.

billion)—would be appropriate to bring about a better balance
between the size of the Fund and the need of members for balance
of payments financing over the medium term. This view was based on
a number of factors, including the expectations that world trade will
continue to expand significantly during the years ahead, and that IMF
member countries will continue to experience relatively large
payments imbalances and financing needs. The quota increase will
ensure that the Fund is capable of continuing to fulfill its responsibilities for promoting balance of payments adjustment through the
provision of balance of payments financing to member countries in
support of appropriate economic stabilization and adjustment programs.
Distribution.—In view of extensive changes in quota shares agreed on
the occasion ofthe sixth quota review, the Committee agreed that this
quota increase should be mainly equiproportional (i.e., equal
percentage increases for most members), with only a very few
selective increases available for countries whose quota shares are
particularly small in terms of their relative positions in the world
economy. Accordingly, the great bulk of IMF members will receive
quota increases of 50 percent with selective increases confined to the
following countries: Iraq, Iran, Korea, Kuwait, Lebanon, Libya,
Oman, Qatar, Saudi Arabia, Singapore, and the United Arab
Emirates.
Means of payment.—It was also agreed that participants in the Special
Drawing Rights Department should pay 25 percent ofthe increase in
their quota subscriptions in SDR's and that nonparticipants should
pay 25 percent ofthe increase in foreigri exchange (128 ofthe IMF's
135 members, including the United States, are participants). The
remaining 75 percent would be paid in members' own currencies.
These subscription requirements will provide for a larger role for the
SDR in IMF operations, enhance the importance of the SDR as a
reserve asset in the intemational monetary system, and strengthen the
IMF's liquidity.

[The IMF Board of Govemors approved a resolution proposing the quota
increase on December 11,1978. Increases in quotas pursuant to this resolution
cannot take effect until members having 75 percent of total quotas have
consented to increases in their quotas, and it is not likely that the quota
increase will take effect before the latter part of 1980. The increase in the U.S.
quota would amount to 50 percent, from SDR 8,405 million to SDR 12,607
million ($16,150 million), and will require congressional approval.]
Special drawing rights.—During fiscal 1977, a consensus was reached in
support of further allocations of special drawing rights as well as on a number
of measures to improve the characteristics and usability of the SDR. At its



REVIEW OF TREASURY OPERATIONS

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September 1978 meeting,2^ the Interim Committee expressed the view that the
Fund should make allocations of SDR 4 billion (approximately $5 billion) per
year over the next 3 years. This recommendation reflected the view that
substantial increases in international transactions can be expected in the
future, and that with such growth in the international economy there will be
a need for growth in official reserves. An SDR allocation will meet a part of
this need for reserves, will help to assure maintenance of the viability and
credibility of the SDR as an important reserve asset, and will assist the SDR
in fulfilling its important longrun potential in the international monetary
system. The allocations will take place in 1979, 1980, and 1981. The United
States would receive allocations totaling approximately SDR 2.67 billion
(approximately $3.5 billion) over the 3-year period.
The measures to improve the characteristics and usability ofthe SDR, which
are designed to enhance its role as a reserve asset in the international monetary
system, include:
Changes in the composition of the currency baskets used for determining
the value and interest rate of the SDR, involving essentially an update
ofthe baskets to reflect changing relative importance of currencies over
time. These changes took effect July 1, 1978.
An increase in the SDR interest rate from 60 to 80 percent ofthe weighted
average of short-term interest rates in the five largest countries.
Agreement in principle on the desirability of expanding the uses of SDR's
to include three additional categories of SDR operations—settlement
of obligations, loans, and security of obligations (collateral)—subject
to further examination of operational and technical questions.
Reduction in the SDR "reconstitution" requirement (i.e., the obligation
to maintain a minimum average balance of SDR's over specified
periods) from 30 to 15 percent of allocations.
It is expected that formal decisions regarding the latter three measures will
take effect at the time of the 1979 SDR allocation.
IMF operations

Use of the IMF resources during fiscal 1978 was substantially less than in
the immediately preceding years. This development reflected improvement in
some members' external financial positions as a result of successful stabilization efforts, the availability of financing from the private capital markets, and
the fact that a number of countries had made substantial use of Fund resources
during the previous years and consequently had limited additional access to
the IMF as well as obligations to repurchase earlier drawings.
Transactions and operations in the IMF General Resources Account.—Total
gross drawings (purchases) by IMF members in fiscal 1978 from the General
Resources Account (including use of reserve tranches) amounted to SDR
24 See exhibit 62.




92

1978 REPORT OF THE SECRETARY OF THE TREASURY

1,347 million by 31 countries, compared with SDR 4 billion by 36 countries
in the preceding year. Turkey and Zambia were the two largest purchasers,
each with drawings of SDR 124 million, followed by Spain (SDR 99 million). 25
A large part of total drawings were made in special drawing rights (SDR 984
million), with the principal currencies drawn from the IMF being the United
Kingdom pound sterling (SDR 102 million); U.S. dollar (SDR 60 million); and
Argentine peso (SDR 57 million).
Repayment of outstanding drawings (repurchases) totaled a record SDR 3.6
billion in fiscal 1978, with the largest repurchases made by Italy (SDR 730
million); the United Kingdom (SDR 700 million); and Argentina (SDR 509
million). Currencies used in the repurchases included U.S. dollars (SDR 1,649
million); German marks (SDR 594 million); and Japanese yen (SDR 433
million).
SDR 1,036.5 million of total repurchases were attributed to drawings under
the oil facility. The Fund repaid the equivalent of this amount to 14 lenders
that had made loans to the Fund in connection with the oil facility.
As of September 30, 1978, cumulative drawings under the IMF's regular
resources, from the beginning of IMF operations, amounted to SDR 46 billion,
of which SDR 13.9 billion was in U.S. dollars. Cumulative repurchases
amounted to SDR 25.5 billion, ofwhich SDR 7.9 billion was in U.S. dollars.
The U.S. reserve position in the IMF decreased to SDR 3,289.6 million at
the end of fiscal 1978 from SDR 4,104.9 million at the end of fiscal 1977 as
a result of net repurchase of dollars by other countries.
Of the total SDR 1,347 million in gross purchases from the General
Resources Account in fiscal 1978, purchases in the reserve (gold) and credit
tranches accounted for SDR 643 million, 48 percent of the total. Purchases
under the compensatory financing facility totaled SDR 554 million, with the
largest borrowers under the facility being Spain (SDR 99 million); Turkey
(SDR 74 million); and Israel (SDR 73 million). Drawings under the Extended
Fund Facility during fiscal 1978 totaled SDR 150 million, with the largest
purchases made by Egypt (SDR 75 million) and the Philippines (SDR 47
million). There were no purchases under the buffer stock facility.
General Arrangements to Borrow.—The General Arrangements to Borrow
(GAB) was not activated during fiscal 1978.25 In July 1978, the IMF repaid
GAB lenders the equivalent of SDR 90 million, based on a repurchase by Italy
of an earlier drawing financed by the GAB. A number of technical changes in
the GAB, which were necessary in order to conform to the second amendment
ofthe IMF's Articles of Agreement, became effective on August 11, 1978. In
addition, the Group of Ten conducted an examination ofthe adequacy and the
role ofthe GAB. This study, which was commissioned at the April 29 meeting
ofthe Group of Ten, concluded inter alia that "the GAB as an additional means
of official financing will remain valuable in the future and should be
23 (The United States drew the equivalent of SDR 2.22 billion from its reserve tranche in November 1978. A part of this
drawing, SDR 777 billion, was financed through the General Arrangements to Borrow (GAB), which was activated for this
purpose. 1




REVIEW OF TREASURY OPERATIONS

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maintained" and that "no further changes ofthe Arrangements are considered
necessary by the Deputies at the present time." The fourth review of the
arrangements will be conducted during fiscal 1979.
Transactions and operations in the Special Drawing Rights Department.—
Activity in the SDR Department increased to a record level during fiscal 1978
with total use by participants amounting to SDR 2,518 million. Transfers of
SDR's by participants to other participants totaled SDR 1,385 million. These
transfers include transfers between members by agreement and transfers with
designation.
Transfers by participants to the General Resources Account amounted to
SDR 1,134 million. These transfers were mainly for the purposes of making
repurchases and payment of interest and charges on drawings. Use of SDR's
by the General Resources Account equaled SDR 1,307 million, primarily to
finance drawings by members and in payment of remuneration to creditors in
the General Resources Account. As a result of all SDR transactions of the
General Resources Account, the Account's SDR holdings declined by SDR
173 million during the fiscal year, to SDR 1,041 million as of September 30,
1978.
IMF gold sales.—During fiscal 1978, the IMF continued its program ofgold
sales in which 50 million ounces ofthe IMF's gold are being sold over a 4-year
period as part of the process of reducing the role of gold in the international
monetary system.
1. Gold auctions.—Half of the total 50 million ounces is being sold in
public auctions by the IMF trust fund for the benefit of developing
countries. In fiscal 1978, the IMF, on behalf of the trust fund, held
12 monthly auctions at which a total of approximately 7.25 million
ounces ofgold were sold, bringing total sales in the auction program
to 15.65 million ounces as of September 30, 1978. The profits
received from sales in fiscal 1978 equaled approximately $981
million, bringing total profits accrued from all auctions held to
approximately $1.76 billion.
At each of the monthly auctions through May 1978, the IMF sold
approximately 525,000 ounces. The amount for the remaining public
auctions during fiscal 1978 was reduced to 470,000 ounces per
month, to allow for noncompetitive bids by developing countries. The
overall agreement on the gold sales program provided for the
distribution of a portion of the profits accruing to the trust fund
directly to eligible developing countries. As part of this agreement,
eligible members have the option to use these profits to bid for gold
on a noncompetitive basis at IMF auctions, paying market prices for
the gold. At the monthly auctions held during June-September 1978,
the IMF sold 1.17 million ounces to nine developing countries which
exercised this option.




94

1978 REPORT OF THE SECRETARY OF THE TREASURY

2.

Gold distribution.—The other half of the 50 million ounces is being
sold at the former official price (SDR 35 per fine ounce) directly to
all countries that were members of the Fund as of August 31, 1975,
in proportion to their quotas in the Fund. The second of four annual
direct sales occurred during fiscal 1978, with the Fund selling a total
of 6,090,362 fine ounces. The United States received 1,433,516.1
ounces.
Trustfund.—The trust fund was established in May 1976 for the purpose of
providing additional balance of payments assistance to developing members
from the profits ofthe IMF gold auctions. It is legally separate from the IMF
but administered by the IMF as trustee. A portion of the profits on trust fund
gold sales—that proportion that corresponded to the quota shares of eligible
developing countries as of August 31, 1975—would be transferred directly to
each eligible country in proportion to its quota, with the balance of the profits
made available to finance balance of payments loans by the trust fund on
concessional terms to the poorest countries.
The "direct transfer" of trust fund profits from the first 2 years of the gold
sales took place in fiscal 1978, with a total of $362.6 million being distributed
to 104 developing member countries. As indicated above, eligible members
have the option of using their profits to bid for gold on a noncompetitive basis
at IMF auctions. Two further disbursements of trust fund loans were also made
during fiscal 1978, with loans totaling approximately SDR 662 million made
to 43 developing countries, bringing total disbursements under the first 2 years
of the trust fund loan program to approximately SDR 841 million.
Oilfacility subsidy account.—This subsidy account was established in August
1975 to assist the Fund's most seriously affected members to meet the cost of
using the 1975 oil facility. The objective ofthe account, which is financed by
voluntary contributions from 24 members plus Switzerland and administered
by the IMF as trustee, is to reduce the effective rate of annual charge payable
on drawings under the 1975 oil facility by about 5 percentage points per year
(from roughly 7.2 percent to 2.2 percent). During fiscal 1978, subsidy
payments totaling SDR 24.95 million were made to 18 members, bringing total
subsidy account payments to SDR 66.29 million.
Participation in the OECD

Secretary Blumenthal attended the annual meeting ofthe OECD Council at
Ministerial Level in Paris on June 14-15, 1978. During this meeting, the
assembled Ministers reached agreement on an OECD program of concerted
action to achieve more sustained, noninflationary growth in the OECD
economy. 26
The major components of this concerted action program had been
developed during meetings ofthe OECD Economic Policy Committee (EPC),
Executive Committee in Special Session (XCSS), and Trade Committee (see
26 See exhibit 56.




REVIEW O F TREASURY

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"Trade negotiations" and "Export credits" sections of "Trade and Investment
Policy"), and at the OECD's affiliated organization, the International Energy
Agency (see "Energy policy" section of "Commodities and Natural Resources").
Two of the key components of the strategy agreed to were (1) closer
coordination of demand management policies as recommended by the EPC
and (2) promotion of more positive policies for facilitating adjustment to
structural change as recommended by the XCSS.
Concerted action.—Treasury officials participated actively during fiscal
1978 in the work of the EPC and of its several working groups on growth,
inflation, short-term economic prospects, and balance of payments.
The primary concern ofthe EPC and its working groups during this time was
development of a concerted strategy for overcoming constraints on more
rapid, sustained growth ofthe OECD area. Constraints seen limiting action by
individual governments included persistent inflation, protracted current
account imbalances, structural problems exacerbated by slow growth, and the
lagged adjustment of trade flows to exchange rate changes.
At the November 1977 EPC meeting, the emphasis had been on the key role
of certain "locomotive" economies in assuring the success of the OECD
medium-term strategy for noninflationary growth. "Stronger" countries such
as Germany and Japan were urged to meet their announced growth targets,
with recent U.S. performance being cited as the example to follow.
By the February 1978 meeting, the emphasis of discussion shifted to factors
constraining policy action by individual governments. A more concerted
approach to raising the areawide OECD growth rate, one emphasizing the
responsibilities of all member countries, was seen to be both possible and
desirable. During this meeting Charles L. Schultze, Chairman of the U.S.
Council of Economic Advisers, was elected chairman of the EPC.
At its May meeting, the EPC discussed the elements of a possible concerted
action program.
1. The program adopted.—At the June meeting, the OECD Ministers
agreed on the respective responsibilities of member countries in contributing
to faster growth, greater price stability, and better payments equilibrium over
the next 18 months. Eight countries (Belgium, Canada, France, Germany,
Italy, Japan, Switzerland, and the United Kingdom) agreed to ensure that the
expansion of their domestic demand was significantly greater than in 1977; the
Netherlands agreed to maintain the boost in domestic demand achieved in
1977; and all other member countries agreed to concentrate primarily on
reducing inflation and improving their balance of payments position.
The Ministers further agreed on renewal ofthe trade pledge, and stressed
the importance of the multilateral trade negotiations, the Arrangement on
Officially Supported Export Credits, and positive adjustment policies to the
success of the concerted action program; stressed that strengthened energy




96

1978 REPORT OF THE SECRETARY OF THE TREASURY

policies form an essential part ofthe program; and agreed that monetary policy
has an important role to play in achievement of the program's objectives.
2. WP-3.—Treasury led the U.S. delegation to meetings of EPC
Working Party 3 (international payments equilibrium). Under Secretary for
Monetary Affairs Solomon attended the February, May, and September 1978
meetings. Assistarit Secretary for International Affairs Bergsten attended the
November 1977 meeting.
At both the November and February meetings of WP-3, the external
payments situation of the United States and the policy posture of the U.S.
authorities were primary topics of discussion. Continued rapid U.S. growth,
despite projected large payments deficits, was considered essential to further
recovery of the world economy. By February, the WP-3 was also giving
considerable attention to the desirability of faster growth outside the United
States as a principal means of reducing payments imbalances and avoiding
disorder in exchange markets.
At its May meeting, the WP-3 reviewed the preceding period of relative
calm in exchange markets, discussed the possible reasons, and considered the
importance of concerted action to assuring continued market stability.
At its September meeting, the WP-3 noted with approval the improved
prospects for convergence of growth rates and for reduction of payments
imbalances. The WP-3 also heard a report on plans for the European
Monetary System.
Positive adjustment.—In support ofthe concerted growth strategy, the XCSS
during 1978 considered the development of more positive policies for
facilitating adjustment to structural change. In addition, an ad hoc meeting of
government representatives to discuss adjustment policies was held just before
the May 1978 meeting ofthe EPC. Treasury officials attended the meetings
of both groups.
The June Ministerial communique made reference to the need for more
positive adjustment policies. In July, the OECD Council directed the sectoral
committees ofthe Organization to begin working on this issue, concurrent with
the work underway in the ad hoc group.
International Banking Act of 1978

Federal legislation to regulate the U.S. activities of foreign banks was
enacted in September 1978, with the adoption ofthe Intemational Banking
Act of 1978 (Public Law 95-369). Treasury officials testified on behalf of the
administration in general support of this legislation during congressional
hearings.
, The new law is designed to accord to the extent possible national treatment
for operations of foreign banks in the United States and also to provide for
more uniform Federal regulation of these foreign bank operations.
Under the new law, foreign banks are prohibited from engaging in both
commercial banking and nonbanking activities in the United States, except to



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the extent permitted domestic banks. Nonbank operations already in existence
(including securities affiliates) are either permanently grandfathered or for
those operations which commenced or were authorized between July 27 and
September 16, 1978, grandfathered through 1985.
Federal deposit insurance is required at foreign bank branches which accept
small deposits. Also, U.S. branches and agencies of foreign banks with over
$1 billion in assets are subject to the Federal Reserve's reserve requirements
and interest rate ceilings which are applicable to member banks.
The act also subjects foreign banks to restrictions on new multi-State
branching, while existing multi-State operations are permanently grandfathered. Foreign banks may continue to establish agencies outside their home
State. They may not acquire a bank subsidiary outside their home State unless
such acquisition would be permitted for a domestic bank holding company.
Foreign banks may establish branches outside their home State if the new State
approves and if the bank enters into an agreement with the Federal Reserve
to receive only such deposits at that branch as would be permissible to an Edge
Act corporation; i.e., deposits related to international financial transactions.
International investment and capital flows (OPEC investors)

The cumulative total of OPEC investable surpluses rose approximately $27
billion between June 1977 and end-June 1978, down moderately from the year
earlier period. However, as the current account surplus (excluding official
transfers) of OPEC members as a group plummeted from over $33 billion in
1977 toward $ 14 billion in 1978, total OPEC financial investments in industrial
countries declined by approximately $3 to $4 billion during the second quarter
of 1978, due to the effects of seasonally low oil revenues and continuing
disbursements of funds to developing countries under prior aid commitments.
The withdrawal by oil-exporting countries as a group ofabout $1.8 billion from
the United States in the second quarter 1978 reflects the rapid decline in
investable funds available to OPEC member nations.
Since 1974, when 86 percent of OPEC members' money market and
portfolio investments in the United States were placed in short-term assets,
OPEC investments in the United States have progressively shifted toward
longer term instruments. This trend continued in 1978. Net new investments
in U.S. stocks and domestic bonds, other than Treasury bonds and notes,
amounted to $ 1.2 billion in first half 1978, while there were net sales of other
assets.
Developing Nations
Multilateral development banks 27

In fiscal 1978, the Congress appropriated $2,514 million for increased U.S.
participation in the World Bank group (the International Bank for Reconstruction and Development (IBRD), the International Development Association
27See exhibits 65. 66, and 67.




98

1978 REPORT OF THE SECRETARY OF THE TREASURY

(IDA), and the International Finance Corporation (IFC); the In ter-American
Development Bank (IDB) and its Fund for Special Operations (FSO); the
Asian Development Bank and Fund (ADB and ADF); and the African
Development Fund (AFDF). This amount, for use beginning in fiscal 1979,
was 31 percent greater than the amount appropriated for the banks during the
previous fiscal year. No new authorizing legislation for U.S. participation in
the banks was submitted to Congress during fiscal 1978. A breakdown ofthe
appropriations legislation approved by Congress is shown in the table below:

U.S. participation in the multilateral development banks during fiscal 1978
[$ millions]
Institution
Intemational Bank for Reconstruction and
Development:
Paid-in
Callable

Intemational Development Association....

Intemational Finance Corporation

Fiscal 1979
appropriation

16.3
146.8

1,258.0

40.0

Comment

Second installment of U.S. contribution to
IBRD selective capital increase authorized
in fiscal 1977. $452.5 million callable and
$50.3 million paid-in remains to be appropriated for the second installment.
$800 million represents the second installment
of the U.S. contribution to the fifth replenishment of IDA. $458 million represents the
U.S. contribution to IDA's fourtn replenishment. $292 milhon remains to be appropriated for the fourth replenishment.
Appropriation is second installment of U.S.
contribution to IFC capital increase authorized in fiscal 1977.

Inter-American Development Bank:
Paid-in
Callable
Fund for Special Operations

27.3
561.5
175.0

Appropriation completed U.S. contribution to
IDB replenishment authorized in fiscal 1976.
$150.3 milhon remains to be appropriated from
replenishment authorized in fiscal 1976.

Asian Development Bank:
Paid-in
Callable

19.4
175.1

Appropriation is second installment of U.S.
contribution to second ADB capital increase
authorized in fiscal 1977. $40.3 milhon callable and $4.5 million paid-in remains to be
appropriated for the second installment.
Appropriation is second instalhnent of U.S.
contribution to first ADF replenishment.
Appropriation is U.S. contribution to first
AFDF replenishment authorized in fiscal
1977.

Asian Development Fund
African Development Fund

Total

70.5
25.0

2,514.0

The multilateral development banks committed $12,049 million to developing countries in fiscal 1978. The distribution of commitments by institution
was as follows: World Bank group, $9,345 million; Inter-American Development Bank, $ 1,546 million; Asian Development Bank, $ 1,002 million; and the
African Development Fund, $155 million. The development banks have
become an important source of finance for developing countries. Estimates
indicate that in 1977 multilateral agencies accounted for one-third of all
official flows to developing countries.



REVIEW O F TREASURY

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99

The development banks are an extremely effective and efficient mechanism
for promoting U.S. relations with developing countries and contributing to
their social and economic development. In all cases, the loan appraisal
processes of the banks are detailed and rigorous, insuring that the maximum
developmental impact is obtained from every dollar lent. The banks provide
developing countries with sound economic advice and serve as focal points for
the coordination of the activities of official lenders. In addition, the banks
permit the United States to share the burden of assisting the developing
countries with other donors; for every dollar of U.S. contributions to the banks
other countries contribute 3 dollars. The U.S. domestic economy also benefits
directly by U.S. participation in the development banks through procurement
contracts and the interest payments made to U.S. citizens who purchase bank
bonds.
World Bank group

The World Bank group committed a total of $9,345 million for economic
assistance to its borrowing member countries in fiscal 1978, an increase of 29
percent over the previous fiscal year. IBRD lending totaled $6,004 million in
fiscal 1978, compared with $5,541 million in fiscal 1977, an increase ofabout
8 percent. New IDA credits reached $2,858 million in fiscal 1978, compared
with $ 1,437 million in fiscal 1977. IFC commitments increased to $483 million
in fiscal 1978 from $269 million in fiscal 1977, an increase of 80 percent. As
of September 30, 1978, IBRD commitments outstanding totaled $34.4 billion
and IDA credits totaled $11,372 million. IFC commitments outstanding
totaled $2,206 million.
During fiscal 1978, both the IBRD and IDA increasingly concentrated their
lending in agriculture. The IBRD increased its commitments to the agricultural
sector in fiscal 1978 to $ 1,383 million (31 percent of total lending), compared
with $1,614 million (29 percent of lending) in fiscal 1977. The amounts
committed by IDA to agriculture increased from $773 million in fiscal 1977
to $1,415 million in fiscal 1978, an increase of almost 83 percent. Other
important sectors of IBRD and IDA lending in 1978 included development
finance companies and industry (16 percent), transportation (14 percent),
and power (12 percent). IFC investments were concentrated in mining and
iron and steel (14 percent), food and food processing (11 percent), general
manufacturing (5 percent), and development finance companies and capital
markets (4 percent).
The IBRD and IDA committed resources for 241 projects totaling $8,862
million in 75 countries distributed by region as follows: Africa, 74 ($1,041
million); Asia, 76 ($3,960 million); Latin America, 49 ($2,090 million);
Europe, the Middle East, and North Africa, 42 ($ 1,771 million). India was the
largest borrower from the IBRD and IDA ($1,595 million), while Brazil was
second ($688 million); the Philippines, Mexico, and Indonesia received $526
million, $495 million, and $490 million, respectively.



100

1978 REPORT OF THE SECRETARY OF THE TREASURY

IFC commitments during fiscal 1978 went to 53 projects in 33 developing
countries. These commitments included 14 projects in Europe, the Middle
East, and North Africa (26 percent ofthe total committed), 11 projects in Asia
(12 percent), 18 projects in Latin America (55 percent), and 10 in Africa (7
percent). Mexico received the largest individual total ($133 million) with
Jordan second ($73 million) and Brazil third ($68 million).
At the September 1978 meeting of the World Bank in Washington, D . C ,
Secretary Blumenthal expressed his satisfaction at the rate of economic
progress in the developing countries, but stressed the fact that even at the
present rate of growth, 600 million people will face absolute poverty by the
end of this century. To meet these needs, concerted action must be taken in
the areas of trade expansion, nonconcessional finance to middle-income
countries, concessional capital flows to the poorest countries (and to the
poorest sectors within developing countries), and nonrural employment.
The Secretary expressed support for the new directions charted by the
World Bank in financing social and economic development and the increased
lending by the World Bank for expansion of energy resources in developing
countries.
The lending operations of the IBRD are financed from five sources: Paidin capital subscriptions; borrowings in private capital markets, and from
governments and central banks; sales of participations; principal repayments
on loans; and earnings on its loans and investments.
The Bank's outstanding funded debt increased during the IBRD fiscal year
by $4,124 million to reach $22,602 million as of June 30, 1978. Estimates
indicate that as of that date 26 percent of Bank bonds were held by investors
in the United States, 24 percent in Germany, 13 percent in Japan, 6 percent
in Saudi Arabia, and 11 percent in Switzerland. The remaining 20 percent of
outstanding borrowings was held by central banks and government agencies
in more than 80 countries.
The Bank's borrowing program for IBRD fiscal 1978 was set at the
equivalent of $4,200 million. Of this amount, $600 million was borrowed in
April 1977 as an advance in order to take advantage of favorable factors in
the U.S. investment market. This issue was therefore included in the Bank's
statistics for fiscal 1977. Actual borrowings in IBRD fiscal 1978 amounted to
the equivalent of $3,636 million.
As in fiscal 1977, the principal sources of borrowed funds to the Bank were
borrowings on private capital markets. The Bank sold 20 issues totaling the
equivalent of $2,398 million in private markets, or about 66 percent of total
funds raised through borrowings. This continues the trend of obtaining more
from private financial sources rather than governments and central banks; in
IBRD fiscal 1978, governments and central banks purchased $1,220 million
of Bank issues, or about 34 percent of the year's total. This was $82 million
more than in fiscal 1977.



REVIEW O F TREASURY

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101

During IBRD fiscal 1978, the Bank's public and private borrowings came
principally from the following countries: $750 million in the United States;
$1,120 million in Germany; $700 million from the issuance of 2-year dollar
bonds to central banks and other government agencies in some 80 countries;
$363 million in Switzerland; and $571 million in Japan.
In IBRD fiscal 1978, the Bank also borrowed $18 million from the interest
subsidy fund, or third window. This facility was established in fiscal 1976 to
permit lending on terms intermediate between those of the IBRD and IDA.
Aggregate borrowings by the Bank from the subsidy fund totaled $ 184 million
as of June 30, 1978.
During IBRD fiscal 1978, the Bank's borrowers repaid $890 million of
principal, $831 million to the Bank and $59 million to purchasers of loans.
Cumulative repayments on loans by June 30, 1978, were $6,480 million to the
Bank and $2,425 million to purchasers of loans. Income on Bank investments
amounted to $614 million, up $78 million, or nearly 14.6 percent, over the
previous fiscal year. Income on loans rose by $252 million, or 23.5 percent,
to a total of $1,325 million. For the same period, sales of participations in the
Bank's loan portfolio amounted to $183 million, compared with loan sales of
$189 million in fiscal 1977. Net income ofthe Bank in IBRD fiscal 1978 was
$238 million, up $29 million, or nearly 13.9 percent, from the previous fiscal
year. However, after taking adjustments arising from currency devaluations
into account, income was $348 million, compared with $199 million in the
previous fiscal year.
As discussed in last year's Annual Report, the United States believes that
a substantial increase in IBRD capital is desirable in order to permit Bank
lending to expand in real terms. The United States hopes that negotiations on
a general capital increase can be concluded early in calendar 1979.
Asian Development Bank

ADB lending in fiscal 1978 totaled $1,002 million, compared with $722
million in fiscal 1977. Of fiscal 1978 loans, $647 million came from Ordinary
Capital resources and $355 million from concessional funds. Lending in U.S.
fiscal 1978 brings cumulative ADB lending through September 30, 1978, to
$4,744 million—$3,430 million from Ordinary Capital and $1,314 million on
concessional terms.
In fiscal 1978, agriculture and agro-industry continued to be the largest
beneficiaries of Bank lending, accounting for $242 million, or almost 24
percent of total lending. Since the Bank's inception in 1966, power projects
have received the largest amount of ADB loan funds ($1,458 million, or 31
percent), followed by agriculture and agro-industry ($1,151 million, or 24
percent), industry ($896 million, or 19 percent), and transportation and
communications ($841 million, or 18 percent).
The three largest borrowers from the ADB's Ordinary Capital resources in




102

1978 REPORT OF THE SECRETARY OF THE TREASURY

fiscal 1978 were Indonesia ($181 million, or 28 percent), the Philippines
($137 million, or 21 percent), and Korea ($125 million, or 19 percent).
Pakistan and Bangladesh were the two largest borrowers from the ADB's
concessional resources, having borrowed $123 million (35 percent) and $70
million (20 percent), respectively.
ADB Ordinary Capital lending operations are financed by paid-in capital
subscriptions, funds borrowed in private capital markets and from governments and central banks, repayments of principal and interest on loans, and
net earnings on investments. Asian Development Fund resources—used for
concessional loans—derive from member country contributions, amounts set
aside from Ordinary Capital earnings, and repayments on loans.
As of September 30, 1978, the Bank's subscribed Ordinary Capital stock
totaled $8,389 million. In fiscal 1978, the Bank's gross borrowing totaled $396
million, including $70 million in 2-year U.S. dollar bonds. The ADB's
outstanding borrowings amounted to $ 1,692 million as of September 30,1978.
In April 1978, at the l l t h annual meeting of the Board of Governors in
Vienna, the Carter administration reaffirmed its continuing support for the
goals and operations ofthe Asian Development Bank, particularly the Bank's
increasing efforts to assist rural development through the introduction of
integrated rural development projects, and the special attention paid by the
Bank to the use of appropriate technology. The U.S. representative expressed
approval for the Bank's special attention to subregional development
cooperation in the South Pacific and in the Association of Southeast Asian
Nations (ASEAN).
In fiscal 1978, negotiations were completed on a second replenishment of
the Asian Development Fund to finance its 1979-82 lending program. The
intended U.S. contribution, subject to congressional authorization and
appropriation, would be $445 million over the 4~year period, or $111 million
in fiscal 1980-83. The U.S. contribution would represent 22.2 percent ofthe
basic replenishment and 20.7 percent of the total replenishment including
voluntary contributions.
Inter-American Development Bank

During fiscal 1978, the IDB committed a total of $1,638 million, a 24percent increase in lending over fiscal 1977. Of this amount, $973 million was
lent on conventional terms from the capital account and $524 million was lent
on concessional terms from the Fund for Special Operations. In addition, the
IDB committed $91 million in funds administered for various donors
(primarily the Venezuelan trust fund). Cumulative lending by the IDB, as of
September 30, 1978, totaled $12.6 billion, ofwhich $6.3 billion had been lent
from the capital accounts, $5.4 billion from the FSO, and $0.9 billion from
other resources (primarily the U.S. social progress trust fund and the
Venezuelan trust fund).



REVIEW OF TREASURY OPERATIONS

103

Agriculture, industry, and energy received the greatest attention in fiscal
1978. About 29 percent ($474 million) of the funds committed were for
energy projects, 27 percent ($439 million) for industry, and 16 percent ($264
million) for agriculture. On a cumulative basis, through the end of fiscal 1978,
energy had received the largest amount, 23 percent, or $2.9 billion, and
agricultural projects had received the next largest amount, 22 percent, or $2.8
billion. (In some instances, however, distribution of loans into sector
categories such as these may tend to be misleading since many IDB projects
are of a multipurpose character.)
IDB lending operations are financed principally from paid-in capital
subscriptions, borrowings in international capital markets, and member
country contributions to the FSO. As of September 30, 1978, the total
subscribed capital ofthe Bank was $9,943 million, ofwhich $ 1,283 million was
paid-in and $8,660 million was callable. The resources ofthe FSO amounted
to $5,905 million. The U.S. subscriptions to IDB capital shares amounted to
$3,458 million, or approximately 35 percent ofthe total. Including contributions authorized, but still pending appropriations, the United States accounted
for $3,690 million, or 62 percent of total resources contributed to the FSO.
In fiscal 1978, the IDB borrowed $130 million equivalent in international
capital markets, including $9 million in the United States. In addition, the Bank
sold $35 million of 2-year bonds to central banks in Latin America and $39
million of 2-year bonds to central banks in nonregional member countries. The
Bank's outstanding funded debt amounted to $2,637 million as of September
30, 1978.
At the 1978 annual meeting ofthe IDB in Vancouver, British Columbia, the
U.S. representative affirmed the Carter administration's commitment to
respect for the political integrity and economic and social aspirations of all
nations, and our recognition ofthe essential interdependence of developed and
developing economies—especially in light ofthe impressive progress made in
many of the world's developing countries.
The U.S. representative commended the Bank on its impressive achievements in Latin America, urging that in light of the region's relatively advanced
position along the spectrum of development, further efforts should be made
to assure equitable distribution of resources to the poorest of the developing
countries and to those poorest sectors within countries receiving assistance.
The Bank's successful efforts to draw increasingly on private sources through
the mechanism of complementary financing, as well as its efforts to promote
the use of appropriate technologies in its activities, were commended.
During fiscal 1978, negotiations began on a replenishment ofthe resources
of the Bank and the FSO. It is anticipated that the negotiations will be
completed early in fiscal 1979.
African Development Fund

The African Development Fund was created on July 3, 1973, as the
concessional lending affiliate ofthe African Development Bank (AFDB). The




104

1978 REPORT OF THE SECRETARY OF THE TREASURY

AFDF is designed to channel resources to the poorest African nations; except
in the most unusual circumstances, its loans are not extended to countries with
a per capita GNP in excess of $400.
The United States joined the AFDF in November 1976 with an initial
contribution of $ 15 million and contributed a further $ 10 million in December
1977. In addition to the United States, membership in the AFDF includes 13
European countries, Canada, Brazil, Japan, Saudi Arabia, Kuwait, and the
AFDB, which has no nonregional members. Total resources pledged to the
fund amounted to $463.3 million as of September 30, 1978.
In fiscal 1978, AFDF lending amounted to $155.2 million, distributed
among 23 African countries. This represented an increase of $27.2 million, or
21 percent, above the 1977 lending level of $ 128 million. The Central African
Empire was the largest borrower ($18.6 million), having received 12 percent
ofthe year's loans; Mali was the second largest ($15.5 million, or 10 percent);
and Benin was the third ($13.8 million, or 8.9 percent).
AFDF lending in 1978 helped to finance projects in health, water supply and
sewerage, agriculture and rural development, and education and transportation. Transportation projects accounted for the largest sectoral share of AFDF
lending at $63.3 million, or 41 percent of total loans. The two other leading
sectors benefiting from AFDF loans were agriculture ($55.5 million, or 35.8
percent) and health and education ($29.7 million, or 19.1 percent).
The fifth annual meeting of the African Development Fund was held in
Libreville, Gabon, during May 1978. The U.S. representative expressed the
administration's commitment to assisting Africa's growth and development
and support for the African Development Fund. While applauding the great
strides made in enhancing the fund's administrative capacity, the U.S. delegate
stressed the need for continued vigilance in improving fund operations,
including greater attention to the use of appropriate technologies and an
intensified program of project evaluation and auditing. The United States also
emphasized that fund resources should continue to be concentrated on the
poorest African countries and on reaching the basic human needs of Africa's
poor.
During the annual meeting, negotiations were completed on a second
replenishment of the African Development Fund to finance its 1979-81
lending program. Donors agreed to a $777 million target for the replenishment, ofwhich $693 million was actually pledged. The second replenishment
will permit a 10-percent real growth in AFDF lending and reflects Africa's
need for concessional aid. The intended U.S. contribution to the replenishment, subject to congressional authorization and appropriation, will be $125
million, to be appropriated in three installments in fiscal 1980-82.
Situation of the non-OPEC developing countries

The overall economic situation of the non-OPEC developing countries in
1977 and 1978 is a mixed picture with significant improvements in some
indicators and less progress in others.



REVIEW O F TREASURY

OPERATIONS

105

Current account deficits for the group,^s which declined significantly to $26
billion in calendar 1976 and fell further to $22 billion in calendar 1977, are
projected to rise in 1978 to about $28 billion. However, this nominal increase
is not significantly different from historical averages when world inflation and
economic growth are factored in, nor should it pose financing difficulties for
the group as a whole.
Export earnings for the group grew 17 percent to around $136 billion in
1977, while imports increased 11 percent to about $162 billion. With export
prices ofthe industrial countries rising an average of about 7.5 percent in 1977
and some continued softness in primary commodity prices, the terms of trade
for the group declined. This trend is likely to continue through 1978.
Total official and private flows to non-OPEC developing countries were,
however, more than adequate to cover the aggregate current account deficits
of the non-OPEC LDC's, amounting to about $34 billion in 1977. Official
development assistance (grants and loans) from Development Assistance
Committee countries and multilateral development banks to LDC's as a group
increased in 1977 to about $15 billion; concessional and nonconcessional
flows from OPEC countries to non-OPEC LDC's were about $5 billion. Gross
foreign exchange reserves of the non-OPEC LDC's increased 29 percent to
about $53 billion by the end of calendar 1977. Projections for 1978 show
slower growth in aggregate reserves although it is expected that import
coverage (about 4 months) will not decline.
There are corresponding changes in the debt situation of these countries. In
1977, the rate of increased net external indebtedness dropped significantly
from the very rapid rates experienced in the 1974-76 period. The rate of
increase in 1978 is likely to be close to historical trends. At the same time, the
distribution and composition of debt improved as the major borrowers made
further progress in their adjustment efforts and as terms of borrowing in the
intemational capital markets became more favorable. Multilateral arrangements to reorganize external debt were negotiated for Turkey and Peru. Zaire
continued to experience critical debt-servicing difficulties.
The non-OPEC developing countries as a group experienced real GDP
growth of just under 5 percent in 1977 and projections indicate that growth
in 1978 will be somewhat more rapid. Inflation in many non-OPEC LDC's
continues to be quite high. A small drop from the estimated aggregate 30percent levels of 1976 and 1977 is expected in 1978.
Disaggregating non-OPEC developing countries is critical to better understanding their widely varying economic situations. For example, a few large
countries skew the aggregate figures for GDP markedly, obscuring both higher
growth in 1977-78 in Asia and the Middle East and slower growth in Africa
and parts of Latin America. The same caveat is true for the widely varying
current account positions of non-OPEC LDC's, for variations in inflation rates.
28 Excluding official transfers. Including such transfers deficits were about $ 17 billion in calendar 1976, $ 12 billion in calendar
1977, and arc projected at $16 billion for calendar 1978.




106

1978 REPORT OF THE SECRETARY OF THE TREASURY

debt positions and creditworthiness, methods of financing external balance of
payments gaps as well as for virtually all other financial indicators.
Development Committee

Discussions and negotiations between the developed and developing
countries, known collectively as the North-South dialog, take place in a variety
of forums. The United Nations Conference on Trade and Development
(UNCTAD) and the newly created Committee ofthe Whole explore a broad
range of international economic issues. Specialized forums, most under U.N.
auspices, explore specific issues such as commodities, trade, investment,
technology transfer, and debt. The IBRD/IMF Development Committee, on
which the United States is represented by the Secretary ofthe Treasury, is one
of these forums.
The Development Committee was established in 1974 by the Govemors of
the World Bank and the International Monetary Fund to maintain an overview
of the development process and to consider all aspects of the question of the
transfer of real resources to developing countries. The resolutions establishing
the Committee called for a review of its performance after 2 years. In 1976
the Committee's mandate was extended to 1978.
The Development Committee ministerial meeting in September 1978
devoted much of its discussion to the first annual World Development Report,
prepared by the IBRD staff at the request ofthe Committee. The United States
strongly supported the main conclusions of the report, which pointed out the
importance of improving the domestic policies ofthe developing countries, the
need to maintain flows of concessional and nonconcessional capital to
developing countries, and the necessity of avoiding protectionism. Also
discussed at the September meeting was a study of stabilization of export
earnings prepared by Bank and Fund staff at the request of the Committee.
The Committee decided that further work was needed on the adequacy of
existing facilities to stabilize export eamings, proposals for other measures,
and the medium-term shortfall problem.
It was agreed that the Committee Chairman, the IBRD President, and the
IMF Managing Director should consult on ways to improve the effectiveness
of the Committee and report back next year. Secretary Blumenthal stated in
September that the United States shares the view of many developing and
developed country members that the potential of the Committee has not yet
been fully realized.
The Working Group on Access to Capital Markets this year completed its
substantive examination of developing country access to the long-term bond
market. Senior officials, meeting in September 1978, endorsed the study and
concluded that while progress to liberalize capital market restrictions was still
needed in some countries, lack of knowledge by lenders of potential
borrowers' credit and lack of information by borrowers about the operation
of capital markets and criteria for access accounted for a large part of the




REVIEW OF TREASURY OPERATIONS

107

difficulties experienced by developing countries. To address this latter
problem, a seminar organized by the Committee Secretariat was held in
October 1978 in Paris to bring together potential borrowers and market
operators.
The Working Group on Capital Markets also began work on private direct
investment, with the objective of reaching agreement on general policies for
developed and developing countries which would maximize the benefits of
investment while minimizing the adverse effects. As a result of these meetings,
in which the United States participated, a draft report has been circulated to
members recommending appropriate government policies.
The Working Group on Development Finance and Policy reviewed a survey
of the multilateral development banks, identifying a number of policy issues
regarding their relative roles, funding, and operational activities.
Delinquent debt

The total long-term principal outstanding on post-World War II debts owed
the United States was $45 billion on September 30, 1978. Most of this debt
derives from foreign aid and export credit programs ofthe U.S. Govemment
undertaken during the last 30 years. A total of $20.4 billion ofthe indebtedness
was contracted under the Foreign Assistance Act and its predecessor
legislation; $7.0 billion was contracted under Public Law 480; and $13.3
billion was contracted under the Export-Import Bank Act and the Commodity
Credit Corporation Act. An additional $1.3 billion stems from activities
directly related to World War II—primarily lend-lease and surplus property
disposal programs.
Since World War II, the vast majority of these debts have been paid on time.
During fiscal 1978, the United States collected over $4 billion ofprincipal and
interest payments due on long-term credits, and the equivalent of almost $300
million in principal and interest payments on loans repayable in foreign
currencies. As of September 30, 1978, principal and interest due and unpaid
90 days or more on post-World War II debt amounted to $611.6 million. More
than two-thirds of this delinquent debt is subject to special political or other
factors, as in the cases pf China and Cuba, which make prompt payment
unlikely at this time.
Foreign indebtedness to the U.S. Government resulting from World War I
totaled approximately $25.6 billion as of September 30, 1978, ofwhich $22.6
billion was delinquent. The collection of this debt presents special problems.
Most debtor countries fulfllled their commitments under the debt agreements
until 1933-34, but have made no payments since. Aside from the Soviet Union,
which repudiated all foreign debts in January 1918, the principal debtor
governments have never denied the validity of the debts. However, these
nations have steadfastly maintained that they would only resume payments on
their war debts to the United States on condition that the issue of Germany's
war reparations was satisfactorily settled. Resolution of the problem of




108

1978 REPORT OF THE SECRETARY OF THE TREASURY

government claims against Germany arising from World War I has been
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.
On January 31, 1978, Treasury submitted to Congress the administration's
fourth annual report on developing countries' external debt and debt relief
provided by the United States as required by section 634(g) of the Foreign
Assistance Act of 1961, 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.
Debt rescheduling

During fiscal 1978, the United States participated in multilateral debt
reschedulings for Zaire and Turkey.
Zaire's major official creditors met in Paris on November 30 and December
1, 1977. In light of the deterioration in Zaire's economic situation, they
decided to improve the terms of the multilateral rescheduling agreement
negotiated the previous July 7 which covered debt service falling due in 1977.
Under the amended terms, the creditors agreed to reschedule 85 percent of
both principal and interest for all of 1977, rather than principal and interest
in the first half and principal only in the second half. With regard to Zaire's
request for reorganization of 1978 debt service, the creditors agreed to meet
in April 1978 to study the question on condition that: (a) Zaire had adopted
an effective stabilization program in the context of an IMF standby; (b) Zaire
had concluded an arrangement with its private bank creditors, through a new
medium-term credit or a direct rescheduling or refinancing, which was
comparable to the agreement concluded with its official creditors; and (c)
Zaire had made its best efforts to meet its external obligations, particularly
payments to official creditors under the Paris Club reorganizations of 1976 and
1977. As these conditions were not fulfllled, the creditors did not meet in April
and had not met by the end of fiscal 1978.
The United States and Zaire have negotiated a bilateral agreement
implementing the multilateral agreements of July and December 1977, which
is currently pending signature. This agreement reschedules $56.5 million in
debt service due in 1977. The weighted average interest rate charged by the
United States is 7.5 percent. Under the 1977 rescheduling agreements, other
creditors agreed to provide the equivalent ofabout $ 110 million in debt relief.
The rescheduled amounts are to be repaid in 10 years, including a 4-year grace
period.
Turkey's principal official creditors met in Paris on May 18, 19, and 20,
1978, in the context of a working party of the OECD-led consortium for
Turkey. To assist Turkey in overcoming its critical economic and financial
problems, these creditors agreed to extend debt relief to Turkey on 80 percent



REVIEW O F TREASURY

"

•

OPERATIONS

109

of payments ofprincipal and interest falling due between May 21, 1978, and
June 30, 1979. The United States subsequently negotiated a bilateral
agreement with Turkey, which was signed in Washington on September 21,
1978, implementing the terms ofthe multilateral agreement. Under the terms
of the bilateral agreement, the payments rescheduled by the United States
amounted to about $191 million, $15 million ofwhich related to short-term
maturities of less than 1 year and the remainder ofwhich relates to mediumand long-term maturities. The weighted average interest rate charged by the
United States was 6.4 percent. Under the multilateral agreement, other
creditors are expected to provide almost $ 1 billion of debt relief to Turkey.
The rescheduled amounts are to be repaid in 8 years, including a 3-year grace
period.

*,

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 U.S.
Government requirements. The purpose of this determination is to assure
maximum use of local currencies in lieu of dollars for U.S. programs in the
countries concerned. For fiscal 1979, Burma, Egypt, Guinea, India, and
Pakistan will remain on the excess currency list.
As U.S. foreign currency receipts decrease and in-country expenses
increase, currencies lose their excess status. When countries are removed from
the excess list special foreign currency programs in those countries are phased
out. These programs involve scientific and research projects which usually
have some political benefit to the United States but, because of their lower
priority, might not be funded were it not for the availability of excess
currencies.
Development assistance policy

^

The Department of the Treasury, in addition to its responsibilities with
regard to the multilateral development banks, participates in the formulation
of U.S. development assistance policy through its membership in the National
Advisory Council on International Monetary and Financial Policies, in the
Development Coordination Committee (DCC), and in various other interagency committees designed to coordinate economic assistance programs.
Treasury's principal concerns are to promote the efficient utilization of
development assistance resources and to assure that bilateral aid objectives
and programs remain consistent with overall U.S. economic interests and with
U.S. multilateral aid efforts, in particular.^^
As a member ofthe DCC, Treasury has actively supported measures taken
in early 1978 to strengthen that Committee's policy coordinating role.
Treasury participates in each of the four new subcommittees which were
29See exhibit 64.




110

1978 REPORT OF THE SECRETARY OF THE TREASURY

established to treat issues in the specific areas of multilateral assistance,
bilateral assistance, food aid, and international organizations.
Multilateral Assistance Subcommittee.—As chairman of this DCC Subcommittee, Treasury has instituted new procedures for reviewing projects
proposed by the World Bank and the regional development banks. These
procedures are designed to allow for review and comment early enough in the
bank's review process for the United States to suggest changes. At the same
time, the Subcommittee is focusing increasingly on general policy issues which
relate to multilateral assistance programs such as lending policies in specific
sectors.
Bilateral Assistance Subcommittee.—As a member of this DCC Subcommittee, which is chaired by the Agency for International Development (AID),
Treasury reviews broad policy issues related to AID development programs,
including those which arise from proposed AID projects. A major objective of
Treasury in this area is to assure maximum coordination between AID policies
and programs and those of the multilateral development banks. It also
participates in the Subcommittee's review of AID budget proposals. During
fiscal 1978, AID committed $3.3 billion in loans and grants for specific
projects and supporting assistance. Of this amount $1.6 billion was in grants
and $1.7 billion in loans.
Food Aid Subcommittee.—Treasury is represented on the DCC Food Aid
Subcommittee (previously the Interagency Staff Committee) which reviews all
Public Law 480 food for peace proposals. Treasury looks primarily at the
impact of this program on the development efforts and financial prospects of
the recipient countries as well as on the U.S. domestic economy. During fiscal
1978, Title I sales agreements with participating governments and private
trade entities totaled $812 million. Title II donations totaled $337 million.
Under the new Title III authority, two agreements were signed with recipient
governments for a total of $37 million.
International Organizations Subcommittee.—Treasury also participates in
this DCC Subcommittee, which examines proposed U.S. contributions to the
development programs ofthe United Nations and other international agencies.
With respect to other DCC work undertaken this year. Treasury has worked
closely with other agencies in establishing a procedure for DCC review of U.S.
development assistance strategies for selected individual countries. It is hoped
that this procedure will enable all involved agencies to focus on development
problems of high-priority countries and to formulate a coherent U.S. policy
which integrates the full range of development assistance programs, bilateral
and multilateral. The first such review—on Jamaica—has been completed.
The DCC is also developing U.S. policy on several issues, including the
definition of a "basic human needs" strategy and how to implement it; the
needs ofthe "middle-income" developing countries and how the United States
should relate to them; and energy problems and prospects ofthe less developed
world and programs the United States should undertake in this area. Treasury
expects to be actively involved in this process.



REVIEW OF TREASURY OPERATIONS

111

Relations with developing nations

OPEC.—The combined current account surplus (excluding official transfers) ofthe 13 members of OPEC is expected to be about $13 billion in 1978,
a decline of $21 billion from the 1977 level of about $34 billion. The decline
will result from a continued soft market for OPEC oil, an OPEC oil price freeze
throughout the year, and continued growth of OPEC imports to sustain
development plans. Since yearend 1973, the cumulative OPEC surplus has
totaled nearly $180 billion. About $166 billion of this combined surplus was
earned by six Arab Gulf countries (Saudi Arabia, Kuwait, Iran, Iraq, Qatar, and
the United Arab Emirates). Almost $79 billion of this was earned by Saudi
Arabia alone, although Saudi Arabia's share of the total decreased to 40
percent from its 47-percent share in 1977. Estimates of the OPEC current
account position for 1977-78 are contained in the accompanying table.
OPEC current account position
[$ billion]
1977

Forecast
1978

Trade:
Oil exports (government-take basis)
Nonoil exports (f o.b.)
Imports (f.o.b.)

131.5
9.2
-85.2

127.0
10.4
-97.4

Trade balance
Services and private transfers

55.5
-21.7

40.0
-26.5

Current account balance (excluding govemment transfers)
Surplus countries
Deficit countries
Total OPEC

33.7

13.4

38.3
-4.6

24.7
-11.3

33.7

13.4

OPEC oil earnings (government-take basis) totaled about $131 billion in
1977 and should fall to around $ 127 billion in 1978. Generally, slow economic
activity and conservation in major consuming countries, along with greatly
increased non-OPEC production, contributed to a slow 1-percent growth of
exports during 1977. Oil consumption in the major industrial countries rose
only 3 percent in 1977 compared with a 6-percent increase in 1976. Increased
production from Alaska arrested the steady decline in U.S. production, and
the North Sea accounted for a more than tripling of United Kingdom output.
Production from all non-OPEC sources increased over 5 percent in 1977. For
1978, the sluggish demand for OPEC oil is expected to continue. The volume
of OPEC oil exports is expected to decline by about 4 percent as non-OPEC
oil production in Alaska and the North Sea increase, and as slow growth
continues in the major consuming countries.
At OPEC ministerial meetings in December 1977 and in June 1978, it was
decided that OPEC oil prices would not be increased during 1978. The OPEC
ministers will meet again to discuss prices in December of this year.




112

1978 REPORT OF THE SECRETARY OF THE TREASURY

It is expected that the aggregate value of OPEC imports will grow almost
14 percent this year, to about $97 billion. Yearly growth in the volume of
merchandise imports for OPEC as a group has trended downward since 1975.
In the six strongest surplus countries, physical congestion in ports and
transportation networks, the shortage of skilled and unskilled manpower to
implement projects, and social factors have been the major constraints pn
import growth. While transportation constraints have been reduced substantially, the manpower shortage continues to be an important limitation on the
rate of import absorption for all these countries, except Iraq. In 1978, concern
over strong inflationary pressures and a desire for more efficient use of
resources has tempered government spending programs.
The other OPEC countries have greater capacity to absorb a higher
proportion of their export revenues in imports. However, in many of these
countries actual or anticipated financing constraints, in addition to limited
pools of trained labor, have caused cutbacks in development plans which in
turn are bringing about lower rates of import growth. For Iran, concem over
inflation, rather than financing, has been the main limitation on higher
increases in the volume of imports.
The deficit on services and private transfers is expected to rise by about 22
percent in 1978, or almost $5 billion. The rate of increase, however, is down
from the 1977 rate of 28 percent and this trend is expected to continue. One
important element is the adoption of restraining fiscal policies by more OPEC
countries, reflecting moderation of development programs and desires to
restrain the growth of foreign labor forces. The OPEC countries are also
expected to incur lower demurrage costs in 1978 due to improvements in port
operations. Service payments are increasingly being offset by growing net
interest income on foreign investments, which should be slightly above $6
billion in 1978. Kuwait's service account, for example, moved from deficit to
surplus in 1975, due largely to these earnings.
Middle East.—Secretary Blumenthal visited Egypt, Israel, Saudi Arabia,
Kuwait, and Iran in October and November 1977. The purposes of the
Secretary's visit were to discuss economic and financial matters of mutual
interest and to establish a personal relationship with key officials of each
country. The subjects discussed included the outlook for petroleum prices and
the world economy and, in Egypt and Israel, the outlook for U.S. economic
assistance.30 In Israel the Secretary also cochaired a meeting of the United
States-Israel Joint Committee for Investment and Trade.
The Secretary subsequently met with a wide variety of Israeli and Arab
Government officials in Washington during 1978.
Latin America.^^—Treasury officials maintained a close working relationship with the Government of Mexico on a wide range of matters of mutual
interest. Between April and September 1978, the Secretary met three times
30 See exhibit 41.
31 See exhibit 65.




REVIEW OF TREAwSljRY OPERATIONS

113

with Finance Minister Ibarra and other Mexican officials to discuss the
multilateral development banks, negotiations covering U.S. bank loans to
foreign governments, access to capital markets, trade issues, national
economic policies, and Mexico's stabilization program. Earlier in the year.
Under Secretaries Solomon and Anderson hosted meetings with a high-level
Mexican delegation concerning the United States-Mexican Customs Agreement and expanded cooperation between the respective customs services. In
addition. Assistant Secretary Bergsten met with Mexican officials on several
occasions to discuss the Inter-American Development Bank replenishment.
Treasury also agreed to a 2-year extension of a longstanding $300 million swap
line with Mexico, although in fiscal 1978 no drawings were made under this
agreement.
Negotiations on countervailing duties, a proposed income tax treaty, and the
replenishment ofthe Inter-American Development Bank were areas of mutual
concern to the United States and Brazil.32 In December 1977, Assistant
Secretary Bergsten spent a week in Brazil during which he called attention to
Brazil's preeminent status as an advanced developing country and the need to
find new ways to encourage greater collaborative efforts between our two
governments in helping to resolve the world's key economic problems. He also
urged accelerated bilateral negotiations on our subsidy/countervailing duty
problems. A team of U.S. negotiators headed by a Treasury official traveled
to Brasilia in February 1978 to outline our proposals for an MTN code on
subsidies and to review the status of our bilateral tax treaty negotiations.
Secretary Blumenthal met twice with Finance Minister Simonsen in an effort
to resolve a pending textile countervailing duty case. Some progress was
achieved in formulating a joint approach on how the MTN code on subsidies
should be applied to developing countries and in establishing certain principles
for conducting the IDB replenishment.
In April, Deputy Secretary Carswell met with Argentine Finance Minister
de Hoz and Central Bank President Diz, who outlined the economic recovery
realized since 1976 and some of Argentina's long-range economic objectives.
Later in the year. Secretary Blumenthal also met with Minister de Hoz and
other Argentine officials to exchange views on the replenishment of InterAmerican Development Bank resources, and discuss Argentina's recent
economic performance and human rights policies. In the past year. Treasury
has conducted countervailing duty investigations on Argentine exports of
leather wearing apparel, nonrubber footwear, and textiles based on complaints
from U.S. industry.
The Department of the Treasury continued to work closely with the
Government of Peru in its attempts to overcome balance of payments and
budgetary problems. Treasury supported a 2 1/2-year IMF standby loan for
Peru designed to strengthen Peruvian stabilization policies and set the stage
32 See exhibit 42.




114

1978 REPORT OF THE SECRETARY OF THE TREASURY

for growth in key sectors of the economy. Secretary Blumenthal met on two
occasions with Peruvian Government officials in Washington to review its
economic situation and exchange views on the debt rescheduling negotiations
of official bilateral credits to be considered in the context of a Paris Club
meeting this fall.
Secretary Blumenthal met with Venezuelan President Perez in Bogota,
where they discussed the results of the recent Bonn summit, commodity price
stabilization, the future directions of the North-South dialog, and ways to
increase bilateral aid cooperation in the Caribbean region.
Asia.—Secretary Blumenthal chaired a session ofthe second U.S./ASEAN
Economic Consultations held in Washington, D . C , August 2-4, 1978. ASEAN
(Association of Southeast Asian Nations) was established in 1967 by
Indonesia, Malaysia, the Philippines, Singapore, and Thailand. During the
ministerial meetings, the United States and ASEAN exchanged views on a
broad agenda of economic subjects, including extensive discussion of the
global economy and North-South issues. The meetings achieved the basic U.S.
objectives of promoting cohesion and strengthening ASEAN and helping to
stimulate awareness of ASEAN in the United States. From the ASEAN side
the meeting was also viewed as being productive, both politically and
economically. ASEAN ministers welcomed U.S. proposals for development
cooperation, the decision to send Eximbank and OPIC investment missions to
the region, and the U.S. commitments to actively pursue the common fund
negotiations to an early and successful conclusion.
On May 9, 1978, the Internal Revenue Service made a favorable ruling on
a production sharing arrangement between the Government of Indonesia and
U.S. oil firms producing oil in that country. Previously, in a ruling in May 1975
the IRS concluded that certain payments made by the U.S. oil companies were
not creditable income taxes for purposes of the U.S. foreign tax credit.
Subsequently, the Government of Indonesia changed its tax arrangements with
the oil firms to meet the standards of a creditable tax and asked for a new
ruling. The favorable ruling of this year is expected to improve the investment
climate and oil production levels in Indonesia.
The Govemment of Singapore would like to arrange an investment treaty
with the United States. Treasury participated in developing a draft treaty that
was sent to the Government of Singapore in September 1978. Formal
negotiations were expected to begin later in the calendar year. Assuming a
treaty is successfully concluded, it would be the first such arrangement for the
United States since 1968.
Treasury officials participated in the third annual meeting of the IndoUnited States Economic and Commercial Subcommission on October 26 and
27, 1977, in Washington, D.C. The array of topics discussed was quite broad.
Treasury officials were particularly interested in the tax treaty negotiations,
India's import regime, and its investment climate.




ADMINISTRATIVE

I




REPORTS




ADMINISTRATIVE MANAGEMENT
Management and organization

During fiscal 1978, the Office of Management and Organization (OMO) was
involved in numerous studies and special projects touching both the Office of
the Secretary and Treasury's bureaus, and in several interagency efforts arising
from the President's reorganization project and other administration initiatives. OMO was the principal liaison with the reorganization project.
Organization changes in the Office of the Secretary.—The position of Chief
Deputy to the Under Secretary (Enforcement and Operations) was upgraded
to Assistant Secretary (Enforcement and Operations) at Executive Level IV.
The position of Inspector General, reporting directly to the Secretary and
Deputy Secretary, was established to receive and analyze allegations of official
or employee misconduct within the Department.
Interagency projects.—During half ofthe fiscal year, a member ofthe OMO
staff was detailed to the Task Force on Law Enforcement Reorganization. The
task force made a comprehensive review of all Federal law enforcement
activities.
Substantial effort was devoted by Office of the Secretary and Customs
Service personnel to a set of task forces examining the complex problems
which would surround the establishment of a Border Management Agency.
The major feature of the proposed agency was to be the melding of the
Immigration and Naturalization Service Border Patrol with the Customs
Patrol.
OMO coordinated the response to the President's reorganization project
Survey of Federal Economic Analysis and Policy Machinery. Several elements
ofthe Office ofthe Secretary which have responsibilities for economic analysis
and policymaking were asked to respond, as was the Assistant Commissioner
(Planning and Research) of IRS.
The Deputy Assistant Secretary (Administration) served on the President's
Interagency Task Force on Women Business Owners. Under her direction, a
Treasury study director from OMO headed an internal task group which
contributed Treasury's portion to the final task force report, an examination
of the barriers facing women entrepreneurs in the areas of credit and capital
formation.
Departmental projects.—During fiscal 1978, OMO was closely involved in
studies of the field organizations of the Internal Revenue Service, the U.S.
Customs Service, the Bureau of Alcohol, Tobacco and Firearms, and the U.S.
Savings Bonds Division. These studies had been ordered by the Secretary in
the previous fiscal year. Recommendations for changes in the field structures
of the IRS and Savings Bonds were approved by OMB and implemented.
Suggestions regarding Customs and ATF were held in abeyance pending the
outcome of the larger law enforcement study being conducted by the
President's reorganization project.
Staff advised the Office of Revenue Sharing in the preparation ofa request
for proposal and selection of a private contractor to conduct a congressionally
mandated study ofthe antirecession fiscal assistance program. OMO participated in the final research design, after the contract was let, and reviewed the
final report.
A senior analyst from OMO participated in the review of bullion refining at




117

118

1978 REPORT OF THE SECRETARY OF THE TREASURY

the Mint's New York Assay Office; the purpose was to determine whether this
activity should be continued or contracted out to private industry.
OMO conducted a study in response to proposals to merge the criminal
investigator training and police training faculties at the Federal Law Enforcement Training Center; the report recommended organization and staffing, as
well as target workload goals for instructors.
Office ofthe Secretary projects.—Early in fiscal 1978, Secretary Blumenthal
directed the Assistant Secretary (Administration) to develop a more effective
system for appraising employee performance and recognizing accomplishments through incentive awards. The OMO staff was given the charter to
develop this system, drawing upon its own and other staffs in the Office ofthe
Secretary, and upon an outside contractor. A system was developed to improve
work planning and performance feedback between supervisors and subordinates, and to distribute incentive awards on the basis of documented
performance. The Secretary launched the system at a meeting of top staff, and
implementation will occur in fiscal 1979.
OMO also led the following management studies within the Office of the
Secretary during the year:
1. A review of the Office of Industrial Economics and the asset depreciation range system which it administers. The purpose was to determine the
effectiveness of the office's operations, and whether it was in the proper
organizational location within Treasury.
2. A review ofthe organizational placement ofthe Office of Foreign Assets
Control.
3. A study ofthe structure, staffing, and workload ofthe Telecommunications Operations Branch, Office of Administrative Programs.
4. A review of the workload and responsibilities associated with the
Freedom of Information and Privacy Acts, and the mechanisms for dealing
with them in the Office of the Secretary.
Zero-base budgeting objectives.—During fiscal 1978, most Treasury offices
and bureaus went through initial participation in the zero-base budgeting
objectives program, which replaced the management by objectives program.
The object of the prograrri is to maintain and track a set of management
objectives in a manner integrated with the budgeting process. Objectives and
associated resources, initially identified in the zero-base budgeting process, are
picked up, refined, and tracked into the current operating year by the system
managed by OMO.
Productivity management.—The departmental productivity management
directive was issued, requiring bureaus, for the first time, to submit annual
productivity plans. These plans cover projects to be undertaken to enhance
productivity and efforts to be made to extend productivity measurement
practices over an even-larger portion of bureau activities.
Advisory committee management.—The Secretary established new procedures whereby he would personally approve the establishment or renewal of
any Treasury advisory committees. Under these procedures, five committees
were renewed during the year and no new ones established. In addition to its
own committees. Treasury took on management of one new Presidential
advisory committee, the United States Tax Court Nominating Commission.
Assistance to international visitors.—The International Visitors Program
office has provided orientation and specialized consultation and observational
programs on a continuing basis to international visitors referred by the
International Communication Agency, Agency for International Development, and other agencies, both governmental and nongovernmental. This



ADMINISTRATIVE

REPORTS

119

office handled appointments and programs for 118 visitors representing 5 1
countries, both industrial and less developed. In addition, the office arranged
briefings at Treasury for five classes of junior Foreign Service officers.
Financial management

The major part ofthe Financial Management Division's (FMD) efforts in
fiscal 1978 was devoted to the daily ongoing requirements of a budget,
accounting, and payroll liaison operation for the Office of the Secretary.
The major achievements in fiscal 1978 were:
1. Completed initial transfer of all accounting data to a computerized
system. This is a culmination of a 3-year effort that resulted in tripling the
available accounting data that forms the base for the budget execution system,
provides reports in a timely and usable manner, and is cost effective by
offsetting a rising workload through mechanization instead of increased
accounting personnel.
2. Instituted a new budget execution system that provides monthly status
reports to office directors, thus giving them more control and understanding
of their expenditures. FMD also instituted new control procedures on, among
other things, the use of consultants, personnel hiring, and promotions.
3. Completed efforts on the transfer of the payroll system from the IRS
Data Center to the Treasury payroll/personnel information system and
designed a computer program system for the automatic transfer ofthe payroll
data into the accounting system, thus eliminating 3 days of manual input
monthly.
Emergency preparedness

The Emergency Planning Staff directed primary emphasis to the continuing
enhancement of the Department's overall emergency preparedness posture.
Improvement was achieved through program review, evaluation, internal
activities, and participation in interagency projects, task forces, and civil
readiness exercises. It is essential that Treasury's contingency plans be
developed in keeping with changing concepts and technologies, and in
anticipation of potential crises. To this end, a close working relationship was
maintained with the Federal Preparedness Agency and other departments and
agencies with emergency preparedness responsibilities under Executive Order
11490.
In April and May 1978, the departmental emergency planners participated
in regional civil readiness exercises in San Juan, P.R., and Dallas, Tex.,
benefiting both regional and headquarters planners in improving organizational preparedness. Expanded participation in similar exercises is planned for
fiscal 1979. For example. Treasury has commenced planning for nationwide
civil readiness exercise REX-78 to be conducted in October 1978. REX-78
will permit Federal agencies to test and refine contingency plans and
capabilities to support military mobilization and forces deployment, and to
provide civilian resource agencies an opportunity to examine critical resource
problems during a protracted period of conventional war. Treasury will be
involved significantly because of its responsibility for developing policies,
plans, and procedures applicable to emergency stabilization of the monetary,
credit, and financial systems of the country.
An extensive Department-wide review of emergency policy and planning
documents was made in fiscal 1978 with departmental and bureau officials
revising those documents pertaining to their functional responsibilities.




120

1978 REPORT OF THE SECRETARY OF THE TREASURY

Renegotiation of interdepartmental agreements and understandings continues.
Contingency planning for possible postal service disruption during the last
half of fiscal 1978 was an active project, including interagency liaison,
guidance to Treasury offices and bureaus, and close monitoring of the postal
strike situation to avoid disruption of Treasury operations.
Review of major national plans and procedures was initiated during fiscal
1978, and included the National Plan for Emergency Preparedness, Federal
Civil Emergency Actions Guidelist, Presidential Emergency Action Documents, and Treasury regional plans. Most significantly. Treasury participated
in the President's reorganization project. Federal Emergency Preparedness
and Response Study, conducted by OMB. Establishment of the Federal
Emergency Management Agency, with its expanded role in multifaceted
preparedness planning and response, could impose increased requirements on
Treasury and other agencies. In fiscal 1979, Treasury will participate in the
implementation of Reorganization Plan No. 3, and in an interagency
coordinating group conceming the National Earthquake Hazards Reduction
Actof 1977.
Treasury payroll/personnel information system

The Treasury Employee Data and Payroll Division has been reorganized into
the Treasury Payroll/Personnel Information System (TPPIS) Division. The
accounting, payroll, and systems modifications functions previously performed by the Bureau of the Mint were transferred to the TPPIS Division. The
reorganization essentially centralized authority and responsibility for the
management and control of all aspects of the system and will result in greater
efficiency and effectiveness of the system operation. The Mint will continue
to provide computer and administrative support services for TPPIS.
TPPIS has completed the conversion of all Treasury bureaus, with the
exception of the IRS, to the system as well as three other organizations—the
Executive Office of the President, Federal Trade Commission, and National
Gallery of Art.
Budget and program analysis

The Office of Budget and Program Analysis continues to provide departmental leadership for developing, administering, and analyzing bureau budget
estimates and short-term and long-range financial plans. In addition, it initiates
selected analytic studies designed to systematically measure the achievement
of bureau programs with stated objectives.
For fiscal 1978, budget estimates totaling $56 billion were submitted to the
Congress. The amount included $3 billion for the operating accounts, $6.9
billion for general revenue sharing and the antirecession programs, and $46.1
billion for public debt interest and miscellaneous accounts.
During the period of this report, the staff—
1. Maintained controls on expenditures, number of personnel on roll, and
motor vehicle fleet to comply with limitations and directives prescribed by
OMB.
2. Obtained supplemental appropriations for the cost of pay increases
authorized by Executive Order 11941, wage board actions, and administrative
actions amounting to $132.2 million.
3. Maintained control of the Department's execiition of the approved
budget levels which include the approval of certain rej^rogrammings.




ADMINISTRATIVE REPORTS

121

4. Assisted in the preparation and presentation of budget requests totaling
nearly $ 1.925 billion to be appropriated to the President for the U.S. share to
the multilateral development banks of which the Secretary of the Treasury
serves as a Governor.
5. Assisted in the preparation and presentation of the budget request of
$1.8 billion for U.S. participation in the Supplementary Financing Facility of
the International Monetary Fund.
6. Issued Department-wide zero-base budgeting directive updating the
zero-base budgeting system within Treasury.
7. In conjunction with other staff offices in the Department, developed
legislation to bring the Exchange Stabilization Fund administrative expenses
on budget in fiscal 1979.
8. Coordinated a survey of Treasury program evaluation activities and a
survey of Treasury information sources and systems for the General Accounting Office.
9. Evaluated the merits of contracting out or performing in-house the
refining of the Bureau of the Mint's U.S. Assay Office, New York.
10. Prepared a report to the Congress on the utilization of Governmentowned vehicles by employees permitted to take those vehicles to their place
of residence overnight.
11. Analyzed currency and stamp demand forecasts to determine the need
for expanding the production capacity of the Bureau of Engraving and
Printing.
12. Improved procedures for preparing the annual Geographic Outlay
Report to increase its accuracy and timeliness.
13. Studied the feasibility of developing computer models to estimate IRS
resource requirements given certain workload levels.
14. Analyzed relationships between the purchase and retention of U.S.
savings bonds and such characteristics as the denomination of the bond, the
method of purchase, and the geographic area where purchased.
15. Monitored overseas staffing levels of Treasury bureaus and coordinated requests for changes and increases with the State Department.
16. Monitored Federal agency compliance with Treasury Circular No.
1082, Notification to States of Grant-in-Aid Information.
Internal auditing

The Office of Audit provides leadership and professional assistance to
Treasury bureaus on their systems of auditing and administrative accounting.
The staff also furnishes audit service directly to the Office ofthe Secretary and
to other organizations upon request.
In fulfillment of a plan to make periodic reviews of the audit systems of
Treasury bureaus, a formal review and appraisal was made ofthe internal audit
activities ofthe U.S. Customs Service, which included field work in three of
:he nine Customs regions. The report to the Commissioner of Customs
•ecognized the importance of actions planned by Customs in response to a
leed for more systematic audit planning. It also reenforced Customs efforts
;o improve audit coverage of ADP activities and to make more multiregional
ludits of the same subject matter.
An appraisal of the internal audit system of the Bureau of Govemment
financial Operations is in progress to compare the audit staff, organization,
)olicies, plans, reports, and related matters with Federal audit standards and
>ther desirable requirements for an effective program.
A substantial amount of assistance was provided to the Exchange Stabiliza-




122

1978 REPORT OF THE SECRETARY OF THE TREASURY

tion Fund during the year. In addition to auditing work, the office, at the
request ofthe Deputy Secretary, assisted in developing a memorandum issued
by the Under Secretary for Monetary Affairs establishing procedures for theproper handling of Fund financial agreements. The office is also developing
an operational accounting manual with specific emphasis on accounting
principles and procedures for foreign exchange, special drawing rights, and
other unique Fund transactions.
Other special projects included reviews at the request of the Under
Secretary of the contracting procedures and practices of the Bureaus of the
Mint, and Engraving and Printing.
Advisory service was continued in support of TPPIS. In particular,
documentation of the system was monitored, and a directive developed for
controlling audits. The office is responsible under the directive for the overall
audit, but assistance of Treasury bureau audit staffs will be required and the
plans and programs will be coordinated with them.
Direct audit services were provided to the Federal Law Enforcement
Training Center. Coverage included an examination of financial operations
and an assessment of comphance with OMB Circular No. A-76 on acquiring
commercial or industrial products and services. Also, reports were issued to
the Director, Office of Revenue Sharing, on the audits of the trust funds and
the administrative accounts, and on a special examination into revenue sharing
payments made to certain cities.
The office prepared the consolidated 1977 report to the Secretary on
internal auditing in Treasury. Audit activities summarized showed that audits
contributed to improved financial management, increased efficiency and
effectiveness, and stronger controls over the varied Treasury activities. Savings
and benefits susceptible to dollar measurement totaled $100 million.
The staff participated regularly in the activities of Intergovernmental Audit
Forums led by the Comptroller General to provide an orderly approach to
improving audits of Federal programs. Regular meetings were held with
Treasury auditors to help unify the audit system.
Personnel management

Treasury's labor relations program continues to have an increasingly
significant impact on personnel management. Sixteen different unions
represent nearly 102,000 employees in 9 Treasury bureaus and in the Office
of the Secretary. Treasury keeps its lead among all Cabinet agencies in the
extent to which its employees have organized. Unions have consolidated
bargaining units at the national level in the IRS and the Customs Service.
The Treasury labor relations program directive was extensively revised to
meet current Executive order requirements. Pursuant to that directive.
Treasury's labor relations staff has begun reviewing agreements negotiated at
the bureau level and has been giving close scrutiny to cases appealed to the
final arbiter in the program. The Department's Labor Relations Information
Center, designed for research and case-handling informational resource
requirements, has been used by the bureaus in preparing for negotiations. It
permits access to a computerized retrieval system of Federal labor relations
agreements and cases.
Summer training in the Department for young men and women ranging from
disadvantaged high school youths to college and graduate-level students was
highly successful in achieving the goals and objectives ofthe Federal summei
employment program. On-the-job training experience provided by the
employing bureaus afforded the summer employees an excellent opportunit>




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123

to find a workable balance between the academic world and the practical
complex operations of the Federal Government. To complement the work
experience, a series of seminars, panel discussions, workshops, and other
related activities were conducted to inform summer employees of the many
varied and complex issues now facing the Federal Government. The level of
participation and interest shown by Secretary Blumenthal, members of his
staff, and other high-ranking Federal officials who served as key speakers and
discussion leaders was instrumental in making the sessions as productive arid
successful as possible from the viewpoint ofthe summer employees participating.
Bureaus are revising their old programs or developing new ones to increase
the effectiveness of executive development. At the departmental level, efforts
are being made to activate the Departmental Executive Resources Board as
the first step in implementing the Senior Executive Service or a similar
resources system.
The Career Development Program for Lower Level Employees (CADE),
formerly known as the upward mobility program, underwent substantial
change in 1978. Substantive changes were necessary to ensure implementation
of a results-oriented program that would accommodate both the needs of the
Department and employees. The impreciseness was corrected by requiring
accountability for growth in the formal program. As an additional assurance
of having a good program, skills training (to include counseling) is being
conducted at both local and field levels.
The Personnel Security Manual (Chapter 732 TPMM) was revised and now
provides meaningful guidance for the program Department-wide. Personnel
security evaluations were conducted in seven bureaus during fiscal 1978.
One hundred and twenty-nine employees representing most Treasury
bureaus, as well as components ofthe Departments of Health, Education, and
Welfare, Justice, and Transportation, completed training in the onsite method
of personnel management evaluation during four presentations of the
Treasury-developed course by that name during 1978. This training is
expected to yield practical benefits by providing bureaus with increased
capability of conducting much-needed internal personnel management
assessments.
Procurement and personal property management

Total commercial procurements for the Department in fiscal 1978
amounted to $303 million, ofwhich $57 million in contracts was awarded to
small business firms. This excludes contracts funded by the Saudi Arabian
Government. Of the total, $218 million was expended through Treasury
negotiated and advertised contracts. The balance was ordered under established General Services Administration and other agency contracts. The
expenditures made to minority owned and operated businesses, to the extent
identifiable, both through the Small Business Administration's " 8 ( a ) "
program and other contracts, totaled $5.1 million, a significant increase over
fiscal 1977's total of $2 million.
During fiscal 1978, 44 blanket purchase agreements for use by all Treasury
bureaus provided a savings in excess of $96,000 over standard unit prices
under existing Government contracts. The Department-wide consolidation of
Treasury requirements for 951 law enforcement vehicles procured through
GSA and in excess of 16 million rounds of small-arms ammunition resulted in
a significant dollar savings over separate procurement methods. Compacts,




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1978 REPORT OF THE SECRETARY OF THE TREASURY

intermediate- and full-size automobiles, and 31 types of ammunition were
purchased.
The Department issued a "Minority Business Contracting Handbook" to
assist procurement personnel in taking positive steps to increase minority
business contract awards. The program staff also held a training class for over
200 Treasury headquarters and field office personnel in minority business
contracting procedures. Similar training was provided to all procurement
personnel in the revised labor surplus area set-aside program, part of the
administration's urban assistance efforts. The Department also continued its
staff assistance visit program designed to help identify potentials for improvement in Treasury's overall contracting activities. Visits were made to three
bureau headquarters and two regional cities.
In support of the U.S. technical cooperation agreement with the Saudi
Arabian Government, and using Saudi funds. Treasury contract specialists
awarded and administered contracts in excess of $40 million in fiscal 1978.
Contracted services and equipment were to improve several aspects of Saudi
socioeconomic conditions.
Treasury significantly increased its participation in vendor procurement
conferences during fiscal 1978. Departmental personnel or bureau personnel
designated as Treasury representatives attended seven conferences throughout the Nation to provide information to small businesses and minority vendors
interested in selling to Treasury.
During fiscal 1978, Treasury personal property transactions included the
reassignment within Treasury of property valued in excess of $945,000.
Personal property valued in excess of $11 million, no longer needed by the
Federal Government, was transferred for use by State organizations and
nonprofit groups. Treasury also obtained, without cost, personal property
valued at over $22 million from other Federal agencies.
As part of the vehicle management program, home-to-work driving
authority for Government vehicles was successfully reduced from 940 to 558,
meaning a significant cost savings.
Real property management

The Bureau of Alcohol, Tobacco and Firearms completed in June 1978 the
relocation of its national laboratories from the IRS headquarters building to
a new facility in Rockville, Md.
On March 17, 1978, the Assistant Secretary (Administration) accepted 3 1
townhouse buildings at the former Glynco Naval Air Station, Brunswick, Ga.,
for Federal Law Enforcement Training Center student dormitories. This will
result in a cost avoidance of about $3.7 million.
The U.S. Customs Service completed its Washington, D . C , consolidation
in August 1978, with the move of its computer facility into the headquarters
building on Constitution Avenue.
A study ofthe long-range space and facility needs ofthe Bureau of Engraving
and Printing determined that the Bureau does not need a new facility to meet
its projected production levels. Technological improvements and policy
changes mean that the existing facihty can meet future production requirements. A new study in about 5 years will reevaluate this decision. On June 1 8,
1978, the Under Secretary released the Department's reservation ofthe south
portal site, next to the Bureau's buildings, to its owner, the District ofColumbia
Department of Housing and Community Development.
On May 3, 1978, the Under Secretary approved a Bureau of the Mint
decision on the future ofthe Park Hill (Denver, Colo.) site, acquired by the




ADMINISTRATIVE

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125

Department in 1975 for a new mint. The Mint now plans to satisfy its expanding
production levels by acquiring and adapting surplus Federal facilities. An
assessment is being made to determine the most cost-effective way of fulfilling
the Mint's nationwide facility requirements. Buildings at the Rocky Mountain
Arsenal near Denver, and the former Frankford Arsenal near Philadelphia, are
being evaluated as potential satellite production and storage sites. A formal
proposal is expected by late calendar 1978.
Several space planning initiatives continue, aimed at achieving consolidations of bureau headquarters activities. Treasury now has 51 locations in the
metropolitan Washington, D . C , area. Studies ofthe long-range space needs
of the U.S. Secret Service and the Fiscal Service have been made, and the
resultant proposals will be the basis of facility acquisition actions by the
General Services Administration. Partial consolidation of the Office of the
Secretary, now scattered in 13 locations, is being planned. This will help limit
the acquisition of new office locations and anticipate the long-range Fiscal
Service consolidation plan, which returns the Treasury Annex Building to the
Office of the Secretary.
Approximately 11,000 square feet of nonoffice space in the Main Treasury
Building is being reclaimed for office use to satisfy increasing space
requirements without adding more locations, avoiding recurring annual space
rental charges of about $90,000.
The Main Treasury repair and improvement program is progressing:
1. Design work has been completed and construction contracts awarded
for the first phase of structural repairs to the basement floors, chimneys, and
fireplaces.
2. Design work is nearing completion on the project for primary electrical
renovations, fire security alarms, and civil defense alarms. A contract should
be awarded by January 1, 1979.
3. Design work on the project for air conditioning renovations, secondary
electrical distribution, window repairs, and downspout and rain leader repairs
is also nearing completion. Contracting will not be possible until next summer.
4. Studies of the balustrades and cornices are being done to identify
potential safety hazards. Work on those elements will be done before the
repointing of the exterior stonework begins.
Printing management

At the request of the U.S. Savings Bonds Division, Printing Management
conducted a study of the Division's printing plant in Chicago and printing
procurement function in Washington, D.C. The study included a detailed,
onsite evaluation of the Chicago facility to determine the most efficient
equipment to produce the promotional material required by the Savings Bonds
operation. A recommendation was made to update two printing presses. The
Division's internal procedures for procurement of printing were also evaluated
and a recommendation was made to realign functions in its three branches in
Washington.
In February 1978, Printing Management acquired an electronic phototypesetting system which means full pages of camera-ready copy can be provided
very quickly. A new compatible typesetter for headlines was also acquired.
The departmental printing plant received about $50,000 worth of virtually
new printing equipment from the U.S. Secret Service as the result of the
breaking up ofa counterfeiting operation in Utah. The equipment includes a
printing press, camera, platemaker, papercutter, and light table. The actual



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1978 REPORT OF THE SECRETARY OF THE TREASURY

cost to the Office ofthe Secretary for the equipment was $814 for shipping
from Salt Lake City.
A task force, proposed by Printing Management, was established to look into
procuring alcohol tax stamps, currently produced at the Bureau of Engraving
and Printing, from commercial printers. The task force, composed of members
from Printing Management, the Government Printing (Office, Bureau of
Engraving and Printing, and the Bureau of Alcohol, Tobacco and Firearms,
wrote specifications and contacted commercial contractors for production
cost estimates. Preliminary information points to a substantial savings with
commercial production. A final determination will be withheld pending the
outcome of legislation that might negate the need for sequentially numbered
stamps.
Physical security

The Department-wide training, orientation, and briefing program for
employees who handle classified documents was revised. The new program is
pictorial so that employees are more likely to participate in and understand
the presentation. Other agencies have seen the program materials and have
requested Treasury's assistance in their own program development.
To supplement the departmental defensive international travel briefing
program, a booklet entitled "Overseas Assignment" was prepared for
distribution to departmental personnel traveling or assigned overseas. It
stresses awareness of the risks inherent in foreign travel and basic guidelines
for protection to be followed by employees and immediate family members.
Treasury, along with certain other Government agencies, is participating in
an FBI crime resistance program to reduce thefts at Government facilities in
Washington, D.C. It will provide background and statistical data and stress
employee awareness. The first half of the program has been devoted to the
collection of information on past losses of Government property which has
been provided to the FBI for analysis. During the last half of the program, the
FBI will provide recommendations to Treasury which should help bring about
a reduction in property losses.
Telecommunications

Treasury automated communications system.—Substantial progress has been
made on the contract awarded in August 1977 for the Treasury automated
communications system (TACS). The implementation of TACS in 12 months
will round out the Treasury communications capability by providing a modern
message processing and dissemination facility which will increase productivity
and efficiency.
Treasury Centrex telephone system.—The Treasury Centrex system has been
in service for nearly 2 years and now serves Treasury bureaus and 2 other
Government agencies with over 18,000 telephone stations. An automated
directory and information service is being designed and should be implemented in 1979. The use of the single line telephone in lieu of the more
expensive multiline telephones or call directors is progressing well and is
expected to result in significant savings. The new Centrex attendant service has
permitted a reduction of seven telephone operators, one-third ofthe former
staff
Federal telecommunications system (FTS) cost reduction program.—Treasury
met its goal of reducing long-distance telephone costs by $2 million in fiscal
1978. GSA rebated over $2 million in FTS costs to Treasury. Detailed calling
data were collected and distributed and educational memoranda prepared on
the proper use ofthe FTS for Treasury employees. Managers and supervisors
indicated that the usage data proved to be valuable in controlling calls. This



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127

program will be e n h a n c e d by a unique FTS off-net restriction capability now
available on the Treasury system.
Departmental audiovisual management program.—Based on O M B Circular
A - 1 1 4 , a draft Treasury directive was circulated for c o m m e n t prescribing
specific m a n a g e m e n t criteria for audiovisual programs. Agreement on its final
form has not yet been reached, but the directive has stimulated m a n a g e m e n t
thinking and activity in the reduction of audiovisual costs. Due in large part
to the contributions of interested bureau audiovisual managers, a useful and
economical audiovisual program will be in operation within the next fiscal
year.
Overseas communications support.—Telecommunications M a n a g e m e n t has
b e c o m e deeply involved in providing a sophisticated satellite communications
system between Riyadh, Saudi Arabia, and Washington, D.C. T h e system is
supporting the Office of Saudi Arabian Affairs and n u m e r o u s projects
established under the auspices of the United States-Saudi Arabian Joint
Commission on E c o n o m i c Cooperation. T h e first phase of the project, which
provides direct voice communications between the two cities, has been
completed and the second, which will provide c o m p u t e r terminal access t o
data bases in the United States, is u n d e r development. Initial users, besides
Treasury personnel, will be the Saudi Ministry of Finance. O t h e r users are to
be phased in as their communications requirements b e c o m e known.
Radio frequency management.—During fiscal 1978, the D e p a r t m e n t doubled its capacity of radio frequency assignments and approximately 300
international negotiations were successfully undertaken. It is anticipated that
the d e m a n d s in fiscal 1979 will be 75 p e r c e n t above present levels. Completed
studies indicate that due to an upcoming major reorganization, the frequency
requirements are projected to triple, but can be accompUshed with only a 50p e r c e n t increase in cost as a result of innovative data-handling techniques.
Improvement of commercial carrier service to Treasury.—In 1978, the
A m e r i c a n T e l e p h o n e & Telegraph C o . established a national a c c o u n t
m a n a g e m e n t staff to serve Treasury, and the associated Bell System companies
realigned their marketing staffs accordingly. As a result, response to Treasury
requirements has improved significantly. For example, the new A.T.&T.
m a n a g e m e n t team recently c o n d u c t e d a survey of U.S. Customs Service voice
communications requirements along the United States-Mexican border and
submitted its r e c o m m e n d a t i o n for improved service in this area. T h e project
called for a coordinated effort a m o n g the three telephone companies serving
the area and the national account m a n a g e m e n t staff.
Departmental communications security.—Responsibility for the managem e n t o f t h e departmental communications security ( C O M S E C ) program was
officially assigned to the Assistant Director (Telecommunications Managem e n t ) by Treasury D e p a r t m e n t O r d e r No. 254, dated August 12, 1977. T h e
departmental C O M S E C staff is charged with ensuring that classified and
sensitive voice, record (message), and data communications (including
a u t o m a t e d data processing transmissions) are accomplished so that t h e
information is not inadvertently disclosed by h u m a n or machine error, o r
intercepted by an adversary. C O M S E C support is provided to the Office o f t h e
Secretary and to those other offices and bureaus within the D e p a r t m e n t t h a t
process or transmit sensitive or classified information.
Paperwork management

Departmental paperwork management program.—The staff continued developing programs in c o r r e s p o n d e n c e , forms, internal reports, and directives, and
began a new program in the area of records maintenance and disposition. A



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1978 REPORT OF THE SECRETARY OF THE TREASURY

program directive was published to assure that only required records are
maintained and disposition is timely.
Treasury's part in the President's program to reduce the reporting burden
imposed on the public was again a success. In fiscal 1978, the Department
reduced its reporting burden by more than 25 million work-hours, a 5-percent
reduction in time required by the public to complete Treasury reports.
The forms management program established a central facility to store and
distribute forms which allows for cost savings and better control.
Office of the Secretary program.—A more efficient realignment of clerical
functions in the Records Management Branch led to the expansion of services
such as word processing and microfilm.
Unneeded central files in the Office ofthe Assistant Secretary (International
Affairs) were discontinued. A new filing system established official records
locations at designated stations throughout the office to assure complete
documentation and record accessibility. A new storage and holding facility was
established, freeing hundreds of square feet of prime office space in the Main
Treasury Building, to make it possible for program officials to store semiactive
records for almost immediate access.
Schedules to permit the orderly, legal destruction of thousands of cubic feet
of Office ofthe Secretary records currently stored in the Washington National
Records Center and the Main Treasury Building are about 80 percent
completed. This will result in significant savings to GSA and Treasury.
Disclosure program.—For the past 2 years, this program, which administers
the Freedom of Information Act and Privacy Act provisions, had been staffed
by people on temporary assignment throughout Treasury. Now it has a
permanent full-time staff. The new Disclosure Officer is reviewing the systems
before revising procedures and policies for disclosure. An orientation program
has been developed to train new employees who will be associated with
disclosure.
New directions.—Rapidly developing technology has led to several new
programs that promise to revolutionize information management at Treasury.
Heretofore nothing had been done to coordinate word processing activities on
a Department-wide basis. The Office of Paperwork Management organized a
word processing task force of representatives of each of the bureaus, chaired
by an analyst on the staff. Standard guidelines now exist for acquiring and using
word processing equipment throughout the Department.
The basis for a word processing system to allow originators, reviewers, and
signers of correspondence to communicate almost instantly has also been
established, eliminating the days or weeks of revision now associated with
document preparation.
A computerized correspondence tracking system developed for the Office
of Public Affairs permits the user to instantaneously identify all correspondence within the system and obtain status reports immediately.
Paperwork Management is developing an information locator system to
prepare a number of reports required on a quarterly, semiannual, and annual
basis. It will also identify sources of information throughout the Federal
Government and eliminate most duplicative requests. The system, projected
to save tens of thousands ofdollars each year in forms and reports management
personnel costs, will, more significantly, reduce even more the reporting
burden imposed on the public.




ADMINISTRATIVE REPORTS

129

General services

International support.—The IMF/IBRD annual meetings bring together the
Finance Ministers, central bankers, and other top officials from around the
world in discussions concerning international monetary and financial policies.
The Office of General Services planned and coordinated all administrative
requirements for Treasury's participation in the 1978 IMF/IBRD conference.
Complete logistical support, including telecommunications, furniture and
supplies, and pther office services, was provided in a major temporary office
installation for top Treasury officials in a wing of the Sheraton Park Hotel,
Washington, D.C. Numerous events were arranged for the Secretary and other
officials, including a reception by the Secretary for approximately 1,300
guests.
In addition, the Office of General Services continued to provide planning
and coordination services for overseas travel by the Secretary and other top
Treasury officials, as well as related protocol support services.
Environmental programs

Environmental quality.—The Assistant Secretary (Administration) approved the completed supplemental environmental assessment on the expansion of facilities at the Federal Law Enforcement Training Center. In addition,
the first phase of environmental assessments was completed on the ATF
explosives tagging program and the Customs Detector Dog Training Center
expansion at Front Royal, Va. Assistance was provided to the Council-on'
Environmental Quality in the formulation of new regulations implementing the
National Environmental Policy Act.
Historic preservation.—Treasury continued its participation as a statutory
member of the Advisory Council on Historic Preservation (ACHP). This
included review of impact studies on Federal projects involving historic
properties, and representation on task forces such as the Interagency National
Heritage Trust Task Force and the Economic Policy Group ofthe Council on
Historic Preservation. A comprehensive directive was prepared to establish
responsibilities, standards, and procedures for complying with the National
Historic Preservation Act. A report was prepared for the ACHP summarizing
the Department's historic preservation activities and the processing of several
inquiries concerning the impact of Department activities on historic buildings.
Energy conservation.—In order to facilitate preparation of the energy
management plans required by Executive Order 12003, the Assistant Secretary (Administration) established a task force in March 1978. The task force
completed the energy survey of 14 Treasury owned and operated buildings in
order to determine actions to meet the President's stated goal ofa 20-percent
reduction in energy consumption. In the area of agency operations, the task
force identified eight energy conservation options; among them were vanpooling, use of electric vehicles, energy conservation in the use of ADP equipment,
and a driver training course. The latter two programs are being initiated for
the first time in the Federal Government. A study was begun to determine
necessary departmental response to a weather/fuel shortage crisis.
Pollution abatement.—In accordance with the Solid Waste Disposal Act of
1965 and the Resource Recovery Act, the Department completed a study on
the feasibility of source separation of high-grade wastes. The study found
source separation at the Main Treasury and Annex to be economically
unfeasible, but advised the Environmental Protection Agency (EPA) that
source separation will be done at the Bureau of Engraving and Printing. The




1 30

1978 REPORT OF THE SECRETARY OF THE TREASURY

"Beverage Container Guidelines Non-Implementation R e p o r t , " concerning
departmental implementation of E P A ' s guidelines under the Solid Waste
Disposal Act, was submitted in final to EPA. Also submitted to E P A was a reply
concerning compliance with the National Pollution Discharge Elimination
System permit granted to the Customs dog training center and alleged
violations of the permit by that bureau.
Library

T h e library expanded its automation program in two major areas, internal
operations and public services. Internally, a m a n a g e m e n t information system
for acquisitions and subscriptions control was implemented. For public
services, the library acquired the a u t o m a t e d reference services " O r b i t " and
the New York Times Information Bank, thereby expanding reference and
bibliographic services.
Safety

Office of the Director of Safety.—The safety action plan project was
completed on schedule in fiscal 1978. O n e bureau plan was unacceptable,
however, and the project was extended until the plan is revised.
A directive, " D e p a r t m e n t a l Occupational Safety and Health P r o g r a m , " was
published. T h e basic directive has nine parts. Parts I and II are in force; parts
III-IX have been released for coordination. They cover legislated requirements for the D e p a r t m e n t ' s occupational safety and health program.
T h e criteria and evaluation p r o c e d u r e s governing the Secretary's bureau
safety awards were revised and published in a directive, " D e p a r t m e n t of the
Treasury Safety A w a r d s . " T h e highest award of honor went to the Bureau of
Engraving and Printing in calendar 1977 and to the Bureau of G o v e r n m e n t
Financial Operations in calendar 1978. The next highest award of excellence
went to the IRS in calendar 1977 and to the Secret Service in calendar 1978.
Treasury Occupational Safety and Health Council (TOSHC).—A T O S H C
committee wrote a new organization and bylaws d o c u m e n t published as a
directive. T h e d o c u m e n t reestabHshed the T O S H C as a forum for ( 1 )
discussion of departmental and bureau safety and health problems, ( 2 )
information on a regular basis on important safety and health topics, and ( 3 )
recommendations on departmental policy. Annual meetings of the Council,
which included Office of the Secretary and bureau top staff, were held in
N o v e m b e r 1977 and May 1978. T h e Assistant Secretary (Administration)
chaired the May meeting. The annual meeting is now an established spring
event.
Treasury Historical Association

In 1978 the Treasury Historical Association began having three membership
meetings a year instead of only one. These were held February 2 at the Bureau
of Alcohol, T o b a c c o and Firearms, April 12 in the Treasury Cash R o o m , and
September 27 at the National Archives.
Rex D. Davis, Vice President, was appointed to fill the vacated office of
President and then agreed to stay on as President after he retired as Director
o f t h e Bureau of Alcohol, T o b a c c o and Firearms. Continuing in their current
offices are Charls E. Walker, Chairman of the Board of Directors; Abby
Gilbert, Secretary to the Board; and Arthur D. Kallen, Treasurer. Sidney
Sanders resigned as Executive Secretary and was replaced by Tacy Cook.
By the end of fiscal 1978, the Association had 350 m e m b e r s .




ADMINISTRATIVE REPORTS

131

BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
The responsibilities ofthe Bureau of Alcohol, Tobacco and Firearms (ATF)
include: Reducing the criminal misuse of firearms and the misuse or unsafe
storage of explosives; assisting other Federal, State, and local law enforcement
agencies in reducing crime and violence in which firearms and explosives are
used by helping enforce the firearms and explosives laws of the United States;
collecting all revenue due under the Federal alcohol and tobacco tax statutes,
and to achieve, to the maximum extent possible, voluntary compliance with
those laws; eliminating the illicit manufacture and sale of nontaxpaid alcoholic
beverages; and quashing commercial bribery, consumer deception, and other
improper trade practices in the alcoholic beverage industry through administration and enforcement of the Federal Alcohol Administration Act.
Originally, ATF, as a unit ofthe Internal Revenue Service, was responsible
mainly for the reduction of the manufacture and sale of illicit alcohol.
Criminal violence in the 1920's and 1930's prompted Congress to enact the
National Firearms Act of 1934. ATF enforces and administers the law, which
imposed a tax on, and required registration of, automatic and other gangstertype weapons. In 1942, Congress passed the Federal Firearms Act to regulate
interstate commerce in firearms.
Similarly, an upsurge in violence in the 1960's led to broader law
enforcement responsibilities for ATF. Increased firearms crimes, spurred by
assassinations of political and other leaders, prompted passage of the Gun
Control Act of 1968. It encompassed existing Federal firearms laws and added
new provisions, to be enforced by ATF. In 1970, enactment of title XI ofthe
Organized Crime Control Act assigned explosives regulation and enforcement
jurisdiction to ATF.
Treasury Order No. 221, June 6, 1972, separated ATF from the IRS. ATF
then became a separate Treasury bureau.
In fiscal 1978, the Bureau expanded its explosives enforcement program to
investigate arson-related crimes by setting up arson task forces in major
metropolitan areas in the United States.
A national pilot test was conducted in fiscal 1978 on the feasibility of adding
microscopic, coded chemical particles, called taggants, to explosives during
manufacture. When tagged dynamites, gels, and slurries are used in bombings,
they can be identified at the bomb sites.
Agents and inspectors continued to identify sources and channels through
which firearms moved from areas with minimal or no firearms laws to areas
with strict laws. This effort began in Boston, Chicago, and Washington, D . C ,
when ATF started its concentrated urban enforcement (CUE) program in
fiscal 1976.
Intensified enforcement efforts to suppress interstate and international
movement of firearms and explosives intended for criminal use revealed new
weapons sources. Complex criminal investigations were developed successfully and forwarded for prosecution.
During fiscal 1978, ATF collected more than $8 billion in alcohol and
tobacco excise taxes—the third largest source of U.S. revenue, following
personal and corporate income taxes. ATF continued its efforts to investigate
trade practice violations and to conduct compliance inspections of firearms
and explosives industry members.
Several steps were taken by ATF to modernize laws, regulations, and rulings.



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1978 REPORT OF THE SECRETARY OF THE TREASURY

including steps to deregulate while assuring the collection of tax revenue.
Consumer protection was promoted by issuing regulations to strengthen winelabeling requirements, and by proposing regulations to require labels on
alcoholic beverages to warn pregnant women ofthe dangers of alcohol to fetal
development.
Criminal Enforcement
ATF agents investigate violations of Federal firearms, explosives, and
alcohol laws. In fiscal 1978, as reports documented a rise in arson crimes in
the United States, ATF agents developed investigative techniques for use in
arson cases. Operation CUE continued to be an effective tool for charting the
criminal misuse of firearms and explosives in metropolitan areas.
The work of ATF special agents opened 24,670 investigations, and led to
recommendations that 4,264 defendants be prosecuted. ATF agents were
responsible for the seizure of 8,898 firearms, 15,108 pounds of explosives, and
252 illicit distilleries. Undercover techniques used during investigations
resulted in the purchase of 3,924 firearms and 2,184 pounds of explosives
destined for use by the criminal element.
To enforce Federal explosives and firearms laws, the Bureau has developed
special programs to meet the needs of its field agents and other law
enforcement officers. Those programs include the stolen explosives and
recoveries (SEAR) project, interstate theft project for firearms, international
traffic in arms (ITAR), Operation CUE, arson task forces, and undercover
storefront operations.
Explosives enforcement program

Explosives incidents involving death, injury, and property loss continued to
rise in fiscal 1978. The illegal and improper use of explosives resulted in 116
deaths, 247 injuries, and more than $2 billion in property losses. Agents
investigated 3,459 explosives incidents, ofwhich 1,075 were bombings, 342
attempted bombings, 63 accidental bombings, 409 incendiary incidents, and
85 arson bombings.
ATF investigated approximately 77 percent of all reported explosives
incidents in the United States last year. Investigations by the Federal Bureau
of Investigation, the U.S. Postal Service, and State and local law enforcement
agencies account for the remaining cases.
To meet its explosives enforcement responsibility, ATF provides training for
its agents and for other Federal, State, and local law enforcement officers.
Training includes destructive device identification, explosives safety, security,
bomb threats, bomb responses, and investigative techniques.
ATF also stresses public awareness and cooperation with other law
enforcement agencies.
The stolen explosives and recoveries project and arson task forces are
principal ATF explosives enforcement tools.
Stolen explosives and recoveries.—In an effort to curb explosives thefts in the
United States, ATF developed the stolen explosives and recoveries project to
assist ATF agents and other Federal, State, and local law enforcement agencies
in detecting and recovering stolen or lost explosives.
After a public campaign advertising a toll-free explosives theft reporting
number, 800-424-9555, ATF received an increase in explosives theft reports
in 1978. Three hundred forty-eight explosives thefts involving 85,591 pounds
were reported.



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REPORTS

133

Through investigative efforts with other agencies, ATF recovered 59,662
pounds of explosives in undercover purchases, seizures, and abandonments.
The detection and apprehension of individuals who steal explosives is an
ATF priority, since many stolen explosives subsequently are used in bombings.
Arson task forces.—Incidents of arson have increased in recent years and
have placed a multibillion-dollar financial burden on business communities,
municipalities, and insurance agencies. Arson is committed to defraud
insurance companies by the destruction of insured property.
Studies show that arson incidents have increased by 1,300 percent since
1950. Arson is the cause of more than 30 percent of building fires.
Because of ATF's law enforcement responsibilities, the Bureau is in a unique
position to investigate the arson problem at the national level and to assist State
and local authorities simultaneously in their efforts to solve arson crime. ATF's
authority stems from the Gun Control Act of 1968 and the Organized Crime
Control Act of 1970, of which the Explosives Control Act is a part.
ATF began its approach to arson with an experimental task force in
Philadelphia. A task force is a combined strategy among law enforcement
agencies in a geographical area. In the Philadelphia area, cases were perfected
against a furniture store owner, an insurance adjuster, and two organized crime
figures seeking to collect insurance on an arson-for-profit fire and a slum
landlord who burned down several tenements to defraud underwriting
insurance companies; other cases are under investigation. Because of the
success of the Philadelphia task force, ATF formed 22 more task forces in
major cities across the United States in conjunction with strike force
operations.
Explosives and arson investigations.—ATF agents investigated major explosives and arson cases in fiscal 1978. Many bombings occurred in Kentucky and
West Virginia during the 1978 United Mine Workers strike.
Typical ATF bombing investigations are illustrated by a train derailment in
West Virginia during the coal-mine strike, in which ATF agents there
conducted an investigation which resulted in the arrest of suspects 3 days later;
or by the case in which six defendants were prosecuted in 1978 for blowing
up a Letcher County, Ky., bridge which spanned the Kentucky River (the
explosion caused $200,000 damage to the bridge); and by yet another in which
two suspects were arrested for possession of 100 pipe bombs during an
investigation in Bellaire, Mich. They were planning to sell the bombs to
undercover agents for criminal use.
Firearms enforcement program

In fiscal 1978, ATF agents conducted 20,825 firearms investigations, which
led to recommendations that 3,652 defendants be prosecuted. During the
investigations, agents seized 8,988 firearms and, while working undercover,
purchased another 3,924. The seizures and purchases prevented the weapons
from being used in crimes.
Because of ATF's ability to trace firearms used in crimes. Bureau analysts
can identify sources and channels through which firearms illegally move from
areas with minimal or no firearms laws to areas with strict laws. Local law
enforcement officers are sometimes limited in their ability to curb the illegal
flow because of jurisdictional restrictions or inadequate laws.
ATF has recently focused its efforts toward stemming the illegal interstate
and intrastate flow of arms. The approach is to identify and apprehend
principal illegal firearms traffickers and their sources, distributors, and
coconspirators.




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1978 REPORT OF THE SECRETARY OF THE TREASURY

While local law enforcement officers investigate firearms cases within their
jurisdiction, ATF agents will now concentrate on Federal violations such as
complex investigations of major, organized firearms suppliers.
Two major programs in ATF firearms enforcement are the interstate theft
project and the international traffic in arms project.
Interstate theft project.—The Bureau started a firearms theft reporting
program in 1973 to help prevent firearms stolen from interstate shipments
from becoming a source of weapons for criminals. The trucking industry and
other interstate shippers voluntarily have reported thefts or losses of firearms
to ATF yearly.
In fiscal 1978, ATF received 884 reports involving approximately 2,430
stolen or lost firearms. Seventy-four percent ofthe total, or 660 reports, were
forwarded by United Parcel Service offices. ATF agents, working with local
investigators, developed 6 criminal cases involving 14 defendants and
recovered 332 stolen firearms.
International traffic in arms.—The ITAR project provides information
which assists agents in curbing illegal international trafficking of firearms.
Smuggling firearms, ammunition, and explosives out ofthe United States into
other countries is an area of concern for Customs and ATF agents.
During fiscal 1978, ATF and Customs agents in several instances were
successful in curbing the illegal flow of firearms and ammunition into other
countries by perfecting cases against the U.S. suppliers of these weapons.
Four suspects were arrested after ATF undercover agents met with the
individuals, who wanted to purchase 600 semiautomatic pistols for illegal
shipment to Rhodesia. A criminal lawyer and onetime Rhodesian mercenary
from Dayton, Ohio, was a major suspect. The individuals were arrested and
later convicted on Gun Control Act violations.
Firearms destined for a South American country were seized in Miami after
a 3-day surveillance. Agents arrested three suspects. The weapons were
concealed in air conditioning units.
Agents learned that an individual in another Miami case had purchased 175
firearms in a brief period. After the suspect was observed purchasing more
firearms, agents arrested the individual and an associate. One hundred
firearms, valued at $36,000 and destined for Colombia, were seized.
In Texas, ATF agents worked with U.S. Customs Service and Texas
Department of Public Safety officers in a joint undercover operation to curb
illegal firearms trafficking into Mexico. As a result, eight defendants were
arrested as principal suppliers to Mexico. Federal search warrants at 5
locations in the Rio Grande Valley resulted in seizures of 43 firearms and a
quantity of ammunition.
Firearms investigations.—ATF agents investigated major firearms cases in
fiscal 1978 involving organized crime, illegal interstate transportation, and
illegal possession.
An individual was arrested in Tampa, Fla., for illegal manufacture of
silencers and assassination kits, which were briefcases mounted with silencerequipped handguns, and were designed to fire at close range. The suspect was
arrested after undercover agents purchased three silencers from him. Three
assassination kits were seized later.
ATF agents in Chicago, 111., and Mississippi worked together to uncover a
Mississippi-to-Chicago gunrunning operation. A Chicago resident with associates in Mississippi illegally acquired about 300 firearms through a cooperating licensed dealer in Mississippi. The weapons were being sold to individuals




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135

in high-crime areas in Chicago. Agents developed a successful conspiracy case
involving the suspects.
In Philadelphia, ATF agents worked with local police to investigate
members of a group called MOVE„ Agents investigated one member of the
group for Gun Control Act violations. Enforcement efforts culminated in the
seizure of 10 firearms, 50 destructive devices, and a quantity of chemicals;
which could be used to manufacture explosives.
Alcohol enforcement program

ATF investigations into illicit liquor violations continued to diminish in fiscal
1978 as local law enforcement officials conducted more investigations. ATF
has encouraged local enforcement against illegal liquor production while the
Bureau restricts its involvement to large-scale illicit liquor violations and
concentrates its efforts in explosives and firearms investigations.
ATF illicit liquor investigations resulted in seizures of 252 moonshine stills,
146,619 gallons of mash, and 5,686 gallons of illicit whisky. Agents developed
160 criminal cases for prosecution.
Legal manufacturers of alcoholic beverages also were the object of ATF
enforcement scrutiny. Ten investigations ended in recommendations for
prosecution.
Operation Concentrated Urban Enforcement

ATF began Operation CUE in 1976 at Boston, Chicago, and Washington,
D . C , in response to a congressional mandate to expand Federal enforcement
against firearms crime.
The Bureau concentrated enforcement resources in the three metropolitan
areas to: Develop cases against individuals using firearms and explosives in
criminal activities; reduce or eliminate illegal sources of street-type firearms
and explosives; trace firearms seized in the metropolitan areas to determine
type and sources of firearms used in crimes and to chart the flow of these
firearms into the cities; and expand its firearms dealer inspection program to
ensure compliance with Federal laws and regulations.
Operation CUE continued in the three cities during fiscal 1978. ATF agents
began 2,928 investigations and recommended 816 defendants forprosecution.
A total of 1,308 firearms and 684 pounds of explosives were seized during
these ATF investigations. Undercover agents purchased 816 firearms and 228
pounds of explosives.
The Bureau traced 12,156 firearms to support CUE investigative efforts in
identifying and cutting off illegal sources of firearms used in crime. ATF
concentrated on tracing firearms used in major violent crimes such as murder,
robbery, assault, and narcotics violations.
Tracing results continue to show that handguns under 3 years of age are
being used less frequently in Boston, Chicago, and Washington, D . C , than
they were before ATF began CUE investigations into legal and illegal sources
of firearms.
Rates of violent firearm crimes in the CUE cities also have dechned
markedly since CUE began. The reduction is measured by statistics of robbery
and aggravated assault with a firearm.
CUE investigations.—Agents investigated major firearms cases in the three
CUE cities.
A series of thefts from licensed firearms dealers in northern Virginia
prompted a CUE investigation which uncovered an organized theft ring in
Delaware, Maryland, and Virginia. The suspects were a principal illegal source




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1978 REPORT OF THE SECRETARY OF THE TREASURY

of firearms in Washington, and were involved in other activities, including
burglary and contract killings. The investigations ended in the arrest of 12
individuals and the seizure of 64 stolen firearms. One stolen firearm was the
murder weapon in a local contract killing. ATF agents referred information
during the investigation to other law enforcement agencies, which was used
to pursue violations outside ATF jurisdiction.
In Chicago, information obtained in an explosives investigation helped solve
two bombings in the city, and provided leads to other bombing and arson
investigations in the area. ATF agents investigated a source believed to be
supplying components for dynamite bombs in the Chicago area.
Through undercover work and surveillance, ATF agents purchased five
dynamite bombs from the principal suspect in Chicago, and followed him to
Tennessee, where he falsified records for a large quantity of explosives and
related materials. When the suspect returned to Chicago, agents arrested him
with two associates, and seized explosives and materials sufficient to
manufacture more than 200 dynamite bombs.
In another CUE case, ATF agents investigated an exclusive yacht club in the
Boston area. The club was visited frequently by known organized crime
figures, and was identified as a source of illegal firearms. Agents infiltrated the
club, purchased machineguns and handguns equipped with silencers, and
developed leads about other illegal firearms sources in the Boston-Springfield
area.
The investigation led to the purchase and seizure of 22 firearms and the
arrest of 21 suspects, including 5 prominent members of Boston organized
crime. With search warrants, agents recovered stolen paintings, art objects,
and china worth $250,000, and seized narcotics and explosives materials.
Undercover storefront operations

Storefront operations, popularly known as "stings," were developed by the
law enforcement community to recover stolen merchandise and apprehend
individuals who steal for profit. Those who steal often try to resell the
merchandise through fences.
The antifencing operations set up by law enforcement agencies generally are
funded by the Law Enforcement Assistance Administration (Justice). In
addition to the arrest of suspects and recovery ofmerchandise, the undercover
operations also provide many leads which result in solving other crimes ranging
from larceny to homicide.
ATF participated in 27 undercover storefront operations in fiscal 1978 in
major metropolitan cities throughout the United States. The Bureau's
objective was to assist local law enforcement agencies and to develop leads
which would help cut off the illegal sources of firearms into those cities. The
27 storefront operations ended in the recovery of more than $10 million in
stolen property, and netted some 1,700 suspects.
Regulatory Enforcement
The Office of Regulatory Enforcement regulates the alcohol, tobacco,
firearms, and explosives industries to ensure fair trade practices, consumer
protection, compliance with Federal law, and the collection of Federal excise
taxes.
During fiscal 1978, the Bureau intensified efforts to investigate trade
practice violations in the alcoholic beverage industry and to conduct
compliance inspections of firearms and explosives industry members. ATF




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137

also issued regulations involving wine labeling, offered proposals for an
alcoholic beverage label warning of the effects of alcohol on fetal development, and began studies on powdered alcohol and on alcohol used as a fuel
or fuel additive.
Regulatory compliance program

To ensure the accurate determination and full collection of more than $5.4
billion in alcohol excise taxes, ATF inspectors conducted 6,934 revenue
protection inspections at distilleries, breweries, and wineries, 3,877 alcohol
application inspections, and 1,549 consumer protection inspections. In fiscal
1978, Regulatory Enforcement issued 1,857 original alcohol permits,
amended 1,373, and terminated 8. More than 41,600 tax refund claims for
permittees were processed. The Bureau audited semimonthly tax returns of
approximately 261 distilleries, 106 breweries, and 772 wineries. Also, by
utilizing a more flexible approach to supervise distilled spirits plants operations, the Bureau was able to reduce the number of inspectors providing joint
custody at these plants.
The Bureau regulates and controls 335 tobacco permittees. To ensure the
accurate determination and collection of more than $2.2 billion in Federal
excise taxes. Regulatory Enforcement processed 837 claims for tax refunds,
conducted 882 revenue protection audits, and inspected 122 tobacco
applications.
Infiscai 1978, ATF issued 144,161 firearmslicenses, of which 139,338 were
renewals and 29,963 were new applications. Regulatory Enforcement inspected 8,361 new firearms license applicants to explain Federal laws and
regulations. Approximately 1,531 licenses and applications were denied,
withdrawn, or revoked. Inspectors conducted 22,130 compliance audit
inspections at the premises of firearms licensees to ensure accurate recordkeeping and regulation compliance.
ATF received and processed 8,287 explosives permit and license applications and issued 7,065 permits and licenses. Inspectors conducted 4,639
inspections to examine explosives licensees for compliance with applicable
laws and regulations. Under a memorandum of understanding with ATF, the
Mine Safety and Health Administration (Labor) assisted the Bureau by
inspecting 13,000 explosives applicants, licensees, and permittees in fiscal
1978. Special emphasis was placed upon the safe and secure storage of
explosives and the prompt reporting of losses and thefts.
Alcohol regulation enforcement

As part of its regulation of the alcoholic beverage industry, ATF develops
programs to ensure consumer protection and compliance with Federal laws.
Voluntary disclosure.—Since becoming a bureau in 1972, ATF has placed
increased emphasis on the enforcement of unfair competition and unlawful
trade practices provisions ofthe Federal Alcohol Administration Act (FAA).
Industry members are encouraged to come forward under the Bureau's
disclosure program, announced September 14, 1976. Industry members
entering the program are advised that any information received may be used
as evidence, that remedial action commensurate with the seriousness of the
violation would be initiated against them, and that information received would
be made available to other Federal and State agencies.
At the end of fiscal 1978, two industry members had paid offers in



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1978 REPORT OF THE SECRETARY OF THE TREASURY

compromise and several other members were under investigation as a result
of their disclosures.
During the investigations, ATF cooperated with the Securities and Exchange Commission, which is interested in any disclosure made by a publicly
held corporation, and with the IRS, which is interested in illegal expenditures
claimed as business expenses.
Consumer protection.—In addition to the voluntary disclosure program,
ATF conducts investigations into complaints of unfair trade practices not
voluntarily disclosed. In fiscal 1978, ATF accepted 30 offers in compromise,
which totaled $898,250. There were also 4 suspensions and 28 revocations of
basic permits. Many of these actions were the result of a task force approach
in which a team of inspectors enters a market area to resolve complaints of
unfair trade practices.
To ensure compliance with Federal law and to prevent deceptive labeling
and advertising, 74,928 applications for label approval were reviewed and
9,270 were disapproved. Of an additional 1,723 applications for special
natural wines and rectified products, 452 were disapproved, returned, or
withdrawn.
ATF and the Food and Drug Administration continued a joint study on
partial ingredient labeling of alcoholic beverages.
In fiscal 1978, the Bureau began work with three other Government
agencies on a study to determine the effects of alcoholic beverage advertising
on the perceptions and attitudes of the consumer. The other agencies are the
National Institute on Alcohol Abuse and Alcoholism, the Department of
Transportation, and the Federal Trade Commission.
Distilled spirits plant program.—ATF continued pilot operations at distilled
spirits plants to measure the effectiveness of protecting Federal revenue while
reducing or modifying Government supervision. Twenty-three distilled spirits
plants, or 9 percent ofthe total, were involved in the pilot tests in fiscal 1978.
Pilot operations offer greater flexibility for proprietors and an opportunity for
ATF inspectors to use postaudits as alternatives to onsite supervision.
Wine labeling.—After more than 2 years of proposals and alternative
proposals for new wine-labeling rules, ATF issued new regulations on August
23, 1978 to revise the wine-labeling terms for appellations of origin, estate
bottled, grape varietal designations, and viticultural areas. The new wine
regulations will go into effect January 1, 1983.
Metrication.—The Bureau began a program in fiscal 1975 and 1976 to
require the wine and distilled spirits industries to convert containers to a metric
system of standards of fill. During fiscal 1978, the Bureau extended the
standards of fill for wine to include any container larger than 3 liters if the
container was filled to a whole liter size. Previously, 3 liters had been the largest
standard of fill allowed for wine under the regulations. By January 1, 1979,
wine bottles will be in 100 ml., 187 ml., 375 ml., 750 ml., 1 liter, 1.5 liters, and
3 liters sizes.
Metric standards of fill for distilled spirits is mandatory by January 1, 1980.
The six approved metric sizes are 50 ml., 200 ml., 500 ml., 750 ml., 1 liter,
and 1.75 liters.
Advantages of metrication include aiding consumers by reducing the
number of bottle sizes for comparative shopping and by promoting international trade through adoption of common standards. Metrication permits
packaging and handling efficiencies, which result in a cost savings to industry.
Cautions on fetal alcohol syndrome.—In fiscal 1978, the Food and Drug



ADMINISTRATIVE REPORTS

139

Administration advised the Bureau that research showed possible danger of
birth defects to fetuses when pregnant women consumed quantities of alcohol.
There was evidence that it was possible for some children born of women who
consumed alcohol to have severe physical and/or mental deformities.
In response, the Bureau issued a notice of proposed rulemaking on January
16, 1978. The regulation proposed that alcoholic beverage containers bear
labels cautioning women about the risks of fetal alcohol syndrome when
alcohol is ingested during pregnancy.
With the recommendation of the Office of Science and Technology Policy,
Office of the President, ATF selected three consultants to assess the scientific
evidence and public comments. The three consultants were chosen from the
fields of medical genetics, biochemistry, and social policy. The consultants
submitted their recommendations to ATF on September 25, 1978.
Gasohol.—Interest in the production and use of alcohol as a fuel and fuel
additive increased in fiscal 1978. "Gasohol" is a term most often used to
describe alcohol fuel, and was copyrighted as "gasohol" by the Nebraska
Agricultural Products Utilization Committee to describe a mixture of 90
percent unleaded gasoline and 10 percent alcohol.
ATF took several approaches to the interest in alcohol fuels. The Bureau
approved the operation of seven experimental distilled spirits plants to test
materials and processes for producing alcohol as a fuel or fuel additive. ATF
responded to citizen inquiries concerning alcohol fuel and the qualification
requirements for producing it. Bureau officials attended interest group
meetings, testified at hearings concerning alternative energy sources, and
commented to Congress concerning proposed legislation involving alcohol
fuels.
ATF organized a task force to study statutes and regulations on the
production and distribution of alcohol to simplify requirements for qualification and operation of alcohol fuel plants.
The Bureau compiled a brochure to explain existing regulations on the
establishment and operation of distilled spirits plants and the requirements for
converting ethyl alcohol to a fuel or fuel additive.
Powdered alcohol.—In fiscal 1978, the alcoholic beverage industry developed a powdered alcohol product which, when added to water, becomes
beverage cocktails. The alcohol in the dry mixes is encapsulated within a
material soluble in water. Changes in the alcohoHc beverage industry. Federal
law, and regulations could occur if industry members apply to market
powdered alcohol.
Liquor bottle strip stamps.—The Bureau examined the feasibility of
procuring strip stamps from commercial sources. With departmental assistance, and in conjunction with the Government Printing Office and the Bureau
of Engraving and Printing, ATF developed stamp security specifications which
could be included in a commercial contract. After soliciting stamp production
and price estimates from the printing industry, ATF projected $1.2 million
yearly savings from a commercial contract.
Industry education.—ATF conducted two seminars for alcohoHc beverage
control State administrators to explain Bureau policy on trade practice issues
and to hear the problems of State administrators. The seminars were sponsored
jointly by ATF and the National Alcoholic Beverage Control Association, Inc.
Firearms regulation program

As part of its policy to work with firearms Hcensees to ensure compliance
with Federal law, ATF furnished licensees with "Your 1978 Guide to Firearms
Regulations," which lists Federal firearms laws and regulations and excerpts



140

1978 REPORT OF THE SECRETARY OF THE TREASURY

from State laws and local ordinances related to firearms and ammunition. ATF
also prepared and distributed to licensees a pamphlet, "Federal Firearms
Licensee Information," which is a general guide to Federal requirements.
Proposed firearms regulations.—The Bureau issued a notice of proposed
rulemaking on March 2 1 , 1978, to update several firearms regulations and to
propose three major changes. The changes included a requirement that each
firearm receive a unique serial number when manufactured or imported into
the United States, that all thefts and losses of firearms by licensees be reported
to ATF within 24 hours, and that licensees report quarterly the manufacture
and disposition of all firearms.
More than 340,000 comments were received from the public during a
comment period extended to June 30, 1978. ATF submitted a summary report
of the comments for departmental consideration at the end of fiscal 1978.
Explosives regulation program

In addition to permit, license, and premises inspection of explosives dealers,
the Bureau developed other areas to improve explosives regulation.
In fiscal 1978, the Department of Defense asked ATF to review a proposed
military directive which would require individuals or groups obtaining military
contracts to store explosives according to ATF regulations. ATF and Defense
will formalize a memorandum of understanding on the proposed military
directive in fiscal 1979. Federal explosives laws exempt from Federal
requirements any individual or group manufacturing explosives for a military
department.
Pending approval in the Department are recodifications and amendments
of the explosives materials regulations to allow ATF adoption of many
standards of safety and security now generally recognized by the explosives
industry and other regulatory agencies. The major amendments include
revision of explosives storage and recordkeeping requirements, addition of
new terms to conform to current industry terminology, and simplification of
existing regulatory language to make regulations easier to understand.
Interagency cooperation

ATF continually cooperates with other Federal and State agencies in
matters of mutual interest. The Bureau works with the Securities and Exchange
Commission and the IRS in efforts resulting from voluntary disclosure of FAA
Act violations by alcoholic beverage industry members. ATF cooperates with
the Mine Safety and Health Administration on explosives compliance
investigations at mines.
Cooperative initiatives by the Bureau with State and local agencies have
resulted in increased legal compliance across the entire range of regulated
industries. ATF, the IRS, and the Justice Department refer violations or
potential violations of law to each other and maintain access to investigative
files.
Technical and Scientific Services
The Office of Technical and Scientific Services provides technical,
scientific, and data processing services to the Bureau in its enforcement and
regulation of Federal alcohol, tobacco, and firearms laws.
Services are provided from Headquarters offices and five laboratories in
Atlanta, Cincinnati, Philadelphia, San Francisco, and Rockville, Md. The
National Laboratory Center in Rockville was opened in June 1978 to replace
the inadequate ATF laboratory in downtown Washington.



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141

Laboratories

Bureau laboratories provide technical and scientific support to both
Regulatory and Criminal Enforcement operations. The ATF National Laboratory Center and four field laboratories examine evidence without charge for
State and local law enforcement agencies. This accounts for about 15 percent
of the laboratory's workload.
Both ATF special agents and local officers have Bureau laboratory support
available for the analysis of physical evidence, using forensic sciences and
identification technology. Because of ATF advances in specialized fields such
as explosives tagging, ink tagging, voiceprints, and tape filtering techniques,
several international scientists visited ATF facilities in fiscal 1978 to train in
these fields.
ATF implemented a voiceprint identification program in 1972. In fiscal
1978, 76 cases involving 1,904 exhibits were examined. The ATF examiner is
the only court-qualified voiceprint expert in a Federal agency who holds
international certification, and is 1 of 19 in the United States.
In fiscal 1978, a National Science Foundation study concluded that
voiceprint identification is scientifically valid. The study should help voiceprint identification gain acceptability in court.
Laboratory scientists examined 7,769 exhibits in 1,205 arson and explosives
cases in fiscal 1978. The recovery of a dynamite bomb under a car in California
led to an ATF laboratory ink examination which linked the device to a member
ofthe Hell's Angels motorcycle group in San Diego. A search ofthe suspect's
house uncovered a pen used to punch holes in the dynamite device. Though
nitroglycerine was found on the tip ofthe pen, it was the pen's ink formulation
which was the significant link between the suspect, the device and some
dynamite wrappers involved in an earlier attempted bombing.
During the 1978 coal-mine strike in Kentucky and West Virginia, many
samples from bombings involving dynamite and homemade devices were sent
to the Atlanta Field Laboratory for analysis. Cooperation between agents and
laboratory scientists helped lead to convictions.
Firearms and toolmark examinations are an important part of many
investigations. Laboratory scientists examined 1,163 exhibits in 465 cases
during fiscal 1978.
Bullet fragments dispersed in the brain of a victim in Montana were analyzed
by forensic scientists to determine caliber. The scientists found the fragments
to be from a high-velocity small-caliber bullet rather than from a large-caliber
bullet, as originally suspected. The new information identified a different rifle,
and pointed to a second suspect, who, as a result, pleaded guilty.
Forensic scientists examined 8,122 exhibits in 1,211 cases requiring
fingerprint examination. The IRS requested ATF examination of some
questioned documents in a $1.5 million stock manipulation fraud case. An
ATF fingerprint expert showed that some of the questioned documents were
linked to five of nine defendants involved in the conspiracy.
Laboratory scientists also examined 7,734 exhibits in 980 gunshot residue
examinations, 802 exhibits in 59 serology analyses, 196 exhibits in 146 illicit
distilled spirits cases, and 1,637 exhibits in 156 cases involving comparative
analysis of hair, paint, metal, and chemical samples in law enforcement cases.
Scientists examined 19,028 exhibits in 1,413 cases involving questioned
documents and 1,221 exhibits in 120 cases requiring ink and paper analysis.
Photographic service was provided for 169,992 exhibits in 5,519 separate
requests.
In fiscal 1978, the National Laboratory expanded its use of the computer



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1978 REPORT OF THE SECRETARY OF THE TREASURY

data base information search and retrieval system, which is part of the
laboratory library. The data base service was used extensively by all Bureau
offices.
The headquarters Chemical Laboratory provides advisory and analytical
services to Regulatory Enforcement operations for alcohol and tobacco
products such as formula and label compliance, consumer protection, and
analyses in connection with tax classification. It is concerned also with the
accuracy of gauging instruments and the development of security devices to
protect revenue. The field laboratories also provide many of these services.
In fiscal 1978, as part of its consumer protection responsibility, the
laboratory revealed that certain flavored vodkas contained levels of the
artificial flavoring coumarin in excess of those allowed by law. Upon ATF
recommendation, the products were removed from sale.
The chemical and field laboratories examined 9,513 alcoholic beverages
samples, 1,948 nonbeverage alcohol samples, and 4,845 specially denatured
alcohol product samples. The laboratories also examined 962 exhibits in 82
investigative cases in which alcoholic beverage containers were refilled with
beverages other than that indicated on the label.
Training.—The Bureau laboratories train foreign scientists, officials from
other agencies, and forensic intern students from several universities. As part
of an expanded in-house training program, the ATF National Laboratory
developed courses in fiscal 1978 for Bureau scientists from field laboratories.
The programs were designed to develop analytical procedures, train new staff,
allow exchange of ideas, and open new areas of expertise to Bureau specialists.
Programs include specialized schools for gunshot residue, arson, ink and paper
analysis, regulatory chemistry, forensic microscopy, and firearms examination.
The Forensic Science Laboratory conducts proficiency tests to ensure
accurate and reliable results on physical evidence examination by all
laboratories. In fiscal 1978, as part of this effort, the Headquarters Forensic
Laboratory began preparation of a manual of recommended methods of
analysis. Similar testing is conducted by the Chemical Branch to ensure
reliability. These interlaboratory studies involve both industry and ATF
laboratories. From such testing and study, methodology is developed which is
accepted as official and suitable for both routine use and in resolving questions
arising among laboratories.
Automated data processing

The services provided by Automated Data Processing Services (ADP)
Division have increased nearly 50 percent in fiscal 1978. The ADP Division
issues 90 computer reports on a regular basis and is responsible for applying
data processing techniques to all appropriate Bureau needs, streamlining
existing systems, and providing efficient computer service.
A file of Federal firearms licensees and explosives permittees were added
to the computer systems in fiscal 1978 to provide monthly printouts on
microfiche. The two programs have netted significant savings in time,
computer paper, and storage space.
In fiscal 1978, the ADP staff began studying microfiche formats for two
other Bureau programs, the capital assets property system and criminal
automated reporting system. Other systems—the automated inspection
management system, the laboratory workload system, and the criminal
automated reporting system—were combined with the ATF computerized
financial management/planning system.



ADMINISTRATIVE REPORTS

143

Firearms technology

ATF firearms technicians examine, identify, classify, and test firearms for
Bureau agents as well as for other Federal, State, and local law enforcement
authorities. Technicians also examine and evaluate foreign-made handguns to
determine if they are eligible for importation into the United States.
In fiscal 1978, the Bureau opened a new vault to house its firearms reference
library of more than 4,000 weapons. Technicians also provide training in the
areas of firearms safety, handling, and identification for Treasury agents.
Additionally, the technicians prepare replies to the general public, members
ofthe firearms industry, and the Congress regarding technical matters dealing
with the Gun Control Act of 1978.
Firearms tracing.—ATF's National Firearms Tracing Center traces domestic and imported firearms to the point of first retail sale as an investigative aid
for Federal, State, and local law enforcement agencies. Firearm trace
information is also used in compiHng analytical data to study the flow of
firearms into major cities.
Since the center's inception in October 1972, more than 240,000 firearms
have been traced either to an individual or to the last retail dealer.
Approximately 5,500 trace requests are received each month, with more than
64,000 traces requested during fiscal 1978.
The National Firearms Tracing Center can trace domestic firearms as well
as firearms manufactured in 14 countries.
Imports

Under the International Security Assistance and Arms Export Control Act
of 1976 (formerly the Mutual Security Act of 1954), import permits are issued
for aU firearms, ammunition, and implements ofwar. During fiscal 1978, the
Bureau approved and issued 13,299 import permits. Of these, 11,236
pertained to firearms, 600 covered firearms and ammunition, 651 were for
ammunition only, and 872 covered other implements of war. Disapproved
applications totaled 267.
Importers of articles enumerated on the U.S. Munitions Import List are
required to register with ATF. The registry is approved and maintained by the
Bureau. Currently, there are 286 registered importers in the United States.
Pursuant to agreement with the United States, certain foreign countries are
entitled to request certification of legality of importation of articles on the U.S.
Munitions Import List (27 CFR 47.51). During fiscal 1978, ATF issued 769
international import certificates.
National Firearms Act weapons

National Firearms Act (NFA) weapons, which include short-barreled
shotguns and rifles, machineguns, silencers, and destructive devices, are
controlled by ATF. In fiscal 1978, ATF processed 14,066 applications
involving 202,695 firearms and destructive devices. This represents an
increase of 2,720 firearms registered in the National Firearms Registration and
Transfer Record during this period.
During the year, 3,275 searches of the National Firearms Registration and
Transfer Record were conducted in response to ongoing criminal investigations. This work resulted in the preparation of 2,146 certifications of
registration status for use as evidence in Federal court proceedings.
There are 808 firearms licensees registered to deal in NFA-type weapons.




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1978 REPORT OF THE SECRETARY OF THE TREASURY

Explosives technology

Technicians in the Explosives Technology Branch offer a variety of services
to ATF personnel and other Federal, State, and local law enforcement officers.
ATF is responsible for the evaluation of new explosives developed for sale
and distribution within the United States, and provides technical advice on
Federal explosives storage regulations. The Bureau provides explosives
training for State and local law enforcement officers.
During fiscal 1978, explosives specialists provided onsite investigative
technical assistance at 75 bombings and accidental explosions. Destructive
device and explosive determinations were made for 300 incidents. Ninety-nine
criminal cases were successfully prosecuted in which technical assistance was
provided during the year.
To support investigations involving destructive devices and explosives,
technicians developed methodology helpful to field agents for classifying
explosives and incendiary devices. Explosives specialists also expanded efforts
to provide technical assistance in arson-related cases.
The National Explosives Tracing Center increased service to law enforcement agencies with more than 1,500 traces in fiscal 1978. Traces have helped
provide investigative leads in bombing and explosives theft cases.
To assist in the Bureau's development of an explosives tagging program, the
Explosives Tracing Center began providing distribution information concerning tagged explosives.
The Bureau trained more than 200 ATF special agents in the handling,
transportation, and destruction of explosives to increase the Bureau's ability
to safely dispose of seized or abandoned explosives.
Research and Development
The explosives tagging program is a major ATF project to help investigators
identify explosives at a bomb scene and detect the presence of bombs before
detonation. New developments were achieved during fiscal 1978, the
program's second year of funding.
Tagging for identification

One part of the explosives tagging program is the addition of microscopic,
coded chemical particles to explosives during manufacture. To test this
technique, called tagging for identification, ATF began a national pilot test in
which 7 million pounds of dynamites, water gels, and slurries were manufactured with identification taggants and distributed to commercial channels. This
has been completely successful in all quality and safety tests and if the facility
for large-scale manufacturing was built, commercial identification tagging
could begin today.
Another crucial class of explosives to be tagged for identification are the
black and smokeless powders, used more than any other class of explosives in
bombings. Powders are more easily available than dynamites, water gels, and
slurries, though they are generally less powerful and therefore usually less
often the cause of deaths, injuries, and property damage.
However, because of special considerations in adding taggants to smokeless
and black powders, ATF began conducting tests to ensure compatibility ofthe
taggants with powders and adherence to safety requirements. The taggants also
must not degrade the powders' ballistic qualities, create a wearing effect on
a firearm, or damage a firearm's mechanism.
It is clear that the addition of identification taggants to commercial explosive



ADMINISTRATIVE REPORTS

145

materials or their boosters will better enable law enforcement authorities to
trace the explosive material from a bomb scene to its last recorded owner and,
hopefully, to its ultimate user. The chances of solving more bombing crimes
will be improved when identification tagging is introduced. In addition, many
valuable investigative hours now necessarily spent attempting to identify the
last legal owner of the explosives involved can be saved.
To demonstrate the bomb-scene effectiveness of the explosives tagging
method, ATF held a test at Fort Mac Arthur near San Pedro, Calif, in
November 1977. Congressman Glenn M. Anderson of California, government
officials, police department representatives, and the news media attended the
demonstrations. The Fort Mac Arthur test was the third major test of explosives
tagging for government officials and news media since the program began.
Tagging for detection

A second part of the explosives tagging program is the detection of bombs
before detonation. Research scientists developed a method of injecting vapors
into the plugs of electric blasting caps. The electric blasting cap was chosen
for first priority research because it is used in most explosives crimes. ATF also
discovered a way to place detection tags in microcapsules which appear to the
eye as minute grains of sand. These microcapsules can be added to the outer
surfaces of the electric blasting caps. At the end of the fiscal year, ATF was
experimenting with the addition of microcapsules to bulk explosives.
Substantial progress in developing a working capability to tag explosives so
that they may be detected before exploding has recently been made. And it
is this part of the tagging program from which the greatest direct benefits to
the public safety can be expected. With detection taggants added to explosives
materials and with detection devices placed at high target value locations, the
Government can go beyond solving bombing crimes only after the destruction
has happened and begin, through predetonation discovery, to prevent
bombings from occurring.
Inspection
The Office of Inspection is responsible for protecting Bureau integrity,
reviewing operational activities, auditing the Bureau's fiscal position, and
implementing the ATF personnel and document security program. The staff
also conducts all Bureau investigations into equal employment opportunity
complaints, tort claims, and accidents.
Office of Inspection statistics were included in the ATF computerized
automated information management system during fiscal 1978. The result is
a more accurate assessment of open and closed investigations.
Integrity investigations

The Operations Review Division began 119 new investigations into
allegations involving employee conduct in fiscal 1978. Completed investigations involving 178 employees, some of which were started in fiscal 1977,
ended in 5 resignations, 31 adverse actions, 140 clearances, and 2 referrals to
other law enforcement agencies. Fifty-six investigations still were being
conducted at the end of fiscal 1978.
Operations review

The operations of selected offices bf Criminal Enforcement, Regulatory
Enforcement, and Technical and Scientific Services were reviewed. Manage


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1978 REPORT OF THE SECRETARY OF THE TREASURY

ment uses the reviews to improve field operations when necessary. Inspectors
also supervised 45 accident investigations involving ATF personnel and
property.
Internal audits

The Internal Audit Division assists management by furnishing information,
analyses, appraisals, and practical recommendations concerning Bureau
objectives. The staff began 34 audits, continued work on 25 audits started
before fiscal 1978, and issued 36 reports. The audits appraised the financial
and program management activities ofthe Offices of Administration, Criminal
Enforcement, Regulatory Enforcement, and Technical and Scientific Services.
Security

The Security Division coordinated 810 new employee background and
security update investigations. One thousand seventy-eight investigations,
some ofwhich were started in fiscal 1977, were completed. One hundred fortythree still were being conducted at the close of fiscal 1978.
Equal employment opportunity

The Office of Inspection investigated nine equal employment opportunity
complaints in fiscal 1978.
Administration
The Administration Office provides support services for Bureau personnel
through its headquarters staff and seven regional offices. Support services
include fiscal and personnel management. Bureau communications, training,
facility improvement and maintenance, printing and distribution, forms
management, and management analysis.
Fiscal management

The Bureau's fiscal 1978 budget totaled approximately $128.6 miUion.
About 4,000 employees were employed during the year. Firearms and
explosives programs accounted for almost two-thirds of ATF expenditures,
and reflected the Bureau's priorities in investigating violent crime. Alcohol and
tobacco enforcement comprised the remainder of the budget.
To execute programs in alcohol, tobacco, firearms, and explosives enforcement and regulation, ATF spent 71.5 percent of its budget on salaries and
benefits, 9.1 percent on communications and space, 4.2 percent on travel, 3.5
percent on printing, and 11.7 percent in miscellaneous areas.
In fiscal 1978, the Administration Office implemented an automated
allocation/obligation system. Expenditure data for each ofthe Bureau's major
offices are stored in a computer, and may be compared with projected
expenditures to ensure fiscal control. Automated monthly reports allow
headquarters and field managers to monitor their budgets more easily.
Personnel management

To help improve the classification system for special agent positions, the
Administration Office began a criminal enforcement investigation analysis
system in July 1978. When agents complete an investigation, their supervisors
assign a GS grade level to the work, based on its complexity. The system is a
tool in determining the grades for special agent positions, and allows
supervisors to participate in the position classification process.



ADMINISTRATIVE

REPORTS

147

The Office of Administration requested and received permission from the
Civil Service Commission to appoint 58 criminal investigator candidates
without examination on a nontenured basis who have special skills and abilities
necessary for sensitive undercover assignments.
The Employee Relations Branch continued refining the Bureau's agreement
with the National Treasury Employees Union. The Bureau has avoided
problems in executing the agreement by keeping supervisors of bargaining-unit
employees regularly informed of interpretive decisions.
Communications

The Communications Center staff in Washington, D . C , spent 65 percent of
its daily fiscal 1978 activity in support of law enforcement efforts. Communication helped in the apprehension of 534 suspects and the recovery of 197
stolen firearms. The remaining 35 percent ofthe center's work was made up
of other communications and computer file maintenance.
Fourteen cities were added to the Bureau's Treasury enforcement communications system (TECS) network. The additions expanded TECS coverage of
ATF field offices by 27 percent, and required a redesign of transmission
facilities. The redesign incorporated faster line speeds, onsite channel
equipment, and a 4,800-word-per-minute printer to receive online reports
from the computer. Teletype terminals at Criminal Enforcement district
offices also were upgraded. The Administration Office estimated the new
terminals would meet Bureau needs for 5 to 7 years.
Training

More than three-fourths of 3,092 Bureau employees who participated in 1
or more training courses in fiscal 1978 were from Regulatory Enforcement and
Criminal Enforcement. Employees from other areas of the Bureau attended
specialized training in management, administrative, and technical subjects.
Criminal enforcement.—The ATF Law Enforcement Training Branch in
Glynco, Ga., expanded its special agent basic training course 1 week to include
instruction in hostage negotiation, stress management, radio communications,
report writing, and practical courtroom procedures. One hundred sixteen new
agents participated in the basic 7-week course during fiscal 1978.
The Bureau broadened the scope of its specialized enforcement training,
offered at Glynco, to include certified explosives-handling instruction,
advanced explosives investigation, and arson investigation. Staff from the ATF
laboratories taught classes in arson evidence analysis, gunshot residue, and
firearms and toolmark examination. About 1,271 senior agents participated in
specialized enforcement training.
The Bureau continued to provide seminars in a number of law enforcement
subjects for State and local police officers. Under a grant from the Law
Enforcement Assistance Administration, 194 officers attended ATF-sponsored organized crime investigation seminars at various sites nationwide.
Regulatory enforcement.—The basic training course was revised in fiscal
1978 and was attended by 30 new inspectors. A total of 475 senior inspectors
attended a variety of courses including audit seminars, refresher training, and
specialized instruction in the Federal Alcohol Administration Act and
National Firearms Act.
Other areas.—In fiscal 1978, 468 Bureau employees received specialized
training offered by other government agencies, universities, and private
industry. This represents a 9-percent increase over fiscal 1977.
Supervisory/management training was provided for 95 personnel in super-




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1978 REPORT OF THE SECRETARY OF THE TREASURY

visory and management positions. As part of its instructor training efforts, the
Training Division began a course design class to teach selected employees a
systems approach to training course development. In the systems approach,
selection of training techniques is determined by an analysis of the principal
tasks of the job which require training.
Printing and distribution

The Administration Office added new photocopy equipment to the
headquarters reproduction facility in March 1978. By meeting more in-house
printing needs, the new equipment wiU save about $60,000 annually in
reduction of outside printing and reproduction costs.
The Bureau also issued an ATF series of alcoholic beverage revenue strip
stamps in March 1978. These replace IRS issues the Bureau had continued to
use until the supply was exhausted. Strip stamps are affixed to bottles of
distilled spirits to show proof of Federal taxpayment.
The ATF Distribution Center, located in Arlington, Va., stocks and
distributes Bureau forms and publications. The center experienced a 6-percent
increase in workload to almost 50,000 orders during fiscal 1978. The center
shipped 58,495 packages and 101,257 envelopes at a cost of $142,275. The
distribution workload has stabilized since fiscal 1976.
Facility improvement

As part of its responsibility to manage ATF office space, the Administration
Office worked with the ATF National Laboratory in Washington, D . C , to
open new laboratory facilities in Rockville, Md. Planning by the laboratory
staff and the Administrative Programs Division began in fiscal 1976. The new
laboratory allows ATF scientists to meet increasing demands and to offer a
broader range of services to ATF field employees and to other Federal, State,
and local officials.
In fiscal 1978, ATF also moved its firearms reference collection from the
IRS building in Washington, D . C , to Bureau headquarters offices. The move
required a redesign of storage space to provide an expanded, climatically
controlled weapons vault. The facility includes a work area for testing firearms
involved in criminal investigations.
Chief CounsePs Office
Demands for services from the Chief Counsel's Office in Washington and
its seven regional offices increased once again in fiscal 1978. More than 1,000
cases were referred for legal resolution each month.
Legal assistance also was provided for Bureau testimony and legislative
programs. Attorneys helped prepare testimony for the Treasury Assistant
Secretary (Enforcement and Operations) and the ATF Director on proposed
firearms regulations and the problems of cigarette smuggling. The testimony
was presented to the House Judiciary Subcommittee on Crime. For the Senate
Human Resources Subcommittee on Alcoholism and Drug Abuse, the staff
authored testimony on the issue of alcoholic beverage labels warning pregnant
women of the dangers of alcohol.
Attorneys prepared the Bureau's legislative program, submitted draft
legislation, and authored legislative reports for congressional committees on
bills affecting the Bureau. Attorneys also appeared before the Joint Committee
on Internal Revenue Taxation concerning distilled spirits, wine, and malt
beverage tax proposals.



ADMINISTRATIVE

REPORTS

149

The Chief Counsel's Office participated in several studies involving the
President's reorganization projects on law enforcement and attorney representation. Attorneys helped clarify aspects ofthe Federal Alcohol Administration
Act by appearing before industry conferences.
Under the Federal Tort Claims Act, the Chief Counsel's Office processed
numerous claims alleging negligence of ATF employees. Claims exceeding
$100,500 were reviewed and granted in fiscal 1978. The staff also made
recommendations to the Department of Justice in the prosecution and defense
of litigation involving the Bureau.
Chief Counsel attorneys participated regularly on matters arising from
employee-employer relationships involving equal employment opportunity
and unfair labor practice complaints.
As an outgrowth of positive working relationships between U.S. attorney's
offices and the seven ATF regional counsel offices. Bureau attorneys received
requests to prepare briefs, propose pleadings, propose court orders and other
documents in litigation. At times, attorneys participated in the trial or oral
arguments of civil and criminal cases.
Regional attorneys represented the Bureau before an administrative law
judge in hearings concerning violations of the FAA Act and firearms and
explosives laws.
Public Affairs
Information services

The Public Information Office services and materials included more than
100 news releases, factsheets, brochures, articles, speeches, news conferences,
and media interviews.
News releases explained ATF missions and programs relating to firearms,
explosives, alcohol, and tobacco. Examples include a news article describing
ATF's pilot program for arson control, releases about the deadly toll in lives
and property taken by explosives, coverage of illegal firearms seizures, and
actions to curb alcohol trade violations.
Public information officers supported Bureau officials at 12 news events
which took place away from Washington. Information officers answered more
than 2,000 information requests received from throughout the United States
and other nations.
The Public Information Office published 12 issues ofthe ATF newsletter,
"All the Facts," to inform employees of Bureau events and programs. A
summary of ATF-related news articles, which appeared in newspapers and
magazines, was distributed three times weekly.
Congressional liaison

The Congressional Liaison Office coordinated replies to 700 congressional
inquiries about proposed firearms regulations. Other issues generating
congressional interest were wine labeling, ingredient labeling and possible
warning labels for alcohoHc beverages, explosives tagging, cigarette smuggling, and alcohol advertising.
Liaison officers supported the Director and other ATF managers on 16
occasions when they testified before committees of Congress. The office
responded to a total of 1,500 congressional letters in fiscal 1978, and an
average 160 telephone inquiries each month.




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1978 REPORT OF THE SECRETARY OF THE TREASURY

Convention liaison

Public Affairs officers participated at 12 conventions and meetings which
served as contact points between ATF, law enforcement and industry
representatives.
Office of Disclosure
The Disclosure Office responded to a 32-percent increase in Freedom of
Information requests and a 15-percent increase in Privacy Act requests during
fiscal 1978.
Freedom of Information Act requests numbered 566. Four hundred ten
requests were granted in full, 115 were granted in part, and 41 were denied.
Of 16 administrative appeals, 2 were granted in full, 5 were granted in part,
and 6 were denied. Two appeals still were being processed at the close ofthe
fiscal year. Fees collected for Freedom of Information Act requests were
$9,409.
Privacy Act requests numbered 466. Forty were granted in fuU, 392 were
granted in part, and 34 denied. Forty-two requests were being processed at the
fiscal year's close. Of four administrative appeals, three were granted in full
and one was denied.
The Disclosure Office answered 95 percent ofthe requests within deadlines
set by Federal regulation. Disclosure Office deadlines are 10 working days for
Freedom of Information Act requests and 30 working days for Privacy Act
requests.
The staff asked for voluntary extensions in 5 percent of the requests, which
often required review of thousands of pages. Six civil actions were filed against
ATF under the Freedom of Information Act and the Privacy Act.
To help Bureau employees better understand ATF disclosure policy, the
Disclosure Office issued a comprehensive order describing the Freedom of
Information Act and the Privacy Act. The office also changed accounting
procedures to reduce use ofthe ATF Disclosure Accounting Form and to save
the Bureau an estimated $220,000 in fiscal 1979.
The Disclosure Office staff teaches ATF disclosure practices to Bureau
agents and inspectors. Refresher training and course instruction for new agents
and inspectors were expanded.

OFFICE OF THE COMPTROLLER OF THE CURRENCY i
The Office ofthe 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.
Operations of the national banking system reflected the continued growth
• Additional information is contained in the separate Annual Report of the Comptroller of the Currency.




ADMINISTRATIVE

REPORTS

151

experienced by the U.S. economy. Total assets ofthe country's 4,655 national
banks increased by 11.7 percent between yearend 1976 and yearend 1977.
This increase is quite significant since it represents a change from the previous
trend of asset growth evidenced by the previous year's increase of 5.4 percent.
The Office was reorganized to consolidate management functions,
strengthen the administration of regional activities, and accommodate changes
in the banking industry. Of particular significance was the formal establishment ofthe Customer and Community Programs Department, which includes
the Divisions of Community Development, Consumer Programs, and Civil
Rights.
In particular, the Customer and Community Programs Department coordinates implementation of the Community Reinvestment Act, recommends
legislative proposals, helps train bank examiners in civil rights and consumer
law compliance, and acts as a liaison to bring the banks together with the
myriad governmental, institutional, public interest, and community groups
concerned with redevelopment.
International banking issues which confronted the Office ofthe Comptroller
of the Currency during the year included the rapid growth in foreign
assets/deposits/earnings, substantial lending to foreign public sector borrowers
and the applicability of the statutory legal lending limit to such credits, and
expanded international money market and foreign exchange activity. The
three Federal bank regulatory agencies have developed and implemented a
joint semiannual Consolidated Country Exposure Report that shows, by
country, the foreign claims held by U.S. banks and bank holding companies.
Information from that report permits the systematic monitoring of overseas
lending by U.S. banks. The monthly Foreign Currency Report continued to be
used by the International Operations Division to monitor the foreign exchange
trading activities of national banks.
Consumer affairs

The Consumer Affairs Division is responsible for enforcing all consumer
protection laws applicable to national banks. The Office conducts specialized
examinations of each national bank on a continuing basis to enforce
compliance with consumer laws and regulations. In addition to those
examinations, consumers' rights are protected by requiring national banks to
comply with consumer laws and by informing consumers of their rights and
available remedies.
Six more 2-week schools were conducted across the country this year to
train bank examiners in consumer laws. The schools stress examination
techniques and rely heavily on case studies to give the examiners a good
functional background in consumer laws and regulations. Particular emphasis
is placed on evaluating policies and practices to detect unlawful discrimination. Representatives from bank trade associations, consumer groups, and
Federal and State regulatory agencies also attended the schools.
Bank examinations and related activities

The Office of the Comptroller of the Currency is required by statute to
examine all national banks twice in each calendar year. However, the
ComptroUer may, at his discretion, waive one such examination in each 2-year
period, or may cause such examinations to be made more frequently, if




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1978 REPORT OF THE SECRETARY OF THE TREASURY

considered necessary. In addition, the Comptroller examines all banks located
in the District of Columbia.
For the year ended December 31, 1977, the Office examined 2,886 banks,
838 trust departments, and 96 affiliates and subsidiaries, and conducted 61
special examinations. The Office received 47 applications to establish new
banks, and processed 721 applications for de novo branches and 2 applications
to convert State banks to national banking associations.
National bank examinations are conducted to determine the condition and
performance of banks, the quality of their operations, and the capacity of
management, and to enforce compliance with Federal laws. The Office has
fully implemented new examination policies and procedures placing greater
emphasis on analysis and interpretation of financial data and less on detailed
verification. Also, considerable reliance is placed on systems for internal
control and work performed by internal and external auditors.
On December 31, 1977, the Office employed 2,082 examiners, 1,939
commercial and 143 trust examiners, or more than 70 percent of the total
Office employment. A select group of examiners specially trained in computer
operations and technology examine bank computer operations. This area of
the examination function also has been updated to coincide with the new
concepts employed by the Office in regular bank examination.
Administration

The Administration Department was reorganized during the year to
consolidate the administrative and support functions of the Office. The
Department now contains four divisions: Human Resources, Operations
Planning, Finance and Administration, and Systems and Data Processing.
Human Resources.—The Human Resources Division is responsible for
administration and implementation ofthe Office's personnel programs. Those
programs are managed by functional program groups. Under the group
concept, the Office has been successful in establishing ongoing programs in
staff analysis, national recruitment, compensation, employee relations,
personnel development, and staffing and operations.
To improve communications, regional directors of human resources were
designated in each ofthe 14 regional offices. The Human Resources Division
also instituted a computer-based information system which provides management with projections, personnel trends, and skill searches.
Operations Planning.—The Operations Planning Division manages the
process by which each functional and operational unit prepares resultsoriented operating plans for the oncoming budget year and the 3 years
thereafter. Policy objectives set and updated by the Comptroller and operating
goals established by functional unit heads in support of those objectives form
the base for results-oriented, measurable performance targets and action
programs. Unit plans are consolidated into an overall Office plan, and the
performance of each unit is periodically monitored to determine the extent to
which planned results are achieved.
Finance and Administration.—The Finance and Administration Division is
responsible for accounting and promoting optimum utilization ofthe Office of
the Comptroller of the Currency's financial and physical resources. Its
functions are accounting, budgeting, contracting, office space leasing and
management, and publications control and distribution. During this year, the
Division refined the financial information system which was developed in 1976
and became fully operational in 1977. The Division also further refined the
budget monitoring system which identifies potential cost-saving areas.




ADMINISTRATIVE REPORTS

153

Systems and Data Processing.—The Systems and Data Processing Division
supports operations through the development and operation of computerbased systems and the provision of management analysis services. The Division
processes statistical and accounting data and designs, programs, and maintains
aH data processing systems, including data base management systems. During
the year, the Division directed its efforts to the continued improvement and
operation ofthe Office's information systems in three major areas: Regulation
(national bank surveillance, enforcement and compliance, public disclosure);
administration (human resources. Treasury payroll/personnel information);
and finance (planning, budgeting, accounting).
Bank organization and structure

The Bank Organization and Structure Division is responsible for supervising
the processing of bank structure applications. The first full year of operation
under the Comptroller's revised corporate activity procedures, developed to
improve efficiency and to expand the role of the regional offices in the
decision-making process, particularly in the area of branching, has been
completed. Initial review of the year's activities indicates that the new
procedures have resulted in more expeditious processing of applications, more
consistent application of policy, and improved analyses. It is expected that
further improvement in those areas will continue.
Law Department

The Law Department, under the direction ofthe Chief Counsel, advises the
Comptroller and his staff on legal matters arising in the administration of laws
and regulations governing the national banking system. Attorneys in the Law
Department deal directly with the management of national banks, with bank
attorneys and accountants, and with the staffs of other Government agencies
and congressional committees. The Department also participates in litigation
involving the Office and exercises certain direct responsibility in enforcement
and securities matters.
On January 1, 1977, 56 lawsuits were pending involving the Office. During
the year, 27 new cases were filed and 28 cases were closed. As of December
31, 1977,55 cases were pending. Fifty-five enforcement administrative actions
were taken during the same period, and the Securities Disclosure Division
reviewed the activities of the 340 national banks which have a class of
securities registered pursuant to the Securities Exchange Act of 1934. The
Legal Advisory Services Division processed 2,140 formal written inquiries
during the year.
Operations review

The Operations Review Department, which functions as an internal
inspector general in addition to its auditing duties, is responsible for reviewing,
evaluating, and monitoring the quality and effectiveness of Office supervisory
and regulatory functions.
During the year. Operations Review activity was widened to include: (1)
Development and use of programs designed to assess the effectiveness and
efficiency of functions other than examinations; (2) performance of investigations of a special, nonrecurring nature; and (3) implementation of review
procedures for solicitation of comments from national banks. Plans were
developed to reemphasize the peer review concept through the conduct of
onsite reviews to assess examiner compliance with revised examination
procedures.



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1978 REPORT OF THE SECRETARY OF THE TREASURY

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 ofthe Secretary.
An integrated ADP planning and budgeting system for Treasury was
developed by the Office of Computer Science in conjunction with the Office
of Budget and Program Analysis. The system, built around Treasury's financial
resource management system, zero-base budgeting, and the ADP financial
plan, reduces the workload on the bureaus since only one submission is
required for both offices rather than separate ones. It requires reporting major
initiatives in the spring, planned acquisitions of all equipment in the summer,
and a complete plan with supporting narrative in the fall.
The Office developed and implemented a departmental computer facility
review program. One review has already been conducted in the Office ofthe
Secretary, and the second is scheduled in the U.S. Customs Service in late
1978.
Guidelines were issued to aid data processing managers in meeting their
Privacy Act responsibilities. One of the bureaus is planning to utilize the
guidelines as the nucleus for a major privacy/security program.
ADP acquisition guidelines were developed to assist managers in obtaining
the approval needed to acquire ADP computer equipment, software, and
services. These guidelines, supplementing Treasury Directive 10-08 and
Treasury's ADP Procurement Handbook, describe how to prepare feasibility
studies, develop system requirements, and prepare the actual solicitation
documents.
The Office aided in obtaining approval from the General Services Administration and the House Committee on Governmental Operations in acquiring
larger computer systems for the Secret Service, the Detroit Data Center, and
the Office of the Secretary.
The Office of Computer Science matched the processing needs of the
Bureau of Government Financial Operations with excess ADP equipment from
the Internal Revenue Service. This resulted in the transfer of an IBM 360/65
computer to BGFO, enabling it to release some obsolete equipment and
postpone the acquisition of a new computer system for at least a year.
A Treasury directive, "Management of Data Processing in the Office ofthe
Secretary" (TD 10-08.A), was issued in January 1978. It states the policy and
delineates responsibilities for the management of ADP in the Office of the
Secretary, and specifically provides for the establishment of an ADP planning
process to be accomplished by the Applications Planning and Development
Division for the Office of the Secretary. The first plan was completed this year
along with the procedures for collecting and updating planning information.
Significant analytical and statistical support was provided to the Office of
Equal Opportunity Program for the enforcement of the bank compliance
program. Generalized software was utilized to provide statistical analysis on
the affected class of employees of several large U.S. banks.
Workload processed by the Office of the Secretary Computer Center
increased 23 percent in fiscal 1978. To provide the support necessary for such
growth, the service capability of the Center was extended by increasing its



ADMINISTRATIVE

REPORTS

155

usable floor space, introducing larger capacity and more reliable equipment,
and installing updated and new state-of-the-art equipment. Included in this
delegation was approval to install an interim computer so that growing
workload requirements can be met without any degradation in service to the
user community.

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 immediate supervision ofthe General Counsel.
Pursuant to the provisions of 31 CFR, part 10 (Treasury Department 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.
During fiscal 1978, amendments to the provisions of Circular 230 goveming
solicitation and advertising were proposed. The proposed amendments, which
appeared in 43 Fed. Reg. 115 dated June 14, 1978, were promulgated in light
of recent judicial decisions in the area of advertising and seek to permit the
expansion of advertising by practitioners before the IRS consistent with those
decisions. In addition, an amendment to Circular 230 was proposed permitting
individuals enrolled to perform actuarial services under the Employee
Retirement Income Security Act of 1974 (ERISA) to engage in limited
practice before the IRS. Notice appeared in 43 Fed. Reg. 150 dated August
3, 1978. Publication ofthe final rule on both proposals was pending at the end
of the fiscal year.
On October 1, 1977, there were 166 derogatory information cases pending
in the Office under active review and evaluation, 6 of which were awaiting
presentation to or decision by an administrative law judge. During the fiscal
year, 124 cases were added to the case inventory ofthe Office. Disciplinary
actions were taken in 77 cases by the Office or by order of an administrative
law judge. Those actions were comprised of 6 orders of disbarment, 36
suspensions (either by order of an administrative law judge or consent ofthe
practitioner), 1 resignation, and 34 reprimands. The actions affected 32
attorneys, 34 certified public accountants, and 11 enrolled agents. Thirty-six
cases were removed from the Office case inventory during fiscal 1978 after
review and evaluation showed that the allegations of misconduct did not state
sufficient grounds to maintain disciplinary proceedings under 31 CFR, part 10.
As of September 30, 1978, there were 177 derogatory information cases under
consideration in the Office.
During the fiscal year, 10 attorneys, certified public accountants, and
enrolled agents under suspension or disbarment from practice before the IRS
petitioned the Director of Practice for reinstatement of their eligibility to
resume practice. Favorable disposition was made on eight of those petitions
and reinstatement was granted. Two petitions remained pending at the year's
end. In addition, the Director of Practice granted the petition pending from




156

1978 REPORT OF THE SECRETARY OF THE TREASURY

the previous year. There were 19 appeals from denials by the Commissioner
of Internal Revenue of applications for enrollment to practice before the IRS.
These appeals remained pending as of September 30, 1978. There were three
decisions on appeal pending from the previous fiscal year. Two decisions
reversed the denial; one appeal was pending at the year's end.
Eighteen administrative proceedings for disbarment or suspension were
initiated against practitioners before the IRS during fiscal 1978. Together with
the 6 cases remaining on the administrative law judge docket on October 1,
1977, 24 cases were before the administrative law judge during the year. Five
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 disbarment were rendered
in six of the cases. One complaint was dismissed. On September 30, 1978, 12
cases were pending on the docket awaiting presentation to or decision by an
administrative law judge.
During fiscal 1978, one case was appealed to the Secretary from the initial
decision by an administrative law judge. The appeal remained pending at
yearend. In addition, one decision was issued by the Secretary on an appeal
from the initial decision of an administrative law judge pending October 1,
1977. In that appeal, the administrative law judge's order of suspension was
changed to an order of disbarment.
The Director of Practice is Executive Director of the Joint Board for the
Enrollment of Actuaries. The Joint Board, formed pursuant to section 3041
of ERISA, 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.

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 the
production of U.S. currency, postage stamps, public debt securities, and
misceUaneous 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. Therefore, savings cited in
this report mitigate the impact on those costs of generally rising labor, material,
and other operating expenses.
In fiscal 1978, in accordance with Public Law 95-81, July 31, 1977, the
Bureau received an appropriation of $5 million in order to ease serious cash
flow problems. This amount increased the appropriated portion of the
revolving fund to a total of $14,250,000. It was only the third time that such
an appropriated increase was necessary since the inception of the fund. By




ADMINISTRATIVE REPORTS

157

means of this fund, the Bureau financed a program involving a total projected
cost for sales and services of $130 million in fiscal 1978, as compared with
$118,592,000 in fiscal 1977.
Of long-range significance is the fact that Public Law 95-81 also authorized
the Bureau to include in the charge for its products an amount to be
accumulated for the acquisition of capital equipment and to provide future
working capital. This authority should preclude the need to request future
additional appropriations for those purposes.
During fiscal 1978, the Bureau included in the price of its products
surcharges totaling about $5,700,000—$4,730,000 earmarked for equipment
and $970,000 recorded as additional working capital.
Currency program

Deliveries ofcurrency in fiscal 1978 totaled 3.3 bUlion notes, as compared
with 2.9 billion notes delivered in fiscal 1977. During fiscal 1978, the Bureau
negotiated a buy-out-for-cash agreement for four high-speed intaglio printing
presses that had been acquired on a lease-purchase contract. These presses are
fully operational, and the agreement to buy out resulted in a savings of
$500,000. In addition, negotiations were initiated with other vendors supplying currency production equipment to the Bureau on a lease-purchase basis
in an effort to produce similar savings by cash purchases of contracts.
During this period, the 1977 currency series bearing the signatures of
Secretary Blumenthal and United States Treasurer Morton was introduced.
A revision in currency examining methods and procedures involving
conversion to a single 16-subject examination, initiated during fiscal 1977, has
been fully implemented. It is anticipated that $ 1,500,000 in annual savings wUl
be achieved.
Improvement of currency overprinting and processing methods, and
refinement of production standards have contributed to a 14-percent increase
in productivity, and will result in annual savings exceeding $500,000.
Based on an economic evaluation of altemative processes, acquisition ofthe
initial pieces of equipment that will constitute the next generation of security
printing and processing equipment is proceeding. Initial procurement work is
underway for the acquisition of two 50-subject currency presses which,
because they represent a 56-percent increase in productivity over present 32subject equipment, are expected to save in excess of $1,500,000 annually.
Ancillary numbering and processing equipment will also be acquired. Benefits
in space and energy utilization will be realized as well.
A system has been developed to economically salvage perfect currency
notes located on partially defective currency sheets. Because implementation
of this proposal will reduce the volume of notes requiring destruction, it is
expected to generate significant ecological benefits through reduced disposal
of security waste material.
Replacement of chipboard trays and plastic bags, used for in-process
transport and to secure currency, by a two-piece polypropylene box is
expected to yield annual savings of $50,000, as well as improve product
security.
Typical printing errors with graphic illustrations of defective currency are
described in an improved quality standard and updated training manual. The
inspection accuracy program was improved to more definitively determine the
effectiveness of currency examination. This program provides management
quicker information for the retraining of examiners or other performance
improvement.



158

1978 REPORT OF THE SECRETARY OF THE TREASURY

A recently developed method of mechanical currency sheet examining has
been expanded to include sheet counting and consolidating into a single
operation. Plans for trimming and splitting 32-subject currency sheets are
currently being formulated and will significantly increase productivity while
providing greater note margin consistency. Expected savings cannot be
determined without further experimentation.
An identification system compatible with automatic currency handling
equipment at Federal Reserve banks (including fitness determination and
detection of counterfeit notes) has been jointly selected by the Bureau and the
Federal Reserve System. A contract is being negotiated by the Federal Reserve
System for delivery of the equipment to the Bureau during 1980.
Postage stamp program

Deliveries of U.S. postage stamps were 28.5 biUion units in fiscal 1978, as
compared with 27.4 billion units in fiscal 1977. The program included
production of a new series of 15-cent stamps issued in conjunction with the
decision to change the prime postal rate. A supply of nondenominated stamps,
some previously produced by the Bureau in anticipation of this situation, were
also issued at the time of the rate change in order to meet the surge in demand
for stamps at that time.
To determine public acceptance of a small-size postage stamp, the U.S.
Postal Service authorized the issuance of the 13-cent Indian Head Penny
Special Issue Stamp as an experiment. These stamps were printed in 600subject sheet size (as opposed to normal 400-subject), and public reaction was
favorable. Based on the results of the initial experimental issue, the Postal
Service proposes to authorize additional issues of smaller size stamps in the
future.
Installation and acceptance trials of six postage stamp booklet-forming
machines were concluded during fiscal 1978. AU machines are fully operational and are utilized for producing vending and over-the-counter postage stamp
booklets.
An automatic labeling system, designed to affix pressure sensitive labels to
coils of lOO's, was installed in the CoU Manufacturing Section. The system,
consisting of 9 machines, attains the same productivity as 12 machines
previously required. A significant reduction in energy demands was realized
since the new system requires no heating application. Additionally, methods
improvements and the efficiency ofthe system will result in estimated savings
of $270,000.
The pile delivery on the L perforating machine was converted from a manual
operation to a fully automated system, and is used to perforate approximately
25 percent of the annual postage stamp sheet production requirements. This
system was developed from an in-house design and has reduced manpower
requirement by 50 percent, resulting in annual savings of about $16,000.
An innovative package for postage stamp booklets produced on the newly
acquired booklet-forming machines was accepted and approved by the Postal
Service. The design is a foldout tray containing popup divider panels made
from inexpensive chipboard. This development enhances the integrity of the
package and allows for improved security and accountabUity of its contents
upon receipt at field post offices. InstaUation of a Bureau-designed system for
the automatic subpackaging and overwrapping of postage stamp booklets is
planned for fiscal 1979.
Improved handling methods have been developed for reducing the personnel complement required to load postage stamp coils into trays for packaging.




ADMINISTRATIVE

REPORTS

159

Annual savings of approximately $310,000 are anticipated untU the next
generation of coil manufacturing and packaging equipment is operational.
Installation of a hydraulic roll splitter has significantly improved the
operation for destruction of mutilated postage stamp rolls. Annual recurring
savings of approximately $15,000 are anticipated.
Improvement was made to the inspection accuracy program used to
determine the effectiveness of postage stamp sheet examination. It provides
more rapid management information for the retraining of examiners or other
performance improvement.
Quality standards have been developed for the newly installed postage stamp
booklet-forming equipment. These are designed to provide ready reference to
operating personnel for maintaining required quality standards.
Research was conducted into the feasibility of reducing to one, from two or
three, the number of sets of engraved cylinders currently required to produce
a postage stamp issue by the gravure process. Studies revealed that a systematic
method of dechroming and rechroming the original set of cylinders increased
the lifespan so that the majority of commemorative issues required only one
set of cylinders. Based on the average number of such issues printed by the
Bureau by the gravure process, preliminary cost estimates indicate a recurring
annual savings of approximately $120,000.
Platemaking

A study was initiated in 1976 to determine the feasibUity of reducing the 24hour time cycle required for platemaking operations. After considerable
modification of the work processes and the platemaking equipment, the
operation was accomplished on a two-shift basis in January 1977. The
technology developed included automation of several aspects of electroplating
such as automatic temperature control, tank level, and ampere-hour limiting
of current flow. By January 1978, it was possible to complete the platemaking
activity on a single work shift. Annual savings of $210,000 were realized. In
addition, increased productivity and improved product quality and utilization
of personnel were achieved.
Inks

Major formula variations have been made for the black and green currency
intaglio inks in order to improve suitability and comply with environmental
requirements. Similarly, a number of postage stamp inks have been reformulated to improve quality and to address changing raw material availability and
environmental considerations.
A trial is being conducted to determine the feasibility of purchasing currency
intaglio ink bases from commercial sources. This will provide research
referencing to state-of-the-art ink-making technology, possibly reduce costs
associated with ink manufacturing, printing, and processing, and improve the
ink-manufacturing work environment by some elimination of dry pigments
handling.
Efforts to develop water wipeable intaglio stamp inks have been successful
and this expertise has been applied to a research and development program
for water wipeable intaglio currency inks. Progress to date has been
encouraging, and initial studies indicate resultant cost reduction in currency
production by such conversion.
Long-range studies are underway to determine whether alternative imaging
systems could reduce costs and provide higher quality products. These areas




160

1978 REPORT OF THE SECRETARY OF THE TREASURY

involve the use of an excitation source such as electron beam curing, to effect
immediate drying ofthe imaging materials as printed on the various substrates.
Food coupon program

The Bureau continues to exercise responsibility for administering contracts
awarded to two private banknote companies for the production of food
coupons for the Department of Agriculture. During this period, the Bureau
provided the Department of Agriculture with technical assistance and
rendered services in the areas of quality control, security, contract negotiating,
accountability procedures, and financial management. In addition, periodic
unscheduled audits have been made at the contractors' plants to verify that the
prescribed quality and security standards are maintained.
Specifications were prepared, bids solicited, and a contract awarded for the
production of a new $10 food coupon book containing six coupons (five $1
and one $5), to be issued early in the next fiscal year.
Alien identification card

On March 25,1977, production ofthe resident alien identification cards was
begun for the Immigration and Naturalization Service. The central facUity for
fabrication of the cards initially established at the Bureau was transferred to
a new location in Arlington, Tex., in July 1978.
Gasoline rationing program

In conjunction with the congressional requirement that the Department of
Energy prepare a contingency gasoline rationing program, the Bureau has
provided technical advice regarding the design of a secure rationing document,
and data regarding private and public sector capabilities to produce the
volume of documents required to meet projected program demands.
Forensic science research and development

A cooperative effort with another Government agency has led to the
development of new types of distinctive red and blue fibers used in the
manufacture of currency paper. During the next fiscal year, subsequent to the
scheduled production of the fibers, the contracting agency will continue in
cooperative research efforts to develop other fiber variations.
Bureau input is provided to contractual research being conducted by the
National Bureau of Standards for defining parameters leading to extended
currency circulation life. This can conceivably lead to the development of
alternate paper fiber compositions more technically appropriate to end-use
requirements and to raw materials cost reduction.
Forensic laboratory techniques have included research and the acquisition
of instruments to improve capability for associating evidentiary materials
relative to counterfeiting for the U.S. Secret Service.
Electronic processing programs

The systems definition for the prototype currency examining machine has
been completed. Hardware and software elements are being assembled by the
contractor and the prototype machine is scheduled for delivery during 1980.
The breadboard model and systems definition for an electronic counting
system have been completed and the laboratory model for testing purposes wUl
be ready for delivery to the Bureau in 1979.



ADMINISTRATIVE

REPORTS

161

An active development program is underway to apply the state-of-the-art
electronic technology for (a) detection of inverted sheets at press, (b)
identification and verification of numerical sequence of currency sheets, and
(c) improved systems for drying security printings.
Security program

A new security access control system, replacing the pass-badge system, with
perimeter card readers, provides for enhanced overall physical security
control, restricts personnel movement into and within sensitive areas, and will
eliminate the time-consuming system of handwritten logs for recording
personnel movement. A compatible minicomputer to provide for incorporating anti-intrusion and fire alarms in the system is under consideration.
A handbook of security measures for self-protection, and for safeguarding
property and home, was developed and the proposed manuscript has been
endorsed by the Under Secretary of the Treasury for pubUcation and
distribution to all employees of the Department.
Safety program

About 5 percent of all Bureau employees have been trained in the
techniques of cardiopulmonary resuscitation.
In the area of industrial hygiene, the Bureau has expanded its hearing
conservation program. Audiometric tests will be given to all employees to
establish base data as to their present hearing capability, with periodic testing
to ascertain possible hearing loss. The frequency of testing wUl be predicated
upon the employee's work environment. In addition, the Bureau is acoustically
treating areas where excessive noise levels cannot be reduced by engineering
design.
During fiscal 1978, lost-time cases associated with employee accidents were
reduced by 15 percent from the previous fiscal period, reducing the Bureau's
payment to the Office of Federal Workers' Compensation by $260,000.
Internal audit program

An intensive program of internal audit provides for the evaluation and
reexamination of operational and financial efficiency, economy, and internal
control adequacy, as well as audit reviews of the financial accounts and
reports, and ensures compliance with prescribed regulatory directives. During
fiscal 1978, 67 reports of audit were published. Three hundred and twentyseven recommendations for possible improvements 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.
Personnel management

Traditionally, the position of plate printer has been filled in accordance with
criteria prescribed by the Civil Service Commission and related Federal hiring
requirements. In addition to the recruitment of qualified journeymen, an
intensive 4-year apprenticeship program, including classroom and on-the-job
training, is utilized to provide the required complement of journeyman plate
printers. To augment these usual methods of selection and training, the
position of intermediate plate printer was established. This will provide a
recruiting supply of experienced press operators, and will reduce the period
of time for a candidate to achieve journeyman plate printer's status from 4
years to 1. The position has been advertised with response from applicants




162

1978 REPORT OF THE SECRETARY OF THE TREASURY

from all parts ofthe United States. Initial screening of applications wiU be made
by a panel of experts approved by the CivU Service Commission, after which
the potential candidates will be evaluated for final selection. Although the
Bureau will continue to recruit and train candidates through the 4-year
apprenticeship program, the establishment of the intermediate plate printer
position will provide management with greater flexibility in filing these craft
positions in order to meet short-term production requirements when an
adequate supply of journeymen is unavailable.
Reorganization of supervisory positions throughout the Plate Printing
Division has resulted in the abolishment of the position of plate printer
foreman and the establishment of the positions of plate printer assistant
foreman and plate printer general foreman. Under the reorganization plan, the
23 foreman positions will be replaced with 20 assistant foreman positions
charged with responsibility over operating sections, and the 3 general foremen
will be responsible for overall coordination of division operations on each of
the 3 work shifts. WhUe the salary rates ofthe former position of foreman and
the newly established position of general foreman are identical, the salary rate
for the position of assistant foreman wUl be 10 percent less than the prevailing
rate for foreman. An annual recurring savings of $150,000 will result.
Management development

As part of an effort to improve management effectiveness, the Bureau
initiated a team-buUding and action planning process within the top management staff as well as specific divisions. After a preliminary organizational
assessment that identified factors inhibiting maximum effectiveness, participants shared concerns and ideas for improvement and engaged in group
problem solving. Specific objectives were to enhance communications and to
promote cooperation in order to clarify roles, functions, and responsibilities.
Labor-management relations

The Bureau continues to foster constructive and harmonious relationships
with its employees and the 17 bargaining units which represent them. In
keeping with the spirit and intent of Executive Order 11491, as amended,
management deals with 16 AFL-CIO affiliate unions representing 25 distinct
craft groups, a noncraft unit, and a guard unit. One independent union
represents the GS clerical/technical unit. Fourteen substantive negotiated
labor-management agreements are now in force.
Training courses and seminars were held for each level of supervisory and
management personnel to further improve the Bureau's record of effectiveness
in negotiating with labor organizations and in dealing with labor relations
matters.
Awards

During fiscal 1978, 1,222 employees received special achievement awards
and 27 employees received high quality pay increases. Under the employee
suggestion phase ofthe program, 150 suggestions were received, ofwhich 57
were adopted with tangible savings of $14,500. Twenty-nine summer employees were granted awards in recognition of their superior performance.
Performance evaluation system

The Bureau's performance evaluation system and incentive awards program
are being redesigned to provide for regular dialog between supervisors and
employees on factors germane to specific job performance. The redesigned



ADMINISTRATIVE REPORTS

163

incentive awards plan relates directly to measurable individual or group
contributions to improved organizational performance, and provides a more
effective tool for recognizing such contributions.
Equal employment opportunity program

The Bureau continues to make progress in the advancement of minorities
and women. One of several significant first accomplishments included the
promotion ofa black woman to the top line management position of Assistant
Director (Operations), GS-16.
Numerical recruitment goals were established for occupations with underrepresented percentages of minorities and women. Nine ofthe 17 identified
goals had been accomplished by July 1978. The composition ofthe Bureau's
work force continued to remain close to the availability of minorities and
women in the local recruitment area, with employment constituting 72 percent
blacks and 38 percent women.
Career development

Thirty-seven employees applied for three new positions identified to be filled
through the CADE (upward mobility) program. Applicants were evaluated by
the assessment center process and supervisory ratings. Individual development
plans are being formulated for the three successful candidates, and counseling
was afforded to all applicants.
Treasury payroll/personnel information system

During fiscal 1978, the Bureau successfully transferred the computation and
processing of its payroll and personnel information to the Treasury payroll/
personnel information system located at the Bureau of the Mint facility in San
Francisco.
Service to the public

The Bureau continues to be one of the major attractions for visitors to the
Washington area. During fiscal 1978, over 500,000 visitors utUized the selfguided tour facilities of the Bureau.
During the fiscal year, exhibits of securities were provided for five scheduled
phUatelic and numismatic events.

OFFICE OF EQUAL OPPORTUNITY PROGRAM
The Office of Equal Opportunity Program assists the Secretary and the
Assistant Secretary (Administration) in the formulation, execution, and
coordination of policies relating mainly to two programs: (1) The equal
employment opportunity program for Treasury employees, and (2) compliance surveUlance of the equal employment policies and programs of those
financial institutions that are Federal depositaries or issuing and paying agents
of U.S. savings bonds and U.S. savings notes. The President has expressed his
intention to sign an Executive order in October 1978 consolidating the
contract compliance program under the Department of Labor, thus reHeving
Treasury of the responsibility for this program.



164

1978 REPORT OF THE SECRETARY OF THE TREASURY

Federal equal employment opportunity p r o g r a m

This component of the Office's program is concerned with administering
Department-level equal opportunity program efforts for all of Treasury's
employees. See the following table for a breakout of this work force by grade
groups.
Department of the Treasury full-time employment by minority group status
•
1968

1972

1974

1976r

1977

Comparison
1976-1977
No.

Total employees*

82,155 102,813 114,686 122,003 123,472

Black
Hispanic
Native American
Asian American
Other
GS 1-4:
Total

11,777
1,052
79
482
68,765

15,619 18,216 19,430 19,904
2,247
3,437
3,657
4,417
128
175
196
194
813
1,230
1,219
1,330
84,006 91,628 97,501 97,627

19,120

24,126 25,526 27,531

28,051

Black
Hispanic
Native American
Asian American
Other

4,947
255
25
80
13,813

5,904
791
45
159
17,227

6,679
1,065
84
181
17,517

6,347
1,205
49
197
19,733

6,600
1,426
47
247
19,731

19,480

27,601

33,295

31,643 32,977

2,708
264
26
141
16,341

4,290
5,569 5,914
6,112
551
1,008
988
1,135
35
50
51
54
249
445
342
385
22,476 26,223 24,348 25,291

28,893

32,321

1,144
332
21
186
27,210

GS 5-8:
Total
Black
Hispanic
Native American
Asian American
Other
GS9-12:
Total

;

Black
Hispanic
Native American
Asian American
Other
GS 13-18:
Total
Black
Hispanic
Native American
Asian American
Other

Percent

Comparison
1968-1977
No.

Percent

1,469

1.2

41,317

50.2

474
760
-2
111
126

2.4
20.7
-1.0
9.1
.1

8,127
3,365
115
848
28,862

69.0
319.8
145.5
175.9
41.9

520-

1.8

8,931

46.7

253
221
-2
50
-2

3.9
18.3
-4.0
25.3
-.01

1,653
1,171
22
167
5,918

33.4
459.2
88.0
208.7
42.8

1,334

4.2

13,497

69.2

198
147
3
43
943

3.3
14.8
5.8
12.5
3.8

3,404
871
28
244
8,950

125.7
329.9
107.6
173.0
54.7

37,960 - 1 7 6

-.4

9,067

31.3

1,587
2,050 2,693 2,920
227
519
803
881
956
75
34
44
58
59
1
222
368
391
409
18
29,959 32,315 34,113 33,616 - 4 9 7

8.4
8.5
1.7
4.6
-1.4

1,776
624
38
223
6,406

155.2
187.9
180.9
119.8
23.5

35,580 38,136

9,491

12,037

13,257

13,598

13,934

336

2.4

4,443

46.8

151
35
3
55
9,247

307
88
8
90
11,544

399
136
16
105
12,601

473
135
16
124
12,850

511
38
151
16
1 5 - 1
134
10
13,123
273

8.0
11.8
-6.2
8.0
2.1

360
116
12
79
3,876

238.4
331.4
400.0
143.6
41.9

r Revised.
* The totals include wage board persoimel. Grade comparisons are for GS series only.

Efforts are being focused on the development of a unified framework for
achieving measurable EEO program results. These include:
1. The issuance of memoranda from the Secretary, Assistant Secretary
(Administration), and bureau heads outlining top management commitment
and support for the EEO programs and structuring a system of accountability
at the highest levels in the Department.
2. The inclusion of EEO objectives in the overall zero-base budgeting
objectives for each bureau, thereby utilizing the zero-base budgeting objectives system for the integration ofthe EEO program into the total departmental



ADMINISTRATIVE REPORTS

165

management process. This provides for quarterly review at the highest
management levels to track program progress and problems.
3. Organizational relocation of the EEO function in four of Treasury's
largest bureaus, the IRS, Customs, Alcohol, Tobacco and Firearms, and Mint,
so that the EEO officer has direct access to the bureau head and other top
management officials.
The Department has made considerable progress in the expanded usage of
special hiring authorities in the cooperative education program. Also, there
has been increased use ofthe bilingual certification program for public contact
positions, particularly in the IRS, Alcohol, Tobacco and Firearms, and
Customs, to increase Hispanic employment.
A directives manual chapter outlining criteria for bureau nomination of
employees and managers for a departmental EEO award has been developed.
The award will be presented in January 1979.
Six personnel management evaluations ofthe bureaus' EEO operations have
been completed, and five are planned for the balance of calendar year 1978.
These survey efforts amplify the personal commitment of the Secretary and
provide a regular context for learning about the accomplishments of each
bureau, thus closely monitoring progress against stated goals.
Contract compliance program achievements

Minority employment in the banking industry has increased from 4.4
percent to 17.4 percent since 1966. Women, who comprise 65.6 percent of
the industry work force, have doubled their representation in the "officials and
managers" category since 1971 from 13 percent to 26 percent. Though fiscal
1978 activities have been curtailed by the need to prepare for the upcoming
move to the Department of Labor, the Office has conducted to date 102
reviews with 96 stUl in progress. Financial institutions have signed 67
conciliation agreements committing a total of $176,805 in major monetary
adjustments, including backpay for relief of affected minority and women
employees. The year's activities have produced 19,121 women and 4,887
minority hires and promotions.

FEDERAL LAW ENFORCEMENT TRAINING CENTER
The Federal Law Enforcement Training Center (FLETC) is an interagency
training facility formally established as a Treasury bureau on March 2, 1970,
and is under the supervision of the Assistant Secretary (Enforcement and
Operations).
The Department ofthe Treasury is the lead agency for operating the Center
and supervises its administrative and financial activities. Training policy,
programs, criteria, and standards are established by a Board of Directors
comprised of eight members at the Assistant Secretary level representing the
major agencies which have organizations participating in the Center. Five are
voting members—1 each from the Departments of Interior, Justice, and
Treasury; 1 from the General Services Administration; and 1 representing the
several other participating organizations with less than 500 law enforcement
officers. Three are nonvoting members—one each from the Office of
Management and Budget, the U.S. Civil Service Commission, and the U.S.
Capitol Police Board.




166

1978 REPORT OF THE SECRETARY OF THE TREASURY

The Center conducts basic and common advanced courses in criminal
investigator and police training for the participating organizations. In addition,
facilities and support services are provided so that participating organizations
may conduct advanced, inservice, refresher, and specialized (AIRS) training
for their own law enforcement personnel. Currently, 36 enforcement organizations, representing most major executive departments, independent agencies, and the legislative branch, participate in FLETC programs. In fiscal 1978,
the Public Safety Service and Land Between the Lakes Patrol ofthe Tennessee
Valley Authority, and the Amtrak Northeast Corridor Police Department
began participating in the Center's programs. The Center also furnishes
training on a space-available, reimbursable basis to personnel from other
Federal, State, and local agencies.
The consolidation of Federal law enforcement training at the Center has
resolved many ofthe difficulties previously encountered in the search for highquality, cost-effective, standardized training. The continuing growth of the
Center and plans for additional consolidation have thrust the Center into a
position of national leadership in law enforcement training. The Center is
meeting the responsibilities inherent in this leadership position, as it provides
the programs and facilities to ineet the changing law enforcement training
needs of today, and prepares to meet the demands of the future.
Training and support facilities

In May 1975, the Congress authorized the expenditure of $30 million for the
adaptation of the former Glynco Naval Air Station as the facility for the
FLETC In September 1975, the Center relocated from the Washington, D . C ,
area to the former naval air station, located on the southeast coast of Georgia
near the city of Brunswick. Many of the existing Navy facilities at the 1,500acre site were renovated or modified to accommodate various training and
support activities such as administrative offices, classrooms, instructor offices,
dormitories, dining hall, instructional services (photolab, graphic arts, and TV
production), motor pool and garage, printshop, interim physical training and
driver training areas, indoor and outdoor practical exercise areas, and outdoor
firing ranges.
Major construction projects started during fiscal 1978 include a new 96point indoor firing range, a new classroom buUding, an expansion and
modernization of the physical training complex, an expansion of the dining
hall, and a new energy distribution system. Construction projects completed
during fiscal 1978 include conversion of former Navy family housing units to
quarters for visiting instructors, renovation of the former Navy officers club
for use as a student center and registration area, renovation of several existing
buUdings to accommodate office space for representatives ofthe participating
organizations, conversion of a former Navy barracks to a classroom building,
and two new student dormitory buildings. In addition, 31 two-story townhouse
buildings were transferred to Treasury from the General Services Administration, and are in use as student housing. Construction of a new driver training
course will begin during fiscal 1979, with all master plan construction
scheduled for completion by December 1979.
Training programs

Criminal investigator training.—During fiscal 1978, 19 basic 7-week
criminal investigator classes were conducted and 824 students graduated. In
addition, the Criminal Investigator Training Division (CITD) staff continued
to provide instructional support as needed to the agencies conducting AIRS
training at the Center.



ADMINISTRATIVE

REPORTS

167

Several texts and practical exercises used in the CITD program were revised
to keep pace with changes and new developments in the criminal investigator
field. A new felony car stop course with practical exercises and a new
questioned documents course were developed and implemented. The CITD
staff coordinated the planning and preparation of a white collar crime seminar
for investigators. All training divisions at the Center, as well as participating
organizations, contributed manpower and resources to the development ofthe
curriculum for this seminar. It is expected to be offered for the first time during
early fiscal 1979.
Police training.—During fiscal 1978, the Police Training Division (PTD)
conducted 55 classes and graduated 1,797 students—a 34-percent increase in
the number of classes and a 46-percent increase in students graduated over the
previous fiscal year.
PTD staff members headed a task force to design and develop a training
program to specifically meet the basic training needs of law enforcement
agencies engaged in land management and recreation. The development of this
program was completed during fiscal 1978. The first course will be conducted
by PTD during early fiscal 1979.
In addition, the PTD staff continued to review and revise existing programs
with the objective of acquiring additional equipment and materials to increase
the realism of practical exercises.
Special training.—The special training programs in driving, firearms, and
physical activities support the basic training divisions and the AIRS programs.
During fiscal 1978, the number of students participating in Special Training
Division (STD) programs increased substantially over fiscal 1977.
The staff of each of the branches of STD continued to revise and update
lesson plans and course outlines to incorporate the most recent teaching
techniques and law enforcement procedures. The Physical Training Branch
instituted changes in the standard first-aid course to conform to the American
Red Cross procedural changes regarding airway obstructions and the saving
of choking victims. The Driver Training Branch designed and began using a
new and improved evasive maneuvering course to test the driving skill and
dexterity of students. The Firearms Training Branch restructured the instinctive and decision reaction courses to allow more students to participate at one
time, began the experimental development of three-dimensional targets to add
additional realism to the training, and began planning for a firearms instructor
course to be offered as a Center-conducted AIRS program.
Advanced, inservice, refresher, and specialized training.—During fiscal 1978,
AIRS training accounted for 27 percent of the man-weeks of training
conducted at the Center. During the year, 4,100 students graduated from the
various AIRS training programs, representing a 15-percent increase over fiscal
1977. A significant portion ofthe Center's services, facilities, and personnel
was devoted to supporting these programs conducted by the participating
organizations. The greater percentage of the AIRS programs was conducted
by the Bureau of Alcohol, Tobacco and Firearms, National Park Service,
Internal Revenue Service, U.S. Marshals Service, Federal Protective Service,
and the U.S. Fish and Wildlife Service.
Training support

A word processing system has been developed and implemented to
automate the preparation of student records, examinations, and certificates.
The design ofa computerized student registration system was initiated during
fiscal 1978, and wiU result in more timely service to students and a more
efficient method of collecting student data.
A student athletic and recreation program was funded and initiated for the



168

1978 REPORT OF THE SECRETARY OF THE TREASURY

first time during fiscal 1978. It is designed to provide activities for students
during nontraining hours. In addition to providing an outlet for student
energies and contributing to their physical development, this program
complements the instructional programs by creating a more complete living
and learning environment.
Audiovisual support for the training activities was improved substantially
during fiscal 1978 by the installation of audiovisual projection booths and
improved remote controls in classrooms. In addition, several films used in the
judgment pistol shooting portion of firearms training have been converted to
video tape, resulting in a 50-percent reduction in the time required for training.
Several video tapes used as training aids were produced by the Center staff for
the first time. The volume of other audiovisual, graphic, and photographic
support activities provided during the year increased substantially to keep pace
with the increase in the number of students trained.
The Office of Research and Evaluation was created and staffed during fiscal
1978. This Office conducts research, program planning, program and
curriculum analysis and evaluation, long-range planning, and faculty development courses of instruction. The Office has added significantly to the Center's
capability to insure that training programs are of the highest quality and
adequately meet the training needs of the participating organizations.
Administration

The impact of an increasing number of students made necessary the
development of a supplement to the original environmental assessment of
fiscal 1976. This supplement was prepared and approved in fiscal 1978.
An audit ofthe Center's financial activities for fiscal 1977 was conducted
by auditors ofthe Bureau of Alcohol, Tobacco and Firearms. The audit found
that financial operations were being carried out in a satisfactory manner.
The Center's outdated telephone system, originally installed by the Navy in
1942, was replaced by a new Dimension PBX system. The new system not only
effects a 3 3-percent reduction in switchboard operator requirements, but also
provides improved service. Data for the Treasury payroll/personnel information system can now be transmitted via telephone line.
A comprehensive occupational safety and health action plan for the Center
was developed and implemented during fiscal 1978.
The Center's equal employment opportunity program received increased
emphasis during fiscal 1978. A complete analysis ofthe work force resulted
in a validation and revision of hiring and promotion goals.
Graduate and undergraduate student intern-programs were developed and
coordinated with regional colleges and universities, with the first interns being
assigned to the Center during fiscal 1978.
Management improvement

The Center continued the trend of reducing the training cost per student
during fiscal 1978. This fact is especially significant considering the simultaneous enhancements which occurred in training programs, support activities,
and facilities. This cost reduction is due to economies achieved through the
consolidation of programs and facilities, increased productivity by staff, and
the Center's ability to obtain funding for student travel and en route per diem.
A management information system was developed and implemented during
the year. This system collates and organizes data reflecting all aspects ofthe
Center's operations. It provides pertinent information necessary for management review of existing operations and improvement of the decisionmaking
process.



ADMINISTRATIVE REPORTS

169

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 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 services involved in the management of the Government's cash
resources; under specified provisions of law is responsible for investing various
Government trust funds; oversees 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

During fiscal 1978, the Division of Disbursement operated 11 disbursing
centers servicing over 1,400 Federal administrative offices throughout the
United States and in the Philippines. The Division also rendered disbursing
services for embassies located in Central America, South America, and the Far
East. In addition to its disbursement activities, the Division prepared and
distributed Federal tax deposit forms for the Internal Revenue Service.
Management improvements and significant achievements.—The Division of
Disbursement has been phasing in the presort program since November 1976.
To obtain a 2-cents-per-item postage discount, checks are released to the
Postal Service in ZIP code sequence permitting direct shipment to the delivery
points. The Division is presorting each month an average of 35 million social
security, supplemental security income, veterans compensation and pension,
and railroad retirement checks, as well as approximately 45 million tax refund
checks during the peak period of March through June. Since the inception of
the program, there has been a postage discount of $4,979,390 with a net
savings of $4,460,009 after operating costs. During fiscal 1979, the Division
will begin presorting veterans education and civil service annuity checks,
thereby adding approximately 1,360,000 to the monthly volume of presorted
payments and increasing the net savings to a total of $8 mUlion.
The conversion of income tax refund nonreceipt claims from a manual
operation to a magnetic tape transmission system was an important accomplishment. Stop payment requests for the social security, supplemental
security income, and income tax refund programs processed under the tape
claims system totaled 578,828, or approximately 38 percent ofthe total stop
payments requested during the year. Veterans Administration, Civil Service
Commission, and Railroad Retirement Board claims are scheduled for
conversion to the system in fiscal 1979. The Division also began to research
payment-issue information by computer for approximately 80 percent of the
social security claims. As a result, manual microfilm operations have been



170

1978 REPORT OF THE SECRETARY OF THE TREASURY

significantly reduced, and the Division is able to accomplish initial identification of the specific payment involved in less than 24 hours.
In fiscal 1978, 87,839,410 social security, raUroad retirement annuity, civU
service annuity, veterans compensation and pension, miners benefit, and
revenue sharing payments were issued using Treasury's electronic funds
transfer recurring payment system (EFT). EFT, a major element ofthe direct
deposit system, permits the rapid computer-assisted transfer of funds between
the Treasury, Federal Reserve banks, and member banks. Extension of EFT
system to Federal salary payments was begun in September 1978 for one
agency office, the National Aeronautics and Space Administration, Langley,
Va. Two more agency payroll systems have been selected to participate—the
Small Business Administration beginning February 1979, and the Veterans
Administration beginning by midsummer.
A total of 5,671,627 payments were issued in fiscal 1978 using optical
character recognition (OCR) equipment. In an OCR system, payment data
typed on voucher schedules is captured electronically by an optical scanner
and then transferred onto a magnetic tape for computer preparation of the
checks. The eventual conversion of all manual payments to OCR processing
is a primary goal of the Division of Disbursement.
Beginning in mid-fiscal 1979, all social security payments will be issued from
the disbursing center nearest the delivery point. Expected benefits from
geographic disbursement of checks include expedited delivery of social
security payments, a more equitable distribution of workload among the
disbursing offices, an increase in the number of payments eligible for the
presort program, and improved delivery of EFT payments. Under geographic
disbursement, each disbursing office will service only those Federal Reserve
banks that fall within certain geographic areas; therefore, fewer payment tapes
will need to be created.
Disbursing operations.—During fiscal 1978, a total of 687,455,206 checks,
savings bonds, adjustments and transfers, and EFT payments were issued
under Treasury's centralized disbursing system at an average cost of $0.0444.
In addition, 128,782,057 Federal tax deposit forms were prepared and mailed.
The following table is a comparison of the workload for fiscal years 1977
and 1978:
Volume
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 life insurance dividends
Other
Savings bonds
Adjustments and transfers

Operations financed by reimbursements:
Railroad Retirement Board
Bureau ofthe Public Debt (General Electric Co. bond program)
Total workload—reimbursable items
Total workload




1977

1978

379,493,103
51,957,379
77,772,027
68,005,540
2,956,546
71,593,135
7,896,031
243,986

390,317,774
52,050,282
76,410,883
69,399,321
2,278,299
73,115,661
7,966,722
249,471

659,917,747

671,788,413

13,705,160
1,684,412

13,871,202
1,795,591

15,389,572

15,666,793

675,307,319

687,455,206

ADMINISTRATIVE

REPORTS

171

Settling check claims.—An a u t o m a t e d reclamation system was implemented
in the Division of C h e c k Claims in mid-August. U n d e r this system requests for
refunds from commercial banks, which cashed fraudulently endorsed checks,
are c o m p u t e r generated and followup demands are automatically generated.
It is expected that this will significantly improve the cash flow for such items.
T h e check truncation system wherein the Federal Reserve banks microfilm
Treasury checks and provide a magnetic tape o f t h e payment data has resulted
in claims being processed m o r e quickly since the actual check does not have
to be retrieved from a storage facility.
Claims modernization project.—Substantial progress has been made in the
project initiated in D e c e m b e r 1976 to improve and modernize the processing
of claims for Treasury checks. A system developed in January 1977 to track
claims-processing time has been refined to provide a more detailed indication
of Bureau timeliness and effectiveness in taking settlement action on claims.
The tracking system has also been expanded to cover other claims-processing
functions which are now being reviewed for improvement. Negotiations are
continuing with the Social Security Administration and other agencies with
regard to improving the timeliness of claims processing under their control.
A r r a n g e m e n t s were completed in January 1978 with the Internal Revenue
Service whereby claim data on tax refund checks is submitted to disbursing
offices on magnetic t a p e rather than paper d o c u m e n t s . This system also
includes claims received through the Social Security Administration, and
negotiations are continuing for coverage of claims for checks processed by
other major program agencies. Plans call for additional automated systems
designed to further s u p p o r t claims-related operations and to improve
m a n a g e m e n t control.
Public Law 9 5 - 3 8 0 , approved September 22, 1978, authorized issuance of
substitute checks without undertakings of indemnity except as the Secretary
of the Treasury may require. Implementation of this change will serve to
protect the interests of the United States while avoiding any unnecessary
delays and paperwork in issuing substitute checks to payees whose original
checks have been lost or stolen. A comprehensive review of other statutes
relating to claims processing has b e e n initiated to identify further legislative
initiatives which could be taken to achieve more effective and efficient service
to the public.
Check claims operations.—During fiscal 1978, there were 1.5 million
requests to stop p a y m e n t of G o v e r n m e n t checks or to obtain information
about c h e c k status. This resulted in 452,314 paid-check claims acted u p o n ,
including 69,304 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
120,618 checks.
During the year, 41,818 paid-check claims resulted in settlement checks t o
payees totaling $ 12.8 million; 6,693 resulted in settlement checks to endorsers
totaling $2.1 mUlion and 42,637 claims resulted in payments to other agencies
of $10.3 million for death and nonentitlement cases. In addition, 541,088
substitute checks were authorized to replace checks that were lost, stolen,
destroyed, or not received.
Government-wide accounting

Government accounting systems.—Prototype consolidated financial statements covering fiscal 1976 and the transition quarter were released early in
fiscal 1978. Publication of the statements is the result of an experimental
undertaking aimed at extending accrual accounting concepts to governmental
accounting. This undertaking is intended to contribute to the improvement of



172

1978 REPORT OF THE SECRETARY OF THE TREASURY

accounting at all levels of government and to the development of accounting
standards for public financial reporting by government entities. The interagency Advisory Committee on Consolidated Financial Statements, consisting
of top-level representatives from various Government agencies and headed by
the Comptroller General, continues to work on developing practical solutions
and implementation procedures for some of the major problem areas such as
valuation of assets, retirement system liabilities, allowance for losses on
accounts and loans receivable, accrual of taxes, and inflation accounting. The
results of the work of the task groups for the problem areas will be reflected
in the fiscal 1977 and future reports.
A number of systems improvements were made to standardize and thus
reduce the amounts of paperwork required for transactions flowing through
the Treasury daily transcript and transit accounts. Changes have been
completed to eliminate transactions involving transit accounts for the Bureau
ofthe Public Debt's bond adjustments and for charges of food stamp coupons
and postal money orders. Under the new system these items are charged
directly to the appropriate agency location codes rather than transit accounts,
resulting in a reduction of over 25,000 documents per year. A simUar
procedure was developed for erroneously paid checks. This procedure alone
produced a reduction from 14,000 to 300 documents per year. Previously, the
reclamation refund tickets were treated as deposit tickets on the daily
transcript. A system change was made so that the amounts on the tickets are
totaled and deposited on one standard deposit ticket each day. The reclamation refund ticket forms are forwarded directly to the Division of Check Claims
by the Federal Reserve banks to support the confirmed copy of the deposit
ticket. This change reduced the processing of forms on the daily transcript
from 144,000 to 7,200 documents per year.
On January 1, 1978, a new procedure was implemented for agency transfers
of withholdings and contributions for health benefits, group life insurance, and
civil service retirement to the CivU Service Commission (CSC). Payment is
accomplished by a journal voucher prepared by the Government agency which
also reports the deposit to a CSC receipt account on its monthly statement of
transactions. The agency forwards to CSC the completed journal voucher at
the time the withholdings and contributions are collected during the month.
At monthend, CSC reconcUes the document to the amount reported to its
receipt account by the agency. This change eliminated the processing of
approximately 30,000 checks each year. The functioning of checks through
commercial banks costs the Federal Government $1.5 miUion per year in
interest. Based on information provided on the journal voucher document,
CSC invests the amounts in three trust funds. Under the check procedure the
trust funds were losing $ 1.2 million per quarter of interest on their investments
due to the timing lag of receiving and depositing checks.
The BANK ON US promotional campaign that was first implemented in the
Bureau in fiscal 1977 was expanded to a Department-wide campaign in fiscal
1978. The increase in the number of employees authorizing their salary checks
to be sent directly to financial organizations as a result of that campaign will
eliminate an additional 135,000 checks each year from the Treasury payroU
alone. With the success of the Treasury campaign, BANK ON US was
introduced Government-wide, and virtually every department or agency not
already promoting this payroll option wUl be participating in a Governmentwide BANK ON US campaign early in fiscal 1979.
Under regulations governing withholding of District of Columbia, State,
city, and county income or employment taxes by Federal agencies (31 CFR
215), the Secretary of the Treasury has entered into tax withholding
agreements with 41 States and 49 cities or counties. Public Law 95-365,



ADMINISTRATIVE REPORTS

173

September 15, 1978, extends mandatory withholding to Federal employees
who are residents of cities and counties where a withholding agreement is in
force. Formerly, mandatory withholding was required only for employees
regularly employed within the taxing jurisdiction.
A deposit-in-transit maintenance plan was drafted disclosing procedures to
achieve 100 percent Government-wide use ofthe SF 215 **Deposit Ticket" and
the SF 5515 **Debit Voucher" by February 1, 1979. Salient features ofthe plan
include the use of written correspondence, meetings, and personal contacts to
reinforce the need for compliance and a program to retire stocks of
unacceptable forms. In a related area, a study was made of various ways the
Treasury could assist agencies in revising their procedures to limit the number
of SF 215's submitted to one per day.
In an ongoing effort to assist in the reduction of Government directives, the
Bureau is codifying into the Treasury Fiscal Requirements Manual all Division
of Disbursement circulars pertinent to the interests of Government departments and agencies. In addition, the Bureau is responsible for 175 Treasury
Department circulars. A number of the Treasury circulars are being codified
in the TFRM with the remainder classified as rescinded or inactive. The Fiscal
Service Regulations were also reviewed and, as a result, an annual reporting
requirement on financial accomplishments and plans was eliminated from
Fiscal Service Regulation No. 5 ''Review and Approval of Fiscal Accounting
Systems." It was determined that simUar information is available in other
reports. These efforts further the goal of having the TFRM as the Bureau's sole
prescribing document to be followed by agencies.
The Treasury financial communications system (TFCS) has been in
operation since September 1976, and during fiscal 1978 processed a monthly
average of $2.7 billion for deposit transactions and $2.5 biUion for payment
transactions. Utilizing a computer link to the Federal Reserve Bank of New
York, this system provides access to the Federal Reserve Communications
System and its associated financial data. TFCS automates the generation of
nonrecurring payments and the receipt of Government deposits, and provides
a comprehensive accounting and audit control mechanism for streamlining
financial recordkeeping and reporting. During fiscal 1978, the deposit message
retrieval subsystem was developed to allow agencies to receive immediate
hardcopy notification of incoming messages by accessing the TFCS with a
terminal device on the day that deposits are expected. Present efforts are
devoted to developing a new subsystem of TFCS that can be utilized to
accomplish letter-of-credit transactions. The implementation of this subsystem will provide the basis for the future expansion of the TFCS and the
development of improved Government-wide financial management practices.
Assets and liabilities in the account of the U.S. Treasury.—Table 53 in the
Statistical Appendix shows the balances at the close of fiscal years 1977 and
1978 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 ofthe 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 $ 11,595.3 mUlion at the beginning ofthe fiscal
year and $11,667.7 million at the yearend.
Stocks of coinage metal stood at $282.2 mUlion at the beginning of fiscal
1978 and $261.9 miUion at yearend. Such stocks included silver, copper,
nickel, zinc, and alloys of these metals which are not yet in the form of finished
coins.



174

1978 REPORT OF THE SECRETARY OF THE TREASURY

The number of depositaries of each type and their balances on September
30, 1978, are shown in the following table:
September 30, 1978
Number of
accounts'

Depositaries
Federal Reserve banks and branches
Other depositaries reporting directly to the Treasury:
Special demand accounts
Other:
Domestic
Foreign3
;
Depositaries reporting through Federal Reserve banks:
General.....
Special (Treasury tax and loan accounts)
Total

:

Balance

37

2 $16,904,511,658

3

275,450,000

17
40

217,851
94,042,608

1,170
14,063

52,024,835
5,796,586,685

15,330

23,122,833,637

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 $257,326,624 in process of collection.
3 Principally branches of U.S. banks and of the American Express International 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 1977 and 1978:
Deposits, withdrawals, a n d balances in the U.S. Treasury account
[In millions of dollars]

Operating balance at beginning of period
Cash deposits:
Gross tax 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 grants
Unemployment insurance
Other
Total cash withdrawals
Operating balance at close of period




Fiscal
1977

Fiscal
1978

17,414

19,104

355,468
458,101
1,510
54,446

404,388
480,758

869,525

950,268

416,250

440,402

18,790
23,591
2,308
396,896

24,021
26,516
9,385
446,604

867,835

946,928

19,104

22,444

65,122

ADMINISTRATIVE

175

REPORTS

Investments.—The Secretary of the Treasury, under specific provisions of
law, is responsible for investing various Government trust funds. The
Department also furnishes investment services for other funds of Government
agencies. At the end of fiscal 1978, Government trustfunds and accounts held
public debt securities (including special securities issued for purchase by major
trustfunds as authorized by law). Government agency securities, and securities
of privately owned Government-sponsored 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 of
currency. 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.
A comparison of the amounts of paper currency of all classes, issued,
redeemed, and outstanding during fiscal years 1977 and 1978 follows:
[In thousands]
Fiscal 1977

Outstanding beginning of period
Issues during period
Redemptions during period
Outstanding end of period

Fiscal 1978

Pieces

Amount

Pieces

Amount

7,341,695
3,127,691
2,630,202
7,839,184

$86,189,614
22,714,508
14,538,870
94,365,252

7,839,184
3,823,271
2,620,030
9,042,425

$94,365,252
32,056,844
16,229,577
110,192,519

Details of the issues and redemptions for fiscal 1978 and of the amounts
outstanding at the end of the year 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 fiscal 1978, 712.7 mUlion checks were paid and
reconciled by the electronic check payment and reconcUiation system. These
include all checks issued worldwide by civiHan and military disbursing offices.
Additional improvements and further automation were incorporated into
the central accounting system as part of an ongoing project. The system
embraces all cash financial operations ofthe Government and 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 Treasury
Combined Statement of Receipts, Expenditures and Balances of the U.S.
Government.
Extensive support services were provided to the Division of Check Claims.
New reporting and data collection procedures were implemented to support
case tracking and status reporting through the check claims process.
Additional automated services were implemented to facilitate the Treasury
check truncation system.



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1978 R E P O R T O F THE SECRETARY OF THE TREASURY

Banking and cash m a n a g e m e n t

Division of Currency C/a/m^.—Arrangements for the Federal Reserve
branch bank at Baltimore to ship coin to, and receive deposits of coin from
Washington, D . C , banks were completed September 30, 1978. The Treasury,
which formerly provided these services, now performs no cash services with
commercial banks or the general public except to redeem mutilated currency.
During fiscal 1978, nearly 50,000 mutUated currency claims were received
and $8.9 miUion was paid out in settlement thereof. At the end of the year,
only 231 cases remained unprocessed. Nearly all of these are classified as
"difficult" because considerable processing time is required due to the degree
to which the currency has been burned or mutilated.
Foreign currency management.—During fiscal 1978, the Foreign Currency
Staff developed and published the foreign currency section, chapter 8000, of
the TFRM which promulgates cash management policies and objectives for aU
Government agencies. Included were procedures incorporating competitive
bidding as part ofthe process for the selection of a commercial bank to provide
the Government's required banking services overseas. As a result the
Government has been able to obtain more favorable banking services with
respect to the custody, purchase, deposit, and disbursement of foreign
currencies.
Through competitive bidding, the Govemment has entered into a 1-year
contract with a commercial bank to purchase all U.S. Government Japanese
yen requirements at a premium rate. This arrangement will result in a savings
of $680,000.
Federal depositary system.—The types of depositary services provided and
the number of depositaries for each ofthe authorized services as of September
30, 1977 and 1978, 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 Govemment officers for credit in Treasury's general accounts
Maintain cnecking accounts for Government disbursing officers and for quasi-public funds
Maintain State unemployment compensation benefit payment and clearing accounts
Operate limited banking facilities:
In the United States and its outlying areas
In foreign areas

1977

1978

14,029
859
5,387
44

14,063
741
5,395
(*)

191
215

156
(**)

* The responsibility for compensating banks for handling unemployment accounts was transferred to the
Department of Labor, effective Oct. 1, 1977.
** The management and funding of the overseas military banking facility program were transferred to the
Department of Defense, effective Oct. 1, 1977.

Paying grants through letters of credit.—At the close of fiscal 1978, 84
Government agency accounting stations were financing with letters of credit
under the Federal Reserve bank system. During the period, the Bureau
processed 145,945 withdrawal transactions aggregating $68,998 million,
compared with 99,294 transactions totaling $60,420 mUlion in fiscal 1977.
Treasury regulations governing advance financing under Federal grants and
other programs that are contained in Treasury Department Circular No. 1075
have been revised to formally establish the letter of credit RDO system. At
September 30, 1978, 61 Government agency accounting stations were
financing with letters of credit under the Treasury RDO system. During the
year. Treasury regional disbursing offices issued 75,507 checks totaling



ADMINISTRATIVE

REPORTS

177

$19,340 mUlion, in response to grantee requests, compared with 65,129
checks totaling $15,069 mUlion in fiscal 1977.
Tax and loan investment program.—Public Law 95-147, October 28, 1977,
provided the Secretary of the Treasury the authority to invest Treasury's
operating cash in (1) obligations of depositaries maintaining Treasury tax and
loan accounts and (2) obligations of the United States and of agencies ofthe
United States.
The funds maintained in Treasury tax and loan accounts will be invested with
participating depositary financial institutions, enabling the Treasury to earn a
direct return on its temporarily excess operating cash. In return for the services
provided as depositaries, financial institutions will receive a fee for each
Federal tax deposit processed. The financial institutions eligible to become
depositaries will be expanded to include savings and loan associations and
credit unions. The fiscal activities to carry out this investment program will be
performed by Federal Reserve banks.
Substantial progress was accomplished during this reporting period on the
design and implementation phases of the program. Significant mUestones
achieved were: The issuance of proposed and final rulemaking to accomplish
regulatory changes; the issuance of procedural instructions to depositary
financial institutions; the provision of procedural instructions to Federal
Reserve banks; and the design and implementation of automated systems at
Federal Reserve banks to carry out the fiscal activities required by this
program.
Net earnings from this program have been projected at between $50 mUlion
and $100 mUlion annually. The Treasury is scheduled to start the investment
program in fiscal 1979.
Processing Federal tax deposits.—During fiscal 1978, the Fiscal Service
regulation (31 CFR part 214) regarding the deposit of Federal taxes made by
a taxpayer directly at a Federal Reserve bank was changed.
The former provisions of this regulation were very liberal and permitted a
tax depositor to make a tax deposit at any Federal Reserve bank with a check
drawn on any commercial bank. The provisions governing commercial banks
acting as depositaries for Federal taxes were more restrictive and required a
commercial bank to accept as payment of a tax deposit a check drawn on and
to itself. As compared with a deposit at an authorized commercial bank, the
former provisions concerning tax deposits at Federal Reserve banks permitted,
and generally resulted in, slow availability of funds to the Treasury.
The regulation was changed to reflect the following: A Federal Reserve bank
shall, through any of its offices, accept a tax deposit directly from a taxpayer
when such tax deposit is in the form of cash or check drawn to the order of
that bank and considered to be an immediate credit item by that bank. When
a deposit of Federal taxes is not in accordance with this provision the bank will
place a stamp impression on the FTD form reflecting the name ofthe bank and
the date on which the proceeds of the accompanying payment instrument are
collected by the bank. This date will be used to determine the timeliness ofthe
Federal tax payment.
Destruction of unfit currency.—Emphasis in fiscal 1978 was in working with
the Federal Reserve banks in the development and installation of automated
high-speed currency-processing equipment, specifically as it relates to the
identification, counting, and destruction of Federal Reserve notes which are
no longer fit for circulation. During the year, nine pieces of equipment were
tested at five banks for their acceptability in disposing of unfit currency.
This equipment shreds the unfit currency into 1/8-inch strips and supplants
incineration at those banks which have only incinerators to destroy currency.




178

1978 REPORT OF THE SECRETARY OF THE TREASURY

Consequently, much of the unfit currency is now being destroyed by the
ecologically cleaner methods of pulverization at most of the banks which do
not yet have high-speed equipment and shredding at the banks which have
installed such equipment. This will increase substantially as additional banks
install high-speed equipment.
Cash management.—Chapter 8000, entitled "Cash Management," (included in part 6 of volume I ofthe Treasury Fiscal Requirements Manual) was
issued on March 31, 1978. Chapter 8000 contains the detailed fiscal
requirements which implement the provisions of Treasury Department
Circular No. 1084 issued on December 29, 1976. This Circular established the
policy governing cash management practices within the Federal Government.
Chapter 8000 prescribes the procedures to be observed by all Government
departments and agencies whose financial transactions affect the cash account
ofthe Treasury through bUlings, collections, deposits, disbursements, advance
funding operations, and cash held outside the Treasury to assure effective
management ofthe Government's cash when these organizations are developing regulations, systems, and procedures. These fiscal requirements establish
the regulations pursuant to which affected organizations are to conduct their
financial activities in order to maximize the amount of cash avaUable to, this
Department on a continuing basis for purposes of investment and to preclude
unnecessary borrowing.
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) Expansion of the direct deposit-electronic funds transfer program
through which recipients of recurring Federal payments receive credit directly
in their accounts at their financial organizations is well underway. In 1978, the
program was extended to include recipients of Federal salary payments of one
agency as a pilot program. Plans are to include other agencies with their
Federal salary payments beginning in 1979. The staff is also coordinating the
inclusion of payments made by other Federal disbursing activities, particularly
those of the Department of Defense. Approximately 88.2 million Treasury
payments were made by the EFT system during fiscal 1978.
(2) The joint developmental efforts of the Treasury and the Federal
Reserve to develop a check truncation system progressed to implementation
within the Bureau and the Federal Reserve banks with approximately 85
percent of the checks being processed under the new system. Full-scale
implementation of the system is scheduled for December 1978. Under this
system, the flow of paid Treasury checks stops at the Federal Reserve bank
level. Magnetic tapes and microfilm records are prepared for the hundreds of
millions of checks formerly shipped by the Federal Reserve banks to Treasury
for final payment and reconciliation.
Miscellaneous fiscal activities

Auditing.—During fiscal 1978 the Audit Staff issued 75 audit reports on
financial, compliance, and operational matters. The audits ranged from small
imprest funds to the accounting for multibillion-dollar Federal trust funds and
the audit of U.S. Government-owned gold. Onsite examinations were made at
several ofthe Bureau's disbursing centers 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.



ADMINISTRATIVE

REPORTS

179

Substantial improvement in operations and internal controls resulted from the
audits.
An auditor was assigned to the President's reorganization project. Office of
Management and Budget, to assist in developing accounting and budgetary
systems. An auditor also served on the audit improvement project ofthe Joint
Financial Management Improvement Program. The work of this project
involved the setting of audit policy on a Government-wide basis and
developing ways to promote more effective use of Federal, State, and local
audit resources. Another auditor served as a member of the Secretary's
Committee for the Audit of the Exchange StabUization Fund.
As a result ofthe annual Audit Staff examination ofthe financial statements
and related supporting information of surety companies, 287 of these
companies qualified for Certificates of Authority as acceptable sureties and
reinsurers on bonds running in favor of the United States (6 U.S.C. 6-13).
Certificates are renewable each July 1, and a list of approved companies
(Departmental 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 programs with those
corporations and agencies that have authority to borrow from the Treasury.
See the Statistical Appendix for tables showing the status of those Treasury
loans at September 30, 1978.
Federal Financing Bank.—During the period, loans outstanding were
increased by $12.7 bUlion, resulting in a balance at the end of fiscal 1978 of
$48.1 billion. Interest of $2.8 billion was collected from borrowers and $2.7
billion was paid on borrowings from the Secretary of the Treasury. See the
Statistical Appendix for comparative financial data for the Federal Financing
Bank.
Liquidation of Reconstruction Finance Corporation assets.—The Secretary of
the Treasury's responsibUities 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.Totalunliquidatedassetsasof September 30,1978,
had a gross book value of $1.8 million.
Liquidation of Postal Savings System.—Effective July 1, 1967, pursuant to
the act ofMarch 28, 1966 (39 U.S.C. 5225-5229), the unpaid deposits ofthe
Postal Savings System were to be transferred to the Secretary of the Treasury
for liquidation. As of June 30, 1970, a total 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 fiscal 1978 totaled $202,472.
Cumulative payments amount to $58.5 mUlion plus pro rata payments to the
States and other jurisdictions of $6 miUion. The undistributed funds balance
as of September 30, 1978, was $597,811.
Government losses in shipment.—Claims totaling $231,007 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.—The Bureau received "conscience fund"
contributions totaling $ 120,499 and other unconditional donations totaling
$805,450. Other Government agencies received conscience fund contribu-




180

1978 REPORT OF THE SECRETARY OF THE TREASURY

tions and unconditional donations amounting to $16,926 and $212,276,
respectively. Conditional gifts to further the defense effort amounted to $850.
Gifts of money and the proceeds of real or personal property donated in this
period for reducing the public debt amounted to $341,567.
Foreign indebtedness

World War I.—The Governments of Greece and Hungary made payments
during fiscal 1978 of $328,898 and $78,576, respectively. 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 principal and interest payments of $85.8 mUlion and $67.6 mUlion,
respectively, which were due on December 31, 1977, under the Financial Aid
Agreement of December 6, 1945, as amended March 6, 1957.
Indonesia, consolidation of debts.—The Government of the Republic of
Indonesia made payments in fiscal 1978 of $6,097,360 in principal and
$731,683 interest on deferred principal instaUments, in accordance with the
Indonesian Bilateral Agreement of March 16, 1971. The normal payment of
interest on principal is not due untU June 11, 1985.
Payments of claims against foreign governments

The 18th instaUment of $2 million was received from the Polish Govemment
under the Agreement of July 16, 1960, and pro rata payments on each unpaid
award were authorized.
The sixth installment of $2,796,000 was received from the Hungarian
Government under the Agreement of March 6,1973. The sixth instaUment was
greater than the minimum installment of $945,000 because 6 percent ofthe
dollar proceeds of imports into the United States from Hungary for the 12
months ending December 31, 1977, exceeded the minimum installment by
$ 1,851,000, thereby raising the annual installment from $945,000 to $2,796,000. An additional pro rata payment has been authorized to all entitled
awardholders, and payments are now being made.
Administration

Equal employment opportunity.—In an effort to reduce the heavy expenses
incurred during the EEO complaint process, the Bureau's EEO Staff initiated
a program of annual in-house refresher training for its EEO counselors. The
training is specifically aimed at improving their effectiveness during the
informal counseling process. Consequent financial savings to be achieved
cannot yet be estimated, but the Bureau has already experienced a reduction
in the number of formal discrimination complaints.
Procurement activity.—Five new or upgraded word processing systems were
installed with resulting annual savings estimated at almost $1.3 million during
the next 5 years: In a somewhat related area, following a cost-effectiveness
study, the Bureau obtained approval to purchase copier machines, with a
projected savings of $131,000 over a 5-year period. Another development
concerns efforts being exerted to widen the basis of Bureau procurement, with
a view to stimulating economic growth, and assisting small, minority-owned
business concerns.
Records control.—A comprehensive records control schedule, providing
retention and disposition standards for all Bureau records, has been approved
by the National Archives and Records Service, GSA. A reduction in retention



ADMINISTRATIVE

REPORTS

181

periods for certain records is expected to result in savings of over $100,000
in filing and storage costs.
Labor-management relations.—The National Treasury Employees Union
(NTEU) was certified the official collective bargaining representative of
headquarters employees. Four of the Bureau's subordinate field offices are
represented by other unions, and NTEU has filed a petition for a residual unit
composed of the remaining nonunion Bureau employees in the field.
Training.—Labor relations training has been established for management
and supervisors to acquaint them with management's rights and obligations
under the above-cited Bureau headquarters agreement with NTEU. A
supervisory course has also been implemented during the year; participation
for non-Bureau personnel is possible, but on a space-available basis. Additionally, an individual learning center was opened during the year, permitting
employees to participate at their own pace and convenience. Participation in
the Co-op, summer employment, and stay-in-school programs continues.
Further, the Career Development Program for Lower Level Employees
(CADE) was highly successful; the CADE skUls inventory is being automated,
providing for greater efficiency and effectiveness. Finally, the Bureau placed
one intern under the Presidential Management Intern Program.
Troubled employee program.—This program continues into its third year,
including not only alcoholism and drug abuse, but all personal problems
affecting an employee's job performance.
Part-time employment.—The Bureau has affirmed its policy of maximum
utilization of persons interested in and qualified for part-time employment, and
has designated certain positions as appropriate for such employment.
Bureau of the Public Debt
The Bureau ofthe PubHc Debt is charged with the administrative functions
arising from the Treasury's debt management activities. These functions
extend to transactions in the security issues of the United States, and of the
Government agencies for which the Treasury acts as agent. The Bureau
prepares the offering circulars and instructions relating to each offering of
public 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;
maintains book-entry accounts of eligible securities for individuals; processes
and adjudicates 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 and 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, U.S. savings notes,
retirement plan bonds, and individual retirement bonds are handled.
Management improvement

A new productivity and cost-effectiveness system, providing computergenerated monthly reports on volumes of work processed, costs, workyears
consumed, unit costs, and productivity factors, was installed. These figures are
also compared with budgeted and prior-year figures. The new report provides




182

1978 REPORT OF THE SECRETARY OF THE TREASURY

earlier and better information to Bureau m a n a g e m e n t and serves as a basis for
regular reviews of productivity and resource utilization.
Four Federal Reserve banks and three branches began reporting their daily
activity in securities transactions to the Bureau via magnetic tape. Fifteen
banks and branches are now participating in this ongoing program. Magnetic
tape reporting enables the Bureau to immediately introduce the daily public
debt activity into the processing cycle without data conversion. Thus,
processing is more timely and daily reporting is m o r e timely and complete. In
addition, 23 banks and branches are now reporting all or part of their
m o n t h e n d accountability balances via magnetic tape on a monthly basis.
T h e Treasury and agency securities accounting system can now p r o d u c e
Treasury, agency, and savings bond journals and ledgers in hard copy or on
microfilm. T h e cash accounting system can also now p r o d u c e the cash journal
on microfilm. Microfilming of these journals and ledgers has resulted in space
reductions in the filing and storing of these records.
T h e installation of systems furniture and mechanical file retrieval systems
has also resulted in space savings. T h e use of these systems and a thorough
analysis of current space configurations allows for the most efficient utilization
of office space.
T h e use of revised workflow p r o c e d u r e s and group dynamics resulted in a
reduction in processing time for r e d e e m e d and retired securities. As a result,
certified audit results and up-to-date information is being provided on a m o r e
timely basis.
T h e issues-on-tape program was expanded to include six additional issuing
agents. Approximately 64 mUlion sales of series E savings bonds were reported
on tape by 69 participating agents. A recurring annual savings of approximately $1,282,000 should be realized based on the volume of issues handled
by these agents.
T h e Bureau established an A D P m e m o r a n d a system which enables managem e n t to provide instructions related to the implementation of O M B , departmental, and Bureau policy and p r o c e d u r e s related to the effective management of A D P resources. Some of the areas covered this year were ( 1 )
development of a glossary of A D P terms so that users and data processing
personnel have a c o m m o n ground of communication; ( 2 ) statement of policy
regarding the review and disposition of excess A D P equipment; ( 3 ) installation
of a formal A D P planning system which includes the requirement that longrange plans be m a d e in conjunction with the budget process so that p r o p e r
funding can be m a d e ; and ( 4 ) establishment of a system to ensure that p r o p e r
steps are taken in the acquisition of A D P and data/telecommunications
equipment, and that inventories of Bureau equipment are effectively maintained.
T h e following organizational and functional realignments were made to
maximize work efficiency and improve personnel utilization:
1. A new Division of Investor Accounts was estabhshed to service and
maintain the ever-increasing n u m b e r of book-entry securities accounts and to
assume the responsibility of establishing and maintaining accounts for
registered securities.
2. With the transfer of the functions for establishing and maintaining
accounts for registered securities to the Division of Investor Accounts, the
n a m e of the Division of Public Debt Accounts was changed to the Division of
Public D e b t Accounting. A new Accounting Review Branch was established
to review and evaluate internal operating procedures and accounting systems.




ADMINISTRATIVE REPORTS

183

participate in Bureau-wide accounting system development projects, and test
and implement new accounting systems and procedures.
3. The Division of Securities Operations transferred its functions relating
to book-entry securities to the new Division of Investor Accounts. Also,
similar-type functions within the Division were combined where possible.
4. The Division of ADP Management reallocated its personnel due to a
tapering off of its responsibility to convert existing computer systems to a new
Univac 1110 computer. Emphasis wiU now be placed on developing new
computer systems.
Bureau operations

During the fiscal year, 169,000 individual accounts covering publicly held
registered securities other than savings bonds, savings notes, individual
retirement bonds, and retirement plan bonds were opened, and 98,000 were
closed. This increased the number of open accounts to 509,000, covering
registered securities in the principal amount of $37,449 miUion. There were
797,000 interest checks with a value of $1,545 million issued during the
period.
Redeemed and canceled securities received for audit, other than savings
bonds, savings notes, and retirement plan bonds, included 2,642,000 bearer
securities and 380,000 registered securities. Coupons totaling 7,578,000 were
received.
During the period, 45,000 registration stubs of retirement plan bonds,
33,000 registration stubs of individual retirement bonds, 2,591 retirement plan
bonds, and 634 individual retirement bonds were received for audit and
recordation.
A summary ofthe public debt operations handled by the Bureau appears on
pages 16-34 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 of the 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 164 million registration stubs or records on magnetic tape and
microfilm received, representing the issuance of series E savings bonds,
making a grand total of 4,422 million, including reissues, received through
September 30, 1978. 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 136 miUion series A-E savings bonds and savings notes redeemed and
charged to the Treasury during the period, 132 million (96.8 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
$16,710,000 and an average of 12.70 cents per bond and note.
Interest checks issued on current income-type savings bonds (series H)
during the period totaled 4,222,000 with a value of $510 mUlion. New
accounts established for series H bonds totaled 108,000 while accounts closed
totaled 124,000.




184

1978 REPORT OF THE SECRETARY OF THE TREASURY

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 60;000. In 37,000 of such cases the issuance of
duplicate bonds was authorized. In addition, 20,000 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
which implement the Department of the Treasury's freezing controls.
The Foreign Assets Control Regulations and the Cuban Assets Control
Regulations prohibit, unless licensed, all trade and financial transactions with
North Korea, 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 AprU 1975. These regulations also block
assets in the United States of the 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, 197 1,
remain prohibited.
During the fiscal year, the Foreign Assets Control and the Cuban Assets
Control Regulations were amended to authorize persons in the United States
to remit limited amounts annually to Cuba and Vietnam for the support of
close relatives and on a one-time basis to enable such relatives to emigrate. The
Cuban Assets Control Regulations were also amended by the addition of a
general license authorizing certain transactions ordinarily incident to travel to,
from, and within the United States by certain Cuban nationals holding U.S.
visas. These regulations were further amended by the issuance of an
announcement of the availability of licenses for transactions involving
participation by certain Cuban nationals in public exhibitions or performances
in the United States and by U.S. nationals when participating in simUar events
in Cuba.
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. by controlling certain goods
of foreign origin not subject to Commerce control. 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, Vietnam, and Cambodia. The prohibitions
apply not only to domestic American companies, but also to foreign firms



ADMINISTRATIVE

REPORTS

185

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, Vietnam, and Cambodia) provided shipment is made from and licensed
by a Coordinating Committee (COCOM)-member country. (COCOM is a
NATO entity.)
The Office also administers controls on assets remaining blocked under the
World War II Foreign Funds Control Regulations. Those 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, in
East Germany.
I Finally, the Office administers the Rhodesian Sanctions Regulations which
iniplement United Nations Resolutions calling upon member nations to impose
[mandatory sanctions on Southern Rhodesia. The regulations include comprethensive controls on the importation ofmerchandise of Rhodesian origin. There
jjS also a prohibition, except as licensed, on the importation of ferrochromium
produced in any country from chromium ore or concentrates of Rhodesian
Oirigin; on the importation of non-Rhodesian chromium ore, except when
imported directly or on a through bill of lading; and on the importation from
stray country of ferrochromium and of steel mill products in their basic shapes
/and forms which contain more than 3 percent chromium. A general license in
' the regulations authorizes imports of ferrochromium and of steel mUl products
' that are certified by the govemment ofthe producing country not to contain
any chromium or ferrochromium of Rhodesian origin.
Under the Foreign Assets Control Regulations and the Transaction Control
Regulations, the number of specific license applications received from
October 1, 1977, through September 30, 1978 (including applications
f reopened) was 190. During that period, 190 applications were acted upon.
Applications for licenses and requests for reconsideration under the Cuban
Assets Control Regulations totaled 484 during fiscal 1978. During this period,
* 508 applications were acted upon, including carryover cases.
During the period, 390 applications (including applications reopened) were
received under the Rhodesian Sanctions Regulations; 389 applications were
acted upon.
Nine applications (including applications reopened) were received under
the Foreign Funds Control Regulations; 10 were acted upon, including
carryover cases.
Certain broad categories of transactions are authbrized 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 the fiscal year, two criminal cases involving violations of the Foreign
Assets Control Regulations were forwarded to the Justice Department. A
payment of $2,844 for violation ofthe Cuban Assets Control Regulations, as
i a mitigated penalty in lieu of forfeiture, was received by the U.S. Customs
i Service. At the fiscal yearend merchandise was under seizure in three cases
for having been imported in violation of the regulations.
On September 8, 1978, the President made a determination that it was in
^^the national interest of the United States to continue for another year the
emergency legal authorities of section 5(b) ofthe Trading with the Enemy Act
Ibas a basis for the following: (1) The Foreign Assets Control Regulations, (2)
[the Transaction Control Regulations, (3) the Cuban Assets Control Regula, tions, and (4) the Foreign Funds Control Regulations.




186

1978 REPORT OF THE SECRETARY OF THE TREASURY

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).
Collecting The Revenue
Returns processing

IRS service centers received 136.7 million tax returns of all types in fiscal|
1978 compared with 133.5 million in 1977. Ofthe returns received in 1978,]
over 89.1 million were individual and fiduciary income tax returns a^
compared with 87.3 million in 1977.
After several years of increase up to 1977, the number of form 1040 filerjs
decreased this year whUe the ranks of form 1040A filers continued to grov
The shift from form 1040 to the shorter 1040A was due to the simpHficatiojn
of the form and its increased availability made possible by the Tax Reduction
and Simplification Act of 1977 and to the form 1040A being mailed te
taxpayers who had used the 1040 in 1977 but were eligible to file the shorter!
form. The Service received 53.2 miUion forms 1040 in 1978, 6.1 percent less •'
than the 56.5 miUion received last year. More than 34 mUlion individual 1
taxpayers, 39 percent of all individual filers, used the form 1040A, compared
with over 29 million in 1977, an increase of 17.3 percent.
The IRS checked the mathematics on 87.6 million individual returns. As a
result, 2 million taxpayers had decreases in the liabUity shown on their returns
totaling $309 million, an average of $ 152 per return, resulting in larger refunds
or smaller tax due. On 3.4 million returns, correction of taxpayers errors
increased their tax liability by $791 million—an average of $235.
Error rates for forms 1040A processed dropped dramatically from last year.
In 1977, 12 percent of aU forms 1040A processed over the same period had
mathematical errors, while in 1978 only 5.1 percent had such errors. Error
rates for the redesigned form 1040 also fell, from 9.1 to 6.5 percent in a tally
taken at the close of the annual filing period.
The decrease in math errors was mainly attributable to changes made by the
Tax Reduction and Simplification Act of 1977 and redesign ofthe forms 1040
and 1040A. The new forms eliminated the need for many taxpayers t o ,
calculate their taxes which was the cause of numerous errors in previous years.
The Service also checked the estimated tax credit claimed on individual
returns. The verification showed that taxpayers underclaimed $259 miUion in
estimated tax credits and overclaimed by $474 million.
Receipts

Gross revenue collections amounted to $399.8 billion, an increase of $41.6'
bUlion (11.6 percent) over 1977. AU major tax categories with the exception
of estate and gift taxes showed an increase. Factors contributing to this year's
collection picture were higher personal income, higher corporate profits, and
increases in the social security tax rate and base.
!
Income taxes accounted for over two-thirds of all tax receipts. Individualincome taxes amounted to $213.1 biUion, a gain of $26.3 billion (14.1 percent)'
I Additional information will be found in the separate Annual Report of the Commissioner of Internal Revenue.




ADMINISTRATIVE

REPORTS

187

over the prior year. Corporation income taxes collected were $65.4 biUion—
up $5.3 billion (8.9 percent).
Employment taxes—social security, self-employment. Federal unemployment, and raUroad retirement—totaled $97.3 bUlion, advancing $11.2 bUlion
(13 percent). This increase reflected a higher level of wage and salary
payments, increases in the amounts subject to social security and unemploy' ment taxes, and an increase in the social security rate.
Excise taxes registered the smallest advance of any major tax category, rising
$800 miUion (4.7 percent) on collections of $18.7 bUlion. Much of the^ain
was generated by excises related to autos and air transportation. A new excise
tax on coal to finance the payment of black lung benefits to miners was
effective AprU 1, 1978.
I Estate and gift tax collections registered the only decrease, falling $2 billion
I (27.5 percent). The decline was from last year's abnormaUy large gift tax
I receipts caused by the pending estate and gift tax revisions of the Tax Reform
^ Act of 1976.
Refunds

i The IRS paid refunds totaling $39.6 biUion to 69 million taxpayers whose
irficome tax withholding, estimated tax payments, or credits were shown on
^tHieir returns to have exceeded their tax liabilities. The average refund to
iridividuals was $495. This year's individual refunds included 4.3 mUlion
Checks totaling $900 mUlion for the earned income credit (EIC). In 1977, 67.9
million individual refunds totaling $36.5 billion were paid, with 4.4 mUlion
checks for $900 miUion in EIC.
Penalties and interest

The IRS under the law can levy penalties such as those for failure to pay tax
due, bad checks, delinquency, negligence, and fraud. More than 15 million
•penalties totaling $1.3 billion were assessed with 1.4 million of these
amounting to $336 million abated. Almost half of the penalties were for
individual returns.
The Service also is required to assess interest against taxpayers who fail to
meet payment requirements. More than $85 million in interest was assessed
on individual returns this year, ofwhich $4 million was abated. For business
returns, interest assessed was $759 million with abatements of $95 million.
^ Interest paid this year amounted to $108 million for individual and
employment taxes and $198 mUlion for corporations.
Presidential election campaign fund

A total of 24.9 mUHon individual income tax returns had designations for
the Presidential election campaign fund in 1978—28.9 percent ofthe returns
processed during that period. The amount designated was $39.1 mUlion. In
J 9 7 7 , there were 23.2 million individual tax returns—27.5 percent of those
processed—with designations totaling $36.5 million. The cumulative amount
credited to the fund since it was initiated in 1972 is $171.5 mUlion.
Information returns

The IRS received nearly 484 million information returns from businesses
and organizations required to report payments of wages, interest dividends,
and other payments. Over 265 mUlion of these documents were submitted on
magnetic media as a result ofthe Service's continuing program to encourage
payers that have computer capability or computers to do so.




188

1978 REPORT OF THE SECRETARY OF THE TREASURY

Ofthe information returns received, all of those filed on magnetic media that
report income paid to individuals and approximately 15 percent of those on
paper will be matched against the master file.
Combined annual wage reporting

Combined annual wage reporting (CAWR) is a new system for reporting,
employee wage data which has been developed to reduce the reporting burden
for employers.
This new system wiU satisfy the reporting requirements of both the IRS and
the Social Security Administration (SSA). CAWR became effective for all
wages paid after December 31, 1977. Under CAWR, the requirement to file
schedule A with employment tax forms 941 and 943 became obsolete and the
form W-2 was redesigned to transmit the Federal Insurance Contributions Acti
information formerly filed on schedule A. The forms W-2 are to be filed withl
the SSA which will transcribe the information and supply it to the IRS.^
By eliminating schedule A, the President's Advisory Council estimated an
annual savings to employers of $235 miUion.
Assisting The Taxpayer
Direct assistance

The Service provides taxpayers with comprehensive information about tfie
tax system and their responsibilities and rights under it. Aware that the process
of determining income, exemptions, deductions, and correct tax can be
difficult, the IRS provides direct assistance through personal contact, by
telephone and by correspondence.
During 1978, the IRS received about 93,000 written, 28 million telephone,
and 9 million walk-in inquiries. More than 63 percent of these inquiries
occurred from January 1 through AprU 29,1978—over 17 million phone calls,,
more than 6 mUlion walk-in inquiries, and over 38,000 written inquiries—
almost 24 mUlion requests for assistance. Over 196,000 ofthe responses to
telephone calls and returns prepared after IRS assistance were reviewed as part
of the quality review system, and an overall national accuracy rate of 97.5
percent was found.
Filing period walk-in taxpayer assistance was offered at about 690
permanent offices and at 200 temporary offices set up for the filing period..
These offices were located in the inner city, business districts, and suburban
and rural areas. When possible, hours of service were extended for taxpayers
unable to call or visit during normal business hours. Most taxpayers were
required to wait less than half an hour and more than half waited less than 15
minutes for assistance.
The IRS continued to provide bilingual service to taxpayers who do not
speak English. Of approximately 890 taxpayer service offices, 207 offices had
tax assistors who spoke foreign languages. Spanish assistance was provided by
487 employees, and 515 employees assisted in other foreign languages.
Bilingual taxpayer assistance also was provided through a questionnaire,
translated into Spanish, Chinese, and Vietnamese, that was issued to taxpayers
who could not communicate in English.
IRS toll-free telephone service continues to reach more taxpayers with
greater efficiency than any other method of assistance. Almost 97 percent—
17.2 million—ofthe telephone calls received during the 1978 filing period
were on the toll-free system. This represented 72 percent of total taxpayei
inquiries received during the same period.



ADMINISTRATIVE

REPORTS

189

The toll-free system makes IRS offices as close to taxpayers as their phones.
By using this system, without paying a long-distance charge, taxpayers
anywhere in the United States may call the IRS for assistance or clarification
of bills or notices received. Toll-free numbers are listed in the tax packages
and are also publicized to alert taxpayers to this service.
During this filing period, calls answered by TV phones and teletypewriter
service for the deaf increased by 4 percent. This special service has a
nationwide toll-free number, excluding Alaska and ftawaii, staffed by the
Indianapolis district. As a result, hearing-impaired taxpayers have access to
services similar to those offered other taxpayers.
This year marked the 10th year of the IRS volunteer income tax assistance
(VITA) program. Under this program, the Service attracts, recruits, and trains
volunteers to offer free tax assistance to low-income, elderly, or disadvantaged
taxpayers at convenient locations and times. Approximately 30,000 volunteer
assistors were trained by the Service as part of the VITA program—a 50percent increase over last year.
While VITA assistance increased, a decline was noted in the quality of
VITA-prepared returns. In 1979, the primary objective for VITA wiU be
[improved program quality and management.
\ The Service's taxpayer education program sponsored over 4,000 classes for
labout 200,000 individuals. Additionally, in the school programs, **Under^standing Taxes" and "Fundamentals of Tax Preparation," about 5 million tax
course books were distributed to high school and college-level students
throughout the country.
Media assistance

The Service relies heavily on the mass media to inform the public about its
operations and to explain tax laws, regulations, rulings, and procedures.
During 1978, material was sent to 16,067 radio and TV stations, daily and
weekly newspapers, magazines, and special publications. Additionally, Service
personnel participated in 6,158 interviews and answered 18,568 media
inquiries.
The IRS issued 4,901 releases to the media covering substantive technical
and procedural matters, tax forms and publications, statistics, speeches by IRS
officials on important tax topics, and organizational changes. There also were
releases to assist taxpayers in meeting due dates and properly filling out forms
and in understanding their rights and responsibUities under the tax law.
Four IRS half-hour color films presented information on the American tax
system, audit and appeal rights and responsibilities, tax aspects of running a
small business, and how to prepare a tax return. These films, two ofwhich also
were released in Spanish, appeared 514 times on TV across the Nation and
3,045 times before professional, trade, civic, educational, and other groups.
Earned income credit

The Service continued to alert the public to the eamed income credit, which
benefits low-income taxpayers. With the cooperation of other Federal
agencies such as the Departments of Health, Education, and Welfare,
Agriculture, and Labor special notices were sent to those considered eligible
for the EIC. Also, nearly one million notices were sent to taxpayers whp filed
returns without claiming the EIC who possibly qualified according to their tax
return information. As a result, nearly 452,000 additional claims for the EIC
were allowed.




190

1978 REPORT OF THE SECRETARY OF THE TREASURY

January 1 through September 30, approximately 5.6 mUlion taxpayers
claimed the EIC for a total of approximately $1.1 billion, averaging out to
nearly $203 per taxpayer. Individuals who filed returns only to claim the EIC
received almost 6 percent of these credits.
Simplifying the forms

The last-minute congressional preadjournment flurry of activity produced
the year's most important legislation for the IRS, taxes and energy. The-very
real resulting problem for the IRS was to reflect these late changes in the law,
in the forms and instructions being designed and printed for 197 8 so they could
be available for taxpayers in time.
Despite problems created by legislative changes, simplification efforts
continued. This year's efforts focused on rewriting and redesigning the
instructions for forms 1040A, 1040 and related schedules. The instructions |
now have a ninth-grade readabUity level compared with a 13-14 grade level
2 years ago. Graphic design changes were also made in an effort to improve
the instructions.
But simplification efforts were not limited to the form 1040 family. Th
instructions for Form 941, Employer's Quarterly Federal Tax Return, wen
rewritten and Circular E, Employer's Tax Guide, is being rewritten, both t
improve readability. In addition, after the Service requested comments on |a
simplifled Form 940, Employer's Annual Federal Unemployment Tax Return,
a new form 940 was developed which eases the computation of unemployment
tax for over 90 percent of its filers.
Form 5329, Return for Individual Retirement Arrangement Taxes, and
Form 5500-K, Annual Return/Report of Employee Pension Benefit Plan for
Sole Proprietorships and Partnerships, also were revised. The 1978 form 5329
will be filed only by individuals who owe one of three individual retirement
arrangement taxes on excess contributions, premature distributions, and ^
certain accumulations in IRA accounts or annuities. Form 5500-K no longer
is required for plans in which an owner-employee is the only participant in
1978 and all previous plan years, nor is it required for partnerships when the
only plan participants are partners who own more than a 10-percent interest
in either the capital or profits of the partnership.
In July the General Accounting Office issued a report entitled "Further
Simplification of Income Tax Forms and Instructions Is Needed and Possible."
The report stated that although the Service has progressed in making the forms'*
and instructions easier to read and understand, more can be done. GAO
suggested that the Service establish a high-level task force to improve the
forms. This task force, consisting ofthe Commissioner, Deputy Commissioner,
and several Assistant Commissioners, has met and is developing a plan of
operation.
Also, public hearings on the forms were held in Denver, Colo.; Des Moines,
Iowa; Columbia, S.C.; and Columbus, Ohio. Although many ofthe suggestions-*
wiU help to improve the 1978 tax forms under existing law, others require
change in the law.
Publications

AU publications were revised to cover the many changes in the law and
regulations, and continuing a policy adopted in recent years, the Service,
distributed a number of publications free of charge. During the year, 3.r
mUlion copies of Ptiblication 17, Your Federal Income Tax, were distributed,
along with 1.1 million copies of Publication 334, Tax Guide for SmaU Business,^



ADMINISTRATIVE REPORTS

191

and 830 copies of Publication 225, Farmer's Tax Guide. Additional tax
materials including tax return forms were furnished on request to over 6
million individual taxpayers, 600,000 tax practitioners, and 360,000 employers. Over 35,000 banks and Postal Service locations helped distribute more
than 250 mUlion tax forms and instructions.
Besides the three comprehensive tax guides, the Service issues over 80 small
publications concerning such matters as income tax, excise tax, exempt
organizations, pensions and annuities, and estate and gift tax. Three of the
publications were written in Spanish—publications 597S, 556S, and 584S—
explaining basic rules about preparing and filing a tax return, taxpayer rights
if a return is examined, and the taxpayer's payment responsibUities if additional
tax is due.
Resolving problems

Under the problem resolution program (PRP), the IRS attempts to resolve
taxpayers' complaints not satisfied through normal channels and to identify
systemic and procedural problems needing correction. During 1978, approximately 66,000 taxpayer problems were resolved through PRP.
Review and evaluation was continued this year with procedures rewritten
I to provide a more structured, uniform, and visible program and to expand PRP
4 o service centers. Many systems and procedural changes have resulted from
PRP, improving Service efficiency and responsiveness to the public.
A major success of the program has been the establishment of liaison with
other Government agencies to assist in the resolution of taxpayer problems
such as lost and stolen refund checks, and internal processing problems such
as incorrect social security numbers.
Making information available

To reflect the Service's attitude that responding promptly to requests for
information and documents under the disclosure laws and the Freedom of
Information and Privacy Acts is an important part of service to the public, the
Disclosure Operations Division and its field counterpart were moved from the
Compliance function to the Office of the Assistant Commissioner (Taxpayer
Service and Returns Processing). During calendar 1977, 7,913 requests were
received for documents not available in IRS Freedom of Information Reading
Rooms. Of these there were 5,438 full grants and 748 partial grants. In
addition, the National Office Reading Room responded to 18,415 requests.
Under the Privacy Act, 738 requests for access to records were received,
ofwhich 475 were granted in full and 95 were granted in part. Only 10 requests
were received to amend records.
The Service accelerated efforts to protect the confidentiality of tax returns
and return information by increasing disclosure training for employees,
beginning an annual review of safeguards of other Federal agencies that are
entitled under the law to obtain confidential tax information, and by
implementing recordkeeping and reporting requirements for the disclosure of
tax returns and return information.
The Tax Reform Act of 1976 revised the disclosure provisions in the tax law
by considerably restricting the methods by which Federal agencies may obtain
tax information for nontax purposes, and requires that those who have access
to such information maintain safeguards for its protection. Federal tax
information received by States may be disclosed only to State agencies charged
with administering State tax laws, upon request of the head of the State tax
agency. A new provision permits disclosure of tax information to Federal,




192

1978 REPORT OF THE SECRETARY OF THE TREASURY

State, and local child support enforcement agencies to collect chUd support
obligations. Among disclosures made in this year were 3,148 to the Department of Justice, 35,249 to child support enforcement agencies, and approximately 80 million to State tax agencies.
Efforts to maximize the exchange of tax information between the Service
and State tax administrators were undertaken and the responsibility given to
the Disclosure Operations Division. The exchange of confidential tax
information with the States is intended to increase tax revenues, reduce
duplicate audits, and increase taxpayer compliance. As part of this program,
the Service, through its field disclosure officers, visits each State tax agency
semiannually to determine that safeguards adequately protect the confidentiality of information provided. All Federal/State agreements on coordination
of tax administration that were in effect before enactment of the Tax Reform
Act of 1976 were amended. There are now 97 agreements in effect. ^
Helping other countries

j

In 1963 the Service, through the Tax Administration Advisory Services |
Division and in cooperation with the Agency for International Development]!
(AID), initiated a program to assist foreign governments in modernizing their I
tax administration systems, emphasizing effectiveness, efficiency, and equityJ j
IRS advisers have been assigned to 37 countries, the Caribbean Community^
and the Central American Secretariat for Economic Integration for periods of
from 2 weeks to several years. Funding is provided by AID, the recipient
countries, or international agencies.
This year long-term assistance programs were completed in El Salvador,
Uruguay, and Trinidad and Tobago and onsite projects were initiated in Egypt,
Liberia, Jordan, the Northern Mariana Islands, and the Trust Territory ofthe
Pacific Islands. New projects are pending for El Salvador, Sierra Leone, and
the Caribbean. Also, diagnostic surveys were completed in Nicaragua, Egypt,
and Jordan, and a followup assessment was made ofthe Trinidad and Tobago
project.
Since 1963 over 5,000 visitors from 127 countries have visited the Service
for orientation and study observation programs. This year 387 officials from
66 countries participated.
There was an increase in the number of representatives from European
countries—France, Italy, United Kingdom—with programs that focused on
IRS automation and organizational structure and the voluntary compliance,
self-assessment system. In addition, there were frequent exchange visits
between Canadian National Revenue and IRS officials.
A 7-week middle-management seminar in tax administration for tax officials
from six countries was presented, and a special 6-week intensive orientation
in automatic data processing, sponsored by the Organization for European
Community Development, was held for Turkish tax officials. Participants from
Harvard's international tax program and two International Monetary Fund
public finance groups visited the IRS. A group of high-level Nigerian civU
servants, sponsored by Brookings Institution, received a special presentation
by the Deputy Commissioner on the management structure of the IRS.
The Service's participation in the 26 member country Inter-American
Center of Tax Administrators (CIAT) featured a presentation by the
Commissioner, "Developing Tax Laws, Administrative Rules, and Procedures
for Resolving Taxpayers' Disputes," to the 12th general assembly in Port-ofSpain, Trinidad and Tobago, in May 1978. Assistance was provided to CIAT
for automatic data processing diagnostic studies in the Dominican Republic j




ADMINISTRATIVE REPORTS

193

and Honduras and for systems analyst guidance in Guatemala. The Director,
Tax Administration Advisory Services Division, finished his term as a member
of CIAT's Executive CouncU, and the Assistant Commissioner (Data Services)
was a member of the ADP Advisory Committee.
The Service's assistance to States, local governments, territories, and the
Commonwealth of Puerto Rico includes the participation of their employees
and officials in training courses conducted by the IRS, supplying training aids,
and the assignment of IRS personnel for onsite technical assistance.
The Intergovernmental Personnel Act of 1970 has been an important
vehicle for the assignment of administrative expertise between the IRS and the
States and territories. The Tax Administration Advisory Services Division has
coordinated 32 assignments to 10 States, Puerto Rico, Guam, the Virgin
Islands, and the University of Southern California, with emphasis on mutual
benefit. In 1978, the Division received 11 requests and inquiries from States,
territories, and a university for assignments of IRS personnel. Two employees
were detailed to the Virgin Islands and one to Guam to prepare and present
revenue officer training courses. A new dimension of the law was its use to
bring a Yale University faculty member to the National Office for a year.
Enforcing The Law
The IRS has a delinquency prevention program to identify potentially
delinquent taxpayers and to assist them in maintaining compliance and in
preventing future delinquencies.
Nonpayment of taxes withheld from employees' wages is the most serious
delinquency problem facing the IRS Collection Division. The trust fund
compliance program helps ensure that chronically delinquent taxpayers
adhere to more strict filing and paying requirements, such as monthly rather
than quarterly filing, and making deposits to a special bank account. Violations
of certain requirements ofthe program can lead to criminal prosecution. Some
8,300 taxpayers were filing and paying their taxes monthly and 3,936 of these
also were required to comply with the special bank account provisions as of
September 30, 1978. During the first half of the year, 75 taxpayers were
convicted of criminal violations for not maintaining separate accounting for
certain collected taxes.
The Service published "The Collection Process (Employment Tax Accounts)," a booklet explaining the rights and duties of business taxpayers and
the IRS in the collection of employment taxes. The publication is sent to
business taxpayers with their second delinquency notice or delivered by a
Collection representative on initial contact. A similar booklet, "The Collection Process (Income Tax Accounts)," designed for individual taxpayers, was
first published in 1974.
Delinquent accounts and returns

The Collection Division disposed of over 2.3 million accounts receivable,
including some 342,000 notices sent taxpayers who contacted IRS field offices
to resolve their delinquencies. Collection employees had to initiate contact on
the remaining 1.97 million delinquent accounts.
Over 1.3 million delinquent return investigations and 108,000 returns
compliance leads were disposed of by Collection personnel in 1978. Approximately one mUlion delinquent returns were secured, involving nearly 989
million in additional assessments.




194

1978 REPORT OF THE SECRETARY OF THE TREASURY

Criminal investigations

The Criminal Investigation Division is responsible for investigating tax fraud
and other criminal violations of the tax laws. The Division's enforcement
activities are divided into the general program and the special enforcement
program.
The general program provides balanced criminal tax enforcement for
various types of violations, geographical locations, and economic and
occupational status. Several enforcement efforts such as the questionable
refund program and the illegal tax protester project have been initiated to
correct specific abuses of the tax laws.
The special enforcement program covers the identification and investigation
of persons who derive substantial income from illegal activities while violating
the tax laws. The program includes strike force activities and a project on highlevel narcotics financiers and traffickers. In addition, the Criminal Investigation Division this year again began investigating violations of the Federal
wagering tax laws.
The Division completed 8,713 investigations and recommended prosecution of 3,439 taxpayers. Grand juries indicted or courts filed information on
1,724 taxpayers. Prosecution was completed successfully in 1,414 cases.
Taxpayers entered guilty pleas in 1,056 cases; 133 pleaded nolo contendere,
and 225 were convicted after trial. Acquittals and dismissals totaled 70 and
119, respectively. Ofthe 1,446 taxpayers sentenced during 1978, 681, or 47.1
percent, received jaU sentences.
Organized crime

The IRS cooperates in the fight against organized crime by participating in
the Federal organized crime and strike forces program. Strike force units
located in 13 major cities are headed by attorneys from the Department of
Justice. The program objective is to coordinate the combined forces of Federal
law enforcement agencies against organized crime. The IRS is responsible for
detecting criminal tax violations and for ensuring that the income from illegal
activities is reported correctly and taxed. The IRS contributed 417 staff years
of direct investigative and examination time to the strike force effort during
1978.
Under the program, 107 were convicted or pleaded guilty to tax charges
during the year and 582 prosecutions were pending when the year ended. Since
the inception ofthe organized crime program in 1966, some 941 organized
crime members and associates have been convicted or have pleaded guilty to
tax charges.
As part of its special enforcement program, the Service continued to identify
and investigate significant tax violations by high-level narcotics financiers and
traffickers. During 1978, the IRS completed 323 criminal tax investigations,
obtained 65 indictments, and achieved 56 convictions of financiers and
traffickers.
Examinations

The IRS examines returns to help ensure a high degree of voluntary
compliance. Additionally, when returns are filed they are reviewed also by IRS
employees and computers. They are first checked manually for completeness
and for such obvious errors as the claiming of a partial exemption or duplicate
deductions. Then the Service's computers check the taxpayer's arithmetic and
pick up other errors that may have escaped manual detection.



ADMINISTRATIVE REPORTS

195

The primary method used by the IRS in selecting individual returns for
examination is a computer program of mathematical formulas—the discriminant function system (DIF)—that measures the probability of error. Returns
selected by DIF are screened manually and those confirmed as having the
highest potential of error are assigned for examination. New DIF formulas for
individual returns were developed in 1978 and will be used for returns filed
in 1979. Since DIF was introduced in 1969, the number of individual taxpayers
whose examinations resulted in no tax change has been reduced from 43
percent in 1968 to 24 percent, indicating the superiority of DIF over manual
selection for most returns.
Returns may also be selected for examination under the taxpayer compliance measurement program, a computerized system that makes a random
selection of returns. Examinations under this program are more intensive
because the results are used to develop information required for research
purposes such as the measurement of compliance among various classes of
taxpayers and to update DIF formulas. Compliance measurement is an
important factor in determining audit coverage of different classes of
taxpayers.
Computer selection of returns is complemented by manual selection. For
example, if the IRS examines a partnership return, the returns ofthe partners
also may be examined. Returns of shareholders and executives may be
examined in connection with the examination of their corporation. Other
returns may be selected based on information documents filed by payers of
wages, dividends, and interest. The IRS also screens returns with adjusted gross
income above certain amounts and some returns of taxpayers who submit
claims for refund or credit after filing returns.
Examination results

The IRS examined 2,328,812 tax returns of aU types in 1978. Of those,
169,390 were examined in service centers, compared with 150,730 last year,
an increase of 12 percent. The remainder were examined in district offices by
revenue agents and tax auditors.
Examinations conducted by revenue agents at the taxpayer's place of
business or residence covered 728,253 returns, or an increase of 27,450
returns, or 4 percent, from last year. There were 1,431,169 returns examined
by tax auditors under office audit procedures—a decrease of 86,507 returns,
or 6 percent, from last year.
Examination coverage of income, estate and gift tax returns, excluding
partnerships and forms 1120S, was 2.28 percent, compared with 2.46 percent
in 1977. The coverage including partnerships and forms 1120S was 2.29
percent, compared with 2.44 percent in 1977.
The Service's examination program resulted in approximately $6.3 billion
in recommended additional tax and penalties. Assessments totaled $5 biUion,
$4.1 billion in tax and penalties and $913 million in interest. In 1977,
assessments were $3.4 billion in tax and penalties and $650 million in interest.
Examiners are required to determine a taxpayer's correct liabUity and to
ensure that taxpayers neither overstate nor understate their liabUity. Service
examinations disclosed overassessments on 132,600 returns, accounting for
refunds of $312 million. In 1977, there were 122,003 returns with refunds of
$281 miUion.
Service center program

The IRS service center review program, begun in 1972, generally is limited
to the verification or resolution of issues that can be handled satisfactorily by




196

1978 REPORT OF THE SECRETARY OF THE TREASURY

service center personnel through correspondence with the taxpayer. There
were 663,173 returns checked by the Examination Division in service centers
in 1978, compared with 913,460 for 1977—a 27-percent decrease.
Of those checked, 169,390 were examined; the remainder, a total of
493,780 returns, were verified and corrected, compared with 762,730 in the
previous year. The decrease occurred primarily because of the continuing
impact of the Tax Reform Act of 1976, which allows certain errors to be
corrected during initial returns processing.
Computer-assisted examinations

The Service uses computer programs in the examination of automated
accounting systems used by taxpayers. Both taxpayers and the IRS save time
and expense since computer procedures take a fraction of the time required
to do the same job manually.
Over 12,000 computer applications were performed in 1978—an increase
of 2,000 over 1977. The applications are done by computer specialists who are
experienced revenue agents with intensive training in computer systems,
hardware, programming languages, and examination techniques.
Coordinated examinations

Corporations whose gross assets exceed $250 million are included in the
coordinated examination program. Financial institutions and utUities are
included in the program if gross assets exceed $1 billion.
Coordinated examinations involve complex accounting systems and the use
of teams consisting of experienced revenue agents, economists, computer
specialists, engineer agents, intemational and excise tax examiners, and
employee plans specialists to examine these corporate returns.
At the end of 1978 there were 1,300 corporations in this program, with 3.2
open years per corporation.
During 1978, the IRS continued its practice of conducting industrywide
examinations of major companies in a given industry. Ten industries currently
are being examined by this approach and two more are in the planning stage.
Joint Committee review

The Internal Revenue Code requires that aU income, estate, gift, private
foundation, and pension plan tax refunds and credits in excess of $200,000 be
reported to the Joint Committee on Internal Revenue Taxation, This year
978 cases involving overassessments of $ 1.1 bUlion were reported to the Joint
Committee, as compared with 997 cases and $984 million in 1977.
United States-United Kingdom arrangement

The Service developed a working arrangement with the United Kingdom
Board of Inland Revenue for simultaneous examinations of multinational
taxpayers. This is the second such arrangement between the United States and
another country (the first was with Canada in 1977).
Under this arrangement, the United States and the United Kingdom
separately examine taxpayers under their respective jurisdictions. Before an
audit begins, representatives ofeach country meet to plan and coordinate the
examination. During each stage ofthe examination, information is exchanged
in accordance with the tax treaty between the countries.




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197

Oil industry

The Service also implemented the oil industry program by forming an oil
taxation unit in the Southwest regional office. Among the unit's principal
functions are: Making determinations and recommendations on certain issues;
negotiating letters of agreement on these issues; coordinating selected issues
and examination activities; developing pricing methods and examination
techniques unique to the oil industry; and making industry analyses.
Enrolled agents

The special enrollment examination enables individuals who are not
attorneys or certified public accountants to demonstrate their competence in
tax matters and become enrolled to practice before the IRS.
The current examination, pattemed after the CPA examination, is divided
into four parts and emphasizes Federal tax laws as they apply to business
operations, sole proprietorships, partnerships, and corporations. The questions focus on the tasks enroUed agents must perform to complete forms and
file returns and to represent taxpayers before the Service. Candidates are
required to pass each part though they may retain credit for any part passed
and need only retake those parts failed.
In 1978, 5,425 candidates filed applications, compared with 5,090 in 1977.
Appeals

The Service encourages the resolution of tax disputes through an administrative appeals system rather than litigation. A taxpayer who disagrees with a
proposed change in tax liability is entitled to a prompt, independent review of
the case. The appeals system is designed to minimize inconvenience, expense,
and delay to the taxpayer in resolving contested tax cases.
Before October 2, 1978, district conference staffs were the first level of
appeal in tax disputes between taxpayers and the IRS on issues arising from
the examination of returns. If the dispute were not settled, the taxpayer could
have requested a second appeal conference with the Appeals Division.
District conference staffs reached agreement with the taxpayer in about 69
percent of the cases they considered this year.
During 1978, all IRS appeals functions were consolidated into a single
appeals body. Effective October 2, 1978, these activities will be conducted by
the Office ofthe Regional Director of Appeals in each ofthe seven IRS regions.
Proceedings in the appeals process are informal. Taxpayers may represent
themselves or be represented by an attomey, a certified public accountant, or
other adviser enrolled to practice before the IRS. If the disputed tax liability
for each taxable year involved is $2,500 or less, the taxpayer may obtain a
conference without filing a written protest.
In most cases, the taxpayers and the district conferee, or regional appeals
officer, reached mutually acceptable agreements, so few cases went to trial.
In the past 10 years, 97 percent of all disputed cases were closed without trial.
In 1978, the appeals function disposed of 54,715 cases by agreement.
Cases considered by the Appeals Division fall into two broad categories,
nondocketed and docketed. Nondocketed cases are those in which the
taxpayer is protesting a proposed action by an IRS District Director involving
additional taxes, a refund disallowance, or a rejection of an offer in
compromise. These cases made up about 54 percent ofthe Division's workload




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1978 REPORT OF THE SECRETARY OF THE TREASURY

in 1978. Docketed cases involve situations in which taxpayers have filed a
petition for a hearing before the U.S. Tax Court.
In 1978, 70 percent of nondocketed cases and 73 percent of docketed cases
were closed by the Division by agreement with the taxpayer.
Other appeal options

If a tax dispute cannot be resolved at the administrative appeals level, the
taxpayer is advised of additional appeal rights to the courts.
If the disputed tax does not exceed $1,500 in any tax year, a simple
procedure is available under the U.S. Tax Court's small-case procedures that
permit informal hearings where taxpayers may present their cases before a
special trial judge. Since a knowledge of courtroom proceedings is not
required, an inexpensive forum for the taxpayer is provided. However, there
is not provision in the law for an appeal ofthe Tax Court's decision under the
small-case procedure.
If a taxpayer chooses to bypass the Tax Court, the tax deficiency may be paid
and a claim for refund filed within 2 years from the date of payment. If the
claim is denied or no action is taken by the Service on the claim within 6
months, the taxpayer may file suit for a refund in either a U.S. district court
or the Court of Claims.
A taxpayer may appeal an adverse decision ofthe Tax Court or district court
to the U.S. Circuit Court of Appeals having jurisdiction. Adverse decisions of
the Court of Claims or a Circuit Court of Appeals may be appealed to the U.S.
Supreme Court, although not all such appeals are accepted. The Tax Court
tried 1,742 cases, and the U.S. district courts and Court of Claims 447 cases.
International operations

IRS foreign operations are the responsibility of the Office of Intemational
Operations (OIO). The Service maintains permanent foreign posts and
Revenue Service representatives at these stations are involved in compliance
and taxpayer assistance activities and maintain cooperative contacts with
foreign tax agencies.
Since OIO established its first office in Paris in 1948, the number of foreign
posts staffed by Revenue Service representatives has increased to 14.
Currently, posts in Bonn, London, Paris, and Rome cover Westem 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 Sydney administer
OIO activities in Japan, Southeast Asia, Australia, and New Zealand. A post
in Tehran covers the Middle East, and the one in Johannesburg services Africa
south of the Sahara.
This marked the 25th consecutive year that U.S. taxpayer received tax
assistance abroad. Twenty-two assistors were detailed abroad during the year,
providing assistance in 145 cities in 80 foreign countries. Approximately
151,000 taxpayers were assisted overseas, and several hundred members ofthe
Armed Forces attended 5 military tax schools held overseas. The Armed
Forces participants then helped thousands of military personnel prepare their
own tax returns.
Toll-free telephone assistance was expanded to all U.S. taxpayers in Puerto
Rico during 1978. Further, the Service entered into a tax administration
agreement with Puerto Rico that, along with agreements with American




ADMINISTRATIVE REPORTS

199

Samoa, Guam, and the U.S. Virgin Islands, allows the exchange of taxpayer
return information and the development of mutual tax assistance programs.
OIO is responsible for ensuring compliance with Federal tax laws by U.S.
citizens residing in foreign countries and foreign entities doing business in the
United States. It is also concerned with U.S. business controlled by foreign
interests and assists in the overseas examination of multinational corporations.
OIO examination and collection activities take place primarily in the United
States. However, OIO does send revenue agents and tax auditors to the foreign
posts to examine the retums of taxpayers living overseas. Those collection
cases that cannot be settled through correspondence are sent abroad for
personal contact.
OIO also administers the social security laws in U.S. possessions and Puerto
Rico and the income tax laws for Puerto Rican residents on income from
sources outside of Puerto Rico.
Under the reorganization of the Office of the IRS Chief Counsel, a District
Counsel office was established to serve as principal legal adviser to OIO.
Treaties

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 39 countries and estate tax
treaties with 13 countries.
In 1978, meetings were held with tax officials from several treaty countries
to improve the administration of the treaties involved. These conferences
improved working arrangements for more effective exchanges of information
and for resolution of recurring problems that arise from conflict of U.S. and
foreign tax laws.
A limited number of tax treaties provide for mutual collection assistance and
OIO is playing an increasing role on a reciprocal basis in collecting taxes of
these treaty partners from aliens in the United States.
Employee plans and exempt organizations

The Office of Employee Plans and Exempt Organizations (EP/EO)
administers the regulatory responsibilities of the Service for employee benefit
plans and tax-exempt organizations.
At the National Office, the functions are Employee Plans, Exempt
Organizations, and Actuarial Divisions. EP/EO field staffs are located
primarily in the 7 regional IRS offices and 19 key districts.
The Employee Plans activity administers the Employee Retirement Income
Security Act of 1974 (ERISA) with emphasis on developing regulations and
procedures urgently needed by the public. The IRS continues to coordinate
the implementation of ERISA with the Department of Labor and the Pension
Benefit Guaranty Corporation. As part of an effort by the IRS to reduce the
reporting burdens placed on taxpayers, plan sponsors and administrators are
flling the 1977 annual retum/report (form 5500 series) only with the IRS. In
addition, a single computer system has been developed to provide retum and
data information needed by the three agencies.
A questionnaire mailout was developed in 1978 to survey employers who
received benefit plan determination letters before the enactment of ERISA but
who failed to request a determination letter for their plans to conform to
ERISA's requirements. The survey provides an estimate of the volume and




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1978 REPdRT OF THE SECRETARY OF THE TREASURY

expected receipt dates of determination letters and assists the Service in
protecting the rights and benefits of plan participants.
Taxpayers have been encouraged to take advantage of IRS-approvedl
pattem, model, master, and prototype plans to reduce the expense andl
paperwork in complying with ERISA.
Some 7 regulations, 15 revenue rulings and procedures, and 25 news
releases were issued, as well as 4,836 National Office opinion letters on master
and prototype plans dealing with self-employed plans, corporate plans, andl
individual retirement accounts and annuities.
The Service devoted an average of 854 field professional positions tc>
carrying out employee plans responsibilities. Advance determinatibn letters
were issued on the qualification of pension, profit-sharing, and other employecj
benefit plans. Examinations were conducted to determine the qualification of
plans in operation and to verify plan contribution deductions. During the year,
214,672 determination letters were issued on corporate and self-employed
plans, an increase of 40 percent from 1977. The prohibited transactions
activity closed 155 exemption cases, including 23 published proposed and final
exemptions covering 116 individual cases.
On August 10,1978, the President submitted an ERISA reorganization plan
to Congress. The plan essentially will eliminate overlapping jurisdiction ancl
duplication of effort in the administration of ERISA by separating the authority
of the Treasury and Labor Departments.
The Exempt Organizations activity determines the qualifications of organizations seeking tax-exempt and private foundation status and examines retumjj
to ensure compliance with the law. The number of active entities on the
Exempt Organizations master file increased from 789,666 in 1977 to 810,048
in 1978.
During 1978, 4 regulations, 55 revenue rulings and procedures, 264
technical advice memoranda, 19 announcements, 7 news releases, and 8
publications were issued or revised. An average of 379 field professional
positions were devoted to the examination of 17,238 exempt organization
retums. Also, field professional positions were devoted to applications,
reapplications, and requests for rulings on proposed transactions from
organizations seeking a determination of tax-exempt status or ofthe effect of
organizational or operational changes on their status.
In August 1978, a proposed revenue procedure was published providing
more definitive guidelines to determine whether certain private schools
claiming tax exemption operate on a racially nondiscriminatory basis as
required by judicial decisions.
The selection of exempt retums for examination (SERFE) system, designed
to recognize certain retums based on specific selection criteria, was implemented. SERFE is used instead of manual classification to identify retums that
may warrant examination.
The decentralization ofthe processing of EO returns and related documents
in 1977 from the Philadelphia Service Center to the Andover and Fresno
Service Centers was expanded in 1978 to include the Atlanta, Austin, and
Ogden Service Centers.
Basic principles and rules for uniform interpretation and application of the
Federal tax laws involving actuarial matters are provided by the EP/EO
Actuarial Division.
The Service devoted an average of 17 professional positions to carrying ou t
actuarial responsibilities. The Division participated in public hearings on
proposed regulations and serviced taxpayer requests for rulings.



ADMINISTRATIVE REPORTS

201

Managing The Tax System
Planning and research

Planning, research, and analysis are integral, continuing management
activities conducted throughout all IRS components. During 1978, planning
activities included the preparation ofthe Service's long-range plan and work
toward the development of a single, uniform program structure for use in
planning and in zero-base budgeting. Service research activities included the
testing of improved work technologies, the development of testimony and
other materials for presentation to congressional committees, the analysis of
pending legislation, and a number of statistical and analytical projects to
identify optimum program designs and objectives. The Planning and Research
function also initiated a new system for monitoring and coordinating studies,
tests, and research projects throughout the Service to maximize the effectiveness of such activities, which account for nearly $10 million in annual
expenditures.
Reorganization

During the past year. Planning and Research provided guidance and support
for a number of organizational studies within such components as Employee
Plans and Exempt Organizations, the IRS Data Center, the Criminal Investigation function, the IRS service centers, and the Intemal Security function. In
addition. Planning and Research provided management, coordination, and
analytical support to the IRS organization review group directed by the Deputy
Commissioner. This group conducted a comprehensive assessment ofthe IRS
that led to major revisions in operations, including the creation ofa single level
of taxpayer appeal and the combination of all IRS public service and
information activities into a single organization.
The Accounts, Collection and Taxpayer Service (ACTS) organization has
been redesignated "Taxpayer Service and Retums Processing." It now
includes the taxpayer information activity, formerly assigned to the Public
Affairs Division, and the Disclosure function, formerly a part of Compliance.
The Collection function from the old ACTS organization has been shifted to
the Assistant Commissioner (Compliance), consolidating all enforcement
activities under a single authority.
Another major change was the creation of a new unit at the district level to
provide centralized technical and administrative support services. Before the
organizational review, field operating functions commonly had staffed and
equipped their own support units.
The organization review group also recommended the redesignation of the
Service's Administration organization as "Resources Management." In
addition to retaining the traditional Administration activities, such as training,
administrative services, and fiscal management. Resources Management also
is responsible for the new district office Centralized Services unit and for a new
Security function, formed to improve IRS safeguards of tax retums and other
taxpayer records.
To more accurately describe their actual roles. Audit and Intelligence
activities have been redesignated "Examination" and "Criminal Investigation."
Studies

As a part of the Service's efforts to simplify tax retums and the tax filing
process, a short questionnaire was included in a randomly selected sample of
1977 tax packages to identify aspects of the tax returns, instructions, and



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1978 REPORT OF THE SECRETARY OF THE TREASURY

schedules that taxpayers fmd difficult to understand. The questionnaire also
sought to determine how taxpayers try to overcome their returns preparation
problems and solicited suggestions for simplifying the forms.
Among the 7,600 respondents, only 29 percent of 1040 filers and 11 percent
of 1040A filers said that they had difficulty in understanding the tax returns
or instructions. The tax computation portions of the tax forms were citedl as
causing the most difficulty. Most respondents said they cope with their
preparation problems by rereading the instructions. The survey results
suggested that further simplification of the tax foQns and instructions would
not significantly alter the proportion of respondents who seek professional
assistance.
In another effort to get direct information from the public, the Service
contracted with the Opinion Research Corp. of Ann Arbor, Mich., to
determine the potential demand for free IRS return preparation services. The
results of this survey will be used in a comprehensive review of the Service's
current retums preparation policy.
The first thorough IRS examination ofthe economic, social, and behavioral
factors that promote or discourage individual taxpayer compliance was
undertaken in 1978. The Service awarded an 18-month contract to Westat
Inc., of Rockville, Md., to conduct a study to develop methods for measuring
the impact of factors identified as affecting individual taxpayer compliance.
Once a working methodology is developed, further research will be conducted
to obtain relevant data and to apply the study findings to tax administration
program evaluation and planning.
The Service initiated a long-term series of studies to determine how v/ell
taxpayers understand and comply with the approximately 85 provisions in the
tax law that permit the deferral of certain tax consequences to subsequent
years. Some of the specific studies cover deferred gains on sales of personal
residences, losses from activities not engaged in for profit, reductions of st<3ck
cost basis, and the recapture of the new residence purchase credit where the
residence is sold within 3 years of purchase. Other areas under consideration
for examination include deferred gains on installment sales, changes in
accounting methods, at-risk loss limitations for various business activities, and
generation-skipping trusts. The results of these studies will be used to
determine the need for a system to track and better enforce individual taxpayer
obligations under the deferred tax provisions.
There are civil penalties in the tax law for the violations of approximately
75 different rules governing the filing of tax retums, the timely payment of
taxes due, and reporting Federal tax liability. The IRS began a review of these
provisions to assess their fairness, effectiveness, and administrability. Upon
completion ofthe study, scheduled for fiscal 1979, legislative recommendations will be developed to amend or repeal penalties provisions where changes
are warranted. The study also will consider proposals for improving the
administration of penalties and for monitoring their effectiveness.
Planning and Research is responsible for analyzing legislative proposals
affecting the IRS and for determining their administrative implications. Once
legislation is enacted, a plan for implementing each provision is developed and
coordinated with those functions responsible for administering the legislation.
Approximately 55 bills were analyzed for their impact on Service activities,
and implementation plans were developed and carried out for 11 new public
laws.




ADMINISTRATIVE REPORTS

203

Productivity

A program was established to provide expanded incentives for promoting
productivity at all IRS levels. The goal of this program is to improve efficiency
by substituting investments in technology for staff, particularly in work
processing, clerical, and other routine operations. An important part of the
program is a productivity enhancement fund for financing projects that
improve procedures, techniques, and equipment. Plans call for the Service to
prepare an annual productivity plan, hold productivity management seminars,
and improve work measurement systems.
Measuring compliance

The taxpayer compliance measurement program (TCMP) is a continuing
enforcement and research effort by which the Service attempts to determine
the nature and extent of tax law compliance. The TCMP data also are used
to develop computer routines for selecting returns for examination. TCMP
data are derived from examinations of tax returns selected on the basis of
random probability samples.
During 1978, work continued on the first TCMP survey of fiduciary retums
and on the sixth survey of individual income tax returns. Field examinations
also were initiated for the third corporate TCMP survey. For the first time, this
survey was expanded to include corporate returns filed with no balance sheets,
as well as those returns with assets up to $ 10 million. Plans are now being made
to initiate the first TCMP survey of employee benefit plans in July 1979 and
a second survey of tax-exempt organizations, beginning in January 1980.
Optical scanning

Recent developments in electro-optical technology have given rise to the
possibility of using scanning equipment to record the data reported by
^ taxpayers on their returns. During the past 2 years, the Service tested the
performance of this technology on machine-prepared tax documents such as
I forms 1099 and 941 to determine what changes must be made in Service forms
and procedures before optical character recognition (OCR) can be used.
Meanwhile, plans are being made to test the feasibility of OCR processing of
1040A tax returns.
Federal-Stote test

The IRS is working with the National Association of Tax Administrators to
promote the filing of forms 1099 and 1087 information documents on
computer tape. Under the test program, which wiU begin in calendar 1979
using tax year 1978 information filed principally by institutional taxpayers in
California, Minnesota, and New York, the Service wUl process the magnetic
tapes, retaining information for Federal tax purposes and simultaneously
producing information for use by the States in whatever medium and format
they require. This arrangement wUl reduce recordkeeping and filing requirements for taxpayers and accelerate the use of more efficient electronic media
by both the IRS and State tax administrators. If the test is successful, it wUl be
a model for a similar arrangement among institutional filers, the IRS, the Social
Security Administration, and the States in handling information from the form
W-2 withholding statement.
y Publishing statistics

The annual Statistics of Income (SOI) publications provide the public and
the Government with a variety of data reported on income tax retums without




204

1978 REPORT OF THE SECRETARY OF THE TREASURY

violating taxpayers' rights to privacy. Nearly all ofthe data are estimates based
on representative samples of returns.
Preliminary SOI publications in 1978 covered individual income tax returns
for 1976 and corporation and business retums for 1975. As required by the
Tax Reform Act of 1976, the 1976 report for individuals included statistics on
the tax liability of persons with high total income computed using several
different concepts. Detailed statistics for 1975 and 1976 also were provided
to the Office of Tax Analysis for a special pubUcation on high-income
taxpayers. Publication of statistics on this topic is required annually by the
1976 act.
An SOI supplemental report on individual income tax retums also was
published, providing certain 1974 information for each county and for the 125
largest metropolitan areas.
Special statistical studies included information on sales of capital assets
reported on individual income tax retums, the new jobs tax credit introduced
by the Tax Reduction and Simplification Act of 1977, and the foreign tax credit
and tax-exempt income eamed abroad as reported on individual income tax
returns.
Data also were provided for inclusion in reports to Congress on domestic
intemational sales corporations, U.S. taxpayers that participated in intemational boycotts, and the revised system of taxing domestic corporations on
their operations in Puerto Rico and U.S. possessions.
Statistics of Income publications may be obtained from the Superintendent
of Documents, U.S. Govemment Printing Office, Washington, D.C. 20402.
Tax models

Developed in the early 1960's to meet Treasury's need for timely estimates
of the impact and revenue effects of proposed tax legislation, tax models also
have proved to be valuable tools for economic planning. Five basic models—
individuals, corporations, sole proprietorships, partnerships, and estates—are
updated each year to reflect changing levels and pattems of income. Each
model consists of generalized manipulation and table-generating computer
programs, used in conjunction with specially structured Statistics of Income
files containing the most current available year's tax retum data.
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.
Special projections also are made for research purposes. Work planning
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.
The number of primary returns and supplemental documents is expected to
grow from 133.8 million in 1977 to 163.3 million in 1985. This increase of 22.1
percent reflects the expected growth in population and economic activity.
Resources Management

Resources Management—redesignated from Administration under the
reorganization—is responsible for fiscal management, personnel, facihties
management, training, centralized services, employment policy, security
standards and evaluation, and management improvement. This office is also
responsible for the functional supervision of Resources Management activities
in the field.



ADMINISTRATIVE REPORTS

205

Consistent with President Carter's commitment to improve the quality of
public correspondence, participation in writing improvement workshops was
increased this year. Nearly 700 IRS employees attended various workshops
that stressed clarity and responsiveness in correspondence.
Four different workshops are offered to accommodate employee needs. The
training ranges from 8 to 40 hours of classroom work, plus some self-study
exercises. It is designed for the executive, the legal or technical originator, the
reviewer, and those persons needing refresher courses.
A Security Standards and Evaluation Division was established, consolidating
responsibilities previously placed in several different organizations. The
Division directs the development, implementation, and evaluation of a
comprehensive Service-wide security program. The program provides reasonable protection for employees and against loss, destruction or compromise of
tax and other protected information, facilities and property, data systems, and
other assets.
Equal employment opportunity

Total full-time regular employment from July 1977 through July 1978
increased by 2.9 percent, while the number of women increased by 5.9 percent
and the number of minorities by 7.8 percent.
Women and minorities made gains in 19 of the 20 most populous IRS
occupations, including revenue agent, revenue officer, tax auditor, attomey,
and criminal investigator. The number of women and minorities at GS-13 and
above also increased—women increased from 3.8 percent to 4.5 percent, and
minorities in these positions increased from 5.4 percent to 5.8 percent.
During the year, the Service observed Black History Week as well as
Hispanic Heritage Week and Women in Govemment Month.
Training to instruct special emphasis program coordinators, including those
for women, Hispanic employment, upward mobility, and blacks, was developed and piloted. In addition, about 100 EEO counselors received training in
handling class discrimination complaints.
Labor-management relations

In mid-1977, the Assistant Secretary of Labor for Labor-Management
Relations ruled in favor ofthe National Treasury Employees Union's petition
to consolidate 11 center bargaining units into 2 nationwide units. One unit
consists of all service centers—except Andover—the Data Center, and the
National Computer Center. The second unit consists of all districts—except
Anchorage—and all regional offices—except the North-Atlantic appeUate
function and the Southeast regional office—and the National Office.
As a result of this consolidation, the Service revised its labor relations casehandling procedures, strengthened its basic labor relations training courses to
include a complete package in discipline, adverse actions, and appeals, and
initiated new communications techniques between the field and the National
Office.
There has been an increase in the unfair labor practice caseload along with
a continued upward trend in grievance activity. The Service republished the
agency grievance procedure in handbook form and substantially revised its
grievance examiner training course.
Paraprofessional savings

The IRS has established approximately 1,400 paraprofessional positions
instead of as many higher graded professional and technical positions. This was




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1978 REPORT OF THE SECRETARY OF THE TREASURY

accomplished by identifying and splitting off the less complex work present in
higher graded professional and technical positions and assigning it to
paraprofessional employees at lower grades.
This resulted in a savings of approximately $8 million in salary and benefit
costs. In addition to the recurring dollar savings, establishing paraprofessional
positions also increased the effectiveness and productivity of the Service's
professional and technical employees, enabling them to spend more time on
higher level work.
Paraprofessional positions have been established in Examination, CoUection, Inspection, Criminal Investigation, and Resources Management. Similar
positions are being considered for other occupational areas.
Jobs for the handicapped

The number of handicapped employees in the IRS increased from 1,667 in
1977 to 1,701 in 1978. The IRS nominee for Outstanding Federal Handicapped Employee ofthe Year was WiUiam J. Boucher, a tax auditor from the
Austin district. Mr. Boucher also was selected as the Department's nominee
for Outstanding Federal Handicapped Employee of the Year.
Awards for incentive

The IRS incentive awards program received special attention in 1978 with
many employees receiving recognition for their outstanding contributions to
the Service—including 2 Meritorious Service Awards, 15 Commissioner's
Awards, 5 Special Achievement Awards of $1,000 or more, and 2 special
recognition awards for exposing bribery schemes.
Also, several IRS employees received recognition from organizations
outside of the Service. Deputy Commissioner William E. Williams was the
Department ofthe Treasury nominee for the 1977 Roger W. Jones Award for
Executive Leadership. Sixty-five employees received Presidential Letters of
Recognition for employee contributions that resulted in tangible benefits of
$5,000 or more.
Linda Molyneux ofthe Fresno Service Center was presented the 1977 John
E. Fogarty Public Personnel Award for her outstanding efforts towards the
hiring of the handicapped. This award, the highest given by the President's
Committee on Employment ofthe Handicapped, was made on June 13, 1978,
at the International Association of Personnel Employment Security convention in St. Louis.
Yolanda Carrillo of the Fresno Service Center has had an exceptional year
beginning with an award of $ 1,285 for a suggestion with a tangible benefit of
$184,000. In addition to the cash award, Ms. Carrillo's accomplishment
brought a Presidential Letter of Recognition and made her 1 of 11 recipients
ofthe 1977 Presidential Management Improvement Award. This award was
presented in the White House Rose Garden on May 23,1978, by the President.
Internal Revenue Manual

The Service adopted a new system to compose, print, and distribute its
internal operating procedures in the Internal Revenue Manual. Using
electronic technology, accurate copy is produced in 6- by 9-inch format at less
cost and in less time than with the old method. Additional services, provided
under a single contract, include filling orders for current parts or handbooks,
comprehensive topical indexes and management summaries of recent functional or operational changes to any part of the Manual.



ADMINISTRATIVE REPORTS

207

Training

The coordinated examination training program was developed and piloted
in early 1978. This course will provide a cadre of revenue specialists who can
make determinations of areas of accounting systems to be isolated for more
thorough auditing and reducing or eliminating the time expended on
nonproductive auditing.
This training also wUl increase the number of companies under the program,
provide a greater degree of uniformity and consistency in resolving tax issues,
simplify decisions on taxability, and eliminate duplication of effort. Some 325
senior agents are expected to be trained for the program in each future year.
The Service continued to conduct basic training for the Criminal Investigation Division at the Federal Law Enforcement Training Center. Several new
programs were produced to support the Division—new on-the-job training for
recruit special agents was tested, all special agents received review training in
the implication of the new disclosure provisions, and a TV tape test similar to
the national driver's exam was used. A wagering tax course also was written
and piloted this year.
Tax shelters

A 3-day program to train examination employees—revenue agents, tax
auditors, estate tax attorneys—for detailed identification and examination of
abusive tax shelters was developed this year.
Tax shelter training is now an integral part of all new examiners' training
courses. This training also is given to incumbent employees as part of the
update courses, and a limited partnership portion serves to reinforce previous
tax shelter training.
The training provides examiners with the general tools needed to recognize
the abusive elements of a tax shelter regardless of its business nature or
reporting form.
Data entry

The IRS trained approximately 4,000 data transcribers using a 60-hour
training program. In previous years the direct data entry training program was
80 hours in length.
By using this new, shorter training program, the IRS saved approximately
$404,000 in training, administrative, and instructor costs. The reduced
amount of training had no adverse effect on the trainees' ability to reach the
job standards for speed and accuracy.
Instructing others

More than 100 employees of State and local governments participated in
IRS training activities.
Financial investigative courses were held for the Maricopa County, Ariz.,
Sheriff's Association to train 20 participants from various local police and
attorney general offices, and for 48 members of the Pennsylvania Crime
Commission.
Students in the 5-week IRS special agent course included revenue employees from the Colorado Department of Revenue, the New Jersey Department
of Law and Safety, and the PhUippines, Dallas, Tex., and Phoenix, Ariz.,
governments.
Participants in various revenue agent training courses included employees
of the Government of American Samoa; the States of Alaska, New York,
Maine, and Oregon; and the cities of Milwaukee, Wis., and St. Paul, Minn.




208

1978 REPORT OF THE SECRETARY OF THE TREASURY

Special investigation employees of the St. Louis Police Department attended
the 8-day wagering tax course. Instructor training and course assistance was
provided to the Idaho State Tax Commission to enable it to train employees
in auditing techniques.
Logistics support

The Service continued its efforts to eliminate unnecessary intemal reporting, canceling 21 reports in 1978 for annual savings of approximately
$406,000.
The IRS conducted an extensive study of the taxpayer assistance toll-free
telephone system (TFTS) to determine if the efficiency of that operation could
be improved. The study identified the best locations and the optimum number
of sites to locate the TFTS answering operations. New procedures for planning
and managing the telephone circuitry used in the toll-free system also were
implemented to provide a better balance between incoming circuits and
answering positions. The initial result of these efforts was a $2 mUlion
reduction in the telecommunications cost for the toll-free program.
Other actions to reduce communications costs included implementation of
new procedures for transmission of written records, such as facsimile, teletype,
and express mail, and more control over commercial long-distance and
Federal Telecommunications System usage. These efforts saved approximately $1.6 million.
An internal management reporting system has helped the IRS to monitor and
control its space inventory and costs. Approximately $500,000 was saved by
releasing space, using space-saving techniques, and closely reviewing utility
and service charges. Continued implementation of multiple-occupancy work
stations and open office planning concepts is resulting in more efficient
utilization of property resources. During 1978, the Service reduced its field use
of office space 4 square feet per person, saving 221,000 square feet at $7.78
per square foot, or approximately $ 1.7 million.
A revised inventory management system for property accountability will
consolidate reporting requirements of three inventory systems into a single
system at an estimated annual savings of $100,000.
The IRS continued to rate as one ofthe top Federal agencies in occupational
safety and health. In calendar 1977, the Service reduced both disabling injuries
and motor vehicle accidents at a time when most agencies realized substantial
increases in rates. The IRS had a rate of 3.4 disabling employee injuries per
million staff-hours worked. Service employees drove 119 million miles on
official business with 671 accidents, 72 less than in calendar 1976. The
accident frequency rate decreased from 5.8 to 5.6 accidents per million miles
driven.
A system of using unique service center ZIP codes was implemented for the
1978 filing season. This system reduced the average transit time of maU from
the taxpayer to the service centers by 1 day. Because the Treasury has use of
the tax revenue 1 day earlier, the Govemment saves some $5 million in interest
annually.
Records disposal resulted in the release of space and equipment valued at
$3,809,000. A total of 208,273 cubic feet of records was destroyed and
592,570 cubic feet of records was retired to Federal Records Centers.
Data services

Data Services is responsible for the development, implementation, and
evaluation of computer systems, programs, and hardware requirements. The




ADMINISTRATIVE REPORTS

209

Office of Assistant Commissioner (Data Services) originally provided for three
developmental areas—the Service and Design Division, the Systems Programming Division, and the Systems Analysis Division—and two computer
facilities—the National Computer Center and the Data Center.
Two areas have been added, the Systems Development office to develop and
assess new computer systems to meet increasing IRS needs, and the Planning
and Control staff to monitor Data Services personnel and hardware, to
maintain an inventory of data processing requests and the resources to fill
them, and to serve as Executive Secretary to the ADP Policy/Resource Board.
The Service is implementing a remittance processing system (RPS) for
quicker and more efficient handling of remittances. RPS processes the
remittance, encodes the source document with an audit trail, and prepares
documentation for forwarding to the bank with the checks. RPS handles
retums, estimated payments, and subsequent payments, forwarding transactions to the appropriate master file to indicate receipt ofthe remittances before
the source documents are processed, aiding in answering taxpayer inquiries.
Automated information

Control of partnership retums on the audit information management system
was implemented on a test basis in the Salt Lake City district office and the
Ogden Service Center on July 1, 1978.
Under the system, the examiner of the partnership retum is able to
requisition an unlimited number of partner returns for shipment and
examination in the partner's district office. The examiner of the partnership
retum receives a moilthly report showing all partners established on the data
base. Each district office receives a cumulated monthly repoit showing income
adjustments applied to a partner's retum in the district, resulting from
partnership examination.
National Computer Center

The National Computer Center in Martinsburg, W. Va., plans, directs, and
coordinates computerized master file operations of the integrated tax
administration system. Eight large computers and three computerized microfilm systems are used in the testing and production processing ofthe individual,
business, exempt organization, employee plans, and individual retirement
account master files for the Nation.
The Computer Center operates 24 hours a day, 7 days per week and
maintains reciprocal accounting with each ofthe 10 service centers. Input of
data to the Computer Center such as tax returns, tax payments, and
adjustments is primarily on magnetic tape shipped from the service centers and
other organizations by air. The output, also on magnetic tape, contains data
for printing notices such as bills, refund checks, etc., and is air shipped to the
service centers and other Federal and State agencies. During the year, the
Computer Center received more than 84,000 input tapes and shipped more
than 82,000 output tapes.
As of August 1978 there were 121,063 magnetic tapes in the Computer
Center library, with the individual master file containing 111,028,298 taxpayer
accounts, the business master file, 17,106,712 accounts, the exempt organization master file, 1,007,496 accounts, the employee plans master file,
1,129,694 accounts, and the individual retirement account master file,
2,876,309 accounts.




210

1978 REPORT OF THE SECRETARY OF THE TREASURY

Data Center

The Data Center in Detroit, Mich., is responsible for the performance of
non-master-file data processing operations for the Service.
In 1978 a new system was selected to replace the current computer systems.
Installation ofthe replacement system is scheduled for early calendar 1979
with testing and acceptance expected by the middle of the year.
Two new software systems were installed to monitor and report computer
utilization and control development of new systems and produce reports of
human resource utilization.
The Data Center is processing up to 1 miUion employee benefit plan forms
for the Department of Labor this filing season, with work started in late 1978.
Processing involves the filming of retums with special cameras and producing
output on microfiche. Output wiU be shipped to service centers, the National
Archives, and the Department of Labor.
Technical activities

The Service's tax ruling program consists of letter rulings, technical advice,
and published revenue rulings.
A letter ruling is a written statement issued to a taxpayer by the National
Office interpreting and applying tax law to a specific set of facts. Such a ruling
provides guidance conceming the tax effects of a proposed transaction. Letter
rulings are not precedents and may not be relied upon by taxpayers other than
the recipient.
Technical advice provides guidance on the proper application ofthe tax laws
to specific facts issued by the National Office at the request of a district office
in connection with the audit of a taxpayer's retum or claim for refund or credit.
Frequently, the District Director's request is made at the suggestion of a
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 to inform and guide
taxpayers, practitioners, and IRS personnel.
Tax shelter rulings

During 1978, the Service continued an active program of publishing revenue
rulings to answer significant issues with respect to tax shelters and other
artificial tax devices. The goals of this program are to provide technical
guidance to taxpayers and to Service personnel on the specific issues presented
and to increase public awareness that the Service will carefully scrutinize taxmotivated transactions. A highlight of this program was the publication on
October 31, 1977, of nine revenue rulings addressing a number of current tax
shelter issues.
Art Advisory Panel

The Art Advisory Panel held three meetings at the National Office during
its 10th anniversary. Since 1968 this unpaid, 12-member panel of art experts—
museum directors, curators, scholars, and dealers—has helped the Service to
review taxpayers' appraisals and to determine the value of works of art donated
to charity or for gift or estate tax purposes.
All appraisals of works of art claimed at $20,000 or more in audited tax
returns must be referred to the National Office for review. The claimed value
ofthe average item referred to the panel recently has been close to $ 100,000.
Nearly half of all reviewed appraisals are found to be unacceptable.



ADMINISTRATIVE REPORTS

211

The panel reviewed appraisals on 702 works of art with taxpayer-claimed
values amounting to $67 million this year, resulting in valuation adjustments
of $12 million. During its 10 years of operation, the panel has reviewed
appraisals with claimed values of $276 million which resulted in valuation
adjustments of $75 million.
Internal Revenue Bulletin

The weekly Internal Revenue Bulletin announces official rulings and
procedures ofthe Service and publishes 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, with weekly and semiannual issues distributed
within the Service and available to the public through the Superintendent of
Documents, U.S. Government Printing Office, Washington, D.C. 20402.
During 1978, the Bulletin included 499 revenue rulings, 39 revenue
procedures, 8 public laws relating to Internal Revenue matters and 10
committee reports, 58 Treasury decisions containing new or amended
regulations, 50 delegation orders, 4 Treasury Department orders, 14 notices
of suspension and disbarment from practice before the Service, 268 announcements of general interest, and 8 court decisions.
The Bulletin Index-Digest System, with current supplements, aids in
researching material published in the Bulletin after 1952.
Making rulings public

The Tax Reform Act of 1976 provided that IRS rulings and technical advice
generally be opened to public inspection after the deletion of the taxpayer's
identity, trade secrets, and confidential commercial and financial information.
Rulings and technical advice requested after October 31, 1976, generally
are made available within 90 days after they are issued to taxpayers. Of the
approximately 80,000 issued in answer to requests made before November 1,
1976, 25,000 were made available to the public in 1978. The remaining rulings
will be opened for public inspection in 1979.
Publishing Services developed a computer-based system to produce
microfiche indexes for the release of letter rulings. This dual system produces
Code section indexes for the weekly release of current rulings. Nine monthly
and cumulative indexes were developed to provide the ruling information in
various formats based-on user needs.
Inspection

The Inspection Service's internal audit and security programs aid IRS
managers in maintaining the highest levels of efficiency and integrity.
The Internal Audit staff independently appraises the operations of the IRS
to measure the extent of compliance with established management policies and
to determine whether procedures are in accordance with law and regulations.
Controls are reviewed in all IRS activities to ensure that both taxpayers' and
the Government's rights are protected and that operations are carried out
efficiently, effectively, and with integrity.
Internal Audit reviews operations that have widespread impact on the
Service or that are considered high risk. The review of controls for
safeguarding tax information and assuring fair and equitable treatment of
taxpayers also is stressed.




212

1978 REPORT OF THE SECRETARY OF THE TREASURY

To improve the efficiency of Service operations, national coordinated audits
are being used more often to provide uniform coverage in several offices and
to evaluate the operation of a program better on a nationwide basis. These
audits provide managers with a better perspective of their operations, permit
nationwide corrective action if necessary, and require less staff.
Abstracts of Internal Audit findings are prepared and distributed to Service
officials nationwide to help identify operational areas that may need increased
management attention.
Internal Audit issued 241 reports to Service managers during the fiscal year.
Management actions on these problems resulted in better service to taxpayers,
strengthened controls, and improved operations. In addition, response to
Internal Audit findings resulted in measurable savings and additional revenue
estimated to total $157 million.
Maintaining integrity

Internal Audit gives priority to the detection of fraud, embezzlement, or
other wrongdoing on the part of Service employees. During the year, Intemal
Audit informed Internal Security of possible breaches of integrity by 161
employees and 38 other individuals. Some 97 investigations were completed
in 1978. As a result, 84 employees and 8 others were cleared of allegations of
improprieties, while actions were taken or were pending against 1 employee
and 4 others.
Internal Security

The Intemal Security Division protects the integrity of the Service by
investigating high-risk areas and alerting managers and employees to integrity
hazards.
The Division investigates complaints of criminal misconduct or irregularities
affecting IRS employees or operations. It also conducts investigations of nonService persons who attempt to bribe, threaten, or assault Service personnel,
the unauthorized disclosure of Federal tax return information, disclosure or
use of information by preparers of retums, and charges against tax practitioners.
In addition, the Division investigates IRS job applicants and conducts special
investigations and inquiries for the Commissioner and the Secretary of the
Treasury.
During 1978, Internal Security inspectors arrested or were responsible for
the indictment of 147 persons including 92 taxpayers and tax practitioners, and
55 employees or former employees. Ninety-five persons were convicted during
the year, including 83 defendants who pleaded guilty. Forty-six of these
convictions were for bribery, 11 were for assault, and the remainder involved
such criminal charges as conspiracy to defraud the Govemment, obstruction
of justice, subscribing to false returns, disclosure of confidential tax information, and embezzlement.
In one case, two high officials of a nationally known company were
convicted of authorizing gratuities of approximately $27,000 to IRS employees. The corporation also was convicted and fined $36,000. Earher an IRS
audit manager was convicted of accepting free vacation trips from the
company.
Bribery awareness

The Division increased the number of bribery awareness presentations to
Service employees, expanding them to include video tapes that realistically
portray bribery situations Service employees may encounter.
The effectiveness of these presentations may be gauged by the facts: 186



ADMINISTRATIVE REPORTS

213

employees reported 252 possible bribery attempts resulting in 73 arrests or
indictments and at the end of 1978, 31 persons were awaiting trial on bribery
charges.
Assaults and threats

FBI statistics from last year show that 74 percent of all threats and 41 percent
of all assaults on Federal employees were directed at IRS employees.
Intemal Security responds promptly to protect IRS employees threatened
or assaulted while performing their duties and seeks vigorous prosecution of
these cases by the U.S. attorney. In instances where prosecution is declined—
usually in verbal threat cases without physical assault—an inspector, with the
approval ofthe U.S. attomey, contacts the alleged assailant to inform him or
her of applicable Federal statutes concerning assaults or threats on Government employees. The person also is advised that repetitive acts could result
in prosecution.
The Division is conducting studies seeking better ways to ensure the safety
of IRS employees in assault and threat situations.
Checking the work force

The Intemal Security Division completed 13,017 investigations of employees during the year and 15,674 police record checks on persons considered
for temporary appointments.
These investigations and record searches resulted in the rejection of 85 job
applicants and disciplinary actions, including separations, suspensions,
reprimands, wamings, or demotions, against 741 employees. Also, at the
request ofthe Office ofthe Secretary ofthe Treasury, the Division conducted
special investigations involving employees of other Treasury bureaus.
While some investigations of IRS employees resulted in criminal prosecution
or disciplinary action, in many other cases employees were exonerated of
accusations of misconduct.
Taking precautions

In each region, 100 integrity development projects initiated by Intemal
Audit and Intemal Security probed high-risk Service operations. As an
altemative to merely reacting to complaints, allegations, or referrals, this
approach is designed to identify and examine areas in Service operations
particularly susceptible to corruption and fraud.

BUREAU OF THE MINT i
The Mint became an operating bureau of the Department of the Treasury
in 1873,pursuanttotheCoinage Actof 1873 (31 U.S.C. 251). AU U.S. coins
are manufactured at Mint installations. The Bureau of the 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 fiscal 1978, functions performed by the Mint on a reimbursable basis
1 Additional information is contained in the separate Annual Report of the Director of the Mint.




214

1978 REPORT OF THE SECRETARY OF THE TREASURY

included the manufacture and sale of proof coin sets and uncirculated coin
sets, medals of a national character, and, as scheduling permitted, the
manufacture of foreign coins.
The headquarters ofthe 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 are in New York, N.Y., and San Francisco, Calif; 2 and buUion
depositories are located in Fort Knox, Ky., (for gold) and West Point, N.Y.
(for silver). The Old Mint, San Francisco, houses the Mint Data Center, the
Mint Museum, and a numismatic order processing operation. The West Point
Depository continued to produce coins during fiscal 1978.
The Mint security program provides appropriate and continuous protection
for all employees and assets under the jurisdiction of the Bureau of the Mint.
This is accomplished by the Mint Security Force, supported by extensive and
sophisticated alarm systems, closed-circuit television coverage, special vaults
or other controlled locking devices, and the Bureau's personnel security
clearance program.
A total of 37 Mint security officers completed the 5-week police training
course at Treasury's Federal Law Enforcement Training Center. The principal
security supervisor from one of the mints completed the 7-week criminal
investigator's course.
The Hungarian-owned Crown of St. Stephen and other related relics had
been in custody ofthe Mint at the Fort Knox Bullion Depository for a number
of years. Extraordinary security measures were employed in January 1978 at
Fort Knox during the inspection, packing, and shipping of these Hungarian
treasures, which were handled by Department of State employees. The items
were returned to the Govemment of Hungary during the fiscal year.
The Mint's Laboratory continued to provide technical expertise on the
authenticity of U.S. coins, examining 954 questioned coins submitted by the
U.S. Secret Service and other law enforcement agencies. The coins involved
135 cases. Two hundred twenty-two counterfeit gold coins, the content of
which is being returned to innocent collectors, were processed through the
New York Assay Office. Gold granulations, valued at more than $ 10,000, were
returned to collectors who had innocently purchased counterfeit gold coins.
Following the upgrading of the electrostatic precipitator at the New York
Assay Office, reported in the 1977 report, the Mint's refinery resumed gold
production during fiscal 1978.
Internal audits during the fiscal year contributed to: A further strengthening
of internal controls and accounting and reporting systems; better utilization of
personnel, materials, and equipment; improved safety; and reduced operating
costs.
The Continuing Committee for the Audit of U.S.-owned gold located at
various depositories at appropriate intervals was established by the Fiscal
Assistant Secretary during fiscal 1976. The Committee consists of one
representative each from the Bureau of the Mint, the Bureau of Govemment
Financial Operations, and the Federal Reserve Bank of New York, with
representatives of the General Accounting Office invited to participate in the
audits as observers. During fiscal 1978, gold audits were performed in three
ofthe four Mint depositories where gold is stored (Fort Knox, Ky.; U.S. Assay
Office, New York; and the Denver Mint). By September 30, 1978, more than
50 percent of the U.S.-owned gold had been audited and verified. The
continuing audit is planned to provide for a complete audit of U.S.-owned gold
over a 10-year cycle ending in 1984.
A total of $414,432,568 was deposited into the general fund ofthe Treasury
2 The San Francisco Assay Office also operates as a mint.




ADMINISTRATIVE REPORTS

215

by the Bureau of the Mint during fiscal 1978. Seigniorage on U.S. coinage
accounted for $367,156,260 ofthe total.
Domestic coinage

In April 1978, Secretary Blumenthal transmitted to the Congress proposed
legislation to authorize a smaller dollar coin to replace the current one. On
August 22, 1978, the Senate approved S. 3036 which authorizes the Secretary
to mint and issue the smaller doUar coin bearing the portrait of Susan B.
Anthony on the obverse and the Apollo 11 eagle design on the reverse. An
identical bill was approved by the House of Representatives on September 26,
1978. The legislation was awaiting the approval of President Carter at the end
of the fiscal year. [Public Law 95-447 was signed October 10, 1978.]
The Anthony dollar will be a clad coin. The cladding is an alloy of 75 percent
copper, 25 percent nickel. It will constitute 50 percent ofthe total thickness
ofthe coin. The core will be pure copper. The coin wiU weigh 8.1 grams and
have a diameter of 26.5 millimeters. The design has an 11 -sided border on both
sides of the coin within the outer circular configuration, which will make it
distinguishable by touch, as well as sight.
The accompanying photograph illustrates both sides of the new doUar coin,
which will be minted and issued for the first time during fiscal 1979.

The Susan B. Anthony dollar coin

During the 1978 fiscal year, U.S. mints manufactured 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.



216

1978 REPORT OF THE SECRETARY OF THE TREASURY

Coinage strip for the manufacture of U.S. coinage was obtained from both
in-house fabrication and outside sources. All 5-cent, 10-cent, and 25-cent strip
and a portion of the necessary 1-cent strip for the Philadelphia Mint was
fabricated in-house. Coinage strip used by the Denver Mint and the San
Francisco Assay Office was purchased on the open market. Most of the
annealed/cleaned 1-cent blanks for West Point were furnished by the
Philadelphia Mint, with lesser quantities purchased.
The PhUadelphia Mint produced 5,260,137,000 coins; the Denver Mint
5,149,519,090 pieces; the West Point Depository manufactured 1,560,852,000 coins; and the San Francisco Assay Office 92,730,000 1-cent coins for
general issue.
In this 12-month period, the Mint shipped approximately 13.4 biUion coins
to Federal Reserve banks and branches, establishing an alltime record.
The Bureau ofthe Mint maintained its close liaison with the Federal Reserve
in determining coin requirements. Demand for coin, as measured by the net
outflow from the Federal Reserve banks to commercial banks, totaled 13.1
billion coins. This represented an increase of approximately 14.5 percent over
1977. Joint Mint/Federal Reserve inventories of coins amounted to 5.9 billion
on September 30, 1978, compared with 7 billion a year earlier.
Direct shipments of coins from the Mint to commercial banks without their
passing into and out of the Federal Reserve banks was initiated. Direct
shipments were being made to four banks in the New York Federal Reserve
District and to two banks in the San Francisco District by the fiscal yearend.
This is benefiting the Government in a number of ways, including savings in
transportation costs, labor costs at the Federal Reserve banks, and the
conservation of energy (fuel).
By June 1978, copper prices had become sufficiently stabilized and the 1cent inventory had become large enough for Treasury to revoke the
regulations which had been imposed in April 1974 prohibiting the exportation,
melting, or treatment of 1-cent pieces. The revocation became effective June
7, 1978, following signature by Under Secretary Anderson. ^
3 See exhibit 24
U.S. coins manufactured, fiscal y e a r 1978
•General circulation
Denomination
I doUar:
Cupronickel
Silver-clad
50 cents:
Cupronickel
Silver-clad
25 cents:
Cupronickel
Silver-clad
10 cents
5 cents
1 cent
Total

Number of
pieces

Numismatic '

Total coinage
Number of
pieces

Face value

Number of
pieces

Face value

37,598,006

$ 37,598,006.00

3,096,815
131,908

$3,096,815.00
131,908.00

40,694,821
131,908

$40,694,821.00
131.908.00

33,588,506

16,794,253.00

3,096,815
131,908

1,548,407.50
65,954.00

36,685,321
131,908

18,342,660.50
65,954.00

2 792,886,378

198,221,594.50

3,096,815
131,908

993,856,628
676,286,872
3 9,529,021,700

99,385,662.80
33,814,343.60
95,290,217.00

3,0%,815
3,096,815
3,096,815

774,203.75
32,977.00
309,681.50
30,968.15

795,983.193
131,908
996.953,443
679,383,687
9,532,118,515

198.995,798.25
32.977.00
99,695.344.30
33,969,184.35
95,321,185.15

12,063,238,090

481,104,076.90

18,976,614

6,145,755.65

12,082.214.704

487,249,832.55

154,840.75

Face value

' All numisinatic coins were made at the U.S. Assay Office, San Francisco, and consisted of 1,046.259 1977 proof sets, 2,050,556
1978 proof sets, and 131,908 silver-clad Bicentennial sets (110,044 proof, 21.864 uncirculated). Production of Bicentennial coins ceased
on Dec. 31. 1976; however, sets continued to be packaged and sold after that date. Bicentennial sets reported in this table were
packaged and sold during fiscal 1978.
2 Includes 15,352,000 quarter dollars produced at the U.S. Bullion Depository at West Point.
3 Includes 1,545,500,000 1-cent coins manufactured at West Point and 92,730,000 made at the San Francisco Assay Office.
NOTE.—Dollars, half dollars, quarters, and dimes for general circulation and regular proof sets are three-layer composite c o i n s outer cladding 75 percent copper, 25 percent nickel, bonaed to a core of pure copper. Dollars, half dollars, and quarters comprising
the Bicentenmal proof and uncirculated sets are three-layer composite coins with an outer cladding 800 parts silver. 200 parts copper,
bonded to a core approximately 209 parts silver. 791 parts copper.




ADMINISTRATIVE REPORTS

217

Bureau ofthe Mint operations, fiscal years 1977 and 1978
Selected items
Newly minted U.S. coins issued:!
1 dollar
50 cents
25 cents
10 cents
Scents
Icent
Total
Inventories of coins in Mints, end of period
Electrolytic refinery production:
Gold—fme ounces
SUver-fme ounces
Balances in Mint, end of period:
Gold bullion-fine ounces
Silver bullion—fme ounces

Fiscal
1977

Fiscal
1978

50,600,000
75,200,000
729,200,000
814,500,000
673,700,000
8.362,600,000
10,705,800,000

50,000,000
78,400,000
997,900,000
1,184,600,000
971,300,000
10,185,800,000
13,448,000,000

4,611,700,000

3,227,600,000

3,331,771.75

2,040,848.525
3,257,560.10

266,169,764
39,401,062

266,393,521
39,208,331

For general circulation only.

Reimbursable programs

Foreign coinage.—The Bureau ofthe Mint is authorized to produce coinage
for foreign govemments on a reimbursable basis provided that the manufacture of such coins does not interfere with U.S. coinage requirements. At the
fiscal yearend Mint installations were processing coinage orders for the
Dominican Republic and Panama.
Afe^/5.—Public Law 95-229, February 14, 1978, authorized the Secretary
to strike up to 104,000 medals for the U.S. Capitol Historical Society by
December 31, 1978. The medals are to commemorate historic events and
personalities ofthe 1777-1778 period. By September 30, 7,750 medals had
been produced and delivered to the Society.
Special coin programs.—On AprU 3, 1978, the Mint began offering the 1978
proof coin sets for sale to the public at $9 per set. These special sets, stmck
at the U.S. Assay Office at San Francisco, contain one coin of every current
denomination. By June 30,1978, when the ordering period closed, 3.1 mUlion
sets had been purchased. Shipment ofthe sets began in May and was scheduled
to continue through December 1978.
During fiscal 1978, 1.7 million 1977 uncirculated 12-coin sets (consisting
of one coin of each denomination struck at both the Philadelphia and the
Denver Mints) were shipped to customers who had ordered them between
September 1 and October 31, 1977.
Administration

Effective May 21,1978, the Office ofthe Secretary ofthe Treasury assumed
operation ofthe Treasury payroll/personnel information system (TPPIS). The
Bureau of the Mint transferred 54 positions and $400,000 to that Office to
continue ongoing operations for the remainder of the fiscal year.
The Bureau of the Mint embarked on a program during fiscal 1978 to
develop an automated financial management information system. The General
Ledger and Appropriation Accounting/Reporting System, the first module,
was in the design stage at the fiscal yearend.




218

1978 REPORT OF THE SECRETARY OF THE TREASURY

Labor relations

Effective December 15, 1977, the Bureau of the Mint and Mint CouncU
American Federation of Government Employees (AFGE) entered into the
second national labor-management agreement. This agreement will remain in
force for 3 years.

OFFICE OF REVENUE SHARING i
The Office of Revenue Sharing is located within the Office of the Assistant
Secretary (Domestic Finance) for administrative purposes. The revenue
sharing staff consists of approximately 200 professional and clerical positions,;
with 30 of them designated for the antirecession fiscal assistance (ARFA)
program. Offices are located at 2401 E Street, NW. in Washington, D.C.
The Office of Revenue Sharing was made responsible for administering the
ARFA program with the passage of title II of the Public Works Employment
Act of 1976 (Public Law 94-369). Under the act, the Office had distributed
more than $3 billion by the end of fiscal 1978.
With the passage of the Intergovernmental Antirecession Assistance Act of
1977 (Public Law 9.5-30, May 23, 1977), the civU rights and audit requirements of the ARFA program were made identical to those of the general
revenue sharing program.
During fiscal 1978, $6.8 billion in revenue sharing funds 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 $42 billion the amount of money retumed 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 for the 5-year period that ended
December 31, 1976. The money was allocated according to formulas
contained in the law which use data on population, per capita income, and
general tax effort for each recipient unit of local govemment.
The ninth entitlement period in the general revenue sharing program is the
second entitlement period authorized by the State and Local Fiscal Assistance
Amendments of 1976 (Public Law 94-488, October 13, 1976). These
amendments extended general revenue sharing from January 1, 1977, through
September 30, 1980, at higher annual levels of funding than had been
authorized by the original act. The amendment for the ninth period authorizes
$6.8 billion for distribution, bringing the total authorized for distribution to
$42 biUion.
Data improvement

To ensure that aU funds are distributed equitably, consistent with the intent
ofthe Congress, all data used by the Office of Revenue Sharing in the formula
allocation process must be ofthe highest quality, both in terms of currentness
and accuracy.
To meet the first objective, all four data factors relating to local governments
were updated by the Bureau of the Census for the allocation of funds for
entitlement period 10, which extends from October 1, 1978, through
1 Additional information is contained in the separate Annual Report of the Office of Revenue Sharing for 1978.




ADMINISTRATIVE REPORTS

219

September 30, 1979. The population and per capita income estimates were
updated to 1976 and 1975, respectively, and the adjusted taxes and
intergovernmental transfers data elements were each updated to fiscal 1977.
The Bureau of Indian Affairs also developed updated population estimates as
of 1976 for Indian tribes and Alaskan native villages. In addition, revised 1974
per capita income estimates were developed and used to compute adjusted
allocations for all local govemments for entitlement period nine.
The second objective, that of ensuring the accuracy of the data, is met in
large part through the Office of Revenue Sharing's annual data improvement
program. This administrative procedure consists of notifying each govemment
ofthe individual data elements to be used in determining its allocation, as well
as an estimated allocation amount based on the preliminary data. Each
government is then asked to examine its data factors in light of established data
definitions, and propose corrections for any data element considered to be in
error, submitting appropriate documentation to support any challenge. These
are thoroughly reviewed, and appropriate revisions are made when justified.
Approximately 1,500 governments proposed challenges to 1 or more
individual data elements believed to be in error, in response to the data
improvement program for entitlement period 10, conducted in April 1978. Of
this number, several hundred resulted in changes being made to the data in
question. As a result of this program and the Census Bureau's ongoing data
review, nearly 2,000 data revisions were made prior to the official entitlement
period 10 allocations.
In determining the allocations to govemments under the antirecession fiscal
assistance program, the Office of Revenue Sharing uses updated unemployment data provided each quarter by the Department of Labor, Bureau of Labor
Statistics, as required by statute. The Intergovemmental Antirecession
Assistance Act of 1977 made it possible for Govemors of States to supply to
the Bureau of Labor Statistics unemployment rates prepared according to that
agency's methodology for local govemments for which the Bureau did not
have local unemployment rates for the July 1978 payment quarter.
In each calendar quarter, the Office of Revenue Sharing provides each of
the approximately 39,000 potentially eligible govemments with notice of its
antirecession data factors for review, as well as its quarterly allocation amount.
The data can be corrected if a government notifies the Office of a processing
error within 21 days after the mailing of the payment and allocation data
notices. Approximately 125 govemments write during a typical quarter to
question the data factors used. Such correspondence occasionally results in
corrections to the data and adjustments to the antirecession payments.
During 1978, a newly designed Actual Use Report, consolidating local
government reporting of expenditures under both the general revenue sharing
and antirecession fiscal assistance programs into a single concise format, was
introduced by the Office in conjunction with the Bureau of the Census. This
information, the collection of which is mandated by the enacting legislation,
wUl be highly useful in periodically evaluating both programs' effectiveness.
Technical assistance

The Office of Revenue Sharing provides information and technical
assistance to State and local govemments receiving general revenue sharing
and antirecession fiscal assistance funds. The past year was an especially active
one because of the many State and local officials who assumed public office
for the first time.
Technical assistance was provided in the form of more than 3,000 letters in
response to written requests for specific information and guidance. In addition.



220

1978 REPORT OF THE SECRETARY OF THE TREASURY

over 88,000 telephone contacts were made with recipient govemments,
various organizations, and others interested in the revenue sharing and ARFA
programs. Six technical papers were prepared on various aspects of both
programs and over 7,500 individual mailings were made of these and other
informational materials.
The Office has established a network of liaisons within each ofthe 50 States
and the 4 territories receiving ARFA funds. Over 60 technical assistance
workshops were conducted during the year in cooperation with these liaisons
and other cosponsors for the benefit of recipient governments.
Quarterly, each of the more than 38,000 recipient governments in the
general revenue sharing program and each of the more than 20,000
governments which have received ARFA funds has been sent a letter to
provide information which wiU enable the recipient govemment to continue
to participate and remain in compliance with the requirements of the
legislation.
Public participation

Considerable time was spent during the year informing recipient governments and public interest groups ofthe new public participation requirements.
These provisions require two public hearings to be held by State and local
govemments receiving revenue sharing funds prior to the use of such funds,
with attendant public notice and opportunity for examination of budget
documents.
A series of publications designed to assist recipient govemments to
understand the new requirements was developed. Public participation
compliance reviews were conducted in more than 100 recipient jurisdictions.
Direction was provided to those governments which had failed to comply with
public participation requirements.
Civil and human rights

Section 122 of the 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 subjected to
discrimination under any program or activity of a State govemment or unit of
local government, which government or unit receives funds * * *. Any
prohibition against discrimination on the basis of age under the Age
Discrimination Act of 1975 or with respect to an otherwise qualified
handicapped individual as provided * * * shall also apply to any such program
or activity. Any prohibition against discrimination on the basis of religion, or
any exemption from such prohibition, as provided * * * shall also apply to any
such program or activity."
Although the staff which has responsibility for monitoring and enforcing this
section of the Revenue Sharing Act is small, it has been successful in
investigating a significant number of civil rights complaints. Of even greater
significance has been the success demonstrated by the Civil Rights Division in
resolving most of the complaints, mainly through negotiation and efforts to
achieve voluntary compliance. In those rare instances where recipient
jurisdictions have been reluctant to take those steps necessary to come into
compliance, the Office has demonstrated its mandated responsibility to
enforce the law and has initiated action to fulfill its responsibilities through the
route of administrative hearings to compel compliance.
Shown below is a table that demonstrates the growth ofthe activities ofthe
Division.




221

ADMINISTRATIVE REPORTS
Discrimination complaints
Year
1972
1973
1974
1975
1976
1977
1978

Received r

Determinations/
findings

Qosedr

Carried over r

2
27
75
213
229
276
306

0
1
14
8
7
125
156

0
2
26
29
71
142
184

2
27
76
260
418
552
674

r Revised.
Note.—The most significant unit of work measurement is the determinatioris/fmdings issued, rather than
number of complaints closed. The major portion of the work process is completed upon the issuance of a
determination/fmding. Usually, the closure of the case is dependent upon a review ana analysis of requested
inlbrmation from a recipient govemment after the issuance of a noncompliance determination, or nnding.

To assist in conducting field investigations and to help resolve discrimination
complaints, the Office continues to work in a cooperative effort with several
major Federal agencies. The Office is currently attempting to renegotiate
cooperative agreements with the Federal agencies with which it has shared
agreements.
Audit procedures

The 1976 amendments to the Revenue Sharing Act require that a recipient
govemment receiving $25,000 or more annually in revenue sharing entitlements must have an independent audit of its financial statements conducted,
in accordance with generally accepted auditing standards, not less often than
once every 3 years. This requirement is applicable to more than 11,000 ofthe
nearly 39,000 revenue sharing recipients.
During fiscal 1977, the Office reviewed the professional practice of aU State
auditors responsible for making financial and compliance audits of State and
local governments and found the audits of 11 of these audit agencies to be
unacceptable. Since State auditors audit about one-half of the recipients
required by the 1976 amendments to have audits, the Office has given
particular attention to those 11 agencies that were not doing an acceptable job.
As of the end of the fiscal year, all 11 either had taken positive steps to bring
their practice to an acceptable status or had decided to contract with
independent public accountants to make the required audits.
In December 1977, a new audit guide was issued which incorporated the
changes in the Revenue Sharing Act made by the 1976 amendments in
accounting and auditing requirements and included the compliance audit
procedures of the Antirecession Fiscal Assistance Act. A program was
prepared for reviewing audit reports submitted to the Office by independent
public accountants and State auditors. Also, the review programs of State
auditors and independent public accountants were revised in view of the
enlarged requirements ofthe 1976 amendments.
The Office definition of "independence" contained in its regulations was
adopted by the American Institute of Certified Public Accountants (AICPA).
In defining independence in relation to the auditing of govemmental entities
previously, the AICPA recognized only practicing certified public accountants
as being independent for this purpose.
During the year, the Audit Division either received or was advised of the
issuance of 2,700 audit reports of revenue sharing recipients. Copies of audit
reports issued by independent public accountants for which a State auditor has



222

1978 REPORT OF THE SECRETARY OF THE TREASURY

no legal responsibUity must be furnished to the Office. Also, copies of audit
reports must be submitted to the Office if they disclose violations of the
Revenue Sharing or Antirecession Fiscal Assistance Acts and regulations.
State auditors provide the Office with a quarterly report listing audit reports
which they issue or receive for review from independent public accountants
that do not contain findings of violations of the Revenue Sharing or
Antirecession Fiscal Assistance Acts or regulations. These reports are kept on
file by the State auditors for review by the Audit Division as a part of the
periodic reviews made of State auditors' performance.
Considerable time was devoted during the year to the review of the
professional practices of independent public accountants. During the year,
135 reviews were made involving 235 recipients. The practice of 65 of these
independent public accountants deviated from generally accepted auditing
standards to such an extent that they could not be considered to be in
compliance with the requirements of the Revenue Sharing Act.
The Audit Division also responded to 4,000 requests from independent
public accountants for confirmation of entitlement fund payments.
In fiscal 1978, 375 cases were opened ofwhich 260 resulted from findings
of audit reports. Cases closed totaled 580. Thus, open cases were reduced from
390 to 185 or a decrease of 205 during the year. There was also progress made
in closing cases more promptly. As of September 30, 1978, there were only
40 cases that had been open for a year or more.
Legal issues

During the fiscal year, the Chief Counsel participated in the initiation or
defense of 14 legal actions including 3 administrative hearings. Several court
suits involved discrimination charges against recipient govemments in which
the Office was joined as a party defendant.
In regard to alleged charges of discrimination against recipient governments
in which the Office was joined as a party defendant, the case Committee for
Full Employment v. Simon is on appeal in the U.S. Court of Appeals for the
District of Columbia Circuit. The district court (U.S.D.C, D.C.) in this case
decided for the Secretary of the Treasury, agreeing that plaintiffs lacked
standing to sue. The individual complaints filed with the Office in relationship
to this case are expected to be settled through the adoption of compliance
agreements between the concemed recipient governments and the Office prior
to the oral argument on the case.
The Office was involved in several suits involving the application of adjusted
tax data in the revenue sharing allocation formula, and the procedures of the
Office in making downward adjustments to a recipient govemment's allocation. Board of Supervisors of Henrico County, Virginia \ . W. Michael Blumenthal
et al. (U.S.D.C, W.D. Va.) concems the treatment of county highway funds
with respect to the derivation of adjusted taxes in the revenue sharing
allocation formula. Edward V. Regan v. Jeanna Tully (Bernadine Denning)
(U.S.D.C, W.D. N.Y.) concerns whether the Office properly made a
downward adjustment in Erie County, N.Y.'s seventh entitlement period
allocation.
The Office also obtained a favorable data decision in the U.S. District Court
for the District ofColumbia in City of Newark, New Jersey, et al. v. Blumenthal,
CivU Action No. 74-548 (January 17, 1978). In granting the defendant's
motion for summary judgment and denying the plaintiffs' motion for summary
judgment, the court held that the Secretary's discretion in adjusting revenue
sharing allotments under S 109(a)(7)(B) is not reviewable (31 U.S.CA. S



ADMINISTRATIVE REPORTS

223

1228(a)(7)(B) ). The cities of Newark and Baltimore had asked the court for
a determination that their past and future allocations be increased to reflect
an estimated black population undercount indicated in an updated analysis of
the 1970 Census data originally relied upon by the Secretary.
Other court and administrative actions involving Nottoway and New Kent
Counties, Va., were settled before trial in conformance with the earlier case
of Albemarle County, Virginia v. William E. Simon, Secretary of the Treasury,
et al. (U.S.D.C, W.D. Va.). These actions concerned the proper derivation of
adjusted taxes for those Virginia counties with general revenue or "commingled" fund accounting systems.
An administrative proceeding against the town of Dover, N.J., was begun,
founded on the Office's determination that the town had discriminated against
Hispanics in its employment practices. A pretrial conference was conducted
before an administrative law judge, and the action was settled before the date
of the hearing on the merits. The town made lump-sum payments to the two
individual complainants, and it submitted a satisfactory affirmative action plan
pertaining to its employment practices.
An administrative hearing against the city of Akron, Ohio, was begun based
upon an Office determination that the city had discriminated against an
individual on the basis of handicapped status in violation of S 122(a) of the
amended Revenue Sharing Act (31 U.S.C. 1242(a) ). This action was settled
at the commencement of the hearing on grounds favorable to the position of
the Office.
An Office legislative program for the First Session ofthe 96th Congress was
developed. This program recommended amending the Revenue Sharing Act
of 1976 to provide, among other things, (1) the Secretary, when necessary,
with the authority to reserve (in accordance with S 102(c) of the act) more
than 0.5 percent ofeach State's allocations in order to pay any later required
adjustments to the aUocation of the State or any unit of local government
within that State; (2) sanctions for noncompliance with the public participation requirements of S 121 of the act; (3) for deferral of Office jurisdiction to
other Federal agencies. Federal or State courts when they are acting promptly
and expeditiously on the same matter before the Office; and (4) for other
technical amendments aimed at correcting drafting oversights in the act.
During the fiscal year, the Chief Counsel issued approximately 70 letter
rulings to recipient governments seeking guidance for the use of ARFA funds.
A digest of these letter rulings has been prepared for the use of recipient
governments.
Antirecession fiscal assistance

Treasury distributes antirecession funds to States and local general
governments based on unemployment rates and general revenue sharing
entitlements. These funds supplement the general revenue sharing payments.
Appropriations of funds to be distributed and of money to be used to
administer the new program were first made available in fiscal 1977.
In May 1977, the Congress extended the ARFA program for four quarters
beyond its original life, through September 1978, by enacting the Intergovernmental Antirecession Assistance Act of 1977. This legislation maintained the
broad outlines of the original program.
In excess of $3 bUlion has been distributed to over 25,000 State, general
purpose local, and several U.S. territorial govemments. These funds are
intended by the Congress for use to maintain basic services normally provided
by governments and to help these units avoid actions which run counter to
national economic policies.




224

1978 REPORT OF THE SECRETARY OF THE TREASURY

OFFICE OF TARIFF AFFAIRS
The Office of Tariff Affairs, which provides policy direction, review, and
final action on recommendations by the Customs Service on administration of
the Antidumping Act and the countervailing duty law, faced a radically
increasing workload during the fiscal year, with antidumping cases rising to
247 percent of the 1977 level, and countervailing duty investigations
increasing to 175 percentof the 1977 level. In February 1978, the Office began
oversight of the trigger price mechanism for monitoring of steel imports for
the purpose of determining when self-initiation of antidumping investigations
of imported steel products might be appropriate. The Office also adopted a
new antidumping regulation to deal more appropriately with imports from
state-controUed-economy countries under the Antidumping Act.
During fiscal 1978, the Treasury initiated 47 antidumping investigations and
reached final determinations of sales at less than fair value in 11 cases. There
were eight dumping findings during that time. Over the same period, the
Treasury initiated 28 investigations under the countervaUing duty law, made
4 affirmative determinations and 8 negative decisions. Five waivers of
countervailing duties were issued during that time. During the year, the Office
also completed an investigation under section 232 ofthe Trade Expansion Act
concerning an alleged threat to the national security arising from imports of
metal fasteners, and provided assistance to Treasury participants in the
multilateral trade negotiations insofar as they related to the negotiation of a
countervailing duty code.

UNITED STATES CUSTOMS SERVICE
The principal missions ofthe U.S. Customs Service are 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 intemational traffic and trade and protect the American public.
To accomplish these missions, the Customs Service performs the following:
1. As the principal border enforcement agency and a protector of the
American consumer. Customs administers and enforces over 400 laws and
regulations of over 40 Govemment agencies, relative to international traffic
and trade.
2. Detection and prevention of all forms of smuggling and other Ulegal
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.
4. Examination and clearance of carriers, persons, and merchandise
consistent with the requirements for the proper assessment and collection of



ADMINISTRATIVE REPORTS

225

customs duties, taxes, fees, fines and penalties, and compliance with the
customs laws and regulations applying to intemational commerce.
5. The most effective application of resources to carry out the total
Customs mission, consistent with efficiency in Govemment and economy and
service to the public.
During fiscal 1978, Customs cleared over 273 million persons arriving in the
United States. More than 82 million cars, trucks, and buses crossed the
country's borders; an additional 211,000 ships and 441,000 aircraft also
cleared Customs. This involved processing 16 mUlion customs declarations.
Customs collected a record $7.5 billion in duty and taxes and processed
$165 billion worth of imported goods which required over 4 million formal
entries (those over $250 in value). In addition, there were 47 miUion foreign
maU parcels processed in fiscal 1978, requiring over 2.3 mUlion informal maU
entries.
The Customs enforcement mission also produced tangible results during
fiscal 1978. Merchandise seized, including illicit drugs, prohibited articles,
undeclared merchandise, etc., was valued at over $2 billion. There were over
21,000 drug seizures. These seizures included 1,419 pounds of cocaine, 7.6
million units of polydrugs, and 2,308 tons of marijuana. There were 189
pounds of heroin seized.
Merchandise Processing
As part of its functions to examine and clear carriers, persons, and
merchandise, in fiscal 1978, Customs processed 4 miUion formal entries; and
collected $7.5 billion in revenue on merchandise valued at more than $165
billion.
Quotas

One of the principal uses of vital trade statistics is in the establishment of
commodity quotas. Currently the Customs Service enforces more than 940
such quotas.
Mail operations

During fiscal 1978, Customs mail branches processed approximately 47
million parcels, prepared over 2 million maU entries, and coUected approximately $21 million in duty. Over 80 percent of the foreign mail is processed
by Customs mail branches at locations in New York, Oakland, Seattle, Los
Angeles, and Chicago. Streamlined procedures for revenue collection are
being implemented with the aim of better servicing the public.
Containerization program

The container examination program was designed to separate containers of
goods arriving from foreign countries into two categories, those on which an
intensified examination was necessary and those which could be released upon
a cursory examination. During fiscal 1978,1,603,210 empty and merchandisefilled containers arrived in the United States. Of this number, 154,606 (10
percent) were given an intensified examination. A total of 303,485 "empty"
containers were screened for controlled substances and presence ofmerchandise.
Reduced supervision of bonded warehouses

In a continuing effort to reevaluate the risk factors and controls in cargo
processing, Customs has embarked upon a program to reduce the supervision



226

1978 REPORT OF THE SECRETARY OF THE TREASURY

of bonded warehouses. This reduction, for the most part, consists ofremoving
the Customs locks from the warehouse and physically supervising only
selected, high-risk activities.
Automation of cargo control

Nearly all merchandise that enters the United States must be reported on
the manifest ofthe carrier that brings it into the country. Customs checks each
manifest for merchandise verification.
Customs reviewed its manifest controls during 1978 and decided to use the
cargo manifest to initiate an audit trail for all goods entering the United States.
The period covered wUl extend from the time they arrive until they finally leave
Customs jurisdiction. This would include not only goods entered directly for
consumption, but also the many shipments whose final entry or reexportation
is delayed for transportation in bond to another port, entry for warehouse and
subsequent withdrawal, unclaimed goods placed in general order, and similar
situations.
Military predeparture program

There are over 150 predeparture inspection activities located overseas
staffed by over 2,700 full- and part-time military customs inspectors (MCI's).
MCI's perform inspections of cargo, passengers, crew, and their baggage;
personal and household effects; aircraft; vessels; and mail. The purpose of this
overseas program is to interdict narcotics, dangerous drugs, and other
contraband prior to arrival in the United States, and thus expedite the
movement of passengers, cargo, carriers, and mail.
Although the major military commands are responsible for the establishment of predeparture inspection programs and the assignment, training, and
supervision ofthe MCI's, six customs officers have to serve as advisers to the
major commands and ensure that effective inspection procedures are being
UtUized.
Customs laboratories

The Customs laboratories analyzed over 160,000 samples. Changes in
classification occurred in over 12,000 of these samples as a result of laboratory
analysis. Many of these changes involved high-risk merchandise such as metal,
textiles, chemicals, and footwear (with a concurrent increase in revenue). Use
ofthe National Commodity Sampling Information System (NCSIS—a report
detailing classification change rates for imported commodities) was instrumental in increasing the sampling rates for high-risk imports. Further
refinements and extensive dissemination ofthe NCSIS report will improve this
ratio.
Trade
Antidumping and countervailing duty

During fiscal 1978, 56 new antidumping and 28 countervaUing duty cases
were initiated; 17 antidumping and 16 countervailing duty cases were
published. Antidumping master lists on 77 manufacturers were circulated to
field offices for their use in assessing dumping duties. Presently, 75 findings
of dumping are in effect. Antidumping and countervailing duty investigations
more than doubled from 1977 to 1978.



ADMINISTRATIVE REPORTS

227

Antidumping.—Approximately 30 of the antidumping investigations conducted in fiscal 1978 concerned steel mUl products. The greatly increased
volume of steel imports and the generally depressed condition ofthe U.S. steel
industry appear to have accounted for so many investigations involving steel
products. As the trigger price mechanism has begun to take effect, the
domestic industry has been withdrawing its complaints of dumping and
investigations are being terminated.
Antidumping appraisement procedures.—The major accomplishment in this
area during fiscal 1978 was the appraisement of televisions from Japan under
the Antidumping Act. Approximately $46 mUlion has been assessed on entries
of television receivers. However, accomplishing these appraisements required
such a large amount of manpower that Customs has been unable to reduce the
backlog of antidumping appraisements on other merchandise.
Countervailing duties.—The majority of the countervailing duty petitions
filed in fiscal 1978 related to various textile products. These primarily
concerned exports from South America and the Far East. Common elements
of these petitions concemed allegedly favorable tax treatment for export
industries and various measures to encourage economic development in
specified areas of individual exporting countries. The Supreme Court has
upheld the Government's position on the Japanese electronics products case
that noncollection ofthe Japanese commodity tax does not constitute a bounty
or grant under the countervailing duty law. Accordingly, the entries of
consumer electronic products from Japan, which had been subject to this
litigation, will be liquidated without assessment of countervaihng duties.
Trigger price mechanism (TPM)

In 1977, the U.S. steel industry was experiencing financial difficulties which
industry analysts attributed to unfairly priced steel imports. To help the steel
industry, the President signed a comprehensive aid package, dealing with such
matters as plant obsolescence, environmental controls, worker assistance, and
imports. To alleviate the import problem and ensure free but fair competition,
the report proposed a trigger price mechanism.
TPM is designed to monitor imports of steel products and enable Treasury
to expedite dumping investigations when warranted. Trigger prices are
calculated and published for steel mUl products. During fiscal 1978, trigger
prices had been published for 84 steel mill products covered by the program.
These prices, which must be revised quarterly, consist of: A base price, a
charge for "extra" specifications, ocean freight, handling, interest, and
insurance.
Generalized system of preferences (GSP)

Customs participated in GSP in conferences in Malaysia, Singapore, the
Philippines, and Hawaii to discuss verification procedures and other mutual
problems concerning GSP implementation.
Amendments to sections 10.172 and 10.173 ofthe Customs Regulations
were effective in January 1977. These changes relaxed the rigid requirements
concerning liquidated damages and written claims under GSP. Currently, 140
countries/territories and 2,750 major item numbers in the Tariff Schedules of
the United States are eligible for GSP. During fiscal 1978, the number of GSP
imports represented 6 percent of the total line items processed.
Classification of exported goods

Customs participated in an interagency effort to achieve statistical comparability between U.S. import, export and production data. As a result of this



228

1978 REPORT OF THE SECRETARY OF THE TREASURY

project, a new schedule B encompassing the classification of exported goods,
a revised manufacturing code, and revised tariff schedules were published for
use in fiscal 1978.
Enforcement
Interdiction

The tactical interdiction patrol program attempts to combat smuggling
activity along the national borders by reducing the smugglers' options for
choosing the method, time, and place for entering contraband into the United
States. Customs seeks to accomplish this by maintaining a mobile interdiction
force capable of operations on land, sea, and in the air.
Air interdiction.—In fiscal 1978, there were 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. However, since the southern border of the
United States is more than 3,000 miles long, each air branch has responsibUity
for protecting a corridor that, on the average, is 500 miles wide.
This year, the air program entered into another agreement with the U.S. Air
Force for the loan of four T-39 Saberliner high-performance jet aircraft. These
aircraft will serve as the firstline interceptors for the airborne warning and
control system (AWACS) operations. In addition to these aircraft. Customs
continues to utilize the North American Radar Defense/Federal Aviation
Administration (NORAD/FAA) long-range radar as weU as mobUe groundbased radar units for smuggler detection and tracking.
In concert with sophisticated radar and aircraft. Customs also utilized—
1. Intelligence information on suspect aircraft available through the
Treasury enforcement communications system (TECS).
2. Data from the private aircraft reporting system (PARS), which requires
all private aircraft crossing the Southwest border to give at least a 15-minute
advance report before penetrating U.S. airspace and land at 1 of 14 specially
designated airports.
3. The private aircraft inspection reporting system (PAIRS), which
automates the arrival reports of all general aviation-type aircraft arriving from
foreign countries and clearing U.S. Customs. Such arrival information is
entered in TECS.
The combination of these elements enables Customs to concentrate on highrisk aircraft by screening out legitimate private aircraft.
On July 29, 1978, air surveillance detected a suspect aircraft in the vicinity
of Homestead General Airport located south of Miami, Fla. As the aircraft
landed at the airport four large suitcases were tossed onto the side of the
taxiway. Customs air officers attempted to intercept the aircraft, and on an
attempted departure the suspect plane crashed. The pilot managed to escape
but further investigation led to identification of the suspect and subsequent
indictment. Customs officers successfully seized the 4 suitcases which
contained over 200,000 quaaludes.
During fiscal 1978, the air support program seized 62 vehicles, 56 aircraft,
596,428 pounds of marijuana, 74 pounds of hashish, 54.4 pounds of cocaine,
11 vessels, 27 weapons, and $172,940 in cash, and made 177 arrests.
Border interdiction.—Customs land interdiction resources along our northem and southern borders consist of mobile tactical units which utilize border
intrusion devices arranged into electronic sensor fields, night vision devices.



ADMINISTRATIVE REPORTS

229

TECS and sector communications networks. At major ports of entry patrol
officers search aircraft and vessels.
On January 2, 1978, a Miami customs officer observed a suspicious person
remove a box from a banana boat and transfer it into a waiting vehicle. The
vehicle was stopped; the box was found to contain 17 pounds of cocaine and
the suspect driver of the vehicle was arrested. Following a search of the area
located near the banana boat, an additional 31 pounds of cocaine was also
seized for a total of 48 pounds of cocaine.
During fiscal 1978, the land program seized over 3 million pounds of
marijuana and hashish. The program resulted in the arrest of 500 suspects. This
is an increase of more than 200 percent over the number of seizures made
during fiscal 1977. The seizures of hard narcotics increased more than 90
percent over the seizures for fiscal 1977.
Marine interdiction.—Customs marine interdiction units detected and
apprehended marine violators in many coastal, lake, and river boundary areas.
The violations included many smuggling attempts and delinquencies in
reporting and entry requirements. These units utilized Customs patrol boats,
special reporting and inspection facilities, reports of legitimate traffic, and
intelligence concerning illicit activities. Four new marine patrol stations were
put into operation in fiscal 1978.
On July 18, 1978, customs officers, on patrol off the coast of Florida,
boarded two suspect 55-foot "Crawfish" vessels and discovered 35,000
pounds of marijuana. As a result, both vessels and the marijuana were seized
along with a van and two 5-ton trucks. Twelve suspects were apprehended and
arrested.
In fiscal 1978, the Customs marine interdiction program seized over 1
million pounds of marijuana and 200 pounds of cocaine along with 146 vessels.
The program resulted in the arrest of 500 suspects.
Mail interdiction.—Customs mail facilities interdicted the smuggling of
narcotics, weapons, explosives, stolen property, and other contraband, making
over 6,000 seizures of illicit narcotics in both military and nonmilitary mail.
On June 9, 1978, at the Chicago mail facility, customs officers, examining
a letter-class envelope from the Netherlands, discovered films dealing with
child pornography. A subsequent controlled delivery to Paducah, Ky., resulted
in one arrest and seizure of the film. The suspect was later convicted of
smuggling controlled contraband into the United States and sentenced to three
consecutive 5-year terms.
Enforcement Support
Treasury enforcement communications system

The Treasury enforcement communications system continues to be the
major tool in Customs effective enforcement program through instant online
communication. TECS makes available law enforcement information to
enforcement personnel in ports of entry, to investigative offices in field and
headquarters, locations within Customs, and to other Federal law enforcement
activities. It has provided data instrumental in the arrests of thousands of
fugitives; recovery of countless firearms, automobiles, and other stolen or
missing property; seizure of thousands of articles of contraband and tons of
narcotics and illegal drugs; and seizures of millions ofdollars ofcurrency and




230

1978 REPORT OF THE SECRETARY OF THE TREASURY

negotiable instruments. Due to this effectiveness, and the flexibility of the
Burroughs 7700 host computer and the redesigned TECS software. Customs
is implementing a plan which has expanded the network to over 1,000
terminals with an integrated data base of almost 2 million records. The TECS
redesign is being implemented as a system that will serve the needs of law
enforcement officials within and outside Treasury with a minimum of cost to
the taxpayers through the economies of sharing a computer and communication resources in the enforcement community. In addition, TECS provides
enforcement-related management information indispensable to headquarters,
field management and operations. It also serves as an index to all of Customs
central files. This means rapid retrieval of supportive hard copy enforcement
documentation.
In fiscal 1978, a stolen vehicle index based on National Crime Information
Center (NCIC) records has been entered into TECS. The national avaUability
of this index has resulted in the recovery of over 400 stolen vehicles and 500
related arrests this fiscal year.
The private aircraft inspection and reporting system was implemented on a
national basis, providing for improved inspection, control, and reporting of
private aircraft arrivals.
A fines, penalty, and forfeiture system was designed and implemented to
provide a national index for Customs field use in processing penalty cases. The
system also provides improved regional and national management control for
timely and consistent penalty processing.
The Immigration and Naturalization Service (INS) Lookout Book was
automated within TECS. This provided a base for increased Customs-INS
cooperation resulting in the interception of about 80 individuals since
implementation. Pilot tests of several passenger inspection configurations are
underway at selected international airports.
Emphasis focused also on development of productivity and effectiveness
measurement. Initial output of this effort results in establishment of zero-base
budget objectives for 1978 and 1979, greater focus on improving the reliability
and utilization of TECS terminals, as well as improved computer system
configuration management and planning.
The first TECS telecommunications concentrator was installed in Washington. It is currently providing a $6,000 monthly cost savings in telecommunication costs. This savings is expected to grow to $ 12,000 monthly when all of
the assigned terminals have been switched over to operation via the
concentrator.
The systems security and privacy compliance program was initiated to
establish and implement guidelines, policies, and procedures to ensure the
security and integrity of aU related TECS computer operational activities. The
program addresses the objective, background, policies, responsibilities, and
support action required to enhance the security of TECS. A security evaluation
checklist has been produced which provides the program with a valuable
reference document for use at Customs installations where TECS is in
operation. In addition, a revised TECS Security Manual is being prepared for
use and reference by Customs and non-Customs users of TECS. It wiU include
informational guidelines regarding security procedures and records, personnel
and data access controls, and physical security; recent developments regarding
privacy and disclosure awareness are appropriately emphasized.
TECS service was extended this fiscal year to the Freeport, Toronto, and
Calgary preclearance facilities, Miami Satellite and Newark Airports, INS
headquarters, and State Department headquarters and field units as well as to
additional stations at JFK Airport.



ADMINISTRATIVE REPORTS

23 1

Joint projects were initiated with INS to identify a common use terminal
device for land border and airport facUities to accommodate the processing
of machine-readable travel documents, and shared use ofthe TECS telecommunications network.
Customs enforcement information system (CEIS)

CEIS is designed to provide information from various enforcement systems.
Its purpose is to support the interdictory and investigative missions of Customs
by providing immediate information to customs officers in the detection of
violations of customs laws; enforcement statistics to evaluate programs and
performance and to identify deficiencies; statistics for projecting requirements
and for determining the optimum allocation of equipment and dollars and the
optimum deployment of personnel; and data for intelligence analysis of, among
other things, violation patterns, latest modus operandi, and courier profiles.
A computerized information system such as CEIS increases in value over the
years as more data is fed into the system. During fiscal 1978, approximately
200,000 records were created or updated, bringing the TECS data base to
more than 1.5 mUlion records. In fiscal 1978 the enforcement lookout system
aided in the seizure of heroin with a street value of $ 16 mUlion; marijuana with
a street value of $20 million; cocaine with a street value of $20 million; hashish
with a street value of $4 million; dangerous drugs with a street value of over
$1 million; numerous vehicles, vessels, and aircraft used to transport such
contraband into the country; more than $560,000 in cash and bearer monetary
instmments; and general merchandise valued at more than $1 mUlion.
The TECS interface with the FBI's NCIC also produces impressive results.
Forewarned by TECS-NCIC hits in fiscal 1978, customs officers apprehended
1,058 fugitives wanted by other Federal, State, and local law enforcement
agencies.
CEIS is continually being expanded and improved. The system is currently
operational at Dulles Airport and the preclearance facUities in Nassau,
Freeport, and Bermuda and is scheduled for implementation at additional
preclearance ports in Canada.
Customs central enforcement files have continued to experience tremendous growth. The number of records microfiched during fiscal 1978 was up
79 percent over fiscal year 1977. The number of aircraft reports received in
support of the private aircraft inspection reporting system has more than
doubled since fiscal 1977.
A number of enforcement information systems designed to enhance
Customs enforcement results were implemented or perfected in fiscal 1978.
To support the Customs air interdiction program aimed primarily at drug
smugglers, the private aircraft inspection reporting system was expanded
nationwide. After a test period during fiscal 1977, PAIRS was brought on-line
to all Customs and El Paso Information Center (EPIC) terminals. PAIRS
charts arrivals from foreign countries by pilots in private aircraft. It also
provides valuable information when used in conjunction with TECS records
on individuals and aircraft. To counter narcotics smuggling via small vessels
(as opposed to oceangoing commercial vessels with records in the Customs
vessel violation profile system), the small boat program was implemented in
fiscal 1977. Information sources have been expanded in fiscal 1978 and
include Customs, Coast Guard, Drug Enforcement Administration, and State
and local authorities. During fiscal 1978, the small boat program was




232

1978 REPORT OF THE SECRETARY OF THE TREASURY

instrumental in the seizure of 189 pounds of cocaine valued at over $50 mUlion
and approximately 3.5 million pounds of marijuana valued at over $1 billion.
Detector dog program

During fiscal 1978, the strength of the detector dog program rose to 142
teams assigned to 43 ports of entry throughout the United States. These dog
handler teams facilitated the expenditious processing of the traveling public
and played an important role in the screening of imported merchandise and
international mail. Detector dog teams seized 57 pounds of heroin, 91
pounds of cocaine, 17,428 pounds of marijuana, and 1,768 pounds of hashish.
Communications support program

The communications support program consists of the nationwide radio
system, the administrative teletype system, and the facsimUe system, as well
as provides technical support for other Customs communiciations programs.
The overall objective of the program is to provide modem and responsive
systems to meet the communications needs of the Customs Service. As the
Service grows to meet new mission responsibilities, communications growth
must follow. Advances in technology and equipment development must be
closely monitored and integrated into the system as they are justified on the
basis of costs and user needs. More specifically, the objectives are to:
(a) Implement and operate a nationwide radio communications system which
provides substantially complete radio coverage around the perimeter of the
United States and at all locations where customs officers operate in a mobile
environment; (b) provide an electronics system for rapid intraservice
distribution of administrative textual and graphic correspondence; and
(c) provide technical assistance directed toward reducing costs and increasing
reliability of Customs data communications systems.
Significant accomplishments for fiscal 1978 included:
1. Regional communications centers were estabhshed in the Miami, New
Orleans, and Houston regions. This was done by moving the Tampa sector to
Miami, the Mobile sector to New Orleans, and merging the El Paso and San
Antonio sectors into Houston.
2. A regional communications center was established in San Francisco and
radio services were expanded to cover the border and coastal areas of this
region.
3. A radio communications system was installed in the major cities and
Great Lakes areas of the Chicago region. Plans were initiated with the
Immigration and Naturalization Service to share a common radio system along
the northern border of North Dakota and Minnesota.
4. Procurement of the Customs-designed two-position sector console was
initiated. This new concept should greatly improve the productivity and
services provided by the sector operators. The prototype unit will be installed
in the Los Angeles center in the early part of calendar 1979.
5. A major modification of the administrative teletype system reduced
annual costs by greater than 10 percent.
6. A new annunciator system was designed and installed at Dulles Airport
to support the Customs-INS inspection test program.
Enforcement systems development and evaluation

Customs must cope with numerous and diverse ways of smuggling through
ports and across miles of borders. In addition to having the opportunity to
choose among many possible smuggling routes and methods, the smuggler



ADMINISTRATIVE

REPORTS

233

adds to his advantage by using modern equipment to carry out his illicit activity
or to prevent its detection. To be effective in this situation. Customs needs
equipment that will not only neutralize the smuggler's advantage, but also
provide an advantage for the enforcement officer. The objective of the
enforcement systems development and evaluation program is to support the
enforcement officer, both in the port of entry and along the border, through
the identification and provision of technical equipment that will improve the
productivity of the individual officer and the overall performance of the
Customs interdiction and investigative programs.
Significant accomplishments for fiscal 1978 included:
1. In contraband detection. Customs continued to develop and evaluate a
number of complementary approaches to the detection of narcotics and dther
contraband concealed on people or in vehicles and merchandise, among other
things. The principal utilization of these approaches will be at locations where
a customs officer suspects the presence of concealed narcotics; e.g., at a
private or remote airstrip, a marina, or along the border. Customs continued
the development and the evaluation of the neutron backscatter device. This
hand-held device is capable of detecting organic substances (i.e., narcotics)
concealed in metal structures or sealed compartments on vehicles, aircraft,
and vessels.
2. Radar systems are an essential element in the detection and tracking of
aircraft and boats attempting to illegally cross the U.S. borders. Accordingly,
Customs has continued its efforts to intelligently utilize either available
Federal radar systems or its own equipment. One ofthe Nation's major radar
resources is the Air Force airborne warning and control system. As the
culmination of program efforts initiated in fiscal 1977, Customs has now signed
an agreement with the Air Force permitting customs personnel aboard
selected AW ACS flights and at the AW ACS base.
3. Customs continued its marine radar program by installing a second
SPS-59 in a Miami patrol boat for evaluation purposes. A second installation
of a similar radar was also completed in a small truck to provide a mobile shorebased radar for tracking boats operating within 2 to 3 miles of the coast or
within harbors, rivers, and inland waterways.
4. In the area of day/night observation and surveillance systems. Customs
began a joint program with the Immigration and Naturalization Service to test
the utility of an infrared device mounted in a helicopter. The purpose of this
device is to detect and help apprehend aliens and smugglers crossing the
border on land or in small boats. The tests are being performed along the entire
southwest border by INS Border Patrol and Customs patrol officers working
as a team to operate, maintain, and evaluate the helicopter infrared system.
Customs also conducted extensive tests at four sites ranging from Miami to
Portland, Oreg., to determine the operational applications of the new handheld thermal viewers to be delivered early in fiscal 1979. Extensive orientation
and training programs on the variety of night vision and long-range viewing
devices now available to Customs were also conducted.
Investigative Activity
Customs maintains a force of 640 special agents stationed at 66 domestic
and 8 foreign offices. The mission of the special agent force is to function as
the professional investigative arm of the Customs Service with sole responsibility to conduct investigations of violations of customs and related laws and
regulations. The agents conduct criminal, civil, and factfinding investigations




234

1978 REPORT OF THE SECRETARY OF THE TREASURY

involving a broad spectrum of violations covering 33 separate categories of
investigative cases.
Of the 23,868 investigative cases closed during fiscal 1978, over threequarters consisted of investigations relating to: General smuggling, fraud,
navigation violations, customhouse licenses, currency violations, petitions for
relief, investigations for other departments and agencies, neutrality violations,
and cargo theft.
Currency reporting violations

During fiscal 1978, a major organizational development occurred with the
establishment of a Currency Investigations Branch at Customs headquarters.
The Branch is the focal point of the effort to (1) investigate economically
oriented crime, (2) enforce compliance with reporting requirements, and
(3) pursue organized crime, white collar crime, and narcotics trafficking
figures via their financial transactions. Results are achieved by bringing
currency reporting charges against these figures by disrupting and/or eliminating their financial base through seizures of illicit proceeds/assets.
The Branch will work closely with the newly established Treasury Reports
Analysis Unit located in the Customs Building and staffed principally by
Customs employees. The Unit was formed to improve the utilization of all
information obtained from the three reports filed in compliance with the Bank
Secrecy Act. Reports filed on Customs Form 4790, Report ofthe Intemational
Transportation of Currency and Monetary Instruments, will be included
among those analyzed by the Unit.
A criminal fraud investigation conducted in Cleveland produced evidence
of false invoicing (assists and rebates). Evidence was established that a large
company had made rebate payments to a second company ofwhich $202,000,
in the form of bearer bonds, was maUed into the United States from the
Netherlands in violation of 31 U.S.C. 1101. On March 8, 1978, the Federal
grand jury retumed an indictment charging one firm with violation of 31
U.S.C. 1059 (felony currency) and 18 U.S.C. 371 (conspiracy). Additionally,
a criminal information was filed by the U.S. attorney charging an individual
with violation of 18 U.S.C. 371 (conspiracy). On March 16, 1978, the
individual and counsel for the corporation appeared in the U.S. district court
and pleaded guilty to the violations charged in the information and indictment.
On May 2, 1978, the defendant was sentenced and received 2 years' probation
and fined $10,000. Sentencing for the firm is pending.
On AprU 26, 1978, as a result of an investigation conducted by Customs'
Multinational Task Force, Falls Church, Va., counsel for a large computer firm
appeared in U.S. district court. District of Columbia, and pleaded the
corporation guilty to a criminal information charging violation of 31 U.S.C.
1059 (felony currency reporting) and 18 U.S.C. 1343 (wire fraud). Investigation had identified both the unreported movement of $ 180,000 into the United
States and the unreported movement of $200,000 out ofthe United States. The
failure to report was in violation of the Bank Secrecy Act. The funds exiting
the United States were subsequently utihzed to bribe a high-ranking foreign
official.
Immediately following the corporation's plea, the court imposed a criminal
fine of $ 1,001,000 ($1 million for two counts 31 U.S.C 1059 and $ 1,000 for
one count 18 U.S.C 1343), and directed the corporation to pay $380,000 as
civU liabilities incurred under 31 U.S.C. 1103 (settlement agreed to by the firm
and the Department of Justice with concurrence of the Deputy Assistant
Secretary (Enforcement)).




ADMINISTRATIVE REPORTS

235

Neutrality violations

While the attempted smuggling of weapons and ammunition directly into
foreign countries from the United States continues, violations of the Arms
Export Control Act are evolving into a more complex and intricate character.
On February 13, 1978, customs agents in Chicago seized 140 firearms at
O'Hare International Airport for violation of the neutrality statutes. These
weapons were shipped to Illinois from a firm in Michigan and destined for
export to Zurich, Switzerland. Subsequent investigation disclosed that the
Michigan firm had made 20 shipments of munitions that had been illegally
diverted to South Africa. A Chicago grand jury has returned multiple
indictments.
Organized crime

During fiscal 1978, Customs became the lead Federal agency in three major
organized crime operations and in five separate investigations; special agents
developed evidence for legal sanction against three organized crime members
and three organized crime associates.
Two undercover special agents in Newark, N.J., effected a deep covert
penetration of organized crime cargo theft activity in the northern New Jersey
waterfront area. As a result of their penetration, the agents were approached
by a major crime figure to collect payments on shylock loans on his behalf. The
operation expanded into a joint operation between Customs, New Jersey State
authorities, and the Newark strike force, funded by a $350,000 Law
Enforcement Assistance Administration (LEAA) grant. The operation had to
be closed after the special agents were placed in a highly dangerous
confrontation which suggested that their true identity was known. However,
the agents had made various purchases of stolen merchandise and obtained
other evidence of criminal violations. Subsequently, 20 Federal search
warrants were executed which resulted in various seizures, including merchandise and 35 firearms. The Newark strike force is preparing numerous
indictments against 20 to 25 persons.
Cargo theft

The Office of Investigations cargo theft action plan was fully implemented
during fiscal 1978. The plan, which suggested a three-phase enforcement
approach—response, target selection, and covert penetration in areas of high
theft incidences—resulted in the creation of cargo theft squads in several
major offices. These squads and individual agent cargo theft specialists have
become the nucleus of four new LEAA-funded anti-cargo-theft/antifencing
operations in which Customs is serving as the lead Federal agency. The
implementation ofthe action plan has also resulted in increased development
of sources of information.
In early AprU a shipment of 3,450 men's suits from Romania, valued at
approximately $300,000, were reported stolen from JFK International
Airport. A confidential informant provided information to the Special Agent
in Charge, JFK, as to the whereabouts ofthe stolen property. A search warrant
was issued and on April 21, 1978, the warrant was executed at a warehouse
where 1,972 of the suits along with a tractor-trailer and a container were
recovered. Also, 79 sacks of Colombian coffee beans and a second tractortrailer rig, taken during an armed hijacking, were discovered and seized by
special agents. Total domestic value of this seizure was $370,000.




236

1978 REPORT OF THE SECRETARY OF THE TREASURY

Fraud

Customs fraud is white coUar crime committed on an international scale.
Violations of customs laws adversely affect significant segments ofthe national
economy—balance of trade, domestic industry, the American labor market,
and U.S. trade policies—and thus constitute an important investigative priority
for Customs. Major fraud investigations continue to be concentrated on cases
which have a high potential for civil/criminal prosecution and revenue
recoveries of consequence.
A Federal grand jury in Buffalo retumed a 13-count indictment against two
Canadian businessmen and a Canadian trading company. The indictment
charged that these individuals attempted to defraud the United States by
entering woven polyethylene sheeting into the country and paying less than the
amount of duty legally due on the sheeting. The product was made in Japan
and the loss of revenue amounted to more than $523,000. The case involved
the submission of various false documents including false Japanese laboratory
reports. The submission of these false documents qualified the product for a
lower tariff rate. If convicted, the defendants are facing prison terms plus
substantial fines.
On August 2, 1978, a firm was found guilty on seven counts of violating 18
U.S.C. 542 (criminal fraud) in Federal District Court for the Middle District
of Florida. The convictions related to the fraudulent entry of 937,000 barrels
of residual fuel oil at JacksonvUle during 1973-74 utilizing a fraudulently
obtained fee-free import license issued by the Federal Energy Administration.
The conviction culminated a 4-year investigation of the firm and resulted in
a loss of revenue totaling $167,745.
Modernization
Customs Procedural Reform Act

The Customs Procedural Reform Act (Public Law 95-410) was passed by
the House of Representatives on October 17, 1977. The Senate passed an
amended version of the bill on June 8, 1978, and a conference committee
composed of members of the House Ways and Means Committee and the
Senate Finance Committee met early in August 1978 to resolve the differences. A conference report was filed in late August 1978, and action by both
House and Senate on final version of the bill resulted in passage of the bill in
September 1978.
The act provides greater flexibility in administering the customs laws while
permitting the Customs Service to modernize and simplify customs procedures. It raises the personal exemption from $100 to $300 (and from $200 to
$600 for U.S. citizens returning by way of American Samoa, Guam, and the
Virgin Islands). In addition, the fraud and penalty provisions ofthe Tariff Act
of 1930 were revised to provide due process safeguards and de novo judicial
review in the Federal courts. Congressional authorization of Customs Service
appropriations will create a new element of congressional review and oversight
of Customs activities.
As part of Customs continuing effort to serve the public, new border stations
were opened at Alexandria Bay (Wellesley Island), N.Y., and Cannon Corners,
N.Y.
Mail facility

A new maU facUity at Seattle was completed and occupied on June 19,1978.
With consolidation of the Seattle mail branch into the facUity, both air and
surface mail as well as registered mail will be processed together.




ADMINISTRATIVE REPORTS

237

Automated merchandise processing system (AMPS)

To meet the requirements of merchandise processing. Customs instituted
AMPS. AMPS is designed to improve nationwide the Customs Service
supervision and control of imported merchandise, and collection of duties and
taxes. The program combines a variety of process improvements and modern
computer and communications technology applications to entry and revenue
processing. The process improvements are generally in the direction of
standardizing procedures. Modern business techniques are also introduced for
more efficient processing of import transactions. Use of AMPS is enabling
Customs to meet the demands of increasing workload.
In fiscal 1978, automated line-item processing of immediate delivery
control, entry screening, and collection processing was maintained at
Philadelphia, Baltimore, Chicago, Boston, Miami, and Los Angeles Airport.
A revised automated coUection system was developed and implemented at
Houston and Los Angeles Airport with implementation preparation for this
new capability begun at New Orleans, San Francisco, Seattle, Newark, New
York, Wilmington, Washington, Norfolk, Charleston, and Savannah. With
these ports scheduled for operation in early fiscal 1979, 17 percent of aU
customs entries and 65 percent of all customs collections will be automated.
An automated interface which provides statistical data to the Census Bureau
was developed and operationally tested prior to implementation in fiscal 1979.
This automated interface eliminates the manual processing and keypunching
required by the present Customs-Census interface operation.
An automated manifest clearance system was designed and developed this
year for pilot testing at Los Angeles Airport. This system is scheduled to
become the standard manifest clearance system used by aU carriers nationwide.
Improvements in passenger processing

The Customs accelerated passenger inspection system (CAPIS) was
developed to provide airport inspectors with an environment to selectively
screen passengers, whose numbers swell at an annual rate of 12 percent.
Approximately 80 percent of all arriving passengers are released from the area
at "primary," where a brief interview, hand luggage inspection, and TECS/
NCIC check are made. The remaining 20 percent are referred to "secondary"
for various reasons where complete baggage inspections are conducted. In
1978, additional CAPIS units were installed at Dulles, JFK, Miami, O'Hare,
and Seattle-Tacoma Airports.
Customs, in conjunction with the Immigration and Naturalization Service,
installed a one-stop citizen inspection system at selected airports having
CAPIS. This system was successfully tested and implemented at DuUes
Airport.
Regulatory Efforts
Regulatory audit

The regulatory audit program is part of a broad-based Customs effort to
modernize and simplify the processing of commercial transactions. The
purpose of the program is to improve the revenue-producing function in
addition to protecting both the revenue and the importing public. Regulatory
Audit's objective is to provide Customs with an external audit capability to
verify transactions and claims of importers, carriers and exporters. This wiU



238

1978 REPORT OF THE SECRETARY OF THE TREASURY

be accomplished by means of onsite audits of their records, accounts,
statements, and operating facilities in lieu of more costly physical control or
other means of verification.
By application of scientific sampling methods and information quantified
through computer analysis, companies can be selected for audit which are
identified as most likely to provide Customs with high-payoff transactions. An
analysis of importers transacting business with Customs has revealed that
15,000 importers represent 90 percent of the total dutiable entry workload.
Audits of a relatively small percentage of selected persons and firms reduce
the need for individual processing of millions of transactions. The resultant
reduction of routine paperwork permits more cost-efficient utilization of
manpower elsewhere in Customs.
During fiscal 1978, approximately 80 field auditors in 9 regional offices
completed audits of various types which resulted in recovered revenues for
Treasury or the importing public in excess of $11 million.

Type of audit
Customhouse brokers
TSUS 806.30/807
Drawback
Agent assists
Containerized importations
Other
Total

Number

Amount
recovered

89
29
348
4
162
94

$1,807,200
4,542,800
2,043,800
31,500
77,800
2,916,500

726

11,419,600

I n t e r n a l security

Working in coordination with other agencies, including the office ofthe U.S.
attorney, 70 customs investigators closed and completed a total of 781
investigations. Of that total, 75 were either referred for criminal prosecution,
or resulted in arrests and/or indictments. Also undertaken during fiscal 1978
were 109 investigations involving either administrative discipline (adverse
action) or procedural change. The majority of these investigations refuted the
original allegation or found that the allegation could not be substantiated.
Full field investigations

Due to an accelerated hiring program, 1,783 fuU field investigations were
conducted in fiscal 1978 with each taking an average of 50 man-hours to
complete.
Security clearances

Continued efforts on the part of Customs to reduce the number of security
clearances have resulted in reducing the number to 220 issued in fiscal 1978.
Internal a u d i t

In fiscal 1978, 152 audits, surveys, and special reports were completed by
headquarters and regional offices. During the year, increased emphasis was
placed on servicewide multiregional audits for specific operational programs.
Upgrading of audit potential was achieved during the year through the hiring
of computer science specialists, and through the rotation of auditors between



ADMINISTRATIVE REPORTS

239

regional and headquarters offices. Substantial savings were achieved, or
monetary losses disclosed with appropriate recommendations for correction
or improvement through Internal Audit disclosures during the year.
These audits showed—
1. Consolidating drug and seizure facUities could result in annual savings
of $1,175 million.
2. Review of appraisement procedures in connection with importation of
turbines disclosed undervaluations resulting in underpayment of duties
exceeding $630,000.
3. Review of vessel entrance in the Houston region disclosed that over
$500,000 in tonnage taxes were never billed.
4. Disclosure ofthe loss of $ 142,000 at New York due to irregular delivery
of merchandise by customs inspectors.
5. Annual savings of $56,300 have been achieved through improved maU
operations in the New Orleans district.
Other Activities
International Customs Conference

The First Intemational Customs Conference for cooperation in the control
of narcotics trafficking took place in Vama, Bulgaria, September 11-16,1978.
Participating were delegations of the customs administrations from Austria,
Belgium, Bulgaria, Czechoslovakia, Denmark, the Federal Republic of
Germany, Finland, France, the German Democratic Republic, Great Britain,
Hungary, Italy, Morocco, the Netherlands, Norway, Pakistan, Poland, Spain,
Sweden, Switzerland, Turkey, the United States, the U.S.S.R., and Yugoslavia,
as well as representatives ofthe United Nations and the Customs Cooperation
Council. The Conference was organized by the Bulgarian Customs Administration and the Customs Administration of the United States.
The Conference brought together competent customs officials from the
participating countries for an exchange of experience and to find new and
more efficient ways for customs cooperation in the control of narcotics
trafficking.
In the course of the sessions the delegates unanimously emphasized the
usefulness and the significance ofthe Conference as a new and important step
in the common efforts to curtail drug abuse and to strengthen control of
narcotics trafficking.
The Conference completed its work with the adoption of recommendations
concerning the improvement of contacts between customs administrations,
increased efficiency of customs control, and improved training of customs
officers in detecting narcotics smuggling.
Throughout the Conference a series of bilateral meetings was arranged to
enable participating countries to make a more profound examination and
discussion of specific problems.
Relocation of Customs National Data Center

The Customs National Data Center, including all equipment and personnel,
was moved from Silver Spring, Md., to the Customs headquarters building. Site
preparation for the move commenced late in fiscal 1977. FuU implementation
at the new site was accomplished by a relocation team in August 1978, with
no delay in scheduled processing.




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1978 REPORT OF THE SECRETARY OF THE TREASURY

Revised work ticket system

Culminating several years of effort, the revised work ticket system was
implemented nationwide during the fiscal year. The work ticket system insures
payment of overtime compensation to Customs employees and generates
corresponding bUlings to parties-in-interest for inspectional services provided
in accordance with the Customs overtime laws. The implementation was
accomplished on a region-by-region basis and included training regional
personnel in proper preparation and correction procedures. The revisions to
the system were necessary to accommodate data processing equipment
changes. As a result, revised work tickets and bUlings to parties-in-interest are
now processed on a more timely and accurate basis.
Foreign trade zones

Foreign trade zones are geographical enclaves not considered part of the
customs territory ofthe United States. Importers may bring merchandise into
these zones for processing without the payment of customs duties and taxes.
As of August 1978, there were 34 foreign trade zones and 4 special purpose
subzones in operation. Applications are pending before the Foreign-Trade
Zones Board for seven additional zones. In comparison, 10 years ago, 1968,
there were 13 zones in operation.
Labor>management relations

On February 23, 1978, the Assistant Secretary of Labor for LaborManagement Relations granted a petition by the National Treasury Employees
Union (NTEU) seeking consolidation of 12 Customs bargaining units for
which NTEU and/or its local chapters were the exclusive representatives. The
consolidation will permit NTEU to negotiate a single, nationwide collective
bargaining agreement covering all professional and nonprofessional Customs
employees in headquarters and regional offices who are exclusively represented by NTEU and/or its local chapters. Negotiations are expected to begin in
1978.
International narcotics control and reimbursable assistance program

The International Narcotics Control (INC) programs (formerly the Cabinet
Committee on Intemational Narcotics Control) continue to provide assistance
to foreign governments in narcotics enforcement areas. U.S. Customs
continued to play an important role in this assistance. Emphasis in both
international narcotics control and U.S. Customs centered around development of more self-sufficient customs services with narcotics control capabilities within the foreign govemments borders.
U.S. Customs narcotics control programs involve help to foreign customs
services in both advisory assistance and narcotics enforcement training
programs. Under International Narcotics Control funding. Customs stations
narcotics-oriented advisory teams in various countries. In fiscal 1978, two such
advisers were stationed in Ecuador and three in Thailand.
The narcotics enforcement training programs that are part of the Intemational Narcotics Control/U.S. Customs assistance to foreign governments
involve several different programs. All are designed to train foreign enforcement officers and upgrade foreign customs services in border control activities
and narcotics interdiction capabilities. Emphasis is placed upon narcotics
identification, border surveillance, cargo and passenger control, and search
and seizure methods. These programs include an executive-level observation
Jour of U.S. Customs facilities for foreign heads of customs services; a
midmanagement-level training program offered in the United States to foreign



ADMINISTRATIVE REPORTS

241

officers who are supervisors or at the midmanagement level of their careers;
a program offered in a foreign country to operational line officers in narcotics
interdiction methodology; and a program designed to train handlers of
narcotics detector dogs. Since the inception of these training programs, U.S.
Customs has provided training to over 5,000 foreign officers representing
some 60 different countries.
In addition, two international conferences on the use of narcotics detector
dogs were held in Singapore for the East Asian countries and in Miami for Latin
American countries. Appropriate law enforcement officers from throughout
these areas gathered to exchange information and ideas on the use of this
proven tool which accounted for over half of all hard narcotics seizures in the
United States last year.

UNITED STATES SAVINGS BONDS DIVISION
The U.S. Savings Bonds Division promotes the sale and retention of U.S.
savings bonds, thereby encouraging individual thrift. Because the average life
of series E and H savings bonds is about twice that ofthe marketable debt, this
form of borrowing constitutes a long-term underwriting ofthe Treasury's debt
structure and makes possible the widespread distribution of the national debt
through its ownership by a substantial number of smaU savers.
The program is carried out by a Treasury staff of less than 450 people with
the active assistance of thousands of volunteers who are leaders in business,
labor, finance, and the media. An estimated 670,000 people provide volunteer
services of some kind for the program.
In fiscal 1978, Americans saved $8 billion through savings bonds purchases,
bringing the total value of outstanding savings bonds to over $80 billion.
Savings bonds are held by one out of every three American households, and
more than 16 million men and women buy them each year—9 1/2 miUion
through the payroll savings plan.
Office of the National Director

In support of President Carter's Govemment reorganization efforts, the
Savings Bond Division thoroughly reviewed its field structure and began to
implement improvements which will allow the Division to operate more
efficiently and effectively. The changes, which will be fully implemented by
mid-fiscal 1979, reduced the number of regional offices from 7 to 6 and
consolidated 42 State-level offices of varying size into 25 balanced sales
districts. The benefits ofthe new organization include: Standardizing the role,
grade level, and span of control of field supervisors; shortening the chain of
command in key urban areas; better allocating staff resources and improving
cost-effectiveness.
In addition to directing the reorganization efforts, Mrs. Azie Taylor Morton,
Treasurer of the United States and National Director of the United States
Savings Bonds Division, began work on an updated and more specific role and
mission for the Division which will stress the importance of savings bonds to
the financing of the public debt.
She and other senior officials ofthe Division also conducted active speaking
schedules on behalf of the savings bonds program in addition to directing the
divisions and programs discussed in the following sections.



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1978 REPORT OF THE SECRETARY OF THE TREASURY

Industrial payroll savings campaign

The 1978 U.S. Industrial Payroll Savings Committee, appointed by Secretary Blumenthal, is chaired by Charles J. Pilliod, Jr., chairman ofthe board,
Goodyear Tire and Rubber Co. The Committee is composed of top business
leaders each representing either a major industry group or geographic area.
Mr. Pilliod hosted a meeting of the Committee in Washington, D . C , on
January 11, 1978. Secretary Blumenthal charged the Committee with its 1978
calendar year goal of signing up 2.6 million new or increased-allotment savers.
Members of the U.S. Industrial Payroll Savings Committee conduct
meetings of top management people, urge chief executives in their areas and
industries to conduct payroll savings drives, and set strong examples by
conducting campaigns in their own companies.
Chairman Pilliod, in contributing much of his own time and effort to the
program, traveled to 17 cities and addressed 20 meetings of business and
community leaders on the importance of savings bonds to our economy. He
also provided some excellent sales tools for savings bonds volunteers, including
a brochure for top executives entitled "Take Stock in America," three
newsletters to volunteers to publicize the campaign, and a fuU-page ad in the
Wall Street Journal featuring the 1978 Committee members. The three
Goodyear blimps added a special touch to the savings bonds program as they
crisscrossed the country—120,000 mUes of America—displaying animated
savings bonds messages.
Volunteer activities

State and county volunteers are the grassroots "mainstay" of the savings
bonds program. Governors, appointed by the Treasury Secretary, serve as
honorary chairmen of their States, while a working State chairman provides
direction. At the local level, more than 3,000 county chairmen coordinate
savings bonds activities for their areas.
Richard B. Sellars, former chairman and chief executive officer, Johnson &
Johnson Co., is both the State chairman for New Jersey and the National
Chairman, Volunteer State Chairmen's Council. While presiding at the
Council meeting in Washington, D . C , on October 3 and 4, 1977, Mr. Sellars
encouraged the State chairmen to hold payroll savings campaigns in their own
companies as the first step in an active 1978 program. Mr. Sellars also traveled
extensively, early in 1978, to help kick off campaigns in Take Stock in America
Centers throughout the country. To help identify important areas of activity
during the year, he published for top volunteer leaders in every State a special
brochure containing information on bond program history and sales since
1941, as well as an action plan for volunteers.
A special kit of materials, "A Program for the Nation's Volunteers," also
distributed, included suggested proclamations for State and local governments, sample speeches, radio and TV scripts, and other information
materials.
National organizations

The National Organizations Committee, under the chairmanship of Valerie
F. Levitan, executive director of Soroptimist International, continued its
strong support for the savings bonds program. As part of the national
organizations program, the national presidents of 41 civic, fraternal, service,
and women's clubs sent letters to their members, sponsored advertisements,
or placed articles in various magazines in support of savings bonds.
The Division is investigating ways to improve and expand the involvement
of these important voluntary organizations.



ADMINISTRATIVE REPORTS

243

Labor support

America's labor unions and their leaders continued to support the savings
bonds program and the payroll savings plan. Through the labor press, more
than 20 miUion union and independent employee association members were
exposed to savings bonds advertising. Other union and employee associations
published editorials and sent more than 3 million letters urging individual
members to join the payroll savings plan where they work.
The Division honored eight AFL-CIO-affiliated national labor organizations, at their conventions, for outstanding support to the bond program. They
were: County and Municipal Employees; American Federation of Government
Employees; Intemational Union of Electrical, Radio and Machine Workers;
United Steelworkers of America; International Chemical Workers Union;
United Brotherhood of Carpenters and Joiners of America; International
Brotherhood of Electrical Workers; and United Rubber, Cork, Linoleum and
Plastic Workers of America. The National Association of Postmasters of the
United States was also honored.
In addition, the AFL-CIO-affiHated Amalgamated Clothing and Textile
Workers Union, and the National Association of Letter Carriers, received
awards. Three State labor organizations. South Carolina AFL-CIO, Georgia
State AFL-CIO, and the Ohio Conference of Teamsters, were also recognized.
During 1978, 104,250 savings bonds leaflets were distributed at 9 major
union conventions, and 230 national labor kits, part ofthe unions' educational
and community services program, were sent to the AFL-CIO Community
Services Department.
Financial institutions support

A major factor in the growth of savings bonds sales has been support from
the Nation's financial institutions. Banks, savings and loan associations, and
similar institutions provide more than 39,000 over-the-counter sales outlets.
They also issue bonds for many companies offering the payroll savings plan.
In 1978, American banks and bankers sent more than 10 million letters
recommending bonds to their customers and maUed more than 53 million
promotional leaflets as enclosures with bank statements. Banks and other
financial institutions also sponsored many bond newspaper advertisements,
and Secretary Blumenthal's "Message to Bankers" appeared in the industry's
daily publication.
This promotional effort was spearheaded by the American Bankers
Association Savings Bonds Committee, chaired by John D. Chisholm,
president ofthe Marquette Bank & Trust Co., Rochester, Minn. In 1978, Mr.
Chisholm was the keynote speaker at numerous "Take Stock in America"
campaigns and at several State bankers association conventions.
For 1979, the ABA Savings Bonds Committee wiU continue to encourage
bankers to support the savings bonds program through the five-point banking
program of bank letters, bank leaflets, bank sponsorship of ads, bank teller
training, and payroll savings programs established in banks.
Federal Government savings campaign

The 1978 savings bonds campaign for Federal workers, under the chairmanship of Secretary of Labor Ray Marshall, was the most successful of its kind
in the last 15 years.
The campaign resulted in more than 397,000 new or increased-allotment
savers—66,000 more than the 1977 bond drive produced. Sixty-one percent
of all civilian employees of the Federal Government are now on the payroll




244

1978 REPORT OF THE SECRETARY OF THE TREASURY

savings plan. Dollar sales this year will meet or exceed last year's outstanding
results of $ 1.1 billion.
President Carter provided leadership from the top, with a strong endorsement of savings bonds. On February 1, a Presidential memo to White House
employees said, in part, "I urge you to enthusiastically support this campaign.
Our leadership * * * will greatly assist in meeting the very worthy goals of this
program."
On April 6, television star Arte Johnson, honorary chairman ofthe Federal
savings bonds campaign, and Chairman Marshall kicked off the Federal
campaign at a meeting with 1,800 Federal employees.
Advertising support

The public service advertising campaign for savings bonds, conducted in
cooperation with The Advertising Council, was well received by all media. The
council estimates that more than 29,000 ads were published in newspapers,
255,000 lines appeared in national magazines, and 4 billion home impressions
resulted from television use of savings bonds announcements.
The advertising campaign focused on ways in which savings bonds enrich
the lives of Americans by helping them reach specific savings goals. Created
by the Leo Burnett Co., a volunteer task-force agency ofthe council, the ads
continue to use the general theme and tag line "Take Stock in America."
Information activities included completion of an all-new copy kit for daily
and weekly newspapers and several feature articles for newspapers, and
continued publication of "The Bond Teller" for bank personnel and the
"Savings Bond Salute" for volunteers. The pocket speech guide for volunteers,
"In Which We Serve," was completely revised and updated.
Public affairs

The Office of Public Affairs provides information on the savings bonds
program and encourages its use by newspapers, television stations, and other
forms of media. During 1978, strengthened contacts with national media
people resulted in increased coverage of the program.
Direct assistance was given to the savings bonds industrial payroll savings
campaign and to the Federal campaign for payroll savings through providing
remarks and press releases, arranging for press coverage and photographic
services, and similar activities. During the year, the office also provided speech
material to government officials speaking on behalf of the program.
The office handles a large volume of telephone and mail inquiries from the
general public on savings bonds.

UNITED STATES SECRET SERVICE
The major responsibilities ofthe U.S. Secret Service are defined in section
3056, title 18, United States Code. The investigative responsibUities are to
detect and arrest persons committing any offense against the laws ofthe 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



ADMINISTRATIVE REPORTS

245

relating to the Federal Deposit Insurance Corporation, Federal land banks,
joint-stock land banks, and Federal land bank associations. The protective
responsibilities includes protection of the President of the United States and
the members of his immediate family; the President-elect and the members of
his immediate family unless the members decline such protection; the Vice
President or other officer next in the order of succession to the Office ofthe
President, and the members of his immediate family unless the members
decline such protection; the Vice President-elect, and the members of his
immediate family unless the members decline such protection; a former
President and his wife during his lifetime; the widow of a former President until
her death or remarriage; the minor children of a former President until they
reach 16 years of age, unless such protection is declined; a visiting head of a
foreign state or foreign govemment; and, at the direction of the 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 Secret Service to protect major Presidential
and Vice Presidential candidates, unless such protection is declined; the
spouse of a major Presidential or Vice Presidential nominee, except that such
protection shall not commence more than 60 days prior to the general
Presidential election.
Investigative operations

Counterfeiting.—The Secret Service received $22.3 million in counterfeit
U.S. currency during fiscal 1978. This represents a 49-percent decrease from
fiscal 1977. Losses to the public decreased 18 percent, from $4.9 million in
fiscal 1977 to $4 million in fiscal 1978. Seizures prior to circulation decreased
53 percent, with $18.3 million being seized.
Of interest is the fact that 26 percent of the $4 million passed on the
American public originated with overseas operations. In contrast, only 1
percent of the $18.3 million seized in the United States prior to circulation
stemmed from overseas activities.
Six percent, or $234,000, of the notes passed on the public involved tne
violations of raising or altering genuine currency.
The following case summary illustrates counterfeit investigations successfully concluded during fiscal 1978.
On September 15, 1977,theSecret Service received information that a new
counterfeit $50 note was being distributed by a Brooklyn, N.Y., bakery
company route driver. At that time none ofthe new counterfeit notes had been
passed.
However, by October 6,1977, a sample ofthe new counterfeit note had been
obtained, the suspect identified, and a meeting between the suspect and
undercover Secret Service agents arranged. The following day agents
purchased $25,000 of these new counterfeit notes. Ten days later a second
meeting was arranged with the suspect. He was arrested and an additional
$17,000 in counterfeit $50 notes was seized. When the suspect was interviewed, he identified a previously known counterfeiter as the printer of these
new counterfeit notes.
The suspect printer, owner of two legitimate printing concems, was
immediately placed under surveUlance in order to locate the counterfeit plant.
Numerous attempts to corroborate the printer's alleged involvement culminated in success on November 15,1977, when the printer and two others were
arrested as they delivered over $30,000 in counterfeit notes. Postarrest




246

1978 REPORT OF THE SECRETARY OF THE TREASURY

statements by the defendants enabled Secret Service agents to recover over
$2.1 million in counterfeit notes.
Check forgery.—During fiscal 1978, the Service received 85,286 checks for
investigation. Treasury paid approximately 717 miUion checks during fiscal
1978. The Service received 119 checks per million paid, or 1 check for
investigation for approximately every 8,400 checks paid.
During fiscal 1978, the Service made 9,409 check forgery arrests, compared
with 8,779 last year—a 7.2-percent increase.
The backlog of pending check cases for fiscal 1978 decreased to 53,733, as
compared with 81,488 last year. Any possible reduction in the check workload
caused by the direct deposit or electronic funds transfer programs is
considered minimal.
A check forgery investigative summary follows.
Between November 1977 and February 1978, special agents ofthe Secret
Service New York field office and New York postal inspectors carried out a
joint "sting" operation using the code name "Audubon Check Cashing
Service." Checks were not actually cashed, but rather purchased at a
percentage of the amount for which issued.
Associates handed out business cards in preselected sections of New York
City, providing a special telephone number to handle customer orders. When
calls came in, a mobile unit responded for on-the-spot check purchases. The
Audubon Check Cashing Service purchased checks with a face value of
$135,000 within the first few months.
When Operation Audubon was terminated, personnel of the Audubon
Check Cashing Service surfaced as Government agents and the negotiables
included stolen Treasury checks. State and county social security and welfare
checks, and other obligations.
The Audubon Check Cashing Service was the first mobile undercover
fencing operation of its kind and culminated in the arrest of approximately 90
individuals.
Bond forgery.—Bond forgery investigations decreased during fiscal 1978,
with 10,399 bonds received for investigation, as compared with 12,189 last
fiscal year.
At yearend, there were 950,463 stolen bonds, representing a face value of
$64.1 million, entered into the National Crime Information Center by the
Secret Service.
During fiscal 1978,164 persons were arrested for bond forgery, as compared
with 152 persons in fiscal 1977.
During the fiscal year, the Secret Service recovered, prior to forgery and
redemption, 8,648 stolen bonds with a face value of $728,530 compared with
fiscal 1977 when 14,631 stolen bonds were recovered with a face value of $ 1
million.
The summary of a typical bond forgery investigation follows.
The executor for the estate of a deceased registered owner removed 147
U.S. savings bonds from a safe-deposit box assigned to the deceased registered
owner. The bonds, which were to be negotiated as part of a normal procedure
in settling the estate of the registered owner, were stored in the office of the
executor. A month later, the executor took the bonds to a bank for negotiation,
unaware that approximately $8,500 worth ofthe bonds were now missing. The
theft was discovered months later when the executor received payment for the
bonds from the bank, short approximately $8,500.
Subsequent investigation revealed that a janitor in the building where the
office ofthe executor was located stole the missing bonds, opened a checking




ADMINISTRATIVE REPORTS

247

account in the name of the deceased registered owner, and redeemed the
stolen bonds by depositing them into that account and writing checks on those
funds. Following investigation by the Secret Service, the janitor was arrested
and pleaded guilty.
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 1978, members of the Identification Branch conducted
examinations in 10,986 cases involving 732,847 exhibits. This resulted in
3,291 identifications of persons and a total of 316 court appearances to furnish
expert testimony.
Organized crime

The Secret Service provides special agents to each ofthe 14 organized crime
strike forces located throughout the United States. All information is
coordinated and disseminated to Secret Service field offices by the Special
Investigations and Security Division at headquarters. The agent in charge of
this Division, as a member ofthe National Organized Crime Planning CouncU,
participates in the establishment of targets for the strike forces. This Council,
made up of representatives of all Federal law enforcement agencies, meets
monthly at the Department of Justice.
f-

Treasury Security Force

The Treasury Security Force, a uniformed branch ofthe U.S. Secret Service,
protects the Main Treasury and Treasury Annex Buildings and participates in
providing security for the White House. It also enforces Treasury's restricted
access policy and conducts investigations involving petty larceny cases, theft,
and other improper actions which take place on Treasury premises.
During fiscal 1978, the Force made 54 felony arrests and interviewed 58
persons for attempted unauthorized entry into the Treasury Building.
Protective operations

The Secret Service provided protection for the President and Mrs. Carter;
their children. Amy, Jack, James, and Jeff; and grandsons, James and Jason.
Protection continued for Vice President and Mrs. Mondale.
Protection was also provided for former President and Mrs. Gerald R. Ford;
former President and Mrs. Richard M. Nixon; and former First Ladies Mrs.
Harry Truman, Mrs. Dwight Eisenhower, and Mrs. Lyndon Johnson.
Protection was highlighted during the fiscal year by numerous foreign trips.
The President and Mrs. Carter visited Poland, Iran, India, Saudi Arabia, Egypt,
France, and Belgium during the period December 29, 1977, through January
6, 1978, and Venezuela, Brazil, Nigeria, and Liberia March 28 through AprU
3, 1978. Secret Service protective security arrangements were also made for
President and Mrs. Carter's July trip to Germany, the President's June trip to
Panama, and Mrs. Carter's visits to Costa Rica and Italy.
The Vice President and Mrs. Mondale visited Mexico City in January, the
Philippines, ThaUand, Indonesia, Australia, and New Zealand during May, and
Israel and Egypt at the end of June and early July. The Vice President was in
Canada in January and May. Mrs. Mondale visited Helsinki, Finland, and
Leningrad, U.S.S.R., in December 1977.




248

1978 REPORT OF THE SECRETARY OF THE TREASURY

Former First Lady Mrs. Lyndon Johnson made nine foreign trips during the
past fiscal year, visiting Mexico, Venezuela, England, Jordan, Iran, Israel, and
the Virgin Islands.
The Secret Service continued to provide security for the Secretary of the
Treasury on a limited basis—on all foreign trips, on some domestic trips, and,
occasionally, in the Washington, D . C , area.
During fiscal 1978, foreign dignitary protection continued to be a major
effort with 126 foreign dignitaries receiving protection. These included 123
visits by heads of foreign states or govemments and 3 other distinguished
foreign visitors to the United States. Included in the figures are 12 foreign
dignitaries who received protection during the NATO Summit Conference in
Washington, May 30-31, 1978, and 28 foreign dignitaries who received
protection during the United Nations Disarmament Conference in New York
City, May 20 through June 7, 1978.
The U.S. Secret Service Uniformed Division continued to provide protection for the White House, Presidential offices, the official Vice Presidential
residence, the Blair House when visiting heads of state or government are in
residence, and foreign diplomatic missions of 136 countries at 405 locations
in the metropolitan area of the District of Columbia. In addition, the
Uniformed Division provided protection for the World Bank/International
Monetary Fund meetings in Washington, D . C , in September 1978.
Protective research

During fiscal 1978, the Secret Service continued, and will complete in fiscal
1979, a major study to provide more comprehensive data for the evaluation
of individuals suspected of threatening the life of the President and others
protected by the Service.
Protective research study groups completed a feasibility study for converting handwriting specimens and other graphic images to microforms for storage
in an automated microform retrieval system. They also examined and
identified the need to obtain secure computer equipment to facilitate the
processing and retrieval of classified data of protective significance. A study
to allow the application of geoprocessing technology to intelligence files
continued.
The Intelligence Division implemented and conducted formal training
sessions for Division personnel and field office agents assigned to protective
research in order to increase understanding between headquarters and the
field. Division personnel received specialized training in handwriting examination and were trained in the use of supplemental data systems such as the
New York Times Information Bank.
The Division has implemented a number of engineering improvements to the
protective intelligence and events automatic data processing system which will
permit the efficient use of computers by more employees.
The Technical Security Division implemented regulations for Executive
Order 12036, section 1-1004, signed by the President in January 1978,
regarding new audio countermeasures procedures.
Communications

During fiscal 1978, the Communications Division completed software and
hardware enhancements on the teletype message switcher to improve and
expedite the handling of message traffic. A high-speed terminal was installed
in the Washington field office.




ADMINISTRATIVE REPORTS

249

Installation of new radio systems in the resident agencies and upgrading of
existing systems in the field offices continued.
Protective communications support was provided for the Office of Protective Operations. Mobile command post units were employed on several
occasions.
Liaison

Through fiscal 1978, the Liaison Division maintained personal liaison at the
headquarters level with law enforcement, intelligence, and other governmental agencies to assure proper coordination, communication, and exchange of
information in matters relating to protective and criminal investigation
responsibilities.
Increased visits by protectees, both domestic and foreign, resulted in much
activity by the Division at the U.S. Capitol, State Department, foreign
embassies. Department of Defense facilities, and numerous other Federal
agencies.
Creation and staffing ofthe Emergency Preparedness Branch in this Division
resulted in better efficiency and operability of these programs.
During fiscal 1978, the Freedom of Information and Privacy Acts Office
processed 1,909 Freedom of Information Act requests and 268 Privacy Act
requests.
Administration

An employee assistance program was established to assist employees with
personal problems through counseling or referral services. Counseling is
provided to aid the employee in recognizing the existence of a problem
(especially those personal problems that affect job performance). Community
agencies that can provide further counseling and/or treatment are recommended.
A health maintenance program for Secret Service employees age 40 and
over was established. The program provides for an optional annual physical
examination for all eligible employees assigned to offices in Washington, D . C ,
or at field office locations.
The employee performance evaluation program was rewritten to provide
better guidance to both supervisors and employees, and additional documenting requirements were prescribed to enhance the quality of annual performance rating discussions.
Overcrowded space conditions and increasing fragmentation of headquarters' offices to separate locations continue to reinforce the need for a
consolidated building site. The contractor selected by the General Services
Administration submitted a report projecting the Service's office space
requirements over the next 10 years, supporting the need for a consolidated
facility, and recommending the 1800 G Street building for that purpose. The
report has been submitted for departmental approval.
The safety program has realized greater visibUity with the addition of a fulltime safety staff. Employee safety awareness has been increased through the
establishment of Occupational Safety and Health Committees and the
distribution of safety promotional materials. In addition, environmental
evaluations are being performed at the Service's indoor firing ranges, garages,
and other facilities, and significant changes are being made.
A substantial increase in the reuse of excess property was noted during the
fiscal year. A program for managing the redistribution of surplus property
among Secret Service offices, and the acquisition and distribution of excess
property from other Federal agencies, has been implemented.




250

1978 REPORT OF THE SECRETARY OF THE TREASURY

Efforts were made to increase the number of contract and purchase order
awards to minority small businesses. The plan included establishing liaison
with the Small Business Administration and the Office of Administrative
Programs, in order to locate minority firms that could fulfill the Service's
requirements. Special emphasis was placed on identifying minority contractors
approved by the Small Business Administration for awards authorized by
section 8(a) of the Small Business Act.
A 2-year effort to identify future automated data processing needs is
culminating in a procurement to replace current Secret Service computer
hardware. The new equipment will be of larger scale and more technologically
advanced, and is expected to be fully operational by the 1980 Presidential
campaign.
Management information systems continue to be improved, in order to be
more responsive to a greater number of managers within the organization.
Primary emphasis has been placed on increased flexibility in reporting
collected data to enhance the Service's financial and man-hour accounting
systems, workload measurement systems, and investigation control systems.
During fiscal 1978, the Treasury payroll/personnel information system
(TPPIS) became fully operational in the Secret Service. Substantial progress
was made to maximize the benefits attainable from TPPIS. Enhancements to
the automated accounting system resulted in automatic cost accounting
distribution, improved financial records based on TPPIS-provided payroU
information, and savings in processing time.
The Service implemented the Government bill of lading method for moving
employee household goods upon transfer during fiscal 1978. Under the
method, the Service makes the arrangements with a carrier, monitors the
shipment, and processes loss and damage claims. Since the method can be used
only when a real savings to the Government exists, this method will be cost
beneficial for the Service.
The Presidential Protection Assistance Act of 1976, Public Law 94-524,
provides that Federal agencies be reimbursed for providing .assistance in
support of Secret Service protective duties. During fiscal 1978, the Service
established written instructions for the submission of requests and provided
them to other Federal agencies.
Training

There were 89,310 man-hours of training conducted by the Secret Service,
Office of Training, during fiscal 1978. In addition, 14,927 man-hours of
interagency and 20,258 man-hours of non-Government training were completed for a total of 124,495 man-hours.
An inservice course, designed to update senior special agents in the state of
the profession, was given to 150 agents.
The 4-day advanced emergency care course graduated 125 participants to
aid in the Service's protective and investigative mission. Reports have been
received of lives saved because of care given by course graduates, both on and
off duty.
Technical operations briefings, designed to provide expertise in modern
technical equipment, were given to 61 special agents. These agents are able
to maximize the use of camera and surveillance equipment in accordance with
the latest legal and organizational poHcies.
There were 23 exercises simulating various attacks on a principal. These 1 day exercises were performed for temporary and permanent dignitary
protective details.




ADMINISTRATIVE REPORTS

25 1

The protective forces driving course, designed especially for the Service's
protective function, was taken by 84 special agents. This course prepares the
agent for safe operation of limousines and security vehicles under stress
conditions. Improvement of normal driving skills is a collateral benefit.
Protective research briefings were provided to 66 senior agents and 5
intelligence research specialists. The briefings updated agents working
protective intelligence in the field and aided the inteUigence research
specialists in the analysis and evaluation of intelligence data.
A clerical orientation program, designed for lower graded employees
outside the Washington, D . C , area, was developed and pUot-tested in one
major field office. It is anticipated that the course will be offered to all field
clerical personnel in the future.
To ensure safe and proficient use of firearms, approximately 30,000
individual courses were fired by Service and other Federal law enforcement
personnel who are required to carry a firearm.
In addition, 1,432 uniformed personnel ofthe Service received specialized
training in such areas as the Cuban Mission detail and protective details at the
Blair House. Along with the specialized training, there were inservice courses
designed to update the professional skills of captains, lieutenants, and
sergeants.
While providing formal training for its own personnel, the Service is
committed to training other Federal, State, and local officials to the following
extent. Eleven dignitary protection seminars were conducted to aid 213
command-level police officers. Protective operations briefings were given to
110 lower echelon police officials. These briefings, 2 days shorter than the
dignitary protection seminar, are designed for generally the same purpose, but
are directed toward the line officer.
Numerous protective seminars were provided for Secret Service administrative personnel and other law enforcement agencies to improve skills and
enhance coordination with the Service in the area of protection. SimUarly, 1to 3-day programs were offered in the area of criminal investigation.
Firearms training was provided to 1,539 employees of 21 Federal law
enforcement agencies. In addition, 32 employees from other Federal, State,
and local agencies were trained to be firearms instructors.
In addition to the programmed events, the Office of Training had conducted
specialized security surveys for various police agencies, directed several
intraorganizational research projects, and offered individual or small group
briefings when the participants' inclusion in a programmed course was
impractical.
Inspection

The Office of Inspection conducted 61 office inspections during fiscal 1978.
In addition, 32 special investigations, and other in-depth studies and reviews
were completed.
Inspectors were diverted from their regular duties to serve as supervisors on
several temporary protective details, including the NATO Conference, the
Panama Canal Treaty signing, and the United Nations Disarmament Conference. One inspector is currently coordinating the planning of the candidate/
nominee protective details for the 1980 elections.
Inspectors have been involved in the continuing maintenance of the
classified document program and the headquarters and field emergency
readiness plan. One inspector has served on a committee to develop an




252

1978 REPORT OF THE SECRETARY OF THE TREASURY

improved merit promotion plan. A comprehensive in-house study of the
inspection program was also made, and several inspection procedures and
areas of emphasis were revised.
The internal auditors issued several audit reports during fiscal 1978,
including a feasibility study on using Government bill of lading for transporting
household goods and personal effects of employees involved in permanent
change-of-station transfers. Auditors also made preaward reviews of cost
proposals, submitted by potential contractors concerning several procurements. These reviews have been used by contracting officers as a basis for
contract negotiations. One auditor was also assigned to the ADP procurement
team to assist in evaluating offers made by vendors competing for a contract
to provide a new ADP system.
Legal counsel

During fiscal 1978, the Secret Service resubmitted a legislative proposal to
the Secretary ofthe Treasury that would amend title 18, United States Code,
section 871, "Threats against the President or successors to the Presidency,"
to cover threats made against most protectees of the Secret Service.
The Secret Service proposed a new section 510 to title 18, United States
Code, "Forgery of Government checks, bonds, and other obligations," which,
in effect, eliminates the need to rely on title 18, United States Code, section
495, "Contracts, Deeds, and Powers of Attomey" and other Federal statutes
in the investigation of any violations concerning Treasury check, bonds, and
other obligations.







EXHIBITS




Public Debt Operations, Regulations, and Legislation
Exhibit 1.—Treasury notes
A Treasury circular covering an auction for cash with an interest rate determined
through competitive bidding is reproduced in this exhibit. Circulars pertaining to the
other note offerings during fiscal 1978 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 year there were no offerings in which holders
of maturing securities were given preemptive rights to exchange their holdings for new
notes.
DEPARTMENT CIRCULAR NO. 14-78. PUBLIC DEBT
DEPARTMENT OF THE TREASURY,

Washington, June 15, 1978.
1.

INVITATION FOR TENDERS

1.1. The Secretary of the Treasury, under the authority of the Second Liberty Bond
Act, as amended, invites tenders for approximately $3,000,000,000 of United States
securities, designated Treasury Notes of June 30, 1980, Series Q-1980 (CUSIP No.
912827 HV 7). The securities wiH be sold at auction with bidding on the basis of yield.
Payment will be required at the price equivalent of the bid yield of each accepted
tender. The interest rate on the securities and the price equivalent of each accepted
bid will be determined in the manner described below. Additional amounts of these
securities may be issued to Govemment accounts and Federal Reserve Banks for their
own account in exchange for maturing Treasury securities. Additional amounts may
also be issued for cash to Federal Reserve Banks as agents of foreign and intemational
monetary authorities.
2.

DESCRIPTION OF SECURITIES

2.1. The securities will be dated June 30,1978, and will bear interest from that date,
payable on a semiannual basis on December 31, 1978, and each subsequent 6 months
on June 30 and December 31, until the principal becomes payable. They will mature
June 30, 1980, and will not be subject to call for redemption prior to maturity.
2.2. The income derived from the securities is subject to all taxes imposed under
the Intemal Revenue Code of 1954. The securities 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, any
possession of the United States, or any local taxing authority.
2.3. The securities will be acceptable to secure deposits ofpublic monies. They will
not be acceptable in payment of taxes.
2.4. Bearer securities with interest coupons attached, and securities registered as
to principal and interest, will be issued in denominations of $5,000, $ 10,000, $ 100,000,
and $ 1,000,000. Book-entry securities will be available to eligible bidders in multiples
of those amounts. Interchanges of securities of different denominations and of coupon,
registered and book-entry securities, and the transfer of registered securities will be
permitted.
2.5. The Department of the Treasury's general regulations goveming United States
securities apply to the securities offered in this circular. These general regulations
include those currently in effect, as well as those that may be issued at a later date.
3.

SALE PROCEDURES

3.1. Tenders will be received at Federal Reserve Banks and Branches and at the
Bureau ofthe Public Debt, Washington, D.C. 20226, up to 1:30 p.m., Eastem Daylight




255

256

1978 REPORT OF THE SECRETARY OF THE TREASURY

Saving time, Tuesday, June 20, 1978. Noncompetitive tenders as defined below wUl be
considered timely if postmarked no later than Monday, June 19, 1978.
3.2. Each tender must state the face amount of securities bid for. The minimum bid
is $5,000 and larger bids must be in multiples of that amount. Competitive tenders must
also show the yield desired, expressed in terms of an annual yield with two decimals,
e.g., 7.11%. Common fractions may not be used. Noncompetitive tenders must show
the term "noncompetitive" on the tender form in lieu of a specified yield. No bidder
may submit more than one noncompetitive tender and the amount may not exceed
$1,000,000.
3.3. All bidders must certify that they have not made and wUl not make any
agreements for the sale or purchase of any securities of this issue prior to the deadline
established in Section 3.1. for receipt of tenders. Those authorized to submit tenders
for the account of customers will be required to certify that such tenders are submitted
under the same conditions, agreements, and certifications as tenders submitted directly
by bidders for their own account.
3.4. Commercial banks, which for this purpose are defined as banks accepting
dememd deposits, and primary dealers, which for this purpose are defined as dealers
who make primary markets in Govemment securities and report daily to the Federal
Reserve Bank of New York their positions in and borrowings on such securities, may
submit tenders for account of customers if the names ofthe customers and the amount
for each customer are fumished. Others are only permitted to submit tenders for their
own account.
3.5. Tenders will be received without deposit for their own account from
commercial banks and other banking institutions; primary dealers, as defined above;
Federally-insured savings and loan associations; States, and their political subdivisions
or instmmentalities; public pension and retirement and other public funds; intemational organizations in which the United States holds membership; foreign central banks
and foreign states; Federal Reserve Banks; and Govemment accounts. Tenders from
others must be accompanied by a desposit of 5% ofthe face amount of securities applied
for (in the form of cash, maturing Treasury securities or readily collectible checks), or
by a guarantee of such deposit by a commercial bank or a primary dealer.
3.6. Immediately after the closing hour, tenders wUl be opened, followed by a public
announcement of the amount and yield rsmge of accepted bids. Subject to the
reservations expressed in Section 4, noncompetitive tenders will be accepted in full, and
then competitive tenders will be accepted, starting with those at the lowest yields,
through successively higher yields 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
established, on the basis of a 1/8 of one percent increment, which results in an
equivalent average accepted price close to 100.000 and a lowest accepted price above
the original issue discount limit of 99.500. That rate of interest will be paid on all of
the securities. 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 equivalent to the yield bid. Those submitting noncompetitive tenders will pay the
price equivalent to the weighted average yield of accepted competitive tenders. 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 shaU be final. If
the amount of noncompetitive tenders received would absorb all or most ofthe offering,
competitive tenders will be accepted in an amount sufficient to provide a fair
determination of the yield. Tenders received from Govemment accounts and Federal
Reserve Banks will be accepted at the price equivalent to the weighted average yield
of accepted competitive tenders.
3.7. Competitive bidders will be advised of the acceptance or rejection of their
tenders. Those submitting noncompetitive tenders will only be notified if the tender is
not accepted in full, or when the price is over par.
4.

RESERVATIONS

4.1. The Secretary of the Treasury expressly reserves the right to accept or reject
any or all tenders in whole or in part, to allot more or less than the amountof securities



EXHIBITS

257

Specified in Section 1, and to make different percentage allotments to various classes
of applicants when the Secretary considers it in the public interest. The Secretary's
action under this Section is final.
5.

PAYMENT AND DELIVERY

5.1. Settlement for allotted securities must be made or completed on or before
Friday, June 30, 1978, at the Federal Reserve Bank or Branch or at the Bureau ofthe
Public Debt, wherever the tender was submitted. Payment must be in cash; in other
funds immediately available to the Treasury; in Treasury bills, notes or bonds (with all
coupons detached) maturing on or before the settlement date but which are not
overdue as defined in the general regulations goveming United States securities; or by
check drawn to the order of the institution to which the tender was submitted, which
must be received at such institution no later than:
(a)
(b)

Wejdnesday, June 28, 1978, if the check is drawn on a bank in the Federal
Reserve District ofthe institution to which the check is submitted (the Fifth
Federal Reserve District in case of the Bureau of the Public Debt), or
Monday, June 26, 1978, if the check is drawn on a bank in another Federal
Reserve District.

Checks received after the dates set forth in the preceding sentence will not be accepted
unless tliey are payable at the applicable Federal Reserve Bank. Payment will not be
considered complete where registered securities are requested if the appropriate
identifying number as required on tax retums and other documents submitted to the
Intemal Revenue Service (an individual's social security number or an employer
identification number) is not fumished. When payment is made in securities, a cash
adjustment will be made to or required of the bidder for any difference between the
face amount of securities presented and the amount payable on the securities allotted.
5.2. In every case where full payment is not completed on time, the deposit
submitted with the tender, up to 5 percent of the face amount of securities allotted,
shall, at the discretion ofthe Secretary ofthe Treasury, be forfeited to the United States.
5.3. Registered securities tendered as deposits and in payment for allotted
securities are not required to be assigned if the new securities are to be registered in
the same names and forms as appear in the registrations or assignments ofthe securities
surrendered. When the new securities are to be registered in names and forms different
from those in the inscriptions or assignments ofthe securities presented, the assignment
should be to "The Secretary ofthe Treasury for (securities offered by this circular) in
the name of (name and taxpayer identifying number)." If new securities in coupon form
are desired, the assignment should be to "The Secretary of the Treasury for coupon
(securities offered by this circular) to be delivered to (name and address)." Specific
instrnctions for the issuance and delivery of the new securities, signed by the owner or
authorized representative, must accompany the securities presented. Securities
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 securities must be
delivered at the expense and risk of the holder.
5.4. If bearer securities are not ready for delivery on the settlement date, purchasers
may elect to receive interim certificates. These certificates shall be issued in bearer
form and shall be exchangeable for definitive securities of this issue, when such
securities are available, at any Federal Reserve Bank or Branch or at the Bureau ofthe
Public Debt, Washington, D.C. 20226. The interim certificates must be retumed at the
risk and expense of the holder.
5.5. Delivery of securities in registered form will be made after the requested form
of registration has been validated, the registered interest account has been established,
and the securities have been inscribed.
6.

GENERAL PROVISIONS

6.1. As fiscal agents ofthe United States, Federal Reserve Banks are authorized and
requested to receive tenders, to make allotments as directed by the Secretary of the




258

1978 REPORT OF THE SECRETARY OF THE TREASURY

Treasury, to issue such notices as may be necessary, to receive payment for and make
delivery of securities on full-paid allotments, and to issue interim certificates pending
delivery of the definitive securities.
6.2. The Secretary of the Treasury may at any time issue supplemental or
amendatory mles and regulations goveming the offering. Public announcement of such
changes will be promptly provided.
PAUL H . TAYLOR,

Acting Fiscal Assistant Secretary.
SUPPLEMENT TO DEPARTMENT CIRCULAR NO. 14-78. PUBLIC DEBT
DEPARTMENT OF THE TREASURY,

Washington, June 2 1 , 1978.
The Secretary of the Treasury announced on June 20, 1978, that the interest rate
on the notes designated Series Q-1980, described in Department Circular—Public
Debt Series—No. 14-78, dated June 15, 1978, wiU be 8 1/4 percent. Interest on the
notes will be payable at the rate of 8 1/4 percent per annum.




PAUL H . TAYLOR,

Acting Fiscal Assistant Secretary.

Summary of information pertaining to Treasury notes issued during fiscal y e a r 1978
Date of
preliminary
announcement
1977
Sept. 27
Oct. 12
Oct. 21
Oct. 21
Nov. 14
Nov. 21
Dec. 13
1978
Jan. 12
Jan. 25
Jan. 25
Feb. 10
Feb. 15
Mar. 15
Mar. 21
Apr. 12
Apr. 26
]Vfayl7
May 22
June 14
July 12
July 26
July 26
Aug. 17
Aug. 22

Department
circular
Date
No.
23-77
24-77
25-77
26-77
28-77
29-77
30-77
1-78
2-78
3-78
5-78
6-78
7-78
8-78
9-78
10-78
12-78
13-78
14-78
16-78
17-78
18-78
20-78
21-78

Concurrent
offering
circular
No.

Treasury notes issued
(all offered for cash)

1977
Sept. 28
Oct. 13
Oct. 25
Oct. 25
Nov. 15
Nov. 22

7-1/8
7-1/4
26-77, 27-77 7-1/8
25-77. 27-77 7-5/8
7-1/8
7-1/4

Dec. 14
1978
Jan. 13
Jan.26
Jan.26
Feb. 10
Feb. 16
Mar. 16
Mar. 22
Apr. 13
Apr. 27
M&y 18
May 23
June 15
July 13
July 27
July 27
Aug. 18
Aug. 23

..7-1/2 percent Series K-1980
3-78, 4-78 7-1/2 percent Series M-198I
2-78, 4-78 8 percent Series A-1985
..7-5/8 percent Series L-1980
..7-7/8 percent Series G-1982
..7-1/2 percent Series M-19804
..7-7/8 percent Series C-1983
..7-3/4 percent Series N-1980
11-78
8-1/4 percent Series A-1988
..8 percent Series P-1980
8-1/4 percent Series H-1982
8-1/4 percent Series Q-1980
8-1/2 percent Series R-1980
18-78, 19-78 8-3/8 percent Series N-1981
17-78, 19-78 8-1/4 percent Series B-1985
8-3/8 percent Series S-1980
8-3/8 percent Series J-1982

percent
percent
percent
percent
percent
percent

Series
Series
Series
Series
Series
Series

F-1982
V-1979
J-1980
A-1987
W-1979
L-1981

7-1/8 percent Series X-1979

Type of
auction •
Yield
Yield
Yield
Yield
Yield
Yield

99.750
99.%3
99.695
99.552
99.991
99.776

Yield

99.863

Yield
Yield
Price
Yield
Yield
Yield
Yield
Yield
Yield
Yield
Yield
Yield
Yield
Yield
Yield
Yield
Yield

99.909
99.849
100.65
99.863
99.928
99.891
99.698
99.909
99.732
99.837
99.911
99.873
99.802
99.779
99.426
99.991
99.859

1 All auctions but one for issues of notes were by the "Yield" method in which bidders were required
to bid on the basis of an annual yield; one issue of notes was by the "Price" method, in which case the
interest rate is announced prior .to the auction, and bidders were requested to bid a price. After tenders
were allotted in the "Yiela' method auction an interest rate for the notes was estabhshed at the nearest
1/8 of one 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.
3 Relatively small amounts of bids were accepted at a price or prices above the high shown. However,




Accepted tenders
Low
Average
High
price
price
price

Minimum
denomination

Issue
date

99.666
99.927
99.668
99.415
99.972
99.741

1,000
5,000
5,000
1,000
5,000
1,000

3 99.936

99.808

5,000

1977
Oct. 17
Oct. 31
Nov. 15
Nov. 15
Nov. 30
Dec. 7
1978
Jan. 3

3 99.963
99.935
3 100.80
3 99.918
3 99.997
3 100.000
3 99.740
3 100.000
3 99.933
3 100.000
3 100.013
3 100.000
3 99.964
3 99.831
3 99.843
3 100.009
3 99.961

99.891
99.792
100.58
99.845
99.894
99.872
99.657
99.873
99.665
99.819
99.877
99.855
99.784
99.753
99.166
99.973
99.826

5,000
5,000
1,000
5,000
1,000
5,000
1,000
5,000
1,000
5,000
1,000
5,000
5,000
5,000
1,000
5,000
1,000

Jan. 31
Feb. 15
Feb. 15
Feb. 28
Mar.6
Mar.31
Apr. 5
IVfey 1
May 15
May 31
June 7
June 30
July 31
Aug. 15
Aug. 15
Aug. 31
Sept. 6

3
3
3
3
3
3

99.876
100.092
99.748
99.759
100.009
99.845

Maturity
date

Date
tenders
received

Payment
date 2

Nov. 15, 1982
Oct. 31, 1979
Nov. 15, 1980
Nov. 15, 1987
Nov. 30, 1979
Dec. 31, 1981

1977
Oct. 5
Oct. 18
Oct. 28
Nov. I
Nov. 22
Nov. 30

1977
Oct. 17
Oct. 31
Nov. 15
Nov. 15
Nov. 30
Dec. 7
1978
Jan. 3

Dec. 31, 1979
Jan. 31, 1980
M a y 15, 1981
Feb. 15, 1985
Feb. 29, 1980
Mar. 31, 1982
Mar. 31, 1980
M a y 15, 1983
Apr. 30, 1980
N ^ y 15, 1988
M a y 31, 1980
June 30, 1982
June 30, 1980
July 31, 1980
Aug. 15, 1981
Aug. 15, 1985
Aug. 31, 1980
' Sept. 30, 1982

Dec. 21
1978
Jan. 18
Jan. 31
Feb. 1
Feb. 16
Feb. 22
Mar. 22
Mar. 28
Apr. 19
May 2
M a y 23
M a y 31
June 20
July 20
Aug. 1
Aug. 2
Aug. 23
Aug. 29

Jan. 31
Feb. 15
Feb. 15
Feb. 28
Mar.6
Mar.31
Apr. 5
May 1
M a y 15
M a y 31
June 7
June 30
July 31
Aug. 15
Aug. 15
Aug. 31
Sept. 6

X
X
c/3

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 Since auction resulted in coupon rate of 7 1 /2 percent, this was considered an additional issue of the
4-year notes C-1980 issued Mar. 17, 1976, maturing Mar. 31, 1980.
NOTE: The maximum amount that could be bid for on a noncompetitive basis for each issue was
$1,000,000.

to

260

1978 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 2.—Treasury bonds

A Treasury circular covering an auction of Treasury bonds for C2ish is reproduced
in this exhibit. Circulars pertaining to other bond offerings during fiscal 1978 are simUar
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 wUl be shown in table 38 in the Statistical Appendix. During the year there were
no offerings in which holders of maturing securities were given preemptive rights to
exchange their holdings for new bonds.
DEPARTMENT CIRCULAR NO. 31-77. PUBLIC DEBT
DEPARTMENT OF THE TREASURY,

Washington, December 20, 1977.
1.

INVITATION FOR TENDERS

1.1. The Secretary of the Treasury, under the authority of the Second Liberty Bond
Act, as amended, invites tenders for approximately $ 1,500,000,000 of United States
securities, designated Treasury Bonds of 1993 (CUSIP No. 912810 CA 4). The
securities will be sold at auction with bidding on the basis of yield. Payment wUl be
required at the price equivalent of the bid yield of each accepted tender. The interest
rate on the securities and the price equivalent of each accepted bid will be determined
in the manner described below. Additional amounts of these securities may be issued
for cash to Federal Reserve Banks as agents of foreign and intemational monetary
authorities.
2.

DESCRIPTION OF SECURITIES

2.1. The securities will be dated January 6, 1978, and wiU bear interest from that
date, payable on a semiannual basis on August 15,1978, and each subsequent 6 months
on February 15 and August 15, until the principal becomes payable. They will mature
Febmary 15, 1993, and will not be subject to call for redemption prior to maturity.
2.2. The income derived from the securities is subject to all taxes imposed under
the Intemal Revenue Code of 1954. The securities 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, any
possession of the United States, or any local taxing authority.
2.3. The securities will be acceptable to secure deposits of public monies. They will
not be acceptable in payment of taxes.
2.4. Bearer securities with interest coupons attached, and securities registered as
to principal and interest, wiU be issued in denominations of $1,000, $5,000, $10,000,
$100,000, and $1,000,000. Book-entry securities wUl be available to eligible bidders
in multiples of those amounts. Interchanges of securities of different denominations and
of coupon, registered and book-entry securities, and the transfer of registered securities
wUl be permitted.
2.5. The Department of the Treasury's general regulations goveming United States
securities apply to the securities offered in this circular. These general regulations
include those currently in effect, as well as those that may be issued at a later date.
3.

SALE PROCEDURES

3.1. Tenders wUl be received at Federal Reserve Banks and Bramches and at the
Bureau ofthe Public Debt, Washington, D.C. 20226, up to 1:30 p.m., Eastem Standard
time, Tuesday, December 27, 1977. Noncompetitive tenders as defined below will be
considered timely if postmarked no later than Monday, December 26, 1977.
3.2. Each tender must state the face amount of securities bid for. The minimum bid
is $ 1,000 and larger bids must be in multiples of that amount. Competitive tenders must
ilso show the yield desired, expressed in terms of an annual yield with two decimals,



EXHIBITS

261

e.g., 7.11%. Common fractions may not be used. Noncompetitive tenders must show
the term "noncompetitive" on the tender form in lieu of a specified yield. No bidder
may submit more than one noncompetitive tender and the amount may not exceed
$1,000,000.
3.3. All bidders must certify that they have not made and will not make any
agreements for the sale or purchase of any securities of this issue prior to the deadline
established in Section 3.1. for receipt of tenders. Those authorized to submit tenders
for the account of customers will be required to certify that such tenders are submitted
under the same conditions, agreements, and certifications as tenders submitted directly
by bidders for their own account.
3.4. Commercial banks, which for this purpose are defined as banks accepting
demand deposits, and primary dealers, which for this purpose are defined 2is dealers
who make primary markets in Govemment securities and report daily to the Federal
Reserve Bank of New York their positions in and borrowings on such securities, may
submit tenders for account of customers if the names ofthe customers and the amount
for each customer are fumished. Others are only permitted to submit tenders for their
own account.
3.5. Tenders will be received without deposit for their own account from
commercial banks and other banking institutions; primary dealers, as defined above;
Federally-insured savings and loan associations; States, and their political subdivisions
or instmmentalities; public pension and retirement and other public funds; intemational organizations in which the United States holds membership; foreign central banks
and foreign states; Federal Reserve Banks; and Govemment accounts. Tenders from
others must be accompanied by a deposit of 5% ofthe face amount of securities applied
for (in the form of cash, maturing Treasury securities or readily collectible checks), or
by a guarantee of such deposit by a commercial bank or a primary dealer.
3.6. Immediately after the closing hour, tenders will be opened, followed by a publ ic
armouncement of the amount and yield range of accepted bids. Subject to the
reservations expressed in Section 4, noncompetitive tenders will be accepted in full, and
then competitive tenders will be accepted, starting with those at the lowest yields,
through successively higher yields 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
established, on the basis of a 1/8 of one percent increment, which results in an
equivalent average accepted price close to 100.000 and a lowest accepted price above
the original issue discount limit of 96.250. That rate of interest will be paid on all of
the securities. 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 equivalent to the yield bid. Those submitting noncompetitive tenders will pay the
price equivalent to the weighted average yield of accepted competitive tenders. 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 shaU be final. If
the amount of noncompetitive tenders received would absorb all or most ofthe offering,
competitive tenders will be accepted in an amount sufficient to provide a fair
determinatioh of the yield. Tenders received from Govemment accounts and Federal
Reserve Banks will be accepted at the price equivalent to the weighted average yield
of accepted competitive tenders.
3.7. Competitive bidders will be advised of the acceptance or rejection of their
tenders. Those submitting noncompetitive tenders will only be notified if the tender is
not accepted in full, or when the price is over par.
4.

RESERVATIONS

4.1. The Secretary of the Treasury expressly reserves the right to accept or reject
any or all tenders in whole or in part, to allot more or less than the amount of securities
specified in Section 1, and to make different percentage allotments to various classes
of applicants when the Secretary considers it in the public interest. The Secretary's
action under this Section is final.




262

1978 R E P O R T OF T H E SECRETARY OF THE TREASURY
5.

PAYMENT AND DELIVERY

5.1. Settlement for allotted securities must be made or completed on or before
Friday, January 6, 1978, at the Federal Reserve Bank or Branch or at the Bureau of
the Public Debt, wherever the tender was submitted. Payment must be in cash; in other
funds immediately available to the Treasury; in Tresisury bills, notes or bonds (with all
coupons detached) maturing on or before the settlement date but which are not
overdue as defined in the general regulations goveming United States securities; or by
check drawn to the order of the institution to which the tender W2is submitted, which
must be received at such institution no later than:
(a)
(b)

Wednesday, January 4, 1978, if the check is drawn on a bank in the Federal
Reserve District ofthe institution to which the check is submitted (the Fifth
Federal Reserve District in case of the Bureau of the Public Debt), or
Tuesday, January 3,1978, if the check is drawn on a bank in another Federal
Reserve District.

Checks received after the dates set forth in the preceding sentence will not be accepted
unless they are payable at the applicable Federal Reserve Bank. Payment will not be
considered complete whei^e registered securities are requested if the appropriate
identifying number as required on tax retums and other documents submitted to the
Intemal Revenue Service (an individual's social security number or an employer
identification number) is not fumished. When payment is made in securities, a cash
adjustment wUl be made to or required of the bidder for any difference between the
face amount of securities presented and the amount payable on the securities allotted.
5.2. In every case where full payment is not completed on time, the deposit
submitted with the tender, up to 5 percent of the face amount of securities allotted,
shaU, at the discretion ofthe Secretary ofthe Treasury, be forfeited to the United States.
5.3. Registered securities tendered as deposits and in payment for allotted
securities are not required to be assigned if the new securities are to be registered in
the same names and forms as appear in the registrations or assignments ofthe securities
surrendered. When the new securities are to be registered in names and forms different
from those in the inscriptions or assignments ofthe securities presented, the assignment
should be to "The Secretary of the Treasury for (securities offered by this circular) in
the name of (name and taxpayer identifying number)." If new securities in coupon form
are desired, the assignment should be to "The Secretary of the Treasury for coupon
(securities offered by this circular) to be delivered to (name and address)." Specific
instrnctions for the issuance and delivery of the new securities, signed by the owner or
authorized representative, must accompany the securities presented. Securities
tendered in payment should be surrendered to the Federal Reserve Bank or Branch or
to the Bureau of the Public Dept, Washington, D.C. 20226. The securities rriust be
delivered at the expense and risk of the holder.
5.4. If bearer securities are not ready for delivery on the settlement date, purchasers
may elect to receive interim certificates. These certificates shall be issued in bearer
form and shall be exchangeable for definitive securities of this issue, when such
securities are available, at any Federal Reserve Bank or Branch or at the Bureau ofthe
Public Debt, Washington, D.C. 20226. The interim certificates must be retumed at the
risk and expense of the holder.
5.5. Delivery of securities in registered form will be made after the requested form
of registration has been validated, the registered interest account has been established,
and the securities have been inscribed.
6.

GENERAL PROVISIONS

6.1. As fiscal agents of the United States, Federal Reserve Banks are authorized and
requested to receive tenders, to make allotments as directed by the Secretary of the
Treasury, to issue such notices as may be necessary, to receive payment for and make
delivery of securities on full-paid allotments, and to issue interim certificates pending
delivery of the definitive securities.




263

EXHIBITS

6.2. The Secretary of the Treasury may at any time issue supplemental or
amendatory rules and regulations goveming the offering. Public announcement of such
changes will be promptly provided.
I
PAUL H . TAYLOR,

'

Acting Fiscal Assistant Secretary.
SUPPLEMENT TO DEPARTMENT CIRCULAR NO. 31-77. PUBLIC DEBT

|

DEPARTMENT OF THE TREASURY,

Washington, December 28, 1977.
The Secretary ofthe Treasury announced on December 27, 1977, that the interest!
rate ofthe bonds described in Department Circular—Public Debt Series—No. 31-77,
dated December 20, 1977, will be 7 7/8 percent per annum. Accordingly, the bonds
are hereby redesignated 7 7/8 percent Treasury Bonds of 1993. Interest on the bonds;
will be payable at the rate of 7 7/8 percent per annum.




PAUL H . TAYLOR,

Acting Fiscal Assistant Secretary.

\

as

Summary of information pertaining to Treasury bonds issued during fiscal year 1978
Date of
prelim^
nouncement
1977
Oct. 24
Dec. 19
1978
Jan. 25
Apr. 26

^ S r
f£
en circu ar
circular
No.
Date
No.
1977
27-77
Oct. 25 25-77,26-77

7 7/8 percent of 2002-2007

Yield

31-77

7 7/8 percent of 1993

Yield

8 1/4 percent of 2000-2005
8 3/4 percent of 1995-2000

Price
Price

4-73
11-78

Dec. 20
1978
Jan. 26 2-78. 3-78
Apr. 27 10-78

Treasury bonds issued
(all auctioned for cash)

^^^^
Issue
Maturity
tenders Payment
date
date
received
date 2
1977
1977
1977
99.261 3 99.487
99.148
Nov. 15 Nov. 15, 2007 Nov. 2 Nov. 15
1978
1978
99.315 399.575
99.228
Jan. 6
Feb. 15, 1993 Dec. 27
Jan. 6
1975
1978
100.13
100.73
100.01
May 2 4 May 15, 2005 Feb. 2 . Feb. 15
99.02
399.23
98.91
May 15 5 Aug. 15, 2000 May 3 May 15
1978
99.924 3 100.OO8
99.924
July 11
Aug. Ii5, 1993 June 28 July 11
99.402
100.055
99.079
Aug. 15 Aug. 15, 2008 Aug. 3 Aug. 15
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 Interest was payable from Feb. 15, 1978.
5 Interest was payable from May 15, 1978.

Type of
auction •

Average
price

Accepted tenders
High
Low
price
price

June 19
15-78 June 20
8 5/8 percent of 1993
Yield
July 26
19-78
July 27 17-78,18-78
8 3/8 percent of 2003-2008
Yield
1 Some issues ofbonds were auctioned by the "Price" method, with the interest rate being announced
prior to the auction, and bidders were required to bid at a price. Other auctions were held by the "Yield"
method in which case bidders were reauired to bid at a yield. After tenders were allotted in the "Yield"
method auction an interest rate for the Donds was estabUshed at the nearest 1/8 of one 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.
NOTE: The maximum amount that could be bid for on a noncompetitive basis for each issue was
3 Relatively small amounts of bids were allotted at a price or prices above the high shown. However, $1,000,000. AU issues had a minimum denomination of $1,000.




EXHIBITS

265

Exhibit 3.—Treasury bills
During the fiscal year there were 52 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), 13 52-week issues, 1 issue of 139 days, and 4 issues of short-dated ("cash
management") biUs. 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 shortdated bills. The offering press release of March 1,1978, inviting tenders for 43-day bills
is also included and 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 fiscal year appears in table 39 in the Statistical Appendix^
PRESS RELEASE OF DECEMBER 6, 1977
The Department of the Treasury, by this public notice, invites tenders for two series
of Treasury bUls totaling approximately $5,700 million, to be issued December 15,
1977. This offering will provide $200 mUlion of new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,516 miUion. The two series offered
are as follows:
91-day bills (to maturity date) for approximately $2,300 mUlion, representing an
additional amount of bills dated September 15, 1977, and to mature March 16, 1978;
(CUSIP No. 912793 P3 4), originally issued in the amount of $3,377 million, the
additional and original bUls to be freely interchangeable.
182-day biUs for approximately $3,400 million to be dated December 15, 1977, and
to mature June 15, 1978 (CUSIP No. 912793 Q8 2).
Both series of bills will be issued for cash and in exchange for Treasury bills maturing i
December 15, 1977. Federal Reserve Banks, for themselves and as agents of foreign
and intemational monetary authorities, presently hold $2,855 miUion ofthe maturing
bills. These accounts may exchange bills they hold for the bills now being offered at;
the weighted average prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive and noncompetitive \
bidding, and at maturity theif par amount will be payable without interest. Except for I
definitive bills in the $ 100,000 denomination, which wUl be avaUable only to investors
who are able to show that they are required by law or regulation to hold securities in
physical form, both series of bills will be issued entirely in book-entry form in a
minimum amount of $ 10,000 and in any higher $5,000 multiple, on the records either
of the Federal Reserve Banks and Branches, or of the Department of the Treasury.
Tenders will be received at Federal Reserve Banks and Branches and at the Bureau
ofthe Public Debt, Washington, D.C. 20226, up to 1:30 p.m., Eastem Standard time,
Monday, December 12, 1977. Form PD 4632-2 (for 26-week series) or Form PD
4632-3 (for 13-week series) should be used to submit tenders for bills to be maintained
on the book-entry records of the Department of the Treasury.
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 Govemment
securities and report daily to the Federal Reserve Bank of New York their positions
in and borrowings on such securities may submit tenders for account of customers, if
the names of the customers and the amount for each customer are fumished. Others
are only permitted to submit tenders for their own account.
)
Payment for the full par amount of the bills applied for must accompany all tenders
submitted for bills to be maintained on the book-entry records of the Department of
the Treasury. A cash adjustment will be made on aU accepted tenders for the difference
between the par payment submitted and the actual issue price as determined in the
auction.
No deposit need accompany tenders from incorporated banks and tmst companies
and from responsible and recognized dealers in investment securities for bills to be
maintained on the book-entry records of Federal Reserve Banks and Branches, or for




266

1978 REPORT OF THE SECRETARY OF THE TREASURY

bills issued in bearer form, where authorized. A deposit of 2 percent ofthe par amount
of the bills applied for must accompany tenders for such bills from others, unless an
express guaranty of payment by an incorporated bank or trust company accompanies
the tenders.
Public announcement will be made by the Department ofthe Treasury ofthe amount
and price range of accepted bids. Competitive bidders wiU be advised ofthe acceptance
or rejection of their tenders. The Secretary ofthe Treasury expressly reserves the right
to accept or reject any or all tenders, in whole or in part, and the Secretary's action
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 weighted average price (in three decimals) of accepted competitive bids for the
respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records
of Federal Reserve Banks and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the Bureau of the Public
Debt on December 15, 1977, in cash or other immediately available funds or in
Treasury bUls maturing December 15, 1977. Cash adjustments wiU be made for
differences between the par value of the 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 these bills 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 these bills (other than life
insurance companies) must include in his or her Federal income tax retum, 2is 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 of the Treasury Circulars, No. 418 (current revision). Public Debt
Series—Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury
bills and govern the conditions of their issue. Copies of the circulars and tender forms
may be obtained from any Federal Reserve Bank or Branch, or from the Bureau of the
Public Debt.
PRESS RELEASE OF MARCH 1, 1978
The Department of the Treasury, by this public notice, invites tenders for
approximately $3,000 mUlion of 43-day Treasury biUs to be issued March 8, 1978,
representing an additional amount of bills dated October 20, 1977, maturing April 20,
1978 (CUSIP No. 912793 P8 3).
The bills will be issued on a discount basis under competitive bidding, and at maturity
their par amount will be payable without interest. Except for definitive bills in the
$ 100,000 denomination, which will be available only to investors who are able to show
that they are required by law or regulation to hold securities in physical form, this series
of bills will be issued entirely in book-entry form in a minimum amount of $ 10,000 and
in any higher $5,000 multiple, on the records of the Federal Reserve Banks and
Branches.
Competitive tenders will be received at all Federal Reserve Banks and Branches up
to 1:30 p.m., Eastem Standard time, Friday, March 3, 1978. Noncompetitive tenders
will not be accepted. Tenders will not be received at the Department of the Treasury,
Washington. Wire and telephone tenders may be received at the discretion of each
Federal Reserve Bank or Branch. Each tender for the issue must be for a minimum of
$1,000,000. Tenders over $1,000,000 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 institutioris and dealers who make primary markets in Govemment
securities and report daily to the Federal Reserve Bank of New York their positions
in and borrowings on such securities may submit tenders for account of customers, if
the names of the customers and the amount for each customer are fumished. Others
are only permitted to submit tenders for their own account.




267.

EXHIBITS

No deposit need accompany tenders from incorporated banks and trust companies
and from responsible and recognized dealers in investment securities for biUs to be
maintained on the book-entry records of Federal Reserve Banks and Branches, or fori
bills issued in bearer form, where authorized. A deposit of 2 percent ofthe par amounti
of the bills applied for must accompany tenders for such bills from others, unless an:
express guaranty of payment by an incorporated bank or trust company accompanies!
the tenders.
i
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 of their tenders. The Secretary of the Treasury expressly!
reserves the right to accept or reject any or aU tenders, in whole or in part, and the
Secretary's action shall be final. Settlement for accepted tenders in accordance withl
the bids must be made or completed at the Federal Reserve Bank or Branch in cashi
or other immediately available funds on Wednesday, March 8, 1978.
'
Under Sections 454(b) and 1221(5) of the Intemal Revenue Code of 1954 the!
amount of discount at which these bUls 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 these bills (other than lifel
insurance companies) must include in his or her Federal income tax retum, as ordinaryl
gain or loss, the differerice between the price paid for the bills 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.
i
Department of the Treasury Circulars, No. 418 (current revision), Public Debt
Series^Nos. 26-76 and 27-76, and this notice, prescribe the terms of these Treasury
bills and go vem the conditions of their issue. Copies of the circulars may be obtained
from any Federal Reserve Bank or Branch.
PRESS RELEASE OF MARCH 3, 1978
I

Tenders for $3,004 miUion of 43-day Treasury bills to be issued on March 8, 1978,
and to mature April 20, 1978, were accepted at the Federal Reserve Banks today. The
details are as follows:
i
Range of accepted
competitive
bids

Price

Discount
rate

99.246
99.238
99.242

6.313
6.380
6.346

Investment rate i
(equivalent coupoilissue yield)
Percent

High
Low
Average

6.45
6.52
6.48

NOTE. —Tenders at the low price were allotted 67 percent.

,
;
!
I
•'
j

Total tenders received a n d accepted by Federal Reserve districts
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total




Received

Accepted

$15,000,000
5,845,000,000
—
—
117,000,000
—
696,000,000
26,000,000
15,000,000
20,000,000
—
550,000,000

$3,350,000
2,566,850,000
—
—
3,000,000
—
182,920,000
14,000,000
7,350,000
—
—
226,700,000

7,284,000,000

3,004,170,000

268

1978 REPORT OF THE SECRETARY OF THE TREASURY

Exhibit 4.—Department Circular No. 653, Ninth Revision, April 23, 1974, amended,
offering of United States savings bonds, Series E
DEPARTMENT OF THE TREASURY,

Washington, February 27, 1978.
SUMMARY: The purpose of this amendment to the current offering of United States
Savings Bonds, Series E, is to revise the tables of redemption values and investment
yields contained therein to reflect the entrance ofbonds of various issue dates into their
first or next extended period.
EFFECTIVE DATE: Upon publication.
SUPPLEMENTAL INFORMATION: The tables contained in the offering circular
for Series E savings bonds show the redemption values and investment yields for bonds
of all possible issue dates. Each Table covers a particular consecutive group of issue
dates. Whenever the earlier dated bonds covered by a particular Table reach the end
of an original or extended maturity period, it is necessary to provide a supplemental
Table to cover the extended maturity period those bonds will next enter. During 1978,
earlier dated bonds in each of the following groups will begin a new extended maturity
period.
(1) Table 18—bonds dated June 1 through November 1, 1948;
(2) Table 19—bonds dated December 1, 1948, through May 1, 1949;
(3) Table 59—bonds dated June 1 through August 1, 1960;
(4) Table 60—bonds dated September 1 through November 1, 1960;
(5) Table 61—bonds dated December 1, 1960, through Febmary 1, 1961;
(6) Table 62—bonds dated March 1 through May 1, 1961;
(7) Table 94—bonds dated June 1 through November 1, 1972;
(8) Table 95—bonds dated December 1, 1972, through May 1, 1973.
Also, Table 97 covers bonds bearing issue dates of December 1, 1973, through
August 1, 1976. Of those bonds, only those bearing an issue date of December 1, 1973,
will enter their first extended maturity period during 1978.
To reflect these new extended maturity periods. Tables 18, 19, 59, 60, 61, 62, 94,
and 95 are being supplemented to show redemption values and investment yields for
the first or next extended maturity period applicable thereto. It should be noted,
however, that later dated bonds covered by these Tables will not enter their first or next
extended maturity period untU after 1978. While these bonds have already been
irrevocably granted such extension, the supplemental Tables will only be applicable
thereto if there is no intervening interest rate change.
With respect to Table 97, new Table 98 is being added to cover bonds dated January
1, 1974, through August 1, 1976, which wiU not enter their first extension untU a later
time. Table 97, which will now only cover bonds dated December 1, 1973, is being
supplemented at this time to show redemption values and investment yields of these
bonds for their first extended maturity period. These are the only bonds covered by
former Table 97 that wUl enter an extension during 1978.
Accordingly, Department of the Treasury Circular No. 653, Ninth Revision, as
amended, dated April 23, 1974 (31 CFR, Part 316), is hereby further amended by the
deletion of current Table 97 and the issuance of new Tables 18-A, 19-A, 59-A, 60-A,
61-A, 62-A, 94-A, 95-A, 97, 97-A, and 98.
The foregoing amendments were effected under authority of section 22 ofthe Second
Liberty Bond Act, as amended (49 Stat. 2 1 , as amended; 31 U.S.C. 757c) and 5 U.S.C.
301. Notice and public procedures thereon are deemed unnecessary as the fiscal policy
of the United States is involved.




PAUL H . TAYLOR,

Deputy Fiscal Assistant Secretary.

TABLE 18-A
BONDS BEARING ISSUE DATES FROM JUNE 1 THROUGH MOV. 1, 1948
Issue price
Denoalnation

.

Period
(years and manths after
second extended maturity at
30 years 0 months)

$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 period (values Increase on first day of period)*
THIRD ETTENnKD MATTTRITY PERIOD**

Approximate Investment yield
(annual percentage rate)
(2) From begin- (3) From begin- (4) From beglnning of each
ning of current ning of each
maturity period Jj-yr. period to S-yr. period
to beginning of beginning of
to 3rd extended maturity
each %-yr, pd.
next H-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 . . . l/( 6/1/78)
to I-O . . . 7 (12/1/78)
to 1-6 . . . . ( 6/1/79)
to 2-0 . . . . (12/1/79)
to 2-6 . . . . ( 6/1/80)
to 3-0 . .
. (12/1/80)
to 3-6 . .
. ( 6/1/81)
to A-0 . .
. (12/1/81)
to 4-6 . .
. ( 6/1/82)
to 5-0 . .
. (12/1/82)
to 5-6 , .
. ( 6/1/83)
to 6-0 , .
. (12/1/83)
to 6-6 . . , . ( ^/l/84)
to 7-0 . . . . (12/1/84)
to 7-6 . , , . ( 6/1/85)
to 8-0 . . . . (12/1/85)
to 8-6 . . . . ( 6/1/86)
to 9-0 . . . . (12/1/86)
to 9-6 . . . . ( 6/1/87)
tolO-0 . . . . (12/1/87)
2/
. . . . . ( 6/1/88)

$24.56
25.30
26.06
26.84
27.64
28.47
29.32
30.20
31.11
32.04
33.01
34.00
35.02
36.07
37.15
38.26
39.41
40.59
41.81
43.07
44.36

$61.40
63.24
65.14
67.09
69.11
71.18
73.31
75,51
77.78
80.11
82.52
84.99
87.54
90.17
92.87
95.66
98.53
101.48
104.53
107.67
110.90

$122.80
126.48
130.28
134.18
138,22
142.36
146.62
151,02
155,56
160,22
165,04
169.98
175,08
180,34
185,74
191,32
197,06
202.96
209.06
215.34
221.80

$245.60
252.96
260.56
268,36
276,44
284,72
293,24
302,04
311,12
320,44
330,08
339,96
350,16
360,68
371.48
382.64
394.12
405,92
418,12
430,68
443,60

$491,20
505.92
521.12
536.72
552.88
569.44
586,48
604,08
622,24
640,88
660,16
679,92
700,32
721,36
742,96
765.28
788,24
811,84
836,24
861,36
887.20

$1228.00
1264.80
1302.80
1341.80
1382.20
1423.60
1466.20
1510.20
1555.60
1602.20
1650,40
1699,80
1750,80
1803,40
1857,40
1913,20
1970.60
2029.60
2090,60
2153,40
2218,00

$2456,00
2529,60
2605,60
2683.60
2764,40
2847.20
2932.40
3020.40
3111.20
3204.40
3300.80
3399.60
3501.60
3606.80
3714.80
3826,40
3941,20
4059.20
4181.20
4306.80
4436.00

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
6.00
6.00 3/

Percent
5,99
6,01
5,99
6,02
5.99
5.98
6.00
6.01
5.99
6.02
5.99
6.00
6.01
5.99
6.01
6.00
5.99
6.01
6.01
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
6.01
6.00
6.00

m
X
X

5H
C/J

1/ Month, day, and year on which Issues of June 1, 1948, enter each period. For subsequent Issueraonthsadd the appropriate nunber of months.
?/ Third extended maturity reached at 40 years 0 months after Issue.
3 / Yield on purchase price from Issue date to 3rd extended maturity date Is 4.49 percent.
*
**

For earlier redenption 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 tine the extension begins is different from 6.00 percent.




to
ON

O
TABLE 19-A
BONDS BEARING ISSUE DATES FROM DEC. 1, Ipi+S, THROUGH MAY 1, 19l*9
Issue price
Denomination

Period
(years andraonthsafter
second extendedraaturityat
30 years 0 months)

$7.50 "$18?75'
10.00
25.00

$37.50
50.00

$75.00
100.00

$150.00
200.00

$375.00
500.00

$750.00
1000.00

(l) Redenption values during each half-year period (values increase on first day of period)*
THIRD EXTENDED MATURITY PERIOD**

Approximate investment yield
(annual percentage rate)
(2) Prom begin- (3) From begin- (U) From beginning of each
ning of current ning of each
raaturity period H-yr. i>eriod to H-yr. period
to beginning of beginning of
to 3rd extended maturity
each *§-yr. pd.
next is-yr. pd.

S
^
00

0
H

Percent
0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
U-0
U_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 U-0
to U-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/(12/1/78)
.
. . ( 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)
( 6/1/8U)
.
(12/1/8U)
.
.
( 6/1/85)
.
(12/1/85)
.
( 6/1/86)
.
(12/1/86)
.
( 6/1/87)
.
(12/1/87)
.
( 6/1/88)
.
(12/1/88)

$2U.90
25.6U
26. Ul
27.20
28.02
28.86
29.73
30.62
31.5U
32. U8
33. U6
3U.U6
35.50
36.56
37.66
38.79
39.95
Ul.15
U2.38
U3.66
UU.96

$62.2l4 $12U.U8
6U.11
128.22
132.06
66.03
68.01
136.02
lUO.lO
70.05
lUU.30
72.15
1U8.6U
7U.32
153.10
76.55
78.8U
157.68
81.21
162.U2
167.30
83.65
172.30
86.15
88.7U
177.U8
91. Uo 182.80
9U.1U
188.28
193.9U
96.97
99.88
199.76
205.7U
102.87
105.96
211.92
109.lU
218.28
112.Ul
22U.82

$2U8.96
256.UU
26U.12

272.ou
280.20
288.60
297.28
306.20
315.36
32U.8U
33U.6O
3UU.6O
35U.96
365.60
376.56
387.88
399.52
U11.U8
U23.8U
U36.56
UU9.6U

$U97.92
512.88
528.2U
5UU.O8
560.Uo
577.20
59U.56
612.Uo
630.72
6U9.68
669.20
689.20
709.92
731.20
753.12
775.76
799.OU
822.96
8U7.68
873.12
899.28

$12UU.80
1282.20
1320.60
1360.20

lUoi.oo
1UU3.OO
1U86.U0
1531.00
1576.80
162U.2O
1673.00
1723.00
177U.8O
1828.00
1882.80
1939.Uo
1997.60
2057.Uo
2119.20
2182.80
22U8.2O

$2U89.60
256U.UO
26U1.2O
2720.Uo
2802.00
2886.00
2972.80
3062.00
3153.60
32U8.UO
33U6.OO
3UU6.OO
35U9.6O
3656.00
3765.60
3878.80
3995.20
U11U.8O
U238.UO
U365.60
UU96.UO

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
6.00 3/

Percent
6.01
5.99
6.00
6.00
6.00
6.02
6.00
5.98
6.01
6.01
5.98
6.01
6.00
6.00
6.01
6.00
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
6.00
5.99

1/ Month, day, emd year on which issues of Dec. 1, I9U8, enter each period. For subsequent issue raonths add the appropriate number of months.
2 / Third extended maturity reached at UO yecurs 0raonthsafter issue.
3 / Yield on piurchase price fron issue date to 3rd extended maturity date is U.53 percent.
• For earlier redenption values and yields see appropriate table in Department Circuleu* 653, 9th Revision, as amended and suppleraented.
•• This table does not apply if the prevailing rate for Series E bonds being issued at the tirae the extension begins is different fron 6.00 percent.




0
Tl
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c/3

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po
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0
Tl
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X

m
H
M

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05
G

TABLE 59-A
BONDS BEARING ISSUE DATES FROM JUNE 1 THROUGH AUG. 1, I960
Issue price
DencKDination

....
....

. . .

Period
(years and raonths after
first extendedraat\irityat
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

(1) Redenption values during each half-year period (values increase on first day of period)*

.............

—..

SECOND EXTENDED MATURITY PERIOD**

.......

Approxiraate investraent yield
(annual percentage rate)
(2) From begin- (3) From begin- ( U) From beginning of eeu;h
ning of current ning of each
maturity period S-yr. period to S-yr. period
to beginning of beginning of
to 2nd extended matxirity
next *5-yr. pd.
each H-yr. pd.
Percent

0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
U-0
U-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 . . . l/( 3/1/78)
to 1-0 .
. ( 9/1/78)
to 1-6 .
. ( 3/1/79)
to 2-0 .
. ( 9/1/79)
to 2-6 .
( 3/1/80)
to 3-0 .
( 9/1/80)
. ( 3/1/81)
to 3-6 .
to U-0 .
( 9/1/81)
to U-6 .
( 3/1/82)
to 5-0 .
( 9/1/82)
to 5-6 .
( 3/1/83)
to 6-0 .
( 9/1/83)
( 3/1/8U)
to 6-6 .
( 9/1/8U)
to 7-0 .
to 7-6 .
( 3/1/85)
to 8-0 .
( 9/1/85)
( 3/1/86)
to 8-6 .
to 9-0 .
( 9/1/86)
to 9-6 .
( 3/1/87)
tolO-0 .
( 9/1/87)
2/
...
( 3/1/88)

$U3.18
UU.U8
U5.81
U7.18
U8.60
50.06
51.56
53.11
5U.70
56.3U
58.03
59.n
61.56
63.Ul
65.31
67.27
69.29
71.37
73.51
75.72
77.99

$86.36
88.96
91.62
9U.36
97.20
100.12
103.12
106.22
109.Uo
112.68
116.06
119.5U
123.12
126.82
130.62
I3U.5U
138.58
1U2.7U
IU7.O2
151.UU
155.98

$172.72
177.92
183.2U
188.72
I9U.U0
200.2U
206.2U
212.UU
218.80
225.36
232.12
239.08
2U6.2U
253.6U
261.2U
269.08
277.16
285.U8
29U.OU
302.88
311.96

$3U5.UU
355.8U
366.U8
377.UU
388.80
U00.U8
U12.U8
U2U.88
U37.60
U50.72
U6U.2U
U78.16
U92.U8
507.28
522.U8
538.16
55U.32
570.96
588.08
605.76
623.92

$863.60
889.60
916.20
9U3.60
972.00
1001.20
1031.20
1062.20
IO9U.OO
1126.80
1160.60
1195.Uo
1231.20
1268.20
1306.20
I3U5.UO
1385.80
IU27.U0
IU7O.20
I51U.UO
1559.80

$1727.20
1779.20
1832.Uo
1887.20
I9UU.OO
2002.Uo
2062.Uo
212U.UO
2188.00
2253.60
2321.20
2390.80
2U62.UO
2536.Uo
2612.Uo
2690.80
2771.60
285U.80
29UO.UO
3028.80
3119.60

$17272
17792
I832U
18872
19UUO
2002U
2062U
212UU
21880
22536
23212
23908
2U62U
2536U
2612U
26908
27716
285U8
29U0U
30288
31196

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/

Percent
6.02
5.98
5.98
6.02
6.01
5.99
6.01
5.99
6.00
6.00
6.00
5.99
6.01
5.99
6.00
6.01
6.00
6.00
6.01
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

1^/ Month, day, and year on which issues of June 1, I96O, enter each period. For subsequent issue months add the appropriate number of months.
£/ Second extended naturity reached at 27 years 9 months after issue.
3 / Yield on purchase price frora issue date to 2nd extended naturity date is 5.20 percent.
*
•*

For earlier redenption values and yields see appropriate table in Departnent Circular 653, 9th Revision, as araended and supplemented,
This table does not apply if the prevailing rate for Series E honds being issued at the time the extension begins is different frora 6.00 percent.




X

X
H
c/3

to
TABLE 60-A
BONDS BEARING ISSUE DATES FROM SEPT. 1 THROUGH NOV, 1, I960
Issue price
Denonination

$18.75
25.00

Period
(ye€u*8 and raonths after

$37.50
50.00

$75.00
100.00

$150.00
200.00

$375.00
500.00

$750.00
1000.00

$7500
IOOOO

(l) Rederaption values during each half-year period (values increase on first day of p e r i o d ) *

SECOND EXTENDED MATURITY PERIOD**

17 years 9 months)

Approxiraate investraent yield
(annual percentage rate)
(2) Frora b e g i n - (3) From b e g i n - (U) From beginning of each
ning o f current ning of each
maturity period S-yr. period to S-yr. period
t o 2nd extendto beginning of beginning of
next S-yr. pd.
ed matxirity
each S-yr. pd.
Percent

0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
U-0
U-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 U-0
to U.6
to 5-0
to 5-6
to 6-0
to d~d
to 7-0
to 7-6
to 8-0
to 8-6
to 9-0
to 9-6
tolO-0
2/
.

. . , l/( 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)
.
( 6/1/8U)
(12/1/8U)
.
.
( 6/1/85)
.
(12/1/85)
.
( 6/1/86)
.
(12/1/86)
.
( 6/1/87)
.
(12/1/87)
.
( 6/1/88)

$U3.57
UU.88
U6.22
U7.61
Uo.oU
50.51
52.02
53.59
55.19
56.85
58.55
60.31
62.12
63.98
65.90
67.88
69.92
72.01
7U.18
76.Uo
78.69

$87.lU
89.76
9 2 . UU
95.22
98.08
101.02
lOU.OU
107.18
110.38
113.70
117.10
120.62
I2U.2U
127.96
131.80
135.76
139.8U
1UU.02
1U8.36
152.80
157.38

$17U.28
179.52
18U.88
190.UU
196.16
202.oU
208.08
21U.36
220.76
227.Uo
23U.2O
2U1.2U
2U8.U8
255.92
263.60
271.52
279.68
288.OU
296.72
305.60
31U.76

$3U8.56
359.oU
369.76
380.88
392.32
U0U.08
U16.16
U28.72
UU1.52
U5U.80
U68.U0
U82.U8
U96.96
511.8U
527.20
5U3.0U
559.36
576.08
593.UU
611.20
629.52

$871.UO
897.60
92U.UO
952.20
980.80
1010.20
loUo.Uo
1071.80
1103.80
1137.00
1171.00
1206.20
I2U2.UO
1279.60
1318.00
1357.60
1398.Uo
IUU0.20
1U83.60
1528.00
1573.80

$17U2.80
1795.20
I8U8.8O
190U.UO
1961.60
2020.Uo
2080.80
21U3.6O
2207.60
227U.OO
23U2.OO
2U12.UO
2U8U.8O
2559.20
2636.00
2715.20
2796.80
2880.Uo
2967.20
3056.00
31U7.60

$17U28
17952
18U88
190UU
19616
2020U
20808
21U36
22076
227UO
23U20
2U12U
2U8U8
25592
26360
27152
27968
2880U
29672
30560
31U76

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
6.0 0
6,0 0
6.00
6.00
6,00
6,00
6.00 3/

Percent
6.01
5.97
6.01
6.01
6.00
5.98
6.0U
5.97
6.02
5.98
6.01
6.00
5.99
6.00
6.01
6.01
5.98
6.03
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
6,00
5.99
5.99

1_/ M o n t h , d a y , and year on which issues of Sept. 1 , I96O, enter each period. For subsequent issue months add the appropriate nuraber of months.
2 / Second extended raaturity reached at 2 7 years 9 months after issue.
3 / Yield on purchase price from issue date to 2nd extended naturity date is 5.2U percent.
*
•*

F o r earlier rederaption values and yields see appropriate table in Departnent Circuleu* 6 5 3 , 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.




W
10

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po
H
O

Tl

H
X
w

c/3

oPI?o
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>

po

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Tl

H

X

Pl
H
JO
PI

>

C/3

C
*<

• ^

~^.—^"

TABLE 61-A
BONDS BEARING ISSUE DATES FROM DEC, 1, I960, THROUGH FEB. 1, 1961
Issue price
Denonination

, . . ,
, , , ,

, , ,

Period
(years and months after
first extendedraaturityat
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

(l) Redenption values during each half-year period (values increase on first day of period)*

Approxinate investment yield
(annual percentage rate)
(2) Fron begin- (3) Frora begin- ( U) From beginning of each
ning of current ning of each
naturity period S-yr. period to S-yr. period
^n Pnrl ^'rt.t^nAmm
to beginning of beginning of
ed naturity
next S-yr. pd.
each S-yr. pd.
Percent

0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
U-0
U-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 . . . l/( 9/1/78).
to 1-0 .
. . ( 3/1/79)
to 1-6 .
. ( 9/1/79)
to 2-0 .
( 3/1/80)
to 2-6 .
( 9/1/80)
to 3-0 .
( 3/1/81)
to 3-6 .
( 9/1/81)
to U-0 .
( 3/1/82)
to U-6 .
( 9/1/82)
to 5-0 .
( 3/1/83)
to 5-6 .
( 9/1/83)
to 6-0 . ,
( 3/1/8U)
to 6^6 . .
( 9/1/8U)
to 7-0 . ,
( 3/1/85)
to 7-6 . ,
( 9/1/85)
to 8-0 .
( 3/1/86)
to 8-6 . .
( 9/1/86)
to 9-0 . .
( 3/1/87)
to 9-6 . .
( 9/1/87)
tolO-0 . .
( 3/1/88)
2/
...
( 9/1/88)

$U3.65
UU.96
U6.31
U7.70
U9,13
50,60
52.12
53,68
55.29
56.95
58,66
60. U2
62.23
6U.10
66,02
68.01
70.05
72.15
7U.31
76.5U
78.8U

$87.30
89,92
92.62
95. Uo
98,26
101,20
10U.2U
107.36
110.58
113,90
117.32
120,8U
12U.U6
128.20
132.OU
136.02
lUO.lO
lUU,30
1U8.62
153.08
157.68

$17U.60
179,8U
185.2U
190,80
196.52
202.Uo
208.U8
21U.72
221.16
227,80
23U.6U
2Ul,68
2U8.92
256.Uo
26U.08
272.OU
280.20
288.60
297.2U
306.16
315.36

$3U9.20
359.68
370.U8
381.60
393. OU
UOU.80
U16.96
U29,UU
UU2.32
U55.60
U69.28
U83.36
U97.8U
512.80
528,16
5UU.08
560.Uo
577.20
59U.U8
612.32
630.72

$873.00
899.20
926.20
95U.OO
982.60
1012.00
10U2,U0
1073.60
1105.80
1139.00
1173.20
1208.Uo
I2UU.60
1282.00
1320.Uo
1360.20
lUOl.OO
IUU3.OO
IU86.2O
1530.80
1576.80

$17U6.00
1798.Uo
1852.Uo
1908.00
1965.20
202U.OO
208U.80
21U7.20
2211.60
2278.00
23U6.U0
2U16.8O
2U89.2O
256U.OO
26UO.8O
2720.Uo
2802.00
2886.00
2972.Uo
3061.60
3153.60

$17U60
1798U
1852U
19080
19652
202U0
208U8
21U72
22116
22780
23U6U
2U168
2U892
256UO
26U08
2720U
28020
28860
2972U
30616
31536

-__-,

6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
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
6.00
6.00
5.98
6.01
5.99
6.00
6.00
6.01
6.00
5.99
6.01
5.99
6.03
6.00
6.00
5.99
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
6.00
6.00
6.00
6.00
6.01
6.01

Pl
X
X

s

H
w

1^/ Month, day, and year on which issues of Dec. 1, I96O, enter each period. For subsequent issue nonths add the appropriate nuraber of raonths,
£/ Second extendedraaturityreached at 27 years 9 months after issue,
3/ Yield on purchase price from issue date to 2nd extended nattirity date is 5.2U percent.
* For earlier redenption values and yields see appropriate table in Departraent 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.




-J

TABLE 62-A
BONDS BEARIRG ISSUE DATES FROM MARCH 1 THROUGH ^ Y 1, 1961
Issue price
Denomination

Period
(years and nonths after
first 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

(1) Redemptior values during each half-year neriod (vsLLues increase on first day of period)*
SECOND EXTENDED MATURITY PERIOD**

Approximate investment yield
(annual percentage rate)
(2) Frora begin- (3) Fron begin- (U) Frora beginning of each
ning of current ning of each
raaturity period S-yr, period to S-yr. period
'
frt 9nH ^'rf^nH.
to beginning of beginning of
ed raaturity
next S-yr. pd.
each S-yr. pd.
Percent

0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
U-0
U-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 , . , 1/(12/1/78)
to 1-0 .
. . ( 6/1/79)
to 1-6 .
. (12/1/79)
. ( 6/1/80)
to 2-0 .
. (12/1/80)
to 2-6 .
to 3-0 .
. ( 6/1/81)
. (12/1/81)
to 3-6 .
. ( 6/1/82)
to U-0 .
(12/1/82)
to U-6 .
to 5-0 .
. ( 6/1/83)
to 5-6 .
(12/1/83)
( 6/1/8U)
to 6-0 .
. (12/1/8U)
to 6-6 .
to 7-0 .
( 6/1/85)
to 7-6 .
(12/1/85)
to 8-0 .
( 6/1/86)
(12/1/86)
to 8-6 . ,
to 9-0 . ,
( 6/1/87)
to 9-6 .
(12/1/87)
( 6/1/88)
tolO-0 . ,
(12/1/88)
2/
...

$UU.05
U5.37
U6.73
U8.13
U9.58
51,07
52.60
5U.18
55,80
57,U8
59.20
60.98
62.80
6U.69
66,63
68.63
70.69
72.81
7U.99
77.2U
79.56

$88.10
90.7U
93. U6
96.26
99.16
102.lU
105.20
108.36
111.60
llU.96
118.Uo
121.96
125.60
129.38
133.26
137.26
lUl.38
1U5.62
IU9.98
I5U.U8
159.12

$176.20
181.U8
186.92
192.52
198.32
20U.28
210.Uo
216.72
223.20
229.92
236.80
2U3.92
251.20
258.76
266.52
27U.52
282.76
291.2U
299.96
308.96
318.2U

$352.Uo
362.96
373.8U
385.OU
396.6U
U08.56
U20.80
U33.UU
UU6.U0
U59.8U
U73.60
U87.8U
502.Uo
517.52
533.OU
5U9.OU
565.52
582.U8
599.92
617.92
636.U8

$881.00
907.Uo
93U.6O
962.60
991.60
1021.Uo
1052.00
1083.60
1116.00
IIU9.6O
II8U.OO
1219.60
1256.00
1293.80
1332.60
1372.60
1U13.8O
IU56.2O
IU99.8O
I5UU.8O
1591.20

$1762.00
I81U.8O
1869.20
1925.20
1983.20
20U2.8O
2IOU.OO
2167.20
2232.00
2299.20
2368.00
2U39.2O
2512.00
2587.60
2665.20
27U5.2O
2827.60
2912.Uo
2999.60
3089.60
3182.Uo

$17620
I81U8
18692
19252
19832
20U28
2IOUO
21672
22320
22992
2368d
2U392
25120
25876
26652
27U52
28276
2912U
29996
30896
3182U

5.99
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 3/

Percent
5.99
6.00
5.99
6.03
6.01
5.99
6.01
5.98
6.02
5.98
6.01
5.97
6.02
6.00
6.00
6.00
6.00
5.99
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
6.00
6.00
6.00
6.00
6.00
6.01

1/ Month, day, and year on which issues of March 1, 1961, enter each period. For subsequent issue raonths add the appropriate number of months.
2 / Second extended raatxirity reached at 27 years 9 nonths after issue.
3 / Yield on purchase price Traax issue date to 2nd extended raaturity date is 5.28 percent.
* For earlier rederaption values and yields see appropriate table in Department Circulair 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 x>ercent.




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TABLE 9l»-A
BONDS BEARING ISSUE DATES FROM JUNE 1 THROUGH NOV, 1, 1972
Issue price
Denonination

$18.75
25,00

Period
(years and months after
original naturity 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 half-year period (values increase tm first day of period)*
EXTENDED MATURITY PERIOD**

Approxiraate investment yield
(annual percentage rate)
(2) From begin- (3) From begin- (U) From beginning of each
ning of current ning of each
maturity period S-yr. period to S-yr. period
to extended
to beginning of beginning of
next S-yr. pd.
raaturity
each S-yr. pd.
Percent

0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
U-0
U-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
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 U-0
t o U-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
to 9-6
tolO-0
2/
.

.
.
.
.
.
.
,
.
.
.
.
.
.
.
.
,
.
,
.
,
.

.
.
.
.
.
.
.
.
.
.
.
.
.
.
,
,
.
.
,
,
.

,
.
.
.
.
.
.
.
.
.
.

l/( U/1/78)
, (10/1/78)
. ( U/1/79)
. (10/1/79)
, ( U/l/80)
. (10/1/80)
, ( U/1/81)
. (10/1/81)
. ( U/l/82)
, (10/1/82)
. ( U/1/83)
, (10/1/83)
. ( U/1/8U)
. (10/1/8U)
. ( U/1/85)
. (10/1/85)
, ( U/l/86)
, , (10/1/86)
, . ( U/l/87)
, . (10/1/87)
, ( U/l/88)

$26,28
27.07
27,88
28,72
29.58
3 0 , U7
31.38
32.32
33,29
3U,29
35,32
36,38
3 7 . U7
38,59
39,75
U0.9U
U2.17
U3,UU
UU,7U
U6,08
U7,U6

$52,56
5U.IU
55.76
5 7 . UU
59,16
60.9U
62.76
6U.6U
66.58
68.58
70.6U
72.76
7U.9U
77.18
79.50
81.88
8U.3U
86,88
89. U8
92.16
9U.92

$78.8U
81.21
83.6U
86.16
88.7U
9 1 . Ul
9U.1U
96.96
99.87
102.87
105.96
109.lU
112,Ul
115.77
119.25
122,82
126.51
130.32
13U,22
138.2U
IU2.38

$105.12
108.28
111.52
llU.88
118.32
121,88
125.52
129.28
133.16
137.16
1U1,28
1U5,52
IU9.88
I5U.36
159.00
163.76
168.68
173.76
178.96
18U.32
189.8U

$210.2U
216.56
223.OU
229.76
236.6U
2U3.76
251.ou
258.56
266.32
27U.32
282.56
291,oU
299.76
308.72
318.00
327.52
337.36
.3U7.52
357.92
368.6U
379.68

$525.60
5U1.U0
557.60
57U.U0
591.60
609.Uo
627;60
6U6.U0
665.80
685.80
706.Uo
727.60
7U9.U0
771.80
795.00
818.80
8U3.U0
868.80
89U.8O
921.60
9U9.20

$1051.20
1082.80
1115.20
IIU8.8O
1183.20
1218.80
1255.20
1292.80
1331.60
1371.60
IU12.8O
IU55.2O
1U98.8O
I5U3.6O
1590.00
1637.60
1686.80
1737.60
1789.60
I8U3.20
1898.Uo

$10512
10828
11152
IIU88
11832
12188
12552
12928
13316
13716
1U128
IU552
1U988
15U36
15900
16376
16868
17376
17896
18U32
1898U

6.01
6.00
6.01
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
6,01
5.98
6.03
5.99
6.02
5.97
5.99
6.00
6.01
6,01
6.00
5.99
5.98
6.01
5.99
6.01
6,02
5.99
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

Pl
X

X

S
H
C/3

1./ M o n t h , d a y , arid year on which issues of June 1. 1 9 7 2 , enter each period. For subsequent issue months add t h e appropriate number of months.
2 / Extended raatui•ity reached at 15 years 10 raonths after issue.
3 / Yield on purchase price frcMB issue date to extended maturity date is 5.95 percent.
*
••

For eeurlier redemption values and yields see appropriate table in Department Circular 653, 9th Revision, as eunended 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

ts)
-J
OS
TABLE 95-A
BONDS BEARING ISSUE DATES FROM DEC. 1, 1972, THROUGH MAY 1, 1973
Issue price
Denoalnation

$18,75
25.00

Period
(yeaors and months after
original naturity 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

Approximate investment yield
(annual percentage rate)

vO

(l) Redenption values during each half-year period (valueii increase on first day of period)*
MATURITY PERIOD**

(2) Frora b e g i n - (3) From begin- (U) Frora beginning of each
ning of current ning of each
raaturity period S-yr. i>eriod to S-yr. period
to extended
t o beginning of beginning of
maturity
next S-yr, pd.
each S-yr, pd.
Percent

0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
U-0
U-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 U-0
to U-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/
.

$26.3U $52.68
. . . 1/(10/1/78)
5U.26
,
27,13
, ( U/l/79)
55.88
27,9U
.
(10/1/79)
57.56
28,78
.
( U/l/80)
59.30
(10/1/80)
.
29.65
61.08
30,5U
( U/i/81)
.
(10/1/81)
.
62.90
31, U5
6U,78
.
( U/l/82)
32,39
66.7U
(10/1/82)
.
33,37
68.7U
.
( U/1/83)
3U.37
70.80
35, Uo
.
(10/1/83)
36, U6
( U/1/8U)
72.92
.
(10/1/8U)
.
75.10
37,55
77.36
38,68
.
( U/l/85)
39,8U
79.68
.
(10/1/85)
UI.OU
82,08
.
( U/l/86)
8U,5U
(10/1/86)
.
U2,27
87.08
. ,
( U/l/87) . U3.5U
UU.8U- 89.68
.
(10/1/87)
92.38
( U/l/88) /U6,19
.
.
95.lU
(lO/l/88>^ U7.57

$79.02
81,39
83.82
86.3U
88.95
91.62
9U.35
97.17
100.11
103.11
106.20
109.38
112.65
116.oU
119.52
123.12
126.81
130.62
13U.52
138.57
IU2.7I

$105,36
108.52
111.76
115.12
118.60
122.16
125.80
129.56
133.U8
137.U8
1U1.60
1U5.8U
150.20
15U.72
159.36
16U.16
169.08
17U.16
179.36
I8U.76
190.28

$210,72

217.ou
223.52
230.2U
237.20
2UU.32
251.60
259.12
266.96
27U.96
283.20
291.68
300.Uo
309.UU
318.72
328.32
338.16
3U8.32
358.72
369.52
380.56

$526,80
5U2.6O
558.80
575.60
593.00
610.80
629.00
6U7.8O

667.Uo
687.Uo
708.00
729.20
751.00
773.60
796.80
820.80
8U5.UO
870.80
896.80
923.80
951.Uo

$1053.60
1085.20
1117.60
1151.20
1186.00
1221.60
1258.00
1295.60
133U.8O
137U.8O
IU16.OO
1U58.UO
1502,00
I5U7.2O
1593.60
I6U1.60
1690.80
17U1.60
1793.60
I8U7.6O
1902.80

$10536
10852
11176
11512
11860
12216
12580
12956
I33U8
137U8
1U160
1U58U
15020
15U72
15936
16U16
16908
17U16
17936
18U76
19028

6.00
5.98
5.99
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 3/

Percent
6,00
5.97
6.01
6.05
6.00
5,96
5.98
6,05
5.99
5.99
5.99
5.98
6.02
6.00
6.02
5.99
6.01
5.97
6.02
5.98

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
5,99
5,99
5,99
6,00
5.98

1 / Month, day, and year on which issues of Dec. 1, 1972, enter each period. For subsequent issue months add the appropriate number of months.
2/ Extended naturity reached at 15 years 10 months after issue.
3 / Yield on piirchase price fron issue date to extended naturity date is 5.97 percent,
• For earlier redenption values tuid 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 from 6,00 percent.




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TABLF. 97
BONDS BEARING ISSUE DATE DEC . 1 , 1973
IsMie p r i c e
Denomination

.

Period
(ymara aad montha a f t a r U M « )

$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

(1) Rmdemptlon v a l u e s d u r i n g ea ch h a l f - v e a r p e r i o d ( v a l u e s
on f l r a t day of p e r i o d )

Approximate i n v e s t m e n t y l a l d
(annual p e r c e n t a g e r a t a )

$ 7500
IOOOO

Increaae

(2) From I s s u e (3) From b e g i n - (4) Prom b « t i a d a t e t o b e g i n - n i n g of each
n i n g of a a c h
S-yr. porlod
S-yr. period t o
n i n g of e a c h
S-yr. period
t o moCurUy
b e g i n n i n g of
next S-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

t o 0-6 .
t o 1-0
.
t o 1-6 o
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 .
2/
. .

. .
,
,
,
.
.
.

1/(12/1/73>
. ( 6/1/74)
(12/1/74 )
( 6/1/75^
(12/1/75 )
( 6/1/76)
(12/1/76 >
( 6/1/77 >
(12/1/77 )
( 6/1/78
(12/1/78 1

$18.75
19.10
19.61
20.10
20.60
21.14
21.71
22.31
22.97
23.67
25.20

$37.50
38.20
39.22
40.20
41.20
42.28
43.42
44.62
45.94
47.34
50.40

$56.25
57.30
58.83
60.30
61.80
63.42
65.13
66.93
68.91
71.01
75.60

$75.00
76.40
78.44
80.40
82.40
84.56
86.84
89.24
91.88
94.68
100.80

$150.00
152.80
156.88
160.80
164.80
169.12
173.68
178.48
183.76
189.36
201.60

$375.00
382.00
392.20
402,00
412.00
422,80
434,20
446,20
459.40
473.40
504,00

$750.00
764.00
784.40
804.00
824.00
845.60
868.40
802.40
918.80
946.80
1008.00

$

7500

7640
7844
8040
8240
84 S6
86R4
8924
9188
9468
10080

3.73
4.54
4.69
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

Porcoac
6.00
6.25
6.37
6.57
6.83
7.15
7.59
8.29
9.48
12.93

Pl

X
X

S
H
C/3

—

1 / Month, day and year on tihlch laauea of l>«ce«b«r 1, 1973,. enter each period.
2/ Maturity value reached at 5 years and 0 months after issue.




•-a

to
(X)
TABLE 0 7 - A
3 0 I D S BEARING ISHIIE DATE DEC
Issue price
Denomination

$10.75
25.00

$37.50
50.00

I56T25"
75.00

$75.00
100.00

$150.00
200.00

$375.00
500.00

1, 1973
$750.00
1000.00

$7500
IOOOO

Approximate investnent y i e l d
( a n n u a l percentage r a t e )
sO

Period
( y e a r s and n o n t h s
(>,"<iT-lno1

5

(1)
after

n o - f iiT.-t'l-ir

R e d e n - o t i o n v a l u e s d u r i n g e a c h h a l f -- y e a r o e r i o d
c r e a s e on f i r s t d a y o f p e r i o d ) *

(values in-

a*

E:(TEIiDED

y e a r s 0 ncj n t h s )

lATURITY PERIOD

( 2 ) F r o m b e g i n - ( 3 ) From b e g i n -• (U) From b e g i n n i n g o f c u r r e n t n i n g of each
n i n g of each
m a t u r i t ; ' - o e r i o d H-yr. period t o S-yr. period
t o b e g i n n i n g o f hfaf't'^'^'!'^'* ' ^ ^
t o extended
Def
e a c h '5-?^-. p d .
Ct S - y r . pd
naturity
ne:
Percent

0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
U-0
U-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
t o U-0
t o U-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/
.

. . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.

1/(12/1/78)
7 ( 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/80)
( 6/1/81)
(12/1/81)
( 6/1/02)
(12/1/82)
( 6/1/03)
(12/1/03;
( 6/1/OU)
(12/1/QU)
( 6/1/05)
(12/1/05)
( 6/1/06)
(12/1/06)
( 6/1/07)
(12/1/87)
( 6/1/00)
(12/1/00)

$25.20
25.96
26.73
27.5U
20.36
29.21
30.09
30.99
31.92
32.00
33.07
3U.OO
35.93
37.01
38.12
3Q.26
UO.UU
Ul.65
U2.90
UU.19
U5.51

$50.Uo
51.92
53.U6
55.00
56.72
50.U2
60.10
61.00
6 3 . OU
65.76
67.7U
69.76
71.86
7U.02
76.2U
70.52
00.00
03.30
05.00
00.30
91.02

$75.60
77.00
80.10
82.62
85.08
87.63
90.27
92.97
95.76
90.6U
101.61
10U.6U
107.70
111.03
llU.36
117.78
121.32
I2U.05
120.70
132.57
136.53

.-^lOO.OO
103.OU
106.02
110.16
113.UU
116.OU
120.36
123.96
127.60
131.52
135.U8
139.52
IU3.72
lUO.OU
152.U8
157.OU
161.76
166.60
171.60
176.76
102.OU

$201.60
207.60
213.OU
220.32
226.00
233.68
2U0.72
2U7.92
255.36
263.OU
270.96
270.ou
207.UU
296.00
30U.96
31U.OO
323.52
333.20
3U3.2O
353.52
36U.0O

$50U.00
519.20
53U.6O
550.00
567.20
58U.20
601.80
619.00
630.Uo
657.60
677.Uo
697.60
710.60
7U0.20
762.Uo
705.20
QoO.00
833.00
050.00
803.80
010.20

$1008.00
1038.Uo
1060.20
1101.60
II3U.UO
1168.Uo
1203.60
1230.60
1276.00
1315.20
135U.80
1395.20
1U37.2O
1U80.UO
152U.8O
1570.UO
1617.60
1666.00
1716.00
1767.60
IO2O.UO

$10080
IO38U
10692
11016
II3UU
1168U
12036
12306
12768
13152
135U8
13952
1U372
IU80U
152U8
1570U
16176
16660
17160
17676
I820U

....
6.03
5.98
6.01
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
6.003/

Percent
6.03
5.93
6.06
5.95
5.99
6.03
5.98
6.00
6.02
6.02
5.96
. 6.02
6.01
6.00
5.98
6.01
5.98
6.00
6.01
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
6.00
5.99
6.00
5.99
5.97

-a

00

po
Pl

0*v
70
H

0Tl
H

X
Pl
c/3
Pl
0
?3
H

>
73
*<
0

Tl
H

X
Pl
H

po
Pl

>
C/3

G
7i

1 / Honth, do;/-, and year on uhich issues of Dec. 1, 1973 enter each period.
2/ Extended naturity reached at 15 years 0 nonths after issue.
3/ Yield on purchase nrice fron issue date to extended naturity date is 6.00 percent.
*
**

For earlier redenption values and yields r.ee appropriate table in Departnent Circular 653, 9th Revision, as amended and supplenented.
This table does not apply if the prevailinj; rate for Series E honds being issued at the tine the extension begins is different fron 6.00 percent.




TABLE 98
BONDS BEARING ISSUE DATES FROM JAN. 1, 197U , THROUGH AUG. 1, 1976
Issue price
Denomination

,

$18.75
25wOO

.

Period
(years and months after Iasue)

$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 flrat day of period)

Approximate investment ylold
(annual percentage rate)
(2) From Issue (3) From begin- (4) From bog Indate to begin- ning of each
ning of oach
ning of each
S-yr. period to
S-yr. porlod
beginning of
S-yr, period
to maturity
next S-yr, pd.
Percent

0-0
0-6
1-0
1-6
2-0
2-6
3-0
3-6
A-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 4-0
to 4-6
to 5-0
2/
.

1/(1/1/7U)
. (7/1/7U)
. (1/1/75)
. (7/1/75)
. . (1/1/76)
. (7/1/76)
. (1/1/77)
. (7/1/77)
. (1/1/78)
. (7/1/78)
. (1/1/79)

$18.75
19.10
19.61,
20.10
20.60
21.14
21.71
22.31
22.97
23.67
25.20

$37.50
38.20
39.22
40.20
41.20
42.28
43.42
44.62
45.94
47.34
50.40

$56.25
57.30
58.83
60.30
61.80
63.42
65.13
66.93
68.91
71.01
75.60

$75.00
76.40
78.44
80.40
82.40
84.56
86.84
89.24
91.80
94.68
100.80

$150.00
152.80
156.88
160.80
164.80
169.12
173.68
178.48
183.76
189.36
201.60

$375.00
382.00
392.20
402.00
412.00
422.80
434.20
446.20
459.40
473.40
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
4.69
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

Porcont
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 on t/hich Issues of January 1, 197U, enter each period. Tliese are representative dates. For subsequent Issue dates,
substitute the month, day and year of Issue on the first line, and the appropriate six-month accrual date on each succeeding line. For
example: If the issue date of the bond is October 1, 1974, the entries on succeeding lines in this column would be 10/1/74, 4/1/75, 10/1/75,
4/1/76, 10/1/76, etc., to the maturity date of 10/1/79; if. the issue date of the bond is July 1. 1976, the line entries %*ould be 7/1/76,
1/1/77, 7/1/77, 1/1/78, 7/1/78, etc., to tlie maturity date of 7/1/01.
2 / Maturity value readied at 5 years and 0 months after issue.




Pl

X
X

S
H

c/3

280

1978 REPORT OF THE SECRETARY OF THE TREASURY

Exhibit 5.—Department Circular No. 905, Sixth Revision, April 19, 1974, amended,
offering of United States savings bonds. Series H
DEPARTMENT OF THE TREASURY,

Washington, Febriuiry 27, 1978.
SUMMARY: The purpose of this supplement to the current offering circular for
United States Savings Bonds, Series H, is to show the schedule of interest payments and
investment yields for bonds of various groups of issue dates, which will be applicable
to their first or next extended maturity period.
EFFECTIVE DATE: Upon publication.
SUPPLEMENTAL INFORMATION: The Tables contained in the offering circular
for Series H savings bonds show the schedule of interest payments and investment yields
for bonds of all possible issue dates. Each ofthe Tables covers a particular consecutive
group of issue dates. When the earlier dated bonds in any of these groups reach the end
of an original or extended maturity period it is necessary to publish a new Table to
reflect the interest payments and investment yields that will be applicable to the first
or next extended maturity period those bonds will enter. During 1978, the earlier dated
bonds in each of the following groups will enter their first or next extended maturity
period:
(1) Table 15—bonds dated June 1 through November 1, 1958;
(2) Table 16—bonds dated December 1, 1958 through May 1, 1959;
(3) Table 35—bonds dated June 1 through November 1, 1968; and
(4) Table 36—bonds dated December 1, 1968, through May 1, 1969.
It should be noted, however, that in some cases, later dated bonds in each ofthe above
groups will not enter their first or next extended maturity period until after 1978. Since
such extension already has been irrevocably granted to them, the supplemental Tables
to be published below will be applicable to them so long as there is no intervening
change in the interest rate paid on savings bonds.
Accordingly, Department of the Treasury Circular No. 905, Sixth Revision, as
amended, dated April 19, 1974 (31 CFR, Part 332) is hereby supplemented by the
addition of Tables 15-A, 16-A, 35-A, and 36-A.




PAUL H . TAYLOR,

Deputy Fiscal Assistant Secretary.




TAHLE
BONOS H E A k l ^ c
ocrcLrMf^**.*

. . . . . . .

^-l'll!Il!!l!!!!l

'

15-A

ISSUE DATES FRnM JyNE
*S00

H,00n

^""

*'°"°

"^^"^^

»S,n00
^ ' " ° "

I

THWOUOM N U V . 1 » 1958
*10,000

APPWnxT'iATh

^^'^^^
(?)

DKL^inn nc TTUC
AC.io r
. Irl
<?0 Y E A W 5 ,

n
^'"^
n

^ ' ^ AMOliNTS HF I M E « E S T
ChfcCKS F(l» EACH OENOMINATIOS •

^^ "'^'-'-'^

MONTHS

SECONip

p^Mino**

c

•
.
'
•
'
.

•
.
'
.
•
.

Fn»

(U)

J-WijM

MALF-YEAW

EACH

QF CURHEM
MATURITY

PO.
P^E- I ^ T E >* E S T
CEl-jNG
P ^ T . OATE

INTE«EST
P M T , OATE

PAY^tNT
OATE

E*TE'-(?eJ
MATI.IPITV

PFMCFNJT

PF»^CM"

PE»CFNT

tlSO.OO
150.00
150.00
150,00
150.00
150.00

t300.00
300.00
300.00
3or*.00
300.00
300.00

6,00
6.00
6.00
6,00
6.00
6,00

b.UO
6,00
^.00
'>,00
6.00
h.oo

6.00
6.nu
6,00
6,o()
6.00
6 00

'' n?/l/7H)
, ( e/l/7P)
• (5^/1/79)
. ? 6/1/flO)
• n?^'/**'^)
. ( 6/1/M1)

*1S.00
15.00
IS,00
15,00
15.00
15,00

130.00
30.00
30.00
30.00
30.00
30.00

a r t !5Jn

• • • • n?/i/8n

15.00

50.00

150,00

300.00

6.00

'i.oo

6.*o-j

u Q vcAo
^ rt VCAO
^ Q VCAO
I n
CA
I'l
ly.^l
7 n vciD.
7 Q vr!o!
H O vcAo!
I'l
vcAoe
I n I l l l l

•
•
•
•
•
•
•
•
•
•

f 6/1/**?)
^^?/l/**?)
f h/1/*'^)
f'?/1/P5)
' ^yi/6U)
f'?/'/^'^)
f- ^/1/fl'^)
f'^/l/^*^^
f 6/1/86)
f»^/'/«»«>)

15.00
15.00
15.00
15.00
,5.00
15.00
15.00
15.00
15.00
15.0.)

30.00
30.00
30.00
30.00
50.OU
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

300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00
300.00
500.00

6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00

^.00
•>.00
6.no
^.00
^.00
6.00
h.OO
6.00
6.00
h.OO

6.00
6,00
6 O',
6,0U
^,00
O.OO
6.00
6.0U
O.OO
6.00

• • f'^/^/^7)
• • ^ ^"''^S^J

I''.00
1^.00

30.00
30.00

150.00
150.00

300.00
300.00

6.00
3/ 6.00

h.OO
6.00

6 00
•-•-

•
•
•
•
•
•
•
•
•
•

in rt vcAoe ^ Z
- - - I - , . . . . .!

•
.
•
.
•
.

(3)

HEGINSING

MATUBITV

wfAo.

I I I
YEARS
vcAD.
l l . l l
l l t l l
YFARS

ffffJM

YTrLO

HATE)

ExTE'^'DEO

^

1 rt
.0
i n
3 c
x'n
3.U

PiVtSTM^NT

( A K ^ U A I . Pt^CENTA&t

•
•
.
•
•
•
•
•
•
•

.
•
.
•
.
•
•
•
•
•

m
X
X

s

1/ MONTH
MAY AhT, vPAP ON i« H I c H T \ T K - K 5? T "c Hf c K ' 7 S'p A Y A WL E'oN ' TS S U F S'HF " J U N F ' " ' " ^5fl^
MONThS Arn APPROPRIATE ^JuMHtH .IF MRNTHS.
ly vrfPl^^.f*!^'"'-^" "*T""ITY WEACHED AT 30 YFARS ANO 0 MONTHS A F T F R ISSUE O A T E .
3/ YIFLO ON Pu^rHASE PPICE F P O H ISSUE DATE Tf) SECOND bXTENOED MATURITY IS «.73'*.
* Fnw EARLIER INT^BFST CHECKS A N D Y I E L H S
AM£NDFO ANr SUPPLEi-ENTED.

"

SEE APPROPRIATE

TAHLE

IN DEPAKTMENT

CIRCULAR 905. 6 T H ^ V E V I S I U N , A S

" ^ ' H u t ' s S n i F r ' ^ P F r F R n i V ; ; ^ PERCENT."' " " ' " '"" ' " " ' ' " ' ^ " ^ ^ " ' " ' ' " " " "

'"^ ''"^^ '"^ f Tt^S„M

00




to
TAbLE
BONDS BEARING
ISSUE PRICE
REDEMPTION ANO MATURITY

VALUE

PERIOD OF TIME BOND IS MELD
AFTER EXTENDED MATURITY AT
20 YEARS, 0 MONTHS

,5
1,0
1,5
2,0
2,5
3,0
3,5
a,0
a,5
5,0
5,5
6,0
6,5
7,0
7,5
8,0
8,5
9,0
9,5
10.0

YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
'EARS
iARS
^EARS
EARS
YEARS
^EARS

. . .1/
, , . ,
, . . .
,.,"•.
• , . .
, , , ,
, , . .
. . . .
, , , ,
, . , .
• . , ,
, , . ,
, . , .
, . , .
. • . .
, , . ,
, . , .
, , , ,
. . . .
2/. , ,

( 6/1/79)
(12/1/79)
( 6/1/80)
(12/1/80)
( 6/1/81)
(12/1/81)
( 6/1/82)
(12/1/82)
( 6/1/85)
(12/1/85)
( 6/1/80)
(12/l/8a)
( 6/1/85)
(12/1/85)
( 6/1/86)
(12/1/86)
( 6/1/87)
(12/1/87)
( 6/1/88)
(12/1/88)

00

U-A.

ISSUE DATES Ff<OM DEC. I t

l<»58 THROUGH

$ 5 0 o " ' $ ' ' o o o ' "'is'ooo' '$'0^000
500
1,000
5,000
10,000

(1) AMOUNTS OF INTEREST
CHECKS FOR EACH DENOMINATION *
SECOND EXTENDED MATURITY PERIOD**

$15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15,00
15.00
15.00
15,00
15,00
15.00
15,00
15,00
15,00

SJO.OO
50.00
50.00
50,00
50,00
50.00
30,00
30,00
50.00
50,00
30,00
50.00
50.00
30.00
50,00
50,00
50.00
50.00
50.00
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
150.00
150,00
150.00
150.00
150.00

$300.00
500.00
500.00
500.00
500.00
500.00
500.00
500.00
500.00
300.00
500.00
500.00
500.00
300.00
500.00
500.00
500.00
300.00
500.00
300.00

HAY I, 1«*59
APPROXIMATE INVESTMENT YIELD
(ANNUAL PtRCENTAGE KATE)
(?) FROM
(3) FOR
BEGINNING
HALF-YEAK
UF CURRENT
V O . PRE*
MATURITY
CEDING
PO, To EA, INTEREST
INTEREST
PAYMtNT
PMT. DATE
•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
6.00
6.00
6.00
6.00
6.00
6.00
6.00
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
H M T , DATE
TO 2 N 0
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
.-..

50

m

n3
O
7S
H

O
H
X

w

c/5

w
n
?o

w
H

>
•<
O
-n
H
X

w

H
?0
PI

>
C/l

1/ MONTH, DAY AND YEAR ON WMJCM INTEREST CHECK IS PAYABLE ON ISSUES OF DEC. 1, 1958. FOR SUBSEQUENT
MONTHS ADO APPROPRIATE NUMBER OF MONTHS,
2/ SECOND ExTENOED MATURITY REACHED AT 30 YEARS AND 0 MONTHS AFTER ISSUE DATE.
3/ YIELD ON PURCHASE PRICE FROM ISSUE DATE TO SECOND EXTENDED MATURITY IS 0.78*.

ISSUE

• FOR EARLIER INTEREST CHECKS AND YIELDS SEE APPROPRIATE TABLE I N DEPARTMENT CIRCULAR 9 0 5 , 6TH NEvISlON, As
AMENDED ANO SUPPLEMENTED.
•* TKIS TABLE DUES NOT APPLY IF THE PREVAILING RATE FOR SERIES H B O N Q S B E I N G ISSUED'AT THE TjHt THE EXTENSION
BEGINS IS DIFFERENT FROM 6,00 PERCENT.

C




BONDS HEARINr, ISSUE DATES FROM JUNE

>«••
PRICE

ISSUE
REOEM PTION 'ANn MATURITY

VALUE

450 0
50 0

*l,000
1,000

i THROUGH

45,000
5,000

N U V . i, i96«

410,000
10,000

APPROjtTMATE INVESTINENT YlFLi'
(ANNUAL PERCENTAGE K A T F )

1fl) AMOUNTS

PERIOD OF 'TIME HOMO IS H E L O
Af^Tc o
r t l3 CT
MATURITY AT
10 YEARS,
0 MONTHS

.5 YEARS
1 .0 YEARS
1.5 YEARS
?.o YEARS
?.5 YFARS
3.0 YEARS
3.5 YEARS
«.0 YEARS
«.5 YEARS
5.0 YEARS
5.5 YFARS
6.0 YEARS
6.5 YEARS
7.0 YEARS
7.5 YFARS
P.O YEARS
ti.5 YFARS
*'.o YEARS
0.5 YFARS
1 0.0 YEARS

.1/
. .
. .
. .
. .
. .
. .
. ,

fl?/l/7fl)
( 6/1/79)
(l?/l/79)
( 6/1/flO)
(i?/i/eo)
( 6/1/61)
(i?/i/fln
( 6/1/fl?)

. , n?/i/H?)

?/.*

. , ( 6/1/85)
. . (i?/i/e5)
. . ( 6/1/8U1
. , Cl?/l/^o)
. . ( 6/1/6S)
. . n?/i/ps)
. . ( 6/1/86)
. . (1?/l/86)
. . ( 6/1/87)
. . (l?/l/87)
. . ( 6/1/88)

OF INTEREST
CHfCKS FOR EACH nENQHINATlPN *
•
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
15.00

*50.0 0
30,uO
50.00
50.0 0
50.0 0
50.00
50,00
50.00
50.0<)
30.0 0
50.00
50.00
50.00
50.00
50.00
50.0 0
50.00
50.00
50,00
50.00

MATURITY

PERinn«<»

4 150.00
150.00
150.00
15 0.00
150.00
150.00
150,00
150.00
150.00
15 0.00
150.00
150.00
150.00
150,00
150,00
15 0.00
150.00
150.00
150,00
150,00

4500.00
500,00
500.00
300.00
500.00
500.00
500.00
300.00
300 .00
500.00
300.00
300.00
300.00
500.00
500.00
300.00
30 0.00
500.00
300.00
300.00

(3) ^ n »

(?) FROM
BEGINNING
OF CURRENT
MATURITY
PO
TO F A
INTEREST
PMT, DATE

PP.
PRECtUiNG
IfjTEKfsT
PAYMENT
DATE

PERCENT
6.00
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
5/ 6.00

Ptf*C*- NT
6,0 0
6.O0
6.00
6.O0
^.0 0
6.00
6,00
6.00
6.00
e.OO
6.00
6.00
6.0 0
6.0 0
6.00
6.0 0
6. 00
6,00
6.U0
6.00

MALF-YEAR

1/ MONTH, OAf AND YEAR ON WHICH INTfkFST CHfCK IS P A Y A P L E ON ISSUES OF JU'>'E 1, 1968, FOR SUBSEQUENT
MONTHS Ann APPROPRIATE NUl^^^EW OF MONTHS,
?/ EXTENOED MATURITY R E A C H E O AT ?0 YEARS AND 0 MONTHS AFTER ISSUE O A T F .
i/ YIELD ON PURCHASE PRICE F R Q M ISSUE DATE TO EXTENDED MATURITY IS 5.57X.
• FOR EARLIER INTEREST CHECKS AND YTFLHS SEE APPROPRIATE TABLE IN O F P A R T M E N T
AMENDED ANU SUPPLEMENTED.
** ^""^fJt!o\?"^'^ "'^^ ^ ^ ' ' ^ ' ^ ^^ ^^^ PReVAlLiNG RATE FUP SERIES H H O N O S B E I N G
BEGINS IS niFFERENT FROM 6.00 PE^^CE^T,

CIRCULAR
ISSUED

(a) FRUM
EACH
INTEREST
PMT. DATE
TU FIRST
EXTENOED
HATUWITY
PERCFNT
6,00
6.00
6.00
6.00
6,00
6.00
6.00
6,0 0
6.0 0
6.00
6.00
6.00
6.00
6.00
6.00
6,00
6.00
6,00
6,0 0

m
X
X

2
H
Vi

....
ISSUE

905, bTH REVISIUN, AS

AT ThE

TIMf

T H E tXTtNSION

00




00

TABLE 56-A
BONDS BEARING ISSUE DATES FROM DEC. 1, 1*>e8 THROUGH
ISSUE PRICE
REDEMPTION AND MATURITY VALUE

PERIOD OF TIME BONO IS HELD
AFTER FIRST MATURITY AT
10 YEARS, 0 MONTHS

*^00
500

$1,000
1,000

$5,000
5,000

$10,000
10,000

(1) AMOUNTS OF INTEREST
CHECKS FOR EACH DENOMINATION *
EXTENDED MATURITY PERIOD**

FiAY I, 1969
APPROXIMATE INVtSTMENT YIELD
(ANNUAL PERCENTAGE RATE)
(2) FROM
BEGINNING
OF CURRENT
MATURITY
PD, TO EA,
INTEREST
PMT. DATE

(3) FOR
(<*) FROM
HALF-YEAR EACH
PO.
PRE-.INTEREST
CEDING
PMT, DATE
INTEREST
TU FIRST
PAYMENT

EXTENDED

DATE

MATURITY

m

S
H

,5
1,0
1,5
2.0
2.5
3.0
3.5
<i.O
«.5
5.0
5.5
6,0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0

YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YEARS
YE-.RS
YEARS
YEARS
YE^RS
YEARS
YEARS
YEARS
YEiRS
YEARS
YEARS
YEARS
YEARS
YEARS

, , , 1 / ( 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)
,
(12/1/85)
,
, ( 6/1/8U)
.
,
, (12/l/8a)
( 6/1/85)
,
,
(12/1/85)
( 6/1/86)
.
(12/1/86)
,
( 6/1/87)
,
(12/1/87)
,
( 6/1/88)
,
(12/1/88)
2/

$15,00
$50,00
i5.00
30,00
15,00
30.00
15,00
30.00
15.00
30.00
15,00
30.00
15,00 .
30.00
15.00
30.00
15,00
30.00
15,00
30.00
15,00
30.00
15,00
30.00
15,00
30.00
30.00
15,00
30.00
15.00
30.00
15,00
15,00
30.00
15,00
30.00
15,00
50,00
15,00
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
150.00
150.00
150.00
150.00
150.00

$500,00
500.00
500.00
500.00
500.00
500.00
500.00
500.00
500.00
500.00
500.00
500.00
500.00
300.00
300.00
300.00
500.00
500.00
500.00
500.00

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
3/ 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

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

....

•.a

1/ MONTH, DAY AND YEAR ON WHICH INTEREST CHECK IS PAYABLE ON ISSUES OF DEC, l# 1968. FOR SUbSEOUENT
MONTHS ADO APPROPRIATE NUMBER OF MONTHS,
2/ EXTENDED MATURITY REACHED AT 20 YEARS AND 0 MONTHS AFTER ISSUE DATE,
3/ YIELD ON PURCHASE PRICE FRQM ISSUE DATE TO EXTENDED MATURITY IS 5.6aX.

ISSUE

• FOR EARLIER INTEREST CHECKS AND YIELDS SEE APPROPRIATE TABLE IN DEPARTMENT CIRCULAR 9 0 5 , 6TH REVISION, AS
AMENDED ANO SUPPLEMENTED.
•* THIS TABLE DDES NOT APPLY IF THE PREVAILING RATE FOR SERIES H BONDS B E I N C ISSUED AT THE TIMF T H E EXTENSION
BEGINS IS DIFFERENT FROM 6,00 PERCENT,

o
H
m
X

C/)

m
n
JO

>
7i

o
H

X
m

H
73
m
>
c/3
G
73

<

EXHIBITS

285

Exhibit 6.—An act to increase the (temporary debt liinit, and for other purposes
[Public Law 95-120, 95th Congress, H.R. 9290, October 4, 1977]
Public debt limit.
Temporary increase.
31 U.S.C. 757b note.

Repeal; effective date.
31 U.S.C. 757b note.

Be it enacted by the Senate arul House of Representatives of the
United States of America in Congress assembled. That during the
period beginning on the date ofthe enactment of this Act and ending
on March 31,1978, 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 $352,000,000,000.
SEC. 2. Effective on the date ofthe enactment of this Act, the first
section ofthe Act of June 30, 1976, entitled "An Act to increase the
temporary debt limit, and for other purposes" (Public Law 94-334),
is hereby repealed.
SEC. 3. The last sentence of the second paragraph of the first
section ofthe Second Liberty Bond Act (31 U.S.C. 752) is amended
by striking out "$17,000,000,000" and inserting in lieu thereof
"$27,000,000,000".

Exhibit 7.—An act to extend the existing temporary debt limit
[Public Law 95-252, 95th Congress, H.R. 11518, March 27, 1978]
Public debt limit.
Temporary increase.
31 U.S.C. 757b note.

Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled. That the first section
of the Act of October 4, 1977, entitled "An Act to increase the
temporary debt limit, and for other purposes" (Public Law 95-120),
is amended by striking out "March 31, 1978" and inserting in lieu
thereof "July 31, 1978".

Exhibit 8.—An act to provide for a temporary increase in the public debt limit
[Public Law 95-333, 95th Congress, H.R. 13385, August 3, 1978]
Public debt limit.
Temporary increase.
31 U.S.C. 757b note.

Repeal; effective date.

31 U.S.C. 757b note.

Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled. That, during the
period beginning on the date ofthe enactment of this Act and ending
on March 31,1979, the public debt limit set forth in the first sentence
of section 21 oftheSecondLiberty Bond Act (31 U.S.C. 757b) shall
be temporarily increased by $398,000,000,000.
SEC. 2. Effective on the date ofthe enactment of this Act, the first
section ofthe Act of October 4, 1977, entitled "An Act to increase
the temporary debt limit, and for other purposes" (Public Law
95-120), is hereby repealed.
SEC. 3. The last sentence of the second paragraph of the first
section ofthe Second Liberty Bond Act (31 U.S.C. 752) is amended
by striking out "$27,000,000,000" and inserting in lieu thereof
"$32,000,000,000".

Domestic Finance
Exhibit 9.—Statement by Assistant Secretary Altman, February 6, 1978, before the
Subcommittee on Taxation and Debt Management of the Senate Finance Committee,
on the public debt limit
I am pleased to be here today to assist you in your consideration of the public debt
limit. The present temporary debt limit of $752 billion will expire on March 31, 1978,




286

1978 REPORT OF THE SECRETARY OF THE TREASURY

and the debt limit will then revert to the permanent ceiling of $400 billion. Legislative
action by March 31 will be necessary, therefore, to permit the Tresisury to borrow to
refund securities maturing after March 31 and to raise new cash to finance the estimated
deficits in the budget, as submitted to Congress by the President last month.
In addition, to permit the Treasury to continue borrowing in the long-term market,
it will be necessary to increase the $27 billion limit on the amount of bonds which we
may issue without regard to the 4 1/4-percent interest rate ceiling on Treasury bond
issues.
Finally, we are repeating our earlier request for authority to permit the Secretary of
the Treasury, with the approval of the President, to change the interest rate on U.S.
savings bonds if that should become necessary to assure a fair rate of retum to savings
bond investors.
Debt limit
Tuming first to the debt limit, our estimates of the amounts of debt subject to limit
at the end of each month through the fiscal years 1978 and 1979 are shown in the
attached tables. The tables indicate that the debt subject to limit will increase to $778
billion on September 30, 1978, and to $868 billion on September 30, 1979, assuming
a $12 billion cash balance on those dates. These are the debt estimates and cash
balances assumptions included in the President's January budget proposals. The usual
$3 billion margin for contingencies would raise these amounts to $781 billion on
September 30, 1978, and $871 billion on September 30, 1979. Thus the present debt
limit of $752 billion would need to be increased by $29 billion to meet our financing
requirements through the remainder of fiscal 1978 and by an additional $90 billion to
meet the requirements in fiscal 1979.
Our $781 billion estimate ofthe debt subject to limit on September 30, 1978 (which
includes the $3 billion margin for contingencies) is $6 billion higher than the $775
billion approved in the second concurrent resolution on the Federal budget for fiscal
year 1978, which was adopted by Congress on September 15, 1977.
The $90 billion increase in FY 1979 reflects the administration's current estimates
of a fiscal 1979 unified budget deficit of $60.6 billion, a tmst fund surplus of $13.9
billion, and a net financing requirement for off-budget entities of $ 12.5 billion. The tmst
fund surplus must be reflected in the debt requirement because the surplus is invested
in Treasury securities which are subject to the debt limit.
The relevant debt of off-budget entities consists largely of obligations which are
issued, sold, or guaranteed by Federal agencies and financed through the Federal
Financing Bank. Since the Federal Financing Bank borrows from the Treasury, we are
required to increase our borrowing in the market by a corresponding amount. This, of
course, adds to the debt subject to limit.
Bond authority
I would like to tum now to our fiscal 1979 need for an increase in the Treasury's
authority to issue long-term securities in the market without regard to the 4 1/4-percent
statutory ceiling on the rate of interest which may be paid on such issues. To meet our
requirements next year, the Treasury's authority to issue bonds (securities with
maturities over 10 years) should be increased by $10 billion from the current ceiling
of $27 billion to $37 billion.
The 4 1/4-percent ceiling predates World War II but did not become a serious
obstacle to Treasury issues of new bonds until the mid-1960's. At that time, market rates
of interest rose above 4 1/4 percent, and the Treasury was precluded from issuing new
bonds.
In 1971, Congress authorized the Treasury to issue up to $ 10 billion of bonds without
regard to the 4 1/4-percent ceiling. This limit has since been increased a number of
times, and in the debt limit act of October 4, 1977, it was increased from $17 billion
to the current level of $27 billion.



EXHIBITS

287

The Treasury, to date, has used almost $20 billion of the $27 billion authority,
including the $11/4 billion bond auctioned last week, which leaves the amount of
unused authority at about $7 billion. While the timing and amounts of future bond issues
will depend on prevailing market conditions, $ 10 billion increase in the bond authority
would permit the Treasury to continue its recent pattem of bond issues throughout
fiscal year 1979. Thus, the Treasury would be able to make further progress toward
achieving a better balance in the maturity structure of the debt and reestablishing the
market for long-term Treasury securities. We believe that such flexibility is essential
to efficient management of the public debt.
Savings bonds
In recent years. Treasury has recommended frequently that Congress repeal the 6percent ceiling on the rate of interest that the Treasury may pay on U.S. savings bonds.
Prior to 1970 the ceiling had been increased many times, but the current 6-percent
statutory ceiling was enacted by Congress in 1970. As market rates of interest rose, it
became clear that an increase in the savings bond interest rate was necessary to provide
investors in savings bonds with a fair rate of retum.
Mr. Chairman, we do not feel that an increase in the interest rate on savings bonds
is necessary today. Yet, we are concemed that the present requirement for legislation
to cover each increase in the rate does not provide sufficient flexibility to adjust the
rate in response to changing market conditions. The delays encountered in the
legislative process could result in inequities to savings bond purchasers and holders as
market interest rates rise on competing forms of savings.
Furthermore, Treasury relies on the savings bond program as an important and
relatively stable source of long-term funds. On that basis, we are concemed that
participants in the payroll savings plans and other savings bond purchasers might drop
out of the program if the interest rate were not maintained at a level reasonably
competitive with comparable forms of savings.
Any increase in the savings bond interest rate by the Treasury would continue to be
subject to the provision in existing law which requires approval of the President. Also,
the Treasury would, of course, give very careful consideration to the effect of any
increase in the savings bond interest rate on the flow of savings to banks and thrift
institutions.
Debt limit procedure
Mr. Chairman, I would also like to take this opportunity to suggest that your
committee consider a more effective procedure for controlling the size of the public
debt.
We do not think that the present statutory debt limit is an effective way for Congress
to control the debt. In fact, the debt limit may actually divert public attention from the
real issue—control over the Federal budget. The increase in the debt each year is simply
the result of earlier decisions by the Congress on the amounts of Federal spending and
taxation. Consequently, the only way to control the debt is through firm control over
the Federal budget. In this regard, the Congressional Budget Act of 1974 greatly
improved congressional budget procedures and provided a more effective means of
controlling the debt. That act requires congressional concurrent resolutions on the
appropriate levels of budget outlays, receipts, and public debt. This new budget process
thus assures that Congress will face up each year to the public debt consequences of
its decisions on taxes and expenditures.
Moreover, the statutory limitation on the public debt occasionally has interfered with
the efficient financing ofthe Federal Govemment and has actually resulted in increased
costs to the taxpayer. For example, when the temporary debt limit expired on
September 30, 1977, and new legislation was not enacted on the new debt limit until
October 4, Treasury was required, in the interim, to suspend the sale of savings bonds
and other public debt securities. The suspension of savings bonds sales, in particular,
resulted in considerable public confusion, and indignation, as well as additional costs




288

1978 REPORT OF THE SECRETARY OF THE TREASURY

to the Government. The cost of printing and distributing notifications to about 40,000
savings bonds issuing agents was $ 16,775. A much greater, but incalculable, cost is the
loss of public confidence in the savings bond program and in the management of the
Govemment's finances.
Accordingly, we believe that the public debt would be more effectively controlled
and more efficiently managed by tying the debt limit to the new congressional budget
process. We simply put this proposal on the table, Mr. Chairman, for you and the other
members of the subcommittee to consider in the hope that we can work together to
devise a more acceptable way to control the debt.
Public debt subject to limitation, fiscal year 1978, based on budget receipts of $400 billion, budget
outlays of $462 billion, unified budget deficit of $62 billion, off-budget outlays of $12 billion
[In billions of dollars]

1977

With $3 biUion
margin for
contingencies

Public debt
subject to
limit

Operating
cash
balance
ACTUAL

Sept 30
Oct.31
Nov. 30
Dec.31

700.0
698.5
709.1
720.1

19.1

7.7
5.5
12.3

1978
Jan.31

722.7

12.5
ESTIMATED

Feb. 28
Mar.31
Apr. 19
Apr.30
May 31
June 21
June 30
July 31.
Aug.31
Sept. 30

738
747
750
740
753
753
746
756
772
778

12
12
12
12
12
12
12
12
12
12

741
750
753
743
756
756
749
759
775
781

Public debt subject to limitation, fiscal year 1979, based on budget receipts of $440 billion, budget
outlays of $500 billion, unified budget deficit of $61 billion, off-budget outlays of $12 billion
[In billions of dollars]
Operating
cash
balance
1978
Sept 30
Oct 31
Nov. 30
Dec.31

Pubhc debt
subject to
hnut

With $3 billion
margin for
contmgencies

ESTIMATED

;

12
12
12
12

778
789
801
806

781
792
804
809

12
12
12
12
12
12
12
12
12
12
12

809
824
837
841
828
846
852
839
848
864
868

812
827
840
844
831
849
855
842
851
867
871

1979
Jan.31
Feb. 28
Mar.31
Apr. 18
Apr.30
May 31
June 20
June 30
July 31
Aug.31
Sept 30




EXHIBITS

289

Exhibit 10.—Statement by Assistant Secretary Altman, June 27, 1978, before the
Subcommittee on Domestic Monetary Policy of the House Committee on Banking,
Finance and Urban Affairs, on extension of the authority of Federal Reserve banks
to purchase public debt obligations directly from the Treasury
I welcome this opportunity to assist in your oversight of the authority of Federal
Reserve banks to purchase directly from the Treasury up to $5 billion of public debt
obligations. As you know, the most recent extension of this authority expired on April
30, 1978. On April 19, 1978, this subcommittee favorably reported House Joint
Resolution 816, to extend this authority to April 30, 1979. The resolution was adopted
by the House of Representatives on May 1, but the Senate has not yet acted.
The purpose ofthe direct-purchase authority is to facilitate the efficient management
of the public debt. It was first granted in its present form in 1942, and it has been
renewed for temporary periods on a number of occaisions. The authority has lapsed,
however, on five occasions in recent years—from July 1 until August 14, 1973; from
November 1, 1973, until October 28, 1974; from November 1 to November 12, 1975;
from October 1 until November 7, 1977, and the current period.
Borrowings from the Federal Reserve System under this authority have been for very
short periods, the average length being from 2 to 7 days. Only twice in the past 35 years
has the Treasury had to draw funds in this manner for periods exceeding 13 consecutive
days. I have appended a table which lists the instances of actual use. Borrowings under
the authority are subject to the public debt limit, and its use is reported in the Daily
Treasury Statement, the weekly Federal Reserve Statement, and in the Federal Reserve
Board's Annual Report to the Congress.
The existence of the direct-purchase authority provides us with a margin of safety
which permits us to let our cash balance fall to otherwise unacceptably low levels
preceding periods of seasonally heavy revenues. This, in tum, results in balances that
are not as high as they otherwise would be during the periods of high revenues that
follow, allowing the public debt to be kept to a minimum and thus reducing interest
costs to the Govemment. Moreover, there is always the possibility that unforeseen
swings in our cash flows may suddenly deplete our cash balance and require a sudden
borrowing.
The direct-purchase authority is available to provide an immediate source of funds
for temporary financing in the event of a natural emergency on a broader scale. While
this has never happened, it is conceivable that financial markets could be disrupted at
a time when large amounts of cash had to be raised to maintain govemmental functions
and meet the emergency. Consequently, the direct-purchase authority has for many
years been a key element in the Treasury's financial planning for a national emergency.
I want to emphasize that the direct-purchase authority is viewed by the Treasury as
a temporary accommodation to be used only under unusual circumstances. The
Treasury fully agrees with the general principle that our debt obligations should be
floated in the market and that purchases of Trezisury obligations by the central bank
should normally be made through that same public market. The Treasury agreed also
that the direct-purchase authority should not be considered a means by which the
Treasury may independently attempt to influence credit conditions by usurping the
authority of the Federal Reserve to engage in open market operations in Govemment
securities. In that connection, it is important to emphasize that any direct recourse by
the Treasury to Federal Reserve credit under this authority is subject to the discretion
and control of the Federal Reserve itself.




290

1978 REPORT OF THE SECRETARY OF THE TREASURY
Direct borrowing from Federal Reserve banks, 1942 to date
Days used

Maximum amount
at any time
(millions)

Number of
separate times
used

Maximum number
of days used at
any one time

1942
1943
1944
1945
1946
1947
1948
1949

19
48
None
9
None
None
None
2

$422
1,302
—
484
—
220

4
4
—
2
—
1

6
28

1950
1951
1952
1953
1954
1955
1956
1957
1958
1959

2
4
30
29
15
None
None
None
2
None

180
320
811
1,172
424
207
-

2
2
4
2
2
—
1
-

1
2
9
20
13

1960
1961
1962
1963...
1964
1965
1966
1967
1968
1969....

None
None
None
None
None
None
3
7
8
21

—
169
153
596
1,102

—
—
1
3
3
2

1970
1971
1972
1973
1974
1975
1976
1977

None
9
1
10
1
16
None
4

610
38
485
131
1042
2,500

1
1
3
1
4
1

Calendar year

3
3
6
12
7
1
6
1
7

NOTE.—Federal Reserve direct-purchase authority expired on Apr. 30, 1978.

Exhibit 11.—Statement by Assistant Secretary Altman, April 3, 1978, before the
House Budget Committee, on the administration's urban policy proposals
I am pleased to appear today to discuss with you certain of the President's urban
policy initiatives. The administration has worked hard this past year to analyze social,
economic, and fiscal conditions in American cities, the effectiveness of existing Federal
policies and programs aimed at cities, and, then, to determine the need for new program
initiatives. The culmination of this process was announced by the President last
Monday. His urban policy proposals are worthy of your support, and we join with the
other departments in urging you to include the related funding in the first concurrent
budget resolution.
The President's message presented the conceptual framework of his urban policy.
Over this next month we will be drafting legislation on the various program initiatives
in consultation with the Congress. So today I will not describe the specific details of
initiatives, but I will address the general thrust of three components ofthe President's
urban policy proposals: The National Development Bank, supplementary fiscal
assistance, and the tax proposals—the industrial revenue bonds, the differential
investment tax credit, and the employment tax credit. These initiatives address the
following principles of the President's urban policy:




EXHIBITS

•
•
•
•

291

Involving all levels of govemment and the private sector.
Leveraging significant private sector resources.
Increasing access to opportunities for disadvantaged people.
Providing flexibility to respond to diverse needs of all cities and communities
while recognizing that certain localities will require strategic targeting of
resources.

The National Development Bank
It is clear to us that a crucial cause of urban decay has been the decline ofthe private
sector employment base in central cities. This has resulted in a smaller tax base and
higher fiscal strain for city govemments. While fiscal and monetary policies are
effective instruments for improving the overall level of economic activity, we have
leamed that they are not precise enough tools to address the interrelated problems of
slow growth, chronic economic decline, and the resulting high levels of unemployment
among certain groups in many of our cities. We believe, therefore, that new Federal
incentives for the private sector to expand job opportunities in distressed areas should
be undertaken.
The National Development Bank represents a long-range economic development
strategy to rebuild the private economies of distressed areas. Its key objective is to help
create permanent jobs.
This strategy includes a set of financing incentives to influence businesses to remain
and expand or to locate in distressed areas. The effect of these incentives would be to
improve business and job opportunities, by lowering one element of the costs of doing
business—the cost of capital.
The package of incentives includes:
1.
2.

3.
4.

A program of "up-front" capital grsmts involving up to 15 percent (or a
maximum of $3 million) of an eligible firm's capital costs for rehabilitation or
fixed-asset expansion. EDA and HUD grants would be used.
In coordination with the grants, a program of loan guarantees to cover 75
percent of the remaining capital costs at interest rates representing a slight
premium above Treasury rates. In special circumstances the bank could
subsidize the interest rate down to 2.5 percent. The business or project could
only receive this package of a grant and loan guarantee if it obtained the
balance of its needed financing from private sources.
An increase in the limit from $5 to $20 million of tax-exempt or taxable
industrial revenue bonds that can be issued in an economically distressed area.
A new secondary market for (a) private loans made directly to eligible smalland medium-sized businesses to finance capital expenditures, and (b) the
private loans made to businesses receiving Federal financing assistance
through the Development Bank.

A "private market test" will place the initial credit decision not in the Federal
bureaucracy, but in the private market. This test will differentiate between economically viable projects which can provide permanent private sector jobs and those which
will fail. It will also help ensure that the bank will be financially self-sustaining. Hence,
we think that the bank can leverage significant private sector investment in distressed
areas with relatively small Federal exposure.
Successful local economic development requires public and private cooperation and
careful planning at the local level. We have designed this Development Bank as a
catalyst for promoting public and private sector cooperation in distressed areas and one
which will leave maximum flexibility for economic development planning at the local
level.
This proposed Development Bank, Mr. Chairman, is the result of an intense analysis
of current Federal economic development programs and a series of consultations with
mayors, Govemors, academicians, economic development practitioners, and representatives of the business, labor, and financial communities. It will not duplicate existing
Federal programs but, rather, fill a gap among Federal tools aimed at local economic
development. Specifically, there is no major Federal program involving tmly long-term




292

1978 REPORT OF THE SECRETARY OF THE TREASURY

financing incentives to affect business locational decisions. Mr. Chairman, our
combination of long-term financing incentives are strong enough to influence
locational decisions. They can reduce long-term business borrowing costs significantly
and impact job creation. Local practitioners have confirmed that it is a proposal which
can be combined with other resources to seriously attack the continuing losses of
private investment and jobs.
A crucial question in considering this proposal, of course, is why the Federal
Govemment should influence locational decisions at all. We think that the answer is
clear. For years, through a variety of programs, the Federal Govemment has directly
and indirectly encouraged certain developmental pattems. It is only logical that
rebuilding distressed areas must be an object of Federal policy.
The costs of doing nothing are too high—they include the tremendous human
suffering and capital waste of permitting these areas to continue to decline. They
include increased costs for welfare, health and unemployment compensation for the
unemployed—those who cannot move to find new jobs in growing areas. They include
the inefficient use of scarce national economic resources which flow into new areas to
build new private facilities and public infrastructure while the old and valuable
infrgistmctures are underutilized.
Supplementary fiscal assistance program
Let me tum now to discuss the fiscal relief component of President Carter's urban
policy—our proposed supplementary fiscal 2issistance program. This would replace the
expiring antirecession fiscal assistance program (frequently called countercyclical
revenue sharing), and would use the $ 1.04 billion already contained in the President's
fiscal 1979 budget for the countercyclical program.
The new program, Mr. Chairman, would provide relief to local govemments
experiencing fiscal strain because of underlying and long-term economic decline. We
are recommending it because there are a series of local govemments which cannot
withstand the impact of losing their current countercyclical funds. These are not
govemments, however, which are experiencing temporary recession-induced fiscal
strain. Instead, their fiscal difficulties reflect shrinking urban revenue baises caused by
the long-term outmigration of taxpayers, investment, and jobs or by underdevelopment.
During the past year, the Treasury Department studied carefully the fiscal conditions
of our largest municipalities. Indeed, as part of this eff'ort, some of you may be familiar
with a report we made available to Congress conceming the fiscal impact on these
municipalities of President Carter's 1977 economic stimulus program. In that report,
we developed an index of "municipal fiscal strain" and ranked the 48 largest municipal
govemments according to that index. It became clear to us that certain local
govemments are experiencing considerable fiscal strain. Their revenues are stagnant,
and the combination of inflation, high local unemployment, and high concentrations
of low-income persons are exerting upward pressure on their expenditures. The loss of
countercyclical funds would require these "high strain" localities to implement severe
fiscal austerity programs, which would have highly negative effects on the provision of
municipal services to their citizens. These high-strain localities are precisely those who
are least able to afford the loss of monies available under the current countercyclical
programs. Many simply would be unable to balance their budgets without it. Their only
choices would be to cut expenditures or raise taxes by the amounts of countercyclical
funds lost. Yet, in these areas, taxes already are at high levels and raising them further
would be counterproductive to economic redevelopment. Conceming service reductions, many of the largest cities would be forced to cut services such as police and fire
which are vitally needed. In addition, they are already experiencing high unemployment
levels, and further layoffs could only worsen their economic plight.
Tax proposals
Industrial development bonds. Let me now address the three tax portions of the
President's urban policy. As part ofthe Development Bank proposal, the President has
recommended changes in the small issue exemption goveming the use of tax-exempt
industrial development bond (IDB) financing. Under current law, small issue IDB's can
be issued on a tax-exempt basis for financing investment in depreciable property or land



EXHIBITS

293

by private business firms. The use of such tax-exempt financing within any county is
limited to the first $ 1 million of any project or, altematively, to $5 million if total capital
expenditures by the firm over a 6-year period, beginning 3 years before the date of bond
issue and ending 3 years after, do not exceed $5 million.
In the tax reform program, the administration proposed that the use of tax-exempt
small issue IDB's be repealed except for distressed areas and that for such areas the $5
million limit be increased to $10 million with the capital expenditures limitation
applying at this higher level. The original IDB proposal reflected the concem of this
administration that preferential tax-exempt financing be channeled to areas of most
urgent need.
The current proposal extends the IDB recommendations in the tax reform package.
The increase of industrial development bond financing to $ 10 million in the tax program
will be further increased to $20 million. The urban policy IDB proposals leave intact
the recommendations in the tax reform program to remove tax-exempt industrial
development bond financing in areas which do not qualify as distressed. Thus, while
the dollar limitations are liberalized, there is still a strong commitment to limit the use
of tax-exempt IDB financing to those areas of the country which are having difficulty
in attracting private capital. Also these IDB's will be eligible for the administration's
taxable bond option proposed as part of the tax reform program. Under the taxable
bond option, State and local govemments will have the choice of issuing tax-exempt
or subsidized taxable bonds. The Federal subsidy on taxable bonds will be 35 percent
of the taxable rate for bonds issued during the first 2 years and 40 percent thereafter.
The urban policy IDB's may also be issued on either a tax-exempt or a subsidized taxable
basis.
Differential investment tax credit. In addition, the administration is proposing, on a
2-year trial basis, a program ofa differential investment tax credit for private investment
(including the construction and rehabilitation of industrial buildings) for the
improvement of distressed areas. These tax credits would be administered by the
Commerce Department except that the income tax system would be employed as a
clearing mechanism for final payment to the investor. Authority to grant the additional
5-percent investment credit would total $200 million for each of the next 2 years.
To become eligible, a company would apply to the Commerce Department for a
"certificate of necessity" basing its request on financing need and employment
potential for the particular project in the distressed area. The certificate would be
attached to a firm's tax retum, thus making the firm automatically eligible for the
additional 5-percent investment tax credit for the specified amount of the project.
This program would be similar to that which was used and administered by the
Defense Production Board during World War II and the Korean war. The Treasury
Department would be responsible to audit the firm's net tax liability and not its
eligibility for the certificate of necessity.
Employment tax credit. The administration proposes a targeted employment tax
credit that would substitute for the new jobs tax credit in the present law that is
scheduled to expire at the end of this year. A tax credit for employment is desirable
because of persistent problems of structural unemployment, but the existing jobs credit
addresses the unemployment problem in a very unfocused and uncertain way. That
credit has been available for the employment of workers generally and only for firms
whose employment is growing. The credit is uncertain in application because an
employer needs to predict the rate of growth of his unemployment tax base to the end
ofthe year in order to judge whether a credit will be allowed. In the case of slow-growing
industries and regions, the credit is denied to most employers simply because the
demand for their products does not justify an increase of the wage base by more than
2 percent over the previous year. No employment incentive is provided to large
employers that expect to grow by more than about 50 employees in a year.
Preliminary results from a recent survey of taxpayers conducted by the Census
Bureau for an interagency task force show that less than 3 percent of employers report
any conscious effort to increase their employment in response to the credit. These
preliminary results also suggest that at least 80 percent ofthe dollar amount ofthe credit
will be received by employers who report no conscious effort to increase employment.
The administration proposal would focus the employment incentives ofthe tax credit
on the most serious stmctural unemployment problem: The high incidence of




294

1978 REPORT OF THE SECRETARY OF THE TREASURY

unemployment among disadvantaged youth and handicapped workers. The categories
of individuals who would be aided under this proposal have a recent rate of
unemployment of about five times that of the remaining labor force. This proposal
would not discriminate against slow-growing or declining firms nor against firms with
rapidly expanding employment opportunities. It would, however, require that all ofthe
benefits be targeted at a demonstrated special problem area of unemployment. As
compared with the present jobs credit, this proposal would provide a larger dollar
amount of incentive to employ each worker over a 2-year period, but at less than onehalf of the total revenue cost of the present program in a typical year.
According to the administration proposal, a tax credit would be allowed to employers
of eligible handicapped and disadvantaged individuals for 2 full years.
The major identifiable source of structural unemployment is minority and disadvantaged youth. Most other groups within the labor market do not suffer from perv2isive
structural unemployment. There are approximately 2.3 million young Americans
between the ages of 18 and 24 who live in low-income households. The recent
unemployment rate among this group is 26 percent; and this does not count the large
number of such persons who wish to work full time but can find only part-time work
or who have not been seeking work because they believe it is futile.
This program will provide strong incentives for employers to offer employment
opportunities to those disadvantaged young people who have found it most difficult to
gain the important experience of working in the private sector. Because the tax credit
is continued for up to 2 years for each employee, there is an incentive for employers
to retain these employees long enough for them to gain sufficient work experience and
training to become a part ofthe regular work force. Therefore, this program will provide
the necessary extra help to bring into our country's work force mzmy young persons
from low-income backgrounds, who might otherwise be denied entrance into the
regular private job market.
I appreciate this opportunity today to present the broad outlines of some ofthe urban
initiatives. We look forward to working with you and the other Members of Congress
to achieve the President's urban policy goals.

Exhibit 12.—Statement by Assistant Secretary Altman, October 12, 1977, before the
Senate Committee on Energy and Natural Resources, on the financing of an Alaska
natural gas transportation system
I am pleased to have this opportunity to assist you in your consideration of the
President's decision on an Alaska natural gas transportation system, and, in particular,
the financing aspects of the decision.
The Treasury Department has participated in the Alaskan gas decision process from
its initial stages. Among other activities, the Department led an interagency task force,
which on July 1, 1977, delivered a public report to the President on financing a
transportation system.
The President has designated the Alcan system to transport Alaskan gas across
Canada for delivery to consumers in the lower 48 States. The President's report
discussing the reasons for that decision was forwarded to Congress. It included a
detailed discussion of the financing issues. Let me begin, Mr. Chairman, by
summarizing the discussion of financing contained in that report.
The President observes that "the Alcan project will be one ofthe largest—if not the
largest—privately financed intemational business ventures of all time." Obviously, the
amount of financing required for such an undertaking is enormous and raising it is a
complex task. Indeed, certain financing issues still remain unresolved. My central
conclusion, however, is that the Alcan project can be privately financed, assuming
equitable participation of those parties who will benefit directly from its constmction.
Federal regulation
The Treasury Department has consistently argued that an Alaska natural gas
transportation system could be privately financed given a proper Federal regulatory
climate. The President's decision, with the accompanying terms and conditions, would




EXHIBITS

295

eliminate much ofthe potential uncertainty of Federal regulation and ensure that such
regulation will be conducive to both an efficient project and a private financing.
To be specific, the President has recommended a modified form of incremental
pricing for Alaskan gas to assure marketability to consumers. He has recommended the
creation of an Alaiska Natural Gas Office directed by an appointed Federal Inspector
to coordinate the Govemment's involvement in constmction of the project and to
ensure the project proceeds efficiently. He has prepared 2m agreement with the
Govemment of Canada which largely eliminates binational regulatory problems. The
President has recommended establishing a rate of retum on equity which discourages
cost overruns. He has discouraged the use of new and controversial tariff arrangements
that would be subject to time-consuming litigation with uncertain results. Finally, the
President has recommended that the field price to the producers of Alaskan gas be
established in accordsmce with his national energy plan, thus eliminating a lengthy price
proceeding before the Federal Energy Regulatory Commission and subsequent
litigation.
By adopting these recommendations, the Carter administration expects to resolve
much of the uncertainty which earlier characterized the Federal regulatory environment for this project. This should eliminate what had been perceived to be a major risk
of the project. In effect, the President's recommendations go far to encourage an
economically viable Alaskan gas project, which is the key to a private financing.
One of the issues mentioned above, the form of the tariff paid by gas consumers, is
particularly central to financing the project privately. The project applicants originally
requested a novel form of tariff referred to as the "all events, full cost of service" tariff.
This tariff would have reimbursed the project company for its costs, including the retum
on and of equity, under any and all possible circumstances, including noncompletion.
It was argued such a tariff was necessary to induce sufficient private lending for this
project.
Alcan's financial advisers have recently concluded that such a tariff will not be
necessary. Alcan is prepared, instead, to finance its project with a more conventional
tariff commencing only after the project has been completed. Such a tariff would assure
that the project's debt would be serviced upon completion and should satisfy lenders
that principal and interest payments on the project's debt will be met.
Essentially, our anticipation of an economically viable project coupled with this
assurance of debt service leads me to believe that the Alcan project can be financed
in the private sector.
Alcan financing plan
Alcan's financing plan, which is included in the President's report, estimates the total
capital requirements ofthe project at $9.7 billion in escalated dollars, most ofwhich
is to be raised over a 3-year period beginning in 1980. Of this total, 22 percent will
represent equity investments and 78 percent will be in the form of debt capital. Alcan
expects approximately 82 percent of this $9.7 billion total ($7.9 billion) to be raised
in the United States and the remaining 18 percent ($1.8 billion) to be raised in Canada.
The U.S. and Canada private capital markets combined represent the largest and
most resilient capital markets in the world and have the inherent capacity to supply
these amounts. As an example, Alcan plans to raise approximately $5.5 billion during
3 years in the U.S. corporate long-term debt market. Overall long-term borrowing by
nonfinancial corporations in that market is projected to reach $300 billion this year.
In 1982, the final year of Alcan's borrowing, it is projected to increase to $466 billion.
Alcan's borrowings would represent only 1.2 percent of this total.
The Alcan financing plan should be viewed as tentative because several important
issues must be resolved before funds will be committed to it. These currently unresolved
issues include—
1. The final determination of the field price of Alaskan gas;
2. The completion of sales contracts for the gas;
3. The final determination of the rate of retum that will be allowed on the equity
investment in the project.
A small group of the largest U.S. insurance companies will provide the bulk of the
U.S. debt capital required. Accordingly, their perceptions of the risks will be critical.




296

1978 REPORT OF THE SECRETARY OF THE TREASURY

At this initial stage, we cannot be sure how these key lenders will assess the risks or
even which risks they will perceive as dominate, e.g., the risks of marketability and
noncompletion. It will take more than a year before we will know with certainty whether
the financing can be arranged.
Participants in a private financing
One important aspect of our conclusion on the private financing is that the parties
who benefit from the project can and should participate in its financing. The major and
direct beneficiaries of this project are natural gas transmission corporations, the
producers of North Slope natural gas, and the State of Alaska. Their participation will
increase the overall private financeability by reducing the amounts which must be
raised on the strength ofthe project's credit alone. I will discuss each of these parties
briefly.
Natural gas transmission and distribution corporations. Natural gas transmission and
distribution corporations comprise the Alcan consortium and they must provide the
necessary equity for the project as well as the equity portion of any cost overrun
financing. The strength of this sponsoring consortium, therefore, is a key element of
the financing. Our analysis shows that the firms currently involved in the Alcan project
have the capacity to provide these required equity investments. Furthermore, we expect
that the consortium will continue to expand and eventually will include a large portion
of the entire natural gas transportation industry. In addition, the Alcan project has the
advantage ofthe substantial equity investment of Canadian transmission corporations,
which will total at least $800 million.
Producers of Alaskan natural gas. The owners and producers of Alaskan natural gas
are major U.S. energy companies. This group is primarily composed of Exxon, Atlantic
Richfield, and the Standard Oil Co. of Ohio. These companies will benefit substantially
from the sale of their natural gas reserves and obviously require a transportation system
to sell them.
These three companies had total assets of $51 billion in 1976 and net income in
excess of $3 billion. They clearly have the capacity to participate in the financing of
a transportation system, especially as full retums from their North Slope oil and related
pipeline investments are realized. These companies have demonstrated varying degrees
of interest and have not yet agreed to participate in the project. It seems in their interest,
however, and they should be encouraged to do so. We think that financial participation
by the producing companies can be structured so as to avoid anticompetitive practices,
a continuing concem ofthe Department of Justice. This issue is specifically addressed
in the report which has been forwarded to you with President Carter's decision.
The State of Alaska. The State of Alaska will realize substantial revenue in the form
of royalty payments and taxes from the sale of North Slope gas. The State will also
benefit from use of the pipeline for natural gas distribution and resulting commercial
development within the State.
The State of Alaska can use a portion of its revenues from the sale of Alaskan oil
to assist in the financing of this project. Originally, the State offered to assist in the
financing of the El Paso project by guaranteeing $900 million of project debt. Similar
State of Alaska support for the Alcan project is considered advantageous and is
encouraged.
Federal Govemment financial assistance
Possible Federal Government support to the project, viz., loan guarantees or
insurance, has been evaluated intensively by the Treasury Department because certain
parties earlier claimed that it was necessary. These parties asserted that Federal
financing support was necessary to finance the project in the uncertain regulatory
environment which then existed. They argued that only such assistance would assure
lenders of repayment in the event the project was not economically viable and only this
would assure their participation. In particular, the Arctic Gas consortium, which
withdrew earlier, claimed that financing assistance by both the Canadian and United
States Governments was required for the financing of their project. In addition, the El
Paso proposal incorporated approximately $1.5 billion in loan guarantees under the




EXHIBITS

297

existing Maritime Administration shipbuilding program. On the other hand, no Federal
financial assistance has been requested for the Alcan project.
Alcan's investment banking advisers do not believe that Federal financing assistance
is necessary for the Alcan project. The administration shares this conclusion. In
addition, the administration believes that Federal assistance to this project would be
undesirable for several important reasons.
1. Federal financial support substitutes the Govemment for private lenders in the
critical risk assessment function normally performed by the private lenders.
2. Financial assistance also reduces incentive for efficient management of the
project.
3. Serious questions of equity would result from the transfer of project risks to
taxpayers, many of whom are not gas consumers or will not receive additional
gas supplies as a result of the Alaskan project.
4. A subsidy in the form of lower interest rates yields an artificially low price for
the gas.
5. Other large energy projects might not be undertaken without similar Federal
assistance.
The Govemment of Canada also opposes Canadian govemmental financial
assistance to a binational project.
Transfer of financial risks to consumers
The issue of a new mechanism by which gas consumers bear some or all of the
financial risks of this project also has received careful study by the executive branch.
The most frequently discussed mechanism for consumer support would entail a
consumer financial guarantee by means of an all-events tariff with noncompletion
arrangements. The noncompletion features would provide for a consumer guarantee
of at least debt service in the event of noncompletion.
The Alcan sponsors and financial advisers have stated that the Alcan project can be
financed without such a consumer guarantee prior to completion and without Federal
financial assistance. The administration has concluded that the bearing of financial risks
by consumers prior to completion is unnecessary for this project. Furthermore, the
administration believes that consumer guarantees are undesirable for many ofthe same
reasons that Federal financing assistance is undesirable.
Conclusion
The Alcan project is the largest construction project ever contemplated by private
enterprise. The requisite financing is uniquely large, complex, and most difficult. Let
me emphasize, however, that the administration currently believes that this project can
be financed privately—that is, without Federal financing assistance or consumer
guarantees. We encourage appropriate and equitable financial participation by the
parties benefiting directly from the project. In conclusion, I urge congressional approval
of the President's decision recommending the Alcan project.

Exhibit 13.—Statement by Assistant Secretary Altman, August 1, 1978, before the
Subcommittee on Economic Stabilization of the House Committee on Banking,
Finance and Urban Affairs, on the proposed National Development Bank
I appear before you today to present the President's proposal for a National
Development Bank, which is embodied in H.R. 13295. This innovative proposal is the
product of extensive work within Treasury, HUD, Commerce, and other agencies, and
of consultations over more than a year with representatives of State and local
govemments, local development authorities, financial institutions, businesses, and the
academic community. This project has been one of the administration's highest
priorities during that time. These are the reasons why we are proposing this legislation:
1. The key to this country's economic future is our private sector. Four of every
five jobs are private jobs. The primary reason that national unemployment fell
from 7.4 percent to 5.7 percent in the period from January 1977 toJune 1978
is that more than 5.5 million new private jobs were created.




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1978 REPORT OF THE SECRETARY OF THE TREASURY

2.

Many areas of this country, urban and rural, have not fully participated in this
recent growth. Particularly during the 1970's, certain areas have lost
population, jobs, and important parts of their tax base.
3. These trends are costly for those places. They experience high unemployment,
unused public facilities, a growing concentration of less skilled and less
educated groups, and increasing welfare and other social support costs. At the
same time, their fiscal bases shrink, and their ability to maintain an appropriate
level of social services becomes strained.
4. Land, construction, and operating costs in distressed cities are disproportionately high and have led American businessmen to invest elsewhere. Furthermore, small and medium-sized businesses already located in distressed urban
and rural areas frequently cannot obtain long-term financing to expand or
rehabilitate.
5. In the past, the Federal Govemment has influenced, directly and indirectly,
these business and job location trends.
6. The National Development Bank represents a private jobs strategy. It is aimed
at increasing private investment and related jobs in distressed areas. We
believe that a new economic development tool of this type is needed. It does
not presently exist.
7. Specifically, the National Development Bank will provide a combination of
grants, loan guarantees, and interest subsidies to reduce financing costs for
business in distressed areas. These reduced financing costs will relate to
acquiring, constructing, and rehabilitating facilities. The combination ot
Development Bank incentives can lower the cash invested in such projects, on
a present value basis, by over 60 percent.
In addition, the bank also will provide a liquidity facility to incre2ise the flow
of private credit to small and medium-sized companies located there.
8. It would be inefficient to give the bank's powers to existing agencies. This
would mean building a separate long-term, private financing staff in each
agency—two or more staffs instead of one.
Chronic economic distress
Numerous rural and urban areas are experiencing chronic economic distress—low
levels of investment, a lack of jobs, loss of population, poverty, and a shrinking tax base.
The health of most central cities has declined relative to the suburbs. The cities ofthe
Northeast and Midwest have not shared in the growth ofthe South and West. And many
rural areas in all parts of the Nation continue to be isolated from growth.
There is no single cause of this distress; firms leave an area or go out of business; the
loss of jobs and skilled people increases the concentration of unemployment and
poverty among those who remain; a greater proportion of the unemployed are
structurally unemployed persons; the physical and social environment deteriorates;
crime increases, insurance costs rise and the cost of attracting and retaining skilled
workers increases; the tax base deteriorates and taxes rise; and then investment declines
more and there is a further loss of jobs and skilled workers. The resulting social cost
grows at the very time the local govemment's tax base is eroding; so services deteriorate
further, which accelerates the trend. The Nation's level of economic activity may pick
up, but it does not reverse the long-term decline in these places.
Rural distress is less visible than urban distress because it is not geographical 1>
concentrated; but it is no less serious. Low incomes and chronic poverty caused both
by unemployment and underemployment characterize economically weak mral areas
Rural America may need infrastructure beyond what now exists to successful 1>
attract the private investment necessary to diversify its economy. In addition, rural
development needs should be planned across geographic areas large enough to provide
sufficient labor for a variety of basic economic activities.
Urban distress
The characteristics of chronic distress in urban areas can be highlighted b)
comparing the economic indicators for distressed places with those of healthy places
Employment and unemployment.—It is well known that many of our larger cities have




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not shared in national growth. During the period 1970 to 1975, overall growth in
employment was 7.8 percent. In contrast, in St. Louis, employment fell during that
period by over 19 percent, and in New York City by 16 percent.
Central cities showed major declines in manufacturing jobs between 1970 and 1975.
Jobs lost, largely through ordinary attrition, were not being replaced. In addition,
looking at the 10 American cities with the largest number of headquarters of "Fortune
500" companies in 1956, we find that the number of headquarters had declined from
293 to 236 in 1971. In large measure, the cities' loss has been the suburbs' gain.
Looking at the unemployment side ofthe equation, we again see clear geographical
disparities. One study has compared the average unemployment rates of 14 declining
cities with those of 8 growing cities. On an unweighted basis, the rate of unemployment
in the declining cities was 41 percent greater in 1976 than in the growing cities. Within
regions, there are further disparities between central cities 2md their suburbs.
Investment.—The imbalance among different regions and cities is also highlighted by
differences in investment per employee. According to a recent Urban Institute study,
the average capital investment per production employee during 1970-76 was 66.7
percent greater in a group of growing cities as compared to distressed cities. For the
same distressed cities, the ratio of wages to value added per production worker was 35
percent less favorable than in the group of growing cities.
Shifts in population.—Population loss is also both a cause and an effect of chronic
distress. During the 1960's, the Nation's central cities lost 3.5 million residents through
population movements; in the first half of this decade the pace quadrupled. In some
individual cases, this loss has been staggering. Detroit has shrunk from a city of 1.85
million in 1950 to a city of 1.3 million in 1975.Thepopulationof St. Louis has declined
by more than 15 percent since 1970.
Those who leave tend to be young and have above-average skills and income.
Employers fmd the relatively more unskilled job pool less attractive than before. Thus,
it is even more difficult to find jobs for those who remain. Between 1970 and 1976, 1.2
million skilled workers left the central cities for the surrounding suburbs, while only
a half million skilled.workers moved in the opposite direction.
In addition, the more affluent tend to leave distressed cities. For example, 25 percent
of the households that moved from the Pittsburgh area between 1965 and 1970 had
1970 incomes of $15,000 or more, while only 18 percent of all Pittsburgh area
households had incomes at that level. Individuals who left Pittsburgh also tended to be
young, with a median age of 24 compared to the city's median age of 35.
Rural distress
Rural areas have consistently had a lower standard of living and a larger share of
poverty-stricken residents than urban areas. While rural America has shown signs of
some turnaround in its economic prospects since 1970, nationwide data conceals the
continuing decline in population which some rural areas are experiencing,