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FISCAL YEAft f977
DEPARTMENT OF THE TREASURY
DOCUMENT NO. 3273
Secretary
For sale by the Superintendent of Docuinents, U.S. Govemment Printing Office, Washington, D.C. 20402
STOCK 0 4 8 - 0 0 0 - 0 0 3 0 9 - 0 5
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/97?
THE SECRETARY OF THE TREASURY
WASHINGTON
January 3 , 1978
Dear S i r s :
I have the 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, 1977.
submission is in
accordance
with
31 U.S.C. 1027.
Sincerely yours,
WJ ( C i ^ J U o ^ l ^ e A ^ ^ ^
W. 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 ofthe
Enforcement and Operations
Tax Policy
Intemational Affairs
3
8
37
40
42
45
53
ADMINISTRATIVE REPORTS
Administrative Management
Alcohol, Tobacco and Firearms, Bureau of
Comptroller ofthe Currency, Office ofthe
Computer Science, Office of
Director of Practice, Office of
Engraving and Printing, Bureau of
Equal Opportunity Program, Office of
Federal Law Enforcement Training Center
Fiscal Service:
Govemment Financial Operations, Bureau of
Public Debt, Bureau ofthe
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
111
125
136
139
141
143
147
150
154
166
169
170
194
199
205
205
223
228
EXHIBITS
1.
2.
3.
4.
5.
6.
7.
8.
Public Debt Operations, Regulations, and Legislation
Treasury notes
Treasury bonds
Treasury bills
Department Circular, Public Debt Series No. 26-76, December 2, 1976,
regulations goveming book-entry Treasury bills
Department Circular, Fublic Debt Series No. 26-76, First Amendment,
December 20, 1976, regulations governing book-entry Treasury bills
Department Circular, Public Debt Series No. 27-76, December 2, 1976, issue
and sale of book-entry Treasury bills and of definitive Treasury bills to
eligible bidders
Department Circular, Public Debt Series No. 1-63, January 10, 1963,
amended, regulations goveming United States retirement plan bonds
Department Circular No. 530, Tenth Revision, December 5, 1973, amended,
regulations goveming United States savings bonds
V
239
244
249
253
261
262
266
267
VI
CONTENTS
Page
9. Department Circular No. 653, Ninth Revision, April 23, 1974, amended,
offering of United States savings bonds. Series E
10. Department Circular No. 905, Sixth Revision, April 19, 1974, amended,
offering of United States savings bonds. Series H
11. Department Circular, Public Debt Series No. 1-75, January 3, 1975, First
Amendment, regulations governing United States individual retirement
plan bonds
267
268
268
Domestic Finance
12. Statement by Assistant Secretary Gerard, November 10, 1976, before the
Economic Stabilization Subcommittee of the House Banking, Currency,
and Housing Committee, the Task Force on Tax Expenditures and Onbudget Agencies of the House Budget Conmiittee, and the Subcommittee
on Oversight of the House Ways and Means Committee, on loan guarantee
programs
13. Statement by Assistant Secretary Altman, August 1, 1977, before the House
Ways ana Means Conmiittee, on the public debt limit
14. Remarks by Special Assistant to the Secretary (Debt Management)
Niehenke, September 13, 1977, before the Greater Philadelphia Money
Marketeers Qub, Philadelphia, Pa., on Treasury financing operations
15. Statement by Assistant Secretary Altman, September 20, 1977, before the
Subcommittee on Oversight of the House Ways and Means Committee, on
loan guarantee programs
16. Other Treasury testimony pubhshed in hearings before congressional committees
271
274
278
281
286
Econoinic Policy
17. Remarks by Secretary Blumenthal, March 3, 1977, at the Waldorf Astoria in
New York City, on the Government's role in the capital formation process..
18. Remarks by Secretary Blumenthal, May 11, 1977, before the Economic Club
of Chicago at the Palmer House, Chicago, 111., on national economic
policymaking
19. Statement by Assistant Secretary Brill, May 16,1977, before the Subcommittee on Taxation and Debt Management of the Senate Finance Committee,
on incentives for economic growth
20. An address by Assistant Secretary Brill, June 9, 1977, to the Mth annual
Economic Outlook Conference, Chicago, 111., entitled "Lessons of the
Seventies"
286
291
295
298
Enforcement and Operations
21. Exchange of letters between Attomey General Bell and Secretary Blumenthal estabhshing policy for Justice Department review of certain reports
received by Treasury under the Currency and Foreign Transactions
Reporting Act
22. Statement by Under Secretary Anderson, March 29, 1977, before the
Commerce, Consumer, and Monetary Affairs Subcommittee of the House
Committee on Govemment Operations, on the Bank Secrecy Act
23. Remarks by Under Secretary Anderson, May 17, 1977, before the American
Importers Association, Plaza Hotel, New York City, on customs procedural reform
,
302
309
Tax Policy
24. Statement by Secretary Blumenthal, January 27, 1977, before the House
Budget Committee, on the President's economic stimulus program
25. Statement by Secretary Blumenthal, May 16, 1977, before the House Ways
and Means Committee, on the President's energy program
301
312
319
CONTENTS
VII
Page
26. Statement by Assistant Secretary Woodworth, June 15, 1977, before the
Subcommittee on Taxation and Debt Management ofthe Senate Committee on Finance, on capital formation
27. Remarks by Secretary Blumenthal, June 29, 1977, to the Financial Analysts
Federation, Washington, D.C, on tax reform
'.'.
28. Statement by Secretary Blumenthal, August 9, 1977, before the Senate
Finance Committee, on the national energy plan
328
331
335
Trade and Investment Policy
29. Statement by Secretary Blumenthal, March 16, 1977, before the Senate
Committee on Banking, Housing, and Urban Affairs, on legislation
regarding bribery of foreign public officials
30. Statement by Under Secretary for Monetary Affairs Solomon, March 25,
1977, before the Subcommittee on Intemational Trade, Investment and
Monetary Policy of the House Committee on Banking, Finance and Urban
Affairs, on proposed legislation extending the expiration date of the
Export-Iniport Bank
31. Excerpt from Joint Communique on the Third Session ofthe United StatesSaudi Arabian Joint Commission on Economic Cooperation, May 3-4,
1977, Washington, D.C
32. Statement by Assistant Secretary Bergsten, May 12, 1977, before the
Subcommittee on Antitrust and Monopolies of the Senate Judiciary
Conimittee, on the relationship between trade and competition policy
33. Remarks by Assistant Secretary Bergsten, May 26, 1977, before the American Iron and Steel Institute, New York, N.Y., entitled "The U.S. Trade
Balance and American Competitiveness in the World Economy"
34. Statement by Secretary Blumenthal, June 10, 1977, to the press following the
Joint U.S.-U.S.S.R. Commercial Commission, on the accomplishments of
the Commission's sixth session
35. Summary statement by Deputy Assistant Secretary Hufbauer, July 18, 1977,
before the Subcommittee on Trade of the House Committee on Ways and
Means, in support of the President's request to extend the Emigration
Waiver Authority for Romania under section 402 of the Trade Act of 1974.
36. Statement by Assistant Secretary Bergsten, July 27,1977, before the Subcommittee on Foreign Assistance of the Senate Committee on Foreign
Relations, entitled "Adniinistration Policy Toward the Overseas Private
Investment Corporation (OPIC)"
348
352
353
357
361
367
368
370
Commodities and Natural Resources Policy
37. Remarks by Secretary Blumenthal, May 4, 1977, before the Japan Society at
the Hotel Waldorf Astoria, New York, N.Y., on the relationship of the
United States and Japan to the developing nations of the world
38. Statement by Deputy Assistant Secretary Junz, May 20, 1977, before the
Subcommittee on Oceanography of the House Committee on Merchant
Marine and Fisheries, regarding the Treasury's views on deep seabed
mining legislation
39. Remarks by Assistant Secretary Bergsten, June 27, 1977, Washington, D.C,
entitled "Commodity Agreements, Common Funding, Stabilization of
Export Eamings, andf Investment in Commodity Production: The Policy of
the Carter Administration Toward Intemational Commodity Issues"
40. Statement by Deputy Assistant Secretary Junz, September 19, 1977, before
the Senate Conimittee on Commerce, Science, and Transportation, and the
Subcommittee on Pubhc Lands and Resources ofthe Senate Committee on
Energy and Natural Resources, regarding Treasury's views on deep seabed
mining and tax policy
375
379
382
388
VIII
CONTENTS
International Monetary Affairs
Page
41. Communique of the Interim Committee of the Board of Govemors of the
Intemational Monetary Fund on the Intemational Monetary System,
October 2, 1976, issuea after its sixth meeting in Manila, Philippines
397
42. Statement by Secretary Simon as Govemor for tne United States, October 5,
1976, at the joint annual meetings of the Boards of Governors of the
Intemational Monetary Fund and the International Bank for Reconstruction and Development and its affiliates, Manila, Philippines
399
43. Statement by Under Secretary for Monetary Affairs Yeo, October 18, 1976,
before the Subcommittee on Intemational Economics of the Joint Economic Committee, on intemational monetary reform—the operational
phase
410
44. Remarks by Deputy Assistant Secretary Widman, December 3, 1976, before
the Northwest Mining Association, Spokane, Wash., entitled "Role of
Gold in the Intemational Monetary System"
413
45. Press release, February 11, 1977, announcing agreement on $300 million
credit between the United States and Portugal
417
46. Statement by Assistant Secretary Bergsten, Apnl 5,1977, before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of
the House Committee on Banking, Finance and Urban Affairs, on various
issues raised by the foreign lending activities of U.S. commercial banks..
417
47. Remarks by Assistant Secretary Bergsten, April 22, 1977, before the Chicago
Council on Foreign Relations, Cnicago, 111., entitled "The Intemational
Economic Policy of the Carter Administration"
420
48. Communique of the Interim Committee of the Board of Govemors of the
Intemational Monetary Fund on the Intemational Monetary System,
April 28-29, 1977, issued after its eighth meeting in Washington, D.C....
426
49. Text of communique and appendix, issued following the meeting of the heads
of state or govemment of Canada, France, Federal Republic of Germany,
Italy, Japan, the United Kingdom of Great Britain and Northem Ireland,
ana the United States of America, May 7-8, 1977, in London, England.
428
50. Remarks by Secretary Blumenthal, May 25, 1977, at the International
Monetary Conference, Tokyo, Japan, entitled "Toward Intemational
Equihbnum: A Strategy for the Longer Pull"
432
51. Remarks by Secretary Blumenthal, June 24, 1977, at the OECD ministerial
meeting in Paris, entitled "Prospects and Policies for Sustaining Expansion
in the OECD Area"
437
52. Statement by Under Secretary for Monetary Affairs Solomon, July 13, 1977,
before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the House Committee on Banking, Finance and
Urban Affairs, on the Intemational Banking Act of 1977 (H.R. 7325)....
441
53. Statement by Under Secretary for Monetary Affairs Solomon, September 20,
1977, before the Subcommittee on Intemational Trade, Investment, and ,
Monetary Policy ofthe House Committee on Banking, Finance and Urban
Affairs, on legislation to authorize U.S. participation in the IMF Supplementary Financing Facility
445
54. Commumque of the Interim Committee of the Board of Govemors of the
Intemational Monetary Fund on the Intemational Monetary System,
September 24, 1977, issued after its ninth meeting in Washington, D.C...
450
55. Statement by Secretary Blumenthal as Govemor for the Umted States,
September 27, 1977, at the joint annual meetings of the Boards of
Govemors of the Intemational Bank for Reconstruction and Development
and its affiliates and the Intemational Monetary Fund, Washington, D.C..
452
Developing Nations
56. Communique ofthe Joint Ministerial Committee ofthe Boards of Govemors
of the Intemational Bank for Reconstruction and Development and the
Intemational Monetary Fund on the Transfer of Real Resources to
Developing Countries (the Development Committee), October 3, 1976,
issued at
456
tne close of its sixth meeting in Manila, Philippines
CONTENTS
IX
Page
57. Excerpt from statement by Assistant Secretary Bergsten, February 16, 1977,
before the Subcommittee on Foreign Operations ofthe House Appropriations Committee, on the U.S. foreign assistance program for 19/7 and
1978
58. Statement by Secretary Blumenthal, March 9,1977, before the Subcommittee
on Foreign Assistance and Economic Policy of the Senate Foreign
Relations Committee, on proposed replenishment of the International
Bank for Reconstruction and Development, the Intemational Development Association, the International Finance Corporation, the Asian
Development Bank, and the Asian Development Fund
59. Statement by Under Secretary for Monetary Affairs Solomon, June 16, 1977,
before the Subcommittee on Foreign Economic Policy of the Senate
Committee on Foreign Relations, on the results of the Conference on
Intemational Economic Cooperation (CIEC)
60. Statement by Under Secretary for Monetary Affairs Solomon, September 30,
1977, bef<)re the Senate Foreign Relations Committee, regarding the
economic aspects of the Panama Canal Treaty and the economic arrangements..
Testimony on Intemational Matters
61. Other Treasury testimony in hearings before congressional committees
Organization and Procedure
62. Secretaries, Deputy Secretaries, Under Secretaries, General Counsels, Assistant Secretanes, Deputy Under Secretaries, and Treasurers of the United
States serving in the Department ofthe Treasury from September 11, 1789,
to January 20, 1977, and the Presidents under whom they served
63. Treasury Department orders relating to organization and procedure
INDEX
:^.:.
458
463
472
476
478
480
490
509
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, Deputy Secretaries, Under Secretaries, General Counsel, Assistant Secretaries, and Treasurer of the United States serving in the Department of the Treasury
from January 21, 1977, through September 30, 1977»
Term of service
From
To
Officials
Secretary of the Treasury:
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.
Under Secretary for Monetary AfTairs:
Mar. 30, 1977
Anthony M. Solomon, Virginia.
Under Secretary (Counselor):
Mar. 30, 1977
Bette B. Anderson, Georgia.
General Counsel:
Aug. 4, 1977
Robert H. Mundheim, Pennsylvania.
Assistant Secretaries:
Apr. 11, 1972 Apr. 28, 1977
Warren F. Brecht, Connecticut.
Feb. 28, 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.
Fiscal Assistant Secretary:
July 29, 1975
David Mosso, Virginia.
Treasurer of the United States:
Aug. 3, 1977
Azie T. Morton, Virginia.
^
• For officials from Sept. 11, 1789, to Jan. 20, 1977, see exhibit 62.
2 Act of May 18, 1972, provided for two Deputy Under Secretaries, to be designated Assistant Secretaries by the President as
desired.
XI
PRINQPAL ADMINISTRATIVE AND STAFF OFFICERS OF THE
DEPARTMENT OF THE TREASURY AS OF SEPTEMBER 30, 1977
Secretary ofthe 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
Confidential Assistant to the Secretary
Office, Deputy Secretary of the Treasuiy:
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 Intemational
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 Administrative Programs...
Director, Office of Audit
Director, Office of Budget and Program Analysis
Director, Office of Computer Science
Director, Office ofEqual Opportunity Program
.. Director, Officeof 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
Lisa Astudillo
David W. Heleniak
Peter S. Bridges
Ann M. Morgan (acting)
J. Foster Collins
C Fred Bergsten
Gary C Hufbauer
Helen B. Junz
F. Lisle Widman
Amold Nachmanoff
Lewis W. Bowden
George H. WiUis
Weir M. Brown
David Mosso
Paul H. Taylor
John A. Kilcoyne
Philip J. Fitzpatrick
Lester W. Plumly
Stephen M. Creskoff
William 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
Chief Deputy to the Under Secretary (Enforcement
and Operations)
Deputy Assistant Secretary (Enforcement)
Director, Oflfice of Law Enforcement
Director, Interpol (National Central Bureau)
Deputy Assistant Secretary (Operations)
Director, Oflfice of Operations
Director, Foreign Assets Control
XIII
(Vacancy)
James J. Featherstone
Wilham B. Butler
Louis B. Sims
(Vacancy)
William F. Hausman
Stanley L. Sommerfield (acting)
Treasurer ofthe United States
Azie T. Morton
Assistant to the Treasurer of the United States... (Vacancy)
Office, General Counsel:
Deputy General Counsel
Henry C Stockell, Jr.
Assistant General Counsel and Chief Counsel,
Intemal 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. Ehrehhaft
Assistant Secretary (Tax Pohcy)
Deputy Assistant Secretary (Tax Pohcy)
Deputy Assistant Secretary (Tax Policy) (Tax
Analysis)
Associate Director, Oflfice of Tax Analysis
Tax Legislative Counsel
Intemational Tax Counsel
Director, Oflfice of Industrial Economics
Laurence N. Woodworth
Donald C Lubick
Assistant Secretary (Legislative Affairs)
Deputy Assistant Secretary (Legislative Affairs)
Deputy Assistant Secretary (Legislative Aflfairs)
Special Assistant to Assistant Secretary
Special Assistant to Assistant Secretary
Gene E. Godley
Lawrence M. Baskir
Colbert I. King
B. Alexander Kress
Lawrence F. O'Brien III
Special Assistant to Assistant Secretary
Assistant Secretary (Economic Policy)
Deputy Assistant Secretary for Domestic Economic
Analysis
Director, Oflfice of Financial Analysis
Deputy Assistant Secretary for Intemational Economic Analysis
Assistant Secretary (Domestic Finance)
Deputy Assistant Secretary for Capital Markets
Policy
Director, Oflfice of Securities Market Policies..
Director, Oflfice of Capital Markets Legislation.
Deputy Assistant Secretary for State and Local
Finance
Director, Oflfice of Municipal Finance
Deputy to the Assistant Secretary for New York
City Finance
Special Assistant to the Secretary (Debt Management)
Senior Adviser (Debt. Research)
Director,
Oflfice of Govemment Financing
Emil M. Sunley
Harvey Galper
Daniel I. Halperin
Charles I. Kingson
Karl Ruhe
Leshe J. BanDaniel H. Brill
Beatrice N. Vaccara
John H. Auten
Roger E. Shields
Roger C Altman
Stephen J. Friedman
(Vacancy)
Basil N. Petrou
J. Chester Johnson
Richard K. Moss (acting)
(Vacancy)
John J. Niehenke
Edward P. Snyder
Francis X. Cavanaugh
XIV
P R I N C I P A L ADMINISTRATIVE A N D STAFF OFFICERS
Director, Office of Market Analysis and Agency
Finance
Roland H. Cook
Director, Office of Revenue Sharing
Bernadine N. Denning
Assistant Secretary (Public Affairs)
Deputy Assistant Secretary
Joseph Laitin
Everard Munsey
BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
Director
Deputy Director
Assistant Director
Assistant Director
Assistant Director
Assistant Director
Assistant Director
Chief Counsel
Rex D. Davis
John G. Krogman
(Administration)
William J. Rnodes
(Criminal Enforcement)
Marvin O. Shaw (acting)
(Inspection)
Jarvis L. Brewer
(Regulatory Enforcement)..,
Stephen E. Higgins
(Technical and Scientific Services).... William H. Richardson (acting)
Marvin J. Dessler
OFFICE OF THE COMPTROLLER OF THE CURRENCY
Comptroller of the Currency
First Deputy Comptroller
First Deputy Comptroller (Operations)
Deputy Comptroller (Operations Review)
Deputy Comptroller (Special Surveillance)
Deputy Comptroller for Administration
Deputy Comptroller (Operations Planning)
Deputy Comptroller (Banking Operations)
Deputy Comptroller (Economics)
Deputy Comptroller (Strategic Studies)
Deputy Comptroller (Trusts/Operations):
Chief Counsel
Deputy Chief Counsel
Associate Deputy Comptroller (International Operations)
Associate Deputy Comptroller (Special Projects)
Associate Deputy Comptroller for Consumer Affairs and
EFTS
Associate Deputy Comptroller (Bank Organization and
Structure)
Assistant to the Comptroller (Special Projects)
Special Assistant to tne Comptroller (Congressional Affairs)
Special Assistant to the Comptroller
Special Assistant to the Comptroller for FDIC Affairs..
EEO Officer
Director, Public Affairs
Director, Communications
John G. Heimann
Robert Bloom
H. Joe Selby
Thomas G. DeShazo
Robert A. Mullin
C Westbrook Murphy
W. A. Howland, Jr.
Charles B. Hall
David C Motter
Richard D. Chotard
Dean E. Miller
John E. Shockey
(Vacancy)
Robert R. Bench
Paul Homan
Thomas W. Taylor
Gail W. Pohn
James T. Keefe
Donald A. Melbye
Robert A. Baer
Joseph M. Ream
Thomas G. DeShazo
William B. Foster
Caryl Austrian
BUREAU OF ENGRAVING AND PRINTING
Director
Deputy Director
Assistant Director (Administration)
:
Assistant Director (Operations)....
Assistant Director (Research and Engineering)
(Vacancy)
(Vacancy)
Seymour Berry
Everett J. Prescott
(Vacancy)
FEDERAL LAW ENFORCEMENT TRAINING CENTER
Director
Deputy Director
Associate Director for Administration
Arthur F. Brandstatter
(Vacancy)
David W. McKinley
P R I N C I P A L ADMINISTRATIVE A N D STAFF OFFICERS
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)
Dale C. Mitchum
William H. McClarin
Alvin C Turner
Robert T. Lacey
John C Dooher
BUREAU OF GOVERNMENT FINANCIAL OPERATIONS
Commissioner
Deputy Coinmissioner
Assistant Conimissioner, Administration
Assistant Commissioner, Banking and Cash Management
Assistant Conimissioner, Comptroller
Assistant Coinmissioner, Disbursements and Claims
Assistant Commissioner, Govemment-wide Accounting
Dario A. Pagliai
Gerald Murphy
George L. McConville
Lloyd L. Morgan
Steve L. Comings
Michael D. Serlin
John O. Tumer
INTERNAL REVENUE SERVICE
Commissioner
Deputy Commissioner..
Assistant Commissioner (Accounts, Collection and Taxpayer Service)
Assistant Commissioner (Administration)
Assistant Commissioner (Compliance)
Assistant Commissioner (Employee Plans and Exempt
Organizations)
Assistant Conimissioner (Inspection)
Assistant Commissioner (Planning and Research)
Assistant Commissioner (Technical).
Chief Counsel
Jerome Kurtz
William E. Williams
James I. Owens
Joseph T. Davis
Singleton B. Wolfe
Alvin D. Lurie
Warren A. Bates
Anita F. Alpern
John L. Withers
Stuart E. Seigel
BUREAU OF THE MINT
Director
Deputy Director
Assistant Director for Administration
Assistant Director for Management Planning
Assistant Director for Marketing and Statistical Services.
Assistant Director for Production
Assistant Director for Technology
(Vacancy)
Frank H. MacDonald
Chadwick B. Pierce
(Vacancy)
Francis B. Frere
George G. Ambrose
Alan J. Goldman
BUREAU OF THE PUBLIC DEBT
Commissioner
Deputy Comnlissioner
Assistant Commissioner (Washington)
Assistant Commissioner (Field).....
Chief Counsel
UNITED STATES CUSTOMS SERVICE
Commissioner of Customs
Deputy Commissioner of Customs
Assistant Commissioner (Operations)
Assistant Commissioner (Regulations and Rulings)
Assistant Commissioner (Administration)
Assistant Conimissioner (Investigations)
Assistant Commissioner, Office of Security and Audit...
Assistant Commissioner (Enforcement Support)
Chief Counsel
H. J. Hintgen
William M. Gregg
Kenneth W. Rath
Martin French
Calvin Ninomiya
Robert Chasen
G. R. Dickerson
Roland Raymond
Leonard Lehman
John A. Hurley
George C Corcoran, Jr.
William A. Magee, Jr.
Alfred R. DeAngelus
(Vacancy)
XV
XVI
PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS
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 Forces)
(Inspection)
(Administration)
H. Stuart Knight
Lilbum E. Boggs
James T. Burke
Burrill A. Peterson
Thomas J. Kelley
Myron I. Weinstein
Francis A. Long
ORGANIZATION OF THE DEPARTMENT OF THE TREASURY
DEPUTY SECRETARY
UNDER SECRETARY
FOR MONETARY
AFFAIRS
SfO««nf
UNDER SECRETARY
RKriASBtKt
Qiiof Ooputy ts
the Under Sac
(Ciifurceruent aod
Oeputr Asst Sec
to Domestic
Econ. Analysis
Oeputy Asst Sec.
Oepuly Asst S e t
for Capital
toTraiteand
Investment Poficy
Office of
Operations
Offitsof
Oepuly Asst S e t
to Tax
Poficy Econoinies
Deputy Asst S e t
fof tntemational
Monetary Affairs
Deptity Asst Set
to Developing
Officeof
Intemational
Tax Counsel
Federal
Law Enforcer
Trainng Center
Deputy tothe
Asst S e t and S e t
of the tnt^nattoi^
Monetary Group
In^ecto
Gen^
to bitematii
• NOTE Dotted line endoses officials serviced by the Executive Seeretariat
Offroof
Foreign Assets
Control
INTRODUCTION
This introduction reviews major domestic and intemational developments
which affected areas of Treasury interest and responsibility during fiscal 1977.
Detailed information on the operating and administrative activities of the
Department is provided in the text of the report and supporting exhibits.
Statistical information may be found in the separate Statistical Appendix.
DOMESTIC DEVELOPMENTS
Domestic Economic Recovery
The domestic economic situation continued to improve in fiscal 1977, but the
pace was uneven during the year as a minor inventory adjustment ran its course.
Real economic growth, which was at a 3.9-percent annual rate of increase during
the transition quarter (the third quarter of calendar 1976), slowed to only 1.2
percent during the final quarter of calendar 1976, when growth in GNP was held
down by a substantial fall in the rate of inventory accumulation. During the
early part of calendar 1977, real growth was checked temporarily by severe
winter weather but rebounded vigorously when the weather warmed up. As a
result, real GNP rose at nearly a 7-percent annual rate during the first half of
calendar 1977. By the third quarter ofthe calendar year—2 1/2 years after the
recovery began—growth eased back to just over 5 percent, still somewhat above
the longrun rate of growth in potential output. By the end ofthe fiscal year, the
economy had grown by 15.2 percent from the recession low, and 5.0 percentage
points, or about one-third of that growth had occurred during the fiscal year
under review.
Employment registered strong gains during the year in conjunction with
unusually large increases in the labor force. Total employment increased by 3.3
million persons (3.8 percent) from September to September, somewhat more
than the increase of 2.6 million persons (2.8 percent) in the labor force. As a
result, the unemployment rate dropped from the 7-8-percent level prevailing at
the beginning of the period to 6.9 percent. Most of the improvement in the
unemployment rate occurred over a relatively short interval. The rate dropped
five-tenths ofa percentage point from 7.8 percent in December to 7.3 percent in
January and continued to fall to 7 percent by April. After April the rate seesawed
back and forth between 7.1 percent and 6.9 percent, indicating a temporary
plateau had been reached at a still unacceptably high rate of unemployment.
The improvements in the unemployment picture did not affect all labor force
groups equally, however. Because the labor force growth for adult males was
generally more modest than that of adult women or teenagers, this group
enjoyed the largest improvement in the unemployment rate—a decline from 6.1
XIX
XX
1977 R E J > 0 R T O F T H E SECRETARY OF THE TREASURY
percent in September 1976 to 4.9 percent in September 1977. Adult women,
whose increased labor force participation accounted for about two-thirds of the
total labor force growth over the period, experienced only half as much decline
in the unemployment rate, from 7.6 percent to 7 percent. The situation for
teenage workers was still less favorable. For this group, the growth in the labor
force and employment were approximately equal, with the number of unemployed teenagers remaining virtually unchanged at around 1,670,000 persons
and with Httle improvement in the unemployment rate which fell from 18.8
percent to 18.1 percent. The structural character ofthe unemployment problem
thus became clearer during fiscal 1977, and by the end ofthe period new policy
initiatives, dealing with the unemployment of youth were being investigate:d.
Personal consumption was a major source of economic strength early in the
recovery and it continued to be one in fiscal 1977 though some weakness was
becoming! evident toward the end of the period. After a relatively lackluster
performance in the third quarter of calendar 1976, retail sales increased strongly
as the holiday season approached, and that strength continued throughout the
first quarter of 1977, except for the decline due to the cold weather during
January. In mid-1977, the pace of personal consumption again tumed weak, and
the quarter-to-quarter rates of increase were disappointingly sniall in the second
and third calendar quarters of 1977, although some strength was evident in the
monthly data in the third quarter.
Investment continued to play a pivotal role in economic developments during
fiscal 1977 and occupies a critical position with respect to the outlook for 1978.
Nonresidential fixed investment began the year on a rather poor note, increasing
at only a .1.8-percent armual rate as a consequence of weakness in investment
spending for both structures and equipment. In the second quarter, however,
settlement ofa major strike in the motor vehicle industry boosted total spending
on equipment by near-record rates. In the subsequent quarters, investment for
structures began to exhibit some strength, though the final quarter of the fiscal
year once again saw diminishing performances for both categories of nonresidential investment. Residential investment, on the other hand, grew at a rapid
49-percent annual rate in the first quarter, followed by a much smaller gain in
the next quarter due to the cold weather, and another gain in excess of a 40percent annual rate in the third quarter. Having thus reached a high plateau,
activity in the final quarter edged ofF slightly for this sector.
The major developments in business inventories over the course of the fiscal
year consisted primarily ofa significant inventory retrenchment at the beginning
and much smaller adjustments during the final quarters. Overall, relatively tight
inventory control appeared to be the order of the day. The events of 1976 and
1977 suggest that businesses are no longer inclined to accumulate inventory
stocks significantly in excess of sales growth, and whenever they find this
happening, adjustments—occasionally involving production cutbacks—almost
surely follow.
On balance, the economic expansion proceeded at a fairly satisfactory pace
during fiscal
1977 though the rate of progress was not smooth. For the year as
INTRODUCTION
XXI
a whole, growth amounted to 5.0 percent in real terms with the individual
quarterly rates varying from 1.2 percent to 7.5 percent. The easing which became
evident as the year wore on was a function of decreasing gains in personal
consumption as well as the absence of further large jumps in inventory
accumulation.
Inflation
Substantial progress was made in controlling inflation early in the economic
recovery, but in the course of fiscal 1977 very little further moderation was
achieved. At the begiiming of the period, consumer prices were increasing at an
annual rate ofabout 4 1/2 percent—a rate not greatly different from that which
prevailed by the final quarter. In between, however, the pace was driven to
almost double the beginning and ending rates of advance as a consequence of
sharply higher prices for food and, to a lesser extent, for energy and services.
Wholesale prices showed a roughly similar pattem during the period except that
absolute declines in food prices during the summer led to small absolute
decreases in the total index and generally moderate rates of advance as the year
came to a close. For the Wholesale Price Index, as was the case with the
Consumer Price Index, the volatility of food prices played a major role in
quarter-to-quarter variations.
Early in the fiscal year, food prices jumped as a consequence of the
exceedingly cold and dry weather in Florida and California, respectively, and
concem about the lack of snow cover over much of the Great Plains. When the
effects of these special influences proved to be less severe than expected and
favorable harvests became assured, equally strong declines in food prices
occurred which served to dampen the pace of the major price indexes.
The recent behavior and outlook for industrial prices is not as favorable, but
even here there are few signs that a major resurgence of inflation is imminent.
The pace of industrial price increases accelerated somewhat at the very end of
the fiscal year, but substantial improvements in the price behavior of crude
materials suggest the deterioration may well prove to be transitory.
Productivity growth in the private business sector slowed slightly to a 2.3percent rate of increase during the fiscal year. Within the year, the quarterly
pattem was erratic. Compensation per man-hour continued to increase at
relatively rapid rates and rose 8.7 percent during the fiscal year. The net result
was that unit labor costs continued to rise fairly strongly, with the increase for
thefiscalyear slightly in excess of 6 percent, as had been the case in the previous
year.
Thus, inflation continues to be a major problem. Further moderation is
proving progressively more difficult to achieve, yet the current rates remain far
too high and cannot be tolerated indefinitely without ruiming the risk of
progressively more serious distortions. Such distortions—in consumption, saving, and investment pattems—would eventually pose a significant threat to the
current economic expansion and the longer term stability of the U.S. economy.
XXII
1977 REPORT OF THE SECRETARY OF THE TREASURY
The Budget and Fiscal Developments
The budget estimates for fiscal 1977 presented in January 1977 by the
outgoing administration called for outlays of $411.2 billion and revenues of $354
bilhon, leaving a deficit of $57.2 billiori. In the early months of the new
administration (i.e., during the second quarter of fiscal 1977) budget revisions
were subinitted to Congress which would have increased outlays to $417.4 billion
and reduced revenues to $349.4 bilhon. As a result, the deficit for the year would
have been increased by approximately $10.8 billion, to $68 billion. Before
congressional action on the revisions took place, however, the emergence of
greater than expected economic strength led to the administration's cancellation
of its proposal for a tax rebate, the major item in the 1977 revisions.
Actual outlays totaled $401.9 billion and receipts amounted to $356.9 billion,
for a deficit of $45 billion. The major reason for the difference between the
expected and realized budgetary outlays was the continued occurrence in fiscal
1977 of outlay underruns. The underruns had first attained noticeable dimensions during fiscal 1976 and the transition quarter, and at that time it was
expected that once the fiscal year had been shifted to its new terminal date the
phenomenon would largely disappear. The underruns continued throughout
fiscal 1977, however, and no single cause could be identified.
Off-budget net outlays for fiscal 1977 were also somewhat lower than had been
anticipated. In the revised budget such outlays were expected to amount to $ 10.8
billion and the midsession review issued on July 1 had lowered that estimate to
$10.3 billion. Off-budget net outlays actually amounted to $8.7 bilhon for the
year.
Domestic Finances
The financing ofthe record volume of funds raised in thefinancialmarkets in
fiscal 1977 was facilitated by substantial inflows of funds to savings institutions
and by a buildup of liquidity by other investors. Money market rates generally
dechned in thefirsthalf of the year and rose in the second as the Federal Reserve
tightened credit policy in response to accelerating growth rates of the monetary
aggregates. By late September 1977, short-term interest rates were around 6 3/8
percent, about 1 percentage point higher than 12 months earlier. In the bond
markets, yields on Government and corporate issues remained remarkabl^
stable through this period, but municipal bond yields fell by 1 percentage point.
Even so, long-term interest rates were still high by historical standards.
The volume of financing was large in both the capital and money markets.
Strong demands for long-term funds, particularly for mortgage loans and by
State and local governments, were accompanied by greater demand for shortterm business loans and consumer credit. Nonfinancial corporate businesses
continued to restructure their balance sheets, and corporate liquidity stabilized
in fiscal 1977. Bank loans to nonfinancial corporations climbed by an estimated
$17 billion, and other kinds of short-term borrowings by nonfinancial corporations FRASER
Digitized for (namely, commercial paper and finance company loans to business) rose
INTRODUCTION
XXIII
by another $12 billion. At the same time, net new issues of corporate and foreign
bonds (including bonds issued by financial companies) amounted to about $34
billion, down from $36 billion the year before, and net new stock issues $10
billion, down from $12 biUion.
During fiscal 1977, the rather strong demand by business for bank loans,
coupled with rapid expansion in bank real estate and consumer loans, held down
bank purchases of Treasury securities. Although total bank credit expanded at
a rapid 11 percent during the year, net purchases of Treasury securities by
commercial banks accounted for only 12 percent ofthe net volume of Treasury
securities issued to the pubhc.
PubHc debt securities held by investors other than U.S. Govemment accounts
and Federal Reserve banks rose $46.4 bilHon in fiscal 1977. Foreign investors
were the largest purchasers of Treasury securities followed by State and local
govemments. The combined net purchases ofthe two absorbed 77 percent ofthe
net issues of Treasury securities to the public. Individuals increaised their
purchases of savings bonds but reduced their holdings of marketable securities,
as did corporations.
A large segment of the Treasury's security offerings consisted of additional
amounts of regular bills and notes with maturities up to 5 years. Also, the
Treasury issued longer notes and bonds with a view toward lengthening the
average maturity of the marketable debt. In fiscal 1977, notes and bonds
increased by $41.3 biUion, whUe Treasury biUs decreased by $5.4 billion. Issues
to State and local govemments (for advance refunding) rose by $8.6 billion and
savings bonds by $4.7 biUion.
Despite the issuance of a record volume of municipal bonds in fiscal 1977,
bond prices rose sharply. The Bond Buyer's index of yields on municipal bonds
averaged 6.51 percent in September 1976, but dropped to 5.50 percent in
September 1977, a low for the past 3 1/2 years.
Record inflows of funds were set in fiscal 1977 not only by savings institutions
but also by credit unions, insurance companies, and private pension funds. In
addition, nonfinancial businesses placed some of the proceeds of their security
offerings and of their heavy intemal flows into credit market instruments.
Foreign investment in the U.S. credit markets rose by a record $28 billion.
Taxation Developments
Tax policy developments reflected the need for economic stimulus coupled
with tax simplification and permanent tax reductions.
In Febmary 1977, President Carter proposed a $26.4 billion tax package for
fiscal 1977 and 1978 which included an $18.5 biUion economic stimulus program
and a $7.8 billion tax cut in fiscal 1978 through a permanent extension of the
temporary tax cuts enacted in the 1976 Tax Reform Act.
The $18.5 bUlion tax cuts to stimulate the economy consisted of $15.4 biUion
of pefsonal tax reductions, including $8.2 billion for a per capita tax rebate, and
of business tax cuts to encourage investment in productive facilities.
$3.1 bilHon
XXIV
1977 REPORT OF THE SECRETARY OF THE TREASURY
Taxes would have been reduced by $10.6 billion in fiscal 1977 and $7.9 bilHon
in fiscal 1978 under this proposal.
Extension ofthe temporary tax cuts provided under the 1976 Tax Reform Act
would have lowered individual taxes by $6.8 billion and corporate taxes by $1
billion in fiscal 1978.
Acting on the President's proposals. Congress passed and the President signed
on May 23, 1977, a $20.4 billion tax reduction program for fiscal 1977 and 1978
in the Tax Reduction and Simplification Act of 1977. The permanent extension
of the temporary tax cuts was enacted with some modification providing $7.9
bUlion of tax reduction, ofwhich $6.9 biUion went to individuals and $1 billion
went to business. The basic tax reduction and simplification in the act (excluding
the extension provisions) amounted to an aggregate $12.5 billion in fiscal 1977
and 1978, of which $10.5 billion went to individuals and $2 bilHon went to
business.
The act omitted the per capita rebate proposal, which was withdrawn by the
President in the light of the performance of the economy, accepted a slightly
modified version of the President's standard deduction proposal, and added a
new jobs credit. The net reduction in fiscal 1977 and 1978 receipts from all tax
changes in the Tax Reduction and Simplification Act of 1977 is $2.6 billion and
$17.8 billion, respectively.
The President proposed an energy program containing, in part, tax proposals
which would first take effect in fiscal 1978. The objective ofthe energy program
is to conserve energy use and to reduce fhe annual energy growth to less than
2 percent a year by 1985. At the close of the fiscial year, congressional
consideration of alternative approaches was proceeding with the nature of the
eventual legislative outcome in doubt.
The President took action to resolve both short- and long-term problems in the
social security system. High unemployment in recent years curtailed revenues
whUe benefits rose with inflation. Since 1975, outlays have exceeded income and
existing reserves are being seriously depleted. In addition, the current system will
have an estimated deficit of 8.2 percent of taxable payroll over the next 75 years.
This is attributable in part to a projected higher proportion of elderly persons in
the population as life expectancy increases and birth rates drop. It is also
attributable in part to a technical flaw in the automatic cost-of-living formula
apphcable to benefits.
To bring financial stabihty back into the system, the President proposed that
general revenues be used in countercyclical fashion to replace payroll tax
receipts lost during recessions. He also proposed increased payroll tax revenues
by removing in one action the taxifcle payroll ceiling for the employer tax and
moderately increasing, in several changes by 1985, the ceiling for the employee
tax. In addition, the tax rate for self-employed would be increased so that it
equaled 1 111 times the rate for employees. The 75-year deficit would be reduced
to a manageable 1.9 percent under the President's proposals. At the fiscal
yearend, social security changes were under consideration by the Congress.
INTRODUCTION
XXV
Work continued on the development of tax reform proposals. Final decisions
had not been reached by the end of the fiscal year on the exact nature of the
legislative package which the President would submit to the Congress.
INTERNATIONAL DEVELOPMENTS
The World Economy
During the past fiscal year, the pace of real growth in world economic output
was somewhat slower than in thefirstyear of cyclical recovery, 1975-76, and was
stronger outside Western Europe than in that region. Most ofthe progress made
in 1975-76 in restraining global inflation was retained, but the wide differences
in national rates of inflation persisted. In many countries, inflation still
continued at an unacceptably fast pace, unemployment remained appreciably
higher than in the sixties, and global payments deficits continued to require
financing on the much higher plateau that has prevailed since the abrupt
increase in oU prices in 1973-74.
In May 1977, the Secretary participated in the summit meeting in London,
where leaders of seven large industrial democracies committed themselves "to
stated economic growth targets or to stabUization policies which, taken as a
whole, should provide a basis for sustained non-inflationary growth, in our own
countries and world-wide and for reduction of imbalances in international
payments."
The seven major industrial economies experienced real growth rates of
roughly 4 1/2 percent in the first half of calendar 1977, foUowing 3.2 percent in
the last half of 1976. This average rate is somewhat misleading as the economies
of Japan and the United States—which account for about 60 percent of the
group's GNP—expanded at 7.7 and 5.5 percent rates, respectively, while those
ofthe other five averaged 2.3 percent. Again this year, as in 1976, the summer
months produced a "pause" in the expansion. Real growth in the seven industrial
countries as a group in calendar 1977 now seems likely to fall significantly short
ofthe 5.2-percent rate posted in 1976.
The smaller industrialized countries, largely as a result of stabilization policies
in some countries, are now expected to post gains averaging about 2 1/2 percent
per annum in calendar 1977, down shghtly from the corresponding rate ofabout
3 percent in 1976.
As for the oil-importing developing countries, real growth rates for the full
year 1977 seem likely to average close to the 5-percent level estimated for 1976.
In 14 industrial countries, the average armual rise in consumer prices at the
end of September 1977 was 7.8 percent (latest 12-month period), as compared
with 7.3 percent at the end of September 1976. During the final quarter of the
fiscal year, the rate of price increases in several countries was perceptibly slower
than earher in the year. At the end of September 1977, the possibility of future
improvement depended particularly upon the course of basic commodity prices
and future wage settlements.
XXVI
1977 REPORT OF THE SECRETARY OF THE TREASURY
Within the less developed countries (LDC's), consumer prices in the oilexporting countries continued to rise at an average rate ofabout 15 percent per
annum. Although some slowdown of extremely rapid price changes was
achieved in a few oil-importing developing countries, the average rate of
inflation in this large and diverse group of countries continued to hover around
30 percent a year, with a wide range from 9 percent in Asia to 50 percent in the
Westem Hemisphere.
In most industrial countries other than the United States, rates of unemployment were higher in mid-1977 than in 1976 or 1975, though in Germany and
Japan they were about the same as in 1976, and in Switzerland remained very
low.
Aggregate payments imbalances, as measured by current account deficits
(goods and services, plus those official and private transfers of funds that are not
considered capital transfers), appeared to be holding at about the 1976 level of
$70 billion in doUar terms. Although they were somewhat reduced in real terms,
these imbalances remained nearly twice as high, relative to the aggregate exports
ofthe deficit countries, as in the years 1971-73.
Financing for about three-quarters ofthe total deficit ofabout $225 bilHon in
1974 through 1976 was provided by private market-oriented financing, something less than 20 percent by official developmentfinancing,and about 7 percent
by the Intemational Monetary Fund.
There were marked changes in the distribution of payments deficits and
surpluses. During the first half of 1977, the current account position of the
United States moved to a deficit at an annual rate of $17 1/2 billion, seasonally
adjusted, as against $1.3 bilHon in the fuU calendar year 1976. By contrast, the
Japanese and German current account surpluses together were running at an
annual rate of $15 billion, up from about $7 billion for the full year 1976. The
combined deficit ofthe United Kingdom, Italy, France, and Canada was down
about $2 bilHon on the same comparison, at the annual rate of $13 1/2 bilHon.
Thus the rest of the world had improved its aggregate position, at midyear, by
something like an aimual rate of $10 bUHon.
As of September, it was clear that severe and complex problems remained, but
it was also evident that there were important signs of encouraging progress.
Stabilization programs in Italy, the United Kingdom, France, Brazil, Mexico,
and some other countries had helped to slow the pace of inflation, check the
deterioration of payments positions, and restore financial confidence. There
continued to be very wide differences, among both industrial and developing
countries, in inflationary pressures and in payments positions. Nevertheless,
foreign industrial countries, as a group, succeeded in arresting further deterioration and made some progress in coping with inflationary pressures and
improving their payments positions. The payments position of non-OPEC
developing countries as a group also appears to have strengthened during the
fiscal year. During the period October 1976-March 1977, the rise in the doUar
value of imports (c.i.f) over the previous 6 months was only 75 percent of the
growth in exports (f o.b.) during the same period.
INTRODUCTION
XXVII
International Monetary Cooperation
At the annual meeting ofthe Intemational Monetary Fund in October 1976,
Ministers were concemed primarily with the persistence of high rates of inflation
and high levels of unemployment. There was also a general consensus that,
nearly 3 years after the abrupt increase in oil prices, it was time to place more
emphasis on adjustment of payments imbalances, and thus slow down the rapid
growth of debt by some deficit countries. To attack these problems simultaneously and symmetrically, the Interim Committee of IMF Governors agreed on
a basic four-point strategy:
• Deficit countries should arrange their domestic policies so as to restrain
domestic demand and to permit the shift of resources to the external
sector, to the extent necessary to bring the deficit on current account in
line with a sustainable flow of capital imports and aid.
• Industrial countries in strong payments positions should ensure continued adequate expansion in domestic demand, within the limits set by
effective anti-inflationary policies.
• Exchange rates should be allowed to play their proper role in the
adjustment process.
• In the context ofthe use ofthe Fund's resources, adjustment by deficit
countries can be promoted by a larger use ofthe credit tranches and the
Extended Fund FacUity.
Late in 1976, the Intemational Monetary Fund arranged to borrow about $3.3
bUlion from a number of Group of Ten countries and Switzerland, including a
commitment of $1.1 billion from the U.S. Treasury, under the General Arrangements to Borrow. These funds were used to provide a standby commitment to
the United Kingdom of about $3.9 billion, associated with the adoption of a
stabilization program. Additional support to the United Kingdom was provided
in Febmary 1977 by a number of monetary authorities under the aegis of the
Bank for Intemational Settlements, in an amount up to $3 billion, related to
potential drawdowns of official sterling balances. The U.S. commitment,
provided by the Federal Reserve and the Exchange Stabilization Fund of the
Treasury, amounted to $ 1 bUlion, but had not been drawn upon as of September
30, 1977.
In April, supplementary financing (about $390 million) was committed to the
Intemational Monetary Fund under the General Arrangements to Borrow to
facilitate a standby arrangement for about $520 million with the Italian
Govemment, in coimection with the Italian stabilization program.
At their meeting in April 1977, the Interim Committee of Fund Govemors
encouraged the Managing Director of the Fund to proceed with a plan for a
Supplementary Financing Facihty, designed to provide needed additional
resources to the Fund, to help promote orderly adjustment and to provide
confidence to private markets that adequate official financing was available. The
Managing Director's negotiations resulted in an undertaking by seven industrial
seven oil-exporting countries to establish credit lines to the Fund,
countries and
XXVIII
1977 REPORT OF THE SECRETARY OF THE TREASURY
aggregating slightly over $10 billion. The U.S. share was $1.7 biUion. Legislation
to authorize U.S. participation was pending before the Congress as of September
30, 1977.
At their meeting in September 1977, the Interim Committee, concerned with
the weakness of domestic demand in several foreign countries in relatively strong
overall positions, urged such countries to make every effbrt to ensure adequate
growth of domestic demand compatible with containing inflation. In this
connection, they welcomed recent announcements of expansionary programs by
Germany and Japan. The Committee also noted the importance of structural
problems ih these and other countries, and the need to develop appropriate
energy policies. They expressed the belief that, as the results of adjustment
actions became more evident, other countries would become strong enough to
contribute to the growth of the world economy; but they also cautioned that
policies shpuld at a minimum be directed at avoiding a resurgence of inflation.
The second amendment to the Articles of Agreement of the International
Monetary Fund, which would formally establish the reform of the Bretton
Woods international monetary system, and the one-third increase in Fund
quotas agreed last year have not yet become effective. As of September 30, 1977,
the amendment had been accepted by 56 nations with 58.14 percent ofthe voting
power. The amendment will become effective when three-fifths of the members
(79 at present) having at least four-fifths of the voting power have formally
accepted it. The increase in quotas enters into force when the amendment is
effective and members with 75 percent of quotas have consented to their
increased quotas. By the end of the fiscal year, members with 52.43 percent of
quotas had. given their consent. The United States accepted the amendment and
the quota increase pursuant to PubHc Law 94-564, effective October 19, 1976.
In many foreign exchange markets, official intervention, official borrowing,
and other actions by national authorities have exerted strong influence on dollar
and other exchange rates. Nevertheless, the substantial number of exchange rate
changes in the past 2 years in major countries attest to the fact that countries
have become more flexible in their attitudes toward such rate movements.
Currencies of countries in relatively strong payments positions have appreciated,
while currencies of countries in relatively weak positions have depreciated by
varying amounts. On a trade-weighted basis, against a basket of Organization for
Economic Cooperation and Development (OECD) currencies, the U.S. dollar
appreciated by about 2.4 percent during the year ending September 30, 1977.
During this period, the Swiss franc, deutsche mark, yen, and pound sterling rose
in terms of the U.S. dollar, while the values of the Canadian dollar, the
Australian dollar, and the Italian lira feU.
The Treasury and the Federal Reserve continued to maintain very close
contact with major foreign monetary authorities in order to discuss current
market conditions and official exchange market operations. These consultations
have been of great value in avoiding misunderstandings on policies and in
ensuring that markets function effectively. From time to time there have been
periods of nervous markets in some foreign currencies, often associated with
INTRODUCTION
XXIX
market expectations as to possible changes in official policies and attitudes
affecting exchange rates.
The U.S. exchange rate poHcy is based on the view that the value ofthe doUar
in the exchange markets wiU tend to reflect the underlying performance of the
domestic economy—success in dealing with inflation, ability to expand the
economy and to maintain an open, efficient, and attractive capital market. The
United States has intervened to counter disorderly conditions in the exchange
market. This pohcy has not, however, merited regular or massive participation
in the market.
Financial Relations with Non-OPEC Developing Countries
The aggregate current account deficit of this group of countries is estimated
to have improved markedly in calendar 1976, faUing from about $37 bilHon in
1975 to about $26 bilHon in 1976 (excluding official transfers). The net flow of
official financing (including transfers) reached about $22 billion in 1976 and the
private money and capital markets and direct investment provided something
lUce $15 bilHon. As the combinedflowsexceeded the current account deficit, the
intemational reserves ofthe group rose by 37 percent in 1976 (to $41 billion at
yearend), and another 10 percent in the first half of 1977. In analyzing financial
flows to these countries, it is useful to distinguish between those that obtain the
bulk of their extemal capital from private capital markets and those that rely
primarily on official flows. In 1974 and 1975, the privately financed group
(Brazil, Mexico, Korea, etc.) experienced relatively larger increases in their
current account deficits than the officially financed group (Bolivia, India, Zaire,
etc.). In 1976 and 1977, the first group accounted for most ofthe reduction in
the aggregate deficit of the nonoil LDC's. As for the officially financed group,
their deficits are constrained by the amount of financing available, and in 1977
are on an increasing trend as official flows increase.
The improved payments position since 1975 has resulted from buoyant
exports to the industrial countries at improved terms of trade, while imports
grew more slowly. This change reflected the higher growth rates in the Uiuted
States and some other countries, as well as some especially sharp price rises in
coffee and cocoa. Moreover, in some major countries exchange rates were
permitted to depreciate and domestic stabilization programs were undertaken to
slow down the pace of inflation. In one case, that of Mexico, temporary
financing was provided by the Treasury's Exchange Stabilization Fund, to meet
short-term pressure on the peso during an interval preceding an arrangement
with the International Monetary Fund to support the Mexican stabilization
program. Thus domestic policy changes as well as extemal influences contributed to the improved payments position.
The rate of increase in debt ofthe non-OPEC LDC's has been slowing down,
and the size of their aggregate extemal public debt, relative to their recurring
extemal receipts and level of output, appears to be moving back toward
historical levels. This change has been brought about mainly by a reduction of
xxx
1 7 REPORT OF THE SECRETARY OF THE TREASURY
97
deficits in the dozen or so larger and more advanced countries that have relied
primarily on borrowing from private money and capital markets. At the same
time, average rates of real growth in the oil-importing developing countries
recovered from about 3 percent a year in 1975 to about 5 percent in 1976, a rate
likely to be sustained in 1977. BrazU and Mexico instituted major adjustment
poHcies and are likely to record somewhat lower growth rates in 1977. Other
countries that adopted stabUization programs earlier are likely to have somewhat higher growth rates in calendar 1977 than in 1976.
During 1977, U.S. pohcy placed an increasing emphasis on the role of the
multilateral development lending institutions, especially the World Bank and the
regional development banks, in providing financing for sound projects and
programs in developing countries. On a net flow basisfinancingby multUateral
development institutions provided about 15 percent of total private and official
capitalflowsto the nonoU developing countries in 1976. The soft-loan windows
of the development banks presently supply about two-thirds of the official
capital flows to the poorest countries.
The United States is committed to encouraging growth with equity in the
developing world. For this reason, the United States favors increased priority for
lending by the development banks for agriculture, nutrition, health, and
education to meet the basic human needs of the world's poorest people.
Protection of human rights is also an important element of U.S. pohcy. The
United States believes that these rights should be advanced through the
multilateral development agencies.
During the year. Congress appropriated $1.9 billion as the U.S. fiscal 1978
contribution to the resources of the intemational development banks. Of this
figure, $800 milhon represented an appropriation for the full amount ofthe first
installment of the U.S. contribution to the fifth replenishment of the International Development Association. For fiscal 1977, the United States had contributed $1.1 bilHon to the resources of these institutions. During the year under
review. Congress also approved authorizing legislation totaling $5.1 biUion for
U.S. contributions to the World Bank group, the Asian Development Bank, and
the African Development Fund.
During consideration of the appropriations legislation, the House of Representatives proposed certain restrictive amendments barring the use of U.S. funds
for loans by the intemational development banks to certain countries and for
certain commodities. A compromise was ultimately worked out under which the
restrictive amendments were not enacted, and the President agreed to instruct
the U.S. representatives at the respective institutions to oppose and vote against
such loans.
Reflecting the importance of the development banks in U.S. relations with
developing countries, the Department of the Treasury under the new administration has undertaken a review of the effectiveness of these institutions in
achieving U.S. objectives and of how U.S. objectives can best be pursued in
them. The study is expected to be completed early in 1978.
INTRODUCTION
XXXI
The Development Committee brings together a group of Governors of the
World Bank and the IMF several times a year. During this year, the Committee
endorsed recommendations by a working group aimed at improving developing
country access to private capital markets, and it created a second working group
to examine certain aspects of official development finance and policy. At its
September 1977 meeting, the Committee adopted an ambitious work program
including the subjects of coordination among the multilateral development
institutions, the stabilization of export eamings, private direct investment, the
role of borrowing in development, and a World Bank study of development
issues.
The Treasury continued to take part in interagency coordination of the U.S.
bUateralfinancingand aid programs through the National Advisory Council on
Intemational Monetary and Financial Policies, the Development Coordination
Committee, and the Development Loan Committee of the Agency for Intemational Development.
Treasury also continued to foUow developments in international indebtedness.
In January 1977, the Treasury subinitted to Congress the third aimual report on
the extemal debt of developing countries and debt relief provided by the United
States. During the fiscal year, the United States participated in only one
multilateral rescheduling of official debts, in response to the inability of the
Govemment of Zaire to meet its debt obligations.
New Initiatives in Commodity Policy and Energy
The administration undertook a fourfold approach to international commodity problems in 1977. First, it adopted a positive and open attitude toward the
negotiation of individual commodity agreements to stabilize prices around
market trends. Second, the U.S. representatives agreed at the North-South
conference in May 1977, along with other developed and developing countries,
to support the establishment of a common fund, in order to facilitate the
financing of buffer stock arrangements. Third, the United States undertook a
policy of promoting increased investment in the production of key raw materials
through encouraging increased involvement in such activities by the World Bank
group, the regional development banks, and the U.S. Overseas Private Investment Corporation. Finally, it was decided to continue to review the adequacy of
existing mechanisms to assure adequate support for the stabilization of export
eamings bf developing countries, although it was concluded that the IMF
compensatory financing facility, foUowing its extensive liberalization in 1975,
was functioning well and was capable of meeting export earnings stabilization
needs, as and when they arose, for the foreseeable future.
Much of the attention of the administration in the commodities area focused
on the type of buffer stock arrangement which would be most economically
rational and in the U.S. interest as a major producer and consumer ofa number
of important raw materials. It was concluded, for example, that the United
States should seek to provide sufficient financial resources to agreements it
XXXII
1977 REPORT OF THE SECRETARY OF THE TREASURY
joined and to accumulate buffer stocks large enough to be effective in protecting
against price surges as well as price declines. It was also decided to liinit the use
of export quotas in support of buffer stocks to extreme situations, and to oppose
production controls in any buffer stock arrangement.
Where international buffer stock agreements were not feasible, but greater
price stabilization appeared desirable, the United States could consider export
quota arrangements which would promote national stocking to protect against
high prices and encourage investment through a flexible quota reallocation
system. It was also decided that the United States could consider internationally
coordinated national stocks in cases where international buffer stocks were not
feasible.
When a sufficient number of commodity agreements with operating biiffer
stocks had been negotiated, the funds allocated for such agreements could be
pooled in a common fund in order to facihtate the financing of buffer stocks.
This purpose would be achieved by making unused funds from some agreements
available to others which were in a buying phase and by providing such
agreements with supplementaryfinancingthrough common fund borrowings on
commercial markets.
A new commodity agreement for sugar, requiring stockholding, seemed
certain to enter into force. Negotiations for a new International Sugar Agreement were successfully concluded and the agreement was scheduled to become
effective on January 1, 1978. The new agreement, through the combined use of
stock and quota mechanisms, was designed to stabilize prices within a 10-centper-pound price band (11-21 cents). Market forces would be allowed to operate
freely over a substantial segment at the center of this band. The United States
actively participated in negotiating the new agreement because it believed the
pact would serve the interests of the United States as both a major sugarproducing nation and as the world's leading sugar importer.
In the energy area, the key issues revolved around price, supply, and technical
and financial cooperation. There was also the question of establishing an
appropriate means to continue an energy dialog, following the conclusion of the
Conference on Intemational Economic Cooperation. The key demands of
developing countries included indexation of oil export revenues and increased
resource transfers to the oil-importing developing countries, particularly those
deficient in energy resources, to help in meeting their oU biUs and to assist in
developing any existing indigenous energy resources. Increased financial, scientific, and technological cooperation in conventional and nonconventional energy
areas continued to receive considerable attention.
The United States called for intemational cooperation to effectuate an orderly
and smooth transition to the period of global energy use when there would be
increased reliance on sources other than oil and gas. The industrialized nations
indicated they recognized the importance of oil prices to all nations and
continued to seek to achieve energy prices that were fair to both producers and
INTRODUCTION
XXXIII
consumers. The OPEC countries continued to seek to maintain the purchasing
power of their oil export earnings, caUing for indexation of oil prices, transfers
of real resources to LDC's, and substantial revisions of pricing poHcies.
The developed nations proposed specific initiatives to intensify cooperation in
energy research and development programs with special attention given to
technologies appropriate for developing nations. The United States developed
an energy investment proposal which recognized the importance of capital in
energy development in the oU-importing developing countries, the role of the
private sector, and the need to improve access to capital markets. It also
considered a possible increase in the role of international financial institutions
in fostering energy development. The United States fully recognized the
importance of suchfinancialand investment issues to the oil-importing developing countries.
Intemational Trade Policy
The key emphasis of our trade policy remained our commitment to maintaining and improving an open intemational trading environment in the face of
increasing protectionist pressures. The May 1977 summit conference in London
and the renewal of the OECD trade pledge provided vital opportunities for the
United States and its major trading partners to reconfirm their commitment to
avoid protective trade measures. During the year, the United States also
participated actively in efforts to achieve a broadened and strengthened
intemational consensus on export credits to avoid destructive competition in this
area.
At the same time, the administration responded to serious problems of import
competition in domestic television and shoe sectors through mutual agreements
which facihtate domestic adjustment, by slowing the pace of imports from the
one or two countries responsible for the rapid surge in U.S. imports. The
President asked Treasury Under Secretary for Monetary Affairs Solomon to
chair an interagency task force to look into the problems ofthe steel industry and
propose a comprehensive policy program for that industry early in fiscal 1978.
The United States and the European Community succeeded in achieving a
major breakthrough in the stalemate which had deadlocked the multilateral
trade negotiations and established a timetable for the submission of requests,
offers, and draft codes. Treasury remained actively involved in the preparation
of subsidy/countervailing duty and safeguard codes in particular.
The East-West Foreign Trade Board, chaired by the Secretary of the
Treasury, continued to monitor trade with the nonmarket economies to ensure
that it remained consistent with U.S. national interests. Secretary Blumenthal
was cohost ofthe Sixth Session ofthe Joint U.S.-U.S.S.R. Commercial Commission on June 9-10, 1977, in Washington, D.C. [He also served as cochairman of
the U.S.-U.S.S.R. Trade and Economic CouncU meeting in Los Angeles on
November 14, 1977.]
XXXIV
1 7 REPORT OF THE SECRETARY OF THE TREASURY
97
International Investment
The administration estabhshed a policy on direct international investment
that is based on four basic premises:
• First, intemational investment will generaUy result in the most efficient
allocation of economic resources if it is allowed to flow according to
market forces.
• Second, there is no basis for concluding that a general policy of actively
promoting or discouraging international investment would further the
U.S. national interest.
O Third, unilateral U.S. Government intervention in the international
investment process could prompt counteractions by other govemments
with adverse effects on the U.S. economy and U.S. foreign policy.
• Fourth, the United States has an important interest in seeking to assure
that established investors receive equitable and nondiscriminatory
treatment from host governments.
In accordance with these premises, it was determined that U.S. pohcy should
be neither to promote nor discourage inward or outward investment flows or
activities. From this it followed that the U.S. Government should not give any
special incentives or disincentives to intemational investment or intervene in the
activities of individual companies regarding intemational investment.
On the basis of this poHcy, a task force identified several objectives that the
U.S. Govemment should seek. They include strengthening intemational restraint over govemment interventions in the investment process which adversely
affect other countries, obtaining equitable treatment for investors based on
national treatment and the principles of intemational law, and fostering
intemational cooperation in this area.
R E V I E W OF T R E A S U R Y OPERATIONS
FINANCIAL OPERATIONS
Summary
On the unified budget basis the deficit for fiscal 1977 was $45 billion. Net
receipts for fiscal 1977 amounted to $356.9 billion ($48.3 billion over the
period October 1, 1975, through September 30, 1976), and outlays totaled
$401.9 billion ($32.7 bUlion over the period October 1, 1975, through
September 30, 1976).
Fiscal 1977 borrowing from the public amounted to $53.5 billion as a result
of (1) the $45 billion deficit, (2) a $2.2 billion increase in cash and monetary
assets, and (3) a $6.2 billion decrease in other means of financing.
As of September 30, 1977, Federal securities outstanding totaled $709.1
billion, comprised of $698.8 billion in public debt securities and $ 10.3 bUlion
in agency securities. Of the $709.1 billion, $551.8 billion represented
borrowing from the public.
The Government's fiscal operations for the period October 1, 1975, through
September 30, 1976, and fiscal 1977 are summarized as follows:
[In billions of dollars]
Comparable
prior
period t
Budget receipts and outlays:
Receipts
Outlays
Fiscal
1977
308.6
369.2
356.9
401.9
-60.6
-45.0
Means of financing:
Borrowing from the public
Increase in cash and other monetary assets
77.5
-8.9
53.5
-2.2
Other means:
Increment on gold and seigniorage
Outlays of off-budget Federal agencies
Other
.6
-8.5
-.1
.4
-8.7
2.0
60.6
45.0
Budget deficit
Total budget financing
I Oct. 1, 1975, through Sept. 30, 1976.
1977 REPORT OF THE SECRETARY OF THE TREASURY
THE BUDGET
1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977
Fiscal Years
Receipts
Total budget receipts amounted to $356.9 billion in fiscal 1977, an increase
of $48.3 billion over the comparable period ended September 30, 1976. Net
budget receipts by major source for fiscal 1977 and the comparable prior
period are shown below.
[In billions of doUars]
Source
Individual income taxes
Corporation income taxes
Employment taxes and contributions
Unemployment insurance
Contributions for other insurance and retirement
Excise taxes
Estate and gift taxes
Customs duties
Miscellaneous receipts
Total budget receipts
Comparable
prior
period i
Fiscal
1977
135.8
42.0
82.5
9.0
4.9
17.1
5.3
4.4
7.7
156.7
54.9
92.2
U.3
5.2
17.5
7.3
5.2
6.5
308.6
356.9
I Oct. 1, 1975, through Sept. 30, 1976.
NOTE.—Detail will not agree with final Monthly Treasury Statement, fiscal 1977.
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 reached $ 156.7 billion in
fiscal 1977, an increase of $20.9 billion over the comparable prior period,
substantially
all due to increased personal incomes.
Corporation income taxes.—Corporation income taxes increased by $12.9
REVIEW O F TREASURY O P E R A T I O N S
3
bUlion over the prior period to reach $54.9 billion. This sharp (31 p e r c e n t )
increase reflected high final payments on 1976 liability and continued
increases in corporate earnings.
Employment taxes a n d contributions.-^RQCcipis from this source totaled
$92.2 billion reflecting in part an increase in the social security taxable
earnings base from $ 1 5 , 3 0 0 to $ 1 6 , 5 0 0 effective January 1, 1977.
Unemployment insurance.—Unemployment insurance receipts increased by
26 p e r c e n t in fiscal 1977 to $11.3 billion. State tax deposits at the Treasury,
the largest c o m p o n e n t in this category, increased by $2.0 billion (or 28
p e r c e n t ) , reflecting increased State financing of past unemployment benefits.
In addition, the Federal u n e m p l o y m e n t insurance tax rate was raised from 0.5
p e r c e n t to 0.7 p e r c e n t effective January 1, 1977.
Contributions f o r other insurance a n d retirement.—Receipts in this category
increased by $0.3 biUion to a total of $5.2 biUion in fiscal 1977.
Excise taxes.—Receipts of excise taxes in fiscal 1977 were $17.5 bUlion, an
increase of $0.4 billion over the prior period.
Estate a n d gift taxes.—Receipts in this category increased by $2.0 billion to
reach $7.3 bUlion in fiscal 1977. A n estimated $1.4 billion of this increase was
due to increased gifts in anticipation o f t h e estate and gift tax provisions o f t h e
Tax Reform Act of 1976.
Customs duties.—Customs duties increased by $0.8 billion in fiscal 1977 to
reach $5.2 bUlion.
Miscellaneous receipts.—These receipts totaled $6.5 billion in fiscal 1977,
a decrease of $1.2 billion over the prior period. Deposits by the Federal
Reserve System increased by $0.3 billion while oil import fees declined from
$1.5 billion in the prior period to - $ 1 3 million in fiscal 1977.
Outlays
Total outlays in fiscal 1977 were $401.9 biUion ( c o m p a r e d with $369.2
billion for the c o m p a r a b l e prior p e r i o d ) . Outlays by major agency for fiscal
1977 and the c o m p a r a b l e prior period are presented in the following table. For
details see the Statistical Appendix.
[In billions of dollars]
Comparable
pnor
period 1
Funds appropriated to the President
Agriculture Department
Defense Department
Health, Education, and Welfare Department
Housing and Urban Development Etepartment
Labor Department
Transportation Department
Treasury Department
Energy Research and Development Administration
National Aeronautics and Space Administration
Veterans Administration .....:
Other
Undistributed offsetting receipts
Total outlays
I Oct. 1, 1975, through
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Federal Reserve Bank of St. Louis
Fiscal
1977
3.7
13.5
90.7
132.4
5.7
25.0
12.0
44.7
4.1
3.6
18.2
31.3
-15.8
2.5
16.7
98.0
147.5
5.8
22.4
12.5
49.6
5.0
3.9
18.0
35.0
-15.1
369.2
401.9
O
1977 REPORT OF THE SECRETARY OF THE TREASURY
Cash and monetary assets
On September 30, 1977, cash and monetary assets amounted to $28.8
billion. The balance consisted of U.S. Treasury operating cash of $ 19.1 bUlion
($1.7 billion more than September 30, 1976); $1.3 billion held in special
drawing rights ($0.3 billion less than September 30, 1976); a net $4.1 billion
with the Intemational Monetary Fund ($0.1 billion more than September 30,
1976); $0.7 billion in loans to Intemational Monetary Fund ($0.7 billion more
than September 30, 1976); and $3.7 billion of other cash and monetary assets
(a slight increase over September 30, 1976).
For a discussion of the assets and liabilities in the Treasury's account, see
page 158- Transactions affecting the account in fiscal 1977 are shown in the
following table:
Transactions affecting the account of the U.S. Treasury, fiscal 1977
[In biUions of dollars]
Operating balance Sept. 30, 1976
Excess of deposits or withdrawals (—), budget, trust, and other accounts:
Deposits
Withdrawals (-)
Excess of deposits or withdrawals (-), public debt accounts:
Increase in gross pubUc debt
Deduct:
Net discounts on new issues
Interest increment on savings and retirement plan securities ....
Net pubUc debt transactions included ih budget, trust, and
other Govemment accounts
17.4
411.4
451.6
-40.2
64.1
8.5
3.9
9.9
Net deductions
Operating balance Sept. 30, 1977
22.3
41.8
19.1
Corporations and other business-type activities of the Federal Govemment
The business-type programs which Govemment 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.
Amounts so borrowed and outstanding are reported as liabilities in the periodic
financial statements of the Government corporations and agencies. In fiscal
1977 borrowings from the Treasury, exclusive of refinancing transactions,
totaled $30 biUion, repayments were $21 billion, and outstanding loans on
September 30, 1977, totaled $66.4 billion.
Digitized Those agencies having legislative authority to borrow from the public must
for FRASER
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either consult with the Secretary of the Treasury regarding the proposed
Federal Reserve Bank of St. Louis
REVIEW O F TREASURY
OPERATIONS
7
offering, or have the terms of the securities to be offered approved by the
Secretary.
T h e Federal Financing Bank m a k e s 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
G o v e r n m e n t or bank securities of comparable maturity. The bank may charge
fees to provide for expenses and reserves. During fiscal 1977, all funds loaned
by the bank have been borrowed from the Treasury.
During fiscal 1977, Congress granted new authority to borrow from the
Treasury in the total a m o u n t of $9.2 billion, adjustments increased borrowing
authority by $2.5 billion, making a total increase of $11.6 billion. The status
of borrowings and borrowing authority and the a m o u n t of corporation and
agency securities outstanding as of September 30, 1977, 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 G o v e r n m e n t ' s cost for its
borrowings in the c u r r e n t market, as reflected by prevailing m a r k e t yields on
G o v e r n m e n t securities which have maturities comparable with the Treasury
loans to the agencies. A description of the Federal agency securities held by
the Treasury on S e p t e m b e r 30, 1977, is shown in the Statistical Appendix.
During fiscal 1977, the Treasury received $3.8 billion from agencies which
consisted of dividends, interest, and similar payments. (See the Statistical
Appendix.)
As r e q u i r e d by D e p a r t m e n t Circular No. 9 6 6 , Revised, semiannual
statements of financial condition, and income and retained earnings are
submitted to the Treasury by G o v e r n m e n t 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 G o v e r n m e n t corporations
and other business-type activities, as of September 30, 1977, are shown in the
Statistical Appendix.
Government-wide financial management
International Monetary F u n d . — T h e Treasury, as U.S. correspondent with
the International Monetary Fund for matters related to the Fund's government
finance statistics project, coordinated the collection of Federal G o v e r n m e n t
finance statistics. Information sources outside the Treasury sphere furnished
statistical data for fiscal years 1973 through 1975 to the Treasury for review
and transmission to the Fund. Statistics were published in the Fund's
'^Government Finance Statistics Yearbook, 1 9 7 7 . " A Treasury project team
has also initiated a study of transactions between the United States and the
8
1977 REPORT OF THE SECRETARY OF THE TREASURY
Fund in order to improve the accounting and reporting system used for these
transactions.
Joint Financial Management Improvement Program.—JFMIP activities were
c o n c e n t r a t e d in the following^ four areas: Audit improvement, financial
m a n a g e m e n t , productivity, and cash rnanagement. A study designated as the
'* A u d i t I m p r o v e m e n t P r o j e c t " was initiated to review the various aspects of
auditing federally assisted programs administered by State and local governments. T h e sixth annual Financial M a n a g e m e n t Conference was held in
February 1977, featuring **New Challenges for Financial M a n a g e r s . " In M a r c h
1977, J F M I P published a booklet entitled ^'Implementing a Productivity
Program: Points to C o n s i d e r , " to capture some of the lessons learned
concerning productivity programs. A series of cash m a n a g e m e n t workshops
were approved, featuring the specific areas of loan accounting systems, letters
of credit, and regulations governing cash m a n a g e m e n t practices within t h e
Federal G o v e r n m e n t .
DOMESTIC FINANCE
Federal Debt Management
Federal debt m a n a g e m e n t was c o n d u c t e d in an economic atmosphere of
general recovery in fiscal 1977. Following the **pause" of 1976 the economy
began to pick up and subsequently set a brisk p a c e of economic activity over
the first half of calendar 1977. Beginning in July 1977 the rate of economic
expansion slowed, but over the fiscal year as a whole significant progress was
m a d e . Industrial production increased, housing showed strong gains, personal
income rose, and price increases moderated. T h e labor force expanded, and
the u n e m p l o y m e n t rate declined from about 8 p e r c e n t at the beginning of t h e
fiscal year to about 7 p e r c e n t at the end of the year.
T h e Ford administration January budget estimate for fiscal 1977 showed a
deficit of $57.2 bUlion. This estimate was raised to $68 biUion in February by
the incoming Carter administration to a c c o m m o d a t e the proposed economic
stimulus package aimed at promoting growth in the economy and improving
unemployment. T h e first phase was to consist mainly bf a tax rebate t o
stimulate consumer spending while the second phase was designed to reduce
business taxes, expand training and employment programs, and increase public
works spending and countercyclical revenue sharing. However, after the
e c o n o m y began to m a k e impressive gains the rebate proposal was withdrawn.
T h e canceling o f t h e rebate proposal combined with outlay shortfalls r e d u c e d
the estimated budget deficit to $48 billion. As it turned out, outlays continued
to be less than expected, and the actual budget deficit was $45 billion.
T h r o u g h o u t the fiscal year Treasury financing o f t h e deficit was accomplished
with a minimum
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Federal Reserve Bank of St. Louis
REVIEW OF TREASURY
OPERATIONS
V
From the outset, t h e Treasury indicated that the amount of financing that
had to be d o n e , though large, was manageable. In fact, the Treasury found
through its *'regularization" of note offerings ( t h e 2-, 4-, and 5-year cycle
notes) and the quarterly refundings there were ample borrowing opportunities
to raise n e e d e d cash. This was d u e in part to the large a m o u n t of new cash
provided by foreign *'add-ons" in t h e auctions of marketable securities and t o
the n o n m a r k e t a b l e securities sold t o State and local governments. Combined,
these t w o sources of funds provided over $18.6 billion, or 35 percent o f t h e
total budget and off-budget new financing requirements for t h e fiscal year.
Moreover, t h e Treasury took advantage of the good market atmosphere that
prevailed throughout most of t h e fiscal year to improve the structure of t h e
debt. This was d o n e primarily by deliberately paying down bills and raising
large a m o u n t s of new cash in t h e coupon m a r k e t when the market was
receptive.
For t h e fiscal year, total Treasury financing in coupons, including refundings, a m o u n t e d to $86.7 billion, $77.6 billion of which was with private
investors a n d $9.1 billion was with t h e Federal Reserve System and Governm e n t accounts. Nearly 59 p e r c e n t or $44.1 billion o f t h e coupon financing with
private investors was for cash, while the remaining $33.5 billion, or 41 percent,
was for refunding maturing notes privately held. T h e a m o u n t of new cash
raised through c o u p o n s a m o u n t e d t o $43.7 billion, $27.6 billion, or 6 3
MARKET YIELDS AT CONSTANT MATURITIES 1972-1977^
1972
1973
1974
1975
Digitized 1 Monthly averages of daily market yields of public debt securities. Bank discount
for FRASER
1976
rates of Treasury bills.
1977
10
1977 REPORT OF THE SECRETARY OF THE TREASURY
percent, of which was raised with notes in the 2- to 7-year maturity area.Two-,
4-, and 5-year cycle notes provided $ 13.1, $ 11, and $7.9 billion, respectively.
About $11.7 billion was raised in quarterly refundings and the issuance of a
15-year bond. In the bUl market a $5.4 billion paydown in regular bills was
achieved, the first such paydown since fiscal 1964. The bill paydown in fiscal
1977 was in marked contrast to the past 2 fiscal years when the Treasury
tapped the bUl market for $23.6 biUion in fiscal 1975 and $32.6 billion infiscai
1976 for part of its new cash needs. Total new cash raised through marketable
debt amounted to $38.3 biUion in fiscal 1977, compared with $79.6 bUlion in
fiscal 1976 and $50.4 billidn in fiscal 1975. OveraU financing operations
resulted in the average length ofthe privately held marketable debt increasing
from 2 years 9 months at the beginning of fiscal 1977 to a peak of 3 years in
August 1977 and settling at 2 years 11 months at the end of the fiscal year.
Federal debt a n d Government-sponsored agency debt
[In billions of dollars]
Class of debt
June 30,
1976
Increase, or
decrease
Sept. 30,
1976
Sept. 30,
1977
204.2
127.0
49.5
11.9
206.1
131.1
57.3
13.2
217.9
148.4
58.9
18.3
11.8
17.3
1.6
5.1
392.6
407.7
443.5
35.8
69.7
.4
2.3
70.8
.4
2.3
75.4
.4
2.2
4.6
0
-.1
19.9
1.6
2.2
19.2
1.6
3.0
20.5
1.3
14.2
1.3
-.3
11.2
(-)
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
Other nonmarketable debt
Total nonmarketable public issues
Govemment account series (nonmarketable) .
Non-interest-bearing debt
Total gross public debt
Federal agency securities:
Govemment National Mortgage Association
Export-Import Bank bf the United States
Tennessee Valley Authority
Defense family housing
Other
Total Federal agency debt
Total Federal debt
Government-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
96.1
97.3
114.0
16.7
130.6
1.2
128.6
l.l
140.1
1.2
11.5
.1
620.4
634.7
698.8
64.1
4.2
r2.7
2.1
1.2
.8
4.1
r3.6
2.0
l.l
.8
3.8
2.9
1.8
1.0
.8
-.3
-.7
-.2
-.1
0
rll.O
rll.7
10.3
-1.4
r631.4
r646.4
709.1
62.7
19.4
29.9
16.1
10.3
3.7
rl.O
19.1
30.7
16.6
10.8
3.9
r.7
19.2
31.5
18.7
11.7
4.1
l.O
1.0
.1
.8
2.1
.9
.2
.3
1.0
r80.3
r81.8
87.2
5.4
Digitizedrfor FRASER
Revised.
http://fraser.stlouisfed.org/ first offered in May l%7; sales discontinued after June 30, 1970.
I U.S. savings notes
Federal Reserve Bank of St. Louis
REVIEW OF TREASURY OPERATIONS
11
Changes in Federal securities
Federal securities consist o f t h e debt issues ofthe Treasury, both marketable
and n o n m a r k e t a b l e , as well as those obligations issued by Federal agencies
which are included in the unified budget totals and in which there is an element
of Federal ownership. T h e Federal agency securities included are the
participation certificates of the G o v e r n m e n t National Mortgage Association,
the d e b t issues of the Export-Import Bank of the United States and the
Tennessee VaUey Authority, Postal Service bonds, Defense family housing
mortgages, and various guaranteed issues of the Federal Housing Administration.
At the end of fiscal 1977 there was $709.1 billion Federal securities
outstanding, c o m p a r e d with $646.4 billion a year earlier. Outstanding public
debt i s s u e s o f the Treasury a m o u n t e d to $698.8 bUlion, an increase of $64.1
billion for the fiscal year. Federal agency issues outstanding totaling $10.3
billion wer^ down $ 1.4 billion from a year ago. Marketable Treasury securities
outstanding at the end of fiscal 1977 amounted to $443.5 bUlion, an increase
of $35.8 billion but $41.1 bUlion less than the fiscal 1976 increase of $77
billion. N o n m a r k e t a b l e Treasury securities increased $28.2 billion to a level
of $254.1 billion at the end of fiscal 1977. T h e increase in fiscal 1977 w a s $ 1 8
bUlion m o r e than in fiscal 1976. Special nonmarketable securities issued only
to G o v e r n m e n t a c c o u n t s and trust funds such as the Federal old-age and
survivors insurance trust fund increased $11.5 billion, or 41 percent. Special
PRIVATE HOLDINGS OF MARKETABLE FEDERAL SECURITIES
Federal Agency Securities
1972 1973 1974 1975 1976 1977
1972 1973 1974 1975 1976 1977
Fiscal Years
12
1977 REPORT OF THE SECRETARY OF THE TREASURY
nonmarketable securities issued to State and local governments increased $8.6
billion, or 30 percent. Savings bonds and notes outstanding rose $4.6 billion
while special n o n m a r k e t a b l e issues to foreign investors increased $ 1 billion.
A special certificate issued to the Federal Reserve System on September 30,
because Congress delayed the extension of the debt limit, accounted for $2.5
billion o f t h e increase in nonmarketables. All other nonmarketables increased
by less than $0.1 billion net.
T h e securities issued by Government-sponsored agencies are not part of
Federal securities since these agencies are not owned in whole or in part by
the G o v e r n m e n t . However, these privately owned and managed agencies are
subject to some degree of Federal supervision. In fiscal 1977 Governmentsponsored agency d e b t increased by $5.4 biUion to a level of $87.2 billion.
Private investors held $80.2 bUlion and a c c o u n t e d for the total $5.4 biUion
increase. Holdings of Federal Reserve banks and G o v e r n m e n t accounts
totaled $7 billion, about the same as a year ago.
OH'nership
A t t h e end of fiscal 1977 private investors held $446.8 billion o f t h e $709.1
billion of Federal securities outstanding. T h e remaining $262.3 billion was
held by the Federal Reserve System and G o v e r n m e n t accounts. Borrowings
from the public, which includes the Federal Reserve and foreign investors,
a m o u n t e d to a net $54.8 billion in fiscal 1977. This was $28.2 billion less than
the $82.9 billion borrowed in fiscal 1976. O f t h e $54.8 billion borrowed from
the public $46.5 billion, or 85 p e r c e n t , was accounted for by private investors
while the Federal Reserve System acquired $8.3 biUion, or 15 percent.
Individuals.—Holdings of public debt securities by individuals increased
$4.2 billion infiscai 1977, c o m p a r e d with a fiscal 1976 increase of $9.3 billion.
A $4.5 billion increase in savings bonds in fiscal 1977 was partially offset by
the $0.3 billion decrease in individuals' holdings of other securities, mostly
marketables. This decline in marketables reflects, in part, the redemption of
the maturing 9 p e r c e n t notes in May 1977 by those individuals who did not
participate in the May refunding where two new issues were offered which bore
coupon rates much lower than the maturing 9 percent notes. On September
30, 1977, individuals held $ 103.9 biUion ofpublic debt securities. Holdings of
U.S. savings bonds and notes totaled $75.6 billion and holdings of other
Treasury securities were $28.3 billion. Individuals reduced their holdings of
Federal agency securities by $0.3 billion to a level of $0.4 bUlion infiscai 1977.
Insurance companies.^^HoXdings of public debt securities by insurance
companies rose $2.7 billion in fiscal 1977. This c o m p a r e s with a $3.5 billion
increase in fiscal 1976. On S e p t e m b e r 30, 1977, insurance companies held
$14.5 billion of public debt securities, while holdings of Federal agency
securities remained virtually u n c h a n g e d at $0.5 billion.
Savings institutions.—Savings and loan associations increased their holdings
of for FRASER
Digitized public debt securities by $1.5 bUlion in fiscal 1977, c o m p a r e d with $3.7
REVIEW O F TREASURY
13
OPERATIONS
Estimated ownership of public deht securities on selected dates 1 9 6 7 - 7 7
[Dollar amounts in billions]
June 30,
1%7
Estimated ownership by:
Private nonbank investors:
Individuals: i
Series E and H savings bonds
U.S. savings notes2
Other securities
Total individuals
Insurance companies
Mutual savings banks
Savings and loan associations
State and local govemments ...
Foreign and intemational
Corporations
Miscellaneous investors 4
Total private nonbank investors
Commercial banks
Federal Reserve banks
Govemment accounts ..
Total gross debt outstanding
June 30,
1976
Sept. 30, Sept. 30,
1977
1976
Change
during
fiscal
1977
$69.2
.4
26.8
$70.5
.4
28.8
$75.2
.4
28.3
96.4
99.7
103.9
-.5
4.2
311.4
rll.O
rll.3
rlO.6
r5.4
rS.O
r39.2
r69.8
r24.3
r30.0
rll.7
r5.7
r8.3
r38.7
74.6
r25.3
r32.8
14.5
6.1
9.8
53.5
95.1
23.9
30.9
2.7
.4
1.5
14.8
20.5
-1.4
-1.9
3148.9
r283.8
r2%.9
337.6
40.8
55.5
46.7
71.8
r92.5
94.4
149.6
r95.3
%.4
146.1
101.0
104.7
155.5
5.7
8.3
9.4
3322.9
620.4
634.7
698.8
64.1
$50.4
(*)
r20.0
r70.4
r9.0
r4.2
7.9
r23.6
$4.7
(-*)
Percent
Percent owned by:
Individuals
Other private nonbank investors .
Commercial banks
Federal Reserve banks
Govemment accounts
22
r24
17
rl5
22
16
30
15
15
24
16
31
15
15
23
15
34
14
15
22
Total gross debt outstanding
100
100
100
100
rRevised.
* Less than $50 million.
I Including partnerships and personal tmst accounts.
2U.S. savings notes first offered in May 1%7; sales discontinued after June 30, 1970.
3 Adjusted to reflect the reclassification in July 1974 of outstanding non-interest-bearing special notes issued
to the Intemational Monetary Fund and other intemational lending institutions. The adjusted amount was
$3,328 million at the end of fiscal 1%7.
4Includes nonprofit institutions, corporate pension trust funds, nonbank Govemment security dealers,
certain Govemment deposit accounts, and Govemment-sponsored agencies.
billion in fiscal 1976. Federal agency security holdings climbed $0.1 billion.
At the end of fiscal 1977, savings and loan associations held $9.8 billion of
public debt securities and $0.5 billion of Federal agency issues.
On September 30, 1977, mutual savings banks held $6.1 billion ofpublic
debt issues, representing a $0.4 billion increase during the fiscal year. In fiscal
1976, the increase was $1.9 billion. Holdings of Federal agency securities
registered a small decline and stood at $0.4 billion at the close of fiscal 1977.
State and local governments.—StSiie and local governments held $53.5
billion of public debt securities on September 30, 1977. This represented a
record $14.8 billion increase during fiscal 1977, compared with a $7.6 billion
rise in fiscal 1976. About $8.6 billion, or 58 percentof the increase, was from
special nonmarketable issues sold exclusively to these governmental units as
they invested the proceeds from the sale of lower coupon issues that are to be
14
1977 REPORT OF THE SECRETARY OF THE TREASURY
OWNERSHIP OF FEDERAL SECURITIES
September 30, 1977
$ Bil.
700
Total
Gov't Accounts
600
Federal Resen^e
500hPrivate
Nonbank Investors
400 hCom'l Banks ^ ^
300
IndividuaEs
200
Savings Institutions K^:6i^:^___^Corps
100
All Other
used to " a d v a n c e refund'' higher c o u p o n securities. Holdings of Federal
agency issues d r o p p e d by almost $0.5 billion to $3.4 billion during fiscal 1977.
Foreign and international.—Foreign investors increased their holdings of
public d e b t securities by $20.5 biUion to a record level of $95.1 bUlion at the
close of fiscal 1977. T h e increase in holdings was m o r e than five times the $3.8
billion gain in fiscal 1976. Holdings of foreign special nonmarketables rose $ 1
billion whUe holdings of marketables increased $ 19.5 biUion. Over 51 percent,
or $10 bUHon, o f t h e increase in marketable securities was foreign add-ons.
Foreign add-ons represent additional a m o u n t s of a publicly offered marketable
security sold to foreign official a c c o u n t s at the average price. Federal agency
securities held by foreign and international investors were just under $0.7
billion on September 3 0 , 1977, after a small decline over the year.
Nonfinancial corporations.—Corporate holdings of public debt securities
d e c h n e d $1.4 bUlion infiscai 1977, in contrast to an $11.1 bUlion increase the
previous fiscal year. T h e level on September 30, 1977, was $23.9 billion.
Holdings of Federal agency securities, on the other hand, rose $0.2 bUlion t o
a level of $0.6 billion.
Other private nonbank investors.—Other private n o n b a n k investors d e creased their holdings of public d e b t securities $ 1.9 bUlion to $30.9 bUlion in
fiscal 1977. During fiscal 1976 holdings increased $8.9 billion. Holdings of
Federal agency issues decreased $0.2 biUion to a level of $0.6 billion at the
e n d of fiscal 1977.
Commercial banks.—Commercial bank holdings of public debt securities
rose to a record $106.3 bUlion at the midpoint of fiscal 1977 and then declined
to a level of $ 101 billion by the close of the fiscal year. This represented a net
increase of $5.7 billion for the fiscal year as a whole, c o m p a r e d with a $23.5
REVIEW OF TREASURY
OPERATIONS
15
billion increase in fiscal 1976. Although banks experienced much stronger
loan d e m a n d in fiscal 1977 than during the prior fiscal year, loan demand was
still low. As a c o n s e q u e n c e , banks had an incentive to take longer maturities
than usual. In 31 offerings, the Treasury sold $77.6 billion of marketable
coupon securities to private investors in fiscal 1977 and commercial banks
received $31.1 billion, or 40 percent, of the original allotments in these
offerings. Commercial bank holdings of Federal agency securities totaled $1.7
billion on September 3 0 , 1977, down $0.4 billion over the year.
Federal Reserve System.—In fiscal 1977, the Federal Reserve System
increased its holdings of public debt securities $8.3 billion, c o m p a r e d with a
$9.7 billion rise in fiscal 1976. A b o u t $5.8 billion of the increase was in
marketable securities while $2.5 billion was a nonmarketable special certificate. Holdings o f p u b l i c debt issues stood at $104.7 bUlion while holdings of
Federal agency securities rose slightly to $0.3 billion by the end of fiscal 1977.
Government accounts.—Public debt securities held by G o v e r n m e n t accounts rose $9.4 billion in fiscal 1977, c o m p a r e d with a $4.3 billion increase
in fiscal 1976. Special n o n m a r k e t a b l e securities held by these accounts rose
$11.4 billion while holdings of marketables declined $2 billion. Holdings of
Federal agency issues declined $0.1 billion. On September 30, 1977,
G o v e r n m e n t accounts held $155.5 billion o f p u b l i c debt securities and $1.8
billion of Federal agency issues.
Financing operations
T h e Treasury began the fiscal year with a record opening cash balance of
$17.4 billion, due in p a r t to a lower-than-expected budget deficit of $12.7
billion for the transition quarter. Because of this large cash balance, market
participants believed Treasury fmancing requirements would be moderate in
the near term.
T h e first coupon issue o f t h e new fiscal year was a 7 percent 5-year 1-month
note dated October 12, maturing N o v e m b e r 15, 1981, from which over $2.5
billion was raised in new cash. This note, which had been auctioned on
September 28, completed the 5-year cycle note issues for 1976. Only moderate
interest at lower-than-expected yield levels was shown for the issue as $4.2
billion of tenders were received. Noncompetitive tenders totaled $0.4 billion.
About $ 1.4 billion went to commercial banks and $0.8 billion went to dealers.
Together they accounted for 86 p e r c e n t o f t h e issue. The 7.08 percent average
yield was 55 basis points below the last 5-year cycle note auctioned on J u n e
29, and was the lowest average yield o f t h e four 5-year cycle notes sold to date.
On O c t o b e r 15 the Treasury a n n o u n c e d an auction of 2-year notes to be held
on O c t o b e r 2 1 . A b o u t $2.5 billion was to be sold to refund $ 1.5 billion of notes
held by the public and raise $ 1 billion in new cash. Issue date for the new notes
was N o v e m b e r 1. T h e Treasury accepted $2.5 bUlion o f t h e $4.1 billion of
public tenders in a rather unenthusiastic but cautious m a r k e t atmosphere.
Noncompetitive tenders accounted for $0.2 billion o f t h e issue. Including the
$0.3 billion
of foreign add-ons, $1.3 billion of new cash was raised.
16
1977 REPORT OF THE SECRETARY OF THE TREASURY
Commercial banks and dealers were awarded $1.3 billion and $0.8 billion, or
46 percent and 27 percent, respectively. The average yield was 5.96 percent,
34 basis points below the September 21 auction of 2-year notes. A 5 7/8
percent coupon was set on the issue. Accepted tenders included 94 percent
of the amount of notes bid for at the highest yield of 5.99 percent. Market
participants were discouraged by these results and the notes began trading at
a discount.
Interest rates continued to decline in October. The effective Federal funds
rate was down over 20 basis points from September and 90- to 119-day
commercial paper rates dropped by a like amount. Most banks lowered their
prime rate from 7 percent to 6 3/4 percent during the first week of October,
and rates on 3-month CD's were down over the month. Treasury bill rates
moved between 10 and 25 basis points below September levels. Treasury
intermediate coupon yields were down about 25 basis points on average, and
long rates declined slightly. Corporate and municipal bond yields also fell
during this period.
The economy did not pick up much steam in October, although there was
as much good news as bad. The index of leading economic indicators,
originally reported as unchanged from September, was twice revised to show
Offerings of marketable Treasury securities excluding refunding of regular hills,
fiscal 1 9 7 7
[In millions of dollars]
Allotted to
Federal
Reserve and
For
Govemment
accounts
refunding
Allotted to private
investors
Date
Description
1976
For
cash
Total
Average
auction
yield
(percent)
NOTES AND BONDS
Oct 1
.. 1 1/2 percent note, Oct. I, 1981»
Oct. 12 .. .. 7 percent note, Nov. 15, 1981
Nov. 1 ... .. 5 7/8 percent note, Oct. 31, 1978
Nov. 15 . .. 6 1/4 percent note, Nov. 15, 1979
Nov. 15 . .. 7 percent note, Nov. 15, 1983
Nov. 15 . .. 7 7/8 percent bond, Feb. 15,
1995-2000
Nov. 30 . .. 5 3/4 percent note, Nov. 30, 1978
.. 5 7/8 percent note, Dec. 31, 1980
Dec 7
Dec. 31 .. ..5 1/4 percent note, Dec. 31, 1978
14
2,543
1,342
1,295
885
392
1,435
2,692
1,107
1,481
2,011
1,374
•'"98
70
50
609
1,370
"nis
2,017
"25'2
1,124
688
256
1,515
i'.iob
2,053
1
"523
1,469
2,910
1,004
1,897
"Tib
2,623
900
190
1,906
"264
1,451
1,671
**65
425
14
2,543
2,921
3,376
2,309
7.08
5.96
6.36
7.02
1,001
2,941
2,692
3,376
7.80
5.86
5.91
5.37
2,697
2,855
4,608
2,905
1,143
2,845
2,809
3,519
1
2,613
1,992
5,533
1,904
2,087
2,514
2,308
1,504
3,180
4,133
6.19
5.97
6.62
7.25
7.63
5.98
6.88
6.02
1977
.. 6 1/8 percent note, Feb. 15, 1982
Jan 6
Feb 3
.. 5 7/8 percent note, Jan. 31, 1979
Feb. 15 .. .. 6 1/2 percent note, Feb. 15, 1980
Feb. 15 .. .. 7 1/4 percent note, Feb. 15, 1984
Feb. 15 .. .. 7 5/8 percent bond, Feb. 15, 2002-07..
Feb. 28 .. .. 5 7/8 percent note, Feb. 28, 1979
Mar 8 .. 6 7/8 percent note. Mar. 31, 1981
Mar. 31 . .. 6 percent note. Mar. 31, 1979
Apr. 1 .... .. 1 1/2 percent note, Apr. 1, 19821
Apr. 4 .... .. 7 percent note. May 15, 1982
May 2 .... ..5 7/8 percent note, Apr. 30, 1979
May 16 .. .. 7 1/4 percent note, Feb. 15, 1984
May 16 .. .. 7 5/8 percent bond. Feb. 15, 2002-07..
May 31 .. . . 6 1/8 percent note, May 31, 1979
June 3 .. 6 3/4 percent note, June 30, 1981
June 30 .. .. 6 1/8 percent note, June 30, 1979
July 8 .... .. 7 1/4 percent bond, Aug. 15, 1992
Aug. FRASER
Digitized for 1 ... .. 6 1/4 percent note, July 31, 1979
Aug. 15 . .. 6 3/4 percent note, Aug. 15, 1980
2,697
2,855
2,184
1,336
4%
1,180
2,809
943
2,613
413
2,514
138
1,504
1,664
2,037
881
391
150
7.02
5.87
7.28
7.77
6.23
6.80
6.14
7.29
6.34
6.84
17
REVIEW OF TREASURY OPERATIONS
Offerings of marketable Treasury .securities excluding refunding of regular bills,
fiscal 7 9 7 7 — C o n t i n u e d
Allotted to
Federal
Reserve and
For
Govemment
refunding
accounts
300
1,155
199
452
123
1,898
Allotted to private
investors
Date
Aug. 15 . .. 7 1/4
Aug. 15 . .. 7 5/8
Aug. 31 . .. 6 5/8
Sept. 7 ... .. 6 3/4
Sept. 30 . .. 6 5/8
percent
percent
percent
percent
percent
Description
note, Aug. 15, 1984
bond, Feb. 15, 2002-07..
note, Aug. 31, 1979
note, Sept. 30, 1981
note, Sept. 30, 1979
Total notes and bonds
For
cash
1,408
551
1,460
2,968
635
44-0%
Average
3.136
"'96
yield
(percent)
Total
7.26
2.863
7.72
1,202
6.68
3,481
684
2,968
6.74
3.861
33.462
9.140
86.698
BILLS (MATURITY VALUE)
Change in offerings of regular bills:
1976
October-Etecember
482
482
272
-7.195
1,027
272
-7,195
1,027
-5,414
-5,414
2,005
2,005
4,506
4,506
2,002
2,002
901
901
903
903
1977
January-March
April-June
July-September
Total change in regular bills .^..
Other bill offerings:
1976
Dec. 10
4.448 percent, 132-day, maturing Apr.
21, 1977
1977
Apr. 6
June 7
Sept. 6
Sept. 6
4.632 percent,
21, 1977
5.240 percent,
16, 1977
5.760 percent,
15, 1977
5.760 percent,
22, 1977
15-day, maturing Apr.
9-day, maturing June
9rday, maturing Sept.
16-day, maturing Sept.
Total other bill offerings
10,317
Total offerings
48,999
10,317
33,462
9,140
91,601
11ssued in exchange for 2 3/4 percent Treasury bonds, investment series B-1975-80.
a 0.2-percent and then a 0.6-percent increase. Personal income posted a good
$ 12.5 billion increase. Inflation remained under control as the Consumer Price
Index rose only 0.4 percent. Housing and hardgoods orders both looked strong
while unemployment edged back up to its August level of 7.9 percent. The
Federal Reserve Board index of industrial production held steady while the
Boan^'s index of manufacturing capacity dropped to a utilization rate of 79.7
percent. This low rate of utilization and continued high unemployment were
two major signs of weakness in the economy.
Meanwhile, the market cautiously awaited the terms of the November
refunding operation. On October 27, the Treasury announced it would refund
$4 billion of privately held notes maturing November 15 and raise $2 bUIion
of new cash. Three securities were offered. The auctions were held on
consecutive days beginning with $3 billion of 3-year notes oil November 3. The
following day $2 billion of 7-year notes were sold, and $ 1 bUlion of reopened
7 7/8 percent bonds due February 15, 2000, were auctioned on November 5.
18
1977 REPORT OF THE SECRETARY OF THE TREASURY
These a m o u n t s , which were at the low end of preliminary m a r k e t estimates,
resulted in a very favorable m a r k e t reception of the financing. Unlike the
previous three quarterly financings, the N o v e m b e r financing did not include
a fixed-price note offering. However, beginning with this financing, the
maximum a m o u n t of t e n d e r s accepted on a noncompetitive basis for preferred
allotment was raised from $ 5 0 0 , 0 0 0 to $1 million. T h e Treasury felt t h a t
raising the noncompetitive m a x i m u m would broaden the yield auction
technique. This allowed greater direct participation by investors not in close
contact with daily m a r k e t developments who were unwilling to bid for larger
amounts competitively. It gave these investors in this size range the assurance
that they would get securities at the average rate.
T h e N o v e m b e r 3 auction of 3-year notes elicited aggressive bidding. A b o u t
$3 billion o f t h e $5.4 billion tenders submitted was accepted, including $0.6
biUion of noncompetitive tenders. A n additional $0.3 biUion of foreign addons b r o u g h t the total issue to $3.3 billion. T h e average yield was 6.36 percent,
and the highest yield a c c e p t e d was 6.37 percent. A 6 1/4 p e r c e n t c o u p o n was
set on the notes. C o m m e r c i a l banks were aUotted $1.2 biUion, or 37 percent,
and dealers were allotted $1 billion, or 31 percent. T h e issue began to trade
at a p r e m i u m foUowing the auction.
On N o v e m b e r 4, the 7-year note was auctioned. Again, there was strong
bidding interest present. T h e average yield of 7.02 percent on this issue was
also the highest yield accepted and a 7 p e r c e n t c o u p o n was set. T h e Treasury
a c c e p t e d $2 bUHon from the m o r e than $6.2 billion of tenders received,
including almost $0.9 billion of noncompetitive tenders. An additional $0.2
billion of foreign add-ons brought the total issue to $2.3 billion. Commercial
banks received $0.9 billion or 4 0 p e r c e n t and dealers received $0.8 billion o r
35 p e r c e n t o f t h e notes due N o v e m b e r 15, 1983.
O n N o v e m b e r 5, the reopened 7 7/8 p e r c e n t bonds were sold in a price
auction. A b o u t $ 1 billion o f t h e $ 1.5 bUlion of tenders received was accepted.
T h e average price was $100.79 which yielded 7.80 percent. Almost $0.2
bUlion of accepted tenders were noncompetitive. Commercial banks and
dealers were awarded $0.3 billion and $0.6 billion, respectively, which
a c c o u n t e d for 90 p e r c e n t o f t h e b o n d s . This brought the total of this financing
package to $6.6 billion of securities sold to private investors. T h e $2.6 bUlion
of new cash was the smallest a m o u n t raised in calendar 1976 quarterly
financings. O n e effect of this financing was to raise the average length of t h e
privately held Treasury m a r k e t a b l e d e b t by I m o n t h to 2 years 10 months at
mid-November.
T h e next financing c o n d u c t e d by the Treasury was to refund $ 1.4 bUlion of
2-year notes maturing N o v e m b e r 30, 1976. T h e auction was held on
N o v e m b e r 18, with the Treasury accepting $2.5 billion o f t h e $3.8 biUion of
public tenders, including $0.3 biUion of noncompetitive tenders. Including
$0.3 bUlion of foreign add-ons new cash a m o u n t e d to $ 1.4 biUion. Commercial
banks and dealers received $1.2 biUion and $1 bUlion, or 42 p e r c e n t and 34
percent, respectively. Although bidding interest was weaker t h a n anticipated.
REVIEW O F TREASURY
OPERATIONS
19
as competitive tenders were a c c e p t e d from over an unusually wide range of
yields ( 5 . 7 6 percent up to 5.94 p e r c e n t ) , the average yield of 5.86 percent was
10 basis points below the previous 2-year note auctioned in October. A 5 3/4
percent c o u p o n was assigned to this N o v e m b e r 30, 1978, maturity and it was
bid to a premium in when-issued trading.
T h e Treasury a n n o u n c e m e n t on N o v e m b e r 23 o f t h e sale of a 49-month note
for new cash was generally expected. T h e N o v e m b e r 30 auction of this 4-year
cycle note took place in an atmosphere in which most Treasury coupon prices
were at or near highs for the year thus far. Of the $5.6 billion of tenders from
the public, $2.5 billion was accepted. Foreign add-ons of $0.2 billion brought
the total issue to $2.7 billion. A b o u t $0.5 billion of this a m o u n t was from
noncompetitive tenders. Commercial banks took $1.2 billion, or 46 percent,
and dealers accounted for $0.9 billion, or 32 percent, o f t h e issue. Very strong
bidding interest resulted in a 5.91 -percent average yield, down 102 basis points
from the last auction of 4-year notes on August 3 1 . A 7 7/8 percent c o u p o n
was set on these notes, which were to be dated D e c e m b e r 7 and m a t u r e
D e c e m b e r 3 1 , 1980. T h e s e notes also began trading at a premium.
N o v e m b e r brought further declines on virtually all fixed-income security
yields and lending rates. Some commercial banks reduced their prime lending
rate to 6 1/4 p e r c e n t late in the m o n t h after an earlier November reduction
from 6 3/4 percent to 6 1/2 percent. On November 19 the Federal Reserve
a n n o u n c e d a discount rate reduction of one quarter point to 5 1/4 percent. T h e
m o n t h ' s final auction of 13- and 26-week Treasury bUls p r o d u c e d rates 46 and
53 basis points, respectively, below the 13- and 26-week bUls sold the last week
in O c t o b e r . These, and other short-term interest rates, reached their lowest
levels since 1972. Intermediate and long rates in the Treasury, corporate, and
municipal sectors also continued their downward slide.
Most measures of the e c o n o m y ' s performance gave good readings in
November. Employment rose, but due to the rapid growth of the labor force
the u n e m p l o y m e n t rate j u m p e d to 8 percent, the highest level of calendar
1976. Personal income rose 1.2 percent, the largest increase since August
1975. T h e Federal Reserve Board index of industrial production was up by 1.1
percent—its best increase in 9 months. Retail sales posted a good increase, and
the C o m m e r c e D e p a r t m e n t ' s index of leading economic indicators was up 0.7
percent. Increases of 0.3 percent in the C o n s u m e r Price Index and 0.2 percent
in the Wholesale Price Index indicated inflation was holding steady. At the end
o f t h e m o n t h , on N o v e m b e r 29, a $2 billion issue of 132-day cash management
bills was a n n o u n c e d with very little market reaction. The bills were auctioned
on D e c e m b e r 7 and issued D e c e m b e r 10 as an addition to outstanding bills
dated O c t o b e r 2 1 , 1976, due April 2 1 , 1977. About $4.7 bUlion of tenders
were received for the $2 billion issue. T h e average discount rate was 4.45
percent.
On D e c e m b e r 13, the Treasury a n n o u n c e d a D e c e m b e r 20 auction of 2-year
notes to m a t u r e D e c e m b e r 3 1 , 1978. A b o u t $3 billion o f t h e $6.6 billion of
public tenders was a c c e p t e d , including noncompetitive tenders of $0.4 billion.
20
1977 REPORT OF THE SECRETARY OF THE TREASURY
About $1.1 billion of new cash was raised, including $0.1 billion of foreign addons. C o m m e r c i a l banks were awarded $ 1.2 billion, or 37 percent, and dealers
took $1 billion, or 33 percent. Bidding interest was good, and a 5.37-percent
average yield resulted in the assignment of a 5 1/4 p e r c e n t coupon. T h e
average yield and c o u p o n rate were the lowest since the Treasury began selling
2-year cycle notes regularly, over 4 years ago.
Most government securities continued to m a k e strong price gains in
D e c e m b e r . Although investors were uncertain over what course inflation and
e c o n o m i c growth would take in the near future, optimism prevailed. T h e
concern of market participants at this time focused primarily on the extent to
which the Federal Reserve and the economy in general would affect interest
rates.
T h e D e c e m b e r 17 a n n o u n c e m e n t of a sale of 5-year 1 -month notes for new
cash was expected, as m a r k e t participants were thoroughly familiar with the
Treasury's regular 2-, 4-, and 5-year note cycles. T h e D e c e m b e r 28 auction
drew stronger-than-anticipated bidding interest as $2.5 bUlion of the $5.3
billion of p u b h c tenders was a c c e p t e d , including $0.9 billion of n o n c o m p e t itive tenders. Foreign add-ons of $0.2 biUion brought the total issue of $2.7
billion. Average yield was 6.19 percent, 89 basis points below the last auction
of 5-year notes on S e p t e m b e r 2 8 . A 6 1/8 p e r c e n t c o u p o n was set. Commercial
banks and dealers received $1.4 billion, or 50 percent, and $0.7 billion, or 25
percent, respectively, of the notes due on February 15, 1982. Secondary
m a r k e t d e m a n d was sufficient at first, but by the time the notes were issued
on January 6, 1977, they were trading slightly below the average auction yield.
T h e average length of the marketable interest-bearing public debt held by
private investors stood at 2 years 9 months at the end of D e c e m b e r . This was
down 1 m o n t h from its p e a k in N o v e m b e r but was at the same level as at the
beginning of fiscal 1977.
T h r o u g h o u t the first quarter of fiscal 1977, the Treasury bill market was
seldom tapped for new cash. T h e 52-week bUl auctions raised about $0.2
bUlion in N o v e m b e r and $0.3 bUlion in D e c e m b e r , while all 13- and 26-week
bill maturities were simply rolled over during the period. Including the $2
billion raised through the sale of 132-day cash m a n a g e m e n t bUls, just under
$2.5 billion of new cash was raised in the biU m a r k e t in the first quarter of fiscal
1977. However, about $ 11 3/4 billion of new money was raised in the c o u p o n
market, of which nearly $ 1 1 / 2 biUion was from foreign add-on amounts which
averaged $0.2 billion p e r c o u p o n issue over the quarter. Total new money
raised from m a r k e t a b l e securities for the O c t o b e r - D e c e m b e r p e r i o d
a m o u n t e d to $14 1/4 billion.
For the past 2 m o n t h s many market-watchers were expecting each new d r o p
in rates to be the bottom o f t h e decline, but rates continued downward through
D e c e m b e r . Early in D e c e m b e r , most banks followed the lead o f t h e few banks
that had reduced their prime rate to 6 1/4 p e r c e n t in late November, while
some banks lowered their prime to 6 percent. These rates had not been seen
since FRASER1973. At m i d m o n t h , the Federal Reserve lowered its reserve
Digitized for early
REVIEW O F TREASURY
OPERATIONS
21
requirements on d e m a n d deposits by one quarter to one half point. T h e
effective Federal funds rate d r o p p e d by about 25 basis points in D e c e m b e r .
Rates on commercial p a p e r and large C D ' s were also down. T h e Treasury's
52-week bUl auction on D e c e m b e r 8 p r o d u c e d a 4.71 average discount rate,
the lowest since May 1972. T h e first three auctions of 13-week bills in
D e c e m b e r and all four 26-week bill auctions produced successive new low
yields not seen since August 1972.
In the c o u p o n m a r k e t , prices continued to improve with yields on Treasury
securities down from N o v e m b e r by 35 to 50 basis points. Prices of municipal
bonds rose to 2 1/2-year highs while corporate bond prices rose to 3-year
highs. T h e economy gained some m o m e n t u m in D e c e m b e r . T h e C o m m e r c e
D e p a r t m e n t ' s index of leading indicators posted an 0.8-percent increase.
Retail sales showed a very strong 4.2-percent (seasonally adjusted) uptick
while p r o d u c t i o n , i n c o m e , e m p l o y m e n t , housing, and c o n s u m e r credit
registered strong advances. U n e m p l o y m e n t dropped 0.2 p e r c e n t to 7.8
p e r c e n t after a d o w n w a r d revision. A downward-revised 0.3-percent gain in
the C o n s u m e r Price Index brought the total rise to 4.8 percent in calendar
1976, the smallest in 4 years. Business loans and short-term business credit in
general were the strongest in 2 years by the end of D e c e m b e r .
Immediately after the beginning of the new year, interest rates in the money
and bond markets began to climb as fears of increased inflation were fueled
by signs of faster e c o n o m i c growth and President Carter's proposed fiscal
stimulus p a c k a g e . M a r k e t participants were also concerned with the heavy
new supplies of c o r p o r a t e and municipal bonds coming to the market.
Participants began to feel that any further easing of Federal funds rates was
unlikely and the relatively large weekly increases in the money supply might
induce the Federal Reserve Board to adopt a tighter policy. T h e r e was little
investor buying interest, and, as dealers sought to reduce large inventories,
upward pressure on rates increased.
January was the only m o n t h in fiscal 1977 in which there were no Treasury
c o u p o n maturities. A 2-year note issue for new cash was a n n o u n c e d on January
12. A b o u t $2.5 billion would be auctioned January 19 and c o m e due on
January 3 1, 1979. T h e issue date was February 3, 1977. Bidding interest was
stronger than anticipated, given the atmosphere of faUing prices and slack
d e m a n d in the c o u p o n market. Almost $2.6 bUlion ofthe $5.5 billion of tenders
was a c c e p t e d , including $0.4 billion of noncompetitive tenders. An additional
$0.3 billion was accepted from foreign add-ons, which brought new cash raised
to $2.9 billion. Commercial banks and dealers took 72 p e r c e n t of the issue,
or $ 1.2 billion and $0.9 billion, respectively. T h e average yield of 5.97 p e r c e n t
was 60 basis points above the D e c e m b e r 20 auction of 2-year notes. The issue,
which was assigned a 5 7/8 p e r c e n t c o u p o n , lost about eighteen thirty-seconds
from the average-yield price in when-issued trading.
T h e few banks that lowered their prime rate to 6 percent in D e c e m b e r raised
it back to 6 1/4 percent in mid-January. Prime 4- to 6-month commercial p a p e r
yields rose about 18 basis points while rates on 3-month C D ' s j u m p e d 30 basis
22
1977 REPORT OF THE SECRETARY OF THE TREASURY
points in January. Three-month Treasury bUl yields climbed almost 40 basis
points. Yields on most Treasury issues in the 2- to 5-year maturity range rose
75 basis points or more, and longer maturities rose 40 to 60 points.
On the economic front, consumer prices jumped a seasonally adjusted 0.8
percent in January while wholesale prices rose at a 0.5-percent clip. The index
of leading economic indicators fell by 1.2 percent. Also declining were
industrial production, manufacturing capacity utilization, new construction,
housing starts, and retail sales as the Nation attempted to cope with an
unusually harsh winter. A surprisingly large 0.5-percent drop in unemployment brought that rate down to 7.3 percent.
One sector ofthe Treasury bond market experienced an even more dramatic
plunge in prices as the new year began. These were the "flower" bonds. These
marketable Treasury bonds were issued before March 3, 1971, with coupons
of 4 1/4 percent or less. They are redeemable at par plus accrued interest in
payment of Federal estate taxes on a deceased owner's estate. Tax law changes,
brought about by the Tax Reform Act of 1976, led the market to reassess the
value of these bonds. The rules regarding the basis of assets received from a
decedent and the required holding period for realization of long-term capital
gains were changed. Although the Tax Reform Act was passed in October
1976, the market did not really digest the implications for **flower" bonds until
January 1977. Between early January and mid-February, market prices ofthe
"flower" bonds feU more than $100 p«;r $1,000 face value.
The market was still under heavy downward price pressure when the
Treasury announced its plans on January 26 for the February quarterly
financing. Market participants considered the financing to be routine because
of the small amount maturing and the Treasury's large cash balance. The
refunding consisted of three new issues to refund $2.1 billion of privately held
notes maturing February 15 and raise $3.7 billion of new cash. The securities
to be issued on February 15 were: $3 biUion of 3-year notes due February 15,
1980; $2 biUion of 7-year notes due February 15, 1984; and $0.8 billion of 30year bonds due February 15, 2007, callable on February 15, 2002. Market
prices continued to fall following this announcement but stabilized just prior
to the auctions.
The 3-year note was auctioned on February 1. Interest in the auction
materialized only at a yield much higher than those prevailing on comparable
outstanding issues. About $3 bUlion ofthe $5.9 biUion ofpublic tenders was
accepted, including $0.7 billion of noncompetitive tenders. Foreign add-ons
raised an additional $0.3 bUlion. A 6 1/2 percent coupon was set after the
average yield was calculated at 6.62 percent. Commercial banks and dealers
accounted for $1.7 bUlion, or 52 percent, and $0.9 billion, or 26 percent, of
the issue, respectively.
About $4.8 biUion of tenders from the public were received at the February
3 auction of 7-year notes. Of the $2 bUlion accepted, $0.7 billion were
noncompetitive tenders. Commercial banks and dealers accounted for 80
percent ofthe issue as they took $1 billion and $0.6 billion, respectively. The
REVIEW O F TREASURY
OPERATIONS
23
7.25-percent average yield was the result of stronger than expected bidding
interest and a 7 1/4 p e r c e n t coupon was assigned.
The refinancing operation was completed on February 4 with the auction
o f t h e 30-year bonds. O f t h e $2.4 billion ofpublic tenders received, $0.8 billion
was accepted, including $0.3 billion of noncompetitive tenders. Dealers and
brokers were allotted over $0.4 billion, or 59 percent of the bonds. Strong
bidding interest led to a 7.36-percent average yield. A 7 5/8 percent c o u p o n
was placed on the issue. Over $4 billion in new cash was raised through the
three new issues. T h e 3- and 7-year note issues encountered strong secondary
d e m a n d while the bonds sold at slightly lower prices in when-issued trading.
T h e success of the sale touched off a strong but brief price rally in the bond
markets.
O n February 11, the Treasury a n n o u n c e d a February 17 auction of $2.5
billion of 2-year notes to refund $1.5 billion of notes coming due on February
28. T h e auction drew $6.5 bUlion of tenders, of which $2.5 billion was
accepted, including $0.4 billion of noncompetitive tenders. Foreign add-ons
of $0.2 billion brought the total to $2.7 billion. Commercial banks received
$1 bUlion, or 37 p e r c e n t , while dealers took $0.8 bUlion, or 30 percent. T h e
average yield was 5.98 percent and a 5 7/8 percent coupon was assigned.
Following the auction the price of the notes dropped in response to weak
d e m a n d in the market.
February 15 brought the expected Treasury a n n o u n c e m e n t of a February
23 auction of a cycle note. T h e security announced was a 4-year 1-month note
to raise $2.3 billion in new cash. T h e notes were to be issued March 8 to mature
on M a r c h 3 1 , 1981. A 6 7 / 8 p e r c e n t coupon was set after moderate bidding
interest led to a 6.88-percent average yield. This was almost 100 basis points
higher than the last 4-year cycle note auctioned on November 30, 1976. Of
the $4.5 billion of tenders received from the public, $2.3 billion was accepted,
including $0.4 billion of noncompetitive tenders. In addition, a significant
a m o u n t of foreign add-ons, $550 million, raised the total of new cash to $2.8
billion. Commercial banks and dealers were awarded $1.3 billion, or 45
percent, and $0.6 billion, or 22 percent, respectively. In secondary market
trading the 6 7/8 p e r c e n t notes were bid slightly higher in price.
Fears of a return to higher levels of inflation were revived when the
wholesale and c o n s u m e r price indices were reported for February. T h e
seasonally adjusted rates rose 0.9 percent and 1.0 percent, respectively.
Despite the severe winter weather, the economy seemed to be gaining strength.
A m o n g the indicators posting increases were industrial production, retail sales,
housing starts, and new construction. Even though employment increased, a
larger increase in the labor force pushed the unemployment rate from 7.3
p e r c e n t to 7.5 percent.
Interest rates recorded mixed changes in February in contrast to January's
steady increases. Treasury 3- and 6-month bill rates moved slightly lower on
balance. Federal funds traded in a slightly higher range while 3-month C D rates
were down and commercial paper rates remained virtually unchanged over the
24
1977 REPORT OF THE SECRETARY OF THE TREASURY
month as a whole. Yields on Treasury coupons maturing within 3 years moved
lower while longer maturities posted small yield increases. Corporate bond
yields rose while good d e m a n d for municipals contributed to moderate rate
declines in that sector.
E c o n o m i c data reported for March indicated continued strengthening.
Large increases were recorded in industrial production, personal income, and
retail sales. Manufacturing capacity utilization rose to 82 percent, its best rate
in over 2 years. U n e m p l o y m e n t d r o p p e d back to 7.3 percent. C o n s u m e r prices
rose 0.6 p e r c e n t seasonally adjusted while wholesale prices increased l . l
percent. C o n s u m e r installment credit extended in M a r c h was $ 18.3 bUlion, the
third consecutive monthly record. Expenditures for new plant and equipment
in the J a n u a r y - M a r c h period were almost $5 billion above the previous
quarter. Finally, gross national p r o d u c t increased at a healthy 6.9-percent
annual rate in the quarter.
T h e M a r c h 10 a n n o u n c e m e n t of 2-year notes to be auctioned March 22 was
well received, d u e , in part, to the favorable outlook for Treasury cash
requirements. Only $0.4 bUlion in new cash was sought as the March 3 1 issue
refunded $2.1 billion of privately held notes maturing. A b o u t $2.5 billion of
the $4.8 billion of public tenders was accepted, including $0.3 billion of
noncompetitive tenders. New cash raised a m o u n t e d to $0.9 billion, including
$0.5 billion of foreign add-ons. Dealers took $0.6 billion, or 19 percent, o f t h e
notes and commercial banks received $1.2 billion, or 42 percent. Routine
bidding resulted in a 6.02-percent average yield and a 6 p e r c e n t coupon. T h e
issue did n o t m e e t with m u c h retail d e m a n d and traded lower until just before
the p a y m e n t date when it was bid up to par.
In an a n n o u n c e m e n t expected by the market, the Treasury, on March 2 1 ,
said it planned to raise $2.3 billion of new cash by auctioning 5-year 1-month
notes on M a r c h 29. Public tenders totaled $3.9 billion for the AprU 4 issue and
$2.3 bUlion was a c c e p t e d , including over $0.2 bUlion in noncompetitive
tenders. An additional $350 million was issued to fulfill foreign add-ons.
Commercial banks and dealers subscribed for $1.4 billion and $0.6 billion,
respectively, or 76 p e r c e n t together. M o d e r a t e bidding interest resulted in a
7.02-percent average yield and a 7 p e r c e n t coupon. T h e issue was well
accepted and traded at a premium in the secondary market.
Rates on 3- and 6-month Treasury bUls moved lower in March. The 52-week
biU auctioned on M a r c h 30 brought an average auction rate of 5.16 percent,
seven basis points lower than the bill sold on the second of the month. T h e
effective Federal funds rate dropped early in March but rose to end the m o n t h
at 4.74 percent, almost unchanged from the end-of-February rate. C o m m e r cial p a p e r rates averaged about 4 3/4 p e r c e n t throughout the month. In the
c o u p o n markets, yields on corporate bonds rose in March for the most p a r t
while municipal yields declined on the whole. Most yields on Treasury c o u p o n s
fell with the largest decreases of up to 25 basis points registered on shorter
maturities.
REVIEW O F TREASURY
OPERATIONS
25
Over the J a n u a r y - M a r c h q u a r t e r only $0.3 billion of new cash was raised
in the Treasury bill market. The 52-week issues dated February 8 and March
8 raised $0.2 billion and $0.1 billion, respectively. A b o u t $14.5 billion of new
cash was raised with c o u p o n issues, o f w h i c h $2 billion was from foreign addons. This $14.8 billion of new money raised in the J a n u a r y - M a r c h quarter
brought the total for the first half of fiscal 1977 to $29 billion.
Increases in production and manufacturing capacity utilization and the
decline in u n e m p l o y m e n t from 7.3 percent to 7.0 percent were among the
favorable e c o n o m i c signs in April. Worries centered around the growth in the
money supply during April and the resulting Federal Reserve policy considerations to tighten money. C o n c e r n over inflation was heightened by large
increases in the April c o n s u m e r and wholesale price indices. T h e market was
in excellent technical position and participants were relieved because
Treasury's borrowing needs would be smaller as a result of President Carter's
decision to cancel the personal tax rebates and business tax incentives
proposed in his 1 9 7 7 - 7 8 fiscal stimulus package.
After a brief rally in early April short- and long-term interest rates began to
move in opposite directions. Rates on short-term instruments began to rise
when the Federal Reserve began to supply reserves less generously in response
to the sharply higher growth in the monetary aggregates. In the meantime,
yields in the long-term d e b t markets were generally declining.
On April 1, the Treasury auctioned the $4.5 billion of 15-day cash
m a n a g e m e n t bills that had been a n n o u n c e d on March 2 8 . Payment date for
these bills, which represented an additional a m b u n t of bills maturing April 2 1 ,
1977, was April 6. T h e issue drew heavy bidding interest as $14.9 billion of
tenders were received. T h e average discount rate of 4.63 p e r c e n t on this issue
was close to the rate prevailing on the outstanding bills due April 2 1 .
Later, on April 12, the Treasury a n n o u n c e d its intention to auction $1.5
billion of 2-year notes on April 19 to refund a like a m o u n t of maturing notes
held by private investors. M a r k e t reaction was favorable, but little interest
surfaced at auction time as only $2.8 biUion of tenders were received. A b o u t
$ 1.5 billion was a c c e p t e d , including $0.2 billion in noncompetitive tenders. A n
additional $0.4 billion of new cash was accounted for by foreign add-ons.
C o m m e r c i a l banks took $0.7 billion, or 38 percent, o f t h e notes while dealers
received $0.5 billion, or 26 percent. T h e average auction yield was 5.87
percent, and a 5 7/8 p e r c e n t c o u p o n was assigned to the May 2 issue. T h e price
o f t h e notes dropped in secondary trading in an atmosphere dominated by the
prospect of a less accommodative Federal Reserve System policy.
Data on the strength of the e c o n o m y and money supply growth continued
to contribute to investor uncertainty. T h e April 27 a n n o u n c e m e n t concerning
the T r e a s u r y ' s May quarterly financing improved the m a r k e t outlook
somewhat since the terms ofthe a n n o u n c e m e n t were not greatly different from
what the m a r k e t had expected, except for the small $500 million paydown.
T w o notes falling due on May 15, totaling $4.3 billion, were to be refunded
through the sale of $3.8 bUlion of additional a m o u n t s of two issues originally
26
1977 REPORT OF THE SECRETARY OF THE TREASURY
offered in February. T h e balance o f t h e $4.3 billion of privately held maturities
were to b e paid off from the Treasury's cash balance.
A 6-year 9-month n o t e representing a reopening o f t h e 7 1/4 percent note
issued in the February 1977 refunding was sold in a price auction on May 3.
Interest in the auction was high as $6 billion of tenders were received from the
public. Of the $2.8 bUlion a c c e p t e d , $0.9 biUion was in noncompetitive
tenders. A b o u t $0.1 billion of foreign add-ons raised the total to $2.9 billion.
C o m m e r c i a l banks received $1.2 billion, or 40 percent, of the notes while
dealers received $1 billion, or 35 percent. T h e average price of accepted
tenders corresponded to a yield of 7.28 p e r c e n t , and the issue moved to a
premium in when-issued trading.
A second price auction on May 4 attracted $2.7 billion of tenders from the
public for an additional $1 billion of 7 5/8 p e r c e n t bonds also issued in the
February 15, 1977, refunding. T h e bonds were due February 15, 2007, and
caUable February 15, 2 0 0 2 . Only $0.1 biUion of noncompetitive tenders were
awarded. Dealers took $0.5 bUlion, or 53 p e r c e n t of the issue. T h e average
auction yield was 7.77 p e r c e n t , but the bonds traded at slightly higher yields
in the secondary m a r k e t . T h e net effect of the mid-May refunding operation
was to increase the average length of the privately held Treasury marketable
d e b t by 2 m o n t h s to 2 years 11 m o n t h s and realize a $0.4 bUlion reduction in
m a r k e t a b l e c o u p o n securities held by private investors. This was the first
paydown in a quarterly refunding since May 1974. Moreover, the Treasury
indicated that further d e b t reduction would be accomplished during the
quarter. In fact, beginning with the last weekly auction in April, the Treasury
had Started paying down regular bills. This continued through the third weekly
auction in July.
O n May 1 1 , the Treasury a n n o u n c e d the sale of a 2-year cycle note to refund
$1.5 biUion of the $1.9 billion notes maturing on May 3 1 . This amounted t o
a paydown of $0.4 billion; however, this was mostly offset by a like a m o u n t
of foreign add-ons. T h e new notes were due May 3 1 , 1979. Unenthusiastic
bidding at the May 18 auction resulted in an average yield of 6.23 percent and
a 6 I /8 p e r c e n t c o u p o n . This yield was the highest on a 2-year cycle note since
the S e p t e m b e r 2 1 , 1976, auction. A b o u t $1.5 billion of the $3.8 billion of
public tenders was a c c e p t e d , including $0.3 billion of noncompetitive tenders.
Including t h e foreign add-ons private investors took nearly $ 1.9 billion of t h e
issue. C o m m e r c i a l b a n k s were awarded $0.6 bUlion, or 29 percent, o f t h e notes
while dealers took $0.7 bUlion, or 35 percent. T h e net paydown in this
refunding was less than $0.1 billion.
In a May 17 a n n o u n c e m e n t , the Treasury said it would seU $2 biUion of 4year 1-month notes for new cash. Although the a n n o u n c e m e n t of this cycle
note was expected, some participants thought $2 billion was on the high side.
T h e notes were to be issued J u n e 3 and m a t u r e J u n e 30, 1981. Bidding interest
was good at the May 24 auction and of the $4.3 billion of public tenders
submitted, about $2 bUlion was a c c e p t e d , including $0.3 billion of n o n c o m petitive tenders. An additional $0.5 billion o f t h e notes were issued as foreign
REVIEW OF TREASURY OPERATIONS
27
add-ons. T h e average yield was 6.80 percent, and the coupon was set at 6 3/4
percent. Commercial banks and dealers each received $0.8 billion o f t h e issue,
or a combined total of 63 percent. The notes subsequently sold at a small
premium in when-issued trading.
With the Federal Reserve adopting a tighter stance in response to the growth
in monetary aggregates, between late April and mid-May the Federal funds
rate rose a b o u t 60 basis points to a level of 5 3/8 percent. Following the rise
in most o t h e r short-term rates banks increased their prime rate first to 6 1/2
p e r c e n t and then to 6 3/4 p e r c e n t in May.
On the economic front, unemployment dropped to 6.9 percent in May, the
lowest level in 30 m o n t h s . Price increases slowed from their April pace and
most e c o n o m i c gauges, including industrial production and new construction,
showed signs of further strengthening. On May 3 1, the Treasury announced
a $2 billion sale of 9-day cash m a n a g e m e n t bills representing an addition t o
outstanding 13- and 26-week biUs maturing June 16. T h e June 3 auction drew
$9.5 bUlion of tenders. T h e good bidding interest for the bUls led to an average
issuing rate of 5.24 p e r c e n t on the J u n e 7 issue, slightly higher than the rate
on outstanding bills maturing June 16.
At mid-June the Treasury a n n o u n c e d , on J u n e 14, plans to refund $1.5
billion of the $ 1.9 billion notes maturing on June 30 with a 2-year cycle note
due J u n e 30, 1979. T h e J u n e 21 auction met with routine bidding interest as
the average yield of 6.14 p e r c e n t resulted in the assignment of a 6 1/8 p e r c e n t
c o u p o n to the issue. Of the $4.4 billion of tenders received from the public,
$1.5 billion was a c c e p t e d , including $0.3 billion of noncompetitive tenders.
The foreign add-on for this issue was more than $0.5 billion which resulted in
raising a b o u t $0.1 billion of new cash. Commercial banks received $0.6 billion,
or 27 percent, and dealers received $0.5 bUlion, or 23 percent. This issue,
which was the last c o u p o n security offered in the third quarter, moved to a
slight premium in when-issued trading.
D u r i n g t h e third q u a r t e r of fiscal 1977, the Treasury managed a $9.2 bUlion
paydown in bills excluding those cash m a n a g e m e n t bills r e d e e m e d in the same
month in which they were issued. This significant paydown in debt included
a $2 billion cash m a n a g e m e n t bill issued in D e c e m b e r 1976 and paid off in
April; the cumulative paydown in 52-week bUls of $1.1 billion during the
quarter; and the $6.1 billion paydown in 13- and 26-week bill maturities. From
c o u p o n issues, a total of $5.3 billion of new cash, which included $2.3 billion
of foreign add-ons, was raised, mostly through the 4- and 5-year cycle note
issues. For the quarter. Treasury m a r k e t financing resulted in a net $3.9 bUlion
paydown. T h e reductions in interest-bearing marketable public debt in April,
May, and June 1977 were the only reductions since June 1974.
During the q u a r t e r ending J u n e 30, short-term interest rates posted
significant increases. For example, the Treasury bill auction at the end of J u n e ,
c o m p a r e d with the last auction in March, produced average rates 36 basis
points higher for 13-week bills and 30 basis points higher for 26-week bills.
28
1977 REPORT OF THE SECRETARY OF THE TREASURY
Most rates surged higher between late April and mid-May. From April to J u n e ,
M - 1 , the narrowest measure of the money supply, grew at an 8.5-percent
annual rate, its fastest increase since 1972. Other factors influencing rates
included the continued e c o n o m i c expansion and the corresponding increase
in funds raised in domestic credit markets. In particular, short-term business
credit grew at a 15.8-percent annual rate and consumer installment credit grew
at a record pace.
Prices in the Treasury coupon m a r k e t continued to improve for the most
part throughout J u n e . Taking the quarter as a whole, most intermediate- and
long-term rates moved slightly lower as business and the Treasury reduced
their n e e d s for long-term funds. Although short-term c o r p o r a t e borrowing
increased, gross b o n d a n d equity financing declined. This enabled bond yields,
as m e a s u r e d by the Federal Reserve index of new triple-A-rated utility b o n d
yields, to d r o p 15 basis points to 8.07 in the 3-month period. G o o d d e m a n d
for tax exempts permitted yields on those instruments to decline even as longterm b o n d offerings by State and local governments reached a record level for
the second consecutive quarter. As in the previous quarter a b o u t 20 p e r c e n t
of the new issues w e r e sold to advance refund higher c o u p o n issues
outstanding. O n e long-term rate which did rise was the conventional new h o m e
mortgage rate. As the volume of net mortgage borrowing rose to a record level,
this rate climbed a b o u t 15 basis points to 9 p e r c e n t by the end of J u n e .
At the end of June the market outlook was good as dealers' inventories were
modest and new Treasury issues were expected to be within manageable
proportions. In addition, it was felt that money m a r k e t conditions would be
relatively stable. However, as the fourth quarter of the fiscal year was
underway this optimistic attitude started to deteriorate. C o n c e r n over nearterm Federal Reserve System policy and expectations of faster growth in the
monetary aggregates led some m a r k e t participants to believe that the recent
price improvements and the m a r k e t ' s good technical position would not hold
up. It was at this time that the Treasury was issuing its first 15-year bond in
2 1/4 years.
T h e 15-year 1-month bond issued on July 8 had been a n n o u n c e d on J u n e
20 and auctioned on J u n e 28 to raise $1.5 biUion in new cash. T h e possibihty
of substituting a 15-year issue for the 5-year cycle note usually issued in thes
month following the end of a quarter had been discussed at the time the terms
of the May quarterly refunding were a n n o u n c e d , so the August 15, 1992,
maturity was generally expected by m a r k e t participants. This was the first 15year bond sale since AprU 1975. T h e aggressive bidding for the bond at the
J u n e 28 auction led to a 7.29-percent average yield, which was below
preauction estimates. A 7 1/4 p e r c e n t coupon was placed on the issue. Public
tenders totaled $3.7 billion and, of the $1.5 bUlion accepted, a lower-thanexpected $0.4 billion of noncompetitive tenders was awarded. Dealers and
commercial banks each received $0.6 billion, which equaled 81 percent o f t h e
issue. In contrast to the success o f t h e auction, weak investor d e m a n d caused
the bonds to drop in price in the secondary m a r k e t to 98 10/32 to yield 7.44
REVIEW O F TREASURY
OPERATIONS
29
percent, 15 basis points above the auction average at the close of business on
July 7.
A r o u n d m i d m o n t h , on July 13, the Treasury said it would sell $2.5 billion
of 2-year cycle notes to refund $1.5 billion of maturing notes held by the public
and raise $ 1 billion of new cash. T h e new notes were to be dated August 1 and
were due July 3 1 , 1979. A b o u t $4.7 bUlion of tenders were submitted by the
public at the July 19 auction and $2.5 bUlion was accepted, including $0.3
billion of noncompetitive tenders. Including $0.6 bUlion of foreign add-ons,
new cash raised totaled $1.6 bUlion and the total issue exceeded $3.1 billion.
C o m m e r c i a l banks received $ 1.4 bUlion, or 46 percent, whUe dealers took $0.5
bUlion, or 17 p e r c e n t of the issue. A c o u p o n rate of 6 1/4 p e r c e n t was placed
on the notes when routine bidding resulted in an average auction yield of 6.34
percent. O n a when-issued trading basis, the yield was bid up to 6.50 percent
by August 1 in a cautious m a r k e t a t m o s p h e r e .
Included in the official offering circular for the 6 1/4 p e r c e n t 2-year notes
was a provision similar to one which had been dropped from Treasury offering
circulars and a n n o u n c e m e n t s that prohibited participation in this and aU
subsequent c o u p o n auctions by anyone who contracted to purchase or sell the
security prior to the deadline for receipt of tenders. T h e Treasury felt that
preauction trading would be distracting or confusing to auction participants
and, in fact, would facilitate undesirable speculative activity in Treasury
securities, whUe not contributing to the efficient marketing of new Treasury
issues.
As the Treasury a p p r o a c h e d its August refunding the data being released o n
the p e r f o r m a n c e of the e c o n o m y was mixed. In early July the L a b o r
D e p a r t m e n t had reported a 0.4-percent decline in the Wholesale Price Index
for J u n e , the first d r o p in almost a year. Industrial production was reported to
have been up in J u n e while the Federal Reserve's rate of manufacturing
capacity utilization had risen for the sixth consecutive month. In addition, real
G N P had advanced at a strong 6.4-percent rate in the April-June quarter. By
contrast, the C o n s u m e r Price Index rose 0.7 p e r c e n t in J u n e . Housing starts
fell, while the C o m m e r c e D e p a r t m e n t ' s index of leading economic indicators
registered a 0.6-percent decline, the largest drop since January, and unemployment climbed 0.2 p e r c e n t to 7.1 percent.
Meanwhile, short-term rates had continued to climb in July and had a
depressing effect on the market. Also, m a r k e t participants were concerned
about the large increases in the money supply and the possible course of
Federal Reserve action since it later was revealed that the seasonally adjusted
annual growth rate o f t h e M - 1 monetary aggregate had been 18.3 percent in
July, almost a repeat of April's performance. T h e lack of secondary investor
d e m a n d for the Treasury's new 15-year 1-month bonds also had a depressing
effect on the m a r k e t as did the anticipation of higher Treasury financing needs
in the immediate future.
In the c o u p o n securities market, most intermediate and long market rates
were FRASER
also rising. C o r p o r a t e and municipal bond rates edged up, while rates in
Digitized for
30
1977 REPORT OF THE SECRETARY OF THE TREASURY
the Treasury sector rose somewhat on intermediate issues but held steady on
longer term maturities.
The terms ofthe Treasury's August quarterly refunding were announced on
July 27. Three new securities would be issued for the $3.3 billion of notes held
by private investors maturing on August 15 to refund the maturities and raise
$3 billion of new cash. The new issues were: $3 billion of 3-year notes, $2.3
billion of 7-year notes, and $1 billion of reopened 29 1/2-year bonds. Market
prices dropped slightly in reaction to the size of the offerings.
The 3-year notes were weU received at an auction on August 2. About $7.9
billion of tenders was submitted by the public and, ofthe $3 billion accepted,
$0.7 billion was in noncompetitive tenders. The acceptance of $0.7 billion of
foreign add-ons increased the size of the issue to $3.7 billion. A 6 3/4 percent
coupon was assigned to the notes due August 15, 1980, as the average auction
yield was 6.84 percent. Commercial banks received $ 1.4 billion, or 36 percent,
and dealers took $1.1 billion, or 30 percent. InitiaUy, the notes moved to a
premium but, by mid-August, the price had dropped below the auction
average.
Strong interest developed at the August 3 auction of 7-year notes due August
15, 1984. About $5 billion of tenders were submitted by the public and $2.3
billion was accepted, including noncompetitive tenders totaling more than
$0.8 billion. Close to $0.3 billion of foreign add-ons brought the total issue to
$2.6 billion. Commercial banks received $0.9 billion, or 35 percent, and
dealers took $0.8 billion, or 30 percent. The average yield was 7.26 percent,
and a 7 1/4 percent coupon was set on the issue.
The August 4 price auction of 7 5/8 percent bonds due February 15,2002-7,
also drew good bidding interest. These bonds were first issued in the February
1977 financing operation and reopened in the May financing. About $ 1 bUlion
ofthe $2.1 biUion ofpublic tenders was accepted, including $0.1 biUion of
noncompetitive tenders. Dealers were awarded $0.5 billion, or 49 percent, of
the bonds. Commercial banks received $0.2 bUlion, or 20 percent, whUe an
unusually high $0.1 billion, or 14 percent, of the bonds was taken by insurance
companies. The average yield to maturity of 7.72 percent was about the
prevailing rate on those outstanding bonds of this reopened issue. In summary,
$7.3 billion of securities were sold to the public in the August financing, $3.3
bUlion to refund the maturing issue and $4 bUlion for new cash.
Later, on August 12, the Treasury announced that it would refund $1.9
bUlion of notes held by the public maturing on August 31 by selling $2.9 billion
of 2-year cycle notes due August 31, 1979. About $7 bUHon of public tenders
were submitted at the August 23 auction, and good bidding interest resulted
in a 6.68-percent average yield, which was also the highest yield accepted.
Although slightly below market participants' expectations, this was the highest
yield in a 2-year note auction in 13 months. A 6 5/8 percent coupon was placed
on the note. Over $2.9 billion of tenders were accepted from the public,
including $0.4 biUion of noncompetitive tenders. The issue size was enlarged
to' for FRASER
Digitized almost $3.4 billion when over $0.4 bUlion of foreign add-ons were also
REVIEW O F TREASURY
OPERATIONS
31
accepted. Commercial banks took $1.2 billion, or 35 percent, while dealers
took $ 1 billion, or 29 percent o f t h e notes. T h e issue traded above the auction
price in the secondary m a r k e t in when-issued trading.
O n August 19, the sale of a 4-year 1-month note issue was announced. In
line with m a r k e t expectations, $2.5 billion of new cash was sought with this
cycle note to be dated September 7 and to mature September 30, 1981. T h e
August 30 auction attracted good interest as $5.1 billion of tenders were
received from the public. A b o u t $2.5 billion was accepted, including $0.2
billion of noncompetitive tenders. T h e total issue size reached almost $3 billion
with the addition of over $0.4 bUlion of foreign add-ons. Dealers were awarded
$0.6 billion, or 20 p e r c e n t , of the notes and commercial banks took $1.3
billion, or 44 percent. A 6.84-percent average yield resulted in the auction, and
the Treasury set the c o u p o n rate at 6 3/4 percent. T h e 4-year cycle notes began
trading at higher yield levels on a when-issued basis but by September 7 they
were below the auction yield.
Most short rates continued to rise throughout August. Bill rates continued
to move higher, and the weekly auction held on August 15 produced the
highest average 13-week rate since O c t o b e r 1975 while the 26-week rate was
the highest since D e c e m b e r 1975. By the end of August the 3-month biU r a t e
was 30 basis points above its July level. After a brief dip in the second week
the Federal funds rate rose sharply to 6 p e r c e n t where it remained for the
remainder o f t h e month. Late in the month most banks raised their prime rate
to 7 p e r c e n t . Also at the end of August the Federal Reserve raised its discount
rate o n e half p e r c e n t to 5 3/4 p e r c e n t to bring it closer to prevailing rates and
discourage excessive use of bank borrowing privileges. In the Treasury coupon
m a r k e t , d u e to the d r a m a t i c rise in rates on maturities of less than 3 years, the
Treasury yield curve b e c a m e very flat in August. In fact, it was flatter at the
time o f t h e August refunding than for any quarterly refunding in the previous
2 years. After initial increases Treasury intermediate and long rates leveled off
around m i d m o n t h and ended August slightly below their month earlier levels.
C o r p o r a t e and municipal bond yields also drifted lower.
This improvement in the Governmerit securities and capital markets at the
end of August reflected the e n c o u r a g e m e n t of market participants by the
e c o n o m i c data reports (leading business indicators, wholesale prices, and the
u n e m p l o y m e n t rate) indicating a slower pace to both the recovery and
inflation pressures. This along with the unchanged M - 1 , monetary aggregate
was favorable to the d e b t markets. However, the Treasury's a n n o u n c e m e n t o n
August 31 that it intended to raise new cash by issuing $1.8 billion in cash
m a n a g e m e n t bills caught the m a r k e t by surprise.
T h e a n n o u n c e m e n t indicated that two cash m a n a g e m e n t bill issues were t o
be auctioned on S e p t e m b e r I and would be issued on September 6. The issues
were $0.9 biUion of 9-day bills due September 15 and $0.9 bUlion of 16-day
bills due September 22. Both were additions to outstanding 13- and 26-week
issues. T h e 9-day bills drew $4.3 billion of tenders from the public while the
32
1977 REPORT OF THE SECRETARY OF THE TREASURY
Disposition of marketable Treasurv securities excluding regular hills,
fiscaf 1977
[In millions of dollars]
Securities
Date of
retirement
Description and maturing date
1976
Redeemed Exchanged
for cash or for new
- carried to
issue at
Issue date matured debt maturity
NOTES AND BONDS
Oct. 1 ....
Oct. 31 ..
Nov. 15 .
Nov. 30 .
Dec. 31 ..
. 1 1/2
. 6 1/2
. 6 1/4
. 7 1/8
. 7 1/4
percent
percent
percent
percent
percent
note,
note,
note,
note,
note,
Oct. 1, 1976
Oct. 31, 1976
Nov. 15, 1976
Nov. 30, 1976
Dec. 31, 1976
Oct. 1, 1971 ...
June 6, 1975 ..
Sept. 8, 1971 .
Apr. 8, 1975 ..
Dec. 31, 1974
. 8 percent note, Feb. 15, 1977
. 6 percent note, Feb. 28, 1977
. 6 1/2 percent note. Mar. 31, 1977
. 1 1/2 percent note. Apr. 1. 1977
. 7 3/8 percent note, Apr. 30, 1977
. 6 7/8 percent note, May 15, 1977
. 9 percent note, May 15, 1977
. 6 3/4 percent note. May 31, 1977
. 6 1/2 percent note, June 30, 1977
. 7 1/2 percent note, July 31, 1977
. 7 3/4 percent note, Aug. 15, 1977
. 8 1/4 percent note, Aug. 31, 1977
. 8 3/8 percent note, Sept. 30, 1977
Feb. 15, 1970
Mar. 3, 1975 ..
Mar. 31, 1975
Apr. 1. 1972 ..
Apr. 30, 1975
Feb. 15. 1974
Aug. 15, 1974
May 27, 1975
June 30, 1975
July 31, 1975 .
Aug. 15, 1970
Aug. 29, 1975
Sept. 30, 1975
11
Total
11
1.481
4.205
1.371
2.030
98
120
136
252
1,579
4,325
1,507
2.282
2.591
1.515
2,053
2,572
5.163
1.665
2.576
1977
Feb. 15 ..
Feb. 28 ..
Mar. 31 .
Apr. 1 ....
Apr. 30 ..
May 15 ..
May 15 ..
May 31 ..
June 30 ..
July 31 ..
Aug. 15 .
Aug. 31 .
Sept. 30 .
Total coupon securities
150
523
5
5
1,469
2,038
2,333
1,947
1,906
1,451
3,994
1,898
3,136
35,434
110
527
190
264
65
924
123
90
1,579
2,565
5,329
2.137
2,170
1,516
4,918
2,021
3,226
9,140
44,574
2,996
BILLS
7977
Apr. 21 ....
Apr. 21 ....
June 16 ....
Sept. 15 ...
Sept. 22 ...
Other:
4.448 percent
4.632 percent
5.240 percent
5.760 percent
5.760 percent
(132-day)
(15-day)
(9-day)
(9-day)
(16-day)
Dec. 10, 1976
Apr. 6, 1977 .
June 7, 1977 .
Sept. 6, 1977
Sept. 6, 1977
2,005
4,506
2,002
2,005
4,506
2,002
901
903
901
903
Total other bills
10,317
10,317
Total securities
45,751
9,140
54,891
16-day bUls attracted $5.3 billion. An identical 5.76-percent average discount
rate resulted in both auctions.
The last coupon issue of fiscal 1977 was announced on September 13. The
Treasury indicated that about $3.1 billion of 2-year cycle notes would be issued
September 30 to refund a like amount of privately held notes maturing on that
date. A good interest in the notes was shown at the September 21 auction as
$5.5 bUlion of tenders were received from the public. Included in the $3.2
billion accepted was $0.5 bUlion of noncompetitive tenders. About $0.6 biUion
of foreign add-ons raised the issue size to $3.8 bUlion. Commercial banks and
dealers took $1.3 bUlion, or 34 percent, and $1 bUlion, or 25 percent,
respectively. A 6.74-percent average yield resulted at the auction, and a 6 5/8
percent coupon was assigned to the notes. On the date of issue, the notes
finished trading on a when-issued basis at a bid price equivalent to a yield of
6.81 percent.
REVIEW OF TREASURY OPERATIONS
33
Short rates were still on the rise in September. In the Federal funds market,
rates fluctuated around 6 percent until late in September when funds traded
at 6 1/4 percent. B y t h e end of the m o n t h , the "effective" rate was approaching
6 1/2 percent. T h r e e - m o n t h Treasury bill rates j u m p e d about 40 basis points
during the month, and commercial paper rates climbed a similar amount.
Commercial banks raised their prime rate to 7 1/4 percent in mid-September
and by the 30th pressure was mounting for another rise. Intermediate and long
rates also rose in September. Treasury maturities in the 7-year range rose an
average of about 15 basis points while maturities of 20 years rose about 10 basis
points. C o r p o r a t e rates also climbed about 10 to 15 points while municipal
bond yields remained relatively stable. By the end of September, the volume
of long-term municipal bond sales for the first three quarters of 1977 had
surpassed the previous record for a full calendar year sales set in 1976. O f t h e
approxirnately $34 billion sold during this 9-month period, an unprecedented
$6 billion was issued for advance refunding purposes. Short-term corporate
financing in September also p r o d u c e d a record when outstanding commercial
paper r e a c h e d a level of nearly $61 1/2 billion.
In the final quarter of fiscal 1977 the Treasury raised $ 1 billion of new cash
in the bill market. A b o u t $0.2 billion new cash was raised through 52-week
issues, and $1.8 billion was raised with the two September 6 issues of cash
m a n a g e m e n t bills. A net paydown of $1 billion was realized in the regular 13and 26-week bill auctions. In the c o u p o n sector $12.2 billion of new cash was
raised, including $3.8 billion in the three 2-year note auctions. A b o u t $3 billion
was raised in auctions of 3-year and 7-year notes in the August refunding.
Foreign add-ons included in the new cash raised in this quarter amounted to
$3 billion, the highest of any q u a r t e r in fiscal 1977.
Although the growth in economic activity m o d e r a t e d somewhat during the
final q u a r t e r of fiscal 1977, inflation also slowed down. Along with G N P ,
industrial production and personal income advanced at a slower pace during
the q u a r t e r ending S e p t e m b e r 30 than in the previous two quarters. The G N P
implicit price deflator indicated inflation was around a 5-percent annual rate
in the J u l y - S e p t e m b e r quarter, c o m p a r e d with a rate of 6.2 percent over the
two prior quarters. So, while the e c o n o m y did not look as strong as it did earlier
in the year, the pace of the expansion was more sustainable and less
inflationary as the Treasury a p p r o a c h e d the beginning of fiscal 1978.
Federal Financing Bank
T h e Federal Financing Bank ( F F B ) is a G o v e r n m e n t corporation under the
general supervision of t h e Secretary o f t h e Treasury established by the Federal
Financing Bank Act of 1973 to coordinate and reduce the costs of public
borrowings by Federal agencies and borrowers whose obligations are guaranteed by Federal agencies. T o carry out this purpose, the act authorizes the bank
to purchase obligations issued, sold, or guaranteed by Federal agencies with
funds obtained by the issuance of bank obligations to the public or the
Secretary of the Treasury.
34
1977 REPORT OF THE SECRETARY OF THE TREASURY
The FFB's officers are Treasury officials, and its operations are conducted
by Treasury employees who furnish services to the bank on a reimbursable
basis. Except for an initial public offering of bills in 1974, the FFB has financed
its lending by borrowing from the Secretary of the Treasury.
Since it began operations in 1974, the FFB has become the vehicle for
financing most Federal agency direct borrowings, guaranteed loans, and asset
sales. The major programs eligible for bank financing still not financed by the
bank are Department of Commerce guaranteed ship mortgages. Department
of Housing and Urban Development guaranteed tax-exempt housing and
urban renewal notes and bonds, and Government National Mortgage Association guaranteed passthrough securities.
On September 30, 1977, FFB holdings of Federal and federally backed
obligations totaled $35.4 bUlion, an increase of $9.5 billion from the end of
September 1976. Significant changes during the year for existing programs
include an increase of $5 billion in FFB holdings of loan assets purchased from
the Farmers Home Administration, and a $ 1 billion decrease in the amount
of FFB-held U.S. Postal Service debt. The latter change results from $ 1 billion
in congressional appropriations to the Postal Service to retire part of its
operating debt.
The FFB began financing several new guarantee programs during fiscal
1977. On January 31, 1977, the bank purchased a $22 million bond issued by
the Virgin Islands and guaranteed by the Secretary of the Interior pursuant to
Public Law 94-392. As authorized by Public Law 94-395, the FFB during the
year advanced a total of $36 mUlion to the Guam Power Authority, the
repayment of which is guaranteed by the Secretary of the Interior. The FFB
lent the Missouri, Kansas, Texas Railroad $4.4 million of a $12 million
commitment; the loan is guaranteed by the Secretary of Transportation
pursuant to section 511 of the Railroad Revitalization and Regulatory Reform
Act of 1976. On December 30, 1976, the FFB entered into a $687 million
commitment with Western Union Space Communications, Inc., to finance the
construction of a satellite tracking system for the National Aeronautics and
Space Administration. Repayment of advances under this commitment is
secured by NASA's unconditional obligation to make payments under its
procurement contract with Western Union.
During its 4 years of operations, the FFB has twice lowered its lending rates,
resulting in further savings to programs financing through the bank rather than
directly in the securities markets. However, even these reduced rates have
generated a return to the bank in excess of its operating needs. Consequently,
the FJFB's Board of Directors at its June 27, 1977, meeting authorized the
transfer to the Treasury of $142.7 mUlion of the bank's accumulated cash
surplus, and directed the bank's officers to study the advisability of further
modifying the bank's lending rate from the current one-eighth percent above
the new issue rate on marketable U.S. securities with similar maturities.
S u m m a r y of Federal Financing Bank holdings, fiscal years 1 9 7 5 - 1 9 7 7
[In millions of dollars]
Holdings end of period
Obligation
On-budget agency debt:
Export-Import Bank of the United States i
Tennessee Valley Authority
Off-budget agency debt:
U.S. Postal Service
U.S. Railway Association
Agency assets:
Farmers Home Administration
Health, Education, and Welfare health maintenance organization .
Health, Education, and Welfare medical facilities loan program ...
Overseas Private Investment Corporation
Rural Electrification Administration
Secretary of the Treasury (N.Y.)
Small Business Administration
Government-guaranteed loans:
Chicago, Rock Island & Pacific Railroad
Defense foreign military sales
General Services Administration
Guam
Housing and Urban Development New Communities Administration
Missouri, Kansas, Texas Railroad
National Railroad Passenger Corporation (Amtrak)
Rural Electrification Administration
Small business investment companies
Student Loan Marketing Association
Virgin Islands
Washington Metropolitan Area Transit Authority
Westem Union space communications
Total
• Restored to on-budget status on Oct. 1, 1976.
.
Net change in holdings
T.Q.
Fiscal
1977
935.2
745.0
-216.5
555.0
1,155.3
1,145.0
1,000.0
33.9
1,248.0
51.4
500.0
11.5
-1,067.0
213.6
5,000.0
3,800.0
850.0
60.1
5.5
56.4
7.0
4,%5.0
29.8
26.7
39.0
166.4
166.4
187.3
1,082.1
-6.8
787.2
23.7
5.6
207.7
6.2
T.Q.
Fiscal
1977
Fiscal
1975
4,984.6
2,180.0
4,768.1
2,735.0
5,923.5
3,880.0
4,049.4
1,435.0
1,500.0
33.9
2,748.0
85.3
3,248.0
%.8
2,181.0
310.4
5,000.0
8,800.0
9,650.0
62.1
55
118.5
5.5
166.4
166.4
125.5
5.5
353.6
1,082.1
159.6
14,615.0
29.8
152.2
44.5
353.6
1,157.2
133.1
111.7
45.1
898.9
68.8
5.6
1,106.5
75.0
21.0
27.5
37.5
Fiscal
1975
Fiscal
1976
4,049.4
1,435.0
317.5
254.8
47.5
240.0'
567.5
948.0
70.7
400.0
602.4
1.159.9
90.9
405.0
177 0
177.0
177.0
13,300.4
22,413.2
25,884.3
15.0
2,515.7
142.1
36.0
42.5
4.4
558.5
2,382.4
176.0
510.0
22.0
177.0
56.5
35,418.4
111.7
45.1
Fiscal
1976
21.0
6.5
10.0
317.5
254.8
47.5
140.0
250.0
693.3
23.2
160.0
34.9
211.9
20.2
5.0
9,112.8
3,471.1
75.1
-26.5
9.4
1,409.2
67.1
36.0
5.0
4.4
-43.9
1,222.5
85.1
105.0
22.0
177.0
56.5
12,698.5
9,534.3
73
m
<
0
73
. PI
>
C/3
c
Ti
<
0
no
m
>
z
c/3
O
36
1977 REPORT OF THE SECRETARY OF THE TREASURY
Capital Markets Pplicy
Fiscal 1977 was a period of change for the Department's capital markets
operation. The Secretary created the new Office of the Deputy Assistant
Secretary for Capital Markets Policy. That group includes both the Office of
Securities Markets Policy (which is primarily concerned with markets and
equity securities), and the Office of Capital Markets Legislation (which is
primarily concerned with administration policy toward banks and other
financial institutions).
A review of financial institutions reform proposals was conducted for the
Economic Policy Board, and the administration's NOW account bill was
introduced in the Senate. That bill would permit all depositary institutions to
accept transaction deposits and pay interest on those deposits. In addition, the
President established an interagency task force on regulation Q and other
aspects of deposit interest rate controls. This group will consider not only the
economic effect of the controls but the effect of any changes in the control
on the supply of mortgage credit. This office has also monitored the work of
the National Commission on Electronic Fund Transfers and is carefully
reviewing its recommendations.
In the securities markets area, the Office participated in the Securities and
Exchange Commission's proceedings to eliminate off-exchange trading
restrictions. Moreover, its examination of the Glass-Steagall Act restrictions
on bank securities activities continues.
Finally, during fiscal 1977, this Office represented the Treasury on the
Boards of several Government corporations, including the U.S. Railway
Association and the Pension Benefit Guaranty Corporation.
State and Local Finance
The Office of the Deputy Assistant Secretary for State and Local Finance
was created in the spring of 1977 to serve as the point of coordination for the
existing offices of Municipal Finance and New York Finance. In addition, the
Office is expected to improve Treasury's capacity to evaluate the financial
condition of State and local governments as well as the fiscal impact of Federal
programs on these governments.
Office of New York Finance
During fiscal 1977, the Department oversaw the loan program to New York
City pursuant to the provisions of the New York City Seasonal Financing Act,
which authorizes the Secretary to extend up to $2.3 billion in annual seasonal
financing in fiscal 1977 to the city. The Secretary is authorized to make loans
to New York City until June 30, 1978.
Shortly after the Carter administration took office, the Department was
faced with a financial crisis in New York City as a result of a New York State
Court of Appeals decision in November 1976. Under the decision. New York
City was required to repay up to $1.6 billion in so-called moratorium notes
within 6 months. The Secretary and other Department officials worked closely
REVIEW OF TREASURY OPERATIONS
37
with representatives of the city. New York State, and the private sector to
develop a feasible solution to the fiscal situation.
For New York City's current fiscal year, which began on July 1, 1977, the
D e p a r t m e n t has extended $1.15 billion to the city and anticipates additional
seasonal cash needs by the city during its fiscal year of approximately $725
million.
T h e duties of the Office include, a m o n g other things, loan closings,
monitoring New York City cash flows, and related financial arrangements.
Office of State and Local Fiscal Research
T h e Office of State and Local Fiscal Research was established within the
D e p a r t m e n t o f t h e Treasury for evaluating the overall fiscal condition of State
and local governments and also to perform periodic analyses of the fiscal
impact of Federal programs on State and local governments.
T h e Office will first a t t e m p t to establish a quality data base, which will
incorporate a series of key financial indicators from a representative cross
section of governments. While considerable work in this field has already been
d o n e within the G o v e r n m e n t and by academicians and research organizations,
it is frequently not sufficient to be beneficial in shaping Federal G o v e r n m e n t
policy in a n u m b e r of critical areas.
In addition, the Office will review developments and proposals in the field
of fiscal m a n a g e m e n t and financial administration of State and local governments, with particular attention to analyzing budgetary and accounting
practices.
In 1977, the Office c o m p l e t e d major evaluations of the President's
e c o n o m i c stimulus package and the antirecession fiscal assistance program
and the fiscal impact of these programs on State and local governments.
Office of Municipal Finance
T h e purpose of the Office of Municipal Finance is to k e e p the D e p a r t m e n t
aware of various trends in the municipal credit market. T h e Office provides
policy r e c o m m e n d a t i o n s relating to the condition and regulation of, and access
by State and local governments to, the municipal credit markets.
T h e Office is giving significant attention to current issues which may affect
this m a r k e t , in particular the development of uniform financial disclosure in
the sale of State and local securities, the impact of new Federal bankruptcy
laws for municipalities on credit markets, and related issues.
ECONOMIC POLICY
In the domestic e c o n o m i c area, the Office of the Assistant Secretary for
Economic Policy is responsible for informing the Secretary and other senior
policy officials of the D e p a r t m e n t of current and prospective economic
38
1977 REPORT OF THE SECRETARY OF THE TREASURY
developments, in the determination of appropriate economic policies. This
office participates in the interagency group which develops the official
economic projections that serve as the basis for choices among alternative
courses of economic policy. Other agencies participating in the group are the
Council of Economic Advisers, the Office of Management and Budget, the
Department of Commerce, and the Department of Labor. Within OASEP staff
support for these projection exercises is provided by the Office of Financial
Analysis.
The economic projection for calendar 1977 developed within the Troika
and presented along with the revised budget in February 1977 called for an
increase of about 6 percent in real GNP during 1977, a rise of 5.9 percent in
the GNP deflator, and an average unemployment rate for the year of 7.1
percent. By the end of the fiscal year, it was apparent that the actual results
were likely to be close to target, with real growth and inflation near 6 percent
and the unemployment rate averaging close to 7 percent. These results were
achieved without the $50 tax rebate initially proposed when the expansion
seemed to lack sufficient forward momentum.
During the year, a series of regular biweekly briefings for the Secretary and
other policy officials was initiated. These briefings analyze important
economic and fmancial developments, both domestic and international, on a
timely basis and supplement the flow of information provided through other
channels.
In addition, during the past year this office undertook analyses and
evaluations of the President's economic stimulus package, and the impact of
the package on economic growth, employment and unemployment, prices and
incomes. An evaluation was made of the shortrun and longrun effects of the
President's energy plan on the economy, jobs, and prices.
Other analyses and evaluations undertaken during the year centered on
Government agricultural policies and programs, social security and welfare
proposals; and the President's program for controlling and reducing inflation.
U.S. balance of paynients
The main balance of payments development during the fiscal year was a
rapid and continuing increase in the merchandise trade deficit—from a $ 1 1/2
billion seasonally adjusted annual rate in the second (January-June) half of
fiscal 1976 to a $31 bUlion rate in the second (April-September) half of fiscal
1977.
The primary causes for this worsening of the trade balance were: An
extremely sharp volume increase in oil imports, at increased prices; and a nearstagnation of nonagricultural export volume, reflecting a combination of
unexpectedly sluggish economic recovery in the major foreign countries and
stabilization programs undertaken by a number of less developed and smaller
industrial countries faced with balance of payments difficulties.
39
REVIEW OF TREASURY OPERATIONS
U.S. current account transactions, July 1975-September 1 9 7 7
[Seasonally adjusted; $ billion]
Fiscal 1977*
Fiscal 1976
(quarterly Transition
averages)
quarter
27.4
29.6
Exports
Agriculture
Other
Imports
Oct.-Dec. Jan.-Mar. Apr.-June July-Sept,
1976
1977
1977
1977
29.7
29.5
30.6
30.9
Net services and remittances
Govemment economic grants
Net invisibles
6.2
23.4
-32.4
5.9
23.8
-33.3
6.1
23.3
-36.6
6.7
23.9
-38.3
6.0
24.9
-38.4
-7.5
-19.6
.3
-9.4
-23.0
- 2.8
-9.3
-24.0
- 3.6
-11.0
-25.5
- 7.1
-11.9
-26.4
- 7.8
-11.5
-26.9
- 7.5
2.0
-.6
3.2
—1.5
2.8
-.6
3.6
-.6
3.9
—.7
4.0
-.8
1.4
1.7
2.2
2.9
3.2
3.2
1.7
Petroleum and products
Other (including other fuels) .
Trade balance
5.6
21.8
-27.1
-1.1
-1.4
-4.2
-4.6
-4.3
Balance on current account
* 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 1977, published by U.S. Department of
Commerce, Bureau of Economic Analysis.
Financing of U.S. current account balances, July 1975-September 1977"^
[Inflows (+) and outflows ( - ) ; $ billion]
Current account balance*
^.
, ,«.,,
Fiscal 1976
(quarterly
averages)
1.7
Fiscal 1977
Transition
quarter
-3.8
Oct.-Dec. Jan.-Mar. Apr.-June July-Sept.
1976
1977
1977
1977
.3
-3.4
-4.8
-6.9
U.S. reserve assets (increase ( - ) )
-.7
-.4
.2
-.4
.0
.2
Other U.S. Govemment assets* ..
-.8
-1.3
-1.0
-1.1
-.8
-1.0
Foreign official assets
Industrial countries
OPEC members
Other countries
2.3
-.8
2.8
.3
3.1
-.3
1.8
1.6
7.0
4.9
.8
1.3
5.7
2.2
3.2
.3
7.9
5.5
1.1
1.4
8.2
7.2
1.4
-.4
2.7
U.S. banks, net
-1.9
-1.6
-4.1
-1.9
1.8
Claims
-3.6
-3.4
-9.1
3.4
-4.6
.2
1.6
1.8
5.0
-5.3
6.3
2.5
-.5
.4
-2.2
1.2
-2.4
-.4
-1.8
-2.7
-2.2
-.7
-1.8
-2.2
Liabilities a
Securities, net
Foreign securities
U.S. securities a
Direct investment, net
U.S. investment abroad
Foreign investment in United
States
Other U.S. corporate capital, net..
Claims
Liabilities
Statistical discrepancy*
1.3
3.1
-.1
1.9
-.6
1.8
-.6
-.6
-.4
.1
-1.4
-.6
-1.1
-1.2
-.8
-.4
.5
-1.0
-.9
-.1
1.5
.6
.4
.7
-.3
3.9
.4
-1.2
-1.0
-.2
1.5
.5
-1.1
-.7
-.4
.8
-2.0 ,
-1.1
.6
-1.5
-1.1
-.4
1.3
.5
.6
.7
-.1
-2.7
* All data are seasonally unadjusted, because capital flows except U.S. Govemment lending are not
available on seasonally adjusted basis,
a Excluding foreign official assets.
Source: Survey of Current Business, June and December 1977, published by U.S. Department of
of Economic Analysis.
Commerce, Bureau
40
1977 REPORT OF THE SECRETARY OF THE TREASURY
Growth of nonpetroleum imports, though strong, was generally in line with
past normal relationships to domestic business activity; and agricultural
exports showed a respectable gain in value as well as volume.
Partially offsetting the trade deficit increase was a $6.5 billion annual-rate
gain—between second-half fiscal 1976 and the s e e o n d h a l f of fiscal 1977—in
the surplus on c u r r e n t invisibles transactions.
Thus, the current a c c o u n t balance (seasonally adjusted) swung from a $2
bUlion annual-rate surplus in the second half of fiscal 1976 to an annual-rate
deficit of $6.5 bUlion in the second half of fiscal 1977.
T h e sharply increased current a c c o u n t deficit, plus continued G o v e r n m e n t
lending and moderately larger net outflows on n o n b a n k private capital
transactions, was financed by increased holdings (particularly by other
industrial countries) of foreign official assets in the United States.
OFFICE OF THE GENERAL COUNSEL
T h e General Counsel, appointed by the President by and with the advice and
consent of the Senate, is the chief law officer of the D e p a r t m e n t of the
Treasury. As the chief law officer, the General Counsel administers the Legal
Division, composed of all attorneys performing legal services in the Departm e n t and all nonprofessional employees providing support to the attorneys,
and is responsible for all o f t h e legal activities o f t h e Department. This includes
the legal staffs of all subordinate offices, bureaus, and agencies.
T h e 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 m a n a g e m e n t of the public debt, administration of the
revenue and customs laws, international e c o n o m i c , monetary, and financial
affairs, law enforcement, and other activities. Other responsibilities include
providing general legal advice wherever n e e d e d , coordinating Treasury
litigation, preparing the D e p a r t m e n t ' s legislative program and comments to
the Congress on pending legislation, reviewing the D e p a r t m e n t ' s regulations
for legal sufficiency, and counseling the D e p a r t m e n t on conflict of interest and
ethical matters. T h e General Counsel also is responsible for hearing appeals
to the Secretary o f t h e Treasury from administrative decisions of bureau heads
or other officials.
During this fiscal year, the General Counsel was given full responsibility over
the Office of Tariff Affairs. > T h a t office administers the U.S. antidumping and
countervailing duty laws.
I Sec exhibit 63.
REVIEW OF TREASURY OPERATIONS
4 1
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. In addition, the
Office of Director of Practice is under the supervision ofthe General Counsel.
Legislation
During fiscal 1977, the General Counsel provided the Department's views
to the Congress and the Office of Management and Budget on nearly 1,500
bills on non-tax-related matters pending before the Congress. In addition, the
Legal Division participated in drafting a number of legislative proposals.
Among the more significant were:
1. The renewal legislation for general revenue sharing which was enacted
into law on October 13, 1976, as the State and Local Fiscal Assistance
Amendments of 1976 (Public Law 94-488).
2. The legislation for the Intergovernmental Antirecession Assistance Act
of 1977, enacted on May 23, 1977 (Public Law 95-30).
3. Legislation to revise section 5(b) ofthe Trading with the Enemy Act to
remedy problems with the grant of authority given to the Office of Foreign
Assets Control. The legislation has passed both Houses and is expected to be
signed by the President.
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 U.S. Court of Customs and
Patent Appeals reversed the Customs Court and sustained the long-held
Treasury position that the nonexcessive remission by an exporting country of
an excise tax alone was not a bounty or grant as a matter of law and did not
require that countervailing duties be levied. Zenith has petitioned the U.S.
Supreme Court for a writ of certiorari to review the decision.
In United States v. Ramsey y the Supreme Court decided that where a customs
inspector had **reasonable cause to suspect" the presence of contraband in an
envelope entering the country as international mail, there was no fourth
amendment prohibition against opening the envelope without obtaining a
search warrant.
In Richardson and Chaimowitz, as Executors of the Estate of Concepion
Brodermann Stuetzel v. Simon and the Bank of Nova Scotia, the U.S. Court of
Appeals for the Second Circuit affirmed the dismissal ofthe complaint by the
U.S. District Court for the Eastern District of New York, ruling against
plaintiff's argument that certain Foreign Assets Control regulations were not
42
1977 REPORT OF THE SECRETARY OF THE TREASURY
authorized by the Trading with the Enemy Act or, if authorized, violated the
due process clause of the fifth amendment.
Regulations
During the fiscal year, the Office of the Chief Counsel for Revenue Sharing
prepared interim and final regulations covering all aspects of the renewal
legislation for general revenue sharing and the antirecession fiscal assistance
program.
The Office of the Chief Counsel of the Office of Foreign Assets Control
prepared amendments to the Rhodesian Sanctions Regulations reimposing the
prohibition on importation of strategic and critical materials from Rhodesia
and certain products produced in other countries from Rhodesian ores and
concentrates. The action was necessitated by the repeal of the Byrd
amendment (Public Law 95-12) by the Congress. In addition, the office
prepared amendments to the Cuban Assets Control regulation statement of
policy for the issuance of specific licetises for trade with Cuba by foreign
affiliates of U.S. firms, and added a general license to both Cuban and Foreign
Assets Control Regulations authorizing persons who visit Cuba, North Korea,
Vietnam, and Cambodia to pay for their transportation and maintenance
expenditures while in those countries.
ENFORCEMENT AND OPERATIONS
At the beginning of fiscal 1977, six operating bureaus ofthe Department of
the Treasury were nominally organized under an Assistant Secretary (Enforcement, Operations, and Tariff Affairs), who was assisted by three deputies and
three staff offices (Offices of Law Enforcement, Operations, and Tariff
Affairs). The bureaus were U.S. Customs Service, Bureau of Engravinig and
Printing, Bureau ofthe Mint, U.S. Secret Service, Federal Law Enforcement
Training Center, and the Bureau of Alcohol, Tobacco and Firearms. The
policies and operations ofthe Office of Foreign Assets Control were also under
the purview of the Assistant Secretary.
However, after Assistant Secretary David R. Macdonald was appointed
Under Secretary of the Navy in September 1976, the Assistant Secretary
position remained vacant and during fiscal 1977 official functions of the
Assistant Secretary were performed over the signature ofthe Under Secretary.
In the latter half of the fiscal year, the new administration made several
organizational changes.' The Office of Tariff Affairs was assigned to the
supervision of the General Counsel; the Bureau of the Mint and the Bureau
of Engraving and Printing were formally placed directly under the supervision
I Sec exhibit 63.
REVIEW O F TREASURY
OPERATIONS
43
ofthe Under Secretary; the Assistant Secretary position was assigned to Public
Affairs; and the position of Chief Deputy to the Under Secretary (Enforcement
and Operations) was established and assigned responsibility for the remaining
four bureaus and the Office of Foreign Assets Control, assisted by the two
Offices of Enforcement and Operations.
The Office of Law Enforcement continued its oversight and coordination of
Treasury's law enforcement policies and programs, with particular attention
to legislation affecting the enforcement bureaus, such as those relating to gun
control and the general revision of Title 18 of the U.S. Code. The Office of
Operations placed special emphasis on review and support of bureau activities
in the areas of budgeting, cost-effective execution of programs, productivity
improvements, equal employment, management information reports, ahd
improved controls over utilization of official vehicles and qualification for
special premium pay.
Reorganization studies were initiated in the U.S. Customs Service and the
Bureau of Alcohol, Tobacco and Firearms. An intensive study of the
justification for, and administration of, the Federal Alcohol Administration
Act was begun.
The activities of each of the bureaus are recorded in the ^'Administrative
Reports" section of this volume. Policy statements on law enforcement are
contained in exhibits 2 1 , 22, and 23.
Interpol
Under an agreement negotiated with the Attorney General, the operating
supervision and the physical establishment ofthe U.S. National Central Bureau
(USNCB) ofthe International Criminal Police Organization (Interpol) were
transferred from Treasury to the Justice Department in March 1977. The
agreement provided for a reciprocal rotation between Treasury and Justice of
the two major Interpol offices of Chief, USNCB, and U.S. Representative to
Interpol.
Financial recordkeeping and reporting
Under Treasury regulations (31 CFR 103) issued to implement the Bank
Secrecy Act, fmancial institutions, including banks and brokerage firms, are
required to keep certain basic records that have a high degree of usefulness
in the investigation of tax, regulatory, or criminal matters. The regulations also
require reports of the international transportation of monetary instruments,
reports of foreign bank accounts, and reports of large and unusual domestic
currency transactions.
The Under Secretary has been delegated responsibility for general supervision of the enforcement and administration of the regulations. Specific
compliance responsibilities have been delegated to the Federal bank supervisory agencies,
the Securities and Exchange Commission, the Internal Revenue
44
1977 REPORT OF THE SECRETARY OF THE TREASURY
Service, the U.S. C u s t o m s Service, the Federal H o m e Loan Bank Board, and
the National Credit Union Administration.
In fiscal 1977, the C o m m e r c e , Consumer, and Monetary Affairs Subcommittee of the House C o m m i t t e e on G o v e r n m e n t Operations continued its
review of Treasury's implementation of the act. Under Secretary Anderson
and other Treasury officials testified at the subcommittee hearings held o n
March 29 and 30, 1977.^
T h e subcommittee indicated in those hearings, as well as in the r e c o m m e n dations in House R e p o r t 9 5 - 2 4 6 , dated May 5, 1977, that it favored action t o
encourage wider use o f t h e information filed with Treasury in compliance with
the act. In response, Treasury took steps to improve the utilization of that data.
Treasury's Office of Enforcement now reviews all currency transaction reports
filed with the IRS and m a k e s t h e m available to other agencies where
appropriate. During fiscal 1977, 4 7 4 reports pertaining to more than $87
million were transmitted to the Drug Enforcement Administration. These
reports have already led to investigation of at least one large drug conspiracy.
A n u m b e r of reports of currency transactions and the international transportation of monetary instruments have also been furnished to other c o m p o n e n t s
of the Justice D e p a r t m e n t and various congressional committees for use in
their investigations.
A r r a n g e m e n t s to computerize the currency transaction reports are also
underway. Computerization will greatly increase Treasury's ability to perceive
and c o r r e c t patterns of n o n c o m p l i a n c e with the reporting requirements. It will
also facilitate reference to individual reports and their association with other
reports.
In a n o t h e r action intended to improve the implementation of the act, the
Office of the Secretary and the IRS have agreed to convert IRS form 4683 to
Treasury D e p a r t m e n t F o r m 9 0 . 2 2 - 1 , Report of Foreign Bank, Securities, and
O t h e r Financial A c c o u n t s . It is anticipated that information on the new form,
which will be filed with t h e Treasury, will be available to other Federal agencies
on a selective, need-to-know basis. The form will no longer be tied to tax
returns a n d , consequently, will not be subject to the disclosure provisions of
the tax law.
During the fiscal year, Customs m a d e 463 seizures totaling more than $7
million in connection with violations of the requirement to report the
international transportation of currency and monetary instruments. A significant percentage o f t h e cases appear to involve persons who have been engaged
in illegal activities. T h e total n u m b e r of convictions obtained duririg the year
was 35.
As the result of an investigation in which IRS agents, the Federal Reserve
bank examiners, and Federal prosecutors in New York c o o p e r a t e d , a large
New York bank pleaded guilty to 450 counts of failure to file currenc>
transaction reports as required by the regulations. T h e bank was fined
Digitized Sec exhibit 22.
2 for FRASER
REVIEW O F TREASURY
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$222,500. A significant element in the case was the fact that some of the
u n r e p o r t e d transactions involved narcotics traffickers.
T h e bank supervisory agencies have started to provide the Under Secretary
with the n a m e s of those institutions they determine have violated provisions
of the regulations pertaining to the recording and reporting of large currency
transactions. This p r o c e d u r e should provide additional assurance that instances of n o n c o m p l i a n c e by b a n k s will be given appropriate attention and
corrected.
Antinarcotics p r o g r a m
A U.S. (Treasury) sponsored resolution was adopted unanimously by the
United Nations Commission on Narcotics Drugs and by the Economic and
Social Council ( E C O S O C ) urging governments to include narcotics economic
alternative/crop substitution projects in their national development programs
when applying for technical and financial assistance from the international
financial institutions. Adoption of the resolution served to bring a b o u t
noteworthy contributions from certain Scandinavian countries to the United
Nations Fund for Drug Abuse Control, which for some time has been trying
to tap d e v e l o p m e n t assistance budgets of developed countries for narcoticsrelated projects. These contributions reduce the percentage of total contributions to the Fund attributed to the United States from 79 percent to 53 percent.
TAX POLICY
Legislation
During fiscal 1977, the Carter administration proposed substantial tax
reduction to stimulate e c o n o m i c activity and to reduce tax burdens o n
individuals and businesses. The administration also r e c o m m e n d e d tax changes
to simplify tax return preparation by individuals. In addition, a long-range tax
program was proposed to conserve energy use, to reallocate energy-producing
resources, and to stimulate a greater energy supply. The administration also
proposed social security tax changes directed at solving the problems of shortand long-term financing of benefits.
Economic stimulus a n d tax simplification.—In January 1977, President
Carter a n n o u n c e d an e c o n o m i c stimulus p r o g r a m . ' Part of the program
consisted of tax provisions designed to provide a stimulus to consumer and
business spending and to take a significant first step in a program of tax
simplification and reform.
The tax stimulus plan had a budget cost of approximately $ 14 billion in fiscal
1977 and $8 bUlion in fiscal 1978.
I Sec e x h i b i t 2 4 .
46
1977 REPORT OF THE SECRETARY OF THE TREASURY
The program included a one-time tax rebate to be distributed to more than
70 million tax filers in the form of a $50 payment per person reported on 1976
tax returns. In addition, 36 million beneficiaries under social security,
supplemental security income, and railroad retirement who do not file income
tax returns would have received $50 payments.
The program also included a change in the standard deduction to provide
tax relief and to simplify tax computations. A simple standard deduction
amount of $2,200 for single people, and $3,000^ for married couples would
be substituted for the complex provisions then in effect. Under then existing
law, the standard deduction was 16 percent of adjusted gross income with a
minimum of $1,700 and a maximum of $2,400 for single people and a $2,100
minimum and $2,800 maximum for married couples.
In addition, the President proposed the extension for 1 year of certain
temporary tax cut provisions of the Tax Reform Act of 1976. These extensions
included: The $35 tax credit per exemption or a credit equal to 2 percent of
the taxpayer's taxable income up to $9,000, whichever is larger; the earned
income credit for families with dependent children, equal to 10 percent of
earned income subject to a maximum credit of $400; and corporate rate
reductions from 22 percent to 20 percent on the first $25,000 of income and
from 48 percent to 22 percent on the second $25,000.
The program included business tax relief. Each busiriess would be given the
option to choose (1) a refundable credit generally equal to 4 percent of the
employer's share of social security payroU taxes, or (2) an additional 2-percent
investment credit. The optional credits would have been in effect from January
1, 1977, through December 31, 1980.
On April 14, 1977, the President announced that the primary thrust of his
tax program would be the simplification of the income tax structure with an
increased standard deduction. He withdrew the $50 rebate because consumer
confidence had returned and consumer spending was up.
Public Law 95-30, the Tax Reduction and Simplification Act, was approved
on May 23, 1977. The act contained the essence of the President's simplification proposal. It provided a flat amount standard deduction of $2,200 for
single persons and $3,200 for married couples. The act also made compensating changes in filing requirements, tax withholding, and tax rate schedules, to
refiect the individual income tax credits originally enacted in the Tax
Reduction Act of 1975 and then extended in the Tax Reform Act of 1976.
These temporary credits included a general tax credit equal to the greater of
$35-per-capita tax credit for each taxpayer and dependent, or 2 percent ofthe
first $9,000 of taxable income ($180). The credit is nonrefundable. The 1977
act with some modifications extended the credit to the end of 1978.
The temporary credits included also an earned income credit equal to 10
percent of the first $4,000 of earned income. The credit is phased out as
adjusted gross income or earned income increases from $4,000 to $8,000. The
2 As originally propoBcd by the President, the standard deduction would have been $2,400 for single taxpayers and $2,K00
for couples.
REVIEW O F TREASURY
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credit is available to those maintaining a household for a child under 19, a
student, or disabled d e p e n d e n t . T h e earned income credit is refundable. T h e
1977 act extended the earned income credit to the end of 1978.
T h e act extended to the end of 1978 the $50,000 corporate surtax
exemption which has a 20-percent tax rate on the first $25,000 of taxable
income, 22-percent tax rate on the next $25,000, and 48-percent in excess of
$50,000.
T h e act also introduced a new j o b s tax credit. T h e credit is equal to 50
percent of the increase in an employer's wage base (up to $4,200 per
employee) under the Federal U n e m p l o y m e n t Tax Act ( F U T A ) over 102
percent of that wage base in the previous year. Wages on which the credit is
based are limited to total wages paid during the year in excess of 105 percent
of total wages paid during the previous year. However, an employer's
deduction for wages must be offset by the a m o u n t of the credit. The law
provides a limitation on the a m o u n t of the credit available to new or rapidly
expanding businesses. T h e law also provides an overall limitation on the credit
of $ 1 0 0 , 0 0 0 per year exclusive of carrybacks or carryovers to that year. T h e
new jobs tax credit apphes to tax years beginning in 1977 and 1978.
T h e 1977 act m a d e additional changes as follows:
Delays until taxable years beginning after 1976 the effective date o f t h e
sick pay exclusion changes m a d e in the Tax Reform Act of 1976.
Allows taxpayers to elect for the first taxable year beginning in 1976 to
c o m p u t e either the credit for the elderly enacted in the Tax Reform Act of
1976 or the retirement income credit under prior law.
Delays untU taxable years beginning after 1976 the effective date for 1976
Tax Reform Act changes to ( 1 ) the exclusion of income earned abroad by
U.S. citizens and ( 2 ) the allowance o f t h e foreign tax credit for foreign taxes
paid by U.S. citizens who elect the standard deduction.
Extends to taxable years beginning in 1976 the election of a State
legislator to treat his place of residence within his legislative district as his
tax h o m e for the purpose of computing the deduction for living expenses.
Provides an exception from the general disallowance rule and the
exclusive use test for expenses incurred in connection with the business use
of any portion of a residence to provide day care services.
Extends through J u n e 13, 1 9 8 1 , the period during which deductions are
allowed for ( 1 ) charitable contributions of remainder interests in real
property and ( 2 ) charitable contributions, exclusively for conservation
purposes, of perpetual leases, options, and easements with respect to real
property.
Modifies the requirement for withholding on gambling winnings effective
after AprU 30, 1977.
Delays until taxable years beginning after 1977 the effective date of
accrual accounting r e q u i r e m e n t for certain farm corporations.
48
1977 REPORT OF THE SECRETARY OF THE TREASURY
C h a n g e s the minimum tax provision so that excess intangible drilling costs
are considered a tax preference item only to the extent these costs exceed
the taxpayer's net income from all oil and gas properties. T h e provision was
effective only for a taxable year beginning in calendar 1977.
Extends the period of election by a taxpayer of a 5-year rapid amortization
period for child-care facilities. T h e election period begins after 1976 and
ends before 1982.
O t h e r changes included the withholding of certain taxes from Federal
employees, special relief from additions to tax, interest, and penalties
attributable to changes in the 1976 Tax Reform Act.
Energy.—On April 2 0 , 1977, President Carter proposed to the Congress a
comprehensive long-term national energy program^ which would conserve
energy use and reduce the annual energy growth to less than 2 percent a yeai
by 1985. T h e program was also directed at reallocation of energy-producing
resources and at stimulation of growth in energy supply.
Tax r e c o m m e n d a t i o n s were an important element of the President'*
program:
A graduated excise tax on new '*gas guzzling" automobiles and light truck;
which do not meet Federal mileage standards. T h e auto efficiency tax woulc
be phased in from 1978 through 1985. T h e effect would be to shift tht
d e m a n d for new automobiles from fuel-inefficient, relatively expensive can
to fuel-efficient, relatively inexpensive cars. Collected taxes would b(
returned to consumers through graduated rebates on motor vehicles that are
m o r e efficient than the mileage standard. Electric vehicles would alsc
qualify for a c o n s u m e r rebate.
A standby tax on gasoline consumption of an additional 5 cents per galloi
would automatically take effect each year beginning in 1979 if gasolin(
consumption fails to m e e t an annual reduction target in the previous year
T h e cumulative taxes in any one year would not exceed 50 cents per galloi
and would be reversible if consumption fell below the target level. The effec
of the tax, if imposed, would be to accelerate the m o v e m e n t from fuel
inefficient to fuel-efficient vehicles and to reduce travel mileage. Collectei
taxes would be rebated on a per capita basis through the Federal income ta
system and by direct payments to people who do not pay taxes.
Businesses would generally be entitled to a 10-percent tax credit i
addition to the existing investment tax credit for investments made i
**business energy p r o p e r t y " if acquired after April 20, 1977, and put in plac
before 1983 as part of a building or other structure which has bee
substantially c o m p l e t e d on or before April 20, 1977. Cogenerative equip
m e n t and special types of alternative energy equipment, principally coa
handling equipment, would be eligible for the additional credit. Buildin
insulation and heating and cooling equipment (including solar energ
^See exhibit 25.
REVIEW O F TREASURY
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e q u i p m e n t ) not eligible for the existing investment credit would receive a
10-percent tax credit.
All domestic oil would be subject to a crude oil equalization tax applied
in three stages beginning in 1978. W h e n fully phased in, in 1980, the tax per
barrel would equal the difference between the controlled domestic price and
the world price of oil. A tax rebate would be provided in the case of h o m e
heating oil payable to retailers who demonstrate that the a m o u n t of rebate
had been fully passed through to consumers in the form of lower prices. All
other collected taxes, after adjustment for the revenue loss from deductions
o f t h e tax as a business cost, would be returned to the public, on a per capita
basis, in the form of tax credits or direct payments for those who have n o
income tax liability.
Use of natural gas or petroleum in a trade or business would be taxed
beginning in 1979 ( 1 9 8 3 for electric utilities) whenever annual usage o f t h e
two products is equivalent to 86,000 barrels of oil. The tax on petroleum
(except for electric utilities) would rise gradually to 1985. Petroleum used
by electric utilities would be taxed at a flat rate per barrel. The tax rates
would be adjusted for changes in the implicit price deflator for the gross
national product. T h e tax on natural gas usage would be based on the
difference between the user's average cost of natural gas during the year and
a price target keyed to the c u r r e n t price of No. 2 grade distillate oil.
Exemptions from the taxes would be available for usage in specified
c a t e g o r i e s such as transportation, farming, or production of refined
petroleum products. Taxable users of fuel (other than electric utilities)
could offset expenditures for boilers and fuel-handling equipment for fuel
other than petroleum or natural gas against their oil or gas tax liability
instead of taking the 10-percent additional energy investment tax credit for
these expenditures. In the case of electric utilities, the offset would apply
only for expenditures for electrical generating property to use coal or other
fuels to replace generating property using petroleum or natural gas.
A tax credit would be provided of 40 p e r c e n t of the first $ 1,000 and 25
p e r c e n t of the next $6,400 (a maximum of $2,000) spent for installation of
qualifying residential solar equipment. T h e credit percentages would be
reduced in subsequent years so that the maximum credit would be $1,210
in 1 9 8 2 - 8 4 .
H o m e o w n e r s would be entitled to a tax credit of 25 percent of the first
$800 of expenditures and 15 p e r c e n t o f t h e next $ 1,400 of expenditures (for
a maximum credit of $410) for energy conservation purposes (insulation,
etc.) if m a d e to their principal residence after April 20, 1977, and before
January I, 1985, if the dwelling were in existence on April 20, 1977.
T o encourage geothermal drilling, a tax deduction for intangible geothermal drilling costs would b e provided comparable to the deduction for
intangible drilling costs now available for oil and gas drilling.
T h e current 10-percent excise tax on buses would be removed to
e n cforuFRASER
Digitized o r a g e expansion in the use of that form of transportation.
50
1977 REPORT OF THE SECRETARY OF THE TREASURY
The excise taxes on fuel for general aviation and motorboats would be
increased. As a result, the tax on aviation fuel would increase from 7 to 1 1
cents a gallon. The current 2-cent rebate for motorboat fuel would be
deleted and the additional revenue transferred to the land and water
conservation fund.
Social security.—On May 9, 1977, President Carter proposed to the
Congress revision ofthe social security laws to solve both short- and long-term
financing problems. His recommendations were as follows:
General revenues would be used in countercyclical fashion to replace the
payroll tax receipts lost during recessions.
The ceiling of the first $16,500 of wages which is the base for both the
employer and employee payroll taxes would be removed by 1981 for the
employer tax. The purpose is td help long-term financing.
The wage base ceiling for employees would be increased by $600 in 1979,
1981, 1983, and 1985, in addition to automatic increases provided in
current law. This would provide a progressive source of financing.
The tax rate on self-employed would be increased from 7 percent to 7.5
percent for OASDI.
The timing ofthe future tax rate increase in current law would be adjusted.
The 1 -percent tax rate increase presently scheduled for the year 2011 would
be moved forward so that 0.25 percent would occur in 1985 and the
remainder in 1990.
At the end of fiscal 1977, Congress had not completed action on social
security legislation.
Tax reform.^—President Carter stated early in his administration that he
planned to present a tax reform program to the Congress in the fall of 1977.
However, congressional deliberations on energy and social security tax
legislation had continued into the late fall of 1977. The delay in these
enactments, which would have substantial tax connotations, made it inappropriate to make also major tax reform proposals in that congressional session
Therefore, President Carter in a press conference on October 27, 1977, stated
that he preferred to make a final decision on tax reform after the Congress had
completed action on the energy and social security programs.
Unemployment compensation.—The unemployment compensation prograrr
is a Federal-State insurance system designed to provide temporary wage losj
compensation to workers if unemployed. Funds accumulated from payrol
taxes permit payment of benefits to unemployed insured workers. The Federa
Government and the States impose employer payroll taxes. If a State law meet!
Federal requirements, employers receive a 2.7-percent credit against the 3.2
percent Federal payroll tax. The effective Federal tax, therefore, is O.f
percent. But Public Law 94-566, approved October 20, 1976, increased the
effective rate temporarily to 0.7 percent, effective January 1, 1977. The rate
4Sec exhibit 27.
REVIEW O F TREASURY
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51
will be reduced back to 0.5 percent after all advances to the Federal extended
unemployment compensation account are repaid. The Federal tax is imposed
on taxable wages defined as wages up to $4,200 per year in calendar 1977 and
$6,000 beginning January 1, 1978.
Public Law 95-19, approved April 12, 1977, the Emergency Unemployment
Compensation Extension Act of 1977, extended emergency unemployment
benefits (Federal supplemental benefits) and changed financing provisions.
Until this enactment, the Federal Government made repayable advances from
the general revenues (without interest) to the extended unemployment
compensation account. The act makes such advances nonrepayable if the
advances are made after March 31, 1977. After March 31, 1977, the costs of
the Federal supplemental benefits program are met from general revenues and
not from employer payroll taxes on the grounds that long-term joblessness
(beyond 39 weeks) results from general economic and social problems.
The act also extends the payback time of Treasury advances to State
programs by an additional 2 years, through January 1, 1980. The Federal
employer tax for a State will automatically increase by 0.3 percent a year, for
each year the loan remains unpaid after the extended payback period.
Other legislation.—Additional tax legislation was enacted duriugfiscal 1977.
Public Law 94-452, approved October 2, 1976, amended the tax treatment
of certain divestitures of assets by bank holding companies.
Public Law 94-455, approved October 4, 1976, generally reformed the tax
laws ofthe United States (see the 1976 Secretary's Annual Report, pp. 54-6).
Public Law 94-514, approved October 15,1976, amended the rules relating
to the deduction of interest on certain corporate indebtedness to acquire stock
or assets of another corporation.
Public Law 94-528, approved October 17, 1976, provided for a distribution
deduction for certain cemetery perpetual care funds and modified the effective
dates of certain provisions of the Tax Reform Act of 1976.
Public Law 94-529, approved October 17, 1976, reduced the tax on beer
from $9 to $7 a barrel for certain small breweries.
Public Law 94-530, approved October 17, 1976, exempted certain aircraft
museums from Federal fuel taxes and the Federal tax on the use of civil aircraft.
Public Law 94-547, approved October 18, 1976, amended the definition of
the term ^^compensation" for purposes of the railroad retirement tax.
Public Law 94-553, approved October 19, 1976, amended the treatment of
copyright royalties as personal holding company income.
Public Law 94-563, approved October 19, 1976, amended the rules relating
to the payment of social security taxes by a nonprofit organization.
Public Law 94-568, approved October 20, 1976, provided that a social club
need be operated only ^^substantially" rather than **exclusively" for social
purposes to be exempt from the income tax.
Public Law 94-569, approved October 20, 1976, provided an extension of
certain tax provisions relating to members of the Armed Forces missing in
action.
52
1977 REPORT OF THE SECRETARY OF THE TREASURY
Administration, interpretation, and clarification of tax laws
During fiscal 1977, 35 final Treasury decisions, 37 temporary Treasury
decisions, and 32 Treasury notices of proposed rulemaking were published in
the Federal Register. A substantial number of these publications implemented
provisions of the Tax Reform Act of 1976, including regulations relating to
limitations on percentage depletion in the case of oil and gas wells; duties of
income tax return preparers; public inspection of written determinations ofthe
IRS; exclusion of certain disability income payments; deduction for expenditures to remove architectural and transportation barriers to the handicapped
and elderly; and qualified possession source investment income.
In addition, regulations implementing the Employee Retirement Income
Security Act of 1974 were published relating to minimum vesting and funding
standards of qualified retirement plans.
Guidelines were issued under the antiboycott provisions of the Tax Reform
Actof 1976 in November 1976, with additional guidelines in December 1976.
Public hearings were held on the guidelines in April 1977, and revised
guidelines were issued in August 1977.
Tax reports
High-income taxpayers.—Pursuant to the Tax Reform Act of 1976, the
Department published the first in a series of annual reports on high-income
taxpayers entitled "HIGH-INCOME RETURNS: 1974 and 1975; A Report on
High-Income Taxpayers Emphasizing Tax Returns with Little or No Tax
Liability." The 1976 act requires the annual publication of a report containing
data on high-income taxpayers (for income defined in four different ways),
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 its fourth annual report
on the operation and effect ofthe DISC legislation. The report covered DISC
year 1975 (essentially calendar 1974).
Tax policy conference.—OnJuly 17 and 18, 1975, a conference on tax policy
was held at the Treasury at which distinguished consultants and researchers
presented theoretical and empirical analysis related to a number of key issues
in tax policy. The report of the conference entitled ''Conference on Tax
Research 1975" was published during fiscal 1977.
Basic tax reform,—On January 17, 1977, the Treasury under the Ford
administration published a report, ''Blueprints For Basic Tax Reform," which
presented two model tax systems prepared by the Treasury staff One was a
plan for comprehensive broadening ofthe base of the income tax. The second
was based on consumption taxation rather than income taxation and
substituted a
cash flow tax for the income tax.
REVIEW O F TREASURY
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International taxation.—On D e c e m b e r 3 1 , 1 9 7 6 , the Treasury published the
third volume in a continuing series of Treasury tax policy research studies
analyzing the interactions between tax policy and economic policy. T h e report,
"Essays in International Taxation: 1 9 7 6 , " is a collection of essays which
addressed international tax issues and represented the work of economists and
lawyers.
Tax treaties
Income tax treaties with M o r o c c o and the Philippines were signed during
the year and have been submitted to the Senate for approval. Treasury officials
testified before the Senate Foreign Relations C o m m i t t e e in July 1977 on
pending income tax treaties with the United Kingdom, Korea, and the
Philippines. Negotiations and technical discussions on income tax treaties
were c o n d u c t e d with Australia, Brazil, C a n a d a , France, West Germany, Italy,
Jamaica, New Zealand, Spain, and Sri Lanka. Estate tax treaty discussions
were held with G e r m a n y , and negotiations were concluded on an estate tax
treaty with the United Kingdom. O n May 17, 1977, the Treasury issued a press
release listing all countries with which income tax treaty discussions were in
various stages of progress, and releasing the text of the current " m o d e l "
income tax treaty. On M a r c h 16, 1977, the text of a " m o d e l " estate tax treaty
was released.
Participation in international organizations
Treasury representatives participated in the work of the Committee on
Fiscal Affairs of the Organization for Economic Cooperation and Developm e n t ( O E C D ) , including membership on a n u m b e r of working parties of the
C o m m i t t e e . Treasury representatives also attended meetings of the InterAmerican C e n t e r of Tax Administrators ( C I A T ) , and the U N E S C O conference on the taxation of copyright royalties.
INTERNATIONAL AFFAIRS
T r a d e and Investment Policy
Trade issues
In the aftermath o f t h e global oil crisis, fundamental structural changes have
been taking place in the world e c o n o m y with a profound impact on trade.
Economies have not yet adjusted to the new regime of energy prices; as a result,
production worldwide has stagnated and unemployment soared. Countries
have increasingly looked to export markets to maintain production, while
experiencing strong pressures to p r o t e c t their domestic markets from foreign
54
1977 REPORT OF THE SECRETARY OF THE TREASURY
goods. Competition has b e e n k e e n for the limited export opportunities, and
increased import competition has b e e n especially sensitive in such sectors as
steel, ships, shoes, and televisions.'
T h e sensitivity of t r a d e issues has u n d e r s c o r e d the need for strong
improvements in international trading rules, and stimulated countries to focus
attention on securing meaningful progress in multilateral trade negotiations
( M T N ) underway in Geneva. At the L o n d o n summit in May and through
bilateral understandings with the E u r o p e a n C o m m u n i t y in July, the talks were
given renewed impetus to reduce barriers to trade in an effort to counter the
trend towards increased trade protectionism.
Working in close cooperation with other executive d e p a r t m e n t s . Treasury
was very active during fiscal 1977 in the formulation of a U.S. policy which
emphasized our long-term interest in an o p e n e c o n o m y while meeting the
shortrun d e m a n d s of adjustment to the new regime of energy prices.
O n e of the major challenges for U.S. trade policy in the past year has b e e n
to maintain an o p e n e c o n o m y in spite of continuing high levels of unemploym e n t and increased imports. T h e U.S. e c o n o m y m a d e strong gains in fiscal
1977, b u t recovery a b r o a d p r o c e e d e d at a slower pace. As a result, d e m a n d
for U.S. exports was sluggish while the growing U.S. m a r k e t absorbed
increasing volumes of imports. T h e U.S. trade deficit soared to historic highs
as our annual energy bill increased t o almost $45 biUion.^
Domestic trade problems
In light of the growing imbalance in trade, industry increasingly called o n
the G o v e r n m e n t to provide protection against imports of sensitive industrial
products. T h e U.S. International T r a d e Commission ( I T C ) received n u m e r o u s
requests for import relief, and r e c o m m e n d e d the imposition of quantitative
restrictions and/or tariff increases on imports of shoes, televisions, and sugar.
After review by executive agencies, the President decided to reject the ITC
proposals for across-the-board import restraints. He decided, instead, t o
negotiate arrangements which would provide temporary relief to allow
domestic industry time t o adjust to changing competitive conditions. Orderly
marketing agreements were negotiated with our major suppliers of shoes and
color televisions, and talks initiated to develop and defend a floor for the
international price of sugar. In the case of shoes, the President also a n n o u n c e d
a major new p r o g r a m u n d e r the t r a d e adjustment assistance p r o g r a m
specifically tailored to the adjustment needs of that industry. O u r trading
partners thus participated in the d e v e l o p m e n t of import policies aimed at
smoothing the adjustment process for trade in these products.
T h e c o n s u m e r electronic and steel industries also availed themselves of new
provisions in the T r a d e Act of 1974 to challenge Treasury rulings in the courts
in an effort to force Treasury to impose countervailing duties. In one case, t h e
I See exhibit 32.
2Sec FRASER
Digitized forexhibit 33.
REVIEW O F TREASURY
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Zenith Radio C o r p . argued that the rebate o f t h e Japanese commodity tax was
a subsidy under the provisions of U.S. law. T h e G o v e r n m e n t argued that,
consistent with international rules, the rebate of an indirect tax was not a
bounty or grant. On April 12, 1977, the Customs C o u r t ruled in favor of Zenith,
and Treasury immediately suspended liquidation on the import entries of
consumer electronic products from Japan. Importers were required to post a
15-percent bond to cover potential duty liabilities. The Treasury appealed the
decision to the C o u r t of Customs and Patent Appeals, which overturned the
lower court ruling by a 3-to-2 vote on July 28. Zenith then asked the Supreme
Court to review the case. Treasury will continue to suspend liquidation,
however, until conclusion of the judicial review.
In a separate case. United States Steel C o r p . charged that the Treasury
should impose countervailing duties against the rebate of the value-added tax
on steel exports from the European Community. The case has not yet been
heard before the C u s t o m s Court.
In sectors where structural adjustment problems arose, the United States
sought multilateral solutions to specific trade problems. Steel was faced with
a fundamental problem as lower growth worldwide resulted in excess capacity
in the major steel producers. T o prevent a further increase in protectionist
pressures in the world steel industry, the United States and other Organization
for E c o n o m i c C o o p e r a t i o n and Development ( O E C D ) m e m b e r nations
proposed the establishment of an ad hoc steel group. This body met twice in
July and September to review and monitor developments in world steel trade.
T o coordinate domestic policy in this area, the President also asked Treasury
Under Secretary for Monetary Affairs Solomon in September to chair an
interagency task force to develop a comprehensive policy program for this
sector in early fiscal 1978 that will include both domestic and international
elements.
Maintaining open world trade
At the same time, the United States was in the forefront of nations
committed to maintaining an open and nondiscriminatory world trading
system. This goal was reaffirmed by the participants at the Downing Street
summit in May, who stressed the need to reject protectionism and to m a k e
substantive progress in key areas in the M T N in 1977. T h e leaders pledged to
"provide strong political leadership to expand opportunities for trade to
strengthen the open international trade system."
T o reinforce this c o m m i t m e n t , the United States joined with other m e m b e r s
o f t h e O E C D in J u n e to reaffirm the O E C D trade pledge for the third year in
a row. T h e pledge represents a mutual c o m m i t m e n t by signatories to avoid the
imposition of trade or other c u r r e n t account restrictions for balance of
payments reasons.
The results of these international commitments began to bear fruit in July
when Ambassador Strauss reached agreement with our major trading partners
56
1977 REPORT OF THE SECRETARY OF THE TREASURY
on an accelerated timetable for the negotiation and conclusion of the M T N .
The agreement covered conditions for the tabling of requests, offers, and new
codes for the regulation of nontariff barriers to trade such as subsidies,
government p r o c u r e m e n t practices, and standards, as well as new rules on
safeguards. T h e Treasury is actively involved in the preparation of U.S.
positions, in particular the development of codes of c o n d u c t on subsidy/
countervail and safeguards. Tentative agreement on a tariff plan was reached
in late September which presaged an overall cut of around 40 percent. All
offers are to be tabled by January 15, 1978.
East-West trade
Progress in the development of U.S. commercial relations continued in fiscal
1977, despite legislative restrictions on the normalization of East-West trade
relations contained in title IV o f t h e T r a d e Act of 1974 and the Export-Import
Bank legislation of 1974. T h e total turnover of U.S. trade with Communist
countries in 1976 was $4.70 biUion, up substantiaUy from the 1975 total of
$3.98 billion.
On J u n e 3 , 1977, President Carter r e c o m m e n d e d to the Congress extension
of the waiver authority as provided in section 402 of the T r a d e 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
allowed the agreement to remain in force.
In his role as U.S. Chairman of the Joint U.S.-U.S.S.R. Commercial
Commission, Secretary Blumenthal chaired the Commission's sixth session in
Washington J u n e 9 - 1 0 , 1977.^
Secretary Blumenthal, as honorary Director, attended an executive session
o f t h e U.S.-U.S.S.R. T r a d e and E c o n o m i c Council in Washington on June 1 3,
1977.
Export credits
Treasury representatives led the U.S. delegation to the semiannual meetings
of the O E C D Export Credits G r o u p and the meeting of the Participants in t h e
Consensus on Officially Supported Export Credits, which took place in t h e
framework o f t h e O E C D . T h e discussions in the Export Credits G r o u p resulted
in the expanded participation in the Consensus from the original 7 c o u n t r i e s United States, C a n a d a , France, G e r m a n y , Italy, the United Kingdom, and
J a p a n — t o 19 countries and the E E C Commission. Thus, aU the m e m b e r s of
the O E C D Export Credits G r o u p except Austria and New Zealand are
Participants in the Consensus. T h e trial period of 1 year for the operation of
t h e C o n s e n s u s , i.e., July 1, 1976, to J u n e 30, 1977, was extended for 6 m o n t h s
^Sce exhibit 35.
4See exhibit 34.
REVIEW O F TREASURY
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57
so that the Participants could negotiate a new international arrangement which
substantially improved the Consensus.
Treasury attends the weekly meetings of the Board of Directors of the
Export-Import Bank. On March 2 5 , Under Secretary for Monetary Affairs
Solomon testified to extend the life o f t h e Eximbank from J u n e 30, 1978, to
September 30, 1978.^
United States-Saudi Arabian Joint Commission on Economic Cooperation
Serving in his capacity as cochairman of the United States-Saudi Arabian
Joint Commission on Economic Cooperation, Secretary Blumenthal hosted
the third annual meeting o f t h e Joint Commission in Washington in May 1977.
At the meeting, three new project agreements were signed in the areas of
desalination, financial information services, and consumer protection.^ This
brought the total n u m b e r of major project agreements under the Joint
Economic Commission to 12 with a total ultimate value of over $500 million.
[In O c t o b e r 1977, Secretary Blumenthal visited Saudi Arabia and held a
series of wide-ranging discussions with leaders of the Saudi Arabian Government. During this visit, a multimillion-dollar project agreement was signed
under which the two nations will c o o p e r a t e in solar energy research.]
T h e r e are at present over 120 Americans working in Saudi Arabia under
Joint Commission auspices, and this n u m b e r is expected to increase substantially during the coming year.
Investment policy statement
As indicated in the I n t r o d u c t i o n to this R e p o r t , the administration
established during the period under review a new policy on direct international
investment. The policy is contained in a statement drafted by a task force that
was cochaired by Assistant Secretary Bergsten; the statement was approved
by the Cabinet-level E c o n o m i c Policy G r o u p in July 1977. It was intended both
to serve as a general expression of this administration's policy in this area and
to provide a basis for decisions on specific issues that arise from time to time.
( T h e major provisions of the statement are outlined in the Introduction.)
International Investment Survey Act of 1976
T h e International Investment Survey Act of 1976 provides authority for t h e
President to collect information on international investment and to provide
analyses of such information to Congress, executive agencies, and the general
public. P e r m a n e n t and unambiguous authority is provided by the act for
ongoing d a t a collection programs on international capital flows administered
by the Treasury and other d e p a r t m e n t s , while new authority is provided for
other b e n c h m a r k and special studies.
SScc exhibit 30.
^Scc exhibit 31.
58
1977 REPORT OF THE SECRETARY OF THE TREASURY
T h e act requires that b e n c h m a r k surveys of foreign direct investment and
foreign portfolio investment in the United States be c o n d u c t e d every 5 years.
In addition, U.S. direct investment abroad is to be surveyed in a b e n c h m a r k
every 5 years, while a b e n c h m a r k census of U.S. portfolio investment abroad
must be u n d e r t a k e n at least o n c e within a 5-year period after e n a c t m e n t o f t h e
act. In the last b e n c h m a r k surveys the D e p a r t m e n t s of C o m m e r c e and
Treasury collected d a t a on foreign direct and portfolio investment in the
United States as of the e n d of 1974. T h e last census of U.S. direct investment
abroad covered 1966 d a t a , and outward U.S. portfolio investment has not b e e n
surveyed since 1 9 4 1 . C o m m e r c e is preparing to u n d e r t a k e a b e n c h m a r k
survey on U.S. direct investment a b r o a d to gather data as of the end of 1977.
Overseas Private Investment Corporation (OPIC)
Since 1948 the U.S. G o v e r n m e n t has had various types of investment
insurance programs to p r o t e c t private American overseas investments against
the political risks of currency inconvertibUity, expropriation, and war. T h e
c u r r e n t principal purpose of these programs is to mobilize and facilitate the
participation of U.S. private capital and skills in the e c o n o m i c and social
progress of less developed friendly countries as a c o m p l e m e n t to o u r
d e v e l o p m e n t assistance to those countries.
T o accomplish its p u r p o s e , O P I C administers three types of programs:
Investment insurance, financing, and investment information and p r o m o t i o n
activities.
In its c o r e p r o g r a m , insurance, O P I C has issued protection against t h r e e
forms of risk associated with foreign investment. Maximum insured a m o u n t s
as of S e p t e m b e r 30, 1977, were: ( 1 ) $3.4 bUlion for expropriation; ( 2 ) $2.9
billion for inconvertibility; and ( 3 ) $2.8 billion for war, revolution, and
insurrection.
OPIC's finance p r o g r a m consists of: ( 1 ) Investment guarantees on mediumand long-term loans from institutional lenders to private enterprises in less
developed countries ( L D C ' s ) ; and ( 2 ) direct loans to private projects in
LDC's.
As of September 30, 1977, outstanding c o m m i t m e n t s under the investment
guarantee program were $164.7 million and outstanding commitments under
the direct loan program were $32.9 mUlion.
Finally, in order to identify and assess investment opportunities, and
stimulate U.S. private investment in developing countries, O P I C has a third
program in which it identifies foreign investment opportunities and " b r o k e r s "
these projects to U.S. investors. O P I C also provides financial, technical, and
other assistance to potential investors as part of its " b r o k e r i n g " activities.
OPIC may not finance surveys for minerals, but is now seeking authorization
to d o so for minerals o t h e r than oil and gas.
O P I C wrote m u c h less insurance in fiscal 1977 than in fiscal 1976, sustaining
a decline in both dollar volume ( m a x i m u m insured a m o u n t ) to $700 mUlion
REVIEW O F TREASURY
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59
from $1.2 bUlion and n u m b e r s of individual insurance coverages from 389 t o
245.
OPIC's statutory authority to issue new insurance and investment guarantees was d u e to expire D e c e m b e r 3 1 , 1977. In view of this, the administration
completed a review of OPIC's insurance programs in May 1977. This review
concluded that OPIC can advance several U.S. foreign economic policy
objectives and should be continued. It also was concluded that, with new
program directions, O P I C could play a more important role in the future than
it has in the past.
T h e administration concluded that three changes were needed in the
emphasis of QPIC programs to enable it to play such a role.^ First, OPIC should
focus its efforts m o r e heavily on the p o o r e r developing countries which have
the greatest difficulty in attracting adequate flows of public and private
d e v e l o p m e n t resources. Second, OPIC should develop innovative, riskreducing coverage for selected new investments in energy and other raw
materials. Third, existing legislation should be modified to eliminate OPIC's
statutory objective of increasing private participation in its insurance functions
with the aim of withdrawing completely from direct underwriting by the end
of 1980.
Expropriation
U.S. policy regarding expropriation was spelled out in a statement issued by
the President in J a n u a r y 1972. T h a t message, which is still g e r m a n e ,
acknowledges a government's sovereign right to nationalize foreign property,
provided that such action does not violate commitments to the contrary and
IS carried out in a c c o r d a n c e with international law. This requires that the
action be nondiscriminatory; for a public purpose; and accompanied by
prompt, a d e q u a t e , and effective compensation. Since the end of the Second
World W a r , the Congress has also enacted various laws providing for the
mposition of sanctions against countries which expropriate properties in
Avhich U.S. citizens hold 50 p e r c e n t or m o r e interest but which d o not t a k e
•easonable steps to c o m p e n s a t e the former owners. T h e basic statutory
sanctions are included in the Hickenlooper a m e n d m e n t , the Gonzalez
i m e n d m e n t , and the " G e n e r a l System of Preferences ( G S P ) provision" in t h e
Trade A c t of 1974. T h e Hickenlooper a m e n d m e n t requires suspension of
issistance provided u n d e r the Foreign Assistance and other acts, including
ievelopment loans and technical and military assistance. T h e Gonzalez
i m e n d m e n t extends the foreign assistance prohibitions of the Hickenlooper
i m e n d m e n t to U.S. multilateral lending policy. T h e a m e n d m e n t requires the
'resident to instruct the U.S. Executive Directors o f t h e various international
ievelopment institutions (the International Bank for Reconstruction and
development, Inter-American Development Bank, etc.) to vote against the
oan of bank funds to expropriating countries which have not provided p r o m p t .
7See exhibit 36.
60
1977 REPORT OF THE SECRETARY OF THE TREASURY
adequate, or effective compensation; engaged in good faith negotiations to
make such payments; or established a suitable mechanism to arrive at a
solution, such as submitting the dispute to arbitration under the International
Centre for the Settlement of Investment Disputes (ICSID). Finally, the 1974
Trade Act requires the President to deny the GSP benefits to expropriating
developing countries which have failed to pay or otherwise take steps toward
paying prompt, adequate, and effective compensation.
On January 12, 1974, the People's Republic of the Congo issued a decree
nationalizing eight oil companies, including Mobil and Texaco. The companies
promptly submitted claims and on a number of occasions sought to enter into
discussions or negotiations looking towards a settlement, but there was no
progress in that direction.
OnDecember 14,1976, the Gonzalez amendment was invoked and the U.S.
Executive Director voted against an $8 million International Development
Association (IDA) loan to the People's Republic ofthe Congo. On January 19,
1977, President Ford notified Congress of his intention to withdraw that
country's eligibility for GSP and the People's Republic of the Congo was so
informed on February 18, 1977. In the note to the African nation it was made
clear that in considering whether to implement withdrawal upon expiration of
the required minimum period of prior notice (60 days), the U.S. Government
would take into account any information received in the interim regarding
steps taken to provide compensation to the concerned firms. In July 1977, the
People's Republic ofthe Congo and representatives of Texaco met and entered
into substantive negotiations regarding compensation for the expropriated
property.
International codes of conduct
Iri accordance with its general policy of encouraging multilateral action to
maintain an international environment in which investment is relatively free
to move, the United States has agreed to participate in several negotiations on
codes of conduct dealing with the activities of multinational enterprises
(MNE's). The United States believes that codes of conduct consisting of
general guidelines can serve a useful purpose by providing a basis for firmer
expectations of accepted behavior for both investors and host governments.
At the same time, in view of the varied legal and social traditions among
nations, as well as the differing perceptions of the role of foreign investment
and the MNE, general codes of conduct dealing with a wide range of issues
are by necessity broad in nature and not amenable to legally binding
arrangements.
OECD investment package.—As noted in last year's Report, the United
States and 22 other members of the OECD adopted a Declaration on
International Investment and Multinational Enterprises on June 21, 1976.
During the past year, these countries have been implementing the various
elements of the Declaration—the guidelines for MNE's and the agreements
R E V I E W O F TREASURY
OPERATIONS
61
concerning national treatment of foreign investors and official incentives/
disincentives for foreign investment—and the accompanying decisions to hold
consultations on each. They have held preliminary exchanges of views on
experience gained under the guidelines and will initiate discussions on national
treatment and exceptions thereto, i.e., the laws and regulations under which
established foreign investors are treated less favorably than their domestic
counterparts. No consultations have yet been held on the Incentives/Disincentives Agreement. A formal review ofthe three elements ofthe Declaration wiU
take place in 1979.
U.N. code of conduct negotiations.—In the United Nations the Commission
on Transnational Corporations began work on a comprehensive code of
conduct during the past fiscal year, but is unlikely to meet its goal of preparing
an annotated outline of a code for submission to the Commission in 1978.
Significant differences remain between the developed and developing countries that are participating in the negotiations.
UNCTAD code on technology transfer.—A code of conduct on the international transfer of technology is being negotiated in the United Nations
Conference on Trade and Development (UNCTAD). Major areas of disagreement have arisen between the developed and developing countries conceming
the legal nature ofthe code, the extent of governmental involvement in private
transactions, "guarantees" by suppliers of technology, restrictive business
practices, and elaborate new international machinery to oversee transfer
arrangements. A U.N. negotiating conference is now tentatively scheduled for
fall 1978, but slow progress may warrant a further postponement of it.
UNCTAD discussions on restrictive business practices.—In May 1972, the
UNCTAD established a group of experts to investigate various aspects of
restrictive business practices and to take into account the need for appropriate
remedial measures at the national, regional, interregional, and international
levels. Work has progressed slowly, in large part because the developing
countries want a set of legally binding principles. The position of the United
States and some other developed countries is that the time has not yet come
for a binding international antitrust code and that any set of principles should
be voluntary for both corporations and governments. A report will be
presented to the UNCTAD in 1978.
ILO principles concerning MNE's.—A tripartite group within the International Labor Organization (ILO), composed of business, labor, and government representatives from four developed and developing countries, adopted
a "Draft Declaration of Principles Concerning Multinational Enterprises and
Social Policy" in AprU 1977. The Governing Body ofthe ILO, a specialized
agency associated with the United Nations, is to take action on the Draft in
November 1977. The 58 principles cover such issues as general policies,
employment, training, conditions of work and life, and industrial relations.
They are voluntary and are addressed to both MNE's and to home and host
governments.
62
1977 REPORT OF THE SECRETARY OF THE TREASURY
Illicit payments
In March 1977, Secretary Blumenthal—while offering suggestions for
improvements—testified on behalf of the executive branch in support of
proposed legislation to criminalize corrupt payments to foreign officials by
U.S. nationals.^ By the end of this period, the Senate version had passed
unanimously, and its House counterpart was still in committee.
The U.S. Government has also continued to pursue its initiative in the United
Nations for an international agreement on illicit payments. In response to a
proposal made by the United States in March 1976, the U.N. Economic and
Social CouncU (ECOSOC) had established an 18-member working group to
elaborate the scope and contents of an agreement and to report back to the
ECOSOC in 1977. In July, the ECOSOC received the repprt ofthe working
group and adopted a resolution containing the following elements: (1) A
continuation and expansion of the working group; (2) a mandate for the
working group to draft an international agreement on illicit payments in 1978;
and (3) a recommendation to the U.N. General Assembly to decide when
appropriate to convene a diplomatic conference to conclude such an
agreement.
Commodities and Natural Resources Policy
U.S. commodity policy
The Carter administration modified U.S. international commodity policy
during 1977 in the interest of promoting price stability and smoother economic
growth, both at home and abroad.^ Under this program, the United States
supported the negotiation of international agreements, based on buffer stocks,
to stabilize commodity prices. It also agreed to participate in the negotiation
of a common fund to facilitate financing of these agreements.
The United States sought to encourage increased investment in the
production of key raw materials in developing countries through an expansion
in such activities by the World Bank, the regional development banks, and the
Overseas Private Investment Corporation in cooperation with the investment
insurance agencies of other industrialized countries. In addition, the United
States supported the recommendation of the Development Committee of the
International Monetary Fund and the World Bank for a review of existing
mechanisms to stabilize export earnings.
Officials of Treasury, State, and other agencies participated actively in the
formulation of this comprehensive commodity policy and pursued its implementation in several international fora in the belief that it could enhance the
general welfare of all nations and, thereby, contribute to the lessening of
economic and political tensions worldwide.
KSce exhibit 29.
''Sec exhibit 39.
REVIEW OF TREASURY
OPERATIONS
63
In June 1977, the Conference on International Economic Cooperation
( C I E C ) concluded its 1 1/2 years of periodic meetings in Paris. Discussion of
commodity issues took place in the Commission on Raw Materials ( C O R M ) .
These discussions were impeded by conflicting views between developed and
developing countries on the issues of indexation of commodity prices and the
stabilization of export earnings of developing countries. However, participating nations did agree t h a t a c o m m o n fund should be established to facilitate
the financing of international commodity agreements. Negotiations of the
purposes, objectives, and other constituent elements of the fund were to be
conducted in the United Nations Conference on T r a d e and Development
(UNCTAD).
T h e idea of a c o m m o n fund dates back to late 1975, when the U N C T A D
Secretariat first proposed it as a central element of an integrated commodity
policy. As originally conceived, the fund would finance: ( 1 ) buffer stock
arrangements for 10 commodities, ( 2 ) non-buffer-stock measures to aid in
development of commodity industries in developing countries, and ( 3 )
intervention in commodity markets to support declining prices. While the
developing countries quickly adopted the proposal, the United States and
other developed countries were generally opposed to this concept of a
c o m m o n fund because it could lead to disruptions in commodity markets,
encourage uneconomic commodity agreements, and duplicate some of the
financing activities of existing international financial institutions.
Negotiating sessions on the c o m m o n fund were continuing under the
auspices of U N C T A D . A t the session in N o v e m b e r 1977 the United States was
prepared to endorse a c o m m o n fund based on a financial pooling arrangement.
Under this proposal, the financial resources of individual commodity buffer
stocks would be consolidated in a central facility comprising several c o m m o d ity agreements. Such a fund would be financially more efficient than buffer
stock organizations acting independently because of cost-saving benefits
through the pooling of cash resources and the consolidation of borrowing
operations. Utilization o f t h e fund's resources would be strictly confined to the
buffer stock needs of commodity agreements.
The United States continued its membership in both the coffee and tin
agreements and a n n o u n c e d its intentions to join the new sugar agreement.
Though not a m e m b e r o f t h e c o c o a agreement, the United States indicated its
willingness to participate in renegotiation sessions. Preliminary discussions of
wheat and natural rubber appeared to hold some promise for agreements.
Discussions among producing and consuming countries for copper, jute, tea,
hard fibers, and tungsten also showed some progress in identifying trade,
production, and marketing problems.
The United States, in 1977, adopted a positive approach toward the
negotiation of commodity agreements aimed at price stabilization around
long-term market trends so as to achieve greater stability in economic growth.
This objective was felt to be in the interest of developing and developed
countries alike whether they were producers, consumers, importers, or
64
1977 REPORT OF THE SECRETARY OF THE TREASURY
exporters. In the U.S. view, buffer stocks provided the most effective price
stabilization mechanism. Under such a scheme, authorized stocking of a
particular commodity must be sufficient to defend the price floor as well as
the price ceUing. Ideally, the price range ofthe agreement would be sufficiently
broad to permit the free functioning of m a r k e t forces u n d e r normal
circumstances. By insulating prices from excessive fluctuations, commodity
production could be m o r e efficiently maintained to the benefit of producers
and c o n s u m e r s alike. U n d e r these conditions, investment prospects in
commodity production would be m o r e favorable and adequate commodity
supplies could be assured.
For international agreements to operate effectively, sufficient financial
resources must be m a d e available to assure adequately sized buffer stocks, with
such financial resources to be provided by both producing and consuming
countries. For commodities where an international buffer stock is n o t
appropriate, an export q u o t a a r r a n g e m e n t might be suitable ifit also provided
for the accumulation of nationally held stocks and the export quotas were
reallocated frequently so as to encourage new investment and allow entry of
new production facilities. Production controls, on the other hand, were
considered unacceptable because they could lead to destabilization of prices
through inefficient production patterns.
Agricultural commodity developments
Sugar.—The United States actively participated in the negotiation of the
new International Sugar A g r e e m e n t (ISA) because it believed that a new
a g r e e m e n t would serve the interests of the United States as a major sugarproducing nation as well as the world's leading sugar importer. Negotiations
of the ISA were successfully concluded, and it is scheduled provisionally t o
enter into force on January 1, 1978. T h e agreement is designed to stabilize
prices within a 10-cent-per-pound price band ( 1 1 - 2 1 c e n t s ) , through the
combined use of stock and quota mechanisms. Market forces would be allowed
to operate freely over a substantial segment of this band.
Wheat.—At the June meeting o f t h e International W h e a t Council the United
States introduced its revised grain reserve proposal. T h e U.S. scheme called
for international coordination of nationally held grain reserves that would b e
accumulated and released according to changes in grain prices. It provided for
a sharing of costs between exporters and importers with special financing
provisions for the p o o r e r nations. T h e principal objective is to avoid
interruptions in trade due to conditions of surplus or scarcity. Scheduled
preparatory conferences appeared to be leading to a draft agreement which
would be the basis for negotiations in early 1978.
Coffee.—The export q u o t a provision o f t h e International Coffee A g r e e m e n t
did not c o m e into effect in 1977 because o f t h e extremely high coffee prices
caused by a small Brazilian crop. Nevertheless, the International Coffee
Council ( I C O ) meetings provided an appropriate forum for an exchange of
REVIEW O F TREASURY
OPERATIONS
65
views between producers and consumers over high prices and uncertain
supplies. In this regard, the United States m a d e a significant contribution to
an ICO working group's study of the short-term world supply and d e m a n d
situation.
Grain sales.—In the first year of the 5-year U.S.-Soviet Union grain trade
agreement which b e c a m e effective O c t o b e r 1, 1976, Soviet purchases barely
exceeded the minimum levels of 6 million metric tons of wheat and corn.
Shipments during the year included 3.1 million tons of corn and 3 million tons
of wheat. A recovery in Soviet production to a record level was the major
factor in keeping U.S.S.R. purchases to near-minimum levels. For 1 9 7 7 - 7 8 ,
expanded Soviet grain purchases are likely because of lower Soviet grain
production, lower U.S. grain prices, and possibly some additional stock
building in the U.S.S.R.
Industrial commodity developments
Tin.—Tin prices rose from $3.81 to $5.50 per p o u n d between O c t o b e r 1976
and O c t o b e r 1977 despite the existence of the International Tin A g r e e m e n t
( I T A ) . Partly because of its relatively small buffer stock, the ITA has had httle
success in moderating tin price fluctuations during the 1970's. T h e administration, recognizing the deficiency in the buffer stock, requested authorization
from Congress to permit a U.S. contribution of up to 5,000 tons of tin to the
agreement. In addition, the United States indicated its objection td high
production and export taxes levied by producing countries, which discourage
production and lead to escalation of tin prices.
Rubber.—In January, and again in J u n e , the major natural rubber producing
and consuming countries met under U N C T A D auspices to discuss problems
in the international r u b b e r market. Both groups agreed that excessive price
fluctuations had adverse effects on both consumers and producers and that
appropriate measures to smooth price movements should be examined.
Preliminary analysis indicated that a stock arrangement was feasible and could
provide economic benefits to the United States. Since producers had already
agreed to a limited buffer stock arrangement, an agreement of some kind
appears likely. Therefore, it was determined to be in the economic interest of
the United States to take an active role in attempts to design a workable rubber
agreement.
Copper.—International meetings under the U N C T A D program considered
possible measures to stabilize c o p p e r prices. While the characteristics of
c o p p e r (standardized grading, open trading, and storability) appear suitable
for a buffer stock arrangement, a feasibility study of stabilization measures is
currently underway. A p r o d u c e r - c o n s u m e r conference, scheduled for February 1978, will help decide whether a negotiating conference for a commodity
agreement should be convened. The feasibility of establishing an international
producer-consumer organization for copper is also being considered.
66
1977 REPORT OF THE SECRETARY OF THE TREASURY
Tungsten.—Although tungsten was not one ofthe commodities listed in the
Integrated Program for Commodities, tungsten producers and consumers met
in July in Geneva under UNCTAD auspices to consider measures to stabilize
trade in tungsten. Producers and consumers wUl meet again in November to
discuss background studies on the tungsten industry and to assess proposed
measures to improve tungsten trade. A major obstacle to any agreement is the
lack of a central market.
Energy policy
The administration has made the development, adoption, and implementation of a national energy program one of its prime objectives. Treasury's
interests center on the tax, financial, and economic implications of such a
program. Treasury staff have participated in the evaluation of various options
affecting domestic and intemational policy. Treasury has focused on the
effects of Organization of Petroleum Exporting Countries (OPEC) pricing
decisions on the U.S. and world economy, and on policy options which would
encourage the development of indigenous resources in non-oil-producing
developing countries. In addition. Treasury officials have responded to
numerous inquiries and invitations by the Congress and the public to speak on
a wide range of energy issues, energy-related legislation, and energy regulatory
policy.
Alaskan natural gas transportation.—Treasury issued a comprehensive
report on the financing of the Alaskan natural gas transportation system,
assisted in the preparation ofthe President's Decision Report to Congress, and
appeared before Congress to support that report.
Strategic petroleum reserves,—Through review of environmental impact
statements, estimations of trade effects, and review of the plans for strategic
storage reserves, Treasury assisted in the development of this important
emergency measure.
Financial considerations for electric utilities.—Early in the fiscal year
Treasury staff prepared a comprehensive financial analysis of the domestic
electric utility industry, resulting in policy recommendations to the Energy
Resources Council.
Interagency cooperation
Treasury staff participated in various interagency task forces and committees:
Interagency Geothermal Coordinating Council.—This Council encourages
and facilitates expanded development of geothermal energy. Treasury
participated in the development of taxation and loan guarantee policies which
will provide additional financial incentives for expeditious development of this
source of energy.
Energy information,—Tvcsisury participated in the Federal Interagency
Council on Energy Information, an intergovernment forum to coordinate the
collection and use of energy data.
REVIEW OF TREASURY OPERATIONS
67
Presidential Task Force for the Reform of FEA Regulations.—This task force
was established to simplify and make improvements in the FEA price and
allocation regulations. Treasury staff participated in the task force and helped
prepare the final report.
Liquefied natural gas (LNG).—Treasury representatives participated in the
interagency Task Force on Liquefied Natural Gas, which considers LNG
import policy.
Cogeneration Interagency Task Force.—This considers tax incentives and
other financial incentives which may be required to foster the development of
cogeneration projects.
Nuclear energy policy coordination.—Treasury staff assisted the Nuclear
Subcommittee in formulating an interagency decisions schedule for the
nuclear fuel cycle, including waste management. The Nuclear Subcommittee
had been formed by the Energy Resources Council to integrate Federal
regulatory procedures affecting nuclear energy development.
Nuclear energy po/zcy.—Treasury staff provided trade, financial, and
economic analyses for various interagency committees concemed with
nuclear power development and proliferation.
Conference on International Economic Cooperation (CIEC)
The Conference on Intemational Economic Cooperation was established at
a Ministerial meeting in Paris in December 1975. The Conference consisted
of representatives from developed countries, nonoil developing countries, and
OPEC countries. Its objective was "to initiate an intensified international
dialog on the international economic situation, to address problems, and to
further international economic cooperation for the benefit of all countries and
peoples."'°
There were 27 participants in the CIEC. These included seven industrial
countries (Australia, Canada, Japan, Spain, Sweden, Switzerland, and the
United States) plus the European Economic Community, and 19 countries
representing the developing world (Algeria, Indonesia, Iran, Iraq, Nigeria,
Saudi Arabia, Venezuela, Argentina, Brazil, Cameroon, Egypt, India, Jamaica,
Mexico, Pakistan, Peru, Yugoslavia, Zaire, and Zambia).
Discussions took place in four different commissions: The Energy Commission, the Raw Materials Commission, the Commission on Development, and
the Commission on Financial Affairs. Each Commission consisted of 15 CIEC
members, 5 from among the industrial country participants and 10 from the
developing country participants. The Conference concluded on June 3, 1977,
with a Ministerial meeting, which adopted a final communique by consensus.''
Energy.--The CIEC participants agreed to a general set of guidelines that
(1) recognize the essentiality of adequate and stable energy supphes to global
10See exhibit 37.
tISee exhibit 59.
68
1977 REPORT OF THE SECRETARY OF THE TREASURY
growth and the responsibilities of all nations to ensure that such supplies are
available; (2) call for intensified national and international cooperation efforts
to expand energy conservation and accelerate the development of conventional and nonconventional energy supplies during the energy transition period
and beyond; (3) affirm that special efforts should be made to assist oilimporting LDC's alleviate their energy burdens; (4) recommend that the
IBRD, in the context of a general capital increase, give priority to lending for
LDC energy development; (5) call for new international efforts to facilitate
the transfer of energy technology to LDC's wishing to acquire such technologies; (6) endorse enhanced international cooperation in energy research and
development; and (7) recognize the desirability and inevitability of the
integration of the downstream processing industries of the oil-exporting
countries into the expanding world industrial structure as rapidly as practicable.
Raw Materials.—The objectives ofthe industrialized countries consisted of
ensuring a pragmatic, objective treatment of the various problems in
commodity trade as well as the possible solutions to these problems. There
were general areas of agreement but greater areas of disagreement, particularly on such traditional developing country objectives as indexation and
measures to harmonize the production of synthetics with that of natural
products. The CIEC participants reached agreement in principle on the
establishment of a common fund with its purposes, objectives, and other
constituent elements to be further negotiated in UNCTAD.
Development.—Agreement was reached on a number of useful concepts and
programs in the areas of development finance, transfer of technology, trade,
assistance to agriculture, infrastructure, and industrialization. These include
(1) a commitment by donor countries to seek increases in official development
assistance and to enhance the quality and distribution of aid fiows; (2) agreement to begin negotiations on a general capital increase of the IBRD;
(3) agreement to establish a special action program of $ I bUlion of additional
aid for the poorer developing countries; (4) agreement on a set of general
concepts concerning infrastructure development, with particular reference to
a conference to establish objectives for an African transport and communications decade; and (5) agreement on a 500,000-ton emergency grain reserve,
support for early negotiation of a grains agreement with stocks, and
recommendations for enhanced aid for food production and research. In the
area of trade, the participants agreed to (1) recognize the importance of
making general progress in the MTN, (2) call for efforts to improve the GSP,
and (3) reach an early conclusion to the multilateral textile negotiations.
Findnce.—Discussion within the Financial Commission focused on four
main areas: Private foreign direct investment, developing countries' access to
capital markets, other financial fiows including monetary issues, and measures
to enhance economic cooperation among developing countries. The Commission made considerable progress toward agreement on the essential elements
that constitute a favorable investment climate. In addition, support was
REVIEW OF TREASURY OPERATIONS
69
expressed for the recommendations of the IMF/IBRD Development Committee on increasing access of developing nations to international capital markets.
The initiative to establish a supplementary credit facility within the IMF was
also endorsed. Finally, participants agreed to take appropriate measures to
enhance economic cooperation among developing nations.
International Energy Agency (lEA)
As a result ofthe 1973 Arab oU embargo, 19 industrialized oU-consuming
countries established the lEA to help coordinate their international energy
policies. The goals of these policies are to reduce dependence upon imported
oU through conservation, accelerated development of indigenous resources,
and shared research and development. To meet supply emergencies, the lEA
updates methods to restrain demand and share existing supplies equitably.
Treasury participated in meetings ofthe Governing Board, and in the Standing
Groups on Emergency Questions, Long-Term Cooperation, and the Oil
Market.
Standing Group on Emergency Questions (SEQ).—The Standing Group has
now essentially completed preparation ofthe lEA emergency program which
establishes procedures necessary to implement the sharing of fuel assets in
emergencies. Current activities involve refinement and testing ofthe system.
During the year, the "Emergency Management Manual" was completed. This
document reflects all the basic decisions, goals, and procedures for emergency
operations in the event of embargo-related petroleum shortages. In addition,
a successful test of the emergency oil allocation system was conducted during
a 6-week simulated shortage period in the fail of 1976.
Standing Group on Long-Term Cooperation (SLT).—Largely as the result of
the Standing Group action, lEA participants recently agreed in 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. Treasury participated in several working
groups ofthe SLT on conservation arid on accelerated development of energy
resources. The SLT has also concentrated on an annual assessment of the
energy programs of lEA member countries with a view toward reaching the
lEA reduced oil import objective.
Standing Group on Oil Market (SOM).—Treasury has participated in general
meetings of the SOM, and in particular in its Ad Hoc Working Group on
Capital Investment and Financial Structure. It is undertaking an evaluation of
the feasibility of forecasting the energy industry capital requirements for
OECD countries and the ability of the industry to finance such capital
investments.
Law of the Sea
Treasury representatives served on the U.S. delegation to the third U.N. Law
of the Sea Conference. The Conference, which held negotiating sessions in
70
1977 REPORT OF THE SECRETARY OF THE TREASURY
Geneva and New Y o r k , in 1977, has endeavored to draft a single c o m p r e h e n sive treaty package which will include provisions for a judicial system, fish
conservation, navigation, marine pollution, marine scientific research, coastal
States rights, and d e e p o c e a n mining. T h e United States has important
objectives in all of these areas. With the exception of the d e e p o c e a n mining
text, the text p r o d u c e d at the r e c e n t New Y o r k session represented c o m p r o mises which were generally acceptable to most nations.
T h e U.S. concerns over the lack of progress and the inequitable negotiating
process in the d e e p o c e a n mining negotiations have increased to the point t h a t
the question of continued U.S. participation in the Conference has c o m e u n d e r
review within the administration. At stake is access to extensive deposits of
manganese nodules which contain significant quantities of manganese, cobalt,
nickel, and copper. T h e basic position o f t h e United States has been to ensure
that the treaty provides assured access for private c o m p a n i e s and stateo p e r a t e d enterprises, after they have satisfied certain objective criteria
concerning safety, pollution, and work requirements. T h e major industrial
countries, some of which are currently cooperating with American firms in
consortia, have supported this c o n c e p t . O n the other h a n d , the G - 7 7 has
wanted a discretionary access system controlled by the proposed International
Seabed Authority.
At t h e o p e n negotiating sessions in G e n e v a and New Y o r k , progress was
m a d e toward drafting an acceptable compromise text; however, further
negotiations would have b e e n necessary. In spite of this progress, at the last
minute, the C h a i r m a n o f t h e O c e a n Mining C o m m i t t e e drafted a text in private
which largely ignored t h e earlier progress. This text was never discussed with
a representative group of c o n c e r n e d nations and treated weeks of serious
d e b a t e and responsible negotiation as essentially irrelevant.
T h e United States objects to this lack of due process and to provisions of
the text which ( 1 ) give t h e Authority and the proposed one-country-one-vote
Council discretionary power to require a transfer of technology to the
Authority in return for a mining contract; ( 2 ) set an artificial limit on seabed
production to p r o t e c t land-based p r o d u c e r s ; and ( 3 ) faU to specify t h e
financial b u r d e n on the firms of any revenue sharing scheme.
T h e resource policy and revenue sharing issues in the d e e p ocean mining
negotiations have important implications for U.S. economic policies. Underlying the position of the United States in favor of assured access is the desire
to e n c o u r a g e an efficient increase in the output of important minerals and t o
minimize controls over investment, production, and prices. T h e United States
has t a k e n the position t h a t revenue sharing should be limited to a portion of
the value added from mining. Such payments would be a deductible expense
and not a credit against tax liability.
O n O c t o b e r 4, 1977, Ambassador Richardson, the special representative of
the President, a n n o u n c e d that the administration now supports the e n a c t m e n t
of d e e p o c e a n mining legislation to cover the transition until a treaty enters
into force. Treasury is developing a program of domestic tax t r e a t m e n t for t h e
REVIEW O F TREASURY
OPERATIONS
71
U.S. portion of an o c e a n mining operation.'2 However, such beneficial tax
treatment for the industry must be viewed as part of an overall ocean mining
finance program which provides benefits for the international community
(revenue sharing) and which contains no provisions for investment guarantees
for ocean mining firms. If the G o v e r n m e n t were to provide such guarantees,
the ocean miners would have more favorable Federal financial treatment than
other U.S. industries whose interests are also affected by international
negotiations.'^
International Monetary Affairs
W o r l d economic a n d financial developments
The world economy. ^"^—At the beginning of fiscal 1977 the world e c o n o m y
was entering the second year of recovery from the 1974-75 recession. Most
observers expected a steady solid expansion that would reduce both inflation
rates and u n e m p l o y m e n t levels. '^ T h e first half of the fiscal year produced solid
industrial production growth in most countries, but inflation rates—partly
reflecting the strong production increases—rose rather than declined. C o m modity prices posted sharp increases in the September 1 9 7 6 - M a r c h 1977
period.
Toward the end of fiscal 1977 the pattern of faster growth and lower
inflation was reversed. As of August, aggregate industrial production in the six
largest O E C D countries (excluding the United States) had registered declines
for 5 consecutive m o n t h s , and the aggregate level was less than 2 percent above
that of a year earlier.
~
Not surprisingly, the weak domestic d e m a n d picture was associated with
decelerating inflationary pressures. Worldwide commodity prices (excluding
oil) retreated from the fall and early spring increases, and were only slightly
above D e c e m b e r 1976 levels at the end of the fiscal year. Wholesale price
increases reflected this softness, and cost-of-living increases began to
decelerate by the end o f t h e summer in most countries. In the O E C D area, costof-living increases averaged less than 6 percent (annual rate) in the 4 months
ending in September 1977 after rising at a roughly 11-percent rate earlier in
the year.
T h e soft growth picture was also reflected in unemployment levels, which
continued to rise in most countries during the fiscal year. By the end of the
fiscal year more than 16 million persons in the O E C D area were unemployed—
roughly 5.4 percent o f t h e civilian labor force. Near-record levels prevailed in
most countries and even in the expanding economies—especially Japan and
the United States—unemployment continued to be sticky in the downward
12 Sec exhibit 40.
13 Sec exhibits 3K and 40.
MScc exhibit 47.
IS Sec exhibit 5 1.
72
1977 REPORT OF THE SECRETARY OF THE TREASURY
direction and hovered around 2 and 7 percent levels, respectively—both quite
high by historic standards. Within most economies unemployment was
particularly troublesome in demographic terms. Given widespread job security
arrangements, disproportionate shares of the unemployment had fallen on
young workers seeking their first jobs and in some countries on minority
groups.
Perhaps most disturbing was the continued slow growth in real investment
demand. In many countries, business confidence continued to be weak and
essentially only replacement or labor-saving investment was undertaken. In
prior recoveries, real investment followed rather closely behind increases in
consumption levels, providing a "third-stage" boost to the recovery/expansion
path. To date no country outside the United States has yet experienced
anything like the expected pattern of investment demand. Clearly continued
business pessimism clouded investment decisions and, hence, the third stage
of the cycle has not materialized.
The expansion of the nonoil LDC's has been substantially more encouraging. Most of the LDC's facing external financing constraints in fiscal 1976
registered sharp improvements in both external and internal imbalances during
fiscal 1977. For LDC's as a whole inflation rates slowed somewhat and
dramatic declines were recorded for Latin America, as annual rates of costof-living increases declined from 80 to 50 percent.
Payments patterns and financing developments.—The world pattern of
current balances in aggregate terms experienced the largest changes witnessed
since the oil price increase of 1973. Basically, however, these shifts were within
the broad groupings of countries—the OECD, nonoil LDC's, OPEC—rather
than between groups. Since 1973, major groups in the world economy
witnessed sharp year-to-year changes in their respective external balances.
During 1977 this tendency was substantially dampened. In broad, aggregate
terms OPEC's current account surplus stood essentially unchanged in 1977.
The OECD's aggregate deficit rose by roughly $6 billion, partly reflected in
a reduction of the nonoil LDC deficit (about $4 bUlion) and partly due to a
contraction of the rest-of-the-world's deficit—largely in Eastern Europe—of
about $2 billion.
It is the changes in individual country positions within the major groupings
which have been important. This past year brought impressive proof that
appropriate stabilization policies can produce meaningful adjustments in both
external and internal imbalances. Improvements were recorded by the United
Kingdom and Italy and both wUl Ukely run small surpluses on their current
accounts—a significant and welcome change from the deficits of recent years.
A number of non-oil-producing LDC's have also benefited from the enactment
of stabilization policies last year. India, BrazU, and Mexico have substantially
reduced external and internal imbalances—inflation rates have declined
current account deficits have receded, and private sector evaluations ol
creditworthiness have improved.
REVIEW O F TREASURY
OPERATIONS
73
The change in the U.S. current account deficit was the most dramatic as the
deficit on current account, influenced by the country's rapid growth and
slower growth in other major countries, rose about $18 billion. At the other
extreme, the Japanese current surplus increased by $7 billion as the economy
failed to reach its target growth rate.
The pace of gross external borrowing by oil-importing countries reflected
the changes in current account position within major country groupings. By
the end of fiscal 1977, the rate of increase in gross medium- and long-term
borrowing from private capital markets had slowed appreciably. The improved
aggregate deficit position of the non-oil-producing LDC's enabled gross
borrowings to remain essentially at the 1976 pace but with a decline in net
borrowings. In addition, these LDC's were able to increase gross foreign
exchange reserves substantially for the second straight year. The nonmarket
economies of Eastern Europe, the U.S.S.R., and the People's Republic of
China continued to face resistance in private capital markets to new credit
arrangements but were able to arrange borrowings at a pace equal to that of
1976 levels. More important was the successful reentry to private markets of
several borrowers who had been excluded due to a lack of creditworthiness.
Markets were apparently impressed by the results of stabilization programs.
Role of private banks.—International lending by commercial banks'^ has
grown rapidly in recent years, largely as a consequence of the massive OPEC
surpluses and the associated needs of many countries for financing of their
current account deficits. Bank lending has been of vital importance in
cushioning the twin shocks of worldwide recession and massive oil price
increases, while permitting deficit countries time to institute appropriate
adjustment policies aimed at restoring external equilibrium. In calendar 1976,
the private markets provided about three-quarters ofthe gross financing of all
the deficit countries.
Concerns have been expressed that the banks might not be able to continue
their intermediation because of the decline in the creditworthiness of
borrowers, that some countries may have borrowed beyond their capacity to
service debt, and that banks themselves may be overexposed.
Despite the large volume of bank lending, however, the banks on the whole
have not incurred undue risks. "^ While the phasing in of adjustment programs
'
has not been uniform in all countries, considerable progress has been made in
reducing substantially the large payments deficit which many countries have
been running in recent years.
Moreover, the capacity of most countries to service their external debt has
increased over time as a result of an expansion in real income and in the volume
ofthe exports of goods and services. Also, inflation has substantially reduced
their debt burden in real terms.
IftSec exhibit 46.
17 for FRASER
Digitized Sec exhibit 50.
74
1977 R E P O R T OF THE SECRETARY O F T H E TREASURY
Bank loans continue to be heavily concentrated in the developed countries.
At the end of 1976, the foreign claims of banks in the major industrial countries
totaled $530 billion. Of this, $400 billion represented claims on residents in
developed countries and the offshore banking centers. The pattern was similar
for U.S. banks. At the end of 1976, their foreign claims totaled $225 billion,
excluding claims on their affiliates abroad, and over 60 percent of these, or
$ 140 billion, were claims on residents in the developed countries and on banks
in the offshore centers.
Foreign exchange developments and operations.—During the fiscal year,
countries followed a variety of exchange rate practices. There continued to be
a greater willingness among countries to permit changes in exchange rates than
there was 5 or 10 years ago and a much clearer recognition ofthe importance
of exchange rate movements in facilitating the adjustment of international
imbalances. During the fiscal year, there were a number of movements in the
exchange rates of important, internationally traded currencies as market
forces continued to respond to the wide divergencies in domestic economic
and financial conditions.
During 1976, the major market developments had involved the depreciation
in terms of the dollar of currencies of a few industrial countries experiencing
payments deficits and the efforts of those countries, notably the United
Kingdom, France, and Italy, to deal with imbalances in their domestic
economies. In 1977, attention was attracted to the currencies of the major
countries experiencing payments surpluses as well as to the progress being
made by countries pursuing stabilization programs. The German mark,
Japanese yen, and Swiss franc, which had been appreciating in terms of the
dollar in 1976, continued to appreciate. The United Kingdom and Italy took
advantage of improved positions to rebuild depleted reserves and to begin the
process of debt repayment. The U.S. dollar, on a trade-weighted basis,
continued to fluctuate rather narrowly, though the dollar depreciated briefly
by about 1 1/2 percent between late June and late July. Following the release
of an OECD Ministerial communique, stating that countries with current
account surpluses would allow their currencies to appreciate in response to
underlying market forces, the dollar experienced a period of speculative selling
fostered by an impression in the market that the United States sought a lower
dollar. This impression was dispeUed by U.S. officials when the speculative
atmosphere persisted. At the end of September, the dollar, on a trade-weighted
basis in terms of OECD currencies, was about 2.4 percent above its level of
a year earlier.
Early in the fiscal year, speculative pressures on the German mark, in large
part in expectation of a DM revaluation within the European common margins
("snake") arrangement, resulted in an appreciation of that currency; the mark
moved to DM 2.40 per dollar following the October snake realignment, which
included a 2 percent DM revaluation. Late in 1976 the DM began to appreciate
again, but the rate returned to the DM 2.40 level early in 1977 as the German
economy showed signs of weakening and reflows of funds were attracted by
REVIEW OF TREASURY OPERATIONS
75
countries which had u n d e r t a k e n stabilization measures. T h e DM traded rather
narrowly below that level before appreciating from about DM 2.36 in late J u n e
to less than DM 2.25 briefly in late July during the speculative period following
release o f t h e O E C D c o m m u n i q u e . T h e rate then fluctuated around DM 2.32,
moving to about DM 2.3 1 at the end of September, reflecting an appreciation
of about 6 percent in terms of the dollar over the fiscal year.
T h e Japanese yen appreciated during the first half of 1976, and was trading
at less than Y 2 9 0 per dollar by August. T h e rate then began to depreciate in
advance of the Japanese elections in D e c e m b e r and midst apprehension of a
major boost by O P E C in oil prices; the trade and current account surplus had
narrowed, and the yen reached nearly Y300 before the elections. The yen then
resumed appreciating, reaching less than Y275 in April, during a period in
which there were only minor fluctuations in the rates of other internationally
important currencies. After a b r i e f p e r i o d of uncertainty, stemming from the
prospects of the imposition of trade restrictions by other major countries on
imports from Japan and an easing in Japanese monetary policy, the yen again
began to appreciate early in J u n e and reached Y 2 6 3 briefly in early July.
Subsequently, the rate receded to about Y265 per dollar, reflecting an
appreciation o f a b o u t 8 percent from September 1976.
T h r o u g h o u t much of the period under review, the Swiss franc attracted
funds from countries whose currencies were experiencing selling pressure,
primarily because of a low Swiss inflation rate and a large current a c c o u n t
surplus. During O c t o b e r 1976-early J a n u a r y 1977, however, the rate
fluctuated around SF 2.45 per dollar. T h e franc then depreciated and traded
above SF 2.56 in M a r c h ; with Swiss interest rates low and capital outflow
encouraged, there were reflows from the franc—as well as from the D M — t o
currencies of countries which had u n d e r t a k e n stabilization programs. In April,
the franc was temporarily affected by the reports of the losses at the Chiasso
branch of a major Swiss bank, but by the end of May the franc was appreciating
rather strongly again and traded below SF 2.40 by the end of July. The rate
was fairly steady in August, as funds were drawn, in particular, into sterling,
but in S e p t e m b e r the franc appreciated to a record high in terms o f t h e dollar
of less than SF 2.35, reflecting an appreciation of about 5 percent from
September 1976.
The major change in the Canadian dollar was in November 1976, when it
depreciated from a b o u t $1.03 to less than $0.97. T h e Canadian dollar had
been appreciating earlier in the year, reflecting C a n a d a ' s progress in reducing
inflation and the effects of large Canadian borrowings abroad. With the p a c e
of recovery slow and unemployment gaining, however, the Separatist Party's
election victory in Q u e b e c brought the currency under selling pressure.
Subsequent concern a b o u t C a n a d a ' s , and especially Q u e b e c ' s , continuing
ability to place long-term bonds in U.S. and other foreign capital markets, as
well as a b o u t Canadian economic performance, led to further depreciation.
Although C a n a d a continued to borrow in foreign capital markets, the
Canadian dollar reached a low of less than $0.93 in August. The rate was also
76
1977 REPORT OF THE SECRETARY OF THE TREASURY
at this level at the end of September, reflecting a depreciation of about 10
percent over the period under review.
T h e Italian lira, which had reached a record low of Lit 917 per dollar in May
1976, appreciated following the imposition of severe exchange restrictions. A
new Italian G o v e r n m e n t was installed in September, and planning began on
an e c o n o m i c stabilization program, a n n o u n c e d in October. T h e lira fluctuated
widely t h r o u g h o u t the latter part of 1976, ending the year at about Lit 8 7 5 .
Some exchange controls were removed, and the lira reached about Lit 887 in
April 1977, when a g r e e m e n t was reached with the IMF for a standby
a r r a n g e m e n t of SDR 4 5 0 million. In connection with the standby, the Italian
stabilization was able to rebuild reserves, and at the end of September, the rate
was a b o u t Lit 8 8 3 , representing a depreciation of about 2 p e r c e n t over the
period.
Sterling began to depreciate in early M a r c h 1976, after having traded above
$2.02 1/2. By early J u n e the rate was little more than $1.70, and sterling
reached a low of $1.55 1/2 briefly late in October. A series of discussions
among the G r o u p of T e n countries, Switzerland, and the Bank for International
Settlements (BIS) was initiated in early June to deal with the immediate
c o n c e r n s o f t h e British foreign exchange situation. These discussions resulted
in an a g r e e m e n t on J u n e 7 to provide a $5.3 billion package of short-term
standby facilities. T h e Treasury, through the Exchange Stabilization Fund
( E S F ) , and the Federal Reserve, against its reciprocal currency ( " s w a p " )
arrangemerit with the Bank of England, agreed to provide up to $ I bUlion each
as part o f t h e package, to terminate o n D e c e m b e r 9. T h e British G o v e r n m e n t
pledged that it would arrange to draw additional amounts on its IMF credit
tranches if necessary to obtain funds for repayment. T h e United Kingdom drew
a total of a b o u t $1.5 billion against these facUities, in June and in September;
drawings on the U.S. portion totaled $600 mUlion, with the ESF and the
Federal Reserve e a c h providing $ 3 0 0 million. All drawings under the
a r r a n g e m e n t were repaid at maturity on D e c e m b e r 9.
Following the imposition of emergency measures in O c t o b e r , including a
severe tightening in monetary policy, sterling began to appreciate, the rate
reaching $1.65 in N o v e m b e r and $1.70 in D e c e m b e r .
T h e British had begun negotiating a standby arrangement with the IMF; a
stabilization program, a n n o u n c e d in D e c e m b e r , led to the conclusion in
January 1977 of an SDR 3,360 million, 2-year IMF standby arrangement. As
a supplement to this IMF standby, only part of which could be drawn
immediately, the ESF and the Federal Reserve each agreed to provide shortterm swap facUities to the Bank of England of up to $250 miUion, to be repaid
following subsequent drawings on the IMF standby; these facilities were n o t
used. Negotiations were also u n d e r t a k e n on a multilateral credit arrangement
to alleviate pressures on sterling which might arise from further shifts out of
officially held sterling balances and under which such balances would be
reduced. Such a facility would be designed to accompany and reinforce t h e
e c o n o m i c program u n d e r t a k e n by the British G o v e r n m e n t in connection with
REVIEW O F TREASURY
OPERATIONS
77
the IMF standby. T h e arrangement, concluded in January, established a
medium-term standby facUity, provided to the Bank of England by the BIS,
backed up by the participating countries. U n d e r the arrangement, the Bank
of England may draw up to $3 billion to finance net reductions in official
sterling holdings below D e c e m b e r 1976 levels. For the United States, the
Federal Reserve and the ESF agreed to provide a combined a m o u n t of up to
$1 billion in short-term swaps to the BIS. For their part, the British authorities
agreed to offer m e d i u m - t e r m , foreign-currency-denominated securities to
official holders to fund part of the sterling balances outstanding. T h e r e were
no transactions under this a r r a n g e m e n t during the period under review.
T h e position of sterling in the m a r k e t reversed toward the end of 1976, the
United Kingdom external and domestic financial position improved, and the
Bank of England gained reserves. Sterling fluctuated narrowly around $1.72
during J a n u a r y - J u l y , moving then to $1.74 1/2, an appreciation of about 4
p e r c e n t over the fiscal year. T h e Bank of England intervened strongly in the
m a r k e t to prevent an appreciation of sterling which it considered incompatible
with trends in domestic prices.
T h e F r e n c h franc traded at less than F F 4.50 per dollar in early 1976 and
was supported heavily to maintain its EC snake margins until the French
withdrew from the a r r a n g e m e n t in mid-March. By August, the franc was
trading at over 5.00, and the French instituted an e c o n o m i c stabilization
program. T h e rate then fluctuated fairly widely as the m a r k e t gradually
regained balance by early 1977. With progressive improvement in the French
price and external payments performance, and bolstered by borrowings
abroad, the franc appreciated slightly in 1977, and the Bank of France
regained reserves. At the end of September the rate was about FF 4.90,
reflecting an appreciation of 1 p e r c e n t from its September 1976 level.
T h e r e were a n u m b e r of changes in the EC snake arrangement. T h e
resistance to m a r k e t pressures inherent in the arrangement has often been
unsettling to the exchange market. T h e snake was instituted in March 1972,
when the six m e m b e r s o f t h e E u r o p e a n Community a n n o u n c e d their intention
to maintain their exchange rates within 2 1/4 percent of each other; the
Benelux m e m b e r s maintained narrower margins of I 1/2 p e r c e n t among their
own rates. Since that time, Britain has joined and withdrawn; France has
withdrawn, reentered, and withdrawn again; Italy has withdrawn; D e n m a r k
joined, withdrew, and rejoined; Norway and Sweden joined, and in 1977
Sweden withdrew. T h e Benelux a r r a n g e m e n t was abandoned in March 1976.
During the period under review, exchange rate realignments among participants were undertaken in O c t o b e r 1976 and in April and August 1977, and
at the end of the period the participants were Belgium, D e n m a r k , G e r m a n y ,
the Netherlands, and Norway.
U.S. policy on intervention in the foreign exchange m a r k e t is based on the
view that exchange rates should be permitted to reflect m a r k e t forces. T h e
Federal Reserve and the Treasury intervene in the market not to influence the
trend of exchange rate movements, but only when necessary to c o u n t e r
78
1977 REPORT OF THE SECRETARY OF THE TREASURY
disorderly market conditions. An expression of U.S. policy on intervention is
found in the December 1976 revisions ofthe FOMC Authorization for Foreign
Currency Operations and Foreign Currency Directive which were developed
in consultation with the Treasury. The United States considers a strong dollar
to be in its national interest as well as in the interest of the system generally,
and seeks to pursue that objective through the achievement of a strong,
expanding, noninflationary domestic economy.
All U.S. foreign exchange market intervention during October 1976-September 1977 was undertaken by the Federal Reserve, through the Federal
Reserve Bank of New York, in consultation with the Treasury. Operations
were conducted almost entirely in German marks, the most important foreign
currency affecting the market for dollars. Sales of DM were at times financed
by drawings against the Federal Reserve's $2 billion swap arrangement with
the Bundesbank, necessitating subsequent purchases of DM to repay the swap
drawings. DM were also purchased from time to time when especially strong
demand for dollars tended to unsettle the New York market, and the Federal
Reserve often maintained some balances in DM in order to be able to conduct
relatively small operations without drawing on the swap line. At no time during
the period did outstanding Federal Reserve drawings under the swap line
exceed $ 108 million, or DM balances held by the Federal Reserve exceed $93
million.
In addition to market intervention, the U.S. authorities began in November
1976 to undertake foreign exchange transactions for the repayment of Swiss
franc indebtedness remaining from August 1971. Pursuant to an agreement
with the Swiss authorities, regular repayment will be made over a 3-year period
on $1,147 million equivalent of Swiss franc drawings under the Federal
Reserve swap line and $1,599 million equivalent of Swiss franc-denominated
U.S. Treasury securities. By September 30, 1977, the Federal Reserve
indebtedness had been reduced to $615 million equivalent, and the Treasury's
outstanding securities had been reduced to $ 1,289 million equivalent. Most of
the Swiss francs used for the repayments were purchased directly from the
Swiss National Bank against dollars; in addition, sorhe francs were purchased
against third currencies acquired in the market by the Federal Reserve, and
some francs were purchased by the Federal Reserve from correspondents.
During the period, the Treasury, through the ESF, and the Federal Reserve
System also provided short-term credit facilities to Mexico and the ESF to
Portugal,'** described below. All drawings were repaid. ESF commitments
which remained outstanding at the end of the period, and against which
drawings could be made, consisted of a $300 million Exchange Stabilization
Agreement with Mexico and the commitment of up to $1 billion, shared with
the Federal Reserve, under the sterling balance facility. The Federal Reserve
maintained reciprocal currency arrangemerits with 14 foreign central banks
IKScc e x h i b i t 4 5 .
REVIEW O F TREASURY
OPERATIONS
79
and the BIS totaling $20,160 million, under which drawings by either party
may be m a d e subject to agreement.
In conjunction with its new policies following its decision to allow the peso
to float on August 3 1 , 1976, the Mexican G o v e r n m e n t entered into negotiations for medium-term financing from the IMF. Within that context, in
S e p t e m b e r the Treasury and the Federal Reserve agreed to a special
arrangement with the Bank of Mexico, making available up to $600 million
of interim financing. U n d e r this arrangement, the Bank of Mexico drew $365
million in a currency swap with the ESF and repaid that a m o u n t in November
following a Mexican drawing on the IMF. T h e remaining $235 million under
the arrangement was not utilized. In October, Mexico repaid the full $360
million which had been drawn under its swap line with the Federal Reserve in
April. In November, Mexico drew $ 150 miUion in two equal installments from
the ESF under the longstanding stabilization agreement with the Treasury. At
the same time, Mexico drew equivalent amounts on its swap line with the
Federal Reserve. T h e remaining $ 150 million available under the stabilization
agreement was drawn in N o v e m b e r and repaid in December. Mexico repaid
its outstanding drawings to the Federal Reserve in February and to the ESF
in AprU 1977.
In February 1977, the Exchange StabUization Fund was used to extend up
to $300 million in short-term credit facilities to the Bank of Portugal. T h e ESF
a r r a n g e m e n t was envisaged as part of a three-phase program of assistance—
involving this short-term credit, drawings on the IMF by Portugal, and a
proposed medium-term multilateral credit facility—designed to assist Portugal
in stabilizing its economy. T h e ESF facilities were provided during a period of
critical need, pending the arrangement of more substantial multilateral
medium-term financing, in the context of the implementation by Portugal of
a sound economic program to correct underlying factors that had led to
instability. Thus, the facility was designed to encourage Portugal to adopt
measures which would enable that country to draw from the IMF and
ultimately to obtain adequate financing through private channels. Under the
arrangement, doUar/escudo swaps were extended, which were repaid following Portuguese drawings on the IMF: A $50 million swap was provided in
February and repaid in May, and a $35 million swap was provided in May. T h e
remaining $215 million under the arrangement was in the form of reciprocal
gold deposits made during February-July. These deposits enabled Portugal to
mobilize part of its gold reserves during an especially critical period. All o f t h e
drawings were repaid by September 1, the gold deposits were withdrawn, and
the facility expired.
International monetary cooperation
I.
Meeting official financing requirements
During fiscal 1977, international monetary developments continued to
reflect cooperative efforts to p r o m o t e sound economic growth and to deal with
80
1977 REPORT OF THE SECRETARY OF THE TREASURY
the unprecedented imbalances in international payments arising since the
1973-74 oil price rise. In the initial period following the oil price rise emphasis
had been placed on financing the oil deficits, thus enabling countries to
"accept" them and avoid self-defeating efforts by some to shift their deficits
to others through excessive deflation, protectionist measures, or competitive
exchange rate idepreciation. As some countries began to approach the limits
of prudence in their borrowing and it became apparent that OPEC surpluses
would continue longer than originally anticipated, a general consensus
developed that greater emphasis must be placed on adjustment of payments
positions to achieve a more sustainable pattern. The outlines of a broad new
strategy were initially developed at the IMF/IBRD annual meetings in Manila
in October 1976,'^ and subsequently elaborated at the London economic
summit.20 This approach seeks to redistribute and reduce the deficits so that
necessary borrowing is undertaken by those nations whose creditworthiness
and economic strength are adequate to sustain the additional debt.
The private markets have provided about 75 percent ofthe $225 billion in
fmancing required during 1974-76 and can and should continue to provide the
bulk of the funds in the years ahead. In a relatively few cases, however, where
the need for adjustment is pressing, the private markets have become less
willing to provide all the financing required. Without adequate financing, some
countries might be forced to take adjustment measures—for example,
excessively restrictive domestic policies and recourse to protectionist controls—that would be destructive of national and international prosperity.
In order to ensure that needed adjustment is pursued—in a cooperative and
internationally appropriate manner—by countries facing balance of payments
difficulties, it is therefore important that adequate official financing be
available on appropriate terms and conditions. The IMF is the primary source
of "conditional" financing—that is, financing keyed to the adoption by the
borrower of sound adjustment policies designed to eliminate the need for such
financing and to provide a basis for repayment. Between 1974 and 1976, the
IMF provided about 7 percent, or roughly $ 15 billion, of total financing. This
record use of Fund resources has reduced its holdings of currencies that are
available for lending to about $4.5 to $5.5 bUlion. While additional funds will
be available when the quota increase agreed in 1976 takes effect pursuant to
the sixth quota review, and some uncommitted resources remain under the
General Arrangements to Borrow (see below), IMF resources nonetheless are
quite low in relation to potential demands over the next few years.
Supplementary Financing Facility.—At its April 1977 meeting,2' the IMF
Interim Committee concluded "that there was an urgent need for a supplementary arrangement of a temporary nature that would enable the Fund to expand
its financial assistance to those of its members that in the next several years
I^Scc exhihits 41 and 42.
20Sec exhibit 49.
21 Sec exhibit 48.
REVIEW O F TREASURY
OPERATIONS
81
will face payments imbalances that are large in relation to their e c o n o m i e s . "
After a period of intensive negotiations, agreement was reached in August with
a number of major industrial and oil-exporting countries in strong financial
positions to provide, on a roughly equal basis between the two groups, a b o u t
SDR 8.6 billion (about $10 billion). In September, the IMF Executive Board
decided on the final terms and conditions for the financing arrangements and
for use of the facility.
The financing c o m m i t m e n t s of participants in the facility would remain
effective for 5 years, with actual drawdowns repaid over 3 1/2 to 7 years,
equivalent to an average maturity of 5 1/4 years. Participants in the financing
a r r a n g e m e n t will receive a liquid reserve claim on the IMF that can be
encashed at any time upon representation of a balance of payments need, can
be sold to IMF m e m b e r s and to other approved purchasers, and will earn
interest equal to the yield on U.S. Treasury securities of comparable maturity
( r o u n d e d up to the nearest one-eighth of 1 p e r c e n t ) .
T h e terms and conditions on use of supplementary financing by IMF
m e m b e r countries include the following provisions:
a. Eligibility.—There are basically three criteria: ( a ) T h e m e m b e r ' s
b a l a n c e of p a y m e n t s financing need must be greater than its
remaining access to regular IMF resources; ( b ) the m e m b e r ' s
problems must justify an adjustment and repayment period longer
than normally applies to use of regular IMF resources; and ( c ) the
m e m b e r must provide a detailed economic program that the IMF is
satisfied is a d e q u a t e to solve the country's problems and is compatible
with the IMF's policies on use of its resources in the upper ( m o r e
conditional) credit tranches.
b.
Access.—Access will parallel access to the IMF's regular credit
tranches and Extended Fund Facility. In conjunction with use of
regular credit tranches, an eligible m e m b e r ' s access to supplementary
financing will initially be in an a m o u n t approximately equal to its
q u o t a in the IMF. Supplementary financing will be m a d e available in
amounts up to 140 p e r c e n t of quota in conjunction with use of the
Fund's Extended Fund Facility. T h e IMF may decide to provide larger
amounts of financing in special circumstances.
c.
Period of availability.—Members will be able to apply to the IMF for
use of the facility at any time within 2 years of the date the facility
enters into force. This period will be reviewed and may be extended
for a third year. Drawings will normally be m a d e over 2 to 3 years,
provided that all drawings must be completed within 5 years of the
facility's entry into force.
d. Repayment. — R e p a y m e n t of drawings under the supplementary
facility will be m a d e in equal semiannual installments beginning not
later than 3 1/2 years and completed not later than 7 years from the
date of drawing.
82
1977 REPORT OF THE SECRETARY OF THE TREASURY
e.
Charges.—Charges on drawings under the supplementary facility will
be equal to the rate of interest paid on financing provided to the
facility, plus a margin that will average slightly less than one-quarter
of 1 percent. T h e margin will be used to meet IMF administrative
expenses in connection with operations of the facility.
T h e facility will e n t e r into force when the IMF has completed formal
financingagreementsfor
a t o t a l o f at least SDR 7.75 billion ( a b o u t $9 bUlion),
including agreements with at least six countries each providing at least SDR
500 mUlion of fmancing to the facility. T h e United States requires prior
congressional approval to participate in the facility. A bill22 authorizing the
Secretary of the Treasury to m a k e resources available for U.S. participation
in an a m o u n t not to exceed the dollar equivalent of 1,450 million special
drawing rights ( a b o u t $1.7 billion) was submitted to Congress on September
16, 1977, and hearings were underway as the fiscal year ended.
I M F quotas.—The Supplementary Financing Facility is intended as a
temporary measure and q u o t a subscriptions will continue to be the means of
providing the IMF with p e r m a n e n t resources. As part of the monetary reform
a r r a n g e m e n t s agreed in 1976, the sixth general review of quotas was
completed in 1976 and it was decided to increase IMF quotas by SDR 10 bUlion
(one-third) to SDR 39 billion ( a b o u t $45 bUlion).
T h e increase in IMF q u o t a s will n o t enter into force until the effective date
o f t h e second a m e n d m e n t o f t h e IMF Articles, and m e m b e r s having not less
than three-fourths of total quotas have consented to the increase in their
quotas. Legislation authorizing the United States to consent to the increase in
its q u o t a was approved by Congress and signed into law on O c t o b e r 19, 1976.
T h e United States formally notified the Fund of its consent to the increase in
its q u o t a on N o v e m b e r 15, 1976. A s o f September 30, 1 9 7 7 , 4 5 IMF m e m b e r s
accounting for 52.43 p e r c e n t of quotas had consented to their increases.
As part of the 1976 q u o t a decision, it was also agreed to initiate the next
(seventh) general review of quotas after a 3-year period instead of waiting t h e
customary 5 years. At its April 1977 meeting, the Interim C o m m i t t e e agreed
in principle to a further " a d e q u a t e " increase in quotas and requested t h e
Executive Board to p r e p a r e a report, including recommendations, for the
S e p t e m b e r meeting o f t h e C o m m i t t e e . Discussions in the Board have revealed
a wide variety of views o n the size and distribution of a q u o t a increase and o n
the timing of a subsequent (eighth) q u o t a review. A consensus had n o t
emerged by the end of the fiscal year and the Interim C o m m i t t e e therefore
requested that the Executive Board continue its deliberations with a view
towards submitting a report in 1978.^3
22Sec exhibit 53.
23See exhibits 54 und 55.
REVIEW O F TREASURY
II.
OPERATIONS
83
Implementing m o n e t a r y reform
The 1976 Annual Report described in detail the agreements on reform of
the international monetary system reached last year. T h e focus of attention
during fiscal 1977 was in implementing these reforms, particularly ratification
o f t h e a m e n d m e n t o f t h e IMF Articles of Agreement and the increase in Fund
quotas, phasing out the monetary role ofgold, and providing for the increased
IMF responsibility for surveillance of exchange rate arrangements.
Ratification of I M F amendments.—A central feature of the reform agreement was a general revision of the IMF Articles, particularly as they relate to
exchange rate arrangements and gold. T h e a m e n d m e n t s do not enter into force
until formally accepted by at least three-fifths of m e m b e r s ( 7 9 ) with at least
four-fifths p f t h e total voting power. As of September 30, 1977, 56 m e m b e r s
with 58.14 percent of the total voting power had completed the ratification
process.
T h e United States required congressional authorization to accept the
a m e n d m e n t s , and legislation for this purpose was submitted on May 3 1 , 1976.
The bUl also provided for a m e n d m e n t of the Bretton W o o d s Agreements Act
and the Special Drawing Rights Act to conform their provisions with the new
Articles and to modify the Gold Reserve Act of 1934 to retain the value o f t h e
dollar in terms of gold solely for the purpose of serving as the legal standard
for the issuance of gold certificates. T h e House passed the bill, with
a m e n d m e n t s , on July 2 7 , 1976, and the Senate accepted the House bill on
O c t o b e r 1, 1976. T h e bill was enacted into law on October 19, 1976 (Public
Law 9 4 - 5 6 4 ) , and the United States formally notified the IMF of its
a c c e p t a n c e o f t h e a m e n d m e n t s on N o v e m b e r 15, 1976.
Exchange rate arrangements.'^^—The a m e n d e d Articles provide for a
fundamental change in exchange rate arrangements. Instead of requiring
a d h e r e n c e to a particular exchange rate regime, members are given wide
latitude in the choice of exchange rate practices best suited to their domestic
requirements but subject to important undertakings regarding exchange rate
policies. T h e IMF has been provided with increased authority and responsibility to oversee the compliance o f e a c h m e m b e r with these undertakings, and
the Fund is directed to adopt specific principles to guide m e m b e r s with respect
to exchange rate policies.
In preparation for this role, the IMF Executive Board adopted in April 1977
a decision on surveillance over exchange rate policies that will take effect when
the a m e n d e d Articles enter into force. This decision sets forth the principles
for guidance of m e m b e r s ' exchange rate policies, principles for Fund
surveillance over those policies, and procedures for IMF surveillance.
T h e principles for guidance of m e m b e r s are broad and build on the concepts
contained in the a m e n d e d Articles. They provide— '
24 Sec exhibit 43.
84
1977 REPORT OF THE SECRETARY OF THE TREASURY
T h a t a m e m b e r shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of
payments adjustment or gain an unfair competitive advantage;
T h a t a m e m b e r should intervene in the exchange m a r k e t if necessary to
c o u n t e r disorderly conditions; and
T h a t in intervention policies m e m b e r s should take a c c o u n t o f t h e interests
of others, including countries whose currencies they use for exchange
m a r k e t intervention.
T h e principles for surveillance by the IMF are more detailed and include
developments in a country that might indicate the need for discussions
between the Fund and the member—for example, protracted intervention in
one direction; unsustainable levels of borrowing or lending; the adoption or
intensification of restrictions. P r o c e d u r e s are also set forth which the Fund
would use in appraising the situation and reaching a judgment.
This a p p r o a c h reflects recognition that a comprehensive assessment of
countries' policies is required rather than rigid quantitative measurements. It
is based on the fundamental premise of the new exchange rate article that
stability of exchange rates can only be achieved by promoting stable
underlying economic and financial conditions.
Gold.^^—Concrete measures were incorporated in the a m e n d e d Articles to
eliminate effectively any impprtant monetary role for gold in the IMF and to
provide for the future disposition of IMF gold holdings. In addition to these
steps, it was agreed to begin disposal, under existing authority, of 50 million
ounces of gold held by the Fund, of which half would be sold for the benefit
of developing countries (see below) and the remainder would be sold to IMF
m e m b e r s in proportion to their quotas.
In J a n u a r y - F e b r u a r y 1977 the IMF sold about 6 million ounces o f g o l d to
m e m b e r s in proportion to quotas at the official price of SDR 35 per fine troy
o u n c e . T h e United States received a b o u t 1.4 million ounces, paying SDR 50.2
million equivalent in dollars.
III.
IMF operations
T h e r e c e n t record use of IMF resources slowed during the current fiscal year
from the extraordinary levels of the preceding year due to a convergence of
several factors. Successful stabilization efforts in some countries—both
developed and developing—helped to redress domestic and external imbalances, thereby improving access to private credit, reducing official financing
requirements and permitting early repayment of previous I M F drawings by
several countries. An improvement in commodity prices contributed to a
reduction of export shortfalls and thus use of the liberalized compensatory
financing facility from the very high levels in 1976. The temporary oil facility,
which had been a major source of relatively unconditional IMF financing in
prior years, ceased operations. Finally, some countries may have been
25 See exhibit 44.
REVIEW OF TREASURY
OPERATIONS
85
reluctant t o use t h e IMF's m o r e conditional facilities in view of the limited
a m o u n t of financing that would be available to them under present IMF rules
and resources.
General account transactions.—Total gross drawings by I M F members in
fiscal 1977 (including use of I M F reserve position) a m o u n t e d to SDR 4.0
bUlion by 36 countries, c o m p a r e d with SDR 7.1 billion by 59 countries in t h e
preceding year. During t h e period, t h e United Kingdom was t h e largest single
borrower, accounting for SDR 2.3 billion. T h e principal currencies drawn
from t h e IMF were t h e U.S. dollar, S D R 1.7 bUlion; G e r m a n mark, SDR 7 5 5
mUlion; a n d Japanese yen, S D R 471 miUion. A total of SDR 268 million in
special drawing rights were also used for drawings.
R e p a y m e n t of outstanding drawings totaled S D R 2.9 billion in fiscal 1977,
largely reflecting repurchases by Italy, SDR 950 million; t h e United Kingdom,
SDR 610 million; a n d India, SDR 281 million. Currencies used in repurchases
included U.S. doUars, S D R 1.2 billion, and G e r m a n marks, SDR 459 miUion.
R e p a y m e n t s with special drawing rights a m o u n t e d to SDR 844 mUlion.
General Arrangements to Borrow.—The General Arrangements to Borrow
( G A B ) was established in 1962 by 10 indiistrial m e m b e r countriesof the I M F * ,
including the United States, as a m e a n s of supplementing the Fund's resources
when n e e d e d to cope with developments that threaten to impair the operation
o f t h e international monetary system. Each participant undertakes to provide
specified amounts of its currency when called to help finance drawings from
the I M F by another G A B participant. Total commitments currently a m o u n t
to the equivalent of SDR 6.7 billion, ofwhich the U.S. share is SDR 1.7 billion.
During fiscal 1977, t h e IMF Managing Director activated t h e G A B to help
finance an SDR 3.36 billion standby arrangement with t h e United Kingdom
and an SDR 450 million standby with Italy. In January, May, a n d August calls
totaling S D R 9 4 5 million were m a d e to finance United Kingdom purchases
under its standby, of which t h e United States provided SDR 5 5 2 million. In
May, t h e United States also provided SDR 24 mUlion as part of an SDR 9 8
million call for Italy.
Compensatory a n d buffer stock financing facilities.—The compensatory
financing facility was established in 1963 andHberalizedin 1966 and 1975 ( s e e
1976 Annual Report for details) to provide I M F m e m b e r s , particularly
primary producing countries, with additional access to Fund resources to m e e t
balance of payments difficulties arising from temporary shortfalls in export
earnings due primarily to circumstances beyond their control. After extremely
heavy use in fiscal 1976, the p a c e of drawings slackened this year as
commodity prices improved. During the year, gross drawings amounted t o
SDR 691 million by 20 countries, bringing t h e level of outstanding drawings
to SDR 2,789 million. Developed countries accounted for 4 2 percent of
drawings in fiscal 1977, with South Africa t h e largest D C borrower. A m o n g
LDC's, Mexico drew S D R 185 million as t h e largest user of t h e facility.
* Switzerland also participates in the GAB but is not a member of the IMF.
86
1977 REPORT OF THE SECRETARY OF THE TREASURY
The buffer stock facility was created in 1969 to help members experiencing
balance of payments difficulties finance their contributions to international
buffer stocks that satisfy IMF criteria. The tin and cocoa buffer stocks are
eligible for financing but no use of the IMF facility was made in fiscal 1977.
Extended Fund Facility.—The Extended Fund Facility was established in
September 1974 to provide assistance to IMF members in meeting their
balance of payments deficits for longer periods than is the practice under
normal credit tranche policies. A member may draw up to 140 percent of its
quota under the extended facility, but not in excess of 165 percent of its quota
from this source plus regular IMF sources combined. (The combined limit was
temporarily raised to 176.25 percent of quota by the temporary expansion of
access to the IMF's regular resources agreed in 1976 and effective until the
sixth quota increase comes into effect.)
Assistance from the Extended Fund Facility was approved for one country
infiscai 1977—Mexico—for an amountof SDR 518 miUion. In February 1977
Mexico drew SDR 100 million under its extended arrangements. The only
other purchase under this facility in fiscal 1977 was made by the PhUippines
in August in the amount of SDR 78.8 mUlion, as part of a 3-year arrangement
for SDR 217 million agreed in September 1976. Since the facility was
established, only one other country—Kenya—has entered into an extended
arrangement. After an initial purchase of SDR 7.7 million in August 1976,
Kenya has made no further purchases. Total purchases in fiscal 1977
amounted to SDR 178.8 riiillion, for a cumulative total since the facility was
established of SDR 276.5 mUlion.
Special drawing rights.—The Managing Director of the IMF is required by
the Articles of Agreement to submit to the Board of Governors, not later than
6 months before the end of each basic period (a basic period lasts 5 years),
a proposal with respect to the allocation of special drawing rights in the next
basic period. Calendar 1977 is the last year of the second basic period that
began on January 1, 1973, and in 1977 Managing Director Witteveen
submitted a report to the Board of Governors and to the Executive Directors
indicating that he had concluded that there was no proposal for allocation
consistent with the Articles that had broad support among participants.
Accordingly, at its April meeting the Interim Committee deferred a decision
on an SDR allocation until its first meeting in 1978. The Interim Committee
also requested the Executive Directors to '^review the characteristics and uses
ofthe SDR so as to promote the purposes ofthe Fund, including the objective
of making the SDR the principal reserve asset in the international monetary
system." This review was in progress as the fiscal year ended.
Trust fund gold auctions.—As part ofthe process of phasing out the monetary
role ofgold agreed in the reform negotiations, the IMF initiated in June 1976
a program of sales of 25 million ounces of Fund gold for the benefit of
developing countries. In fiscal 1977, the IMF held 10 public auctions at which
about 6 million ounces ofgold were sold, bringing total sales as of September
REVIEW OF TREASURY OPERATIONS
87
30, 1977, to 8.4 million ounces. T h e profits received from sales in 1977
amounted to SDR 512 million, raising total resources to be used for the benefit
of L D C ' s to SDR 839 million. Following a review of the gold sales program
in N o v e m b e r - D e c e m b e r 1976, the IMF Executive Directors decided to retain
the basic features of the sales program but placed it on a more regular basis
by initiating monthly auctions and acted to widen the range of potential
participants.
A portion o f t h e p r o c e e d s from the gold sales corresponding to L D C shares
in IMF quotas are to be distributed directly to each eligible country in
proportion to its quota. T h e remainder is to be used to finance a trust fund to
provide balance of payments financing on concessional terms to the poorest
IMF m e m b e r s . T h e trust fund was established in May 1976, and initial loan
disbursements o f a b o u t SDR 131 million to 19 o f t h e 61 eligible countries were
m a d e during fiscal 1977. As the fiscal year ended, the Executive Board was
completing arrangements for the first direct distribution.
Oil facility subsidy account.—The IMF oil facility was a temporary program
designed to respond to emergency needs arising from sharply increased oil
prices. New lending from the facility terminated on March 3 1 , 1976. O n
August 1, 1975, the IMF established an interest subsidy a c c o u n t under a trust
a r r a n g e m e n t separate from the oil facility, and financed by voluntary
contributions, to reduce the cost of borrowing from the facility to those IMF
country m e m b e r s most seriously affected by the oil price increases. Subsidy
payments are to be m a d e during the period 1 9 7 6 - 8 3 , and the first payments
were m a d e to 18 eligible m e m b e r s in July 1976. For 1977, the IMF Executive
^ B o a r d decided to m a k e subsidy payments of SDR 27.5 mUlion, bringing total
diswbursements to SDR 41.3 mUlion.
U.S. initiative in the OECD Committee on Financial Markets
At its N o v e m b e r 1976 meeting, the O E C D C o m m i t t e e on Financial Markets
discussed a U.S. initiative aimed at further liberalizing international flows of
portfolio capital.
In M a r c h 1977, the Committee reviewed a U.S. submission identifying
I possible obstacles to international securities transactions in selected O E C D
countries. Other countries were asked to verify the information in the U.S.
submission and to provide any additional information on possible obstacles to
international flows of portfolio capital. At the June 1977 meeting, the
C o m m i t t e e received additional information from m e m b e r countries and
instructed the O E C D Secretariat to integrate the material into a single matrix
based in large part upon the U.S. submission. T h e C o m m i t t e e was expected
to review this information at its N o v e m b e r 1977 meeting and subsequently t o
discuss the i m p o r t a n c e of various obstacles to international securities
transactions, and possible liberalization measures.
88
1977 REPORT OF THE SECRETARY OF THE TREASURY
Proposed International Banking Act of 197726
Virtually identical to last year's bill, this bill (H.R. 7 3 2 5 ) would provide for
Federal regulation of foreign banks operating in the United States. The bill was
reintroduced by m e m b e r s of the House C o m m i t t e e on Banking, Finance and
Urban Affairs, and hearings were held by the House Subcommittee o n
Financial Institutions Supervision, Regulation and Insurance in July 1977. As
o f t h e end of September 1977, the Senate had taken no action on the proposal.
T h e bill would affect the U.S. operations of foreign banks, by applying
Federal regulations and supervision similar to existing regulations on large,
domestically owned banks. T h e bill provides for p e r m a n e n t grandfathering of
foreign b a n k s ' multi-State b r a n c h e s in existence prior to May 1, 1976, and
subsequent multi-State b r a n c h e s would be prohibited as long as national banks
c a n n o t b r a n c h across State lines. Also, foreign banks would be prohibited, as
are domestic banks, from engaging simultaneously in both commercial and
investment banking in the United States, and existing simultaneous operations
would have to be terminated by D e c e m b e r 1985. T h e bill would permit foreign
banks to establish Edge Act corporations, as well as Federal branches and
agencies, and to have foreign citizens as minority directors of national banks.
Treasury testified for the administration in support of H.R. 7325 with certain
modifications to achieve more equal t r e a t m e n t of foreign and domestic banks
as well as to avoid u n d u e burdens on the existing operations of foreign banks
in the United States.
International investment and capital flows (OPEC investors)
y^
T h e financial surpluses accruing to oil-exporting countries on cirrrent
accounts continue to be a source of sizable inflows of funds to U.S'. capital
markets. T h e estimated distribution of investable O P E C surpluses between
1973 and end-June 1977 is given in the table which follbws this text.
An increasing share of O P E C ' s investable surplus was placed in the United
States from 1974 to 1976, rising from about 20 percent in 1974 to nearly 30
p e r c e n t in 1976. Since 1975, the Mideast oU exporters have been the only
O P E C countries making new investments in the United States. Mideast
p l a c e m e n t of funds in the United States continued in the first half of 1977 b u t |
at a slower rate, with the U.S. share declining to about 18 percent of total *
O P E C placements. Following 1974, when 86 percent of O P E C ' s money
m a r k e t and portfolio investments in the United States were placed in shortterm assets, O P E C investments in the United States have progressively shifted
toward long-term instruments. This pattern is continuing in 1977, with 86
percent of O P E C investments placed in long-term U.S. instruments (primarily
debt securities), c o m p a r e d with 84 p e r c e n t in first half 1976.
2hScc exhibit 52.
REVIEW O F TREASURY
89
OPERATIONS
Estimated distribution of O P E C investable surpluses, end 1 9 7 3 - J u n e 1 9 7 7
Amount
Relative
share
United Stales
Eurobanklng market
Other developed countries
$ hillion
39 1/2
48 1/2
33.1/2
Percent
23
28
20
United Kingdom
Other
7 1/4
26 1/4
Developing countries and intemational financial institutions..
Communist countries
Unallocated
Total
30 1/4
4 1/2
13 3/4
18
3
8
Too
170
Developing Nations
International development b a n k s 27
In fiscal 1977, the Congress approved legislation authorizing $5,124.7
million in increased U.S. participation in the World Bank group ( t h e
International Bank for Reconstruction and Development ( I B R D ) , the International Development Association ( I D A ) , and the International Finance
Corporation (IFC) ), the Asian Development Bank ( A D B ) , and the African
Development Fund ( A F D F ) , and appropriated $ 1,925.5 million for the banks
as part o f t h e fiscal 1978 Foreign Assistance Appropriations Act. T h e a m o u n t
appropriated represented an increase of 69 p e r c e n t over the fiscal 1977
appropriation of $ 1,141.5 million. A breakdown of authorizing and appropriations legislation approved by Congress is shown in the table below:
U.S. participation in the international development banks during fiscal 1 9 7 7
[$ millions]
"^
Institution*^
Fiscal 1978
Authorization appropriation
Intemational Bank for
Reconstmction and
Development:
^
Paid-in
Callable
Intemational Development
Association
Intemational Finance Corporation
Inter-American Development
Bank:
Paid-in
Callable
Fund for Special Operations
27 See exhibits 57 and 58.
-
156.9
1,412.1
2,400.0
111.5
Comment
38.0 Authorization is U.S. share in selective
342.0
capital increase; appropriation is first
U.S. installment of increase.
800.0 Authorization is U.S. share of fifth replenishment; appropriation is first U.S.
installment of replenishment.
38.0 Authorization is U.S. share in first capital
increase; appropriation is first U.S.
installment of increase.
36.7 $67.3 million paid-in and $561.4 million
328.5
callable remains to be appropriated
from amount authorized in fiscal 1976.
114.7 $325.3 million remains to be appropriated
from amount authorized in fiscal 1976.
90
1977 REPORT OF THE SECRETARY OF THE TREASURY
U.S. participation in the international development banks during fiscal 1 9 7 7 — C o n t i n u e d
Institution
Asian Development Bank:
Paid-in
Callable
Asian Development Fund
African Development Fund
Total
Fiscal 1978
Authorization appropriation
81.4
732.8
180.0
50.0
5,124.7
Comment
16.8 Authorization is U.S. share of second
151.2
capital increase; appropriation is first
U.S. instaUment of increase.
49.5 Authorization is U.S. share of first replenishment; appropriation is first installment of replenishment.
10.0 Authorization is for U.S. contribution to
first replenishment. Appropriation is
final installment of initial U.S. $25
million contribution authorized in fiscal 1976.
1,925.5
The international development banks committed $9,407 million to 84
developing countries in fiscal 1977. The distribution of commitments by
institution was as follows: World Bank group, $7,197 million; Inter-American
Development Bank (IDB), $1,385 million; Asian Development Bank, $722
million; and the African Development Fund, $130 miUion.
The international development banks are an important source of finance
and economic advice for developing countries. Measured on a disbursement
basis, total lending flows from the banks to developing nations in calendar year
1976 were equal to over 45 percent of total bilateral development assistance
from .DAC donors.
The development banks help fulfill a variety of U.S. foreign policy
objectives. By attacking the economic and social causes of poverty, they
address U.S. humanitarian interests and help increase \yorld stability and
security. The banks serve to promote U.S. economic relations with developing
countries; they help expand the market for U.S. exports, improve U.S. access
to sources of raw materials, and increase the security of present and future U.S.
investments in developing countries. U.S. contributions to the development
banks also foster cooperative political relations with developing countries by
demonstrating our commitment to their growth while permitting the United
States to share the burden of this commitment with other donor countries.
World Bank group
The World Bank group committed a total of $6,943 mUlion for economic
assistance to its borrowing member countries in fiscal 1977, an increase of $65
mUlion over the previous fiscal year. IBRD lending totaled $5,521 miUion in
fiscal 1977, compared with $4,977 miUion in fiscal 1976, an increase ofabout
10 percent. New IDA credits declined 11 percent from $ 1,655 miUion in fiscal
1976 to $1,422 miUion in fiscal 1977, due largely to foreign exchange losses
resulting from currency shifts and the failure of Switzerland to make its
expected contribution. IFC commitments increased to $273 mUlion in fiscal
1977 from $230 mUlion in fiscal 1976, an increase of 1.6 percent. As of
September 30,
1977, IBRD commitments outstanding totaled $31,550 miUion
REVIEW O F TREASURY
OPERATIONS
91
and IDA credits totaled $11,800 million. IFC c o m m i t m e n t s outstanding
totaled $1,715 mUlion.
During fiscal 1977, both the IBRD and IDA increasingly concentrated their
lending in agriculture. T h e IBRD increased its commitments to the agricultural
sector in fiscal 1977 to $1,733 million (31 p e r c e n t o f total lending), c o m p a r e d
with $1,258 mUlion (25 p e r c e n t of lending) infiscai 1976. More dramatically,
the a m o u n t s committed by IDA to agriculture increased from $327 million in
fiscal 1976 to $864 million in fiscal 1977, an increase of almost 165 percent.
O t h e r i m p o r t a n t sectors of IBRD and IDA lending in 1977 included
development finance companies and industry (17 p e r c e n t ) , transportation ( 1 6
p e r c e n t ) , and electric power ( 1 3 p e r c e n t ) . IFC investments were c o n c e n t r a t e d
in development finance companies ( 3 0 p e r c e n t ) , food and food processing ( 1 2
p e r c e n t ) , general manufacturing (18 p e r c e n t ) , and mining and iron and steel
(18 p e r c e n t ) .
T h e IBRD and IDA committed resources for 220 projects totaling $6,943
million in 74 countries distributed by region as follows: Africa, 62 ( $ 8 0 9
million); Asia, 69 ( $ 2 , 7 2 2 miUion); Latin America, 42 ( $ 1 , 6 1 3 million);
E u r o p e , Middle East, and North Africa, 47 ($1,799 million). India was the
largest borrower from the IBRD and IDA ($811 mUlion), while Indonesia was
second ( $ 4 2 5 mUlion) and Korea was third ( $ 4 1 8 mUlion).
IFC c o m m i t m e n t s during fiscal 1977 went to 28 enterprises in 17 developing
countries. These c o m m i t m e n t s included 5 projects in E u r o p e , the Middle East,
and North Africa ( 2 9 p e r c e n t o f t h e total c o m m i t t e d ) , 19 projects in Asia ( 2 2
p e r c e n t ) , 16 projects in Latin America ( 4 0 p e r c e n t ) , and 3 in Africa ( 1 9
p e r c e n t ) . Brazil received the largest individual total ( $ 5 6 million) with G r e e c e
second ( $ 4 0 million) and Yugoslavia third ($21 million).
At the O c t o b e r 1976 annual meeting of the World Bank in Manila, the
Philippines, the Secretary o f t h e Treasury outlined U.S. concerns and efforts
for assisting the developing world. He emphasized that a shared prosperity
between developed and developing countries was the best m e a n s of promoting
development and affirmed the priority being given to the ongoing replenishment efforts by the administration in Congress.
At the September 1977 meeting o f t h e World Bank in Washington, D . C ,
the Secretary o f t h e Treasury stressed the c o m m i t m e n t o f t h e new administration to meeting the basic h u m a n needs of the world's poor. He noted t h a t
development requires action on the part of both industrialized and developing
lations and emphasized the need for effective domestic policies in the
developing countries. T h e Secretary expressed support for the new directions
charted by the World Bank in financing social and economic development and
:he increased lending by the World Bank for expansion of energy resources
n developing countries.
T h e lending operations of the IBRD are financed from five sources: Paidn capital subscriptions; borrowings in private capital markets, and from
governments and central banks; sales of participations; principal repayments
m loans; and earnings on its loans and investments.
92
1977 REPORT OF THE SECRETARY OF THE TREASURY
T h e Bank's outstanding funded debt increased to $19,939 million as of
September 30, 1977. As of June 30, 1977, estimates indicate that 28 p e r c e n t
of Bank bonds were held by investors in the United States, 24 p e r c e n t in
G e r m a n y , 9 p e r c e n t in Japan, 7 p e r c e n t in Saudi Arabia, and 8 p e r c e n t in
Switzerland. T h e remaining 24 p e r c e n t of outstanding borrowings was held by
central banks and government agencies in more than 80 countries.
T o an increasingly large extent, borrowings provide the major portion o f t h e
Bank's funds. In fiscal 1977, IBRD gross borrowings reached a new record,
with 39 issues totaling $4,728 million. This was $917 million (24 p e r c e n t )
m o r e than was raised in the preceding fiscal year. During the five fiscal years
1973 through 1977, the Bank's gross borrowings aggregated $16,625 miUion,
more than 2 1/2 times the a m o u n t raised in the preceding 5-year period.
As in fiscal 1976, the principal sources of borrowed funds to the Bank were
borrowings on private capital markets. T h e Bank sold 28 issues totaling t h e
equivalent of $3,696 miUion in private markets, or slightly more than 78
p e r c e n t of total funds raised through borrowings. This continues the trend of
obtaining m o r e from private financial sources rather than governments and
central b a n k s , which together in fiscal 1973-75 accounted for m o r e than 7 0
p e r c e n t of the IBRD's borrowed funds. In fiscal 1977, governments and central
banks purchased $1,633 million of Bank issues, or 22 p e r c e n t of the year's
total. This was $318 million less than in fiscal 1976.
In fiscal 1977, the Bank also borrowed $37.5 mUlion from the interest
subsidy fund, or third window. This facility was established in fiscal 1976 t o
permit lending on terms intermediate between those of the IBRD and IDA.
Aggregate borrowings by the Bank from the subsidy fund totaled $167.5
million as of September 30, 1977.
During the year u n d e r review, the Bank's public and private borrowings
c a m e principally from the following countries: $1,885 miUion in the United
States; $ 1,463 million in Germany; $ 1,033 million from the issuance of 2-year
doUar b o n d s to central banks and other government agencies in some 7 0
countries; $367 million in Switzerland; and $186 million in Japan.
During the fiscal year, the Bank's borrowers repaid $917 miUion of
principal, raising cumulative repayments on the Bank's loans to $8,05 3
mUlion; of this a m o u n t , $5,699 million was repaid to the Bank and $2,359
million to purchasers of loans. Income on Bank investments a m o u n t e d to $541
mUlion, up $116 million, or nearly 26 percent, over the previous fiscal year.
Income on loans passed the $ 1 biUion mark, rising $224 mUlion, or 23 p e r c e n t ,
to a total of $ 1,121 million. For the same period, sales of participations in the
Bank's loan portfolio a m o u n t e d to $253 million, c o m p a r e d with loan sales of
$65 million in fiscal 1976. This fourfold increase over the previous fiscal year
was the highest level in a d e c a d e . N e t income of the Bank in fiscal 1977 was
$ 194 mUlion, down $26 mUlion, or nearly 12 percent, from the previous fiscal
year. However, after taking adjustments arising from currency devaluations
into account, income was $192 million, c o m p a r e d with $69 mUlion in t h e
previous fiscal year.
REVIEW OF TREASURY OPERATIONS
93
In May 1976, the Executive Directors o f t h e IBRD r e c o m m e n d e d that the
Bank be authorized to increase its capitalization by $8.4 billion and a c c e p t
subscriptions from its 127 m e m b e r countries. During fiscal 1977, Congress
approved authorizing legislation for a U.S. share in the capital increase of
$ 1,568.9 million. As the first installment in the capital increase. Congress also
appropriated $380 miUion for fiscal 1978.
In order for the IBRD to continue to be able to increase lending in real terms
into the next d e c a d e . Bank m a n a g e m e n t , in February 1977, proposed that a
further general capital increase ( G C I ) would be necessary. IBRD President
M c N a m a r a hopes to reach a g r e e m e n t on the GCI by J u n e 1978. The actual
p a y m e n t period for the increase would not b e c o m e effective until 1981 or
1982.
T h e administration believes that U.S. participation in the GCI o f t h e IBRD
is an important element in our foreign assistance policy. With an increase in
its capital, the Bank can continue to be a key source of financing for sound
projects and programs in developing countries, and provide indispensable
assistance to developing countries in formulating effective domestic policies.
During fiscal 1977, IDA granted new credits totahng $1,422 mUlion, a
decrease of $233 mUlion from fiscal 1976. IDA credits are funded primarily
by m e m b e r country contributions, grants from the net income of the IBRD,
repayments of credits, and earnings. Usable resources of IDA, cumulative to
S e p t e m b e r 30, 1977, a m o u n t e d to $13,141 mUlion, consisting of $11,725
mUlion in m e m b e r contributions, $1,189 mUlion in transfers from IBRD n e t
income, and the remainder from earnirigs, participations in credits, and
repayments on outstanding credits.
\ l n M a r c h 1977, the Part I m e m b e r s o f l D A concluded negotiations for a fifth
replenishment of the resources of IDA. T h e $7.6 billion replenishment wUl
provide IDA with loanable funds from July 1, 1977, through J u n e 30, 1980.
During 1977, the Congress approved legislation authorizing a U.S. contribution of $2,400 million to the replenishment, or 31.4 percent o f t h e total—down
from the 33.3 percent, the U.S. share in IDA's fourth replenishment. Congress
also appropriated $ 8 0 0 mUlion for the first of three U.S. installments to IDA V.
In May 1976, the Board of Directors of the International Finance
C o r p o r a t i o n r e c o m m e n d e d a $ 5 4 0 million increase in the authorized capital
of the Corporation. T h e increase was the first since the establishment of t h e
IFC in 1956. During 1977, Congress approved authorizing legislation for a
$ 111.5 million U.S. subscription to the capital increase and appropriated $38
million for the IFC as the first U.S. installment. W h e n the IFC's capital increase
is fully completed, the U.S. share o f t h e funding o f t h e IFC will drop from 3 3
percent to 25 percent.
Inter-American Development Bank
During fiscal 1977, the IDB committed a total of $1,350 million, an 8percent increase in lending over fiscal 1976. Of this a m o u n t , $704.8 million
was lent on conventional terms from the capital a c c o u n t and $583 million was
94
1977 REPORT OF THE SECRETARY OF THE TREASURY
lent on concessional t e r m s from the Fund for Special Operations ( F S O ) . In
addition, the IDB c o m m i t t e d $86.5 million in funds administered for various
d o n o r s (primarily the Venezuelan trust fund). Cumulative lending by the IDB,
as of September 30, 1977, totaled $10.7 bUlion, o f w h i c h $5 billion had b e e n
lent from the capital a c c o u n t , $4.9 billion from the FSO, and $0.8 billion from
other resources (primarily the United States Social Progress Trust F u n d ) .
Agriculture, industry, and transport received the greatest attention in fiscal
1977. A b o u t 25 p e r c e n t ( $ 3 3 7 . 7 million) of the funds committed were for
agriculture, 21 p e r c e n t ( $ 2 8 2 million) for industry and mining, and 14 p e r c e n t
( $ 1 9 0 million) for transportation and communications. O n a cumulative basis,
through the end of fiscal 1977, agriculture had received the largest a m o u n t ,
24 p e r c e n t , or $2.5 bUlion, and p o w e r projects had received the next largest
a m o u n t , 20 p e r c e n t , or $2.1 biUion.
IDB lending o p e r a t i o n s are financed principally from paid-in capital
subscriptions, borrowings in international capital markets, and m e m b e r
country contributions t o the FSO. As of September 30, 1977, the total
subscribed capital o f t h e Bank was $8,901 miUion, ofwhich $ 1,257 miUion was
paid-in and $7,644 million was callable. T h e resources o f t h e FSO a m o u n t e d
to $5,897 million. T h e U.S. subscriptions to IDB capital shares a m o u n t e d to
$3,105 million, or approximately 35 p e r c e n t o f t h e total. Including contributions authorized, b u t still pending appropriation, the United States a c c o u n t e d
for $3,400 million, or 63 p e r c e n t of total resources contributed to the F S O .
In fiscal 1977, the IDB borrowed $331.4 million equivalent in international
capital m a r k e t s , including $100 niillion in the United States. In addition, t h e
Bank sold $74 million in 2-year b o n d s to central banks in Latin America. The.
Bank's outstanding funded d e b t a m o u n t e d to $2,246 million as of S e p t e m b e r
30,1977.
At the 1977 annual meeting o f t h e IDB in G u a t e m a l a City, G u a t e m a l a , t h e
major issues which Secretary Blumenthal, as U.S. Governor, raised in his
address w e r e the C a r t e r administration's support for the international
d e v e l o p m e n t banks and the c o n c e r n o f t h e United States in working with o t h e r
countries to m e e t the basic h u m a n n e e d s and p r o m o t e the dignity o f t h e people
of the developing world.
T h e U.S. G o v e r n o r c o m m e n d e d the Bank on its impressive achievements in
Latin America and m a d e a series of suggestions for improvements and new
directions in the Bank's programs. He referred to President C a r t e r ' s reaffirmation of U.S. support for regional and subregional integration efforts in Latin
America, and e n c o u r a g e d the IDB to expand its efforts to develop indigenous
resources to meet Latin America's needs for energy and raw materials, t o
continue support for the private sector, and to encourage mobilization of
domestic savings t h r o u g h lending to credit unions, cooperatives, and savings
and loan associations.
As discussed in last year's Annual Report, a major replenishment of t h e
Bank's resources totaling $5 biUion for the 1 9 7 6 - 7 8 period was approved o n
June 1, 1976. U n d e r the terms o f t h e replenishment agreement, the regional
REVIEW O F TREASURY
OPERATIONS
95
m e m b e r countries would increase their capital subscriptions in the Bank by $4
billion, and would contribute m o r e than $1 billion to the Fund for Special
Operations. Agreement was also reached in principle on an additional $1.3
billion increase in the Bank's callable capital, to take effect after the final
payment of the callable portion of the $4 billion increase has been made. In
conjunction with the replenishment exercise, the membership o f t h e IDB was
expanded to include d o n o r countries from outside the Western Hemisphere,
including Western E u r o p e a n countries and Japan.
During fiscal 1977, six additional nonregional countries (Austria, the
Netherlands, F r a n c e , Finland, Sweden, and Italy) joined the Bank, pledging
to subscribe $153.6 million to capital and an equivalent a m o u n t to the FSO.
During 1977, Congress also appropriated $365.2 mUlion for the capital
resources of the Bank and $114.7 mUlion for the FSO.
Asian Development Bank
A D B lending in fiscal 1977 totaled $722 miUion, c o m p a r e d with $878
miUion in fiscal 1976. Of fiscal 1977 loans, $515 miUion c a m e from Ordinary
Capital resources and $207 million from concessional funds. Lending in U.S.
fiscal 1977 brings cumulative A D B lending through September 30, 1977, to
$3,742 mUlion—$2,783 miUion from Ordinary Capital and $959 mUlion o n
concessional terms.
In fiscal 1977, agriculture and agro-industry continued to be the largest
beneficiaries of Bank lending, accounting for $206 million, or almost 28
percent of total lending. Since the Bank's inception in 1966, public utilities
have received the largest a m o u n t of ADB loan funds ($1,242 million, or 3 3
p e r c e n t ) followed by agriculture and agro-industry ( $ 9 0 9 million, or 24
p e r c e n t ) , industry ( $ 8 1 9 million, or 22 p e r c e n t ) , and transportation and
communications ( $ 7 2 8 million, or 19 p e r c e n t ) .
r T h e thr^e largest borrowers from the ADB's Ordinary Capital resources in
fiscal 1977 were the Philippines ( $ 1 5 0 million, or 30 p e r c e n t ) , Korea ( $ 9 2
miUion, or 18 p e r c e n t ) , and Indonesia ( $ 1 1 4 miUion, or 22 p e r c e n t ) .
Bangladesh and Nepal were the two largest recipients from the A D B ' s
concessional lending, having borrowed $69 million ( 3 3 p e r c e n t ) and $45
million ( 2 2 p e r c e n t ) , respectively, in fiscal 1977.
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 m e m b e r country contributions, amounts set
aside from Ordinary Capital earnings, and repayments on loans.
As of September 30, 1977, the Bank's subscribed Ordinary Capital stock
totaled $6.95 bUlion. In fiscal 1977, the Bank borrowed $112 mUlion in
international capital markets. The A D B raised $70 million in the United States
and $42 million in G e r m a n y .
96
1977 REPORT OF THE SECRETARY OF THE TREASURY
O n O c t o b e r 15, 1976, the Bank's Board of Governors ratified a 135-percent
increase in the Bank's capital subscriptions. T h e replenishment took effect on
September 30, 1977. T h e capital increase amounts to $5,003 million and
consists of 10 p e r c e n t paid-in capital and 90 percent callable capital. During
fiscal 1977, Congress authorized $814 million as the U.S. share in the Bank's
capital increase and appropriated $168 million as the first U.S. installment.
Also in 1976, the membership of the ADB reached agreement on an $809
million replenishment of the Asian Development Fund. U n d e r the terms o f t h e
agreement, the U.S. share was set at $ 180 million, or 22.2 p e r c e n t o f t h e total—
down from the 28.5-percent U.S. share o f t h e original resource mobilization
in the A D F . During fiscal 1977, Congress appropriated $49.5 million as the
first U.S. installment in the replenishment. This replenishment of the Asian
D e v e l o p m e n t Fund will finance soft-loan lending from 1976 through 1978.
In April 1977, at the 10th annual meeting o f t h e Board of Governors, the
new administration expressed the continuing support of the United States for
the goals and operations of the 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. T h e U.S. representatives urged the
Bank to pay special attention to its financial policies in order to preserve the
Bank's well-deserved reputation for fiscal p r u d e n c e and administrative
austerity. T h e U.S. Alternate G o v e r n o r also detailed the efforts being m a d e
by the new administration to fully m e e t the resource commitments made by
the United States to the Bank.
African Development Fund
/
T h e African Development Fund was created on July 3, 1973, as the
concessional lending affiliate of the African Development Bank. T h e fund is
designed to channel resources to the poorest African nations. Except under
the most unusual circumstances, A F D F loans are not granted to countries with
a per capita G N P above $400.
T h e United States joined the A F D F in N o v e m b e r 1976, with a contribution
of $15 million. In addition to the United States, the fund's membership
includes 12 E u r o p e a n countries, C a n a d a , Brazil, J a p a n , Saudi Arabia, and the
A F D B representing its 47 m e m b e r states.
In fiscal 1977, A F D F lending a m o u n t e d to $129.7 million, distributed
among 19 African nations. This represents an increase of $36.9 million, or 39.8
percent, above the fiscal 1976 lending level of $92.8 million. Malawi was the
largest borrower ($16.5 mUlion), receiving 12.7 percent o f t h e year's loans,
Rwanda ( $ 1 3 . 6 mUlion) received 10.5 percent, Madagascar ($10.7 million)
received 8.2 percent, and Mali ( $ 1 0 . 6 million) received 8.2 percent.
A F D F lending for the fiscal year financed projects in health, water supply
and sewerage, agriculture and rural development, education, and transportation. Agricultural projects a c c o u n t e d for the largest share of A F D F lending
REVIEW O F TREASURY
OPERATIONS
97
activities, $48.9 million, or 37.7 p e r c e n t of total lending. T h e two other leading
sectors of A F D F lending were water supply projects ($34.9 million, or 2.7
p e r c e n t of total lending), and transportation, particularly road construction,
which received $26.3 million, or 30.3 p e r c e n t of lending.
T h e U.S. initial contribution of $15 million raised total resources pledged
to the fund to $410 million—up from the initial figure of $ 100 million in 1973.
For fiscal 1978, Congress has appropriated an additional $10 million for the
fund. As of September 30, 1977, total contributions received by the A F D F
a m o u n t e d to $292 million. At the current rate of c o m m i t m e n t , the fund's
financial resources will b e exhausted in 1978. In order to finance the 1979-8 1
lending program, m e m b e r states will meet in D e c e m b e r 1977 to begin
discussions of a major replenishment of fund resources.
T h e fourth annual meeting of the African Development Fund held in
Mauritius during May 1977 was the first which the United States attended as
a full-fledged m e m b e r o f t h e A F D F . T h e U.S. representative expressed support
for the African Development Fund as a way of addressing African aspirations
for a better material life and a fair share in the international economic system.
The United States indicated its desire to assume an appropriate role in funding
the A F D F and supported the creation of an independent review committee to
examine fund operations and policies.
Situation of the non-OPEC developing countries
T h e e c o n o m i c situation of the n o n - O P E C developing countries improved
considerably in 1976, and the trend of improvement continued into 1977. T h e
improvement was clearly reflected in the aggregate current a c c o u n t deficit of
these countries, which declined from $37 billion in 1975 to $26 billion in
calendar 1976 (excluding the receipt of official transfers). In 1977, a further
decline pf about $3 billion is projected.
T h e r e c e n t improvement in the balance of payments situation o f t h e nonoil
developing countries resulted from buoyant exports to the industrial countries,
improved terms of t r a d e , and continued import constraints. Export earnings
increased about 20 p e r c e n t to a level of around $110 billion in 1976. T h e
increasB-in export volume was m o r e than 12 percent. At the same time, imports
(f.o.b.) increased only 4 percent to a level o f a b o u t $125 billion, which m e a n t
that the increase in volume was barely 1 percent. T h e rapid growth in exports
was associated with the economic recovery in the industrialized countries,
while the lack of growth in imports was associated with stabilization programs
implemented by a n u m b e r of key countries combined with the efforts of many
others to restrain imports.
Available data for 1977 indicate a continuation of the favorable trend
established in 1976. On the basis of these data, it is projected that exports will
again increase rapidly. C o m m o d i t y prices were particularly buoyant during the
first half of the year. Imports are expected to increase somewhat more rapidly
than last year but not so much as to offset the increase in exports.
98
1977 REPORT OF THE SECRETARY OF THE TREASURY
In 1976, the p a t t e r n of financial flows changed very little from the previous
year. A b o u t $20 billion in official flows (including transfers) were provided
to the n o n - O P E C developing countries, on a net basis. T h e bulk of these flows
c a m e from D A C countries and the multilateral financial institutions. About $5
bUlion were provided by the O P E C countries.
N e t private direct investment continued at the level of a b o u t $4 billion.
Other private capital flows remained at a high level. In particular, gross private
borrowing by these countries continued at the rapid pace set in the previous
2 years. Publicized Eurocredits and b o n d issues in 1976 a m o u n t e d to $11
billion, c o m p a r e d with $7.5 billion in 1975 (gross basis). Net borrowing from
the IMF was about $2 billion. Altogether, the flows of capital to the n o n - O P E C
developing countries exceeded their requirements by a substantial margin.
Consequently, their international reserves increased by $11 billion ( 3 7
p e r c e n t ) to a level of $41 billion at the end of 1976.
Even though gross borrowing from private capital markets continued at a
high level in the first half o f t h e year, the pattern of external fmancing in 1977
appears to be shifting toward a m o r e historically " n o r m a l " pattern in which
official flows (on a net basis) constitute a larger share of the total net flows.
While gross borrowing has remained at a high level, more o f t h e borrowing this
year represents rolling over of maturing debt. If borrowing does not slacken
in the second half of the year, then reserve accumulation is again likely to b e
in the* $10 billion range.
T h e r e are corresponding changes in the debt situation of these countries
during the period covered by this report. Specifically, their external d e b t
increased substantially for the third year in a row in calendar 1976. However,
in 1977, the rate of increase in d e b t is expected to be lower. T h e creditworthiness of the n o n - O P E C developing countries is generally considered to b e
improving. If present trends continue, the size of their external debt relative
to their capacity to repay (as indicated by G D P and exports) will be close t o
historical levels.
r
From the point of view of e c o n o m i c growth, the situation of the n o n - O P E C
developing countries is also returning to **normal." Average >growth for all
developing countries in t h e 1960's was 5.5 p e r c e n t per a n n u m . In 1975,
average growth in G D P for the n o n - O P E C developing countries bottomed o u t
at around 3 percent. Average growth in 1976 b o u n c e d back to a level of a r o u n d
5 p e r c e n t and is expected to stay at this level in 1977.
While the situation of the n o n - O P E C developing countries is reassuring in
the aggregate, a few countries dominate the aggregate figures. Just three
countries (Brazil, Mexico, and India) account for about half of the G N P and
the population of the n o n - O P E C developing countries. T h e deficits of those
three countries set the p a c e for the rest in 1974 and 1975. In 1976, stabihzation
programs in Brazil and Mexico began to take hold and their deficits began to
decline significantly. India experienced a rather dramatic improvement in its
balance of payments situation of over $2 billion between 1975 and 1976 as a
result of favorable harvests and unexpectedly large private remittances.
REVIEW O F TREASURY
OPERATIONS
99
A n o t h e r useful distinction is between countries that finance their deficits
primarily by borrowing from private sources, and others that rely predominantly on official flows or a combination of the two. T h e r e are about a dozen
countries in the first group, including Brazil, Mexico, Korea, and the
Philippines. In general, the deficits of the first group increased more sharply
in 1974 and 1975 than did those of the second group. Now the pattern is
shifting so that the privately financed countries are accounting for an
increasingly smaller share of the aggregate n o n - O P E C developing countries
deficit. This pattern is necessarily consistent with the projected trends in flows
from official'and private sources.
A m o n g the n o n - O P E C developing countries, of course, are a few that a p p e a r
to be in a particularly strong balance of payments situation at the present time.
T h e r e are also a few individual countries facing particularly difficult situations.
Development Committee
T h e Development C o m m i t t e e was established in October 1974 by the
G o v e r n o r s of the World Bank and the International Monetary Fund to
maintain an overview of the development process and to consider all aspects
of the b r o a d question of the transfer of real resources to the developing
countries. T h e Development C o m m i t t e e was formed with the understanding
that its performance would be reviewed at the end of its second year.
T h e sixth meeting of the D e v e l o p m e n t C o m m i t t e e was held in Manila on
O c t o b e r 3, 1976, in conjunction with the joint annual meetings o f t h e Boards
of G o v e r n o r s o f t h e Bank and the Fund.2» An important item on the agenda
was a r e p o r t by the Executive Directors of the Bank and the Fund on the
performance o f t h e C o m m i t t e e . While noting a n u m b e r of problems during its
first 2 years, there was general agreement that the C o m m i t t e e was a useful
forum for the discussion of issues relating to the transfer of real resources. At
the jointxineeting, the Governors of the Bank and the Fund passed parallel
resolutions extending the Committee for another 2 years without any changes
in its m a n d a t e .
T h e most significant action taken by the Development C o m m i t t e e at its sixth
meeting was a decision to establish a new working group—the Working G r o u p
on Development Finance and Policy—in addition to the existing Working
G r o u p on Access to Capital Markets. At the initiative o f t h e United States, the
C o m m i t t e e agreed that this new working group should consider a study o f t h e
International Resources Bank to be prepared by the World Bank. O t h e r
subjects to which the C o m m i t t e e assigned high priority were the volume,
terms, and distribution of official flows, and the resources situation of the
multilateral financial institutions.
The Development C o m m i t t e e also received a report from the Working
G r o u p on Access to Capital Markets. The C o m m i t t e e endorsed r e c o m m e n d a 2KSce e x h i b i t 5A.
100
1977 REPORT OF THE SECRETARY OF THE TREASURY
tions of this working group relating to the removal of legal and administrative
barriers to L D C access, technical assistance activities in this field, and
cofinancing between multilateral financial institutions and private lenders.
T h e seventh meeting o f t h e Development Committee was held in Manila on
O c t o b e r 6, 1976, for the purpose of electing a new Chairman and appointing
a new Executive Secretary. Cesar E. A. Virata, Secretary of Finance of the
Philippines, was elected Chairman of the Development C o m m i t t e e , and Sir
Richard King of the United Kingdom was appointed Executive Secretary.
T h e eighth meeting o f t h e Development C o m m i t t e e was held in Washington,
D . C , on April 2 7 , 1977. Because the meeting was held only a month before
the conclusion o f t h e C I E C and shortly after the formation of new governments
in several of the m e m b e r countries, the eighth meeting was more an
opportunity for reflection and discussion of general positions than for taking
action. T h e main substantive items on the agenda were reports from the
Development C o m m i t t e e ' s two working groups.
In connection with the report of the Working G r o u p on Access to Capital
Markets, the D e v e l o p m e n t C o m m i t t e e discussed multilateral guarantees and
the International Investment Trust. T h e C o m m i t t e e also accepted a recommendation from this working group to call on all governments to c o o p e r a t e
in the process of improving the collection, processing, and dissemination of
information on international financial stocks and flows.
In connection with the report of the Working G r o u p on Development
Finance and Policy, the D e v e l o p m e n t C o m m i t t e e agreed that the working
group should examine the International Resources Bank; procedures for
replenishment o f t h e multilateral financial institutions; the distribution, terms,
and quality of official development assistance; and the effectiveness of aid in
promoting development.
T h e policy of the new administration toward the Development C o m m i t t e e
was set forth in remarks by Secretary Blumenthal, who noted the comrnitment
o f t h e new administration to promoting economic development throughout t h e
world. Secretary Blumenthal also expressed the view that the C o m m i t t e e has
the potential of playing an important role in the years ahead in discussing the
most pressing e c o n o m i c issues between developed and developing countries.
T h e ninth meeting o f t h e Development C o m m i t t e e was held in Washington,
D . C , on September 2 5 , 1977, in conjunction with the 1977 annual meetings
of the Bank and Fund. T h e major accomplishment at this meeting was
agreement on a work program consisting of: ( a ) Issues related to official
development assistance; ( b ) issues related to L D C access to capital markets;
( c ) the role of borrowing in development; ( d ) a report on world development
issues to be p r e p a r e d during the coming year by the World Bank; ( e )
coordination o f t h e lending programs and the replenishment o f t h e multilateral
development institutions; (f) stabilization of export earnings of developing
countries; and (g) the role of private direct foreign investment in the
development process. At its ninth meeting, the Development C o m m i t t e e also
endorsed r e c o m m e n d a t i o n s contained in reports from its two working groups.
REVIEW O F TREASURY
OPERATIONS
101
In connection with the report of the Working G r o u p on Access to Capital
Markets, the following four r e c o m m e n d a t i o n s were endorsed:
T o have the IFC test the feasibility of a program to p r o m o t e the b o n d
issues of selected developing countries;
T o have the IBRD and other development banks consider requests from
m e m b e r countries for guarantees of bond issues in full or partial
substitution for direct project loans;
T o have the IFC u n d e r t a k e a simulation of operations and results of
international portfolio investment such as might be done by an
International Investment Trust; and
T o discuss progress reports on the elimination or reduction of barriers and
restrictions to borrowing by developing countries in capital markets of
the capital-exporting countries.
In connection with the report of the Working G r o u p on Development
Finance and Policy, the Development C o m m i t t e e agreed that the establishment of an International Resources ^ a n k was not feasible or jgenerally
desirable. T h e C o m m i t t e e also agreed that the creation of a consultative group
for energy resources development was not necessary. At the same time,
however, considerable interest was expressed in the general area of mineral
and energy resources. T h e subjects of volume, terms, and distribution of
official development assistance were discussed. The C o m m i t t e e welcomed
suggestions for steps to be taken to provide better information on aid flows
from O P E C countries.
A procedural innovation was adopted by the C o m m i t t e e in September 1977,
namely, the creation of a Deputies group. T h e first meeting of Development
C o m m i t t e e Deputies was held in Paris on September 15, 1977. T h e future
work program of the Development C o m m i t t e e and other matters on the
agenda for the upcoming September 25 meeting were discussed. T h e Deputies
resolved a n u m b e r of difficult issues that enabled the C o m m i t t e e to reach
agreement on the work program and other matters without extensive d e b a t e .
Delinquent debt and rescheduling
T h e total long-term principal outstanding on post-World W a r II debts owed
the United States was $41.6 billion on September 30, 1977. Most of this d e b t
is a result of U.S. G o v e r n m e n t foreign aid and export credit programs
u n d e r t a k e n during the last 30 years, and consequently a high proportion of it
(about 70 percent by value) is owed by n o n - O P E C developing countries.
Since World War II, the vast majority of these debts have been paid on time.
During fiscal 1977, the United States collected over 3 bUlion in U.S. dollars
on principal and interest due on long-term credits, and the equivalent of almost
$300 million in principal and interest on loans repayable in foreign currencies.
As of September 30, 1977, principal and interest due and unpaid 90 days or
more on post-World W a r II debt a m o u n t e d to $591 million. M o r e than two-
102
1977 REPORT OF THE SECRETARY OF THE TREASURY
thirds of delinquent d e b t is subject to special political or other factors, as in
the cases of China and C u b a , which m a k e p r o m p t p a y m e n t unlikely at this
time.
O n January 13, 1977, Treasury submitted to Congress the administration's
third annual report on developing countries' external d e b t and debt relief
provided by the United States. ( T h e report is required by section 6 3 4 ( g ) of
the Foreign Assistance Act of 1 9 6 1 , as a m e n d e d in 1974.) T h e report is
comprehensive, containing detailed information on the d e b t situation of major
debtor countries and the m e a n s by which the United States and other creditor
countries have dealt with debt service problems.
During fiscal 1977, the United States participated in multUateral d e b t
rescheduling for only o n e country, Zaire. On January 17, 1977, a bilateral
a g r e e m e n t was signed with Zaire, rescheduling approximately $46 million of
d e b t service falling d u e in calendar years 1975 and 1976. This agreement,
effective as of August 30, 1977, implemented an ad referendum d e b t
rescheduling a g r e e m e n t reached on J u n e 16, 1976, with Zaire by the Paris
Club of creditor countries. U n d e r the 1976 Paris Club agreement, o t h e r
creditors will provide t h e equivalent of a b o u t $150 million in d e b t relief for
the period 1975 and 1976. All creditors agreed that the rescheduled a m o u n t s
would be repaid in 10 years. T h e interest rates charged by the creditors were
generally in the range of 7-8 p e r c e n t , and the weighted average interest rate
o f t h e United States was 7.8 p e r c e n t . Continued adverse economic conditions
caused Zaire to seek further debt reschedulings in 1977, and the Paris Club
creditors concluded a n o t h e r ad referendum rescheduling agreement on July
7, 1977. U n d e r the t e r m s of this agreement, 85 p e r c e n t o f principal and interest
faUing d u e in the first half of calendar 1977, plus 85 p e r c e n t of principal only
in the second half of 1977, are to be rescheduled. During the course of t h e
negotiations, the creditors countries indicated their concern that rescheduling
agreements with private creditors be based on comparable terms. It was further
decided that the Paris C l u b would m e e t again in N o v e m b e r 1977 to consider
reschedulings for calendar 1978. In the upcoming months, bilateral agreements between Zaire and its creditors wUl be negotiated to implement formally
the Paris Club agreement.
Local currency management
O n e 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.
G o v e r n m e n t requirements. T h e purpose of this determination is to assure
maximum use of local currencies in lieu of dollars for U.S. programs in the
countries c o n c e r n e d .
As U.S. foreign currency receipts decrease and in-country expenses
increase, currencies lose their excess status. T w o countries, Tunisia and
Poland, are being removed from the excess currency list after fiscal 1977,
leaving only five excess currency countries—Burma, Egypt, Guinea, India, and
REVIEW O F TREASURY
OPERATIONS
103
Pakistan. When countries are removed from the excess list special foreign
currency programs in those countries conditioned on the availability of excess
funds 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
T h e D e p a r t m e n t of the Treasury, in addition to its responsibilities with
regard to the international financial institutions, 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 C o m m i t t e e ( D C C ) , and in various other
interagency committees designed to coordinate economic assistance p r o grams. Treasury's principal concerns are to p r o m o t e 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 m e m b e r of the D C C Treasury has participated in coordination of U.S.
development interests in the less developed countries. Of particular significance has been the D C C ' s review of U.S. aid effectiveness. In the PRM 8
North/South planning group, created in March 1977, Treasury representatives
have worked closely with other agencies in assessing the progress realized in
U.S. relations with developing countries as well as in the formulation of
strategic U.S. North/South options on a wide range of development issues.
Treasury also participates with other agencies in the NSC ad hoc group on
population policy to coordinate and implement U.S. worldwide population
policy. Toward this end, the group has developed a set of performance criteria
for Agency for International Development ( A I D ) population assistance
programs.
T h e principal U.S. bilateral e c o n o m i c assistance programs in which
Treasury is interested are the programs administered by AID (development
loans and grants and supporting assistance) and Public Law 480 food for p e a c e
program, administered by the D e p a r t m e n t of Agriculture and AID.
Agency f o r International Development.—As a m e m b e r o f t h e Development
Loan C o m m i t t e e of AID, Treasury focuses primarily on the economic impact
of AID development programs in the recipient country and on the latter's
economic policy performance. During fiscal 1977, AID committed $4.2 billion
in loans and grants for specific projects and supporting assistance. Of this
amount, $1.8 billion was in grants and $1.3 billion in loans.
Puhlic Law 480.—Treasury is represented on the Interagency Staff Committee, which reviews all Public Law 4 8 0 proposals. Treasury looks primarily at
the impact of this program on the U.S. balance of payments and the domestic
economy, as well as on the development efforts and financial prospects o f t h e
104
1977 REPORT OF THE SECRETARY OF THE TREASURY
recipient countries. During fiscal 1977, Title I sales agreements were signed
with participating governments and private trade entities for a total value of
$740 million. Title II donations totaled $459 million.
Relations with developing nations
In AprU 1977, the Office of Development Policy and the Office of
Developing Nations merged to form the Office of Developing Nations Finance.
This reorganization b r o u g h t desk officers and economists working o n
functional issues involving the developing world together in the same office in
order to improve coordination.
O P E C current account trends in 1976 and 1977.—The combined current
account surplus (excluding official transfers) of the 13 m e m b e r s of the
Organization of Petroleum Exporting Countries ( O P E C ) in calendar 1977 is
expected to decline only slightly from the near-$42 billion level attained in
1976. Since yearend 1973, the cumulative O P E C surplus has totaled nearly
$150 billion. About $125 billion of this combined surplus was earned by four
A r a b Gulf countries (Saudi Arabia, Kuwait, Iran, and the United A r a b
Emirates) and $65 billion of this by Saudi Arabia alone. Estimates o f t h e O P E C
current a c c o u n t position for 1976-77 are contained in the accompanying
table.
O P E C current account position
[$ billion]
1976
Forecast
1977
Trade:
Oil exports (government-take basis)
Nonoil exports (f.o.b.)
Imports (f.o.b.)
115
9
-68
129
10
-83
Trade balance
Services and private transfers
56
-14
56
-16
42
40
44
-2
43
-3
42
40
Current account balance (excluding govemment transfers)
Surplus countries
Deficit countries
Total OPEC
O P E C oil earnings (government take basis) totaled $115 bUlion in 1976 and
should r e a c h $ 129 biUion in 1977. Oil d e m a n d in 1976 was bolstered by strong
economic recovery, especially in the United States, and heavy stockpiling in
the final quarter in anticipation of a yearend price rise. While demand for
O P E C oil continued to rise sharply through the first half of this year as a result
of abnormally cold weather and a natural gas shortage in the United States,
a downturn is underway as new production from Alaska and the North Sea
begins to outpace consumption growth and oil companies draw down large
inventories. For the year as a whole, O P E C oU exports should average, a b o u t
4 p e r c e n t higher than in 1976.
REVIEW OF TREASURY OPERATIONS
105
The two-tier pricing a r r a n g e m e n t arrived at by the O P E C ministers at D o h a
in D e c e m b e r 1976 was resolved at midyear. At that time, Saudi Arabia and
the United Arab Emirates agreed to raise their prices an additional 5 percent,
bringing them in line with the majority of O P E C m e m b e r s that had raised
prices 10 percent in D e c e m b e r . In return, the other 1 1 members agreed to d r o p
a 5-percent additional increase planned for July. T h e O P E C ministers will m e e t
again in D e c e m b e r of this year to discuss the question of prices.
Merchandise imports by t h e O P E C group will probably grow by about 2 1
percent in aggregate value, reaching approximately $83 billion this year, d u e
about equally to increases in prices and volume. Individually, import growth
rates differ significantly. T h e Arabian Gulf countries of Saudi Arabia, United
Arab Emirates, and Kuwait as well as Iraq and Libya are increasing their import
levels a b o u t 1 2 - 1 6 p e r c e n t in volume, which is substantially faster than t h e
other O P E C members. These countries have ambitious development plans and
in general d o not face serious financial constraints. Even in these countries,
however, import growth has declined significantly from the very rapid rates of
growth experienced over the period 1974-75 d u e to absorptive constraints
arising from limited m a n p o w e r and infrastructure. For similar reasons, t h e
growth of imports into Iran will be limited to about 3 p e r c e n t in volume. Deficit
countries such as Algeria, Nigeria, Indonesia, and Venezuela have continued
borrowing externally to finance import volume increases in the 5- to lOp e r c e n t range. E c u a d o r and Q a t a r have increased imports little in real terms
due to financial constraints in the first case and limited development potential
in the latter.
On the services account, the increase in the deficit in 1977 will be m u c h
more m o d e r a t e than the j u m p that took place in 1976. In that year, large
increases in expatriate remittances, especially in Saudi Arabia, boosted t h e
services deficit by nearly $5 billion. A contributing factor was the slower
growth of investment earnings that year d u e to recession-induced lower oil
revenues in 1975. This year, the services a c c o u n t deficit should grow by only
about $2 billion as increased payments for freight and insurance on imports,
expenditures for m a n a g e m e n t and consulting services, travel, remittances,
and, in the case of the major d e b t o r countries, foreign interest payments a r e
largely offset by increased earnings on overseas investments.
T h e surplus is highly c o n c e n t r a t e d among the low absorbing countries o f t h e
Arabian Gulf. Saudi Arabia a c c o u n t e d for about 43 p e r c e n t of the total in
calendar 1976 and its share will rise to about 55 percent this year because of
increased exports during the first half. Together the four Arabian Gulf States
now a c c o u n t for about 85 p e r c e n t of the total net surplus.
Middle East.—The United States-Israel Joint C o m m i t t e e for Investment and
T r a d e , cochaired by the Finance Minister of Israel and the Secretary of t h e
Treasury, did not convene during fiscal 1977. T h e C o m m i t t e e subgroups,
however, were active. T h e Sub-Committee on Science and Technology
presided over t h e establishment of the Israel-United States Binational
Industrial Research and Development Foundation, when Assistant Secretary
106
1977 REPORT OF THE SECRETARY OF THE TREASURY
o f t h e Treasury for International Affairs C Fred Bergsten exchanged letters
with Ambassador of Israel Simcha Dinitz on May 1 8, 1977. T h e Joint Steering
G r o u p , c o c h a i r e d by Assistant Secretary Bergsten and Israel Embassy
E c o n o m i c Minister Ze'ev Sher, m e t in July and September to develop issues
for consideration by the Joint C o m m i t t e e early in fiscal 1978.
In 1977 Treasury had several discussions with Egyptian G o v e r n m e n t
officials on matters of mutual c o n c e r n . T h e Secretary met on three occasions
with Egyptian G o v e r n m e n t officials in Washington and held extensive
discussion on e c o n o m i c questions with government officials in Cairo during
his Mideast trip. In addition. Treasury participated in the first meeting of the
Egypt Consultative G r o u p as part of the U.S. delegation. Discussion in this
meeting focused on Egypt's e c o n o m i c problems and d o n o r assistance.
Treasury was also active in interagency policy towards Egypt.
Latin America.—The D e p a r t m e n t o f t h e Treasury continued to work closely
with the G o v e r n m e n t of Mexico in its efforts to strengthen the economy.
Treasury and the Federal Reserve System m a d e available a $600 mUlion swap
line to c o u n t e r disorderly exchange m a r k e t conditions during the transition
period when Mexico was making arrangements for IMF financing. Mexico
drew and repaid $335 million u n d e r the agreement through the Exchange
Stabilization Fund. T h e Secretary m e t twice with Finance Minister Moctezum a Cid and other Mexican officials, who outlined the progress realized u n d e r
their IMF program and the substantial improvement in the balance of
payments situation. U n d e r Secretary Solomon also met with President Lopez
Portillo to discuss the e c o n o m i c situation and actively participated in t h e
Consultative G r o u p Mechanism, which the U.S. and Mexican Presidents
established in February 1977, by chairing the subgroup on financial affairs.
Treasury also strongly supported a $ 5 9 0 million credit from the Export-Import
Bank for the d e v e l o p m e n t of petroleum and gas reserves in Mexico.
I m p o r t a n t steps were taken this year toward the resolution of several
bilateral e c o n o m i c issues between the United States and Brazil. On two
occasions. Secretary Blumenthal m e t with Finance Minister Simonsen t o
discuss issues of mutual concern. Earlier this year, negotiations continued o n
a p r o p o s e d income tax treaty between the United States and Brazil; some
progress was m a d e . Early this fall, the United States-Brazil Subgroup on T r a d e
met in Washington to discuss current bUateral trade issues and the prospective
multilateral trade negotiations. O n several occasions, IRS staff met with U.S.
businessmen working in BrazU to discuss the recent IRS ruling which limits
deductions on income e a r n e d in a foreign country. Treasury is now reviewing
the ruling based on input obtained from those businessmen and from o t h e r
businessmen working abroad. A g r e e m e n t was also reached between the
United States and Brazil on countervailing duty cases involving cotton yarn
and scissors and shears.
Subsequent to meetings J a m a i c a n Foreign Minister Patterson had with
Secretary Blumenthal and Secretary V a n c e , and in response to Jamaica's
severe e c o n o m i c p r o b l e m s , a Joint United States-Jamaica Technical T e a m was
REVIEW O F TREASURY
OPERATIONS
107
formed. T h e U.S. m e m b e r s of the team (including a Treasury economist)
visited Jamaica May 1-7 to study recent economic measures undertaken by
the G o v e r n m e n t of Jamaica and to identify resource requirements for
development programs. It was decided that U.S. assistance to Jamaica should
be coordinated with the efforts of other donors. In July, Jamaica reached
agreement with the IMF for a standby arrangement.
Although Treasury is not a m e m b e r of the team which negotiated the
P a n a m a Canal Treaty, Treasury staff and officials were involved in analyzing
for U.S. negotiators options on the financial aspects of the treaty and on the
economic cooperation package. In addition. U n d e r Secretary for Monetary
Affairs Solomon testified before the Senate Foreign Relations Committee on
September 30, 1977, on the e c o n o m i c aspects o f t h e P a n a m a Canal Treaty and
the e c o n o m i c arrangements. ^^ U n d e r Secretary Solomon agreed to serve on
the Interim Board of Directors of the P a n a m a Canal C o m p a n y .
Asia.—Korea's e c o n o m y resumed its strong pace of development following
the setback caused by the oil crisis and international recession of 1 9 7 4 - 7 5 .
Treasury supported an IMF standby loan to Korea designed to help Korea
solidify its stabUization efforts and to lay the foundation for resuming a high
growth level. A n u m b e r of trade issues arose in the past year. Treasury was
involved in the negotiation of trade agreements with Korea to resolve some of
these issues, including an orderly marketing agreement on n o n r u b b e r footwear
and a new 5-year textile agreement. In the past year. Treasury assessed
countervailing duties on one item exported by Korea—textiles. In addition, the
D e p a r t m e n t has been active in discussions regarding appropriate levels of U.S.
assistance to Korea in order to help assure that country's long-term political
and e c o n o m i c viability despite the withdrawal of U.S. ground forces.
In April Secretary Blumenthal m e t with the leading Indonesian e c o n o m i c
official to explain new U.S. policy initiatives on a c o m m o n fund to stabilize
commodity prices. Indonesia is an L D C that relies heavily on earnings from
primary commodity exports (including p e t r o l e u m ) to finance economic
development and is a leading advocate of, and LDC spokesman for, the
implementation of such a funding facility. Several other discussions between
U.S. Treasury and Indonesian officials to discuss broad international economic
policies have also taken place in the last year. During this period. Treasury has
also agreed to Indonesia's reinstatement for IDA eligibility, as the n u m b e r of
eligible countries for these concessional funds was increased. Treasury has also
been active in helping to formulate U.S. G o v e r n m e n t bilateral aid policy
toward Indonesia through participation in interagency policymaking groups.
2«'Scc exhibit 60.
ADMINISTRATIVE
REPORTS
ADMINISTRATIVE MANAGEMENT
Special studies, projects, and programs
T h e m a n a g e m e n t staff of the Office o f t h e Assistant Secretary (Administration) completed n u m e r o u s studies and projects and initiated new p r o c e d u r e s
to strengthen analytic capability and administrative control, to improve the
operation of Treasury activities, and to respond to new responsibilities.
Office of the Assistant Secretary (Administration).—The Assistant Secretary
(Administration) commissioned a study of the responsibilities within the.
Office of the Secretary for personnel m a n a g e m e n t , equal e m p l o y m e n t
opportunity, and program evaluation. Following the study, the supervision of
the operational personnel functions in the Office of the Secretary was
consolidated under the Director of Personnel by the transfer of the Office of
the Secretary Personnel Division from the Office of M a n a g e m e n t and
Organization to the Office of Personnel. In addition, the personnel staff of the
Office o f t h e Assistant Secretary (International Affairs) was transferred to the
Office of Personnel.
Offices under the Assistant Secretary (Administration) established m a n a g e ment objectives and developed action plans for achieving them. Quarterly
meetings were held with each of the Office Directors and their key staff
m e m b e r s to discuss the objectives and related problems. Future meetings with
Office Directors wUl be c o n d u c t e d in a c c o r d a n c e with recently implemented
zero-base budgeting p r o c e d u r e s .
Office of the Secretary.—With the change in administration. Treasury
officials and analysts reviewed the organization and current operations o f t h e
Office o f t h e Secretary. T h e basic departmental organization was restructured
to redistribute responsibilities a m o n g senior Office of the Secretary officials
and to facilitate direction and coordination of both operational and policymaking functions. Major organizational changes included:
( 1 ) Designation of an Assistant Secretary (Public Affairs);
( 2 ) Reassignment of the Office of Tariff Affairs from the Assistant
Secretary (Enforcement, Operations, and Tariff Affairs) to the General
Counsel;
( 3 ) Designation of a Chief Deputy to the Under Secretary (Enforcement
and Operations) with the c o n c o m i t a n t disestablishment of the Office of the
Assistant Secretary (Enforcement, Operations, and Tariff Affairs);
( 4 ) Transfer of international e c o n o m i c research and analysis functions
from the Assistant Secretary (International Affairs) to the Assistant Secretary
( E c o n o m i c Policy);
( 5 ) Changing the title of the Assistant Secretary (Capital Markets and
Debt M a n a g e m e n t ) to Assistant Secretary (Domestic F i n a n c e ) , thereby
emphasizing the role of this Office as a focal point for Treasury policy
regarding State and local public financing;
( 6 ) Reassignment of responsibility for supervising the Office of Revenue
Sharing from the U n d e r Secretary to the Assistant Secretary (Domestic
Finance); and
( 7 ) Disestablishment o f t h e Office of National Security, and transfer o f t h e
Office's secretariat-type functions to a newly created Office of Intelligence
Support under the supervision of the Executive Secretary.
Ill
112
1977 REPORT OF THE SECRETARY OF THE TREASURY
Departmental.—The Department provided several personnel on detail to
two of the task forces of the President's reorganization project: those dealing
with law enforcement and personnel management. Treasury also furnished
comments on numerous issue papers produced by these task forces.
The field structure of the criminal enforcement side of the Bureau of
Alcohol, Tobacco and Firearms was reorganized in December 1976, eliminating the regional headquarters and establishing straightline authority from the
Assistant Director (Criminal Enforcement) to the Special Agents in Charge
at the district level. At that time, the regulatory enforcement side ofthe Bureau
was left untouched, except that the Assistant Regional Directors (Regulatory
Enforcement) were retitled Regional Regulatory Administrators, reporting
directly to the Assistant Director (Regulatory Enforcement). In the early
summer of 1977, the Secretary directed a study of the field structure of the
regulatory enforcement side of ATF. This study is continuing.
At the Secretary's direction, joint Office of the Secretary and bureau task
forces undertook reviews of the field organization of the Internal Revenue
Service, the U.S. Customs Service, and the U.S. Savings Bonds Division. The
results of these studies will be submitted to the Office of Management and
Budget early in fiscal 1978.
A management review of the Old Mint, San Francisco, was conducted to
examine its organizational structure with the objective of improving operations. The review included an assessment of the Old Mint's capability of
meeting the challenge of an expanded mission resulting from the implementation and operation of Treasury's payroll/personnel information system.
Management by objectives.—The departmental management by objectives
program was integrated with the President's zero-base budgeting program to
strengthen overall planning efforts by highlighting the financial impact of the
objectives.
Productivity.—The Department initiated a formal productivity management
program designed to continue its long history of productivity improvement.
Treasury bureaus have quantified productivity measures covering activities
that comprise 78 percent of the Department's staff-years.
For the period 1967 through 1976 Treasury had a 1.5-percent average
annual rate of productivity improvement compared with the 1.2-percent
annual rate Government-wide. Many activities have been started throughout
the Department to continue this improvement trend. A study was completed
which related productivity measurement to criminal enforcement activities. A
major Department-wide study is nearing completion which will identify
directives that adversely affect Treasury's productivity. Additionally, each
bureau prepares an annual plan of projects and activities which are undertaken
during the year to improve productivity.
Advisory committee management.—The Assistant Secretary (Administration), as departmental advisory committee management officer, continues to
advise and assist all Treasury components in the application of procedures
required by the Federal Advisory Committee Act (Public Law 92-463) and
reviews advisory committee utilization and effectiveness. A comprehensive
review of all Treasury advisory committees, requested by the President,
resulted in a reduction in the number of Treasury committees from 27 to 10.
Assistance to foreign governments and officials.—The Foreign Visitor
Program office has provided orientation and specialized consultation and
training on a continuing basis to foreign visitors referred by the Agency for
International Development (AID) and other agencies, both governmental and
nongovernmental. Visitors have come from less developed countries and also
from Western Europe and other industrial areas of the world.
ADMINISTRATIVE
REPORTS
13
Emergency p r e p a r e d n e s s
The Emergency Planning Staff has directed primary emphasis to several
ongoing activities and to new individual projects with potential to significantly
enhance the D e p a r t m e n t ' s emergency preparedness posture and to facilitate
overall administration o f t h e program.
The program emphasis on state of readiness in the 10 standard Federal
regions, stressed in the previous Annual Report, has been continued. Since the
final reports of the joint Federal Preparedness Agency (FPA)-Treasury
regional readiness reviews found that the Department's readiness posture in
the 10 regions varied from satisfactory to excellent for the individual regions,
the knowledge has been used in evaluating, modifying, and reemphasizing the
regional program. An in-house m a n a g e m e n t review of the Treasury civil
emergency preparedness program was initiated in calendar 1976 and culminated in the fourth q u a r t e r of fiscal 1977. The study recommendations within
the D e p a r t m e n t ' s authority to implement are being formalized for adoption.
The implementation of other r e c o m m e n d a t i o n s , which would impact on the
overall Federal program, is being coordinated with the FPA.
T h e D e p a r t m e n t ' s report to the Joint Congressional C o m m i t t e e on Defense
Production in September 1976, which provided a comprehensive compilation
of all significant aspects of the Treasury emergency preparedness program,
was published later as an integral part of the Annual Report of the Joint
C o m m i t t e e . One of the committee's major oversight agenda activities, a
comprehensive assessment o f t h e Federal civil emergency preparedness effort,
paid particular attention to preparedness resources, institutional arrangements, plans, and programs.
In May and S e p t e m b e r 1977, the d e p a r t m e n t a l emergency planners
participated in interagency civil readiness Exercise R E X - 7 7 which, in sharp
departure from previous nationwide exercises, was conducted as two separate
regional seminar/exercises in Atlanta and Dallas. Significant achievement of
the objective, to increase the overall experience and knowledge of regional
planning personnel, was realized through meaningful bureau and national level
participation.
Based upon the lessons learned in civil readiness Exercises R E X - 7 6 and
R E X - 7 7 , the Assistant Secretary (Administration) initiated a comprehensive
review of Treasury's emergency plans and policy documents. The senior
departmental officials participating in this review have also been asked to
provide their conceptual thoughts on emergency preparedness as it pertains
to their areas of functional responsibility.
T h e D e p a r t m e n t ' s overall emergency readiness capability was improved
with ( a ) the installation of a sophisticated new headquarters operations and
communications center and additional communications equipment at its
emergency operating facilities, and ( b ) the replacement of obsolete rations at
the Treasury alternate relocation site with new freeze-dried foods of improved
shelf life, nutrition, and ease of preparation.
Because of the significant turnover in senior Treasury officials with the new
administration, special emphasis was given to familiarizing the members o f t h e
three Emergency Executive T e a m s with the national level preparedness
program, alert notification p r o c e d u r e s , readiness levels, emergency operating
capabilities, and prepositioned emergency plans and vital records. Briefings
and tours were c o n d u c t e d at the two emergency operating facilities.
Other i m p o r t a n t i n t e r a g e n c y participatory activities for the period included:
1. Major review of **Civil Emergency Preparedness Policy Planning
Guidance."
114
1977 REPORT OF THE SECRETARY OF THE TREASURY
2. Federal-State planning for crisis relocation within the overall coordination of the FPA and the Defense Civil Preparedness Agency. Treasury's
existing emergency planning authorities for declared national emergencies and
natural disasters appear adequate for crisis relocation; however, further study
of these authorities is being c o n d u c t e d .
3. Coordinated planning with the Federal Reserve Board and the Bureau
of Engraving and Printing to revise the emergency currency inventory, based
upon modified production capabilities and procedures.
4. Preliminary planning for ' ' G u i d a n c e for Federal Responses to the
C o n s e q u e n c e s of Disruptive T e r r o r i s m . "
5. P r e p a r a t i o n for an interagency reorganization study of ' ' F e d e r a l
Preparedness and Response to Disasters," to be conducted at Presidential
request by the Office of M a n a g e m e n t and Budget.
Treasury payroll/personnel information system
T h e thrust of the resources of the Treasury Employee D a t a and Payroll
Division has been the implementation of the Treasury payroll/personnel
information system ( T P P I S ) . T h e Division is charged with direction of the
effort to convert Treasury bureau payroll and personnel systems to TPPIS and
with m a n a g e m e n t responsibility for the efficient operation of the system.
TPPIS, a singular Treasury project inasmuch as it encompasses all bureaus, is
an a u t o m a t e d personnel and payroll processing and information system which
provides labor distribution for cost center accounting.
T h e Office of the Secretary and six bureaus have been converted to TPPIS
during fiscal 1977. T h e remaining six Treasury bureaus and five other Federal
agencies are expected to be converted to TPPIS during fiscal 1978.
TPPIS is currently being implemented at the Bureau of the Mint, San
Francisco, for all Treasury bureaus, except IRS, and other Federal agencies.
TPPIS as serviced by the Mint will be a multiagency system and will total some
45,000 employee accounts. TPPIS will be implemented at the IRS Detroit D a t a
C e n t e r for some 99,000 IRS employee accounts. TPPIS joins the resources of
the D e p a r t m e n t of the Interior and Treasury in the maintenance and
development of the system. However, TPPIS as a Treasury system is unique
in that it centralizes the c o m p u t e r systems' maintenance and development and
certain fiscal responsibilities while decentralizing the accountabUity for d a t a
entry and the correctness of data. D a t a entry is provided through a r e m o t e
intelligent terminal subsystem.
T h e new system has provided savings to the D e p a r t m e n t with lower costs
for payroU support, the liquidation of antiquated c o m p u t e r equipment, the
consolidation of personnel resources, and the elimination of n u m e r o u s
manually prepared reports which are now automatically produced.
Internal auditing
T h e 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 o f t h e Secretary and
to other organizations upon request.
Formal appraisals were m a d e of third-party audit activities of the U.S.
Customs Service and internal audit activities of the Bureau of Engraving and
Printing. These were d o n e in fulfillment of a plan to review periodically the
audit system of each Treasury bureau.
T h e review of C u s t o m s regulatory audit program included field work in
three o f t h e nine C u s t o m s regions. T h e resulting report urged the carrying o u t
ADMINISTRATIVE
REPORTS
115
of initiatives designed to establish a national program, strengthening the
planning process, m o r e consistently adhering to Federal reporting and
examination standards, and more systematically following up on audit reports.
The appraisal at Engraving and Printing r e c o m m e n d e d consolidation and
better scheduling of segmented financial audits. T h e report also promoted a
more complete development of audit findings in audit reports.
Fulfilling departmental accounting responsibilities, a substantial a m o u n t of
advisory assistance was provided in support of the new Treasury payroll/
personnel information system. This effort was directed toward ensuring p r o p e r
conversion from the IRS system and establishing bureau procedures for
auditing the system.
A review was m a d e o f t h e U.S. Secret Service administrative accounting
system. Improvements were suggested in property control, the classification
of accounts and undelivered orders, the preparation of m a n a g e m e n t reports,
and c o m p u t e r security. T h e report also r e c o m m e n d e d submission o f t h e design
of the new a u t o m a t e d system to the Comptroller General for approval.
Direct audit services were provided to the Federal Law Enforcement
Training C e n t e r at Brunswick, Ga. An audit of appropriated funds resulted in
discontinuing the financing of certain construction from the salaries and
expenses appropriation and correcting weaknesses in financial reporting and
accounting control over funds, property, and payroll activities. An audit of
contracts for food and janitorial services and the operation of the student
center identified opportunities to improve contract award and administration
practices.
Several audits were c o n d u c t e d in the Office of the Secretary. While
improvements were p r o m o t e d in property accounting, p r o c u r e m e n t practices,
and payroll activities, no significant deficiencies were found in such activities
as travel and relocation expenses and appropriation reimbursements.
T h e Director of the Office of Audit coordinates Treasury employee
allegations of merit system violations inappropriate for normal grievance or
appeals procedures. Able technical counsel is provided by departmental
personnel specialists. Almost all o f t h e 70 cases established in the last 3 years
have been resolved to the satisfaction of the parties involved.
T h e Director is also the liaison within the D e p a r t m e n t on matters involving
G A O reports. A b o u t 200 draft and final reports were reviewed; Treasury
officials were apprised o f t h e special significance o f t h e reports to them; and
where appropriate. Treasury responses were coordinated and reviewed.
Budget and program analysis
T h e 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.
For fiscal 1977, budget estimates totaling $54 biUion were submitted to the
Congress. T h e a m o u n t included $2.8 billion for the operating accounts, $6.9
billion for general revenue sharing and the antirecession programs, and $44.3
billion for public debt interest and miscellaneous accounts.
During the period of this report, the staff—
1. Maintained controls on expenditures, n u m b e r 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 1 1 9 4 1 , wage board actions, and administrative
actions amounting to $92.7 million.
116
1977 REPORT OF THE SECRETARY OF THE TREASURY
3. Assisted in the preparation and presentation of budget requests totaling
nearly $750 million to be appropriated to the President for the U.S. share to
the international financial institutions of which the Secretary of the Treasury
serves as a Governor.
4. Revised the D e p a r t m e n t ' s budgetary execution p r o c e d u r e s and reprogramming guidelines in order to obtain better controls on yearend spending,
as well as a more detailed review of spending throughout the year.
5. Issued Department-wide zero-base budgeting directive implementing
the zero-base budgeting c o n c e p t within Treasury.
6. Studied the costs of alternative sites and financing plans for an
expansion o f t h e production facilities o f t h e Bureau of Engraving and Printing.
7. Performed a cost-benefit study o f t h e use o f t h e electronic funds transfer
program for distributing revenue sharing payments.
8. Assisted in analyzing the impact on tax revenue of a proposed change
in the t o b a c c o regulations.
9. C o o r d i n a t e d a zero-base review of overseas staffing requirements.
10. Developed a request for proposal for a contract to study the impact
o f t h e antirecession financial assistance program on the budget-related actions
of States and local governments.
11. Reviewed Treasury compliance with O M B instructions on financial
controls to assure that funds are spent in a c c o r d a n c e with congressional intent.
12. Evaluated the costs, benefits, and funding arrangements for a new
program proposed by the Customs Service to improve the quality of export
statistics.
13. Analyzed the m o t o r vehicle fleets of Treasury law enforcement
bureaus'to determine their adequacy in n u m b e r s and condition, and developed
a m o r e equitable m e t h o d for determining the n u m b e r of replacement vehicles
to be included in the Treasury budget request.
14. Assisted the Customs Service in developing the Customs compliance
m e a s u r e m e n t system to obtain a statistical estimate of the "universe of
violations" of the laws and regulations being committed by persons arriving
in the United States.
15. Issued a report on the first phase of the budget automation project
r e c o m m e n d i n g a compatible budget activity and program structure for all
Treasury bureaus and offices.
16. Assisted the Bureau of Alcohol, T o b a c c o and Firearms in evaluating
the impact of Operation C o n c e n t r a t e d Urban Enforcement on gun-related
crime.
17. Coordinated a survey of Treasury program evaluation activities and a
survey of Treasury information sources and systems for the General Accounting Office.
18. C o n d u c t e d a survey of Federal agency compliance with Treasury
Circular N o . 1082, Notification to States of Grant-in-Aid Information.
Personnel management
A major effort is being m a d e to improve the quality and accuracy of
Treasury-wide personnel m a n a g e m e n t issuances. Bureaus wUl have in writing
clearly stated personnel m a n a g e m e n t policies and approved practices against
which to measure bureau efforts. Twenty-five chapters have been issued or are
in process. Also published were a manager/supervisor h a n d b o o k designed to
better a c q u a i n t these managers with p r o p e r p r o c e d u r e s for improving
employee productivity, performance, and discipline; and a " H o w - T o Hand-
ADMINISTRATIVE
REPORTS
117
book" on personnel management onsite surveys. Also, a course on onsite
surveys was developed and presented to bureau personnelists and EEO staffs.
Onsite surveys have helped stimulate major personnel management improvements at Mint, Secret Service, Customs, Public Debt, and ATF.
Additionally, position management system surveys were conducted in all
bureaus to assure that they are giving adequate emphasis to the economical
and efficient uses of positions and people to accomplish their missions.
Treasury's labor relations program continues to play an expanding and more
complex role in the overall management of human resources. Once again it
leads all Cabinet agencies in the extent to which its employees have organized.
More than 98,000 employees are represented by 18 different unions in 9
Treasury bureaus and the Office of the Secretary. A trend toward more
complex negotiations continues as the unions seek to consolidate bargaining
units within Treasury bureaus to expand the scope of bargaining. Unionmanagement controversies requiring third-party resolution continue to
increase in both volume and complexity. To enable management Departmentwide to more effectively meet the increased challenges, the Labor Relations
Staff established the Department's Labor Relations Information Center to
meet research and case-handling informational resource requirements. This
Center permits access to a computerized retrieval system of Federal labor
relations cases.
With the issuance of a new departmental executive and management
development policy, bureaus have embarked on efforts to revise and upgrade
their programs. The Department initiated a three-phase, intradepartmental
program for executives, described by the Civil Service Commission as an ideal
way to initiate team building and organization improvement efforts.
Summer training programs for college and graduate-level Federal interns
and disadvantaged youth proved highly successful both from the standpoint of
student participation and the high level of interest shown by the Secretary and
other top executives. Secretary Blumenthal, Deputy Secretary Carswell,
Under Secretaries Solomon and Anderson, and other key members of the
Secretary's staff served as principal speakers and discussion leaders for
seminars and panel discussions. Interns working in Treasury and other Federal
agencies had a number of opportunities to discuss with the Secretary and other
senior officials the major issues surrounding economic, monetary, social, and
administrative policymaking. All the sessions were given high ratings by the
participants.
Combined Federal Campaign
Secretary Blumenthal served as Chairman for the Federal-wide 1978
Combined Federal Campaign. The Secretary established a significant increase
in the 1978 local Federal goal over last year's contributions, specifically a goal
of $11.3 million, a $1.3 million, or 12.5-percent, increase for all Federal
agencies.
Procurement and personal property management
Total commercial procurements for the Department in fiscal 1977
amounted to $248 million, ofwhich $51.8 million in contracts was awarded
to small business firms. This amount excludes contracts funded by the Saudi
Arabian Government. Of the total amount, $171 million was expended
through Treasury-negotiated and advertised contracts, with the balance being
ordered under established General Services Administration and other agency
contracts. The expenditures made to minority owned and operated businesses,
118
1977.REPORT OF THE SECRETARY OF THE TREASURY
both through the Small Business Administration's " 8 ( a ) " program and other
contracts, totaled $2 million.
During fiscal 1977, the negotiation of 39 blanket purchase agreements for
use by all Treasury b u r e a u s provided a savings in excess of $225,000 over
standard unit prices u n d e r existing G o v e r n m e n t contracts. T h e D e p a r t m e n t wide consolidation of Treasury requirements for 855 law enforcement vehicles
( p r o c u r e d through G S A ) and an estimated 33 million rounds of small-arms
ammunition resulted in a significant dollar savings over separate p r o c u r e m e n t
methods. Vehicles purchased included c o m p a c t s , intermediate-size and fullsize automobiles; types of ammunition covered 29 varieties.
T h e D e p a r t m e n t issued an " A D P P r o c u r e m e n t H a n d b o o k " as a working
tool to assist bureau c o n t r a c t specialists and c o m p u t e r personnel involved in
acquiring A D P e q u i p m e n t and services. T h e program staff also continued its
staff assistance visit program designed to help identify potential for improvem e n t in the overall contracting activities of the D e p a r t m e n t and individual
bureaus.
In support of the U.S. technical cooperation agreement with the Saudi
Arabian G o v e r n m e n t , Treasury contract specialists awarded, using Saudi
funds, and administered contracts in excess of $90 million in fiscal 1977.
C o n t r a c t e d services and equipment were to provide improvements to several
aspects of the Saudi socioeconomic conditions.
Treasury personal property transactions included the reassignment within
Treasury of property valued in excess of $ 4 8 0 , 0 0 0 and transfer of personal
property valued in excess of $5.3 million no longer needed by the Federal
G o v e r n m e n t for use by State organizations and nonprofit groups. Treasury also
obtained, without cost, personal property valued at over $5.6 million from
other Federal agencies.
Real property management
T h e national laboratories of the Bureau of Alcohol, T o b a c c o and Firearms
will be relocated in February 1978 from the Internal Revenue Service
h e a d q u a r t e r s building at 12th and Constitution Avenue, Washington, D . C , to
a recently acquired suburban facility located in Rockville, Md. Relocation of
the labs from a densely populated office building to a location separate from
other buildings will r e d u c e the potential safety hazards to other Treasury
employees posed by the examination of explosive materials and devices by
ATF.
A r e q u e s t has b e e n filed with GSA on behalf of the Federal Law
Enforcement Training C e n t e r for the transfer of 31 townhouse buildings at the
former Glynco Naval Air Station, Brunswick, Ga., which had been declared
excess to the needs of the D e p a r t m e n t of the Navy. T h e townhouses will be
used to provide dormitory-style housing for 410 F L E T C students and will
eliminate the need to construct new dormitories. A cost avoidance of
approximately $3.7 million will result. Until the formal transfer o f t h e property
early in fiscal 1978, the townhouses will continue to be used by the F L E T C
on a right-of-entry permit granted to Treasury by the Navy.
A U.S. Customs Service facility in L a r e d o , Tex., was declared excess to
Treasury's needs. Since no interest in the property was expressed by Federal,
State, or local agencies. Treasury was able to transfer the property to the Ruthe
B. Cowl Rehabilitation C e n t e r at no cost. T h e C e n t e r is a nonprofit
organization engaged in health and educational programs for the underprivileged and the handicapped.
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T h e U.S. Secret Service pistol range was relocated in S e p t e m b e r 1977 from
the existing antiquated facility in the Main Treasury Building to a new range
in the 12th and Pennsylvania A v e n u e Federal Building. This relocation will
resolve the lead contamination problems experienced in the old facility.
Originally scheduled for N o v e m b e r 1976, the move was delayed for almost a
year while air circulation deficiencies identified by the National Institute for
Occupational Safety and Health were corrected. T h e new facility was retested
and a c c e p t e d by the Institute in mid-September.
Several space planning initiatives have been u n d e r t a k e n to consolidate
bureau h e a d q u a r t e r s activities and r e d u c e Treasury's physical fragmentation
from the present 54 locations in the metropolitan Washington, D . C , area. A
study to define the existing and long-range space needs of the U.S. Secret
Service was completed, while a similar study for the Fiscal Service is scheduled
to be completed by January 1978. Plans have been developed to consolidate
portions of the Office of the Secretary, now scattered in 11 leased locations,
contingent upon the achievement of a Fiscal Service consolidation and the
resultant evacuation of the Treasury Annex Building by the Bureau of
G o v e r n m e n t Financial Operations.
Efforts to achieve better space utilization in the Main Treasury complex
resulted in the reclamation of 10,000 square feet of previously unoccupied
storage and mechanical space for office and specialized operational use. This
will result in recurring annual space rental savings of about $77,500.
Construction was c o m p l e t e d on April 2 2 , 1977, for a telecommunications
complex in the Main Treasury Building. Over 5,200 square feet o f t h e complex
was converted from underutilized security vaults. T h e consolidation of
telecommunications activities and the replacement of obsolete e q u i p m e n t
with electronic devices m a d e available approximately 2,500 square feet of
office space to the Office of the Secretary.
Engineering design efforts for major renovation projects in the Main
Treasury complex are continuing. Awards of construction contracts which will
provide for the installation of 6 additional zones o f a 10-zone air conditioning
project and extensive electrical renovations are anticipated in the spring of
1978. U p o n c o m p l e t i o n of these projects, only two zones of the air
conditioning project wUl remain.
T h e historically significant Cash Room in the Main Treasury Building was
o p e n e d for conference and ceremonial use in the fall of 1976, following t h e
discontinuance of banking activities previously c o n d u c t e d there by the Bureau
of G o v e r n m e n t Financial Operations. An interim "adaptive u s e " o f t h e Cash
Room was made possible by a c o m b i n e d space planning, interior design, and
construction implementation effort by Treasury personnel. A study has been
completed which defines the scope of work and estimates the costs for a
complete restoration o f t h e Cash R o o m at approximately $350,000. No action
is planned for the implementation of the restoration until after fiscal 1979.
Printing management
The wage print employees in Treasury's departmental printing plant have
expressed a desire to be represented by a union in their dealings with
m a n a g e m e n t . Therefore, in an election held on April 2 9 , 1976, the craft
employees voted to grant exclusive recognition to the National Alliance of
Postal and Federal Employees. Soon after the union was recognized,
representatives of Printing M a n a g e m e n t , the union, and the Union Relations
Branch began bargaining sessions to establish a contract. A contract was
agreed upon, but it remained unsigned through the 7 succeeding months d u e
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1977 REPORT OF THE SECRETARY OF THE TREASURY
to the objection of the union to some items it initially agreed to. With new
negotiations starting in late s u m m e r , a successful contract and signing are
expected to be c o n s u m m a t e d this fall.
T h e departmental printing plant, in providing printing, binding, mailing,
photographic, and related services to the Office of the Secretary and all
bureaus, operates u n d e r a working capital fund by which the plant is
reimbursed for all work p r o d u c e d for all customers. Except for a small yearly
inflation factor, the charges used for the work performed have remained
unchanged since 1 9 7 1 . During fiscal 1977, a consultant was retained to
perform a study to d e t e r m i n e the validity of charges billed to customers. T h e
study took 4 m o n t h s to c o m p l e t e and resulted in a cost increase of
approximately 37 p e r c e n t for work p r o d u c e d . T h e new working capital fund
charge sheet currently reflects the actual costs for operating the printing plant,
including the latest raises received by the wage print employees and the newer,
m o r e sophisticated e q u i p m e n t now employed to p r o d u c e work for all
customers.
Treasury operates nine printing plants authorized by the congressional Joint
C o m m i t t e e on Printing. As a result of a factfinding trip to New York City by
that C o m m i t t e e and representatives of the G o v e r n m e n t Printing Office, the
Secretary of the Treasury received direction from the c h a i r m a n of the Joint
C o m m i t t e e in August 1976 to r e d u c e the IRS plant in New York from the
status of an authorized printing plant to a duplicating facility. T h e purpose of
this downgrading was to comply with O M B ' s directive to p r o c u r e all feasible
work from c o m m e r c i a l sources t h r o u g h G P O contracts as opposed to
producing this work in-house. Since a duplicating facility is not allowed to
o p e r a t e the sophisticated e q u i p m e n t , nor to p r o d u c e the volume of work
allowed t h a t of an authorized printing plant, a written departmental appeal was
sent to the J C P to reconsider its decision. In May of 1977, another onsite
survey was c o n d u c t e d in New York by staff m e m b e r s of the J C P , G P O , and
Treasury representatives that supported the earlier findings, and the chairman
of the J C P upheld his original decision to downgrade the IRS plant.
T h e e c o n o m i c policy staffs within the Office of the Secretary submitted a
r e q u i r e m e n t to the Printing M a n a g e m e n t Division to p r o d u c e a biweekly
colored slide presentation to k e e p t o p staff up to date on the status of c u r r e n t
domestic and international e c o n o m i c trends. An average of approximately 110
work hours is required to complete each slide show, involving the Graphics
Branch, the d e p a r t m e n t a l printing plant, and the Photographic Services Staff.
T h e Bureau of Alcohol, T o b a c c o and Firearms requested and received from
Printing M a n a g e m e n t the authority to establish a duplicating facility o n
Bureau premises within the h e a d q u a r t e r s building. Authorization was granted
to o p e r a t e it on a test basis for a I-year period because of its special internal
requirement. At the end of the test period, staff of the Printing M a n a g e m e n t
Division and the Bureau will evaluate the effectiveness of this plant and will
decide, from both a service and e c o n o m i c standpoint, whether to continue its
operation.
Physical security
An active training, orientation, briefing and debriefing program was
established for employees c o n c e r n e d with classified information and material.
This Department-wide briefing program is designed to impress upon all
employees their responsibility for exercising vigilance and care in complying
with the provisions of d e p a r t m e n t a l security policies.
A classification m a n a g e m e n t program review of the D e p a r t m e n t by the
Interagency Classification Review C o m m i t t e e , National Security CouncU,
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r e c o m m e n d e d that Treasury review the number of d o c u m e n t s it had originally
classified to reduce the n u m b e r of departmental officials authorized to classify
national security information and material as " t o p secret," " s e c r e t , " and
"confidential." A review by the Office of Physical Security of over 3,000
d o c u m e n t s classified from 1973 through 1976 revealed that Treasury could
not justify the n u m b e r of authorized classifiers c o m p a r e d with the relatively
few classification actions attributable t o some of the authorized officials.
Therefore, reductions were made of certain classification authorities on an
individual basis, by position, to a lower classification category.
Extensive physical security program evaluation reviews were conducted
throughout the D e p a r t m e n t regarding the m a n a g e m e n t of classified docum e n t s and facilities. R e c o m m e n d a t i o n s were provided to upgrade the
programs to meet specific requirements. One of these surveys resulted in
reducing the n u m b e r of security alarm systems in the Main Treasury and
Annex Buildings and leased buildings, realizing a savings of $9,000.
A defensive international travel briefing program has been developed for use
throughout the D e p a r t m e n t . This briefing is given to all personnel traveling or
assigned overseas and provides for an individual awareness of the risks
inherent in foreign travel and basic procedures to be used for protecting
themselves and their families.
Telecommunications
Telecommunications complex.—A major redesign and construction project
has created over 10,000 square feet of highly sophisticated communications
space on two levels in the Main Treasury Building. This complex now contains
the Telecommunications M a n a g e m e n t operational facilities, including the
new Treasury Centrex telephone system and a secure control room for use in
conducting classified activities. T h e complex will also contain the Treasury
a u t o m a t e d communications system ( T A C S ) and support activities for all
operational facilities. W h e n T A C S b e c o m e s operational, the Treasury
telecommunications capability will have attained a status comparable to that
of other major governmental agencies and one that can be viewed with pride.
Treasury automated communications system.—A contract was awarded to D.
Brown Associates on August 1, 1977, for the automation of the Treasury
telecommunications operations center. T h e implementation of T A C S in 1 8
months will round out the Treasury communications capability by providing
a m o d e r n message processing and dissemination facility which will increase
productivity and efficiency.
Treasury Centrex telephone system.—The final major steps in the conversion
of the Treasury telephone system to Centrex II service were accomplished in
the first quarter of fiscal 1977 followed by conversion of 16,000 T o u c h - T o n e
instruments in the second quarter. Currently, all the Treasury telephones in
the District o f C o l u m b i a , plus some in other areas, have been converted to the
new service. Application of the "single-line" telephone in lieu of the m o r e
expensive "multilined" telephones or "call d i r e c t o r s " is the next major
milestone to be reached in fiscal 1978. Because o f t h e community of interest,
arrangements were m a d e to provide telephone service to the Export-Import
Bank effective September 16, 1977.
Radio frequency management.—An extensive effort was put forth to obtain
a c o m p l e m e n t of radio frequency channels for the Customs Service to permit
expansion and modernization of its nationwide communications system. T h e
additional channels will provide the capability to extend radio coverage and
improve operational flexibility to meet the increasing d e m a n d s of Customs law
enforcement activities throughout the United States.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Federal telecommunications system (FTS) cost reduction program.—A major
effort was initiated in fiscal 1977 to reduce long-distance telephone costs. T h e
first step of this program involved collecting and disseminating detailed calling
data, along with distributing educational m e m o r a n d a to Treasury employees
on the p r o p e r use of FTS. In the second step, a unique restriction capability
will be m a d e available on Centrex which will permit placing long-distance FTS
calls to o t h e r G o v e r n m e n t telephones but will inhibit calls to n o n - G o v e r n m e n t
numbers. These and o t h e r planned actions are aimed at a cost reduction of $2
million in long-distance calling.
Improvement of commercial carrier service to Treasury.—In fiscal 1977
Treasury was one of four G o v e r n m e n t agencies to be designated by the
American T e l e p h o n e & Telegraph C o . to be served by a national a c c o u n t
manager. This action h a d the immediate effect of doubling the staff available
at the Washington A . T . & T . office to handle Treasury requirements. T h e r e has
also b e e n a noticeable beneficial impact on the service provided by local
operating t e l e p h o n e c o m p a n i e s , and a general improvement in service
response on a nationwide basis is anticipated.
Overseas communications support.—Telecommunications M a n a g e m e n t is
assisting t h e Office of Saudi Arabian Affairs in developing a Treasury
communications capability between Saudi Arabia and the United States. A
system has been p r o p o s e d which will support both data processing and voice
transmission facilities for the United States-Saudi Arabian Joint Commission
on E c o n o m i c C o o p e r a t i o n and the n u m e r o u s projects sponsored by the
Commission.
Departmental audiovisual management program.—Responsibility for the
m a n a g e m e n t of the departmental audiovisual program has been formally
delegated to the Assistant Director (Telecommunications M a n a g e m e n t ) .
Additional White House interest in audiovisual activities within the Federal
G o v e r n m e n t suggests that the need for central programmatic control of
audiovisual expenditures will be increased. Substantial savings are possible
through reducing duplication of equipment and sharing of resources within
Treasury.
Paperwork management
Directives system implementation.—Approximately 80 p e r c e n t of all administrative policy and p r o c e d u r e s directives have been converted to the new
system. Completion o f t h e unified directives system conversion is expected by
the end of fiscal 1978.
Reports manage me nt.^^ As a result of creating an internal reports management p r o g r a m , the D e p a r t m e n t now has a comprehensive reports m a n a g e m e n t
program covering internal, interagency, and pubhc-use reporting systems.
Public-use reports burden reduction.—In response to the President's directive
to reduce the n u m b e r of reports required of the public, the D e p a r t m e n t
m o u n t e d an intensive program in fiscal 1976. T h r o u g h this project, which
continued into fiscal 1977, the D e p a r t m e n t intends to reduce the number of
work hours required to fill out its reports by 10 percent.
Forms management program implementation.—After extensive coordination, analysis, and design work, a comprehensive forms m a n a g e m e n t program
has been approved and implemented. A concerted effort will be made over the
next few years to inventory all forms in use in the D e p a r t m e n t and reduce the
n u m b e r substantiaUy. Significant dollar savings will result.
Records management.—A n u m b e r of projects to improve Office of the
Secretary records m a n a g e m e n t practices were initiated and completed. They
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include the development of a unified subject file manual for the Office of the
Assistant Secretary (International Affairs). T h e system provides for filing
material based on functional areas of each of the offices. Also, the files room
o f t h e Office of Tax Policy has been reorganized and reequipped. By removal
of 232 cubic feet of files, very valuable and m u c h - n e e d e d additional prime
office space in the Main Treasury Building was m a d e available for other uses.
Reduction of Privacy Act systems of records.—Under the provisions of the
Privacy Act of 1974 (5 U.S.C. 5 5 2 a ( e ) ( 4 ) ), the D e p a r t m e n t is required to
publish annually in the Federal Register a notice of all the systems of records
containing personal information. With over 300 systems, the D e p a r t m e n t ' s
notices in the Federal Register required 368 pages last year. As the result of
reducing those 300 systems, which duplicated each other many times, to 4
basic models of systems of records, the n u m b e r of pages this year has been
reduced by approximately 100 pages. At a cost of $285 per printed page in
the Federal Register, this represents a $28,500 savings to the Department.
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.
T h e Office of General Services planned and coordinated all administrative
requirements for Treasury's participation in the 1977 IMF/IBRD conference.
C o m p l e t e logistical support, including telecommunications, furniture and
supplies, and other 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. N u m e r o u s events were arranged for the Secretary and o t h e r
officials, including a reception by the Secretary for approximately 1,000
guests.
In addition, the Office of General Services continued to provide planning
and coordination services for overseas travel by the Secretary and other t o p
Treasury officials.
Facilities management.—The Office of General Services planned and
coordinated a large n u m b e r of relocations for top staff offices in the Main
Treasury Building and leased space assigned to the Office of the Secretary.
During this period, detailed planning and close coordination involving each
office's requirements were u n d e r t a k e n . Almost every top official and elements
of every staff in Main Treasury were affected.
Environmental programs
Environmental quality.—The Assistant Secretary (Administration) a p proved completed environmental assessments concerning applications to the
Comptroller o f t h e Currency to establish two new national banks in O k l a h o m a
and a branch bank in Pennsylvania. In addition, the initial phase of an
environmental impact statement on a proposed new Bureau of Engraving and
Printing facility was completed, and an a d d e n d u m to a Customs Service
assessment concerning small b o r d e r stations was approved. Assistance was
also provided to the Council on Environmental Quality in the revision and
improvement of National Environmental Policy Act implementation and the
environmental impact statement process as directed by the President.
Historic preservation.—Treasury continued its participation as a statutory
m e m b e r of the Advisory Council on Historic Preservation ( A C H P ) . This
included the review of adverse impact studies on Federal projects involving
historic properties, and representation on task forces which developed plans
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1977 REPORT OF THE SECRETARY OF THE TREASURY
for historic preservation legislation and for establishing the A C H P as an
independent agency. Historic preservation reviews were c o n d u c t e d in c o n n e c tion with Treasury activities, one of which involved coordination with State
and Federal officials concerning the establishment of a Customs border station
in Clinton County, N.Y., and a d e p a r t m e n t a l directive on historic preservation
is being completed. Treasury provided assistance to the A C H P and the
D e p a r t m e n t of the Interior in the implementation of Section 2124, Tax
Incentives to E n c o u r a g e the Preservation of Historic Structures, of the Tax
Reform Act of 1976. Treasury also served on the Presidential task force
preparing a National Heritage Trust Proposal to reorganize and improve the
t r e a t m e n t of national natural and cultural resources.
Energy conservation.—Continuing departmental energy conservation p r o gram efforts resulted in additional reductions in energy consumption each
quarter. An emergency program was instituted throughout the D e p a r t m e n t
during J a n u a r y - F e b r u a r y 1977 to accomplish additional reductions in energy
consumption and for reporting and responding to emergency conditions such
as fuel shortages and interruptions to program operations. In compliance with
the Energy Policy and Conservation Act and Executive Order 12003,
"Relating to Energy Policy and C o n s e r v a t i o n , " bureau personnel were briefed
on the new requirements in order to organize the D e p a r t m e n t for identifying
further energy conservation opportunities in buildings and departmental
operations. Treasury also assisted the Federal Energy Administration in the
d e v e l o p m e n t of new energy conservation guidelines.
Pollution abatement.—A study of Treasury facilities was completed and an
implementation plan was developed for Customs facilities to comply with new
Environmental Protection Agency ( E P A ) regulations issued under the Safe
Drinking W a t e r Act and designed to upgrade water quality. A feasibility study
was c o n d u c t e d and implementation options are being considered concerning
the applicability of source separation of high-grade paper wastes, and resource
recovery and recycling programs in selected Treasury buildings. Action,
including consultation with E P A , was initiated in response to a proposed claim
by the city of Philadelphia for Treasury funds to partially subsidize the
construction of a municipal wastewater treatment plant. Additional funds were
being sought by the city in addition to the 7 5-percent share of total costs
already provided by the Federal G o v e r n m e n t .
Library
An a u t o m a t e d system for Treasury's library operations was introduced in
M a r c h 1977. Participation in this on-line system from the Ohio College Library
C e n t e r is coordinated through the Federal Library and Information Network
( F E D L I N K ) . In effect the system permits resource sharing with over 7 0 0
libraries.
Safety
T h e safety action plan project is well underway with the plans of five b u r e a u s
completed and the r e m a i n d e r schediiled for completion during fiscal 1978.
T h e b u r e a u plans comprise a detailed analysis o f t h e extent of compliance with
Federal regulations and a schedule of corrective actions with budget estimates.
T h e prototype plan, p r o d u c e d by the Secret Service, was highly c o m m e n d e d
by the President in a letter from him to the Secretary of the Treasury.
A revised directive on accident reporting was finalized and issued to the
bureaus. After considerable study by a committee of the Treasury O c c u p a tional Safety and Health Council, the directive now incorporates all t h e
requirements of 29 C F R , part I 9 6 0 .
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Treasury Historical Association
The Treasury Historical Association held its third annual meeting on J u n e
29, 1977. Highlighting the meeting were an election of new m e m b e r s to the
Board of Directors, the unveiling of a plaque for life d o n o r m e m b e r s , and the
presentation of a check in the a m o u n t of $1,200 from the Catherine V.
Coleman Memorial Fund to the George Washington University Continuing
Education for W o m e n Center.
At a meeting o f t h e new Board held on September 13, 1977, an election of
officers to fill vacancies resulted in the appointment of David Mosso as
President and Rex D. Davis as Vice President. Continuing in their current
offices are Dr. Charls E. Walker, Chairman; Arthur D. Kallen, Treasurer; Abby
L. Gilbert, Secretary; and Sidney Sanders, Executive Secretary.
At the end of fiscal 1977, the Association had 324 m e m b e r s .
BUREAU OF
ALCOHOL, TOBACCO AND FIREARMS
T h e missions o f t h e Bureau of Alcohol, T o b a c c o and Firearms ( A T F ) are:
T o reduce the criminal misuse of firearms and the misuse or unsafe storage of
explosives; to assist o t h e r Federal, State, and local law enforcement agencies
in reducing crime and violence in which firearms and explosives are used,
through effective enforcement of the firearms and explosives laws of the
United States; to efficiently collect all revenue due under the Federal alcohol
and t o b a c c o tax statutes, and to achieve, to the maximum extent possible,
voluntary compliance with those laws; to eliminate the illicit manufacture and
sale of nontaxpaid alcoholic beverages; and to quash commercial bribery,
consumer deception, and other improper trade practices in the alcoholic
beverage industry through effective administration and enforcement of the
Federal Alcohol Administration Act.
As a key Federal law enforcement agency, A T F ' s primary goals are to k e e p
firearms out o f t h e hands of criminals, and to suppress and investigate criminal
explosive incidents. These efforts are being focused upon metropolitan areas
because successful A T F enforcement activities have reduced significantly the
manufacture and sale of illicit alcohol.
Criminal violence in the 1920's and 1930's p r o m p t e d Congress to enact the
National Firearms Act of 1934. A T F 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, regulating
interstate c o m m e r c e in firearms, responsibility for which was also assigned to
ATF.
Similarly, an upsurge in violence in the 1960's led to broader law
enforcement responsibilities for A T F . Increased firearms crimes, spurred by
assassinations of political and other leaders, brought passage of the G u n
Control Act of 1968. It encompassed existing Federal firearms laws and added
new provisions, to be enforced by A T F . In 1970, e n a c t m e n t of title XI o f t h e
Organized Crime Control Act assigned explosives regulation and enforcement
jurisdiction to A T F .
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1977 REPORT OF THE SECRETARY OF THE TREASURY
A reorganization of field criminal enforcement functions into a new straightline m a n a g e m e n t authority from the Assistant Director (Criminal Enforcem e n t ) to Special Agents in Charge was implemented during fiscal 1977. T h e
Bureau completed its first year of a program which reduced the use of firearms
and explosives in crime in three metropolitan cities. A nationwide public
awareness program was initiated to improve explosives storage security and
prevent thefts. An explosives tagging program for identification was field
tested and a national pilot test begun. National implementation is scheduled
for 1978.
Intensified enforcement efforts to suppress interstate and international
m o v e m e n t of firearms and explosives intended for criminal use revealed new
weapons sources. Complex criminal investigations were developed successfully and forwarded for prosecution.
During fiscal 1977, A T F collected more than $8 billion in alcohol and
t o b a c c o excise taxes—the third largest source of U.S. revenue, following
personal and c o r p o r a t e income taxes. A T F intensified its regulatory enforcem e n t efforts to investigate trade practice violations and to c o n d u c t compliance
inspections of firearms and explosives industry m e m b e r s .
Several steps were t a k e n by A T F to modernize laws, regulations, and rulings
including steps to deregulate while maintaining assurance of collecting tax
revenues d u e . C o n s u m e r protection was p r o m o t e d by proposed regulations to
strengthen wine labeling requirements, and by requirements implemented for
use of metric standards by the wine and distilled spirits industries. T h e system
wiU be totally operational by January 1, 1980.
Criminal enforcement
Success was achieved in several areas during fiscal 1977. Operation
C o n c e n t r a t e d Urban Enforcement ( C U E ) curbed violent crime in three pUot
areas; illegal sources of firearms used by criminals were identified; significant
criminals were arrested; persons involved in illegal trafficking of firearms
internationally were indicted; those involved in thefts from interstate firearms
shipments were a p p r e h e n d e d ; and significant illicit liquor and explosives
conspiracy investigations were u n d e r t a k e n .
During fiscal 1977, A T F special agents c o n d u c t e d 15,072 investigations in
which 5,444 cases were r e c o m m e n d e d for prosecution. These resulted in
3,578 arrests and the seizure of 8,424 contraband firearms, explosive devices,
and illicit liquor stills valued at $1.6 million. More than 30,000 pounds of
explosives obtained or possessed illegally were seized. Nearly all of these
investigations were initiated by A T F agents. Federal convictions on firearms
and explosives violations totaled 3,472 during the year.
O p e r a t i o n C U E had b e e n implemented fully in metropolitan Washington,
D . C , Boston, and Chicago by the start of fiscal 1977. C U E ' s objective is t o
reduce the criminal use of firearms and explosives and to develop criminal
cases against persons illegally using these tools of violence by the concentration of personnel and other investigative resources. Aggressive efforts have
resulted in the initiation of 4,830 criminal investigations, the r e c o m m e n d a t i o n
of 956 defendants for criminal prosecution, and the seizure of 3,083 Ulicit
firearms.
T h e use of firearms during the commission of premeditated violent crimes
(robbery and aggravated assault) within each target city has fallen during t h e
operation period to an average rate significantly lower than previous years.
A T F has traced approximately 29,000 firearms obtained by police in the
C U E cities, utilizing some analysis. " N e w " firearms, which prior to C U E
efforts were predominantly utilized in violent acts, b e c a m e less prevalent in
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the trace samples as enforcement pressures were applied to legal and illegal
sources of firearms. During fiscal 1977, the percentage of " n e w " firearms
decreased significantly in Washington, D . C , Chicago, and Boston.
As part of the analysis, firearms sources were identified for each C U E city
and subsequent investigative efforts were formulated into an " i n t e r d i c t i o n "
program designed to eliminate or r e d u c e illegal firearm flow into the C U E city.
These interdiction efforts during fiscal 1977 resulted in the identification of
several major illegal sources and distributors of firearms; 40 firearms dealers
are the subject of criminal cases; and administrative action is being taken
against 19 other dealers.
Significant Criminal Enforcement Project.—The objectives o f t h e project are
to identify, investigate, and a p p r e h e n d habitual criminals engaged in the
commission of violent crimes and who, by their misuse of firearms and
explosives, are a serious threat to the public safety and welfare. The project
also provides assistance to State and local law enforcement officials in their
fight against crime.
During fiscal 1977, special agents identified 1,350 criminals who met t h e
project criteria; a total of 670 significant criminals were r e c o m m e n d e d for
prosecution and 376 were convicted. At yearend, 1,004 were under active
investigation.
In one major case, a convicted felon and known organized crime m e m b e r
was found to be acquiring firearms in Florida through associates using false
identification. O n e firearm purchased by the group was recovered at the
m u r d e r scene of an organized crime figure in New Jersey. A n o t h e r firearm was
later seized from the significant criminal at the time of his arrest. Prosecutions
of individuals for Federal firearms violations are underway in Florida and New
Jersey.
A n o t h e r significant criminal investigation involved a subject engaged in
narcotics and prostitution activities who was also a suspect in several murders.
An A T F agent, acting in an undercover role, purchased a machinegun from
the individual. He was arrested and prosecuted for violation of Federal
firearms laws and was sentenced to 10 years in prison.
International traffic in arms.—This effort was created to cope with mounting
illegal international gunrunning activities that originate within the United
States. Firearms, ammunition, and explosives, illegally exported, frequently
are acquired within the United States in direct violation of Federal laws
enforced by A T F . Most enforcement efforts have focused upon gunrunning to
Northern Ireland and Mexico.
For example, one investigation involved the illegal acquisition and exportation of handguns to J a p a n , where the banned weapons are sought by
organized crime families. A Japanese national and four U.S. residents shipped
the firearms hidden in used automobile transmissions which had been stripped
of all internal parts. A n o t h e r 67 firearms were seized by A T F agents before
they could be exported to Japan. T h e five defendants were convicted in
Federal court.
In a n o t h e r case, a convicted felon and six other Texas residents transferred
high-powered rifles to Mexico, where four of the seven were arrested by
Mexican authorities. T h e weapons and two late-model vehicles were seized.
Through cooperation with Mexican officials, A T F special agents traced the
firearms and perfected a criminal case against the seven for violations of the
G u n Control Act and conspiracy.
Interstate Firearms Theft Pro>cr.—Initiated during fiscal 1974, this project
is designed to eliminate interstate shipments of firearms as a source of weapons
128
1977 REPORT OF THE SECRETARY OF THE TREASURY
for criminals. During fiscal 1977, 582 reports of lost or stolen firearms were
received representing approximately 2,500 weapons. Of this total, approximately 230 weapons were recovered and 9 criminal cases were perfected
against 16 individuals.
Typical of A T F cases resulting from this project was one which occurred in
New York City. T h r e e defendants were arrested by A T F special agents and
police officers because in an undercover investigation an A T F agent was
offered 100 semiautomatic pistols for $8,500. T h e weapons were seized and
found to be part of a shipment of 374 firearms stolen during June 1977 at
Miami, Fla. An investigation is continuing in an effort to recover the remaining
weapons.
Explosives investigations.—Because of the extreme threat to public safety,
A T F has assigned a high priority to criminal incidents involving the misuse of
explosives and destructive devices. During fiscal 1977, agents investigated
2,208 explosives incidents, including 9 6 0 bombings, 240 attempted bombings,
65 accidental bombings, and 301 incendiary incidents. These incidents
a c c o u n t for approximately 70 p e r c e n t of all reported explosives incidents
investigated in the United States. In the process of investigating these
incidents, agents p u r c h a s e d 2,818 p o u n d s in the illicit m a r k e t during
undercover operations. Agents also recovered m o r e than 60,000 pounds of
explosives.
An example of the incidents investigated by A T F special agents in
cooperation with local authorities is a case in which three explosions caused
extensive damage to a compressor plant, and a fourth that damaged a nearby
highway bridge. An Army explosives technician was killed while removing still
another device located in the plant. T w o days later, A T F and local officers
arrested a man and two 17-year-old accomplices. The older suspect was
sentenced to a prison t e r m between 14 and 35 years. T h e bombings were the
result of a domestic squabble between the man and his ex-wife, who was a plant
employee.
Stolen explosives and recovery.—The nature and increasing incidence of
crimes involving the illegal use of explosives is of grave concern to A T F . Efforts
to develop better detection and investigation techniques in stemming the
illegal flow and use of explosives are outlined under Technical and Scientific
Services. Recognizing this as a serious national problem, A T F has expanded
its Stolen and Recovered Explosives ( S E A R ) Project to encourage licensees,
users, carriers, and any person who has knowledge of a loss or theft of
explosives materials to notify A T F .
An incident in J u n e 1977 demonstrates the threat to public safety from
stolen explosives. In this case, 350 pounds of stolen dynamite detonated
accidentally whUe being transported in a remote area, destroying the vehicle
and killing the driver who was later identified as a quarry employee missing
since the dynamite theft. Had these explosives detonated in an inhabited area,
a greater n u m b e r of deaths and property loss would have resulted. With
directed criminal intent—unknown in this case—this a m o u n t of explosives
could have created havoc.
A T F has under development an Explosives Academy at the Federal Law
Enforcement Training C e n t e r in Brunswick, Ga. Its purpose will be to continue
development of explosives investigative techniques for Federal as well as State
and local law enforcement officers whose primary responsibility is investigating explosives incidents. The academy is scheduled to b e c o m e operational in
January 1978.
Organized crime.—ATF has implemented a uniform, nationwide enforcem e n t effort against organized criminal activities, using available intelligence
ADMINISTRATIVE
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129
to expand investigations into the hierarchy of organized crime. An agent serves
on each Federal strike force set up for this purpose. District offices outside
strike force areas have an agent assigned to serve as coordinator for organized
crime investigations.
The Bureau has met with some success in its effort to penetrate organized
crime. A T F played a major role in the multibombing and m u r d e r conspiracy
investigation of 13 violators, including a notorious Florida organized crime
figure. A T F supplied impetus in tying together apparently unrelated violence
to perfect a complicated conspiracy case that resulted in a multiviolation
prosecution. Convictions were h a n d e d down for firearms, explosives, narcotics, and counterfeiting violations, in addition to armed robbery and murder.
Illicit liquor.—There is a decline in illicit liquor activity. A total of 360
distilleries were seized in fiscal 1977 in the southern United States. While some
sizable illicit liquor operations still exist, A T F information indicates that the
retail m a r k e t for moonshine liquor remains sluggish.
Assistance to other law enforcement agencies.—ATF assisted State and local
law enforcement agencies in the operation of projects known as " s t i n g s , "
usually involving law enforcement officers posing as fences for stolen goods.
During fiscal 1977, A T F participated in 25 of these projects which resulted in
n u m e r o u s firearms and explosives cases.
Special agents c o n d u c t e d 16 schools on organized crime for 512 police
officers representing 80 police departments. A T F agents also lectured to
approximately 39,000 State and local officers throughout the country on A T F
functions and resources.
During fiscal 1977, 4,382 referrals of information pertaining to criminal acts
were m a d e to other Federal, State, and local agencies by A T F . An example
of the quality of these referrals: In Boston, after several weeks of intense
investigation of an alleged automatic weapons violation, A T F learned that a
suspect was planning an armed bank robbery. A T F discovered also that the
suspect was wanted for first-degree murder. A T F furnished this information
to the city police d e p a r t m e n t and assisted in the arrest of the murder suspect.
An example of ATF's investigative and technical assistance capability was
shown when it assisted the Fairfax County, Va., police in investigating a
robbery-homicide. A gunman robbed a restaurant of some $ 1,000, then forced
five persons into the cold storage locker, methodically shooting each one. Four
of the victims died from the gunshot wounds. The A T F Forensic Laboratory
examined the limited ballistic evidence. With special agents developing and
following investigative leads, a suspect was identified, tried, and convicted on
four counts of murder and other charges. He is currently serving five
consecutive life sentences. A T F special agents and technicians testified at the
State trial proceedings.
Regulatory enforcement
Regulatory compliance.—In order to ensure the accurate determination and
full collection of more than $5 1/2 billion in alcohol excise taxes, 7,876
revenue protection inspections were conducted at distilleries, breweries, and
wineries. A T F field inspectors also conducted 3,796 application and 2,061
consumer protection inspections. During fiscal 1977, A T F issued 3,194
original alcohol permits, amended 3,291, and terminated 1,985. Over 31,000
tax refund claims for permittees were processed. A T F also audited semimonthly tax returns for approximately 250 distilleries, 110 breweries, and 6 5 0
wineries. A T F continued reduction of joint custody operations at distilled
spirits plants. Draft legislation to permit elimination of joint custody has been
submitted.
130
1977 REPORT OF THE SECRETARY OF THE TREASURY
A T F controls 400 t o b a c c o permittees. Many semimonthly tax returns were
audited. In addition, 112 claims for tax refunds were handled. Inspectors
conducted 918 revenue protection audits to ensure the collection of more than
$2 1/2 billion in Federal revenue due from tobacco p r o d u c t taxes. An
additional, 132 application inspections were conducted.
During fiscal 1977, A T F issued approximately 167,000 firearms licenses and
inspected nearly 30,000 new firearms license applicants' premises to explain
laws and regulations. Some 2,000 applications were either denied, withdrawn,
a b a n d o n e d , or revoked. And inspectors conducted 25,000 audits at the
premises of firearms licensees to ensure accurate recordkeeping and regulation compliance.
A T F received and processed 6,880 explosives permit and license applications. This resulted in the issuance of 6,303 permits and licenses. A T F
c o n d u c t e d 4,900 compliance inspections to determine that explosives licensees were complying with applicable laws and regulations. With the assistance
of the Mining Enforcement and Safety Administration, A T F inspected every
explosives applicant, licensee, and permittee during the year. Special emphasis
was placed upon the safe and secure storage of explosives and the p r o m p t
reporting of losses and thefts.
Consumer protection.—Regulatory Enforcement continued to eliminate
unlawful trade practices defined in the Federal Alcohol Administration Act.
In fiscal 1977, A T F accepted 61 offers in compromise which totaled $377,000.
In addition, there were 3 1 suspensions and 6 revocations of basic permits.
Many of these actions were the result of a task force approach in which a team
goes to a m a r k e t area to resolve complaints of unfair trade practices.
Regulatory Enforcement's actions were responsible for industry's withdrawal
of 602 cases of alcoholic beverages from the m a r k e t after samples were found
to be deficient in proof, or products were mislabeled. T o ensure compliance
with Federal law and to prevent deceptive labeling and advertising, 74,499
applications for label approval were reviewed and 10,612 were disapproved.
A total of 2,237 applications for special natural wines and rectified products
were reviewed; 582 were disapproved, returned, or withdrawn.
Voluntary disclosure program.—Since becoming a bureau in 1972, A T F has
placed increased emphasis on the enforcement of the unfair competition and
unlawful practices provisions of the Federal Alcohol Administration Act.
Industry m e m b e r s are encouraged to c o m e forward under A T F ' s voluntary
disclosure program, a n n o u n c e d on September 14, 1976. Industry m e m b e r s
entering the program are advised any information received may be used as
evidence; that remedial action, c o m m e n s u r a t e with the seriousness of the
violation, would be initiated against them; and that information received would
be m a d e available to other Federal and State agencies.
During fiscal 1977, 14 industry m e m b e r s notified A T F of their intent to
enter the voluntary disclosure program. A national task force of special
inspectors was established to verify such disclosures and investigate all possible
trade practices violations.
Metrication.—ATF has implemented requirements for the wine and distilled
spirits industries to convert to metric standards. In effect, all wine bottles,
including imported wine bottles, will be converted to standard metric sizes by
January 1, 1979. Metric standards of fill wUl be mandatory for distilled spirits
beginning January 1, 1980. Before that date, bottlers of distilled spirits may
voluntarily convert to using the new metric sizes or continue to use c u r r e n t
U.S. standard sizes.
Advantages of metrication include aiding consumers by reducing the
n u mfor FRASER
Digitized b e r of bottle sizes for comparative shopping, and by promoting interna
ADMINISTRATIVE
REPORTS
131
tional trade through adoption of c o m m o n standards. Metrication permits
packaging and handling efficiencies, which result in a cost savings to industry.
Ingredient labeling.—Public hearings on proposed A T F regulations to
require ingredient labeling of alcoholic beverages were held in fiscal 1975 in
Washington, D.C. Testimony presented and c o m m e n t s received were overwhelmingly negative. T h e Bureau concluded that ingredient labeling was not
desirable and withdrew its proposal in fiscal 1976. T h e Food and Drug
Administration then imposed ingredient labeling under the Federal Food,
Drug and Cosmetic Act. A lawsuit, brought by m e m b e r s of the wine and
distilled spirits industries, was won by the plaintiffs on the basis that FDA has
given up any jurisdiction it may have had by deferring labeling matters to A T F
over the years. A T F and F D A are conducting a joint study to review ingredient
labeling a p p r o a c h e s .
Wine-labeling terms.—In fiscal 1976, A T F proposed regulations to define
the wine-labeling terms "appellation of origin," " e s t a t e b o t t l e d , " " g r a p e type
designation," " A T F seal w i n e , " and "viticultural a r e a . " At public hearings in
Washington, D . C , and in San Francisco, in April 1976, it b e c a m e evident t h a t
the proposal was controversial. Many o f t h e c o m m e n t s and testimony of those
hearings have been incorporated into a m e n d m e n t s of the proposed regulations. Hearings for the new a m e n d m e n t s were scheduled for September 1977
in Washington, D . C , and N o v e m b e r 1977 in San Francisco.
Tobacco program.—The tax basis for large cigars (those weighing over 3
p o u n d s a t h o u s a n d ) was changed by the Tax Reform Act of 1976. A tax of
8 1/2 p e r c e n t of the wholesale price, with a maximum a m o u n t of $20 p e r
thousand cigars, was substituted for the longstanding " b r a c k e t " tax based on
the retail price, which had been in effect for 60 years. Proposed a m e n d m e n t s
to tax regulations for exported cigarettes would deter smuggling. This step was
taken late in fiscal 1977 to reduce revenue losses from cigarette smuggling
along the Mexican border.
Firearms and explosives.—Regulatory Enforcement's primary responsibilities in Operation C U E involve an expanded Federal effort to educate firearms
and explosives licensees and to audit their operations to ensure conformity
with laws and regulations. This is accomplished by a concentrated effort
toward audit inspections. T o date, one out of every three firearms or explosives
dealers contacted has been found to be in violation of Federal firearms laws
and/or regulations, and 71 p e r c e n t of these violations involve recordkeeping
p r o c e d u r e s . This a p p r o a c h continues to c o m p l e m e n t enforcement efforts by
decreasing the potential for recordkeeping errors that tend to break the auditand-trace trail of firearms used in crime. In addition, one out of every eight
inspections has disclosed information regarding potential criminal violations.
Public Law 9 3 - 6 3 9 , which a m e n d e d Federal regulations on the use of black
powder and accessory items for antique firearms, raised the a m o u n t of
commercially manufactured black powder which may be purchased for this
purpose from 5 to 50 pounds. Regulations to implement the amended law
b e c a m e effective on May 12, 1977.
New explosives storage and recordkeeping requirements proposed in
August 1977, when a d o p t e d , will enable A T F to use the standards of safety
and security now recognized by the explosives industry. Implementation of
these regulations is anticipated in fiscal 1978. A T F also took steps to improve
explosives theft reporting. In May 1977, A T F reiterated the requirements of
the explosives laws regarding the reporting of thefts, which stipulate that a
person who has knowledge o f t h e theft or loss report it within 24 hours. In July
1977, A T F sought the cooperation of c o m m o n carriers who transport
explosives, to ensure reporting of lost or stolen explosives from carrier
vehicles.
132
1977 REPORT OF THE SECRETARY OF THE TREASURY
Interagency cooperation.—ATF continuously cooperates with other Federal
and State agencies in matters of mutual interest. Ongoing areas of cooperation
include: Securities and Exchange Commission—efforts resulting in voluntary
disclosure of Federal Alcohol Administration Act violations by industry
m e m b e r s ; Mining Enforcement and Safety Administration—explosives c o m pliance investigations at mines; coordination with 10 other Federal agencies
on explosives matters; Internal Revenue Service and Justice Department—
referral of violations or potential violations of law and free access to
investigative files; State and local a g e n c i e s ^ n e w cooperation initiatives by
A T F resulting in increased law compliance across the entire range of regulated
industries.
Technical and scientific services
Laboratories.—ATF laboratories provide technical and scientific support to
both regulatory and criminal enforcement operations through facilities in
Washington, D . C , and in the field in Atlanta, Philadelphia, Cincinnati, and
San Francisco. These laboratories process, without charge, analyses for State
and local law enforcement agencies, which account for about 15 p e r c e n t of
their work. By the end of fiscal 1977, construction o f t h e new A T F National
Laboratory Center, in Rockville, Md., was near completion. Its move from
downtown Washington is expected in early 1978.
Both the A T F special agent and local officer have available Bureau
laboratory support for the analysis of physical evidence, utilizing forensic
sciences and identification technology. Because of A T F ' s advances in
specialized fields such as explosives and ink tagging, voiceprints, and t a p e
filtering techniques, several international scientists visited A T F facilities this
fiscal year to train in these fields.
A b o u t 300 cases have been examined to identify unknown voices since the
voiceprint identification p r o g r a m was i m p l e m e n t e d in 1972. An A T F
examiner is the only court-qualified expert in a Federal agency to hold
international certification, one of 19 in the United States.
Ink tagging was developed by A T F in 1968 and implemented nationally in
1972. This program involves the voluntary addition of chemical taggants by
manufacturers. By the end of fiscal 1977, half of the 16 manufacturers were
participating in the program. T h e Bureau's ink identification and dating
program is acknowledged as one of the world's finest.
A T F has acquired a new microscope with the X-ray analyzer unit which
permits rapid, nondestructive testing of small samples such as paint flecks or
bullet lead fragments. Scientists in fiscal 1977 examined 1,637 exhibits
involving 156 cases using such comparative forensic analysis.
A T F is constantly developing new chemical and instrumental procedures t o
more efficiently solve forensic problems. In the San Francisco laboratory, a
recently purchased s p e c t r o m e t e r has increased significantly the ability to
handle the more than 1,000 exhibits annually in gunshot residue and trace, and
comparative evidence. A T F scientists examined nearly 10,000 exhibits in
1,086 cases in these areas in fiscal 1977. Technicians analyzed 8,769 exhibits
in 1,205 arson and explosives cases. T h e Philadelphia laboratory developed a
method for explosive detection and identification.
A m o n g the 11,350 cases in which 219,568 exhibits were analyzed by
forensic or identification personnel, o n e significant case involved the bombing
of the RockviUe, Md., h o m e of a lobbyist supporter of Israeli activities. Field
investigators were provided valuable clues to the investigation of this case by
laboratory personnel. T h e y also provided vital evidence in the Hanafi terrorist
case in Washington, D.C.
the h e a d q u a r t e r s laboratory acquired some 8,000 books and
In fiscal 1977,
ADMINISTRATIVE
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133
technical reports, and established c o m p u t e r access to 14 data banks enhancing
ATF's research capabilities.
T h e chemical laboratory provides advisory and analytical services to
regulatory enforcement operations for alcohol and t o b a c c o products such as
formula and label compliance, consumer protection, and analyses in c o n n e c tion with tax classification. It is c o n c e r n e d also with the accuracy of gauging
instruments and the development of security devices to protect revenue. T h e
field laboratories also provide many of these services.
During fiscal 1977, label and formula changes for special natural wines using
flavors, and the ban of Red Dye N o . 2 and No. 4 the preceding year, caused
an 89-percent increase to 6,471 submissions for examination of nonbeverage
formulas containing alcohol, products such as foods, flavors, and medicines.
Chemical laboratory technicians examined specially denatured alcohol
articles: 7,0.90 labels and 6,063 formulas. Restriction on the use of benzene
as a d e n a t u r a n t caused n u m e r o u s formula changes in industries using
denatured allcohol. Twenty-one new tobacco products were tested to classify
them as cigars or cigarettes for tax purposes.
C o n s u m e r protection b e c a m e increasingly important during fiscal 1977.
Reports of asbestos in some foreign wines caused closer monitoring of
imported alcoholic beverages. T h r o u g h o u t the year, the laboratories worked
with A T F inspectors to give increased attention to formula compliance among
manufacturers of alcoholic foods, flavors, and medicinal preparations.
In 1977, as the United States moved closer to metrication, A T F began steps
to convert the system of determining alcoholic content and volume—the basics
of tax determination—to metric measurement. Tests were completed and
approval given for two high-security padlocks for A T F use at distilled spirits
plants to tighten security and ensure revenue protection.
National Firearms Act weapons. — NFA weapons, which include shortbarreled shotguns and rifles, machineguns, silencers, and destructive devices,
are controlled by A T F . In fiscal 1977, A T F processed 15,863 d o c u m e n t s
involving the m a n u f a c t u r e , importation and exportation, transfer, and
registration of N F A weapons. A total of 2,604 certifications were prepared as
evidence. Federal regulation changes are being developed which will provide
better d o c u m e n t a t i o n of NFA weapons movement. If approved, the proposed
changes will be implemented during fiscal 1978.
Firearms tracing.—ATF's National Firearms Tracing Center traced domestic and imported firearms to the point of first retail sale as an investigative aid
for Federal, State, and local law enforcement agencies. Since the center's
inception in O c t o b e r 1972, more than 172,000 firearms have been traced
successfully either to an individual or to the last retail dealer. Fifty-four percent
of the traces were for local law enforcement officers. Approximately 6,000
trace requests are received each m o n t h , with 63,965 traces requested during
fiscal 1977. Technical support and expert testimony on firearms was provided
to various law enforcement agencies. A T F tests and approves foreign firearms
for importation, and maintains the firearms reference collection of more than
4,000 weapons. A new vault-storage area will be operational early in fiscal
1978.
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 all firearms, ammunition, and implements ofwar. During
fiscal 1977, 12,699 import permits were issued. Of these, 10,680 pertained to
firearms, 901 covered firearms and ammunition, 486 were for ammunition
only, and 632 covered other implements of war. Applications disapproved
covering a total of 1,303 firearms.
totaled 2 7 6 ,
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Explosives technology.—In support o f t h e investigation o f t h e criminal use
of explosives, A T F operates the National Explosives Tracing C e n t e r for other
Federal, State, and local agencies, provides expert testimony for explosives
cases at all levels of the criminal justice system, and provides onsite
investigative assistance regarding criminal bombings and accidental explosions. A T F trains the State and local law enforcement community in all aspects
of explosives.
During fiscal 1977, A T F technically evaluated more than 240 criminal
bombing cases, providing immediate investigative assistance to the criminal
investigator in compiling evidence and determining a suspect for prosecution.
T h e work of the National Explosives Tracing Center, which began operation
in January 1973, has increased 40 p e r c e n t in the last year to more than 1,400
traces for fiscal 1977, with a 9 0 - p e r c e n t success rate.
Explosives tagging.—ATF began development of an explosives tagging
program in 1972. This program is directed toward technology which will detect
explosives used in b o m b s and identify the type and source of explosives after
they have detonated. T h e program is coordinated through a 14-member
Federal advisory c o m m i t t e e , m e m b e r s of which represent all interested
Federal, State, and local agencies, and explosives manufacturers.
A T F has developed and tested c o n c e p t s for both predetonation detection
and postdetonation identification of explosives. Efforts to date have been most
successful in postdetonation identification. C o d e d chemical taggants can be
safely a d d e d to explosives during the manufacturing process which survive
detonation. Field tests have d e m o n s t r a t e d that an investigator can easily
recover these " t a g s " and a laboratory can readily read the code. Using this
c o d e , an explosives trace can identify the point of sale or theft.
During fiscal 1977, a pUot test began during which 7 million pounds of c a p sensitive dynamite was tagged because this explosive accounts for most deaths,
injuries, and property d a m a g e . By April 1978, the system will be ready for the
addition of coded taggants to all commercial explosives sold in the United
States.
Predetonation detection has not p r o c e e d e d as rapidly. A pilot test, to tag
electric blasting caps with a detectable vapor by mid-1978, is planned.
Research to expand both detection and identification tagging to additional
explosives continues.
Administration
Treasury payroll/personnel information system (TPPIS).—The new payroll
and personnel information system was implemented in D e c e m b e r 1976, and
will be fully operational as soon as r e m o t e terminals are installed in April 1978.
T h e system will ultimately eliminate much manual recordkeeping.
Labor and employee relations.—In the area of labor-management relations,
a c o n t r a c t was agreed u p o n by the National Treasury Employees Union and
A T F , covering some 9 0 0 field personnel. Training of all managers was
c o n d u c t e d to aid in the understanding and implementation of the provisions
of the contract. T h e N T E U was certified to represent the headquarters
personnel and negotiations for a c o n t r a c t covering them were c o n d u c t e d also.
Equal employment opportunity.—ATF's efforts to recruit minorities and
women have resulted in meaningful increases. Colleges and universities, and
community groups were contacted to m a k e them aware of the Treasury
enforcement agent examination. A T F negotiated bilingual certification from
the Civil Service Commission and open hiring where insufficient Spanishspeaking apphcants were available. A T F officials attended Spanish-speaking
ADMINISTRATIVE
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135
conventions to provide recruitment and employment information. The upward
mobility program continues to be expanded. Skills surveys and training for
supervisors in upward mobility have been c o n d u c t e d . Compliance reviews in
the regions and training of regional E E O officers have been c o n d u c t e d . E E O
training continues as part of the supervisory training provided each new
firstline supervisor.
Forms reduction program.—The President requested that A T F reduce by 5
percent the a m o u n t of time the public spends in completing its reports. T h e
Secretary doubled the original request to 10 percent. A T F achieved a
reduction of 10.5 p e r c e n t , exceeding both goals. Approximately 180 A T F
forms were revised during fiscal 1977, without additional man-hours or
overtime expenditures.
Property management.—The capital assets property system ( C A P S ) , d e signed in fiscal 1976, is being implemented. This system will provide better
information and property control than the previous system. C A P S will identify
each item of e q u i p m e n t owned by A T F by description, monetary value,
m a i n t e n a n c e or repairs performed, precise location, and responsible official.
Communications.-7-l^\xr\ng fiscal 1977, A T F ' s Communications C e n t e r
assumed responsibility for the Explosives Report Center, to which all thefts or
losses of explosive material must be reported. Reports are m a d e via a
nationwide toU-free n u m b e r . Upon receipt, the theft or loss is entered into the
Treasury enforcement c o m m u n i c a t i o n s system, and the responsible district
office is notified for investigative action.
Transportation.—Savings of $25,000 were realized in fiscal 1977 due to use
of excursion rates, r e d u c e d rates offered by carriers for shipment of
e m p l o y e e s ' household effects, and shipment of packages via the most
economical m o d e . A savings of $12,000 was realized through auditing of
freight and rental automobile billings.
Firearms records.—The three-region pilot program for out-of-business
firearms dealer records, started in fiscal 1976, has been extended and will
encompass records previously stored at all regional offices. T h e r e were 655
record searches initiated in fiscal 1976. T h e n u m b e r increased to 4,026 in
fiscal 1977.
Inspection
T h e Office of Inspection has four primary areas of responsibility: Protecting
Bureau integrity; reviewing operational activities; auditing the Bureau's fiscal
position; and implementing the Bureau's personnel and d o c u m e n t security
program. In addition, the Office of Inspection is responsible for conducting all
Bureau equal employment opportunity complaint investigations, tort claim
investigations, and formal accident investigations.
Integrity investigations.—During fiscal 1977, the Operations Review Division initiated 225 investigations of allegations involving employee conduct. A
total of 100 separate actions resulted from these investigations: 4 resignations,
19 adverse actions, 74 clearances, and 3 referrals to other law enforcement
agencies for their action.
Operations review.—Operations of three criminal enforcement district
offices and regulatory enforcement area offices were reviewed. T h e reviews
were used by m a n a g e m e n t to improve field operations where necessary.
Inspectors supervised 86 accident investigations involving Bureau personnel
or property.
Internal auditing.—The objective o f t h e program is to assist m a n a g e m e n t in
attaining its goals by furnishing information, analyses, appraisals, and practical
136
1977 REPORT OF THE SECRETARY OF THE TREASURY
r e c o m m e n d a t i o n s pertinent to m a n a g e m e n t objectives. Fifty-one audits were
conducted during fiscal 1977, to appraise financial and program m a n a g e m e n t
activities affecting Administration, Regulatory and Criminal Enforcement,
and Technical and Scientific Services.
Security.—Employee background and security update investigations are
c o n d u c t e d for all A T F employees. T h e Security Division coordinated 247 such
investigations in fiscal 1977.
Equal employment opportunity.—The Office of Inspection c o n d u c t e d
investigations of 19 E E O complaints.
Public affairs
Information services.—More than 90 news releases, factsheets, and o t h e r
information materials were p r e p a r e d . Releases detailed the full range of A T F
activities: firearms and explosives projects, industry regulation, and major
cases. Seven major news conferences, covered by national and local media,
were arranged for the A T F Director. A public service a n n o u n c e m e n t on
explosives theft was a c c e p t e d and is being used by the three national television
networks, and individual T V and radio stations in all 50 States. Information
officers responded to m o r e than 1,200 telephone inquiries.
Liaison.—Liaison was maintained between key congressional committees
and the Bureau. Liaison officers responded to m o r e than 700 written requests
from the Congress, in addition to an average of 100 telephone queries each
m o n t h . Liaison officers a t t e n d e d 15 national and international conferences as
Bureau representatives. Conferences included the annual conventions of the
International Association of Chiefs of Police, and an international meeting of
firearms manufacturers in G e r m a n y .
Disclosure.—The Office of Disclosure directs the Bureau's implementation
o f t h e F r e e d o m o f Information Act (FOI A ) , a m e n d e d in 1974, and the Privacy
Act ( P A ) of 1974. T h e following statistics d o c u m e n t the principal activities
o f t h e Disclosure Office for fiscal 1977: Freedom of Information Act requests,
4 1 4 ; requests granted in full, 3 3 7 ; requests granted in part, 52; requests denied,
2 5 ; administrative appeals, 16; appeals granted in full, 1; appeals granted in
part, 11; appeals denied, 4; FOIA fees collected, $12,887; Privacy Act
requests, 352; requests granted in full, 240; requests granted in part, 9 8 ;
requests denied, 14; administrative appeals, 13; appeals granted in full, 3;
appeals granted in part, 5; appeals denied, 5; Privacy Act routine disclosures,
66,754; suits against A T F (FOIA & P A ) , 0. Requests increased during fiscal
1977, 42 percent in the FOIA area, and 22 percent in the PA area.
OFFICE OF THE
COMPTROLLER OF THE CURRENCY i
T h e Office o f t h e Comptroller o f t h e Currency was established in 1863 by
the National Currency Act, redesignated in 1864 as the National Bank Act (1 2
U.S.C. 3 8 ) . T h e 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 m a n n e r as to best serve the public interest.
>
Digitized Additional information is contained
for FRASER
in the separate Annual Report of the Comptroller of the Currency.
ADMINISTRATIVE
REPORTS
137
Operations o f t h e national banking system reflected the recovery experienced by the U.S. economy. Total assets o f t h e country's 4,703 national banks
increased by 5.4 p e r c e n t between yearend 1975 and yearend 1976. This
increase is significant since it represents a change from the previous trend of
moderate asset growth evidenced by the previous year's increase of only 3.6
percent.
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
Comptroller may, at his discretion, waive one such examination in each 2-year
period, or may cause such examinations to be made more frequently, if
considered necessary. In addition, the Comptroller examines all banks located
in the District of Columbia.
More than 85 p e r c e n t of the Office's employees are bank examiners,
including specialists in the areas of trust d e p a r t m e n t , electronic d a t a
processing, and international examinations. In fiscal 1977 the new procedures
for national bank examinations, developed in 1 9 7 5 - 7 6 , were largely implemented. T h e procedures are designed to place greater emphasis on analysis
and interpretation and less emphasis on detailed verification. Increased
reliance is placed on systems for internal control and on work performed by
internal and external auditors. In addition, systems for regular review and
update of the examination p r o c e d u r e s and for regional review of the revised
report of examination were effected in 1977.
EDP
An evaluation and followup program for the Office's E D P examinations was
implemented this year in all regions. Another major achievement in E D P was
the promulgation of " M i n i m u m Standards of Information for A u t o m a t e d
Systems," a d o c u m e n t which will contribute to the improvement of E D P
evaluations performed by the Office and by bank management.
Special surveillance
In 1977 a new D e p a r t m e n t of Special Surveillance was organized, embracing
the functions formerly exercised by three distinct units: National Bank
Surveillance System, Special Projects, and Bank Review. The function o f t h e
new d e p a r t m e n t is to identify banks having operating characteristics at
variance with those of their peers, to oversee analysis of these banks to identify
conditions of concern, and to p r o m p t remedial attention through continuous
monitoring. The d e p a r t m e n t also provides unique management information to
each national bank in the form of bank performance reports. Consolidation
o f t h e three units into o n e unified division has resulted in the accomplishment
of departmental objectives while simultaneously reducing paperwork and
examiner hours and increasing the effectiveness of m a n a g e m e n t decisionmaking.
C o n s u m e r affairs
The C o n s u m e r Affairs Division, responsible for the enforcement of all
consumer protection laws applicable to national banks, conducts specialized
examinations o f e a c h national bank on a continuing basis to ensure compliance
138
1977 REPORT OF THE SECRETARY OF THE TREASURY
with c o n s u m e r laws and regulations. During fiscal 1977 the Division conducted six 2-week examiner training sessions in various areas of the country.
Following completion of this training, examiners are assigned to perform
consumer examinations for a 6-month period.
In August 1977, the " C o m p t r o l l e r ' s H a n d b o o k for C o n s u m e r Examinat i o n s " was published for use by examiners and for distribution to all national
banks to assist them in complying with the laws and regulations in the
consumer area.
Also during the year, the C o n s u m e r Affairs Division, in conjunction with the
Fair Housing Section, Civil Rights Division, D e p a r t m e n t of Justice, conducted
an examination project involving six national banks, with the objective of
determining the adequacy o f t h e Office's examination p r o c e d u r e s in the area
of fair housing. Corrective action guidelines have been developed to direct the
Office in its t r e a t m e n t of banks which have violated consumer protection laws.
Discussions are in progress with other fmancial regulatory agencies regarding
the final form of these guidelines.
Administration
T h e Administration D e p a r t m e n t was reorganized in 1976 with the transfer
of the Research and Analysis and the Systems and Data Processing Divisions
to the Deputy Comptroller fdr Economics. T h e D e p a r t m e n t is now comprised
of three operating divisions: Bank Organization and Structure, Finance and
Administration, and H u m a n Resources.
Bank organization and structure
T h e Bank Organization and Structure Division continued its efforts to
expand the decisionmaking role of the 14 regional offices by transferring to
them the responsibility for processing applications for charters, branches,
conversions, operating subsidiaries, title changes, and relocations. This
transfer of process functions has resulted in a reduction of the time required
for processing corporate applications.
In addition, policy guidelines have been adopted for all major c o r p o r a t e
activities and integrated into the first draft of the corporate activities manual
which will contain new forms, instructions, and processing checklists. T h e
Division has also begun providing written explanations of disapproved
c o r p o r a t e applications.
Although much processing responsibility has been delegated to the regional
offices, the Bank Organization and Structure Division in Washington will
continue to have primary responsibility for processing merger proposals and
preparing substantive r e c o m m e n d a t i o n s on mergers, new bank charters, and
debt proposals.
Finance and administration
In January 1977, the Finance and Administration Division successfully
implemented a computer-based budget system to project, monitor, and control
Office costs. The system furnishes t o p m a n a g e m e n t with monthly evaluation
reports on expenditures, comparisons with budgeted amounts, and analyses bf
various accounts. Budget performance reports are provided to each organizational unit to enable managers to assess actual performance against budgeted
costs, and should increase their awareness of the need to control expenses.
ADMINISTRATIVE
REPORTS
139
Capital budgeting is also part of the budget process and will permit later
integration of property accounting into a total financial m a n a g e m e n t information system.
Human resources
In March 1977, subsequent to D e p a r t m e n t approval of a new c o m p r e h e n sive h u m a n resources program, the Personnel M a n a g e m e n t Division was
abolished and replaced by the present H u m a n Resources Division. N e w
programs are being implemented in each personnel sector including manpower planning, recruiting, employee relations, staffing and operations, salary
administration, and personnel development. The overall purpose is to develop
and maintain a staff with the technical and managerial ability to fully exploit
the newly adopted supervisory tools and examination techniques. Major
programs and goals are:
Manpower planning—to coordinate efforts of the operations planning
function with h u m a n resources activities. T h e program involves mainten a n c e of a comprehensive computer-based h u m a n resources information
system to ensure that the Office will have the appropriate n u m b e r of
personnel with n e e d e d skills available at all times.
National recruitment—to recruit examining personnel, permitting the
Office to c o m p e t e effectively with other employers on a national basis.
Employee relations—to bring traditional G o v e r n m e n t personnel programs
to the attention of all employees, c o n d u c t exit interviews, review j o b related expenses, improve communications, establish a positive labor
relations program, and develop a monitoring system to identify emerging
problem areas.
Staffing and operations—to represent the core of the traditional staffing
function including efficient processing of personnel actions and staffing
of nonexamining positions.
Compensation and benefits—to design, implement, and maintain the
Office's own salary administration program and ensure that compensation
be internally fair, competitive with external pay levels, and results
oriented.
Personnel development—to develop and maintain a seven-level continuing
education program providing balanced technical and managerial training
t h r o u g h o u t an employee's career, and a three-level development program
to identify and p r e p a r e Office staff for managerial and executive positions.
During the last q u a r t e r o f t h e fiscal year, the H u m a n Resources Division staff
provided extensive support for the September conversion o f t h e Office to the
Treasury payroll/personnel information system. Employee performance was
highlighted by the recognition of 30 Office employees at the September 1977
Treasury awards ceremony.
OFFICE OF COMPUTER SCIENCE
The Office of C o m p u t e r Science is the focal point for the A D P program in
the Department. T h e Office has central m a n a g e m e n t responsibilities for A D P
planning, policy, and evaluation t h r o u g h o u t the D e p a r t m e n t . Also, it furnishes
140
1977 REPORT OF THE SECRETARY OF THE TREASURY
c o m p u t e r processing and systems development services to the analytical,
policy formulation, and administrative functions o f t h e Office o f t h e Secretary.
In fiscal 1977, the D e p a r t m e n t had 148 c o m p u t e r systems, used 32,000 manyears, and spent over half a billion dollars in the A D P program. These
resources support nationwide programs such as tax administration, general
revenue sharing, debt m a n a g e m e n t and administration, analysis of alternative
Federal tax policies, revenue collection, law enforcement, and protective
intelligence.
T h e major departmental functions of the Office included working with the
Internal Revenue Service to upgrade the nationwide tax processing system;
assisting the Bureau o f t h e Public Debt, U.S. Customs Service, the Federal Law
Enforcement Training C e n t e r , and o t h e r bureaus in developing and evaluating
A D P plans and in acquiring new c o m p u t e r systems or equipment; and assisting
the Bureau of the Mint and Customs Service in measuring the utilization of
their c o m p u t e r equipment.
In fiscal 1977, important progress was m a d e in the program to strengthen
A D P m a n a g e m e n t and performance in the D e p a r t m e n t . Key to this program
was the d e v e l o p m e n t of an A D P directive which broadly outlines the
r e q u i r e m e n t for an established overall Treasury A D P plan. This details the
Office of C o m p u t e r Science's new program for promoting the efficient use of
A D P resources to support the D e p a r t m e n t ' s mission and program goals. Also,
progress was m a d e in developing policies and guidelines in C o m p u t e r C e n t e r
a n d application systems evaluation, justifying new systems, implementing the
Privacy Act, and in protecting A D P resources. These policies and detaUed
guidelines will be issued formally in fiscal 1978 to a u g m e n t the new
d e p a r t m e n t a l directive.
T h e Office of C o m p u t e r Science staff manages the Office of the Secretary
C o m p u t e r Center, which provides a wide range of computing and d a t a
processing support to offices and to some bureaus that do not have in-house
capabilities. T h e C e n t e r offers user organizations the potential for making
important productivity gains. Major functions served include the debt analysis,
tax analysis, and other analytical communities in the Office of the Secretary.
W o r k l o a d processed by the C e n t e r increased 26 p e r c e n t in fiscal 1977.
M o r e importantly, a wide range of end-user software was installed to help users
m a k e m o r e efficient use of c o m p u t e r technology.
T h e C e n t e r has 23 registered organization users. Major applications
processed include tax, e c o n o m e t r i c , and debt analysis programs, revenue
sharing and antirecession systems, law enforcement, and a wide variety of
m a n a g e m e n t and administrative applications.
Specific achievements include assisting the Office of Revenue Sharing to
meet tight deadlines on distribution of antirecession and general revenue
sharing funds; helping the Office of Tax Analysis produce the data for a
proposed far-reaching set of tax reforms; introducing new software to assist the
Office of G o v e r n m e n t Financing in performing mission-related analysis; and
working with the Bureau of the Public Debt to m e e t all deadlines associated
with Treasury's debt m a n a g e m e n t activities.
T h e Office actively pursued further d e v e l o p m e n t of general-purpose
application programs for various offices in the Office o f t h e Secretary. As an
example, the time series analysis system was implemented to aid economists
in developing and analyzing e c o n o m e t r i c models in support of tax, debt,
monetary, trade, and energy policy analysis and formulation. Systems such as
this eliminate the need for trained p r o g r a m m e r s as middlemen and permit
ADMINISTRATIVE
REPORTS
141
functional specialists such as economists to interact directly with the c o m p u t e r
to meet their needs.
Considerable strides were made in the development of certain application
systems. These include financial m a n a g e m e n t , legislative tracking, correspondence control, and property m a n a g e m e n t systems in the m a n a g e m e n t and
administrative area. In policy and economic analysis, important progress was
made on the quote sheet for Capital Markets, the economic analysis program,
and the ongoing support for Tax Analysis.
OFFICE OF DIRECTOR OF PRACTICE
The Office of Director of Practice is part of the Office of the Secretary of
the Treasury and is u n d e r the immediate supervision o f t h e General Counsel.
Pursuant to the provisions of 3 1 C F R , part 10 (Treasury D e p a r t m e n t Circular
No. 2 3 0 ) , 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 C F R ,
section 10.4.
During fiscal 1977, a m e n d m e n t s were promulgated to Circular 230. T h e
revision was primarily predicated on r e c o m m e n d a t i o n s m a d e by the Chief
Counsel, IRS, resulting from the report of his Advisory C o m m i t t e e on Rules
and Professional C o n d u c t . T h e revision increases the restrictions on former
G o v e r n m e n t employees who represent clients before the IRS. The final rule
appeared in 42 Fed. Reg. 145, dated July 28, 1977, and was effective August
29, 1977.
On O c t o b e r 1, 1976, there were 164 derogatory information cases pending
in the Office under active review and evaluation, 7 of which were awaiting
presentation to or decision by an administrative law judge. During the fiscal
year, 139 cases were added to the case inventory o f t h e Office. Disciplinary
actions were taken in 74 cases by the Office or by order of an administrative
law judge. Those actions were comprised of 6 orders of disbarment, 30
suspensions (either by order of an administrative law judge or by consent of
the practitioner), 2 resignations, and 36 reprimands. The actions affected 10
attorneys, 32 certified public accountants, and 32 enrolled agents. Sixty-three
cases were rernoved from the Office case inventory during fiscal 1977 after
review and evaluation showed that the allegations of misconduct did not state
sufficient grounds to maintain disciplinary proceedings under 3 1 CFR, part 10.
As of September 30, 1977, there were 166 derogatory information cases under
consideration in the Office.
During the fiscal year, 1 I attorneys, certified public accountants, and
enrolled agents petitioned the Director of Practice for reinstatement of their
eligibility to practice before the IRS. Favorable disposition was made on nine
of those petitions and reinstatement was granted. One petition was denied, and
142
1977 REPORT OF THE SECRETARY OF THE TREASURY
one remained pending at the yearend. In addition, the Director of Practice
granted the three petitions pending from the previous period. T h e r e were three
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, 1977. T h e r e was o n e decision on an appeal pending from
the previous period; the decision affirmed the denial.
Fourteen administrative proceedings for disbarment or suspension were
initiated against practitioners before the IRS during fiscal 1977. Together with
the 7 cases remaining on the administrative law judge docket on October 1,
1976, 21 cases were before the administrative law judge d u r i n g t h e year. Seven
of those cases resulted in the a c c e p t a n c e of an offer of consent to voluntary
suspension from practice before the IRS pursuant to 31 C F R , section 10.55(b)
prior to reaching.hearing. Initial decisions imposing disciplinary actions were
rendered in eight of t h e cases. In six cases, the initial decision of the
administrative law judge was that the respondent be disbarred. Two suspensions from practice before the IRS were invoked. O n September 30, 1977, six
cases were pending on the d o c k e t awaiting presentation to or decision by an
administrative law j u d g e .
During fiscal 1977, two cases were appealed to the Secretary from initial
decisions by an administrative law judge. One case resulted in an affirmation
of the administrative law judge's order of disbarment; the other appeal
remained pending at the year's close. In addition, one decision was issued by
the Secretary on an appeal from the initial decision of an administrative law
judge pending O c t o b e r 1, 1976. In that appeal, the administrative law judge's
order of disbarment was affirmed.
During the fiscal year, the Office represented the D e p a r t m e n t in three
e m p l o y e e s ' appeals to the Civil Service Commission from adverse actions
taken by bureaus of the D e p a r t m e n t against them.
Regulations governing practice before the Bureau of Alcohol, T o b a c c o and
Firearms were adopted on June 2 9 , 1977. They provide the Director of
Practice with parallel duties with respect to practice before A T F as he has
relative to practice before the IRS.
On M a r c h 2 1 , 1975, the Director of Practice was named Executive Director
of the Joint Board for the Enrollment of Actuaries. The Joint Board, formed
pursuant to section 3041 o f t h e Employee Retirement Income Security Act of
1974, is responsible for the enrollment of individuals who wish to perform
actuarial services under the act and for the suspension and revocation of the
enrollment of such individuals after notice and opportunity for hearing.
During the fiscal year, 359 applications pending under regulations governing
enrollment before January 1, 1976, were before the Joint Board. Of these
applications, 126 applicants were enrolled, 180 applicants were denied
enrollment, and 39 applicants withdrew their applications. Fourteen applications were pending at the close of the fiscal year.
T o assist the Joint Board in writing examinations, evaluating organization
examinations, and reviewing university programs, the Joint Board established
an Advisory C o m m i t t e e on Joint Board Examinations during the past fiscal
year. T h e committee was formed under the Federal Advisory Committee Act
and has held seven meetings in a c c o r d a n c e with that statute. T h e Director of
Practice serves as the C o m m i t t e e M a n a g e m e n t Officer.
Regulations governing enrollment for those making applications on or after
January 1, 1976, were adopted N o v e m b e r 12, 1976. T h e first examinations
given under those regulations were held September 29 and 30, 1977.
ADMINISTRATIVE REPORTS
143
BUREAU OF ENGRAVING AND PRINTING
The Bureau of Engraving and Printing, the world's largest securities
manufacturing establishment, designs and p r o d u c e s 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
miscellaneous financial and security d o c u m e n t s .
Finances
T h e regular operations of the Bureau of Engraving and Printing have been
financed since July 1, 1 9 5 1 , by m e a n s of a revolving fund established pursuant
to Public Law 6 5 6 , August 4, 1950 (31 U.S.C. 181). Agencies which the
Bureau serves are required to m a k e reimbursement for all costs incidental to
the performance of work or services requisitioned.
Since the inception of the revolving fund. Congress has supplied appropriations as increases to the fund on three occasions. T h e last such appropriation
b e c o m e s available in fiscal 1978. T h e legislation approving this appropriation
also authorized the Bureau to adjust prices to permit the acquisition of capital
e q u i p m e n t and provide future working capital, thus replenishing its revolving
fund on a regular basis and precluding the necessity of having to request
additional appropriations in the future f^r such purposes.
During fiscal 1977 the Bureau included in the price of its products a
surcharge totaling $7,838,000 e a r m a r k e d for the acquisition of capital
equipment. Beginning in fiscal 1978, the Bureau will also assess a surcharge
to provide additional working capital.
T h e total cost of sales and services was $118,880,000 for fiscal 1977, as
c o m p a r e d with $ 1 1 1 , 2 8 9 , 0 0 0 in fiscal 1976, exclusive of surcharge.
Currency program
Deliveries o f c u r r e n c y in fiscal 1977 totaled 2.9 billion notes, as c o m p a r e d
with 2.8 billion delivered in fiscal 1976. During fiscal 1977, the Bureau
completed installation of two high-speed presses and six additional pieces of
currency overprinting and processing equipment ( C O P E ) . Fail-safe apparatus
being installed is designed to d e t e c t and prevent disoriented and other
obviously defective sheets from traversing the equipment. Complete installation and operation will be accomplished during fiscal 1978.
Postage stamp program
Deliveries of U.S. postage stamps were 27.7 billion units in fiscal 1977, as
c o m p a r e d with 31.5 billion in fiscal 1976.
During fiscal 1977, the Bureau acquired six booklet-forming machines.
They are currently being installed and scheduled for full operation in the
ensuing fiscal year, at which time the full cost benefits anticipated will be
realized.
Food coupon program
The Bureau continued its responsibility for assuring the D e p a r t m e n t of
Agriculture's requirements for food coupons by rendering technical, contractual, financial, security, quality control, and other services and advice.
144
1977 REPORT OF THE SECRETARY OF THE TREASURY
Currency operations
The engineering program to design the next generation of security printing
equipment is in the second year o f a 7-year development program. Resources
have been expended for developing more m o d e r n concepts which will be
combined in a prototype security printing system.
A two-phase engineering d e v e l o p m e n t program resulted in a feasible plan
to construct a prototype machine having capability for electronically examining, counting, and consolidating currency sheets into processing lots. This
equipment is expected to reduce currency manufacturing costs and streamline
the overall currency processing system. A prototype is projected for completion within 3 years.
T h e Bureau has acquired two V a c u u m a t i c Super II sheet counting machines.
Eight additional m a c h i n e s are scheduled for delivery early in 1978. Appropriate accountability, staffing, training, and work methodology are in the
d e v e l o p m e n t stages. T h e s e high-speed electronic sheet counters provide for
cost-effectiveness by replacing the manually intensive verification count of
currency sheet stocks.
C o m p l e t e recount of distinctive currency paper after delivery to the Bureau
from the p a p e r manufacturer has been discontinued and replaced by a Bureaumonitored quality and accountability and audit assurance program at the
papermill. Annual recurring savings are estimated at $100,000.
T h e second phase of the a u t o m a t e d currency packaging and processing
system has been accomplished with the introduction of automatic compression
and plastic strapping e q u i p m e n t for currency packages, to be installed in line
with existing plastic film overwrapping equipment. Steel bands and associated
manual operations will be eliminated. Savings equal to those realized from
implementation of the first phase, estimated at $300,000 per year, are
anticipated from the second phase.
A revision in currency sheet examining m e t h o d s and p r o c e d u r e s is being
implemented. T h e c h a n g e involves replacement of the two-step 32-subject
examination and a subsequent l6-subject reexamination, with a single 16subject sheet examination. A $ 1.5 million annual recurring savings is expected
in addition to improved workflow and improved workplace alignment.
A pUot project is underway to validate projected savings by substituting
secure mobile trash containers for plastic bags currently used in the trimmingsplitting operation. This system obviates manual removal of trimmings
requiring guard escorts. Savings in materials and m a n p o w e r are estimated at
$27,000 annually.
A successful, alternative m e t h o d of destroying mutilated currency, cutting
to I/8-inch strips by guUlotine cutter, was implemented, doubling the
maximum destruction capability ( 6 5 , 0 0 0 sheets per shift, as c o m p a r e d with
30,000 sheets per shift by the hammermUl m e t h o d ) . T h e guillotine cutting
method has the additional benefits of being safer and cleaner.
In the Bureau's continuing effort to improve accountability and security
controls, a contract has been awarded for an electronic counting system for
the final counting of currency during its compression and banding into the
4,000-note " b r i c k " form.
Postage stamp operations
The operation of six newly acquired booklet-forming machines has provided
the capability on each machine to form, from printed and examined rolls of
stamps and rolls of unprinted cover stock, a finished stamp booklet ready for
ADMINISTRATIVE REPORTS
145
subpackaging. Savings from the use of the six machines are estimated at $ 1
million annually.
A fully automatic wjapping system was installed to wrap trays of postage
stamp coils in transparent heat-sealable shrink film. T h e new packaging
method enhances security, and the transparency provides for quick positive
identification o f t h e product. Coil packaging and shipping in open-face shrinkwrapped trays is expected to result in recurring annual savings of $175,000.
An extensive program to improve customer relations and provide higher
quality postage stamps has been implemented. In addition to continuing
quality control inspections m a d e daily during all phases of manufacture,
greater emphasis is being placed on the functional characteristics of the
adhesive and phosphor used on postage stamps. The U.S. Postal Service
estimates a $2 million cost per year for handling mail with insufficient
phosphor. A program of onsite investigation of serious consumer concerns has
been instituted to identify cause and ensure p r o m p t remedial action.
Inks
The ongoing program of ink research has developed water wipeable inks for
printing on web and sheet-fed intaglio presses. Advantages in using such inks
include savings of large quantities of wiping paper used to remove excess ink
from the engraved plate, reduction in the bulk of waste generated in the wiping
operation, and the elimination of the use of more volatile solvents. Postage
stamps produced in whole or in part, using water wipeable inks, included the
T e l e p h o n e Centennial, Centennial of Sound Recording, Lafayette, Drafting of
the Articles of Confederation, 50th Anniversary of Talking Pictures, and the
Alta California c o m m e m o r a t i v e issues.
Gravure cylinder production
The final phase of renovation and equipment acquisition for the manufacture of gravure cylinders was completed, with September 1 the established
target date for the first gravure stamp to be produced completely in-house.
That goal was exceeded by producing not only the 13-cent Herkimer at
Oriskany c o m m e m o r a t i v e stamp but also both issues of the 1977 Christmas
stamps by that date. It is anticipated that this additional engraving capability
will result in annual recurring savings of approximately $100,000 by eliminating private sector contract awards for such work.
Alien identification card
The Immigration and Naturalization Service implemented an automated
system to regulate immigration, identified as alien documentation, identification, and telecommunications. At all ports of entry, photographic data o f e a c h
alien is collected and sent to a central facility for fabrication of an
identfication card. On March 2 5 , 1977, production of the resident alien
identification cards was begun in the Bureau. T h e back of the card is printed
using special formula inks which provide fluorescent characteristics and
optical character recognition blindness. The face side is photographically
manufactured by contractor personnel.
Management development
The Bureau provided staff support to the Department's efforts to develop
a comprehensive executive/management development program which was
146
1977 REPORT OF THE SECRETARY OF THE TREASURY
issued on July 27, 1977. As a result of these concerted efforts, a fiscal 1978
m a n a g e m e n t plan has been formulated which will enable the Bureau to
identify, select, and train present and future high-potential managers.
Labor-management relations
T h e 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 1 1 4 9 1 , as a m e n d e d ,
m a n a g e m e n t deals with 16 A F L - C I O affiliate unions representing 25 distinct
craft groups, a noncraft unit, and a guard unit. O n e independent union
represents the GS clerical/technical unit. Thirteen substantive negotiated
labor-management agreements are^ presently in existence.
A series of training courses and seminars were initiated for each level of
supervisory and m a n a g e m e n t personnel. This program is designed to further
improve the Bureau's record of effectiveness in negotiating with labor
organizations and in dealing with labor relations matters.
Position management
T h e Bureau's Position M a n a g e m e n t Board, which r e c o m m e n d s m a n p o w e r
policy, p r o c e d u r e s , and allocations, has emphasized position m a n a g e m e n t in
its review of m a n p o w e r needs. This has resulted in the downward revision of
internal personnel ceilings and m o r e effective utilization of manpower.
All Classification Act position descriptions are being prepared in accordance with the Civil Service factor evaluation system ( F E S ) guidelines. Wage
and classification specialists received Civil Service Commission training. FES
training has been incorporated into the Bureau's supervisory training program
to familiarize m a n a g e m e n t and supervisory personnel with the FES guidelines
of position classification.
Awards
During fiscal 1977, 1,280 employees received special achievement awards
and 19 employees received high quality pay increases, with nonrecurring
savings of $138,557 being realized. U n d e r the employee suggestion phase of
the program, 204 suggestions were received, o f w h i c h 92 were adopted, with
savings of $53,232.
Six s u m m e r employees were granted awards in recognition of their superior
work performance.
Upward mobility program
Following comprehensive reviews by union and departmental officials, the
Bureau's upward mobility program and promotion policies were revised and
approved in fiscal 1977. Five positions identified to be filled through upward
mobility were a n n o u n c e d in April 1977, and 183 applications were received.
Applicants were evaluated by the assessment center technique and by special
supervisory evaluation. Selection was m a d e of seven employees for whom
individual development plans are being formulated. Nonselected candidates
are afforded performance and career counseling.
T h r e e of the five employees selected for upward mobility positions in the
previous fiscal year have attained target positions and are no longer
participants in the program.
ADMINISTRATIVE
REPORTS
147
Safety
The Bureau continued its efforts, consistent with stated policy, to be
responsive to concerns as they related to employee safety and environmental
well-being. Indicative o f t h e successful accomplishments during the past fiscal
year, the Bureau received the Secretary's Award for Safety ( H o n o r ) for having
the most outstanding safety and health action plan. T o promulgate and
maintain a comprehensive and effective occupational safety and health
program, several significant actions in terms of program development were
accomplished, including a 1977 occupational safety and health action plan,
personal protective e q u i p m e n t program, and a hearing conservation program.
R e c e n t interest in cardiopulmonary resuscitation as a lifesaving technique has
resulted in p r o g r a m m e d activity to provide training and familiarization to 300
key employees. Continuing priority attention is being given to the investigation
and analysis of accidents to identify standard cause factors, comprehensive
safety audits, and clarification and restatement of safety committee goals with
particular emphasis on employee participation.
Internal audit program
An intensive program of internal audit provides for the evaluation and
reexamination of operational efficiency and economy, and ensures compliance with prescribed regulatory directives. During fiscal 1977, 84 reports of
audit were released and c o n t a i n e d 552 r e c o m m e n d a t i o n s for possible
improvements which were referred for m a n a g e m e n t consideration. Coverage
included fiscal and m a n a g e m e n t - t y p e audits and reviews of operations and
programs, c o n d u c t e d on a scheduled, special, and u n a n n o u n c e d basis. Liaison
is maintained with the d e p a r t m e n t a l Office of Audit vand the General
Accounting Office.
Service to the public
T h e Bureau continues to be one of the major attractions for visitors to the
Washington area. During fiscal 1977, a total of 553,522 visitors utilized the
self-guided tour facilities of the Bureau.
Exhibits of securities were provided for 11 scheduled philatelic and
numismatic events. In addition, four souvenir cards were p r o d u c e d and issued
for first-day sale at the Milwaukee Philatelic Society Exhibition, Milwaukee,
Wis., the Rocky Mountain Philatelic Exhibition, Denver, Colo., the American
Numismatic Association Convention, Atlanta, Ga., and the Puerto Rico
Philatelic Exhibition, San J u a n , P.R. Sales of souvenir cards continue to
respond to expressed public interest and serve to defray costs of participation
by the Bureau at these events.
OFFICE OF EQUAL OPPORTUNITY PROGRAM
The Office of Equal Opportunity Program is under the immediate supervision of the Assistant Secretary (Administration), who is the D e p a r t m e n t ' s
principal Compliance Officer and the D e p a r t m e n t ' s Equal Employment
Opportunity Officer. T h e Office assists the Secretary and the Assistant
Secretary (Administration) in the formulation, execution, and coordination of
148
1977 REPORT OF THE SECRETARY OF THE TREASURY
policies relating mainly to two programs: (1) The equal employment
opportunity program for Treasury employees, and (2) compliance surveillance 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.
Federal e q u a l employment o p p o r t u n i t y 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.) The Office has the responsibility for developing and monitoring the
Department's affirmative action program and for operating the Department's
equal employment opportunity complaints processing system.
D e p a r t m e n t of the Treasury full-time employment by minority group status
Comparison
1968
1972
1974
1975
1976
1975-76
No.
Comparison
1968-1976
Percent
No.
Percent
Total employees*
82.155 102,813 114,686 122,648 122.013
-635
-0.5
39,858
48.5
Black
Spanish-American
American Indian..
Oriental
Other
GS 1-4:
Total
11,777 15,619 18,216 19,533 19,466
1,052 2,247 3,437 3,912 4,090
79
128
175
192
198
• 482
813 1,230
1,485
1,466
68,765 84,006 91,628 97,526 96,793
-67
178
6
-19
-733
-.3
4.5
3.1
-1.2
-.7
7,689
3,038
119
984
28,028
65.3
288.3
150.6
295.4
40.8
19,120 24,126 25,526 28,174 27,534
-640
-2.3
8,414
44.0
Black
Spanish-American
American Indian
Oriental
Other
4,947 5,904 6,679 6,664 6,347
255
791
1,065
1,168
1,234
25
45
84
57
49
80
159
181
228
213
13,813 17,227 17,517 20,057 19,691
-317
66
-8
-15
-366
-4.8
5.6
-14.0
6.6
-1.8
1,400
979
24
133
5,878
28.3
383.9
%.0
166.2
42.5
19,480 27,601 33,295 33,064 31,645 -1,419
-4.3
12,165
62.4
2,708 4,290 5,569 5,822 5,915
93
264 ^
551
1,008
960 1,030
70
26
35
50
49
51
2
141
249
445
437
420
-17
16,341 22,476 26,223 25,7% 24.229-1.567
1.6
7.3
4.0
-3.9
-6.1
3,207
766
25
279
7,888
118.4
290.1
96.1
197.8
48.3
GS 5-8:
Total
Black
Spanish-American
American Indian
Oriental
Other
QS 9_12:
Total
Black
Spanish-American
American Indian
Oriental
Other
28,893 32,321 35,580 36,639 38,136
1,497
4.1
9,243
32.0
1,144
1,587
2,050 2,406 2,6%
332
519
803
820
895
21
34
44
47
58
186
222
368
491
523
27.210 29,959 32,315 32,875 33,964
290
75
11
32
1,089
12.0
9.1
23.4
6.5
3.3
1.552
563
37
337
6,754
135.7
169.6
176.2
181.2
24.8
13.257 13.328 13,598
270
2.0
4.107
43.3
151
307
399
435
474
35
88
136
130
134
3
8
16
14
16
55
90
105
131
139
9.247 11.544 12.601 12,618 12.835
39
4
2
8
217
9.0
3.0
14.3
6.1
1.7
323
99
13
84
3.588
213.9
282.9
433.3
152.7
38.8
GS 12-18:
Total
Black
Spanish-American
American Indian
Oriental
Other
9.491
12,037
*The totals include wage board personnel. Grade comparisons are for GS series only.
NOTE.—For figures for 1%9. 1970. 1971. and 1973. see 1974 Annual Report, p. 116.
ADMINISTRATIVE
REPORTS
149
More specifically, the Office guides and oversees the implementation o f t h e
D e p a r t m e n t ' s equal employment program and action plans of all the bureaus,
provides consultative services on equal opportunity matters, and reviews and
approves action plans promulgated by each bureau headquarters. It reviews
and adjudicates the investigation of complaints alleging discrimination
because of race, color, religion, sex, national origin, or age. Also, the Office
provides guidance to Treasury officials and all its field activities through its
onsite and offsite equal employment m a n a g e m e n t review evaluations of the
affirmative action plans and E E O complaints processing system; participates
with the Office of Personnel in the conduct of personnel m a n a g e m e n t
evaluation program reviews; assesses personnel m a n a g e m e n t effectiveness in
the area of E E O , upward mobility, and special emphasis programs; and
prepares and r e c o m m e n d s corrective action plans.
Secretarial initiatives.—Personal accountability for E E O success has been
introdueed. Secretary Blumenthal, in a m e m o r a n d u m to heads of bureaus and
offices, dated August 1 1 , 1977, m a d e clear his personal position and
c o m m i t m e n t oh E E O . In that c o r r e s p o n d e n c e , he directed all bureau heads to
c o o p e r a t e fully with Assistant Secretary Beckham in assuring that equal
opportunities were m a d e a reality in the areas of merit promotions, training,
and related program efforts for all D e p a r t m e n t minorities and women.
Managers at all levels were also directed that zero-base budgeting should be
applied to review of E E O planning and that they would be held personally
accountable for expected positive program results.
Four personnel m a n a g e m e n t evaluations of the b u r e a u s ' E E O operations
have been completed and six are planned for the balance of calendar 1977.
These survey efforts amplify the personal c o m m i t m e n t of the Secretary and
provide a regular context for learning about the accomplishments of each
bureau and closely monitoring progress against stated goals.
T h e D e p a r t m e n t initiated a Civil Service Commission study that could
reinstate **direct-hire" authority for outstanding college graduates. Under the
provisions o f t h e old Federal Service Entrance Examination ( F S E E ) program,
agencies could appoint outstanding college graduates without exam qualification. The provisions of the Professional and Administrative Career Examination ( P A C E ) program effectively eliminate many minorities and women who
fail to qualify in the examination process. The heaviest burden is borne by
minorities whose cultural history provides less adequate test preparation and
who c a n n o t advance through other loopholes such as those offered through
the upward mobility program.
Contract compliance
The D e p a r t m e n t of Labor, the Federal agency assigned responsibility for
implementing section 202 of Executive Order 11246, has designated the
D e p a r t m e n t o f t h e Treasury as the compliance agency responsible for assuring
equal opportunity compliance by Federal contractors in the banking and
savings and loan industries. Under the general policy direction o f t h e Assistant
Secretary ( A d m i n i s t r a t i o n ) , the Office of Equal Opportunity Program
develops policy and directs a nationwide program of compliance surveillance
to assure that these 16,000 or more institutions pursue policies of nondiscrimination and engage in positive programs of affirmative action in all of their
employment operations and practices.
The Office has established six small regional offices located in Los Angeles,
Atlanta, Chicago, Houston, New York, and Washington, D.C. These offices
150
1977 REPORT OF THE SECRETARY OF THE TREASURY
conduct compliance reviews, surveys, and inspections of the policies and
programs of covered financial institutions in their various several-State
regions. Their staffs also investigate complaints alleging discrimination against
financial institutions by their employees or applicants for employment based
on race, color, religion, sex, or national origin.
Program planning initiatives and achievements.—Eighty compliance reviews
of financial institutions have been completed since January and 113 are in
process of completion. Since c o m m e n c e m e n t of the Carter administration,
five formal enforcement actions have been initiated and an additional three
show-cause notices are in process of issuance. A total of $ 1,332,000 has been
budgeted for compliance enforcement during fiscal 1978, and an additional
$568,000 is estimated for this program during fiscal 1979.
Strict enforcement policies have recently been emphasized in compliance
reviews. In May of this year, for the first time in the history of the Executive
Order 11246 program, sanction proceedings were initiated against a bank—
proceedings which place in j e o p a r d y the bank's authority to maintain deposits
of Federal funds. Additional enforcement actions have been initiated and still
others are pending issuance.
Minority e m p l o y m e n t has steadily increased as a result of Treasury's
compliance activity. Between 1968 and 1976 a Treasury survey disclosed that
minority employment in the financial industry increased from 40,000 to
165,000. Of these totals, blacks increased from approximately 22,000 to
90,000 and persons of Hispanic origin from 12,000 to 50,000. C u r r e n t trends
indicate that minority representation in the Nation's banks is increasing even
m o r e dramatically during 1977.
FEDERAL LAW ENFORCEMENT TRAINING CENTER
T h e Federal Law Enforcement Training C e n t e r ( F L E T C ) is an interagency
training facility formally established as an entity within the D e p a r t m e n t o f t h e
Treasury on March 2, 1970, and is under the supervision o f t h e Chief Deputy
to the U n d e r Secretary (Enforcement and Operations).
T h e D e p a r t m e n t o f t h e Treasury is the lead agency for operating the C e n t e r
and, as such, controls its day-to-day activities. A Board of Directors, comprised
of representatives at the Assistant Secretary level from the major d e p a r t m e n t s
which have agencies participating in the Center, and on which there are
nonvoting m e m b e r s from the Office of M a n a g e m e n t and Budget, the Civil
Service Commission, and the U.S. Capitol Police Board, determines F L E T C
training policy, programs, criteria, and standards and resolves conflicting
training requirements.
T h e C e n t e r c o n d u c t s basic and c o m m o n advanced courses in criminal
investigator and police training for participating agencies and furnishes
facilities for the participating agencies to c o n d u c t advanced, inservice,
refresher, and specialized (AIRS) training for their own law enforcement
personnel. Only those Federal employees with arrest authority receive training
at the Center. At present, 30 enforcement organizations and units, representing most major executive d e p a r t m e n t s , independent Federal agencies, and the
legislative branch, participate in C e n t e r programs. In fiscal 1977, the U.S.
Supreme C o u r t Police, Border Patrol agents and immigration officers of the
ADMINISTRATIVE
REPORTS
151
Immigration and Naturalization Service, and Federal Protective Service
officers began participating in the C e n t e r ' s training programs. T h e C e n t e r also
furnishes training on a space-available basis to personnel from other Federal,
State, and local agencies.
T h e C e n t e r is dedicated to providing the finest law enforcement training
available in a cost-effective and efficient m a n n e r . T h e recent growth of the
C e n t e r and future plans for the continuing consolidation of Federal law
enforcement training have thrust the C e n t e r into a position of national
leadership in law enforcement training. Consolidation of the various Federal
training sites at the F L E T C is cost effective and in the overall best interest of
the G o v e r n m e n t . During this reporting period, the D e p a r t m e n t of Justice
closed its Border Patrol A c a d e m y at Port Isabel, Tex., and the General Services
Administration closed training academies at Marietta, Ga., Alameda, Calif.,
and Washington, D . C , to take advantage of C e n t e r resources and facilities.
Training 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
F L E T C . T h e C e n t e r is located on the southeast coast of Georgia near the city
of Brunswick. It relocated from the Washington, D . C , area to the former naval
air station in September 1975. Existing facilities at the 1,500-acre site were
renovated or modified to a c c o m m o d a t e the start of training. Several buUdings,
which were under construction at the time the Navy departed, have now b e e n
completed and are being used. T h e C e n t e r includes facilities for administration, classrooms and training, instructor offices, p r o c u r e m e n t and supply,
facilities engineering and m a i n t e n a n c e , instructional services ( p h o t o l a b ,
graphic arts, and T V p r o d u c t i o n ) , m o t o r pool service station and garage,
driver training classroom, printshop, interim driver training range, gymnasium
and physical training, o u t d o o r firing ranges, student center, dining hall,
dormitories, convenience store, auditorium, explosive range, and a practical
exercise project which includes houses and a criminal court facility, a m o c k
border patrol area and station, aquatic training pool, athletic fields, and tennis
courts.
Master plan
A master plan for the conversion of the facility to meet current and unique
requirements of law enforcement training has been completed and construction has begun. T h e plan was originally designed for a population of 750
students. However, by taking maximum advantage of existing facilities and
including expansion capability in the design program, the C e n t e r will have the
flexibility to double student capacity. The construction work is being time
phased to ensure the least a m o u n t of interruption to ongoing training
operations. Construction controlled by the master plan is expected to near
completion in late 1979.
Public and community affairs
Several major projects were initiated or completed to provide the facilities
and materials required to disseminate information to persons, groups, and
organizations at the National, State, and local levels with an interest in law
enforcement training. In addition, major strides were m a d e in the integration
and involvement of C e n t e r personnel and activities in community affairs
through participation in civic organizations and events and assistance t o
schools, local government, and other interested groups.
152
1977 R E P O R T O F T H E SECRETARY O F T H E TREASURY
General
Due to the increased activity at the outdoor firing ranges, explosive range,
and driver training courses, the C e n t e r has been actively involved with
D e p a r t m e n t officials in regard to the a d e q u a c y of the environmental
assessment prepared in contemplation of the move to Glynco. An updated
draft has b e e n p r e p a r e d for d e p a r t m e n t a l review and c o m m e n t . T h e C e n t e r
does not anticipate any problems as a result of the updated assessment.
During this period the C e n t e r hired a safety officer to formulate and monitor
an active safety p r o g r a m . Occupational Safety and Health Administration
guidelines, m a n d a t e d for Federal agencies, are being implemented.
T h e C e n t e r , through GSA, continues to upgrade facilities. Several old
t e m p o r a r y buildings were demolished and considerable renovation and
alteration work was completed at the physical training complex during the
reporting period.
T h e D e p a r t m e n t approved the acquisition of a minicomputer which will be
delivered to the C e n t e r in O c t o b e r 1977. T h e c o m p u t e r wiU be utilized initially
in the student registration, dormitory assignment, and scheduling functions;
however, financial, work orders, and property m a n a g e m e n t applications will
be mechanized as programs can be developed.
T h e C e n t e r has several major contracts in force that impact favorably on t h e
labor statistics of the local community. Commercial contractors operate the
dining facility, dormitories, student center, convenience store, and barbershop
and perform janitorial services for the entire facility. Approximately 150
employees are on these payrolls. In addition, the C e n t e r in fiscal 1977 spent
approximately three-quarters of a million dollars in the local community
through purchase of supplies and equipment.
During the reporting period, the C e n t e r provided support services and
facilities to Federal Disaster Assistance Administration team personnel who
assisted the local shrimping community in obtaining financial aid.
T h e C e n t e r will provide, beginning fiscal 1978, indoor storage space for
several C o a s t G u a r d b o a t s utilized in surveillance activities when the
Presidential party is on St. Simons Island.
Training programs
Criminal investigator training.—During the year, 19 basic 7-week criminal
investigator classes were c o n d u c t e d and 863 students graduated—a. lOp e r c e n t increase in graduates over fiscal 1976. Advanced Law Enforcement
Photography, a c o m m o n AIRS course conducted by the Criminal Investigator
Training Division ( C I T D ) , graduated 228 students from 23 classes—a 4 4 3 p e r c e n t increase in graduates over fiscal 1976. Considerable effort was
expended to revise texts and practical exercise curriculum in order to k e e p
pace with changes in the criminal investigator field. T h e CITD staff provided
instructional support as required to the various agencies conducting AIRS
training at the Center. T h e n u m b e r of p e r m a n e n t instructors in the Legal
Branch was increased as a result o f a Board of Directors' policy decision. T h e
C e n t e r is o f t h e opinion this action will tend to stabilize the instructional staff,
e n h a n c e professionalism, and increase productivity.
Police training.—During the year, the Police Training Division ( P T D )
c o n d u c t e d 41 classes and graduated 1,281 students—a 70-percent increase in
the n u m b e r of classes and a 62-percent increase in students graduated from
the previous fiscal year.
The past 12 months have been very significant for the P T D in that 4 new
major programs were established: 2-week National Park Service course; 4week Capitol Police refresher course; 14-week immigration officers basic
ADMINISTRATIVE
REPORTS
153
training course, and 16-week Border Patrol course. In addition to these new
programs, the PTD effected a total review of terminal and interim performance
objectives for all courses of instruction. New instructor lesson plans for all
courses were formulated by m e m b e r s of the instructional staff in order to
incorporate the most up-to-date techniques available in law enforcement
instruction. A 2-hour slide program on the history of law enforcement was
developed and has been well received by students and instructors. In addition,
the P T D staff provides support to the various agencies conducting AIRS
training at the Center.
Special training.—The special training facilities have been expanded and
improved and now include o u t d o o r firing ranges, an improved high-speed
driving course, a rough terrain four-wheel-drive course, two vehicle skid
control areas, an o u t d o o r physical training obstacle course, and improved
shower facilities and locker rooms for students.
The special training programs in driver training, firearms, and physical
training support the basic schools and AIRS programs. Courses in arrest
techniques, self-defense tactics, drownproofing, emergency medical techniques, first aid, basic marksmanship, safety, c o m b a t firing, riot gun training,
advanced driving, rough terrain driving, defensive driving, and emergency
vehicle control are provided trainees as part o f t h e overall curriculum to turn
out well-rounded criminal investigators and police officers. During this
reporting period, the n u m b e r of students participating in special training
programs increased 45 percent over fiscal 1976.
Advanced., inservice, refresher, and specialized training. — A significant
portion of the C e n t e r ' s mission involves providing support services and
facilities to participating agencies for conducting AIRS training programs.
During the year, 3,060 students graduated from the various AIRS training
programs—a 32-percent increase over fiscal 1976. The greater percentage of
these graduates are representatives of the Bureau of Alcohol, T o b a c c o and
Firearms, U.S. Customs Service, National Park Service, Internal Revenue
Service (Intelligence), U.S. Marshals Service, and Immigration and Naturalization Service.
Training support
Significant steps have been taken in the area of mechanization to improve
the scoring, grading, and analysis of examinations. The C e n t e r designed and
implemented an instructor training program and during this period trained
over 120 instructors. It is planned to increase the scope of this program during
the next fiscal year. T h e educational staff developed a field survey program
for postgraduation evaluation and feedback in terms of student performance
based on skills, knowledge, and attitudes acquired in the Center's training
programs.
Management improvement
The C e n t e r continues the trend established in fiscal 1976 by training more
students in improved facilities at lower overall cost per student. Many factors
have contributed to this continuing, favorable trend; however, the Center's
ability to obtain funding for student travel and en route per diem continues to
be one o f t h e most stabilizing factors in sustaining a constant student pipeline
and cost-effective posture. A reorganization originated by the Center and
approved by the D e p a r t m e n t during this period established the position of
Associate Director for Training and brought all training functions under a
single training head.
154
1977 REPORT OF THE SECRETARY OF THE TREASURY
FISCAL SERVICE
Bureau of Government Financial Operations
T h e functions o f t h e Bureau are Government-wide in scope. It disburses by
check, cash, or other m e a n s of p a y m e n t for most G o v e r n m e n t agencies; settles
claims involving loss or forgery of Treasury checks; manages the G o v e r n m e n t ' 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 Governm e n t program agencies including subsystems for the reconciliation of check
and deposit transactions, and by compiling and publishing reports of budget
results and other G o v e r n m e n t financial operations; provides banking and
related services involved in the m a n a g e m e n t of the G o v e r n m e n t ' s cash
resources; under specified provisions of law is responsible for investing various
G o v e r n m e n t trust funds; oversees the destruction of currency unfit for
circulation; provides central direction for various financial programs and
practices of G o v e r n m e n t agencies; and directs a variety of other fiscal
activities.
Disbursements and check claims
During fiscal 1977, t h e Division of Disbursement operated 8 disbursing
centers and 3 regional offices, servicing nearly 1,500 offices of agencies
located throughout the United States and the PhUippines, and rendered
disbursing services for embassies located in certain foreign countries in Central
and South America and in the Far East. In addition, the Division distributed
Federal tax deposit forms to taxpayers and performed automated payroll
accounting service on a reimbursable basis for certain small agencies.
Management improvements and significant achievements.—Presorting c o m m e n c e d in the Philadelphia Disbursing Center with supplemental security
income (SSI) checks dated N o v e m b e r 1, 1976, to take advantage ofthe 1-centper-item discount offered by the U.S. Postal Service on envelopes sorted into
ZIP code sequence prior to release in the mails. Under this system, disbursing
office employees band checks together in trays in either five-digit or three-digit
ZIP code sequence for delivery to Postal Service sectional centers. Through
September 30, 1977, the 1-cent discount has been obtained on 25.3 million
SSI checks for a gross postage savings of $252,530. More than 11 mUlion tax
refund checks were also presorted for a gross postage savings of $ 1 1 0 , 2 0 8 .
Next fiscal year, the program will be expanded to include social security
benefit, railroad retirement annuity, veterans compensation, and pension and
educational payments, and civil service annuity payments. W h e n presorting is
fully implemented, it is estimated that more than 4 5 0 million checks will
qualify for the 1-cent discount, resulting in an estimated net savings of $3
million.
Under the tape claims system, which eliminates most ofthe keypunching and
manual preparation of claims and stop payment forms, stop payment requests
were processed by magnetic tape in fiscal 1977 for social security payments.
The claims processing schedule has been reduced from 4 working days to 7
hours for SSI payments.
As participation continues to increase, more than eight times the volume of
electronic funds transfer ( E F T ) payments were m a d e in fiscal 1977 as in 1976
and the transition quarter. In the second year of operation, more than 65
million payments were processed to recipients of social security, railroad
retirement annuity, civU service annuity, veterans compensation and pension.
ADMINISTRATIVE
155
REPORTS
and revenue sharing payments. EFT is a major element of the direct deposit
system, and enables the rapid computer-assisted transfer of funds between the
Treasury, Federal Reserve banks and m e m b e r banks for the purpose of
crediting payees' accounts with financial organizations. Another system which
employs the concept of E F T is the Treasury financial communications system,
which includes certain nonbenefit payments such as grants, investments, the
replacement of lost composite checks, and unemployment compensation
payments to States. In its first year of operation 13,981 transactions totaling
$24.3 billion were m a d e under this system.
Approximately 434.5 mUlion c h e c k s were wrapped in fiscal 1977 under the
check-wrapping system, which manufactures an envelope from a roll of paper
while simultaneously enclosing a check and as many as three separate inserts.
More than 1 billion checks have been wrapped since the inception of the
system in 1973.
As a result of ongoing centralization and computerization of payments, and
the related consolidation of claims operations, the New York Branch
Disbursing Office, which had no E D P facUities, was closed effective July 12,
1977. Estimated annual recurring savings as a result of the closing are
$195,300.
Six additional Federal agencies a u t o m a t e d their accounting systems in 197 7,
enabling them to submit magnetic tapes to disbursing offices for the issuance
of v e n d o r and miscellaneous p a y m e n t s . U n d e r the a u t o m a t e d system,
computer-generated cards accompanying the checks provide the recipient
with a p e r m a n e n t record o f t h e object o f t h e payment. T h e system eliminates
manual processing of paper enclosures with the checks, and reduces the
volume of inquiries regarding the purpose of payments. Twenty agencies are
actively working to convert to the a u t o m a t e d system.
Disbursing operations.—During fiscal 1977, a total of 675 million checks,
savings bonds, and E F T payments were issued under Treasury's centralized
disbursing system at an average cost of $ 0 . 0 4 4 5 . Close to 98 percent of these
payments were c o m p u t e r p r o d u c e d . In addition, 127.2 mUlion Federal tax
deposit forms were p r o d u c e d .
T h e following table is a comparison of the workload for fiscal years 1976
and 1977:
Volume
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 of the Public Debt (General Electric Co. bond program)...
Total workload—reimbursable items
Total workload
I July 1, 1975, through June 30, 1976.
20ct. 1. 1976. through Sept. 30, 1977.
19761
1977 2
360.589.208
53.826,563
86,049.429
68,407.107
2,%5,693
70,690,757
8,032,199
334,380
379,493,103
51,957,379
77,772,027
68,005,540
2,956.546
71.593.135
7.8%.031
243.986
650.895.336
Classification
659.917.747
13.876.014
1.558,599
13.705,160
1,684,412
15,434.613
15,389,572
666,329,949
675,307,319
156
1977 REPORT OF THE SECRETARY OF THE TREASURY
Settling check claims.—During fiscal 1977, the Division of C h e c k Claims
processed 1.4 million requests to stop p a y m e n t of G o v e r n m e n t checks. This
resulted in 572,283 paid-check claims acted upon, including 102,5 19 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 171,645 checks.
During the year, 69,370 paid-check claims resulted in settlement checks to
payees totaling $19.5 mUlion; 7,490 claims resulted in settlement checks to
endorsers totaling $2.8 mUlion, and 52,078 claims resulted in payments to
other agencies of $ 14.4 mUlion for death and nonentitlement cases. In addition
153,930 substitute c h e c k s valued at $173.2 million were authorized to replace
checks that were lost, stolen, destroyed, or not received.
Claims modernization project
A high-priority project was initiated in D e c e m b e r 1976 to substantially
improve and modernize the processing of claims for Treasury checks which
have been lost, stolen, or not received. It calls for changes designed to improve
service to the public, increase efficiency, and reduce costs.
U n d e r the direction of a steering c o m m i t t e e , chaired by the Commissioner,
the newly formed Claims Modernization Project Staff m a d e considerable
progress in this reporting period.
A reliable tracking system within the Bureau has identified areas of delay
in processing time, and corrective action has been taken by streamlining
p r o c e d u r e s , redesigning workflow, and training employees. Negotiations are
underway to extend this tracking system to operations of program agencies
such as Internal R e v e n u e Service and Social Security Administration.
Further' automation efforts call for expanding the system where agencies
submit claim data to disbursing offices on magnetic tape, upgrading Bureau
data processing systems for better reporting, and designing new systems to
support m a n a g e m e n t planning and control of claims operations.
Treasury has proposed legislation to authorize issuance of a substitute check
without an undertaking of indemnity except as the Secretary of the Treasury
may require, and consideration is being given to proposing legislation which
will shorten from 6 years to 3 years the statute of limitations applicable to
claims for paid checks.
Government-wide accounting
Government accounting systems.—Prototype consolidated financial statements covering fiscal 1975 were released early in fiscal 1977. Publication of
the statements is the result of an experimental undertaking aimed at extending
accrual accounting c o n c e p t s to governmental accounting. This undertaking is
intended to contribute to the improvement of accounting at all levels of
government and to the development of accounting standards for public
financial reporting by government entities. An external Advisory C o m m i t t e e
on Federal Consolidated Financial Statements, formed in March 1976,
continued its efforts to advise and m a k e r e c o m m e n d a t i o n s to the Secretary and
to study and identify major conceptual issues to be resolved. A fiscal 1976
prototype is being developed to include r e c o m m e n d a t i o n s of the committee
and c o m m e n t s of the general public on the first prototype. An interagency
Advisory C o m m i t t e e on Consolidated Financial Statements, consisting of t o p
ADMINISTRATIVE
REPORTS
157
level representatives from various G o v e r n m e n t agencies headed by the
Comptroller General, was formed in July 1977 and has begun work on
developing practical solutions and implementation procedures for some o f t h e
major problem areas identified by the external advisory committee. These
include areas such as inflation accounting, valuation of assets, pension fund
liabilities, allowance for losses on accounts and loans receivable, and accrual
of taxes. T h e first operational consolidated financial statements are planned
to be published in 1978, for fiscal 1977. The goal is to furnish statements
applying generally accepted accounting principles for the Federal Government in the fiscal 1982 report.
T h e conversion of the central accounting system from second-generation
magnetic tape files to a third-generation data base environment for processing
accounting transactions has reached the program development stage. The data
base design has been finalized and program specifications for creation of the
data base have been completed. T h e deposits-in-transit subsystem, a control,
tracking, and reporting system designed to account for moneys received by or
for the G o v e r n m e n t , is in the implementation stage, and is targeted for
completion in fiscal 1978. Standardized deposit forms, suitable for automated
input processing, are now in use by Federal agencies and the banking
community. Several agencies having a large volume of collection activity each
month are submitting detail deposit and debit data on magnetic tape, thereby
reducing the time required to process deposit data. T h e Treasury financial
communications system ( T F C S ) has been in operation since September 1976,
and has processed a monthly average of $2.3 billion for deposit transactions
and $2.1 billion for payment transactions during fiscal 1977. Utilizing a
c o m p u t e r link to the Federal Reserve Bank of New York, this system provides
access to the Federal Reserve Communications System and its associated
financial data. T F C S automates the generation of nonrecurring payments and
the receipt of G o v e r n m e n t deposits, and provides a comprehensive accounting
and audit control mechanism for streamlining financial recordkeeping and
reporting. Plans for the optimization and e n h a n c e m e n t of T F C S have been
developed and are being implemented. The Treasury asset accountability
system ( T A A S ) automates the maintenance of Treasury cash and monetary
assets held in Federal depositaries and Treasury offices. Initial analysis efforts
are currently being performed. A top-down system approach toward implementation will be followed by implementing modules o f t h e total system over
a period of several years.
The Tax Reform Act of 1976 (Public Law 9 4 - 4 5 5 ) authorized the
withholding of State and District of Columbia income taxes from the
compensation of military personnel. In addition, the Tax Reduction and
Simplification Act of 1977 (Public Law 9 5 - 3 0 ) provided for the withholding
of county income or employment taxes from the compensation of Federal
employees. To a c c o m m o d a t e the new withholding provisions, an Executive
order and a change in regulations under 3 1 CFR 21 5 were published to include
a standard withholding agreement. T h e change in 3 1 CFR 21 5 provides a single
point of reference for all State, city, and county tax officials and payroll officers
regarding the withholding of such taxes.
A pilot promotional campaign utilizing the theme '*BANK ON U S " was
developed and implemented in the Bureau, encouraging employees to
authorize sending their salary checks directly to financial organizations for
credit to their personal accounts. T h e campaign resulted in a significant
158
1977 REPORT OF THE SECRETARY OF THE TREASURY
increase in the n u m b e r of employees utilizing the composite check p r o c e d u r e ,
with a corresponding increase in savings in the disbursing area. With the
success of this BANK ON US campaign, plans are to introduce the BANK ON
US t h e m e throughout Treasury early in fiscal 1978.
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 1976, the
transition quarter, and fiscal 1977 of those assets and liabilities comprising the
account of the U.S. Treasury. T h e assets and liabilities in this a c c o u n t include
the cash accounts r e p o r t e d as the ''operating b a l a n c e " in the Daily Treasury
Statement. Other assets included in the a c c o u n t o f t h e U.S. Treasury are gold
bullion, coin, coinage metal, paper currency, deposits in Federal Reserve
banks, and deposits in commercial banks designated as G o v e r n m e n t depositaries.
Treasury's gold balance was $11,597.8 mUlion at the beginning of the fiscal
year and $ 11,595.3 million at the yearend. Major transactions during the year
included gold purchased from the International Monetary Fund amounting to
$60.5 million and sales to the Exchange Stabilization Fund and American
Revolution Bicentennial Administration amounting to $62.7 million and $0.3
million, respectively.
Stocks of coinage metal stood at $319.1 million at the beginning of fiscal
1977 and $282.8 million at yearend. Such stocks included silver, copper,
nickel, zinc, and alloys of these metals which are not yet in the form of finished
coins.
The n u m b e r of depositaries of each type and their balances on September
30, 1977, are shown in the following table:
September 30, 1977
Number of
accounts i
Depositaries
Federal Reserve banks and branches
1,975,808
47,210,697
1,355
14,029
•
354,550,000
17
38
Depositaries reporting through Federal Reserve banks:
General
Special (Treasury tax and loan accounts)
2$15,886,797,200
9
Other depositaries reporting directly to the Treasury:
Special demand accounts
Other:
DomesUc
Foreign 3
Total
Badance
37
156,659,248
3,364,137,578
15.452
19,811,330,531
I Includes only depositaries having balances with the U.S. Treasury. Excludes those designated to fumish
official checking account facilities or other services to Government 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.
2lncludes checks for $147,161,625 in process of collection.
3Principally branches of U.S. banks and of the American Express Intemational Banking Corp.
G o v e r n m e n t officers deposit moneys which they have collected to the credit
of the U.S. Treasury at Federal Reserve banks or at designated G o v e r n m e n t
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 1976, the transition quarter,
and fiscal 1977.
ADMINISTRATIVE
159
REPORTS
Depo.sits, withdrawals, a n d balances in the U.S. Treasury account
[In millions of dollars]
Fiscal
1976
T.Q.
Fiscal
1977
7,589
i 14,828
17,414
299,802
462,771
1,224
276,869
1,040,663
75,039
121,128
1,126
13.642
210,935
355,468
458,101
1,510
54.446
869,525
393,594
106,354
416,250
15,903
20,862
16,339
586,720
4,178
5,651
3,101
89,065
18.790
23,591
12,308
3%,8%
1,033,417
208,349
867,835
14,835
17,414
19,104
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:
PubUc debt redemptions
Letter of credit transactions:
Medicare
HEW grants
Unemployment insurance
Other
Total cash withdrawals
Operating balance at close of period
• Total operating balance excludes "other demand deposits" effective July 1, 1976.
Investments.—The Secretary of the Treasury, under specific provisions of
law, is responsible for investing various G o v e r n m e n t trust funds. T h e
D e p a r t m e n t also furnishes investment services for other funds of G o v e r n m e n t
agencies. A t t h e end of fiscal 1977, G o v e r n m e n t trust funds and accounts held
public d e b t securities (including special securities issued for purchase by major
trust funds as authorized by law), G o v e r n m e n t agency securities, and securities
of privately owned Government-sponsored enterprises. See the Statistical
Appendix for tables showing the investment holdings by G o v e r n m e n t agencies
and accounts.
Issuing and redeeming paper currency.—The Treasury is required by law (3 1
U.S.C. 4 0 4 ) to issue U.S. notes in a m o u n t s equal to those r e d e e m e d . In o r d e r
to comply with this requirement in the most economical m a n n e r , 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 p e r c e n t of the total a m o u n t of
currency. T h e Bureau of Engraving and Printing prints and holds these notes
in a reserve vault until needed by the Federal Reserve banks. The Bureau of
G o v e r n m e n t Financial Operations accounts for Federal Reserve notes from
the time they are delivered to the reserve vault by the Bureau of Engraving and
Printing until redeemed and destroyed.
The Bureau also handles all clainis involving burned or mutilated currency.
During fiscal 1977, payments totaling $9.1 million were m a d e to 50,567 such
claimants.
A comparison of the amounts of paper currency of all classes, issued,
r e d e e m e d , and outstanding during fiscal 1976, transition quarter, and fiscal
1977 follows:
Outstanding beginning of
period
Issues during period
Redemptions during period...
period..
Outstanding end of
[In thousands]
Fiscal 1976
Pieces
Amount
6,808,126 $77,611,087
3,207,354 22,275,951
2,724,415
15,287.064
7,291,065 84,599,973
T.Q.
Pieces
Amount
7,291,065 $84,599,973
711,357
5,164,905
660.728
3,575,263'
7,341.695 86,189,614
Fiscal 1977
Pieces
Amount
7,341,695 $86,189,614
3.127,691
22,714,508
2,630,202
14,538,870
7,839,184
94,365,252
160
1977 REPORT OF THE SECRETARY OF THE TREASURY
Details of the issues and redemptions for fiscal 1977 and of the a m o u n t s
outstanding at the end of the year are given by class of currency and by
denomination in a table in the Statistical Appendix. O t h e r tables in that volume
give further information on the stock and circulation of currency and coin in
the United States.
Data processing.—During fiscal 1977, 121.4 million Treasury checks were
paid and reconciled by the electronic check payment and reconciliation
system. These include all checks issued worldwide by civilian and military
disbursing offices.
Improving the a u t o m a t e d central accounting system embracing all cash
financial operations o f t h e G o v e r n m e n t continued as an ongoing project. This
system, which brings together all of the cash transactions of the Federal
G o v e r n m e n t , is the d a t a base for Federal budget results published in the
Monthly Treasury S t a t e m e n t of Receipts and Outlays of the U.S. G o v e r n m e n t
and in the annual C o m b i n e d Statement of Receipts, Expenditures and
Balances of the U.S. G o v e r n m e n t .
Services to the Division of C h e c k Claims were improved during the year by
the addition of an online updating capability which aids the tracking of cases
through the check claims process. An average of 7,000 online transaction
updates and 16,000 batch transactions are processed daily against the data
base which contains the status of nearly 6 million checks on which stops have
been placed.
Banking and cash management
Cash services.—The p h a s e o u t of the Division of Cash Services continued
during the year and the Division was officially abolished on April 1, 1977. This
change impacts the Washington, D . C , banks in that coin and currency
functions provided by Treasury already have been or will be transferred to the
Federal Reserve Bank of Richmond and its Baltimore Branch.
As part o f t h e phaseout, a coin exchange program was instituted among the
larger District of C o l u m b i a banks on August 8. This program has reduced
Treasury's coin handling by 70 percent. It is anticipated that by December of
next year, the F e d e r a l Reserve Branch at Baltimore will assume full
responsibility for the coin operation.
C o n c u r r e n t with the abolishment of the Division of Cash Services, the
remaining functions of the Division were placed with the newly established
Division of C u r r e n c y Claims with major responsibility for the receipt,
examination, and settlement of mutilated currency claims submitted by
individuals and banks. Steps were also taken to improve service to the public
with the addition of six currency examiners and the purchase of newer and
m o r e sophisticated equipment. As a result, the traditional 6-month backlog of
the m o r e difficult cases has been r e d u c e d to 3 months. During the fiscal year,
the Division processed approximately 51,000 mutilated currency claims, and
paid out $9.1 million in settlement thereof.
Foreign currency management.—The Foreign Currency Staff's automatic
funding c o n c e p t of maintaining local currency bank balances sufficient only
to m e e t the disbursing officers' immediate needs, first implemented in Latin
America during fiscal 1975, has been expanded to include most European,
African, and Asian countries. W h e n the Foreign Affairs Data Processing
C e n t e r in Bangkok, Thailand, b e c o m e s fully operational by the end of fiscal
1978, the automatic funding of all embassy operating accounts will be
implemented worldwide. T o date, balances in disbursing officers' operating
ADMINISTRATIVE
16;
REPORTS
accounts have been reduced by $32 million, which is resulting in recurring
annual interest savings of approximately $2 million.
During fiscal 1978, the Foreign Currency Staff will request the assistance
of the D e p a r t m e n t of Defense for implementation of similar cash management
systems for military disbursing officers worldwide.
Federal depositary system.—The types of depositary services provided and
the n u m b e r of depositaries for each of the authorized services as of September
30, 1976 and 1977, are shown in the following table:
Type of service provided by depositaries
1976
Receive deposits from taxpayers and purchasers of public debt securities for credit in
Treasury tax and loan accounts
rl3,891
Receive deposits from Goverament officers for credit in Treasury's general accounts ...
887
Maintain checking accounts for Govemment disbursing officers and for quasi-public
funds
5,725
Maintain State unemployment compensation benefit payment and clearing accounts
43
Operate limited banking facilities:
In the United States and its outlying areas
190
In foreign areas
218
1977
14,029
859
5,387
44
191
215
rRevised.
Paying grants through letters of credit.—At the close of fiscal 1977, 75
G o v e r n m e n t agency accounting stations were fmancing with letters of credit
under the Federal Reserve bank system. During the period, the Bureau
processed 99,294 withdrawal transactions aggregating $60,420 million,
c o m p a r e d with 79,690 transactions totaling $50,582 million in fiscal 1976.
At S e p t e m b e r 30, 61 G o v e r n m e n t agency accounting stations were
financing with letters of credit under the Treasury R D O system. During the
year. Treasury regional disbursing offices issued 65,129 checks totaling
$15,069 million, in response to grantee requests, c o m p a r e d with 48,693
checks totaling $12,948 mUlion in fiscal 1976.
Processing Federal tax deposits.—A new processing procedure was piloted
in May 1976 by the Kansas City Federal Reserve Bank and fully implemented
throughout the remainder of the Federal Reserve System by mid-December
1976. It provides for the taxpayer to present the tax payment and FTD card
to his/her bank which forwards daily a report of the total a m o u n t of the
deposits received to the appropriate Federal Reserve bank. The bank also
forwards a copy of the report, together with the FTD cards, to the Internal
Revenue Service for reconciliation with the taxpayers' returns. This p r o c e d u r e
eliminates the processing of the F T D cards by the Bureau of G o v e r n m e n t
Financial Operations and is expected to result in substantial cost savings by the
D e p a r t m e n t and expedite reconciliation o f t h e F T D cards with the taxpayers'
returns.
Methods of destroying unfit currency. — Dxxx'mg fiscal 1977, the Treasury
continued to encourage the use of ecologically cleaner methods of destroying
currency which is no longer fit for circulation. A total of nearly 3,000 tons of
unfit currency are destroyed each year by methods tested and approved by the
Treasury.
Two methods, incineration and pulverization, are currently being used to
destroy currency, and a third m e t h o d , shredding, was approved for use on the
high-speed currency-processing equipment currently being developed. U n d e r
the latter method, a shredder slices the notes into strips one-eighth of an inch
wide or less. This process uses the least amount of energy of the three
destruction methods.
162
1977 REPORT OF THE SECRETARY OF THE TREASURY
Incineration is still the more prevalent method being used by 22 Federal
Reserve offices which a c c o u n t for 62 p e r c e n t of the currency. Although
incineration effectively destroys currency, the equipment has to be very
carefully controlled and correctly operated to k e e p its emissions within limits
permitted by applicable municipal air quality standards. Consequently, the
Treasury has been encouraging the Federal Reserve banks to convert to
pulverization, which grinds the currency to a fibrous residue or very fine
particles. Fifteen Federal Reserve offices are now pulverizing the unfit
currency.
Cash management.—Treasury D e p a r t m e n t Circular N o . 1084, issued o n
D e c e m b e r 20, 1976, established the requirements pursuant to which Government d e p a r t m e n t s and agencies are to c o n d u c t their activities involving the
G o v e r n m e n t ' s cash so as to maximize the a m o u n t of cash available to this
D e p a r t m e n t and preclude unnecessary borrowing. These regulations are
applicable to all G o v e r n m e n t d e p a r t m e n t s and agencies whose financial
transactions affect the cash a c c o u n t of the Treasury. These regulations cover
cash m a n a g e m e n t practices relating to billings and collections, deposits,
disbursements, cash advances under Federal grant and other programs by
letters of credit and other m e a n s , and cash held outside the Treasury.
Operations planning and research
T h e Operations Planning and Research Staff is continuing its systems
developmental activities for a n u m b e r of fiscal functions, including the
following major systems revisions:
( 1 ) Implementation of the program for p a y m e n t of recipients of recurring
Federal payments by credit to their accounts in financial organizations is well
underway. In 1977 the program was extended to include recipients of veterans
compensation and pension payments. Planning is now underway to include
recipients of Federal salary p a y m e n t s beginning in 1978. T h e Staff is also
coordinating the inclusion of payments m a d e by other Federal disbursing
activities, particularly those o f t h e D e p a r t m e n t of Defense. It is estimated that
approximately 88.2 million payments will be m a d e by EFT during fiscal 1978.
( 2 ) T h e joint efforts of the Operatibns Planning and Research Staff and the
Federal Reserve to develop a check truncation system have progressed to the
implementation of a pilot program using checks issued by the Kansas City and
Birmingham Disbursing Centers and processed by the Richmond and Dallas
Federal Reserve Banks. Full-scale implementation o f t h e system is scheduled
for June 1978. Under this system, the flow of paid Treasury checks will stop
at the Federal Reserve bank level. Magnetic tape and microfilm records will
be substituted for the hundreds of millions of checks now shipped by the
Federal Reserve banks to Treasury for final payment and reconcUiation.
( 3 ) T h e revised Federal tax deposit system was implemented nationally
during calendar 1976 to expedite the flow of tax deposit data from the taxpayer
to the related master file record of the IRS. T h e joint efforts of the Federal
Reserve banks. Internal Revenue Service, and the Bureau of G o v e r n m e n t
Financial Operations resulted in a smooth transition to the new system during
1977. T h e effect of the system change is to forward Federal tax deposit d a t a
directly to the IRS service centers from the depositary in which the taxpayer
makes his normal tax deposits.
Miscellaneous fiscal activities
Auditing.—i:>ux'\r\g the fiscal year, the Audit Staff issued 77 audit reports o n
financial, compliance, and operational matters. T h e audits ranged from small
ADMINISTRATIVE
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163
imprest funds to the accounting for several multibillion-dollar Federal trust
funds and the audit of U.S. G o v e r n m e n t - o w n e d gold. Substantial improvements in operations, including cash savings, resulted from the audits. T h e
audits included onsite reviews at various disbursing centers of the Bureau
throughout the United States and at the A n c h o r a g e , Honolulu, and Manila
disbursing offices. Also, onsite audits were m a d e of the cancellation,
verification, and destruction of unfit currency at virtually all of the Federal
Reserve banks and branches.
An auditor served as chairman of the Secretary's C o m m i t t e e for the Audit
o f t h e Exchange Stabilization Fund. An auditor also served on the task force
to phase o u t operations of the Division of Cash Services, and another served
on the audit i m p r o v e m e n t project of the Joint Financial M a n a g e m e n t
Improvement Program.
As the result of the annual Audit Staff examination of the financial
statements and related supporting information of surety companies, 281 of
these companies qualified for Certificates of Authority as acceptable sureties
on bonds running in favor o f t h e United States (6 U.S.C. 8). Certificates are
renewable each July 1, and a list of approved companies ( D e p a r t m e n t a l
Circular 570, Revised) is published annually in the Federal Register for
information of Federal bond-approving officers and persons required to give
bonds to the United States.
Loans by the Treasury.—The Bureau administers loan agreements with those
corporations and agencies that have authority to borrow from the Treasury.
See the Statistical Appendix for tables showing the status of Treasury loans to
G o v e r n m e n t corporations and agencies at September 30, 1977.
Federal Financing Bank.—During the period, loans outstanding were
increased by $9.5 bUhon, resulting in a balance at the end of fiscal 1977 of
$35.4 billion (see table on page 3 5 ) . Interest of $2.1 billion was collected from
borrowers and $2.05 billion was paid on borrowings from the Secretary o f t h e
Treasury.
Liquidation of Reconstruction Finance Corporation assets.—The Secretary of
the Treasury's responsibilities in the liquidation of R F C assets relate to
completing the liquidation of business loans and securities with individual
balances of $250,000 or more as of J u n e 30, 1957, and securities of and loans
to railroads and financial institutions. Net income and proceeds of liquidation
amounting to $60 million have b e e n paid into Treasury as miscellaneous
receipts since July 1, 1975. Total unliquidated assets as of September 30, 1977,
had a gross book value of $2.3 million.
Liquidation of Postal Savings System.—Effective July 1, 1967, pursuant to
the a c t o f March 2 8 , 1966 (39 U.S.C. 5 2 2 5 - 5 2 2 9 ) , the unpaid deposits of the
Postal Savings System were to be transferred to the Secretary of the Treasury
for liquidation. As of J u n e 30, 1970, a total of $65.1 mUlion, representing
principal and accrued interest on deposits, had been transferred for p a y m e n t
of depositor accounts. All deposits are held in trust by the Secretary pending
proper application f o r p a y m e n t . Payments for fiscal 1977 totaled $232,1 13.
Cumulative payments a m o u n t to $58.3 million plus pro rata payments to the
States and other jurisdictions of $6 million. The undistributed funds balance
as of September 30, 1977, was $ 8 0 0 , 2 8 3 .
Government losses in shipment.—Claims totaling $418,667 were paid from
the fund established by the G o v e r n m e n t Losses in Shipment Act, as a m e n d e d
(40 U.S.C. 7 2 1 - 7 2 9 ) . Details of operations under this act are shown in the
Statistical Appendix.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Donations and contributions.—The Bureau received '^conscience fund"
contributions totaling $120,611 and other unconditional donations totaling
$ 4 2 8 , 7 0 3 . Other G o v e r n m e n t agencies received conscience fund contributions and unconditional donations amounting to $500 and $3,469, respectively. Conditional gifts to further the defense effort a m o u n t e d to $65 1. Gifts
of money and the p r o c e e d s of real or personal property d o n a t e d in this period
for reducing the public debt a m o u n t e d to $332,912.
Foreign indebtedness
World War I.—The G o v e r n m e n t s of G r e e c e and Hungary m a d e payments
during fiscal 1977 of $328,898 and $ 4 , 3 3 7 , 8 9 8 , respectively. T h e latter
a m o u n t represents a p a y m e n t o f $ 4 , 3 2 7 , 2 7 1 , which brings the Hungarian d e b t
up to d a t e , and a semiannual interest payment of $10,627. For a complete
status of World W a r I indebtedness to the United States, see the Statistical
Appendix.
Credit to the United Kingdom.—The G b v e r n m e n t of the United Kingdom
deferred the principal and interest payments of $72.7 million and $46.5
million, respectively, which were d u e on D e c e m b e r 15, 1976, under t h e
Financial Aid A g r e e m e n t of D e c e m b e r 6, 1945, as a m e n d e d March 6, 1957.
An interest payment of $10.9 million representing interest on principal and
interest installments previously deferred was m a d e on D e c e m b e r 3 1 , 1976.
Indonesia, consolidation of debts.—The G o v e r n m e n t of the Republic of
Indonesia m a d e payments in fiscal 1977 of $6,097,360 in principal and
$761,168 in interest on deferred principal installments, in a c c o r d a n c e with the
Indonesian Bilateral A g r e e m e n t of M a r c h 16, 1971. T h e normal payment of
interest on principal is n o t due until J u n e 1 1 , 1985.
Payments of claims against foreign governments.—The 17th installment of
$2 million was received from the Polish G o v e r n m e n t under the agreement of
July 16, 1960, and pro rata payments on each unpaid award were authorized.
T h e fifth installment of $2,940,000 was received from the Hungarian
G o v e r n m e n t under the a g r e e m e n t o f M a r c h 6, 1973. T h e fifth installment was
greater than the minimum installment of $945,000 because 6 p e r c e n t of the
dollar p r o c e e d s of imports into the United States from Hungary for the 12
m o n t h s ending D e c e m b e r 3 1 , 1976, exceeded the minimum installment by
$ 1 , 9 9 5 , 0 0 0 , thereby raising the annual installment from $945,000 to $2,940,0 0 0 . All awardholders in the second Hungarian program have received equal
payments to those in the first Hungarian program. An additional pro rata
p a y m e n t has been authorized to all entitled awardholders under both
programs, and payments are now being m a d e .
T h e D e p a r t m e n t of the Treasury received $3,800,000 for deposit into t h e
W a r Claims Fund for p a y m e n t on awards certified under the W a r Claims A c t
of 1948, as amended. A distribution of 4.5608 p e r c e n t o f t h e unpaid balance
of the awards was m a d e .
Administration
Co-op program.—Implementation o f t h e Bureau's first cooperative education ( C o - o p ) program coincided with the beginning of the fiscal year. T h e
major benefits o f t h e program are that ( 1 ) it provides college students practical
yet indispensable opportunities to apply their education in actual j o b
assignments, ( 2 ) the students obtain academic credit and are salaried during
their e m p l o y m e n t under the program, ( 3 ) their assignments are c o m m e n s u r a t e
with their college major, i.e., accounting, ( 4 ) the Bureau is ensured of
temporary help for special projects, ( 5 ) it provides managers m o r e time and
ADMINISTRATIVE
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165
a more realistic setting within which to evaluate the students' abilities and
progress prior to appointment, ( 6 ) following graduation, the students may be
converted noncompetitively to career-conditional appointments, and ( 7 )
m o r e so than o t h e r a p p o i n t m e n t sources, it strengthens the Bureau's
affirmative action recruitment efforts. Currently, there are 16 Co-op students
participating in the program, with prospects of expanding both the number of
students and participating colleges and universities in the next fiscal year.
Upward mobility.—This program continues to be the primary and most
effective vehicle for moving lower level employees into better positions. T h e
following figures represent accomplishments in the fiscal year: 791 employees
completed a skills survey; 310 candidates received career counseling; a total
of 25 positions were advertised and 19 lower graded employees were placed
in upward mobility positions.
Work incentives.—The Bureau implemented the utilization of personal
services through unpaid work experience programs for low-skilled persons.
Twenty-two trainees were placed from the District of Columbia Work
Incentive Program, and 15 trainees were recruited from the United Planning
Organization.
Summer employ ment . ^ S u m m e r employment totals for fiscal 1977 included
25 s u m m e r exam students, 3 Federal junior fellows, and 97 summer aids
appointed under the Federal s u m m e r program for needy youth. Thirty o f t h e
33 stay-in-school students from the 1976-77 school year were converted to
full-time positions at the beginning of the summer. This year, the Bureau's
q u o t a of 62 needy youth appointments was exceeded by 6 5 .
Labor-management relations. — Union activity remains centered in the
Division of Disbursement with four regional disbursing centers (Austin,
Birmingham, Philadelphia, and Washington, D.C.) dealing with certified
exclusive representatives. All have ties with A F G E , A F L - C I O , except Austin,
which deals with N F F E . Successful labor contract negotiations were completed in the Philadelphia and Washington Disbursing Centers. Presently, the
National Treasury Employees Union is organizing the Bureau's headquarters
employees.
Labor-management relations training.—The Labor Relations Training
C e n t e r of the Civil Service Commission and Bureau specialists conducted inhouse labor-management relations training for field and headquarters managers and supervisors.
Labor relations training was planned in three stages. Stage 1 focused on
sensitizing supervisors and managers to the dynamics and requirements of
labor relations in the public sector. A total of 20 sessions were conducted in
headquarters and field offices for 360 managers and supervisors. Under stage
II, approximately one-half of Bureau management received training in their
responsibilities under Executive O r d e r 11491, as amended, covering such
items as processing of grievances, unfair labor practices, daily relationships
with bargaining unit employees and shop stewards, formal discussions under
section lOe o f t h e Executive order, and contract negotiations. Stage III, which
has been scheduled fpr fiscal 1978, will concentrate on individual skills
building through workshops.
Troubled employee program.—This program has been in effect for almost 2
years and covers not only alcoholism and drug abuse but all personal problems
and concerns which may affect an employee's j o b performance. In-house
training covering the program has been offered to all supervisors, and
employees have been informed about the program:
166
1977 REPORT OF THE SECRETARY OF THE TREASURY
Personnel management for supervisors.—During the past year, consistent
with the Bureau's continuing emphasis on improving supervisory skills, 86
supervisors attended the extensive 40-hour ''Personnel Management for
Supervisors'- training course conducted by personnel specialists. Three ofthe
four courses were conducted in field offices in conjunction with personnel
management surveys. The course will be scheduled in other field offices as
future surveys are planned.
Employee orientation.—A 2-day Bureau orientation course was implemented to familiarize employees with the Bureau, its structure and mission.
The course also concentrated on the various rules and regulations ofthe Civil
Service Commission, the Department, and the Bureau in such areas as
standards of conduct, time and leave, adverse actions, grievances, the troubled
employee program, upward mobility, indebtedness, training, promotions, and
health and life insurance. Sixteen classes were scheduled and a total of 326
employees attended. Thirteen are scheduled for fiscal 1978. An "Employee
Handbook," outlining all the subjects covered in the orientation, was
distributed to each participant.
Position classification/management.—During the year. Bureau (Manual of
Administration) policies on position classification and management were
revised. These will be issued the first quarter of fiscal 1978 and are expected
to further strengthen management of resources and controls over the average
grade. As reinforcements in these most important areas, two brochures were
developed. The first, "Position Management and You," outlines the aim of
position management and what it entails. Problems resulting from poor
position management are also discussed. The second brochure, entitled "Desk
Audits and You," is a guide for every employee. It not only explains the
purposes of a desk audit, but also specifies the factors that are and those that
are not relevant to the grading of positions and the role of the employee in a
desk audit. Each of these brochures is distributed to employees and supervisors
in training courses, when scheduling personnel management reviews and desk
audits, and upon request.
Bureau of the Public Debt
The Bureau ofthe Public 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.
ADMINISTRATIVE
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167
Management improvement
T h e work of a joint Treasury-Federal Reserve task force to expand the bookentry system of issuing G o v e r n m e n t securities resulted in a program to
eliminate definitive Treasury bills on a phased basis during fiscal 1977.
Issuance of Treasury bills in book-entry form only began with a 52-week bill
issue in D e c e m b e r 1976. The program was extended in J u n e 1977 to 26-week
bills and in September 1977 to 13-week bills. Under this expanded book-entry
system, Treasury provides, for the first time, book-entry accounts for bill
investors who elect not to deal through a financial institution or securities
dealer. As of S e p t e m b e r 30, 1977, Treasury was maintaining 6,690 accounts
totaling $182,1 10,000. It is anticipated that this program wUl be extended to
selected new offerings of other Treasury marketable securities during the latter
part of 1978.
T h e Bureau has begun phasing over a u t o m a t e d systems to a new Univac
1110 c o m p u t e r installed during fiscal 1976 in the Parkersburg office. T h e
entire series H, or c u r r e n t income bond, system and a significant portion of
the series E savings bonds system have been converted. This enabled the
Bureau to release an IBM 1410 and Honeywell 200 previously used in
Parkersburg for processing series H and E bond data. A savings of $42,977 was
realized through the release of this equipment. Telecommunication circuits
and r e m o t e j o b entry terminals linked to the Univac 1110 will also enable the
Washington office to use the new facility. An administrative accounts online
system used in Washington was converted during fiscal 1977 and a major
conversion of all Washington office systems is planned for fiscal 1978.
Nine additional issuing agents began reporting series E savings bonds sales
on magnetic tape in lieu of using registration stubs. A recurring annual savings
of approximately $68,000 should be realized based on the volume of issues
handled each year by these agents. Sixty-three issuing agents are now
participating in this continuing program.
T h e Bureau has consolidated two separate accounting systems, one for
Treasury securities and one for agency securities, into one a u t o m a t e d system
designed to improve timeliness and accuracy in the production of statistical
data and maintenance of control accounts. Taking advantage of c o m m o n
processing routines existing between the two former systems and state-of-theart programming techniques the newly implemented Treasury and agency
securities accounting system ( T A S A S ) provides the capability for accepting
transaction data and m o n t h e n d report data from Federal Reserve banks via
magnetic tape. T A S AS also provides stricter control of daily transaction input
through application of stringent edits and permits greater flexibility in
requesting reports necessary to audit files and transactions.
T h r e e Federal Reserve banks and five branches are now reporting daily
activity in securities transactions to the Bureau via magnetic tape. Additions
during the fiscal year included the Federal Reserve Bank of San Francisco
(book-entry transactions only) and branch banks at Birmingham, Nashville,
and Memphis. It is anticipated that approximately 10 more banks will begin
reporting transaction data during fiscal 1978 in this manner which provides for
the immediate introduction of daily public debt activity into the processing
cycle without data conversion.
The sale of U.S. savings bonds, series E, at U.S. post offices was discontinued
effective March 26, 1977. A t t h e time there were only 234 post offices issuing
savings bonds to the public, and sales averaged about a bond per week per
office. T h e discontinuance was p r o m p t e d by cost considerations, and the fact
168
1977 REPORT OF THE SECRETARY OF THE TREASURY
that, with m o r e than 39,000 financial and other institutions now issuing bonds,
virtually all communities are serviced by or have access to these agents.
Several organizational changes were m a d e in the Washington office to
e n h a n c e efficiency and to better define certain activities. These changes were:
( I ) Creation of three new sections in the Division of Public D e b t Accounts,
which effected consolidation of five previously separate functions, including
merger of a reporting function and decentralization of a mail and files unit; ( 2 )
establishment of the Division of Financial M a n a g e m e n t to achieve better
administration and c o n t r o l of the B u r e a u ' s b u d g e t and administrative
accounting functions; and ( 3 ) creation of the Division of Financing with
responsibilities for maintaining the Bureau's liaison with Department-level
officials c o n c e r n e d with public d e b t financing, and the administrative activities
c o n n e c t e d with that function.
Bureau operations
During the fiscal year, 81,000 individual accounts covering publicly held
registered securities o t h e r than savings b o n d s , savings notes, individual
retirement bonds, and retirement plan bonds were o p e n e d , and 120,000 were
closed. This decreased the n u m b e r of o p e n accounts to 4 3 3 , 0 0 0 , covering
registered securities in the principal a m o u n t of $22,408 million. T h e r e were
869,000 interest c h e c k s with a value of $975 million issued during the period.
R e d e e m e d and canceled securities received for audit, other than savings
bonds, savings notes, and retirement plan bonds, included 3,761,000 bearer
securities and 503,000 registered securities. C o u p o n s totaling 10,020,000
were received.
During the period, 55,000 registration stubs of retirement plan bonds,
41,000 registration stubs of individual retirement bonds, 17,000 retirement
plan bonds, and 4,400 individual retirement bonds were received for audit and
recordation.
A summary o f t h e public debt operations handled by the Bureau appears o n
pages 1 5 - 3 3 of this r e p o r t and in the Statistical Appendix.
U.S. savings bonds.—The issuance and retirement of savings bonds result in
a heavy administrative b u r d e n 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 b o n d
owners and others for information; and adjudicating claims for lost, stolen, and
destroyed bonds.
Detailed information o n sales, a c c r u e d discount, and redemptions of savings
bonds will be found in the Statistical Appendix.
T h e r e were 158 million registration stubs or records on magnetic tape and
microfilm received, representing the issuance of series E savings b o n d s ,
making a grand total of 4,250 million, including reissues, received through
S e p t e m b e r 30, 1977. All registration stubs of series E bonds are microfilmed,
audited, and destroyed, after required p e r m a n e n t record data are prepared by
an E D P system in the Parkersburg office.
Of the 129 million series A - E savings bonds and savings notes redeemed and
charged to the Treasury during the period, 123 million (95 p e r c e n t ) were
r e d e e m e d 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 oyer the first 1,000 for a total of
$ 1 5 , 8 9 5 , 0 0 0 and an average of 12.92 cents per bond and note.
Interest checks issued on c u r r e n t income-type savings bonds (series H )
during the period totaled 4,225,000 with a value of $498 million. New
accounts established for series H b o n d s totaled 120,000 while accounts closed
totaled 123,000.
ADMINISTRATIVE
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169
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 61,000. In 3 7 , 0 0 0 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.
O F F I C E O F F O R E I G N ASSETS C O N T R O L
T h e Office of Foreign Assets Control administers five sets of regulations
which implement the D e p a r t m e n t of the Treasury's freezing controls.
T h e Foreign Assets Control Regulations and the C u b a n Assets Control
Regulations prohibit, unless licensed, all trade and financial transactions with
North Korea, Vietnam, C a m b o d i a , and Cuba, and their nationals. These
regulations also block assets in the United States o f t h e 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 shipments to the People's Republic of China of internationally
controlled strategic merchandise from third countries. Such shipments may
qualify u n d e r the T r a n s a c t i o n 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 a m e n d e d to authorize persons who visit North
Korea, Vietnam, C a m b o d i a , or C u b a to pay for their transportation and
maintenance expenditures while in those countries. The Cuban Assets Control
Regulations were also a m e n d e d to permit travel agencies to assist American
travelers in making arrangements for authorized travel to Cuba. A n o t h e r
a m e n d m e n t to the C u b a n Assets Control Regulations clarified the existing
guidelines applicable to trade with C u b a by foreign affiliates of U.S. firms.
T h e Transaction Control Regulations supplement the export controls
exercised by the D e p a r t m e n t of C o m m e r c e over direct exports from the
United States to Eastern Europe and the U.S.S.R. These regulations prohibit
unlicensed dealings in strategic merchandise located outside the United States
intended 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 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 C a m b o d i a ) provided
shipment is made from and licensed by a Coordinating Committee ( C O C O M )m e m b e r country. ( C O C O M is a N A T O entity.)
T h e Office also administers controls on assets remaining blocked under the
World W a r II Foreign Funds Control Regulations. These controls continue to
apply to blocked assets of Czechoslovakia, Estonia, Latvia, Lithuania, and East
G e r m a n y , and nationals thereof, who were, on D e c e m b e r 7, 1945, in
Czechoslovakia, Estonia, Latvia, or Lithuania or on D e c e m b e r 3 1, 1946, were
in East Germany.
Finally, the Office administers the Rhodesian Sanctions Regulations,
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1977 REPORT OF THE SECRETARY OF THE TREASURY
controlling transactions with Rhodesia and its nationals. T h e regulations
implement United Nations Resolutions calling upon m e m b e r countries to
impose mandatory sanctions on Southern Rhodesia. From 1971 to 1977 an
exception to the prohibition against imports of merchandise of Southern
Rhodesian origin existed for certain strategic and critical materials, pursuant
to section 503 of the Military P r o c u r e m e n t Act of 1971, known as the Byrd
Amendment.
On M a r c h 18, 1977, the Byrd A m e n d m e n t was repealed (Public Law 9 5 - 1 2,
91 Stat. 2 2 ) with respect to Rhodesia. In addition to reimposing the ban o n
imports of strategic commodities from Rhodesia, the law provides that imports
of c h r o m e steel p r o d u c t s p r o d u c e d abroad must be duly certified to the
satisfaction of Treasury as not having been m a d e with Rhodesian ore or
ferrochrome.
T h e Rhodesian Sanctions Regulations were correspondingly changed to
prohibit imports of c h r o m i u m ore from any country except when imported
directly or on a through bill of lading, and imports from any country of
ferrochromium and steel mill products containing more than 3 p e r c e n t
c h r o m i u m , except when properly certified.
At the end of the fiscal year, certification agreements had been concluded
with 12 exporting countries, including one with the E u r o p e a n Economic
Community on behalf of its 9 m e m b e r states. Notices of the availability of
special certificates issued under these agreements were published in the
Federal Register.
U n d e r the Foreign Assets Control Regulations and the Transaction Control
Regulations, the n u m b e r of license applications received during fiscal 1977
(including applications r e o p e n e d ) was 2 8 3 , with 348 applications acted upon.
Applications for licenses and requests for reconsideration under the C u b a n
Assets Control Regulations totaled 534 during fiscal 1977, with 530 applications acted upon.
Duriugfiscal 1 9 7 7 , 4 3 9 applications (including applications r e o p e n e d ) were
received under the Rhodesian Sanctions Regulations, and 4 5 8 applications
were acted upon.
Nine applications (including applications r e o p e n e d ) were received under
the Foreign Funds Control Regulations and 11 were acted upon.
Certain broad categories of transactions are authorized by general licenses
set forth in the regulations, and such transactions may be engaged in by
interested parties without the need for securing specific licenses.
During the fiscal year, one criminal case was referred to the Department of
Justice involving violations of the regulations administered by the Office. N o
criminal fines were levied during this period. Civil penalties paid amounted to
$2,800, and the total value ofmerchandise under seizure at the end ofthe fiscal
year a m o u n t e d to $139,640.
INTERNAL REVENUE SERVICE i
T h e Internal R e v e n u e Service administers the internal revenue laws
embodied in the Internal Revenue C o d e (26 U.S.C.) and certain other statutes,
including the Employee Retirement Income Security Act of 1974 (Public Law
9 3 - 4 0 6 , 88 Stat. 8 2 9 ) .
• A d d i t i o n a l i n f o r m a t i o n will be f o u n d
in t h e s e p a r a t e A n n u a l R e p o r t of the C o m m i s s i o n e r of I n t e r n a l R e v e n u e .
ADMINISTRATIVE
REPORTS
171
Receipts
Gross revenue collections in fiscal 1977 rose to $358.1 billion, an increase
of $47.3 billion (15.2 p e r c e n t ) over the preceding 12-month period. T h e
monetary increase was the largest ever recorded, far in excess of the $34.1
billion rise in 1969. Major factors contributing to this year's strong advance
were higher personal income, higher corporate profits, increases in the social
security wage base, and abnormally large gift tax collections.
Income taxes a c c o u n t e d for over two-thirds of all tax receipts. Individual
income taxes a m o u n t e d to $186.8 billion, an increase of $22.9 billion ( 1 4
p e r c e n t ) . Growth was m o d e r a t e d by a reduction in the a m o u n t of withholding
for most taxpayers, effective J u n e 1, 1977, to reflect an increase in the standard
deduction (Tax Reduction and Simplification Act of 1977). C o r p o r a t e income
taxes were $60 billion, u p sharply by $12.6 billion (26.6 p e r c e n t ) .
E m p l o y m e n t taxes (social security, unemployment insurance, and railroad
retirement) of $86.1 billion gained $9.4 billion (12.2 p e r c e n t ) . Receipts from
this source were affected by higher wage and salary payments, increases in t h e
social security wage base due to the operation of the automatic adjustment
mechanism, and an increase in the net Federal unemployment tax rate from
0.5 p e r c e n t to 0.7 p e r c e n t .
Excise tax collections registered the smallest gain for any major tax category,
rising $0.4 billion (2.5 p e r c e n t ) on collections of $ 17.8 billion. T h e continued
phasing o u t of the telephone excise tax and lower alcohol and t o b a c c o tax
collections contributed to this smaller gain.
Estate and gift tax collections of $7.4 billion showed the largest rate of
increase, advancing 37.3 percent ($2 billion). Much o f t h e increase was d u e
to a very large rise in both the n u m b e r and a m o u n t of taxable gifts made prior
to the January 1, 1977, effective date for gift tax revisions under the Tax
Reform Act of 1976. T h e gift tax portion of this combined tax class a m o u n t e d
to $1.8 billion, up $1.3 bUlion ( 2 8 3 p e r c e n t ) .
Refunds.—During fiscal 1977, the IRS paid refunds of $36.5 billion to 67.9
million taxpayers whose payments and credits exceeded their tax liabilities.
For the preceding 12-month period, a total of 67.6 million refunds totaling
$34.7 billion were paid. Included in 1977 data are 4.4 million checks totaling
$0.9 billion for earned income credit ( E I C ) . T h e average refund to individuals
was $ 4 5 9 .
Returns received.—IRS service centers received 133.7 million tax returns in
fiscal 1977, c o m p a r e d with 127.7 million during the preceding 12-month
period. Individual and fiduciary returns accounted for almost two-thirds of all
return receipts. Nearly 87.3 million individual and fiduciary returns were
received in 1977, an increase of 3.1 million over the previous 12-month period.
After declining during 1976, the n u m b e r of form 1040 filers increased this
year. T h e Service received 56.5 million forms 1040 during 1977, a 3 p e r c e n t
increase over the 54.7 million received last year.
T h e n u m b e r of form 1040A filers continues to grow. More than 29 million
individual taxpayers, 34 percent of all individual filers, used the short form
1040A in 1977 as c o m p a r e d with nearly 28 million in the previous 12-month
period, an increase of 5 percent in the n u m b e r of forms 1040A filed.
Information returns program.—The Service continued the information
returns program ( I R P ) started in 1975. This program m a t c h e s information
returns for a portion of individual taxpayers with their income tax returns to
detect nonfiling or underreporting of income.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
T h e IRP matches all information returns filed on magnetic tape for
individuals, and a percentage of those filed on paper. T h e Service has an active
program to encourage all organizations which have tape capability or access
to c o m p u t e r s to report on tape. During 1977, the IRS received almost 4 7 0
million information returns from businesses and organizations required to
report payments of wages, interest, dividends, and other forms of income,
nearly 245 million of which were submitted on magnetic tape in 1977.
Assisting taxpayers
T h e Service is committed to maintaining and strengthening the American
voluntary compliance tax system. This c o m m i t m e n t requires the Service to
inform taxpayers about the system and their responsibilities and rights under
it. Aware that taxpayers d o n o t find the process of determining their income,
exemptions, deductions, and c o r r e c t tax an easy task, the IRS provided
substantial assistance.
During 1977, the IRS continued to expand assistance to taxpayers through
a program designed to offer quality service, and to m a k e taxpayer assistance
readily available to taxpayers. In over 340,000 contacts sampled during the
1977 filing period, taxpayer assistors achieved an accuracy rate of about 97
percent, based on a review of Service-prepared returns, and the monitoring of
responses to taxpayer telephone inquiries.
Taxpayer Service was reinforced in 1977 by the establishment of Problems
Resolution P r o c e d u r e ( P R P ) offices in each district. T h e s e PRP offices
attempt to resolve taxpayers' complaints that have not been settled through
normal channels and to identify problems in the system which need correction.
Tax assistors' training was significantly improved in 1977. A special training
package was developed to acquaint tax assistors with the Tax Reform Act of
1976.
T e l e p h o n e sampling continued to be a major Taxpayer Service objective for
the 1977 filing period. Tax assistors sampled over 191,000 questions from 15.5
million telephone calls at 74 IRS toll-free answering sites to provide broader
information to tax assistors on taxpayers problems.
T h e Service continued to emphasize the placement of Taxpayer Service
offices in first-fioor locations and convenient to public transportation. During
the 1977 filing period, walk-in service was offered in about 700 p e r m a n e n t
offices and in over 220 temporary filing-period-only offices. These offices were
located in the inner city, business districts, and in suburban and rural areas.
W h e r e n e e d e d , extended hours of service were offered in IRS offices for
taxpayers unable to call or visit during normal business hours.
T h e Service again provided special assistance to taxpayers speaking foreign
languages, with 140 offices and over 480 employees offering tax assistance in
Spanish and 148 offices and over 4 7 0 employees providing help in other
foreign languages.
U n d e r the volunteer income tax assistance ( V I T A ) program, the Service
trained approximately 20,000 volunteers who provided free tax assistance t o
elderly, Spanish-speaking, low-income, and other taxpayers in their c o m m u nities. Over 216,000 individuals, an increase of 23 percent over 1976, attended
approximately 4,000 IRS-sponsored classed on taxes conducted as part o f t h e
Service's taxpayer ediication institutes and workshops program.
T h e IRS made major efforts to raise the level of public awareness of the
e a r n e d i n c o m e credit, which benefits low-income taxpayers. With the
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cooperation.of other Federal agencies (i.e.. Health, Education, and Welfare,
Agriculture, and L a b o r ) notices are sent to eligible EIC taxpayers. Notices
were also sent to taxpayers who filed returns without claiming EIC, but who
apparently qualified for it based on their tax return information.
During the period January 1 through September 30, the EIC was allowed
to approximately 6.2 million taxpayers for a total of approximately $ 1.2 billion,
averaging out to nearly $201 per taxpayer. Tax filers, who only filed returns
to receive the EIC, were allowed almost 5 percent of these credits.
During fiscal 1977, the Service received about 100,000 written, 28 million
telephone, and 9 million walk-in inquiries. More than 63 percent of these
inquiries occurred from January 1 through April 30, 1977,during which period
the IRS received over 17 million telephone calls, over 6 million walk-in
inquiries, and over 42,000 written inquiries, for a total of over 23 million
requests for assistance.
Toll-free telephone service continued nationwide, representing over 90
p e r c e n t o f aU telephone calls received d u r i n g t h e 1977 filing period. Under this
system, any taxpayer in the United States may call the IRS for assistance
without having to pay a long-distance telephone charge.
Since D e c e m b e r 1976, TV telephone and teletypewriter service for the deaf
has been provided on a nationwide toll-free basis by the Indianapolis district.
As a result hearing-impaired taxpayers in all States except Alaska and Hawaii
now have access to the services IRS provides other taxpayers. In May 1977,
two representatives from the Indianapolis district attended the President's
C o m m i t t e e on Employment of the Handicapped Convention held in Washington, D . C , to d e m o n s t r a t e the TV p h o n e and increase public awareness among
the handicapped of this IRS assistance program.
T h e Service continued to use the mass media to furnish tax information to
the public. In 1977, over 17,850 radio and TV stations, daily and weekly
newspapers, and magazines received material prepared by the IRS to inform
and assist taxpayers. Service personnel participated in 6,288 interviews,
answered more than 19,483 media inquiries, and made 4,491 talks to citizen
groups.
Nearly 7,916 news releases were issued to the media. These releases covered
such topics as services available to taxpayers, appeal rights, correct filing of
returns, tax advice for disaster victims, earned income credit, pension benefit
plans, and various aspects of the Tax Reform Act of 1976. T h e r e also were
n u m e r o u s releases covering tax rulings, procedures, regulations, and certain
legal interpretations.
Some of the releases, as well as radio and TV scripts, and certain IRS films,
were translated into Spanish for use in areas where it is widely spoken as a
second language.
The IRS made use of three color films covering the American way of taxing,
audit and appeals procedures, and tax information relating to small businesses.
These IRS films were shown on 97 occasions by TV outlets, and on 3,426
occasions by civic associations, service, professional, and educational groups.
Tax publications
To help taxpayers the Service distributes, free of charge, a number of
pubhcations.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
During 1977, the IRS distributed 3 million copies of Publication 17, Y o u r
Federal Income Tax, 9 0 0 , 0 0 0 copies of Publication 334, Tax Guide for Small
Business, and 800,000 copies of Publication 2 2 5 , Farmer's Tax Guide. In
addition, tax materials were furnished on request to 5 million individual
taxpayers, to 520,000 tax practitioners, and to 400,000 employers. Over
32,000 banks and Postal Service stations assisted in the distribution of over 237
million tax forms and instructions to taxpayers. T h e IRS also prepares many
other publications relating to m o r e specific tax matters such as disability
payments or business use of h o m e that have been revised to reflect current law
and changes in the regulations. Substantive revisions were m a d e to the
publications in 1977 to reflect changes in the Tax Reform Act of 1976, and
several new publications were developed to explain new provisions enacted by
the Tax Reduction and Simplification Act of 1977. Publication 560, T a x
Information on Self-Employed Retirement Plans, and Publication 5 7 1 , TaxSheltered Annuity Plans for Employees of Public Schools and Certain TaxExempt Organizations, have b e e n revised to reflect the provisions of the
Employee Retirement Income Security Act of 1974.
Tax forms improvements
T h e complexity o f t h e Tax Reform Act of 1976 and its late e n a c t m e n t m a d e
the Service's j o b of simplifying the 1976 forms and instructions that m u c h
m o r e difficult. Over 100 forms were affected by the new law. In spite of these
obstacles, the IRS was able to achieve some degree of simplification. For
example, the form 1040A instructions were printed in larger type and reduced
from 3 to 2 columns, making them more legible and easier to read; space in
the instructions saved by reducing the tax tables from 10 to 3 pages was used
for explanatory material on the Tax Reform Act and to clarify other areas that
gave taxpayers trouble in the past; the earned income credit worksheet in the
Form 1040 Instructions was moved from page 8 to page 2 and expanded t o
a full page to give it p r o m i n e n c e and assure taxpayers would be m a d e aware
of it; and several infrequently used lines were removed from form 1040.
As a result of c o n c e r t e d efforts of IRS personnel, and in conjunction with
the Federal Paperwork Commission's request for a Government-wide special
drive to r e d u c e the paperwork b u r d e n , n u m e r o u s other forms and form letters
were simplified, eliminated, or consolidated.
T h e Tax Reform Act of 1976 also had an impact on income tax return
preparers. Any person preparing income tax returns for compensation is now
subject to disclosure requirements and penalties for negligently or fraudulently
preparing returns. In addition to the signature, the identification number and
address of the p r e p a r e r must now be disclosed on all tax returns. Also, an
annual information report must be filed by preparers before August 1.
1977 tax forms.—The Tax Reduction and Simplification Act of 1977 has
enabled the IRS to develop a simplified form 1040A for 1977. T h e complex
formula for computing the standard deduction has been eliminated and
incorporated into the tax tables, along with the allowances for personal
exemptions and the general tax credit. T h e 1977 form 1040A is designed to
encourage more taxpayers to have the IRS c o m p u t e their tax liability. The form
has 15 n u m b e r e d entries c o m p a r e d with 25 on the 1976 form, and has all
calculations on one full-sized page. T h e 1976 form used both sides of a halfpage form.
Form 1040 for 1977 is designed to arrange all items in a natural sequence
that permits filers to start at the top of the front page and continue in sequence
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to the signature block on the bottom of the back page, eliminating the need
for frequent reference to both sides of the form.
Other significant changes for 1977 include an agreement with the Department of L a b o r to eliminate duplicate filing o f t h e annual pension plan returns,
form 5500 series. U n d e r the agreement, the IRS is developing a processing
system for the returns that will satisfy the administrative needs of both
agencies. T h e Pension Benefit G u a r a n t y Corporation ( P B G C ) , which was to
have obtained data from Labor, will also use the system. PBGC's annual report,
schedule A (form P B G C - 1 ) , will be merged into the form 5500 series returns.
Public participation in forms simplification.—In response to the public's
c o n c e r n over the complexity and n u m b e r of G o v e r n m e n t forms, the IRS is
making every effort to ease the chore of taxpayers to m e e t their filing
obligations by eliminating forms where possible and simplifying forms in o t h e r
situations. In a Federal Register notice in March 1977, the IRS asked the public
to submit written c o m m e n t s and suggestions for improving and simplifying IRS
tax forrns and instructions. In response, nearly 500 written submissions were
received. In addition, public hearings on forms 1040 and 1040A were held in
three cities—Boston, Mass.; Portland, Oreg.; and O k l a h o m a City, Okla.
All r e c o m m e n d a t i o n s were evaluated by the Service for feasibility. While
many of the suggestions would require changes in the tax law by Congress
before they could be a d o p t e d , others did help in improving the 1977 forms.
As a result of the suggestions and changes in the law, significant improvements
were m a d e in the 1977 forms 1040 and 1040A that will r e d u c e the public's
reporting burden for IRS forms by 10 percent. T h e IRS will also sample public
opinion on the forms by including a questionnaire in a n u m b e r o f t h e 1977 form
1040 and 1040A packages.
Tax rulings and technical advice
T h e Service's tax ruling program consists of letter rulings and published
revenue rulings.
A letter ruling is a written statement issued to a taxpayer by the National
Office interpreting and applying the tax laws to a specific set of facts. Such a
ruling provides advice concerning the tax effects of a proposed transaction so
that the taxpayer may structure the transaction to comply with the tax laws,
thus resolving issues in advance and avoiding future controversy. Letter rulings
are not precedents and may not be relied upon by other taxpayers.
Technical advice is counsel or guidance as to the interpretation and p r o p e r
application of the tax laws to a specific set of facts. It is furnished by the
National Office at the request of a district office in connection with the audit
of a taxpayer's return or claim for refund or credit. Frequently, the District
Director's request is m a d e in response to the suggestion of the taxpayer that
technical advice be sought.
A revenue ruling is an interpretation o f t h e tax laws issued by the National
Office and published in the Internal Revenue Bulletin for the information and
guidance of taxpayers, practitioners, and IRS personnel.
Puhlic availability of rulings.—The Tax Reform Act of 1976 provided that
IRS rulings and technical advice m e m o r a n d a will generally be open to public
inspection. Prior to making these written determinations available for public
inspection and copying in the National Office reading room, identifying
details, trade secrets, confidential commercial or financial information, etc.,
will be deleted.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Written determinations requested after O c t o b e r 3 1 , 1976, are generally
m a d e available within 90 days after they are issued to taxpayers. Over 100,000
written determinations requested prior to N o v e m b e r 1, 1976, will be m a d e
available over the next two years.
Internal Revenue Bulletin.—The weekly Internal Revenue Bulletin is the
authoritative publication of the Commissioner for announcing official rulings
and p r o c e d u r e s o f t h e Service and for publishing Treasury decisions. Executive
orders, tax conventions, legislation, court decisions, and other items of general
interest. Bulletin c o n t e n t s of a p e r m a n e n t nature are consolidated semiannually into Cumulative Bulletins. Copies o f t h e weekly and semiannual issues are
distributed within the Service and are m a d e available to the public by the
Superintendent of D o c u m e n t s , U.S. G o v e r n m e n t Printing Office, Washington,
D.C. 2 0 4 0 2 , on a single copy or subscription basis.
During 1977, items in the Bulletin included 545 revenue rulings, 48 revenue
p r o c e d u r e s , 15 public laws relating to Internal Revenue matters and 18
c o m m i t t e e reports, 72 Treasury decisions containing new or a m e n d e d
regulations, 21 delegation orders, 6 Treasury D e p a r t m e n t orders, 14 notices
of suspension and disbarment from practice before the Service, 250 ann o u n c e m e n t s of general interest, and 6 court decisions.
T h e Bulletin Index-Digest System, revised as of D e c e m b e r 3 1 , 1974,
provides a rapid and comprehensible means of researching material published
in the Internal R e v e n u e Bulletin after 1952. T h e major part of the system
consists of digests of Bulletin items arranged under headings that facilitate a
topical a p p r o a c h to a search for items on a specific issue. With the aid of
finding lists, the researcher can locate items by C o d e section or n u m b e r .
Tax credits under 1976 Reform Act
T h e Tax Reform Act of 1976 continued or modified some of the credits
originally established by the Tax Reduction Act of 1975. T h e earned income
credit continued as a "negative income t a x " in that it provides a refundable
credit to taxpayers meeting certain criteria of income and dependents. T h e
general tax credit replaces the previous personal exemption credit; it is a
nonrefundable credit available to taxpayers based on $35 per exemption or 2
p e r c e n t of taxable income. T h e child care expense credit was available to
taxpayers for the first time in 1977; it provides a nonrefundable credit of 20
p e r c e n t of employment-related expenses paid in order to enable the taxpayer
to work if the taxpayer maintained a household including a child under age 1 5
or d e p e n d e n t or spouse incapable of self-care.
Presidential election campaign fund
A total of 23.2 million individual income tax returns had designations for
the Presidential election campaign fund ( P E C F ) in fiscal 1977. This was 27.5
percent of the returns processed during that period. T h e total a m o u n t
designated in fiscal 1977 was $36.5 million. In the preceding 12-month period,
there were 21.2 million individual tax returns (25.8 p e r c e n t of returns
processed) with P E C F designations totaling $33.7 million.
Data services
A new position of Assistant Commissioner ( D a t a Services) was created as
a result of a comprehensive study to consolidate data processing support
services within the IRS. T h e overlap of data processing responsibilities across
functional lines had m a d e it increasingly difficult to ( 1 ) develop integrated
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long-range goals; (2) assure a well-balanced A D P program; and (3) control
the expenditure of resources. As a result of a comprehensive study of these
problems, the Commissioner approved the establishment of an Office of
Assistant Commissioner (Data Services) and the new organization was
effective January 2, 1977.
The Office of Assistant Commissioner (Data Services) comprises the
following organizational segments: The Service and Design Division, the
Systems Programming Division, the Systems Analysis Division, the National
C o m p u t e r Center, and the Data Center. This reorganization affects only the
National Office; there are no counterpart changes in the field organization.
Employee plans and exempt organizations
T h e Office of Employee Plans and Exempt Organizations ( E P / E O )
administers the regulatory responsibilities assigned to the Service concerning
employee benefit plans and tax-exempt organizations. In the National Office,
the function consists of Employee Plans, Exempt Organizations, and Actuarial
Divisions. E P / E O field staff are located primarily in 7 regional offices and 1 9
key districts, with local service provided in n u m e r o u s other offices.
Employee plans.—The Employee Plans division administers the Employee
Retirement Income Security Act of 1974 ( E R I S A ) . Major emphasis has been
placed on developing regulations and procedures most urgently needed by
taxpayers.
The IRS has continued to coordinate implementation of ERISA with the
D e p a r t m e n t of Labor and the Pension Benefit Guaranty Corporation in order
to issue regulations, procedures, and rulings that are compatible with those
issued by such other agencies and to reduce duplication of reporting by
taxpayers. For example, starting with the filing of the 1977 annual return/
report (form 5500 series), plan sponsors and administrators will file only with
the IRS.
To reduce the expense and burden to taxpayers in complying with ERISA,
four model plans were developed for use by corporate employers along with
new p r o c e d u r e permitting sponsors to obtain approval of their field prototype
plan. Also, a new and simpler Short Form Application for Determination for
Employee Benefit Plan, Form 5 3 0 7 , was introduced.
During 1977, 15 regulations, 10 revenue rulings and procedures, 11
delegation orders, 8 forms, and 23 news releases were issued. In addition, the
National Office issued 4,128 opinion letters on master and prototype plans.
In 1977, the Service devoted an average of 841 field professional positions
to carrying out its responsibility in the employee plans area. Advance
determination letters regarding the qualification of pension, profit-sharing,
and other employee benefit plans were issued. Examinations to determine
whether plans continue to qualify in operation and to verify the appropriateness of deductions for plan contributions were conducted. During fiscal 1977,
158,473 determination letters were issued on corporate and self-employed
plans, an increase of 345 percent from the 12-month period prior to O c t o b e r
I, 1976.
In the prohibited transactions area, five final and two proposed class
exemptions, four regulations, two delegation orders, and three news releases
were issued. Three hundred and fourteen individual exemption applications
were processed to disposition.
Exempt organizations.—The Exempt Organizations division determines the
qualifications of organizations seeking tax-exempt and private foundation
status, and examines returns to ensure compliance with the C o d e .
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1977 REPORT OF THE SECRETARY OF THE TREASURY
During 1977, 7 regulations, 76 revenue rulings and procedures, 278
technical advice m e m o r a n d a , 4 delegation orders, 21 a n n o u n c e m e n t s , 24
forms, form letters, and applications, 8 news releases, 6 publications, and 10
" E x e m p t Organization and Private Foundation H a n d b o o k " chapters were
issued or revised.
In 1977, the Service devoted an average of 465 field professional positions
to the examination of 9,803 exempt organizations returns and other exempt
organizations activities. T h e Service received 50,649 applications and
reapplications from organizations seeking a determination of their tax-exempt
status or seeking a determination o f t h e effect of organizational or operational
changes on their status, and issued 47,067 determination and ruling letters, and
329 revocations.
As a result of a change in the filing requirements for exempt organizations,
from those with gross receipts in excess of $5,000 to those with gross receipts
in excess of $ 10,000, approximately 3 6,000 exempt organizations will not have
to file the annual information return.
T h e feasibility test c o n d u c t e d at the Cincinnati Service C e n t e r in 1976
concerning decentralizing the processing of exempt organizations returns
proved successful. During 1977, the Andover and Fresno Service Centers
started processing E O returns and related d o c u m e n t s . Previously, all return
filing and processing was done at the Philadelphia Service Center.
T h e first exempt organizations taxpayer compliance m e a s u r e m e n t program
( T C M P ) covering the examination of private foundations, public charities,
a n d s o c i a l welfare organizations was completed asof D e c e m b e r 3 1 , 1976. D a t a
from this survey will be used to select returns for examination.
Audit of returns
The IRS audits tax returns in order to help ensure voluntary compliance with
the tax laws. While audit activity is the primary method, every return is subject
to scrutiny by IRS employees and computers. W h e n a return is received in one
o f t h e 10 IRS service centers, it is first checked manually for completeness and
accuracy and for certain obvious errors such as the claiming of a partial
exemption or duplicate deductions. T h e n the service center's computers check
the accuracy o f t h e taxpayer's arithmetic and pick up other errors which may
have escaped manual detection such as the failure to reduce medical
deductions by 3 p e r c e n t of adjusted gross income.
Returns selection.—The primary method used by the IRS in selecting returns
for audit is a c o m p u t e r program of mathematical formulas—the discriminant
function system (DIF)—which measures the probability of tax error in each
return. Returns identified by the system as having the highest error potential
are selected for audit. Since this system was introduced in 1969, the IRS has
reduced the n u m b e r of taxpayers contacted whose audit would result in no tax
change (all taxes) from a peak of 43 percent in 1968 to 24 percent in 1977.
The new DIF formulas for both individual and partnership returns were
developed in 1977 and will be implemented for returns filed in 1978.
The c o m p u t e r selection of returns is complemented by manual selection.
For example, if the IRS is auditing the return of a partnership (or of o n e
business p a r t n e r ) , the returns o f t h e partners (or additional partners) may also
be audited. Other returns may be manually selected as a result of information
d o c u m e n t s (forms W - 2 and 1099), and information from other enforcement
activities or criminal investigations. T h e IRS also screens returns with adjusted
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gross income above certain a m o u n t s , and some returns of taxpayers who
submit claims for refund or credit after filing their returns.
Results of audit activity.—The IRS audited 2,345,110 tax r e t u r n s o f all types
in 1977. O f t h e total returns audited in 1977, 150,730 were examined in service
centers, c o m p a r e d with 142,667 last year. T h e remainder were examined in
district offices by revenue agents, and tax auditors. Examinations c o n d u c t e d
by revenue agents under field audit techniques totaled 677,192 returns, a
decrease of 37,148 returns, or 5 percent, from last year.
Examinations c o n d u c t e d by tax auditors under office audit procedures
n u m b e r e d 1,5 17,188 returns, a decrease of 91,1 I 8 returns, or 6 percent, under
last year. Audit coverage of income, estate and gift tax returns was 2.46
percent, c o m p a r e d with 2.59 p e r c e n t achieved in 1976.
T h e Service's examination program resulted in approximately $5.1 billion
of additional tax and penalties r e c o m m e n d e d . R e c o m m e n d a t i o n s have
exceeded $5 billion for the fifth straight year.
During 1977, assessments totaled $4.1 billion, including $3.4 billion in
assessed tax and penalties and $650 million in interest. In 1976, assessments
a m o u n t e d to $4.3 billion, o f w h i c h $3.6 bUlion represented tax and penalties
and $710 million represented interest.
Examiners are required to determine a taxpayer's correct tax liability. This
means that examiners observe that taxpayers neither overstate nor understate
their liability. In 1977, Service examinations disclosed overassessments on
122,003 returns, accounting for refunds of $281 mUlion.
Service center programs.—The IRS service center review program began in
1972. It is generally limited to the verification or resolution of issues which can
be satisfactorily handled by service center personnel through c o r r e s p o n d e n c e
with the taxpayer. M o r e than 91 3,000 returns were checked in service centers
in 1977, a 51-percent decrease from 1976.
T h e decrease o c c u r r e d primarily in the unallowable items program. Certain
items previously included in this program, such as medical expenses n o t
reduced by the 1-percent and 3-percent limitations, are now considered
mathematical or clerical errors and are corrected during initial returns
processing.
As a result, 354,916 returns were corrected by the audit activity in 1977,
c o m p a r e d with approximately 1,474,000 in 1976.
T h e service centers also c o n d u c t c o r r e s p o n d e n c e examinations of returns,
selected under district office criteria. A total of 150,730 returns in this
category were examined during 1977, an increase of 7 p e r c e n t over the
142,667 examined in 1976.
Computer-assisted audits.—The Service has an ongoing program to use
c o m p u t e r s in audits of tax data in automated accounting systems. Both
generalized c o m p u t e r programs and specifically developed programs are used
to retrieve and analyze data essential to an examination. Both taxpayers and
the IRS save time and expense since computer-assisted audits can be done in
a fraction of the time needed to do the same j o b manually.
Over 10,000 apphcations of these c o m p u t e r audit techniques were performed in 1977, an increase of 2,000 over 1976. These are d o n e by c o m p u t e r
audit specialists, experienced revenue agents who received intensive training
in c o m p u t e r hardware, programming languages, and audit techniques.
Coordinated examination program.—All large-case taxpayers, except financial institutions and utilities, whose gross assets exceed $250 million are
included in the coordinated examination program. Financial institutions and
utilities are included in the program if gross assets exceed $1 biUion.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
At the end of fiscal 1977, there were 1,286 large cases in this program which
averaged 2.8 open years per case. This is the fifth consecutive year the average
open years in the large-case program has been less than 3 per case.
During 1977, the IRS continued its practice of conducting industrywide
audits of major companies in a given industry. Nine industries are currently
being audited by this a p p r o a c h , and two more are in the planning stage.
Tax shelter program.—In 1974, the IRS established a nationwide tax shelter
program to c o n d u c t examinations of possible tax shelter abuses by investors
in the oil and gas industry. T h e program was expanded in later years to include
real estate, farm operations, motion pictures, master recordings, and coal
shelters. Most o f t h e returns examined in this program are partnership returns,
as this is the vehicle commonly used by taxpayers to obtain significant tax
benefits without the risk of personal liability.
Joint Committee review.—The Internal Revenue C o d e provides that all
income, estate, gift, private foundation, and pension plan credits which exceed
$200,000 must be reported to the Joint C o m m i t t e e on Internal Revenue
Taxation. During 1977, 997 cases involving overassessments of $984 million
were reported to the Joint C o m m i t t e e , as c o m p a r e d with 1,506 cases and $ 1
biUion in 1976.
T h e Tax Reform Act of 1976 increased the a m o u n t for reporting such cases
to the Joint C o m m i t t e e on Taxation from a refund of $100,000 to $200,000,
effective O c t o b e r 4, 1976.
Audit information management system.—In 1977, the Service successfully
implemented the audit information m a n a g e m e n t system ( A I M S ) nationwide.
The new system is an expansion o f t h e existing integrated data retrieval system
currently located in the IRS service centers.
AIMS allows Service personnel to promptly locate any return in the Audit
Division," permitting m o r e rapid responses to taxpayer inquiries and faster
assessment and refund action resulting in improved taxpayer relations. Also,
the system provides for automated control and verification of assessments
from the point of origin in the district office and service center.
The appeals process
Administrative appeals.—The Internal Revenue Service encourages the
resolution of tax disputes through an administrative appeals system rather than
through litigation. Taxpayers who disagree with a proposed change to their tax
liability are entitled to a p r o m p t , independent review of their cases. T h e
appeals system is designed to minimize inconvenience, expense, and delay to
the taxpayer in disposing of contested tax cases.
Within the system are two levels of appeal: T h e district conference staff in
the Audit Division o f t h e District Director's office, and the Appellate Division
in the Regional Commissioner's office. Each level of appeal is independent of
the other, and each has different authority and jurisdiction. Opportunities for
such a hearing are offered at 58 district offices and 40 regional branch offices
throughout the country. Conferences are also arranged, as needed, at other
IRS locations, at a place and time convenient to the taxpayer.
Proceedings are informal in both offices. Taxpayers may represent themselves or be represented by an attorney, a certified public accountant, or any
other adviser enrolled to practice before the IRS. If the disputed tax liability,
for each taxable year involved in the dispute, is $2,500 or less, the taxpayer
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may obtain a district conference and a subsequent regional conference without
filing a written protest. For larger amounts a written protest is required. If
agreement cannot be reached during the district conference, the taxpayer is
advised of his further appeal rights and then may request a regional appellate
office conference.
In most cases, the taxpayers and the district conferee or regional appeals
officer reach mutually acceptable agreements. Consequently, very few cases
go to trial. In the past 10 years, 97 p e r c e n t of all disputed cases were closed
without trial. In 1977, the appeals function disposed of 56,805 cases by
agreement; the Tax C o u r t tried 1,402 cases; and the U.S. district courts and
Court of Claims tried 403 cases.
District conference.—District conference staffs consider disputes involving
factual questions, and whether proposed actions by a District Director's office
reflect the correct interpretation o f t h e Internal Revenue C o d e , as stated, and
as clarified, by the courts and by IRS regulations and revenue rulings. Since
April I, 1974, district conference staffs have had the authority to settle cases
where the a m o u n t of tax in dispute was $2,500 or less, by taking into a c c o u n t
the hazards of litigation.
Since receiving this settlement authority, the percentage of agreed cases
closed by district conference staffs has significantly increased. Where the
settlement authority could be exercised, about 31 percent of the cases have
been settled on that basis.
District conference staffs reached agreement with the taxpayer in about 70.5
percent of the cases they considered in 1977.
Appellate Division.—Cases considered by the Appellate Division fall into
two broad categories: N o n d o c k e t e d cases involve cases in which the taxpayer
is protesting a proposed action by the District Director, involving additional
taxes, a refund disallowance, or a rejection of an offer in compromise. These
cases m a d e up about 55 percent of Appellate's workload in 1977. The second
category of cases are known as d o c k e t e d , and these involve cases in which
taxpayers have filed a petition for a hearing before the U.S. Tax Court.
In 1977, 70 percent of n o n d o c k e t e d cases and 73 percent of docketed cases
were closed by the Appellate Division by agreement with the taxpayer.
Other appeal options. —If a tax dispute cannot be resolved at either the
district or the regional level, the taxpayer is advised o f t h e remaining appeal
rights. In most cases, the taxpayer may file an appeal with the U.S. Tax Court.
If the disputed tax does not exceed $1,500 in any tax year, a simplified
procedure is available under the Tax Court's small case rules. Small case Tax
Court proceedings provide for informal hearings where taxpayers may present
their cases before a special trial judge. A knowledge of courtroom proceedings
is not required, since the objective is to provide an inexpensive forum for the
taxpayer. Because of the nature of the proceedings, no provision for appeal
of the C o u r t ' s decision is provided.
If a taxpayer chooses to bypass the Tax Court, the tax deficiency may be paid
and a claim filed for refund within 2 years from the date of payment. If the
claim is denied by the IRS, or if the IRS takes no action on the claim within
6 months, the taxpayer may file suit for a refund in either a U.S. district court
or the C o u r t of Claims.
A taxpayer may appeal an adverse decision o f t h e Tax Court or district court
to the U.S. Circuit C o u r t of Appeals having jurisdiction. Adverse decisions of
the Court of Claims or the Circuit C o u r t of Appeals may be reviewed by the
U.S. Supreme Court.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Tax fraud investigations
T h e Intelligence Division is responsible for the enforcement o f t h e criminal
provisions of the tax laws, investigating evidence of tax evasion or tax fraud
and r e c o m m e n d i n g prosecution when warranted.
During 1977, the Intelligence Division completed 8,391 investigations and
r e c o m m e n d e d prosecution of 3,408 taxpayers. Grand juries indicted or courts
filed information on 1,636 taxpayers. Prosecution was successfully completed
in 1,476 cases. In 1,063 cases taxpayers entered guilty pleas, 166 pleaded nolo
c o n t e n d e r e , and in 247 cases, the taxpayers were convicted after trial.
Acquittals and dismissals totaled 55 and 110, respectively. Of the 1,532
taxpayers sentenced during 1977, 6 8 5 , or 14.7 percent, received jail sentences,
c o m p a r e d with 41.5 p e r c e n t last year.
Organized crime and strike force activities.—The IRS cooperates in the
Federal G o v e r n m e n t ' s fight against organized crime by participating in the
Federal organized crime and strike forces program. Located in 1 2 major cities,
strike force units are headed by attorneys from the Justice Department. T h e
objective of this program is to coordinate the combined forces of Federal law
enforcement agencies against the criminal element in our society. The IRS is
responsible for ensuring the income from illegal activities is correctly reported
and taxed for detecting criminal violations of the tax laws. During 1977, the
IRS contributed 485 staff years of direct investigative and examination time
to the strike force effort.
A total of 135 organized crime m e m b e r s and their associates were convicted
or pleaded guilty to tax charges during the year and 678 prosecution cases were
pending when the year ended.
Since the inception o f t h e organized crime program in 1966, 834 organized
crime m e m b e r s and associates have been convicted or have pleaded guilty to
various tax charges.
Tax investigations of high-level narcotics leaders and financiers.—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 1977, the IRS completed 220 criminal tax investigations, obtained
72 indictments, and achieved 62 convictions of financiers and traffickers.
Delinquent accounts and compliance
During 1977, the Service emphasized the delinquency prevention program
( D P P ) , designed to identify potentially delinquent taxpayers and help review
and correct their problems. A significant development in the failure to file
activity was the mailing of 1.2 million notices to all individuals who had not
filed forms 1040.
Despite a budget reduction of over 800 staff-years, improved staff utilization
permitted a nominal increase in the n u m b e r of outstanding delinquent
accounts assigned to field operations. C o m p a r e d with 1976, the cases assigned
to district offices in 1977 increased by 16 percent while the total dollar value
of these accounts increased by 7 percent.
Program accomplishments.—The collection activity closed over 2.6 million
delinquent accounts receivable during 1977. Included were some 328,000
notice cases in which taxpayers, when notified of a delinquency, contacted IRS
field offices to resolve the matter. Field contact by IRS employees was required
on the remaining 2.3 million delinquent accounts.
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Nearly $3.1 billion in delinquent taxes was collected during the year, a
decrease of approximately $700 million over a comparable period in 1976 due
to a budget reduction in staff, emphasis on delinquency prevention, and
investigations for failure to file returns. District personnel disposed of over 2.4
million investigations for failure to file. This is a 0.28-percent increase over a
comparable 1976 period. For 1977, approximately 689,000 delinquent returns
were secured, involving nearly $501 million in additional taxes.
During 1977, 16 p e r c e n t of delinquent individual taxpayers were repeaters,
while the rate for business taxpayers was 39 percent. Because of the high
business repeater rate, the Service stresses the importance of bringing business
repeaters into voluntary compliance through the trust fund compliance
program. At the beginning of 1977, there were nearly 275,000 taxpayers with
delinquent trust fund accounts amounting to over $635 million. Of these
accounts, 2,500 had a balance of $25,000 or m o r e . At the end of 1977, the
n u m b e r of taxpayers with delinquent trust fund accounts was some 325,000,
with an outstanding balance of approximately $667 million, and the n u m b e r
of delinquent trust fund accounts over $25,000 was 2,400.
Restricting access to tax r e t u r n s
Legislative actions concerning disclosure matters were significant during
1977. T h e Tax Reform Act of 1976 a m e n d e d Internal Revenue C o d e section
6 1 0 3 , effective January 1, 1977, to provide that tax returns and tax return
information are to be confidential and not subject to disclosure except as
authorized by various sections of the C o d e . Increased criminal penalties and
new civil damage provisions for unauthorized disclosures were also included
in the act. T h e disclosure legislation was strongly supported by the IRS since
it reflected Treasury legislative r e c o m m e n d a t i o n s . It also codified most
existing regulatory and policy practices concerning the disclosure of confidential tax information.
T h e Disclosure Operations Division provides program guidance to disclosure officers in all IRS field offices. Field officials now act on certain requests
for testimony of Service employees and m a k e initial determinations concerning freedom of information requests and process requests for information
under the Privacy Act of 1974.
T o implement the provisions of the Privacy and Freedom of Information
Acts, and IRC 6103 a m e n d m e n t s , the IRS decentralized some administrative
responsibilities for disclosure, privacy, and freedom of information to its field
offices. Disclosure officer positions were established in IRS regions, districts,
service centers, the Office of International Operations, the Office of Assistant
Commissioner (Inspection), and the IRS Data Center.
Tax administration a b r o a d
The Service maintains a system of p e r m a n e n t foreign posts. Revenue Service
representatives ( R S R ' s ) at these stations are involved in compliance and
taxpayer assistance activities and maintaining contacts with foreign tax
agencies under the Office of International Operations ( O I O ) .
Since the OIO established its first office in Paris in 1948, the number of
foreign posts staffed by RSR's has increased to 14. At present, posts in Bonn,
London, Paris, and R o m e cover Western Europe and North Africa. Those in
Mexico City, Caracas, and Sao Paulo are responsible for Mexico, Central
America, and South America, while C a n a d a is served from Ottawa. Offices in
Tokyo, Manila, Kuala Lumpur, and C a n b e r r a administer OIO activities in
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Japan, Southeast Asia, Australia, and New Zealand. A post in T e h r a n covers
the Middle East, and one in J o h a n n e s b u r g services Africa south o f t h e Sahara.
IRS foreign posts provide a vital link with m o r e than 2 million Americans
living abroad. In 1977, the RSR's continued to maintain personal contacts with
foreign tax authorities, foreign government officials, the D e p a r t m e n t of State
and other U.S. agencies, as well as the American communities abroad. T h e
RSR's act as a liaison with foreign c o m p e t e n t authorities in tax treaty matters
when called upon to represent the U.S. c o m p e t e n t authority.
T h e 1977 filing period m a r k e d the 24th consecutive year overseais taxpayers
received tax assistance through the overseas taxpayer service program. In
1977, over 148,000 taxpayers were assisted, an increase of approximately 20
p e r c e n t over 1976. Reasons for the increase were the Tax Reform A c t o f 1976
and the Tax Reduction and Simplification Act of 1977, which included
important changes affecting overseas taxpayers. Twenty-three assistors were
detailed abroad during 1977, providing assistance in 131 cities in 76 foreign
countries.
Commissioner Kurtz met in 1977 with the Canadian Minister of National
R e v e n u e , Monique Begin, to formalize a working arrangement for simultaneous examinations of taxpayers. In a c c o r d a n c e with the income tax treaty
between the United States and C a n a d a , the two tax authorities will exchange
tax information concerning related U.S. and Canadian companies developed
in the c o u r s e of such examinations. T h e tax treaty also provides for
confidentiality of taxpayer information exchanged between the two countries.
T h e Service has e n t e r e d into coordination of tax administration agreements
with American Samoa, G u a m , and the U.S. Virgin Islands. These agreements
allow the Service to provide taxpayer return information and to develop
programs with the possessions to e n h a n c e tax administration. An a d d e n d u m
has been included with the U.S. Virgin Islands to provide for a mutual
a g r e e m e n t to resolve cases of double taxation.
Compliance overseas.—The OIO's audit activity takes place primarily within
the United States. This activity focuses on securing compliance with Federal
tax laws from resident and visiting aliens, and foreign corporations conducting
business in the United States. Personnel o f t h e O I O , at the National Office, also
examine thousands of tax returns filed by Americans living abroad.
T h e m o r e complex tax return examinations continue to be conducted at the
foreign country site of origin, and during 1977 the n u m b e r of these audits
increased over previous years.
Tax treaties and the competent authority.—The n u m e r o u s tax treaties with
other countries are designed to eliminate double taxation, remove tax barriers
to trade and investment, and help c u r b tax avoidance. T h e United States now
has income tax treaties with 39 countries and estate tax treaties with 1 3
countries. A new i n c o m e tax treaty to replace the current treaty with the
United Kingdom was signed in D e c e m b e r 1975 and awaits ratification by both
the U.S. Senate and the British House of C o m m o n s .
T h e Assistant Commissioner ( C o m p l i a n c e ) is the designated U.S. c o m p e tent authority under our system of tax treaties.
In 1977 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 which arise from conflict of U.S. and
foreign tax laws.
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Technical assistance to foreign countries.—Since 1963 the Service has
provided reimbursable training, technical and managerial advisory services to
requesting foreign governments in cooperation with the Department of State
and the Agency for International Development. The program objective is to
assist friendly developing countries to modernize their tax administrations.
During 1977, the Service extended long-term onsite advisory assistance to
El Salvador, Liberia, Trinidad and T o b a g o , and Uruguay. Short-term assistance was provided to the U.N. Trust Territory o f t h e Pacific Islands. A shortterm mobile instructor team presented audit courses in Liberia and Sierra
Leone.
General tax administration surveys in the U.N. Trust Territory o f t h e Pacific
Islands and the Northern Mariana Islands were completed. Specialized surveys
were c o n d u c t e d for Cyprus in A D P applications, for Ecuador on collection of
delinquent accounts, and for Egypt as a followup to a major report in 1975.
New projects are underway in Sierra Leone and the Caribbean as well as the
expansion of the Liberia project.
In 1977, 330 foreign tax officials from 60 countries visited the Service to
participate in study-observation programs. Over 4,600 officials from 124
countries have c o m e to the IRS for such assistance since 1963.
A m o n g the special visitor training projects were a 7-week middle-managem e n t seminar in tax administration for 11 tax officials from Ethiopia,
Indonesia, Japan, and Nigeria; and a 9-week comparative tax administration
seminar for six Korean tax officials. Twenty-three Harvard international tax
program participants and 25 students from the IMF public finance course were
briefed by the Service.
The Service continued support of the Inter-American Center of Tax
Administrators ( C I A T ) , the 26-country-member hemispheric organization for
promoting tax administration improvement. T h e Commissioner's presentation
on the U.S. tax simplification was one of two IRS papers presented to CIAT's
1 Hh general assembly, Caracas, Venezuela, in May 1977. The Director, Tax
Administration Advisory Services Division, was made a m e m b e r of CIAT's
Executive Council. T h e IRS advised CIAT on a new format for technical
conferences. At CIAT's request, six papers were presented to related technical
conferences on taxation of multinationals and the exchange of information
under tax treaties by representatives o f t h e Office of Assistant Commissioner
( C o m p l i a n c e ) and the OIO. T h e Service also presented two papers at the fifth
annual general assembly o f t h e Caribbean Organization of Tax Administrators
( C O T A ) , Roseau, Dominica, in August 1977.
Assistance to State and local governments
IRS assistance to States, local governments, and territories includes
participation in IRS training courses, use of IRS training materials, and onsite
technical advisory assistance.
In 1977, 47 tax officials from 13 States, 1 city government, Puerto Rico, and
the Virgin Islands participated in IRS formal training courses, providing over
92 weeks of training assistance. The types of courses included basic revenue
agent training, employee plan determination techniques, exempt organization
procedures, and effective T V - r a d i o communications.
Training materials or classroom assistance was also provided to several
jurisdictions to assist them in developing their own training courses.
Also during 1977, the IRS received six requests from States and territories
186
1977 REPORT OF THE SECRETARY OF THE TREASURY
for onsite assistance under the Intergovernmental Personnel Act ( I P A ) . T w o
formal short-term assignments were m a d e to G u a m to improve its revenue
training program. A survey was m a d e of problems in converting the American
Virgin Islands revenue processing system to A D P .
Since the IPA program started in 1970, the Tax Administration Advisory
Services Division has m a d e 29 short-term assignments to 10 States, Puerto
Rico, G u a m , and the University of Southern California.
Planning and research
Planning is an integral and continuing m a n a g e m e n t activity within all
organizational c o m p o n e n t s of the Service. During 1977, IRS planning
activities encompassed preparation of a Service-wide long-range plan, testing
of improvements in work technology and systems, organizational studies,
coordination of the preparation of testimony before congressional committees, analysis of pending legislation, statistical compilation, and projections of
tax return data.
Completed testing projects.—Bsised on successful test results, the IRS is
replacing its existing c o m p u t e r printers with high-speed, nonimpact printers,
which can print up to 25 times faster than conventional printers.
During fiscal 1978, the IRS will install in the 10 service centers remittance
processing systems which perform, in a single operation, several processing
steps now d o n e separately. This innovation will accelerate remittance posting
and r e d u c e processing costs.
Alternative filing period study.—A sample of individual income-tax payers
were sent questionnaires seeking information about current filing practices
and opinions on two alternative filing procedures. Three-fourths of the
taxpayers who responded said they would continue to file their returns in the
m o n t h s of January through April even if the deadline for filing were extended.
A majority of taxpayers were opposed to a second alternative which would
divide individual income-tax payers into two groups, one with a January
1-December 30 tax year and an AprU 15 fihng deadline, the second with a July
1-June 30 tax year and an O c t o b e r 15 filing deadline.
State tax administrators were also surveyed to obtain their views concerning
alternative filing p r o c e d u r e s . Results revealed that rnost States would probably
change their filing period for State individual income tax returns to conform
with any Federal change. However, many State tax administrators expressed
doubt that the changes under consideration would be beneficial.
Tax models.—Originally developed 15 years ago to meet Treasury's need for
timely estimates o f t h e revenue effects of proposed tax legislation, tax models
continue to be valuable tools for economic planning. Five basic models,
representing the returns of individuals, corporations, sole proprietorships,
partnerships, and estates, are now used. Each model consists of a set of
generalized c o m p u t e r programs used with specially structured data files
comprising records in the statistics of income files.
In addition to the basic tax model for individual returns, the Service has
developed a special individual m o d e l set, " S t a t e Tax M o d e l s . " These models
are designed to permit reliable data estimates for each o f t h e 50 States and the
District of Columbia. T o w a r d this end, these models are based on the full
statistics of income sample (over 200,000 returns for 1975) instead of the
subsample of about 100,000 returns used for the basic model.
Taxpayer service telephone study.—Through the use of mathematical
modeling techniques, the IRS has developed alternatives indicating the
ADMINISTRATIVE
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187
Optimum number, size, and location of IRS toll-free telephone sites offering
taxpayer assistance. A parallel study to this IRS staff effort was m a d e by a
commercial telephone site location firm. Results from both studies are under
review to provide taxpayers the best possible telephone answering service at
the least cost.
Legal assistance test program.—Arrangements have been m a d e with the law
schools of three universities to c o n d u c t test programs under which law students
provide free legal assistance to low-income taxpayers during the audit and
administrative appeals processes. Students operate under the close supervision
of practicing attorneys and law school professors. Data and evaluations from
the test program are being gathered to determine whether this assistance
affects the results of audits and appeals. ,
Legislative activities.—The planning and research function has the responsibility for continuing analysis of legislative proposals affecting the IRS and
determination of their probable administrative implications. O n c e legislation
is e n a c t e d , a plan for implementing each provision is developed and
coordinated with all functions that are to be responsible for administering the
legislation. During 1977, more than 9 0 bills were analyzed for their impact o n
the IRS. Implementation plans were developed for 18 enacted public laws,
including two major tax bills—the Tax Reform Act of 1976 and the Tax
Reduction and Simplification Act of 1977.
I m p a c t of 1 9 7 6 T a x Reform Act on I R S o p e r a t i o n s
T h e Tax Reform Act of 1976, which affected over 700 sections of the
Internal Revenue C o d e , b e c a m e law on O c t o b e r 4, 1976. T h e late e n a c t m e n t
of these comprehensive changes left little time for the Service to implement
the provisions that were effective for the 1976 tax year.
Development of tax forms was a special problem. T o distribute tax packages
by the end o f t h e year, forms must be ready to print early in October. T o m e e t
this schedule, the Service followed the proposed legislation closely and
developed alternative forms to implement new provisions. Although the act
required changes in virtually every 1976 tax form, the Service was able to
develop, print, and distribute the tax packages to taxpayers on time.
New Federal-State a g r e e m e n t s executed
T h e Tax Reform Act of 1976 contained major revisions of the Internal
Revenue C o d e which had the effect of nullifying all Federal-State agreements
on coordination of tax administration. In order to avoid serious interruptions
of information exchanges between the IRS and State tax administration
agencies, it was necessary that new agreements be prepared and executed
within a short period of time.
The development of new agreements was complicated by the fact that
" u m b r e l l a " agreements with Governors o f t h e States could no longer be m a d e .
Instead, agreements with the heads by individual tax agencies within each State
were required, and many States have several agencies that administer taxes.
In addition, the new law also imposed on the States complex limitations on the
disclosure of Federal data, privacy safeguards, and accounting obligations.
T h e Service prepared a new standard agreement which incorporated the
provisions o f t h e new disclosure laws and contacted each State agency to work
out an agreement to satisfy the State agency and comply with the Federal law.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Statistical publications
T h e IRS annual Statistics of Income (SOI) publications provide the public
and the G o v e r n m e n t with a wide variety of data reported on income tax
returns. T h e s e reports are p r e p a r e d without violating taxpayers' rights to
privacy. Nearly all of the data are estimates based on representative samples
of returns.
Preliminary SOI publications in 1977 covered individual income tax returns
for 1975, and corporation and unincorporated business income tax returns for
1974. As required by the Tax Reform Act of 1976, the 1975 report for
individuals included the first SOI statistics on the tax liability of individuals
with high total income. For this purpose, total income was c o m p u t e d using
several different income concepts. Detailed statistics for 1974 and 1975 were
provided to the D e p a r t m e n t o f t h e Treasury for a special publication on highincome taxpayers. Publication of statistics on this topic is required annually
by the 1976 act.
Also published in 1977 was an SOI supplemental report on individual
income tax returns providing small area data for 1972. T h e report provides
information on the n u m b e r of tax returns, adjusted gross income, selected
sources of income, exemptions, and tax liability for each county and for the
125 largest metropolitan areas.
As part o f t h e international income and tax statistical studies program, d a t a
were provided to the Treasury to help evaluate the effectiveness of the
domestic international sales corporation (DISC) provisions o f t h e tax code as
a means of promoting U.S. exports. T h e s e statistics were included in Treasury's
annual r e p o r t to Congress on DISC'S.
Other tax analysis studies underway in the international area include the
foreign tax credit claimed by individuals and corporations, the activities of
foreign subsidiaries of U.S. corporations, and the exemption of income earned
abroad by individuals. As a result of the Tax Reform Act of 1976, work is
underway on two new studies needed for annual reports to Congress to provide
information concerning cooperation by U.S. entities in international boycotts
and the effect of the new system of taxing U.S. corporations operating in
Puerto Rico and U.S. possessions.
Plans were completed in 1977 for statistical studies of the impact of the
Employee Retirement Income Security Act of 1974 on pension plans. As part
of the single agency filing r e q u i r e m e n t negotiated with the D e p a r t m e n t of
Labor, the Service will statistically process a sample of pension plan returns
starting with plan year 1977 to meet Labor requirements. Meanwhile, the IRS
is proceeding with its own statistical study for the 1976 plan year.
IRS Statistics of Income publications can be obtained from the Superintendent of D o c u m e n t s , U.S. G o v e r n m e n t Printing Office, Washington, D.C.
20402.
Returns-filed projections
Planning throughout the Service is based on projections of the number of
returns to be filed. T h e planning requirements of the various units of the
Service require that workload projections be prepared for the entire United
States as well as for service center areas, regions, and districts. Specialized
projections are m a d e also for research purposes. T h e projections are updated
each year to incorporate changes in the economic and demographic outlook
ADMINISTRATIVE
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189
as well as the effects of tax law changes and filing patterns. Statistical
techniques are used to identify the relationships between tax returns filed and
economic and demographic changes.
T h e total n u m b e r of primary returns and supplemental d o c u m e n t s is
expected to grow from 128.5 million in 1976 to 162 million in 1985. This is
an increase of 26.1 p e r c e n t and reflects the expected growth in population and
economic activity.
Art advisory panel
Since 1968, a 12-member panel of art experts, including museum directors,
scholars, and art dealers, has helped the Service determine the value of works
of art d o n a t e d to charity or included in taxable gifts.
T h e Commissioner's art advisory panel held two meetings at the National
Office during 1977. The panel reviewed 395 works of art with a claimed value
of more than $ 15 million. Assistance was provided to the panel by the in-house
art group which, in addition, responds to field requests for valuations on such
works of art as antique furniture, ceramics. Oriental and African art,
gemstones, and historical and political memorabilia. Almost half of the
appraisal items received are now being referred to the IRS in-house art group
for valuation r e c o m m e n d a t i o n s .
In its 9 years of operation, the panel has reviewed appraisals of works of art
valued at m o r e than $21 I million and has r e c o m m e n d e d valuation adjustments
of over $63 million.
Maintaining I R S integrity a n d efficiency
T h e Inspection Service's internal audit and security programs aid IRS
managers in maintaining the highest levels of efficiency and integrity.
Internal audit activities.—The Internal Audit staff reviews the operations of
the IRS to ascertain the extent of compliance with established m a n a g e m e n t
policies and to ensure that both the revenue and taxpayers' rights are
protected.
Internal Audit studies operations that have widespread impact on the
Service or that are considered high risk, including controls for safeguarding
tax information and assuring fair and equitable treatment of taxpayers.
Improvement and savings. — Internal Audit issued 334 reports to Service
managers during the fiscal year. M a n a g e m e n t actions on the problems
reported resulted in better service to taxpayers, strengthened controls, and
improved operations. In addition, management actions on Internal Audit
findings resulted in measurable savings and additional revenue estimated to
total $88 million.
Fraud, embezzlement, or misconduct. — Internal Audit gives top priority to
detection of fraud, embezzlement, or other wrongdoing on the part of Service
employees or others who attempt to corrupt IRS employees. During the year,
Internal Audit referred information to Internal Security indicating possible
breaches of integrity by 1 79 employees and 28 other individuals. Also, Internal
Audit spearheaded the design and participated in implementing an improved
Service-wide refund scheme detection program. This program resulted in the
detection of schemes claiming fraudulent refunds of approximately $6.5
million. Most refunds were stopped before issuance to the claimants.
Internal security activities.—The Internal Security Division conducts an
intensive review of high-risk areas by alerting managers and employees to the
integrity hazards that were identified during Inspection investigations.
The Division also investigates the unauthorized disclosure of Federal tax
return information, disclosure or use of information by preparers of returns.
190
1977 REPORT OF THE SECRETARY OF THE TREASURY
and charges against tax practitioners. In addition, the Division conducts special
investigations and inquiries as required by the Commissioner and the Office
of the Secretary of the Treasury.
During 1977, Internal Security inspectors arrested or were responsible for
the indictment of 15 8 individuals, including 91 taxpayers and tax practitioners,
and 67 employees or former employees. A total of 119 defendants were
convicted during the year, including 97 defendants who pleaded guilty rather
than go to trial. Fifty of these convictions were for bribery, 14 were for assault,
and the remainder involved such other criminal charges as conspiracy to
defraud the G o v e r n m e n t , obstruction of justice, subscribing to false returns,
disclosure of confidential tax information, and embezzlement.
Bribery awareness.—During 1977, the Division developed a video-tape
presentation entitled " A n a t o m y of a Bribe," which realistically portrays the
investigation of a bribery case from the initial offer to the subsequent trial of
the offender. These video tapes were distributed servicewide and used in the
bribery awareness lectures.
Last year, IRS employees continued to thwart those who challenged the
integrity o f t h e Service through a t t e m p t e d bribery. In 1977, 157 employees
reported 180 possible bribery attempts resulting in 48 arrests or indictments.
At the end of 1977, 27 persons were awaiting trial on bribery charges.
Assaults and threats on IRS employees.—The protection and safety of IRS
employees subjected to threats or physical assaults while performing their duty
was assigned to the Internal Security Division in March 1972. Since then
prosecution has been authorized in 208 cases, 107 of which resulted in
convictions or guilty pleas, and 20 of which are pending trial. During 1977,
19 persons were convicted, pleaded guUty, placed in the pretrial diversion
program, subject of revocation of probation, or referred for prosecution to
local authorities.
Of 528 total cases investigated, most were threat investigations, which m a k e
up almost all of the instances in which prosecution is not authorized. In these
instances, inspectors, with the approval of the U.S. attorney, contact the
alleged assailant to inform him or her of the applicable Federal statutes
concerning assaults or threats on G o v e r n m e n t employees. T h e individual is
also advised that repetitive acts could result in serious consequences, including
prosecution.
Investigation of employees.—The Internal Security Division completed
13,579 investigations of employees during the year. In addition, police record
searches were c o n d u c t e d on 16,386 persons considered for temporary, shortterm appointments or for positions created for special e c o n o m i c educational
programs.
These searches resulted in the rejection of 99 j o b applicants and in
disciplinary actions such as separations, suspensions, reprimands, warnings, or
demotions against 946 employees.
Employees who engage in improper behavior or unlawful actions constitute
a very small p e r c e n t a g e of the IRS work force. The vast majority of
investigations relating to alleged acts of impropriety by Service personnel
result in exoneration of the employees.
In a new development, an Internal Security investigation conducted in
Detroit resulted in Federal indictments of 53 present and former employees
for falsely claiming and collecting welfare payments, specifically aid to
d e p e n d e n t children. T h e individuals were identified by comparing the
Service's payroll list with the State welfare rolls. Subsequenfly, the Secretary
of the Treasury, in a letter to the Attorney General, suggested that the
ADMINISTRATIVE
REPORTS
191
D e p a r t m e n t of Justice and the D e p a r t m e n t of Health, Education, and Welfare
c o n d u c t a nationwide review to determine the possible abuse of welfare by
G o v e r n m e n t employees.
Investigative teamwork.—Breaches of integrity by individuals may be
investigated jointly by Internal Audit and Internal Security with the assistance
of the IRS Intelligence Division in some cases.
One joint investigation disclosed that weaknesses in supervisory controls
allowed a revenue agent to assign cases to himself so that he could give
preferential treatment to taxpayers for personal gain. T h e former revenue
agent pleaded guilty to accepting gratuities from a taxpayer he audited.
In each region integrity development projects initiated by Internal Audit and
Internal Security probed high-risk Service operations. For example, tests were
made at service centers to determine whether existing controls and p r o c e d u r e s
protect the computerized integrated data retrieval system from fraudulent or
unauthorized use by employees. Also, controls over the receipt and processing
of remittances were tested in cashier functions in district offices. Accountability records were verified to determine that receipts were processed timely and
in a c c o r d a n c e with p r o c e d u r e s . Probes in the administrative area included
reviews of payments to vendors of goods and services, employee travel
vouchers, and the uses of travel advances.
Violations of tax laws discovered during internal audits and integrity
investigations are referred to the IRS Intelligence Division for investigation if
no employees are involved. During the year, there were 18 such referrals.
Cost reduction and m a n a g e m e n t i m p r o v e m e n t
During 1977, the IRS continued to give high priority to efforts aimed at
improving m a n a g e m e n t and reducing costs. Spearheading these efforts was the
m a n a g e m e n t by objectives program. This program encouraged every Assistant
Commissioner to maintain a high level of cost-consciousness a n d to emphasize
productivity savings in all operating areas.
As a result of these and other efforts involving participation of Service
managers and employees at all organization levels, the Service realized savings
of many millions of dollars.
Within the incentive awards program alone, employee participation in cost
reduction efforts resulted in the adoption of 795 employee suggestions, with
resulting tangible benefits of $987,000. In addition, 23 I awards were granted
for special achievements which saved the IRS approximately $1,552,000.
Space and property management.—Special emphasis has been placed on
efficient utilization of space and property resources to reduce costs. Several
internal m a n a g e m e n t reporting systems helped the IRS to monitor and control
its space and property inventories in cooperation with the General Services
Administration. Computerized systems for vehicle reporting has reduced
manual reporting-staff time.
Savings were also achieved by open office planning and multiple occupancy
work station concepts. These concepts, in 1977, resulted in the IRS saving in
excess of $ 1.5 million. A u t o m a t e d mail processing equipment was installed at
1 service center in 1977 and increased the efficiency ofthe mail operation, and
reduced the staff time, so markedly that the equipment will be placed in all
10 IRS service centers by March 1978.
- Reports management program. — During 1977, the Service continued its
efforts to eliminate nonessential internal m a n a g e m e n t reporting. As a result
of this action, 27 reports were cancelled at an annualized savings of
approximately $ 3 1 0 , 0 0 0 .
192
1977 REPORT OF THE SECRETARY OF THE TREASURY
Records disposal program.—Records disposal during 1977 resulted in the
release of space and e q u i p m e n t valued at over $2.2 million.. A total of 155,497
cubic feet of records were destroyed in a c c o r d a n c e with regular programs, and
315,436 cubic feet of records were retired to Federal Records Centers.
Telecommunications.—The Service expanded its cost reduction efforts in
the area of telecommunications. A cost reduction of $ 1.2 million was achieved
in 1977 in Federal T e l e c o m m u n i c a t i o n s System ( F T S ) charges, by reducing
local t e l e p h o n e e q u i p m e n t , and the consolidation of data transmission
facilities.
Projected conversions of telephone systems from attended to unattended
status will result in a n e t decrease of 11 staff-years by July 1978.
Administrative mail management.—Spec\a\ service center zip codes will be
used nationwide as of January 1, 1978, which will reduce the average transit
time of mail from the taxpayer to service centers by 1 day, producing estimated
interest savings to the G o v e r n m e n t in excess of $5 million by making funds
available to the Treasury a day earlier.
Treasury safety award to IRS.—The IRS continued to rate as one o f t h e t o p
Federal agencies in safety by earning the Secretary's Safety Award of
Excellence for 1976 based on its outstanding record in the occupational safety
and health program areas. All b u r e a u s o f t h e Treasury c o m p e t e for this award
annually.
T h e IRS maintained a rate of 3.5 disabling employee injuries per million
staff-hours worked in 1976, and Service personnel drove 126.3 million miles
of official business in 1976 with 745 accidents, 129 less than in 1975, and an
accident frequency rate of 5.8 per million miles driven, c o m p a r e d with 6.4 in
1975.
In both safety areas, the IRS ratios for 1976 were not only the best in
Treasury, but also the best a m o n g c o m p a r a b l e Federal agencies in the
Washington, D . C , area.
Administration
Position management initiatives.—Strong m a n a g e m e n t support for sound
position m a n a g e m e n t practices and the effective utilization of personnel
resources resulted in savings of several million dollars during 1977.
For example, during 1977 over 1,200 paraprofessional positions in the audit,
collection, and intelligence functions were filled in lieu of a like number of
higher graded professional and technical positions. This resulted in a savings
of over $6.7 million. In addition, the use of paraprofessional positions has been
explored in other functional areas such as inspection, appellate, and employee
plans and exempt organizations.
A further indication of m a n a g e m e n t c o m m i t m e n t to sound position
m a n a g e m e n t is the fact that the IRS average grade has decreased from 7.72
in 1968, to 7.56 in 1977, while the average grade for the Federal G o v e r n m e n t
has increased from 7.4 to 8 over that same span.
Labor-management activities.—In D e c e m b e r 1976, the IRS concluded
negotiations with the National Treasury Employees Union ( N T E U ) , resulting
in a 4-year collective bargaining agreement covering approximately 30,000
employees in 57 out of 58 district offices. In May 1977, negotiations with
NTEU involving regional offices were concluded, resulting in a 4-year
agreement covering approximately 1,700 employees in 6 of 7 regions. Overall,
the National Office agreement, the multicenter agreement, and the multiregional and multidistrict agreements cover over 65,000 IRS employees.
During the year, the Service c o n d u c t e d nationwide training in basic labor
relations plus advanced courses in local negotiations, arbitration, and unfair
ADMINISTRATIVE
REPORTS
193
labor practice procedures to increase the expertise of personnel specialists
engaged in the administration of Executive Order 1 149 1, as a m e n d e d , and the
provisions of the collective bargaining agreements.
The unfair labor practice ( U L P ) caseload has dropped approximately onethird and the arbitration caseload has risen approximately one-third during the
past year. The significance o f t h e sharp drop in ULP's reflects the acquisition
of expertise on the part of operating managers in the application and
implementation of Executive O r d e r 11491, as amended. T h e rise in the
arbitration caseload is attributable to the fact that employees have b e c o m e
more aware of their right to file grievances and to appeal, and local
m a n a g e m e n t interpretation of the applicable agreement.
Employment of the handicapped.—The number of handicapped employees
employed by the Service increased slightly from 1976 to 1977, from 1,642 to
1,667. T h e r e are now over 140 visually handicapped employees working as
taxpayer service representatives. T h e IRS nominee for Outstanding Federal
Handicapped Employee o f t h e Year was Ms. Arietta Woods, a blind taxpayer
service specialist from the Los Angeles district. Ms. W o o d ' s nomination
symbolizes the capability and excellence of all handicapped employees.
Equal employment opportunity.—The Service continued to m a k e progress in
the employment of women and minorities in 1977. Total employment (July
1976 to July 1977) increased by 2.99 percent while the number of women
increased by 7.52 p e r c e n t and the n u m b e r of minorities increased by 6.19
percent.
The Service also increased n u m b e r s of women and minorities in higher grade
levels, and in key occupations, including revenue agent, revenue officer, tax
auditor, attorney, and criminal investigator.
Training to instruct E E O counselors in how to counsel in class discrimination complaints was developed during 1977.
In addition, course development was begun on a new training program for
special emphasis program coordinators including the Federal w o m e n ' s
program, Spanish-speaking program, and upward mobility program. T h e
course will be completed and new coordinators will receive this training during
1978.
Special agent training. — Late in 1976, the Deputy Commissioner appointed
a study group of various IRS managerial personnel to ensure that the special
agent occupation was provided the proper criminal investigator training,
c o m m e n s u r a t e with their tasks, duties, and assignments; and that such training
be offered in a logical and timely sequence and conducted in the most costeffective manner.
Major recommendations o f t h e study group were adopted and the revisions
to the special agent training were implemented during 1977. T h e restructured
program has provided for more effective and efficient training with a 3-week
reduction of training time ( $ 7 5 , 0 0 0 per diem and 3,000 staff-day savings
annually). Most important, the agents now receive, more timely, training
directly applicable to present work assignments.
A n o t h e r recommendation of the study group, that these Intelligence
Division employees receive advanced training for certain specialized duties,
has also been adopted. Large case training has been developed to enable the
agents to conduct investigations of coordination examinations program cases.
This study program, which includes such topics as case analysis and planning,
corporate structure, grand juries, referrals, information, etc., will be given to
about 200 special agents during the next year. Another module, intelligence
c o m p u t e r specialist training, was initiated this year and has already proven
successful for providing agents the knowledge to carry out specific enforceDigitized for activities.
ment FRASER
194
1977 REPORT OF THE SECRETARY OF THE TREASURY
Computer audit specialist training.—Most corporations and many small
businesses are now using computers to generate their tax return information.
T h e present c o m p u t e r preparation and recordkeeping of tax information was
anticipated by IRS m a n a g e m e n t several years ago. Also recognized was the
need for a cadre of Service employees, highly skilled in the techniques of using
c o m p u t e r records for examination purposes in the audit process. This led to
creation of the c o m p u t e r audit specialist position. Presently, there are more
than 120 revenue agents performing these very specialized duties.
As taxpayers employ additional and more sophisticated computerized
records, training programs for c o m p u t e r audit specialists are expanded to
match these innovations. This coming year, c o m p u t e r audit specialists will be
instructed in such advanced techniques as C o m m o n Oriented Business
Language ( C O B O L ) " R e p o r t W r i t e r , " data base m a n a g e m e n t , and distributive processing.
BUREAU O F T H E MINT i
T h e Mint b e c a m e an operating bureau of the D e p a r t m e n t of the Treasury
in 1873, pursuant to the Coinage A c t o f 1873 (31 U.S.C. 2 5 1 ) . All U.S. coins
are manufactured at Mint installations. T h e 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 1977, functions performed by the Mint on a reimbursable basis
included the manufacture and sale of proof coin sets and uncirculated coin
sets, medals of a national character, medals c o m m e m o r a t i n g the Bicentennial,
including America's First Medals in pewter and the American Revolution
Bicentennial Administration ( A R B A ) medals; and, as scheduling permitted,
the manufacture of foreign coins.
T h e headquarters o f t h e Bureau of the Mint is located in Washington, D.C.
The operations necessary for the c o n d u c t 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; and bullion
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 M u s e u m , and a numismatic o r d e r processing operation. T h e U.S. Assay
Office at San Francisco operates as a mint. T h e West Point Depository
cpntinued to p r o d u c e coins during the year.
T h e 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 a personnel security clearance
program.
During fiscal 1977, a total of 80 Mint security officers completed the 5-week
course at Treasury's Federal Law Enforcement Training C e n t e r , Brunswick,
Ga.
Digitized •for FRASER
Additional information is contained
in the separate Annual Report of the Director ofthe Mint.
ADMINISTRATIVE
REPORTS
195
The installation of closed-circuit television surveillance systems at the New
York and San Francisco assay offices, the Denver Mint, and the West Point
Bullion Depository were completed during the year. T h e alarm systems at
these locations were modernized in a consolidation of security equipment and
devices. Work on the installation of similar security equipment was in progress
at the Philadelphia Mint at the fiscal yearend.
T h e Continuing C o m m i t t e e 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. T h e C o m m i t t e e consists of o n e
representative each from the Bureau o f t h e Mint, the Bureau of G o v e r n m e n t
Financial Operations, and the Federal Reserve Bank of New York, with the
General Accounting Office invited to participate in the audits as an observer.
Under the C o m m i t t e e ' s program, an audit was c o n d u c t e d o f e a c h o f t h e four
Mint depositories where gold is stored (Fort Knox, Ky.; U.S. Assay Office, New
York; U.S. Assay Office, San Francisco; and the Denver Mint). By September
30, 1977, more than 30 p e r c e n t o f t h e U.S.-owned gold had been audited and
verified. T h e continuing audit is planned to provide for a complete audit of all
U.S.-owned gold over a 10-year cycle ending in 1984.
T h e U.S. Mints at Philadelphia and Denver and the Assay Offices at San
Francisco and New Y o r k were the only G o v e r n m e n t installations at which
operations had to be suspended because of the energy problem of February
1977. Annual settlements of the values stored at Philadelphia, Denver, a n d t h e
San Francisco Assay Office were c o n d u c t e d during the winter shutdown
caused by the natural gas shortage. This action averted a second shutdown for
settlement with a corresponding loss of production and work-force time. T h e
annual settlement at New York was held later in the fiscal year.
It is anticipated that annual recurring savings in excess of $39,000 will be
realized as a result of an audit r e c o m m e n d a t i o n to discontinue the unnecessary
rental of warehouse space for coinage strip. T h e restriction of orders of
commercially fabricated coinage strip to the requirements o f t h e Philadelphia
Mint and the storage capacity of an offsite warehouse are expected to result
in additional savings to the Bureau of the Mint.
T h e Bureau o f t h e Mint deposited a total of $458,043,170 into the general
fund of the Treasury during fiscal 1977. Seigniorage on U.S. coinage
accounted for $ 4 0 7 , 0 2 2 , 9 5 0 o f t h e total.
Domestic coinage
During the 12-month period, U.S. mints p r o d u c e d cupronickel-clad dollars,
half dollars, quarters, and dimes, cupronickel 5-cent pieces, and 1-cent pieces
composed of 95 p e r c e n t copper, 5 percent zinc for general circulation.
In fiscal 1977 the Philadelphia Mint manufactured 4,612,773,000 coins; the
Denver Mint 5,567,349,495 pieces; and the West Point Depository p r o d u c e d
1,389,850,000 1-cent pieces and 6,376,000 quarters for general circulation.
Approximately 10.7 billion coins were shipped by the Bureau o f t h e Mint
to Federal Reserve b a n k s and b r a n c h e s during the year.
Coin demand
The Bureau o f t h e Mint continued its close liaison with the Federal Reserve
in determining coin requirements. D e m a n d for coin, as measured by the n e t
outflow from Federal Reserve banks to commercial banks, totaled 11.5 billion
coins during fiscal 1977. Coin balances at the Federal Reserve banks
decreased by about 872 million coins from September 30, 1976. Joint
Mint/Federal
Reserve bank inventories of coins totaled 7.0 billion on
September 30,
http://fraser.stlouisfed.org/ 1977.
Federal Reserve Bank of St. Louis
196
1977 REPORT OF THE SECRETARY OF THE TREASURY
Coinage study
In December 1976 Secretary Simon transmitted to the President of the
Senate and the Speaker ofthe House of Representatives a report prepared by
the Department on "The State of the United States Coinage." The report
identified two major problem areas. First, it noted the diminishing utility ofthe
1-cent piece in the Nation's commerce and that its increased production costs
suggested giving serious consideration to its elimination from our coinage
system. In addition, the report recommended the replacement ofthe existing
dollar coin with a smaller sized dollar, as well as the elimination of the half
dollar from the Nation's circulating denominations. The Congress had not
taken any action on this report before the administration changed in January.
In March 1977, the chairman of the House Subcommittee on Historic
Preservation and Coinage, Committee on Banking, Finance and Urban Affairs,
requested the current views ofthe Department on the report. On April 7, 1977,
Secretary Blumenthal responded by letter which set forth the position of the
Treasury in this administration, as follows:
The Treasury has not recommended to keep or eliminate the I-cent
coin at this time. While production considerations point toward elimination, a thorough analysis of consumer impact has not yet been made. We
are proceeding with data gathering and assessment of the consumer
impact aspects. A decision should not be made until the potential
economic impact on consumers is understood. In the meantime, we
recommend that the Congress proceed with its own consideration of these
matters.
The Treasury recommends the present dollar coin be replaced with a
smaller, more conveniently-sized dollar coin and that the 50-cent piece
be eliminated.
The above positions are consistent with the report.
Concerning timing, consideration by the 95th Congress ofthe 1-cent
coin question is a necessity. The decision to expand mint capacity is
wholly dependent on the 1 -cent decision. If the 1 -cent coin is retained and
projected demand is to be met, 5-year capacity expansion leadtimes
require commencement of facility implementation action this year.
Foreign coinage
The Bureau of the Mint is authorized to produce coinage for foreign
governments on a reimbursable basis provided the manufacture of such coins
does not interfere with U.S. coinage requirements. From October 1, 1976,
through September 30, 1977, Mint installations manufactured approximately
385 million coins for Haiti, Panama, Peru, and the Philippines.
Production
Secretary Simon directed that the use of the special Bicentennial reverse
designs and the dates 1776-1976 on coins be terminated on December 31,
1976. From fiscal 1975, when these distinctive coins were first manufactured,
through December 1976 the following quantities for general circulation were
produced: 220,565,274 dollars, 521,873,248 half dollars, and 1,669,902,839
quarters.
In the early months of fiscal 1977, the Mint generated a record inventory
of coins, a percentage of which has been placed in long-term storage. At the
fiscal yearend the Mint was holding coins in storage for an extended period
at the West Point Depository, the San Francisco Assay Office, and at the Rocky
Mountain Arsenal, Denver.
After a reduction in force at the Mint's production facilities in April and May
ADMINISTRATIVE
197
REPORTS
1977, a near balance in the ratio of coins produced to coins shipped was
achieved.
The coin shipping load factor at t h e Denver Mint was increased by 10
percent, from 40,000 to 44,000 pounds on 1-cent coins. This more efficient
method of transporting coins gathered savings in costs for the Mint, personnel
for both t h e Mint and the Federal Reserve banks, and most importantly,
savings of energy.
The electrostatic precipitator at t h e New York Assay Office was upgraded
and modernized. This will improve the Mint's ability to refine gold and
decrease pollutants released into the atmosphere.
U.S. coins m a n u f a c t u r e d , fiscal y e a r 1 9 7 7
General circulation
Denomination
1 dollar:
Cupronickel
Silver-clad
50 cents:
Cupronickel
Silver-clad
I cent
Total
Face value
Numismatic •
Number of
pieces
Total coinage
Face value
Number of
pieces
Face value
41,118.277
$41,118,277.00
3,787,152
398,449
$3,787,152.00
398,449.00
44,905,429
398,449
$44,905,429.00
398,449.00
98,275,999
49,137,999.50
3,787,152
398,449
1,893,576.00
199,224.50
102,063,151
398,449
51,031.575.50
199.224.50
2701,689,590
175,422,397.50
1,216,283,525
121,628,352.50
3,787,152
398,449
3,787,152
946,788.00
99,612.25
378,715.20
705.476,742
398,449
1,220,070,677
176,369,185.50
99,612.25
122,007,067.70
993,042,898
49,652,144.90
3,787,152
189,357.60
996,830,050
49,841,502.50
3 8.525.938,206
85,259,382.06
3.787,152
37.871.52
8.529.725,358
85,297,253.58
4 11,576,348,495
25 cents:
Cupronickel
Silver-clad
10 cents.:
5 cents
Nurnber of
pieces
522.218,553.46
23,918,259
11,600,266,754
530,149,299.53
7,930,746.07
' All numismatic coins were made at the U.S. Assay Office, San Francisco, and included 1,582,259 1976 proof sets, 163,906
Bicentennial proof sets, 234,543 Bicentennial uncirculated sets and 2,204,893 1977 proof sets.
2 Includes 6,376,000 quarter dollars produced at the U.S. Bullion Depository at West Point.
3 Includes 1,389,850,000 1-cent coins manufactured at West Point.
4 Includes 7,923,277 Bicentennial dollars, 29,073,999 Bicentennial half dollars, and 196.059.590 Bicentennial quarter dollars.
Other coins of these denominations were dated 1977.
NOTE. —Dollars, half dollars, quarters, and dimes for general circulation and regular proof sets are three-layer composite
coins—outer cladding 75 percent copper, 25 percent nickel, bonded to a core of pure copper. Dollars, half dollars, and quarters
comprising the Bicentennial 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.
B u r e a u of the Mint operations, fiscal 1 9 7 6 , transition q u a r t e r , a n d fiscal 1 9 7 7
Selected items
Newly minted U.S. coins issued: i
1 dollar
50 cents
25 cents
10 cents
5 cents
1 cent
Total
Inventories of coins in Mints, end of period
Fiscal
1976
T.Q.
146,400.000
12,900,000
239,900,000
42,800,000
1,072,000,(XX)
193,6(X),000
874,400,000
232,000,000
618,200,000
114.300,000
7,711,700,000 2,030,200,000
50,600,000
75,200,000
729,200,0(X)
814,5(X),000
673,700,000
8,362.600,000
10,662.600.000 2,625,8(X),0(X) 10,705.8(K),0(X)
3,248,400,0(X) 3,741.3(X),(XX)
Electrolytic refinery production:
Gold—fine ounces
Silver-fine ounces
5,004,140.42
Balances in Mint, end of period:
Gold bullion—fine ounces
Silver bullion-fine ounces
266,188,680
40,197,341
Digitized1for FRASER
For general circulation only.
Fiscal
1977
4,611.7(X).()(X)
3.331,771.75
266,177.852
39.849,021
266.169,764
39.401.062
198
1977 REPORT OF THE SECRETARY OF THE TREASURY
Technology
T h e Bureau of the Mint's Office of Technology completed trial strikes on
three proposed versions of a new, smaller dollar coin bearing the Liberty
obverse and new eagle reverse. Materials other than cupronickel clad were
given detailed consideration, but, the material presently used for the dime^
quarter, half-dollar, and dollar coins was judged most suitable for the proposed
coin.
A review was c o n d u c t e d of all die standardization drawings that were
converted to the metric system,,. A 6-month introduction to the metric system
was c o n d u c t e d by reporting assay and quality control data in both metric and
conventional units. By the fiscal yearend only metric units were being
reported.
T h e Bureau of the Mint's Laboratory in Washington continued to provide
technical expertise on the authenticity of U.S. coins, examining 1,705
questioned coins submitted by the U.S. Secret Service and other law
enforcement agencies, involving 161 cases.
T h e Mint and the Secret Service developed mutual policy and p r o c e d u r e s
for the return of gold bullion contained in counterfeit gold coins confiscated
from innocent collectors.
Administration
Mint-wide classification reviews of Federal Wage System positions resulted
in m o r e than 716 employees being downgraded.
T h e Bureau c o n d u c t e d a significant reduction in force of production
personnel. A total of 117 employees were released from the Denver Mint, the
Philadelphia Mint, and the West Point Bullion Depository.
A satisfactory settlement was reached concerning the only previously
unresolved issue (scope of the negotiated grievance p r o c e d u r e s ) of the
renegotiated Bureau-wide union contract. T h e settlement was obtained as a
result of Bureau m a n a g e m e n t and union participation with the Federal Service
Impasses Panel factfinder. Implementation of the contract was awaiting
employee ratification on September 30, 1977.
T h e Mint's experimental project of preparing a zero-base budget for fiscal
1978 in conjunction with the D e p a r t m e n t ' s Office of Budget and Program
Analysis ( O B P A ) served as a pilot project for the Treasury. The project
applied techniques of zero-base budgeting to an existing budget to determine
required timing, p a p e r w o r k , and review changes. A slide-sound show on the
Mint's project was developed by O B P A , which was shown to the m a n a g e m e n t
staffs of other Treasury bureaus.
T h e conversion of the payroll and related personnel information of seven
Treasury bureaus to the Treasury payroll/personnel information system
(TPPIS) had been accomplished by the end of fiscal 1977. T h e implementation
of TPPIS has p r o c e e d e d in a c c o r d a n c e with the schedule established during
fiscal 1976.
Marketing and statistical services
A proof bronze medal honoring President Carter was offered to the public
for the first time at the American Numismatic Association convention in
Atlanta, Ga., in August 1977. This 1 5/16-inch medal is the first Presidential
medal to be produced in proof edition by the U.S. Mint. T h e medal may be
purchased over-the-counter from Mint sales areas or by mail.
Between April 1 and June 10, 1977, the Mint accepted orders for 3.25
ADMINISTRATIVE
REPORTS
199
million 1977 proof coin sets. Traditionally, orders had been accepted during
N o v e m b e r and D e c e m b e r for the next calendar year's sets. T h e schedule was
revised this year to improve customer service by shortening the length of time
people had to wait to receive their sets. Shipment o f t h e 1977 proof sets began
on May 2 and will continue through D e c e m b e r . A schedule was developed
whereby ranges of o r d e r n u m b e r s were m a t c h e d against production and
mailing schedules, with each order assigned an ^'expected receipt d a t e , " which
was provided to the customer.
Following extensive remodeling, the Treasury Exhibit Hall in the Main
Treasury Building, which is u n d e r thejurisdiction o f t h e Bureau o f t h e Mint,
was formally o p e n e d to the public by Treasury officials on January 4, 1977.
T h e Hall features m a n y historical, mechanical, graphic, and audiovisual
displays reflective of Treasury activities assembled from: T h e Bureau of
Alcohol, T o b a c c o and Firearms; the Bureau of the Mint; Office of the
C o m p t r o l l e r of the C u r r e n c y ; Internal R e v e n u e Service; Office of the
Secretary; U.S. Secret Service; U.S. Savings Bonds Division; and the U.S.
Treasurer's Office. T h e Mint exhibit includes an operating coin press on which
visitors may strike their own White House medal in pewter and 30 gold bars,
weighing approximately one-half a ton, displayed in a unique cannonball vaulttype safe. T h e Exhibit Hall is o p e n Tuesday through Sunday from 9:30 a.m.
to 3:30 p.m. Between January 4 and September 30, approximately 140,000
visitors toured the Hall.
OFFICE OF REVENUE SHARING i
T h e Office of Revenue Sharing is located within the Office of the Assistant
Secretary (Domestic F i n a n c e ) for administrative purposes. T h e revenue
sharing staff consists of approximately 150 professional and clerical positions,
with an additional 30 positions designated for the antirecession fiscal
assistance ( A R E A ) program. Offices are located at 2401 E Street, NW. in
Washington, D.C.
T h e Office of Revenue Sharing was m a d e responsible for administering t h e
AREA program with the passage of title II of the Public W o r k s Employment
Act of 1976 (Public Law 9 4 - 3 6 9 ) . U n d e r the act, the Office had distributed
more than $1.6 billion by the end of fiscal 1977.
With the passage o f t h e Intergovernmental Antirecession Assistance Act of
1977 (Public Law 9 5 - 3 0 , May 2 3 , 1977), the civil rights and audit requirements of the AREA program were m a d e identical to those of the general
revenue sharing program.
During fiscal 1977, $6.8 billion was distributed to more than 38,000 States,
counties, cities, towns, townships, Indian tribes, and Alaskan native villages
which are recipients of shared revenues. This brought to $33.5 billion the
a m o u n t of money returned to States and local governments since the inception
of the general revenue sharing program in 1972.
T h e State and Local Fiscal Assistance A c t o f 1972 (31 U.S.C. 1 2 2 1 - 1 2 6 3 )
authorized the distribution of $30.2 billion during the 5-year period that e n d e d
D e c e m b e r 3 1 , 1976. T h e 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 government.
I for i o n a l i n f o r m
Digitized A d d i tFRASER a t i o n is c o n t a i n e d
in the s e p a r a t e A n n u a l R e p o r t of t h e O f n c e of R e v e n u e S h a r i n g .
200
1977 REPORT OF THE SECRETARY OF THE TREASURY
T h e eighth entitlement period in t h e general revenue sharing program is the
first such period authorized by the State and Local Fiscal Assistance
A m e n d m e n t s of 1976 (Public Law 9 4 - 4 8 8 , O c t o b e r 13, 1976). These
a m e n d m e n t s extended general revenue sharing from January 1, 1977, through
September 30, 1980, at higher anniial levels of funding than had been available
during the 5-year period of operation authorized by the original act. T h e
a m e n d m e n t for the eighth period authorizes $5 billion for distribution,
bringing the total authorized for distribution to $35.2 billion.
Data improvement
During the year, the Office m a d e significant improvements in the data base
used to allocate revenue sharing funds. For example, the Bureau o f t h e Census
revised the 1975 population and 1974 per capita income d a t a for revenue
sharing purposes. T h e s e revised estimates were p r e p a r e d by Census using the
most r e c e n t information available from tax returns, vital statistics, and other
data series which indicate changes since 1970.
T h e Office used the revised 1975 population and 1974 per capita income
estimates, and fiscal 1976 adjusted taxes a n d intergovernmental transfer d a t a
to c o m p u t e allocations, during J u n e 1977, for the ninth entitlement period
which begins O c t o b e r 1, 1977.
R e v e n u e Sharing's annual data improvement program is an administrative
p r o c e d u r e to identify and correct d a t a errors. As part of this program, in April
1977, each government was asked to examine the data used to c o m p u t e its
ninth entitlement period allocation and submit proposed corrections for any
data elements considered to be in error. T h e data notice form also provided
each government with an estimated ninth-period allocation a m o u n t which was
c o m p u t e d using the data on the form. The estimated allocation amounts were
provided to aid governments in their data verification efforts.
M o r e than 2,000 governments questioned at least 1 data element. After
careful study of these challenges, data corrections were m a d e for several
h u n d r e d governments. Additional revisions resulted from ongoing d a t a
i m p r o v e m e n t efforts of the Bureau of the Census and the Office of Revenue
Sharing. Altogether, a few thousand revisions were m a d e to the data elements
prior to the allocation of funds for entitlement period nine.
T h e uneijiployment rates required for the antirecession program are
provided to the Office each q u a r t e r by the Bureau of Labor Statistics as
required by statute. T h e Intergovernmental Antirecession Assistance Act of
1977 m a d e it possible for Governors of States to supply unemployment rates
p r e p a r e d according to the Bureau of Labor Statistics methodology for local
governments for which the Bureau of Labor Statistics did not have unemploym e n t rates. By August 1977, 18 States had submitted unemployment rates for
at least some local governments which were to be used in calculating
antirecession payments for the O c t o b e r 1977 quarter.
T h e Office each q u a r t e r provides to approximately 39,000 potentially
eligible general purpose governments their data factors for review and their
quarterly allocation a m o u n t s . T h e unemployment rates assigned to each
government and its general revenue sharing allocation a m o u n t s can b e
corrected if a government notifies the Office of any processing error within 21
days after the mailing of the p a y m e n t and allocation data notices. Approximately 125 governments each q u a r t e r write to question the data factors used.
T h e c o r r e s p o n d e n c e results in corrections and later adjustments in their
antirecession payment.
ADMINISTRA riVE
REPORTS
201
Electronic funds transfer and direct deposit
During the year, the Office of Revenue Sharing modernized the methods
used to return funds to States and local governments. All recipient governments were given the option of having their revenue sharing payments
deposited directly into bank accounts. Of the 38,000 recipients of general
revenue sharing offered the opportunity to participate in the new program,
25,103 elected to do so. All quarterly payments were transferred into the
accounts of those governments using the new procedure.
Audit p r o c e d u r e s
T h e 1976 a m e n d m e n t s to the Revenue Sharing Act placed significant audit
requirements on more than 11,000 of the 38,000-plus revenue sharing
recipients. This also considerably increased the audit responsibilities of the
Office. N o audits were required under the original act.
However, the Office of Revenue Sharing, through agreements with State
auditors and cooperative relationships with independent public accountants,
obtained audits of a substantial portion of revenue sharing recipients. T h e
1976 a m e n d m e n t s to the Revenue Sharing Act effective January 1, 1977,
require that recipients receiving $25,000 and more annually in revenue sharing
entitlements have an independent audit of their financial statements conducted, in accordance with generally accepted auditing standards, not less
than once every 3 years.
T h e renewal legislation changed the emphasis of the audit program from
making audits to monitoring the audit performance of State auditors and
independent public accountants. Since the State auditors have responsibility
for the largest portion of State and local government audits, the first effort of
the Audit Division was directed toward reviewing the performance of State
auditors. Although the recipients have until 1979 to conform with the audit
requirements of the 1976 a m e n d m e n t s , it was thought to be m o r e constructive
to review present practice to determine ifit conforms to the requirements that
must be m e t b y 1979. T h u s , if the practice were not acceptable, the State audit
agency would have 3 years to upgrade its audit practice. Every State audit
agency was reviewed in fiscal 1977. Letters were written to all State auditors
advising whether their audits met the requirements o f t h e 1976 a m e n d m e n t s .
If they did not, the State auditor was advised of the specific weaknesses that
existed and what needed to be d o n e to comply with the new audit requirements. Of the 11 State auditors whose practices were found to be unacceptable, 5 have already initiated programs to bring their practices to an acceptable
standard.
T h e Audit Division m a d e similar reviews of the performance of 20
independent public accountants. Letters were written to each of them advising
them of the results of the review.
An a u d i t g u i d e f o r A R E A was prepared and distributed in March 1977. Most
o f t h e work of preparing a new audit guide containing the audit standards and
procedures required by the 1976 a m e n d m e n t s was performed during the year.
During fiscal 1977, the Audit Division either received or was advised o f t h e
issuance of 5,152 audit reports on revenue sharing funds. State auditors advise
the Audit Division of audit reports which they issue or receive for review from
independent public accountants that d o not contain findings of violation o f t h e
Revenue Sharing Act or regulations. These reports are kept on file by the State
auditors for review by the Audit Division as a part o f t h e periodic reviews m a d e
of State auditors' performances. These audit reports disclosed 444 violations
202
1977 REPORT OF THE SECRETARY OF THE TREASURY
o f t h e Revenue Sharing Act or regulations. In addition, 18 audits \yere m a d e
by the Audit Division and 46 miniaudits were m a d e for the Office by the U.S.
Customs Service. During the year the miniaudit program was phased out since
recipients receiving less than $25,000 annually in revenue sharing funds are
not required by the 1976 a m e n d m e n t s to have an audit. T h e Audit Division
also responded to 3,355 requests from independent public accountants for
confirmation of entitlement fund payments.
In fiscal 1977, 495 n o n c o m p l i a n c e cases were o p e n e d and 370 were closed.
This c o m p a r e s with 242 opened and 321 closed during the 15 months ending
September 30, 1976.
Technical assistance
T h e Office of R e v e n u e Sharing provides information and technical
assistance to State and local governments receiving general revenue sharing
and antirecession fiscal assistance funds. T h e past year was an especially active
o n e , not only because o f t h e many State and local officials who assumed public
office for the first time b u t also due to the many new provisions of the State
and Local Eiscal Assistance A m e n d m e n t s of 1976 and the Intergovernmental
Antirecession Assistance Act of 1977.
Technical assistance was provided in the form of 2,320 letters in response
to written requests for specific information and guidance. In addition, over
91,000 telephone c o n t a c t s were m a d e with recipient governments and others
interested in the revenue sharing and AREA programs. Eive technical papers
were p r e p a r e d on various aspects of both programs and over 6,000 individual
mailings were m a d e of these and other informational materials.
T h e Office has established a network of liaisons within each o f t h e 50 States
and the 4 territories receiving A R E A funds. Over 40 technical assistance
workshops were c o n d u c t e d during the year in cooperation with these liaisons
and other cosponsors for the benefit of recipient governments.
Quarterly, each of the m o r e than 39,000 recipient governments in t h e
general r e v e n u e sharing p r o g r a m and e a c h of the m o r e than 20,000
governments which have received A R E A funds have been sent a letter which
advises the government of its c u r r e n t status in the respective programs. T h e
letter also provides o t h e r information to enable the recipient government t o
continue to participate in the program and remain in compliance with the
requirements of the legislation.
Public participation
M u c h attention was given during the year to the development of regulations
that would faithfully implement the new public participation provisions o f t h e
State and Local Eiscal Assistance A m e n d m e n t s of 1976. These provisions
require two public hearings to be held, with attendant public notice and
opportunity for examination of budget d o c u m e n t s , by State and local
governments receiving revenue sharing funds prior to the use of such funds.
During the year both interim and final regulations were promulgated. A
public hearing was held on the interim public participation regulations. Nearly
60 letters of c o m m e n t also were received pertaining to the interim and
proposed final public participation regulations. A meeting also was held with
associations r e p r e s e n t i n g State and local g o v e r n m e n t elected officers,
appointed officials, and professional staff to ensure that final regulations would
be workable.
ADMINISTRATIVE
203
REPORTS
The final regulations on this subject reflect the many constructive c o m m e n t s
received on this important feature of the 1976 a m e n d m e n t s . They should
ensure that citizens of recipient jurisdictions have an opportunity to participate
in the decisionmaking processes involving uses of revenue sharing funds.
Compliance
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 o f a State government or unit of
local government, which government or unit receives funds * * *. Any
prohibition against discrimination on the basis of age u n d e r the Age
Discrimination Act of 1975 or with respect to an otherwise qualified
h a n d i c a p p e d 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 relatively small, it has been successful
in investigating a significant n u m b e r 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 c o m p l i a n c e . 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 o f t h e activities o f t h e
Division.
Discrimination complaints
Year
1972
1973
1974
1975
1976
1977
Determinations
Received
:...
1
32
66
209
221
186
Closed
Carried
over
1
14
8
7
125
0
3
26
16
70
93
1
30
70
263
414
507
0
NOTE.—The most significant unit of work measurement is the determinations issued, rather than number
of complaints closed. The major portion of the work process is completed upon the issuance of a determination.
Usually, the closure of the case is dependent upon a paper review of requested information from a recipient
govemment after the issuance of a noncompliance determination.
T o 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 and with a significant n u m b e r of State h u m a n rights
agencies. T h e Office is currently attempting to renegotiate cooperative
agreements with most o f t h e State h u m a n rights agencies, and with the Federal
agencies with which it has shared agreements.
204
1977 REPORT OF THE SECRETARY OF THE TREASURY
Legal issues
During the fiscal year, the Chief Counsel participated in the initiation or
defense of 29 legal actions including 2 administrative hearing actions—one
against a town for alleged discrimination in e m p l o y m e n t on the basis of
national origin, and the other against a State for alleged discrimination in
e m p l o y m e n t on the basis of sex by a school district funded by the State with
revenue sharing funds.
Several of the c o u r t suits involved discrimination charges against recipient
governments in which the Office was joined as a party defendant. In Committee
for Full Employment v. Simon ( U . S . D . C , D . C ) , the court held for the
Secretary of the Treasury, agreeing that plaintiffs lacked standing to sue.
Pegues V. City of Oxford et al. ( U . S . D . C , N . D . Miss.) was dismissed with
respect to all Federal defendants for failure to exhaust administrative
remedies. Dofe/?5 v. City of Atlanta et al. ( U . S . D . C , N . D . G a . ) was dismissed
on failure to state a claim. Hendris v. Simon ( U . S . D . C , C o n n . ) was dismissed
upon plaintiff's failure to prosecute.
O t h e r revenue sharing cases in litigation involved the application of adjusted
tax data for the revenue sharing allocation formula, and the procedures of the
Office in making downward adjustments to a recipient's allocation.
T h e Chief Counsel drafted regulations for both the general revenue sharing
p r o g r a m and the A R E A program and assisted in drafting the renewal
legislation for general revenue sharing.
Eor the general revenue sharing program, interim regulations necessitated
by the a m e n d m e n t s were published by April 1977. Final regulations were
published in September 1977, except for those regulations on nondiscrimination which have b e e n temporarily delayed.
Interim regulations on the A R E A program were prepared in October 1976.
W h e n the A R E A Act was a m e n d e d during the fiscal year by the Intergovernmental Antirecession Assistance A c t of 1977, interim regulations were
a m e n d e d (in May 1977) to refiect the statutory changes. T h e Chief Counsel
also assisted in drafting A R F A renewal legislation.
During the fiscal year, the Chief Counsel issued approximately 200 letter
rulings to recipient governments seeking guidance for the use of AREA funds.
A digest of these letter rulings is currently being prepared for the use of
recipient governments.
Antirecession fiscal assistance
Treasury distributes antirecession funds to States and local general
governments based on u n e m p l o y m e n t 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 m a d e available in fiscal 1977.
In May 1977, the Congress extended the A R E A program for four quarters
beyond its original life, through S e p t e m b e r 1978, by enacting the Intergovernmental Antirecession Assistance Act of 1977. This legislation maintained t h e
broad outlines of the original program.
In excess of $2.1 billion has been distributed to over 25,000 State, general
purpose local, and several U.S. territorial governments. 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 e c o n o m i c policies.
ADMINISTRATIVE REPORTS
205
OFFICE OF TARIFF AFFAIRS
T h e Office of Tariff Affairs, established in 1971 to provide policy direction,
review, and fmal action on r e c o m m e n d a t i o n s by the Customs Service on
administration of the Antidumping Act and countervailing duty law, was
transferred in May 1977 from the Office o f t h e U n d e r Secretary to the Office
of the General Counsel. This action was in keeping with the trade policy
objectives of the C a r t e r administration to ensure that these unfair trade
practice statutes are administered consistent with the legal obligations these
laws impose. In order for the Office to devote m o r e of its attention to increasing
caseload and difficulty of issues involved under these two statutes, all o t h e r
responsibilities for policy review under the tariff laws were removed.
In September 1977 the Treasury was preparing the promulgation of
a m e n d m e n t s to the antidumping regulations requiring more formalized
p r o c e d u r e s governing ex parte meetings involving antidumping investigations,
in order to ensure that these exchanges will contribute more meaningfully to
the case resolution process.
During fiscal 1977, the Treasury initiated 19 antidumping investigations,
and reached final determinations of sales at less than fair value on 13 of them.
T h e r e were three dumping findings issued during that time. Over the same
period, the Treasury initiated 16 investigations under the countervailing duty
law, m a d e 8 affirmative determinations and 2 negative decisions. One waiver
of countervailing duties was issued during the year.
UNITED STATES CUSTOMS SERVICE
The principal missions of the Customs Service are to assess, collect, and
protect the levying of import duties and taxes; to enforce customs and related
laws against the smuggling of contraband; and to control carriers, persons, and
articles entering or departing the United States by enforcing the Tariff Act of
1930 and n u m e r o u s other statutes and regulations which govern international
traffic and trade.
T o accomplish these missions, the Customs Service performs the following:
1. Examination and clearance of carriers, persons, and merchandise
consistent with the requirements for the proper assessment and collection of
customs duties, taxes, fees, fines and penalties and compliance with the
customs laws and regulations applying to international c o m m e r c e .
2. Detection and prevention of all forms of smuggling and other illegal
practices designed to gain illicit entry into the United States of prohibited
articles, narcotics, drugs, and all types of contraband.
3. Detection and investigation of illegal activities to a p p r e h e n d violators
and otherwise take effective action to reduce, prevent, and deter violations of
laws and regulations enforced by Customs.
4. As the principal border enforcement agency, the administration and
enforcement of over 4 0 0 other laws and regulations of approximately 4 0
G o v e r n m e n t agencies relative to international traffic and trade.
206
1977 REPORT OF THE SECRETARY OF THE TREASURY
5. Improved application of resources to carry out the total Customs
mission, consistent with efficiency in G o v e r n m e n t and economy and service
to the public.
During fiscal 1977, C u s t o m s cleared over 263 million persons arriving in the
United States. M o r e t h a n 77 million cars, trucks, and buses crossed the
country's borders; an additional 154,000 ships and 370,000 aircraft were also
cleared. This involved making 71 million baggage examinations and processing
14 million customs declarations.
Customs collected a record $6.0 billion in duty and taxes and processed
$150 billion worth of imported goods, which required over 3.6 million formal
entries (those over $ 2 5 0 in value). In addition, there were 47 million foreign
mail parcels to be processed in fiscal 1977, requiring over 2.3 million informal
mail entries.
T h e Customs enforcement mission also p r o d u c e d tangible results during
fiscal 1977. Merchandise seized, including illicit drugs, prohibited articles,
undeclared m e r c h a n d i s e , etc., was valued at almost $1.2 billion. T h e r e were
over 2 4 , 0 0 0 drug seizures. These seizures included 951 pounds of cocaine, 7.8
million units of polydrugs, and 774 tons of marijuana. T h e r e were 278 p o u n d s
of heroin seized—a decrease of 24 p e r c e n t over fiscal 1976. In addition,
neutrality violations—smuggling arms out of the United States to other
countries—jumped from 1,517 cases in fiscal 1976 to 1,676 cases in fiscal
1977.
Merchandise Processing and Duty Assessment
Merchandise processing
Processing commercial merchandise.—In fiscal 1977, Customs processed
over 3.6 million formal entries. Over $6.0 billion in revenue was collected o n
m o r e than $150 billion worth of merchandise.
Since not all merchandise can be allowed into the country, it is Customs task
to d e t e r m i n e the admissibility of the merchandise and then to classify the
merchandise for statistical and revenue purposes. T h e statistical information
is turned over to the International T r a d e Commission, through the Census
Bureau, for use in negotiating international trade agreements. This provides
the mechanism whereby domestic industry and jobs are protected against any
unfair competition from overseas.
Customs mail operations.—During fiscal 1977, Customs mail branches
processed approximately 47 million mail parcels, prepared over 2.3 million
mail entries, and collected over $22 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.
Import statistics.—In fiscal 1977 customs officers, located at some 100 ports
of entry, verified 6.7 million line items on the 3.6 million entries filed. This
represents verification of approximately 43.6 million individual items. T h e
present high quality of import statistics flows from the commodity expertise
essential for the effective collection of revenue.
Customs also participates in the gathering of export data and transmits
approximately 8.5 million d o c u m e n t s to the Bureau of the Census annually.
Customs is currently developing administrative procedures that will allow for
the verification of the export declarations, resulting in more reliable export
data.
Quotas a n d international agreements.—One of the principal uses of these
vital trade statistics is in the establishment of commodity quotas. Currently the
Customs Service enforces m o r e than 760 such quotas.
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207
Customs officers also monitor specific importations to determine the
quantity of a commodity being imported from a specified country or countries.
This information is then used by Customs and other agencies to determine the
possible need for establishing quotas or negotiating orderly marketing
agreements and to detect unusual fluctuations in foreign trade. Currently being
monitored are various agricultural products, certain meats, footwear, televisions, and mushrooms. Numerous other imports are subject to various
international agreements.
Orderly marketing agreement (OMA)
An innovative foreign trade technique was created in fiscal 1977—the
orderly marketing agreement (OMA). An OMA is an international agreement
whereby a foreign government voluntarily agrees to restrict the quantity of a
specific commodity it exports to the United States. Three OMA's were
negotiated in 1977. Customs implements these agreements.
Stainless and alloy tool steel.—Although the U.S. Government has entered
into an OMA with Japan only, on certain stainless and alloy tool steel. Customs
is administering quotas on such steel from all countries.
Footwear.—Pursuant to Presidential Proclamation No. 4510, June 22,1977,
implementing OMA's, absolute quotas were imposed on nonrubber footwear
from Taiwan and Korea covering 107 Tariff Schedules item numbers grouped
in 3 categories for Taiwan and 2 categories for Korea. These nonrubber
footwear imports must be accompanied by a proper visa from the exporting
country before they can be permitted entry into the United States.
Televisions.—Pursuant to Presidential Proclamation 4511, June 24, 1977,
Customs is responsible for monitoring all complete and incomplete color
television receivers and subassemblies, from all countries, entered or withdrawn from warehouse for consumption into the United States on/after July
1, 1977, through June 30, 1980. The monitoring is by TSUSA item No. (14)
and by country. An OMA with Japan requires that, except for a certain number
each year, such Japanese merchandise entered or withdrawn for consumption
into the United States shall be accompanied by an appropriate and correct
certification. Therefore, Customs is required to limit the number entered
without certification.
Textile agreements.—Currently, the United States has separate bilateral
textile agreements with 18 countries covering trade in cotton, wool, and
manmade fiber textiles and apparel. Ten of those agreements include systems
under which imports from the exporting country must be visaed prior to entry.
During fiscal 1977, Customs administration and maintenance of these
agreements involved an expenditure of approximately 165 man-years.
International Coffee Agreement.—In Eebruary 1976, the United States
became a signatory to the International Coffee Agreement of 1976. Enabling
legislation is still pending. However, this legislation is not necessary for the first
phase ofthe program, which involves monitoring only the movement of coffee.
This monitoring system is designed to provide accurate statistical data on the
quantities of coffee imported by consuming member nations and will serve as
a base for allocations to exporting member countries if and when quotas are
subsequently established.
Customs laboratories.—The Customs laboratories analyzed over 170,000
samples of imported merchandise during fiscal 1977, resulting in over 16,000
corrections in tariff classification. While the number of samples analyzed has
remained virtually unchanged for 2 years, the effectiveness of the laboratory
workFRASER
has been improved by the partial implementation of the national
Digitized for
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1977 REPORT OF THE SECRETARY OF THE TREASURY
commodity sampling information system. These guidelines for statistical
sampling show which commodities should have a high probable change rate,
thus increasing the duty collected. Full implementation of this program should
ensure maximum cost-effectiveness of the laboratory analyses performed.
In bond.—Imported cargo may be transported "in bond" from the port of
origin to a port of destination, where customs examination takes place. An inbond program has been developed to provide for surety bonding and physical
safeguards to assure receipt and customs entry of imported merchandise. The
procedures in use have facilitated cargo movement and reduced cargo
congestion at ports of entry. The resultant decentralization of cargo examination has provided better service to the importing public, which ultimately
benefits the consumer.
A revised computer document control format has been developed to
improve control of in-bond cargo and reduce record error, resulting in manhour savings to Customs and the transporting bonded carriers.
Containerization program.—The current container examination program
was established by the Customs Service as a national program in December
1974. The program was designed to separate containers of goods arriving from
foreign countries into two categories, those on which an intensified examination was conducted and those which could be released upon a cursory
examination. Almost 2 million surface-borne containers arrived in fiscal 1977;
19,150 of these were given intensified examinations.
In June of this year, the basic concepts of a container selection system were
drafted. This system will utilize the Treasury enforcement communications
system's search, arrest, and seizures records as a basis for violator information
on shippers and consignees. The present system will be modified to provide
both positive information in the event of the detection of a violation and
negative information in the event of no violation detection on prior intensified
examinations. A field evaluation of this system is tentatively scheduled for this
winter. As experience is gained, more sophisticated violator profiles will be
introduced.
A second approach developed by Regulatory Audit involves the application
of scientific sampling methods and postaudit verification procedures. Fieldtested on a nationwide basis during fiscal 1977, this program completed 240
miniaudits which yielded recoveries, exclusive of penalties, calculated at
$250,000. This initial return was about $5 for each dollar expended.
Cargo theft prevention
Cargo security awareness.—To educate the importing community and
carriers concerning the merits of cargo security. Customs has conducted cargo
security miniseminars for some 5,200 executives representing importers,
exporters, transportation managers, terminal operators, freight forwarders,
manufacturers, and insurance agents.
Customs has distributed antitheft posters and antipilferage slogan signs,
printed in Spanish and English, to field locations for display in warehouses,
terminals, freight sheds, container and devanning stations, security cribs,
offices, and on docks and piers.
Since 1972, Customs has conducted surveys of physical security at 581
locations where imported merchandise is handled. These surveys, usually
conducted at the request of the owner or operator of the location, have
stimulated the expenditure of over $26.1 million by private industry for
improvements in physical and procedural security.
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209
Imported merchandise quantity control (IMQC).—This program was developed to improve cargo accountability and the quality of cargo manifesting by
carriers.
Theft information system (TIS).—Customs implemented a theft information
system on January 1, 1977, to pinpoint where theft ofmerchandise in Customs
custody takes place and the nature of these thefts. The information gathered
from TIS will enable Customs to allocate its antitheft resources to those areas
where they can most efficiently reduce cargo theft. T h e system relies on
reports m a d e by U.S. customs officers of thefts discovered during the course
of their duties, rather than on reports of carriers and importers who are often
unwilling to convey theft information to Customs. Through June 30, 1977, TIS
revealed a nationwide total of 794 thefts ofmerchandise valued at $ 1,022,500.
As the system matures, it is anticipated that an increasing amount of
merchandise will be recovered and registered in the system.
Enforcement
Interdiction
Operating mainly u n d e r the authority of titles 19 and 26, U.S. C o d e , the
tactical interdiction patrol program attempts to c o m b a t smuggling activity
along the national b o r d e r s by reducing the smuggler's option for choosing t h e
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 the land, sea, and in the air.
Air interdiction.—Congress, in 1969, authorized the establishment of a
Customs air support program. In fiscal 1977, 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 o f t h e United States is more than 3,000 miles long, each air branch has
responsibility for protecting a corridor that, on the average, is 500 miles wide.
This year, the most significant milestones in overall program impact were
the successful utilization of the North American R a d a r Defense/Federal
Aviation Administration ( N O R A D / F A A ) long-range radar and the installation of supporting mobile ground-based radars for smuggler detection and
tracking. Customs demonstrated that these resources could provide the
information and leadtime necessary to permit the aerial interception of
smuggler aircraft. During Operation Startrek, which lasted 50 days, groundbased radars detected 262 target aircraft and Customs made 43 intercepts.
Customs also began with the U.S. Air Force airborne warning and control
system ( A W ACS) an evaluation of AW ACS capabilities in support of the
Customs mission. The AW ACS ability to detect low-flying aircraft could
greatly improve interdiction performance in areas where ground-based radar
is ineffective.
In aodition to radar and aircraft units. Customs employed:
1. Intelligence information on suspect aircraft available through the
Treasury enforcement communications system ( T E C S ) .
2. The private aircraft reporting system ( P A R S ) , which requires that all
private aircraft crossing the Southwest border give at least a 15-minute
advance penetration report before entering U.S. airspace and land at 1 of 14
specially designated airports.
3. T h e private aircraft inspection reporting system ( P A I R S ) , which
automates the arrival records of all general aviation-type aircraft arriving from
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1977 REPORT OF THE SECRETARY OF THE TREASURY
foreign countries and clearing U.S. Customs. Such arrival information is
entered in T E C S .
T h e combination of these elements enables Customs to c o n c e n t r a t e on highrisk aircraft by screening out legitimate private aircraft. T h e Customs air
support program seized 99 aircraft in fiscal 1977, an increase of more than 16
percent over last fiscal year, and 283,690 pounds of marijuana.
Border interdiction.—The United States/Mexican border absorbed pratically
all of Customs land interdiction resources. These consist of mobile tactical
units utilizing b o r d e r intrusion detection devices (electronic sensor fields),
state-of-the-art night vision devices, T E C S and sector communications.
In the L a r e d o , Tex. district alone, marijuana seizures had exceeded 100,000
pounds by the middle of August 1977, with total seizures running approximately 100 p e r c e n t over those of the previous year.
Marine interdiction.—Marine interdiction units detected and a p p r e h e n d e d
marine violators of reporting and entry requirements and smugglers of
c o n t r a b a n d in U.S. coastal, lake, and river boundary areas. These units utihzed
patrol boats, special reporting and inspection facilities, reports of legitimate
traffic, and intelligence concerning illicit activities. Six new marine patrol
stations were put into operation.
Present customs regulations d o not require all small boats to make an
i m m e d i a t e r e p o r t to C u s t o m s w h e n returning from a foreign port o r
international waters. Customs has proposed new legislation which would
require the masters of boats, including pleasure vessels, to report immediately
for inspection at designated locations. These legitimate entries will then be
used to screen out suspected vessels attempting to elude customs inspection.
Customs enforcement units in fiscal 1977 seized over 200 vessels with a
domestic value of $75 million.
Mail interdiction.—In addition to collecting revenue, Customs mail facilities
interdicted the smuggling of narcotics, weapons, explosives, stolen property,
and other c o n t r a b a n d , making over 6,500 seizures of illicit narcotics in both
military and nonmilitary mail. Illegal drugs were uncovered in a diversity of
articles such as camel saddles, Bibles, and baby powder cans, as well as in letter
class mail.
X-ray screening devices were used in major mail units. A **blitz" technique
by Special Narcotics Identification Forces was utilized when significant
shipments of c o n t r a b a n d arrived from specific countries, with all packages
from that particular country o p e n e d and thoroughly examined.
Fraud, neutrality, and currency violations
Customs agents c o n d u c t e d criminal, civil, and factfinding investigations
involving a broad spectrum of violations covering 33 separate categories.
Some of these investigations were conspiracy-type cases, international in
scope. T h e overall e n f o r c e m e n t strategy was balanced between fraud
investigations, focusing o n criminal and civil fraud with high revenue payoffs,
and general investigations, focusing on general smuggling, neutrality violations, theft, currency violations, and other related categories with high
enforcement payoffs in terms of arrests and seizures.
Fraud.—Violations of customs laws constitute an important part of the
white-collar crime problem confronting the United States. Country-of-origin
violations, undervaluation, and violations o f t h e antidumping laws by multinational corporations not only deprive the United States of revenues, b u t
frustrate the intent of Congress and the executive branch in directing the trade
ADMINISTRATIVE
REPORTS
211
policies of the United States. Fraudulent importations to avoid the payment
of customs duties adversely impact domestic industry, labor, and c o m m e r c e .
During fiscal 1977, Customs c o n d u c t e d major investigations of oil importers,
automobile manufacturers, and multinational corporations dealing in every
conceivable commodity.
Customs antifraud program was highly successful in terms of potential losses
of revenue ( L O R ) discovered through field investigations, and cash collections
returned to the G o v e r n m e n t resulting from recovered duties, fines, and
penalties. During 1977, 125 agent man-years were expended on fraud
investigations with the following results: $18,730,288 L O R attributable to
fraud investigations, $ 1 4 9 , 8 4 2 L O R per fraud agent man-year, $28,646,000
total revenue collections attributable to fraud investigations, and $229,168
revenue collections per fraud agent man-year.
Customs officers investigated the alleged dumping of T V sets, steel, and
chemicals. These investigations have been extremely sensitive since they relate
to the volatile issues of trade restraints versus domestic unemployment versus
c o n s u m e r pricing structures, and have far-reaching effects on diplomatic
relations and foreign economies. T h e investigations are being carried into
fiscal 1978 and will require a major investment of agent m a n p o w e r skilled in
complex trade practices.
Agents completed an investigation of one large toy manufacturer charged
with providing fraudulent cost information to Customs on its toy importations
from Mexicali, Mexico. T h e fraudulent invoices undervalued the merchandise
in 11 general areas, resulting in a $2.5 million loss of revenue.
O n J a n u a r y 14, 1977, the Federal grand jury at Jacksonville, Ela., returned
a 15-count indictment against an oil-importing corporation in Coral Gables.
T h e corporation was indicted on 14 counts of violating 18 U.S.C. 542 (entry
of goods by false s t a t e m e n t s ) , and 1 count of 18 U.S.C. 371 (conspiracy), in
that the corporation falsified information in order to obtain free oil import
licenses from the Federal Energy Administration. In addition, the IRS has
recovered approximately $12 million based on violations uncovered during
Customs investigation. A civil penalty in the a m o u n t of approximately $6.3
million will be levied on the corporation after criminal action is complete.
Neutrality violations
In response to the growing frequency of terrorist incidents, both at h o m e and
abroad, and the increased traffic in illegal arms and munitions across o u r
borders. Customs assigned a high priority to the investigation of neutrality
violations during fiscal 1977. Customs maintains jurisdiction over both
criminal violations contained within the scope o f t h e present munition control
laws, and civil violations within the scope of the **War Materials A c t . "
In August 1977, information was developed which led to the disclosure of
a planned raid against a C u b a n military installation by an exile group operating
out of the Miami area. T h e raiders' plan involved staging on a neutral island
followed by an armed assault by three strike boats m a n n e d by C u b a n exiles.
Customs officers, assisted by o t h e r Federal and local agencies, seized the
vessels and automatic weapons. T h e s e seizures occurred immediately prior to
the critical period when diplomatic contacts were renewed between C u b a and
the United States.
Again in August 1977, customs agents investigated attempts by South
Korean interests to obtain military plans for the NIKE missile system. T h e
investigation resulted in the arrest of a U.S.-resident Korean, another Korean
national, and seizure of the plans.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
In a classic '*guns for dope" case with weapons being traded for marijuana,
four Houston area men were apprehended in Tuxpan, Vera Cruz, Mexico,
leading to the arrest and indictment of seven defendants. The case was a
cooperative effort of Mexican officials, U.S. Customs Service, and the Bureau
of Alcohol, Tobacco and Firearms in Houston, Tex.
Currency and foreign transactions
Since July 1976, a Customs task force has been actively investigating
possible currency violations by over 400 major multinational corporations.
Due to the importance of this effort, attorneys from the Justice Department
have been assigned full time to work with the task force. The objective of the
investigation is to determine whether any of these corporations may have
violated the Currency and Eoreign Transactions Reporting Act (31 U.S.C.
1051-1122) by making illegal political campaign contributions or overseas
bribes with currency that was covertly transported into and out of the United
States. A number of grand jury proceedings are underway.
The provisions ofthe Currency Reporting Act have also permitted a number
of successful investigations into all forms of smuggling which involve illegal
currency transfers, including the smuggling of narcotics and dangerous drugs.
In May 1977, Customs and Drug Enforcement Administration special agents
arrested five individuals for violation of 21 U.S.C. 952 following an investigation which revealed that they were involved in the attempted entry into the
United States of approximately 2,000 pounds of hashish concealed in 40 bales
of cloth. A key factor in the case was that the Customs special agents
coordinated with the IRS in placing jeopardy assessments against approximately $850,000 deposited in U.S. savings accounts belonging to the
organization—the fruits ofthe drug smuggling.
Another major case concluded during the year established that an individual
had violated the reporting requirements ofthe Currency Reporting Act during
1975 and 1976 by transporting over $700,000 in unreported currency between
the United States and Canada and Mexico in connection with the smuggling
of more than 14 tons of marijuana by aircraft from Mexico to the United States.
The individual was found guilty and is currently a fugitive; criminal prosecution is pending against other defendants in the case. This investigation resulted
in the seizure of several aircraft, firearms, and a major quantity of marijuana.
In addition to judicial action, violators in cases similar to those cited above
are liable to civil penalties equal to the value ofcurrency illegally transported.
Enforcement support
Detector dogs.—During fiscal 1977, Customs detector dogs screened more
than 21 million units of cargo, mail, and vehicles for concealed narcotic and
dangerous drugs. This same type of searching would take a customs officer
many times longer.
During fiscal 1976, 110 dog teams throughout the country made approximately 27 percent of all the narcotics seizures made by Customs and showed
a 50-to-l return in terms of narcotics value to program expenditures. With 126
teams in operation, seizures during 1977 were approximately 45 percent
greater than 1976.
Treasury enforcement communications system (TECS).—TECS provided
instant online 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 agencies. TECS data was
instrumental in the arrests of fugitives; recovery of firearms, automobiles, and
ADMINISTRATIVE
REPORTS
213
Other stolen or missing property; and seizures of currency and negotiable
instruments.
Aided by the flexibility ofthe Burroughs 7700 host c o m p u t e r and redesigned
software. Customs began expanding the network to over 900 terminals with
an integrated data base of more than a million records. T h e expanded T E C S
system will serve the needs of law enforcement officials within and outside of
Treasury with a minimum of cost to the taxpayers through the economies of
sharing c o m p u t e r and c o m m u n i c a t i o n resources.
In addition, T E C S provided enforcement-related m a n a g e m e n t information
systems and served as an index to all of Customs central files, which m e a n s
rapid retrieval of supportive enforcement documentation. T h e a u t o m a t e d
central files system enables the user to enter a single query and receive a
response from a multiplicity of application-oriented data bases as a summarized output. Also, a new index of stolen vehicles was created from d a t a
provided by the FBI's National Crime Information Center.
Over 2 8 0 new terminals were installed, a majority being new ^'beehive"
displays. Some of these terminals replaced older, less reliable equipment;
others served to add 35 additional users and 12 new airports to the T E C S
network. This raised to 28 the n u m b e r of airports with enhanced law
enforcement capabilities. O n e terminal was installed at a Coast G u a r d
location.
Communications support program.—This program operated the nationwide
radio system, the administrative teletype system, and the facsimile system
which provided ( a ) substantially c o m p l e t e radio coverage around t h e
perimeter of the United States and at all locations where customs officers
operate in a mobile environment and ( b ) an electronics system for rapid intraservice distribution of administrative textual and graphic c o r r e s p o n d e n c e .
Regional communication centers controlled the radio network and provided
administrative message handling, centralized intelligence dissemination, and
duty officer support for each regional executive staff and their field personnel.
The program also was concerned with improving reliability and reducing
network costs on enforcement and nonenforcement data communications
systems.
Significant accomplishments for fiscal 1977 included:
( 1 ) All preliminary actions to establish a regional communications center
and sector radio system in the San Erancisco region were completed.
E q u i p m e n t was p r o c u r e d , antenna sites were identified, fioor plans were
approved and submitted to GSA, and personnel hiring actions were initiated.
( 2 ) T h e relocation o f t h e T a m p a sector into the newly implemented regional
communications center, collocated with the Miami regional executive staff,
was completed. Floor plans were approved and submitted to GSA for
renovation of space to house regional communications centers in Houston and
New Orleans.
( 3 ) T h e development of an integrated, two-man, sector control console was
completed. After evaluation by field personnel, a completed set of p r o c u r e ment specifications was initiated and requests for quotations were solicited.
Customs enforcement information system (CEIS).—CEIS has three primary
c o m p o n e n t s : T h e online ( q u e r i a b l e ) e n f o r c e m e n t l o o k o u t system, the
Customs law enforcement activity reporting ( C L E A R ) system, and an
automated index to Customs central enforcement files. CEIS supported the
interdiction and investigative missions of Customs by providing immediate
information to aid customs officers in the detection of violations of laws
enforced by Customs, enforcement data used to evaluate programs and
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1977 REPORT OF THE SECRETARY OF THE TREASURY
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 that can be analyzed to p r o d u c e
intelligence on violation patterns, latest m o d u s operandi, courier profiles, etc.
In a 12-month period, the enforcement lookout system aided in.the seizure
of heroin with a street value of m o r e than $20 million, cocaine with a street
value of m o r e than $ 13 million, marijuana with a street value of more than $ 11
million, hashish with a street value of m o r e than $400,000, dangerous drugs
with a street value of nearly $ 3 0 0 , 0 0 0 , n u m e r o u s vehicles, vessels, and aircraft
used to transport the above c o n t r a b a n d into the country, m o r e than $280,000
in cash and monetary instruments, and merchandise valued at more than $ 1
million.
T h e T E C S interface with the FBI's National Crime Information C e n t e r
( N C I C ) enabled customs officers to a p p r e h e n d 874 fugitives wanted by o t h e r
Federal, State, and local law enforcement agencies. During fiscal 1977, there
were m o r e than 140,000 NCIC wanted-person records indexed in T E C S and
queriable at airport primary terminals as well as all secondary T E C S terminals.
Also initiated was the entry of the NCIC vehicles file; m o r e than 400,000
records on stolen vehicles and those involved in felonies, enabling them to be
queried at land b o r d e r primary terminals.
Immediate positive results followed implementation of the preclearance
alert system in fiscal 1977. This system, supported by Customs 24-hour
communications center, ensures apprehension in the United States of N C I C
fugitives and other law violators identified at U.S. Customs preclearance
facilities in C a n a d a , Bermuda, and Nassau.
C u s t o m s central enforcement files experienced t r e m e n d o u s growth; the
n u m b e r of records microfilmed during the year was double t h a t microfilmed
during the previous fiscal year. Entry of the records into T E C S increased at
the same rate.
Since narcotics traffickers and others involved in organized crime prefer to
deal in cash. Customs implemented the currency and monetary instrument
reporting ( C M I R ) file. This system, by tracking compliance with the currency
transportation reporting requirements embodied in the (Eoreign) Bank
Secrecy Act, furnished potential investigative leads to Customs and other
Federal law enforcement agencies.
Technical development a n d support.—The technical d e v e l o p m e n t and
support program was responsible for the identification, development, modification, p r o c u r e m e n t , and field support of technical equipment and systems
used in the interdiction of clandestine smuggling activities—by air, land, and
sea.
During fiscal 1977, accomplishments included the installation and evaluation of X-ray e q u i p m e n t for use in cargo examination at selected land ports
along the Southwest border, receipt o f t h e prototypes of n e u t r o n backscatter
devices for the detection of concealed narcotics, and letting of a contract for
the development of prototype system to rapidly and reliably detect narcotics
and explosives in letter mail. In addition, there was significant progress in the
d e v e l o p m e n t of ground sensor e q u i p m e n t and methodology as well as an
airborne detection system to be used in tracking suspect aircraft, while testing
was begun on an u n d e r w a t e r detection system using acoustics to detect boats
crossing the Canadian border.
Testing of an electrochemical c o n t r a b a n d detection system was continued
during fiscal 1977 in several modes: pedestrian examination at the Southwest
border, passenger examination at Miami International Airport, mail examinationfor FRASER
at the Oakland mail facility, bus passenger examination at the Canadian
Digitized
border, and passenger/baggage examination at the Miami International
ADMINISTRATIVE
REPORTS
215
Airport. The results were mixed and further improvements to the passenger/
pedestrian interface counter are required. Additional improvements to the
baggage examination device were sought by contracts to automate the unit and
thus reduce its labor-intensive operational costs. Several seizures were made
utilizing the equipment.
Military predeparture inspection program.—During fiscal 1977, there were
over 150 predeparture inspection activities located overseas with over 2,700
full- and part-time military customs inspectors (MCI's). MCI's performed
inspections of cargo; passengers, crew, and their baggage; personal and
household effects; aircraft; vessels; and mail. The purpose of this overseas
program was to interdict narcotics, dangerous drugs, and other contraband
prior to arrival in the United States, and to expedite the movement of
passengers, cargo, carriers, and mail arriving in the United States.
During the year, a revised joint Customs/Department of Defense regulation
was published, clarifying some ambiguities and strengthening the program. In
addition, a new workload reporting system was designed in order to determine
better resource utilization and program effectiveness. Numerous significant
results during 1977 were also directly attributable to the MCI's. They include:
6,000 methamphetamine pills seized in the mail in South Korea; 11/2 pounds
of opium seized in a shipboard inspection at Rota, Spain; several currencyreporting violations discovered; 30 pounds of hashish seized in a shipboard
inspection at Rota, Spain; the initiation of more than 20 investigations by
Customs for commercial fraud; and 89 seizures of narcotics and dangerous
drugs in 22 vessel searches at Subic Bay, Philippines, between January and
March 1977.
Modernization
Customs Procedural Reform Act.—On July 28, 1977, the Subcommittee on
Trade unanimously ordered that H.R. 8149, as amended, the Customs
Procedural Reform Act of 1977, be reported favorably to the Committee on
Ways and Means. H.R. 8149 seeks to build flexibility into the customs laws to
permit the U.S. Customs Service to modernize and simplify the customs
procedures, revise the penalty and fraud provisions ofthe Tariff Act of 1930
by providing due process safeguards and de novo judicial review in the Federal
courts, and bring a new element of review and oversight over the Customs
Service by providing for congressional authorization for appropriations. On
September 15, 1977, the Committee on Ways and Means referred the bill to
the full House for a vote.
Automated merchandise processing system (AMPS).—AMPS is an ongoing
program designed to improve Customs supervision and control over all
merchandise entering the United States, the collection of duties, anduniform
enforcement of regulations governing importation. It uses modern technology,
combined with improved manual work procedures, to handle steadily
increasing international trade activity without comparable staffing increases.
AMPS, a nationwide computer-supported telecommunications and data
processing system, is being implemented through a phased modular deployment plan. Functional system design and detailed functional specifications,
encompassing full entry and revenue processing for Customs, were completed
during fiscal 1976. Eiscal 1977 was devoted to computer system design,
programming, and testing. Simultaneously, hardware specifications were
identified, resulting in the issuance of a request for proposal to GSA in July
1977 for computer delivery in early fiscal 1979. AMPS is scheduled for
nationwide deployment by fiscal 1981.
The first phase of AMPS, the early implementation system, which provides
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1977 REPORT OF THE SECRETARY OF THE TREASURY
immediate delivery control, entry screening, and collection processing, was
fully operational at Philadelphia, Chicago Seaport, Baltimore, Chicago's
O'Hare Airport, Miami, Boston Seaport, Boston's Logan Airport, and Los
Angeles Seaport. A total of 17 percent of all customs entries and 21 percent
of all collections were handled on the automated system.
Customs accelerated passenger inspection system (CAPIS).—CAPIS was
developed to improve customs facilitation and enforcement at airports. The
system provides airport inspectors with an environment to selectively screen
passengers whose numbers grow at an annual rate of 7 percent. Under CAPIS,
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,"
where complete baggage inspections are conducted.
In 1977, the CAPIS configuration was improved to allow those passengers
designated "free" by the primary inspectors to go straight to exits with their
baggage. This " T " configuration was successfully tested at Miami Airport
during Eebruary and March 1977, at Dulles Airport in April and May 1977,
and Seattle Airport in July and August 1977.
Revision of vessel manifest form.—A proposed revision of Customs Regulations to provide for a modified vessel manifest form based on the standardized
Cargo Declaration prepared by the Intergovernmental Maritime Consultative
Organization (IMCO) was completed in August 1977 and prepared for
publication in the Federal Register. Use of the form will begin on September
1, 1978.
Vessel entry and clearance bill.—This proposed legislation, which would
amend or repeal some 60 navigation laws, including those relating to reports
of arrival and entry by vessels, and authorize the establishment of appropriate
controls by regulations, was cleared by the Office of Management and Budget
and prepared for submission to the 95th Congress.
International Activities and Trade Policy
Trade Act of 1974—generalized system of preferences (GSP)
Customs participated in GSP in conferences in Thailand, Hong Kong,
Republic of China, and Korea to discuss reverification procedures and other
mutual problems concerning GSP. In addition, various beneficiary developing
countries sent government officials to meet with Customs headquarters
personnel to discuss administrative and operational aspects of their governments' participation in the U.S. GSP program.
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 1977,
the number of GSP imports represented 3 percent of all importations reported.
Also the number of GSP line items were 5 percent of the total line items
reported, which partially reflects the increased Customs workload caused by
GSP.
Antidumping and countervailing duties
During fiscal 1977, 19 antidumping and 16 countervailing duty cases were
initiated; 16 antidumping and 10 countervailing duty determinations were
published. Antidumping master lists on 183 manufacturers were circulated to
field offices for their use in assessing dumping duties. Presently 67 findings of
in effect.
dumping are
ADMINISTRATIVE
REPORTS
217
Antidumping.—The automobile antidumping cases of fiscal 1976 resulted in
discontinued investigations, which require the monitoring of assurances of n o
future sales at less than fair value. These assurances are being checked on a
semiannual basis with regard to five companies, and on an annual basis for the
remaining firms.
On September 20, 1977, an antidumping petition was received from United
States Steel Corp. regarding various steel products from Japan. A full-scale
investigation was c o m m e n c e d . This could be one of the largest such
investigations ever u n d e r t a k e n by Customs.
Antidumping appraisement procedures.—A major effort has been made to
reduce the timelag between issuance of a finding of dumping and the actual
assessment of dumping duties. These delays in assessment render the reliefof
domestic industry less effective, often impose large yet unpredictable dumping
duty liabilities on importers, and cause administrative problems for Customs.
Through the use of additional m a n p o w e r on a temporary basis these delays
have been reduced considerably. Further reductions would be realized
through procedural changes which could be effected only by a m e n d m e n t of
the Antidumping Act.
Countervailing duties.—The most prominent o c c u r r e n c e in fiscal 1977
related to the fiscal 1976 negative countervailing duty determination on
consumer electronic products from Japan. Acting on a complaint filed by an
American manufacturer, the U.S. Customs Court, on April 13, 1977, ordered
the assessment of countervailing duties on certain consumer electronic
products from Japan which collectively represent a major element in United
States-Japan trade. Pursuant to that m a n d a t e . Customs issued field instructions which permitted the deposit of special bonds by affected importers in lieu
of actual collection o f t h e countervailing duties while the case is under appeal.
The Customs action permitted the orderly flow o f t h e subject merchandise into
the United States while at the same time ensuring the ultimate collection of
all countervailing duties in the event the lower court decision is sustained. T h e
decision of the Customs Court was reversed by the C o u r t of Customs and
Patent Appeals on July 2 8 , 1977. However, the language of the statute
permitting the manufacturer's petition requires that the finding of the lower
court remain in effect until all judicial avenues of review have been exhausted.
Accordingly, the Customs field procedures originally implemented will remain
in effect pending consideration of review by the Supreme Court.
International enforcement activities
The Customs Service actively participates in the Customs Cooperation
Council ( C C C ) , an 8 1 - m e m b e r body with headquarters in Brussels. In
pursuing its goal of facilitating international trade by improving and h a r m o nizing the customs operations of m e m b e r countries, the Council also seeks to
strengthen cooperation between customs authorities in the prevention,
investigation, and repression of customs offenses.
In June of this year, the Council adopted the International Convention on
Mutual Administrative Assistance, prepared by the Council's P e r m a n e n t
Technical Committee and its Working Party on Customs Enforcement. T h e
Convention, developed at the r e c o m m e n d a t i o n of the United States and the
Australian customs administrations, consists of a main body of rules accompanied by 11 procedural annexes which may be adopted independently,
including a special annex on assistance in action against the smuggling of
narcotic drugs. In D e c e m b e r 1976, the United States notified the Council of
its a c c e p t a n c e without reservation of the 1975 R e c o m m e n d a t i o n on t h e
Pooling of Information Concerning Customs Fraud. A c c e p t a n c e of this
218
1977 REPORT OF THE SECRETARY OF THE TREASURY
instrument should prove beneficial in obtaining information which will assist
the Customs Service in detecting and interdicting fraud activities.
In January 1977, the agreement between the United States and Mexico
regarding mutual assistance between their customs services entered into force.
T h e a g r e e m e n t is similar to the ones negotiated bilaterally with the Governments of G e r m a n y and Austria in that it provides for an expanded range of
cooperative effort in the enforcement of customs laws and regulations.
International narcotics control
T h e International Narcotics Control programs, which were formerly the
Cabinet C o m m i t t e e on International Narcotics Control programs, were
continued to train foreign enforcement officials in narcotics control areas, and
U.S. Customs continued to play an important role in this training. Emphasis
in both International Narcotics Control and within U.S. Customs centered
around "institution building," the establishment of a self-sufficient training
and narcotics control capability within foreign customs services.
U.S. Customs Inspection and Control training involved several different
programs, all ofwhich were designed to train foreign enforcement officers and
upgrade foreign customs services in border control activities and narcotics
interdiction capabilities. Emphasis was placed upon narcotics identification,
border surveillance, cargo and passenger control, and search and seizure
methods.
A n o t h e r program, aimed at foreign officials at the m i d m a n a g e m e n t level of
their careers, provided training to 387 officers from 56 countries. This training
took place in the United States and involved both formal classroom training
and field observation.
U.S. Customs also assisted other countries in the development of narcotics
dog programs. Since inception of this program, 62 officers from 21 countries
have participated in 3-week dog trainer and 14-week narcotics detector dog
handler courses in the United States.
U n d e r International Narcotics Control funding. Customs also stations
narcotics-oriented advisory teams in various countries. In fiscal 1977 two such
advisers were stationed in E c u a d o r and three in Thailand. In Ecuador, the
advisory t e a m working with the Customs Military Police was partly responsible
for the increase in seizures of coca paste on the border between Ecuador and
Peru. In Thailand, the advisory team" assisted Thai Customs in establishing an
effective interdiction system, particularly at Bangkok Airport. At the airport,
narcotics seizures increased each year since the arrival o f t h e advisory team.
In 1973, there was a single seizure, in 1974 there were 10, in 1975 there were
20, in 1976 there were 70 narcotics seizures, and indications are that the trend
will continue upward in 1977.
International trade activities
In its role of facilitating international trade, the Customs Cooperation
Council developed three new technical annexes to the International Convention on the Simplification and Harmonization of Customs Procedures. This
brought the total n u m b e r of annexes adopted to 20. Each of these annexes
covers a specific customs p r o c e d u r e or operation, and upon completion o f t h e
Convention there will be approximately 30 annexes encompassing the whole
range of customs activities. T h e Council also continued the development of
an international harmonized commodity description and coding system which
can serve as an international commodity code for transportation and the
collection of trade statistics as well as for customs purposes. This project is of
major interest to both U.S. G o v e r n m e n t agencies and commercial interests.
ADMINISTRATIVE
219
REPORTS
and Customs has coordinated U.S. participation in the project through its
chairmanship of the Interagency Advisory Committee on Customs Cooperation Council Matters.
Customs also contributed to significant projects of other international
organizations in the field of trade facilitation. The United States accepted a
resolution implementing the technical annexes of the 1975 Transport
International Routier (TIR) Convention. This Convention, a revision ofthe
1959 TIR Convention, makes possible the expeditious transit of cargo across
national borders and through customs by means of carnet backed by an
international guarantee system. In addition. Customs gave testimony before
the Senate Eoreign Relations Committee on the ratification of the 1972
Customs Convention on Containers and made plans for its implementation
This Convention provides for the international approval of containers for the
carriage of goods under customs seal and for the temporary entry of containers
without the payment or deposit of duty.
Regulatory Activities
A comprehensive index to legal decisions issued by Customs Service
headquarters and other pertinent matters (Legal Keyword Precedent Directory) was prepared in microfiche form and made available to the public in
compliance with the requirements of 5 U.S.C. 552(a) (2).
Regulatory a u d i t
The regulatory audit program was established to verify transactions and
claims of importers, carriers, and exporters by means of onsite audits of their
records, accounts, statements, and operating facilities in lieu of more costly
physical controls or other means of verifications. By application of scientific
sampling methods and use of computer analysis, companies can be selected
for audit which are most likely to provide Customs with high-payoff
transactions. Audits of a relatively small percentage of selected persons and
firms also reduces the need for individual processing of millions of transactions. The resulting reduction of routine paperwork permits more efficient
utilization of manpower.
The very existence of a regulatory audit program has had a deterrent effect
on false reporting of importations which is best illustrated by the large increase
in voluntary tenders of withheld duty from major importers. The importers also
benefit because their entries are processed routinely and without undue delay.
During fiscal 1977, 69 auditors in 9 regional offices completed 862 audits
of various types which resulted in recovered revenues for Treasury or the
importing public in excess of $9 million, as detailed below:
Type of audit
Customhouse brokers
TSUS 806.30/807
Drawback
Agent assists
Containerized importations
Other
Total
Number
Amount
recovered
147
20
354
24
240
77
MilUons
$1.1
2.8
2.6
2.9
.1
.4
862
9.9
220
1977 REPORT OF THE SECRETARY OF THE TREASURY
Other-agency requirements.—Besides enforcement of the Tariff Act of 1930
as amended, the Customs Service was charged with assuring compliance by
importers and travelers with the laws and regulations of other Federal
agencies. Customs administered over 400 statutory or regulatory requirements
for about 40 other agencies or administrations. Almost 40 percent of the
10,000 or more Tariff Schedule item numbers were subject to the requirements of Federal agencies other than Customs.
Approximately 36 percent of all Customs transactions and 64 percent of the
total entered value represented merchandise subject to other-agency requirements, ranging from enforcing motor vehicle safety and emission standards to
controlling food and drug importations.
Internal security.—Working in coordination with other agencies including
the office ofthe U.S. attorney, 70 customs investigators closed and completed
a total of 627 investigations. Of that total, 54 were either referred for criminal
prosecution, or resulted in arrests and/or indictments. Also undertaken during
fiscal 1977 were 107 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.—As the Customs Service is the Nation's first line
of defense against smuggling, the full field investigation is Customs safeguard
to ensure that employment of any individual is in the interest of national
security. An average of 1,000 full field investigations are conducted each year
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 196
issued in fiscal 1977. In addition. Customs conducted reinvestigations on 464
critical-sensitive positions and has recertified the security clearances for those
positions.
Internal audits.—The internal audits activity provides assurance to top
management that Customs management objectives, laws, policies, and
instructions are being carried out as intended, that the efficiency and
effectiveness of operations are on an acceptable level, and that resources to
support the operations are being judiciously spent. An important function is
to ensure that the over $6 billion of revenues collected annually are properly
accounted for.
In 1977, 231 audits, surveys, and special projects were completed by
headquarters and regional offices, a decrease of 48 over the 279 cases
completed in 1976. Some ofthe decrease is due to greater audit intensity in
specific reports and partly to a 14 1 /2-percent decrease of audit personnel over
the preceding year.
Two major audit areas of the year were the review of procedures involved
in the seizure, storage, and control over narcotics; and the program for
training, utilization, and control over the use of firearms in the Customs patrol
organization. Also included were the control of imported merchandise and
accountability of customs collections and appropriation expenditures. The
reports identified for management those areas in which increased efficiencies
could be effected and where improved management is required.
Other Activities
Foreign trade zones.—Foreign trade zones are geographic enclaves which
are not considered part ofthe customs territory ofthe United States. Importers
may bring merchandise into these zones for processing without the payment
of customs duties and taxes.
ADMINISTRATIVE
REPORTS
221
Although zones have existed since 1936, their n u m b e r was never large until
recently. T h e n u m b e r of zones increased from 6 in 1972 to 32 at the present
time. T h e complexity of operations c o n d u c t e d in the zones has also increased,
with the addition of such activities as oil refining and the assembly of
automobiles and specialized electronic c o m p o n e n t s .
This rapid growth has increased the problems for Customs in supervising
zones to protect the revenue and enforce import laws. T h e full impact on
Customs is yet to be realized, since most o f t h e new zones have not yet reached
their full potential as trading and manufacturing centers.
Customs has responded to this change by eliminating unnecessary and
o u t m o d e d procedural requirements, and by simplifying and updating customs
forms used in the zones. An educational program was u n d e r t a k e n to familiarize
more Customs personnel with the details of zone operations and with Customs
responsibilities for their supervision. Customs has also improved its links with
foreign t r a d e zone o p e r a t o r s through active participation in meetings of the
National Association of Foreign T r a d e Zones.
Strategic petroleum reserve.—A strategic petroleum reserve ( S P R ) was
authorized under the Energy Policy and Conservation Act of 1976 to provide
a domestic stock of oil that can be drawn on in times of national emergency.
Most o f t h e oil in this reserve is to be imported from other countries and placed
in underground mines, caves, and salt domes located in the southern and
midwestern parts of the United States.
At the request o f t h e Federal Energy Administration, Customs has approved
salt d o m e s on the Louisiana and Texas gulf coasts as Customs b o n d e d
warehouses. The EEA imports the oil free of duty and places it in these bonded
domes for withdrawal in times of emergency, at which time import duties are
to be paid. T h e first shipment of SPR oil was imported and placed underground
in July 1977, and it is anticipated that approximately 150 million barrels will
be placed in these d o m e s by January 1978.
Paperwork improvement.—In response to the President's initiative, Customs
reduced the n u m b e r of forms in use by 27 percent.
Also the "Special Customs Invoice," required on many shipments, was
alined to conform with the U.S. Standard Master format used by the
international trade community. Traders consider this alinement a major
improvement in Customs documentation requirements.
Customs bond information system.—Information users reevaluated their
needs and reduced the n u m b e r of computer-printed lists from 8,400 to 3,900,
thus saving $45,000 a year and speeding distribution of the information.
Minority bank program.—During fiscal 1977, the Freedom National Bank,
New York City, a minority bank, was designated as a depositary for customs
collections, bringing the total n u m b e r of minority banks designated as
depositaries to 2 1 . With the addition of this single bank, the amount of
collections deposited in minority banks increased dramatically. For example,
total Customs collections for July 1977 were $530.8 milhon. Approximately
$302.6 million was deposited in minority-owned banks and of this a m o u n t
$105.2 million was deposited in the Freedom National Bank.
In July 1977, Customs representatives met with representatives from the
Domestic Banking Staff, Bureau of G o v e r n m e n t Einancial Operations to
discuss the feasibility of utilizing women-owned minority banks in Los
Angeles, San Diego, San Erancisco, and New York. Customs has requested
Treasury approval of the Western W o m e n ' s Bank in San Erancisco as a
despositary. In addition. Customs investigated the feasibility of using an
Eskimo-owned bank in A n c h o r a g e , Alaska.
Section 15, Airport a n d Airway Development Act Amendments of 1976.—
law on July 12, 1976, section 15, Airport and Airway DevelopEnacted into
222
1977 REPORT OF THE SECRETARY OF THE TREASURY
ment Act Amendments of 1976 (Public Law 94-353) limits the amount of
reimbursement by owners and operators of aircraft on Sundays and holidays
as required by 19 U.S.C. 267, effective January 1, 1977. Under the act, extra
compensation will continue to be paid for inspection services performed by
Customs on Sundays and hoHdays, but these costs are no longer reimbursable
by the owners or operators of commercial or private aircraft if the services are
provided between the hours of 8 a.m. and 5 p.m. on Sundays and holidays. This
extra compensation is now being paid from the Customs appropriation.
Services which begin immediately before, or continue after, the established
hours are being prorated between the Government and the owners and
operators of aircraft.
U.S. Customs Service exhibit and visitors center.—In the first full year of
operation, the Customs Service Visitors Center played host to approximately
8,000 visitors, and distributed approximately 25,000 pieces of informational
literature.
Late in the fiscal year, the Center was able to arrange a working agreement
with the Department's Exhibit Hall to exchange information, and to direct
visitors from one to the other.
Solar energy prototypes.—The Energy Research and Development Administration is preparing an interagency agreement to provide funds to equip the
Hamlin, Maine, border station with a solar heating system. An additional solar
heating retrofit project at the Westhope, N. Dak., border station hinges upon
an advance of funds by Customs. The Sherwood, N. Dak., station, which was
selected for construction with a solar heating system, is in the planning stages.
Administrative rulings and regulations.—A revised index to the Customs
Regulations was published reflecting all of the changes made to the Customs
Regulations through July 1,1977. This project represented the first meaningful
updating of the index in more than 13 years. The revised index has been
distributed to users ofthe looseleaf Customs Regulations and will be provided
to the Office of the Federal Register for publication in the April 1, 1978,
edition of title 19 of the Code of Federal Regulations.
A reorganization within the regulations area of Customs resulted in the
creation of two branches, one of which (the Legal Publication Branch) is
charged with the task of administering the newly established rulings publication programs. Under one such program, significant rulings (including penalty
decisions) are edited and published in the Customs Bulletin. These rulings are
published for the information and guidance ofthe general public and set forth
the position of the Customs Service as to the correct application of the laws
and regulations to the factual situations presented. Under a separate program,
other significant rulings are published in the Customs Issuance System (CIS),
together with appropriate explanatory material, for the information and
guidance of Customs Service personnel.
Recordations.—Approximately 200 trademarks, service marks, and copyrights, or renewals, assignments, and name changes therefor, were recorded
for import infringement protection. Ten patent surveys and renewals were
approved. Eees collected for these services totaled approximately $54,000.
Publication awards.—Eour publications produced for public consumption
received awards from two national communications societies for their design
and content. Awards of Achievement presented by the Society for Technical
Communication were received for "U.S. Customs Guide for Private Flyers"
and "Marking of Country of Origin on U.S. Imports." "Protectors of
Independence" and "Prologue '76" received first- and second-place Blue
ADMINISTRATIVE REPORTS
223
Pencil Awards, respectively, in the contest held annually by the National
Association of Government Communicators.
Collocation of customs field managers.—The object of the collocation
program is to house all regional field managers in the same city, in the same
building, in order to improve coordination. Within the past 2 years, the
regional offices at Boston, Los Angeles, New Orleans, San Erancisco, and
Miami have been successfully collocated.
In selecting sites, consideration was also given to proximity to other Federal
agencies, including other Treasury bureaus, law enforcement agencies, and the
courts. The public, too, has the advantage of dealing with numerous
governmental agencies at a central location.
Retention of customhouses.—As a contribution to the Bicentennial celebration, the Customs Service has been commemorating customhouses of
architectural or historic merit and encouraging the nomination of worthy
customhouses to the Interior Department's National Register of Historic
Places.
Seventy customhouses have been selected for possible State or local
landmark status. An extensive 6 million dollar renovation ofthe New Orleans
customhouse is nearing the construction phase. This is one ofthe largest and
oldest customhouses and will house all of the major Customs offices in New
Orleans when the renovation is completed several years hence. A major
renovation program has recently been requested for the Baltimore customhouse.
UNITED STATES SAVINGS BONDS DIVISION
The U.S. Savings Bonds Division promotes the sale and retention of U.S.
savings bonds and the encouragement of individual thrift. Because the average
life of series E and H savings bonds is about twice that ofthe marketable debt,
this form of savings 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 small investors.
The program is carried out by a Treasury staff of less than 450 people with
the active assistance cf 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.
Sales of series E and H savings bonds totaled $7.9 billion in fiscal 1977 with
9 1/2 million people on the payroll savings plan. There were over $75.8 billion
in savings bonds and savings notes held at the close of fiscal 1977, and during
fiscal 1977 holders of these savings vehicles received $4.3 billion in interest.
Office of the National DlrecHor
On September 12, 1977, Mrs. Azie Taylor Morton was sworn in as the 36th
Treasurer of the United States and the new National Director of the U.S.
Savings Bonds Division.
During the year, Mr. Jesse Adams, Deputy National Director ofthe Division,
and senior staff members, carried out active speaking schedules on behalf of
the program.
224
1977 REPORT OF THE SECRETARY OF THE TREASURY
Activities to improve the savings bonds program included:
1. Revision and automation of the field sales management information
system, by which field activities are reported. The new systern is expected
to provide more complete information at a substantial savings in staff time.
2. A survey of citizen attitudes towards buying and hblding savings
bonds. This was prepared for the Division by the University of Michigan and
is useful in pinpointing changing attitudes, the motivations of bond buyers,
and similar information.
3. Discussions of the general savings bonds program. This is an ongoing
project for product improvement.
Industrial payroll savings campaign
The U.S. Industrial Payroll Savings Committee, composed of approximately
60 top business and industrial leaders, is a principal force behind the payroll
savings program for industry and a major reason why E bond sales of $25 to
$200 denomination bonds have risen to over $5 billion annually.
Mr. G. William Miller, chairman, Textron, Inc., and Chairman of the 1977
U.S. Industrial Payroll Savings Committee, began the yearly campaign with a
meeting in Washington, D . C , on January 12. The luncheon-meeting was
highlighted by a speech from Treasury Secretary William E. Simon, remarks
by Treasury Secretary-designate W. Michael Blumenthal, and reports by
outgoing Committee Chairman George A. Stinson and incoming Chairman
Miller.
Serving on the Committee with Mr. Miller this year were 14 former
chairmen and 47 top executives of the Nation's major corporations.
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. Campaigns in the companies
of Committee members alone accounted for more than 30 percent of the
national goal of 2.5 million new or increased-allotment savers.
Chairman Miller contributed much of his own time and effort to the
program. He traveled to 15 cities and addressed 21 meetings of business and
community leaders. He also provided some excellent sales tools for savings
bonds volunteers, including a brochure for top executives entitled "Take
Leadership in the Nation," three newsletters to volunteers to publicize the
campaign, and a full-page ad in the Wall Street Journal featuring the 1977
Committee members.
Federal worker payroll savings campaign
The annual savings bonds campaign for Federal employees was conducted
between March and June 1977. This staggered campaign approach allowed the
savings bonds field staff more time for personal attention to Federal agencies
in their area while the headquarters staff had more time to organize and carry
out the campaign.
The Interagency Savings Bonds Committee was headed by T. Bertram
Lance, Director of the Office of Management and Budget. On March 29,
Secretary Blumenthal, OMB Director Lance, and President Carter filmed a
message to all Federal employees outlining the importance of U.S. savings
bonds. A second film was made for business and industrial workers. President
Carter stated, in part, "I urge all Americans to take part in the U.S. savings
bonds program for the sake of your own personal and family security, and for
the sake of your country's economic well-being. You cannot find a more
dependable investment."
ADMINISTRATIVE
REPORTS
225
The Washington, D . C , Federal kickoff rally was held on April 13. Hubert
Harris, Assistant to Director Lance for Congressional Relations, and Midge
Costanza, Assistant to the President for Public Liaison, were the principal
speakers, and television personality Sally Struthers was the honorary chairman. Approximately 1,600 people attended the rally.
T h e Federal establishment, with a work force, of approximately 2 1 /2 million
civilian employees and another 2 million military personnel, will again produce
annual sales in excess of $1 billion. Over 330,000 new savers or increased
allotments were obtained during the year. At present, 52 percent of all Federal
employees buy bonds.
State and county volunteers
T h e leadership provided by savings bonds State and county chairrnen is a
vital factor in meeting the goals of the program. Governors are appointed
honorary chairmen by the Secretary of the Treasury. In addition, there are
volunteer State chairmen who work with the more than 3,000 county chairmen
who, in turn, coordinate savings bonds activities at the local level. This year,
for the first time, volunteer State chairmen were appointed on a calendar year
basis (instead of throughout the year) so all members, as of January 1, 1978,
will serve for two full annual campaigns.
State chairmen activities are coordinated by the Volunteer Chairmen's
Council, headed, in 1977, by Richard B. Sellars, New Jersey State chairman
for savings bonds and former chairman o f t h e board and chief executive officer
of Johnson & Johnson C o . Mr. Sellars met with a large n u m b e r of volunteers
and spoke at n u m e r o u s kickoff campaigns around the country. He succeeded
Bland W. Worley, chief executive officer of American Credit Corp., who was
the 1976 head o f t h e Volunteer C h a i r m e n ' s Council.
In calendar year 1976, 37 States exceeded their dollar sales goals. T h e
leaders were the District of Columbia with 117.1 percent of its goal. New
Jersey with 111 percent of its goal, and Georgia with 107 percent of its goal.
Calendar year 1976 sales of $7.55 billion were more than 7.35 percent over
1975 sales.
In 1978 more emphasis will be placed on involving the State volunteer
chairmen on all levels in savings bonds promotional activities. C o m m u n i c a tions through quarterly newsletters and reports to the council chairman by the
State chairmen will be used to help highlight the role of volunteers as savings
bonds spokesmen and program leaders. Emphasis will also be placed on
strengthening ties between the State committee and T a k e Stock in America
Centers to enhance statewide sales.
Banking support
Banks are the " f a c e " of savings bonds to much o f t h e bond-buying public.
During 1977 that " f a c e " continued to provide the public with basic services
necessary for the success of the savings bonds program. More than 39,000
banks, branches, and other savings institutions made over-the-counter and
bond-a-month sales possible nationwide. In addition, many banks issue bonds,
as a service, to companies with a payroll savings plan.
The American Bankers Association Savings Bonds C o m m i t t e e was chaired
by Hovey S. Dabney, chairman of the board and president of the N a t i o n a l B a n k
& Trust C o . of Charlottesville, Va. He was very active, making n u m e r o u s
personal appearances, sending letters outlining the five-point banking p r o gram, and meeting with volunteer leaders and bankers to p r o m o t e savings
226
1977 REPORT OF THE SECRETARY OF THE TREASURY
bonds sales. Many ABA committee members introduced resolutions supporting the program and reported on savings bonds activities to their State bankers
associations.
During the calendar year 1976, the Nation's bankers sent more than 9
million letters recommending bonds to their customers. More than 48 million
savings bonds leaflets were used as enclosures in statement mailings, and a
number of newspaper ads in support of the bond campaign were sponsored by
banks or other savings institutions.
In 1978 the ABA Savings Bonds Committee will continue to encourage
bankers to support the savings bonds projgram, and will recognize banks,
bankers, and banking associations for their aid. Emphasis will be placed on
making calls'on banks early in the year to introduce the new letters, leaflets,
and advertisements.
Labor support
America's labor unions and their leaders continued to support savings bonds
and the payroll savings plan during 1977. Letters encouraging participation in
the payroll savings campaigns went to many local unions by members of the
National Labor Committee for U.S. Savings Bonds.
Through the labor press, more than 15 million union members were exposed
to savings bonds advertising. Other national and local unions published
editorials and sent open letters of support urging their members to take
advantage ofthe payroll savings plan. More than 2 million letters were directed
to individual members during 1977.
Six AEL-CIO-affiliated national labor organizations and a seventh were
honored at their national conventions for outstanding support to the program.
They were: Communications Workers of America, Utility Workers Union of
America, American Flint Glass Workers of North America, International
Brotherhood of Boilermakers, Amalgamated Transit Union, Western Labor
Press Association, and National Rural Letter Carriers Association. In addition,
numerous State and central councils were recognized for their support at local
meetings and conventions.
Advertising support
The public service advertising campaign for savings bonds, conducted in
cooperation with The Advertising Council, was well received by all media in
1977. The council estimates that more than 25,000 ads were pubhshed in
newspapers and 240,000 lines appeared in national magazines. The council
estimates that there were 4 billion home impressions resulting from television
use of savings bonds announcements.
The advertising campaign continued to focus on the contribution of citizen
financing to the Nation's growth. Created by the Leo Burnett Co., volunteer
task-force agency of the council, the ads continue to use the theme "Take
Stock in America."
In the annual savings bonds awards competition for company communicators—based on payroll savings promotion appearing in company publications
in 1976^Bob Gallagher of Marathon Oil Co. was named "Communicator of
the Year," and Continental Group, Inc., received the grand award for a total
corporate campaign. Presentation of awards was made by Under Secretary of
the Treasury Bette Anderson in ceremonies at the Main Treasury Building on
May 27.
Information activities ofthe Branch included an all-new copy kit for daily
and weekly newspapers, several feature articles for newspapers, and continued
ADMINISTRATIVE
REPORTS
227
publication of "The Bond Teller" and "Savings Bonds Salute," for bank
personnel and volunteers, respectively. The pocket speech guide for volunteers, "In Which We Serve," was completely revised and updated.
The National Committee of Newspaper Publishers continued under the
leadership of Charles R. Buxton, editor/publisher ofthe Denver Post. Special
copy packages for the Committee were prepared and distributed at intervals
throughout the year.
National organizations s u p p o r t
The National Organizations Committee, under the chairmanship of Valerie
E. Levitan of Soroptimist International, continued its strong support of the
bond program. Individual club units were asked by their national presidents
to participate in the five-point program of cooperation, and results to date
indicate broad participation among the Nation's civic, fraternal, and patriotic
organizations.
Public affairs
The Office of Public Affairs provides information on the savings bonds
program and encourages its use by newspapers, television, and other forms of
media. During 1977 the Office Director strengthened contacts with the New
York, Washington, and national mfedia people resulting in increased coverage
of bond programs and progress. In addition, press releases and similar types
of material were provided for media use.
Staff provided speech material for the National Director and for other
Government officials speaking on behalf of the bond program. This included
preparing filmed remarks for President Carter.
Direct assistance was given to the industrial payroll savings campaign and
the Federal campaign for payroll savings through providing speeches, press
releases, media coverage, photographic services, and similar assistance.
A correspondence specialist was added to the staff to direct the handling of
mail and telephone inquiries from the public on savings bonds. Public mail
averages 75 to 100 cards or letters a day, much of it generated by newspaper
articles on the bond program.
The Director of Public Affairs is also the Division's Freedom of Information
Officer, Privacy Act Officer, and Consumer Affairs Officer.
Training
The Division continues to conduct a year's training for those selected for
sales promotion. It includes a comprehensive indoctrination course, a seminar
of "Principles of Professional Salesmanship," and intensive on-the-job
training.
Line managers will continue to be offered various types of training—mainly
in-house and interagency—to meet both organizational and individual needs.
The Division continues to operate an effective upward mobility program as
well as a good EEO program. A management library is provided for staff
members.
During 1977 all participants in the executive development program
prepared written individual developmental plans. Six of the 14 participants
have already completed developmental assignments to meet organizational
and individual needs. Participants also continued planned formalized training
experiences.
228
1977 REPORT OF THE SECRETARY OF THE TREASURY
UNITED STATES SECRET SERVICE
The major responsibilities of the U.S. Secret Service are defined in section
3056, title 18, United States Code. The investigative responsibilities 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 govemments; and to detect and arrest persons violating certain laws
relating to the Federal Deposit Insurance Corporation, Federal land banks,
joint-stock land banks, and Federal land bank associations. The protective
responsibilities include protection ofthe President ofthe United States and the
members of his immediate family; the President-elect and the member^ 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 of the
President, and the mernbers 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 government and, at the direction ofthe President, other
distinguished foreign yisitors 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.—During fiscal 1977, $44 million in counterfeit U.S. currency was recovered by the Secret Service. Of this amount, the Secret Service
seized $39.2 million. While the total amount recovered and the amount seized
prior to circulation rose 23 percent, there was a 44-percent increase in losses
to the public over the preceding year.
Of the $44 million in counterfeit currency recovered, $38.6 million
stemmed from counterfeiting operations which have been successfully
suppressed.
However, counterfeiting operations which have not yet been suppressed
were responsible for the production of $5.4 million in recovered counterfeit
currency—$2.9 million which was seized by the Secret Service and $2.5
million lost to the public. In analyzing the $2.5 million in losses in these
unsuppressed counterfeiting operations, $1.1 million, or 43 percent, originated with overseas counterfeiting conspiracies and $250,000, or 10 percent,
were violations involving raised and altered genuine currency.
An indication of the Secret Service's ability to suppress counterfeiting
activity is its success against the conspiracies which first surfaced during fiscal
1977. Of the totail counterfeit currency recovered during the year, $30.6
million can be traced to fiscal 1977 conspiracies. Nearly 94 percent of the
counterfeiter's output, $28.8 million, was seized before it entered circulation
and the plant operations producing $28.6 million (93.5 percent) had been
successfully suppressed by the end of fiscal 1977.
The following case successfully concluded during fiscal year 1977 is an
example of counterfeiting investigations.
ADMINISTRATIVE
REPORTS
229
In J a n u a r y 1977 the local sheriff's office advised that some partially burned
$50 counterfeit notes had been found west of Provo, Utah. Through t h e
watermark on the p a p e r used for these notes and a survey of paper supply
companies for any large or unusual purchases of this type of paper, the
purchaser was identified and surveillance of his activities begun.
T h e printer, coconspirators, and counterfeit plant were identified and
located. After a search warrant was served at the counterfeit plant location,
investigators concluded that the printer had taken paper scraps and spoiled
counterfeit notes to a r e m o t e area and attempted to burn t h e m . T h e printer
and coconspirators c a n n e d the " g o o d " counterfeit notes with a h o m e c a n n e r
and stored nine cases of cans, containing $5.5 million in counterfeit, in a
warehouse. T h e offset plates and negatives and a partial case of counterfeit $ 5 0
Federal Reserve notes were located in the trunk of a j u n k car at the printer's
residence. T h e printer and coconspirators were responsible for all passes of
these notes.
Check forgery.—During fiscal 1977, the Service received 121,022 checks for
investigation, a record in this activity for the fourth consecutive fiscal year and
an 11.3-percent increase over 1976. Treasury paid approximately 793 million
checks during fiscal 1977. T h e Service received 151 checks for investigation
p e r million checks paid, or 1 check for every 6,500 checks paid.
During the year, the Secret Service m a d e a record-setting 8,779 check
forgery arrests, in contrast to 5,171 check forgery arrests in fiscal 1976 and
6,602 in fiscal 1975.
Eor the third consecutive fiscal year, a significant n u m b e r of the forgedcheck investigations involved checks issued under the supplemental security
income (SSI) program. T h e approximately 12,500 forged checks investigated
is consistent with fiscal year 1976 when the Service received 12,750 forged SSI
checks for investigation.
Neither the direct deposit program nor the electronic funds transfer
program has had any a p p a r e n t reduction effect on the check workload.
A typical case involved a primary conspirator who had been receiving stolen
U.S. Treasury checks from postal employees. He and others acting on his
instructions established n u m e r o u s fraudulent commercial checking accounts
in order to negotiate the stolen checks. T h e actual forgers were lower level
criminals acting under his direction, and they realized little or no profit from
the s c h e m e . T h e leader claimed to be a successful businessman involved in
various c o m m e r c i a l activities—apartment buildings, used cars, painting
companies.
An informant was placed in c o n t a c t with the primary conspirator, w h o
outlined the network of fraudulent commercial accounts used to negotiate the
checks and estimated t h a t he was realizing between $20,000 and $30,000 p e r
month from this operation. O n e postal clerk was identified as being responsible
for stealing approximately 600 U.S. Treasury checks. He disposed of most of
the checks by selling t h e m to an individual who, in turn, provided them to the
primary conspirator.
Subsequently, agents o f t h e Secret Service and postal inspectors arrested t h e
leader and other significant coconspirators. All were charged with uttering
forged U.S. Treasury checks, possession of stolen mail, and conspiracy.
T o d a t e , the total n u m b e r of checks received in this case is 316 and the total
dollar loss is $96,568.66.
Bond forgery .—Bond forgery investigations decreased during fiscal 1977,
with 12,189 bonds being investigated as c o m p a r e d with 14,356 in 1976,
12,645 in 1975, and 13,163 in 1974.
230
1977 REPORT OF THE SECRETARY OF THE TREASURY
At the end o f t h e fiscal year, there were 874,048 stolen bonds, representing
a face value of $59.2 million, entered into the National C r i m e Information
C e n t e r ( N C I C ) by the Secret Service. Each of these b o n d s represents a
potential forgery case and a possible loss to the G o v e r n m e n t if presented for
redemption.
During fiscal 1977, 152 persons were arrested for bond forgery as c o m p a r e d
with 144 persons in 1976. Known organized crime figures continued to b e
c o n n e c t e d with some of those arrested.
T h e Secret Service recovered, prior to forgery and redemption, 14,631
stolen b o n d s with a face value of $1 million c o m p a r e d with fiscal 1976 when
5,757 stolen bonds were recovered with a face value of $ 4 8 7 , 5 7 5 . This was
a record recovery.
Although the incidence of bond forgery investigations decreased during
fiscal 1977, the n u m b e r o f b o n d s stolen increased as indicated by the n u m b e r
o f b o n d s entered into the NCIC system. T h e disparity between the n u m b e r of
bonds forged and the n u m b e r of bonds stolen is attributable to enforcement
efforts. T h e availability of agent personnel following the campaign/inauguration period enabled efforts to be increased in undercover operations and in
bank teller educational programs.
In a typical bond forgery case, a woman entered a savings and loan
institution in Pittsburgh, Pa., and o p e n e d a savings account in the n a m e of a
registered owner whose bonds had been stolen. A short time later, a m a n
entered the same savings and loan and o p e n e d a savings a c c o u n t in the n a m e
of a n o t h e r registered o w n e r whose b o n d s had been stolen. A total of 617 b o n d s
with a face value of $ 109,750 had b e e n stolen from these two owners. T h e male
forger r e t u r n e d to the savings and loan the next day and attempted to r e d e e m
the bonds. T h e institution b e c a m e suspicious and contacted the Pittsburgh
field office, which maintained surveillance o f t h e savings and loan and arrested
the female forger as she attempted to redeem bonds. Additional investigation
led to the arrest of the male suspect while in the process of redeeming b o n d s
at a second location.
Interrogation of the 2 suspects led to the arrest of an accomplice at a local
motel and the recovery of a total of 551 unendorsed savings bonds. All three
suspects pleaded guilty to conspiracy to forge and utter savings bonds and to
receiving stolen G o v e r n m e n t property. Each was sentenced to serve 5 years.
Identification Branch
T h e Identification Branch o f t h e Special Investigations and Security Division
serves all field offices by conducting technical examinations of handwriting,
handprinting, typewriting, fingerprints, palmprints, striations on counterfeit
currency, altered d o c u m e n t s , and other types of physical evidence.
During fiscal 1977, m e m b e r s of the Identification Branch c o n d u c t e d
examinations in 9,488 cases involving 947,090 exhibits. This resulted in 2,540
identifications of persons and a total of 208 court appearances to furnish
expert testimony.
Treasury Security Force
T h e Treasury Security Force, a uniformed branch o f t h e U.S. Secret Service,
protects the Main Treasury complex and participates in providing security t o
the White House. T h e Force also enforces Treasury's restricted access policy.
During fiscal 1977, t h e Force was changed from a guard series to a police
series without a change in pay status. Training for new officers is now being
c o n d u c t e d at the Federal Law Enforcement Training C e n t e r in Brunswick, Ga.
ADMINISTRATIVE
REPORTS
231
During the fiscal year, 21 felony arrests were m a d e by officers o f t h e Force
and 31 persons were interviewed for attempted unauthorized entry into the
Main Treasury Building and detained for further interview by Secret Service
agents.
Organized crime
T h e Secret Service provides special agents to each o f t h e 13 organized crime
strike forces located throughout the United States. This activity is coordinated
by the Special Investigations and Security Division at headquarters. The agent
in charge of this Division is a m e m b e r o f t h e newly formed National Organized
Crime Planning Council and, as such, participates in the establishment of
targets for the strike forces.
Protective operations
In O c t o b e r 1976 the Secret Service continued protection of Presidential
nominee Jimmy C a r t e r , Mrs. C a r t e r , Vice Presidential nominees Walter
Mondale and R o b e r t Dole, and their wives. Protection was also provided t o
i n d e p e n d e n t Presidential candidate Eugene McCarthy. Secret Service protection continued for President and Mrs. Gerald R. Eord and their four children;
Vice President and Mrs. Nelson A. Rockefeller and their two sons; former
President and Mrs. Richard M. Nixon; J o h n E. Kennedy, Jr.; former Eirst
Ladies Mrs. Harry S T r u m a n , Mrs. Dwight D. Eisenhower, and Mrs. Lyndon
B. J o h n s o n ; Secretary of State Henry A. Kissinger (on a reimbursable basis);
ahd Secretary of the Treasury William E. Simon.
After the N o v e m b e r Presidential election, the Secret Service continued
protection of President-elect C a r t e r , Mrs. Carter, Amy Carter, Vice-President-elect M o n d a l e , and Mrs. M o n d a l e . Protection of Senator and Mrs. Dole,
and i n d e p e n d e n t candidate M c C a r t h y terminated on N o v e m b e r 3, 1976.
Protection of John E. Kennedy, Jr. was terminated on N o v e m b e r 26, 1976, his
16th birthday. Protection of Secretary Simon was terminated on January 15,
1977.
T h e Secret Service, at the request of President-elect Carter, c o m m e n c e d
protecting his sons. J a c k , James, and Jeff, on January 19, 1977. The Secret
Service, at the direction of the President, began protection of his grandsons,
Jason on January 2 3 , 1977, and J a m e s on J u n e 18, 1977.
After the inauguration the Secret Service began providing security for
Secretary o f t h e Treasury W. Michael Blumenthal on a Umited basis while in
the Washington, D . C , area and on foreign trips.
Protection was terminated for Jack Eord on January 19, 1977, and for Mike
and Steve Eord on J a n u a r y 20, 1977.
On January 19, 1977, a joint resolution was passed by both Houses of
Congress and signed into law (Public Law 9 5 - 1 ) by President Eord,
authorizing the Secret Service to continue protecting certain former Federal
officials or m e m b e r s of their immediate families. In conjunction with the
passage of this legislation. President Carter directed the Secret Service to
continue protecting former Vice President and Mrs. Rockefeller, their
children, Mark and Nelson, Jr.; former Secretary of State Kissinger; and
former President Ford's daughter, Susan. T h e Secret Service was also directed
by the Secretary of the Treasury to provide protection for Mrs. Kissinger.
Protection of these individuals was reevaluated by President Carter on a 30day basis. After evaluation, he directed the Secret Service to terminate
protection for former Vice President and Mrs. Rockefeller on Eebruary 2 2 ,
232
1977 REPORT OF THE SECRETARY OF THE TREASURY
1977, Mark and Nelson Rockefeller, Jr. on Eebruary 20, 1977, Susan Eord on
March 21, 1977, former Secretary of State Kissinger on May 1, 1977, and Mrs.
Kissinger on January 24, 1977.
During fiscal 1977, foreign dignitary protection remained a major effort with
111 foreign dignitaries receiving protection. These included 107 visits by
heads of foreign states or governments and 4 other distinguished foreign
visitors to the United States. Included in the figures are 19 foreign dignitaries
who received protection during the Organization of American States meetings
for the Panama Canal Treaty signing ceremony held in Washington, D C ,
September 6-9, 1977.
The Executive Protective Service (EPS) continued to provide protection for
the White House, Presidential offices, the official Vice Presidential residence,
and the foreign diplomatic missions of 132 countries at more than 380
locations in the metropolitan area of the District of Columbia. Additionally,
the EPS provided protection for the annual World Bank/International
Monetary Eund meetings in Washington, D . C , in September 1977.
The EPS continued to provide protective details for selected missions to the
United Nations in New York City.
Additionally, a detail of EPS officers was sent to Miami Beach, Ela., on
August 13,1977, to provide security at the Miami Beach Heart Institute, where
President Somoza of Nicaragua was recuperating from a heart operation.
Protective research
During fiscal 1977, the Secret Service initiated an ongoing study and
reviewed other possible studies to provide more comprehensive data for the
evaluation of individuals suspected of threatening the life of the President and
others protected by the Service.
The Intelligence Division increased the size ofthe Intelligence Division duty
desk. The new configuration and innovative equipment provides the capacity
and capability to function as a crisis center. In conjunction with that physical
renovation, the entire Division underwent a reconfiguration to allow optimum
use of space regarding personnel and workfiow.
Protective research study groups have initiated feasibility studies for
converting handwriting specimens and other graphic images to microforms for
storage in an automated microform retrieval system and for application of
geoprocessing technology to intelligence files.
The Division has implemented a number of engineering improvements to the
protective intelligence and events automatic data processing systems which
will permit the use of computers by more employees.
Technical Security Division
With the change of administration, the Technical Security Division (TSD)
reissued all White House and Executive Office Building security pass
credentials to the staff and press corps. A requirement to wear a security pass
while in the White House complex was established.
The TSD munitions countermeasures effort during fiscal 1977 included
publication of training posters dealing with explosive components or explosive
effects; instruction at over 30 regional and international conferences or
schools; and the installation of 10 fiuoroscopic (X-ray) machines to support
various protective details, to include user training, safety, and maintenance.
The Division completed the installation of the field office intrusion alarm
systems, and work is proceeding on installing or upgrading alarm systems at
the LBJ Ranch, Vice Presidential residence, Eord residence, and a multibeam
infrared system at the White House.
ADMINISTRATIVE
REPORTS
233
T S D installed a fire extinguisher system in all special-purpose armored
vehicles, completed the new fire detection system in the west wing o f t h e White
House and at the President's residence in Plains, Ga., and began a project to
install fire alarms systems in major field offices.
T h e Visual Information Branch of TSD installed an automatic color p h o t o
printer to increase efficiency, and set up a full-time audio visual section to m e e t
Service demands.
Technical Development and Planning Division
In cooperation with the National Park Service, the Division completed work
on four additional gates to the White House complex.
T h e White House computerized security system was expanded to facilitate
the functions performed by Executive Protective Service control center
personnel and increase the security and efficiency of processing visitors with
appointments in the White House complex.
Perimeter sensors using various detection techniques were integrated into
security systems at various protective sites. Additionally, a system was initiated
to assist E P S Foreign Missions Division dispatch personnel in monitoring the
status of patrol personnel for efficient assignment in response situations.
Communications Division
During fiscal 1977, the Communications Division completed the installation
of an optical character reader and cathode ray tube editing terminal to
expedite the handling of outgoing message traffic from headquarters. T h e
Division also completed hardware and software changes necessary to e n h a n c e
internal applications. T h e Secret Service resident agencies were added to the
headquarters teletype network as well.
Installation of new radio systems in the resident agencies and upgrading of
systems in the field offices continued. Also, special local and State police
mobile radio units were placed in selected Secret Service field vehicles to
provide emergency and cooperative law enforcement mobile radio communications capability.
In cooperation with the Office of Protective Operations, the Divisiori
equipped two trailers for use as emergency mobile c o m m a n d posts.
Liaison
T h r o u g h o u t fiscal 1977, the Liaison Division maintained personal liaison
with Federal agencies to assure the proper coordination, communication, and
exchange of information relating to the responsibilities of those agencies
during Secret Service criminal investigative and protective missions. T h e
Division also continued to be highly active at the U.S. Capitol, State
D e p a r t m e n t , foreign embassies, and numerous Federal agencies regarding
visits of protectees, both domestically and abroad.
Freedom of Information and Privacy Acts Office
During fiscal 1977, the Freedom of Information and Privacy Acts Office
processed 918 EOI Act requests and 285 Privacy Act requests.
Administration
In conjunction with the Office o f t h e Assistant
the Secret Service began participation in the
iriformation system. This system provides for an
of fulfilling both the D e p a r t m e n t ' s and the
reporting and control requirements.
Secretary
Treasury
expanded
Service's
(Administration),
payroll/personnel
data base capable
payroll/personnel
234
1977 REPORT OF THE SECRETARY OF THE TREASURY
An improved merit promotion plan for administrative, clerical, technical,
and professional positions was put into operation. Also, a classification review
of key administrative and technical positions was instituted in a c c o r d a n c e with
the Civil Service Commission factor evaluation system.
T h e acquisition of a single consolidated headquarters building continues to
be a major goal of the Secret Service. A contractor has been selected by the
General Services Administration to collect data relative to office space needs
projected over the next 10 years.
Programs were initiated during the year to improve the Service's ability t o
judge whether a c o n t r a c t o r has the ability to perform in a c c o r d a n c e with the
stated requirements in a contract proposal. T h e pre-award survey program
determines whether new contractors have the personnel, tooling, plant
facilities, financial capability, and operational stability to perform properly
their c o n t r a c t responsibilities.
T h e c o n t r a c t proposals audit program involves the cognizant contracting
officer and an internal auditor in evaluating a proposal from an apparently
c o m p e t e n t contractor t o confirm the validity of the various cost or price
elements. L a b o r rates, estimated labor hours required, raw materials, unit
prices, anticipated quantities to be used, and overhead rates are carefully
assessed as a basis for challenge or a c c e p t a n c e in preparation for contract
negotiation.
T h e a u t o m a t e d property inventory system was expanded to increase control
of accountable e q u i p m e n t issued to individual employees.
Expansion o f t h e data reporting systems in the Office of Administration has
m a d e significant information m o r e readily available to managers and supervisors throughout the organization. This information includes listings of o p e n
case records on file, geographic listings of all investigations in process, and
listings for identifying case records eligible for destruction or transfer t o
Federal R e c o r d s C e n t e r s .
T h e Presidential Protection Assistance Act of 1976, Public Law 9 4 - 5 2 4 ,
was e n a c t e d O c t o b e r 17, 1976. T h e major financial impact of this legislation
requires that, with certain exceptions. Federal agencies be reimbursed for
providing assistance in support o f t h e Secret Service's protective duties. It also
places certain limitations and conditions on the expenditure of funds at the
private residences of Secret Service p r o t e c t e e s . T h e initial report o n
expenditures m a d e during the period October 17, 1976, through March 3 1 ,
1977, was submitted to the appropriate committees on August 8, 1977.
Training
T h e r e were 196,493 man-hours of training c o n d u c t e d by the Secret Service
Office of Training during fiscal 1977. In addition, 9,015 man-hours of
interagency training and 15,313 man-hours of n o n - G o v e r n m e n t training were
completed for a total of 220,821 man-hours.
During the fiscal year, the basic firearms training course was fired 3,121
times by law enforcement personnel of the Secret Service. Requalification
firearms training was c o n d u c t e d . 2 6 , 2 7 2 times. Additionally, 1,283 employees
of other agencies received basic firearms instruction and firearms instructor
training was provided for 58 employees of other agencies.
T h e Uniformed Forces Training Branch provided specialized instruction for
618 m e m b e r s of the uniformed services.
T h e Secret Service's m a n a g e m e n t training system intensified its instructional training, and 165 students were provided 6,220 man-hours of supervisory and m a n a g e m e n t training.
ADMINISTRATIVE
REPORTS
235
With the onset of TPPIS, an intensified program of regional training was
implemented to provide training to timekeepers ffom all Secret Service field
offices. This was the first attempt at regional training and it was most
successful. The objectives ofthe training were met, and a good deal of money
was saved. The benefits of regional training are being analyzed with a view
toward projected training requirements.
The Training Resource Center enrolled 791 students in individualized study
courses during fiscal 1977. A total of 248 students completed their courses.
The Resource Center was used a total of 6,677 times during the fiscal year.
Secret Service field offices have been equipped with audiovisual equipment
enabling the Office of Training to reach all employees with standardized
instruction. The staff has written training programs and directed their in-house
production. These programs are customized for Secret Service employees and
are more specific and provide greater motivation than commercially obtainable programs.
The Office of Training conducted a course of instruction in sign language
to improve communications with hearing-impaired employees ofthe Service.
Eurther, the course trained several Executive Protective Service officers
assigned to the tour detail at the White House so that hearing-impaired
individuals may benefit from a visit to the White House.
Six special agent training courses were offered to 212 new special agents in
all aspects of investigation coincident with Secret Service jurisdiction and
physical protection.
In-Service training courses designed to update participants in the state ofthe
profession were given to 74 senior agents. This number is expected to rise
significantly in fiscal 1978.
Eleven dignitary protection seminars composed of 224 command level
police officers were conducted to aid the local and State officials in the
protection of dignitaries. Protective operation briefings were given to 53 lower
echelon police officials. These briefings, which are 2 days shorter than the
dignitary protection seminars are designed for generally the same purpose but
directed toward the line officer.
The 4-day advanced emergency care course has graduated 80 participants
to aid in the Service's protective and investigative mission. Reports have been
received of lives saved and care given by course graduates^ both on and off
duty.
Technical operations briefings, designed to. provide expertise in modern
technical equipment, have trained 36 special agents. These agents are able to
maximize the use of camera and surveillance equipment in accordance with
the latest legal and organizational policies.
The questioned document course, designed to aid participants in applying
the basic principles of document examination and identification, was provided
for 49 students from the Secret Service and other agencies.
The protective forces driving course trained 83 special agents in fiscal 1977.
This course, designed especially for the Service's protective function, prepares
the student for the safe operation of a limousine or security vehicle under stress
situations; Improvement of normal driving skills is a collateral benefit.
In fiscal 1977, there were 28 "Attack on a Principal" exercises designed to
simulate various types of attacks on protectees. These 1 -day practical exercises
are performed for temporary dignitary details as well as permanent protective
divisions.
Numerous protective seminars have been provided for other law enforcement agencies to improve skills and enhance coordination with the Secret
236
1977 REPORT OF THE SECRETARY OF THE TREASURY
Service in the area of protection. Similar 1- to 3-day programs have been
offered in the area of criminal investigation.
In addition to the p r o g r a m m e d events, the Office of Training has c o n d u c t e d
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 p r o g r a m m e d course was
impractical.
Inspection
T h e Office of Inspection c o n d u c t e d 51 office inspections during fiscal 1977.
Erom the beginning of the fiscal year and continuing through Inauguration
Day, nine inspectors, six assistant inspectors, and two special agents were
assigned in various capacities to candidate-nominee protection and inauguration activities.
During the fiscal year, four inspectors and three assistant inspectors
c o n d u c t e d an in-depth study and review o f t h e Executive Protective Service,
resulting in the restructuring of t h a t organization. O n e inspector has b e e n
involved in the updating of the White House emergency plan, and continual
m a i n t e n a n c e of the classified d o c u m e n t program and the headquarters and
field emergency readiness plans. Additionally, a complete security review of
the White House complex was c o n d u c t e d by the Office of Inspection.
Legal counsel
During fiscal 1977, the Secret Service resubmitted a legislative proposal to
the Secretary o f t h e Treasury that would amend title 18, United States C o d e ,
section 8 7 1 , " T h r e a t s against the President or successors to the presidency,"
to cover threats m a d e against most protectees of the Secret Service.
T h e Secret Service proposed a new section 510 to title 18, United States
C o d e , " F o r g e r y of G o v e r n m e n t c h e c k s , bonds and other obligations," which
in effect eliminates the need to rely on title 18, United States C o d e , section
4 9 5 , " C o n t r a c t s , D e e d s , and Powers of A t t o r n e y " and other Federal statutes
in the investigation of any violations concerning Treasury checks, bonds, and
other obligations.
A legislative proposal was also submitted to a m e n d Secret Service's basic
authority by altering its protective responsibilities, in some cases eliminating
some persons currently authorized protection.
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 1977 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. 13-77. PUBLIC DEBT
DEPARTMENT OF THE TREASURY,
Washington, May 18, 1977.
1.
INVITATION FOR TENDERS
1.1. The Secretary of the Treasury, under authority of the Second Liberty Bond
Act, as amended, invites tenders for approximately $2,000,000,000 of United States
securities, designated Treasury Notes of June 30, 1981, Series J-1981 (CUSIP No.
912827 GT 3). The securities will 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 for cash to Federal Reserve Banks as agents of foreign and
international monetary authorities.
2.
DESCRIPTION OF SECURITIES
2.1. The securities will be dated June 3, 1977, and will bear interest from that date,
payable on a semiannual basis on December 31, 1977, and each subsequent 6 months
on June 30 and December 31 until the principal becomes payable. They will mature
June 30, 1981, 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 Internal 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 $1,000, $5,000, $10,000,
$ 100,000 and $ 1,000,000. Book-entry securities will be available to ehgible 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 governing 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.. Eastern Daylight
239
240
1977 REPORT OF THE SECRETARY OF THE TREASURY
Saving time, Tuesday, May 24, 1977. Noncompetitive tenders as defined below will be
considered timely if postmarked no later than Monday, May 23, 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
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
ma;y submit more than one noncompetitive tender and the amount may not exceed
$1,000,000.
3:3. Commercial banks, which for this purpose are defined as banks accepting
demand deposits, and primary dealers, which for this purpose are defined as dealers
who make primary markets in Government 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 thie names of the customers and the amount
for each customer are furnished. Others are only permitted to submit tenders for their
own account..
3.4. 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 instrumentalities; public pension and retirement and other public funds; international organizations in which the United States holds membership; foreign central banks
and foreign states; Federal Reserve Banks; and Government 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.
3.5. Immediately after the closing hour, tenders will be opened, followed by a public
announcement of the amount and yield range of accepted bids. Subject to the
reservations expressed in Section 4, noncompetitive tenders will be accepted in full at
the weighted average price (in three decimals) of accepted competitive tenders, and
competitive tenders with the lowest yields will be accepted to the extent required to
attain the amount offered. Tenders at the highest accepted yield will be prorated if
necessary. After the determination is made as to which tenders are accepted, a coupon
rate will be 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 99.000. That rate of interest will be paid on
all ofthe 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. Price calculations will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923, and the determinations
ofthe Secretary ofthe Treasury shall be final. If the amount of noncompetitive tenders
received would absorb all or most of the offering, competitive tenders will be accepted
in an amount sufficient to provide a fair determination of the yield. Tenders received
from Government accounts and Federal Reserve Banks will be accepted at the weighted
average price of accepted competitive tenders.
3.6. 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.
5.
PAYMENT AND DELIVERY
5.1. Settlement for allotted securities must be made or completed on or before
Friday, June 3, 1977, at the Federal Reserve Bank or Branch or at the Bureau of the
241
EXHIBITS
Public D e b t , wherever t h e t e n d e r was submitted. P a y m e n t must b e in cash; in o t h e r
funds immediately available to the Treasury; in Treasury bills, notes o r bonds (with all
c o u p o n s d e t a c h e d ) maturing on or before the settlement date but which are n o t
overdue as defined in the general regulations governing United States securities; or by
check d r a w n to the o r d e r of the institution to which the t e n d e r was submitted, which
must b e received at such institution n o later than:
( a ) T u e s d a y , May 3 1 , 1977, if t h e c h e c k is drawn on a b a n k in the Federal Reserve
District of t h e institution t o which t h e c h e c k is submitted ( t h e Fifth Federal Reserve
District in case of the Bureau of the Public D e b t ) , or
( b ) Friday, May 2 7 , 1977, if t h e c h e c k is drawn on a bank in a n o t h e r Federal
Reserve District.
C h e c k s received after t h e d a t e s set forth in the preceding sentence will not be a c c e p t e d
unless they are payable at the applicable Federal Reserve Bank. P a y m e n t will not b e
considered c o m p l e t e w h e r e registered securities are requested if t h e a p p r o p r i a t e
identifying n u m b e r as required o n tax returns and o t h e r d o c u m e n t s submitted t o t h e
Internal R e v e n u e Service ( a n individual's social security n u m b e r or an employer
identification n u m b e r ) is n o t furnished. W h e n p a y m e n t is m a d e in securities, a cash
adjustment will be m a d e t o or required of the bidder for any difference between t h e
face a m o u n t of securities presented and the a m o u n t payable o n the securities allotted.
5.2. In every case w h e r e full p a y m e n t is n o t c o m p l e t e d o n time, t h e deposit
submitted with the t e n d e r , up to 5 p e r c e n t of the face a m o u n t of securities allotted,
shall, at t h e discretion o f t h e Secretary o f t h e Treasury, b e forfeited t o t h e United States.
5.3. Registered securities t e n d e r e d as deposits and in p a y m e n t for allotted
securities are not required to be assigned if the new securities are to be registered in
the same n a m e s and forms as a p p e a r in t h e registrations or assignments o f t h e securities
s u r r e n d e r e d . W h e n the new securities are to be registered in n a m e s and forms different
from those in the inscriptions o r assignments o f t h e securities p r e s e n t e d , t h e assignment
should be to " T h e Secretary o f t h e Treasury for (securities offered by this circular) in
the n a m e of ( n a m e and taxpayer identifying n u m b e r ) . " If new securities in c o u p o n form
are desired, the assignment should be to " T h e Secretary of the Treasury for c o u p o n
(securities offered by this circular) t o be delivered to ( n a m e and a d d r e s s ) . " Specific
instructions for t h e issuance and delivery o f t h e new securities, signed by the owner or
a u t h o r i z e d r e p r e s e n t a t i v e , must a c c o m p a n y t h e securities p r e s e n t e d . Securities
t e n d e r e d in p a y m e n t should b e s u r r e n d e r e d to t h e F e d e r a l Reserve Bank o r Branch o r
to the B u r e a u of the Public D e b t , Washington, D . C . 2 0 2 2 6 . T h e securities must b e
delivered at the expense a n d risk of the holder.
5.4. If b e a r e r securities are not ready for delivery on the settlement d a t e , p u r c h a s e r s
may elect to receive interim certificates. These certificates shall be issued in b e a r e r
form a n d shall be e x c h a n g e a b l e for definitive securities of this issue, when such
securities are available, at any Federal Reserve Bank or Branch or at t h e Bureau o f t h e
Public D e b t , Washington, D . C . 2 0 2 2 6 . T h e interim certificates must be returned at t h e
risk and expense of the holder.
5.5. Delivery of securities in registered form will be m a d e after the requested form
of registration has b e e n validated, t h e registered interest a c c o u n t has been established,
and the securities have b e e n inscribed.
6.
GENERAL PROVISIONS
6 . 1 . As fiscal agents o f t h e United States, Federal Reserve Banks a r e authorized a n d
requested to receive t e n d e r s , to m a k e allotments as directed by the Secretary of t h e
Treasury, t o issue such notices as may be necessary, to receive p a y m e n t for and m a k e
delivery of securities on full-paid allotments, and to issue interim certificates pending
delivery of t h e definitive securities.
6.2. T h e Secretary of the Treasury may at any time issue supplemental or
a m e n d a t o r y rules and regulations governing the offering. Public a n n o u n c e m e n t of such
changes will be promptly provided.
W. M I C H A E L B L U M E N T H A L ,
Secretary of the Treasury.
242
1977 R E P O R T O F T H E SECRETARY O F THE TREASURY
S U P P L E M E N T T O D E P A R T M E N T C I R C U L A R N O . 1 3 - 7 7 PUBLIC DEBT
D E P A R T M E N T O F THE T R E A S U R Y ,
Washington, May 2 5 , 1977.
T h e Secretary o f t h e Treasury a n n o u n c e d on May 2 4 , 1977, that the interest rate o n
the notes described in D e p a r t m e n t Circular—Public D e b t Series—No. 1 3 - 7 7 , dated
May 18, 1977, will be 6 3/4 p e r c e n t per a n n u m . Accordingly, the notes are hereby
redesignated 6 3/4 p e r c e n t Treasury N o t e s of Series J - 1 9 8 1 . Interest on the notes will
be payable at the rate of 6 3/4 p e r c e n t p e r a n n u m .
DAVID M o s s o ,
Fiscal Assistant Secretary.
S u m m a r y of information pertaining to Treasury notes issued during fiscal y e a r 1 9 7 7
D a t e of
preliminary
announcement
No.
Date
1976
Sept.
16
Oct.
15
Oct.
27
Oct.
27
Nov.
12
Nov.
23
Dec.
13
24-76
25-76
28-76
29-76
31-76
32-76
33-76
1976
S e p t . 17
Oct.
15
Oct.
28
Oct.
28
N o v . 12
N o v . 23
D e c . 13
Dec.
7977
Jan.
Jan.
Jan.
Feb.
Feb.
Mar.
Mar.
Apr.
Apr.
May
May
June
July
July
July
Aug.
Aug.
Sept.
Department
circular
17
34-76
12
26
26
11
15
10
21
12
27
11
17
14
13
27
27
12
19
13
1-77
2-77
3-77
5-77
6-77
7-77
8-77
9-77
10-77
12-77
13-77
14-77
16-77
17-77
18-77
20-77
21-77
22-77
D e c . 17
1977
Jan.
13
Jan.
27
Jan.
27
F e b . II
F e b . 16
M a r . 11
M a r . 22
A p r . 13
A p r . 28
May
12
May
18
J u n e 15
July
14
July
28
July
28
A u g . 12
Aug. 22
S e p t . 14
Concurrent
offering
circular
No.
29-76, 30-76
28-76. 30-76
7
5
6
7
5
5
5
percent Series G-1981
7/8 p e r c e n t S e r i e s S - 1 9 7 8
1/4 p e r c e n t S e r i e s K - 1 9 7 9
percent Series B-1983
3/4 p e r c e n t S e r i e s T - 1 9 7 8
7/8 p e r c e n t S e r i e s F - 1 9 8 0
1/4 p e r c e n t S e r i e s U - 1 9 7 8
6 1/8 p e r c e n t S e r i e s D - 1 9 8 2
3-77, 4-77
2-77, 4-77
11-77
18-77, 19-77
17-77. 19-77
5
6
7
5
6
6
7
5
7
6
6
6
6
6
7
6
6
6
7/8 p e r c e n t S e r i e s L - 1 9 7 9
1/2 p e r c e n t S e r i e s G - 1 9 8 0
1/4 p e r c e n t S e r i e s A - 1 9 8 4
7/8 p e r c e n t S e r i e s M - 1 9 7 9
7/8 p e r c e n t S e r i e s H - 1 9 8 1
percent Series N-1979
percent Series E-1982
7/8 p e r c e n t S e r i e s P - 1 9 7 9
1/4 p e r c e n t S e r i e s A - 1 9 8 4
1/8 p e r c e n t S e r i e s Q - 1 9 7 9
3/4 p e r c e n t S e r i e s J - 1 9 8 1
1/8 p e r c e n t S e r i e s R - l 9 7 9
1/4 p e r c e n t S e r i e s S - 1 9 7 9
3/4 p e r c e n t S e r i e s H - 1 9 8 0
1/4 p e r c e n t S e r i e s B - 1 9 8 4
5/8 p e r c e n t S e r i e s T - 1 9 7 9
3/4 p e r c e n t S e r i e s K - 1 9 8 1
5/8 p e r c e n t S e r i e s U - 1 9 7 9
T y p e of
auction t
Average
Yield .
d o ...
d o ...
d o ...
d o ...
d o ...
d o ...
99.641
99.842
99.704
99.891
99.795
99.864
99.775
do
do
do
do
do .
d o ...
d o ...
d o ...
d o ...
Price .
Yield .
d o ...
d o ...
d o ...
d o ...
d o ...
d o ...
d o ...
d o ...
1 All a u c t i o n s b u t o n e for i s s u e s of n o t e s w e r e b y t h e " y i e l d " m e t h o d in w h i c h b i d d e r s w e r e
r e q u i r e d t o bid o n t h e b a s i s of a n a n n u a l y i e l d ; o n e i s s u e of n o t e s w a s b y t h e " p r i c e " m e t h o d ,
in w h i c h c a s e t h e i n t e r e s t r a t e w a s a n n o u n c e d p r i o r t o t h e a u c t i o n , a n d b i d d e r s w e r e r e q u e s t e d
l o bid a p r i c e . A f t e r t e n d e r s w e r e a U o t t e d in t h e " y i e l d " m e t h o d a u c t i o n a n i n t e r e s t r a t e for t h e
n o t e s w a s e s t a b l i s h e d a t t h e n e a r e s t 1/8 of I p e r c e n t i n c r e m e n t t h a t t r a n s l a t e d i n t o a n a v e r a g e
a c c e p t e d p r i c e c l o s e t o 100.000.
2 P a y m e n t could not be m a d e through Treasury tax and loan accounts.
N O T E . — T h e m a x i m u m a m o u n t t h a t could b e bid for on a n o n c o m p e t i t i v e basis for e a c h issue
w a s $ 1 , 0 0 0 , 0 0 0 e x c e p t f o r t h e i s s u e s of O c t . 12, 1976, a n d N o v . 1, 1976. in w h i c h t h e m a x i m u m
a m o u n t w a s $500,000.
Low
price
Minimum
demonination
99.557
99.787
99.677
99.891
99.647
99.829
99.757
$1,000
5,000
5.000
1,000
5.000
1,000
5,000
Accepted tenders
T r e a s u r y notes issued
(all o f f e r e d f o r c a s h )
High
price
price
Issue.
date
99.699
99.872
99.656
1,000
1976
O c t . 12
Nov. 1
N o v . 15
N o v . 15
N o v . 30
Dec.
7
D e c . 31
1977
Jan.
6
99.824
99.678
100.000
99.805
99.968
99.963
99.889
100.009
9 9 81
99.805
99.808
99.972
99.834
99.760
99.946
99.899
99.671
99.788
99.880
3 99.839
3 100.217
99.861
3 100.073
3 100.019
3 100.058
100.065
100.00
3 99.861
99.984
3 100.028
3 100.000
3 99.920
3 100.054
3 99.954
3 99.811
3 99.843
99.787
99.625
99.892
99.786
99.898
99.944
99.846
99.972
99.76
99.768
99.738
99.972
99.815
99.733
99.892
99.899
99.636
99.770
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
5.000
Feb.
Feb.
Feb.
Feb.
Mar.
Mar.
Apr.
May
Feb.
May
June
June
Aug.
Aug.
Aug.
Aug.
Sept.
Sept.
3
3
3
3
99.894
99.991
99.811
100.000
99.981
100.007
99.925
3
15
15
28
8
31
4
2
155
31
3
30
1
15
15
31
7
30
Maturity
date
Nov.
Oct.
Nov.
Nov.
Nov.
Dec.
Dec.
Feb.
Jan.
Feb.
Feb.
Feb.
Mar.
Mar.
May
Apr.
Feb.
May
June
June
July
Aug.
Aug.
Aug.
Sept.
Sept.
15,
31.
15.
15,
30.
31.
31.
1981
1978
1979
1983
1978
1980
1978
Date
tenders
received
Payment
date 2
1976
S e p t . 28
O c t . 21
Nov. 3
Nov. 4
N o v . 18
N o v . 30
D e c . 20
28
1976
Oct.
12
Nov.
1
N o v . 15
N o v . 15
N o v . 30
Dec.
7
D e c . 31 4
1977
Jan.
19
1
3
17
23
22
29
19
3
18
24
21
19
2
3
23
30
21
Feb.
Feb.
Feb.
Feb.
Mar.
Mar.
Apr.
May
May
May
June
June
Aug.
Aug.
Aug.
Aug.
Sept.
Sept.
15. 1982 D e c .
1977
1979 J a n .
1980 F e b .
1984 F e b .
1979 F e b .
1981 F e b .
1979 M a r .
1982 M a r .
1979 A p r .
1984 M a y
1979 M a y
1981 M a y
1979 J u n e
1979 J u l y
1980 A u g .
1984 A u g .
1979 A u g .
1981 A u g .
1979 S e p t .
31.
15.
15.
28.
31.
31.
15.
30.
15.
31.
30.
30.
31.
15.
15.
31.
30.
30.
3
15
15
28
8
31
m
X
X
H
C/J
2
16
31
3
30
15
15
31
7
30
3 R e l a t i v e l y s m a l l a m o u n t s of b i d s w e r e a c c e p t e d at a p r i c e o r p r i c e s a b o v e t h e high s h o w n .
H o w e v e r , t h e h i g h e r p r i c e o r p r i c e s a r e n o t s h o w n in o r d e r t o p r e v e n t a n a p p r e c i a b l e
d i s c o n t i n u i t y in t h e r a n g e of p r i c e s , w h i c h w o u l d m a k e it m i s r e p r e s e n u t i v e .
4 F i n a l p a y m e n t d a t e of J a n . 3 . 1977. f o r o f f i c e s w h i c h w e r e c l o s e d o n D e c . 3 1 , 1976. p l u s
3 days* accrued interest.
5 I n t e r e s t w a s p a y a b l e f r o m M a y 16. 1977.
244
1977 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 2.—Treasury bonds
A Treasury circular covering an auction of Treasury bonds for cash is reproduced
in this exhibit. Circulars pertaining to other bond offerings during fiscal 1977 are similar
in form and therefore are not reproduced in this report. However, essential details for
each offering are summarized in the table in this exhibit, and allotment data for the
bonds will be shown in table 38 in the Statistical Appendix. During the 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. 15-77. PUBLIC DEBT
DEPARTMENT OF THE TREASURY,
Washington, June 2 1 , 1977.
1.
INVITATION FOR TENDERS
1.1. The Secretary of theTreasury, underthe 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 1992 (CUSIP No. 912810 BY 3). The
securities will 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 ofeach 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 international monetary
authorities.
2.
DESCRIPTION OF SECURITIES
2.1. The securities will be dated July 8, 1977, and will bear interest from that date,
payable on a semiannual basis on February 15, 1978, and each subsequent 6 months
on August 15 and February 15 until the principal becomes payable. They will mature
August 15, 1992, 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 Internal 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 $1,000, $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 governing 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.. Eastern Daylight
Saving time, Tuesday, June 28, 1977. Noncompetitive tenders as defined below will be
considered timely if postmarked no later than Monday, June 27, 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
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
EXHIBITS
245
the term " n o n c o m p e t i t i v e " on the t e n d e r form in lieu of a specified yield. N o bidder
may submit more than o n e noncompetitive tender and the a m o u n t may not exceed
$1,000,000.
3.3. C o m m e r c i a l b a n k s , which for this purpose are defined as banks accepting
d e m a n d deposits, and primary dealers, which for this purpose are defined as dealers
w h o m a k e primary m a r k e t s in G o v e r n m e n t securities and report daily to the Federal
Reserve Bank of New Y o r k their positions in and borrowings on such securities, may
submit t e n d e r s for a c c o u n t of c u s t o m e r s if the n a m e s o f t h e customers and the a m o u n t
for e a c h c u s t o m e r are furnished. O t h e r s are only permitted to submit tenders for their
own a c c o u n t .
3.4. T e n d e r s will be received without deposit for their own a c c o u n t from
c o m m e r c i a l b a n k s and o t h e r banking institutions; primary dealers, as defined above;
Federally-insured savings a n d loan associations; States, and their political subdivisions
or instrumentalities; public pension and retirement and other public funds; international organizations in which the United States holds m e m b e r s h i p ; foreign central b a n k s
and foreign states; Federal Reserve Banks; and G o v e r n m e n t a c c o u n t s . T e n d e r s from
others must b e a c c o m p a n i e d by a deposit of 5% of the face a m o u n t of securities applied
for (in the form of cash, maturing Treasury securities or readily collectible c h e c k s ) , or
by a g u a r a n t e e of such deposit by a c o m m e r c i a l bank or a primary dealer.
3.5. Immediately after the closing h o u r , tenders will be p p e n e d , followed by a public
a n n o u n c e m e n t of the a m o u n t and yield range of a c c e p t e d bids. Subject to t h e
reservations expressed in Section 4 , n o n c o m p e t i t i v e t e n d e r s will be a c c e p t e d in full at
the weighted average price (in three decimals) of a c c e p t e d competitive tenders, and
competitive tenders with the lowest yields will be a c c e p t e d to the extent required to
attain the a m o u n t offered. T e n d e r s at the highest a c c e p t e d yield will be prorated if
necessary. After the d e t e r m i n a t i o n is m a d e as to which tenders are a c c e p t e d , a c o u p o n
rate will be established, on the basis o f a 1/8 of o n e p e r c e n t i n c r e m e n t , which results
in an equivalent average a c c e p t e d price close to 100.000 and a lowest accepted price
above the original issue discount limit of 9 6 . 2 5 0 . T h a t rate of interest will be paid o n
all of the securities. Based on such interest rate, the price on e a c h competitive t e n d e r
allotted will be d e t e r m i n e d and each successful competitive bidder will be required to
pay the price equivalent to the yield bid. Price calculations will be carried to three
decimal places on the basis of price per h u n d r e d , e.g., 9 9 . 9 2 3 , and the determinations
o f t h e Secretary o f t h e Treasury shall be final. If the a m o u n t of noncompetitive t e n d e r s
received would absorb all o r most o f t h e offering, competitive tenders will be a c c e p t e d
in an a m o u n t sufficient to provide a fair determination of the yield. T e n d e r s received
from G o v e r n m e n t a c c o u n t s and Federal Reserve Banks will be a c c e p t e d at the weighted
average price of a c c e p t e d competitive tenders.
3.6. Competitive bidders will be advised of the a c c e p t a n c e or rejection of their
tenders. T h o s e submitting n o n c o m p e t i t i v e tenders will only be notified if the tender is
not a c c e p t e d in full or w h e n the price is over par.
4.
RESERVATIONS
4 . 1 . T h e Secretary of t h e Treasury expressly reserves the right to a c c e p t or reject
any or all t e n d e r s in whole or in part, to allot m o r e or less than the a m o u n t of securities
specified in Section 1, and to m a k e different p e r c e n t a g e allotments to various classes
of applicants when the Secretary considers it in the public interest. T h e Secretary's
action u n d e r this Section is final.
5.
PAYMENT AND DELIVERY
5 . 1 . Settlement for allotted securities must be m a d e or c o m p l e t e d on or before
Friday, July 8, 1977, at the Federal Reserve Bank or Branch or at the Bureau of t h e
Public D e b t , wherever the tender was submitted. P a y m e n t must be in cash; in o t h e r
funds immediately available to the Treasury; in Treasury bills, notes o r bonds (with all
c o u p o n s d e t a c h e d ) m a t u r i n g on or before the settlement date but which are n o t
overdue as defined in the general regulations governing United States securities; or by
246
1977 REPORT OF THE SECRETARY OF THE TREASURY
check d r a w n to the o r d e r of the institution to which t h e tender was submitted, which
must be received at such institution n o later than:
( a ) Tuesday, July 5, 1977, if the c h e c k is drawn on a bank in the Federal Reserve
District o f t h e institution to which the c h e c k is submitted ( t h e Fifth Federal Reserve
District in case of the Bureau of the Public D e b t ) , or
( b ) Friday, July 1, 1977, if the c h e c k is drawn on a bank in a n o t h e r Federal Reserve
District.
C h e c k s received after the dates set forth in the preceding sentence will not be a c c e p t e d
unless they are payable at the applicable Federal Reserve Bank. P a y m e n t will not b e
considered c o m p l e t e w h e r e registered securities are requested if the appropriate
identifying n u m b e r as required on tax returns and o t h e r d o c u m e n t s submitted to t h e
Internal R e v e n u e Service ( a n individual's social security n u m b e r or an employer
identification n u m b e r ) is n o t furnished. W h e n p a y m e n t is m a d e in securities, a cash
adjustment will be m a d e to or required of the bidder for any difference between the
face a m o u n t of securities p r e s e n t e d and t h e a m o u n t payable on the securities allotted.
5.2. In every case w h e r e full p a y m e n t is not c o m p l e t e d on time, the deposit
submitted with t h e t e n d e r , up to 5 p e r c e n t of t h e face a m o u n t of securities allotted,
shall, at the discretion o f t h e Secretary o f t h e Treasury, be forfeited to t h e United States.
5.3. Registered securities t e n d e r e d as deposits .and in p a y m e n t for allotted
securities are not required to be assigned if the new securities are to be registered in
the same n a m e s and forms as a p p e a r in t h e registrations or assignments o f t h e securities
s u r r e n d e r e d . W h e n the new securities are to be registered in n a m e s and forms different
from those in the inscriptions or assignments o f t h e securities presented, the assignment
should be to " T h e Secretary o f t h e Treasury for (securities offered by this circular) in
the n a m e of ( n a m e and taxpayer identifying n u m b e r ) . " If new securities in c o u p o n form
are desired, t h e assignment should b e t o " T h e Secretary of the Treasury for c o u p o n
(securities offered by this circular) to be delivered to ( n a m e and a d d r e s s ) . " Specific
instructions for t h e issuance and delivery o f t h e new securities, signed by the oxyner or
authorized r e p r e s e n t a t i v e , must a c c o m p a n y the securities p r e s e n t e d . Securities
t e n d e r e d in p a y m e n t should be s u r r e n d e r e d t o the Federal Reserve Bank or Branch or
to the Bureau of the Public Debt, Washington, D.C. 2 0 2 2 6 . T h e securities must b e
delivered at the expense a n d risk of the holder.
5.4. If b e a r e r securities are not ready for delivery on the settlement d a t e , purchasers
may elect to receive interim certificates. These certificates shall be issued in b e a r e r
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 t h e Bureau o f t h e
Public D e b t , Washington, D . C . 2 0 2 2 6 . T h e interim certificates must b e returned at t h e
risk and expense of the holder.
5.5. Delivery of securities in registered form will b e m a d e after the requested form
of registration has been validated, the registered interest a c c o u n t has been established,
and the securities have b e e n inscribed.
6.
GENERAL PROVISIONS
6 . 1 . As fiscal agents o f t h e United States, Federal Reserve Banks a r e authorized and
requested to receive t e n d e r s , to m a k e allotments as directed by the Secretary of t h e
Treasury, to issue such notices as may be necessary, to receive p a y m e n t for and m a k e
delivery of securities on full-paid allotments, and to issue interim certificates pending
delivery of the definitive securities.
6.2. T h e Secretary of the Treasury may at any time issue supplemental or
a m e n d a t o r y rules and regulations governing the offering. Public a n n o u n c e m e n t of such
changes will be promptly provided.
W. M I C H A E L B L U M E N T H A L ,
Secretary of the Treasury.
247
EXHIBITS
S U P P L E M E N T T O D E P A R T M E N T C I R C U L A R N O . 1 5 - 7 7 . PUBLIC D E B T
D E P A R T M E N T OF THE
TREASURY,
Washington, J u n e 2 9 , 1977.
T h e Secretary of the Treasury a n n o u n c e d on J u n e 2 8 , 1977, that the interest rate
on the b o n d s described in D e p a r t m e n t Circular—Public D e b t Series—No. 1 5 - 7 7 , d a t e d
J u n e 2 1 , 1977, will be 7 1/4 p e r c e n t per a n n u m . Accordingly, the bonds are hereby
redesignated 7 1/4 p e r c e n t Treasury Bonds of 1992. Interest on the bonds will b e
payable at the rate of 7 1/4 p e r c e n t per a n n u m .
DAVID M o s s o ,
Fiscal Assistant Secretary.
to
00
-J
73
m
S u m m a r y of information pertaining to Treasury bonds issued during fiscal y e a r 1 9 7 7
10
D a t e of
prehminary
annouce
ment
O
73
1976
Oct.
Accepted tenders
Treasury bonds issued
(all a u c t i o n e d for c a s h )
T y p e of
auction l
Average
*price
High
price
Low
price
1976
27
Issue
date
Oct.
4-77
11-77
15-77
19-77
1977
Jan.
27
Apr.
28
J u n e 21
July
28
28
28-76, 29-76
7 7/8 p e r c e n t of 1 9 9 5 - 2 0 0 0
Feb.
15.2000
2 - 7 7 , 3-77
10-77
1 7 - 7 7 . 18-77
7
7
7
7
5/8
5/8
1/4
5/8
p e r c e n t of
p e r c e n t of
percentof
p e r c e n t of
2 0 0 2 - 2 0 0 7 ..
2002-2007 .
1992
2 0 0 2 - 2 0 0 7 ..
.Yield
. Price
. Yield
. Price
N O T E . — T h e m a x i m u m a m o u n l t h a t c o u l d b e bid f o r o n a n o n c o m p e t i t i v e b a s i s for e a c h i s s u e
w a s $ 1 , 0 0 0 , 0 0 0 . All i s s u e s h a d a m i n i m u m d e n o m i n a t i o n of $ 1 , 0 0 0 .
99.941
98.25
99.611
98.94
100.530
3 98.54
3 99.792
3 99.10
99.941
98.13
99.520
F e b . 15
F e b . 15 5
July
8
F e b . 15 6
Payment
date 2
1976
Nov.
5
1977
1977
1 S o m e i s s u e s of b o n d s w e r e a u c t i o n e d b y t h e " p r i c e " m e t h o d , w i t h t h e i n t e r e s t r a t e b e i n g
a n n o u n c e d p r i o r t o t h e a u c t i o n , a n d b i d d e r s w e r e r e q u i r e d t o bid a t a p r i c e . O t h e r a u c t i o n s w e r e
h e l d b y t h e " y i e l d " m e t h o d in w h i c h c a s e b i d d e r s w e r e r e q u i r e d t o bid at a y i e l d . A f t e r t e n d e r s
w e r e a l l o t t e d at t h e " y i e l d " m e t h o d a u c t i o n , a n i n t e r e s t r a l e f o r t h e n o t e s w a s e s t a b l i s h e d a t t h e
n e a r e s t 1/8 of 1 p e r c e n t i n c r e m e n t t h a t t r a n s l a t e d i n t o a n a v e r a g e a c c e p t e d p r i c e c l o s e t o 100.000.
2 P a y m e n t c o u l d n o t b e m a d e t h r o u g h T r e a s u r y t a x a n d l o a n a c c o u n t s f o r a n y of t h e i s s u e s .
F e b . 18 4
Price
Date
tenders
received
1976
Maturity
date
1975
30-76
1977
Jan.
Apr.
June
July
Concurrent
offering
circular
No.
Departmenl
circular
Feb. 15.2007
F e b . 1 5 . 2007
A u g . 1 5 . 1992
Feb. 15.2007
Feb.
May
June
Aug.
4
4
28
4
Nov.
H
O
H
X
m
15
1977
Feb.
15
May
16
July
A u g . 15
3 R e l a t i v e l y s m a l l a m o u n t s of b i d s w e r e a l l o t t e d a t a . p r i c e o r p r i c e s a b o v e t h e high s h o w n .
H o w e v e r , t h e h i g h e r p r i c e o r p r i c e s a r e n o t s h o w n in o r d e r t o p r e v e n t an a p p r e c i a b l e
d i s c o n t i n u i t y in t h e r a n g e of p r i c e s , w h i c h w o u l d m a k e it m i s r e p r e s e n t a t i v e .
4 I n t e r e s t w a s p a y a b l e f r o m N o v . 1 5 . 1976.
' I n t e r e s t w a s p a y a b l e f r o m M a y 16. 1977.
6 I n t e r e s i w a s p a y a b l e f r o m A u g . 1 5 . 1977.
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EXHIBITS
249
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 132 days, and 4 issues of short-dated ("Federal
Funds") bills. Press releases dated December 2, 1976, May 19, 1977, and August 19,
1977, announcing the several phase-ins of 52-week, 26-week, and 13-week bills into
a book-entry system (virtually eliminating the issuance of definitive securities) are
included in this exhibit. 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 August 31, 1977, inviting tenders for 9-day
and 16-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
pf offerings. Data for each issue during the fiscal year appears in table 39 in the
Statistical Appendix.
PRESS RELEASE OF DECEMBER 2, 1976
In a separate announcement today, the Treasury is inviting tenders for the first series
of 52-week Treasury bills to be issued, with a limited exception, in book-entry form
only. The auction will be held on December 8, 1976.
During recent months, the Treasury and the Federal Reserve Banks have made
considerable efforts to acquaint investors and financial institutions with details of the
planned conversion to an exclusive book-entry system for Trieasury securities. A
number of public meetings and special briefings were held in various parts of the
country, and the reactions were such as to convince the Treasury that partial
implementation could begin.
The Treasury has made an exception to its exclusive book-entry offering of 52-week
bills for investors who are still required by law or regulation to hold securities in physical
form. Definitive bills in the $100,000 denomination will be available to such investors
for a limited period of time.
Although the Treasury will not initially charge any fee for establishing or maintaining
book-entry accounts on its records, it reserves the right to impose charges at a later date
for services provided after original issue on future Treasury offerings of book-entry
securities.
The Treasury plans to convert the regular weekly issuance of 26-week bills to full
book-entry form beginning in early June 1977, with the conversion of 13-week bills to
follow in September 1977.
A notice of proposed rule making on the Treasury regulations which are to govern
the new book-entry system was published in the Federal Register on November 1, 1976.
Publication of the final regulations, which are not expected to differ materially from
the proposed rules, is expected shortly.
PRESS RELEASE OF MAY 19, 1977
The second phase ofthe program to eliminate engraved certificates in favor of bookentry securities will begin on June 2, 1977, with the issue of 26-week bills in book-entry
form only. All subsequent 26-week bill issues will be in book-entry form. The Treasury
will announce the terms of the June 2 issue on Friday, May 20, and auction the bills
on Friday, May 27, since the normal Monday auction date will be a holiday.
In the book-entry system, the securities are recorded in the accounts ofthe Treasury
or a Federal Reserve Bank, or in the accounts of banks or other financial institutions
acting as custodians for investors. Instead of an engraved certificate, the purchaser is
given a receipt as evidence of the purchase.
On December 2, 1976, the Treasury announced the first step in a phased program
to eliminate engraved certificates in new Treasury bill offerings. The 52-week bill issue
of December 14, 1976, was offered in book-entry form only, with a limited exception.
There have now been six 52-week bill issues in this form, without any significant
problems.
250
1977 REPORT OF THE SECRETARY OF THE TREASURY
T h e next phase of the program will begin with the 1 3-week bills to be issued on
September 1, 1977. This and subsequent 13-week issues will c o m p l e t e the transition
of bill issues to the total book-entry system.
A limited exception to the total book-entry offering of Treasury bills will be
continued for those institutional investors required by law or regulation to hold
securities in definitive form. Definitive bills in the $ 1 0 0 , 0 0 0 denomination will be
available to such investors for all issues through D e c e m b e r 1978.
P R E S S R E L E A S E O F A U G U S T 19, 1977
T h e third and final phase o f t h e program to eliminate the use of engraved certificates
for new offerings of Treasury bills will begin with the S e p t e m b e r I issue of 1 3-week bills.
T h a t issue, and all s u b s e q u e n t 13-week issues, will be in book-entry form only. T h e
Treasury will a n n o u n c e the terms o f t h e S e p t e m b e r 1 issue on Tuesday, August 2 3 , and
auction the bills on M o n d a y , August 29.
U n d e r t h e book-entry system, the securities are r e c o r d e d in the accounts of t h e
Treasury or a Federal Reserve Bank, or in the a c c o u n t s of banks or other financial
institutions acting as custodians for investors. Instead of an engraved certificate, the
purchaser is given a receipt as evidence of the purchase.
T h e p r o g r a m to issue Treasury bills only in book-entry form began with the 52-week
bill issue of D e c e m b e r 14, 1976. In the second phase of the p r o g r a m , the system was
extended to 26-week bills, beginning with the J u n e 2, 1977, issue. T h e conversion of
13-week bills will c o m p l e t e the transition of all regular Treasury bill issues to the total
book-entry system.
A limited exception to the offering of Treasury bills only in book-entry form will be
continued for those institutional investors required by law or regulation to hold
securities in definitive form. Definitive bills in the $ 1 0 0 , 0 0 0 denomination will be
available to such investors for all issues through D e c e m b e r 1978.
It is anticipated that the program will be extended to selected new offerings of o t h e r
Treasury m a r k e t a b l e securities during the latter part of 1978.
P R E S S R E L E A S E O F A U G U S T 26, 1977
T h e D e p a r t m e n t of the Treasury, by this public notice, invites tenders for two series
of Treasury bills totaling approximately $5,400 million, to be issued S e p t e m b e r 8, 1977.
This offering will not provide new cash for the Treasury as the maturing bills are
outstanding in the a m o u n t of $5,410 million. T h e two series offered are as follows:
91-day bills (to maturity d a t e ) for approximately $2,200 million, representing an
a d d i t i o n a l a m o u n t o f bills d a t e d J u n e 9, 1 9 7 7 , a n d to m a t u r e D e c e m b e r 8, 1977 ( C U S I P
No. 9 1 2 7 9 3 L6 1), originally issued in the a m o u n t o f $3,002 million, the additional and
original bills to be freely interchangeable.
182-day bills for approximately $ 3 , 2 0 0 million to be dated S e p t e m b e r 8, 1977, a n d
to m a t u r e M a r c h 9, 1978 ( C U S I P No. 9 1 2 7 9 3 P2 6 ) .
Both series of bills will be issued for cash and in exchange for Treasury bills maturing
S e p t e m b e r 8, 1977. F e d e r a l Reserve Banks, for themselves and as a g e n t s o f foreign and
international monetary authorities, presently hold $2,526 million o f t h e inaturing bills.
These a c c o u n t s may exchange bills they hold for the bills now being offered at t h e
weighted average prices of accepted competitive tenders.
T h e bills will be issued on a discount basis under competitive and noncompetitive
bidding, and at maturity their par a m o u n t will be payable without interest. Except for
definitive bills in the $ 1 0 0 , 0 0 0 d e n o m i n a t i o n , 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, both series of bills will be issued entirely in book-entry form in a
minimum a m o u n t of $ 1 0 , 0 0 0 and in any higher $5,000 multiple, on the records either
of the Federal Reserve Banks and Branches, or of the D e p a r t m e n t of the Treasury.
T e n d e r s will be received at Federal Reserve Banks and Branches and at the Bureau
o f t h e Public Debt, Washington, D.C. 2 0 2 2 6 , up to 1:30 p.m.. Eastern Daylight Saving
time, Friday, S e p t e m b e r 2, 1977. Form PD 4 6 3 2 - 2 (for 26-week series) or form P D
4 6 3 2 - 3 (for 13-week series) should be used to submit tenders for bills to be maintained
Digitizedthe FRASER
on for book-entry records of the D e p a r t m e n t of the Treasury.
EXHIBITS
251
E a c h t e n d e r must be for a minimum of $ 10,000. T e n d e r s over $ 10,000 must be in
multiples of $5,000. In the case of competitive tenders the price offered must be
expressed o n the basis of 100, with not m o r e than three decimals, e.g., 9 9 . 9 2 5 . Fractions
may not be used.
Banking institutions and dealers w h o m a k e primary m a r k e t s in G o v e r n m e n t
securities a n d report daily to the Federal Reserve Bank of New York their positions
in and borrowings on such securities may submit t e n d e r s for a c c o u n t of customers, if
the n a m e s of the c u s t o m e r s and the a m o u n t for e a c h c u s t o m e r are furnished. O t h e r s
are only permitted to s u b m i t tenders for their own a c c o u n t .
P a y m e n t for the full par a m o u n t of the bills applied for must a c c o m p a n y all tenders ,
submitted for bills to be maintained on the book-entry records of the D e p a r t m e n t of
the Treasury. A cash adjustment will be m a d e on all a c c e p t e d tenders for the difference
b e t w e e n t h e par p a y m e n t submitted and the actual issue price as d e t e r m i n e d in t h e
auction.
N o deposit need a c c o m p a n y t e n d e r s from incorporated banks and trust c o m p a n i e s
and from responsible and recognized d e a l e r s in investment securities for bills to b e
maintained on the book-entry records of Federal Reserve Banks and Branches, or for
bills issued in b e a r e r form, where authorized. A deposit of 2 p e r c e n t of the par a m o u n t
of the bills applied for m u s t a c c o m p a n y tenders for such bills from others, unless an
express guaranty of p a y m e n t by an i n c o r p o r a t e d bank or trust c o m p a n y a c c o m p a n i e s
the tenders.
Public a n n o u n c e m e n t will be m a d e by t h e D e p a r t m e n t o f t h e Treasury o f t h e a m o u n t
and price range of a c c e p t e d bids. Competitive bidders will be advised o f t h e a c c e p t a n c e
or rejection of their t e n d e r s . T h e Secretary o f t h e Treasury expressly reserves the right
to a c c e p t or reject any or all tenders, in whole or in part, and the Secretary's action
shall b e final. Subject to these reservations, noncompetitive tenders for each issue for
$ 5 0 0 , 0 0 0 or less without stated price from any o n e bidder will be a c c e p t e d in full at
the weighted average price (in three decimals) of a c c e p t e d competitive bids for the
respective issues.
Settlement for a c c e p t e d t e n d e r s for bills to be maintained on t h e book-entry r e c o r d s
of Federal Reserve Banks and Branches, and bills issued in bearer form must be m a d e
or c o m p l e t e d at the Federal Reserve Bank or Branch or at the Bureau of the Public
D e b t on S e p t e m b e r 8, 1977, in cash pr o t h e r immediately available funds or in Treasury
bills m a t u r i n g S e p t e m b e r 8, 1977. Cash adjustments will be m a d e for differences
b e t w e e n the par value of the maturing bills a c c e p t e d in exchange and the issue price
of the new bills.
U n d e r Sections 4 5 4 ( b ) and 1 2 2 1 ( 5 ) of the Internal Revenue C o d e of 1954 t h e
a m o u n t of discount at which these bills are sold is considered to a c c r u e when the bills
are sold, r e d e e m e d or otherwise disposed of, and the bills are excluded from
consideration as capital assets. Accordingly, the o w n e r of these bills ( o t h e r than life
insurance c o m p a n i e s ) must include in his or her Federal income tax return, as ordinary
gain or loss, the difference between the price paid for the bills, whether on original issue
or on subsequent p u r c h a s e , and the a m o u n t actually received either upon sale or
r e d e m p t i o n at maturity during the taxable year for which the return is m a d e .
D e p a r t m e n t of the Treasury Circulars, No. 418 ( c u r r e n t revision). Public D e b t
Series—Nos. 2 6 - 7 6 and 2 7 - 7 6 , and this notice, prescribe the terms of these Treasury
bills and govern the conditions of their issue. Copies o f t h e circulars and t e n d e r forms
may be o b t a i n e d from any Federal Reserve Bank or Branch, or from the Bureau o f t h e
Public Debt.
P R E S S R E L E A S E O F A U G U S T 3 1 , 1977
T h e D e p a r t m e n t o f t h e Treasury, by this public notice, invites t e n d e r s for two series
of Treasury bills totaling approximately $ 1,800 million, to be issued S e p t e m b e r 6, 1977,
as follows:
9-day bills ( t o maturity d a t e ) for approximately $ 9 0 0 million, representing an
additional a m o u n t of bills d a t e d M a r c h 17, 1977, and to m a t u r e S e p t e m b e r 15, 1977
( C U S I P N o . 9 1 2 7 9 3 K2 1), and
16^day bills ( t o maturity d a t e ) for approximately $ 9 0 0 million, representing an
additional a m o u n t of bills dated March 2 4 , 1977, and to m a t u r e S e p t e m b e r 22, 1977
DigitizedSfor FRASER 7 9 3 K3 9 ) .
(CU IP No. 912
252
1977 REPORT OF THE SECRETARY OF THE TREASURY
T h e bills will be issued on a discount basis under competitive bidding, and at maturity
their face a m o u n t will be payable without interest. They will be issued in bearer form
i n d e n o m i n a t i o n s o f $ 1 0 , 0 0 0 , $ 1 5 , 0 0 0 , $ 5 0 , 0 0 0 , $ 1 0 0 , 0 0 0 , $ 5 0 0 , 0 0 0 and $ 1 , 0 0 0 , 0 0 0
(maturity value), and in book-entry form to designated bidders.
T e n d e r s will be received at all F e d e r a l Reserve Banks and Branches up to 1:30 p.m.,
Eastern Daylight Saving time, T h u r s d a y , S e p t e m b e r 1, 1977. T e n d e r s will not b e
received at the D e p a r t m e n t o f t h e Treasury, Washington. Wire and t e l e p h o n e t e n d e r s
may be received at the discretion o f e a c h Federal Reserve Bank or Branch. Each t e n d e r
for each issue must be for a minimum of $ 10,000,000. T e n d e r s over $ 10,000,000 must
be in multiples of $ 1,000,000. T h e price on tenders offered must be expressed on the
basis of 100, with not m o r e than three decimals, e.g., 9 9 . 9 2 5 . Fractions may not be used.
Banking institutions a n d dealers w h o m a k e primary m a r k e t s in G o v e r n m e n t
securities and report daily to the F e d e r a l Reserve Bank of New York their positions
in and borrowings on such securities may submit tenders for a c c o u n t of customers, if
the n a m e s of the c u s t o m e r s and the a m o u n t for e a c h c u s t o m e r are furnished. O t h e r s
are only p e r m i t t e d to submit tenders for their own account. T e n d e r s will be received
without deposit from i n c o r p o r a t e d b a n k s and trust c o m p a n i e s and from responsible and
recognized dealers in investment securities. T e n d e r s from others must be a c c o m p a n i e d
by p a y m e n t of 2 p e r c e n t of the face a m o u n t of bills applied for, unless the tenders are
a c c o m p a n i e d by an express guaranty of p a y m e n t by an i n c o r p o r a t e d bank or trust
company.
Public a n n o u n c e m e n t will be m a d e by t h e D e p a r t m e n t of the Treasury o f t h e a m o u n t
and price range of a c c e p t e d bids. T h o s e submitting tenders will be advised of t h e
a c c e p t a n c e or rejection of their tenders. T h e Secretary of the Treasury expressly
reserves the right to a c c e p t or reject any or all t e n d e r s , in whole or in part, and t h e
Secretary's action shall be final. Settlement for a c c e p t e d t e n d e r s in a c c o r d a n c e with
the bids m u s t be m a d e or c o m p l e t e d at the Federal Reserve Bank or Branch o n
S e p t e m b e r 6, 1977, in immediately available funds.
U n d e r Sections 4 5 4 ( b ) and 1 2 2 1 ( 5 ) of the Internal R e v e n u e C o d e of 1954 t h e
a m o u n t of discount at which these bills are sold is considered to a c c r u e when the Bills
are sold, r e d e e m e d or otherwise disposed of, and the bills are excluded from
consideration as capital assets. Accordingly, the o w n e r of these bills (other than life
insurance c o m p a n i e s ) m u s t include in his or her Federal income tax return, as ordinary
gain or loss, the difference b e t w e e n the price paid for the bills, w h e t h e r on original issue
or on s u b s e q u e n t p u r c h a s e , and t h e a m o u n t actually received either upon sale or
r e d e m p t i o n at maturity during the taxable year for which the return is m a d e .
D e p a r t m e n t of the Treasury Circular N o . 418 ( c u r r e n t revision) and this notice
prescribe the terms o f t h e Treasury bills and govern the conditions of their issue. Copies
of the circular may be obtained from any Federal Reserve Bank or Branch.
P R E S S R E L E A S E O F S E P T E M B E R 2, 1977
T e n d e r s for $ 2 , 2 0 2 million of 13-week Treasury bills and for,$3,200 million of 2 6 week Treasury bills, both series to be issued on S e p t e m b e r 8, 1977, were accepted at
the F e d e r a l Reserve Banks and Treasury today. T h e details are as follows:
Dono,o /xf a^/.«»to/i ^r^^,.^*itu,^
Range of accepted compeuuve
1 S-wcclc bllls iiiatuhng
Dec. 8. 1977
Price
Discount
rate
98.604
298.593
98.596
5.523
5.566
5.554
Investment
rate \
26-week bills maturing
Mar. 9. 1978
Price
Discount
rate
397.051
497.042
97.045
5.833
5.851
5.845
Percent
High
Low
Average
Percent
5.68
5.72
5.71
1 Equivalent coupon-issue yield.
2Tenders at the low price for the 13-week bills were allotted 81 percent.
3 Excepting one tender of $65,000.
4Tenders at the low price for the 26-week bills were allotted 79 percent.
Investment
rate i
6.09
6.11
6.11
253
EXHIBITS
Total tenders received a n d accepted by Federal Reserve districts a n d Treasury
13-week bills
Location
Boston
NewYork
Philadelphia
aeveland
Richmond
Atlanta:
Chicago
St. Louis.
Minneapolis
Kansas City
Dallas
SanFrancisco
Treasury
Total
Received
$25,085,000
3,142,060,000
22,835,000 '
37,025,000
34,565,000
24,370,000
328,985,000
33,720,000
17,395,000
20,315,000
23,740,000
300,890,000
115,000
4,011,100,000
26-week bills
Accepted
Received
Accepted
$24,135,000
1,670,265,000
22,835,000
31,950,000
28,565,000
24,370,000
167,915,000
18,720,000
17.395,000
20,315,000
23,740,000
152,140,000
115,000
$14,310,000
5,126,155,000
6,880,000
71,555,000
36,415,000
26,455,000
687,285,p00
29,775,000
17,300,000
16,860,000
27,070,000
508,580,000
70,000
$4,310,000
2,831,595,000
6,880,000
31,555,000
17,365,000
13,355,000
104,260,000
13,395,000
17,300,000
16,860,000
16,070,000
127,230,000
70,000
12,202,460,000
6,568,710,000
2 3,200,245,000
1 Includes $303,920,000 noncompetitive tenders from the public.
2lncludes $134,170,000 noncompetitive tenders from the public.
Exhibit 4.—Department Circular, Public Debt Series No. 26-76, December 2, 1976,
regulations governiing book-entry Treasury bills
DEPARTMENT OF THE TREASURY,
Washington, December 2, 1976.
ADOPTION OF REGULATIONS
On November 1, 1976, a notice of proposed rule making was published in the
FEDERAL REGISTER (41 FR 47959) with respect to regulations which are to govern the
issuance of, and transactions in, all 52-week, 26-week and 13-week Treasury bills and,
any other Treasury bills which, after specified dates, are to be issued, with a limited
exception, only in book-entry form.
The notice explained that the elimination of securities in the form of engraved
certificates would provide substantial benefits to investors, the financial community,
and the Treasury by protecting against losses due to theft, mishandling and
counterfeiting; by reducing costs of issuing, storing and delivering securities in physical
form; and, by moderating the burden ofthe paperwork created by the growing volume
of public debt transactions.
Under the proposed regulations, book-entry Treasury bills would be maintained
through accounts either at Federal Reserve Banks or at the Department ofthe Treasury.
Definitive Treasury bills, in the $100,000 denomination only, would be available until
December 31, 197i8, to investors who establish that they are legally required to hold
securities in physical form. By their terms, the regulations would not apply to Treasury
bills issued prior to the dates on which they would be available only in book-entry form.
Interested parties were given an opportunity to submit comments on the proposed
regulations until November 24, 1976. It is noted that in a series ofpublic meetings and
special briefings held during the past several months in various parts of the country,
the Department ofthe Treasury also undertook directly to acquaint investors, financial
institutions, securities dealers, etc., about the new mandatory book-entry system, and
to solicit their reactions.
Following consideration ofthe comments submitted in response to the notice, and
after reviewing the suggestions otherwise received as a result of its public information
program, the Department of the Treasury has modified, where appropriate, the
proposed regulations. Aside from editorial and other minor changes, the principal
differences between the final regulations and those previously proposed are as follows:
1. Proposed §350.6(a)(2), relating to the identification of accounts held at or
through member banks of the Federal Reserve System, was modified to replace the
phrase reading "provided identification of each customer account is possible by name.
254
1977 REPORT OF THE SECRETARY OF THE TREASURY
address, taxpayer identifying n u m b e r , and includes appropriate loan transaction d a t a "
with a provision that p e r m i t s m o r e flexibility in the m a n n e r in which a c c o u n t s may b e
maintained, and provides specific information as to the data that should be included.
2. F o r m e r § 3 5 0 . 7 ( c ) , which related to the issuance of confirmations of transactipns
involving bills in the Treasury book-entry system, was redesignated as Sec. 350.9, a n d
reworded to indicate that its provisions would apply to all transactions affecting bills
maintained in a Treasury a c c o u n t . As a result, the proposed §350.9 was r e n u m b e r e d
as § 3 5 0 . 1 0 , and all s u b s e q u e n t sections were successively redesignated.
3. P r o p o s e d §350.8, was modified to provide that book-entry Treasury bills
maintained by or t h r o u g h m e m b e r b a n k s could be transferred through the Federal
Reserve Bank c o m m u n i c a t i o n system to an a c c o u n t maintained at the Treasury,
provided such transfer o c c u r r e d n o later than o n e m o n t h before the maturity date pf
the bills, a n d was otherwise a c c e p t a b l e u n d e r the subpart.
Accordingly, the p r o p o s e d regulations governing book^entry Treasury bills, as
modified, are hereby a d o p t e d and a d d e d as Part 350 to 31 C F R , and designated as
Departmerit o f t h e T r e a s u r y Circular, Public D e b t Series ^ o . 2 6 - 7 6 .
DAVID Mosso,
Fiscal Assistant Secretary.
A U T H O R I T Y : R.S. 3 7 0 6 ; 4 0 Stat. 2 8 8 , 5 0 2 , 844, 1309; 42 Stat. 3 2 1 ; 4 6 Stat. 20; 4 8
Stat. 3 4 3 ; 49 Stat. 2 0 ; 50 Stat. 4 8 1 ; 52 Stat. 4 4 7 ; 53 Stat. 1359; 56 Stat. 189; 73 Stat.
6 2 2 ; and 85 Stat. 5, 74 (31 U.S.C. 7 3 8 a , 7 3 9 , 7.52, 752a, 7 5 3 , 7 5 4 , 7 5 4 a , and 7 5 4 b ) ;
5 U.S.C. 3 0 1 .
SUBPART A—APPLICABILITY AND EFFECT—DEFINITIONS
§350.0
Applicability and effect.
( a ) Applicability. T h e regulations in this p a r t govern the issuance of, a n d
transactions in, the following Treasury bills:
( 1 ) 52-week Treasury bills issued after D e c e m b e r 1, 1976;
( 2 ) 26-week Treasury bills issued after J u n e 1, 1977;
( 3 ) 13-week Treasury bills issued on or after S e p t e m b e r 1, 1977; and
( 4 ) Any other Treasury bills issued after S e p t e m b e r 1, 1977, including, but n o t
limited t o , tax anticipation Treasury bills.
( b ) Effect. T h e Treasury bills described in paragraph ( a ) shall, after the d a t e
specified therefor, be issued only in book-entry form, except as provided in Subpart D .
§350.1
Definition of t e r m s in this part.
In this part, unless the context otherwise requires or indicates:
( a ) " T r e a s u r y bill" m e a n s an obligation of the United States issued under Section
5 of the Second Liberty Bond Act, as a m e n d e d (31 U.S.C. 7 5 4 ) .
( b ) " B o o k - e n t r y Treasury bill" m e a n s any Treasury bill issued on or after the dates
specified in § 3 5 0 . 0 ( a ) in t h e form of an entry on the records of a Reserve Bank or t h e
records o f t h e D e p a r t m e n t o f t h e Treasury. (See D e p a r t m e n t o f t h e Treasury Circular,
Public D e b t Series N o . 2 7 - 7 6 , descriptive o f t h e issue and sale of book-entry Treasury
bills.) ( 3 1 C F R , Part 3 4 9 )
( c ) "Definitive Treasury bill", as used in Subpart D, m e a n s a Treasury bill of t h e
$ 1 0 0 , 0 0 0 d e n o m i n a t i o n issued in the form of an engraved certificate.
( d ) "Certified r e q u e s t " or "certified s t a t e m e n t " , as used in Subpart C, means a
request or statement signed by or on behalf of a depositor and certified by an officer
authorized to certify assignments of Treasury securities u n d e r D e p a r t m e n t of t h e
Treasury Circular N o . 3 0 0 , current revision, the general regulations governing U.S.
securities (31 C F R , Part 3 0 6 ) .
( e ) " B u r e a u " m e a n s Bureau of the Public Debt, Washington, D.C. 2 0 2 2 6 .
(f) " D e p o s i t o r " , as used in Subpart C, means the individual, fiduciary or o t h e r
entity in whose n a m e (including, where a p p r o p r i a t e , the title of an officer) an a c c o u n t
is established and maintained on the b o o k s of the Treasury.
EXHIBITS
255
(g) "Fiduciary", as used in Subpart C, means an executor, administrator, trustee;
a legal guardian, committee, conservator or similar representative appointed by a court
for the estate of a minor or incompetent; a custodian under a statute authorizing gifts
to minors; a natural guardian of a minor; a voluntary guardian; or a life tenant under
a will.
(h) "Member bank" means any national bank, or State bank or other bank or trust
company, which is a member of a Reserve Bank.
(i) "Natural guardian", as used in Subpart C, means either parent of a minor or
other person acting on the minor's behalf.
(j) "Pledge" includes a pledge of, or any other security interest in, book-entry
Treasury bills as collateral for loans or advances, or to secure deposits ofpublic moneys
or the performance of an obligation.
(k) "Reserve Bank'' means a Federal Reserve Bank and its branches, acting as
Fiscal Agent ofthe United States and, where indicated, acting in its individual capacity.
(1) "Taxpayer identifying number" means the appropriate identifying number as
required on tax returns and other documents submitted to the Internal Revenue
Service, i.e., an individual's social security number or an employer identification
number. A social security account number is composed of nine digits separated by two
hyphens, for example, 123-45-6789; an employer identification number is composed
of nine digits separated by one hyphen, for example, 12-3456789. The hyphens are an
essential part of the numbers and must be included.
(m) "Treasury" means Department of the Treasury.
(n) "Voluntary guardian", as used in Subpart C, means the person who is acting
for an individual who is incapacitated by reason of age, infirmity, or mental disability.
SUBPART B—BOOK-ENTRY TREASURY BILLS—FEDERAL RESERVE BANKS
§350.2
Authority of Reserve Banks.
Each Reserve Bank is hereby authorized, in accordance with this subpart, to (a) issue
book-entry Treasury bills by means of entries on its records, which shall include the
name of the Bank's depositor, the latter's employer identification number, where
appropriate, and the amount and maturity date ofthe bills, including the CUSIP number
of each loan; (b) issue a confirmation of transaction in the form of an advice (serially
numbered or otherwise), which specifies the amount, maturity date and CUSIP number
ofthe bills, as well as the date of the transaction; and (c) otherwise service and maintain
book-entry Treasury bills.
§350.3 Scope and effect of book-entry Treasury bill accounts maintained by Reserve
Bank under this subpart.
(a) Scope and effect of accounts maintained by Reserve Bank. Except as provided
in Subpart D, each Reserve Bank, as Fiscal Agent of the United States, is authorized
to maintain book-entry Treasury bills in accounts held in its individual capacity, under
terms and conditions which indicate that the Reserve Bank will continue to maintain
such deposit accounts in its individual capacity, notwithstanding application of the
book-entry procedure to such bills. This paragraph is applicable, but not limited to,
book-entry Treasury bills maintained:
(1) As collateral pledged to a Reserve Bank (in its individual capacity) for advances
by it;
(2) For a member bank for its sole account;
(3) For a member bank held for the account of its customers (see §350.6 of this
subpart);
(4) In connection with deposits in a member bank of funds ofStates, municipalities,
or other political subdivisions;
(5) In connection with the performance of an obligation or duty under Federal,
State, municipal, or local law, or judgments or decrees of courts; or
(6) The maintenance by a Reserve Bank of book-entry Treasury bills under this
paragraph shall not derogate from or adversely affect the relationships that would
otherwise exist between a Reserve Bank in its individual capacity and the entities for
which accounts are maintained. The Reserve Bank is authorized to take all action
256
1977 REPORT OF THE SECRETARY OF THE TREASURY
necessary in respect of book-entry Treasury bills to enable such Reserve Bank in its
individual capacity to perform its obligations as depositary with respect to such bills,
( b ) Use as collateral under Treasury circulars. Each Reserve Bank, as Fiscal Agent
of the United States, shall hold in book-entry form Treasury bills pledged as collateral
to the United States u n d e r c u r r e n t revisions of D e p a r t m e n t of the Treasury Circulars
N o . 92 and N o . 176 (31 C F R , Parts 203 and 2 0 2 ) .
§350.4
Transfer or pledge.
( a ) Reserve Bank records. A transfer or a pledge of book-entry Treasury bills to a
Reserve Bank (in its individual capacity or as Fiscal Agent of the United States), or to
the United States, or to any transferee or pledgee eligible to maintain an a p p r o p r i a t e
book-entry a c c o u n t in its n a m e with a Reserve Bank u n d e r this subpart, is effected a n d
perfected, notwithstanding any provision of law to t h e contrary, by a Reserve Bank
making an a p p r o p r i a t e entry in its r e c o r d s o f t h e Treasury bills transferred or pledged.
T h e m a k i n g of such an entry in the r e c o r d s of a Reserve Bank shall ( 1 ) have the same
effect as the delivery of Treasury bills in b e a r e r definitive form; ( 2 ) have the effect of
a taking of delivery by the transferee or pledgee; ( 3 ) constitute the transferee or pledgee
a holder; and ( 4 ) if a pledge, effect a perfected security interest therein in favor of t h e
pledgee. A transfer or pledge of Treasury bills effected u n d e r this p a r a g r a p h shall have
priority over any transfer, pledge, or o t h e r interest, theretofore or thereafter effected
or perfected u n d e r p a r a g r a p h ( b ) of this section or in any other m a n n e r .
( b ) Member banks a n d others. A t r a n s f e r o r a pledge of book-entry Treasury bills,
or any interest therein, maintained by a Reserve Bank (in its indiyidual capacity or as
Fiscal Agent o f t h e United States) in a book-entry a c c o u n t u n d e r this subpart, including
book-entry Treasury bills in a c c o u n t s at the Reserve Bank maintained u n d e r Sec.
3 5 0 . 3 ( a ) ( 3 ) of this s u b p a r t by m e m b e r b a n k s for t h e a c c o u n t of their customers, is
effected, and a pledge is perfected, by any m e a n s that would be effective u n d e r
applicable law to effect a transfer or to effect and perfect a pledge o f t h e Treasury bills,
o r any interest therein, if the Treasury bills were maintained by the Reserve Bank in
b e a r e r definitive form. F o r purposes of transfer or pledge h e r e u n d e r , book-entry
Treasury bills maintained by a Reserve Bank shall, notwithstanding any provision of law
to the c o n t r a r y , be d e e m e d to be maintained in b e a r e r definitive form. A Reserve Bank
maintaining book-entry Treasury bills either in its individual capacity or as Fiscal Agent
of the United States is not a bailee for purposes of notification of pledges of those bills
u n d e r this p a r a g r a p h or a third person in possession for purposes of a c k n o w l e d g m e n t
of transfers thereof u n d e r this p a r a g r a p h . A Reserve Bank will not a c c e p t notice or
advice of a transfer or pledge effected or perfected u n d e r this p a r a g r a p h , and any such
notice or advice shall have n o effect. A Reserve Bank may continue to deal with its
depositor in a c c o r d a n c e with the provisions of this subpart, notwithstanding any
transfer or pledge effected or perfected under this paragraph.
( c ) Filing and recording unnecessary. N o flling or recording with a public recording
office or officer shall be necessary or effective with respect to any transfer or pledge
of book-entry Treasury bills or any interest therein.
( d ) Transfer by Reserve Banks. A transfer of book-entry Treasury bills within a
Reserve Bank shall be m a d e in a c c o r d a n c e with p r o c e d u r e s established by the Reserve
Bank not inconsistent with this subpart. T h e transfer of book-entry Treasury bills by
a Reserve Bank may be m a d e through a telegraphic transfer p r o c e d u r e .
{e) Timeliness of requests. All requests for transfer or any authorized transaction
must be received prior to the maturity of the bills.
§350.5 Reserve Bank discharged by action on instructions—delivery of Treasury
securities.
A Reserve Bank which has received book-entry Treasury bills and effected pledges,
m a d e entries regarding t h e m , or transferred or delivered them according to t h e
instructions of its depositor is n o t liable for conversion or for participation in b r e a c h
of fiduciary duty even though the depositor had no right to dispose of or take o t h e r
action in respect of the securities. A Reserve Bank shall be fully discharged of its
obligations under this subpart by the transfer or delivery of book-entry Treasury bills
upon the o r d e r of its depositor.
EXHIBITS
§350.6
257
Book-entry Treasury bill a c c o u n t s .
( a ) Scope and effect of book-entry Treasury bill accounts.—(1) Classes of accounts.
Reserve Banks are authorized to maintain book-entry Treasury bills for m e m b e r b a n k s
for bills the m e m b e r b a n k s hold for their own a c c o u n t , or hold for the a c c o u n t of their
customers, and as otherwise specified in § 3 5 0 . 3 . Purchasers of book-entry Treasury
bills, on original issue or otherwise, may have such bills maintained at m e m b e r b a n k s ,
or in a c c o u n t s maintained at entities providing securities safekeeping services for
c u s t o m e r s (e.g., n o n m e m b e r b a n k s or thrift institutions, or securities dealers) which
have related a c c o u n t s at m e m b e r b a n k s .
( 2 ) Identification of accounts. Book-entry a c c o u n t s may be established in such form
or forms as customarily permitted by the entity (e.g., m e m b e r bank, or other banking
or thrift institution, or a securities d e a l e r ) maintaining t h e m , except that e a c h a c c o u n t
should include d a t a to p e r m i t both c u s t o m e r identification by n a m e , address a n d
taxpayer identifying n u m b e r , as well as a d e t e r m i n a t i o n o f t h e Treasury bills being held
in such a c c o u n t by a m o u n t , maturity d a t e and C U S I P n u m b e r , and of transactions
relating t h e r e t o .
( 3 ) Pledges a n d transfers. W h e r e book-entry Treasury bills are maintained on t h e
b o o k s of an entity for a c c o u n t of the pledgor or transferor thereof, such entity shall,
for purposes of perfecting a pledge of such Treasury bills or effecting their delivery to
a p u r c h a s e r u n d e r applicable provisions of law, be the bailee to which notification of
the pledge of the bills m a y be given or the third person in possession from which
a c k n o w l e d g m e n t of t h e holding of the bills for the purchaser may be obtained.
( b ) Servicing book-entry Treasury bills—payment of book-entry Treasury bills at
maturity. Book-entry T r e a s u r y bills governed by this part may be transferred b e t w e e n
a c c o u n t s prior to maturity through a wire transfer a r r a n g e m e n t maintained by Reserve
Banks. At maturity, the bills shall be r e d e e m e d and charged by a Reserve Bank in t h e
a c c o u n t of the United States Treasury as of the date of maturity, and the r e d e m p t i o n
p r o c e e d s shall be disposed of in a c c o r d a n c e with the instructions from the m e m b e r
b a n k or o t h e r Reserve Bank depositor for whose a c c o u n t the Treasury bills shall have
been maintained.
SUBPART C—BOOK-ENTRY TREASURY BILLS—DEPARTMENT OF THE TREASURY
§350.7
Establishing a book-entry Treasury bill a c c o u n t .
( a ) General. Treasury bills may be held as book-entries in a c c o u n t s maintained by
the Treasury. Such a c c o u n t s may be established, either upon the original issue of b o o k entry Treasury bills or u p o n the s u b s e q u e n t transfer of such bills to the Treasury, b u t
n o later t h a n o n e m o n t h prior to their maturity d a t e . E a c h a c c o u n t shall consist of an
entry showing the a m o u n t , maturity date and C U S I P n u m b e r of the bills, the n a m e of
the individual, fiduciary or other entity (including, where a p p r o p r i a t e , the title of an
officer) for whom the a c c o u n t is held, t h e address, and t h e taxpayer identifying n u m b e r .
T h e r e c o r d s shall also include a p p r o p r i a t e transaction data.
( b ) Recordation.—(1) Individuals. A c c o u n t s for book-entry Treasury bills may be
held in the n a m e s of individuals in o n e of two forms: single n a m e , i.e., " J o h n A. D o e
( 1 2 3 - 4 5 - 6 7 8 9 ) ( a d d r e s s ) " ; or two n a m e s i.e., " J o h n A. Doe ( 1 2 3 - 4 5 - 6 7 8 9 ) ( a d d r e s s )
or ( M r s . ) Mary B. D o e ( 9 8 7 - 6 5 - 4 3 2 1 ) . N o o t h e r form of recordation in two n a m e s ,
whether individuals or o t h e r s , will be permitted, except in the case of co-fiduciaries.
( 2 ) Others. A c c o u n t s for book-entry Treasury bills may be held in the names of
fiduciaries and o t h e r entities in the forms indicated by the following examples:
J o h n A. Smith and First National Bank, executors of the will of J a m e s B. Smith,
deceased (12-3456789) (address).
May A. Q u e e n , trustee under a g r e e m e n t with T h o m a s J. King, dated June 1, 197 1
(12-3456789) (address).
Smith Manufacturing C o m p a n y , Inc., J a m e s C. Brown, T r e a s u r e r ( 1 2 - 3 4 5 6 7 8 9 )
(address).
Grey and White ( 1 2 - 3 4 5 6 7 8 9 ) , J o h n D. Grey, General Partner ( a d d r e s s ) .
J. Francis D o e , Secretary-Treasurer of Local 100, Brotherhood of Locomotive
Engineers, an u n i n c o r p o r a t e d association ( 1 2 - 3 4 5 6 7 8 9 ) ( a d d r e s s ) .
258
1977 R E P O R T O F THE SECRETARY OF THE TREASURY
J o h n R. G r e e n e , as natural guardian of Maxine S. G r e e n e ( 1 2 3 - 4 5 - 6 7 8 9 )
(address).
J o h n A. J o n e s , a s voluntary guardian of Henry M. Jones ( 1 2 3 - 4 5 - 6 7 8 9 ) ( a d d r e s s ) .
§350.8
Transfer.
Book-entry Treasury bills maintained u n d e r this subpart may not be transferred from
o n e a c c o u n t maintained by the Treasury to a n o t h e r such a c c o u n t , except in cases of
lawful succession, as provided in this subpart. T h e y may be withdrawn from an a c c o u n t
maintained by the T r e a s u r y h e r e u n d e r and transferred through the Federal Reserve
Bank c o m m u n i c a t i o n system to an a c c o u n t maintained by or through a m e m b e r b a n k
under S u b p a r t B, which transfer shall be m a d e in the n a m e or n a m e s appearing in the
a c c o u n t r e c o r d e d o n the b o o k s of the Treasury. Such withdrawal may be effected by
a certified request therefor by, or on behalf of, the depositor, provided the request
therefor is received n o earlier than ten business days after the issue date or the d a t e
the securities are transferred to the Treasury, whichever is later. T h e request must: ( a )
identify the book-entry a c c o u n t by the n a m e of the depositor and title, if any, t h e
address, and the taxpayer identifying n u m b e r ; ( b ) specify by a m o u n t , maturity date and
CUSIP n u m b e r the book-entry Treasury bills to be withdrawn and transferred; and ( c )
specify the n a m e of the m e m b e r b a n k to or through which the transfer is to be effected
and, w h e r e a p p r o p r i a t e , t h e n a m e of the institution or entity which is to maintain t h e
book-entry a c c o u n t . In the case of book-entry Treasury bills held in the n a m e s of two
individuals, a certified r e q u e s t by either will be a c c e p t e d , but the transfer shall be m a d e
in the n a m e s of both. A transfer after original issue of book-entry Treasury bills from
an a c c o u n t maintained by or through a m e m b e r bank to o n e maintained by the Treasury
may be m a d e through the Federal Reserve Bank c o m m u n i c a t i o n system, provided t h e
a c c o u n t is to be held in a form authorized by this subpart, and provided the transfer
is m a d e n o later than o n e m o n t h prior to the maturity d a t e of the bills.
§350.9
Confirmation of transaction.
T h e Treasury will issue t o e a c h depositor following any transaction affecting bookentry Treasury bills maintained for such depositor u n d e r this subpart a confirmation
thereof in the form of an advice (serially n u m b e r e d or otherwise) which shall describe
the a m o u n t , maturity date and C U S I P n u m b e r of the bills, and include pertinent
transaction data.
§350.10
Attorney-in-fact.
A request by an attorney-in-fact for any transaction in book-entry Treasury bills after
their original issue will be recognized in a c c o r d a n c e with this subpart if supported by
an a d e q u a t e power of attorney. T h e original power or a p h o t o c o p y showing t h e
grantor's a u t o g r a p h signature, properly certified, must be submitted to the Bureau. A
request for transfer for t h e a p p a r e n t benefit of the attorney-in-fact will not be
recognized unless expressly authorized.
§350.11 Succeeding fiduciaries, p a r t n e r s , officers—succeeding corporations, uninc o r p o r a t e d associations, partnerships.
( a ) Death of fiduciary, partner or officer. In case of the d e a t h , removal or
disqualification of a fiduciary, p a r t n e r or officer of an organization in whose n a m e
book-entry Treasury bills have been r e c o r d e d , the successor or other authorized person
will be recognized as the depositor u n d e r this subpart. Proof of d e a t h , resignation,
removal or disqualification, as the case may b e , and evidence that the successor or such
other person is fully authorized to act must be submitted to the Bureau. Proof of d e a t h
shall be in t h e form of a d e a t h certificate or p h o t o c o p y thereof showing the official seal.
Evidence of authority should be in the form of a certified statement by: ( 1 ) the surviving
fiduciary or fiduciaries, if any, stating that application for the a p p o i n t m e n t of a
successor has not been m a d e , is not c o n t e m p l a t e d and is not necessary u n d e r the t e r m s
of the trust instrument or otherwise, ( 2 ) a surviving partner or partners that t h e
partnership is being c o n t i n u e d in the s a m e , or a n o t h e r n a m e , which must be identified,
or ( 3 ) the secretary or o t h e r authorized officer of the corporation or u n i n c o r p o r a t e d
association as to the n a m e and title of the successor officer. If there is more than o n e
EXHIBITS
259
surviving fiduciary, a r e q u e s t for transfer of the bills must be signed by all, unless
evidence is submitted to the Bureau that o n e is authorized to act for t h e o t h e r or o t h e r s .
If there is m o r e than o n e surviving p a r t n e r , evidence should be submitted to the Bureau
as to which survivor is authorized to act in behalf of the partnership; otherwise, t h e
signatures of all surviving p a r t n e r s will b e required for transfer of t h e bills.
( b ) Succeeding corporations, unincorporated associations or partnerships. If a
c o r p o r a t i o n has b e e n s u c c e e d e d by a n o t h e r c o r p o r a t i o n , or if an u n i n c o r p o r a t e d
association o r partnership has b e e n s u c c e e d e d by a c o r p o r a t i o n , and such succession
is by o p e r a t i o n of law or otherwise, as the result of merger, consolidation, reincorporation, conversion or reorganization, or if a lawful succession has o c c u r r e d in any
m a n n e r whereby the business or activities of the original organization are c o n t i n u e d
without substantial c h a n g e , an authorized officer or p a r t n e r , as t h e case may b e , o f t h e
successor organization will be recognized as the depositor u n d e r this subpart u p o n
submission to the Bureau of satisfactory evidence of such succession.
§350.12 T e r m i n a t i o n of trust, guardianship estate, life tenancy—dissolution
c o r p o r a t i o n , partnership, u n i n c o r p o r a t e d association.
of
( a ) Termirmtion of trust, life tenancy or guardianship estate.—(1) Trust or life
estate. U p o n the termination of a trust o r life estate, t h e beneficiary or r e m a i n d e r m a n
will be recognized as the depositor u n d e r this subpart. T h e trustee will be required to
submit to the Bureau a certified s t a t e m e n t concerning the termination of the trust a n d
the respective shares, if t h e r e is m o r e than o n e beneficiary. In the case of a life estate,
proof of d e a t h in the form of a d e a t h certificate or p h o t o c o p y thereof showing t h e
official seal will be required, together with a certified s t a t e m e n t identifying t h e
r e m a i n d e r m a n , a n d , if t h e r e is m o r e than o n e , specifying the respective shares.
( 2 ) Guardianship. A former minor or i n c o m p e t e n t will be recognized as t h e
depositor u n d e r this s u b p a r t upon submission to the Bureau of a certified statement,
or o t h e r evidence showing, in the case of a minor, a t t a i n m e n t of majority or o t h e r
removal of t h e legal disability, a n d , in t h e case of an i n c o m p e t e n t , his restoration to
competency.
( b ) Dissolution of corporations, unincorporated associations a n d partnerships. T h e
person or persons ( o t h e r t h a n creditors) entitled to the assets upon dissolution of a
c o r p o r a t i o n , u n i n c o r p o r a t e d association or partnership will be recognized u n d e r this
subpart u p o n proof of dissolution. If t h e r e is m o r e t h a n o n e person entitled and t h e
book-entry Treasury bills h a v e not m a t u r e d , n o c h a n g e in t h e book-entry a c c o u n t will
be m a d e pending transfer o r r e d e m p t i o n at maturity.
§350.13
D e a t h of individual (natural person in own right).
U p o n the d e a t h of an individual in whose n a m e an a c c o u n t is held and who was n o t
acting as a fiduciary or in any o t h e r representative capacity, the following p e r s o n ( s ) ,
in the o r d e r shown below, will be recognized under this subpart as entitled to the b o o k entry T r e a s u r y bills:
( a ) T h e surviving joint designee of an a c c o u n t in the n a m e s of two individuals, if
any;
( b ) E x e c u t o r or administrator;
( c ) W i d o w or widower;
( d ) Child or children of the d e c e d e n t and d e s c e n d a n t s of d e c e a s e d children by
representation;
( e ) Parents of the d e c e d e n t or the survivor of t h e m ;
(f) Surviving brothers o r sisters;
(g) D e s c e n d a n t s of d e c e a s e d b r o t h e r s or sisters;
( h ) O t h e r next-of-kin as d e t e r m i n e d by the laws o f t h e domicile at t h e time of d e a t h .
(i) Any person or persons entitled in the above o r d e r of preference may request
p a y m e n t or o t h e r disposition to any p e r s o n or persons related to the d e c e d e n t by blood
or marriage, but n o p a y m e n t will be m a d e prior to maturity o f t h e bills. T h e provisions
of this section are for the c o n v e n i e n c e o f t h e Treasury and d o not p u r p o r t to d e t e r m i n e
ownership of the bills or of their r e d e m p t i o n p r o c e e d s .
260
§350.14
1977 REPORT OF THE SECRETARY OF THE TREASURY
Reinvestment or p a y m e n t at maturity.
( a ) Request f o r reinvestment. U p o n the request of the depositor, book-entry
Treasury bills held therein will be reinvested at maturity, i.e., their p r o c e e d s at maturity
will be applied to the p u r c h a s e of new Treasury bills at the average price (in t h r e e
decimals) of a c c e p t e d competitive bids for such Treasury bills then being offered. T h e
request for a reinvestment may be m a d e on the t e n d e r form at the time of p u r c h a s e ;
subsequent requests for reinvestment will be a c c e p t e d if received by the Bureau n o later
than ten business days prior to the maturity o f t h e bills. T h e difference between the p a r
value o f the maturing bills and the issue price of the new bills will be remitted to t h e
subscriber in the form of a Treasury c h e c k . Requests for the revocation of t h e
reinvestment of bills will also be a c c e p t e d if received n o later than ten business days
prior to the maturity d a t e .
( b ) Reinvestment in cases of delay. W h e r e a delay o c c u r s in the submission or
receipt of evidence to s u p p o r t a r e q u e s t for transfer, p a y m e n t or o t h e r authorized
transaction of book-entry Treasury bills, and such delay is likely to extend beyond t h e
maturity d a t e s of the bills, upon request or prior notice, the bills will be r e d e e m e d , at
maturity or thereafter, and their p r o c e e d s reinvested in new book-entry Treasury bills.
T h e bills p u r c h a s e d upon such reinvestment shall be those having the shortest term to
maturity t h e n being offered, and will be issued at the average price (in three decimals)
of the a c c e p t e d competitive bids therefor. T h e discount representing the difference
b e t w e e n the par value of t h e maturing or m a t u r e d bills and the issue price of the new
bills will b e remitted in t h e form of a T r e a s u r y c h e c k .
( c ) Payment. If reinvestment is not effected p u r s u a n t to this section, book-entry
Treasury bills will b e paid as of maturity in regular course.
§350.15
Conclusive p r e s u m p t i o n s .
For t h e purposes of this s u b p a r t and notwithstanding any State law o r any regulation
or any notice to the c o n t r a r y , it shall be conclusively p r e s u m e d ( a ) that any depositor
in whose n a m e , or n a m e and title, book-entry Treasury bills are r e c o r d e d , is a
c o m p e t e n t adult, ( b ) that recordation in two n a m e s , as prescribed in Sec. 3 5 0 . 7 ( b ) ( i )
of this s u b p a r t , is i n t e n d e d , if there is an a t t e m p t to create some other form of
r e c o r d a t i o n in two n a m e s , ( c ) that r e c o r d a t i o n in t h e n a m e s o f t h e first two is intended,
if there is an a t t e m p t to n a m e m o r e than two individuals, and ( d ) that the first n a m e
is the depositor in any case ( n o t authorized and not otherwise provided for in this
s u b p a r t ) wherein an a t t e m p t is m a d e to have book-entry Treasury bills r e c o r d e d in two
or m o r e n a m e s , e.g., two officers of an organization or two p a r t n e r s .
§350.16
tices.
Transactions in regular c o u r s e — n o t i c e s n o t effective—unacceptable n o -
( a ) Transactions in regular course—notices not effective. Transfers of book-entry
Treasury bills, p a y m e n t thereof or reinvestment at maturity or any o t h e r transaction
therein will be c o n d u c t e d in the regular course of business in a c c o r d a n c e with this
subpart, notwithstanding notice of the a p p o i n t m e n t of an attorney-in-fact, or a legal
guardian or similar representative, or notice of successorship, the termination of an
estate, t h e dissolution of an entity, or the d e a t h of an individual, unless the requisite
request, proof, and the evidence necessary to establish entitlement u n d e r this subpart
is received by the Bureau n o later t h a n ten business days prior to the maturity date of
the bills.
( b ) Unacceptable notices. T h e Treasury will not u n d e r any conditions accept notices
of pending judicial p r o c e e d i n g s , or of j u d g m e n t s in favor of creditors or others, or of
any claims whatsoever, for the p u r p o s e of suspending or modifying any book-entry
a c c o u n t or any transaction in book-entry Treasury bills.
SUBPART D—DEFINITIVE TREASURY BILLS
§350.17 Definitive Treasury bills—available where holding of definitive securities
required by law—termination d a t e D e c e m b e r 3 1 , 1978.
( a ) General. E a c h Reserve Bank is authorized to issue definitive Treasury bills, in
the $ 1 0 0 , 0 0 0 d e n o m i n a t i o n only, upon original issue or otherwise ( 1 ) to any entity
261
EXHIBITS
described in paragraph (b), and (2) for the account of any such entity described in
paragraph (b), to a securities dealer or broker or any financial institution which in the
regular course of its business purchases securities therefor.
(b) Eligible entities. Entities eligible to have definitive Treasury bills are those
required by or pursuant to Federal, State, municipal or local law to hold or to pledge
securities in definitive form, which may include, but are not limited to: a State,
municipality, city, township, county or any other political subdivision, public
corporation or other public body, an insurance company, and a fiduciary so required
to hold securities in definitive form.
(c) Conversion of book-entry Treasury bills. Each Reserve Bank is hereby authorized
to effect, upon the order of its depositor, conversions from and to book-entry Treasury
bills of definitive bills issued pursuant to this subpart.
(d) Evidence of eligibility. In order to obtain a definitive Treasury bill on original
issue or thereafter (1) an authorized officer on behalf of the entity must furnish to the
Reserve Bank a statement that it is required by, or pursuant to, law to hold or pledge
securities in definitive form; or (2) a financial institution, dealer, or broker purchasing
definitive Treasury bills hereunder for the account of any such entity must submit to
the Reserve Bank a statement that the entity has declared that it is required by or
pursuant to law to hold or pledge securities in definitive form.
(e) Redemption requirements. Where a definitive Treasury bill issued pursuant to
this subpart is presented for payment at or after maturity, it must be accompanied by
a statement ( 1) by an authorized officer ofthe entity making the presentation that such
entity is eligible under this subpart to hold definitive securities, or (2) by the institution
making the presentation identifying the entity to whose account the redemption
proceeds of the bill have been, or are to be credited, and affirming that such entity had
declared that it is eligible under this subpart to hold definitive securities.
(f) Termination date. The provisions of this subpart will apply only to definitive
Treasury bills issued to, or for the account of, eligible entities prior to December 3 1,
19*78.
§350.18
Sanctions for abuse of definitive Treasury bill privilege.
The Secretary of the Treasury reserves the right to disqualify any eligible entity
described in paragraph (b) of Sec. 350.17 from purchasing or holding definitive
Treasury bills if he determines that such entity has disposed of such definitive Treasury
bills solely for the purpose of accommodating another party, including a bank, broker,
dealer, or other financial institution, or a customer of such institution.
Exhibit 5.—Departnient Circular, Public Debt Series No. 26-76, First Amendment,
December 20, 1976, regulations governing book-entry Treasury bills
DEPARTMENT OF THE TREASURY,
Washington, December 20, 1976.
Department ofthe Treasury Circular, Public Debt Series No. 26-76, dated December
2, 1976 (31 CFR Part 350), is hereby amended:
(1) To indicate that the provisions of §350.6(a)(2) describing how book-entry
Treasury bill accounts should be maintained thereunder represent Department of the
Treasury recommendations relative to the maintenance of such accounts;
(2) To clarify the provisions of §350.14(a) to indicate that requests for reinvestment of maturing Treasury bills held under Subpart C would be made by the depositor
"in whose name the account is maintained"; and
(3) To change the provisions of §350.17(f), pertaining to the issuance of definitive
Treasury bills to eligible investors, to make clear that such bills would be available for
periods co-extensive with their maturity dates.
As amended, the above sections read as follows:
31 CFR Part 350 is amended as follows: Section 350.6 is amended by revising
paragraph (a)(2) as set forth below:
262
§350.6
1977 REPORT OF THE SECRETARY OF THE TREASURY
Book-entry Treasury bill accounts.
*
(a)
*
*
*
*
*
*
• * *
(2) Identification of accounts. Book-entry accounts may be established in such form
or forms as customarily permitted by the entity (e.g., member bank, or other banking
or thrift institution, or a securities dealer) maintaining them. The recommended
identification for each such account would include data to permit both customer
identification by name, address and taxpayer identifying number, as well as a
determination ofthe Treasury bills being held in such account by amount, maturity date
and CUSIP number, and of transactions relating thereto.
*
*
*
*
*
*
*
Section 350.14 is amended by revising paragraph (a) as set forth below:
§350.14 Reinvestment or payment at maturity.
(a) Request for reinvestment. Upon the request of the depositor in whose name the
account is maintained, book-entry Treasury bills held therein will be reinvested at
maturity, i.e., their proceeds at maturity will be applied to the purchase of new Treasury
bills at the average price (in three decimals) of accepted competitive bids for such
Treasury bills then being offered. The request for a reinvestment may be made on the
tender form at the time of purchase; subsequent requests fpr reinvestment will be
accepted if received by the Bureau no later than ten business days prior to the maturity
of the bills. The difference between the par value of the maturing bills and the issue
price ofthe new bills will be remitted to the subscriber in the form of a Treasury check.
Requests for the revocation ofthe reinvestment of bills will also be accepted if received
no later than ten business days prior to the maturity date.
*
•
*
*
*
*
*
Section 350.17 is amended by revising paragraph (f) as set forth below:
§350.17 Definitive Treasury bills—available where holding of definitive securities
required by law—termination date December 31, 1978.
*
*
*
*
*
*
*
(f) Termination date. The provisions of this subpart will apply only to definitive
Treasury bills whose issuance in such form was authorized prior to December 31, 1978,
and whose availability will be co-extensive with their maturity dates.
The foregoing amendment was effected under authority of sections 5 and 20 of the
Second Liberty Bond Act, as amended (40 Stat. 290, as amended; 31 U.S.C. 754 48
Stat. 343, as amended; 31 U.S.C. 754b; and 5 U.S.C. 301). Notice and public
procedures thereon are deemed unnecessary as the fiscal policy of the United States
is involved.
DAVID Mosso,
Fiscal Assistant Secretary.
Exhibit 6.—Department Circular, Public Debt Series No. 27-76, December 2, 1976,
issue and sale of book-entry Treasury bills and of definitive Treasury bills to eligible
bidders
DEPARTMENT OF THE TREASURY,
Washington, December 2, 1976.
The regulations in Department of the Treasury Circular, Public Debt Series No.
27-76, set forth below, are descriptive of the issue and sale of the 52-week, 26-week
and 13-week Treasury bills, and other Treasury bills, which, after specified dates, will
be available, with a limited exception, only in book-entry form. The regulations
governing such book-entry Treasury bills, following a notice of proposed rule making,
have been finally adopted and are being published simultaneously herewith.
263
EXHIBITS
Treasury bills issued in book-entry form prior to the dates when they will be available
only in such form are maintained u n d e r , and will c o n t i n u e to be subject t o , t h e
regulations set o u t in S u b p a r t 0 of D e p a r t m e n t of the Treasury Circular N o . 3 0 0 ,
c u r r e n t revision (31 C F R , Part 3 0 6 ) . T h a t subpart prescribes an optional book-entry
p r o c e d u r e , and the sale a n d issue of Treasury bills to which it, in part, applies are
generally provided for in D e p a r t m e n t of the Treasury Circular N o . 4 1 8 , S e c o n d
Revision, d a t e d O c t o b e r 5, 1976 ( 3 1 C F R , Part 3 0 9 ) . T h e Treasury bills held u n d e r
Subpart 0 will continue to be convertible to definitive bills at the request of the party
for whose a c c o u n t they are maintained.
As the fiscal policy o f t h e United States is involved in the issue and sale of T r e a s u r y
securities, it is found unnecessary t o issue these regulations with notice and public
p r o c e d u r e thereof u n d e r 5 U.S.C. 5 5 3 ( b ) , or subject to the effective d a t e limitation of
5 U.S.C. 5 5 3 ( d ) .
DAVID Mosso,
Fiscal Assistant Secretary.
C h a p t e r II of Title 31 of t h e C o d e of F e d e r a l Regulations is a m e n d e d by adding P a r t
349 as set forth below.
A U T H O R I T Y : 80 Stat. 3 7 9 ; sec. 8, 50 Stat. 4 8 1 , as a m e n d e d ; sec. 5, 4 0 Stat. 2 9 0 , as
a m e n d e d ; 5 U.S.C. 3 0 1 ; 31 U.S.C. 7 3 8 a , 754, 7 5 4 b .
§349.0
Authority for issue and sale.
T h e Secretary of t h e T r e a s u r y is authorized u n d e r t h e Second Liberty Bond Act, as
a m e n d e d , to issue Treasury bills of t h e United States o n an interest-bearing basis, o n
a discount basis, or on a c o m b i n a t i o n interest-bearing and discount basis, at such price
or prices a n d with interest c o m p u t e d in such m a n n e r and payable at such time or times
as he may prescribe, b u t n o t exceeding o n e year from t h e d a t e of issue; and to fix t h e
form, t e r m s , and conditions thereof, a n d to offer t h e m for sale o n a competitive or o t h e r
basis, u n d e r such regulations and u p o n such terms and conditions as he may prescribe.
§349.1
Description of T r e a s u r y bills—general—book-entry—definitive.
( a ) General. Treasury bills are obligations of the United States, issued at a discount,
promising t o pay a specified a m o u n t o n a specified d a t e . They are issued only by F e d e r a l
Reserve Banks and B r a n c h e s , acting as Fiscal Agents of the United States, and by t h e
Bureau o f t h e Public D e b t , Washington, D.C. 2 0 2 2 6 , pursuant to t e n d e r s accepted by
the D e p a r t m e n t of the Treasury.
( b ) Book-entry Treasury bills. Book-entry Treasury bills u n d e r this part are bills
issued only in the form of entries o n either the records of a Federal Reserve Bank or
of the D e p a r t m e n t of the Treasury, as follows:
( 1 ) 52-week Treasury bills issued after D e c e m b e r 1, 1976;
( 2 ) 26-week Treasury bills issued after J u n e 1, 1977;
( 3 ) 13-week Treasury bills issued o n or after S e p t e m b e r 1, 1977; and
( 4 ) Any other T r e a s u r y bills issued after S e p t e m b e r 1, 1977, including, but n o t
limited t o , tax anticipation Treasury bills.
( c ) Definitive Treasury bills f o r eligible entities. Treasury bills in the form of
engraved certificates will b e issued on or after the d a t e s specified in p a r a g r a p h ( b ) of
this section, and for the series shown, in t h e d e n o m i n a t i o n of $ 100,000 only, and only
until D e c e m b e r 3 1 , 1978, solely to entities required by or p u r s u a n t t o , Federal, State,
municipal, o r other local law to hold securities in definitive form. Such entities m a y
include, but are not limited to a State, municipality, city, township, county or any o t h e r
political subdivision, public corporation or other public body, an insurance c o m p a n y ,
and a fiduciary so required to hold physical securities.
§349.2
Regulations.
T h e Treasury bills, the issue and sale o f w h i c h are herein provided, shall be subject
to the book-entry Treasury bill regulations set forth in D e p a r t m e n t of the Treasury
Circular, Public D e b t Series N o . 2 6 - 7 6 (31 C F R , Part 3 5 0 ) , a n d , to the extent
applicable, to D e p a r t m e n t o f t h e Treasury Circular N o . 3 0 0 , c u r r e n t revision (31 C F R ,
Part 3 0 6 ) , the general regulations governing United States securities. Copies of t h e
264
1977 R E P O R T O F T H E SECRETARY O F T H E TREASURY
circulars may be obtained from a F e d e r a l Reserve Bank or Branch, or the Bureau of
the Public D e b t .
§349.3
Public notice of offering.
W h e n Treasury bills are offered, t e n d e r s therefor will be invited, o n a competitive
and noncompetitive basis, t h r o u g h public notice given by the Secretary o f t h e Treasury
in t h e n a m e of " T h e D e p a r t m e n t of t h e T r e a s u r y " . In such notice, there will be set forth
the a m o u n t of Treasury bills for which t e n d e r s are being invited, the d a t e of issue, t h e
C U S I P n u m b e r , the d a t e or dates when such bills will b e c o m e d u e and payable, the d a t e
and closing h o u r for the receipt of t e n d e r s at the F e d e r a l Reserve Banks and Branches,
and the D e p a r t m e n t of t h e Treasury, and t h e d a t e o n which p a y m e n t for tenders m u s t
be m a d e or c o m p l e t e d .
§349.4
A m o u n t of t e n d e r ; price.
T e n d e r s in response to t h e public notice must b e for a m i n i m u m of $ 1 0 , 0 0 0 , a n d
t e n d e r s over that a m o u n t m u s t be in multiples of $ 5 , 0 0 0 . Definitive Treasury bills will
be available, as set forth in § 3 4 9 . 1 ( c ) , only in the $ 1 0 0 , 0 0 0 d e n o m i n a t i o n and only for
the a c c o u n t of eligible investors. In the case of competitive t e n d e r s , the price or prices
offered by t h e bidder for t h e a m o u n t or a m o u n t s applied for must b e expressed on t h e
basis of 100, with not m o r e t h a n three decimals, e.g., 9 9 . 9 2 5 . Fractions may not be used.
N o n c o m p e t i t i v e t e n d e r s will be a c c e p t e d at the average price o f t h e competitive t e n d e r s
accepted.
§349.5
F o r m of t e n d e r s .
T e n d e r s may be submitted o n printed forms and forwarded in special envelopes
available from any F e d e r a l Reserve Bank or Branch. If a special envelope is n o t
available, t h e inscription " T e n d e r for Treasury Bills" should be placed o n t h e envelope
used. T h e instructions on t h e forms with respect to the submission of tenders should
be observed. T e n d e r s for book-entry Treasury bills to be maintained on the a c c o u n t s
of the D e p a r t m e n t of the Treasury should be submitted on special forms available for
that p u r p o s e .
§349.6
T e n d e r s for c u s t o m e r s and for own a c c o u n t .
Banking institutions a n d dealers w h o m a k e primary m a r k e t s in G o v e r n m e n t
securities a n d r e p o r t daily to the F e d e r a l Reserve Bank of New Y o r k their positions
with respect to G o v e r n m e n t securities and borrowings t h e r e o n may submit tenders for
the a c c o u n t s of c u s t o m e r s , provided the n a m e s of the c u s t o m e r s are set forth in such
tenders. O t h e r s will not be permitted to submit t e n d e r s except for their own a c c o u n t .
§349.7
Deposits with t e n d e r s submitted to Federal Reserve Banks.
T e n d e r s submitted to F e d e r a l Reserve Banks and Branches by incorporated b a n k s
and trust c o m p a n i e s , a n d responsible a n d recognized dealers in investment securities,
will be received without deposit. T e n d e r s from all others must be a c c o m p a n i e d by a
p a y m e n t of such p e r c e n t of the face a m o u n t of the Treasury bills applied for as
prescribed in the public n o t i c e , except that such deposit will not be required if t h e
tenders are a c c o m p a n i e d by an express guaranty of p a y m e n t in full by an i n c o r p o r a t e d
b a n k or trust c o m p a n y . Forfeiture of t h e deposit may b e declared by the Secretary of
the T r e a s u r y , if p a y m e n t is not c o m p l e t e d , in the case of a c c e p t e d tenders, on t h e
prescribed d a t e .
§349.8
P a y m e n t with t e n d e r s submitted to Treasury.
T e n d e r s for Treasury bills to be issued and maintained on book-entry a c c o u n t s of t h e
Treasury must be a c c o m p a n i e d by full p a y m e n t of the face a m o u n t of the bills applied
for. A cash adjustment will be m a d e for the difference b e t w e e n the par p a y m e n t
submitted a n d the actual issue price of t h e bills.
§349.9
Submission of t e n d e r s .
T e n d e r s must be received on or before the time fixed for closing, as set forth in t h e
public n o t i c e , at Federal Reserve Banks a n d Branches, and at the Bureau o f t h e Public
Debt, Washington, D.C. 2 0 2 2 6 . T e n d e r s not timely received will be disregarded.
EXHIBITS
§349.10
265
Reservation of right.
The Secretary ofthe Treasury expressly reserves the right on any occasion to accept
noncompetitive tenders entered in accordance with specific offerings, to reject any or
all tenders or parts of tenders, and to award less than the amount applied for; and any
action he may take in any such respect or respects shall be final.
§349.11
Acceptance of tenders.
The Department ofthe Treasury will determine from the tenders received the amount
and price range of the accepted bids. Those at the highest prices offered will be
accepted in full down to the amount required, and if the same price appears in two or
more tenders and it is necessary to accept only a part of the amount offered at such
price, the amount accepted at such price will be prorated in accordance with the
respective amounts apphed for. Public announcement of the acceptance will then be
made. Those submitting tenders will be advised ofthe acceptance or rejection thereof
by the Federal Reserve Banks or by the Treasury, depending on where such tenders
were received.
§349.12
Payment of accepted tenders.
Settlement for accepted tenders submitted to a Federal Reserve Bank must be made
or completed at such Bank in cash or other immediately available funds on or before
the date specified, except that the public notice inviting tenders may provide: (a) That
any qualified depositary may make such settlement by credit, on behalf of itself and
its customers, up to any amount for which it shall be qualified in excess of existing
deposits, when so notified by the Federal Reserve Bank of its District, or (b) that such
settlement may be made in maturing Treasury bills accepted in exchange. Whenever
settlement in maturing Treasury bills is authorized, a cash adjustment will be made for
the difference between the par value ofthe maturing bills and the issue price ofthe new
ones.
§349.13
Acceptance of book-entry Treasury bills for various purposes.
(a) Acceptable as security for public deposits. Book-entry Treasury bills will be
acceptable at maturity value to secure deposits of public monies.
(b) Acceptable in payment of taxes where authorized. The public notice inviting
tenders for book-entry Treasury bills may provide that such bills will be acceptable at
maturity value, whether at or before maturity, under such rules and regulations as may
be prescribed, in payment of income taxes payable under the provisions ofthe Internal
Revenue Code.
(c) Discounting by Federal Reserve Bank of notes secured by Treasury bills. Notes
secured by book-entry Treasury bills are eligible for discount or rediscount at Federal
Reserve Banks as provided under the provisions of section 13 of the Federal Reserve
Act, as are notes secured by bonds and notes of the United States.
(d) Acceptable in connection withforeign obligations held by United States. Treasury
bills will be acceptable at maturity, but not before, in payment of interest or ofprincipal
on account of obligations of foreign governments held by the United States.
§349.14
Taxation.
The income derived from Treasury bills, issued pursuant to this part, whether interest
or gain from the sale or other disposition of the bills, shall not have any exemption, as
such, and loss from the sale or other disposition of Treasury bills shall not have any
special treatment, as such, under the Internal Revenue Code, or laws amendatory or
supplementary thereto. The bills shall be subject to estate, inheritance, gift or other
excise taxes, whether Federal or State, but shall be exempt from all taxation now or
hereafter imposed on the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority. For purposes of
taxation, the amount of discount at which Treasury bills are originally sold by the United
States shall be considered to be interest.
266
§349.15
1977 R E P O R T O F THE SECRETARY O F THE TREASURY
Relief on account of loss.
Relief on account of the loss of any Treasury bills issued pursuant to this part may
be given only under the authority of, and subject to the conditions set forth in section
8 ofthe Act of July 8; 1937 (50 Stat. 481), as amended (31 U.S.C. 738a), and the
regulations issued pursuant thereto, as set forth in Department ofthe Treasury Circular
No. 300 (31 CFR, Part 306), insofar as applicable.
§349.16
Functions of Federal Reserve Banks.
Federal Reserve Banks and Branches, as Fiscal Agents of the United States, are
authorized to perform all such acts as may be necessary to carry out the provisions of
this circular and of any public notice or notices issued in connection with any offering
of Treasury bills.
§349.17
Reservation as to terms of circular.
The Secretary ofthe Treasury reserves the right further to amend, supplement, revise
or withdraw all or any ofthe provisions of this circular at any time, or from time to time.
Exhibit 7.—Department Circular, Public Debt Series No. 1-63, January 10, 1963,
amended, regulations governing United States retirement plan bonds
DEPARTMENT OF THE TREASURY,
Washington, April 22, 1977.
SUMMARY: Certain operations regarding U.S. Retirement Plan Bonds have been
transferred from the Division of Securities Operations in the Washington Office ofthe
Bureau of the Public Debt to the Division of Transactions and Rulings in the
Parkersburg Office ofthe Bureau. Accordingly, it is necessary to amend the regulations
governing U.S. Retirement Plan Bonds to make appropriate address changes.
EFFECTIVE DATE: This amendment is effective on April 28, 1977.
Accordingly, Department ofthe Treasury Circular, Public Dept Series, No. 1-63, is
amended as follows:
§§341.8 and 341.12
[Amendedl
1. In the Sections listed below, the references to "The Bureau of the Public Debt,
Washington, D.C. 20226" are changed to read: Bureau ofthe Public Debt, "Division
of Transactions and Rulings", Parkersburg, West Virginia 26101.":
1. Paragraph (b) of §341.8.
2. Footnote 1 to paragraph (c) of §341.8.
3. Section 341.12.
§§341.8-341.11
[Amended]
2. In the Sections listed below, the references to "The Bureau of the Public Debt,
Washington, D.C. 20226" are chanjged to read: Bureau ofthe Public Debt, "Securities
Transactions Branch," Washington, D.C. 20226 or Bureau of the Public Debt,
"Division of Transactions and Rulings", Parkersburg, West Virginia 26101."
1. Paragraph (c) of §341.8.
2. Paragraph (c)(2) of §341.8.
3. Paragraph (a)(5) of §341.9.
4. Paragraph (b) of §341.9.
5. Paragraph (a) of §341.10.
6. Paragraph (b) of §341.11.
267
EXHIBITS
This amendment is issued under the authority of 5 U.S.C. 301, 31 U.S.C. 752. As
it is entirely administrative in nature and involves the fiscal policy ofthe United States,
notice and public procedures thereon are found to be unnecessary.
DAVID Mosso,
Fiscal Assistant Secretary.
Exhibit 8,—Department Circular No. 530, Tenth Revision, December 5, 1973,
amended, regulations governing United States savings bonds
DEPARTMENT OF THE TREASURY,
Washington, May 13, 1977.
SUMMARY: These amendments of the regulations governing U.S. savings bonds
eliminate the requirement that women named as coowners or beneficiaries on such
bonds must be identified by a courtesy title if their social security numbers are not
fumished.
EFFECTIVE DATE: May 19, 1977.
Accordingly, Department of the Treasury Circular No. 530; Tenth Revision, dated
December 5, 1973, as amended (31 CFR Part 315); Department of the Treasury
Circular No. 653, Ninth Revision, dated April 23, 1974, as amended (31 CFR Part
316); and Department of the Treasury Circular No. 905, Sixth Revision, dated April
19, 1974 (31 CFR Part 332), are amended as follows:
§315.5
[Amended]
Section 315.5 of 31 CFR, Part 315 is amended by the deletion of the twelfth sentence
which begins with the words, "If a woman * • *"
DAVID Mosso,
Fiscal Assistant Secretary.
Exhibit 9.—Department Circular No. 653, Ninth Revision, April 23, 1974, amended,
offering of United States savings bonds. Series E
DEPARTMENT OF THE TREASURY,
Washington, May 13, 1977.
SUMMARY: These amendments of the regulations governing U.S. savings bonds
eliminate the requirement that women named as coowners or beneficiaries on such
bonds inust be identified by a courtesy title if their social security numbers are not
furnished.
EFFECTIVE DATE: May 19, 1977.
Accordingly, Department ofthe Treasury Circular No. 530, Tenth Revision, dated
December 5, 1973, as amended (31 CFR Part 315); Department of the Treasury
Circular No. 653, Ninth Revision, dated April 23, 1974, as amended (31 CFR Part
316); and Department ofthe Treasury Circular No. 905, Sixth Revision, dated April
19, 1974 (31 CFR Part 332), are amended as follows:
§316.2 [Amended]
Section 316.2 of 31 CFR, Part 316 is amended by the deletion of the first two
sentences of Footnote 2.
DAVID Mosso,
Fiscal Assistant Secretary.
268
1977
REPORT OF THE SECRETARY OF THE
TREASURY
Exhibit 10.—Department Circular No. 905, Sixth Revision, April 19, 1974,
amended, offering of United States savings bonds. Series H
DEPARTMENT OF THE TREASURY,
Washington, May 13, 1977.
SUMMARY: These amendments of the regulations governing U.S. savings bonds
eliminate the requirement that women named as-coowners or beneficiaries on such
bonds must be identified by a courtesy title if their social security numbers are not
furnished.
EFFECTIVE DATE: May 19, 1977.
Accordingly, Department of the Treasury Circular No. 530, Tenth Revision, dated
December 5, 1973, as amended (31 CFR Part 315); Department of the Treasury
Circular No. 653, Ninth Revision, dated April 23, 1974, as amended (31 CFR Part
316); and Department of the Treasury Circular No. 905, Sixth Revision, dated April
19, 1974 (31 CFR Part 332), are amended as follows:
§332.2
[Amended]
Section 332.2 of 31 CFR, Part 332 is amended by the deletion of Footnote 1.
The foregoing amendments are issued under the authority of 5 U.S.C. 301, 31 U.S.C.
757c. As they involve the fiscal policy of the United States, notice and public
procedures thereon are found to be unnecessary.
DAVID Mosso,
Fiscal Assistant Secretary.
Exhibit 11.—Department Circular, Public Debt Series No. 1-75, January 3,1975, First
Amendment, regulations governing United States individual retirement plan bonds
DEPARTMENT OF THE TREASURY,
Washington, June 27, 1977.
Miscellaneous Amendments
SUMMARY: This amendment to the regulations governing United States Individual
Retirement Bonds makes the changes necessitated by the Tax Reform Act of 1976. This
is being accomplished by the addition of a $75 bond denomination and the revision of
the annual purchase limitation. Certain addresses contained in the regulations are also
being changed to reflect a transfer of operations within the Department.
EFFECTIVE DATE: July 21, 1977.
SUPPLEMENTAL INFORMATION: Individual Retirement bonds have been
offered for sale since 1975 as one of the investments that eligible individuals may utilize
to fund an individual retirement account (IRA) under the Internal Revenue Code. Since
the Code prescribes a maximum amount that may be annually deducted for
coiitributions to such an account, the regulations governing Individual Retirement
Bonds have contained an annual purchase hmitation equal to this maximum amount.
Until passage ofthe Tax Reform Act of 1976 (Pub. L. 94-455), this annual limitation
was 15 percent of earned income up to a maximum of $1,500.
Under section 1501 of the Tax Reform Act, however, certain married individuals
eligible to purchase Individual Retirement Bonds are entitled to elect a higher annual
deduction limitation. Under this new limitation, if the spouse of an individual eligible
for IRA participation has no earned income during the year, the working eligible spouse
may purchase bonds for tax deduction in that year up to either of the following two
limitations:
(1) The working spouse may purchase bonds in his or her own name up to a
maximum of 15 percent of earned income or $1,500, whichever is less, the deduction
therefor to be taken under section 219 of the Internal Revenue Code; or
(2) Bonds may be purchased in each spouse's name, up to a total maximum of 15
EXHIBITS
269
percent of the working spouse's earned income or $1,750, whichever is less, the
deduction therefor to be taken under section 220 of the Code.
Section 220 of the Code also requires that the IRA contributions made in each
spouse's name for deduction under the 15 percent/$ 1,750 limitation must be in equal
amounts. Thus, an eligible married couple desiring to fund their IRA solely with bonds
can only obtain the maximum $1,750 deduction by purchasing $875 in bonds in each
spouse's name. In order to make such purchases possible, the Department is providing
a new $75 bond. This will now make bonds available in denominations of $50, $75,
$100, and $500. The annual limitation on purchases pf bonds is also being revised to
make provision for the new Code Section 220 alternative limitation.
The Department is also making several address changes in the regulations to reflect
a transfer of certain operations. Certain bond transactions previously handled by the
Division of Securities Operations in the Washington Office ofthe Bureau ofthe Public
Debt will now be handled by the Division of Transactions and Rulings in the
Parkersburg Office of the Bureau
The primary author of this document is Albert E. Martin, Attorney-Adviser, Bureau
of the Public Debt.
Accordingly, to accomplish these changes. Department of the Treasury Circular,
Public Debt Series, No. 1-75 (31 CFR Part 346) is hereby amended as follows:
1. In §346.1, the first sentence of paragraph (c) is revised to read:
§346.1
Description of bonds.
(c) Denominations-issue date. Individual Retirement Bonds will be available only
in registered form and in denominations of $50, $75, $100, and $500.
2. Section 346.5 is revised to read:
§346.5
Limitation on holdings.
(a) Except as provided in paragraph (b) of this section, the amount of Individual
Retirement Bonds which may be registered in any one individual's name is limited to
the amount fof which an annual deduction may be taken under either section 219 or
220 of the Intemal Revenue Code. > These limitations are as follows:
(1) In the case of an individual electing to deduct his or her bond purchase under
section 219, the face amount of bonds purchased for tax deduction in any given year
may not exceed 15 percent of the individual's eamed income for that year or $ 1,500,
whichever is less.
(2) In the case of an individual electing to deduct his or her bond purchases under
section 220, the total face amount of bonds purchased for tax deduction in any given
year in the name ofthe individual and in the name of his or her nonworking spouse may
not exceed 15 percent of the working spouse's earned income for that year or $ 1,750,
whichever is less. 2
(b) The above limitations do not apply to rollover bond purchases, as described in
sections 402(a)(5), 403(a)(4), or 408(d)(3) ofthe Internal Revenue Code.
§346.8
3.
[Amended]
Footnote 1 to paragraph (d)(2) of §346.8 is redesignated as footnote 3.
§§346.8, 346.9, 346.10. and 346.12
[Amended]
4. The references in the sections listed below to "Bureau of the Public Debt,
Division of Securities Operations, Washington, D.C. 20226" are changed to read:
"Bureau ofthe Public Debt, Division of Transactions and Rulings, Parkersburg, West
Virginia 26101."
1 NOTE.—Under the Internal Revenue Code, bonds issued during any given year or within 43 days thereafter may be deducted
in that year.
2 NOTE.—Code section 220 requires, in efTect, that the toUl IRA contributions in each spouse's name to be deducted in any
one year be in equal amounts. While it is permissible for an eligible married couple to utilize several different forms of IRA
investments within the same year, this means that couples investing solely in bonds must purchase equal amounts ofbonds in each
spouse's name.
270
1977 R E P O R T O F T H E SECRETARY O F T H E TREASURY
(1) Section 346.8(b)(2); (2) footnote 3 to §346.8(d)(2); (3) section 346.9(a); (4)
section 346.10(a); (5) section 346.10(b); and (6) section 346.12.
•
•
•
•
*
•
•
5. The Table of Redemption Values following §346.15 is replaced by the new Table
set out below:
Table of redemption values providing a n investment yield of 6 percent per a n n u m f o r bonds
bearing issue dates beginning J a n . 1, 1975
NOTE.—This table shows how Individual Retirement Bonds bearing issue dates on or after Jan. 1, 1975, by
denomination, increase in redemption value during the successive half-year periods following issue. The
redemption v&lues provide an investment yield of approximately 6 pet/annum, compounded semiannually, on
the purchase price from issue date to the beginning of each half-year period. No increase in redemption value
is shown, however, until 1 year after issue date since no interest may be paid on bonds redeemed before that
time. The period to maturity is fixed in accordance with the provisions of §346.1(b) of this circular.
Issue price ...I
'.
$50.00
Period after issue date
Istyr
1 t o i 1/2 yr
11/2 to 2 yr
2 to 21/2 yr
21/2 to 3 yr
3 to 3 1/2 yr
3 1/2 to 4 yr
4 to 41/2 yr
41/2 to 5 yr
5 to 5 1/2 yr
5 1/2 to 6 yr
6 to 61/2 yr
61/2 to 7 yr
7 to 7 1/2 yr
7 1/2 to 8 yr
8 to 81/2 y r !
8 1/2 to 9 yr
9 to 91/2 yr
9 1/2 to 10 yr
10 to 101/2 yr
101/2 to 11 yr
11 to 11 1/2 yr
11 1/2 to 12 yr
12 to 12 1/2 yr
12 1/2 to 13 yr
13 to 13 1/2 yr
13 1/2 to 14 yr
14 to 14 1/2 yr
14 1/2 to 15 yr
15 to 15 1/2 yr
15 1/2 to 16 yr
16 to 16 1/2 yr
16 1/2 to 17 yr
17 to 17 1/2 yr
17 1/2 to 18 yr
18 to 18 1/2 yr
18 1/2 to 19 yr
19 to 19 1/2yr
19 1/2 to 20 yr
20 to 20 1/2 yr
$75.00
$100.00
$500.00
Redemption values during each half-year period
(values increase on 1st day of period shown)
,.,
$50.00
53.05
54.64
56.28
57.%
59.70
61.49
63.34
65.24
67.20
69.21
71.29
73.43
75.63
77.90
80.24
82.64
85.12
87.68
90.31
93.01
95.81
98.68
101.64
104.69
107.83
111.06
114.40
117.83
121.36
125.00
128.75
132.62
136.60
140.69
144.91
149.26
153.74
158.35
163.10
$75.00
79.57
81.95
84.41
86.95
89.55
92.24
95.01
97.86
100.79
103.82
106.93
110.14
113.44
116.85
120.35
123.%
127.68
131.51
135.46
139.52
143.71
148.02
152.46
157.03
161.74
166.60
171.59
176.74
182.04
187.51
193.13
198.93
204.89
211.04
217.37
223.89
230.61
237.53
244.65
$100.00
106.10
109.28
112.56
115.92
119.40
122.98
126.68
130.48
134.40
138.42
142.58
146.86
151.26
155.80
160.48
165.28
170.24
175.36
180.62
186.02
191.62
197.36
203.28
209.38
215.66
222.12
228.80
235.66
242.72
250.00
257.50
265.24
273.20
281.38
289.82
298.52
307.48
316.70
326.20
$500.00
530.50
546.40
562.80
579.60
597.00
614.90
633.40
652.40
672.00
692.10
712.90
734.30
756.30
779.00
802.40
826.40
851.20
876.80
903.10
930.10
958.10
986.80
1,016.40
1.046.90
1,078.30
1.110.60
1,144.00
1.178.30
1.213.60
1,250.00
1.287.50
1.326.20
1,366.00
1.406.90
1.449.10
1.492.60
1.537.40
1,583.50
1.631.00
These amendments are being issued under the authority of 5 U.S.C. 301, 26 U.S.C.
220, and 31 U.S.C. 757. As they either involve the fiscal policy ofthe United States
or are administrative in nature, notice and public procedures thereon are found to be
unnecessary. These amendments are effective upon publication.
DAVID MOSSO,
Fiscal Assistant Secretary.
EXHIBITS
27 1
Domestic Finance
Exhibit 12.—Statement by Assistant Secretary Gerard, November 10, 1976, before the
Economic Stabilization Subcommittee of the House Banking, Currency, and
Housing Committee, the Task Force on Tax Expenditures and Off-budget Agencies
of the House Budget Committee, and the Subcommittee on Oversight of the House
Ways and Means Committee, on loan guarantee programs
I am happy to be here today to assist you in your consideration of the guaranteed
loan programs of the Federal Government, and I applaud your efforts in this very
important area. I am hopeful that these efforts by three such distinguished committees
of the House will contribute to more efficient and effective means of financing and
controlling guaranteed loans as well as improvements in the budget and accounting
procedures for guarantee programs. '
Background
The special financing and budgeting problems in the guaranteed loan area have been
studied over the past 30 years by a number of groups including the Hoover Commissions
established by the Congress in 1947 and 1953, the private Commission on Money and
Credit in 1961, the President's Committee on Federal Credit Programs in 1962, and
the President's Commission on Budget Concepts in 1967. It is clear from a review of
the reports of those groups that the problems in the guaranteed loan area are
exceedingly complex and are not amenable to simple solutions.
The President's Commission on Budget Concepts stated in its 1967 report that "One
of the most difficult questions the Commission has faced is how Federal loan outlays
should be reflected appropriately in the budget." The Commission recommended that
direct loans be included in the new unified budget totals and that guaranteed loans be
excluded from the totals, and these recommendations were adopted by the President
in 1968. However, the Commission recognized the need for coordinated surveillance
of guaranteed loans, and the Commission stated:
The Commission believes further study should be made of the need for greater
coordination of guaranteed and insured loan programs. The executive branch and
the Congress may wish to consider the desirability of establishing new procedures
for reviewing the authorizations and ceilings on insured and guaranteed loan
programs in view of the growing importance of this type of program.
Yet, little progress has been made over the past decade toward developing new
congressional procedures for reviewing guaranteed loan authorizations, and in the
Congressional Budget and Impoundment Control Act of 1974 guaranteed loans were
specifically exempted from the new congressional budget process.
While the problem of budget treatment of guaranteed loans has remained unsolved,
considerable progress has been made over the past decade with respect to the financing
of guaranteed loans. Although there were some problems in connection with the sale
and budget treatment of participation certificates, in the Participation Sales Act of 1966
the Congress recognized the importance of consolidation and coordination of Federal
agency sales of guaranteed loans in the market. That act authorized the pooling of loans
sold in the inarket by various agencies and required that loan sales be approved by the
Secretary ofthe Treasury. Thus, the Congress recognized that sales of guaranteed loans,
including certificates of participation in pools of loans, were similar in their market
effects to issues of direct agency securities, which were generally subject to Treasury
approval under the Government Corporation Control Act of 1945.
Then, in 1973, the Congress estabhshed the Federal Financing Bank, which provided
a mechanism to consolidate the financing of obligations issued, sold, or guaranteed by
Federal agencies. Also, in recent years the Congress has enacted a number of statutes
requiring that the fmancing of certain new guarantee programs be subject to Treasury
approval or handled exclusively by the Federal Financing Bank. Examples of such
legislation enacted in 1976 are new loan guarantee programs for coastal energy impact
assistance (Public Law 94-370, July 26, 1976), the Virgin Islands (Public Law 94-392,
272
1977 REPORT OF THE SECRETARY OF THE TREASURY
August 19, 1976), the Guam Power Authority (Public Law 94-395, September 3,
1976), and construction of waste treatment works (Public Law 94-558, October 19,
1976).
Definition of guaranteed loans
In attempting to deal with guaranteed loan problems, it is essential at the outset to
define guaranteed loans. In the Federal Financing Bank Act of 1973 the Congress
defined "guarantee" to mean "any guarantee, insurance, or other pledge with respect
to the payment of all or part of the principal or interest on any obligation * * *." In
keeping with this definition, the FFB has purchased a wide variety of obligations
guaranteed or insured by Federal agencies, including obligations secured by Federal
agency lease payments and obligations acquired directly by Federal agencies and then
sold to the FFB subject to an agreement that the selling agency will assure repayment
to the FFB in the event of default by the non-Federal borrower. We also interpret the
FFB Act definition of guaranteed obligations as including obligations supported by
Federal agency commitments to make debt service grants; e.g., to support public
housing authority bonds, or other commitments such as price support agreements or
commitments by Federal agencies to make direct "take-out" loans in the event of
default on a private obligation.« However, the FFB has uniformly pursued a policy of
purchasing obligations guaranteed under these various arrangements only if there is a
full guarantee of both principal and interest, even though partially guaranteed
obligations would technically be eligible for FFB purchase under the definition of
"guarantee" in the FFB Act.
FFB financing of guaranteed loans
Simply stated, the purchase of guaranteed obligations by the FFB can be viewed as
changing guaranteed loans to direct loans. One of the key issues facing Congress and
the executive branch, and one on which there is disagreement within the executive
branch, is whether such conversions on a large scale are sound as a matter of public
policy.
It is the Treasury's view that FFB financing is in the best interests ofthe Government.
Permitting 100 percent Government-guaranteed obligations to be issued in the market
in direct competition with the Treasury's own securities and at higher interest rates than
those paid by the Treasury would be undesirable from the standpoint of Treasury debt
management policy and clearly not in accord with the intent of Congress as expressed
in the Federal Financing Bank Act of 1973.
If access to the FFB were denied in the case of a fully guaranteed loan, the ultimate
borrower would bear higher costs equivalent on average to one-half percentage point.
While these higher costs mean that the benefit provided by the guarantee is worth less
to the borrower, it would not mean that the burden to taxpayers would be less.
Fully guaranteed obligations would be equivalent to Treasury obligations in terms of
risk to investors, but the market would require the borrower to incur higher borrowing
costs because investors would be unfamiliar with the issue and because of market
factors; e.g., less liquidity. Accordingly, sales of guaranteed obhgations in the market
normally require far more in the way of legal and financial services involving payment
of fees of investment bankers or other financial intermediaries, fees of attorneys and
accountants, and printing costs for prospectuses and other related documents. None
of these costs is incurred when the FFB is employed.
Moreover, if substantial amounts of guaranteed borrowing are effected through
numerous market transactions rather than through the FFB, the entire market for
Government securities—of which private obligations guaranteed by the Federal
Government are, of course, a part—can be disrupted. The result of such disruption is
higher borrowing costs for all participants in the market, and the resulting higher costs
will exert upward interest rate pressures on consumer loans, mortgage rates, small
business loans, and all other financial instruments.
•The broad definition of guaranteed loans in the Federal Financing Bank Act of 1973 is also the approach taken in the
tabulation and analysis of guaranteed loans in Special Analysis C of the President's Budget, which shows a total of $200 billion
in guaranteed loans outstanding at the end of the fiscal year 1975 and an estimated $235 billion at the end of fiscal year 1977.
EXHIBITS
273
The FFB was created by Congress expressly to deal with these concerns. Its
establishment reflected Congress view that obligations backed by the full faith and
credit ofthe United States should be financed as efficiently as possible, with the lowest
possible transaction costs and with the least disruption to our capital markets. It is to
serve these objectives that we believe the bank should be available to finance fully
guaranteed obligations.
The two principal arguments against FFB purchases of fully guaranteed obligations
are (1) the resulting interest cost savings to the guaranteed borrower will provide an
additional and unwarranted incentive to borrow and may add to demands for expanded
and new guaranteed programs, and (2) the additional direct Treasury securities issues
to finance the FFB will add to the total volume of Treasury issues and will thus add to
the cost of Treasury borrowing. Taking the second argument first, while it is unlikely
that any interest rate effect will be material, the precise effects of shifting borrowing
from one sector ofthe Federal securities market to another sector of that market cannot
be predicted with certainty. Yet, it is clear to us that the interest savings realized by
the guaranteed sector from financing through the FFB outweigh any higher interest
costs to the Treasury.
As to the former contention, if Congress determines that the savings made possible
by access to the FFB should not be passed on to the guaranteed borrower, then we
believe that the benefits should be realized by the taxpayers, through increased
guarantee fees or similar offsetting devices, rather than by bondholders, financial
intermediaries, and other unrelated third parties.
Budget treatment of guaranteed loans
Regardless of whether guaranteed loans are financed through the FEB or directly in
the private market, guarantees should clearly be subject to overall coordination and
review in the annual budget and appropriation process. While loan guarantees are
different from outright grants, guarantees do in fact involve very substantial costs to
the taxpayer and to the economy. These costs vary considerably from one guarantee
program to another, depending upon the structure ofthe more than 100 loan guarantee
programs which have been enacted by the Congress and the different types of subsidies
provided by the Congress in these programs.
Principal subsidies.—In some cases the Federal Government enters into loan
guarantee arrangements with the expectation of paying part or all of the principal
amount of the loan, so that the guaranteed loan is equivalent to an outright grant of
taxpayer funds. For example, the $14 billion of guaranteed public housing loans
outstanding will probably have to be repaid by the Federal taxpayer, because it is not
expected that public housing projects will generate enough receipts to cover current
operating costs. As a result, the entire $ 14 billion of their debt will be paid off by annual
contributions by HUD and thus by the Federal taxpayer.
Interest subsidies.—Many guaranteed loan programs, in fact, involve a double subsidy
because direct interest subsidies—e.g., loans for students, rural community facilities,
and subsidized private housing—are provided in addition to the large subsidy implicit
in the guarantee. The Federal budget shows an estimate of $2 billion for the present
value of these subsidies on guaranteed loan commitments in fiscal year 1977.
Default costs.—In addition to direct principal and interest subsidies on certain
guaranteed loans, all guaranteed loans involve Government assumption of credit risks
and t>us potential costs to the Federal taxpayer in the event of default.
Admmistrative costs.—V/hi\e some loan guarantee programs involve fees charged by
Federal agencies to cover the Government's expenses of processing loan applications,
loan servicing, and other administrative expenses, in other programs there are no such
fees, or the fees are not adequate to cover the administrative costs because of provisions
of law which prohibit fees or limit the fees which may be charged. These are only the
costs which lend themselves to ready quantification.
In the long run, the most burdensome costs of Federal credit programs are their
adverse effects on our prosperity and future economic growth caused by the allocation
of capital away from its potentially most productive uses. Every time we create a
guarantee program we are denying other private borrowers access to much-needed
274
1977 REPORT OF THE SECRETARY OF THE TREASURY
capital funds. And without such capital resources, the private sector will be unable to
fulfill its responsibility to create jobs and provide a better standard of living for all
citizens. It is this reality, above all, which Congress must consider each time it is asked
to extend further the full faith and credit of the United States.
Distinction between direct and guaranteed loans
Direct loans are, unless explicitly excluded by law, included in the budget totals, and
it is difficult to see how direct loans differ in substance from guaranteed loans. Rather
than classifying loans for budget and appropriations purposes on the basis of whether
the loans are guaranteed or financed directly by the Government, I think it is essential
to look at the substantive aspects of these Federal credit programs and to determine
on the basis of their substance how they should be financed or treated in the budget
process.
In this regard it is helpful to recognize that all loans involve three basic functions:
(1) The risk function, (2) the financing function, and (3) the processing function. A
popular concept of guaranteed loans is that the Government assumes part or all of the
credit risk and that the private sector performs the functions of financing the loan and
the paperwork involved in loan applications, appraisals, servicing, and default
procedures. Yet, two examples serve to highlight the thin and often invisible line
between guaranteed and direct loan programs. First, certain agencies are empowered
to make direct loans—incurring the costs of origination, servicing, et cetera—but then
can remove the loans from the budget totals by reselling them with a guarantee to a
private party.
The line can be as easily crossed in the other direction. For example, under the HUD
urban renewal program, which provides for direct loan authority, a commitment to
make a direct loan is treated as a guarantee, and the actual obligations are sold in the
market by non-Federal entities.
Possible changes in the budget appropriations process
A number of suggestions have been made over the years as to how the budget
appropriations process might be improved with respect to the treatment of guaranteed
loans.
One alternative is to require all guaranteed loan disbursements and repayments to
be treated in the same way as direct loans and thus included in the budget totals, perhaps
in a separate loan account. A more complicated approach would be to include in the
budget totals only the estimated present value of the costs to the Government for
program administrative expenses, interest subsidies, or loan defaults.
Should Congress determine that guaranteed loans should not be included in the
budget, Congress may still wish to consider more effective means of reviewing each
guarantee program in the regular annual budget appropriations process. I would also
suggest that consideration be given to including the total volume of annual loan
guarantee commitments in the budget resolution each year.
Exhibit 13.—Statement by Assistant Secretary Altman, August 1, 1977, before the
House Ways and Means Committee, on the public debt limit
I am pleased to be here today to assist you in your consideration of the public debt
limit. As you know, on September 30, 1977, the present temporary debt limit of $700
billion (enacted on June 30, 1976) will expire and the debt limit will revert to the
permanent ceiling of $400 billion. Legislative action by September 30 will be necessary,
therefore, to permit the Treasury to borrow to refund securities maturing after
September 30 and to raise new cash to finance the anticipated deficit in the fiscal year
1978.
In addition, we are requesting an increase in the $ 17 billion limit (also enacted June
30, 1976) on the amount of bonds which we may issue without regard to the 4 1/4percent interest rate ceiling on Treasury bond issues.
275
EXHIBITS
Finally, we are requesting authority to permit the Secretary ofthe Treasury, with the
approval of the President, to change the interest rate on U.S. savings bonds if that
becomes necessary for purposes of assuring a fair rate of return to savings bonds
holders.
Debt limit
Turning first to the debt limit, our estimates of the amounts of the debt subject to
limit at the end of each month through the fiscal year 1978 are shown in the attached
table. The table projects a peak debt subject to limit of $780 billion at September 30,
1978, which assumes a $12 billion cash balance. The usual $3 billion margin for
contingencies would raise this amount to $783 billion. We are thus requesting an
increase of $83 billion from the present temporary limit of $700 billion.
This $83 billion increase reflects the administration's current estimates of a fiscal
1978 unified budget deficit of $61.5 billion, a trust fund surplus of $13.1 billion, and
a net financing requirement for off-budget entities of $8.5 billion. The trust fund surplus
must be added to the debt requirement because the surplus is invested in Treasury
securities which are subject to the debt limit.
The debt of off-budget entities which affect the debt limit 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, the Treasury is required to increase its borrowing in the market by a
corresponding amount. This, of course, adds to the debt subject to limit.
As indicated in the table, it is assumed that the Treasury's operating cash balance
will be at $12 billion on both September 30, 1977, and September 30, 1978. On this
basis, no net increase in the debt will be required to finance the cash balance in the
fiscal year 1978. We believe that our $12 billion projection is reasonable in light of
current needs and the actual balances maintained by the Treasury in recent years. Over
the past decade, the Treasury's cash balances at the end of each fiscal year have been
as follows:
1968
1%9
1970
1971
1972
1973
Billion
$5.3
5.9
8.0
8.8
10.1
12.6
1974
1975
1976
T.Q
1977
1978
Billion
$9.2
7.6
14.8
17.4
12.0 est.
12.0 est.
The trend to larger cash balances in recent years reflects the overall growth in
Government receipts and expenditures. Also, there is a heavy drain in cash from
Government expenditures in the first half ofeach month, and there is a sharp increase
in cash from tax receipts in the second half of the tax payment months. Thus, large
monthend cash balances, which must be financed from additional borrowing, are
essential to the efficient management of the Government's finances. ^
Our requested increase in the debt subject to limit is slightly lower than the $784.9
billion agreed to in the House-Senate conference on May 11, 1977, on the first
concurrent resolution on the budget for fiscal 1978. This means that the targeted
amount of debt subject to limit in the May concurrent resolution will be adequate to
meet the administration's estimated requirements of $783 billion.
Bond authority
I would like to turn now to our request for an increase in the Treasury's authority
to issue long-term securities in the market with regard to the 4 1/4-percent statutory
ceiling on the rate of interest which may be paid on Treasury bond issues. We are
requesting that the Treasury's authority to issue bonds (securities with maturities over
10 years) be increased by $10 billion from the current ceiling of $17 billion to $27
billion.
276
1977 REPORT OF THE SECRETARY OF THE TREASURY
As you know, 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.
The Congress first granted relief from the 4 1/4-percent ceiling in 1967 when it
redefined, from 5 to 7 years, the maximum maturity of Treasury notes. Since Treasury
note issues are not subject to the 4 1/4-percent ceihng on bonds, this permitted the
Treasury to issue securities in the 5- to 7-year maturity area without regard to the
interest rate ceiling. Then, in the debt limit act of March 15, 1976, the maximum
maturity on Treasury notes was increased from 7 to 10 years. Today, therefore, the
4 1/4-percent ceiling now applies only to Treasury issues with maturities in excess of
10 years. Conceming amounts exempted from this ceiling, in 1971 Congress authorized
the Treasury to issue up to $ 10 billion of bonds without regard to it. This limit then was
increased to the current level of $17 billion in the debt limit act of June 30, 1976. As
a result of these actions by the Congress, the Treasury has been able to achieve a better
balance in the maturity structure ofthe debt and has reestablished the market for longterm Treasury securities.
Today, however. Treasury has nearly exhausted the present $17 billion authority.
Including the $ 1 billion new bond issue announced on July 27, the amount of remaining
authority to issue bonds is $1 billion. Since the last increase in this limit on June 30,
1976, the Treasury has offered $6.3 billion of new bonds in the market. This includes
$2.5 billion issued in the current quarter. While the timing and amounts of future bond
issues will depend on current market conditions, a $10 billion increase in the bond
authority would permit the Treasury to continue this recent pattern of bond issues
throughout the fiscal year 1978. We believe that such flexibility is essential to efficient
management of the public debt.
Savings bonds
In recent years. Treasury recommended on several occasions that Congress repeal
the 6-percent statutory ceiling on the rate of interest that the Treasury may pay on U.S.
savings bonds. The 6-percent ceiling rate has been in effect since June 1, 1970. Prior
to 1970, the ceiling has been increased many times. As market rates of interest rose,
it became clear that an increase in the savings bond interest rate was necessary in order
to provide holders of savings bonds with a fair rate of return.
While we do not feel that an increase in the interest rate on savings bonds is necessary
at this time, we are concerned that the present process of requiring legislation for 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 other competing forms of savings. Also, the Treasury has come to rely on the savings
bond program as an important and relatively stable source of long-term funds, and we
are concerned that participants in the payroll savings plan and other savings bond
purchasers might drop out of the program if the interest rate were not maintained at
a level reasonably competitive with other 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 ofthe 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.
To sum up, we are requesting an increase in the debt limit to $783 billion through
September 30, 1978, and an increase in the bond authority to $27 billion, and a repeal
of the interest rate ceiling on savings bonds. I will be happy to try to answer any
questions regarding these requests.
277
EXHIBITS
Public debt subject to limitation, fiscal y e a r 1 9 7 7 , based on budget receipts of $ 3 5 8 billion,
budget outlays of $ 4 0 4 billion, unified budget deficit of $ 4 6 billion, off-budget outlays of $ 1 0
billion
[In billions of dollars]
Operating
cash
balance
Public debt
subject to
lunit
17.4
12.0
8.7
11.7
635.8
638.7
645.8
654.7
Jan. 31
Feb. 28
Mar. 31
Apr. 29
May 31
June 30
July 27
12.7
14.6
9.0
17.8
7.0
16.3
9.8
655.0
664.5
670.3
672.2
673.2
675.6
673.0
Aug. 31
Sept. 30
12.0
12.0
With $3 billion margin
for
contingencies
7976
Sept. 30
Oct. 29
Nov. 30
Dec. 31
1977
ESTIMATED
690
696
693
699
Public debt subject to limitation, fiscal y e a r 1 9 7 8 , based on budget receipts of $ 4 0 1 billion,
budget outlays of $ 4 6 3 billion, unified budget deficit of $ 6 2 billion, off-budget outlays of $ 9
billion
[In billions of dollars]
Public debt
subject to
limit
With $3 billion margin
for
contingencies
12
12
12
12
696
708
716
721
699
711
719
724
12
12
12
12
12
12
12
12
12
12
12
720
733
749
757
745
763
770
758
764
775
780
723
736
752
760
748
766
773
761
767
778
783
Operating
cash
balance
1977
Sept. 30
Oct. 31
Nov.30
Dec. 30
ESTIMATED
1978
Jan.31
Fcb. 28
Mar.31
Apr. 17
Apr. 28
May 31
June 15
June 30
July 31
Aug.31
Sept. 29
278
1977 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 14.—Remarks by Special Assistant to the Secretary (Debt Management)
Niehenke, September 13,1977, before the Greater Philadelphia Money Marketeers
Club, Philadelphia, Pa., on Treasury financing operations
I think it might be appropriate at this time as we are about to close the 1977 fiscal
year to reflect on some of the developments which have impacted Treasury financing
operations, review the strategy currently utilized, and speculate a bit on the outlook
for fiscal 1978 for Treasury financing and the market as a whole.
Certainly the 1977 fiscal year will be remembered as one ofthe more volatile in terms
of constantly changing budget deficit estimates and the resulting impact on Treasury
financing operations. We began this fiscal year with the basic Ford administration
budget which indicated a deficit of $57.2 billion which compared to a deficit of $66.5
billion during-fiscal 1976 and $ 12.9 billion during the transition quarter. As the Carter
administration took office, the current fiscal year budget was revised to reflect concerns
over the perceived rate of growth in the economy and the determination to improve
the unemployment situation. An economic stimulus package was prepared and was to
be implemented over 2 years. The first phase consisted primarily of a tax rebate to
stimulate consumer spending and the second or longer term one would reduce business
taxes, expand training and employment programs, and increase public works spending
and countercyclical revenue sharing.
This program proposal had the effect of increasing the budget deficit from $57.2
billion to $68 billion for the 1977 fiscal year, and this group will no doubt recall the
effects of this development which immediately followed the severe price reversal at the
end of December and early January. However, at the same time, it was becoming
apparent that the expenditure shortfall phenomenon first Witnessed in early 1976 was
continuing into the 1977 fiscal year and at an extraordinary rate. In fact, by the end
of January, outlays were already tracking $8 billion below budget, or at an annual rate
of $24 billion; this pace accelerated in February, as they increased by an additional $2.7
billion.
Aside from financial transactions such as asset sales which can be specifically
isolated, these expenditure shortfalls continued to mystify administration budget
analysts who continue to monitor them very closely to understand their cause. It is my
personal view that these shortfalls will eventually be attributed to program cost
overestimates following the hyperinflationary experience in 1974 and some timing
differences and will be gradually corrected.
As we progressed into the year the economy began to register impressive gains and
the rebate proposal came under question. After considerable debate, the administration
decided that the proposal should be withdrawn, thereby reducing $11 billion of the
budget deficit. By the end of April, the combined rebate withdrawal and actual
expenditure shortfalls reduced the deficit from $68 to $48 billion, and considerable
speculation ensued as to whether any of the shortfall would be made up. As it turned
out, outlays continued to erode but at a more gradual rate with the result that the deficit
should approximate $45 billion on September 30.
As a result of the continually reduced budget deficits and corresponding financing
needs, the Treasury found that the regular note cycle and quarterly refundings provided
more than ample borrowing opportunities to raise needed cash. I don't think I need to
review in any great detail for this group the evolution of "regularization" or the
systematic offering of coupon securities designed to give the Treasury frequent
borrowing opportunities with minimum market disturbance. The current regular note
cycle has been in place since January 1976 and consists of a monthly 2-year note
offering, a 5-year note offering in the first month of the quarter, the usual quarterly
refunding in the second month of the quarter, and a 4-year note in the last quarter of
the month. The benefits of regularization are several:
1. This cycle, repeated each quarter, offers the Treasury two coupon borrowing
opportunities which may be utihzed, passed, or, in the case of maturities, paid
down depending on projected cash requirements.
2. Therefore, it reduces the market uncertainty regarding Treasury financing.
And while the precise amount of a forthcoming announcement is uncertain,
the market is nonetheless on notice of a possible financing.
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It permits investors to anticipate Treasury offerings and facilitates the
implementation of their investment programs.
4. As it consists of coupon financing, it addresses the problem of the maturity of
the public debt which would contract \yithout some initiative such as the
regular coupon cycle which, I might note, does not lengthen the average
maturity but rather holds it constant.
As I stated earlier, the regular note cycle provided sufficient borrowing opportunities
to satisfy the fiscal year 1977 cash requirements; in fact, it provided over $43 billion
in new cash from coupon offerings which we estimate to have been 6-8 billion below
the cash-raising potential of this cycle. Fiscal year 1977 financing requirements, while
large, were manageable enough to permit us the luxury and opportunity of some debt
extension. Specifically, the rebate withdrawal in April created the first cash surplus in
a quarter since 1974 and confronted the Treasury with the unusual but welcome
problem of paying off debt. After much debate and discussion, we decided to maintain
the regular note cycle and pay down Treasury bills with the result that we were able
to add 2 months to the average life of the privately held marketable debt, bringing it
to 2 years and 11 months. In addition, we took the opportunity during this period to
issue the long-awaited 15-year bond in early July by substituting the bond for the regular
5-year cycle note. We found the price results of this financing very gratifying although
a market rally immediately preceding this auction faltered and did not make this feeling
universal. Nonetheless, we were sufficiently pleased to consider offering additional 15year securities again sometime in the future. However, the timing of such an offering
will depend on our cash requirements at that time and prevailing market conditions.
Financing operations during the 1977 fiscal year were strongly influenced by two
investor groups: official foreign institutions and State and local governments.
Combined, these governmental units supplied over $ 16 billion or 29 percent ofthe total
budget and off-budget financing requirements for the fiscal year. This compares to $2.8
billion or 4 percent of the fiscal 1976 budget and off-budget financing deficit.
The foreign purchases, which are referred to as **add-ons" due to the fact that we
increase any publicly offered issues of 52-week bills or coupon securities by the amount
of foreign interest, are expected to exceed $8 billion for the 1977 fiscal year, or over
five times the amount of such purchases during fiscal 1976. This add-on facility was
originally designed for a Middle East government in 1974 and has been extended to
all foreign official institutions which may wish to acquire Treasury securities. And while
it is not the only facility offered foreign investors, it is the most visible and commonly
used vehicle.
Foreigners began to step up purchases of Treasury securities in the second and third
quarters of 1976 when these purchases averaged just under $ 1 billion for each of those
periods. They then accelerated in the final quarter to $1.4 billion, to $2 billion in the
first quarter of 1977, and then stabilized at $2 1/4 billion for the second and third
quarters. During this period foreigners also altered their portfolio strategy and maturity
preferences. Initially they concentrated their investments in maturities of 1 to 2 years;
however, by the end of the current fiscal year, foreign purchases were spread equally
among the 2-, 4-, and 5-year cycle notes with moderate purchases of the 7-year
maturities offered in the last two quarterly refundings. While it is difficult to predict
future foreign demand due to changes in interest rates, maturity preferences and foreign
exchange rates, recent experience suggests that foreign demand is stable.
The second source, investment by State and local governments in special Treasury
issues custom-designed to provide a rate of return on funds raised to refund outstanding
and higher cost municipal securities without violating Internal Revenue arbitrage
regulations, has also contributed approximately $8 billion over the current fiscal year
(compared to $1.2 billion in fiscal 1976). The reasons for the substantial increase in
this area are twofold. First, the continued and dramatic recovery of the municipal
market through 1976 and 1977 as evidenced by a reduction in the BBI from 7.13
percent to 5.48 percent provided significant incentive to municipal finance officers to
refund securities issued during the adverse market conditions surrounding the New
York City financial crisis in 1975. Second, the ongoing process of tightening revenue
code regulations to eliminate arbitrage opportunities and the accompanying abuses has
served to legitimize, encourage, and facilitate municipal refundings.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Unlike foreign purchases which are difficult to predict from one month to the next,
it appears that the issuance of State and local special issues may continue as several
large issuers such as the State of Massachusetts and the NY Power Authority are
planning major refundings and many more issuers are considering refundings.
While we expect new arbitrage schemes to emerge and, in fact, have just turned the
latest over to our tax policy people, our current capture rate appears to be over 95
percent and we expect that with some diligence we will be able to count on these
refundings proceeds as a fairly stable financing source.
Hopefully that will be the case as our fiscal 1978 financing requirements will be
considerably higher than those of the current fiscal year. As you are aware. Congress
is currently deliberating the final budget figures. Last week the House passed a budget
resolution which results in a $61.6 billion deficit. The Senate followed on Friday with
a bill creating a deficit of $65.1 billion; the differences are primarily related to estimated
tax collections and the economic assumptions which underpin them. A conference
committee will now create a compromise which should result in a deficit in the
neighborhood of $63 billion. While the precise figure is not yet available, it is obvious
that Treasury's cash requirements for the upcoming fiscal year will be significantly
higher, approximately one-third higher (including off-budget financing) than the
current fiscal year. However, they will modestly lower the record fiscal 1976 financial
operations.
I might acknowledge at this time that the usual but cordial disagreements between
Treasury and Wall Street economic forecasters over financing requirements continue,
as several of the more prominent projectors estimate our financing requirements for
fiscal 1978 to be comparable to the current fiscal year with no significant increase. As
we lack the luxury to second-guess the administration budget as they do, I will address
the higher financing estimate.
Looking ahead to the fiscal 1978 borrowing opportunities, it immediately becomes
apparent that as regularization matures, the amount of a total financing increases but
the new cash raised may decline as cycle securities previously issued must be rolled
over.
For example, the amount of funds that could be potentially raised in the 2-year note
cycle in the coming fiscal year is smaller than the current year. In addition, the amount
of securities to be rolled over in the quarterly refundings is much larger for the coming
year than the current one, thereby again minimizing the new cash potential. A quick
survey ofthe borrowing opportunities in the quarterly refundings and regular note cycle
spots, assuming modest to full-sized issues, produces approximately $40 billion. This
figure obviously excluded any allowance for foreign add-ons. If the amount of foreign
add-ons and State and local issues over the next fiscal year approximate this year's
issues, then those categories would certainly help close the financing gap. However, as
I suggested earlier, the two sources may prove difficult to forecast.
What other options might be considered? First, expanding the size of the regular cycle
notes. Many dealers have offered the view that the shorter maturity cycle might be
increased and indicate that the 2-year note in particular is a prime candidate for
increases. The increases in this note cycle need not be restricted to the short-term area
as the Treasury's increased financing in the intermediate and longer term market has
been very well received. The increase in the maximum noncompetitive allotment from
$1/2 to 1 billion has also facilitated larger longer term note and bond issuance.
I might note that we testified just prior to the August recess before the House Ways
and Means Committee on the debt limit and received an excellent reception. In addition
to acquiring an increase in the debt ceiling which should carry us through most of the
1978 fiscal year, the committee reported out a $10 billion increase in our long bond
authority to $26 billion, which increase should provide considerable flexibility in our
long-term financing operations.
Another possible financing option would be the fixed-price subscription which was
very successfully utilized three times in 1976; this technique is usually held for those
periods requiring extraordinarily larg^ financing operations.
A third option would be bills, which could be accomplished in a variety of ways: Short
and longer term cash management bills, bill strips and recently we have taken a fresh
look at reinstating a 9-month type or 39-week bill and merging it and the present 52-
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281
week cycle into the weekly bill maturity dates. And while we have not as yet formed
any conclusion on this later option, I believe it could be an effective vehicle for raising
large amounts of new cash and enhance bill market liquidity. And lastly, increases in
weekly bills.
As the market has grown phenomenally over the past 2 years in terms of trading
volume, I don't believe that moderate increases to weekly bills will prove too disruptive
and given the structure of the debt, the Treasury is certainly conscious of the effects
of short-term rate increases on our own interest expense.
I certainly don't mean to appear too complacent over the financing chore ahead; the
task is indeed formidable. In addition, the market climate during the next several
quarters should be different from the financial environment of 1976 and early 1977,
when rates were declining or more stable.
The continual but now gradual expansion in economic activity in prospect for the
next year is likely to entail further moderate increases in the demands for funds in the
credit market with the increases fairly well distributed between major borrowers and
types of borrowings. Alternatively, savings flows should be well maintained, and with
expansion of bank credit gaining momentum, the higher demands are likely to be met
fairly smoothly, without more than temporary ruffles in the credit market and with a
gradual but moderate climb in interest rates.
The increases in the funds raised by business in the aggregate in 1977 and 1978 will
be concentrated in the short-term area. The volume of long-term funds raised will level
off as nonfinancial corporations cut back their bond and stock borrowings by much
more than financial corporations raise theirs. External borrowings of nonfinancial
corporations have picked up markedly in 1977; while long-term bond borrowings have
declined, short-time borrowing are expected to continue growing at an increased rate
as corporations are once again turning to their commercial banks. Furthermore, in
1978, emphasis on commercial bank loans (including term loans) is likely to become
even more pronounced.
Finance companies doubled their bond borrowings in 1976 and, with their consumer
and business credit operations expanding, are expected to further increase their drafts
on the bond market in both 1977 and 1978.
Despite record issuance in 1977, the market for State and local securities will
probably remain relatively strong. Municipal bond funds as well as unit trusts should
continue to enjoy growing acceptance among individual investors. Also, the funds
available to fire and casualty insurance companies will probably rise further and their
operations become more profitable, thereby providing additional funds for investment
in tax-exempts. Also, commercial banks have once again begun acquiring tax-exempts.
In summary, the combination of short-term credit demands and Treasury financing,
which is concentrated primarily in the short maturity coupon area, should increase
short-term rates, while a relatively moderate long-term calendar, combined with
excellent availability of long-term investment funds, should flatten the yield curve
further. The increase in yields, however, should not be excessive and should generally
occur in an orderly fashion.
Exhibit 15.—Statement by Assistant Secretary Altman, September 20, 1977, before the
Subcommittee on Oversight of the House Ways and Means Committee, on loan
guarantee programs
I welcome this opportunity to present the views ofthe Treasury Department on H.R.
7416. The bill would place the Federal Financing Bank (FFB) within the budget and
would, in effect, require that certain loan guarantee programs be financed through the
FFB. This would mean that loan guarantee programs which are financed through the
FFB would be included in the budget. Guaranteed loans which are not financed through
the FFB would continue to be excluded from the budget.
We support the basic objectives of this bill from the standpoint of Treasury's debt
management interests. I have a number of technical suggestions relating to the bill,
which I will discuss later in my statement. H.R. 7416 also raises a number of complex
issues from the standpoint of overall budget policies and procedures, however, which
are of concern to the administration.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Mr. Chairman, I would like to turn first to the broader question of control over
guarantee programs. Following that, I will discuss the specific provisions of H.R. 7416.
Control over guarantee programs
In testimony before the House Banking Committee on March 30 of this year, I
discussed the rapid growth of loan guarantees, their large costs and impacts on credit
markets, and the need for more effective controls. I suggested two approaches to
improve control: (1) Establishing tighter standards covering the ways in which
guarantees should be used and not used and (2) setting ceilings on total guarantees.
Much attention has been given to the second approach of setting ceilings either by
including guarantees in the budget or by other means. Yet, all of us need to focus more
on the need for better standards under which guarantee authority is provided by
Congress in the first place.
It seems to me that program agencies must be given much more specific guidelines
on the circumstances under which guarantees are to be provided and the related terms
and conditions of them. Giving these agencies broad guarantee authority and then
expecting them to resist the inevitable demands for guarantees unavoidably leads to
serious problems of control over guarantee totals and general misallocation of our
limited credit resources.
Let me discuss the basic circumstances in which guarantees are issued and make
some suggestions for tightened loan guarantee standards and how they would help deal
with the broader problem of controlling loan guarantee programs.
Credit need test.—Most loan guarantee programs are intended to facilitate the flow
of credit to borrowers who are unable to obtain credit in the private market. The needs
of more creditworthy borrowers are expected to be met in the private market without
Federal credit aid. To achieve this purpose more effectively, and to provide a built-in
control over program growth, enabling legislation should be more specific on requiring
evidence that borrowers cannot obtain credit from conventional lenders. Specifically,
we think that legislation should require the guarantor agency to certify that, without
the guarantee, borrowers would be unable to obtain credit on reasonable terms and
conditions.
Coinsurance.—In addition, guarantee programs are often intended to induce private
lenders to extend loans on more favorable terms to marginal borrowers. The borrowers
involved generally can obtain loans on their own, but only on costly and otherwise
disadvantageous terms. In these cases, 100 percent guarantees don't make sense
because they would lower the interest rate below that paid on unguaranteed loans to
creditworthy borrowers for the same purposes. Doing so would stimulate a demand for
guaranteed loans by creditworthy borrowers who do not need Federal credit aid.
To avoid such excessive demand for guarantees, we favor a much greater use of
partial, rather than 100 percent guarantees. In the future, legislation generally should
limit the guarantees to assume, say, 90 percent of the loan. Private lenders then would
charge a higher rate of interest commensurate with project risk and with the rates
charged on unguaranteed loans. Such risk sharing, or coinsurance, by private lenders
would contribute to the development of more normal borrower-lender relationships,
would prompt lenders to exercise greater surveillance over the loans, and would
stimulate increased conventional lending for the economic activities involved.
Interest rate ceilings.—AW of us also should be more attentive, Mr. Chairman, to the
effects of statutory interest rate ceilings on the problem of controlling guarantee
programs. We oppose fixed interest rates because they usually are either too high or
too low at any particular moment. On the one hand, if a guaranteed lender is permitted
to charge high rates relative to his risk, then he will seek guarantees in cases where he
might otherwise make loans without them.
On the other hand, if the interest rate ceiling is below reasonable market rates, and
the Government pays the difference between the ceiling rate and the higher rate
required by the lender, then demands by both borrowers and lenders for guaranteed
loans will be excessive. For example, loan guarantee legislation often stipulates that the
interest rate paid by the borrower not exceed a fixed rate of, say, 5 percent, This has
the effect of stimulating demand for guaranteed loans (and Federal interest rate subsidy
payments) as interest rates rise. In cases like this, the amount ofthe subsidy fluctuates
with interest rate movements, and not with the needs of the borrowers. Such interest
frustrate efforts to control overall program levels and can also result in
rate provisions
EXHIBITS
283
an inequitable allocation of credit resources. To avoid these problems, we think that
interest rate ceilings should float in relation to interest rate movements.
Equity participation.—Many guarantee programs involve circumstances where
borrowers could take equity positions in the projects being financed, and these
guarantee programs should encourage them to do so. Requiring borrowers to have such
a stake would help avoid excessive demands for guarantees, help assure more efficient
projects, and help protect the interests of the Federal Government as guarantor. This
could be accomplished by a legislative requirement that the amount of guaranteed and
unguaranteed loans not exceed, say, 90 percent of the value of the project being
financed.
Other loan terms and conditions.—Demands for guarantees will also be excessive if
the legislation does not contain specific restrictions on such terms and conditions as
maximum maturities, guarantee fees, reasonable assurance of repayment, default
procedures, and other conditions which are common to commercial loan practice but
are often overlooked or neglected in Federal credit programs.
This is not to say that Federal credit assistance programs should not contain
subsidies—indeed, that is their purpose—but the legislation should be carefully drafted
so that the subsidies provided are by design, not chance, and are directed at specific
needs.
In short, I believe that more effective congressional control over loan guarantee
programs can be accomplished by adopting standards which build that control into the
structure of each guarantee program. I recognize that this is not an easy task,
particularly since there are more than 100 different loan guarantee programs which fall
under the jurisdiction of many different subcommittees of the Congress.
In the executive branch, the Office of Management and Budget and* the Treasury
Department strive to assure a uniform application of standards in the process of
reviewing proposed guarantee legislation. Within Congress, however, it may be
unrealistic for each interested subcommittee to develop the intense focus on guarantee
standards which is essential to this improved control. Accordingly, it may be worthwhile
for such a responsibility to be lodged in one committee ofthe Congress. Alternatively,
the Congress could take the approach taken in the Federal Financing Bank Act or the,
Government Corporation Control Act and enact omnibus legislation to establish credit
program standards.
In addition to the adoption of more effective standards for all credit programs,
including loan guarantee programs, congressional control over loan guarantees could
be improved by requiring that appropriations acts include ceilings on the total amount
of guarantee commitments which can be issued under the related program, regardless
of whether the program is included or excluded from the budget totals.
H.R. 7416
I would like to turn now to the provisions of H.R. 7416. This bill would amend the
Federal Financing Bank Act of 1973 to: (1) Include the receipts and disbursements of
the Federal Financing Bank in the Federal budget totals, (2) limit the bank's purchases
of obligations in any fiscal year to such amounts as may be provided in appropriation
acts, and (3) require guaranteed obligations which would otherwise be financed in the
securities markets to be financed by the FFB. Thus, the principal effects of the bill
would be: (1) To expand the FFB to include the financing of certain guaranteed
securities which are now financed directly in the securities markets, and (2) to broaden
the budget appropriations process by including in the budget totals, and subjecting to
the appropriations process, those guarantee programs which are financed through the
FFB.
Budget treatment.—Section 11(c) of the FFB Act currently provides:
(c) Nothing herein shall affect the budget status of the Federal agencies selling
obligations to the Bank under section 6(a) of the Act, or the method of budget
accounting for their transactions. The receipts and disbursements of the Bank in
the discharge of its functions shall not be included in the totals of the budget of
the United States Government and shall be exempt from any general limitation
imposed by statute on expenditures and net lending (budget outlays) ofthe United
Digitized States.
for FRASER
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1977 REPORT OF THE SECRETARY OF THE TREASURY
T h e first section of H.R. 7 4 1 6 would a m e n d the second sentence of section 1 1 ( c )
o f t h e F F B Act to read: " T h e receipts a n d disbursements o f t h e Bank in the discharge
of its functions shall be included in t h e totals of the budget of t h e United States
Government."
T o o u r knowledge, this would be the first time that statutory language has been used
to expressly require the transactions of a particular Federal agency to be included in
the b u d g e t totals. For e x a m p l e , the Export-Import Bank was returned to the budget by
simply repealing language in the Bank's c h a r t e r act which had excluded its transactions
from the budget, not by enacting a r e q u i r e m e n t that its transactions be included in t h e
budget. T h e intent of this r e q u i r e m e n t is not clear.
W e p r e s u m e that the intent is to follow n o r m a l budget accounting whereby
transactions b e t w e e n F e d e r a l agencies are not reflected in the budget totals. T h u s ,
when the Treasury lends to a F e d e r a l agency, the transaction is not reflected in t h e
budget until the borrowing agency disburses the funds to the public. If the explicit
r e q u i r e m e n t that F F B transactions be included in the budget is intended to override
this n o r m a l accounting a r r a n g e m e n t , t h e n this would cause double counting in t h e
b u d g e t totals. Specifically, F F B loans to o n - b u d g e t F e d e r a l agencies such as the ExportImport Bank and T e n n e s s e e Valley Authority would be c o u n t e d twice in the budget—
thus inducing these agencies to resume their previous a r r a n g e m e n t of borrowing
directly in t h e m a r k e t — a n d F F B p u r c h a s e s of obligations of off-budget agencies such
as t h e Postal Service a n d U S R A , assets sold by F e d e r a l agencies, a n d guarantees by
F e d e r a l agencies would b e c o u n t e d o n c e .
O n t h e o t h e r h a n d , if t h e intent of t h e a m e n d m e n t to section 11 ( c ) is n o t to override
n o r m a l b u d g e t a c c o u n t i n g rules, t h e n F F B loans to on-budget and off-budget F e d e r a l
agencies a n d F F B p u r c h a s e s of agency assets would be treated as intragovernmental
transfers a n d not reflected in t h e budget. Only F F B p u r c h a s e s of obligations g u a r a n t e e d
by F e d e r a l agencies would b e included in the b u d g e t totals. T h e s e totals also would
increase by t h e a m o u n t of asset sales to t h e F F B , however, since such sales n o longer
would b e t r e a t e d as negative outlays. This same effect could be achieved simply by
repealing section 1 1 ( c ) of the F F B Act.
Appropriations process.—H.R. 7 4 1 6 would limit F F B purchases of obligations in any
fiscal year **to such e x t e n t as may be provided in appropriations a c t s . " Yet, situations
may well arise in which t h e total d e m a n d for b a n k financing would e x c e e d the limitation
specified in an a p p r o p r i a t i o n act. T h e r e would be a n e e d , therefore, to allocate F F B
credit a m o n g c o m p e t i n g F e d e r a l p r o g r a m s . F u r t h e r m o r e , the bill would require t h e
b a n k to p u r c h a s e g u a r a n t e e d obligations, b u t would give it discretion c o n c e r n i n g
p u r c h a s e s of Federal agency debt. O n this basis, w h e n d e m a n d s for b a n k financing
e x c e e d e d t h e appropriations act limit in the bill—which applies to b o t h agency d e b t
and g u a r a n t e e d obligations—there would be pressures for agencies borrowing from t h e
b a n k to shift to borrowing in the m a r k e t .
T h e role of credit allocator would n o t be a p r o p e r role for the F F B . Within t h e
executive b r a n c h , t h a t function should b e performed by O M B . T h e original FFB bill
sent to t h e Congress in 1971 c o n t a i n e d provisions which would have authorized t h e
Secretary of the T r e a s u r y , in effect, to require g u a r a n t e e s to be financed through t h e
bank. T h a t bill also would have authorized the President to limit the total a m o u n t of
g u a r a n t e e s issued in any year, regardless of w h e t h e r t h e guarantees were financed by
the b a n k or in the m a r k e t . T h e Congress rejected these provisions.
If H.R. 7 4 1 6 is e n a c t e d , we would e x p e c t that e a c h agency's entitlement to use t h e
FFB would b e d e t e r m i n e d by the President and by the Congress annually in the n o r m a l
budget appropriations process. T h u s , t h e FFB would continue to function as an
instrument of Treasury d e b t m a n a g e m e n t , but neither t h e FFB nor the Treasury would
assume the function of allocating budget or credit resources.
F F B expansion.—H.R. 7 4 1 6 would effectively require guaraiiteed obligations which
would otherwise be financed in the securities m a r k e t s to be financed by the F F B . This
would be accomplished by adding a new subsection ( d ) to section 6 o f t h e act as follows:
( d ) ( 1) • Except a s provided in p a r a g r a p h ( 2 ) , any g u a r a n t e e by a Federal agency
of an obligation shall b e subject to t h e condition that if such obligation is held by any
person o r governmental entity, o t h e r t h a n such agency or the Bank, such g u a r a n t e e
shall thereafter cease t o be effective.
EXHIBITS
285
(2) Paragraph (1) shall not apply in the case of any obligation—
(A) which the Secretary ofthe Treasury determines is ofa type which is not
ordinarily bought and sold in the same markets as investment securities, as defined
in the seventh paragraph of section 5136 of the Revised Statutes, as amended (12
U.S.C. 24), or
(B) which is issued or sold by the Bank.
Before making any determination under subparagraph (A), the Secretary of the
Treasury shall consult with the Director of the Office of Management and Budget,
the Comptroller of the Currency, and the Chairman of the Board of Governors of
the Federal Reserve System.
We strongly support the intent of these provisions. That is, if the FFB is included in
the budget, it is essential to require that certain guaranteed obligations be financed
through the FFB. Otherwise, there would be a budget incentive to return to the
inefficient practice of financing guaranteed obligations directly in the securities market.
This would undermine the purpose of the FFB Act and would add needlessly to the
program financing costs and to the direct costs to the Government.
Yet, we are concemed with one or two adverse, and perhaps unintended, effects of
these provisions. Specifically, the FFB apparently would be explicitly required to
purchase partially guaranteed obligations, since H.R. 7416 does not distinguish
between "partially" and "fully" guaranteed obligations. This contrasts to the present
FFB legislation which authorizes but does not require purchases of such securities. As
you know, we do not think that the FFB should purchase partially guaranteed
obligations, and the bank has not done so since its inception.
Section 3 ofthe Federal Financing Bank Act defines "guarantee" as "any guarantee,
insurance or other pledge * • * of all or part of the principal or interest." In the past,
the FFB has interpreted this to include, and has thus purchased, a wide variety of
obligations guaranteed or insured by Federal agencies, including obligations secured
by Federal agency lease payments and obligations acquired directly by Federal
agencies. These have been sold to the FFB subject to an agreement that the selling
agency will assure repayment to the FEB in the event of default by the non-Federal
borrower.
We also have interpreted this definition of guaranteed obligations to include those
supported by Federal agency commitments to make debt service grants; e.g., to support
public housing authority bonds, or other commitments such as price support
agreements or commitments by Federal agencies to make direct "take-out" loans in
the event of default on a private obligation. Yet, Mr. Chairman, the FFB purchases
obligations guaranteed under these various arrangements only if there is a full guarantee
of both principal and interest.
The bank has not purchased partially guaranteed obligations, even though they would
technically be eligible for purchase under the "guarantee" definition, for the following
reasons.
By purchasing the nonguaranteed portions of partially guaranteed obligations, the
FFB would be required to make judgments as to the creditworthiness of borrowers
guaranteed by other Federal agencies and thus duplicate the functions ofthe guarantor
agencies. Such purchases would also place the Government at risk more than was
contemplated by Congress in enacting provisions which limit guarantees to less than
total principal and interest.
A second problem with partially guaranteed obligations concerns the methods of
financing them which have developed in the private market. The loan guarantee
programs of Small Business Administration and Farmers Home Administration provide
good examples. In these programs, where the guarantee is limited to 90 percent ofthe
loan, practices have developed where the lending bank will sell the 90-percentguaranteed portion in the securities market, treating it as 100 percent guaranteed
paper, and retain the 10-percent-unguaranteed portion in its own portfolio, while
servicing the entire loan. FFB financing may be appropriate for the fully guaranteed
securities market portion ofthe financing, but FFB financing would not be appropriate
for the unguaranteed portion held by the originating bank lender.
In other cases, fully guaranteed obligations such as small FHA and VA mortgages
are originated and serviced by mortgage lenders or acquired by Federal agencies and
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1977 REPORT OF THE SECRETARY OF THE TREASURY
resold into the mortgage market. Here, FFB financing could have adverse effects on
the mortgage market by having the Federal Government perform functions which today
are well handled by mortgage lenders. On the other hand, certain of these mortgagebacked obligations are sold directly into the securities markets, not in the mortgage
market, and FFB financing might well be appropriate there.
The appropriateness of FFB financing of particular obligations should thus be
determined on the basis of both the nature ofthe guarantee and the method of financing
the obligation. We believe that such determinations should be made by the Secretary
of the Treasury in keeping with his overall responsibihties for both debt management
and the markets for Government-backed securities.
We are also concerned with possibly unforeseen and adverse effects on the financing
of a number of programs under which Federal agencies enter into contracts, rentals,
leasing, billing, and other arrangements which are, in effect, pledged to secure the
repayment of loans made by private lenders to companies or other private institutions.
These arrangements would generally fall within the definition of "guarantee" in the
FFB Act, but the bank does not currently purchase many of the private loans secured
by such commitments. Yet, under H.R. 7416, such new "guarantees" would not be
operative unless the FFB purchased them or the Secretary ofthe Treasury determined
that these loans were of a type "not ordinarily bought and sold in the same market as
investment securities." This requirement for a prior determination by the Secretary
could cause serious administrative problems and could create a cloud of uncertainty
over the legal status of a wide variety of Government contractual arrangements.
Finally, the provision of proposed subsection 6(d)(2)(B) of H.R. 7416 may
encourage the FFB to resell guaranteed obligations it holds, into the securities markets.
This subsection would exempt such reselling from the provisions of subsection 6(d)( 1)
which, in effect, removes the guarantee from other obligations sold into the market.
Since these sales would continue to be treated as negative budget outlays, pressures to
make such sales could become irresistible under H.R. 7416 and the budget purposes
of the bill could be defeated.
Exhibit 16.—Other Treasury testimony published in hearings before congressional
committees
Secretary Blumenthal
Testimony before the Subcommittee on Financial Institutions of the Senate
Committee on Banking, Housing, and Urban Affairs, on S. 1664, financial reform
legislation, June 20, 1977.
Statement before the Subcommittee on Taxation and Debt Management of the
Senate Committee on Finance, on the public debt limit, September 22, 1977.
Economic Policy
Exhibit 17.—Remarks by Secretary Blumenthal, March 3,1977, at the Waldorf Astoria
in New York City, on the Government's role in the capital formation process
In analyzing what the Federal Government can do to promote capital formation, it
is best to begin at the beginning.
And the beginning, in my view, is to remind ourselves of the simple, yet oftoverlooked proposition that our free enterprise economy can grow and remain healthy,
can do the job of providing enough employment for all, only if we ensure that enough
private capital flows into financial markets to finance the plant and equipment, the
research and development, and the entrepreneurial activities of large and smaller
companies alike.
If that is not the case—and there is increasing concern that it may not be—nothing
else that the Government can do in shaping an economic program will succeed. An
adequate flow of capital is the lifeblood of our economy. Without it, our economy
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287
cannot function for long, and our many political, social, and cultural goals will remain
unfulfilled.
Has there been a shortage of capital? There is no simple answer to that question.
To begin with, difficulties arise simply in defining what we are talking about. There
has been a lot of debate in recent years as to whether there is or will be a "capital
shortage." But it's not always clear what kind of capital the participants in these debates
are referring to. Is it a shortage of financial capital—of means of financing outlays for
bricks and mortar? Or is it a shortage ofthe physical capital itself—the stock of physical
assets with which to produce the stream of goods and services called the gross national
product? Too often, the debate slips back and forth between the two without regard
for the fact that they are distinct—albeit interrelated—concepts.
Turning first to physical capital and looking at current numbers on capacity
utilization—imperfect as they are—one might be tempted to describe our current stock
of plant and equipment as adequate. With operating rates for manufacturing as a whole
in the low 80-percent range, there is little to suggest a present shortage. Moreover, the
share of total output dedicated to new business fixed investment has been somewhat
higher in the past decade than in the preceding two decades—10 percent of real GNP
as against 9 percent earlier.
What, then, suggests a shortage of physical capital required to sustain the balanced,
noninflationary growth we all are seeking?
To begin with, some industries appear to be nearing the point at which capacity could
constrain production. There are at least half a dozen, including food processing,
petroleum refining and mining, in which current operating rates are edging close to
those that prevailed duriiig the most recent period of high utilization (1973). Moreover,
a number of studies have pointed to potential capacity problems in other industries,
where even moderate sustained growth in economic activity can push them to their
capacity ceilings, creating "bottleneck" situations long before the total economy was
fully utilizing its resources.
Second, we have to look to the changing balance between factor inputs; that is, the
balance between growth in the stock of physical capital and growth in the stock of
human capital. Respectable though recent growth rates in physical capital may be by
historical standards, capital stock has not grown commensurately with growth in the
labor force. In the first half of this decade, the average amount of business capital per
worker grew at only half the rate at which it had been growing in the fifties and sixties.
In other words, we were not providing tools of production as fast as the growth in
workers to use them.
This shortfall in the availability of capital for the growing labor force has unpleasant
ramifications for the economy. It has contributed in an important degree to the slowing
of productivity gains in recent years, a period when output per worker has risen far more
slowly than in the I950's and 1960's. Diminishing rates of gain in productivity put
upward pressure on prices, limit improvement in living standards, adversely affect
profits, lower incentives for capital investment, and reduce the possibilities for creating
jobs in the private sector.
Therefore, if we are to move toward a full-employment economy over the balance
of this decade, investment in productive capacity will have to absorb a higher
proportion of our national output. We will have to achieve a better balance in
distributing the results of economic growth between current consumption and investing
for even greater future growth.
How do we accomplish this? The first prerequisite for an adequate volume of capital
formation, as we see it, is to ensure a sound economy overall, stable and growing, one
in which investors can have confidence.
There appears to have been some nervousness lately as to whether our policies will
meet this need, that efforts to reduce unemployment will be pursued without sufficient
regard for the need to reduce inflation, to bring the Federal budget into balance and
to provide the predictability and stability that is the sine qua non for the Nation's
economic health.
Well, I am here to say to you today that you need not have the slightest doubt about
our intentions and policies in this regard. President Carter is not a spender—far from
it. He is dedicated to a policy of prudence, frugality, and the elimination of wasteful
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expenditures at all levels. He firmly believes in the need for a vigorous attack o n
inflation, a n d he sees this need as just as important as the attack on u n e m p l o y m e n t .
As for myself, I assure you that I did not take this j o b to participate in an
administration that fails t o address itself vigorously to the d a n g e r of inflation.
I a c c e p t e d this assignment precisely b e c a u s e I viewed licking inflation a n d
u n e m p l o y m e n t as linked: b e c a u s e I saw in this my greatest challenge as Secretary of
the T r e a s u r y ; because I believe that it is possible to d o the j o b ; b e c a u s e I believe t h a t
the time to d o it is now; a n d — a b o v e all—because we now have a President who will
fully b a c k a n d , indeed, insist on sound policies to m a k e it h a p p e n .
T h e time has c o m e , I believe, to s e p a r a t e myth from reality, to focus attention o n
the realities o f t h e administration's emerging e c o n o m i c policies, instead of on slogans
and fears u n s u p p o r t e d by facts.
Since this is so vital a m a t t e r , allow m e to state a few points with clarity:
1. This is an administration dedicated to eliminating budget deficits. T h e deficits for
FY 77 and FY 78 are largely inherited. Their cause lies in large m e a s u r e in a sluggish
level of e c o n o m i c activity. For e x a m p l e , if industrial capacity utilization were now at,
say, 86 to 88 p e r c e n t instead of the p r e s e n t 80 p e r c e n t ; if, then, u n e m p l o y m e n t were
n o t 7 1/2 to 8 p e r c e n t b u t m o r e like 5 1/2 to 6 p e r c e n t ; then $20 billion or so in
additional revenues would be available.
T h r e e further c o m m e n t s a b o u t the budget:
First, I regard the FY 77 and FY 78 deficit targets as representing outside limits.
I e x p e c t t h e actual n u m b e r s to c o m e in below t h e m .
Second, work o n t h e FY 79 b u d g e t is beginning. With zero-base budgeting as a tool,
it is o u r firm intention that the FY 79 b u d g e t deficit will be appreciably lower than t h e
previous year's. New p r o g r a m s will not b e funded through increased deficit spending,
but r a t h e r t h r o u g h the growth in r e v e n u e s from an expanding e c o n o m y . O u r goal is
b u d g e t b a l a n c e by FY 8 1 .
Third, t h e projected deficits of $68 billion and $58 billion for FY 77 and FY 7 8 ,
and significantly less in FY 7 9 , n e e d n o t be inflationary in an e c o n o m y with m u c h
unused capacity, nor n e e d it lead to appreciably higher interest rates in an e c o n o m y
currently awash in liquidity.
2. This is not an administration that talks about inflation but will do nothing about
it. W e are putting in p l a c e an anti-inflation p r o g r a m which the President and t h e
Secretary of the Treasury a n d the rest of the C a r t e r administration t e a m will back with
vigor. This p r o g r a m will be a n n o u n c e d within a m a t t e r of weeks, but t h e outline of t h e
p r o g r a m is b e c o m i n g clear.
First of all, let m e say w h a t it will not be:
A. It will not be based on controls—actual, standby, or any other kind. I know of
nothing less likely tp give us growth with stability than saddling this country and o u r
free m a r k e t e c o n o m y with that kind of b u r e a u c r a t i c nightmare.
If a n y o n e had any d o u b t s on that s c o r e , the previous administration's efforts—and
failures—in this regard in t h e early seventies should have dispelled t h e m . T h e C a r t e r
administration has n o intention whatsoever of repeating that folly.
B. It will not be a program concentrated largely on other f o r m s of incomes policy.
M a n a g e m e n t , labor, and c o n s u m e r s must c o o p e r a t e with the G o v e r n m e n t in the antiinflationary fight—that is as clear as it is in their self-interest to d o . But in our view this
is best achieved if neither direct controls nor indirect coercion is involved.
It is missing the point, therefore, to get involved in d e b a t e s over buzzwords and c a t c h
phrases which divert attention from the realities. I d o n ' t know what " j a w b o n i n g " m e a n s
precisely. N o d o u b t it implies different things to different people. Rest assured on o n e
point: If it m e a n s that labor or m a n a g e m e n t is to be strongarmed or pressured into
complying with arbitrary G o v e r n m e n t guidelines, we will have n o n e of it.
Nor d o I believe that it is useful to waste o u r energies on fruitless argunients a b o u t
the pros and cons of imprecise c o n c e p t s such as " p r e n o t i f i c a t i o n " on wages a n d
prices—voluntary or otherwise. W h a t is there to argue a b o u t ? T h e expiration date of
the major labor c o n t r a c t s is a m a t t e r of public record. D o e s n ' t this give all t h e
prenotification n e e d e d ?
O n the price front, I am equally confident that major U.S. industrial leaders, who see
the i m p o r t a n c e of containing inflation as clearly as a n y o n e , will, in the kind of
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cooperative program we plan to develop, weigh carefully and be prepared to discuss
with us the implications of various price options. As you have heard, this pattern has
already begun and it can continue if we aU keep our wits about us.
What, then, will our anti-inflation program involve?
First, a prompt review of all Government regulations which create bottlenecks,
restrict output, or are otherwise inflationary. This has already begun. We are exploring
alternatives to regulations which impose on industry exceptionally stringent technological standards without regard to economic criteria, which indeed may prove perverse
in result because they inhibit industry in adopting more efficient technologies. We are
examining the need for cost-plus or cost-reimbursing contractual arrangernents in
Government purchases, which tend to reduce normal business cost-minimizing
incentives. We are examining Govemment price-fixing, which protects inefficient
producers against competition and reduces consumers' ability to choose between lower
prices and extra services. And we are trying to put a quantitative cost tag on all Federal
actions which affect prices, so that better cost/benefit analyses can be derived.
Second, a policy on international trade that provides help and protection to
industries and workers hurt by imports, but does so in ways which do not result in
inflationary price increases bome by the consumer. We plan to develop new ideas of
how to improve our competitiveness, emphasizing programs of structural reforms that
will lower costs and increase productivity. This, rather than price-raising restrictions
which hurt the consumer, is the right approach and the one we intend to promote.
Third, the presentation to Congress this year of a comprehensive proposal for
major tax reform, designed to promote business investment to achieve increased
productivity.
Fourth, a review of unnecessary and costly reporting requirements imposed on
business by the Government, requirements which raise costs without really meeting any
vital needs. Lawyers and accountants do not need this kind of lifetime employment
guarantee to keep them busy and productive.
Fifth, an effort to create an effective system to analyze the economic impact of
each major new Federal legislative or regulatory effort. This has not worked adequately
in the past—and we aim to do something about it.
Sixth, improvement of the operation of the Council on Wage and Price Stability,
not to control or coerce but to provide the data and the research to identify bottlenecks
and economic problem areas ahead of time, particularly those which limit productivity
and fuel inflationary flames.
Seventh, the administration has decided to organize a labor-management
committee, consisting of outstanding representatives from the ranks of both labor and
management who, together with members ofthe administration, can serve as a forum
where their perspectives on the major issues relating to inflation, productivity,
employment, and related economic questions can be candidly and thoroughly
discussed. We are also encouraging the establishment of similar committees for major
industry areas, so that problems specific to particular segments ofthe economy are not
overlooked.
Eighth, along with all this, a clear identification of the goals and targets to be
achieved as we strive to balance the budget and simultaneously reduce unemployment
and inflation. This set of objectives can then form the basis for enlisting labor,
management, consumers, and all levels of government in a common commitment and
a cooperative effort to achieve our economic goals.
We are now beginning to put the parts of this program into effect. One thing is certain:
We are in dead earnest. To succeed, it will require a common effort and, no doubt, a
common sacrifice. But we will work hard at it, and we aim to succeed.
If we can do the things I have just outlined, one of the critical prerequisites for
ensuring a much greater flow of capital will have been achieved.
But, of course, that will not be enough.
After all, the rate of capital investment depends in the final analysis not as much on
inflation rates as on the rate of return anticipated for that investment.
In this regard, we appreciate the pressure on business executives to halt the decline
in profits and profit margins. The record is quite clear: Whether measured in terms of
share of national income, or in terms of ratios to sales, corporate profits and profit
margins have been declining since the midsixties. We are aware of this erosion, and we
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understand that last year's rise in profits and margins was a cyclical response
characteristic o f t h e early stages o f a cycle recovery, and not necessarily a p e r m a n e n t
reversal of t h e downward trend.
But we d o not believe t h a t the way to break this trend is through inflationary price
m a r k u p s ; indeed, price m a r k u p s of that sort would, in all likelihood, have the opposite
effect. T h e p a t h to sustained recovery in profits is through investment in m o r e efficient
production techniques, for gains in productivity are highly correlated with gains in
profits.
O u r stimulus p r o g r a m addresses this p r o b l e m directly, through the proposed increase
in the investment tax credit. As you k n o w , the stimulus package would, if e n a c t e d ,
increase the investment tax credit by two p e r c e n t a g e points. T h e businessman w h o
takes advantage of the credit can anticipate cost reductions and c o m m e n s u r a t e profit
increases from two sources: reduced cost of capital, and greater productivity from m o r e
m o d e r n plant.
Now let us turn to the o t h e r major c o n c e r n a b o u t the capital formation process, t h e
a d e q u a c y o f t h e flow of financial capital to support the required growths in investment.
O u r financial system is justifiably r e n o w n e d for its capacity, scope, richness of form,
and resiliency. It functions with r e m a r k a b l e efficiency in gathering t h e savings o f t h e
public and transforming these into t h e m e a n s of financing private investment.
Nevertheless, there are a r e a s in which i m p r o v e m e n t s c a n be m a d e to ensure that t h e
availability of financing—in both a m o u n t and form—does not b e c o m e an impediment
to the necessary growth in our capital stock.
O n e fundamental p r o b l e m is the tilt of the system toward financing through d e b t
instruments. Savers a p p e a r , in general, to prefer acquiring financial assets of fixed
nominal value and fixed i n c o m e r e t u r n — a preference that persists despite the postwar
erosion in the purchasing power of fixed-value claims. Moreover, our tax system
e n c o u r a g e s t h e financing of investment through d e b t instruments.
Over the longer run, this is not the ideal arrangement; there are limits to which it is
p r u d e n t or even feasible to pile increasing a m o u n t s of d e b t on a very slowly growing
equity base. A debt-heavy financial structure increases the vulnerability o f t h e business
e n t e r p r i s e t o cyclical fluctuations in i n c o m e . It limits the venturesomeness of
investment, for lenders c a n n o t in good conscience underwrite the risks appropriate to
an equity participant. And it inhibits e c o n o m i c growth because growth d e p e n d s very
m u c h on willingness to risk investment in new p r o d u c t s and new processes.
M o r e o v e r , the emphasis o n d e b t financing raises particular problems for smaller a n d
newer enterprises, which often lack the track record necessary to attract a d e q u a t e
a m o u n t s of financing from lenders, and must therefore fight for access to pools of equity
financing.
Many proposals have b e e n a d v a n c e d to modify the tax structure in order to achieve
m o r e e v e n h a n d e d t r e a t m e n t of alternative m e a n s of financing investment, and to
improve the functioning of securities m a r k e t s with respect to small businesses. T h e s e
proposals a r e all u n d e r active study, and we solicit your advice on how best to achieve
our objectives.
Any review of t h e a d e q u a c y of o u r system for financing capital formation must, of
c o u r s e , address the o p e r a t i o n s o f t h e principal channels through which savings flow into
investment—financial intermediaries and public securities markets.
T h e transformation of savings into investment in our country o c c u r s principally
through the intermediation of financial institutions. In 1976, over two-thirds o f t h e $ 2 5 0
billion a d v a n c e d in credit m a r k e t s was supplied by banking, thrift, and insurance
institutions. T h e question is whether t h e panoply of G o v e r n m e n t legislation and
regulation is helping or hindering a c h i e v e m e n t of m a x i m u m efficiency in the allocation
of these funds.
W h a t we must d o now is reevaluate t h e complex of G o v e r n m e n t rules, regulations,
and p r o c e d u r e s affecting financial intermediaries to ensure that there is not, in o u r
regulatory structure, s o m e things inhibiting the sustained flow of financing for
investment. W e d o not n e e d yet a n o t h e r commission or a n o t h e r r o u n d of extensive
studies. W e will, however, seek your counsel as our own ideas develop.
At the sarne time, we will be reevaluating the efficiency with which our public
securities m a r k e t s m e e t the needs of savers, borrowers and risk-takers. O u r country is
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291
fortunate to have such well-functioning securities markets, very much the product of
the leadership provided by the Securities and Exchange Commission for more than four
decades. The reputation the SEC has earned for fiercely guarding the rights of the
investing public is a major element in our success in transforming the savings of
individuals into the financing of private investment.
The SEC's expertise and insights into the operations ofthe securities markets will be
an important contribution to our review of the savings/investment process. Shortly a
new Chairman of the Commission will be appointed, and we in the economic policy
group look forward to working closely with him, the other Commissioners, and the SEC
staff in this review.
Let me then summarize quickly how I see the capital formation problem today, and
what this administration proposes to do about it.
First of all, we do have a capital shortage, in the sense that growth of physical plant
and equipment is lagging behind the rate of expansion required to reach a fullemployment economy. That situation must be corrected, for, unless it is, we can expect
to experience persistently unsatisfactory productivity increases, rising unit costs, and
a continuation of the unemployment which in large measure is a result of these two
factors.
We do not intend to let this happen, and the administration has already acted on two
fronts to avert it. We have asked for tax relief sufficient to stimulate enough final
demand so that businessmen will find markets for their increased production. We have
asked for an increase in the investment tax credit, which we believe is essential to
achieve increased productivity. Those of you who have been following our actions
probably already appreciate those two thrusts of our policy. In addition to the courses
of action already announced, we will be reexamining the impact of tax and regulatory
structures on investment and on the financial system, to make certain that there is
nothing that we in Washington are doing that might act as an inhibition to the financing
of the investment we all want to see occur.
I thank you for your attention. If there are things I have just said with which you
disagree, or points on which I have not made myself clear, I would be happy to discuss
them with you now.
Exhibit 18.—Remarks by Secretary Blumenthal, May 11, 1977, before the Economic
Club of Chicago at the Palmer House, Chicago, 111., on national economic
policymaking
Last weekend the leaders of seven major industrial nations of the world met in
London at the summit. A meeting of seven heads of state together in one room for 2
days of frank discussion is a good thing in itself. It allows these men, with their awesome
responsibilities, and their individual national preoccupations, to get to know each other,
to learn about each other's problems, and to exchange ideas on how to solve them by
working together.
As always, a summit makes news all over the world, because it touches so many vital
issues of concern to people everywhere. This summit was no exception—particularly
because it was the first one for President Carter. It provided him an important
opportunity to get a firsthand understanding of the issues and problems facing his
colleagues in other countries.
What strikes me as significant is that the principal problems these leaders had to focus
on were economic.
This focus on economic problems is not accidental. It reflects the general realization
that the health, happiness, and welfare of all peoples, and the future of each nation and
of each government, depends on our individual and collective economic well-being.
These issues are intensively discussed among the leaders of industrial countries because
each recognizes that their national economic problems are inextricably intertwined;
that national economic policies depend on the international economic climate; that the
solutions which each leader must seek in his own country are most easily achieved when
a way is found to work together for the benefit of all.
National economic policymaking in the context of a cooperative and sound
international economic environment is a prerequisite for the political stability of our
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1977 REPORT OF THE SECRETARY OF THE TREASURY
countries and the survival of d e m o c r a c i e s . In that sense, e c o n o m i c s and politics are p a r t
and parcel o f t h e same challenge.
I recall t h a t this point was m a d e to m e many years ago when I first went to work as
a deputy to former Secretary of State Christian Herter, who had just been appointed
President K e n n e d y ' s Special Representative for International T r a d e Negotiations.
Chris H e r t e r had had a long and distinguished political career; he had been a
C o n g r e s s m a n , a G o v e r n o r , and the Secretary of State.
Considering this c a r e e r as a political leader, his new j o b as T r a d e Representative—
dealing with shoes and textiles, with m a c h i n e r y and farm p r o d u c t s , with tariffs a n d
quotas and the like—seemed an odd assignment. I r e m e m b e r asking him o n e day why
he had t a k e n the j o b , and I recall his answer only t o o vividly. " M i k e , " he said, "1
suspected it before, but I k n o w it now. T h e r e is m o r e politics wrapped up in this business
of world e c o n o m i c s and trade than in anything else I have ever d o n e b e f o r e . "
So, inflation, j o b s , t r a d e , international finance, m o n e y , exchange rates, c o m m o d i t y
prices, and t h e relation b e t w e e n the rich and the p o o r countries o f t h e world constitute
m u c h of w h a t e c o n o m i c a n d political policy is all about. And that is why this is the stuff
of which summit meetings are m a d e .
T h e President's position at the D o w n i n g Street summit was strong, n o t only b e c a u s e
he is a leader of the world's largest and richest industrial nation, not only because h e
has t h e solid s u p p o r t and admiration of t h e A m e r i c a n p e o p l e , n o t only because h e is
a new leader with a strong and secure m a n d a t e for a 4-year period. M o r e important
than these factors in establishing President C a r t e r ' s ability to speak with strength a n d
conviction at the meetings was the fact t h a t he was seen as a head of g o v e r n m e n t w h o
quickly m o v e d to tackle honestly and openly the difficult task of fashioning a rational
a n d sound e c o n o m i c policy for his country.
President C a r t e r has b e e n willing to face the many contradictions and uncertainties
t h a t underlie the c o m p l e x e c o n o m i c issues of o u r day. H e has n o t glossed over t h e m
or hidden t h e m , or denied t h e complexities that exist. He has been willing to m a k e h a r d
decisions t h a t are for t h e long-term benefit of all of us, even if they m e a n sacrifice. A n d
he has n o t b e e n afraid to m a k e it clear that our resources are limited, that we m u s t
husband t h e m and allocate t h e m carefully a m o n g our many worthwhile objectives.
Over t h e next several m o n t h s , we will be debating and studying a variety of these
e c o n o m i c issues. Congress will take final action on t h e President's proposals for an
initial e c o n o m i c stimulus. T h e President's r e c o m m e n d a t i o n s for a national energy
p r o g r a m , for fundamental reform o f t h e tax system, for assuring the financial soundness
of social security, for transforming the welfare system, and for the handling of t r a d e
issues will be assessed and d e b a t e d in the Congress and in the country. In this process,
all of us will learn with him the h a r d realities and choices that must be faced.
O u r e c o n o m i c policy m u s t serve multiple objectives. It must provide jobs for all
A m e r i c a n s . It must c o m e to grips with the difficult and puzzling p h e n o m e n o n of
persistent inflation. It must give us e c o n o m i c growth and foster social justice for all o u r
citizens. A n d it must provide for collaboration with o t h e r nations in their quest for t h e
same goals in their countries.
E c o n o m i c policymaking in e a c h of these areas is not an easy or a certain task. F o r
to be honest, and regardless of what the a c a d e m i c economists or the c o m m e n t a t o r s in
the m e d i a tell us, there is m u c h that we d o n ' t know a b o u t how to reach our e c o n o m i c
goals.
P e r h a p s we should ask ourselves why after the bicentennial of A d a m Smith's " W e a l t h
of N a t i o n s , " after c e n t u r i e s of e c o n o m i c thought dating back to the Biblical J o s e p h ,
after all the m o d e r n d e v e l o p m e n t s in e c o n o m e t r i c s and model building—why after all
this are we so ignorant a b o u t so m u c h in economics?
I could easily spend the evening on that topic. I will not d o so, but it is worth at least
noting s o m e o f t h e main sources of our uncertainty. W e are experiencing great changes
in o u r e c o n o m y and o u r society—the growth of very large organizations in business a n d
labor, the expansion o f g o v e r n m e n t , rapid changes in technology, almost instantaneous
c o m m u n i c a t i o n s and an expansion o f t h e role and impacts o f t h e media. W e have c o m e
to realize t h a t a rapidly growing world d o e s face resource limitations, a fact b r o u g h t
h o m e by t h e rapid increase in the price of energy. And with this has c o m e a
transformation o f t h e world m o n e t a r y system. All this, and m o r e , confronts policymakers with new challenges a n d the need to navigate in u n c h a r t e d waters.
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Neither the Keynesians nor the Monetarists, nor any other particular school of
thought alone can show us the way. And no computer, however well programmed or
sophisticated, is able to foretell all the economic effects of alternative policies.
For perhaps the largest barrier to certainty—one that will not go away—is that we
are dealing in large measure with the reactions and the interreactions of people
operating in a changed setting. Nothing is harder to comprehend and predict.
For example, take the elusive question of confidence. The other day the Washington
Post in one of its editorials gently chided the administration for too vigorous a pursuit
of what the Post called the "will ofthe wisp of business confidence." At about the same
time there were others who spoke up in more direct ways to voice their anxieties over
what they consider irrelevant concern with business confidence, a concern which they
feel undermines or stands opposed to the achievement of social justice, or job creation,
and of economic stability and security.
The confidence of consumers and of business is indeed a difficult and insufficiently
understood ingredient in economic policymaking. Economists find it particularly
puzzling because it is, inherently, qualitative. It defies quantification via the computer
or by any other reliable means. Yet its elusive nature should nonetheless not mislead
us. Unless consumers and business alike can have confidence, none of our other goals
for economic policy are likely to be met.
How much consumers spend depends on their confidence in the future. How much
business invests in new plant and equipment equally depends on its level of confidence.
Consunier and business spending patterns in turn create the demand for goods and
services. And business in organizing its production to meet these demands creates the
jobs we need, determines the efficiency of our production and ultimately the resources
that are available for our personal and collective goals.
So the pursuit of confidence is not antagonistic to our social goals. Confidence is not
something we gain at the expense of social objectives. On the contrary, we seek
confidence precisely because it is a precondition for the social progress we mean to
achieve.
Over the last several months, the Carter economic program has, I believe, generated
a steady increase in the level of confidence.
It has done so because this administration has set clear and sensible economic goals
and has pursued coherent and consistent policies for their achievement. We seek an
acceleration of economic growth in 1977 at a yearend to yearend rate of 6 percent. We
seek continuing growth that will average 5.2 percent annually through 1981. We seek
a steady reduction of unemployment to around 4 1 /2 percent by 1982. And as a matter
of equal importance, we are striving to contain inflation and to bring it down—cutting
the underlying rate by two points by 1979 and making further reductions in the
following years.
These goals have been matched by policy decisions that show that we mean what we
say. The President's action in withdrawing the tax rebate when it was no longer neeided
was not easy. But it was an action that supports our goals and will help reduce the budget
deficit for fiscal year 1977 from the $68 billion originally anticipated to less than $50
billion.
We intend to meet our commitment to budget balance by 1981. Tough steps to
reduce waste and foster efficiency in Government have been taken. The well-known
water projects are only a prominent example. Zero-based budgeting is being
implemented, and programs that have outlived their usefulness are on their way out.
Actions, not words, have borne out our commitment to avoid protectionism and to
find ways of helping American workers and industries hurt by imports without unduly
boosting prices to consumers or endangering export jobs. The decisions on shoes and
sugar have set a pattern that points down this road.
And in combating inflation we have developed a program that will be effective, that
recognizes inflation as the complex, multifaceted problem it is, that provides for longer
term structural remedies and for cooperation now among business, labor, and
Government to avoid self-defeating wage-price spirals.
In all of our policies we have avoided Government coercion and controls. We have
sought to develop a climate within which the free market can work and in which
Government, business, and labor can act responsibly in the national interest.
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T h e r e has been criticism. O u r voluntary programs have been called weak or
toothless—even though the only " t e e t h " anyone could propose were the controls that
have so miserably failed in the past. Now there is evidence that o u r voluntary policy
is working. T h e recent decisions on steel price increases d o , I believe, prove this point.
Because of the C a r t e r administration goals b a c k e d by clear and consistent policies,
evidence of growing confidence is increasing. C o n s u m e r s must have confidence before
they will s p e n d their i n c o m e s and this, in turn, implies that they expect to have j o b s .
T h e stimulus p a c k a g e which is a b o u t to b e c o m e law will help m o r e Americans join t h e
o n e and a half million w h o have gotten j o b s since January. U n e m p l o y m e n t has declined
from 8 to 7 p e r c e n t , t h e r e b y reaching considerably a h e a d of schedule the target we h a d
set for the e n d of the year. T h e r e is n o reason why the u n e m p l o y m e n t rate should n o t
d r o p comfortably below 7 p e r c e n t , possibly closer to 6.7 p e r c e n t by yearend. T h e fact
that c o n s u m e r spending is at an alltime high, and correspondingly, the c o n s u m e r savings
rate of 5 to 5 1/2 p e r c e n t is at the low e n d o f t h e historical range reveals that the average
A m e r i c a n d o e s have a feeling of security about the way the e c o n o m y is moving.
Similarly, business must have confidence in its m a r k e t s , in its ability to m a k e a profit,
and in the p r o s p e c t that inflation will be handled responsibly before it will spend o n
new investment. While business spending on plant and e q u i p m e n t has b e e n lagging until
recently, t h e r e are now new signs of growth. T h e r e c e n t McGraw-Hill survey indicates
an 18-percent c u r r e n t dollar increase in plant and e q u i p m e n t spending in 1977. Actual
figures on real business capital outlays have shown a similar u p t u r n , rising at a 14p e r c e n t a n n u a l rate during the first q u a r t e r of 1977. O r d e r backlogs for the machine
tool industry have b e e n moving up rapidly, and the cutting tool backlog, a good
indicator of things to c o m e , has increased by 13 p e r c e n t since D e c e m b e r .
So business confidence also is o n t h e rise.
And it is the spending of c o n s u m e r s and business, which d e p e n d s so m u c h o n
confidence, that c r e a t e s t h e private sector j o b s this country needs. It is this spending
that allows for the productivity growth that will k e e p up our competitiveness in world
m a r k e t s and give us a bigger pie to divide and allow us to be d o n e with fighting for shares
of a static or inadequately growing G N P . So let n o one call confidence a will-o'-thewisp. Let us all recognize that a climate of confidence is critical to the success of any
e c o n o m i c policy.
I have talked tonight of some formidable problems. But I must mention o n e m o r e ,
because it will soon b e c o m e a major p a r t of the national e c o n o m i c d e b a t e . In a few
m o n t h s , the C a r t e r administration will propose major tax reforms that can be an
i m p o r t a n t factor in determining t h e future course of o u r e c o n o m y .
T h e t h r e e goals of this reform can be s u m m e d up in the words "simplification,"
"equity," and "capital formation."
W e have already t a k e n the first step toward tax simplification. T h e proposed flat
standard d e d u c t i o n for individuals, which should soon be approved by Congress, will
enable 95 p e r c e n t of all taxpayers to use new tax tables. N o longer will they have to
subtract their personal exemptions, figure their standard d e d u c t i o n , or subtract o u t
their general tax credit. But the complexity o f t h e tax system will still place an excessive
b u r d e n o n t h e ordinary taxpayer. So, while I c a n n o t tell you the details of our proposal,
we are studying ways of taking further steps that will simplify the system by limiting
certain d e d u c t i o n s and allowing r e d u c e d tax rates over the entire range.
T h e n e e d for a new effort toward greater tax equity is a p p a r e n t in t h e d a t a revealing
that taxpayers at the s a m e income levels now pay quite different taxes. W e will
r e c o m m e n d new m e a s u r e s so that taxpayers in like circumstances are treated m o r e
alike. This m e a n s that we have to reexamine all of the existing tax exemptions,
exclusions, and credits, with a view t o w a r d identifying those that are n o t so integral to
our tax system or e c o n o m y that their elimination would m e a n e c o n o m i c hardship.
And to e n c o u r a g e the higher rate of capital formation this country needs, we shall
r e c o m m e n d important new incentives to savings and investment.
W e have to consider steps to eliminate the double taxation of c o r p o r a t e income that
now characterizes our tax system. W e expect that action on this front would increase
the propensity of our citizens to invest in American industry, and thereby provide
business with the capital it needs to invest in o r d e r to increase its own productivity. A t
the same t i m e , equity d e m a n d s that we carefully examine some of our current business
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tax policies to insure that they do not unwisely affect the spending or investment
behavior of our corporations and our financial system.
As we debate our tax package, which is bound to be controversial, I hope we shall
keep a few critical facts in mind.
First, we must have a tax system that raises enough revenue to meet our major social
needs. Those needs are enormous. Over the next decade, we could easily spend billions
to improve our housing and neighborhoods, reduce violent crime, and improve health,
to mention a few. While we cannot meet all these needs, we must preserve public
resources to finance the high-priority programs that we choose.
Second, we must have taxes that are progressive but not so progressive as to
undermine our economic system or eliminate the incentive for individuals and for
business to produce what we need. Thus, lowering taxes may be part ofthe longer run
answer.
And finally, before we rush to the barricade over shifts in business and individual
taxation we should pause. Because in taxes, things are not always what they seem.
Business may pay the tax but it is borne by an individual as a consumer, a worker, or
an owner of capital. So rather than repeat old slogans, we should look at the distribution
of tax burdens on individuals and business ahke and work with open minds for a tax
system that will serve our collective needs and our national economic goal of stable,
noninflationary growth.
I warned you tonight that the economic problems we face are not simple ones. But
I have argued that this administration is committed to goals, to policies, to a
fundamental attitude that can meet our economic needs and, thereby, advance our
broader social objectives. It is an effort in which we must succeed. It is an effort in which
I ask for understanding and support.
Exhibit 19.—Statement by Assistant Secretary Brill, May 16, 1977, before the
Subcommittee on Taxation and Debt Management of the Senate Finance Committee,
on incentives for economic growth
It is indeed a privilege to appear before this committee today to lead off a discussion
of the problems of incentives for economic growth, particularly incentives to increase
the rate of capital formation so essential for sustaining economic growth.
In addressing these issues, we all recognize, of course, that we are not invading virgin
territory. The problem has been the subject of intensive examination by economists,
lawyers, business and labor leaders and by officials in the executive and legislative
branches of Government over an extended period.
Having followed the course of these discussions over the years, from several different
perspectives, I am encouraged by the growing coalescence of views on some key aspects
of the problem. I think it fair to say that there is today much wider acceptance of the
theses that—
(a) There is a need to accelerate the rate of growth of our capital stock;
(b) Government policies—not only the general tools of economic stabilization
such as monetary and fiscal policies, but also regulatory and tax policies—
play a key role in determining the rate of capital growth;
(c)
Encouraging the rate of capital growth involves, importantly, the removal
of impediments in the saving/investment process as well as the development
of new inducements to higher levels of saving and investment.
Before turning to aspects of the problem on which there is less agreement, let me
address what I think are the principal factors underlying these three generally accepted
theses.
Recognition ofthe need to accelerate the rate of capital formation has been spurred,
in recent years, by increasing evidence that productivity in the U.S. economy has
deviated significantly below the earlier long-term growth trend. Ultimately, the increase
in real returns to the factors of production, that is, the possibihty of raising everyone's
living standards, depends on the growth of output per unit of input. This sets the limits
for our society as a whole. Disturbingly, in the past decade, the rate of gain in
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productivity has slowed significantly, limiting the possible growth in living standards
and contributing to upward pressure on prices.
A substantial growth in productivity, averaging 2.9 percent annually in the nonfarm
business sector, was a major contribution to the low inflation rate of the 1956-66
period. The data for the last decade, however, indicate that productivity increased at
an average of only 1.5 percent per year. For the private sector as a whole, labor
productivity growth was slightly more rapid because of a continued shift of employment
out of agriculture into the nonfarm sector, where labor productivity is higher. However,
a significant decline is equally evident for the private sector as a whole.
Of course, the decade ofthe mid-1950's through the mid-1960's was a period of rapid
economic growth, terminating in a year of exceptionally high resource utilization. In
contrast, the latest decade includes two severe recessions, and terminates in a year of
low resource utilization. But even after adjustment for cyclical influences, it appears
that the secular rate of productivity growth slowed perceptibly after 1969.
This slowdown in productivity growth has been attributed to a variety of causes—
reduction in the workweek, slower growth in productive capital per worker, shifts in
the composition of output to low productivity sectors, shifts in the composition of the
work force toward workers with less experience and fewer skills, and to a miscellany
of other causes. For the most recent years, the drop in productivity after 1973 can be
explained by the impact ofthe energy crisis, and the subsequent rebound in productivity
in the past 2 years to the normal cyclical effects accompanying the economic recovery
that began in early 1975. But these fluctuations have occurred around a level far below
the long-term trend growth rate extrapolated from the experience of the 1950's and
1960's.
It is clear that no one factor satisfactorily explains the slowdown in productivity gains.
But I am persuaded that the slower growth in the capital stock per worker has been one
of the most important factors. I should hasten to emphasize that this has not been so
much the result of a slowing in the rate of growth in the capital stock per se. There is
some evidence that in recent years, the capital stock has grown at a somewhat slower
pace than earlier, but the principal factor in the declining capital/labor ratio since 1969
has been the sharp acceleration in the growth of the labor force. In other words, we
haven't been creating the tools of production as rapidly as we have been creating
workers willing to use them. The amount of capital per member ofthe labor force grew
by 3 percent per annum in the first two postwar decades. So far in the 1970's the amount
of capital per worker has grown at only half that rate.
The implications of such a trend are disturbing, not only for the effect on inflation
of reduced productivity but also for the sustainability over the longer term of an
adequate growth rate for the economy as a whole. The benchmark study ofthe capital
requirements of the U.S. economy, undertaken by the Department of Commerce 2
years ago, concluded that to assure a 1980 capital stock sufficient to meet the needs
of a full-employment economy, business fixed capital investment would have to absorb
some 12 percent of real GNP in the second half of this decade. So far into the period,
that is, in 1975 and 1976, fixed investment has been less than 10 percent of real GNP,
so the gap to be filled in the remaining years would require an even faster rate of growth
in addition to our capital stock than was postulated in the study.
In summary, then, we need more capital formation, both to restore productivity to
the growth track ofthe 1950's and 1960's, and also to provide the tools of production
for a full-employment economy in the 1980's.
What private and public policies can facilitate the needed growth in capital
formation? The answer was best put, in my judgment, in a report issued last October
by the Fifty-first American Assembly, when a distinguished group of academic,
business, labor, and government leaders met to consider the capital needs ofthe United
States. The final report of the Assembly noted: "The single most important means of
encouraging investment expenditures is to combat economic instability and inflation."
Wide fluctuations in economic activity induce excessive caution in investment
decisions. After all, whatever else may be done to increase the cost-effectiveness of new
investments, entrepreneurs have to have confidence that a market will be there for the
products that will be produced in the plants in which they are investing. Instability in
the economy breeds uncertainty, and uncertainty diminishes investment propensities.
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Inflation and expectations of inflation are also adverse to investment. Businessmen
no longer rush to accelerate expansion plans to "beat the price rise"; the experience
of recent years has taught that by the time a new facility launched in the feverish
atmosphere of inflationary momentum is likely to come on stream, a postinflation
recession will probably have dried up the intended market. And consumers have long
displayed the wisdom of reducing major outlays when inflationary forces gather
momentum.
The major contribution ofpublic policy to capital formation, then, is the creation of
a stable and noninflationary economic environment. The Carter administration has
expressed its dedication to this objective. The actions taken by the President to date
to insure noninflationary growth, and the President's commitment to pursue this course
into the future, should provide confidence to businessmen and consumers that the
economic environment will be propitious for capital formation.
There are, in addition to the pursuit of macroeconomic policies conducive to
investment, specific policy areas addressing the capital formation problem. Principal
among these is the tax structure. As this committee knows, the Treasury has under way
a major reexamination of our tax system, with the view to proposing to the Congress
significant revisions. That study is not yet complete. However, it will be submitted
sometime this summer or early fall; every effort is being made to reach conclusions as
soon as possible.
Over the years, there have been many proposals for modifying the tax structure to
enhance incentives for adding to our capital stock. The excellent study prepared by the
Joint Committee on Taxation, released last month, classifies these proposals under six
broad headings: Proposals for the integration of corporate and individual income taxes,
investment tax credits, modification of depreciation allowances, changes in the
corporate tax rate, deduction of losses, and indexing for inflation. Each of these
approaches, individually and in various combinations, is being carefully assessed.
The criteria that are being applied in the Treasury's evaluation of all revision options
relate to three general considerations: Simplification, equity, and economic effectiveness, particularly in enhancing capital formation. The need for simplification is selfevident to anyone who has struggled through the preparation of an income tax return.
It is only about a month since many of us have had to suffer through this annual exercise
in frustration. But the complexity of the return is a function of the complexity of the
law; simplification ofthe law will permit the design of a form more easily comprehended
by the bulk of taxpayers.
The need for equity is also self-evident. Our tax system is unique in the extent to which
it depends, successfully, on the voluntary participation of those subject to the system.
That success can be maintained only if all taxpayers are convinced that the burden is
being shared on an equitable basis. Equity considerations require correction of
imbalances in the present tax structure that may be penalizing one form of incomegenerating income as against another, individual taxpayers as against businesses, small
enterprises as against larger firms.
The need for an economically effective system, particularly one that facilitates
capital formation, is evident from the analysis advanced earlier as to the economy's
need for an accelerated rate of investment. One aspect of the tax structure with
particular relevance to the problems of adding to our capital stock is the impact of taxes
on the form of financing new investment. Our financial system is justifiably renowned
for its capacity, scope, richness of form, and resiliency. It functions with remarkable
efficiency in gathering the savings of the public and transforming these into the means
of financing private investment. Nevertheless, there is concern that the availability of
financing—in both appropriate amount and form—is, or could become, an impediment
to the necessary growth in our capital stock.
One fundamental problem is the tilt of the system toward financing through debt
instruments. Savers appear, in general, to prefer acquiring financial assets of fixed
nominal value and fixed income return—a preference that persists despite the postwar
erosion in the purchasing power of fixed-value claims. Moreover, our present tax systeni
encourages the financing of investment through debt instruments.
Over the longer run, this is not the ideal arrangement; there are limits to which it is
prudent or even feasible to pile increasing amounts of debt on a very slowly growing
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equity base. A debt-heavy financial structure increases the vulnerability ofthe business
enterprise to cyclical fluctuations in income. It limits the venturesomeness of
investment, for lenders cannot in good conscience underwrite the risks appropriate to
an equity participant. And it inhibits economic growth because growth depends very
much on willingness to risk investment in new products and new processes.
Moreover, the emphasis on debt financing raises particular problems for smaller and
newer enterprises, which often lack the track record necessary to attract adequate
amounts of financing from lenders and must, therefore, fight for access to pools of
equity financing.
Many proposals have been advanced to modify the tax structure in order to achieve
more evenhanded treatment of alternative means of financing investment. These
proposals are all under active study.
As the committee can well imagine, such a comprehensive assessment of the tax
structure as is now underway is no mean task. Within each broad category of tax
modification proposals mentioned earlier there are many variants to be pursued. There
is a decided lack of unanimity among economists as to the economic "payoff" of the
various alternatives, and reasons for these differences in view must be explored. Foreign
experience with some ofthe alternative approaches must be evaluated in terms of their
possible relevance to U.S. problems. The relationship ofthe various alternatives to the
tax measures and innovations incorporated in the national energy plan must be
assessed.
Finally, the consistency of various alternatives must be established with the
administration's goals of reduced unemployment, reduced inflation, and a balanced
budget by fiscal 1981. I might note, in concluding, that achievement of these goals
depends importantly on maintaining a high rate of growth in investment over the
balance ofthe decade. The committee can be assured, therefore, that the tax revisions
recommended will contribute to this objective.
Exhibit 20.—An address by Assistant Secretary Brill, June 9, 1977, to the 14th annual
Economic Outlook Conference, Chicago, 111., entitled ^'Lessons of the Seventies"
I realize that it's presumptuous at this point, only three-quarters of the way through
the decade, to claim the insights that would permit such a profound title as "Lessons
of the Seventies." The justification—if there is one—for the pomposity of this title is
my confidence in the economy's performance over the balance ofthe decade. I happen
to think we are going to do quite well over the next several years.
This confidence is based on my observation that policymakers, both public and
private, show clearly that at least some of the lessons of the seventies have indeed
already been learned.
The principal lesson is caution. If stagflation has any redeeming quality, it is the
humility it has induced among economic policymakers. This is evident in the more
widespread reahzation that the business cycle is not dead. This is evident in the more
widespread realization that economic shortfalls are not remedied simply by throwing
money at them. This is evident in the equally widespread realization that economic
excesses are not cured by depriving the economy of money or lengthening the
unemployment lines. This is evident in the more widespread realization that inflation
is not simply a question of excess demand in the United States and the increasing
awareness that world demand and supply constraints are also important variables
impacting upon U.S. prices. Moreover, economists have come to know that fear of
inflation can be as great a danger as actual inflation. They have also learned—
relearned—that inflation cannot be outlawed by fiat, or permanently suppressed by
controls.
Economists have also come to realize that steady productivity growth, which in the
past has been a buffer against increasing wage costs, is not a foregone and inevitable
conclusion, that clean air and clean water, a safe and healthy work environment, and
decreasing dependence on foreign energy sources are not free goods, and that
attainment of these goals will of necessity impose some costs on our economy.
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299
All of these realizations are healthy, because they lead to the conclusion that we still
have a lot to learn about economic stabilization, that neither complete dependence on
the marketplace nor overly ambitious fine tuning provide adequate or socially
acceptable solutions to the economic problems of our times.
This is not a conclusion of intellectual despair. With apologies to my hosts, I must
emphasize that I do not share the nihilism that underlies the economic philosophy
usually identified with this city—that of the so-called Chicago school of economics. I
believe in both the perfectability of man, and of his intellectual achievements. But I
don't feel that this state of perfection was reached in either the general theory or in the
monetary history of the United States. Neither provides us with adequate answers for
the complex problems of the day.
Of all the lessons of the seventies, perhaps the most critical lesson is that neither a
high unemployment rate nor a low utilization rate are sufficient to stop inflation, and
that causes other than demand-pull are becoming increasingly important determinants
of inflation.
This point can best be illustrated by contrasting the behavior of prices in the current
business cycle with the behavior in previous cycles. A recent paper by Geoffrey Moore
notes that in the earlier postwar cycles the rate of inflation (as reflected in the CPI)
not only decelerated during contractions, but showed actual declines. Thus, while a
peak inflation rate (measured as changes over a 6-month span) of + 13.5 percent was
achieved in October 1947, a trough rate of —4.2 percent was reached in November
1948. This was a peak-to-trough drop of almost 18 percent over only a 13-month span.
This record of sensitivity of prices to downward demand pressures was never again
achieved in subsequent postwar cycles, with the record showing progressively smaller
declines in price movements during periods of contraction. According to the analysis
of Moore, the low point in the present price cycle was reached in April 1976, when the
change in the Consumer Price Index (measured over a 6-month span) averaged -1-4.7
percent, a far cry from the minus three-tenths of a percent average for the other postwar
troughs in prices. And this change represented a drop of only 8 percent from previous
peak levels.
There is no simple explanation of the apparent reduction in the cyclical sensitivity
of prices. Clearly market structure must be a factor, and to some extent it is related
to a similar development in wages, which appear to be responding less to cyclical
upturns in unemployment.
But this is only part of the price story. The reduced price sensitivity, particularly on
the downward side, is undoubtedly related to the changed behavior of productivity. In
the early postwar years through 1968, fluctuations in productivity in the private
business economy hovered around an average rate considerably above the zero line,
rarely dipping into negative rates. In other words, even during economic downturns,
productivity growth occurred, although at reduced rates. After 1968, however,
fluctuations in productivity not only have shown a more pronounced cyclical pattern,
but have frequently dipped below the zero line.
How does this all contribute to greater price rigidity? Lower levels of productivity
during recent economic downturns, in addition to smaller downside reaction of wages
to increases in unemployment, add up to less cyclical decline in unit labor costs. These
developments, along with other factors discussed below, have imparted an inflationary
bias to the economy and are major reasons for caution in formulating policies, both
public and private. In other words, in calculating the risk/reward ratio, the social costs
of overshooting in a situation calhng for economic stimulation have increased. And the
chances of success in compensating for an overshoot through a reversal of macroeconomic policies has diminished. Perhaps that is why the recent episodes of fierce
monetary restraint have taken a tremendous social toll but still haven't succeeded fully
in reversing inflation or infiation expectations.
Perhaps, also, we've been fighting the wrong war with the wrong tools. Granted that
the economy seems more resistant to the macropolicies traditionally used in defusing
excess demand, the problem has not been excess demand as much as inadequate supply.
Certainly, we've suffered from a sequence of events limiting supply, particularly in
the food and energy areas. Starting with the famous "anchovy disappearance" in 1972
and continuing through several weather disasters and political upheavals, the world
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food, feed, and fuel situation has b e e n plagued by supply constraints. T h e oil situation
is too well k n o w n to be r e c o u n t e d h e r e . And shortage of capacity in basic materials
processing industries was an i m p o r t a n t contributory factor to the price d e v e l o p m e n t s
of 1 9 7 3 - 7 4 .
Supply p r o b l e m s are n o t a m e n a b l e to t h e conventional tools of d e m a n d m a n a g e m e n t .
O n e can screw d o w n as hard as o n e wishes on M,, without adding o n e bushel of
soybeans o r o n e barrel of oil or o n e d r o p of rain to p a r c h e d fields in Kansas. It seems
to rne o n e of the policy mistakes of r e c e n t years was in treating inflation resulting, in
large m e a s u r e , from supply shortages with tools designed to c o p e only with excess
demand.
T h a t is why I'm m o r e confident a b o u t t h e years a h e a d . It seems to m e that the choice
of policy instruments used t o c o p e with such p r o b l e m s will be influenced by the lessons
learned from the earlier 7 0 ' s . T h e energy p r o g r a m is o n e example, with its incentives
t o substitute m o r e a b u n d a n t sources of energy, which c a n be developed u n d e r our o w n
control, for diminishing resources controlled by a foreign cartel. It will undoubtedly
involve m u c h smaller social and e c o n o m i c costs t h a n a policy of trying to offset price
rises that could be invoked by an unchallenged m o n o p o l y by the throttling down of all
demands.
T h e agricultural p r o g r a m , which will build up reserve stocks to m e e t unforeseeable,
uncontrollable effects of adverse w e a t h e r , is a n o t h e r example. In both the energy a n d
agricultural areas, it s e e m s to m e we are trying to fit the right tools to the problem. I'm
n o t defending every last provision of either p r o g r a m , but the a p p r o a c h is clearly
preferable to dealing with the underlying p r o b l e m s through blunderbuss policies.
A n d w h e r e m a c r o p r o g r a m s are a p p r o p r i a t e . G o v e r n m e n t policies also seem to b e
exhibiting t h e right d e g r e e of caution. T h e withdrawal o f t h e tax r e b a t e s was a difficult
decision. Y e t it was m a d e in recognition of the dangers of overstimulation. I am fully
aware of t h e cynics w h o would like to attribute all sorts of political motivation to t h e
action, b e c a u s e it has n o t b e e n customary for administrations to have the c a n d o r to
admit t h a t t h e e c o n o m i c scene c h a n g e d sufficiently in 3 or 4 m o n t h s to w a r r a n t
withdrawing an a n n o u n c e d policy r e c o m m e n d a t i o n . I am willing to a c c e p t the action
at face value, and am pleased to see t h e p r o m p t vindication of this governmental
p r u d e n c e a n d caution in t h e c u r r e n t flow of e c o n o m i c statistics.
Let m e also a c k n o w l e d g e the increased p r u d e n c e and caution of the c o n s u m e r sector
and t h e business c o m m u n i t y . Despite the fact that the e c o n o m y has m a d e a significant
recovery from the low p o i n t in M a r c h 1 9 7 5 , with industrial p r o d u c t i o n , real G N P , a n d
e m p l o y m e n t all exceeding their previous p e a k levels, the expansion in business fixed
and inventory investment h a s b e e n quite m o d e s t and restrained. E x c e p t for a brief rise
during the e c o n o m i c p a u s e of m i d - 1 9 7 6 , the inventory/sales ratio has b e e n dechning
steadily from the swollen levels of early 1975. Business fixed investmerit, while
recovering steadily from its trough in t h e third q u a r t e r of 1975, is still considerably
below its 1974 p e a k .
All of this caution is n o t surprising if o n e traces through the impact on profits of t h e
sluggish adjustments in unit labor costs and other costs, particularly the cost of raw
materials whose prices h a v e b e e n d o m i n a t e d by erratic supply factors. Although
aggregate c o r p o r a t e profits have m a d e a good recovery from the depressed levels of
m i d - 1 9 7 4 , and recently e q u a l e d their 1972 p e a k levels (even after an allowance for
inventory a n d capital c o n s u m p t i o n valuation adjustments), the same c a n n o t be said for
profit rates, o r t h e profit share of G N P . This share is considerably below the 1972 level
and substantially lower t h a n the halcyon days of the mid-60's. In view of these facts,
businessmen have learned that increased growth does n o t necessarily m e a n increased
profitability.
T o generalize a bit, it seems to m e t h a t the increased frequency a n d amplitude of
cyclical fluctuations have conditioned responses of businessmen and c o n s u m e r s toward
greater risk aversion. T h e severity o f t h e 1 9 7 4 - 7 5 recession is c a p t u r e d adequately in
the n u m b e r s , but p e r h a p s we forecasters tend to overlook the impact of so severe a
recession o n the s u b s e q u e n t decisionmaking process, just because s o m e o f t h e recession
s y m p t o m s w e r e , fortunately, mitigated by the insurance and welfare systems c r e a t e d
earlier.
301
EXHIBITS
But just because 10 million unemployed did not riot in the streets does not mean that
we should have expected an immediate return to earlier response patterns in
consumption and investment as the economy climbed out of the trough. The memory
of layoffs, even in executive suites, has been all too fresh.
The violent adjustments in financial markets, imposed to stem the inflationary
moihentum, also contributed to greater caution on the recovery leg of the cycle. A 1 2percent prime rate is not easily forgotten, neither by the industrial executive faced with
the problem of financing a rebuilding of inventories or expansion of plant facilities, nor
by the financial institution manager who has narrowly escaped fatal hemorrhaging of
his deposits.
We have moved from a go-go era of the sixties to a go-slow era in the midseventies,
in both industry and finance, and I don't think the lessons ofthe recent recession have
wom off. To put it in the framework of a cost/benefit analysis, the costs of the risks
involved in new investment weigh substantially heavier today, and this must be factored
into our forecasts, as well as in our policy advice on how to get to desired levels of
private investment. Nor should we overlook the greater risks in international business
transactions, as businessmen leam—often painfully—the true costs of operating in a
regime of floating exchange rates.
It is simple enough for an economist to suggest that if the risks of doing business
increase, then prices must be raised to compensate for the higher risk. In the long run,
that may indeed be the adjustment process. In the shorter run, however, the adjustment
is not that easy; it may be that such risks are avoided completely.
After suffering from the shock of seeing apparently filled order books melt away
rapidly, it is understandable that industrial executives are exceptionally cautious in
expanding production and facilities in response to early signs of rejuvenated customer
demands.
That is why I am neither surprised—nor overly disappointed—in the latest
Department of Commerce survey of business plans for capital spending this year.
Admittedly, it is somewhat below the 9- to 10-percent range of increase we feel
necessary to attain to achieve our medium-term objectives for budget balance,
unemployment, and inflation. But it is still a respectable pace, strong enough to add
support to the economy in the months ahead without raising any specter of runaway
expansion and inflation. I expect similar prudence in business additions to inventories.
In conclusion, let me reiterate that my optimism over the future course ofthe U.S.
economy stems from a belief that business and government have learned the lessons
of the seventies well. I'm glad that everyone is cautious and concerned; the danger
occurs when everyone is convinced there are no pitfalls to pellmell expansion.
Enforcement and Operations
Exhibit 21.—Exchange of letters between Attorney General Bell and Secretary
Blumenthal establishing policy for Justice Department review of certain reports
received by Treasury under the Currency and Foreign Transactions Reporting Act
MARCH 25,
The
1977.
Honorable W. MICHAEL BLUMENTHAL
Secretary of the Treasury
Washington, D.C. 20220
DEAR MR. SECRETARY: The Currency and Foreign Transactions Reporting Act (P.L.
91-508; 31 U.S.C. 1051-1143) and Treasury Department regulations implementing its
provisions require reports of certain domestic currency transactions and of the import
and export of monetary instruments in excess of certain amounts. In enacting this
legislation Congress expressly recognized that such reports would have a "high degree
of usefulness in criminal, tax, or regulatory investigations or proceedings" (31 U.S.C.
1051).
In order to realize more fully the potential ofthe Act and to facilitate broader access
to these reports by the Department of Justice, I suggest that on a continuing basis the
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Treasury Department furnish this Department with copies of all reports that appear to
merit review. The Justice Department will work with your Department in developing
guidelines appropriate for this purpose.
In the case of requests for reports pertaining to specific persons who the Justice
Department has reason to believe are engaged in illegal activities, it would facilitate
matters if such requests were acceptable when signed by an Assistant Attorney General
on my behalf.
I believe this approach is consistent with the objectives of the Act.
Yours sincerely.
(Signed)
GRIFFIN B . BELL,
Attorney General.
APRIL 29, 1977.
The Honorable GRIFFIN B . BELL
The Attorney General
U.S. Department of Justice
Washington, D C . 20530
DEAR MR. ATTORNEY GENERAL: This is in further response to your letter dated March
25, 1977, requesting access to certain reports required under the Currency and Foreign
Transactions Reporting Act (P.L. 91-508; 31 U.S.C. 1051-1143) and the implementing Treasury regulations.
Since your request is consonant with 31 U.S.C. 1061 and 31 CFR 103.43, the
Treasury Department will be pleased to work with your representatives to make
pertinent information from the required reports filed on IRS Form 4789 or Customs
Form 4790 available to the Department of Justice. Requests, signed on your behalf by
an Assistant Attorney General, for reports pertaining to specific persons will be
acceptable.
Please have a member of your staff contact Deputy Assistant Secretary James J.
Featherstone to arrange the necessary procedures.
Sincerely,
(Signed)
W. MICHAEL BLUMENTHAL.
Exhibit 22.—Statement by Under Secretary Anderson, March 29, 1977, before the
Commerce, Consumer, and Monetary Affairs Subcommittee of the House Committee on Government Operations, on the Bank Secrecy Act
Thank you for the opportunity to appear before you to testify concerning the
implementation of titles I and II of Public Law 91-508, which is commonly referred
to as the Bank Secrecy Act. It is my understanding that the current hearings are, to a
certain extent, a continuation of the hearings the subcommittee held last summer.
Therefore, I will attempt to confine my statement to those areas which were not fully
discussed in the testimony that Assistant Secretary Macdonald gave on June 28, 1976.
The Treasury Department shares the subcommittee's apparent concern about the
misuse of foreign financial facilities to further violations of U.S. laws, including, among
others, tax fraud, drug trafficking, securities violations, and corruption.
Misuse of foreign financial facilities in tax violations
A series of investigations are now being conducted by the Internal Revenue Service
in close coordination with the Department of Justice. These investigations involve one
"private" bank in the Bahamas with an office in the Cayman Islands. There are
hundreds of so-called private banks which appear to owe their existence to the tax
afford U.S. taxpayers. Often a private bank is chartered in a tax haven
advantages they
http://fraser.stlouisfed.org/ business only with nationals of other countries. The tax advantages
country to transact
Federal Reserve Bank of St. Louis
EXHIBITS
303
involve tax avoidance and tax evasion schemes. The biggest obstacle in sorting out the
avoidance schemes from the evasion schemes is the difficulty in obtaining information
from the foreign tax havens involved. The lack of information also makes it impossible
to determine the amount of tax dollars which are being lost to the U.S. Treasury.
The following are some ofthe schemes the IRS has uncovered. It is obvious that the
success of each scheme depends almost entirely on the bank secrecy and commercial
secrecy laws of the tax haven countries.
Use of foreign bank accounts or trusts.—The depositor deals with the foreign bank
or trust through a representative in the United States. Funds are deposited to a
correspondent account of the foreign bank or trust in the United States. The depositor
requests the foreign bank's representative to issue checks to others on his behalf, and
instructs those issuing checks to him to make them payable to the foreign bank. These
checks are then forwarded to the foreign bank's representative for deposit to the bank's
correspondent account in the United States. The control and direction of the account
are maintained by the taxpayer within the United States; however, the records of the
account are maintained outside the United States.
Use of brokerage accounts.—Brokerage accounts for numerous foreign trust clients
are maintained by U.S. brokers in the name of the foreign trust. These accounts are
managed either by one of the foreign trust's representatives in the United States or by
the particular clients themselves. Where clients do not directly communicate with their
brokers, it is suspected that they give them instructions through a representative of the
foreign trust. Substantial capital gains taxes are thus evaded.
Use of foreign trusts.— 1. Foreign situs trusts have been set up for use as a vehicle
to divert U.S. income. In effect, these trusts are nominees. Income diverted to these
trusts is returned to the taxpayer in the form of loans which may or may not be interest
bearing and in most instances are not repaid. It is also believed that cash is disbursed
from a viable trust for the benefit of the taxpayer, resulting in a taxable transaction.
The beneficiary may be another individual who has been named by the grantor. It is
significant that all income and expenses of a grantor trust is includable in income,
whether distributed or nbt.
2. A series of manipulated transfers and exchanges of income-producing assets
through foreign trusts and other foreign entities which produce a stepped-up basis to
such assets when brought back to the United States. The U.S. taxpayer depreciates the
asset on this stepped-up basis and the capital gains resulting from these transactions
escapes U.S. taxes by attributing such gains to the foreign entities.
Use of foreign entities.—Foreign entities such as partnerships, joint ventures, or
corporations are used as nominees for U.S. taxpayers. Funds are returned to the U.S.
taxpayers in the form of loans. In some instances, the taxpayers actually control the
bank accounts for these entities. Records relating to these accounts are segregated from
records used by the taxpayers to prepare income tax returns.
Assignment of rights to future income.—The taxpayer assigns rights to future income
through the purchase of an annuity from a foreign entity. After the basis is recovered,
the payments to the taxpayer are recorded as loans. They are not repaid and taxation
of the annuity income is evaded. The future income, as earned, passes untaxed to the
foreign entity.
Transfer of ownership of an income-producing asset.—A series of transactions is
contrived to transfer the ownership of an income-producing asset, usually a going
business, located within the United States to a foreign entity. This income is then
brought back to the United States for the benefit ofthe seller in the form of loans made
to him either by the foreign entity involved in the purchase, another foreign entity, or
a domestic entity; these so-called loans are usually not repaid. The U.S. taxpayer claims
an interest deduction for the interest allegedly paid as a result of these "loans,"
offsetting other income.
Treasury policy: striking balance between benefits of foreign investment versus
dangers of tax abuse
Although the foregoing examples clearly indicate the opportunities for abuse, the
Department does not want to create the impression that there is anything inherently
sinister in the
use of foreign financial institutions by U.S. persons or companies or
others. In fact, I believe that most foreign financial institutions function very much like
304
1977 REPORT OF THE SECRETARY OF THE TREASURY
banks and securities dealers in this country in that they serve a legitimate and vital
economic purpose. Many of them have facilitated foreign investment in the United
States and, as a result, have had a very beneficial effect on our economy.
Our August 1976 "Report to the Congress on Foreign Portfolio Investment in the
United States" states that foreign portfolio investments in U.S. securities amounted to
about $67 billion at the end of 1974, ofwhich about $25 billion was in stocks and about
$42 billion in bonds and other long-term debt. While most of the debt (about 62
percent) was held by official institutions, almost all of the stock (about 96 percent) was
recorded ih the names of the private persons. Most of this stock (about 89 percent)
was held by European or Canadian residents. Of the $4.5 billion of U.S. stock held by
individuals residing abroad, half was held by Americans residing abroad.
Foreign banks, brokers, and nominees held $ 13 billion of foreign investments in U.S.
stocks and $ 12 billion in long-term debt instruments, primarily corporate bonds, a total
of $25 billion. One cannot assume that all of this was in nominee accounts, in that
overseas banks and broker-dealers hold substantial amounts of securities for their own
account. As the holder of record of such securities is a bank or securities firm, it is not
possible to determine how much of the $25 billion was for nominee accounts and how
much for the banks' and broker-dealers' own accounts.
While determining the source of money inflows is iinportant for investigations
relating to tax evasion and other criminal acts, such information is not necessary for
conducting an effective monetary policy. For purposes of developing domestic and
economic policy, the volume and rate of capital inflows and outflows is much more
important than the identities of the persons or corporations owning such funds.
Treasury Department policies strongly attempt to discourage U.S. owners of capital
from trying to disguise such capital as foreign investment in the Unitecl States. Sections
6035, 6038, 6046, and 6048 ofthe Internal Revenue Code require information returns
as to the shareholdings of U.S. persons in foreign corporiations and the creation of or
transfer of money to foreign trusts by U.S. persons. Moreover, as a result of the Tax
Reform Act of 1976, the income of a foreign trust created by a U.S. person will generally
be taxed to the grantor. The investment income of foreign corporations without
substantial operations is currently includable in the income of their U.S. shareholders
regardless of whether the income is distributed.
In view of the above, elimination of withholding taxes on dividends and interest paid
by U.S. entities to nonresident aliens or foreign corporations would not prevent taxation
of the U.S. owners. Moreover, the Treasury has not made a commitment to eliminate
withholding tax on interest and dividends paid to foreign persons.
Dividends paid by U.S. persons to foreign entities are not exempt from withholding
unless the corporation paying the dividends derives 80 percent or more of its income
from outside of the United States. Interest derived by foreign persons from bank
deposits, unless such interest is connected with the conduct of a U.S. business, is exempt
from U.S. tax. The same is true of discount on short-term Treasury bills.
The exemption encourages foreign entities to keep spare funds in the United States
rather than in other countries, which generally offer similar tax exemptions with respect
to such investments. Again, the fact that the foreign entity is exempt from U.S. tax on
such iriterest or discount does not mean that the U.S. owner is exempt from immediate
taxation on such income.
Treasury favors foreign investment in the United States while at the same time
attempting to combat tax evasion. Investment in the United States through tax haven
jurisdictions, such as the Cayman Islands and the Bahamas, will (except as to bank
interest and Treasury bills) incur a withholding tax of 30 percent. That rate is generally
reduced (in the case of interest sometimes to zero) if the United States has a tax treaty
with the country in which the recipient is resident. Tax treaties provide for cooperation
and exchange of iriformation between the two governments. For example, if a U.S.
corporation withholds tax from a dividend at the reduced Swiss treaty rate, but the
addressee in Switzerland is not the real owner of the stock, the Swiss tax authorities
collect the additional U.S. tax. The Swiss annually pay substantial amounts of U.S. tax
collected on our behalf to the Treasury Department.
U.S. business profits are taxed by the United States regardless of whether earned by
foreign entities
or U.S. entities. U.S. dividends and interest, subject to the exceptions
EXHIBITS
305
discussed above, are taxed at a 30-percent rate in the absence of treaty. Where treaties
exist, information as to the recipients of the dividends and interest is available through
exchange of information provisions. Moreover, even if the foreign entity is itself exempt
from tax on such nonbusiness income as dividends and interest, U.S. shareholders in
avoidance situations are generally required by law to include that investment income
currently in their own tax retums even if the amounts are retained by the foreign entity.
International tax enforcement by IRS
The Internal Revenue Service long ago recognized the need for specialization in the
enforcement of its tax laws in the international area. The IRS Office of International
Operations (OIO) has primary jurisdiction over foreign corporations doing business in
the United States, nonresident aliens and foreign corporations receiving income from
the United States, U.S. corporations, and U.S. persons making payments of investment
and other types of income to foreign persons. OIO has over 500 employees and
maintains posts of duty in 14 foreign countries. OIO has many enforcement tools
available to it as means of identifying the earnings and profits flowing to foreign
corporations and other entities. Most important among these are:
1. Chapter 3 of the Code which requires the filing of a return with respect to all
items of U.S. source income flowing to foreign persons.
2. Those sections of the Internal Revenue Code which require the filing of
information returns by U.S. persons having an interest in or who are officers,
directors, or shareholders of foreign corporations.
3. The exchange of information provisions of the income tax treaties which the
United States has covering 39 countries.
These provisions enable us to identify ownership in foreign corporations doing
business in the United States or receiving income from the United States.
Listed below are examples of information presently submitted by U.S. persons to the
U.S. Internal Revenue Service on an automatic basis as required by law. They relate only
to international transactions or activities by U.S. persons and are in addition to the
information which may be required to be submitted by a U.S. taxpayer on his annual
income tax return.
1. Information concerning the creation of and/or transfer of property to a foreign
trust by a U.S. person. (Form 3520)
2. Information regarding interests of U.S. persons in foreign personal holding
companies. (Forms 957 and 958)
3. Information regarding foreign corporations organized or reorganized by U.S.
persons or whose stock has been acquired by U.S. persons. (Form 959)
4. Information regarding foreign corporations controlled by U.S. persons. (Form
2952)
5. Information regarding stock transferred to a foreign corporation by a U.S.
person. (Form 926)
Illegal financial transactions
Although narcotics investigations are primarily the responsibility of the Drug
Enforcement Administration (DEA), we understand that large international financial
transactions are common in major drug cases. For example in one case, boxes of U.S.
ctirrency were carried into Mexico to pay for drugs. The U.S. currency was deposited
in Mexican banks. Banking records in this country indicate that millions ofdollars of
the same currency were later shipped by a Mexican bank to its correspondent banks
in the United States. The leader ofthe drug ring, who was in Mexico, then used the U.S.
banks to move more than $ 1,500,000 of this money to one of his Swiss bank accounts.
We are also aware that narcotics traffickers have been using U.S. financial
institutions and facilities for "laundering" currency. That is to say, their illicit narcotics
trafficking normally results in accumulation of large quantities of currency in small
denominations. In order to facilitate handling and transportation ofthe currency they
attempt to induce banking officials or employees to exchange the small denomination
bills without filing the required currency transaction reports which would identify the
violators.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
The Internal Revenue Service's investigation of a large banking institution in New
York is an example of this technique in action. The bank and four individuals have been
indicted and it is a matter of public record. Two narcotics traffickers made
arrangements with several bank officials and employees to "launder" currency for a
fee. The bank was charged with failure to report more than 500 cash transactions
totaling $8.5 million during one fiscal year; a bank official was charged with perjury
before a Federal grand jury; 2 bank employees were charged with filing false income
tax returns which did not include fees from the narcotics traffickers; and an individual
was charged with income tax evasion for failing to report $600,000 in income from the
proceeds of the sale of heroin.
We are aware of attempts by international currency dealers to circumvent regulations
which require the filing of reports wherein $5,000 or more in currency is taken into
or taken out of the United States. However, this is attempted more often by schemes
which only involve paper transactions without currency either entering or leaving the
country. An example is a case in which the Government returned indictments last fall
against two individuals involving a foreign bank account in the Bahamas. The setup was
such that all deposits and transactions took place in the United States in a domestic
bank, but in the name of the foreign bank rather than the individual. The individual
was charged with falsely answering " N o " to a question on his income tax return relating
to interest in a foreign bank account. An officer of the Bahiamian bank was charged
with furnishing a false affidavit regarding the depositor's interest in a foreign bank
account.
Lastly, we are aware of coin dealer schemes in exchanging currency which seem to
occur most frequently within the United States. Narcotics traffickers allegedly purchase
coins for the twofold purpose of "laundering" their currency and getting it back in
larger denominations when they sell the coins, as well as making a profit on the sale.
Corporate misconduct
In 1966, IRS initiated the coordinated examination program which today includes
100 percent audit coverage of approximately 1,200 ofthe Nation's largest corporations.
Under this program, the audit plans for these large corporate examinations include
specific checks for areas of noncompliance, including fraud. In 1973, the large case
audit program was updated to include compliance checks in the area of political
contributions. This was followed up in August 1974 by a political campaign
contribution compliance project which received and disseminated information of
possible tax violations to the field. Also, in 1974, the IRS issued new and expanded
guidelines regarding the examination of political organizations, candidates, and
contributors.
During this period, investigations of some major corporations by the Service and
other enforcement agencies disclosed intricate corporate schemes designed to generate
large amounts of cash for illegal or improper use and to reduce taxable income
unlawfully.
In a group of over 800 large case examinations, there have been approximately 280
with indications of slush funds or illegal activity. However, after obtaining all ofthe facts
surrounding the illegal or questionable activity, some of these cases have been
determined to have no U.S. tax consequence.
As of December 31, 1976, 80 coordinated examination program cases were under
active criminal investigation by the IRS Intelligence Division or at some point in the
prosecution pipeline, i.e., in the offices of IRS Regional Counsel, Attorney General,
U.S. attorney, or on the docket in Federal district courts. Over 50 of these 80 cases
involve the issue of questionable payments or political contributions. This is a high
percentage of criminal investigation cases when compared to other classes of returns.
For many years, the Internal Revenue Service has had an international enforcement
program which focuses on the foreign-sourced income of U.S.-controlled foreign
corporations. From a staff of 72 international examiners in 1965, it has expanded to
approximately 150 this year and additional growth is expected.
The increase in staffing was necessitated by the increased workload of identified
cases with substantial international transactions, the IRS's growing knowledge of
foreign operations, and the large amount of tax involved in these cases.
Obviously, in some instances, the IRS's ability to regulate and trace corporate
financial activities is affected by the international nature of these examinations. When
EXHIBITS
307
third-party records are located in foreign countries they generally are not as readily
available as domestic records. This problem can best be overcome through mutual
assistance treaties with the countries in which our multinationals do business.
Implementation of the Bank Secrecy Act
The Assistant Secretary (Enforcement, Operations, and Tariff Affairs) (EOTA) has
the overall responsibility for coordinating the procedures and efforts of the agencies
which have been given compliance responsibilities under the implementing regulations.
Consequently, EOTA has worked with the bank supervisory agencies to develop a
system for monitoring compliance with the regulations and for referring instances of
apparently willful noncompliance to Treasury. Treasury serves as the focal point for
inquiries from the law enforcement community with respect to the recordkeeping and
reporting requirements in the regulations. The IRS, for example, has a special form for
its field agents to use to report apparent violations by banks. The reports are forwarded
to Treasury. EOTA reviews them, makes further inquiries, and refers the matter to the
appropriate bank supervisory agency when a followup seems to be warranted. In some
instances where the supervisory agency confirms that a serious violation may have
occurred, the Assistant Secretary has asked the IRS to conduct a criminal investigation.
The Office of the Assistant Secretary (EOTA) has been actively interested in the
regulations and the forms from the time that the act was signed. It was at the request
of EOTA and Treasury's Office of the General Counsel that the IRS took primary
responsibility for the design of Form 4789, Currency Transaction Report, and Form
4790, Report of International Transportation of Currency or Monetary Instruments.
The Customs Service had substantial input with respect to form 4790. In March 1972
EOTA and the General Counsel released both forms for comment together with the
goverriing regulations which became effective in July 1972.
We are very interested in obtaining the maximum benefit from the forms 4789 and
4790 that are being filed. I understand that the IRS and Customs have made
arrangements for exchanging the data from them. In addition, the Office ofthe Assistant
Secretary (EOTA) has been in communication with the Criminal Division at the
Department of Justice concerning steps which could be taken to make that information
more readily available to various organizational elements within Justice. In instances
where DEA would have an obvious interest. Treasury has also offered DEA
investigators information from the reports of the international movement of currency.
As you may recall, Mr. Chairman, when former Assistant Secretary Macdonald
testified before the subcommittee on this matter in June 1976, he indicated that his
office had developed a system for processing the forms 4789 and 4790 that would
integrate IRS and Customs efforts in this area. However, now that the Tax Reform Act
of 1976 is in effect, much of the analysis and cooperation that was planned would be
illegal.
While it is not possible to provide comprehensive statistics concerning the
effectiveness of the reports in combating "white collar" crime, organized crime,
gambling, racketeering, tax evasion, and narcotics trafficking, in our opinion, the
reporting requirements serve two valuable functions. First, they are in themselves a
deterrent. They make crimes involving large currency transactions more difficult to
conceal and, in some instances, provide additional penalties for failure. Second, some
of the reports that are filed pertain to questionable or illegal activities and can help
investigators to identify criminal activities that might otherwise go undetected.
In addition, the reports have been of considerable value to Treasury agencies in
carrying out their law enforcement functions. During the period from July 1973 through
December 1976, the IRS Intelligence Division initiated a total of 195 criminal tax
investigations in which currency transaction reports (form 4789) were involved.
Thirteen cases were recommended for criminal prosecution during this period; 177
cases were forwarded to the Audit or Collection Divisions for civil tax consideration
or closed to the files; and 10 defendants were sentenced. It should be noted that these
counts include cases which were in inventory prior to July 1973. Thirty-six cases
relating to form 4789 were open as of December 31, 1976.
The IRS also recently implemented a procedure that will permit them to determine
the number of cases initiated as the result of information obtained from Form 4790,
Report of the International Transportation of Currency or Monetary Instruments.
Digitized The forms 4790 are required to be filed with the U.S. Customs Service. Customs has
for FRASER
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1977 REPORT OF THE SECRETARY OF THE TREASURY
been responsible for more than 100 convictions under the act—some of them related
to drug violations. In addition. Customs has been able to determine that many of the
reports have been filed by persons suspected of illegal activities including drug
trafficking and smuggling, r
The question regarding foreign bank accounts has been reinstated on tax forms for
1976. While it would probably not be answered by those individuals engaged in illegal
activities, the question can be an investigatory lead.
We recognize the need to resolve, clarify, and simplify a number of provisions in the
current regulations. As the subcommittee staff has indicated, one ofthe areas that needs
immediate attention is the procedure for remitting the seizures of currency and other
monetary instruments that are made under the act when persons fail to report the
transportation of currency in excess of $5,000. In the past, there has been a question
as to which Treasury element should make the required decisions. I am uncertain as
to why the matter has not been resolved, but I can assure you that it will be in the near
future.
The new restrictions on the disclosure of tax-related information for nontax purposes
may also pose a problem with respect to the dissemination of forms 4789 to other
Federal agencies. The subjects of the investigations in which the forms are used may
claim that the forms, which are filed with the IRS, are tax-related or that the IRS action
to alert another Government agency to an unusual transaction may have been partially
based on tax information. For example, if the IRS were to receive a report pertaining
to a $150,000 currency transaction, recognize the person involved as a leading drug
trafficker, and refer the report to DEA, it is very possible that the information would
be tainted. Furthermore, the IRS employee who released the information might be
subjected to criminal prosecution by the Department of Justice and sued for damages
by the drug trafficker.
Treasury has not, as yet, assessed civil penalties in connection with violations of the
reporting requirements of the act. This is primarily because EOTA is not aware of any
instances in which a penalty would have been appropriate. Treasury hsis received no
recommendations for penalties from IRS or the bank supervisory agencies. While no
"penalties" have been assessed in Customs cases, more than $800,000 has been
collected by Customs from persons who violated the regulations. The civil penalty
provisions are practical only when it can be documented that an unreported shipment
left or entered the United States without being detected by Customs. If Customs seizes
a shipment of currency, the entire amount is subject to forfeiture and a penalty can be
assessed. The total of both the forfeiture and the penalty, however, cannot exceed the
amount of the shipment. So, obviously, there is a very limited need to assess civil
penalties.
We have also played a limited role with respect to criminal proceedings. Treasury
has not made any recommendations to the Department of Justice conceming criminal
prosecution for violations of the Bank Secrecy Act because there has not been a need
to do so. Customs routinely refers its cases directly to the appropriate U.S. attorney who
makes the decision regarding criminal prosecution. In other instances where it appears
that a criminal violation may have occurred, we have referred the matter to the
appropriate U.S. attorney before the outcome ofthe investigation was apparent. In my
opinion, it is quite likely that future investigations will be handled in the same manner.
The Justice Department or local U.S. attorneys should ordinarily have complete
freedom in deciding whether prosecution is warranted.
IRS investigations have resulted in seven indictments, and the IRS currently has
several banks under investigation for possible criminal violations.
We have beeri working with the bank supervisory agencies to have increased
emphasis placed on the examinations for compliance with the currency reporting
requirements. However, to date there has been no indication that noncompliance is
widespread. In our opinion, the vast majority of domestic banks are in substantial
compliance with the act.
The Customs Service has referred 254 persons who were arrested for violation ofthe
currency reporting requirements or related statutes to the Department of Justice for
the consideration of criminal action. Further, other investigations, which did not
culminate in arrests, have been referred to the Department of Justice. Of these.
Customs records show 138 complaints or indictments have been filed by the
Justice.
Department of
EXHIBITS
309
We understand that some U.S. attorneys have been reluctant to prosecute more
currency cases because the law permits the imposition of severe civil penalties, while
criminal violations generally are misdemeanors. Furthermore, these cases are difficult
to prosecute because the Government is required to show specific knowledge of the
act and intent to violate the reporting requirements. We believe that there also may be
some reluctance on the part of local U.S. attorneys to seek indictments due to their
general unfamiliarity with the Currency and Foreign Transactions Reporting Act.
Exhibit 23.—Remarks by Under Secretary Anderson, May 17, 1977, before the
American Importers Association, Plaza Hotel, New York City, on customs
procedural reform
It is indeed a pleasure for me to be speaking to you, knowing that I represent an
administration which has pledged itself to continued efforts at liberalizing world trade.
At the economic summit meeting. President Carter and the other leaders of the large
industrial democracies stated that:
We are committed to providing strong political leadership for the global effort to
expand opportunities for trade and to strengthen the open international trading
system. Achievement of these goals is central to world economic prosperity and
the effective resolution of economic problems faced by both developed and
developing countries throughout the world.
In sharp contrast to the unhappy history of the thirties, the leaders of the cpuntries
that produce most of the world's output and account for most of its trade have rejected
protectionism. They rejected any effort to export their unemployment and other
problems to their trading partners. Instead, they called for significant new reductions
of tariffs and nontariff barriers—with the full recognition that by expanding trade, by
working together to strengthen the world's economic system each country will be better
able to solve its problems at home.
This commitment is important. Butit is only the beginning. Now it must be translated
into reality in the Tokyo Round of trade negotiations and in the actions of individual
countries. I do not underrate the difficulties. When growth lags, when unemployment
is high, protectionism grows stronger. That is why Carter's administration's efforts to
speed economic growth in the United States, while controlling and then reducing
inflation, are critically linked to our trade policy.
So we need your understanding and support not only for measures specifically
concerned with maintaining and expanding the open trading system, we need it also for
the other domestic and international economic policies that must accompany our trade
policy.
Within this broad policy setting, the Treasury Department is planning innovations
that will facilitate commercial trade and make life simpler for travelers returning with
foreign goods.
Since the last customs procedural reform in the early 1950's, the value of U.S. imports
and the amount of duties collected has increased fivefold and the workloads of import
specialists and customs inspectors have increased substantially. Customs has modernized and simplifled its procedures wherever possible. But, faced with a law that reflects
business and travel conditions of the 19th century, legislative change is essential if
Customs is to keep pace with today's conditions.
Most of you, I am sure, carefully followed the progress of H.R. 9220, the customs
modemization and simplification legislation in the 94th Congress. The AIA, along with
other interested organizations and business associations, commented on that bill at the
hearings before the trade subcommittee in August 1976. Early this year, your
association had the opportunity to review and discuss with customs officials various
drafts of a new customs procedural reform bill. The proposed legislatiori, currently
under consideration in the Department, is, we believe, responsive to many of your
concerns. Procedural reform is needed to help increase the productivity ofthe Customs
work force in the face of increased workloads and to assure compliance with the laws.
Here are some of the measures we will propose to Congress.
Digitized First, we will propose to eliminate the simultaneous filing of entry documentation and
for FRASER
payment of customs duties, thus permitting separation of entry documentation and
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1977 REPORT OF THE SECRETARY OF THE TREASURY
reporting from the duty collection p r o c e d u r e . This will allow full implementation o f t h e
a u t o m a t e d merchandise processing system ( A M P S ) which is already in effect in
Philadelphia, Chicago, Baltimore, Boston, and Miami and will be initiated soon in L o s
Angeles. With the flexibility provided by this c h a n g e , transactions b e t w e e n C u s t o m s
and i m p o r t e r s could be expedited, duty p a y m e n t s could be m a d e periodically at local
b a n k s , and periodic s t a t e m e n t s of a c c o u n t could replace individual bills and refunds.
And we would gain the d o u b l e benefit of simultaneously reducing the a m o u n t of
p a p e r w o r k b e t w e e n C u s t o m s and importers and increasing the a m o u n t of information
available o n C u s t o m s transactions.
Second, we will p r o p o s e r e c o r d k e e p i n g r e q u i r e m e n t s that allow improved verifications without requiring any records that would n o t be maintained for ordinary business
purposes. T h e provision would only require records to be k e p t which pertain to
importations o f m e r c h a n d i s e or support the correctness of information contained in the
entry d o c u m e n t s submitted to C u s t o m s .
Bearing in mind the President's c o n c e r n a b o u t the costs of G o v e r n m e n t r e c o r d k e e p ing r e q u i r e m e n t s , we have t a k e n care to avoid imposing any u n d u e hardship or needless
costs and t o ca|:efully strike the p r o p e r b a l a n c e b e t w e e n the n e e d s of the G o v e r n m e n t
and t h e i m p a c t o n i m p o r t e r s . A n o t h e r set of specialized records would not have to b e
c r e a t e d and k e p t for C u s t o m s purposes. At the same t i m e , these revised p r o c e d u r e s
should strengthen the generaliy amicable and cooperative relationship that exists
b e t w e e n C u s t o m s and i m p o r t e r s c o n c e r n i n g audits and inquiries.
Third, we will p r o p o s e an administrative s u m m o n s that will provide a better and fairer
m e a n s of compelling testimony or the p r o d u c t i o n of b o o k s and records after reasonable
notice has b e e n given. This administrative s u m m o n s would b e enforceable in a U.S.
district c o u r t , giving the p e r s o n s u m m o n e d an opportunity to contest the s u m m o n s in
a judicial setting and p r o t e c t i n g his or h e r rights as well as those of t h e G o v e r n m e n t .
F o u r t h , to ease the processing of international travelers, we will propose that t h e
personal e x e m p t i o n be increased to $ 3 0 0 from the $ 1 0 0 allowance permitted since
1962. A n d we will p r o p o s e a flat duty rate of 10 p e r c e n t on dutiable articles valued
b e t w e e n $ 3 0 0 and $ 6 0 0 carried by a returning traveler or in his or her baggage.
Fifth, as a n o t h e r m e a s u r e t h a t will benefit returning travelers, as well as small
importers, we will p r o p o s e t o extend informal entry p r o c e d u r e s to shipments valued u p
t o $ 6 0 0 , instead o f t h e c u r r e n t level of $ 2 5 0 . Informal entry p r o c e d u r e s , which can b e
likened t o t h e short-form tax return, would p r o d u c e significant savings to travelers a n d
o t h e r small importers, and reduce formal customs entries by over 2 3 0 , 0 0 0 , resulting
in substantial savings in processing costs.
Of c o u r s e , n o piece of customs legislation could rightfully be called " p r o c e d u r a l
r e f o r m " unless it c o n t a i n e d an a m e n d m e n t to the so-called fraud and penalty provision
o f t h e Tariff Act, section 5 9 2 . In r e c e n t years, this provision of law has b e e n the subject
of m o u n t i n g criticism primarily b e c a u s e the required penalty, equal to the forfeiture
value of t h e m e r c h a n d i s e , has n o relationship to the loss of revenue suffered by t h e
G o v e r n m e n t . T h e great majority of violations of this section, nearly 9 0 percent, result
from the negligence of t h e importer rather than any intention to defraud t h e
G o v e r n m e n t . Nevertheless, whether the violation is d u e to fraud or negligence, t h e
same penalty is assessed in the first instance. Although the intent of the violator c a n
later be considered by C u s t o m s and the penalty r e d u c e d or canceled, the initial penalty
c a n often result in severe injury to business.
A n o t h e r criticism of existing section 592 is that judicial review o f t h e alleged violation
is for all intents and p u r p o s e s p r e c l u d e d b e c a u s e the G o v e r n m e n t is required to sue for
the full a m o u n t of the initial penalty, if the mitigated a m o u n t is not paid. In c o n c r e t e
terms, if t h e initial penalty is $1 million and the mitigated penalty is $50,000, it is
unlikely that a businessman would risk $ 1 million to seek judicial review.
Accordingly, our sixth proposal will authorize the Secretary o f t h e Treasury to assess
a m o n e t a r y penalty u p to the value of the m e r c h a n d i s e with the proviso that t h e
Secretary could only apply the full penalty in those rare instances involving intentional
actions or omissions designed to defraud the G o v e r n m e n t . T h e Secretary would
establish levels of penalty which would reflect the present standard administrative
p r a c t i c e of distinguishing between various degrees of negligent behavior. Such
variations allow penalties to equal a multiple of the loss of revenue or a percentage of
the value of the
m e r c h a n d i s e .
EXHIBITS
311
By reducing the initial penalty assessment, the unintentional damage to business
would be eliminated and access to the courts for review ofthe penalty assessment would
be made available.
Seventh and last, we will offer two proposals to set reasonable time limits for the
settlement of most Customs matters. We will propose to amend section 621 ofthe Tariff
Act to place a 5-year limit, measured from the date of entry, for assessment of a penalty
under section 592 caused by the negligence ofthe importer. In cases of fraud, however,
we would reserve the right to assess a penalty within 5 years of discovery ofthe violation
as is now provided by law.
In response to comments ofthe AIA, customhouse brokers, customs' attorneys, and
surety companies, we will also propose a statute of limitations on the liquidation of
entries.
I hope that the many stories I've heard of entries being unliquidated for over 20 years
will soon be a thing of the past. Since the enactment of the Customs Courts and
Administrative Act of 1970, it is no longer possible for an entry to be tied up in the
courts for many years before it is finally returned to Customs to be liquidated. I also
understand that wherever the automated merchandise processing system has been
installed, the average time between entry and liquidation has been reduced significantly. Nevertheless, despite improvements in this area, there are benefits to importers
and Customs alike from a statute of limitations on the time in which to liquidate entries.
Of course, a statute of limitations would have to provide adequate time for a complete
examination of the import transaction and a fair liquidation, and authority for its
suspension in circumstances where liquidation is delayed by statute or an investigation
cannot be completed within the required time.
In addition to the proposals we will make, there are two areas that are receiving
further study. In the legislation we will propose, title III of H.R. 9220, the amendment
to the customhouse brokers provision of the Tariff Act, has been deleted. This should
not be interpreted as a lack of interest in the conduct ofthe customs brokerage industry.
To the contrary, we are very seriously examining the concept of self-regulation by the
customs brokers. We understand that some customs brokerage associations are now
considering a code of ethics for their members. We applaud this movement.
However, self-regulation must be sufficient to protect the interests of all concerned.
Discussions with your association and the customs brokers are anticipated as our study
progresses.
The Department is also looking into the Customs ruling process, including current
staffing and backlogs, the publication of classification rulings, and possibilities of
strengthening the Customs Information Exchange to improve communications with the
importing community and assure uniformity of action in Customs districts throughout
the country.
Now let me briefly mention our enforcement of the antidumping and countervaihng
duty statutes. In the interests of customs enforcement, I have instructed Customs to
assign additional staff in order to bring all dumping master lists up to date as soon as
possible. We intend to establish a consistent and predictable approach in our
enforcement ofthe antidumping and countervailing duty laws. Predictability is essential
if importers, exporters, and domestic manufacturers are to be able to plan their future
business in a rational manner.
Finally, I would like to refer to a matter which I am sure is on all your minds: the
Zenith case. You have probably heard that the Customs Court has decided in favor of
Zenith Radio Corp. and adversely to the Government's position. This ruling means that
the court considers the rebate ofthe Japanese commodity tax to be a bounty or grant,
and that our countervailing duty law requires the imposition of a duty equivalent in
amount. If upheld, this precedent could affect a substantial portion of our imports. Of
course, this decision we find to be at complete odds with the liberalized trading policies
so necessary to world economic health.
Therefore, the case was immediately appealed to the U.S. Court of Customs and
Patent Appeals, and the Government's brief was filed last week, on May 12. The
argument is scheduled for June 8. We are hopeful that a finding will be in the
Government's favor, and we expect it will be handed down in early fall or possibly
sooner. In the meantime, liquidation of imports of Japanese electronic products has
been suspended, and bonds averaging 15 percent will have to be posted. We understand
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1977 REPORT OF THE SECRETARY OF THE TREASURY
the uncertainty in which this state of affairs puts you, but everything I have said today
should assure you that the Government is doing all that it can to correct this difficult
situation.
As I mentioned earlier, this is an exciting time to be in the Treasury Department. We
have an opportunity to make a major improvement in the procedures which affect
international trade. With your assistance, it is my hope that we can work for customs
procedural reform which will be responsive to the needs of the Government and the
importing public now and in the future.
Tax Policy
Exhibit 24.—Statement by Secretary Blumenthal, January 27, 1977, before the
House Budget Committee, on the President's economic stimulus program
It is a pleasure to appear before you this morning. Although this is my first
opportunity to appear before a committee of Congress since becoming Secretary ofthe
Treasury, I expect that you and your colleagues will make a veteran of me in short order.
Mr. Schultze has indicated to you the reasons why we believe a stimulative package
is needed for the economy at the present time and the impact the package will have
on the economy.
Let me explain the strategy behind this stimulative program. First, this program has
a 2-year time perspective—the years 1977 and 1978. By the end of this period, we
expect to be making significant progress toward achieving full employment and to be
experiencing generally high rates of economic activity. Secondly, the program is
designed to haye a great degree of flexibility. As we continually monitor the
improvement in the economy, we can either add additional stimulus or cut back as
economic conditions warrant.
I will outline for you the tax aspects of this stimulative package and indicate what
we believe will be the effect on the capital market of not only the tax features of the
package but also of the entire stimulative program that we are presenting. I will also
outline the impact the program will have on the international economy.
The tax features ofthe program have a twofold purpose: To provide a quick injection
of spending into the national economy and also to take the first step in a tax
simplification and tax reform program.
In broad terms, stimulus to the economy will be provided by a payment of $50 per
capita to almost everyone. This will be accomplished by a general refundable rebate
of 1976 taxes of $50 for each taxpayer, spouse, child, and other dependent. In the case
of individuals or of families who have either no dependents or no earned income, this
rebate will not exceed the amount of 1976 tax liability. Also, a payment of $50 per
beneficiary will be made to social security beneficiaries, those receiving supplemental
security income payments (SSI), and those receiving railroad retirement payments.
The $50 per person rebate and social security payment will amount to about $11.4
billion. The payments will be made this spring in the months of April, May, and June.
The total rebate payments, therefore, should fall entirely in fiscal year 1977.
The second tax feature in the program is a tax simplification measure designed to
substantially simplify the tax laws for those presently using the standard deduction. I
will describe the tax simplification aspects of this proposal subsequently. Let me say
at the present this involves enlarging the standard deduction for joint returns with
incomes of $ 17,500 or less and single returns with incomes of $ 15,000 or less. This is
accomplished by substituting a flat deduction of $2,400 for single people, and $2,800
for married couples, for the present complex set of standard deduction provisions.
This increase in the standard deduction will apply for the entire calendar year 1977
as well as subsequent years. However, this tax reduction cannot be reflected in lower
withholding until approximately a month after the date ofthe enactment ofthe bill. We
are assuming that the required withholding changes can become effective as ofthe first
of May. Since the lower withholding will not be in effect for the first 4 months of the
year, there will be either smaller tax payments or larger refunds when the individuals
involved file their tax returns by April 15 pf next year.
313
EXHIBITS
In terms of tax receipts, therefore, the standard deduction simplification measure will
result in a reduction of receipts of $1.5 billion in fiscal year 1977 and $5.4 billion in
fiscal year 1978. At current income levels the full-year effect is a tax reduction of $4
billion.
The third feature ofthe tax reduction in the economic stimulus package is a business
tax reduction. Here we are proposing that business be given the option of a 2percentage-point increase in the present generally applicable 10-percent investment
credit or, alternatively, a refundable 4-percent credit against income tax based upon
the payroll taxes paid for social security (FICA) tax purposes. Taxpayers will have their
choice ofthe payroll tax credit or the investment credit increase but cannot take bpth.
They will be required to elect between these two options and stay with their choice for
a number of years.
The full-year effect of this business tax change at current income levels is expected
to be $2.6 billion a year. In fiscal year 1977 this will result in a tax reduction of $0.9
billion and in fiscal year 1978, a reduction of $2.7 billion.
To summarize, the tax features of the proposal have a budget cost of $13.7 billion
in fiscal year 1977. Most of this represents the cost ofthe tax rebate. The public works,
public service employment, expanded training of youth program, and countercyclical
revenue sharing expenditure programs are expected to add to this cost an additional
$1.7 billion. For fiscal year 1977 this represents an overall cost of the program of $15.5
billion.
In fiscal year 1978 the components of the program shift substantially. The tax costs
in that fiscal year are expected to be about $8 billion. There is no tax rebate in that
year. On the other hand, the expenditure programs for public works, public service, and
countercyclical revenue sharing will by that time have filled up the "pipeline" and can
be expected to result in expenditures of $ 7 6 billion. The combination of these tax
measures and expenditure programs involves a budget cost in fiscal year 1978 of $ 15.7
billion. Table 1 summarizes the budget costs of this program.
T A B L E 1.—Budget costs of the administration's stimulus a n d tax simplification a n d reform
proposals
[$ billions]
Fiscal years
1977
Rebate and social security payment program:
Fifty dollar per capita rebate:
Reduction of tax.....
Refunds in excess of liability
1978
8.2
1.4
Total
Fifty dollar payment to social security and railroad retirement
beneficianes
Total rebate program
9.6
1.8
11.4
Simplification and reform program:
Replace the current law standard deduction with a flat deduction
of $2,400 for single retums and $2,800 for joint retums i
1.5
5.5
Business tax reduction program:
Optional increase in the investment tax credit from 10 percent to
12 percent or an income tax credit equal to 4 percent of
employers* social security tax payments
.9
2.7
Other expenditures programs:
Increased countercyclical revenue sharing
Public service employment
Public works
Expanded training and youth programs
.5
.7
.2
.3
.6
3.4
2.0
1.6
Total other expenditures programs
Total administration proposals
,
1.7
7.6
15.5
15.7
I Includes extension of the $35 general tax credit to exemptions for age and blindness.
314
1977 REPORT OF THE SECRETARY OF THE TREASURY
Impact of program on credit markets
I want to turn now to the question ofthe effect ofthe enlarged deficits for fiscal years
1977 and 1978 implied by these economic initiatives on the capital markets. The entire
expenditure program is currently being reviewed and as a result it is impossible for us
at this time to come up with an exact deficit figure for fiscal year 1977. However, it
is believed that the fiscal year 1977 deficit will be in the range of $67 billion to $69
billion. This includes the effect of the stimulus proposal. Together with about $10
billion of off-budget financing, this would mean a draft by the Treasury on the credit
markets in fiscal year 1977 of $77 billion to $79 billion. Some have questioned whether
this prospective Treasury financing will "crowd out" other investments in the market.
Let us review our experience. It is true that non-Federal demands for funds have been
rising from their recession lows since the latter part of 1975. We expect these trends
to continue in 1977 and 1978. These demands, combined with total Treasury financing
requirements, suggest a record level of total financing in the credit markets during
calendar year 1977 of nearly $300 billion.
The supply of funds available to meet this large demand, including the Treasury's
financing requirements, appears ample. Consumer savings should expand further, and
it is likely that savings flows to investors will strengthen to about $150 billion. In
addition, because this stimulus package is clearly not inflationary, it appears reasonable
to anticipate that throughout 1977 and 1978 commercial and Federal Reserve banks
will have the resources to purchase substantial amounts of credit market instruments.
These sources of funds together with funds supplied by business corporations. State and
local governments, the Federal Government, and foreign investors will meet these
demands without the need for substantial purchases by individuals.
In summary, my judgment is that the larger Federal deficits will not have a serious
effect on the availability of financing for the private sector and will, therefore, have only
a moderate impact on interest rates. Even with the economic initiatives I have outlined,
the economy will only gradually return to higher rates of capacity utilization, and the
rate of real growth will not reach an unsustainable level. Thus, we are unlikely to be
confronted with a situation of "crowding out."
International economic considerations
The present policies of the major nations suggest some slackening in the rate of
growth among the industrial countries. As a result, the developing nations will also
encounter weaker markets for their products. Japan and Germany are expected to grow
at a rate only somewhat less than in 1976, but in several of the other major economies
such as the United Kingdom, France, Italy, and Mexico stabilization measures will lead
to slower growth in the period immediately ahead.
It is important that those countries which are in a relatively strong financial position
expand as rapidly as is consistent with sustained growth and the control of inflation.
Expansion in those countries will provide stimulus for the weaker countries. But, it is
easy to overestimate the magnitude of the contribution that faster growth in Japan,
Germany, and the United States can make in fostering the needed adjustments of
weaker countries. A 1-percent rise in the real GNP of the Big Three would result in
an increase in their combined import demand on the order of $4 billion in 1977, of
which only 60 percent, or about $2.4 billion, could directly benefit the financially weak
countries.
In the period ahead when oil-exporting countries are in a very large surplus position,
the financially weak countries must reduce their deficits to preserve their creditworthiness. As a result, this will tend to bring about a deterioration in the trade balances
ofthe stronger countries. This means that the United States must expect a larger deficit
in its current account balance. The key point here is that the weaker countries will of
necessity reduce their current account deficits in accord with their ability to obtain
financing.
To provide a better international economic climate, the United States is encouraging
the major countries abroad which are in a strong financial position to follow a course
of stimulating their economy much as we are proposing for the United States in this
package.
315
EXHIBITS
Tax rebate provision
Let me now turn to the specifics of the tax rebate program. The rebate program of
$50 per person as I indicated previously is designed to be as broadly applicable as it
is administratively possible to provide. First, there is a general rebate of $50 for each
taxpayer, spouse, child, and other dependent included on an income tax return for
1976. For those who had little or no tax liability the rebate will generally be refundable,
along the lines ofthe present earned income credit. In other words, the $50 per person
rebate will be paid in full even though this may exceed a family's tax liability. The only
groups for whom the rebate will not be refundable will be single individuals, married
couples with no dependents, or married couples with dependents but no wage and salary
income. For this group, the $50 credit will be available only to the extent of 1976
liability. Table 2 shows the distribution of this rebate by adjusted gross income class
at 1976 levels of income. The total amount ofthe tax rebate is $9.6 billion distributed
to more than 70 million tax return filers.
The second component of the stimulus package is aimed at those who may not be
required to file tax returns. This conponent provides a payment of $50 to all
beneficiaries under the social security, supplemental security income, and railroad
retirement programs. Thirty-six million beneficiaries will receive these payments at a
total cost of $1.8 billion.
Some have argued that a one-shot stimulus such as a tax rebate will have little or no
stimulative effect. They argue that consumers, seeing that the tax credit is just
temporary, will not change their spending patterns but will instead save the entire
rebate. I believe that the effect of a rebate depends significantly on the condition of
the economy and that under present circumstances a rebate will be rapidly spent. It may
be true that when economic conditions have been good for some time, consumer
spending and saving plans are relatively stable as families adjust their spending
appropriately to their income, both present and anticipated. Under such circumstances,
people receiving a windfall in the form of a temporary tax cut probably will spend only
a portion of it, saving the rest.
TABLE 2.—Estimated effects of the administration's tax rebate program, distributed by adjusted
gross income class
[Calendar year 1976 levels of income]
Adjusted
gross
income
class
Tax change resulting from the fifty dollar per capita rebate
Amount
Cumulative
percentage
distribution
Percentage
distribution
Percent
Less than $5,000
$5,000 to $10,000
$10,000 to $15,000
$15,000 to $20,000
$20,000 to $30,000
$30,000 to $50,000
$50,000 to $100,000
$100,000 or more
Millions
-$984
-2.010
-2,223
-1,904
-1,695
-564
-169
-36
10.3
21.0
23.2
19.9
17.7
5.9
1.8
.4
Total
-9.585
100.0
10.3
31.2
54.4
74.3
92.0
97.9
99.6
100.0
But recent economic circumstances have been neither good nor stable. We have had
combined inflation and stagnation for several years, with unemployment at its highest
levels in decades. Most families' real income expectations have been repeatedly
disappointed. Even when wage increases have been achieved, inflation has rapidly
eroded these increases, leaving many families worse off than they were before. This has
two consequences: First, most consumers have not been able to keep their consumption
spending at a level which they consider satisfactory. There is, in my judgment, a
significant willingness to consume that the rebate program will tap. Second, because
the economy is recovering, consumer confidence is also on the rise. This provides a
further reason for spending rather than saving the rebate.
316
1977 REPORT OF THE SECRETARY OF THE TREASURY
Tax simplification and reform
Another part of this package is designed not only to provide a stimulus for the
economy but also to simplify the tax laws. This is the first step in our long-range tax
reform and simplification proposals.
One source of complexity under present law is the standard deduction provision.
Presently the standard deduction for single people is 16 percent of adjusted gross
income, but not less than $ 1,700 or more than $2,400. In the case of married couples
the standard deduction is 16 percent of adjusted gross income, but in this case not less
than $2,100 or more than $2,800. Everyone claiming the standard deduction, even
though using the tax table, must make this calculation.
The proposal which the administration is presenting would substitute for the
complicated set of standard deduction provisions a flat dollar amount of $2,400 for
single people and $2,800 for married couples. These are the present maximum standard
deductions for single and married persons, respectively. The flat dollar standard
deduction not only is easier to compute than the variable credit but in addition makes
it possible to fold the standard deduction into the tax tables and rate structure. This
in effect means that there would not even be a separate computation of the standard
deduction as there is at present. Instead, the tax tables will incorporate the new standard
deduction.
Even taxpayers who itemize their deductions will be able to use the tax tables, or rate
structures, with the standard deduction built in. They will simply subtract from their
income the excess of their itemized deductions over the flat standard deduction and
then turn to the tax tables.
In addition, the new tax tables will have built-in computations of personal exemptions
and the general tax credit. Under present law, taxpayers must make all of these
calculations themselves. For example, the general tax credit involves a choice bet\yeen
a per capita credit of $35 and an alternative credit of up to $180 based on the first
$9,000 of taxable income.
The new tax tables will not require any of these calculations. The tables will have
different columns for the different numbers of exemptions. After having added up his
income, an individual with three exemptions would simply look down the tax table in
the column referring to three exemptions and read off from the table his tax hability.
For a taxpayer who had no special credits, this would be his final tax. To determine his
tax payment or refund then due, he would only have to subtract the tax which he had
already paid by way of withholding or in some other form. The tax tables will be
available to all taxpayers with incomes under $25,000 or $30,000, the bulk of all
taxpayers. To make this simplification possible, exemptions for the aged and blind will
qualify for the $35 credit.
This change in the standard deduction will result in an annual revenue loss of about
$4 billion a year. However, because the provision will be effective for only a portion
of fiscal year 1977 and also because withholding changes with respect to this standard
deduction probably cannot be made until about the first of May, the revenue iinpact
in fiscal year 1977 is expected to be only about $1.5 billion. In fiscal year 1978, the
revenue loss is expected to be about $5.4 billion, which exceeds the full-year cost
because of refunds generated by the late start in withholding.
The tax reduction as a result of the change in the standard deduction affects only
those with incomes of $17,500 or less in the case of married couples, or $15,000 or
less in the case of single persons. As is shown in table 3 a very large portion of the
reduction resulting from the standard deduction change is concentrated in the lower
income levels. This table shows that 65 percent of the reduction goes to those with
income below $ 10,000. Table 4 shows the reduction in tax liabilities for representative
taxpayers who use the standard deduction. For example, a family of four with earnings
of $10,000 will have its taxes reduced by $133 (from $651 to $518).
The new standard deduction will exceed the itemized deductions of approxirnately
4 million taxpayers who currently itemize. Accordingly, we expect the percentage of
all filers using the standard deduction to rise from approximately 69 percent to 74
percent.
317
EXHIBITS
These tax changes will also insure that persons at or below the poverty level will pay
no income tax. Table 5 shows the levels of tax-free income and the projected poverty
levels for the years 1977 and 1979. While the standard deduction changes raise the taxfree level somewhat above the expected poverty level in 1977, generally this will no
longer be true by 1979.
T A B L E 3.—Estimated effects of the administration's fiat s t a n d a r d deduction proposal, distributed
by adjusted gross income class
[Calendar year 1976 levels of income]
Tax change resulting from $2,400/$2.800 standard deduction i
Adjusted
gross
income
class
Millions
-$616
-1.953
-1.245
-137
-1
f ««s than $s nno
Percent
_•
15 6
49 4
31 5
35
*
•
*
*
-3,951
$5,000 to $10,000
$10,000 to $15.000
$15,000 to $20.000
$20,000 to $30.000
$30,000 to $50.000
$50,000 to $100 000
$100,000 or more
100.0
_•
_•
Total
Cumulative
percentage
distribution
Percentage
distribution
Amount
15 6
65 0
%5
100 0
100 0
100 0
100 0
100.0
* Less than $500,000 or 0.05 percent.
tincludes the effect of extending the $35 general tax credit to exemptions for age and blindness.
T A B L E 4.—The fiat s t a n d a r d deduction proposal f o r 1 9 7 7 — t a x changes f o r representative
taxpayers
Adjusted
gross
income
Single:
$3,000
5.000
7.000
10,000
Joint retum:
Family of four:
1976 tax law
Tax change
$42.50
363.50
714.50
1.331.00
0
$247.50
584.50
1.177.00
-$42.50
-116.00
-130.00
-154.00
5.000
7.000
10.000
15,000
130.00
448.00
948.00
1.882.00
28.00
332.00
829.00
1.794.00
-102.00
-116.00
-119.00
-88.00
7.000
10.000
15.000
Filing status
Proposed
1977
tax I
235.00
651.00
1.552.00
2-70.00
518.00
1.464.00
-105.00
-133.00
-88.00
iThe proposal would increase the minimum standard deduction to $2,400 or^ for joint retums. $2,800.
2 Assumes use of the eamed income credit.
NOTE.—Tax cidculations are based on the tax rate schedules and assume the standard deduction, both for
present law and under the proposal.
T A B L E 5.—Tax-free levels a n d projected poverty levels
Tax-free levels
Projected poverty levels i
1976
law
Single person
Couple without dependents
Family of four.....
Proposed
for 1977
and
thereafter
1977
1979
$2,700
4.100
6.100
$3,400
4,800
6,800
$3,107
4.018
6.110
$3,439
4.448
6.763
I Applicable to nonfarm families. Projections assume consumer price indices of 179.11 in 1977 and 198.26
in 1979.
318
1977 REPORT OF THE SECRETARY OF THE TREASURY
Business tax reductions
To provide further stimulus for economic expansion, we also provide a program of
business tax reductions.
Each firm will choose, but on a long-term binding basis, between two tax credits: (1)
A refundable credit against income taxes of 4 percent ofthe employer's share of social
security payroll taxes (currently 5.85 percent of taxable payrolls); or (2) an additional
2-percent investinent tax credit (generally from 10 to 12 percent) for all investment
outlays which are currently eligible. The self-employed will choose between the
additional investment tax credit or 2 percent ofthe self-employed payroll tax (currently
7.9 percent) plus, of course, 4 percent of any other payroll taxes they have. These
credits will apply to eligible equipment placed in service after January I, 1977, or to
social security taxes on payroll costs incurred after January 1, 1977.
It is well known that business firms do not benefit uniformly from the current
investment tax credit. Relatively labor-intensive firms, those engaged primarily in the
service trades, and nonprofit institutions paying the social security tax may not be
eligible for the investment tax credit and therefore derive few or no benefits from this
provision of tax law. It is partly for this reason that the alternative credit against payroll
taxes is proposed for such firms or organizations. Another reason is that the new device
should directly encourage increased einployment. The payroll tax credit will be fully
refundable so that all firms, whether or not they have current income tax liability, will
be able to reduce their payroll costs through this program.
In 1977, this program will reduce business tax liabilities by $2.6 billion. Of this total
$1.1 billion would result from the use of the payroll tax credit and $1.5 billion from
the use of the higher investment credit.
Countercyclical revenue sharing
Existing law, in addition to general revenue sharing, makes provision for the
expenditure of $1.25 billion (for the period which began last July) for countercyclical
revenue sharing. Under this program, funds are allocated on a quarterly basis of $125
million plus $62.5 million for each half percentage of national unemployment over 6
percent. When national unemployment falls to 6 percent, this latter part ofthe program
turns off. At the national unemployment rate of about 8 percent for the fourth quarter
ofthe calendar year 1976, all funds appropriated by Congress for this program will be
exhausted by April of 1977.
Under this program, funds are distributed to over 20,000 State and local governmental units on the basis of their unemployment rates in excess of 4 1/2 percent and the
fiscal year 1976 general revenue sharing amounts. One-third of these amounts are
distributed to State governments and two-thirds to localities.
It appears that the current allocation formula has targeted funds effectively. For
example, three-quarters of all local funds in the third quarterly payment went to
governmental units with unemployment rates in excess of 8 percent. Similarily, central
cities and governments in States with higher unemployment rates receive larger per
capita antirecession payments. Compared to general revenue sharing, allocations are
more heavily concentrated in cities of 100,000 or more population and counties of
200,000 or more population.
The President's economic stimulus package both expands and modifies somewhat the
operation ofthe countercyclical revenue sharing program. Under the stimulus package,
this program would first of all be given a 4-year authorization with annual appropriations as compared to the current authority which covers only five quarters.
Second, an additional $1 billion would be made available for distribution beginning
in July of 1977. These new funds would be triggered only in response to national
unemployment in excess of 6 percent.
Finally, the indexing of the total quarterly funding would be made more sensitive to
changes in the unemployment rate under the stimulus proposal. Instead of increasing
$62.5 million for every full half percentage point of unemployment over 6 percent as
is currently true, each change of one-tenth of a percentage point would result in the
increased funding of an additional $29.2 million.
EXHIBITS
319
While it is difficult to forecast exactly how the additional $ 1 billion of countercyclical
revenue sharing funds will be spent in fiscal years 1977 and 1978, our current estimates
suggest that this will result in an increase in spending in the fiscal year 1977 of $500
million and in fiscal year 1978 of $600 million. If unemployment is higher than
anticipated, the expenditures in fiscal 1977 might be larger than indicated.
Conclusion
Let me conclude by emphasizing both the balanced nature of this program as well
as the flexibility of our overall stimulus package in meeting the needs ofthe economy.
Our proposals are balanced in that they provide an immediate injection of spending into
the economy while at the same time taking the first step towards tax simplification and
tax reform. Moreover, the stimulus provided from lower taxes and accelerated spending
can be flexibly adjusted to economic conditions as we recover from the worst recession
in 40 years.
Exhibit 25.—Statement by Secretary Blumenthal, May 16, 1977, before the House
Ways and Means Committee, on the President's energy program
Mr. Chairman and members of this distinguished committee, it is an honor to appear
before this committee again and to have an opportunity to discuss a matter as important
as the President's energy program. Dr. Schlesinger is discussing the general setting of
the program with you, and I would like to focus attention on the tax aspects.
Introduction
Let me begin by pointing out that tax aspects of the energy program before this
committee are a major portion ofthe energy program—a carefully integrated package
designed to reduce the annual energy growth to less than 2 percent per year by 1985.
These proposals are a balanced program. Some may be surprised that so comprehensive a program—involving as it does billions ofdollars of additional tax collections and
billions of dollars of disbursements—is projected to have such relatively small net
impact on the Nation's output and prices. The answer is that the plan is designed that
way.
The tax proposals I will discuss today are intended, without the building of a vast
regulatory bureaucracy, to encourage the conservation of scarce fuels, and at the same
time to redirect energy use to alternative fuels—primarily coal—which are widely
available. The principal mechanism for achieving these objectives is the use ofthe tax
system, through a combination of tax penalties and tax incentives. The plan has been
designed so that, for the economy as a whole, the revenues collected under the proposed
tax penalties about equal related elements of the energy conservation program.
I would like to discuss first the pricing policy for oil and how an excise tax is used
to achieve this effect.
Crude oil and gas equalization tax and credits
One ofthe principles of our energy policy is a rational pricing policy for scarce energy
sources to reflect world prices. This is necessary to assure that our scarce natural
resources reflect the price which represents their true cost. The crude oil equalization
tax is intended to bring the domestic refiner price of crude oil up to the world market
price over a 3-year period without providing an unjustified windfall to producers of
existing oil wells.
Under the crude oil equalization tax, domestic crude oil will be subject to an excise
tax equal to the difference between the current controlled price and the 1977 world
market price adjusted for inflation. The tax will be brought into effect in three stages,
beginning in 1978. The full tax will be in effect by 1980.
This tax assures that all consumers of petroleum pay prices that reflect the true
marginal cost of foreign imports. These prices should provide incentives both to reduce
320
1977 REPORT OF THE SECRETARY OF THE TREASURY
consumption and, where possible, to switch to alternative fuels. This tax also assures
that consumers of relatively inexpensive oil will not gain an undue advantage over other
consumers.
Both from the standpoint of fairness and to assure that the tax will not have an adverse
effect on the economy, the net revenues derived from this tax will be recycled to users
of oil. First, a refund of the tax is made to sellers of residential heating oil. But for this
to be available the rebate must be flowed through to home heating oil customers. The
balance ofthe revenues, less administrative costs and income tax reductions associated
with business deduction of the tax, are to be returned to virtually all consumers on a
per capita basis. All income-tax payers, including those receiving the earned income
tax credit, would receive the per capita credit. The same per capita amount would be
made available to those not paying tax but receiving social security payments, to those
receiving SSI payments, railroad retirement payments, and those on the AFDC
program.
The gross crude oil equalization tax collections are estimated to amount to about $2.8
billion in 1978, rising quite rapidly to $11.9 billion in 1980 and then rising to $12.3
billion by 1985. Out of these gross tax receipts there will be paid tax refunds to jobbers
to compensate them for the cost of residential heating oil exemptions. These are
expected to amount to $48 million in 1978, rising to $966 million in 1981 and then
staying at about that level thereafter. The remainder ofthe receipts are either estimated
as reductions in income tax receipts or paid out on a per capita basis to income-tax
payers and to those on social security, AFDC, or similar programs. The estimated
amount going to income-tax payers in 1978 is $ 1.9 billion, rising to $7.5 billion in 1985.
The amount going to those on social security, AFDC, or similar programs on this same
per capita basis is estimated at about $500 million in 1978, rising to $ 1.9 billion in 1985.
Residential and business conservation
To provide a further stimulus to energy conservation, we have also proposed a series
of residential conservation and business energy tax credits. These credits will provide
individuals and businesses the incentives they need to make necessary efficiency
improvements in their homes, factories, and businiess establishments.
The residential energy credit consists ofthe credits for insulation and the solar energy
equipment. For home insulation a credit is provided against income tax to the individual
taxpayer of 25 percent of the first $800 of expenditures of this type plus 15 percent
of the next $1,400 of these expenditures (up to a maximum cumulative credit per
taxpayer of $410). The expenditures for energy-saving equipment are those for wall and
ceiling insulation, storm windows, clock thermostats, and energy-saving furnace
modifications. Expenditures for caulking and weather stripping qualify only if made in
connection with other energy-saving expenditures. This incentive will go a long way
towards achieving the President's goal of making as many as possible of the Nation's
homes thermally efficient.
In addition, we propose a significant incentive be provided for homeowners to tap
our only nondepletable resource—the Sun. We will provide in 1978, for example, a
solar energy equipment credit of 40 percent, on the first $ 1,000 of solar equipment
expenditures and 25 percent of additional expenditures (up to a maximum credit of
$2,000). This covers both solar hot water and solar space-heating installations. After
2 years, lower levels ofthe credit will apply through 1984. This kind of credit will enable
many Americans to look beyond fossil fuels as the primary way of heating their homes
and will enable them to employ the new solar-heating technologies that are emerging.
We have proposed a similar program of tax credits which expand the present
investment tax credit provisions for business investment in certain energy-saving
equipment such as insulation, double-glazed windows, energy control systems, and
efficient heat exchangers. These investments will be eligible for an additional lOpercent business energy property credit on top of the regular investment credit.
Solar heating equipment for commercial and industrial application and cogeneration
property also would be eligible for this additional 10-percent credit. Cogeneration is
the process by which waste heat generated in the process of making electricity is
recycled and used in an industrial application, or vice versa. Cogeneration used to be
EXHIBITS
321
fairly common, but today only 5 percent of total electrical generation capacity has this
capability. This is an area where a tax incentive can make a significant contribution
towards helping the Nation conserve our energy supplies.
We estimate the cost of these residential and business credits to be $754 million in
1978 and to be $616 million in 1985. Most of this—$666 million in 1978 and $517
million in 1985—is attributable to thermal efficiency. Cogeneration accounts for most
ofthe remainder—$52 million in 1978. (The program has expired by 1985.)
Transportation taxes
The two primary proposals designed to encourage improved fuel use in transportation are the automobile fuel inefficiency tax and rebate and the standby gasoline tax
and per capita credits and payments.
The automobile fuel inefficiency tax (commonly referred to as the **gas guzzler tax")
and rebate mechanism will supplement existing law and regulation in this area, which
already provide standards of fuel economy for the fleet in the years ahead and civil
penalties on the automobile companies for failure to comply. The tax and rebate should
result in a higher average fuel efficiency of new cars than that achievable under the
EPCA standards alone. We believe the existing mechanism alone will not achieve the
level of conservation we have established as a national goal.
The fuel efficiency tax and rebate is geared to a specific fuel efficiency standard
already promulgated for new cars each year. For the 1978 model year, for example,
the target level of automobile fuel efficiency is 18 miles per gallon. Cars just achieving
that standard would pay no tax and would not be eligible for a rebate. Cars surpassing
that standard would be eligible for a rebate based on their gasoline efficiency as
determined by EPA testing. In 1978 cars with an average efficiency of 25 m.p.g., for
example, would get a rebate which is five times the amount for which cars achieving
only 20 m.p.g. would be eligible. Conversely, cars not achieving the target efficiency
would pay a tax of up to $450, depending on how far below the standard they rank.
The standard and the tax is increased gradually so that for the 1985 model the standard
is 27.5 m.p.g. and the maximum tax is about $2,500.
No net effect is expected on the budget surplus or deficit from the gas guzzler tax
and rebate because the taxes collected on inefficient vehicles. Rebates on 1977 model
year cars sold after May 1, 1977, along with rebates on 1978 model year cars will be
paid out of 1978 model year taxes. The program is structured this way to help and
encourage the automobile industry to convert from gas guzzlers to efficient small cars.
The intent is to provide an incentive to purchase fuel-efficient automobiles, not to
collect tax revenues. The rebate mechanism will also minimize the inflationary impact
of the program by reducing the net cost of fuel-efficient vehicles to balance off the
increases in cost of the fuel-inefficient cars. The gas guzzler tax is expected to bring
in receipts of $500 million in 1978, increasing to $1.9 billion by 1985. This, however,
will be offset by expenditures of like amounts to cover the rebates.
Rebates will be made to foreign manufacturers on the basis of executive agreements
entered into between the individual countries and the United States. These agreements
will be designed to assure that domestic manufacturers are not disadvantaged by the
tax and rebate system.
The standby gasoline tax in no event would go into effect before 1979 and in no year
could amount to more than a 5-cent increase. It is keyed to a series of gasoline
consumption targets which allow for continued increases through 1980 to a level of 7.45
million barrels a day. The present level is between 6.7 and 7 million barrels a day. After
1980 the targets assume that the energy program generally will result in economies in
the use of gasoline and, thus, in subsequent years the consumption targets will gradually
decrease to a level of 6.5 million barrels a day by 1987.
In 1979 or any subsequent year, the tax would go into effect if gasoline consumption
in the preceding year exceeded the target by at least 1 percent. The amount of the tax
would equal 5 cents for each percent that gasoline consumption exceeded the target
in the preceding year. The tax could be reduced by 5 cents a year based on the formula
in the legislation. The tax could not increase or decrease more than 5 cents per year
and it could never exceed 50 cents per gallon.
322
1977 REPORT OF THE SECRETARY OF THE TREASURY
In 1979, the standby gasoline tax, if imposed, would bring in revenues of $4.1 billion.
This amount less reduced business income tax receipts associated with payment of
higher gasoline taxes would be rebated either to income-tax payers or those on the
various social security and related programs. By 1985, if every increase possible were
provided, this could amount to $39.8 billion in that year; but again it would all be
rebated to income-tax payers or those covered under social security or similar
programs.
Two other lesser elements of the program concerned with transportation are the
repeal of excise tax on buses and an increase in fuel excises paid by general aviation
and motorboats.
The repeal of the 10-percent excise tax on buses is a step forward in promoting the
use of this efficient mode of transportation. The higher excises on general aviation
(increased by 4 cents per gallon) and motorboats (repeal of a 2 cents per gallon rebate)
should achieve reductions in the use of fuel by these relatively inefficient and often
nonessential modes of transportation. These higher excises will only apply to
noncommercial uses of aircraft and motorboats; commercial fishermen and airlines will
be exempt from the increased tax.
Since the automobile efficiency taxes and the standby gasoline taxes are designed to
collect no net revenue, the budgetary impact of these transportation programs is quite
small. The net impact of these two taxes is a gain of $32 million in fiscal 1978, and the
impact in 1985 is estimated to be a gain of $71 million.
Oil and gas consumption tax
The oil and gas consumption tax is designed to encourage industrial and utility users
of oil and gas to convert to coal and other desirable fuels. Oil and gas consumption taxes
would be imposed beginning in 1979 for industrial use and in 1983 for utility use of
oil and gas. The tax on nonutility use is phased in gradually through 1985. The oil and
gas consumption tax is intended to be a permanent tax.
These taxes would be rebated, however, to the extent that oil and gas users convert
their plants to fuels other than oil or gas. This rebate will take the form of a dollar-fordollar offset of conversion expenditures against the taxpayer's oil and gas consumption
tax liability. Conversions include both modification of existing units and construction
of new units. We expect a large percentage, over 50 percent in some years, ofthe taxes
to be rebated because the higher prices of oil and gas and the lower capital costs of
alternative fuels will make conversion investment economically attractive.
The oil and gas consumption taxes will apply only to those users for whom it is
economically feasible to convert. A small-business exemption from tax is provided for
the first 500 billion Btu's a year. For an average user, this amounts to about $1.5 million
in fuel costs per year. This size cutoff for taxable use will tax only the top 2,000 firms
in the country which consume 90 percent of industrial oil and gas. We have also
provided an exemption from these taxes for aircraft, railroads, ships, farming, and use
of oil or gas in the production of fertilizer and for nonfuel use by a refinery.
The expected net cost of these programs after all rebates is estimated at $ 1.4 billion
in 1978 and about $11.9 billion in 1985.
Energy development incentives
Finally, we propose to provide two incentives to insure the future supply of oil, gas,
and geothermal resources. In regard to oil and gas intangible drilling expenses, we
propose limiting the application of the minimum tax to those individuals sheltering
other income through oil and gas losses. We would exempt from the minimum tax the
many independent oil and gas drillers whose investments generate oil and gas income.
Our amendment accomplishes this by restricting the minimum tax to intangible drilling
expenses which exceed a taxpayer's oil and gas income.
In addition, we propose to provide an incentive that will aid in the development of
our largely untapped geothermal resources. This is a relatively new industry, and
because of this we believe that providing the industry with the opportunity to expense
its intangible drilling costs will provide a needed stimulus to development. These
expensed costs will be subject to the minimum tax to the extent that they exceed income
from geothermal operations.
EXHIBITS
323
The revenue cost of these two initiatives is $24 million in 1978 and $128 million by
1985.
There has been criticism that the President's program has stressed energy
conservation at the expense of development. This is not based on a close analysis of
the program. Not only are there the two supply incentives just discussed, but we have
what in the free enterprise system should be viewed as the most important incentive
of all: a free price. After 3 years, newly found oil will receive the 1977 world price of
about $ 13.50 a barrel adjusted for general price increases. One remembers that crude
oil sold for $3 a barrel only a few years back. This should be a great incentive. It is true
that already existing discoveries will not get such a price. We see no reason for allowing
windfall profits in this area.
I hope that this will provide the committee with an outline ofthe major tax aspects
of the energy program.
The energy program and tax simplification
From my prior testimony before this committee, you are aware that one of Treasury's
main conceriis in the tax reform area is simplification. The proposals I have just
described will certainly increase, not reduce, the volume of tax law.
We believe, however, that the administration's energy tax proposals will add little in
the way of complexity to the income tax laws, especially in regard to individual
taxpayers. The bulk of our proposals take the form of excise taxes to be collected by
businesses who are already well equipped to handle this form of tax. The business
energy credit proposal simply expands the already existing investment tax credit
provisions. The residential energy credit proposal may result in one additional line on
tax returns, but it is anticipated that the other individual tax credits in the proposal will,
each year, be folded into the current general tax credit.
In closing, let me reemphasize that these tax proposals form only part of a broad
energy plan. Through the tax system we have tried to provide incentives for individuals
to alter their consuinption and production plans to meet our national objectives. The
nontax proposals in the plan are also directed to this gpal. The overall result is a
coordinated package which will significantly reduce the rate of growth of energy
demand while at the same time providing energy supply incentives.
4^
Estimated revenue impact of the energy program on fiscal year receipts
[$ millions]
73
m
'V
Fiscal years
1978
Auto efficiency tax (effective Sept. 1, 1977) 1
Crude oil equalization tax, net of rebates (effective
Jan. 1,1978)2
Standby gasoline tax (effective Jan. 1, 1979)3
Residential energy credits (effective Apr. 20, 1977,
through Dec. 31. 1984):
a. Themial efficiency (insulation, etc.) 4
b. Solar energy
Business energy credits (effective Apr. 20, 1977,
through Dec. 31. 1982):
a. Thermal efficiency
b. Cogeneration 5
c. Altemative energy 6
Oil and natural gas consumption taxes—rebate for
investment in altemative energy facilities:
a. Tax. net of rebate: electric utilities (effective
Jan. 1.1983)
b. Tax. net of rebate: other businesses
(effective Jan. 1. 1979)
1979
1980
1981
1982
1983
1984
1985
1978-85
500
500
500
700
900
1,200
1,500
1,900
7,700
552
1,180
1,894
2,030
1,974
1,960
1,916
1,879
13,385
-360
-32
-445
-68
-469
-75
-494
-59
-520
-68
-550
-66
-581
-81
-517
-99
-3,936
-548
-306
-52
-4
-307
-62
-9
-349
-106
-19
-428
-157
-33
-488
-214
-46
-317
-139
-28
86
123
101
310
1,403
3,444
4,169
4,918
6,529
8,278
11,862
40,603
-2,195
-730
-139
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H
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73
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Tax incentives for certain energy resources supplies
(effecUve Apr. 20, 1977):
a. Expensing of intangible drilling costs.
geothermal discovery and development
b. Lunitation of minimum tax on intangible
drilling costs to amount in excess of net
related income
Aviation fuels tax revision (effective Oct. 1, 1977)
Revision of tax on gasoline for use in motorboats
(effective Oct. 1, 1977)
Repeal excise tax on buses (Apr. 20, 1977)
Total, excluding standby gasoline taxes
-5
-10
-17
-21
-20
-20
-32
-54
-179
7-19
44
-32
47
-37
50
-42
55
-48
61
-56
66
-65
71
-74
76
-373
470
1
-13
4
-9
4
-9
4
-9
4
-9
4
-9
4
-9
4
-9
29
-76
306
2.192
4.811
5.715
6,444
8,660
11,124
15,069
54.321
1 Taxes shown will be fully rebated on the expenditure side of the budget.
2 Taxes shown are net of refunds and income tax rebates and offsets and will
be fuUy rebated on the expenditures side of the budget.
3Tax collected, if any, will be fully rebated. Collections after income tax rebate
each year will range between zero and the following maximum allowable amounts:
1979. $0.9 billion; 1980, $2 billion; 1981, $3.2 billion; 1982, $4.4 billion; 1983, $5.6
billion; 1984. $6.8 billion; and 1985, $8 billion.
4 In order to achieve the desired level of conservation, it may prove necessary
to have mandatory standards affecting homes sold. The absence of any experience
with the insulation incentives provided by this bill makes it difficult to estimate the
level of insulation investment. The estimates presented here are relatively
conservative. It is assumed that mandatory standards, effective Jan. 1.1980. would
give rise to the following tax loss:
1981
1982
1983
w
H
c/3
Fiscal years
1980
ff
X
X
1984
1985
19801985
Additional revenue effect..
5 Includes effects of elimination of declining block rates.
6Coal conversion and solar equipment.
7The conference agreement on H.R. 3477 includes this provision, effective for
1977 only. Thus, if the biU is enacted, this provision will have no revenue effect
in calendar year 1977 or fiscal year 1978.
to
326
1977 REPORT OF THE SECRETARY OF THE TREASURY
Oil a n d n a t u r a l gas consumption taxes '
{Relationship of tax withput investment rebate to f i n a l tax)
i$ millions]
Fiscal years
1979
Tax without rebate for
qualified investment
Qualified investment rebate.
Reduced industry income
tax2
Net effect on receipts..
1980
1981
1982
1983
1984
1985
2,745
-1,201
7,555
-3.675
10,499
-5,736
12,467
-6,880
16,467
-8,974
19.235
-9.700
21,566 90.534
-8,040 -44.206
-141
-436
-594
-669
-878
-1.134
-1.563
-5,415
1,403
3,444
4,169
4.918
6,615
8,401
11.963
40.913
1 Industry and \itility taxes.
2Results from less than full passthrough of tax to prices.
1979-85
Crude oil equalization tax
(Relationship of gross excise to energy credits a n d payments)
[$ millions]
/ears
Fiscal :
1979
1978
Gross crude oil equalization tax collections
Refund for residential heating oil
Reduced refiners' income tax i
Estimated per capita energy credits
Net effect on receipts
Amount available for energy payments (outiays).
1 Results from less than fuU passthrough of tax to prices.
1980
1981
1982
1983
1984
1985
1978-85
2.834
-48
-295
-1,939
7,173
-361
-1.059
-4.573
11.933
-666
-1,853
-7,520
13.637
-966
-2.329
-8,312
13,259
-942
-2,265
-8.078
12.875
-913
-2,156
-7,846
12.569
-889
-2.102
-7.662
12.329
-871
-2.060
-7.519
86.609
-5.656
-14.119
-53.449
552
552
1.180
1.180
1,894
1.894
2,030
2.030
1.974
1.974
1,960
1,960
1.916
1,916
1.879
1.879
13.385
13.385
ff
X
S
H
328
1977 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 26.—Statement by Assistant Secretary Woodworth, June 15, 1977, before the
Subcommittee on Taxation and Debt Management of the Senate Committee on
Finance, on capital formation
My colleagues today are making a persuasive case for promoting a higher rate of
capital formation in the U.S. economy. There is no need for my repeating it. In view
of our disappointing record regarding economic growth, and gains in productivity and
real income, the important question is, what can public policy do about it? From my
position, the question is even more specific: What can tax policy do about it?
I should first note that capital formation is not solely or perhaps even primarily a tax
issue. We must look to more fundamental reasons to understand why our present rate
of investment is deficient. In the aftermath of a major bout with both inflation and
recession, it perhaps is not surprising that business confidence has not yet fully
recovered. Uncertainty concerning opportunities for expansion of markets as well as
the thrust of future government policies is not easily dispelled. In this climate, general
monetary and fiscal policies to reinforce the recovery of the economy in a
noninflationary manner may be more important than specific structural program
changes. Nonetheless, it is still possible to define a more specific role for tax policy in
stimulating capital formation. This can best be appreciated by considering that
investment will not be undertaken unless the after-tax rewards are commensurate with
the risks of adding to productive capacity. Tax policy can affect investment decisions
by changing these after-tax rewards.
In fact, as I shall discuss in more detail, there are various ways in which tax policy
can improve the after-tax returns to investment and risk taking. We are now critically
evaluating these alternatives as part of the process of developing tax reform proposals
to submit to Congress later this year. No final decisions have been made as yet on the
specific components ofthe tax reform program. I would like to share with you, however,
some of our thinking on tax incentives for capital formation. I will also address the
question of the relationship between the need for additional capital formation and the
other goals of the tax reform program.
The tax reform program we are now working on has two other important goals in
addition to providing adequate incentives for capital investment. The first is tax
simplification to which we assign a much more important role than it has generally been
assigned in the past. Simplification involves making tax returns easier for the average
person to prepare, reducing the burdens of financial recordkeeping, and generally
making the tax law more understandable for taxpayers. The second goal is to improve
the equity of the tax system so that the laws are regarded as fair. This can be
accomplished by removing opportunities for tax gamesmanship with high payoffs to
expert legal advice and shrewd tax planning, and by making sure that individuals with
equal incomes are taxed the same while those with higher incomes are taxed at
progressive rates. In providing incentives for expanding productive facilities, we must
continue to keep in mind the other goals of simplification and fairness.
Designing tax proposals to stimulate capital formation as well as to be consistent with
tax simplification and tax equity is no simple task. I might also add that we have not
yet discovered any new ways of achieving all these goals simultaneously. The problem,
as always, is one of choices and tradeoffs.
Alternative ways to stimulate capital formation
The particular instruments that may be used to increase the after-tax returns to
investment and thereby stimulate additional capital formation are generally familiar to
all of us. They include the investment tax credit, alternative methods of depreciation,
and changes in corporate tax rates. In addition, there is a device which has not been
used in this country but has been adopted by our major trading partners including
Canada, England, France, Germany, and Japan. This is ehminating the double tax on
corporate income, or integrating the corporate and personal income taxes.
Each of these may be discussed briefly in turn.
Investment tax credit.—The investment tax credit now stands at 10 percent for
eligible property which generally includes depreciable equipment, but not buildings,
Digitized forin a production process. Equipment with useful lives of less than 3 years does not
used FRASER
http://fraser.stlouisfed.org/
receive the investment tax credit, that with lives of more than 3 years but less than 5
Federal Reserve Bank of St. Louis
EXHIBITS
329
years receives one-third of the credit, and e q u i p m e n t with useful lives of greater t h a n
5 years but less than 7 years receives two-thirds of the credit. In addition, the credit
c a n n o t e x c e e d $ 2 5 , 0 0 0 plus 50 p e r c e n t of the tax liability over $ 2 5 , 0 0 0 . However,
special higher limitations are temporarily provided for public utilities, railroads, a n d
airlines. U n u s e d credits m a y be carried b a c k 3 years a n d carried forward 7 years. O n e
alternative for stimulating additional capital formation is to increase the investment
credit a b o v e its c u r r e n t level or to relax t h e general 50 p e r c e n t of tax liability limitation.
Depreciation allowances.—Under c u r r e n t law, property held for the production of
i n c o m e in a t r a d e o r business is allowed a reasonable d e d u c t i o n for exhaustion, w e a r
and tear, a n d o b s o l e s c e n c e . D e p r e c i a t i o n d e d u c t i o n s are calculated for tax purposes
by first determining the life of the p r o p e r t y and then applying a depreciation m e t h o d
allowed by law. Lives may be justified by taxpayers on the basis of either facts and
c i r c u m s t a n c e s or by reference to the class lives established by the asset depreciation
range ( A D R ) system for taxpayers electing to use that system. T h p s e electing A D R a r e
also p e r m i t t e d to use 2 0 p e r c e n t shorter lives t h a n t h e published class lives. O n c e t h e
asset life has been d e t e r m i n e d , the actual tax depreciation d e d u c t i o n s are calculated
by using either the straight-line m e t h o d or a m o r e accelerated m e t h o d such as double
declining b a l a n c e .
As a m e c h a n i s m for r e d u c i n g taxes o n capital i n c o m e , it is possible to allow taxpayers
larger d e p r e c i a t i o n d e d u c t i o n s . This could be accomplished by various c o m b i n a t i o n s
of c h a n g e s in either asset lives, m o r e a c c e l e r a t e d m e t h o d s , or indexing depreciation for
inflation.
Corporate tax rates.—Alternatively tax b u r d e n s on capital i n c o m e could be r e d u c e d
by direct c o r p o r a t e r a t e c u t s . C u r r e n t l y , t h e first $ 2 5 , 0 0 0 of c o r p o r a t e income is taxed
at the 2 0 - p e r c e n t r a t e , the next $ 2 5 , 0 0 0 at 22 p e r c e n t , and income in excess of $ 5 0 , 0 0 0
at 48 p e r c e n t . Any or all of these rates could be r e d u c e d as a m e a s u r e to stimulate
investment.
Eliminating the double tax on corporate income.—Although t h e idea of eliminating t h e
d o u b l e tax o n c o r p o r a t e i n c o m e has received considerable attention in recent years,
it may n o n e t h e l e s s be worthwhile to review the various a p p r o a c h e s which might be used
to achieve this result. T h e r e are essentially three alternatives. O n e is full integration of
c o r p o r a t e a n d personal i n c o m e taxes a n d the o t h e r two are alternative variants of
partial integration. Full integration is equivalent to treating the corporation as a
p a r t n e r s h i p . E a c h c o r p o r a t e s h a r e h o l d e r , as d o e s a p a r t n e r u n d e r c u r r e n t law, would
include in his own i n c o m e for tax p u r p o s e s his p r o p o r t i o n a t e share o f t h e c o r p o r a t i o n ' s
i n c o m e w h e t h e r or not it is distributed. T h e c o r p o r a t e tax then b e c o m e s a withholding
tax credited against the s h a r e h o l d e r ' s final individual tax liability. In effect, t h e
c o r p o r a t i o n pays n o s e p a r a t e tax at all in this case but merely serves as a collection agent
for t h e T r e a s u r y .
T h e two variants of partial integration eliminate the c o r p o r a t e tax only on distributed
earnings. T h e c o r p o r a t e tax would remain on undistributed c o r p o r a t e income. One;
version of partial integration involves a d e d u c t i o n for dividends paid at the c o r p o r a t e
level in the same way that interest is currently d e d u c t e d by corporations. T h e
alternative version treats c o r p o r a t e taxes attributed to dividends as a withholding tax.
T h e individual s h a r e h o l d e r grosses up his cash or **take-home" dividends the same way
that t a k e - h o m e pay is grossed up to include taxes withheld by the employer. T h e n in
determining final tax liability, grossed-up dividends are taken into total income but a
credit against tax is alloNved for the c o r p o r a t e tax attributable to the dividends received.
Again, this is similar to o u r c u r r e n t withholding system for wages a n d salaries w h e r e
tax liability is based on " g r o s s e d - u p " or before-tax wages, and a credit is taken for taxes
withheld by the employer.
T h e c h o i c e a m o n g alternative ways of eliminating the double tax in the event that
s o m e proposal of this kind is r e c o m m e n d e d must also be based on considerations of
simplicity a n d equity as well as on possible differences in revenue costs.
Criteria for choosing a m o n g investment stimulus alternatives
It is i m p o r t a n t to specify the criteria to apply in choosing a m o n g alternative ways of
stimulatiiig investment. Let m e e n u m e r a t e these criteria and then briefly evaluate t h e
alternatives.
330
1977 REPORT OF THE SECRETARY OF THE TREASURY
Nondiscriminatory or efficient incentives.—Where possible, incentives for capital
formation should be provided in a nondiscriminatory manner. This means that market
forces rather than the opportunity for specific tax advantages should determine the
particular kinds of investment to be undertaken as well as the particular firms and
industries which undertake it. The allocation of investment will be much more efficient
when iilvestors respond to market signals which reflect the wishes of consumers for
particular goods and services.
Since the double tax on dividends in current law tends to distort the allocation of
investment between corporate and noncorporate enterprise, some form of integration
may make a significant contribution to economic efficiency. Other capital formation
measures, to the extent that they reduce the relative taxation of corporations, have
similar effects but not nearly to the same degree.
Debt versus equity finance, and corporate dividends versus retained earnings.—Also,
tax incentives should ideally be neutral with respect to the way in which investment is
financed aiid the extent to which corporations distribute or retain their earnings. There
is considerable concern that in our present tax structure the corporation income tax
biases the financing choice toward debt rather than equity financing and toward
retentions rather than distributions of earnings. To the extent that debt financing is
encouraged, an unbalanced financial structure can develop with too much debt piled
on a limited equity base. The result could be an economic system increasingly
vulnerable to cyclical fluctuations, and investors increasingly less willing to assume risk.
Similarly, tax incentives to retain earnings can lead to corporate conglomerates as large
firms seek outlets for their retained earnings.
Eliminating the double tax on dividends deals directly with the bias toward debt
financing since returns to debt capital—that is, interest—and returns to equity capital—
that is, divideiids plus corporate retentions—would be taxed more nearly alike. The
other measures for stimulating capital formation have no substantial effects in removing
this bias. Similarly, by eliminating the double tax it is possible to achieve neutrality in
the corporate decision to retain or distribute earnings.
Timing effects.—Alternative devices for stimulating capital formation may also have
quite different effects on the timing of investment per dollar of revenue loss. These
differences in timing may be important since we are concerned about investment to
eliminate potential shortrun bottlenecks as well as to provide an expanding productive
capacity to sustain longrun growth.
The investment tax credit and changes in depreciation measures tend to have a larger
shortrun effect on investment per dollar of foregone revenue than either corporate rate
cuts or eliminating the double tax on dividends. This occurs because in the short run
the investment tax credit and accelerated depreciation have a greater effect on
investment decisions. In contrast, a significant portion ofthe tax reduction from rate
cuts and eliminating the double tax accrues to capital already in place rather than to
new capital formatioii.
It is difficult to determine how heavily to weigh the timing differences of alternative
proposals to stimulate investment. In the long run, it seems to me that proposals which
equally increase the after-tax profitability of investment are likely to have about equal
effects in increasing the capital stock. The extent to which shortrun differences should
be given priority depends in part on one's evaluation of the shortrun constraints
currently impeding capital formation. If tax considerations are exerting a significant
constraint on current investment decisions, then a stronger case could be made for the
investment tax credit or an acceleration of tax depreciatioii. On the other hand, if
investment is currently constrained by a concern about whether markets will be
available for the additional output produced by a larger capital stock, then structural
tax policy may be less effective in the short run and should perhaps be directed towards
longer term objectives.
The overall objectives of tax reform—simplicity and equity—also enter into the
evaluation of investment stimulus alternatives.
Simplicity .—Of the various investment stimulus alternatives, the simplest would be
a straight cut in the corporate rate, although no significant complexities would generally
be involved in increasing the investment tax credit or in allowing more accelerated
depreciation methods. Also, although integration may be less famiUar, it could be
designed so that all the shareholder would have to do would be to copy onto the tax
EXHIBITS
331
return information supplied by his corporation. This is particularly true for partial
integration. Full integration could involve more complexity at the shareholder level
since in this case shareholders would have to increase their basis in the stock for the
eamings which corporations retain on their behalf.
Equity.—Corporate and personal tax integration would be consistent with the goal
of taxing all income only once and would also be more progressive than other ways of
providing an investment stimulus. This result occurs because under integration,
corporate income—dividend income only in the case of partial integration and all
corporate income in the case of full integration—are taxed at individual marginal tax
rates rather than at a flat corporate rate. Eliminating the corporate rate with respect
to dividends therefore confers greater benefits per share to shareholders in lower tax
brackets than to those in higher tax brackets. In other words, the effect is the same as
increasing by a constant factor the dividends of all shareholders. While before-tax
income goes up proportionately, after-tax income goes up more for lower income than
higher income shareholders because of the progressive tax rate schedule.
The other stimulus measures—the investment tax credit, accelerated depreciation^
or corporate rate cuts—also provide initial relief to owners of corporate shares, since
these shareholders claim the higher after-tax income stream earned by the corporation.
However, unless the cash-flow gains to the corporation from lower taxes are completely
paid out in the form of higher dividends, the distribution of the after-tax benefits from
corporate tax cuts will tend to be proportional to dividend income. This occurs because
the additional income available at the corporate level will not immediately be taxed at
the marginal rates of shareholders. If these cash flows are retained by the corporation,
the values of corporate stock may increase and while corporate shareholders have
experienced a gain in wealth as a result, there is no immediate increase in tax liability.
Thus, the greater progressivity from eliminating the double tax is due to the fact that
the additional income accrues at the shareholder level, rather than at the corporate
level, and, therefore, it is subject to a progressive structure of marginal tax rates.
It should be pointed out, however, that while eliminating the double tax on dividends
may be more progressive among shareholders than are cuts in taxes on corporations,
nonetheless, all investment stimulus measures which reduce taxes on capital income are
regressively distributed in general. This is true because capital income tends to be
concentrated among higher income taxpayers as a whole. It need not follow, of course,
that a complete tax reform package cannot be progressive if stimulating capital
formation is to be one of its objectives. But in order for the program to be progressive
in its total impact, it must take into account the effect of measures to stimulate
investment.
Here again there are tradeoffs. While eliminating the double tax may be more
progressive per dollar of revenue loss, the investment tax credit and accelerated
depreciation may require fewer dollars of revenue loss to achieve a given shortrun
investment effect. In any event, the longrun effects of higher rates of capital formation
on the distribution of income will be quite different from the immediate impacts. Over
time, the benefits associated with real productivity gains will be generally distributed
throughout the economy.
Let me conclude by assuring you that this administration is greatly concerned about
the failure bf our economic system to perform up to its potential over the past 10 years.
We have taken seriously the need to provide adequate incentives for capital formation
and risk taking. In the tax program which we shall later be presenting, this objective
will be addressed in a significant way. At the same time we are also committed to
developing a tax system which is more equitable and simpler. I shall look forward to
working with you in the future as we present our proposals to achieve these ends.
Exhibit 27.—Remarks by Secretary Blumenthal, June 29, 1977, to the Financial
Analysts Federation, Washington, D.C, on tax reform
Tonight I want to talk to you about tax reform. President Carter has made a major
commitment to improve the American tax system. Work on the administration's
proposal is moving ahead and we expect to present a program to Congress toward the
332
1977 REPORT OF THE SECRETARY OF THE TREASURY
end o f t h e s u m m e r . So I would like to t a k e this opportunity to share some of our thinking
on this i m p o r t a n t subject.
O u r minds are o p e n to a very wide variety of options for tax reform. But we have
limited ourselves to this extent: W e will retain the i n c o m e tax as the centerpiece o f t h e
A m e r i c a n tax system, without any t h o u g h t of substituting a value-added tax, a
c o n s u m p t i o n tax, or o t h e r exotic possibilities. W e have a tax system that works—
imperfectly, to be sure, but at that better than most. It is preferable to correct its faults
and build u p o n our knowledge and experience with it than to e m b a r k on fundamental
change with an untried system whose effects we could not fully foresee.
G o v e r n m e n t , as H o b b e s taught us long ago, is essential to restrain and mediate t h e
passions of m e n and to provide that o r d e r without which n o t only civilization but life
itself is in j e o p a r d y . A n d taxes in turn must support government.
N o m a t t e r how m u c h we complain a b o u t paying taxes, it is still a lot c h e a p e r t h a n
buying o n e ' s own army a n d navy.
M o d e r n societies have, of course, assigned g o v e r n m e n t m u c h wider responsibilities
than external defense and m a i n t e n a n c e of internal order. For most of our history, t h e
United States got along with only c u s t o m s and excise taxes. T h e c o r p o r a t e income tax
did not a p p e a r until 1909. T h e individual i n c o m e tax, apart from temporary levies
during and just after the Civil W a r and in the 1890's, was e n a c t e d in 1913. And even
then for t h e next 30 or so years it affected relatively few Americans. Payroll taxes c a m e
along in 1935.
O u r r e q u i r e m e n t s have now c h a n g e d . F o r today's n e e d s we must h a v e broadly based
taxes c a p a b l e of raising t h e revenues required by the many social responsibilities of
g o v e r n m e n t and t h e state o f t h e e c o n o m y . But the tax system of a free and d e m o c r a t i c
p e o p l e m u s t d o m o r e t h a n merely raise t h e revenue t h a t g o v e r n m e n t requires. It m u s t
b e equitable in t h e sense t h a t the taxation is reasonably related to people's ability to
pay a n d in t h e sense that people with like incomes pay t h e same a m o u n t of tax. It m u s t
be simple e n o u g h to be u n d e r s t o o d and to be respected. And it must o p e r a t e efficiently
to foster those social goals that it is called upon to p r o m o t e .
How d o e s our p r e s e n t Federal i n c o m e tax system stack u p against these criteria?
In s o m e respects it performs rather well, b u t in o t h e r i m p o r t a n t aspects it falls short
of o u r ideals—fully justifying the heavy emphasis this administration is placing on tax
reform.
As a r e v e n u e system. F e d e r a l i n c o m e taxation is flexible and productive. In 1975,
it g e n e r a t e d $ 1 6 3 billion in revenues—representing nearly 60 p e r c e n t of total F e d e r a l
tax collections.
It is r e m a r k a b l e that we raised this huge sum through a tax system that largely d e p e n d s
Upon, and obtains, voluntary c o m p l i a n c e , a tax system that is administered with honesty
and integrity, and o n e t h a t functions with minimal administrative and e n f o r c e m e n t
costs. In these respects, a n d others as well, the A m e r i c a n tax system is the best in t h e
world.
If we e x a m i n e its fairness, we see that, as a whole, it is reasonably progressive.
Nominal F e d e r a l i n c o m e tax rates range from 14 p e r c e n t on taxable i n c o m e u n d e r $ 5 0 0
t o 70 p e r c e n t on taxable i n c o m e over $ 100,000. And when we look at t h e rates actually
paid on e x p a n d e d i n c o m e — a c o n c e p t which adds capital gains and certain preference
income to adjusted gross i n c o m e — w e find rates ranging from 1.1 p e r c e n t on i n c o m e
u n d e r $ 5 , 0 0 0 in a steady, if s o m e w h a t uneven graduation to 32.6 p e r c e n t on incomes
over $ 2 0 0 , 0 0 0 .
A n d if we look b a c k , we can see that o u r tax system has b e c o m e m o r e progressive
over t h e last dozen years. T h e t o p half of all taxpayers had effective rates that were 1 1 /2
to 2 p e r c e n t a g e points higher in 1975 t h a n in 1965. In the same period, effective tax
rates o n t h e lowest 10 p e r c e n t d r o p p e d to virtually zero and on the next 20 p e r c e n t
declined from 4.1 to 2.4 p e r c e n t .
But there is m o r e to tax fairness than reasonable progressivity. W e also beheve t h a t
people with the same i n c o m e should pay the same a m o u n t bf tax. H e r e the p e r f o r m a n c e
of our tax system is mixed. All taxpayers with incomes b e t w e e n $5,000 and $ 1 0 , 0 0 0
are taxed at effective rates b e t w e e n zero and 15 p e r c e n t — a range of 15 percent. Ninetytwo p e r c e n t o f t h e taxpayers with i n c o m e s b e t w e e n $ 2 5 , 0 0 0 and $ 5 0 , 0 0 0 are taxed at
effective rates b e t w e e n 10 and 25 percent—again a range of 15 p e r c e n t . But for
EXHIBITS
333
taxpayers with incomes of $200,000 and over, the differences are far wider, with some
paying as low as 2 percent and others as high as 58 percent. Substantial numbers pay
at rates of less than 20 percent and more than 45 percent.
The present structure of our tax system allows these large differences among higher
income taxpayers. The high marginal tax rates they face provide them with a strong
incentive to find imaginative ways to lower their taxes. At the same time, opportunities
for them to do so are available because of our piecemeal approach to tax legislation
and regulation and as a byproduct of efforts to promote social objectives. When we
attempt to deal with a single problem in the tax code, we often find that the provisions
can be used in unexpected ways to shelter income from taxation. When we seek to
promote a social goal such as housing development, we may also create real estate tax
breaks for those with reason to seek them.
Part of the problem is the sheer complexity of the tax system. By now our tax code
totals 1,100 pages. Related tax regulations account for many thousands of additional
words and the Federal Tax Reporter runs to 14 volumes. With this great mass of rules,
it is little wonder that nearly half of our taxpayers either cannot complete their returns
unaided or believe that they can gain by hiring professionals who purport to understand
the complexities of the law. The inability to undierstand what the tax laws are, and the
belief that there is money to be made through tax planning and gamesmanship,
undermine the confidence and trust that we require for a system based primarily on
voluntary compliance.
We have sought to use our tax system to promote many social goals—charitable
giving, home ownership, investment in productive equipment and in specific industries,
environmental improvement, and much else. It is difficult to generalize about the results
of these incentives. But there are reasons to doubt that some, perhaps many, of these
so-called tax expenditures are the most efficient means available to the government to
achieve its objectives. On the other hand, in some cases, it appears that present tax
incentives are not strong enough to serve our purpose.
Fbr example, our current deductions for medical and casualty losses might well be
superfluous if we had a national health insurance program.
And we may ask whether in a world of flexible exchange rates the tax code should
promote exports through a device such as DISC, the so-called domestic international
sales corporation.
On the other hand, incentives to investment in productive equipment require
strengthening to encourage the higher rate of capital formation that our economy
needs. In recent years, the rate of capacity growth in manufacturing has slowed-^from
4.6 percent over the period between 1948 and 1968 to 4 percent from 1968 to 1973
and 3 percent from 1973 to 1976. One consequence of this lagging investment is a
decline in productivity growth that means less growth in real incomes and an increased
propensity to inflation.
In these circumstances, criticism of our tax system can come as no surprise.
Americans from many different points of view are saying that the tax system is too
complicated, that its effects are often inequitable, and that it is failing to contribute
effectively to our social objectives.
The Carter administration will respond to these concerns. Our goals are to make the
American tax system simpler, fairer, and better able to foster growth and efficiency in
the American economy. By simplicity, we intend that the average taxpayer should be
able to readily understand what the law requires and to complete his own tax return
without professional aid. By greater equity, we intend that taxpayers with like incomes
should pay like taxes in a system that remains reasonably progressive. And to foster
growth and efficiency, we intend to create incentives to work, to investment and
savings, and to eliminate the waste and resource misallocations that accompany efforts
at tax planning.
At the strategic level, we face a choice between a radical and reformist approach.
By "radical" I do not mean a far-right or a far-left proposal. I mean a solution that goes
to the root of the problem. We could achieve vast simplification, great equity, and at
least eliminate the inefficiencies associated with tax planning by wiping out all
exemptions and deductions and taxing all income from whatever source at much lower
334
1977 REPORT OF THE SECRETARY OF THE TREASURY
rates. The rates could, of course, be lower because the taxable base would have been
greatly enlarged. At the same time, the level at which income would be free of tax could
be raised significantly.
This solution would mean, however, that such items as black lung benefits, social
security payments, capital gains, and every other form of income would be taxed along
with wages and salaries.
The uniform tax treatment under this system would provide few opportunities for
perceived inequities. It would also mean that the tax system would be used for nothing
but raising revenue. The social purposes we now seek to advance through the tax code
would have to be promoted in other ways—ways that would be more direct and obvious
and subject to scrutiny. Promotion of these purposes through budgeted expenditures
would result in review, debate, and legislative action different from the kind of review
given to the tax expenditures that we now use.
But quite apart from the problems of adjustment to such a drastic change—and it
could certainly not be done from one day to the next—there is a crucial question of
whether s o ^ e purposes can be promoted in our system except through tax incentives.
For example, the alternative to tax incentives for investment would seem to require
unacceptable Government controls over capital outlays and the allocation of
investment, with attendant inefficiency and misallocations of resources.
The radical approach is clean and decisive. A strong theoretical case can be made
for it, but it makes some people tremble.
The strategic alternative is to develop a package of specific steps that will take us
in the same direction, but without the wholesale change in existing law. Without
implying that any decisions have been made—because none have—let me describe
some of the possibilities along this line.
The largest single source of tax complexity is the preferential treatment of capital
gains. Forty-one sections and fifty-one subsections of the tax Code are devoted to
capital gains taxation. And efforts to convert ordinary income into capital gains are
probably the largest area of tax planning, leading to many activities of little or no social
value but productive of ample private gain.
Other sources of complexity in present law are the existence of both exemptions and
credits, the recordkeeping requirements related to certain deductions, and the option
for a credit or deduction for political contributions. The $750 exemption for the
taxpayer and each dependent and the general tax credit that can be determined by
optional methods could be simplified and combined. The recordkeeping requirements
associated with itemized deductions could be lessened if certain deductions were
limited or if standard deductions were permitted for certain items in conjunction with
itemized deductions for others. By broadening the tax base, limitations on certain
deductions would permit general reductions of rates with the same revenues.
With the flat standard deduction included in the President's economic stimulus
program, steps such as these could make tax preparation much easier for nearly all
Americans. We should be able to make it possible for more than three out of four
Americans to use the standard deduction and determine their tax from a simple rate
table.
Fortunately, many of the steps that would simplify the tax system would also make
it fairer. A large part of the variation in taxes paid on like incomes stems from the
preferential taxation of capital gains. Other equity problems stem from other kinds of
preference income and from the freedom from taxation of certain fringe benefits and
alleged business expenses such as the $50 martini lunch.
There are several options open to us for increasing growth and efficiency in the
economy. Tax policy can affect investment decisions by increasing its after-tax return.
We could reduce or end the double taxation of corporate income by any of several
methods. One possibility is full integration, which is equivalent to treating the
corporation as a partnership. Each corporate shareholder, as a partner does under
current law, would include in his own income for tax purposes his proportionate share
of the corporation's income whether or not it is distributed. The corporate tax then
becomes a withholding tax which can be credited against the shareholder's final
individual tax
liability.
EXHIBITS
335
Or, corporate and individual taxation could be partially integrated. In one approach,
the individual shareholder grosses up his cash or "take-home" dividends in the same
way that take-home pay is converted to total pay by adding taxes withheld by the
employer. In.determining final tax liability, the dividends are included in total income,
but the taxpayer takes a credit for his share of the corporate tax.
Alternatively, corporations might be permitted a deduction for the dividends they
pay just as interest deductions are allowed at present.
There are other methods of encouraging investment:
Larger deductions for depreciation of income-producing property can be allowed
by various combinations of changes in asset lives, more accelerated methods, or by
indexing depreciation schedules for inflation.
The investment tax credit, now at 10 percent for eligible property including
depreciable equipment but not buildings, could be increased by raising the rate or
relaxing the restriction that generally limits it to 50 percent of tax liability.
Corporate tax rates could be cut.
We will look at these options in terms of their effect on the freedom of investment
to respond to market demands, their neutrality conceming the way investment is
financed, and their impact on the timing and amount of investment that results from
each dollar of revenue lost.
At the same time, we mean to promote growth and efficiency in other ways. The
reduction of very high marginal rates could lessen the incentive for unproductive
activities aimed at reducing taxes. The elimination of capital gains and other preference
income could have a similar result.
In developing a comprehensive tax package, there are obviously conflicts and tradeoffs among our goals. But there is ample opportunity to offset these effects and fashion
a program that, in its entirety, fulfills all three of our objectives and gives this country
the kind of tax system that it should have. It will be one that retains its present good
qualities of integrity and voluntary compliance. But it will also be a better system, fairer
and simpler, and one that provides adequate incentives for growth and efficiency.
We are getting much advice on how to accomplish these goals. We welcome it and
we want more, from you and from Americans across the country. We know that in
translating our goals into realities there are difficult choices and complex issues. We
want to know what you think.
Exhibit 28.—Statement by Secretary Blumenthal, August 9, 1977, before the Senate
Finance Committee, on the national energy plan
It is an honor to appear before you to discuss the national energy plan.
The need for an energy plan
The plan answers a clear need for a concerted national attack on our energy
problems.
Our dependence on imported crude oil has been rising steadily. Today almost onehalf of the oil consumed in the United States is imported. Much of our imported oil
comes from insecure foreign sources. Importing this amount of oil also has serious
balance of payments effects: The estimated $25 billion trade deficit for the current year
would be a surplus of about $20 billion if we imported no fuel.
Even disregarding these international considerations, we face an obvious peril: Our
consumption of oil and gas is growing considerably faster than are proven domestic and
foreign reserves. Unless restraint is shown now, and we prepare to shift to alternative
energy sources, we risk potentially severe shortages of oil and gas.
The national energy plan aims to encourage energy conservation, the substitution of
alternative fuels for oil and gas, and increased production of all forms of energy.
Conservation lies at the center ofthe plan. We are not seeking an absolute reduction
in energy consumption. Rather, we are aiming to reduce the rate of increase in energy
consumption to less than 2 percent per year. This is a feasible, prudent, and essential
objective. It poses no threat to our equally important economic objectives.
336
1977 REPORT OF THE SECRETARY OF THE TREASURY
Conservation is to be achieved by making consumers of oil products pay the
replacement cost of their consumption, by substituting more efficient modes of
transportation for less efficient ones, by taxing businesses on their use of oil and gas,
and by providing tax incentives for insulation and for other improvement outlays to
improve energy efficiency.
The substitution of coal and other fuels for oil and gas is to be achieved by providing
an incentive in the tax system for businesses to convert to these alternative fuels. Solar,
wind, and geothermal energy sources will also be favorably treated to encourage greater
residential and industrial use.
Additional production will be stimulated by allowing newly discovered oil to be
priced at world price levels and by providing an incentive price for newly discovered
natural gas.
The plan's provisions
In general, the House did an admirable job with the energy bill. However, there are
some areas where additional measures need to be considered. Additional energy savings
can be accomplished by changes that I would like to offer to the committee for their
consideration.
Crude oil equalization tax.—The importance ofthe crude oil equalization tax cannot
be overestimated. The tax would insure that by 1980 consumers of oil pay the true
replacement cost of their consumption. This is clearly necessary to achieve conservation and to stem imports.
While promoting conservation, the national energy plan will also encourage the
development of domestic oil and gas resources. This is because newly discovered oil—
so-called new new oil—can be sold, free of the tax, for the world market price of $13
a barrel, or more. This price factor is'a powerful incentive and provides domestic oil
producers a profit margin that is among the highest in the world for the production and
exploration of new oil.
The bill provides a similar incentive to remove a higher percentage of oil from existing
fields. This results from allowing oil from stripper wells and oil obtained by tertiary
production to be sold at the world price, without the payment of any crude oil tax.
These price incentives are fully adequate to encourage and reward new production.
The House wisely rejected all attempts to give the oil producers part of the crude oil
tax to plow back into oil and gas production. The administration strongly opposes a
plowback. A plowback would unbalance the program both economically and in terms
of equity. Such a scheme would defeat the purpose ofthe crude oil tax, which is to raise
the price of new oil to consumers but at the same time to reimburse the average
consumer for his consequent loss of purchasing power. The prospect of $ 13 a barrel
oil will bring forth exploration, discovery, and production of new oil. A plowback
provision would simply be a windfall to producers, who currently have adequate capital
for exploration and development.
The House version ofthe crude oil tax does need some improvement. First, it would
be better if the tax were extended beyond 1981; we should not leave producers and
consumers in a state of uncertainty about our long-term policy in this vital area. Second,
the rebate of net proceeds of the tax should be a permanent feature, rather than
stopping after 1 year. Finally, it would be better if the credit system were on a per capita
rather than a per taxpayer basis: The tax affects the purchasing power of all consumers
of oil products, not merely those consumers who pay income tax.
The House credit oil tax is expected to raise $38.9 billion during the period 1978
throtigh 1982. However, for 1 year at least, the amount collected under the House bill
will be repaid to the consumers. On a net basis, this brings the collections down to $27.5
billion. The energy savings associated with this tax is estimated at about 230,000 barrels
of oil per day by 1985.
Transportation.—In the transportation sector, the administration's objective is to
encourage the shift away from energy inefficient means of transportation. Our major
proposal in this sector was the gas guzzler tax and rebate. We are not suggesting the
restoration ofthe rebate. We do ask the Senate to strengthen the House version ofthe
gas guzzler tax itself. We ask the committee to consider imposing somewhat higher taxes
than does the
House bill.
EXHIBITS
337
We believe that a strong gas guzzler tax is the key to achieving more rational and
efficient use of automobiles. Reducing the number of gas guzzlers on the road will make
the gasoline available for domestic consumption provide more transportation than is
true with our current fleet of automobiles.
Strengthening the gas guzzler tax is important to our program, since we believe the
current standards will not achieve the necessary savings. We need to keep the pressure
on gas-guzzling automobiles until the national automobile stock is truly fuel efficient.
We also need to apply the gas guzzler tax to the smaller trucks, which can be inefficient
and contribute to the problem along with gas-guzzling automobiles.
In the transportation area, the House added several provisions. It extended the
current 4 cents per gallon excise tax on gasoline beyond 1979, repealed the personal
deduction for State and local gasoline taxes, repealed the excises on buses and bus parts,
revised the tax on motor boat fuels, removed the discriminatory tax pn new oil used
in rerefined lubricating oil, and provided a credit for the purchase of electric cars. We
consider these reasonable measures to promote more efficient modes of transportation
and better use of oil.
The energy saving for these provisions is estimated at 275,000 barrels of oil per day.
The total revenue gain of the various transportation proposals is $29.5 billion for the
period 1978 to 1985. However, $21.2 billion of this amount merely represents an
extension of the present 4-cent tax on gasoline scheduled to be reduced 1 1 /2 cents in
1979. Presently, this is a source of revenue for the highway trust fund.
Tax on business use of oil and gas.—The oil and gas use tax on industry and the utilities
was designed to achieve energy conservation and conversion to energy sources other
than oil and gas. Industries and utilities consume oil and gas in many activities where
coal and other nonfossil fuels could be used. The House use tax, while providing
incentives for conversion and conservation, falls short of the use tax we would like to
see enacted. The level of use tax on oil passed by the House varies depending upon
whether the industrial process has conversion potential, conservation potential, or is
a utility.
The gas tax passed by the House is a variable tax based on the difference between
the user's acquisition price and the cost of a Btu equivalent amount of distillate oil. For
utilities, however, the gas tax would be a flat tax such that the price of gas to a utility
including the tax cannot exceed the price of residual oil.
To encourage conversion to coal and other fuels, a rebate of this tax up to the annual
user tax liability is allowed for qualified expenditures in boilers, burners, and other
equipment which do not use oil or gas. In lieu of the rebate, an additional 10-percent
investment tax credit would be allowed.
Where a utility elects to use the rebate option, a State utility commission could
require a utility to pass the benefit of this rebate on immediately to consumers. On the
other hand, if the utility elects the investment credit, the benefit of the credit can be
passed on to the consumer only over the life of the asset.
There are several areas where the use tax passed by the House should be improved.
First, all industrial gas should be taxed at a rate which makes the price of gas in all cases
equivalent on a Btu basis to distillate fuel oil, without exemptions. When applied in this
fashion, the use tax works as a pricing mechanism, which makes industrial users pay
the replacement cost of gas rather than an artificially low price, which encourages
excessive use. This tax should apply to all users without any exceptions except for the
small user (50,000 barrels of oil equivalent per year) exemption.
Sec nnd, we believe that a rebate ofthe utility tax should be conditioned on the benefit
ofthe lebate not being passed on to the consumer any faster than ratably over the life
ofthe asset. This would make the treatment consistent with the treatment provided for
the investment credit, which the utilities at their option may take in place of the rebate.
Third, in place of the industrial oil use tax proposed by the House, we suggest a
simplifled single tier tax on boilers, turbines, and kilns, incorporating the House's tax
schedule, which starts at 30 cents a barrel and in 1985 goes up to $3 a barrel. The only
special exemption would be for currerit facilities unable to convert for environmental
reasons.
The House bill on a net basis—after the rebate—would collect $2.9 billion over the
period 1979 to 1985. There would also be a revenue pickup from the denial of the
338
1977 REPORT OF THE SECRETARY OF THE TREASURY
regular investment credit on that financed out ofthe rebate. Finally, it is estimated the
bill will save 1 to 1.4 million barrels of oil equivalent per day by 1985.
Residential energy credit.—The residential energy credit provides incentives for
homeowners and renters to buy energy conservation equipment and solar and wind
energy equipment.
The^President has set a goal of insulating, by 1985, 90 percent of the homes that
presently have insufficient insulation. The credit provided by the House bill goes a long
way toward the fulfillment of this objective. Expenditures for insulation, storm doors
and windows, clock thermostats, exterior caulking and weather stripping, and certain
modifications to furnaces qualify for the credit.
The solar and wind credit is designed to interest more homeowners in altemative
energy sources. Both the solar and wind energy industries are in their infancy. The
potential benefits to all Americans from developing use of solar and wind devices are
great and justify a temporary tax incentive. The present cost of solar and wind energy
installations is high because demand is currently low. This tax incentive will encourage
more Americans to turn to these inexhaustible energy sources and will help these
industries develop to the point where Government incentives are no longer necessary.
The cumulative cost for the residential credits will amount to $4.8 billion for the
period 1978 through 1985. It is projected that these proposals will save about 500,000
barrels of oil per day by 1985.
Business energy tax credits.—The House also approved a series of business energy tax
credits. These credits are designed to promote the use of energy-efficient insulation,
to encourage commercial and industrial use of solar and other alternative resources,
and to promote recycling and cogeneration. Expenditures in these areas will qualify for
an additional 10-percent investment tax credit above the credit for which they
otherwise qualify. The House also conserved energy at the same time it also reduced
the revenue loss by denying accelerated depreciation and the investment tax credit to
air conditioners, space heaters, and boilers fueled by natural gas or oil. We endorse
these House initiatives.
The expected net revenue cost of these credits is $2.5 billion from 1978 through
1985. The energy savings is about 350,000 barrels of oil equivalent per day.
Supply incentives.—The House adopted two proposals in the national energy plan
relating to the supply of energy resources. First, the House accepted a proposal to make
permanent a provision that applies the minimum tax to intangible drilling costs for oil
and gas only to the extent that such costs exceed the sum ofthe taxpayer's income from
oil and gas production plus the result of 10-year amortization of these costs.
The second provision allows the expensing of geothermal intangible drilling costs,
which extends to geothermal resources the treatment accorded oil and gas. Also, the
House provided percentage depletion for geothermal resources, but only at a lOpercent rate, and only to the extent of basis in the property.
Together these provisions will cost $600 million through 1985. The geothermal
provisions should save 60,000-110,000 barrels of oil per day.
Conclusion
Mr. Chairman, the national energy plan is in large measure a tax program. There are
nontax aspects also, but the plan relies crucially on a battery of net taxes and new tax
credits to move our economy away from its present, dangerous position of overconsumption of oil and gas.
As you know, I am generally opposed to using the tax code to further nontax
objectives. In the not-too-distant future, I will be back before you to urge a major
simplification ofthe income tax code. But in the case of energy, the basic problems are
so urgent, and the alternative solutions so unsatisfactory, that resort to tax incentives
is clearly proper, indeed essential.
We could have relied entirely on market incentives coupled with total deregulation
of oil and natural gas prices. But, given the present distortion of world markets, this
approach would have created enormous and unjust windfalls throughout our economy.
The American people, with justification, would have rejected such an approach out of
hand. The other alternative was to rely solely on physical controls, directives, and
339
EXHIBITS
regulations. But this would have created a giant bureaucracy and injected the heavy
hand of Govemment regulation into every facet of the economy.
Thus, the only reasonable, fair, and effective solution lies with the tax system. The
administration and the American people are now looking to this committee, with its
well-known expertise, experience, and sense of responsibility in matters of taxation, for
a solution to the most serious problem facing the Nation. I hope to work closely with
you in dealing with this challenge.
Crude oil a n d n a t u r a l gas liquids equalization tax uruier title IJ of H.R. 8 4 4 4 , the Natioruil
Energy Act, as passed by the House of Representatives: relationship of the gross tax to
a m o u n t s available f o r credits a n d p a y m e n t s
[$ millions]
Fiscal years
1978
Gross crude oil equalization tax
collections
,....
Reduced refiners' income tax
Refund for oil used to produce
natural gas liquids at refineries
Refund for heating oil:
Homes
Hospitals
Per taxpayer credits
1,897
-305
1979
1980
1981
1982
1978-82
6,349
-971
11,294
-1,720
14.5%
-1.944
4,802
-900
38.938
-5.840
-29
-97
-168
-211
-68
-573
-82
-9
-1,819
-476
-54
-780
-688
-80
-793
-91
-181
-20
-2.220
-254
-2.599
Net receipts effect
Special payments to qualified
recipients
-347
3,971
8,638
11,557
3.633
27,452
Net budget effect
-347
8,638
11,557
3,633
26,586
-866
-866
3,105
Excise tax on business use of oil a n d ruitural gas under title / / of H.R. 8 4 4 4 , the Natioruil
Energy Act, as passed by the House of Representatives: i
relationship of tax without investment rebate to final tax
[$ millions]
Fiscal years
1979
Tax without rebate for
qualified investment
Qualified invcsunent rebate...
Reduced industry income
tax 2
Net effect on
receipts
1980
1^1
1^2
1^3
1984
1985
—
—
1,734
-1,298
2,7%
-2,686
3,642
-3,421
4,678
-3,990
7,574
-6,651
8,524
-7,506
28,948
-25,532
-25
-38
-22
-57
-%
-110
-140
-488
-25
398
88
164
392
813
878
2,908
1 Industry and utility taxes.
2 Results from less than full passthrough of tax to prices.
1979-85
O
Estimated receipts effects of title 11 of H.R. 8 4 4 4 , the National Energy Act, a s passed by the House of Representatives
[$ millions]
Fiscal years
1978
•
— —
1979
1980
1981
1982
1983
1984
1985
1978-85
Total, P a r t i
Part n . transportation tax provisions:
Gas guzzler tax
Repeal of deduction for State and local
tax on gasoline
E x t e n s i o n of existing t a x r a t e o n gasoline
a n d o t h e r m o t o r fuels..
Ainendment of motorboat fuel provisions . .
Repeal of excise tax on buses
Repeal of excise tax on bus parts
Removal of excise tax on certain items
used in connection with buses
Credit for qualified electric motor vehicles.
Total. Part n
Part i n , crude oil equalization and natural gas
Uquidstaxi
-4
—361
_
^ ^
_..
—
Business use of oil and natural gas
Parts IV, V: Excise tax on business use of
oil and natural gas: 2
Industry
Utility
Total. Parts IV, V .
^
^
Q
73
fi5
.
-26
-54
-62
-71
-87
-111
-140
-169
-720
-387
-520
-553
-589
-633
-687
-748
-710
-4.827
100
100
100
135
150
160
170
915
o
11
115
780
780
859
859
944
944
1,039
1.039
1,143
1,143
1.257
1.257
1.383
1.383
1
-13
-3
4
-9
-9
-3
-3
3.404
4
-9
-9
-3
-
3,4%
4
-9
-9
-3
-
3,585
4
4
-9
-9
-3
-
3,677
4
-9
-9
-3
-
3.772
4
4
-9
-9
-3
-
21,236
29
-76
-76
-24
-24
-13
(•)
-13
-13
(*)
()
*
-13
-13
-1
-
-13
-13
-1
-
-13
-13
-2
-2
-13
-13
-4
-4
-13
-13
—
-13
-13
—
87
859
4.239
4.426
4.647
4.853
5.073
5,304
-347
3.971
8,638
11,557
3,633
^
X
W
c/j
J5
7.520
7.520
3.302
4
4
-9
-9
-3
-
_
_
_
-104
-104
-8 -
29.488
27,452
•
;S
—
Part I, residential energy tax credits:
Credit for insulation and other energyconserving components
C r e d i t f o r solar a n d w i n d e n e r g y
expenditures
—
pi
H
^
^
8
§
H
^
m
-25
-25
398
398
88
88
164
164
592
592
715
715
98
784
784
94
2,716
2,716
-25
398
88
164
592
813
878
2,908
192
>
^
^
^
Part VI. denial of investment credit on
property financed with credit:
Industry
Utility
;
57
Total business use of oil and natural gas... .
Business credits. Part VI, excluding denial of
investment credit on property financed with
credit:
Altemative conservation and hew
technology credits
Investment credit denied, and depreciation
limited to straight line on oil or gas
burning equipment, and air conctitioning
and space heaters
Total business credits
Part v n . miscellaneous provisions:
Treatment of intangible drilling costs for
purposes of minimum tax
Option to deduct intangible drilling costs
on geothermal deposits
Ten percent depletion in case of
geothermal deposits
Rerefined lubricating oil
Total, Part VII
Total receipts effects. Parts I-VII
•
-
-409
238
231
261
34
298
73
345
69
1.614
176
57
Total, Part VI
184
184
238
231
295
371
414
1,790
32
582
326
395
887
1.184
1,292
4.698
—
—
-3.293
-415
-516
-673
-789
-491
93
93
111
111
121
121
114
114
103
103
99
99
93
93
88
88
822
822
-316
-316
-304
-304
-395
-395
-559
-559
-686
-686
-392
-392
93
93
88
88
-2.471
-2.471
^^
s<
x
2
H
c/3
—
-32
-37
-42
-48
-56
-65
-74
-354
-5
-10
-17
-21
-20
-20
-32
-54
-179
-1
-3
-9
-1
-3
-1
-3
-2
-3
-2
-3
-2
-3
-2
-3
-2
-3
-13
-24
-46
-58
-68
-73
-81
-102
-133
-570
-972
3.992
12.453
15.093
7.283
4,580
5.500
5.841
53,770
• Less than $500,000.
I Tax not of business income tax offset and refunds and after per taxpayer
credits.
2Tax not of income tax offset and rebates.
4^
342
1977 REPORT OF THE SECRETARY OF THE TREASURY
SUMMARY OF TAX PROVISIONS OF H.R. 8444
A. Residential energy credit
1. General provisions.—A nonrefundable Federal income tax credit is provided for
individuals who make certain energy-related expenditures. The credit is available for
installations of qualified property made from April 20, 1977, through December 31,
1984. Qualifying installations may be made only with respect to the principal residence
of the taxpayer and only if that residence is located in the United States. Thus,
installations made with respect to vacation homes will not qualify. If less than 80 percent
of the use of a residence is solely for residential purposes, a proportionate allocation
of expenditures must be made to the nonresidential use. The amount of expenditures
eligible for the credit must be reduced by any prior expenditures taken into account
in determining the credit.
Owners (including co-op and condominium owners) as well as renters are eligible
for the credit. A change of principal residence restarts the amount of qualified
expenditures eligible for the credit. The credit must be allocated where a single
principal residence is jointly occupied. For administrative convenience, no credit of less
than $10 per retum will be allowed. All eligible property must meet performance and
quality standards prescribed by the Secretary of the Treasury which are in effect at the
time of acquisition. The original use ofthe property must commence with the taxpayer.
To the extent that the tax basis of the residence is increased by the qualifying
expenditures, the basis must be reduced by the amount of any credit allowed.
2. Energy conservation credit.—This portion of the credit is available only for
residences substantially completed before April 20, 1977. The amount ofthe credit is
equal to 20 percent ofthe first $2,000 of qualified expenditures on insulation and other
energy-conserving components (including original installation thereof) for a maximum
credit of $400. Insulation means any item that is specifically and primarily designed to
reduce the heat loss or gain ofthe residence or a water heater therein, and which may
reasonably be expected to remain in operation for at least 3 years. This would include
attic, floor, and wall insulation made of fiberglass, rock wool, cellulose, or styrofoam.
Energy-conserving components include a replacement burner for a furnace that
provides increased combustion efficiency, devices to modify flue openings, furnace
ignition systems that replace a gas pilot light, exterior storm or thermal doors or
windows, clock thermostats, and exterior caulking or weather stripping of windows and
doors. The Secretary of the Treasury may add to the list of energy-conserving items
other items that are designed to increase energy efficiency.
3. Solar and wirui energy credits.—This portion of the credit is available for new as
well as existing residences. The amount of the credit is equal to 30 percent of the first
$1,500 and 20 percent of the next $8,500 (for a maximum total credit of $2,150) of
qualified expenditures on solar and wind energy equipment, including certain labor
costs allocable thereto. Expenditures on new and reconstructed dwellings are treated
as having been made when original use begins. Eligible property must reasonably be
expected to remain in operation for at least 5 years.
Qualifled solar energy property uses solar energy for the purpose of heating or
cooling the residence or providing hot water for use therein. Qualified wind energy
property uses wind energy for any nonbusiness residential purpose. Backup systems of
conventional heating or cooling equipment and expenditures properly allocable to
swimming pools are not included in this credit.
B.
Transportation
I. Gas guzzler tax.—A manufacturer's excise tax is imposed upon the sale of new
automobiles based upon their EPA-certified fuel efficiencies. The tax first applies to
1979 model year automobiles with fuel efficiencies of less than 15 miles per gallon. The
minimum fuel efficiency above which no tax is imposed increases each year so that, for
model years 1985 and thereafter, the tax applies to automobiles whose fuel efficiency
is less than 23.5 miles per gallon. (These threshold levels range from 3 to 5.5 miles per
gallon below the fleetwide average standards imposed under the Energy Pohcy and
EXHIBITS
343
Conservation Act.) The tax applies to automobiles with gross vehicle weights of not
more than 6,000 pounds, but does not apply to trucks with a cargo capacity of at least
1,000 pounds.
^
The tax on automobiles with .a given fuel efficiency increas^^ each year. For example,
the tax on a 14 mile per gallon automobile starts at $339 for the 1979 model year,
increases to $428 the next year, and increases further to $2,688 for 1985 and later
model years. The maxiinum rate of tax applies to automobiles >vith less than 13 or 12.5
mile per gallon efficienc^ies, and ranges from $553 for the 1979 model year to $3,856
for the 1985 model year.
The tax applies to new and used imported cars, according to their model year, and
is imposed on the importer. Where automobiles are leased by the manufacturer, the
first lease is treated as a sale subject to the tax. The amount of the gas guzzler tax may
not be included in the owner's tax basis for the automobile for any purpose. Thus, no
income tax benefit may be derived from payment of the gas guzzler tax, thereby
excluding investment tax credit and depreciation benefits.
All gas guzzler tax revenues are to be deposited into a public debt retirement trust
fund, the proceeds of which are to be used to retire obligations of the United States
that are included in the national debt.
2. Repeal of personal deduction for State and heal taxes on gasoline and other motor
fuels.—Effective after December 31, 1977, the personal deduction for State and local
taxes on gasoline and other motor fuels is repealed.
3. Extension of excise tax on gasoline and other motorfuels.—The Federal excise tax
of 4 cents per gallon on gasoline and other motor fuels will be continued at that rate
through September 30, 1985. This tax is currently scheduled to be reduced to 1 1/2
cents per gallon after September 30, 1979. The committee took no action with respect
to the highway trust fund, which is scheduled to be phased out after September 30,
1979. Accordingly, after that date, gasoline tax receipts will be paid over into the
general fund of the Treasury.
4. Amendment of motorboat fuel provisions.—The act repeals the 2 cents per gallon
refund payment to the purchaser of gasoline and special motor fuels used in a
motorboat. The motorboat fuel payment is presently made because this is a nonhighway
use of gasoline. The act conforms the tax on motorboat use of fuel to the tax on highway
use. Following the treatment accorded to the current 2 cents per gallon tax, the
increased tax on motorboat fuel will also go into the land and water conservation fund.
5. Repeal of excise tax on buses arul bus parts.—The 10-percent excise tax on sales
of buses and the 8-percent excise tax on sales of bus parts and accessories will be
repealed. Floor stocks refunds (as ofthe date of enactment) and consumer refunds (as
of April 20, 1977) are provided where the 10-percent excise tax has already been paid.
Parts and accessories that may be interchangeable between trucks and buses will
continue to be taxed on sale unless the purchaser provides an exemption certificate
which indicates that the part or accessory is purchased for use on a bus.
6. Removal of excise taxes on items used with certain buses.—The act repeals the
excise taxes on tires, inner tubes and tread rubber, gasoline and other motor fuels, and
lubricating oil sold for use with intercity, local, and school buses. With respect to these
excise taxes, this action places private transit and private schoolbus operators on a par
with governmental and nonprofit schoolbus operators.
This action applies to an intercity or local bus, and a schoolbus. The term "intercity
or local bus" means a bus used predominantly in furnishing passenger land transportation to the general public for compensation if such transportation is scheduled and
along regular routes or the passenger seating capacity of the bus is at least 20 adults,
not including the driver. The term "schoolbus" means a bus substantially all the use
of which is in transporting students and employees of schools.
7. Tax credit for electric motor vehicles.—Nev/ electric cars acquired for personal
use after April 20, 1977, and before January 1, 1983, will be eligible for a Federal
income tax credit of the first $300 of the purchase price. A qualified electric motor
vehicle is a four-wheeled vehicle manufactured primarily for use on public roads that
is powered primarily by an electric motor which draws current from rechargeable
storage batteries or other portable sources of electric current.
344
C.
1977 REPORT OF THE SECRETARY OF THE TREASURY
Crude oil equalization taxes and rebates
1. Crude oil equalization tax.—An excise tax is imposed on the first purchase
(generally, by the refiner) of domestically produced crude oil. The purpose of this tax
is to increase the cost of such oil to the world market price. The definition of crude
oil subject to the tax is substantially similar to the definition found in current price
control regulations. The tax applies to crude oil produced in the United States, Puerto
Rico, and the possessions, and on the related Continental Shelf areas.
The tax is brought into effect in three annual stages. In 1978 and 1979, the tax is
imposed on lower tier controlled oil only, and is equal to 50 percent (1978) or 100
percent (1979) of the difference between the ceiling price of upper tier oil and the
ceiling price of lower tier oil ofthe same classification. In 1980 and thereafter, the tax
applies to all controlled crude oil, and is equal to the difference between the controlled
price and the world market price for crude oil of the same classification. The tax
terminates after September 30, 1981. Lower tier oil is the amount of oil produced on
a property, up to the lesser of 1972 or 1975 production, and is now controlled at an
average price of $5.16 per barrel. Upper tier oil is oil produced on a property in excess
ofthe lower tier production level. Upper tier oil is now controlled at an average price
of $10.97 per barrel.
Crude oil used in the production of crude oil, natural gas liquids, or natural gas is
not subject to the tax. In addition, the crude oil tax does not apply to the extent crude
oil is refined into products that are in turn used in the production of crude oil, natural
gas liquids, or natural gas.
A credit or refund of the crude oil tax is also provided for crude oil that is used as
a raw material to produce natural gas liquids, but only if the refiner demonstrates that
he has not passed on the crude oil tax attributable to his production of natural gas
liquids.
2. Natural gas liquids equalization tax.—This tax is imposed after December 31,
1977, on sales for end use (as opposed to first purchases), and on certain uses where
there is no prior sale, of natural gas liquids. The tax applies to liquids sold or used in
the United States, Puerto Rico, and the possessions, and in the related Continental Shelf
areas. The purpose of this tax is to bring the price of controlled natural gas liquids up
to the price of energy-equivalent No. 2 distillate oil. Accordingly, the tax is based upon
the difference between the price for No. 2 distillate in the region in which the taxable
sale or use occurred (adjusted for differences in energy content and seasonal variations
in price) and the controlled price ofthe natural gas liquid. The tax is brought into effect
in three equal annual stages in 1978, 1979, and 1980. The tax terminates on September
30, 1981.
Exemptions are provided for agricultural uses, uses in a residence, hospital, school,
or church, and use as a feedstock in the production of natural gas liquids.
3. Presidential authority to suspend equalization taxes.—The President is granted
authority to suspend all or any part of an equalization tax increase which would result
from an increase in the world price of oil where such tax increase will have a substantial
adverse economic effect. A tax increase suspension may not exceed a period of 1 year,
and is subject to veto by either House of Congress within 15 legislative days after
submission by the President of a plan implementing such suspension.
4. Crude oil tax credits, special payments, and refunds.—Tax credits. The net receipts
from the crude oil equalization taxes in 1978 will be allocated to each adult. Net receipts
are equal to gross revenues derived from these taxes, less: (a) the reduction in Federal
income taxes resulting from the imposition ofthe crude oil taxes, (b) the administrative
costs related to the tax credit, special payment, and refund programs, (c) the amount
ofthe heating oil refund, and (d) the amount ofthe refund to refiners for refining crude
oil into natural gas liquids.
Single taxpayers and married persons filing separately will each be entitled to one
tax credit. Married persons fihng joint returns and heads of households will be entitled
to two credits. The tax credits are limited to the taxpayer's tax hability, except for
taxpayers entitled to the earned income credit. Withholding tax schedules for 1978 will
be adjusted to reflect these tax credits. Estates, trusts, and nonresident alien individuals
are not entitled to this credit.
EXHIBITS
345
Special payments. Special payments are provided for adults who are not taxpayers.
These payments will be made in May or June of 1979 to recipients of benefits under
social security, railroad retirement, and supplemental security income programs. To the
extent not covered under these programs, individuals may receive payments through
State aid to families with dependent children programs. The amount of the special
payment is equal to the amount of the tax credit referred to above, reduced by the
amount of any crude oil tax credit claimed by the individual. Adults who do not receive
a tax credit or a special payment may file an appropriate form with the Secretary of
the Treasury in order to receive the payment.
Lump-sum payments are also authorized for the governments of Puerto Rico and the
possessions if acceptable plans are submitted to the Secretary of the Treasury for the
distribution of amounts under programs similar in effect to the tax credit and special
payment programs described above. These lump-sum payments are in lieu of individual
tax credits and special payments.
Refunds. An exemption is provided from the crude oil equalization tax for heating
oil used in residences, churches, schools, and hospitals. Distributors of heating oil for
such uses will receive a refund ofthe equalization tax for each gallon sold provided that
the amount of the refund is passed through completely to the customers in the form
of lower prices.
5. Miscellaneous.—Study of small and independent refiners. The Secretary of Energy
is to conduct a study of the impact of the crude oil tax on the competitive viability of
small and independent refiners. The Secretary is to report to the Congress not later than
90 days after the date of enactment ofthe tax with his findings, together with legislative
recommendations.
Natural gas contracts. The crude oil taxes are not to be taken into accourit for
purposes of determining or redetermining natural gas prices under any contract which
was entered into before the date of enactment of the act.
D.
Tax on business use of oil and gas and related credit
1. Use tax.—In general. An excise tax would be imposed on the use after December
31, 1978, of oil or natural gas as fuel in a trade or business. Three different sets of tax
rates are provided: The highest rates (referred to as tier 2) apply where conversion to
a fuel other than oil or gas is feasible; a lower industrial rate (tier 1) applies where
conservation in fuel consumption is feasible; and a third rate (tier 3) applies to electric
utility use (including production of steam by an electric utility), certain industrial
electric generating use and use in a qualifying cogeneration facility. Tier 2 applies
generally to uses in a boiler or in a turbine or other internal combustion engine, except
for such uses classified in tier 3. Tiers 1 and 2 apply to uses in 1979 and thereafter; tier
3 applies to uses in 1983 and thereafter.
Tax on oil. The tier 2 tax begins at 30 cents per barrel in 1979, and increases to $3
per barrel ih 1985 and later years. The tier 1 rate begins at 30 cents per barrel in 1979,
and increases to $1 per barrel in 1981 and later years. Tier 3 uses are taxed at a rate
of $1.50 per barrel in 1983 and later years. Inflation adjustments apply to 1981 and
later year rates. Oil subject to the tax includes crude oil, refined petroleum products,
and natural gas liquids (other than liquids which have an API gravity of 110 or more)
but excludes natural gas, gasoline, and substances that are not generally marketable for
use as a fuel.
Tax on natural gas. A variable tax is imposed, based upon the difference between a
target price and the user's acquisition cost for natural gas. The purpose of this variable
tax system is gradually to raise the price of natural gas to slightly less than the price
of energy equivalent oil. Accordingly, the target price is based upon the cost of all No.
2 grade distillate oil sold in the relevant region, adjusted by a subtraction factor (which
decreases each year, thereby increasing the after-tax price of natural gas) and for
inflation. Tier 3 use of natural gas is subject to a tax rate beginning at 55 cents per
million Btu in 1983, and reaching 75 cents per million Btu in 1985 and later years. (One
thousand cubic feet of natural gas contains approximately 1 million Btu.) These rates
would be adjusted for inflation beginning in 1981. The tier 3 tax rate is limited so that
the cost of natural gas never exceeds the cost of energy equivalent residual oil in the
346
1977 REPORT OF THE SECRETARY OF THE TREASURY
region where the gas is used. A 10-percent discount is provided for tier 1 and tier 2 uses
subject to interruptible contracts.
Natural gas subject to the tax includes natural gas, petroleum, or a product of natural
gas or petroleum, having an API gravity of 110 or more. The tax does not apply to
substances that are not generally marketable for use as a fuel, such as still gas.
Suspension power. The President may suspend the imposition of part or all of the use
tax for a period of up to 1 year if he determines that the imposition of such tax would
have an adverse economic effect. A suspension plan must be submitted to Congress,
and would be subject to a veto by either House of Congress before the end of 15
legislative days after submission.
Exemptions. Since the tax applies only to use as fuel, uses of oil and natural gas as
raw materials such as petrochemical feedstocks are not subject to tax. An industrial
process use would be exempt from tax where the use of any fuel other than oil or gas
would materially and adversely affect the manufacturing process or the quality of the
manufactured product, or the use of such alternative fuel would not be economically
and environmentally feasible. Also exempt are uses in: any residential facility; any
vehicle, aircraft, vessel, or transportation by pipeline; agriculture; nonmanufacturing
commercial buildings; and the exploration, development, and production of oil and gas.
An exemption is provided where use of a fuel other than oil or gas is precluded by
applicable air pollution control laws.
In addition, each taxpayer is provided an annual exempt amount equal to the energy
content of 50,000 barrels of oil. For this purpose, greater-than-50-percent commonly
controlled organizations, whether or not incorporated, are considered a single
taxpayer. Where a taxpayer suffers a substantial regional competitive disadvantage as
a result of the use tax, the Secretary of the Treasury may provide additional exempt
amounts for individual plants. The Secretary is required to publish the names of
taxpayers and plants receiving such additional exempt amounts.
Reclassifications. The Secretary of the Treasury must establish a procedure for
reclassifying taxable uses to lower rates of use tax. Reclassification may include
complete exemption from the tax. Reclassifications are to be made only if the Secretary
determines that such action is not inconsistent with the goal of encouraging the
conversion from, or significant conservation in, the use of oil and gas as a fuel. The
Secretary is not authorized to reclassify a use to a higher rate of tax.
2. Credit against use tax.—In general. A person subject to the use tax may elect
either an additional 10-percent investment tax credit (discussed below), or a dollar-fordollar credit against the use tax, for qualified expenditures made in altemative energy
property. The credit is allowable up to current use tax liability. Excess credits may be
carried forward. In addition, 1979 and 1980 taxes (including any tax carried forward
from 1979) which are not offset by the credit may be carried over to 1981. Qualified
progress expenditures are available under rules similar to the investment tax credit rule.
The credit terminates after 1990 except for carryovers and where construction of
alternative energy property began, or such property was acquired, before the end of
that year.
Alternative energy property. Qualified investments (which generate the use tax credit
on a dollar-for-dollar basis) consist of investments in altemative energy property.
Generally, this is new tangible property used in the taxpayer's trade or business, which
is subject to the allowance for depreciation (or amortization), which has a useful life
of at least 3 years and which is not used predominantly outside the United States. The
determination of whether property is **new" depends on the extent to which it is
constructed, or whether it is acquired, on or after April 20, 1977. The original use of
acquired property must begin with the taxpayer.
Altemative energy property consists of: (a) a boiler not fueled by oil or gas; (b) a
burner for a combustor (other than a boiler) not fueled by oil or gas; (c) nuclear,
hydroelectric, or geothermal energy equipment; (d) equipment for producing synthetic
gas; (e) pollution control equipment required in (a), (b), or (d); (f) coal utilization
equipment; and (g) the basis for plans and designs for all of the above equipment.
Alternative energy property does not include buildings and structural components
thereof and property used in the trade or business of leasing.
EXHIBITS
347
Election. A taxpayer must specifically elect to treat qualified investments as a credit
against the use tax. Otherwise, such investments will be available only for the
investment tax credit. This election applies to all the alternative energy property of the
taxpayer. For this purpose, greater-than-50-percent commonly controlled organizations, whether or not incorporated, are considered a single taxpayer. Where the
qualified investment exceeds the tax liability for a calendar year, the excess may be
treated as eligible for the regular (but not the additional 10 percent) investment tax
credit. To the extent such election is made, the use tax credit is no longer available.
Normally, qualified investments used to offset the use tax would not be eligible for
either the regular or the additional investment tax credit, but would otherwise be
treated as part of the tax basis for the property.
Special rules. Dispositions of alternative energy property are subject to recapture
rules similar in form to the rules for the regular investment credit. In addition, utilities
are allowed the credit against the use tax for investment in new boilers only to the extent
that old oil or gas boilers are replaced or phased down. For this purpose, phasedown
is based upon less than 1,500 hours of use per year. Special penalties and recapture rules
apply to phased-down boilers that are subsequently used for more than 1,500 hours per
year.
Property which is financed by industrial development bonds is eligible for only a 50percent use tax credit. No Federal income tax deduction is allowed with respect to any
portion of the use tax offset by the use tax credit.
E. Business energy tax credit and special investment credit and depreciation
changes
1. Business energy credit.—In general. An additional 10-percent investment tax
credit is allowed for business investments in qualifying property intended to reduce
energy consumption in heating or cooling or in an industrial process. The additional
credit is available for qualifying investments made after April 19, 1977, and before
January I, 1983. In the case of alternative energy property, the additional credit may
offset up to 100 percent of the taxpayer's income tax liability as opposed to the 50percent limitation provided under current law. This additional credit may be elected
as an altemative to the credit against the use tax.
Qualifying property. Energy property eligible for the additional investment tax credit
consists of: (a) altemative energy property (as described above in the use tax credit
explanation); (b) the expansion of cogeneration capacity; (c) advanced technology
property; (d) specially defined energy property; and (e) certain recycling equipment.
Altemative energy property is eligible for a maximum additional investment tax credit
of 10 percent, even if described in another category of energy property. Advanced
technology property uses solar, geothermal, or wind energy to provide heat, cooling,
or electricity in connection with an existing building and (where applicable) an existing
industrial or commercial process. Specially defined energy property (such as
recuperators, heat wheels, and energy control systems) includes equipment which
would recover waste heat in gases or otherwise reduce energy consumption, and
equipment to modify existing facilities to allow the use of oil or gas in conjunction with
another fuel.
Energy property must be completed or acquired after April 19, 1977, in conjunction
with a building or other structure located in the United States. Such property must be
subject to the allowance for depreciation (or amortization) and have a useful life of at
least 3 years. All business energy property (other than alternative energy property)
must meet performance and quality standards which have been prescribed by the
Secretary of the Treasury, and which are in effect at the time the property is acquired
or construction is begun.
Utilities are subject to a phasedown requirement similar to the requirement
incorporated in the use tax credit provision. In the case of property financed by
industrial development bonds the additional energy investment tax credit is 5 percent.
Insulation installed in connection with an existing building or industrial facility will
be made eligible (to the extent not already eligible) for the regular investment tax credit
through 1982. Insulation must be specifically and primarily designed to reduce the heat
348
1977 REPORT OF THE SECRETARY OF THE TREASURY
loss or gain of an existing building or facility. The original use ofthe property must begin
with the taxpayer. In addition, the property must reasonably be expected to remain in
operation for at least 3 years, and meet performance and quality standards prescribed
by the Secretary of the Treasury.
2. Denial of investment credit and accelerated depreciation.—Air-conditioning units
and boilers fueled by oil or gas will no longer qualify for any investment tax credit. In
addition, such boilers will be limited to straight-line depreciation and denied the 20percent variance from guideline lives under ADR. If the use of a fuel other than oil or
gas is precluded by applicable air pollution laws or qualifies as an exempt use under
the oil and natural gas consumption tax, these restrictions on the investment credit and
depreciation will not apply.
3. Accelerated depreciation for phased-down boilers.—If a taxpayer certifies that he
plans to replace or retire a boiler or other combustor which uses oil or gas, he may
depreciate the remaining basis of such property over the phasedown period. Under
current law, the taxpayer would ordinarily deduct the remaining basis when the old
equipment is retired.
F.
Miscellaneous provisions
1. Minimum tax on intangible drilling costs.—The act makes permanent a provision
applicable only for 1977 that applies the minimum tax to intangible drilling costs for
oil and gas only to the extent that such costs exceed the sum of the taxpayer's income
from oil and gas production plus the result of 10-year amortization of the intangible
drilling costs.
2. Tax treatment of geothermal expenses.—The expensing of intangible drilling cost
treatment now provided for oil and gas will be extended to the exploration and
development costs of geothermal resources. Such intangible drilling costs will be
subject to the same minimum tax treatment described above for oil and gas, except that
oil and gas properties will be treated separately from geothermal properties for
purposes of determining income. The recapture rules and at risk rules applicable to oil
and gas are extended to geothermal properties.
Percentage depletion is provided at a 10-percent rate for geothermal deposits,
subject to the limitation that the total amount of depletion may not exceed the
taxpayer's adjusted basis in the property.
3. Rerefined lubricating oil.—New lubricating oil would be exempt from the 6 cents
per gallon excise tax if such oil is combined with rerefined oil and the new oil makes
up not more than 55 percent of the mixture. If the new oil in the mixture exceeds 55
percent, the exemption would apply only to the new oil that would make up 55 percent
of the mixture. In any case, the mixture must contain at least 25 percent waste or
rerefined lubricating oil in order to qualify for the exemption.
4. Annual report by the President.—Beginning in August 1978, the President will
report each year to the Congress on the revenue impact, and increased energy
conservation and production resulting from the tax provisions of the act.
T r a d e and Investment Policy
Exhibit 29.—Statement by Secretary Blumenthal, March 16, 1977, before the Senate
Committee on Banking, Housing, and Urban Affairs, on legislation regarding
bribery of foreign public officials
I would like to say at the outset that the administration supports the aims of S. 305.
The Carter administration believes that it is damaging both to our country and to a
healthy world economic system for American corporations to bribe foreign officials.
The United States should impose specific criminal penalties for such acts. The effective
enforcement of U.S. criminal penalties for corrupt payments abroad is a difficult
matter, and will require close interriational cooperation. I will discuss these enforcement aspects later in my testimony.
The problem of corrupt payments is one that is a cause of great concern to this
administration. Paying bribes—apart from being morally repugnant and illegal in most
EXHIBITS
349
countries—is simply not necessary for the successful conduct of business here or
overseas. I believe that the responsible elements ofthe business community agree, and
it had been my hope that the business community itself would formulate and implement
a code of business ethics that would set high standards. Unfortunately, there has been
little movement to date in the private sector. The Carter administration has decided
that strong Govemment action in the form of further legislation is needed.
In its assessment of legislative alternatives, the Carter administration is reviewing
carefully the record of recent regulatory action. We are finding this record a very useful
guide against which new initiatives can be examined. I believe therefore that it would
be worthwhile to review with you the considerable regulatory action that has taken
place during the past few years.
1. The Securities and Exchange Commission has been impressively successful in
obtaining disclosure from issuers of registered securities who have engaged in these
improper practices. It is already clear that these disclosures have compelled many firms
to impose strict intemal controls against these practices. I need not describe further the
SEC's action as I am sure that Chairman Hills will give you a thorough description in
his testimony today.
2. In June 1976 the Intemal Revenue Service issued 11 questions to which
corporate officers and outside auditors are required to respond in affidavit form. These
questions are designed to discover whether corporations have been illegally deducting
bribes. As of December 3 1 , 1976, the 11 questions had been asked in approximately
800 large case examinations. Indications of slush funds or illegal activity have been
found in over 270 such cases. Most of these cases are still under active consideration,
and over 50 criminal investigations have been started.
Also in the tax area, the Tax Reform Act of 1976 eliminated the tax benefits
(deferrals and deductions) associated with illegal payments made by majority-owned
subsidiaries and domestic intemational sales corporations. This new prohibition
parallels longstanding prohibitions against deductions of illegal payments made in the
United States.
I believe that this increased audit activity and new legislation will have an increasingly
salutary effect.
3. The Arms Export Control Act of 1976 now requires reports of payments
(including political contributions and agents' fees) that are made or offered to secure
the sale of defense items abroad. The data reported by U.S. firms is made available to
Congress and to Federal agencies responsible for enforcing laws on this subject. The
Department of State has issued detailed regulations to implement this requirement.
Furthermore, 1976 amendments to the Foreign Military Sales Act require disclosure
to purchasing govemments and to the Department of Defense of any agents' fees
included in contracts covered by the act. Fees determined to be questionable by the
Defense Department or unacceptable by foreign governments will not be allowed costs
under such contracts.
4. Last year, the International Chamber of Commerce organized an international
panel to formulate a code of ethics for businessmen. The panel is scheduled to present
a code of ethics to the ICC Executive Board on March 23. Subject to approval by the
national chambers of commerce, the code could be adopted by the ICC council at its
June 1977 meeting.
5. The United States is actively pursuing in the United Nations a treaty on corrupt
payments in international transactions. The United States has formally proposed that
the treaty be based on three concepts: (1) Enforcement of host country criminal laws;
(2) international cooperation on exchange of information and judicial assistance in
enforcement; and (3) uniform provisions for disclosure of payments to foreign officials
and agents made to influence official acts.
The U.N. working group for this initiative has met twice and will meet again to begin
drafting March 28 to April 8. It has been directed to report by this summer on a possible
treaty on illicit payments for consideration by the United Nations Economic and Social
Council and possible action by the General Assembly.
A number of other governments have expressed interest in international action, but
there is much work still to be done. This treaty may be an essential complement to
effective enforcement of domestic legislation, such as S. 305. President Carter is giving
this effort his fullest support.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
6. The Department of Justice, in cooperation with the Securities and Exchange
Commission and the U.S. Customs Service, has reviewed the foreign activities of
approximately 50 domestic corporations. This review has resulted in the opening of
active criminal investigations of eight multinational corporations. Several of these
investigations are now in the grand jury stage.
The United States is also continuing to cooperate through bilateral agreements in the
law enforcement efforts of other governments. Thirteen agreements on specific
corporate groups have been signed, and discussions are underway with other countries.
The initiatives described above are collectively impressive. They add up to a
significant deterrent to corrupt payments by American firms, both in the United States
and abroad.
Of equal importance, Mr. Chairman, is the change in the climate of pubhc opinion
in the United States. I am certain that any U.S. corporate executive faced with a choice
of whether to make a corrupt payment in 1977 will be much more reluctant than he
would have been 3 years ago.
However, the administration believes that the recent initiatives must be complemented by new legislation. The administration supports the criminalization of corrupt
payments made to foreign officials.
But before tuming to the criminalization aspects of S. 305,1 would like to assure the
committee that the administration agrees with section 102 of title I concerning
accounting records and dealings with accountants. We note that the SEC has recently
offered for comment proposed regulations which closely parallel section 102. We
suggest that the committee consider comments received by the SEC concerning the
proposed regulations when it marks up this section.
Now tuming to the central aspect of S. 305, the criminalization of corrupt payments
made to foreign officials, as I said, we support it. At the same time, the administration
recognizes that great care must be taken with an approach which makes certain types
of extraterritorial conduct subject to our country's criminal laws. Moreover, a law
which provides criminal penalties must describe the persons and acts covered with a
high degree of specificity in order to be enforceable, to provide fair warning to
American businessmen. Mr. Chairman, I am seriously concerned about the enforcement problems arising from the broad and sometimes vague reach of S. 305 as it is
presently drafted. The administration believes that the bill can and must be improved
in a number of respects to ensure that it will be fairly and effectively enforced and, in
its implementation, will not give undue offense to foreign countries whose officials
would be implicated in cases brought under the U.S. criminal law.
Aspects of the bill which we believe require improvement include the following
elements:
• The definition of a "domestic concern" should specify the degree of control
which will bring a foreign corporation controlled by individuals who are
citizens or nationals of the United States within the purview of the law.
• The definition ofthe term "domestic concem" should also make it clear when
a foreign corporation which is owned directly or indirectly by a U.S.
corporation is covered.
• Foreign issuers of registered securities should not be subject to the
criminalization penalties.
• Requiring the SEC to take primary responsibility for enforcing a criminalization program would be a dubious diversion from its primary mission of
securing adequate disclosure to protect investors of registered securities.
• The term "interstate commerce" should be more precisely defined to provide
more specifically the certainty and the extent of contacts with the United
States constitutionally required in a criminal statute.
I want to emphasize that our reservations do not represent an intent to weaken the
thrust of the bill or to delay its passage. Rather, we want to work with your committee
to ensure that legislation in this area is workable and fair. We have established an
interagency group to recommend language which will satisfy our concerns. We will get
that language to you as soon as possible.
Further, the administration believes that prompt disclosure of corrupt foreign
payments also may provide a highly effective deterrent. We do not foreclose the
EXHIBITS
351
possibility that disclosure provisions will be considered in our further review of the
enforcement aspects of this subject.
Moreover, once the bill is eiiacted into law, the administration plans to continue to
seek a multilateral treaty and additional bilateral agreements on illicit payments. Such
agreements will increase the enforceability of domestic legislation and will help to
minimize any adverse effects of this law on our foreign relations. Our intent is to propose
that a multilateral treaty include an undertaking by each country to adopt the approach
of S. 305—in other words, to apply a criminal prohibition against foreign corporate
bribery.
Let me turn now to a brief discussion of title II. First, I support its concept—increased
disclosure where it will help investors and serve public policy. In general, I believe that
the benefits of increased disclosure outweigh its burdens. The trend in recent years
toward both increased corporate disclosure and increased disclosure of shareholders
themselves has benefited investors, and I have favored it.
Concerning title II, however, it seems to us that the present reporting requirement,
coupled with recent SEC actions, may be already achieving its intended goal.
Specifically, we think that these regulations already disclose shareholders in positions
of potential control. We particularly think that recent SEC administrative actions have
helped improve disclosure of the identity of large shareholders.
Let me provide some specifics concerning our reservations over title II. First, the
apparent intention of this legislation is to disclose the ownership interests of persons
with potential influence over corporate managements. Presumably, the sponsors
believe that shareholders and the general public could be affected by these people and,
thus, have a right to know their identity. I agree—disclosure of those who truly could
exercise such control makes sense.
The issue, however, is one of whether the present disclosure requirements already
accomplish this. It seems to me that the present requirement—that beneficial owners
of 5 percent or more disclose their identities—already is effective.
My own experience and observations in business have been that owners of less than
5 percent rarely have potential control of managements. An ownership position of that
size rarely threatens a management with being overruled or overthrown. I realize that
the 5-percent requirement doesn't reveal a large absolute number of owners in any
given corporation, but, nevertheless, it seems to reveal those with potential control.
Indeed, the area of greater abuse has been that of managements abusing shareholder
rights—pursuing policies which aren't disclosed to them and which may be contrary to
shareholders' best interests. In contrast, there have been almost no examples of less than
5 percent shareholders harmfully dominating managements.
Second, I have some concerns over the effects of this lowered reporting level on
foreign portfolio investment in the United States. Our equity market benefits
considerably from foreign transactions in U.S. securities. Any actions which might
reduce the inflow of foreign capital or divert transactions offshore should be studied
carefully. In particular, the amounts of new equity capital available to American
business in the past 3 years has been too small, and if this bill would reduce it further,
I would be concerned. One reason for this concern is that the 1976 Treasury report to
the Congress entitled "Foreign Portfolio Investment in the United States" concluded
that disclosure requirements deterred foreign investors from our equity market.
I also question the possible effects of title II on this administration's objective of an
open environment for international investment and removing existing obstacles to it.
Freer international investment would benefit all nations, and especially the United
States with our strengthening economy. Imposing a lower reporting requirement,
however, is inconsistent with this goal of facilitating such investment. Our report on
foreign portfolio investment noted that many foreign investors often fear filing
ownership reports with the U.S. Government, since it might lead to reporting their
ownership interests to their home governments. Disclosure of this information to home
governments could have, and in some instances has had, serious consequences for
foreign investors, including forced repatriation and confiscation of assets.
As you know, portfolio investment ebbs and flows rapidly, and this tightened
disclosure requirement might impede these flows. It seems to me that this impact of this
legislation on overall portfolio investment should be evaluated more carefully.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
My third reservation, Mr. Chairman, reflects this administration's concern with
costly reporting requirements imposed on American business by Government. We
believe that before new regulations requiring more documentation are imposed, the
need should be proven, and the costs of compliance understood. I already have
indicated uncertainty over the need; moreover, I don't believe that any estimate has
been made ofthe increased costs which title II would require. Ultimately, these costs
probably will be borne by investors, since the financial intermediaries which must
report will pass them through. Indeed, they may be borne particularly by individual
investors, since securities firms recently have had difficulty in passing through costs to
institutional investors.
In summary, we don't think that there is sufficient evidence that the objectives of this
legislation aren't already being met. We particularly think that recent SEC initiatives
may be making the 5-percent requirement more effective.
Concerning the SEC, its recent broadening of the definition of beneficial ownership
will produce more disclosure, and we should assess its effects. Furthermore, recent
legislation directed the SEC to require financial institutions to report their equity
holdings. This may accomplish much of the purpose of title II. We will consult with the
SEC on these developments to assess their effect on overall disclosure. Afterwards, we
would be willing to report back to the coinmittee in writing concerning our findings.
Exhibit 30.—Statement by Under Secretary for Monetary Affairs Solomon, March 25,
1977, before the Subcommittee on International Trade, Investment and Monetary
Policy of the House Committee on Banking, Finance and Urban Affairs, on proposed
legislation extending the expiration date of the Export-Import Bank
I am pleased to support the proposed legislation extending the present expiration date
ofthe Export-Import Bank from June'30, 1978, to September 30, 1978.
This simple 3-month extension will give the administration an opportunity to
thoroughly review all aspects of the Eximbank operation and to reach decisions on the
future role of the Bank.
Mr. Chairman, in your letter inviting me to testify today, you raised several questions
concerning issues on which I might comment. Many of your questions go to the heart
of the role of the Export-Import Bank. Specific answers must therefore await the
intensive review that the administration will be undertaking over the next several
months.
The administration's review will be completed in time for the full and comprehensive
hearings which this subcommittee will undertake when it considers the multiyear
extension ofthe Export-Import Bank Act. This review will consider among other issues:
Eximbank financing of nuclear power projects; the country, size, and industry
composition of Eximbank lending; and the relationship ofthe administration's human
rights policy to Eximbank lending.
Mr. Chairman, I would like to note that last fall the National Advisory Council, after
discussing the Eximbank's policy review, welcomed the thrust ofthe policy changes that
had taken place during the year. These policy changes were initiated and implemented
with the full cooperation ofthe Eximbank's senior management. I believe those changes
go in the right direction. Further, the useful process of review and discussion of
Eximbank policies that was initiated last year should be continued as this administration
takes another look at the role of the Eximbank.
In my view, the Eximbank plays an important role in financing and facilitating U.S.
exports. However, we must continue to give great weight to changes in the international
monetary system, and the progress achieved in limiting counterproductive competition
between officially supported export credit institutions, in our assessment of the
Eximbank. The general acceptance of flexible exchange rates among industrial
countries implies that official export credit institutions should not be used to promote
exports but rather to assist the private sector only in those circumstances when private
fmancing would not otherwise be available. In other words, the role of the ExportImport Bank, and similar institutions abroad, is as lenders of last resort in cases where
there are genuine market imperfections, and not as instruments of export competition
between the industrial countries.
353
EXHIBITS
In recent years, foreign governments have sought, by one means or another, to
increase exports in order to deal with the twin problems of recession and the impact
of oil price increases on their current accounts. Nevertheless, on the initiative of the
United States, it was possible last year for the major trading countries to reach a
consensus to reduce international competition among official export credit agencies.
The Unilateral Declaration by the United States, which became effective on July 1,
1976, was based on that consensus. The guidelines contained in the consensus have
generally been followed by the countries concemed.
There are hopeful indications that not only the seven countries—the United States,
the United Kingdom, France, Germany, Italy, Japan, and Canada—but all the
industrialized countries of the OECD will join in adopting a more encompassing
agreement to limit counterproductive competition in officially supported export
credits. Such an intemational agreement, which deals with the critical issues of
downpayments, interest rates, and maturities, will make export coinpetition a matter
of price, service, quality, and performance. This is the proper arena for competition
among exporters, rather than through officially supported export credits.
Exhibit 31.—Excerpt from Joint Communique on the Third Session of the United StatesSaudi Arabian Joint Commission on Economic Cooperation, May 3-4, 1977,
Washington, D.C.
The United States-Saudi Arabian Joint Commission on Economic Cooperation
concluded its third formal session today with major attention given to new ways in which
the Joint Commission can assist in carrying out programs for the economic and social
development of Saudi Arabia. The two days of discussion affirmed the special
importance each country places on strengthened bilateral economic cooperation.
The Joint Commission evaluated progress on its many program activities with special
emphasis on those projects undertaken since the last Commission meeting in the areas
of vocational training, electrical services and procurement, and the establishment of
a National Park in the Kingdom. At the meeting, new agreements were signed and
understandings reached in the areas of desalination technology, consumer protection,
executive development, and the establishment of an economic information center.
The United States-Saudi Arabian Joint Commission on Economic Cooperation was
established in accordance with the joint statement issued by Crown Prince Fahd and
former Secretary of State Kissinger on June 8, 1974. The Joint Commission meeting,
held in Washington, May 3-4, 1977, was chaired by Secretary of the Treasury W.
Michael Blumenthal. Minister Muhammad Aii Abalkhail, Minister of Finance and
National Economy and Chairman for the Saudi side of the Commission, led the Saudi
Arabian delegation. Mr. Ah Abdallah Alireza, the Saudi Arabian Ambassador to the
United States, also participated in the meetings.
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The American delegation included Richard Cooper, Under Secretary of State for
Economic Affairs, C. Fred Bergsten, Assistant Secretary of the Treasury for
Intemational Affairs and U.S. coordinator ofthe Joint Commission, Lewis W. Bowden,
Treasury Deputy for Saudi Arabian Affairs, and John P. Hummon, Director ofthe U.S.
Representation to the Joint Commission in Riyadh.
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41
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41
4i
m
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The United States and Saudi Arabia agreed that the United States should continue
to play a major role in the development of key sectors of the Saudi economy and
expressed strong interest in promoting increased mutual trade and private business.
The Commission noted the substantial progress which has taken place since the last
meeting in undertaking project activities and in recruitment of technicians for the
various programs. At present there are approximately 95 U.S. professionals in the
Kingdom working on Joint Commission projects in the four major program areas:
agriculture and water, industry and electrification, science and technology, and
manpower and education. These projects are financed by the Saudi Arabian
Govemment through the Trust Account in the U.S. Treasury Department.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
INDUSTRIALIZATION AND RELATED PROJECTS
Acquisition of electrical power equipment
In November 1975 a $57.6 million project agreement was signed involving the
procurement of electrical equipment, together with warehousing and other required
supplies and services. Nearly all of that equipment has been received in Saudi Arabia
and the three warehouses are essentially complete. In addition, some ofthe generators
are now being installed at three locations in the Kingdom using U.S. contractors for this
purpose.
Another Joint Commission program of procurement has been agreed upon for the
Saudi Consolidated Electric Company, an entity handling electrification in the
Kingdom's Eastern Province, with an initial order of $14 million of equipment.
Discussions also were held during the Commission meeting about further purchases of
electrical equipment, in the United States, possibly reaching as much as $100 million.
Electrical services project
At the second Joint Commission meeting in 1976 an agreement was reached that the
U.S. Treasury would contract with a U.S. firm to prepare a comprehensive 25-year
electrification program and to provide advisory assistance on the day-to-day operational problems associated with Saudi Arabia's rapidly expanding demands for power. A
contract was signed within a few months after the Joint Commission meeting with a U.S.
firm which for several months has had a full team in the field working on this program.
A brief report was given on the progress of these activities at the Joint Commission
meeting.
Under Joint Commission auspices, an American firm is establishing a training
program for mid and senior level managers in electric utilities, for the Saudi Ministry
of Industry and Electricity and its General Electricity Organization.
Statistics and data processing
The Commission received a report on the technical cooperation program under
which the U.S. Bureau of the Census has been assisting the Saudi Arabian Central
Department of Statistics and National Computer Center in achieving an effective
statistics and data processing capability. Twenty U.S. project personnel are now
permanently stationed in Riyadh. An important supporting element of this project is
an ongoing program to provide selected Saudi officials with mid-career professional
training.
Highway project
It is expected that a project agreement will be signed shortly between the United
States and Saudi Arabia covering U.S. technical cooperation in the area of highway
system planning, construction, and maintenance. The 6-year program will be directed
toward development of an expanded highway system with emphasis on an expressway
network connecting major Saudi cities. The U.S. Federal Highway Administration is
initially to place a l2-man team in the Saudi Ministry of Conimunications for a 2-year
period. In addition, extensive training will be provided'seliected Saudi personnel in the
United States.
Industrial inventory
The possibility of an industrial inventory being undertaken for the Kingdom was
discussed. It was noted that this proposed project was under review in the Ministry of
Industry and Electricity and would be given careful consideration by the Joint
Commission.
SCIENCE AND TECHNOLOGY
Science and Technology Center
There were discussions on the Saudi Arabian National Center fpr Science and
Technology. The two countries look toward the implementation of a wide variety of
EXHIBITS
355
activities intended to develop the Kingdom's scientific resources in a manner responsive
to its economic and social goals.
Standards
The Joint Commission is exploring the possibility of a joint U.S. Government-private
industry team to assist in developing the Kingdom's industrial and food standards. This
follows visits by experts from the U.S. National Bureau of Standards and the Food and
Drug Administration to study the needs ofthe Saudi Arabian Standards Organization.
Telecommunications
It was announced that the U.S. Department of Commerce's Office of Telecommunications has completed a high-frequency computer-modeling study for the Saudi
Ministry of Information. This work, which was reviewed and discussed last month
during a visit to the United States by Ministry officials, came about as a response to
one of a number of recommendations for upgrading the capability of the Ministry in
the area of radio and television broadcasting. The two Governments are considering
the assignment of one or more U.S. technical advisers to the Ministry of Information.
INFORMATION
Financial Information Center
An agreement was signed at the Joint Commission meeting for the establishment of
an Information Center in the Saudi Ministry of Finance and National Economy. This
Center is to expand the Ministry's present information-gathering analysis capabilities
through provision of U.S. information specialists and economists and the development
of a modern Information Center complex. It is planned that an initial staff will be
recruited shortly and that architectural and engineering work will begin at an early
stage.
MANPOWER AND EDUCATION
Vocational training and construction
The Joint Commission heard a report on the accomplishments of a team of 18 staff
members from the U.S. Department of Labor working at the Saudi Ministry of Labor
and Social Affairs to improve vocational training programs. Plans are underway for the
Joint Commission through the U.S. Department of Labor and the U.S. General Services
Administration to provide design and construction for 10 new vocational and
prevocational centers and for the expansion of 15 existing centers.
Twenty-three prospective Saudi vocational training instructors arrived in the United
States last month to begin instructor training. A group of 20 instructor trainees have
been in training in the United States for the past year and will complete their training
by September.
Consumer protection
An agreement was signed at the Joint Commission meeting under which the U.S.
Departments of Treasury and Health, Education, and Welfare will support the Saudi
Ministry of Commerce in equipping and staffing its new Consumer Protection
Laboratory in Riyadh and in providing its Consumer Protection Department with other
related services.
AGRICULTURE, WATER AND LAND MANAGEMENT
Specialists In agriculture and water
The Joint Commission reported that there are 28 U.S. professionals working in the
Saudi Ministry of Agriculture and Water in a variety of fields, including: water
resources, Central Research Laboratory, project execution and planning, economic
analysis, soils surveys, park development, and agricultural engineering. A very
important element in this project is the work at the Central Research Laboratory. U.S.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Specialists are working with a number of Saudi Ministry employees to speed the
development of this institution which will have primary and overall responsibility for
agriculture research within the Kingdom.
Desalination
A project agreement was signed at the Joint Commission meeting for joint efforts
between the U.S. Department of the Interior and the Saudi Saline Water Conversion
Corporation in establishing a Desalination Research Development and Training Center
in Jidda and a related research program. The projects are to lead to the production of
a new generation of multistage flash desalting plants using the latest technology.
Kingdom Park
The Joint Commission reported that architectural and engineering work is underway
by a private U.S. firm on the development of a Kingdom Park in the Asir region, located
in the southwestern part of the Kingdom. It is expected that the design phase will be
completed within a year and park construction completed within 3 years. The U.S.
National Park Service will monitor the development of the park area.
Agricultural research stations
Fruitful discussions were held on the continuation of a program to establish two
agricultural research stations in Saudi Arabia with the assistance of the Montana
Intemational Trade Commission. Two Montana specialists would work in the Ministry
of Agriculture's Central Research Liaboratory to develop future program requirements
and carry out research at the two sites.
Development of agricultural areas
Useful discussions were held regarding Saudi plans for developing the agricultural
potential of the Wadi Dawasir area in southwest Saudi Arabia. It was announced that
a soil survey of the area would soon be underway and that a Ministry of Agriculture
and Water task force studying various means of developing the area would be making
recommendations in the near future.
Outdoor recreation parks
A discussion of Saudi Arabian Government interest in the creation of municipal parks
and outdoor recreation areas resulted in agreement that the Bureau of Outdoor
Recreation, U.S. Department of Interior, would furnish a specialist for a short-term
assignment.
OTHER POTENTIAL PROJECTS
Archaeology
The two Governments noted that preliminary discussions about cooperative projects
in the areas of archaeology, cultural heritage, and historic architectural preservation
have taken place between the U.S. Department of Treasury and the Department of
Antiquities and Museums in the Saudi Ministry of Education. Both sides indicated their
support for the development of projects in these areas, as well as for the channeling
of U.S. technical and scientific assistance necessary for the establishment and growth
of an effective museum system.
Centralized Procurement Agency
It was agreed that a team of experts from the General Services Administration would
go to Saudi Arabia in early May to advise on the feasibility of creating a Saudi General
Services Administration which would permit centralized procurement.
EXHIBITS
357
Customs assistance
It was agreed by the Saudi Ministry of Finance and National Economy and the U.S.
Department of Treasury to cooperate in the area of customs operations and training.
An agreement is expected to be signed shortly which will involve the assignment of
short- and long-term specialists in the Saudi Department of Customs to assist in
upgrading and expanding the Department's capabilities. Also, training programs for
Saudi officials will be provided in the United States and in Saudi Arabia.
Sister cities
The two delegations discussed the Joint Commission's participation in the establishment of a sister city program for Saudi Arabia. Activities under such programs
traditionally have centered on cultural and educational exchanges as well as mutual
visits by city officials.
Executive development program
In order to enhance and deepen mutual understanding between the people of Saudi
Arabia and the United States, the two Govemments discussed a program for executive
development. Under this program, a small number of Saudi Arabian public servants
would travel to the United States to meet with a wide variety of American government
and industrial leaders and visit a cross section of American government, commercial,
and research activities.
OVERALL ASSESSMENT
The Commission considered the results of its third session to have been most useful.
It noted that the understandings and project agreements entered into are positive and
constructive contributions to the strengthening of United States-Saudi Arabian
bilateral economic and commercial relationships.
The Commission commended all participating departments and agencies on both
sides for their energetic efforts to date and directed them to continue in their
exploration of possible new areas of cooperation.
The cochairmen agreed to hold the next Joint Commission meeting in Riyadh early
in 1978.
Exhibit 32.—Statement by Assistant Secretary Bergsten, May 12, 1977, before the
Subcommittee on Antitrust and Monopolies of the Senate Judiciary Committee, on
the relationship between trade and competition policy
The issue
When President Carter announced his anti-inflation program on April 15, he
included a prominent reference to international trade:
Trade can play an important role in the fight against inflation. It is an effective
means of improving and maintaining competition within American industry.
(emphasis added)
In this statement, the President clearly indicated one aspect of the relationship
between trade and antitrust policy. Competition from abroad provides an important
spur to competition in our own economy. Such a spur is particularly important in
industries dominated by a few large firms, where domestic competition may be
inadequate to provide such pressure.
A second facet of the relationship between trade and competition policy relates to
the effort of sellers which are heavily concentrated abroad to limit competition in world
markets. One effect of such limitation is to raise prices to American and other
consumers. OPEC is of course the premier example, but such efforts have been made
frequently throughout modern history.
A third relationship between trade policy and antitrust policy relates to U.S. exports.
When world markets are relatively open, American firms can maximize their
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1977 REPORT OF THE SECRETARY OF THE TREASURY
competitive positions by increasing production runs and learning from their counterparts in other countries. Oligopolistic collusion at home is much less likely when
American firms can find increasing outlets for their energies in expanding their markets
abroad.
Hence there are three major interfaces between trade policy and competition policy.
The interrelationship among the three reinforces the implication of each that the most
open possible trade policy is most supportive of the basic goals of antitrust policy:
• A relatively open U.S. market for imports maximizes the likelihood that
foreign markets will remain open for U.S. exports.
• A relatively open U.S. market for imports reduces the risk that other countries
will limit our access to their exports.
• An avoidance of export controls by the United States reduces the likelihood
that other countries will deny our access to their supplies by erecting export
controls on their own products.
Two policy implications arise from this line of analysis. First, U.S. antitrust policy
would be weakened by widespread resort to new barriers to imports or exports. Second,
U.S. antitrust policy can be strengthened by achieving, in the multilateral trade
negotiations (MTN) in Geneva and elsewhere, (a) further reductions in barriers to
international trade flows and (b) new international rules which would limit more
effectively the ability of countries to erect barriers to imports (the "safeguard" clause)
or to exports ("access to supply" rules).
Many different factors must be considered, of course, in all trade policy decisions.
For example, the impact on domestic employment of rapid increases of imports in a
particular product can simply be too rapid and too pervasive to be permitted to
continue. Hence President Carter has directed the negotiation of "orderly marketing
agreements" (OMA's) with the two countries (Taiwan and Korea) whose increased
sales equaled almost 100 percent ofthe increase in U.S. imports of shoes over the past
2 years, and the one country (Japan) which accounts for over 80 percent of all imports
of color television sets and whose sales rose by over 150 percent in 1976 alone.
In addition, cutrate selling by foreign companies could in some cases eliminate
domestic (and other foreign) firms from a given market, and thus reduce competition
over the long run. Antidumping duties should be applied vigorously in such cases.
Export subsidies by foreign governments could have similar effects, and should be
met promptly by countervailing duties. And, in some cases, imports could cause
national security problems..
Hence any given trade policy decision must weigh carefully a variety of competing
factors. Nothing which I say today should be construed as depicting, or advocating, a
simplistic or single-factor approach to this complex subject. Nevertheless, this
administration has repeatedly indicated its strong adherence to an overall trade policy
which is as open as possible—as President Carter said in the first sentence of his decision
in the escape clause case on shoes, "I am very reluctant to restrict international trade
in any way." Just last week, the President led the effort to incorporate a strong
commitment to liberal trade into the language ofthe summit communique. And, from
the standpoint of antitrust policy, the subject of these hearings today, an open trading
system is highly desirable.
Imports and competition in the U.S. market
Few Americans would quarrel with the need to resist export controls by our foreign
suppliers or import controls by our foreign customers, for antitrust as well as much
broader economic and political reasons. Hence I will focus my remarks today on the
relationship between imports and competition within the U.S. market which—to put
it mildly—is a much more controversial subject.
The fundamental point is that import competition stimulates innovation and
efficiency. The competitive environment nourished by the relatively open trade posture
of the United States over the past 40 years has spurred American industries to make
steady improvements in the range and quality of available goods. Import barriers, by
contrast, permit protected industries to raise prices and reduce incentives to improve
the quality of their output—as has resulted in a number of developing countries which
pursued import-substitution strategies of economic development in the 1950's and
EXHIBITS
359
1960's. They promote an inefficient allocation of resources and detract from our ability
to produce the things we make best.
Through these effects, open international trade serves consumers—the ultimate
beneficiary of all antitrust policies. Imports hold down prices and stimulate the
discovery of cost-saving technology and other innovations. Trade barriers, by contrast,
raise prices to consumers and push up the cost of living. When import penetration raises
serious problems for a domestic industry, it is always sensible for the Govemment to
consider helping that industry to improve its competitive ability directly as an
alternative to providing insulation from the forces of the marketplace.
The burden of import restrictions falls particularly heavily on low-income consumers,
who tend to spend a greater share of their budgets on protected items such as low-cost
shoes and meat. In some cases, foreign suppliers respond to trade barriers by
discontinuing lower priced items in favor of those with higher unit prices. This tendency
also hurts poorer Americans mpre than others.
The benefits of an open trading system in holding down the rate of inflation extend
across our entire economy. But competition from abroad is especially important in
industries dominated by a few large firms, since these are the industries which may be
least responsive to market pressure. In such industries, imports help to brake price
increases and can provide critically important incentives for diversification of
production in response to new market trends. I shall illustrate this point by reference
to two major American industries, steel and automobiles.
The case of steel
The steel industry illustrates the price-restraining effects of imports under normal
circumstances. Steel prices comprise a major component of the overall price level and
tend to act as a bellwether for prices throughout the economy. But the steel industry
is highly concentrated. The major companies set prices and exercise reasonably
effective price leadership. List prices increase bur'seldom decline.
Imports, which supply about 15 percent of domestic consumption, are of key
importance in this setting. A major study of steel prices, undertaken by the Council on
Wage and Price Stability in 1975, concluded that:
The chief limits on administered price increases have been potential loss of steel
markets to imports and government opposition * * *. Imports * * * are very
important in providing some flexibility or elasticity in steel supply.
The postwar history of steel prices demonstrates the point. From 1946 to 1958, there
was virtually no import competition. In those years, steel prices increased by 141
percent as compared to 61 percent for all industrial prices (including steel). Steel prices
contributed substantially to the inflation of the period.
" In the decade 1959-68, imports grew from 2 million tons a year to 14 million tons
and reached about 14 percent of U.S. consumption. During this period, Japan and
Europe developed modern and highly efficient steel industries that competed
successfully with older U.S. steel plants. Spurred by this competitive pressure, U.S.
industry belatedly adopted the most modern production techniques and began to invest
huge sums of capital to improve its efficiency. U.S. steel prices remained essentially
stable during the entire decade.
In late 1968, the U.S. steel industry and the U.S. Government cooperated in obtaining
voluntary restraint agreements (VRA's) from the major exporters. In the 3 years
following the initiation of these agreements, the U.S. industry raised its prices five times
as much as it had in the previous 8 years. The wholesale price index for finished steel
products rose by 23 percent, as opposed to 10 percent for all industrial products
(including steel). Other factors than the change in U.S. trade pohcy were involved, but
the correlation between the two is highly suggestive.
According to a detailed study done for the Department of Labor by the Public
Research Institute, the VRA added about $1.5 billion (in 1960 dollars) to the cost of
steel for U.S. consumers.»This translates to about $2.7 billion in 1975 dollars. A more
recent analysis estimates that the VRA caused steel prices to increase by $26 to $39
1 Jamei Jandrow et al., "Removing Restrictions on Imports of Steel." May I97S.
360
1977 REPORT OF THE SECRETARY OF THE TREASURY
per ton, meaning that the price of steel would have been 13 to 15 percent lower in the
absence ofthe VRA. 2 Interestingly, the data show that U.S. production was only slightly
above, and in one year actually below, what it would have been without the VRA.
VRA's have a further adverse effect on the concerns of this committee. In contrast
to an import quota administered by the United States, a VRA forces companies in
supplying countries—usually aided by their governments—to organize tightly to
administer the restraints. In so doing, the firms of course seek to maximize the value
of their (restricted) sales, both by raising prices as much as possible and, in the case
of volume-based (rather than value-based) quotas, by switching from low-cost to higher
cost items. Hence VRA's strengthen anticompetitive tendencies in industries abroad.
Steel, however, also reveals the complexities of international trade—including its
impact on pricing and competition policy. When world demand for steel was booming,
in 1973 and early 1974, the prices of imported steel came to exceed domestic prices.
In a sense, this simply meant that foreign suppliers showed greater flexibility in their
pricing on the upside as well as the downside.
However, the episode also raises questions about the reliability and benefits, under
contemporary circumstances, of steel imports. To what extent do the practices of
governments in other countries promote the ability and willingness of foreign steel
suppliers to cut their prices? Do such practices support the usual objectives of
intemational trade? How do they affect the national interests of the United States?
These issues require careful consideration by the administration, and we are now
proceeding with a review of them.
Th® case of automobiles
The case of automobiles illustrates two other advantages of imports: The enrichment
of choices available to the U.S. consumer, and the promotion of an energy-efficieiit and
environmentally sound technology.
Before the mid-1950's, imports were negligible. Sports cars and luxury items, like
Mercedes-Benz and Jaguar, had never been statistically significant. Beginning in 1955,
however, Volkswagen led the way into the U.S. market for small imports. By 1958,
imports had captured over 10 percent of the market.
Recovery from the 1957-58 recession reduced the demand for small cars somewhat,
however, and imports fell to 5 percent of the market by 1962. Throughout the 1960's,
in response, U.S.-produced automobiles swelled in size as incomes rose and real
gasoline prices fell. There was a clear correlation: As imports fell, the size (and energy
consumption) of American-made cars rose.
The 1970's witnessed a new and dynamic upsurge of imports. The recession of
1970-71, the passage of tough antipollution laws, and skyrocketing petroleum prices
all pointed to the need for smaller and more fuel-efficient cars. This trend accentuated
the shift toward imports.
By 1975, imports had reached an alltime high and accounted for over 20 percent of
consumption. Most of this growth stemmed from small and economical cars, such as
Datsun and Toyota. But new technology was also a factor: One manufacturer (Volvo)
has just marketed a car equipped with a new, three-way catalyst system which many
experts believe will be adopted by U.S. automobile producers in order to meet the air
quality standards set for the 1980's by the Clean Air Act.
Such import competition again forced the domestic industry to respond. In 1971, the
Vega and the Pinto made their appearance. U.S. companies also extended their
production abroad, and models produced by U.S. companies in foreign countries
(including Opel, Capri, and Dodge Colt) have risen. Imports clearly forced the U.S.
industry to develop a capacity to produce smaller and more fuel-efficient cars—a
capacity which it lacked almost entirely less than 10 years ago.
It is this previous competition from imports which, paradoxically, places Detroit in
a position in 1977 to be able to contribute positively to the energy program proposed
by President Carter on April 20. At present, more than 90 percent of imported cars
are fuel efficient, whereas less than half of U.S.-made cars are fuel efficient. Average
2 Wendy Emery Takacs, "Quantitative Restrictions on International Trade," unpublished. Ph. D. dissertation, Johns Hopkins
University. 1976, p. 101.
EXHIBITS
361
city/highway mileage of imported cars is typically around 25 to 35 miles per gallon,
whereas 1977 models of U.S.-produced cars registered an average city/highway mileage
of about 16 to 17 1/2 miles per gallon. But less than half is better than nothing, and
16 miles per gallon is better than in the past. Without the previous import competition,
Detroit would have confronted the energy crisis in a hopeless position—indeed, its
position might have precluded the possibility of adopting a program as essential to our
Nation's future as the President's.
Like steel, however, the auto case also illustrates the complexities involved in
intemational trade—and its relationship to domestic competition. On the one hand, still
heavier reliance on imports might enable us to meet more quickly the President's goals
for saving gasoline. On the other hand, seizure of a much greater share of the U.S.
market by imports could well discourage the transition in Detroit which is desperately
needed, both for the longrun future of American energy policy and for maintaining the
strength, and levels of employment, of a key American industry. We have not yet
resolved this dilemma, but plan to work closely with the other major auto-producing
nations to find solutions which will provide fair and equitable treatment for them as well
as support the longer term goals of our own energy efforts.
Conclusion
In conclusion, it is clear that international trade can support American antitrust
policy in several key respects: By providing steady competitive pressure on American
industry at home, by limiting the risk that other countries will limit our access to their
supplies, and by providing global markets which permit American firms to maximize
their productive efficiency. Trade policy should thus be viewed as our important ally
of antitrust policy.
At the same time, many factors other than antitrust must of course be considered in
formulating U.S. trade policy. No issue which comprises so many domestic and
intemational complexities can be founded solely on a single criterion. Nevertheless, this
administration seeks to maintain maximum freedom for international trade—and the
factors being considered by this subcommittee are a central element in that approach.
Exhibit 33.—Remarks by Assistant Secretary Bergsten, May 26, 1977, before the
American Iron and Steel Institute, New York, N.Y., entitled ''The U.S. Trside
Balance and American Competitiveness in the World Economy"
In late April, the Commerce Department reported that the U.S. merchandise trade
balance for the first quarter of 1977 showed a record deficit of $6.9 billion—an annual
rate of almost $28 billion. The deficit for the year as a whole may exceed $20 billion.
These are stark numbers. Some commentators have expressed great concern about
them. Some have voiced doubts about the competitive strength of the United States in
the world economy.
In my view, such doubts are largely unwarranted. But the United States certainly
faces some important trade problems. We must reduce our dependence on imported
oil. We face a few sectoral problems which require direct attention. And we are
experiencing an unprecedented merchandise trade deficit.
Several issues arising from this development must be considered carefully. What does
the present deficit suggest about the competitive position of the United States in the
world economy? Is the deficit sustainable? How does our position relate to the trade
balances of other countries? What should the Govemment do about it, if anything? In
an effort to help answer these questions, my analysis today will focus on four key issues:
The share in world trade of U.S. exports of manufactured goods, the effect of changes
in oil prices on U.S. imports, the effects on the U.S. trade balance of differences in the
economic cycle among the major trading nations, and the important implications for
U.S. policy toward its current trade deficit ofthe continuing large surpluses being run
by a few OPEC countries.
362
1977 REPORT OF THE SECRETARY OF THE TREASURY
The U.S. share of world exports
One ofthe most widely used indicators ofthe competitiveness of U.S. products is the
market share of world exports held by U.S. manufacturers. The U.S. market share—
defined as the exports ofthe 15 major industrial countries, excluding sales to the United
States itself—declined during the latter 1960's, reflecting the declining competitiveness
of U.S. products and reaching its historic low in 1972 (table 1). The dollar became
substantially overvalued in the late 1960's, sharply reducing the price competitiveness
of our exports and some of our import-competing industries. The AFL-CIO and others,
including the steel industry, were right to complain in the late 1960's and early 1970's
that U.S. intemational economic policy had permitted the competitive position of the
United States to deteriorate badly and intensify domestic unemployment. In retrospect,
we can see that the policy errors of that period centered on the exchange rate of the
dollar and inflation in the late 1960's—not on policies directly affecting international
trade or investment, as many thought at that time.
The effects ofthe exchange rate changes ofthe early 1970's began to be realized by
U.S. exporters fairly quickly. The devaluations of 1971 and 1973, coupled with a more
flexible exchange rate system since early 1973, have clearly benefited U.S. exporters
(and import-competing industries). The data on U.S. trade shares in world markets
since 1972 confirm the strengthening of U.S. competitiveness:
•
•
•
•
•
•
•
The U.S. share of total manufactured exports hit its low point of 19.2 percent
in 1972, and rose to 21.3 percent in 1975 (before falling back to 20.5 percent
in the first three quarters of 1976, the most recent period for which
comparable data are available).
The U.S. share of chemical exports rose steadily from 18.7 percent in 1972 to
21.3 percent in 1976.
Our nonelectrical machinery share rose from the 1972 low of 25.1 percent to
27.6 percent in 1975 (before declining to 26.9 percent in 1976).
Electrical machinery climbed steadily from its 1972 low of 20.9 percent to 23.3
percent in 1976.
Basic manufactures rose from a 1972 low of 10.6 percent to 12.6 percent in
1975, and remained at 12.1 percent in 1976.
Only in transport equipment is the U.S. share lower today, down to about 24
percent in 1976 from 26.4 percent in 1972; all of this decline came in 1976,
after the U.S. share had risen to 29.2 percent in 1974 and stayed at 28.2
percent in 1975.
All other manufactures rose steadily from 15.9 percent in 1972 to 18 percent
in 1976.
Other indicators such as price relationships between the U.S. economy and other
major trading countries testify similarly to a sharp improvement in the U.S. competitive
position after 1972 and a maintenance of those gains over the past year or so. We will
be watching these indicators closely, to see if they continue to improve—or at least
maintain the gains of the past 4 years. Any renewed, sustained decline in them would
lead us to take a close look at exchange rate relationships and other key factors
underlying the economic relationship among nations. On the basis of the evolution of
U.S. market shares over the past 4 years, however, we have no reason to doubt the
international competitive position of U.S. industry.
Oil and the U.S. trade balance
Exports, however, are only one side of a country's trade. One must look at the entire
picture to appraise the overall intemational position of a country at any point in time.
In the case ofthe United States, recent swings in the tradie balance have been dramatic.
In 1972, the U.S. trade balance was in deficit by $6 1/2 billion (on the balance of
payments definition). In 1975, only 3 years later, our merchandise trade registered a
surplus of $9 billion—an improvement of over $15 billion despite an increase of over
$22 billion in the costof imported oil during those 3 years. But our trade account was
EXHIBITS
363
in deficit again in 1976, by some $9 billion—an adverse swing of $ 18 billion in a single
year. This year, the deficit may exceed $20 billion—another swing of over $10 billion.
Changes in the price of oil have dominated these changes in the U.S. trade balance.
Our current forecast suggests that U.S. imports may reach nearly $ 150 billion in 1977.
Of this total, more than $40 billion will be oil. In fact, it will take roughly one-third of
our total exports to pay for oil imports alone.
In volume terms, U.S. oil imports have risen sharply over the last 5 years (table 2).
In 1972, the United States imported 5 million barrels a day (mb/d). In 1976, we
imported about 7 3/4 mb/d. Our current estimate for 1977 is imports of about 8 1/2
mb/d—an increase of 70 percent in 5 years. But this increase in volume, sizable though
it is, would have raised U.S. oil import costs by less than $3 1/2 billion if the price of
oil had not risen.
The price of a barrel of crude oil, however, increased from an average ofabout $2.53
in 1972 to an (estimated) average ofabout $ 13.25 this year—a rise of over 500 percent
(table 2). Hence the dollar cost of U.S. oil imports has skyrocketed by some 870
percent, from $4.7 billion in 1972 to an estimated $40 billion this year. The increased
price of oil accounts for more than $30 billion in increased U.S. import costs from 1972
through 1977.
Excluding these oil imports, our trade balance has shown a very large surplus ever
since the exchange rate changes of 1971 and 1973 restored relative price relationships
between the U.S. economy and the rest ofthe world. Nonoil trade was in deficit by $2
billion in 1972, but has been in strong surplus ever since. That surplus peaked at $36
billion in the recession year of 1975. It remains substantial, and is likely to approximate
$20 billion this year.
To be sure, the increases in oil prices have had important effects on the price and
volume of other traded goods. We have obviously been increasing our exports to OPEC
countries at the same time that our oil import costs have been rising. But that export
increase falls far short of the rise in the cost of oil imports. Our merchandise trade
balance with the OPEC area, including indirect U.S. imports of OPEC crude via thirdcountry refineries, shifted from a deficit of $ 1 1/2 biUion in 1972 to an estimated deficit
of about $21 billion in 1976 (table 3). This year the trade deficit with OPEC could
exceed $25 billion.
At the same time, our trade balance with the non-OPEC world has shown impressive
strength. In 1972, we had a deficit with non-OPEC countries of $5 billion. In 1976, this
had shifted to an estimated surplus of about $ 11 1/2 billion with those countries—an
improvement of $16 1/2 billion. This improved trade position has occurred both visa-vis other developed countries (about $ 11 billion) and with the developing countries
(roughly $5 billion). In 1977, we expect to remain in surplus with the non-OPEC world
by several billion dollars. The strength of our position has in fact led many major
countries—including the European Community as a group (with which we ran a surplus
of $7.7 billion in 1976), Spain, and Brazil—to complain frequently about the size of
our bilateral surpluses with them.
It is thus apparent that the rise in oil prices has been the overwhelming cause of the
shift into large deficit of the U.S. trade balance. Even taking into account the
"feedback" effects on U.S. exports of higher OPEC earnings, the price rise for oil has
dominated the U.S. international accounts. Our position with the rest of the world
remains quite positive, just as we saw from my earlier analysis ofthe U.S. share of world
exports of manufactured goods that the overall competitive position of the United
States in the world economy appears strong.
Cyclical factors
A second key element in the recent swings in the U.S. trade balance is the differing
pace of economic recovery among the major countries. This factor is far less important
than the changes in the price of oil, but it is important nevertheless.
It seems reasonable to view 1974 as the most recent year in which cyclical conditions
among the major countries were roughly parallel, and the last year in which most
economies were operating at relatively full capacity levels. In 1975, the United States
plunged more deeply into recession than did most of our major trading partners. Indeed,
364
1977 REPORT OF THE SECRETARY OF THE TREASURY
while the gross national product of the United States (in real terms) declined by 1.8
percent, gross national products rose by 0.6 percent in Canada and 2.1 percent in Japan.
Because the U.S. economy has a higher income elasticity of demand for imports than
our major trading partners, our imports are more sensitive to changes in income than
are the imports of our trading partners and the effects on our trade balance of these
differences in growth rates are magnified. U.S. nonfuel imports declined by $6 1/2
billion in 1975, while exports rose by about $9 billion. Our $9 billion trade surplus in
1975 can thus be largely accounted for by cyclical factors.
From 1975 through 1977, U.S. recovery has been fairly rapid. The economies of our
major trading partners, notably Canada and Japan—but also other industrial countries
and a few major developing countries—have not recovered as strongly. Comparing our
expectations for 1977 with the "base year" of 1974, the trade balance may dechne by
more than $15 billion. Higher fuel costs account for perhaps $14 billion. Agricultural
exports may have risen by $1 1/2 billion. The data in table 1 suggest that the U.S.
competitive position in trade in manufactured goods has not deteriorated. Thus some
$3 billion or so of the 1977 deficit might be attributable to cyclical considerations.
Combining this conclusion with our assessment of the effects of higher oil prices
suggests an underlying U.S. nonoil trade balance which is in comfortable surplus.
The Implications of continuing OPEC surpluses
Finally, we must ask how the current trade position of the United States fits into the
world economic picture. The key point here is that large trade deficits in the non-OPEC
world are inevitable at the present, and for at least several more years, in view of the
large surpluses being run by the OPEC countries themselves. In the interest of
intemational economic and monetary stability, the deficits have to be carried by
countries which have the ability to run a surplus on their international transactions in
services and other invisibles, and/or attract capital on a continuing basis.
Very few countries can do both. Germany and Japan readily attract capital but,
unlike the United States, run sizable deficits on international services—in 1976, about
$9 billion for Germany and $6 billion for Japan. They both also ran deficits on net
private and government transfer payments of about $3 1/2 and $1/2 billion respectively. Hence their trade balances will always be more "favorable" than their current
account balances.
This is a situation precisely opposite to our own. The United States runs a sizable and
growing surplus in its international transactions in services—on balance, primarily
income on U.S. investments abroad and foreign military sales. Our services surplus
reached $ 13 1/2 billion in 1976. It is growing steadily, and may rise by another $2 billion
this year.
This surplus means that the U.S. current account balance is far stronger than the trade
balance alone. To be sure, the current account will also be in sizable deficit in 1977—
but nowhere near the $20 billion or more deficit on trade alone. In addition, the United
States has had no difficulty in attracting capital from abroad. As Secretary Blumenthal
pointed out in Tokyo yesterday, the recent shift in the U.S. current account deficit is
making a major contribution to the stability of the international monetary system.
Another important indicator ofthe underlying economic strength of a country is the
value of its currency on the exchange markets—which takes all of these factors into
account. Exchange rate movements demonstrate the evaluation ofthe relative strength
of national economies by private traders and investors throughout the world. On a
trade-weighted basis, the exchange rate ofthe dollar—relative to the currencies of other
OECD countries—has risen about 5 percent during the past 18 months, despite the
adverse swing in the trade balance. During the first quarter, when our trade deficit was
running at an annual rate of nearly $28 billion, the dollar moved upward against these
OECD currencies. Since the oil crisis hit in late 1973, triggering the sharp decline in
the U.S. trade balance, the dollar has strengthened by about 11 percent. To be sure,
the changes in the average exchange rate of the dollar comprise appreciations against
some currencies and depreciations against some others, but such differences are wholly
proper in a world of flexible exchange rates in which the relationships between national
economies are changing constantly. On the whole this indicator reinforces the picture
of underlying strength of the United States in the world economy.
EXHIBITS
365
Conclusion
Several conclusions emerge from this analysis. First and foremost, it is time that this
country adopted a policy to reduce its dependence on OPEC oil and the costs of that
oil to our balance of payments. The President has proposed a wide-ranging program
to reduce U.S. oil dependency. That program deserves the support ofthe Congress and
of the American people. It is the answer to the current "problem" of the U.S. trade
balance.
Second, there is no need for the U.S. Government to adopt other measures for
balance of payments purposes at this time. We must watch closely such indicators as
the U.S. share in world exports of manufactured goods, and any evidence that officials
of other countries are resisting market forces tending to appreciate their exchange rates
against the dollar. New developments in areas such as these could become cause for
concern, but present indications suggest no need for policy action by the United States.
Finally, we can all take satisfaction in the continuing competitive strength of the
United States in the world economy. To be sure, there are problems in particular
sectors: The President has recently ordered that action be taken regarding some imports
of shoes and color television sets, and the international problems faced by the steel
industry are presently undergoing review both within the U.S. Government and
intemationally. But these sectoral problems do not indicate any general weakness of
the international position of the United States. To the contrary, our overall national
economic strength seems secure. It should be a source of confidence both at home and
abroad in the months and years to come.
ON
OS
T A B L E 1.—U.S. s h a r e of world exports of m a n u f a c t u r e s
[Percentage shares] i
Basic
manufactures
Niiscellaneous
manufactured
articles
Total
manufactures
Chemicals
Nonelectrical
machinery
Electrical
machinery
Transport
equipment
1958
1959
1960
29.6
29.1
29.6
35.0
33.8
32.7
32.8
30.6
28.2
35.3
32.0
33.2
27.7
25.6
25.3
1%1
1962
1963
28.2
27.9
26.9
31.1
30.9
30.2
27.0
27.3
26.8
30.5
31.9
28.2
24.1
24.6
23.6
1964
1965
1966
27.1
24.7
24.6
31.4
30.9
30.1
26.2
24.0
25.2
28.4
28.4
28.7
24.0
22.8
23.0
1967
1968.:
1969
23.7
24.2
21.9
30.2
29.4
28.8
25.8
25.1
24.4
31.8
34.3
32.4
23.3
23.6
22.5
1970
1971
1972
21.9
20.0
18.7
28.1
25.6
25.1
22.7
21.0
20.9
29.0
29.8
26.4
10.8
10.6
16.3
15.9
21.3
20.0
19.2
1973
1974
1975
19.0
18.5
20.3
25.1
26.4
27.6
21.6
23.1
22.6
27.0
29.2
28.2
11.4
12.3
12.6
16.0
17.3
17.6
19.5
20.3
21.3
tl
H
PC
m
21.3
26.9
23.3
23.9
12.1
18.0
20.5
H
73
rfl
:
I976i
:
1 Shares are calculated from values of exports of the 6 commodity groups from
each of the 15 countries. Beginning 1971 when exchange rates began to fluctuate
widely, share calculation is based on export-weighted exchange rate indexes for
each supplier, using official rates of exchange vis-a-vis 67 principal markets.
2Figures for 1976 are averages of first three quarters, the latest date for which
these data are available.
Source: Department of Conunerce, Commerce America.
NOTE.—Term "manufactures" refers to chemicals, machinery, transport
equipment, and other manufactures except mineral fuel products, processed food,
fats, oils, firearms of war, and ammunition. World markets are defined as exports,
excluding shipments to United States, from 15 major industrial countries which
account for approximately 80 percent of worid exports of manufactures: United
States, Austria, Belgium-Luxembourg, Canada, Denmark, France, Federal
Republic of Germany, Italy, Netherlands, Norway, Sweden, Switzerland, United
Kingdom, and Japan.
73
Ifl
O
73
H
o
H
X
m
(fi
m
n
73
Cfl
H
>
73
o
>
C
73
367
EXHIBITS
T A B L E 2.—U.S. imports of petroleum arul products
[Balance of payments basis]
Average
daily
volume
;
Total
value
Mil. bid
Annually:
1970
1971
1972
1973
1974
1975
Import
unit
value
$IBbl.
$ Bil.
3.60
4.11
5.02
6.85
6.62
6.46
2.9
3.6
4.7
8.4
26.6
27.0
7.79
1976
First quarter 1977 (seasonally adjusted)
2.23
2.43
2.53
3.37
11.01
11.45
12.14
34.6
9.39 (Est.)
12.93 (Est.)
I l.l (Est.)
Source: Department of Conunerce, Bureau of Economic Analysis, Balance of Payments Division.
TABLE 3.—Estimated a r e a p a t t e r n of U.S. trade balances, 1 9 7 1 - 7 6
[On approximate balance of payments basis; in $ billion]
PubUshed
worldwide
balance
Of which, estimated balances with—
Of which—
OPEC
Total
countries*
other*
Industrial
LDC's
1971
^23
^1
~l
^1
2
1972
1973
-6.4
.9
- I 1/2
- 4
- 5
5
- 6
1/2
I
5 1/2
1974
1975
1976
-5.4
9.0
-9.2
- 1 7 1/2
-14
-21
3 1/2
101/2
5 1/2
8 1/2
12 1/2
6
12
23
11 1/2
Source: Treasury estimates, derived from Census data.
*Estimates for OPEC countries include, and total other exclude, estimated U.S. imports of OPEC crude
as petroleum products from third-area refineries.
Exhibit 34.—Statement by Secretary Blumenthal, June 10, 1977, to the press following
the Joint U.S.-U.S.S.R. Commercial Commission, on the accomplishments of the
Commission's sixth session
Before inviting your questions, I would like to make a brief background statement,
after which Secretary of Commerce Kreps may wish to make some observations.
The Joint U.S.-U.S.S.R. Commercial Commission was established in 1972 in
accordance with an agreement reached at the summit meeting in May of that year. Its
purpose is to promote mutually beneficial commercial relations and to work out specific
economic and trade arrangements between the United States and the Soviet Union.
Among other things, the Commission studies possible U.S.-U.S.S.R. participation in
the development and sale of natural resource materials and the manufacture and sale
of other products. It also monitors the spectrum of U.S.-U.S.S.R. commercial and
economic relations, identifying and, when possible, resolving issues of interest to both
parties.
The first meeting of the Commission was held in Moscow in July 1972. The meeting
we have just concluded is the sixth in the series of meetings held alternately in Moscow
and in Washington.
In this sixth session, the Commission continued the tradition established in earlier
368
1977 REPORT OF THE SECRETARY OF THE TREASURY
sessions of friendly, frank, and constructive discussion of problems related to expanding
U.S.-Soviet trade and intensifying our economic relationships.
Secretary Kreps, who is Vice Chairman ofthe U.S. delegation, discussed the current
status of Soviet-American trade and economic relations.
The activities ofthe U.S.-U.S.S.R. Trade and Economic Council were reported by
its President, Harold Scott.
We received a report from the Working Group of Experts headed by Deputy Minister
of Trade Manzhulo and Treasury Under Secretary Solomon on its program of exchange
of information related to trade development.
We also received reports from working groups concerned with facilitating the work
of U.S. and Soviet businessmen in each other's countries, and with major industrial
projects in the Soviet Union involving U.S. firms' participation.
I believe that our talks have been highly useful and constructive. They mark a
significant step in our continuing effort to promote trade and to foster the mutual
understanding which is so important for good relations not only in the economic field,
but for our relations in general.
Exhibit 35.—Summary statement by Deputy Assistant Secretary Hufbauer, July 18,
1977, before the Subcommittee on Trade of the House Committee on Ways and
Means, in support of the President's request to extend the Emigration Waiver
Authority for Romania under section 402 of the Trade Act of 1974
Mr. Chairman, I am pleased to appear before you today in support ofthe President's
request to extend the Emigration Waiver Authority for Romania under section 402 of
the Trade Act of 1974. Such action would further the continued improvement of United
States-Romanian political and economic relations witnessed since the signing of the
United States-Romanian Trade Agreement in 1975.
Strengthening good United States-Romanian relations—economic and political—
serves the interests of both countries. More than any other CMEA country, Romania
has aggressively pursued friendly relations with countries ofthe non-Communist world,
and has actively participated in a number of international organizations, including the
IMF, World Bank, and GATT.
Romania's economic vitality is the key to its strategy of independence. It is in our
own interest to encourage Romania's independent foreign policy orientation through
the expansion and improvement of our bilateral relations. To achieve this end, we
believe continuation of the Trade Agreement with Romania is in the U.S. national
interest.
United States-Romanian trade
With extension of the Trade Agreement, continued expansion of United StatesRomanian trade can be expected. Bilateral trade reached a record high in 1976 of $448
million, with U.S. exports making up more than half of this figure. Based on the actual
United States-Romanian trade performance for the first 4 months of this year, bilateral
trade for 1977 could approach $600 million.
Since 1970, two-way trade with Romania has been characterized by a steady growth
pattern and an average U.S. annual trade surplus of $50 million. An exception to this
trend occurred in 1974, when U.S. exports soared due to one-time grain and aircraft
purchases by Romania.
This mutually beneficial expansion of trade must be seen in connection with the
granting of most favored nation (MFN) and generalized system of preferences to
Romania. Trade statistics compared before and after the 1975 and early 1976
agreements—excluding the 1974 aberration—indicate an acceleration in our two-way
trade. Total trade for 1973 amounted to $172 million while total trade levels in 1975
and 1976 jumped to $322 million and $448 million respectively. In contrast to our
EXHIBITS
369
Western competitors, U.S. exports to Romania rose from $ 190 million in 1975 to $250
million in 1976 while, during the same period, exports from West Germany and Italy
actually declined.
Trade financing assistance
Failure to extend the waiver would not only imply loss of MFN tariff status for imports
from Romania but also the inability of the U.S. Government to authorize Eximbank
facilities and Commodity Credit Corporation (CCC) credits to Romania. Without these
credits, U.S. exports to Romania would eventually slacken.
Since the early 1970's, the U.S. Government has encouraged various financing
programs designed to expand U.S. exports to Romania. Eximbank and CCC have been
the major sources of U.S. financial assistance. Romania has been eligible for trade
financing assistance from Eximbank since its lending operations in Romania were
resumed in 1971. Except for the suspension of Eximbank's credits to Romania from
January to August in 1975, Romania has been actively utilizing Eximbank's facilities.
As of May 1977, Eximbank had outstanding $71.7 million in direct loans—ofwhich
$45.1 million has been disbursed—and $3.6 million in long-term financial guarantees
to help finance $158 million of Romanian imports from the United States. Other
programs—short- and medium-term guarantees, insurance, and the compensatory
financing facility credit line—provided an additional $15.9 million of Eximbank
financial support outstanding in May 1977. By authorizing a cumulative total of nearly
$160 million of financial support since 1971 (not all of which was taken up by
Romania), Eximbank has helped U.S. firms in competition with other Westem firms
for markets in Romania.
The CCC has also played an important role in promoting U.S. exports to Romania.
Since 1970, the CCC credit program has financed $ 158.2 million worth of agricultural
commodities, primarily wheat, feed grains, and cotton. The availability of such credits
has thus also offered the United States an opportunity to gain a larger share of
Romania's agricultural market.
Market disruption
Despite increased United States-Romanian trade, it has not been necessary to employ
the safeguard provisions of the Trade Agreement which protect U.S. manufacturers
from disruptive imports. Because Romania has exhibited cooperation to resolve
potential problems, antidumping issues have been settled without formal action taken
by the U.S. Govemment against Romania.
Three instances illustrate Romania's willingness to prevent market disruptions. When
the importation of Romanian welt workshoes was questioned 2 years ago by the
International Trade Commission (ITC), Romania agreed to curtail its exports and
therefore was found not likely to injure U.S. industry.
In January 1977, Treasury determined that Romanian clear sheet glass was being sold
at less than fair market value. After receiving assurances from Romania that it would
limit its clear sheet glass exports, the ITC determined that there had not been, nor was
there likely to be, injury to U.S. manufacturers.
In the third case, Romania signed a bilateral agreement, effective January 1, 1977,
restraining Romanian exports of wool and manmade fiber textiles and apparel to the
United States.
Such cooperation has not only prevented potential problems but also demonstrated
that should conflicts arise in the future, both countries will be able to work together
effectively to resolve them.
Conclusion
Finally, to comment on the subject of emigration—perhaps the most sensitive aspect
of these hearings—we believe, that while Romania's emigration policies still need
370
1977 REPORT OF THE SECRETARY OF THE TREASURY
improvement, advancements have been made in recent years. Compared to pre-MFN
years, Romania's emigration performance is much better and no doubt will continue
to improve as our overall relationship grows.
To conclude. Treasury believes that as a result of the section 402 waiver, overall
United States-Romanian relations have improved. Both U.S. and Romanian trade have
benefited from the granting of MFN to Romania and availability of U.S. financing
programs. Romania has taken advantage of U.S. financial facilities and at the same time
exhibited an excellent record in cooperating to avoid market disruption.
In order to encourage Romania to continue its pursuit of a foreign policy independent
of Moscow; to foster the expansion of economic cooperation between our two
countries; and to provide the climate in which we can expect the Romanian
Government to continue to be responsive to our very deep interest in human rights, we
believe it is in our national interest to extend this waiver as recommended by the
President.
Exhibit 36.—Statement by Assistant Secretary Bergsten, July 27, 1977, before the
Subcommittee on Foreign Assistance of the Senate Committee on Foreign Relations,
entitled *'Administration Policy Toward the Overseas Private Investment Corporation (OPIC)"
The administration has completed a thorough review of OPIC. This review concluded
that OPIC can advance several important U.S. foreign economic policy objectives and
should be continued. It also was agreed that, with new program directions, OPIC could
play an even more important role in the future than it has in the past.
The administration concluded that three changes are needed in the emphasis of OPIC
programs to enable it to play such a role. First, OPIC should focus much more heavily
on the poorer developing countries (LDC's) which really need its assistance. Second,
OPIC should develop innovative, risk-reducing coverage for projects in energy and
other raw materials. Third, OPIC cannot successfully pursue its objectives and turn over
its entire insurance portfolio to the private sector by the end of 1980; thus, existing
legislation should be modified to ehminate the "privatization" objective.
North-South relations and OPIC
U.S. policy toward foreign direct investment in the LDC's, like our policy toward
other international economic relationships with these countries, must be seen in the
overall context of North-South relations as they stand today. It has become a
widespread view that, increasingly, the LDC's have been acting collectively and voting
as a bloc in international organizations. The Group of 77, a loose coalition of LDC
interests (comprising a voting block now substantially larger than the initial 77 LDC
members), has emerged within the U.N. framework. This group is calling for a new
international economic order (NIEO) to increase the share of LDC's in world output
and economic influence.
Investment aspects of the NIEO would include the following propositions:
•
•
•
•
Each state has the right to regulate and exercise authority over foreign
investment in its territory in accordance with its laws and national policies.
Multinational corporations (MNC's) should not intervene in the internal
affairs of a host country.
Each state has the right to nationalize, expropriate, or transfer ownership of
foreign property.
Compensation is to be paid by the expropriating state taking into account its
relevant laws and regulations and other circumstances that the state may
consider pertinent.
EXHIBITS
•
371
All investment controversies will be settled under the laws of the host state
and in its courts unless there is prior agreement that other peaceful means be
sought.
The rhetoric of the NIEO has thus been somewhat hostile to private investment.
However, the actual behavior of most individual members ofthe Group of 77 has been
much more moderate. The intense need for capital, technology, and managerial skills
has encouraged a pragmatic approach to foreign investment in most countries. The
growing ability of the developing countries to harness MNC's to their national
development objectives has reduced hostility toward the firms. In multilateral fora, the
ideological rhetoric of the U.N. Sixth Special Session has been moderated, and LDC
positions in the Conference on International Economic Cooperation and the U.N.
Commission on Transnational Corporations reflect a growing awareness that foreign
investors are not attracted by excessive verbal abuse.
Thus there is ample scope for the continued operation of foreign direct investment
throughout the developing world. Well-conceived OPIC programs can help support
such investment, if those programs are tailored to the realities ofthe latter 1970's and
early 1980's. The administration's objective is to recommend changes in OPIC which
would further that objective.
Privatization
At present, however, the legislative situation which authorizes OPIC is unstable.
Under the 1974 legislation, OPIC must progressively increase private participation in
its insurance functions with the aim of withdrawing completely from direct underwriting of inconvertibility and expropriation insurance by the end of 1979, and of war-risk
insurance by the end of 1980.
It is now clear that this withdrawal schedule cannot be met. OPIC has made heroic
efforts to increase private participation in its portfolio. Some increase in participation
has resulted, but success has been strictly limited and at the cost of diverting OPIC from
the fundamental objectives of its program. If this requirement is not changed, OPIC will
be gutted—and important U.S. policy objectives will lose a helpful policy tool.
OPIC witnesses have detailed their efforts to privatize. Let me simply repeat the
results: After 3 years of effort aimed at obtaining private participation, OPIC has
succeeded in interesting private insurance in only a very limited part of its portfolio and
has not succeeded at all in interesting them in insuring for catastrophic losses. There
is virtually no private willingness to insure land-based war risk, and private insurers will
accept no more than a 1-year renewable commitment in privatization activities. It is
thus unrealistic to expect the private insurers to fully replace OPIC's insurance
underwriting by the end of 1980.
Moreover, these efforts to obtain private participation have been costly to OPIC in
terms of management time. And, most importantly, efforts to obtain private
participation have undoubtedly affected OPIC's portfolio decisions. The portfolio
which maximizes OPIC's developmental impact is clearly not identical to the portfolio
which maximizes private participation. Private insurers are in business for profit, and
their interest in OPIC's portfolio is directly proportional to that portfolio's profitability.
Thus the pressure on OPIC to turn over its insurance to the private sector by 1981 has
led OPIC toward choosing less risky, more profitable, projects even when these are not
the best projects for developmental purposes. It is simply ludicrous that OPIC's past
management seriously considered insuring projects in developed countries such as
Kuwait, Hong Kong, Ireland, and Spain.
Yet this was the inevitable result of the mandate that OPIC privatize. The
administration believes that maximum emphasis should be placed on development,
consistent with OPIC's undertaking to be self-sufficient. The issues before the Congress
today are whether development in the poorer countries is in the national interest ofthe
United States, whether private direct investment promotes such development, and
whether OPIC promotes private direct investment. If the answers to these questions are
affirmative, then OPIC should be given new pohcy direction and a new lease on life.
372
1977 REPORT OF THE SECRETARY OF THE TREASURY
OPIC development policy
The administration believes that the answers to these questions are affirmative.
Private direct investment can play an important role in the economic development
process, particularly through—
Transfer of resources, and of managerial and administrative expertise;
The expansion of productive capacity and employment; and
Establishment of new export markets.
A major barrier to private direct investment is political risk. OPIC insurance pools
this risk and reduces it for the investor. This lowering of risk is an effective incentive
for investment. Thus projects which appear commercially unacceptable because of high
political risk may become profitable when the risk is reduced through insurance. Thus
OPIC insurance increases the total flow of U.S. private investment to LDC's.
OPIC-insured investment is most likely to be additional for projects in countries
where investors consider the political risk to be high. Since investors, whether rightly
or wrongly, tend to perceive higher political risk in the poorer LDC's, OPIC is more
likely to add additional investment in these countries than in richer LDC's. The
administration wants OPIC to assign higher priority in the future to the encouragement
of investment in the poorer countries.
Between 1966 and 1975, U.S. foreign direct investment in the developing countries
rose from $13.9 billion to $34.9 billion, an increase of 151 percent. This expansion is
roughly comparable to the 158-percent rise in U.S. investment in developed countries.
The bulk of this increase in U.S. investment, however, was concentrated in a few
countries. For example, Brazil ($3.7 billion) and Mexico ($1.8 billion) accounted for
$5.5 billion, or about 26 percent, ofthe total $21 billion increase. U.S. direct investment
in Brazil increased more than 400 percent, and in Mexico more than doubled, between
1966 and 1975. Countries such as these have demonstrated an increasing capability to
attract foreign investment on their own, and do not need a great deal of help from OPIC
or other programs in home countries of potential investors.
Relatively little U.S. investment went into other LDC's during this decade, however.
Those nations most in need of external resources received very little private direct
investment, measured as a percentage ofthe U.S. total—though some of them received
fairly important amounts relative to their own economies' needs.
In order to further focus OPIC's efforts, the administration has concluded that OPIC
programs should, pursuant to guidelines to be established by the OPIC Board, be
confined to the less developed countries, excluding the advanced or "upper middle
income" countries except for mineral and fuel projects approved by the Board and
exceptions recommended by the Secretary of State on national interest grounds. OPIC
should concentrate on the poorer countries, which are most in need of external resource
transfers and are least likely to receive investment inflows from the private sector on
their own. The program should not generally operate in the upper tier LDC's which are
quite able to attract private investment without outside assistance.
Energy and raw materials
A second new focus for the OPIC program recommended by the administration
relates to investments in energy and nonfuel raw materials, where additional investment
as a result of OPIC coverage is also higher since firms are now reluctant to invest in
this area without OPIC insurance. OPIC has already introduced a program to develop
innovative, risk-reducing coverage for new types of investments—joint ventures,
service contracts, and the like—in fuel projects in oil-importing LDC's and in minerals
projects. The administration recommends that OPIC continue, and expand, its use of
insurance and guarantees to promote U.S. investment in LDC fuel and nonfuel mineral
projects. This would enable it to pursue three important U.S. national objectives:
To avoid misallocation of important economic resources.
To diversify supply and contribute to a reduction in U.S. vulnerability to collusive
price arrangements and interruptions of supply, and
EXHIBITS
373
To help LDC's deal directly with their own energy needs, one ofthe major current
constraints on their development policies.
There is evidence of global misallocation of resources which, if continued, could
significantly increase the cost of raw materials over the long run. A recent World Bank
survey found that 80 percent of all exploration expenditures in 1970-73 were being
made in the industrialized countries—the United States, Canada, Australia, and South
Africa. Private firms are reluctant to invest in LDC's, primarily because of pohtical
risks. U.S. firms, for example, prefer to develop a copper deposit with less than onehalf percent richness in the United States than deposits which are more than twice as
rich in an LDC. Yet the rate of return in minerals projects in LDC's is twice as high
as in industrial countries (table 1). Indeed, for some Fourth World countries, minerals
projects may be the only good projects that external private investment could develop.
Private firms have already begun to demonstrate the feasibility of management
contracts, service contracts, and other nonequity arrangements in oil and mineral
projects. These approaches offer economic benefits to host countries and profitable
opportunities to American companies, and respond to the desire of many developing
country govemments to maintain sovereign control over their natural resources. OPIC
can play an important role in helping U.S. investors and host countries work out such
mutually acceptable arrangements. This will help reduce the tensions which have
diverted investment from the most economic sites. Also, by reducing the likelihood of
expropriation, it will help avoid the inevitable problems for U.S. policy which arise
when expropriations occur, including issues posed by the legal requirements of the
Hickenlooper and Gonzalez amendments and Section 502 of the Trade Act.
However, the dollar amounts of OPIC activity in this field would be small compared
with the capital requirements for most energy and raw materials projects. Thus some
means of leveraging OPIC's"involvement would need to be developed for it to have a
significant impact. In this connection, OPIC would seek to coordinate its efforts with
similar institutions in the 16 other countries in which they exist. This coordination
would also serve two other U.S. objectives:
To minimize the likelihood that host countries will renege on their end of
investment bargains, by maximizing the costs to them of doing so by increasing
the number of home countries which would be adversely affected.
To minimize fears of other materials-importing countries, in Westem Europe and
Japan, that the United States was unilaterally making "special deals" to outbid
them for potentially scarce raw materials.
The administration thus supports OPIC's efforts to develop risk-reducing coverage
for investments in raw materials in the developing countries, and believes that those
efforts should be expanded and intensified.
Conclusion
The administration believes that OPIC can, and should, serve two important policy
objectives of the United States: Development of the poorer countries, and increased
LDC production of energy and other raw materials. We believe that it can remain selfsustaining financially while doing so.
This approach is clearly not compatible with privatization of OPIC, as mandated
under current legislation. As noted at the outset of my testimony, however, privatization
proved to be impossible even when the program was aimed wholly at achieving that
objective. Hence, for policy as well as for practical reasons, we urge the Congress, in
framing new legislation for OPIC, to abandon the existing privatization mandates and
reaffirm instead the goal of development. With a clear mandate to this end, OPIC can
become a more useful instrument of U.S. policy toward foreign direct investment by
American firms.
73
m
*o
O
T A B L E 1.—Rates of return on U.S. foreign direct investment 1 9 6 7 - 7 5 i
73
1967
All countries
;
;
Developed countries
Mining and smelting
Petroleum
Manufacturing
Less developed countries
Mining and smelting
Petroleum
Manufacturing
N.A.—Not available.
»Adjusted eamings: Direct investment position (yearly average).
1968
1969
23.0
14.0
11.1
15.0
13.4
11.2
10.6
11.0
14.0
8.6
11.1
11.8
11.4
11
8.3
9.4
9.3
9.8
9.3
2.4
11.7
1975
17.5
ll.l
11.2
2.2
9.9
1974
12,6
10.3
.
1973
1971
Percent
11.6
10.0
24
87
1972
1970
H
o
7.7
N.A.
10.5
5.5
4.6
10.9
4.5
4.6
13.4
8.9
11.8
16.5
17 3
18.5
17.9
15.9
16.3
17.7
26.2
53.6
23.6
24.3
27.3
7.7
22.1
29.1
107
25.6
26.9
. 11.1
16.3
24.6
10.8
9.5
28.7
9.6
9.0
29.5
11.3
13.2
49.9
13.3
18.9
133.3
13.9
40.2
13.4
H
X
PI
m
o
?o
Pl
H
>
O
•fl
H
S
Pl
H
73
Pl
>
C/3
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73
EXHIBITS
375
Commodities and Natural Resources Policy
Exhibit 37.—Remarks by Secretary Blumenthal, May 4,1977, before the Japan Society
at the Hotel Waldorf Astoria, New York, N.Y., on the relationship of the United
States and Japan to the developing nations of the world
Ofthe many issues of common interest and concern to the United States and Japan,
I have chosen to speak this evening on a single issue which equally affects both
countries: our relationship to the developing nations of the world.
This relationship is central to the resolution of one of the most pressing problems of
the last quarter of this century—the economic, social, and political needs of the
developing nations, and the continuing tensions between "North" and "South" and
among the developed countries that flow from these needs and from the demands of
the poorer countries.
The United States and Japan share a major responsibility for responding to the
developing countries. They represent huge markets for the commodities and manufactured goods sold by the developing countries. Both countries are major sources of
extemal capital, both public and private, for developing nations. And both play major
roles in shaping the world economic system within which all nations must operate.
Without constructive policies by the United States and Japan, the needs of the
developing nations will not be met, however effective their own economic policies.
Their frustrations, and the tensions they engender, will multiply.
Before considering the whys and hows of our development policies, it is essential to
note the diversity which distinguishes the developing world ofthe 1970's. Brazil is not
India. Korea is not Bangladesh. Singapore is not Chad.
Indeed, there are at least two distinct sets of developing countries. The more
advanced, which have come to be known as the Third World, are rapidly becoming an
intemational middle class. Their per capita incomes are still quite low by our standards,
but are generally above $500 and now exceed $ 1,000 in many cases. They have some
modern manufacturing sectors, and indeed are effectively penetrating the markets of
the industrial countries in many product lines. Many have attractive deposits of raw
materials, and some are agriculturally self-sufficient. They have made the first major
leap toward effective development, by rising above grinding poverty and forming the
base from which sustained growth can proceed. Much of Latin America and the Middle
East, much of the Far East, and some of Southeast Asia falls into this category.
To be sure, these countries continue to face massive problems. But their economic
record is impressive—with growth rates that exceeded the targets of the First U.N.
Development Decade in the 1960's, strong trade gains including an average growth of
25 percent in their exports of manufactured goods, and a doubled share of world
industrial output within the last 10 or so years.
In sharp distinction to this relatively successful Third World is the Fourth World,
comprising 40 or so of the poorest nations on Earth. Most of South Asia and subSaharan Africa and scattered countries elsewhere belong to this group. These countries
with about a billion people have per capita incomes below $500, and frequently below
$200. In many of them, per capita incomes have been stagnant throughout this decade.
Some face seemingly insurmountable problems—an overwhelming press of population,
lack of the most basic economic infrastructure, rudimentary political systems,
overwhelming reliance on commodity exports—or even a single product and shortages
of indigenous talent.
These enormous problems of the Fourth World are among the most important
challenges which face mankind in the coming years.
It is crucial that the responses ofthe United States, and Japan and the other industrial
countries recognize the sharply different characteristics and needs of these two groups
of developing countries.
The Third World needs primarily access to our markets. It can afford to borrow on
commercial terms—but it needs access to private capital to finance its balance of
payments deficits. It can use our technology and management skills—but it needs access
to them on terms which are fair and respect its national sovereignties. It can earn much
of its way in the world by selling abroad the goods it produces—but it must have the
376
1977 REPORT OF THE SECRETARY OF THE TREASURY
opportunity to do so. It can continue to reap sizable earnings from its commodity
exports—but it needs more stable markets to avoid disrupting its development
programs.
The Third World needs the market-related lending of the World Bank and the
regional development banks. But it does not require concessional lending. It does not
need, nor would it even benefit from, other means of direct resource transfer:
• Generalized debt relief would almost certainly impede the access to private
capital it needs.
• International compacts which sought to prop commodity prices artificially
would erode longrun demand for its output.
• Links between international monetary creation and aid would lessen the
stability of the intemational monetary system.
In short, this new international middle class needs to be brought increasingly into the
international economic system which has served the industrial world well for 30 years.
Aid to the Fourth World, on the other hand, must still focus on foreign assistance
of all types: Capital, technical assistance, appropriate technology, and food aid. While
these countries can benefit from greater access to private capital markets and richcountry markets for manufactured goods, most of them are unable to take major
advantage of either.
I believe the United States must respond to these needs rapidly, generously,
effectively, and cooperatively. We must do so, first of all, for humanitarian reasons. Our
basic feelings as human beings and as Americans must impel us to help and to give new
hope to those who face lives of unremitting deprivation and suffering.
Second, our economic interests compel us to help both the Third and Fourth Worlds.
Those countries have already become markets for U.S. exports which account for 1 out
of every 15 American manufacturing jobs. Those countries supply us with critical
imports, including key industrial raw materials. Their sales to us of manufactured goods,
while sometimes raising adjustment problems which require direct governmental
response, contribute to lower prices for our consumers and help us fight inflation. These
countries are home to a quarter of our foreign direct investments and are major clients
of our private banks.
Third, our political and even security interests are deeply entwined with the future
of the developing world. In part, this is simply because the issues related to their
development are central to the developing countries themselves. They place these
matters at the top of their foreign policy agendas. If we do not respond, we thwart their
fundamental purposes and make any constructive relationship between us virtually
impossible.
Development will not necessarily avert tension and international conflict, but we
know that an absence of development will trigger frustrations which can only produce
conflict.
Thus the reasons for cooperation with the Third and Fourth Worlds are compelling.
They pose a challenge to the Uriited States and Japan, and indeed all who pride
themselves on membership in the "First World." They require both an urgent response
and a long-term commitment. They require both money and difficult adjustments and,
perhaps hardest of all, understanding and patience. They point to an essential area in
which the United States and Japan simply must cooperate to help construct an
international society in which we can both live comfortably now and in the years ahead.
But the specific policy responses of our two countries, and indeed of the entire
industrial world, must distinguish clearly between rhetoric and reality.
Some ofthe policy measures which are the focus of rhetoric both in our own countries
and in the developing nations themselves do not—to put it bluntly—address the
fundamental problems which I have outlined. The agenda for the North-South dialog,
as the formal discussions between the developing and industrial countries are called,
does not even include the most critical issues in the economic relationship between
these two sets of countries.
To be sure, the dialog includes some important matters—the quest for greater
stability in commodity prices, and increases in resource transfers through both bilateral
aid and the multilateral lending institutions.
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But what is much more important to the Third and Fourth Worlds, indeed the single
most important step we can take to help them, is the adoption of a policy of strong,
stable, noninflationary economic growth for our domestic economies. Every additional
percentage point of growth in the American economy generates about half a billion
dollars of additional demand for imports from nonoil developing countries. Every
additional percentage point of Japanese growth generates about $200 million of such
additional demand.
When unemployment is high, it becomes much more difficult to resist the inevitable
pressures to raise barriers to imports—especially to imports from "low wage" countries.
When budget deficits are high, because revenues are cut by low growth and
expenditures must be increased to generate more growth, it is harder to win public
support for foreign assistance programs.
A special responsibility for achieving strong growth in the developed countries rests
on the United States and Japan. We are not only the two largest economies in the nonCommunist world. Along with Germany, we are the strongest and most stable
economies with inflation rates that, though still too high, are well under control. And
we have extemal positions which permit us to undertake some degree of internal
expansion. The United States expects to meet its growth targets for 1977, and we hope
that Japan will meet its announced target of 6.7 percent economic growth and a current
account deficit of $700 million. Achievement of these targets is vitally important for
both countries.
Second, only to stable economic growth, in terms of its importance to the developing
countries, are our trade policies. The developing countries, particularly those of the
Third World, must have adequate access to the markets of the industrial nations. Few
if any of their economies provide sufficient scope for scales of production adequate to
develop truly efficient operations. Even the development of regional markets, which
we support, is seldom adequate for this purpose. Hence, they must export to achieve
the needed economies. The only alternative is import substitution, whose weaknesses
were amply demonstrated in earlier decades. But if developing countries are to adopt
the export-oriented strategies which have proven so successful in case after case, the
maintenance of open international markets must be assured.
To support this objective, the United States continues to reject restrictive solutions
to intemational trade problems. President Carter refused to adopt widespread controls
on the import of shoes, for example, an important part because the foreign exchange
eamings from shoe exports are so important to many developing countries. The United
States will maintain a trade policy which takes full account of the concerns of such
countries.
A third area of great importance to the outlook for development is the health of the
international monetary system. That system has been remarkably resilient, and
continues to underpin a dramatic growth in intemational trade and investme'nt—growth
which is of great benefit to developing, as well as industrial, nations. In all candor,
however, we must recognize that the monetary system now faces important problems:
The continued huge deficits forced on the non-OPEC countries, as a group, by the sharp
rise in oil prices, and the resultant sharp increase in the role played by private bank
lending in financing those deficits.
We are seeking to deal with these problems promptly and decisively. Our own energy
program will help reduce the imbalance between OPEC and the rest ofthe world. Our
own more rapid economic growth, and hopefully that of Japan and Germany as well,
will share out the OPEC-induced deficits in ways which permit more stable financing
patterns to energy. We support the stabilization efforts of deficit countries, both directly
and through the IMF, to the same end. And we strongly support the several efforts of
the IMF to assure adequate official balance of payments support, particularly through
the creation of the supplementary lending facility proposed recently by its Managing
Director. Such measures are needed to buttress and stabilize the private lending
networks.
But a sizable imbalance between oil exporters and importers will remain for years
to come. This imbalance hampers the development ofthe poorer countries because it
is they that have been hit hardest by the actions of OPEC.
Clearly, we must all move together toward resolving the fundamental problem of
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international payments balance if we are to deal effectively with all of the individual
economic problems which I am discussing tonight.
All of these steps relate indirectly, rather than directly, to the needs and desires of
the Third and Fourth Worlds. Yet it is our own firm conviction that they can, and must,
lie at the heart of North-South relations. For the South can progress only if economic
growth in the North is stable and dynamic; only if the North remains devoted to an open
world trading system; and only if the international monetary system, for which the
North continues to bear a primary responsibility, functions effectively. The United
States is committed to all of these objectives itself and will continue to work with Japan
and other like-minded industrial countries to fulfill those commitments.
In addition, there are many steps we can take to deal with economic issues that are
more specific to the developing countries and are on the North-South agenda in Paris
and elsewhere. The administration has indicated that it is openminded about the
possibility of negotiating international compacts for the purpose of stabilizing
commodity prices around market trends, and has already entered into such negotiations
on sugar. We are likewise openminded about agreeing on some kind of "common fund"
which will link the buffer stock financing mechanism of individual commodity
agreements, once such agreements are in place. We are seeking significant increases
in U.S. aid—a 30-percent rise in appropriations for fiscal year 1978. In December 1975,
the United States agreed with other IMF members to a sharp expansion of lending
through the IMF's compensatory finance facility to stabilize the export earnings ofthe
developing countries. In 1976 the facility extended credits totaling $2.7 billion, more
than in its entire 13 years of previous existence.
These measures are important arid we are working hard on all of them but they pale
in importance compared with the issues of growth, trade, and monetary stability on
which I have already focused.
In the effort for development, progress has been made, but much more remains to
be done. As we gird for the long haul, we should ask ourselves three questions. First
is the traditional question: Are we doing enough? But even more important may be the
second question: Are we doing the right things? And, perhaps of greatest importance
for the long rUn: What are we asking in return? I do not pretend to have full answers
to these questions tonight, but let me suggest themes which might underlie the
response—focusing on the relative roles of the United States and Japan today,
Trade is clearly one ofthe key areas where we need to do more, both quantitatively
and qualitatively. The United States now takes about 23 percent of all its imports from
non-OPEC developing countries. Over 20 percent of all its manufactured imports
comes from non-OPEC developing countries. And almost half of all U.S. imports from
non-OPEC developing countries consist of manufactured goods.
By contrast, Japan imports very little from the nonoil developing countries except
raw materials and food. Its imports of manufactured goods from them, which are
particularly critical for developing countries' growth, are extremely small. In 1976 they
totaled $2 billion, representing 9.2 percent of total Japanese imports from developing
countries. This in turn reflects the fact that only 13 percent of Japan's total imports are
manufactured goods, compared with 54 percent for the United States. Recognizing the
structural difference in the two economies, we believe that Japan can make a greater
contribution to helping expand the developing countries' sales of manufactured goods.
The current limits of Japan's demand for manufactured goods imports, coupled with
its own traditional strong export orientation, have produced sizable current account
surpluses for Japan in 8 of the last 10 years. These surpluses have two adverse effects
on the developing countries against the background of the OPEC surpluses: They
increase the size of the current account deficits which the developing countries must
run as a share of the total non-OPEC current account deficit. And they make it more
difficult for the developing countries to penetrate world markets.
Much attention has been paid in recent months to the contribution which elimination
of Japan's current account surpluses could make to improving Japan's relations with
the United States and other industrial nations. I would submit tonight that such a
development in Japan's payments position may be even more important for the future
outlook for the developing nations.
Japan needs to demonstrate to the world that it wants to increase imports—that it
recognizes the contribution which can be made to its own longrun welfare as well as
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to the world. Visible steps to create a more hospitable climate for imports would reduce
the risk of actions by other nations to limit imports from Japan. Such steps would reduce
the risks of worldwide protectionism.
It is clear that Japan shares our concern on this score. So we must move forward
together to assure vigorous growth in our economies, to accept our shares ofthe OPECinduced current account deficits, to avoid export surges which disrupt others' markets,
to provide markets for the products—especially the manufactured products—of the
developing countries. In addition, we must work together in the multilateral trade
negotiations to reduce trade barriers, especially barriers to sales by the developing
countries.
Beyond material help, Japan can provide a source of inspiration for the development
process. For postwar Japan is, after all, the most stunning economic development
success story of all time. Its per capita income rose from $200 in the early 1950's to
$4,900 in 1976, a level well above that of Britain or Italy.
It took masterful advantage of an open world market to develop economies of scale,
and to draw in capital and technology to fuel the tremendous talents and hard work
of its people. We in the rest of the world can be proud of our contribution to that
process, both by keeping our markets open for Japan and by bringing Japan increasingly
into the central councils of intemational economic management.
As we look to the future, similar sharing of rights and responsibilities will be
necessary. As countries graduate from the Third World to the First, they too must
accept the responsibilities which go with such a transition—opening of their own
markets, avoidance of misaligned exchange rates, assurance of foreign access to their
supplies of agricultural products and industrial raw materials, and provision of aid to
those who lag behind. It is not too soon to begin thinking of how its process should work,
as others emulate the brilliant success of Japan over the past quarter century.
By the year 2000, there can be many "new Japans"—if the United States, Japan, and
the other industrial countries adopt farsighted policies to permit and support this
transition. Today's Fourth World may not progress so far so fast, but it too can make
rapid gains if its own policies, and ours in response, are well conceived now.
Exhibit 38.—Statement by Deputy Assistant Secretary Junz, May 20, 1977, before the
Subcommittee on Oceanography of the House Committee on Merchant Marine and
Fisheries, regarding the Treasury's views on deep seabed mining legislation
I am very pleased to appear before you today to discuss the Treasury Department's
views on deep seabed mining legislation. Over the decades to come the wealth of
resources at the bottom of the sea will need to be employed productively if our
aspirations for increased standards of living worldwide are to be realized. Therefore,
it is vitally important that we provide an intemational and national climate that will
ensure that deep-sea resources are indeed developed productively, efficiently, and to
the benefit of the world community. The interest the Treasury Department has in the
current Law of the Sea negotiations is how they relate to the overall economic
objectives ofthe United States, as is the bill you wish to discuss with us today. I believe,
as I know Ambassador Richardson believes, that it is vitally important that the Congress
and the executive branch work together as closely as possible on these very difficult
and extremely complex issues.
I want, however, to say at the outset that I shall not be able to answer most of the
specific questions that you have raised in your invitation with regard to the probable
tax treatment of revenues and expenditures associated with deep-sea mining beyond
the national economic boundaries. These matters are currently under review, so that
more likely I shall take away with me more from our discussion today than I may be
able to give you. However, I look forward to future more balanced contacts with you,
and I want you to know that I and my staff at Treasury are prepared to provide whatever
assiistance we can to help you in your deliberations.
As I noted earlier. Treasury's interest in the Law of the Sea Conference is confined
to the areas of economic interest and, therefore, our attention has been focused largely
on the principles that would govern access to and exploitation of the deep seabed
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1977 REPORT OF THE SECRETARY OF THE TREASURY
resources. Earlier in these hearings. Ambassador Richardson explained the major
objectives the United States has in concluding a successful and equitable treaty on the
Law ofthe Sea. At that time, he expressed to you the whole range ofnational interests
that would be covered by such a treaty. I can, of course, comment only on the economic
concerns.
Treasury shares the committee's concern that there is a need to obtain a
comprehensive treaty which includes a stable legal framework for deep ocean mining.
Such a stable legal framework would create an investment climate that would allow
mining consortia to make rational decisions with regard to committing risk capital in
seabed mining.
In order to achieve such a stable framework the principle of assured access for seabed
mining firms must be a main element in any sound seabed mining regime. Such a regime
will encourage state and private firms to undertake the substantial economic risks of
exploring the seabed and of developing the new technology needed to eventually exploit
these new resources for the world market. The Treasury Department believes that
assured access to the seabeds for states and their nationals will lead to the most efficient
allocation of resources as well as the most rapid development ofthe seabed resources
to the ultimate benefit of both the United States and the world economy.
The administration believes that a successful seabeds negotiation within a comprehensive Law ofthe Sea treaty would promote the objectives mentioned above. We must
recognize, however, the distinct possibility that despite our best efforts and the efforts
of those countries which, like us, are sincerely seeking a reasonable treaty, it may not
be possible to conclude the negotiations successfully in a time frame which would allow
companies to maintain their current development schedule. And we recognize that the
ultimate effect of indefinite delay will likely be a loss in output of a potentially important
new industry, a loss of an innovative new technology, inflationary pressures resulting
from supply constraints in mineral production, and the loss to the developing countries
of the benefits we hope they will obtain from a viable seabed regime.
Despite these very real concerns and the difficulties inherent in the issues and
attitudes which confront us in the next session of the New York Conference, it is not
appropriate for the administration to support deep seabed mining legislation at the same
time that it sends Ambassador Richardson to the Law of the Sea Conference to
negotiate a comprehensive treaty. Indeed, support for legislation at this time might well
have a negative impact on the Conference.
However, should Ambassador Richardson's efforts meet with no meaningful
response, then the administration would have to reconsider its views on legislation
regulating the exploitation ofthe deep seabeds. In that case, we would be prepared to
discuss more fully our views on these issues.
Today, I would like to comment briefly on some of the major economic provisions
that have been put forward in legislative proposals. Given the uncertainties regarding
the negotiations, it is clear that any seabed legislation should be interim in nature and
be compatible with likely provisions that would be part of a future internationally
ratified ocean mining regime.
Investment protection
A major uncertainty for miners currently prepared to proceed with a seabed mining
venture is the risk that a future treaty or an International Seabed Authority might in
some way interfere with or change their established mode of operation. Such changes
might range from the imposition of onerous conditions to the actual shutdown of
operations. Industry sources have stated that the risks involved and the capital to be
committed are too great to allow them to go forward with major investments without
some kind of insurance or guarantee of their investment in the event a future treaty
makes operations uneconomic.
In this context, one could think of two basic types of investment protection: (1) An
investment guarantee program, and (2) provision of a basic right to sue the Federal
Government in the event adequate grandfather rights are not included in a treaty and
a firm's investment is thereby diminished in value.
While it is possible to reduce the U.S. Government liability under any such programs,
it could still be very large. For example, if full coverage were to be provided and we
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assume four operations are in place prior to the conclusion of a treaty, the potential
U.S. liability could amount to $2 billion in 1976 dollars. Even if the guarantee were
limited to prototype operations the Government's liability could reach approximately
$300 to $600 million in 1976 dollars. I do not think there is any point at this time in
entering into debates about what the actual costs to the taxpayer might be because these
would be purely notional.
In support of the Government's assuming liability, industry spokesmen have argued
that the Govemment incurs a responsibility if U.S. nationals are injured as a result of
activities entered into on the basis of official views on international law and/or
legislation. In essence, they argue that U.S. agreement to a treaty that impinges on prior
rights of U.S. investors should be accompanied by appropriate compensation.
While the Government, of course, will seek to protect the interests of U.S. investors
in any treaty, we do not feel that the risk that these investments may be impaired by
U.S. accession to a treaty obligates the Government to assume, in effect, part of the
overall investment risk by providing investment guarantees. Indeed, Government
decisions often dramatically affect an industry's profitability, yet there is no
concomitant obligation of the Govemment to compensate those firms which are
adversely affected. The administration has concluded that the situation ofthe deep-sea
mining consortia is not sufficiently unique to justify Government intervention in the
investment decision process; nor does it find that an economic case can be made, in
terms of our national interest, for providing the intemational mining consortia with
investment guarantees. It is clear the U.S. economy will ultimately benefit from the
existence of a viable and productive seabed mineral industry, but we fmd arguments
in favor of preferential treatment of seabed development neither convincing nor
equitable. Therefore, we could not support diversion of official financial resources into
increased seabed production and away from competing claims for Federal funds.
Because of these considerations. Treasury opposes the Govemment guarantees
provided in section 13 of H.R. 3350. Instead, Treasury proposes negotiation of a
grandfather clause in the treaty to ensure that seabed investments made prior to a treaty
are not impaired.
Negotiation of these rights would be facilitated if legislation anticipates various
aspects of an eventual treaty, such as the treaty provisions for benefits for the
intemational community. Therefore, Treasury recommends that any legislation
provide that some benefits for the intemational community be set aside pending
agreement on a treaty. This particular recommendation is based on three factors. First,
it allows firms to make investment decisions and operate in an investment climate
reasonably similar to that which would obtain after the conclusion of a treaty. Thus,
firms would not be faced with a reduction in profitability of their operations by a sudden
change in the conditions on which their investment decisions were based as a result of
U.S. accession to a treaty.
Second, it would signal to other nations that we fully intend to conclude a treaty
which protects the interest of all countries in the deep seabed and that our legislature
is aware and supportive of this effort.
Third, providing benefits for the international community has been a constant theme
of this Nation's oceans policy. The United States has repeatedly emphasized its
commitment to the principle of some type of revenue sharing from deep ocean mining.
This commitment to provide benefits for the intemational community is a recognition
of (a) the concept of the common heritage of mankind, and (b) the commitment to
help improve the standard of living in the developing world.
The administration is currently conducting an extensive review of how such sharing
might actually be realized. Consequently, I will limit my comments to a few general
observations. A first principle is that U.S. corporations engaging in seabed mining
should receive the same U.S. treatment and operate under the same obligations as do
corporations engaged in foreign land-based mining. This principle must govern any
revenue sharing arrangements. Second, revenue sharing obligations should, to the
maximum extent possible, be compatible with the legislative provisions other states are
likely to adopt.
With regard to revenue sharing, the Law ofthe Sea Conference is considering three
possible types of payment seabed miners might be obligated to make to the
International Seabed Authority: (1) Front-end fees, (2) fixed royalties, and (3) charges
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1977 REPORT OF THE SECRETARY OF THE TREASURY
(or taxes) oh net income. All of these charges would be linked to activities in the seabed
area beyond the limits of national jurisdiction. The front-end fees and fixed royalties
place a greater burden than a charge on net income of companies, as they require fixed
payments a;t the outset regardless of actual profitability.
Domestic legislation could provide for similar benefits to the international
community to be held in escrow and to be based on payments equivalent to fees, fixed
royalties, or taxes such as might eventually be authorized by a treaty. We are currently
considering both the best mix of these payments and the mechanics by which they might
be collected. We hope to develop a position in this respect in the next several weeks.
After the next session of the Law of the Sea Conference and further consultations
with the other prospective ocean mining countries, we will be in a better position to
work with Congress in developing an appropriate package of benefits for the
intemational community if we need to enact interim legislation.
Exhibit 39.—Remarks by Assistant Secretary Bergsten, June 27, 1977, Washington,
D . C , entitled ^'Commodity Agreements, Common Funding, Stabilization of Export
Earnings, and Investment in Commodity Production: The Policy of the Carter
Administration Toward International Commodity Issues"
Introduction
Since the Carter administration came into office 5 months ago, it has launched a
number of new initiatives in U.S. international commodity policy:
We have adopted a positive and open attitude toward the negotiation of individual
commodity agreements to stabilize prices around their market trends;
We have agreed in principle to the establishment of a common funding
arrangement to assist in the financing of buffer stocks as part of individual
commodity agreements;
We are seeking to use existing institutions, both national and international, to
expand world production of raw materials which may in the future be in short
supply;
We have indicated a willingness to study the options for further reducing the
variability of the export earnings of countries which rely heavily pn primary
products.
All of these issues are of particular importance to relations between the United States
and Latin America, as well as to our own domestic economy and to overall U.S. foreign
policy. I would like to lay out this morning a few details of that new policy and the
rationale behind it.
Both exporting and importing countries face important problems under the current
international regime for commodity trade. Excessive price fluctuations can ratchet up
inflation in importing countries, and destabilize economic development in exporting
countries. Unstable earnings from commodity exports can disrupt such development.
Inadequate investment in productive sources of raw materials has an inflationary effect
on the world economy over the longer run. The U.S. interest in improved international
arrangements for commodity trade is an important component of the overall
international economic policy of the United States under this administration.
The problems of commodity price instability
Commodity price instability has adverse effects on consuming countries. Larger
manufacturers and food processors, having some measure of control over prices, may
justify price hikes on the basis of temporary increases in the prices of raw materials
which they use in the production process, pushing up the consumer price index.
Increases iri consumer costs, in turn, provide justification for increased wage demands
which limit the reversal of the earlier price increases for manufactured and processed
goods once raw material prices have receded. The effect is a ratcheting-up of the
general price level. Temporary price increases for primary commodities can thus fuel
inflation in the U.S. economy.
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Once inflationary expectations have developed, partly as a result of such events,
additional demand for business inventories is generated through hedging and protective
stocking. Raw material prices are then forced up even further in a commodity-price
spiral.
Paradoxically, excessive price declines in the short run may also contribute to
inflation in importing countries in the longer run, by deterring investment in new
productive capacity at both the primary and processing stages. This can result in later
supply bottlenecks and upward surges in prices in response to increases in industrial
production.
From the standpoint of the United States, the primary purpose in pursuing
international commodity agreements is thus to reduce the risk of inflationary pressures
at home. President Carter referred explicitly to this objective in his anti-inflation
message of April 15. If we feel a commodity agreement contributes measurably to this
end, we will seriously consider signing it.
Commodity price instability can also adversely affect producing countries. There is
little doubt that volatile export eamings, which result from price instability, make it
more difficult to manage the economies of developing countries. A 1975 World Bank
study showed that 48 developing countries, 13 in Latin America, depend on 3 or fewer
commodities for over 50 percent of their total export earnings. The developing
countries themselves have argued in international forums, over the past several years,
that price instability can have adverse effects on their development.
Thus developing and developed countries alike have an interest in achieving greater
price stability in the commodity markets. The problem is to find and implement policies
which are effective in reducing price instability in a balanced fashion.
One such policy is international commodity agreements which stabilize price
fluctuations through the creation and use of internationally held buffer stocks. Buffer
stocks of sufficient size, by buying low and selling high, can work to stabilize prices
around market trends to the benefit of both consumers and producers. Both buyers and
sellers also gain from the fact that buffer stock arrangements help maintain production
at efficient levels when demand slackens sharply; this induces sustained investment in
commodity production, which helps insure adequate future supplies.
The developing countries fully recognize the advantages of international buffer
stocks, as evidenced by the prominence of such schemes in their proposals in the NorthSouth dialog and the efforts of producing countries for some commodities to organize
such schemes on their own. However, the emphasis and balance given to price
stabilization in those proposals are considerably less than we would desire. Indeed, they
often envisage income redistribution from the developed to the developing countries
as well as greater stabilization of markets, prices, and export earnings.
Our policy is to separate out and reject the category of measures designed to effect
income transfers through commodity arrangements. We oppose any measures whose
effect would be to raise prices, such as indexation. But we look positively, if
discriminatingly, at proposals which might achieve greater stability through cooperation between producing and consuming countries alike.
We believe that price stabilization agreements should operate to the maximum extent
possible through buffer stocks. Supply controls, by contrast, generally act to reduce
supplies and raise prices. Production controls can lock industry into inefficient patterns
of production, by forcing low-cost producers to cut back along with high-cost
producers. Use of either production controls or export quotas tends to freeze existing
production and market pattems, since they are usually allocated on the basis of some
past average of market shares and bar entry for efficient new producers.
Most of the buffer stock arrangements proposed by the UNCTAD Secretariat and
the producing countries rely heavily on supply controls as "backup measures." It is
argued that such measures will help assure that the buffer stock arrangement can defend
the floor price and will permit a smaller, less costly buffer stock. However, by limiting
the size of the buffer stock, they may also inhibit its ability to protect the ceiling. For
this reason, the United States recently submitted proposals for a new international sugar
agreement which would contain much more adequate stocking provisions than did
previous sugar agreements—which we remain hopeful can be worked out.
Indeed, production controls may actually increase price instability. When production
(and/or export) controls are relied upon to stem price declines, the buffer stock is often
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1977 REPORT OF THE SECRETARY OF THE TREASURY
unable to accumulate sufficient stock at the lower end ofthe range to defend the ceiling
once there is a resurgence of prices. If these measures force producers to cut back
output significantly, or drive out marginal producers, they may cause rapid price
rebounds and thus destabilize the very markets which they seek to stabilize.
This has in fact occurred occasionally with the Tin Agreement, the only buffer stock
arrangement which has functioned over a long period of time. It is also an important
reason why the Carter administration has decided to seek congressional approval for
a U.S. contribution to the Tin Agreement. We hope that by enlarging the tin buffer stock
we can make the Tin Agreement more effective in stabilizing prices and reduce its
reliance on export controls to defend floor prices. In short, larger buffer stocks are
clearly preferable to smaller buffer stocks from the standpoint of importing countries—
and therefore to the United States in many commodity agreements.
We recognize, however, that international buffer stock agreements are not
appropriate for every commodity. When international buffer stocks are not feasible,
but greater price stabilization appears desirable, the United States will consider export
quota arrangements which would promote national stocking to protect against high
prices and encourage investment through a flexible reallocation system. We are also
willing to consider internationally coordinated national stocks in cases where
international buffer stocks are not feasible; we have proposed such a system for sugar,
and are preparing a national stocking proposal for wheat.
In summary, U.S. policy with regard to individual commodity agreements is to—
Seek agreements which are effective in reducing inflationary pressures within our
own domestic economy and in other consuming countries.
Give priority consideration to buffer stocks as a price-stabilizing technique, where
they are technically feasible and where the price ofthe commodity is determined
in an open market.
Seek to provide sufficient financial resources, including through contributions by
consuming countries, to accumulate large enough buffer stocks to protect
agreed ceiling levels against price surges and floor levels against price declines.
Limit any use of export quotas in support of buffer stocks to extreme situations,
in order to allow the buffer stock to operate unencumbered within the price
range set by the agreement.
Where necessary, accept agreements implemented through export quotas where
production is maintained through holdings of national stocks which are made
available for export when prices rise.
Reject the use of production quotas in such agreements.
U.S. policy and the common fund
Commodity agreements of the type which we seek must be adequately financed, to
enable them to build buffer stocks of sufficient magnitude. Hence an issue closely
related to individual commodity agreements is the proposal to create a "common fund"
to provide financial support for such agreements. At last month's North-South
Conference in Paris, the United States agreed with other developed and developing
countries to the "establishment of a Common Fund with purposes, objectives and other
constituent elements to be further negotiated in UNCTAD." We support an
arrangement whose purpose would be to facilitate the financing ofthe buffer stocks by
(1) reducing the total cost of financing the several buffer stocks which may be
negotiated, and (2) providing some emergency financing in extreme situations when
the prices of most commodities are falling.
Financial savings can occur because commodities have differing trade cycles. Prices
may be high for some such as tin and coffee at present, while they are low for others
such as sugar and copper. As a result, the size, direction, and timing of the cash flows
required for the operation of individual buffer stocks would offset one another to some
extent, reducing the total funds required through the traditional pooling principle.
This administration, however, does not support the UNCTAD proposal for a $6
billion fund which would (1) be the principal source of financing for individual
commodity agreements, (2) financ^e measures other than buffer stocks, (3) have
considerable control over the operations of individual agreements, and (4) be
authorized to intervene directly in markets to buy commodities where no agreement
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exists. We reject the premise on which that proposal is based—that it is necessary to
put funding in place to permit the conclusion of international agreements on particular
commodities.
We are prepared to negotiate on the creation of a common fund at the same time
that individual commodity agreements are being negotiated. But we believe that
financial pooling can only be activated after individual agreements have come into
effect. In our view, it is the technical and political difficulty of negotiating effective
commodity agreements—not inadequate fmancialsupport for buffer stocks—which is
the primary barrier to progress in this area.
Furthermore, we reject any notion of a common fund which would get into a host
of income transfer activities and could be used to raise prices above long-term market
trends. Any such scheme would run counter to our own fundamental objectives, be
inordinately expensive, require continual replenishment, duplicate a number of the
functions of existing international institutions, and disrupt markets. The UNCTAD
proposal would clearly not be in the U.S. economic interest, and thus we will not support
it.
Within the U.S. Govemment, and through discussions at the first negotiating session
in Geneva, in March, we have begun laying out a set of principles or requirements for
the type of common fund which we can support in future negotiations:
• The arrangements must be financially viable.
• Its financial activities must apply only to buffer stocks, not to other
commodity-related activities.
• It should facilitate the financing of individual agreements by providing savings
over separately financed buffer stocks.
• Each member agreement must retain exclusive authority over all matters
relating directly to the commodity it covers, including questions of financing.
Stabilization of export earnings
Price stabilization of individual commodities through intemational agreements will
normally help stabilize the export earnings of producing countries. Yet we know that
such agreements will tum out to be feasible for only a handful of commodities, perhaps
six or seven. And even the exporting countries which benefit from such stabilization
might simultaneously be affected adversely by temporary declines in earnings from
their other exports due to factors beyond their control.
Thus there is a need for additional measures to help developing countries, which rely
heavily on commodity exports, tb avoid the disruption to their development plans which
such instability can cause. Just as we will support price-stabilizing commodity
agreements primarily because of their contribution to fighting inflation in the United
States and other importing countries, we will support effective means of stabilizing the
export earnings of producing countries primarily to help stabilize development in those
countries.
We believe that the compensatory financing facility (CFF) of the International
Monetary Fund is the most effective institutional device for promoting export earnings
stabilization. The CFF makes loans to countries in balance of payments need during
periods of temporary export earnings shortfalls. By compensating for export earnings
shortfalls which occur from factors beyond these countries' control, the activities ofthe
CFF can enhance the possibihty of negotiating more economically rational, balanced
buffer stock schemes. This is because producing countries will more readily accept
price ranges adequate to permit prices to perform their proper allocative function when
they can turn to an earnings stabilization fund in addition to the commodity agreement
itself. Compensatory fmancing also reduces reliance on supply controls in buffer stock
agreements to maintain floor prices, thus avoiding the economic distortions such
controls may bring about.
In an effort to provide additional access to IMF resources for members experiencing
balance of payments difficulties related to commodity trade, the CFF was substantially
liberalized in late 1975. The technique for calculating compensable export earnings
shortfalls was modified to take fuller account ofthe impact of inflation on export trends.
The amount that could be borrowed in a 12-month period was doubled, to 50 percent
of the member's quota, and the level of loans which a country could have outstanding
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1977 R E P O R T O F T H E SECRETARY O F T H E TREASURY
from the facility was raised to 75 percent of quota. Procedures were changed to permit
more timely financing.
As a result of these changes, and the sharp fall in commodity prices in late 1974-75
from their peaks in 1973 and early 1974, loans from the facility have risen sharply. Last
year they amounted to about $2.6 billion. This level of lending was more than double
the total financing provided in the previous 13-year history ofthe CFF, and is more than
five times the amount that would have been possible without the liberalization.
In recent intemational discussions, there have been proposals to further liberalize the
CFF through—
Another expansion of the quota limits, or their total elimination.
Basing claims on shortfalls in aggregate commodity export earnings rather than
total export earnings.
Basing compensation on the real value of export earnings; i.e., taking account of
changes in import prices paid by commodity exporters.
Eliminating the requirement that a country have a balance of payments need to
be eligible to borrow.
In its latest review of the CFF, however, the IMF Executive Board decided to make
no further structural changes at the present time. This reflected recognition that the
current provisions have been in force for less than a full commodity cycle and that it
is therefore premature to determine what, if any, changes may be warranted.
Furthermore, many ofthe proposals would be inconsistent with the monetary character
of the IMF and could result in an excessive drain on its limited resources. In our view,
the current arrangement is functioning well and is capable of meeting export earnings
stabilization needs as and when they arise. Should further modifications prove
necessary, we would be prepared to consider possible steps to assure that the IMF
facility operates effectively to meet such needs.
There are other compensatory financing options which have been proposed to deal
with LDC commodity concerns. The most ambitious approach would be a global
eamings stabilization scheme modeled after the STABEX scheme of the European
Community, which now provides limited stabilization of export eamings for 52
countries ofthe African, Caribbean, and Pacific regions for 11 agricultural commodities and iron ore. Under the present scheme, the European Community makes loans
to these countries—grants in the case ofthe least developed—when their earnings from
any one ofthe 12 commodities drop below the average of the previous 4 years by more
than 7.5 percent (2.5 percent in the case ofthe least developed, landlocked, or island
states).
A number of proposals have been suggested by the European Community itself and
by individual European governments to expand STABEX to developing countries in all
regions, including Latin America, and to cover a wider list of commodities.
We have agreed to further consider problems of the stabilization of export earnings
of developing countries. However, we see no need to take further steps in this area until
there is a clear demonstration that the liberalized CFF is inadequate. Indeed, it is our
view that an effective earnings stabilization scheme is now in place, and that this
particular aspect of the international commodity problem is well in hand.
Investment in commodity production
Any comprehensive commodity policy must include steps to assure the adequacy of
long-term supply. We are concerned over possible future shortages, and temporary
bottlenecks as a result of lagging investment, leading to sharp increases in prices during
future periods of industrial country expansion.
In addition, there is a real risk of misallocation of investment in the nonfuel minerals
industries due to fears, real or imagined, of political risk in developing countries. The
vast bulk of world investment in this sector is now going into a handful of developed
countries, even when the quality (and profitability) of their mineral deposits is
decidedly inferior to deposits in developing countries. If present investment trends
continue, mineral prices by the mid-1980's will be higher than necessary, supply sources
in developing countries will become less secure, and developing countries will face
lower export volumes and smaller export earnings with which to finance their
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development plans. We believe that investment policy initiatives are thus required to
promote more efficient allocation of investment in mineral production.
The proposal ofthe previous U.S. administration for an International Resources Bank
(IRB) sought to deal with this problem by promoting the negotiation of fair and
equitable contract provisions, and by providing insurance against contract default by
host countries. The Carter administration, however, is looking to existing institutions,
at both the international and national level, to do the job.
One such institution is the World Bank. It is a multipurpose institution and, therefore,
has more leverage to reduce the political risks associated with investment in industrial
raw materials. In addition, the IBRD is able to weigh a particular resources project in
the context of overall development programs. We thus favor World Bank participation
in energy and raw material projects with private investors. Indeed, the hope was
expressed at the London summit meeting in May that the Bank will give special
emphasis to projects which will expand domestic energy production in oil-importing
developing countries, and a recommendation to this effect was approved at the recently
concluded Conference on International Economic Cooperation in Paris.
The World Bank group already participates in nonfuel raw materials projects. The
Bank itself lends funds for infrastructure development related to raw material projects.
Its presence during early stages of contract negotiations, and knowledge of its likely
participation in the development phase of a project, is already helping in a few cases
to reduce uncertainties over whether the contract terms would be fulfllled as agreed
by both the host country and the foreign company. Furthermore, the International
Finance Corporation (IFC) can take equity participation in projects. Such tripartite
approaches on natural resource projects, involving the international development
banks, could help to avoid friction between private investors and host governments—
and thereby enhance the prospects for increased levels of efficient production of
industrial raw materials in the future.
We would also like to see the regional development banks expand their efforts to
develop energy and raw materials projects. At the recent annual meeting ofthe Board
of Governors of the Inter-American Development Bank in Guatemala, Secretary
Blumenthal proposed that the IDB devote some of its resources to projects in this area
which would meet the internal demands of Latin American countries, particularly the
poorer nations, and possibly increase exports of those countries as well.
Finally our own Overseas Private Investment Corporation (OPIC), along with its
counterpart investment insurance institutions in other industrialized countries, can aid
in reducing political risk through greater involvement in raw materials projects. OPIC
has already begun a program of innovative, risk-reducing coverage for such projects,
and both OPIC management and the administration testified last week in an effort to
win congressional support for that objective.
Conclusion
The United States is pursuing a comprehensive program to deal with the international
commodity problem, as seen by both industrialized and developing countries. We seek
to do so through cooperative means by which both sets of countries will agree upon,
and subsequently implement, a series of efforts together.
Our program includes international commodity agreements, preferably operated
through international buffer stocks of sufficient magnitude, to stabilize the prices of
particular products around their market trends. It includes a common fund to facilitate
financing of those agreements. It encompasses the compensatory financing facility at
the IMF to help stabilize export earnings of exporting countries, and a willingness to
consider additional measures to that end if further steps appear necessary. It envisages
new efforts, by both the multilateral development banks and through cooperative
efforts of the several national investment insurance agencies, to expand production of
industrial raw materials in the developing countries.
We believe that this program will promote the interests of all countries. It should help
reduce world inflation, in both the short run and the longer run, and thereby contribute
to more stable growth and lower rates of unemployment. It can reduce balance of
payments difficulties, particularly for the poorer countries and for industrialized
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importing nations as well. As a result, it can alleviate the political frictions which
otherwise may well arise among three sets of countries—between producers and
consuniers, among producers, and among consumers—as they scramble to enhance
their market positions at the expense of others. We believe our effort can promote joint
gains for all the nations of the world, including those in Latin America, and hope that
it will do so in the months and years ahead.
Exhibit 40.—Statement by Deputy Assistant Secretary Junz, September 19,1977, before
the Senate Committee on Commerce, Science, and Transportation, and the
Subcommittee on Public Lands and Resources of the Senate Committee on Energy
and Natural Resources, regarding Treasury's views on deep seabed mining and tax
policy
I am very pleased to appear before you today to discuss the Treasury Department's
views on deep seabed mining legislation. We feel, however, that the timing of our
discussions is somewhat unfortunate. As you know, since the end ofthe last session of
the Law of the Sea (LOS) Conference, the executive branch has undertaken a full
review of our posture towards the Law of the Sea Conference, including also the
question of legislation. The LOS review will carefully balance advantages against
disadvantages over the full range of our interests in this area in order to arrive at
decisions that protect them adequately. While this review will still take several weeks
to complete, we expect to have a decision on legislation in a matter of days and certainly
before this bill goes to markup. Therefore, we may have to defer comments on certain
features of this legislation until that time.
You know, from previous testimonies on these matters, that the administration feels
that the wealth of resources at the bottom of the sea must not be left to lie idle. Indeed,
we feel that if our aspirations for increased standards of living worldwide are to be
realized, we will need to employ productively the world's resources wherever they are
to be found.
Therefore, it is vitally important that we provide an international and national climate
that will ensure that deep-sea resources are developed productively, efficiently, and to
the benefit of the world community. The interest of the Treasury Department in the
current Law of the Sea negotiations is related to the overall economic goals of the
United States, as is the bill you are asking me to comment on.
A legal regime to preserve U.S. economic interests
In the negotiations. Treasury's attention has been focused largely on the principles
that would govern access to and exploitation of the deep seabed resources. We share
the committee's concern that a stable, legal framework for deep ocean mining is
needed. Without such a framework, mining consortia would be unable to make rational
decisions with regard to committing risk capital in seabed mining.
A prerequisite for any stable, legal framework is the principle of assured access for
seabed mining firms. Uncertainty with regard to the terms of access can—and, indeed,
should—discourage state and private entities from assuming the substantial economic
risks of exploring the seabed and of developing the new technology needed to
eventually exploit these new resources for the world market. The Treasury Department
believes that assured access to the seabeds for states and their nationals will lead to the
most efficient allocation of resources as well as the most rapid development of the
seabed resources to the ultimate benefits of both the United States and the world
economy.
The administration has hoped that an appropriate framework for the productive
exploitation of deep seabed resources would be provided by a Law of the Sea treaty.
As you know, we have not yet been able to achieve acceptable treaty provisions on this
point.
In a press conference following the last Law of the Sea session. Ambassador
Richardson pointed out the major defects in the text dealing with the economic
management of the seabed resources—the so-called Engo Text—and the process used
to draft it. In the view of the administration, the Engo Text, produced in private and
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never discussed with a representative group of participating nations, was fundamentally
unacceptable because it not only failed to provide for assured access, but would make
deep seabed mining basically uneconomic. But even the Evensen Texts, negotiated
during the Conference and set aside by the Chairman in favor ofthe Engo Text, would
have required a considerable amount of further negotiation to assure that national and
private enterprises could commit their resources and energies with the prudence
dictated by their responsibilities to their taxpayers and stockholders.
While today's technology points only to the existence of nodules, there is no telling
what hes ahead in the future. But even with only today's promise, we simply cannot
agree to a regime that would unnecessarily inhibit, and perhaps even prevent, deep
seabed development. To do so would make a mockery ofthe principle ofthe Common
Heritage of Mankind and shut off altogether, or reduce to a pitiful trickle, the benefits
that could otherwise accrue to mankind as a whole, but in particular to the developing
countries.
Mr. Chairman, for some number of months now, we have been engaged in a dialog
with the developing countries on their proposals for a new intemational economic order
by which they would achieve participation in world economic affairs on an equal footing
with developed countries. And the shaping of an economic regime for the deep seabed
forms part of this dialog. It is clear that any new international institution, ifit is to work,
must reflect the realities of the evolving international system. But one of the realities
of our system is that we cannot force the commitment of private capital resources or
the transfer of the fruits of private research and patent rights. Governmental actions
can facilitate such flows, but finally they must be induced by the economic realities.
Therefore, any international institutions we create for the deep seabed must represent
a true accommodation of the interests of both developing and developed countries if,
indeed, it is to help tap the resources of the deep seabed to the benefit of mankind.
What happened at the Sixth Session is therefore particularly disappointing. We were
prepared to agree to a compromise which would produce maximum benefits to be
shared with the poorer countries while at the same time opening up the opportunity
for the developing world itself to participate in the effort. Such a compromise would
have been a major achievement not only for the benefits to be attained from resource
exploitation as such, but also as a precedent for future world institutions and the
evolution of our international economic relations. Because of both the great
importance and the complexity of the whole range of issues pertaining to the
establishment ofa viable ocean mining regime and a productive seabed mining industry,
we believe it is vitally important that the Congress and the executive branch work
together as closely as possible on these issues.
U.S. legislation
With respect to the substance of deep seabed mining legislation. Ambassador
Richardson and officials of several agencies have on various occasions informed
Members of Congress ofthe administration's views. It is clear from the bills now before
the Congress that considerable understanding has been shown for the administration's
concerns, and I would like to express my appreciation for this. I am confident it augurs
well for continuing cooperative efforts on these matters in the future.
May I briefly review the main elements of administration policy before I turn to a
discussion of the bill before us. In our view, legislation—
Should be interim in nature, and eventually superseded by a treaty;
Should contain provisions for harmonizing U.S. regulations with those of
reciprocating states;
Should provide for environmental protection, sound resource management, and
the safety of life and property at sea;
Should provide that seabed mining by U.S. companies produces financial benefits
for the international community;
Should not be site specific with regard to licensing;
Should not require that processing plants be located in the United States;
Should not offer U.S. mining companies financial protection against adverse
effects of a treaty concluded subsequent to the passage of legislation and the
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commitment of expenditures by those companies; and
Should assure that all provisions of the legislation leave undisturbed the concept
of freedom of the high seas.
As I indicated a moment ago, some of these views coincide with provisions contained
in S. 2053. First, this bill clearly is designed to be interim legislation pending the entry
into force of an international agreement. Second, it contains provisions designed to
prevent conflict with designated reciprocating states engaged in deep seabed mining.
Third, it provides for environmental safeguards and the means to assure timely action
to avoid and avert damage to the ocean atmosphere, although, in our view,
strengthening of enforcement provisions is needed. Finally, there is provision made for
sharing the proceeds of deep seabed mining with the international community.
On the other hand, some provisions of S. 2053 are of concern to the administration.
Among these, the provisions on tax treatment and investment guarantees are of special
concern to Treasury and I would like to comment on these in some detail.
Tax policy
As a general proposition, the administration agrees with the concept that there should
be no tax discrimination between U.S. deep seabed mining and U.S. domestic mining.
However, while this concept can be stated simply, deep seabed mining does raise a
number of complex tax issues, and we believe that the tax provisions in S. 2053 are in
need of further refinement in order to take explicit account of these questions.
Among these questions is the treatment of deep seabed mining activities under
present tax law, with respect to depletion allowances, asset depreciation range (ADR),
the investmerit tax credit, mining exploration expenses, and payments to special funds
for possible transfer to the international community. At this point, I would like to
summarize briefly how present tax laws operate with respect to these particular areas.
Under the principle of domestic treatment, deep seabed mining conducted by a U.S.
individual pr corporation would be subject to U.S. tax. However, this mining activity,
under present law, would not be accorded ADR treatment at a class life of 20 percent
shorter than the normal guideline life; nor would the investment tax credit be available,
because these incentives generally are limited to fixed assets physically located in the
United States.
Exploration expenses, which currently may be deducted if incurred with respect to
mineral deposits located in the United States, must be capitalized and recovered
through depletion when the deposits are located outside the United States. Finally,
percentage depletion, if available at all, would be at the rates prescribed for foreign
mineral deposits (14 percent for manganese, nickel, copper, and cobalt), rather than
at the higher rates for domestic deposits (22 percent for manganese, nickel, and cobalt
and 15 percent for copper). In this connection, it should be noted that under present
law, depletion is allowed only if the taxpayer has an "economic interest" in the minerals
in place. Although the concept of an "economic interest" is not well delineated in the
law, it is something akin to an ownership right in the minerals prior to extraction.
Because there are no clear ownership rights to deposits in the deep seabed, it is not likely
that under present laws deep seabed mining would have the requisite economic interest
to qualify for depletion allowances. With this background, it is apparent that
nondiscriminatory domestic tax treatment for deep seabed mining cannot be achieved
without additional tax legislation.
Further, the definition of U.S. citizenship in this bill can lead, under varying
circumstances, to inequities in tax treatment. For example, as we read section 6( 15),
a "U.S. citizen" is defined to include a foreign corporation or other foreign entity if
"controlled" by a single U.S. individual or other U.S. legal entity. Putting aside the
troublesome omission of a standard for determining control, this provision can lead to
double taxation or tax avoidance. For example, if control were to be defined as a 51percent interest, a joint venture incorporated in France "controlled" by a U.S.
corporation could be a "U.S. citizen" subject to full U.S. tax under this bill. As a French
corporation, the joint venture would also be legitimately subject to French taxation.
Hence, double taxation could result.
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Conversely, if the U.S. corporation did not "control" the joint venture, since it
owned, say, only 49 percent, then the United States would have no tax jurisdiction. If
a "U.S. citizen" incorporates such a joint venture in a tax haven area, for example in
the Bahamas, it would escape all tax. Under the provisions of the bill, which requires
control by a single U.S. entity, two U.S. corporations each owning one-third interest
in a Bahamian corporation also would escape all U.S. tax liability.
The administration believes that a policy based on the following principles would
avoid both double taxation and tax avoidance:
• U.S. entities that engage directly or indirectly in deep seabed mining ventures,
on their own or jointly with non-U.S. entities, should be treated for U.S. tax
purposes as if they were engaged in land-based ventures in the United States.
• Non-U.S. entities, that either mine on their own or participate with U.S.
entities in deep seabed mining, should not be subject to U.S. taxation.
• The tax treatment for payments to an international seabed authority or to an
escrow fund held by the U.S. Govemment should be the same as that accorded
domestic land-based miriing ventures for payments of royalties. Thus, such
payments would either be (1) deductible, or (2) capitalized and recovered
through depletion.
Treasury has already furnished the House Merchant Marine and Fisheries Committee
with a short paper on "Tax Policy Considerations Affecting Ocean Mining." I have
attached a copy of this paper as an Appendix to my testimony.
Remaining issues on which Treasury is continuing to work center on the mechanics
for implementing nondiscriminatory domestic tax treatment for deep seabed miners
according to the principles set out above. In the coming months. Treasury will be
conferring with the committees responsible for ocean mining legislation as well as with
the House Ways and Means Committee and the Senate Finance Committee in order
to work out the necessary legislation to implement the administration's ocean mining
tax policy.
Investment guarantees
Although the administration believes strongly in the desirability of developing the
mineral resources of the seabed, an investment guarantee program for such activities
is both undesirable and unnecessary in our view.
Investment guarantees are undesirable because they imply an obligation on the part
of the Government to indemnify firms for possible adverse consequences of
Govemment policies. But it is a fact of life that Govemment decisions often affect an
industry's profitability dramatically. The claim made for seabed mining in favor of
Government guarantees is that it is in a unique situation because the conclusion of a
treaty may alter its profit calculations profoundly. However, the administration has
concluded that the situation of deep seabed mining consortia is not sufficiently unique
to justify institution of a new guarantee program.
Investment guarantee programs currently in place cover certain domestic and foreign
land-based mineral operations of U.S. corporations. For example, the Overseas Private
Investment Corporation (OPIC) has programs to insure foreign investments in the
minerals industries in developing countries. These programs are now being reviewed,
and as Assistant Secretary Bergsten stated earlier this year, we are now proposing that
OPIC should develop new "risk-reducing coverage for projects in energy and other raw
materials." It would be possible to consider whether there is a role for OPIC in seabed
mining, but to the extent that we are recommending domestic tax treatment for such
operations, it is not clear that OPIC activities indeed could be extended to include
seabed mining activities without raising questions about the equity of treatment of
domestic versus foreign investment under Federal laws. Certain domestic programs
reflect national interests either with respect to the specific industry—for example,
energy—or to a class of investors such as small business. In our view, seabed mining
consortia do not qualify under these counts.
There is no overall national strategic interest sufficient to justify governmental action
to reduce risks that are similar in type to those encountered by both domestic and
foreign investors engaged in mineral exploitation. Governmental and nongovernmental
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groups have conducted several studies of the market for the minerals to be obtained
from the seabed and our strategic need for them. These studies have shown that the
adequacy of supply is reasonably assured. In the absence of a compelling national
interest, the industry ought to compete on equitable terms with land-based producers.
I want to point out that the investment guarantee portion of the proposed legislation
is based on two presumptions: ( I ) That the U.S. Government will negotiate and the
Senate will ratify a treaty under which the terms of operation for firms could be
arbitrarily and adversely affected; and (2) that if an equitable treaty were accepted, the
United States will be unable to prevent later adverse actions through its representation
in the seabed authority's governing body.
We think these premises are incorrect. As you know, this administration has
consistently opposed treaty texts that would subject miners' operations to capricious
or onerous regulation. In fact, the President's Special Representative, Ambassador
Richardson, has denounced the current draft text as "fundamentally unacceptable" to
the United States for just such reasons. Also, we expect the Congress to look askance
at any treaty that significantly diminishes the value of investments of U.S. firms in the
deep seabed. Moreover, the United States will continue to oppose provisions of
governance which fail to give the United States and other ocean-mining countries a
major voice in the decisionmaking councils of an International Seabed Authority.
The second point we want to make with regard to the investment guarantees
proposed in this bill is that we consider them to be unnecessary. The lending climate
for major investments has changed in recent years. Partly in response to the tumultuous
conditions of the early seventies, banks are no longer willing to make loans solely on
the merits of specific projects. They now require that specific investments be fully
backed by the corporations undertaking them. Hence, the testimony you may be
hearing argues correctly that banks will not fund projects without corporate guarantees,
but this increasingly applies across the board and not solely to seabed mining.
Consultations with major U.S. banks, and with other financial agencies in
Washington, lead the Treasury to conclude that funds are available for deep seabed
mining operations without Government guarantees if firms are willing to assume the
risk. The decision whether the reportedly rich returns from seabed mining justify
investment in this new area—under license by the U.S. Government with assurances
that the Government will do all it can to protect mining interests—is a decision which
we firmly believe is best left to the companies themselves. If the anticipated returns
justify the risk, the investments will take place. If not, the capital will be put to more
productive uses elsewhere.
In conclusion, it is clear that the U.S. economy will ultimately benefit from the
existence of a viable and productive seabed mining industry. But we find arguments in
favor of preferential treatment of seabed development neither convincing nor
equitable. Therefore, we could not support diversion of official financial resources into
seabed production and away from competing claims for Federal funds.
Other economic policy considerations
Treasury is in complete agreement with legislative provisions that would provide
benefits for the international community through the establishment of an escrow
account. (S. 2053, section 204 and H.R. 3350, section 203.) Permitting the
administration time to submit a specific revenue sharing proposal after the date of
enactment is a particularly helpful provision in these bills. This will give the United
States time to work out the necessary details and to consult with other prospective
ocean-mining countries and reciprocating states. Thus, the administration will be able
to develop a revenue sharing system that will assure that U.S. firms are not put at a
competitive disadvantage with the miners of other countries.
With regard to provisions in these bills that require license holders to locate
processing plants in the United States (S. 2053, section 102 and H.R. 3350, section
103), the administration believes that such a provision should not be a requirement for
receiving a U.S. license. By allowing processing plants to be located at the most
economical sites, the viability of the ocean mining industry will be increased, and the
benefits of ocean mining will be more widespread as will be support for such activities.
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For example, countries where processing plants are located would be giving implicit
recognition to the fact that U.S. miners are engaged in a legitimate use ofthe high seas.
Thank you for this opportunity to discuss our views on U.S. ocean mining policy with
you. My staff and I will be pleased to make available to you what help we can during
the coming months.
APPENDIX
TAX POLICY CONSIDERATIONS AFFECTING DEEP SEABED MINING
Background
Five multinational consortia (four ofwhich are led by U.S. companies) are currently
investigating the economic and technological feasibility of mining deep seabed
manganese nodules containing approximately 1.5 percent nickel, 1.3 percent copper,
.25 percent cobalt, and 24.2 percent manganese. There is thus a need to determine the
nature of U.S. tax treatment of deep seabed mining.
Deep seabed mining is juridically unlike most other economic activities. Extraction
of nodules will take place in an area which is not subject to thejurisdiction of any nation.
On the other hand, all but one of the U.S.-led consortia plan to transport the nodules
in chartered vessels to shore for processing. One consortium plans to process at sea
beyond national jurisdiction.
While many countries—in particular, developing countries—claim the deep seabed
is "common property" and cannot be exploited until an intemational regime for this
purpose is agreed, the United States and other developed countries maintain it belongs
to no one and can be exploited under customary intemational law providing for
freedom to use the high seas. The United States is, nevertheless, prepared to agree to
the establishment of an intemational regime and organization (International Seabed
Authority) for the administration of deep seabed mining. We are not, however,
prepared to agree to Authority ownership of or sovereignty over deep seabed minerals.
The nature of the international regime and organization for the deep seabed is
currently under discussion in the third U.N. Conference on Law ofthe Sea (LOS). It
is probable that any agreed regime will provide, inter alia, for (i) contracts between the
Authority and private entities sponsored by states to mine specific deep seabed areas,
and (ii) certain payments by these entities to the Authority (financial arrangements)
in recognition of the economic interest of all countries in deep seabed development.
The current draft treaty texts before the Conference provide potentially for four
types of payments from private entities to the Authority:
1.
Payments in kind, upon obtaining from the Authority a contract to mine the
seabed; i.e., banking by the contractor of mining sites for the Authority's
operating arm, the Enterprise.
2. Fee payable on the award of a contract to mine the deep seabed.
3. Royalty based on percentage of value of minerals extracted by the seabed
miner.
4. Taxes on the revenues of contractors derived from their activities in the deep
seabed.
The U.S. proposal on this subject dated June 3, 1977, provides for (i) banking, (ii)
a small fee (not to exceed $500,000), and (iii) profitsharing (15-20 percent of net
proceeds depending on retum on investment) or royalties (10 percent of the imputed
value ofthe minerals at the mine site; the mine value is calculated as 20 percent ofthe
fair market value of the processed metals).
In addition to the LOS Conference discussions, three House committees (Merchant
Marine and Fisheries, Interior and Insular Affairs, and International Relations) are
considering three bills (H.R. 3350/4582 [Murphy-Breaux], H.R. 6784 [McCloskey],
and H.R. 3652 [Eraser] ) which would authorize seabed mining by private entities
pending agreement on an international regime. Only H.R. 6784 (McCloskey) provides
for international payments and deals as such with U.S. tax treatment. It authorizes a
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1977 REPORT OF THE SECRETARY OF THE TREASURY
deep seabed resource development revenue sharing fund to which payments would be
made in escrow for the international community pending agreement on a treaty, and
states such payments shall be considered as payments to a foreign government and
credited against U.S. income taxes. For its part, the administration has indicated that
any U.S. legislation should provide for some payments into escrow for the benefit of
the international community.
Issues
(1) What is the appropriate U.S. tax treatment of deep seabed mining ventures
undertaken by a U.S. entity?
(2) What should be the U.S. tax treatment of payments by U.S. entities to an
International Seabed Authority and/or to a U.S. Government escrow fund for such an
Authority pending its establishment?
Conclusion
U.S. entities that engage in deep seabed mining ventures should be treated for U.S.
tax purposes as if they were engaged in land-based mining ventures in the United States.
Non-U.S. entities, who mine either on their own or in partnership with U.S. entities,
should not be subject to U.S. taxation on this activity to the extent it is undertaken at
sea. Payments to an International Seabed Authority or to a United States Govemment
escrow fund will be either (1) deductible from U.S. gross income; or (2) capitalized
and recovered through depletion. The tax treatment will be the same as that accorded
domestic land-based mining ventures on payments of a similar nature.
Discussion
The policy objective is to assure economic equality of U.S. tax treatment of U.S.
entities as between deep seabed and land-based mining of the minerals concemed.
Meeting this objective in tum involves consideration of whether the economic equality
should be with (i) mining by U.S. entities in the United States, or (ii) mining by U.S.
entities in a foreign country. The entire venture might be considered a purely
"domestic" investment since none of the investment is located within the jurisdiction
of another sovereign nation; or the venture might be considered a "foreign" investment
to the extent located outside the geographic area ofthe United States. (See attachment
A for a quantified comparison of these two treatments.)
The tax treatment of an ocean mining venture will vary somewhat depending on its
treatment as domestic or foreign. The principal differences currently are the rate of
percentage depletion allowed, the availability of ADR (asset depreciation range)
depreciation and the investment tax credit, and the deductibility of mine exploration
expenditures.
The rate of percentage depletion allowed for foreign mineral deposits of manganese,
nickel, copper, and cobalt is 14 percent. The percentage depletion rates in the case of
U.S. deposits are 22 percent for manganese, nickel, and cobalt, and 15 percent for
copper. ADR depreciation at a class life 20 percent shorter than the guideline life and
the investment tax credit are generally limited to fixed assets located in the United
States. Finally, mine exploration expenditures may be deducted currently if incurred
with respect to deposits located in the United States, but generally must be capitalized
and recovered through depletion when incurred with respect to mineral deposits
located outside the United States. In all other principal respects the tax treatment of
domestic and foreign hard mineral mining operations is the same.
As a matter of tax policy, the choice between "domestic" or "foreign" treatment is
relatively simple: Any investment by a U.S. resident should be treated as "domestic"
so long as it is not located within the taxing jurisdiction of a foreign government. This
classification of investment by a U.S. resident is consistent with national income
accounting concepts. Moreover, inasmuch as worldwide income of U.S. residents is
subject to U.S. income tax, treating deep seabed mining operations as "foreign"
needlessly creates income "source" issues when no other sovereign taxing jurisdiction
is involved.
EXHIBITS
395
Although treatment of ocean mining ventures undertaken by a U.S. company as
purely domestic will require certain amendments to the Code, such treatment is
consistent with the tax treatment accorded analogous situations. The investment tax
credit is available for communications satellite and transoceanic cable equipment
(Code sections 48(a)(2)(B)(viii) and (ix) ), and for certain property used in ocean
mining ventures located in the international waters of the northern portion of the
Western Hemisphere (Code section 48(a)(2)(B)(x) ). Income from transoceanic cable
or telegraph transmission operations is deemed from U.S. sources to the extent such
transmissions originate in the United States, and income from communication satellites
would presumably be treated in a similar manner. Finally, tax reform proposals related
to international shipping are not inconsistent with domestic tax treatment of ocean
mining ventures. Proposals to treat international shipping income as U.S. source to the
midpoint ofeach voyage is roughly the same as treating all outbound traffic as domestic
and all inbound as foreign.
On the other hand, from the international point of view, such U.S. tax treatment must
make clear that it in no way implies an assertion of U.S. jurisdiction over the deep
seabed. Amendments to the Internal Revenue Code providing for such treatment
should apply only to U.S. persons and not to non-U.S. persons. In particular, no attempt
should be made to tax the deep seabed mining income of non-U.S. persons who are
members of U.S.-led consortia engaged in deep seabed mining. Such non-U.S. persons,
of course, would continue to be subject to U.S. tax on income arising from their
activities in the United States; e.g., income from processing in the United States. Details
of this policy, such as the taxation of U.S.-controlled foreign corporations or the leasing
of equipment to non-U.S. persons, would need to be worked out in a specific legislative
proposal.
The only disadvantage of domestic treatment from the U.S. companies' point of view
is the unavailability of potential tax credits against U.S. tax for certain ofthe payments
made to the Authority either directly or in escrow. The fourth category of payments
to the Authority (listed above) could be structured so as to be economically similar to
income taxes payable to a foreign state with respect to revenues derived from activities
within its jurisdiction. Some would argue that such payments should qualify for a foreign
tax credit as if these payments were income taxes paid to a foreign government.
The issue of domestic or foreign tax treatment aside, granting a foreign tax credit for
payments to the Authority is undesirable. On the one hand, there has been increasing
concern about granting credit for payments which are not truly income taxes, especially
in the case of payment by oil companies to governments which not only impose the tax
but also own the oil. This has been reflected in recent rules and legislation, and the tests
for a creditable tax are being more stringently applied than ever. And, on the other
hand, to be creditable the income tax must be paid to a foreign government. Payments
to the International Seabed Authority would not be creditable because it is not a foreign
country endowed with sovereign taxing powers. To endow it with sovereignty would
be contrary to both our national security and economic interests. To endow such an
international body with sovereign taxing power would be an extraordinary precedent
and would encourage the Authority to exercise the monopoly power thus bestowed on
it.
While treating deep seabed mining ventures as "foreign" might result in a "revenue
gain" from limiting percentage depletion and denying the investment tax credit and the
shorter depreciation life, foreign treatment would constitute an unwarranted bias
against certain forms of investment of U.S. capital (assuming that access to seabed
minerals is assured) and may buttress the arguments of those desiring to invest the
International Seabed Authority with "tax sovereignty." Accordingly, deep seabed
mining ventures undertaken by U.S. companies should be treated for tax purposes in
a manner identical to domestic land-based mining ventures.
Imports of seabed materials
If the seabed mining is defined as a domestic activity, then consistent trade policy
would dictate that the products from that activity should be treated as domestic
production and exempt from any duties or other import restrictions. Currently the
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1977 REPORT OF THE SECRETARY OF THE TREASURY
duties applied to imports a r e relatively low and vary according to t h e material i m p o r t e d ;
e.g., specific o r e , metal, or mixed ores.
T o assure that these seabed materials are defined as domestic, the tariff schedule
would have to be a m e n d e d to specifically define materials from the seabed as e x e m p t
from duties. This e x e m p t i o n would be similar to the t r e a t m e n t now extended to fish
landed by A m e r i c a n fishermen. U n d e r p r e s e n t law, it is not m a n d a t o r y that materials
be t r a n s p o r t e d in U.S. vessels.
ATTACHMENT A
Quantification of Differences in Tax Treatment of Ocean Mining Ventures
F r o m t h e point of view of a U.S. v e n t u r e r , we may c o m p u t e the value of " d o m e s t i c "
tax t r e a t m e n t as an a m o u n t the v e n t u r e r would be willing to pay for that t r e a t m e n t
rather t h a n " f o r e i g n . " It is also an a m o u n t available to him to pay for a " l i c e n s e " to
m i n e , either as a " b o n u s " or " r o y a l t y " p e r ton of material removed.
T o rnake such calculations, s o m e specification of expenditures related to t h e mining,
t r a n s p o r t a t i o n , and processing is required. For this p u r p o s e , we rely o n a publication
of t h e O c e a n Mining Administration of t h e D e p a r t m e n t of the Interior which
summarizes t h e fragmentary information on this as yet speculative activity.» Based o n
the published " m e d i u m " cost estimates for a venture which would supply 3 million t o n s
of nodules p e r year to b e processed into nickel, c o p p e r , and cobalt,2 and adding t h e
cost of an a l t e m a t i v e site to be provided gratis to the DS A as is presently c o n t e m p l a t e d ,
we c o m p u t e d the p r e s e n t value of t h e m i n i m u m gross i n c o m e from the sale of t h e
aforementioned metals which would b e required to yield the venturer a 15-percent r a t e
of r e t u r n after taxes u n d e r two regimes: ( 1 ) T h e entire project is regarded as
" d o m e s t i c " ; ( 2 ) the sea-based mining activity is " f o r e i g n . " T h e n , based o n these two
calculations, we may c o m p u t e t h e m a x i m u m " a d d i t i o n a l t a k e " of D S A if that agency
is a c c o r d e d sovereign taxing status. 3
If the entire project is t r e a t e d as d o m e s t i c , the present value of the " r e q u i r e d " total
sales over t h e estimated 20-year p r o d u c t i v e life of the project would b e just over $ 8 3 0
million. Of this total value of p r o d u c t , 35 p e r c e n t would be a d d e d by mining, 9 p e r c e n t
by transportation, and 56 p e r c e n t by o n s h o r e processing. * If sales values o f t h e minerals
finally sold, as projected by the aforementioned publication, are used as a reference
point, t h e venturer would b e willing t o pay t h e D S A u p to $ 1 6 million (in addition to
the aforementioned alternative site) for t h e license to mine. Alternatively, the venturer
would be willing to pay $3.85 per ton of nodules r e m o v e d , when removed.5
In contrast, if the sea-mining o p e r a t i o n is treated as " f o r e i g n , " the loss of t h e
investment credit with respect to t h a t investment, along with somewhat slower
depreciation and a p e r c e n t a g e depletion rate of only 14 p e r c e n t rather t h a n t h e
weighted average 19 p e r c e n t for " d o m e s t i c " mining o f t h e same minerals, increases t h e
" r e q u i r e d " total sales t o $ 8 5 5 million, which is $25 million m o r e t h a n u n d e r " d o m e s t i c "
tax t r e a t m e n t . Given the s a m e projected mineral prices, the venturer could only pay
up to $3 million for the license, or a royalty of only a b o u t 75 cents per ton of nodules,
when r e m o v e d . While the overall difference b e t w e e n " d o m e s t i c " and " f o r e i g n "
t r e a t m e n t is not large—a m e r e 3-percent increase in " r e q u i r e d " gross sales income—
it is an 80 p e r c e n t r e d u c t i o n in the v e n t u r e r ' s m a x i m u m biddable b o n u s or royalty,
u n d e r t h e assumed conditions of this example. This must always be t r u e , because t h e
< Rebecca L. Wright, "Ocean Mining: An Economic Evaluation"; May 1976.
2 According to Wright, technology for the extraction of manganese in useful form is still not well-enough defmed to permit
cost speciflcations of the onshore processing. Moreover, she considers that manganese processing may usefully be considered as
processing "tailings" of the nickel-copper-cobalt process. Ibid, Appendix A.
3The published data were organized simply to permit computation of an internal rate of return. For our purposes, and to
facilitate reasonably accurate representation of the critical tax terms, it was necessary to reorganize the basic information. Miss
Barbara Lloyd, who had performed the original computations, kindly provided us with disaggregation of investment and operating
costs, by site. Fortunately, the cost specifications treat transportation as independently provided, not as an integrated operation
of the venturer. This is fitting, for ownership and operation of the transport vessels are of no consequence to the economics of
the project nor its alternative tax treatments.
4 Addition of manganese processing would greatly increase the onshore value-added share. Neither the mining nor transport
activities depend on the extent of onshore processing of nodules.
5 The computation of maximum "bonus" takes into account that the payment will become a part of the venturer's "depletion"
basis whereas the payments of royalties will simply be reductions of gross income for U.S. tax purposes as production occurs.
397
EXHIBITS
rental value of the seabed will always be a tiny fraction of the total value of mineral
product. 6
Finally, if "foreign" tax treatment by the United States is to be accompanied by DSA
"taxing power," the U.S. foreign tax wedge may be taken by the DSA without
discouraging the venturer. This foreign tax wedge is equal to at least $75 million, in
present value terms. If this amount is expressed as additional royalty per ton of nodules,
it adds $9.20 to the $0.75 royalty per ton otherwise payable to DSA under "foreign"
tax treatment only. Alternatively, it affords the venturer the possibility of paying an
additional $39 million bonus.
These calculations may be summarized as follows:
Maximum DSA " t a k e " *
expressed as—
Bonus
Royalty
Completely " d o m e s t i c "
"Foreign" (at sea)
With "creditable" DSA " t a x "
Million
$16
3
42
Per ton
$3.85
.75
9.95
* Assumes the Wright projections of nickel, copper, and cobalt prices and projects costs allow a 15-percent
after-tax rate of retum to the venturer.
International Monetary Affairs
Exhibit 41.—Communique of the Interim Committee of the Board of Governors of the
International Monetary Fund on the International Monetary System, October 2,
1976, issued after its sixth meeting in Manila, Philippines
1. The Interim Committee of the Board of Govemors of the Intemational Monetary
Fund held its sixth meeting in Manila, the Philippines, on October 2, 1976 under the
chairmanship of Mr. Willy De Clercq, Minister of Finance of Belgium. Mr. H. Johannes
Witteveen, Managing Director ofthe Fund, participated in the meeting. The following
observers attended during the Committee's discussions: G. D. Arsenis, New York
Office, UNCTAD; Henri Konan Bedie, Chairman, Development Committee; Wilhelm
Haferkamp, Vice President in charge of Economic and Financial Affairs, CEC; Rene
Larre, General Manager, BIS; E. van Lennep, Secretary-General, OECD; F. Leutwiler,
President, National Bank of Switzerland; Olivier Long, Director General, GATT; and
Robert S. McNamara, President, IBRD.
2. The Committee discussed the world economic outlook and the functioning ofthe
international adjustment process.
The Committee welcomed the economic recovery that has been under way for the
last year. It expressed continued concern, however, about persistently high levels of
unemployment and high rates of infiation in many countries. The Committee beheves
that in present circumstances the restoration of a reasonable degree of price stability
will be necessary to establish the basis for sustained economic growth and the reduction
of unemployment. Accordingly, the Committee is of the view that pohcies in the
industrial countries at the present time should give priority to the reduction of price
and cost infiation. This would require fiscal and monetary policies in these countries
that would provide effective control over the expansion of aggregate demand in a
manner compatible with this objective, even where price and incomes policies are in
effect.
* At best, estimates of the mineral content of the nodules are not expected to be much over 3 percent for copper, nickel, and
>
cobalt, all of which are found ashore in ores which are less expensively processed. Clearly, the price of minerals will trace the
marginal cost of production, and this will ineviubly basically consist in the cost of extraction, transportation, and processing. Only
the slight differences in metal content of nodules and ores will give rise to rents for the higher content mineral sources, and these
rents will be small relative to total value added.
SOTE.—The reader is cautioned not to take the numerical values in the text seriously. Given the insubstantial character of the
cost estimates, along with the implicit assumptions about ultimate mineral recovery, the IS percent discount rate is clearly too
low to be applied to an estimated income stream stretching 26 years into the future (6 years' start-up, 20 years' production). Had
the high cost estimates been used, the projected income stream would have been insufficient to justify making the commitment,
without any lease bonus or royalty, to yield a 1 S-percent return. The sole purpose ofthe numerical results is to provide an indication
of the relative magnitudes.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
The Committee further agreed that, given the constraint under which demand
management policies in the industrial countries must operate, special efforts, including
the reduction in the barriers to trade in the negotiations now under way, to improve
market access to the exports of developing countries, and to increase the flow of
development assistance, would be indicated.
With respect to the international adjustment process, the Committee reached the
following conclusions:
(a) As a result of the recovery in the world economy, exports are rising in many
countries and the international environment has become much more favorable for the
adjustment of external payments positions. The Committee believes that such
adjustment, which should be symmetrical as between deficit and surplus countries, is
now both urgent and opportune.
(b) To this end, deficit countries should arrange their domestic policies so as to
restrain domestic demand and to permit the shift of resources to the external sector,
to the extent necessary to bring the deficit on current account in line with a sustainable
flow of capital imports and aid.
(c) Industrial countries in strong payments positions should ensure continued
adequate expansion in domestic demand, within the limits set by effective antiinflationary policies.
(d) Exchange rates should be allowed to play their proper role in the adjustment
process.
(e) In the context ofthe use ofthe Fund's resources, adjustment by deficit countries
can be promoted by a larger use of the credit tranches and the extended Fund facility.
3. The Committee noted that, in accordance with the agreement incorporated in
the provisions of the Proposed Second Amendment, the Fund will have the obligation
to exercise firm surveillance over the exchange rate policies of members. The Executive
Directors should consider how this function is to be exercised and should report to the
Committee on this subject.
4. The Committee noted the section of the Annual Report of the Executive
Directors dealing with developments in international liquidity. In accordance with its
terms of reference, the Committee requested the Executive Directors to keep all
aspects of international liquidity under review and to report to it at a later meeting.
5. The Committee reviewed, on the basis of a report by the Executive Directors,
the financial activities of the Fund, including developments in the Fund's policies on
the use of its resources and in the liquidity of the Fund. The Committee noted the
unprecedented expansion in the use of the Fund's resources by members in order to
finance their balance of payments deficits and agreed that, even if all reasonable efforts
toward adjustment were made, there might still be a need for large use of the Fund's
resources in the near future. The Committee shared the view ofthe Executive Directors
that greater emphasis should be placed on the adjustment by members of imbalances
in their payments positions and that the use ofthe Fund's resources should present the
Fund with the opportunity to promote the use by members of the kind of adjustment
measures that are most conducive to the interest of all. The Committee noted the
actions taken by the Executive Directors with regard to the Trust Fund and welcomed
their intention to keep the compensatory financing and buffer stock facilities under
review.
6. The Committee endorsed the conclusions of the Executive Directors on the state
ofthe Fund's liquidity. The Committee urged that, pursuant to the resolution on quota
increases adopted by the Board of Governors last March, all members that have not
yet done so should make the necessary arrangements for the use of their currencies in
the operations and transactions of the Fund in accordance with its policies. It was
agreed that the Fund's liquidity should be kept under close review. The Committee
stressed the fact that prompt adoption of the Proposed Second Amendment of the
Articles and the subsequent completion ofthe steps necessary for quota increases under
the Sixth General Review would provide the most effective way of improving the
liquidity of the Fund.
7. The Committee noted that the Executive Directors will initiate in the near future
the Seventh General Review of Quotas so that it can be concluded, as planned, in
February 1978.
EXHIBITS
399
8. The Committee noted the report of the Executive Directors regarding the
progress made by members in connection with their acceptance ofthe Proposed Second
Amendment ofthe Fund's Articles. In view ofthe importance that the entry into force
of the amended Articles will have for the functioning of the international monetary
system, the Committee urged all members that had not yet notified the Fund of their
acceptance ofthe second amendment to complete as soon as possible the arrangements
that would permit them to take this action.
9. The Committee agreed to hold its eighth meeting in Washington, D.C. on April
28 and 29, 1977.
Exhibit 42.—Statement by Secretary Simon as Governor for the United States, October
5,1976, at the joint annual meetings of the Boards of Governors of the International
Monetary Fund and the International Bank for Reconstruction and Development
and its affiliates, Manila, Philippines
Once again, it is a distinct honor for me to address this distinguished body. We are
fortunate to meet in this beautiful land, a nation known for its traditions of warm
hospitality and a nation with which the United States has long maintained the strongest
of ties and the warmest of friendships.
There is an old Chinese saying, eloquent in its simplicity, which merely says: "May
you live in interesting times." Without a doubt, we who are gathered here today have
lived through some very interesting times together. The period since I joined the U.S.
Treasury nearly 4 years ago has been one of extreme tension, even danger, in
international economic affairs. Repeated shocks threatened the traditions of cooperation that are the foundation of world trade and investment, as well as general stability.
Differences among nations over principles and objectives brought our ability to
preserve a free and open international trade and investment system.
We have witnessed the development of an inflationary virus stubbornly resistant to
our attempted remedies; we have experienced an oil embargo and price increases that
disrupted the world economy; and we have lived through the deepest international
recession of the postwar era.
We have done much to meet these challenges—but even more remains to be done.
Today I would hke to discuss both the progress we have made iand the challenges we
still face.
One ofthe characteristics that marked this troubled period was a growing recognition
of our mutual interdependence. More than ever before, people around the world began
to understand that the economy is at the heart of the body politic and that every shock
it receives will ultimately be felt in terms of social and political—as well as economic—
instability. The result of this new understanding has been that, despite all ofthe divisive
economic pressures unleashed on the international scene in the last 4 years,
international cooperation has not broken down and indeed, in one important area,
major reform has been achieved—the first comprehensive reform of the international
monetary system since Bretton Woods.
The international economic system is now truly universal, involving all countries,
large and small. Between 1950 and 1975, the level of trade among market economies
increased from $50 billion to $800 billion. This dramatic expansion of the world
economy has coincided with the creation of scores of new nations and new centers of
economic power. The price and supply of energy, the conditions of trade and
investment, the expansion of world food production, the technological base for
economic development are today the shared concern of every nation. And it is clear
to me that we will either move forward with trust and cooperation or we face the dangers
of retreating into economic instability and nationalistic conflict.
So far, we have followed the correct course of cooperation. And much of our progress
is the result of the efforts of the men and women gathered here today. Speaking for
myself, I am grateful for the chance that has been mine to serve with you—on behalf
of my Government but also on behalf of the ideals we all share—during this period of
reexamination and searching. I am also grateful for the education afforded me over the
past 4 years—for both the many lessons learned willingly and the few learned not so
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1977 REPORT OF THE SECRETARY OF THE TREASURY
willingly. But, above all, I am thankful for the high rewards of personal c o n t a c t a n d
friendship with you, my colleagues, and for the sense of genuine a c c o m p l i s h m e n t t h a t
has grown o u t of o u r work together.
This brings m e to the w o r k that r e m a i n s to be d o n e ; the task before us is a fourfold
one:
W e m u s t restore a n d maintain e c o n o m i c stability in o u r domestic e c o n o m i e s ;
W e m u s t m a k e t h e reformed international m o n e t a r y system work;
W e m u s t tackle with increased c o u r a g e a n d understanding t h e difficult p r o b l e m s
of d e v e l o p m e n t ; a n d
W e m u s t c o n t i n u e to work for a free a n d o p e n world t r a d e and investment o r d e r
that is essential to a shared prosperity to all.
As we w o r k together to achieve international e c o n o m i c progress e a c h nation m u s t
follow responsible d o m e s t i c policies to avoid disrupting both its own e c o n o m y a n d
inevitably those of o t h e r countries. Because of its size, this is particularly true of t h e
U.S. e c o n o m y . Following t h e most severe e c o n o m i c recession of the postwar era, t h e
United States is now I 1/2 years into a healthy and balanced e c o n o m i c expansion. If
erratic shifts and excesses of g o v e r n m e n t actions are avoided, this expansion will
continue well b e y o n d 1976, although the rate of growth will naturally t e n d to m o d e r a t e .
T h e strength of the c u r r e n t expansion that began in the spring of 1975 is indicated
by t h e increase in real o u t p u t of goods a n d services which has averaged 7 p e r c e n t during
the last four quarters. T h e rate of inflation, as m e a s u r e d by t h e G N P price deflator, has
d r o p p e d from a p e a k of o v e r 12 p e r c e n t in 1974 to t h e 5- to 6-percent zone t h r o u g h o u t
1976. E m p l o y m e n t is at a record level of 88 million w o r k e r s , and 4 million new j o b s
have b e e n c r e a t e d since t h e u p t u r n in t h e e c o n o m y , although the u n e m p l o y m e n t r a t e
remains far t o o high reflecting the lagged effect of the recession and t h e extraordinary
surge of new workers into t h e labor force. Despite t h e wide fluctuations in quarterly
statistics, it is clear that a healthy expansion can be c o n t i n u e d if policies focus o n t h e
longer t e r m goals of r e d u c i n g b o t h inflation and u n e m p l o y m e n t .
As e x p e c t e d , personal c o n s u m p t i o n has provided the basic thrust for the growth
t h r o u g h o u t t h e c u r r e n t recovery. Business spending did n o t a c c e l e r a t e as quickly as
originally anticipated, b u t outlays for plant and e q u i p m e n t now a p p e a r to be improving
and inventory buying is u p to expectations. G o v e r n m e n t spending at all levels s e e m s
to be b e t t e r controlled, and the strength of export sales has c o n t i n u e d , although imports
are now rising m o r e rapidly. This has resulted in a swing in o u r b a l a n c e of trade from
a massive surplus in 1975 t o a substantial deficit in 1976. T h e United States views this
shift with equanimity b e c a u s e we recognize t h a t it reflects the sharp increase in imports
that has o c c u r r e d as o u r e c o n o m y has moved from recession to expansion. This
adjustment is a p r o p e r reaction to changing e c o n o m i c conditions that t h e international
m o n e t a r y system can h a n d l e well if we d o not seek to offset the effect of natural m a r k e t
forces.
T h e recovery to date has remained well balanced. It was never anticipated t h a t
specific sectors o f t h e e c o n o m y — s u c h as automobiles or housing—would d o m i n a t e t h e
recovery, although sales of domestic cars have b e e n s o m e w h a t stronger than e x p e c t e d ,
which partly explains t h e a c c e l e r a t e d p a c e of spending early in the year. N o r h a v e
widespread capacity constraints or severe raw material shortages a p p e a r e d at this stage
of t h e recovery.
Best of all, fiscal and m o n e t a r y policies have been carefully m o n i t o r e d to prevent t h e
excesses t h a t led t o r e n e w e d overheating of the e c o n o m y following the t e m p o r a r y
benefits of faster growth.
While m a n y called for m o r e G o v e r n m e n t spending and significantly faster expansion
of the m o n e y supply in 1975 and even this year, the President strongly resisted. As a
result, the recovery has p r o c e e d e d to this point without building u p excessive d e m a n d
pressures for increased o u t p u t or fiscal and m o n e t a r y policies which would lead
inevitably t o a repetition o f t h e familiar boom-and-recession s e q u e n c e . This unfortunate p a t t e r n could be r e p e a t e d , of c o u r s e , if unwise policy adjustments are m a d e to t u r n
the e c o n o m y toward excessive n e a r - t e r m growth. But this negative result can b e
avoided if responsible policies are followed. W e fully intend to guard against a r e t u r n
to the stop-and-go policies that have disrupted the U.S. e c o n o m y in the past.
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Looking to the future, we expect the economic expansion in the United States will
continue in 1977, but at a somewhat reduced pace. This is a proper pattern because
continuation of the rate of output gains in the 6- to 7-percent zone over an extended
period of time would inevitably overheat the U.S. economy, once again leading to a new
round of inflation, followed soon afterwards by recession and unemployment. Output
gains in 1977 should be in the 5- to 6-percent zone as output of the economy gradually
retums to its long-term rate of growth.
Personal consumption will continue to be the basic strength of the U.S. economy,
since it comprises two-thirds of the total GNP, but the rate of increase in this sector
will undoubtedly slow down. Business investment and continued modest gains in
housing construction will provide most of next year's thrust for additional growth.
We expect inflation to remain at the 5-percent to 6-percent zone. This is a most
unsatisfactory level of price increase and our Nation must not and will not accept it.
Employment growth should continue, although not as rapidly as during the last 1 8
months, and the unemployment rate will continue to decline, particularly as the
extraordinary growth in the labor force slows down.
In summary, while there are several worrisome problems to contend with, the likely
overall course for the U.S. economy is favorable, assuming fiscal and monetary policies
remain responsible. The key to achieving this relatively optimistic goal will be how well
inflation is controlled. A resurgence of inflation would quickly erode both consumer
confidence and actual purchasing power, which would restrict the personal spending
that creates the driving force for the entire economy. In turn, business firms would
curtail their spending plans which would erode current economic growth and delay the
capital investment necessary for achieving our national goals, particularly the creation
of new jobs.
In short, we must guard against a resurgence of inflation if we are to avoid a premature
disruption of the economic expansion. This fundamental approach is not based on any
obsession with a particular goal but is a realistic recognition that inflation destroys
economic stability and leads to recession and unemployment. There never was and is
not now a choice between inflation and unemployment. That concept is a fallacy. The
real choice is between making steady progress on both inflation and unemployment or
returning to the stop-and-go economic pohcies that have failed to provide the needed
stability in the past. Every nation faces this same problem and we must all strive for
more responsible solutions.
The new international monetary system
I have said in the past thatthe most important single price in the United States is the
price of our dollar. The same is true of every national currency. The foreign exchange
value of a country's currency plays a significant role in determining what is produced—
exports and imports, the location of production facilities, and capital flows. All of these
vital economic factors are, to varying degrees, a function of the exchange rate—the
price of a nation's money. This is why it is important, especially during a period marked
by pressures for income redistribution, and a period dominated by industrial, corporate,
and national drives for more, that we develop a well-functioning monetary system
rather than a series of makeshift, ad hoc arrangements.
A system means an agreed c h a r t e r ^ a basic understanding among nations on the
principles of behavior—that provides the framework within which we operate. But such
a charter is only the beginning. Over time, the development of a system also involves
the de elopment of a code of behavior based on generally agreed-upon principles. Such
a code must adapt to changing circumstances, but in any case must always adhere to
the agreed broad principles.
What are the alternatives to this type of system? One alternative involves specific
rules but no agreement on underlying principles. In the absence of any anchor of
principles, this would mean a process of continuous negotiations and new rules.
Another alternative would be to have no agreement on either principles or codes. In
the United States this is referred to as the "law of the jungle."
It is not naive to believe in the need for an operating monetary system. It is not even
idealistic. To me, it is the essence of pragmatism. Some of you can recall the disastrous
process of competitive devaluation so prevalent in the thirties that became enshrined
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1977 REPORT OF THE SECRETARY OF THE TREASURY
in the phrase " b e g g a r - t h y - n e i g h b o r . " W e have learned and relearned that the law of
the jungle m e a n s that we all lose, regardless of size, power, or efforts at isolation.
W e all recognized this at Jamaica. T h a t was why we agreed on a system. Before
describing t h e results of o u r efforts and discussing implementation o f t h e system, I think
it would be useful to review what we want from a monetary system—what should it
provide? T h e r e are three overall objectives.
First, the system has to be designed so that it facilitates the international flow of
goods, services, and capital. It should be an o p e n , liberal system that enables us to
c a p t u r e the benefits of international t r a d e , the p a r a m o u n t benefit being the higher
living standards for all that result. It should facilitate the transfer of capital and ensure
its most efficient use, the e n d result again being higher living standards for all. Most
importantly, the system has to o p e r a t e continuously. Its success must not d e p e n d o n
just the right combination of favorable circumstances. It must be m o r e than a fair
weather system. It must be able to function in the e c o n o m i c and financial equivalent
of h u r r i c a n e weather.
Second, t h e system in both its design and its operation must have a built-in
equilibrium. It should engage forces that r e d u c e tendencies toward p e r m a n e n t
disequilibrium, in the form of structural surpluses or structural deficits in c u r r e n t
a c c o u n t s . T h e symmetry of which I speak c a n n o t simply be designed—it must b e
operational; a system that looks perfect on the drawing board but fails in actual
p e r f o r m a n c e is n o answer.
Third, t h e system must help rather t h a n hinder individual efforts toward e c o n o m i c
stabilization—it must e n c o u r a g e stability rather than foment instability.
T h e efforts of this g r o u p have, for almost 4 years, b e e n c o n c e n t r a t e d on designing
an international m o n e t a r y system that will m e e t these objectives. W e have now
c o m p l e t e d that work. T h e framework is built. T h e architecture is c o m p l e t e .
T o g e t h e r we have c o n s t r u c t e d an international m o n e t a r y system that is sound in
s t r u c t u r e , right in a p p r o a c h , and c o m p l e t e in a constitutional sense. T h a t system
remains firmly c e n t e r e d on the I M F , and firmly based on the liberal trade and p a y m e n t s
philosophy of Bretton W o o d s . It remains a global system, in which all m e m b e r s
subscribe to the same standards of responsible international behavior, and in which all
m e m b e r s are treated uniformly. W e have a system which has flexibility and resilience
and which c a n function well in the years ahead without further structural a m e n d m e n t s .
W e have changed, and changed profoundly, both monetary doctrine and t h e
structure o f t h e m o n e t a r y system, in a way which better conforms to present objectives.
T h r e e fundamental alterations can be highlighted—the a p p r o a c h e s toward adjustment,
exchange stability, and gold.
Influenced heavily by t h e imperatives of experience, we have c o m e to realize t h a t
exchange stability c a n n o t b e imposed or forced on nations by the establishment of fixed
exchange rates. W e have e m b r a c e d the c o n c e p t that stability will result only from
responsible m a n a g e m e n t of underlying e c o n o m i c and financial policies in o u r
countries. W e see m o r e clearly that m a r k e t forces must not be treated as enemies to
be resisted at all costs, b u t as the necessary and helpful reflections of changing
conditions in a highly integrated world e c o n o m y with wide freedom for international
trade and capital flows. W e recognize—as proved by events in many countries in r e c e n t
years—that without stable underlying e c o n o m i c and financial conditions, no a m o u n t
of exchange m a r k e t intervention will assure stability, b u t that with stable conditions,
little or n o such m a r k e t intervention would be n e e d e d .
T h e new system thus calls for each of our nations, large and small, developed a n d
developing, to c o n c e n t r a t e on achieving sound, noninflationary e c o n o m i c growth.
T h e r e is n o other answer to our desire for stability. Also, we must each permit o u r
p e r f o r m a n c e in domestic policy to show t h r o u g h — t o assure that governmental efforts
to resist or m o d e r a t e the operations of m a r k e t forces d o not distort our relative
e c o n o m i c positions and b e c o m e a source of instability o n c e again. This applies of
course to avoidance of the use of controls over international trade and payments, long
a basic objective of the Bretton W o o d s system. But it also applies as m u c h or m o r e to
governmental action to restrict the o p e r a t i o n s of m a r k e t forces through the exchange
rate m e c h a n i s m .
In short, a country with an unsustainable deficit should resort to internal stabilization
a c c o m p a n i e d by exchange rate change in response to m a r k e t forces; a country with a
EXHIBITS
403
tendency toward surplus should not simply accumulate reserves, but should allow its
exchange rate to move in order to accommodate these fundamental adjustments of
others. Only then can we have effective international adjustment and the built-in
equilibrium and stabilization which an international monetary system requires. The
inexorable fact is that the implementation of our new system—or any system—will
succeed or fail as a consequence of the soundness and prudence of the policies our
individual govemments pursue. There is no other source of stability, no external entity
to which nations can turn as they address the challenges they face today.
Our historic decision to phase out the monetary role of gold and to provide for a
greater role for the SDR also is a source of strength in the reformed system. By doing
so, we eliminate a major element of instability in the monetary system. Removing gold
from the center of the system, eliminating the requirement that gold be used in IMF
transactions and agreeing to initiate the process of disposing of IMF gold, the Group
of Ten agreement to avoid pegging the price of gold or increasing total holdings are
all steps toward realism, and a more rational as well as stable monetary system.
While we have made fundamental changes, the Jamaica agreements constitute a
reform and not a revolution. Our changes are less of a grand design than Bretton Woods,
and appropriately so. We have not discarded all the concepts or replaced the
institutions of the Bretton Woods order.
Most importantly the IMF retains a unique and indispensable role in the provision
of conditional credit. It is a different role from that of 30 years ago, reflecting the
different world of today, and the growth and development of private international
capital markets which now do and should provide the bulk of international lending. The
Fund's financing is today more clearly a supplement to other sources. But the
conditionality of IMF lending places on that institution a special role and special
responsibilities which are critical to international adjustment and a smoothly operating
international monetary system.
It is to the operation of our monetary system that we must now shift our attention.
The construction ofthe system, the architecture, has been an essential step. It has been
an intellectually stimulating exercise. But we must move ahead to the operational stage.
We must, on the basis of the principles of our new constitution, develop workable
operating practices. No aspect of the IMF's work is more important.
A central feature in the operation of our new monetary system is the IMF's
surveillance of members' exchange rate policies. The new article IV places heavy
emphasis on IMF surveillance to assure that members comply with Fund obligations
and that they avoid manipulative exchange rate practices. It is essential to the successful
functioning ofthe system that this surveillance be performed in a sensible and effective
manner. Working out the techniques of surveillance is the Fund's next major task.
Some have said that precise guidelines for IMF surveillance of members' exchange
rate policies should have been delineated in the Articles. I disagree. The Articles, after
all, are meant to serve as an international constitution, not a commercial contract. Even
if we were agreed on precise guidehnes, it would be wrong to incorporate them in the
Articles—we learned from Bretton Woods the difficulties of a charter containing
detailed rules.
But more importantly, it is neither appropriate nor possible to undertake this
important job of Fund surveillance through the application of detailed rules and
formulas. Such formulas cannot be equitably applied to economies that differ as
profoundly as in the IMF membership. Where the largest member has a gross national
product some 60,000 times larger than the smallest, when some have no capital markets
while others have highly developed and sophisticated markets, where price elasticities
and income elasticities can vary widely, rigid formulas simply won't work.
Similarly, I do not agree with those who would call on the Fund to dehneate hard
and detailed rules by which each member country's performance with respect to
exchange rate policies would be judged. We do not have the capability, the experience,
or the knowledge, to develop such a set of rules to be applied across a broad spectrum
of individual national situations.
Nor would I agree with those who would call on the Fund to attempt to determine
a set of "target" exchange rates toward which each nation's policies should be directed.
There are those who beheve that a comparison of statistical data on prices or costs in
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1977 REPORT OF THE SECRETARY OF THE TREASURY
individual countries can reveal a p p r o p r i a t e exchange rates. T h a t a p p r o a c h is subject
to insurmountable difficulties, both theoretical and practical. While it may indicate t h a t
some rates are i n a p p r o p r i a t e , it c a n n o t be d e p e n d e d on to indicate what rates a r e
proper. It is t a n t a m o u n t to c o n t i n u o u s renegotiation of a par value system, based o n
statistics which are of necessity both partial in coverage and b a c k w a r d looking in
a p p r o a c h . In practice, it m a y prove to be nothing m o r e than a veiled a p p r o a c h to a
return to fixed rates.
T h e r e are those w h o a r e nostalgic for the good old days and may translate this
nostalgia into a desire to r e t u r n to the par value system, thinking that fixed rates would
bring stability. I would suggest that such beliefs are an illusion. T h i n k again o f t h e c h a o s
and disorder o f t h e closing years o f t h e Bretton W o o d s system. Think b a c k to those days
of m a r k e t closures which disrupted t r a d e and c o m m e r c e . R e m e m b e r , t o o , the hurried
a t t e m p t s to p a t c h t o g e t h e r s o m e solution so that m a r k e t s might o p e n again. Think b a c k
to the d u r a t i o n and difficulty of the Smithsonian negotiations and the tensions
associated with those negotiations. T h e n think back over the last 4 years of unparalleled
flows of m o n e y , massive increases in oil prices, inflation, recession, b a l a n c e of p a y m e n t s
p r o b l e m s . Just imagine the old par value system trying to a c c o m m o d a t e those strains.
T h e F u n d should, in its surveillance of m e m b e r s ' exchange rate policies, p r o c e e d by
a careful a n d evolutionary a p p r o a c h . It should cultivate m o r e fully its consultative
processes a n d refine its p r o c e d u r e s for monitoring c o u n t r i e s ' behavior. R a t h e r t h a n
adopting a sweeping p r e c o n c e i v e d , rigid e c o n o m i c c o d e , we need to construct, through
a case-by-case a p p r o a c h , a c o m m o n law based on case history. If we p r o c e e d in this
m a n n e r , we will be able to delineate b r o a d principles of behavior that c a n be elaborated
o n the basis of experience. T h e d e v e l o p m e n t — a n d the a c c e p t a n c e — o f these principles
c a n n o t b e forced. But over time w o r k a b l e c o d e s can be expected to e m e r g e , through
consultation with m e m b e r s and t h r o u g h the monitoring of their activities.
I urge the F u n d to p r o c e e d cautiously in this work. T h e world faces a new situation,
in some ways a dramatically different situation from the past. In this case the lamp of
history may not provide t h e best light to guide us in the future. O u r experience is d r a w n
from a past t h a t may n o t b e fully relevant, and o u r a t t e m p t s to distill this experience
into detailed blueprints for the future may be m o r e harmful than helpful.
T h e adjustment p r o c e s s is a n o t h e r a r e a in which action is imperative. T h e
international financial system has performed the task of recycling funds from surplus
countries to deficit c o u n t r i e s with efficiency. T h e elasticity of o u r financial system h a s
provided us with the time t o c o r r e c t structural maladjustments. This time must not b e
\yasted. Recycling of funds from surplus countries to deficit countries c a n continue only
to the degree that c o u n t r i e s borrowing to finance external deficits c a n obtain credit.
This in turn can only persist so long as lenders remain confident that borrowing
countries c a n repay specific obligations ori schedule and service their overall d e b t s .
Frankly, we have not m a d e sufficient progress toward adjustment. Although t h e r e
have b e e n cases of c o u n t r i e s adjusting to higher oil prices and global recession, a
substantial n u m b e r of countries have preferred to delay adjustment and borrow a b r o a d
t o finance c o n s u m p t i o n , a n d have thus c o n t i n u e d to run the large external deficits
which first a p p e a r e d 3 years ago.
Unless t h e r e is some d r a m a t i c change in the outlook, the world p a y m e n t s pattern next
year will strikingly resemble that of 1974—the first year of abnormally high oil prices.
Indeed, if t h e oil-producing nations t a k e , as is now r u m o r e d , the d a n g e r o u s step of again
raising the price of oil, it would seriously aggravate an already t r o u b l e s o m e e c o n o m i c
and financial situation. Even without an increase in oil prices, the aggregate O P E C
surplus in 1977 will again b e $50 billion or m o r e , while deficits in the industrial O E C D
countries would be on t h e o r d e r of $35 billion, and the oil-importing developing
countries in the range of $ 1 2 billion to $15 billion.
T h e 1974 deficits were successfully financed—to the surprise of m a n y d o o m s d a y
forecasters—as the international financial system displayed u n p r e c e d e n t e d flexibility
and resourcefulness. However, we are a p p r o a c h i n g 1977's look-alike p a y m e n t s
n u m b e r s u n d e r substantially different c i r c u m s t a n c e s . Aggregate O P E C surpluses of
nearly $ 1 5 0 billion from t h e beginning of 1974 to the present have b e e n reflected in
increased external d e b t by oil importers. T h e bulk o f t h e heavy international borrowing
has b e e n of short- to m e d i u m - t e r m maturity, and will in many cases need to be rolled
EXHIBITS
405
over or refinanced. And as debt grows to finance the continuing deficits, an increasing
number of countries which have delayed adjustment will approach limits beyond which
they cannot afford to borrow and beyond which prudent creditors will not lend to them.
This is a serious matter and it cannot be ignored by lenders or borrowers.
There is still time to act, but we must be cognizant of the choices. One unrealistic
possibility that has been mentioned involves widespread debt forgiveness or rescheduling. In reality, this is no choice at all. From time to time circumstances may require
a debt rescheduling on the part of an individual country. But a wide-scale approach of
this type involving a number of countries or even several in a group can only result in
substantial damage to practicially all international borrowers. Lenders would regard—
I think appropriately—such an approach as ipso facto increasing the risk attached to
new lending operations. The result would inevitably be a reduction in the availability
of private credit to broad categories of countries, a reduction that would inevitably have
a widespread contractionary effect on economic activity.
Another dangerous alternative that has been mentioned by some would be to create
large amounts of new official liquidity—a kind of intemational monetary printing press.
Ironically, this would have the same effect—it would ultimately be contractionary,
although in the first instance it might have an expansive effect. Eventually, and probably
with more speed than many suspect, the creation of excessive international liquidity
would destroy the stabilization efforts which many of us have underway. For, in the
United States, and I believe in many other countries, we have found that a high rate
of inflation and prosperity are mutually exclusive.
The third course—and the only one which I believe holds the promise of success—
involves a combination of adjustment by individual countries, some slowing in the rate
of private intemational lending and moderate provision of official financing on a
multilateral and conditional basis. Fortunately, a fioating-exchange-rate system can
respond to changes in underlying economic and financial conditions in a climate devoid
of crisis. The resultant flexibility provides a useful tool for adjustment. But it is only
effective when linked with meaningful programs of domestic economic and financial
stabilization. There is no substitute for such adjustment, and countries that do adjust
can look forward to durable, noninflationary growth. The IMF can contribute to this
process of adjustment. The Fund has both the expertise and the financial resources to
assist in the development of overall stabilization programs and provide conditional
credit to bridge the time from the start of an individual country's stabilization effort
to its favorable end results.
It seems to me the only way that we can proceed without damaging ourselves and
our friends and neighbors is to hold to this third course and immediately introduce
where needed appropriate policies for adjustment.
Development
Our approach to the intemational monetary system has placed responsibility for the
achievement of international monetary stability on the domestic policies pursued in
each country. Our approach to economic development also places primary emphasis
on the policies and efforts of each individual developing country.
At the heart of our policy is the concept of shared prosperity. This concept involves
a mutually beneficial approach to development in today's interdependent world. In
application, this approach means not only direct aid but, most importantly, a liberal
trading and investment system.
We do not regard indirect resource transfer schemes such as generalized debt
rescheduling, price indexing, and commodity funds as the best means to provide
resources to the developing world. To the contrary, such proposals are likely to lead
to inefficiencies and distortions which will make most, if not all, worse off.
I have already commented on the likely adverse impact of broad debt-rescheduhng
schemes. With respect to commodity policy, we have stated on many occasions that
we favor a case-by-case approach to the problems of individual commodities, and in
particular a careful examination of the applicability of the buffer stock approach.
Specifically we must ascertain whether the operation of a buffer stock is likely to lead
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1977 REPORT OF THE SECRETARY OF THE TREASURY
to improved market operations or to a structurally higher level of prices for the
commodity involved.
If it leads to structurally higher prices it helps a few countries, including those
developed countries that are producers, but it hurts the larger numbers of consuming
countries, both developed and developing. Even in the case of developing countries that
produce the commodity, the "help" provided has a high cost. Funds used to finance
the buildup in inventories could have been used for development purposes. To the
degree that an artificial price level results, incentives to develop and use substitutes
increase. Perhaps most important, the producing country allocates labor and capital to
production on the basis of an artificially high and unsustainable price.
In the area of direct resource transfers, the United States has long been in the
forefront of those assisting in the economic and social progress ofthe developing world.
Much of what we have done has been governmental—through our bilateral as well as
multilateral aid programs such as IDA.
I can assure you that the United States will continue its leadership in this area. Not
only will we continue, but we will strengthen our bilateral aid programs, and we will
continue our strong support for the international development banks. Our commitment
to IDA and to a financially strong IBRD cannot be questioned. With respect to the
regional banks, I am pleased that we have just received funds from the Congress to join
the African Development Fund. We are now participating in a major new replenishment
in the IDB. Here in Manila, the home ofthe Asian Development Bank, it is particularly
gratifying to reiterate U.S. support for that institution^ I was pleased to note, in a recent
Development Committee report, that loan commitments in all these banks will increase
from $8.3 billion to about $12.6 billion from 1975 to 1980, or 50 percent, with the
concessional share of the total increasing.
The American partnership with developing countries and development prospects of
all countries depends even more importantly on our trade and investment links. The
worldwide demands for capital in the period ahead will be massive and the competition
fierce. Countries which wish tp attract investment capital will find that establishing the
proper domestic climate is essential. Countries which raise impediments to capital flows
will simply not be able to meet the competition. The experience of many countries
illustrates how this can properly be done. Countries and peoples as varied as the
Taiwanese, the,Brazilians, and the South Koreans have dramatically raised their living
standards and expanded their economic base. They have done so not only because of
the amount of help they received, but because ofthe care and self-discipline they used
in putting that help to work. Others can do the same, but only with the realization that
developmental help involves a partnership and—like all partnerships—requires the best
intentions and the best efforts of both partners in order to succeed.
We must all recognize that individual national economies can best achieve the goal
of sustained noninflationary growth in a free and open intemational trading system. We
need an open world market to allocate raw material and capital resources efficiently
in order to supply abundant goods and services to all of our people at noninflationary
prices. All the aid we can give will not help if it does not foster a prosperity shared by
all. Achieving such a prosperity will require the close cooperation of both industrial and
developing nations. We must, therefore, join together aggressively in the multilateral
trade negotiations to take concrete and significant steps to eliminate tariff and nontariff
barriers to trade.
As these areas for cooperation between developed and developing countries evolve
toward greater mutual advantage, we must preserve the fundamental principles—such
as reliance on market forces and the private sector—on which our common prosperity
depends. Solutions must be dynamic and have widespread benefits. Thus, we must seek
increased production and improved efficiency, not just transfer of wealth. Development
assistance should be thought of not as an international welfare program to redistribute
the world's wealth, but as an important element of an international investment program
to increase the rate of economic growth in developing nations and to provide higher
living standards for the people of every nation.
In a sense this can be thought of as a process by which developed countries devote
a portion of their savings to developing countries. The impact of this type of direct
transfer depends on the amounts involved, the uses to which these funds are put, and
EXHIBITS
407
the effectiveness with which the recipient countries implement development efforts. If
these funds are devoted to financing a higher level of consumption than a given country
can earn, it means only a short-lived improvement in living standards; if these funds are
devoted to investment, the result will be a permanent gain in well-being. This is
especially the case in a system which allocates financial resources to areas of maximum
benefit.
More specifically, in considering how the present system might be improved to the
mutual benefit of all nations, we should be guided by the following principles:
•
•
•
•
Development by definition is a long-term process; increased productivity,
stemming from capital formation and technological advance, is the basis of
development, not transfers of wealth which can only be one time in nature.
Foreign aid can help, but such aid can only complement and supplement those
policies developing countries adopt, which in the end will be decisive.
The role of the private sector is critical. There is no substitute for a vigorous
private sector mobilizing the resources and energies of the people of the
developing countries.
A market-oriented system is not perfect, but it is better than any alternative
system. In general, the effort should be to improve conditions for the
developing countries—both intemally and extemally—by removing unnecessary and burdensome government controls, not by imposing additional
barriers and impediments to market forces.
A basic focus must be on increasing savings and making the institutional and
policy improvements which will enable the financial markets to channel those
savings into activities that enhance the opportunities for people to live better
lives.
The World Bank group
With these principles in mind, let me tum now to issues concerning the World Bank
group. These institutions play a central role in international cooperative efforts to
promote economic progress and development. While their role as suppliers of
development capital is a very important one, their contribution to the development
process itself is equally important. Economic policies in developing countries—with
widely different economic regimes—have greatly benefited not only from the financial
support but also from the advice, encouragement, and technical expertise ofthe World
Bank group. To the degree that these institutions are successful in helping to bring about
sounder, more consistent, and more effective domestic policies in countries to which
they are lending, they multiply their effectiveness as development organizations. Strong
and clear U.S. support exists for the institutions which comprise the World Bank group
not only because their objectives are laudable, but also because they have proven
themselves to be effective agents of policy improvement in the countries in which they
work.
In looking at recent developments among the member institutions ofthe group, I am
greatly pleased by the agreement providing for a capital increase for the International
Finance Corporation. The key role of the private sector in the developing countries
underscores the importance of this proposal. As President McNamara pointed out
yesterday, the poorest countries ofthe world have financed almost 90 percent of their
development investments out of their own meager incomes. The capital increase will
enable the IFC to expand greatly its ability to encourage private capital flows in these
poor countries. As we all know, IFC's participation in projects has a considerable
multiplier effect—$4 for every $1 of its own—through the associated private
investment. The capital increase implies about $5 billion in cumulative commitments
over the next 10 years in the private sectors ofthe developing world. I hope that the
IFC capital increase can be formally ratified by the Board of Governors quickly to
permit this expansion to begin.
I am pleased also by the agreement reached on a selective capital increase for the
World Bank. The Bank is a unique financial institution—publicly capitalized but
privately financed for the major portion of its lending operations. While the paid-in and
callable capital from its member governments are important assurances of solvency to
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its creditors, the Bank is able to operate actively and extensively on its own footing.
In our view, the excellent reputation ofthe Bank and its sound financial condition give
it the capacity to raise very substantial sums in private capital markets for relending
to its borrowers. We are pleased that, in the course of the negotiations on a selective
capital increase, agreements were reached on the lending program and the lending rate
which I believe will continue to strengthen the financial position of the Bank.
During those negotiations, it was agreed that Bank commitments would not be
increased above the level which could be sustained indefinitely without a further capital
increase. I do not believe that this important principle should now be redefined.
With regard to the lending rate formula, I realize the temptation that exists to hold
rates and charges on Bank loans to a minimum, but in the long run neither the interests
ofthe Bank nor those of its borrowers would be well served by such a policy. Continued
sound financial practices by the Bank are the best guarantee that it will maintain the
reputation which gives it the very favorable access to capital markets that it enjoys.
Thus, the Bank will remain in a position to be responsive to its clients' needs tomorrow.
Also, as Bank reserves continue to grow, the time will certainly come when increased
transfers of its eamings can, and should, be made through IDA for the benefit of its
poorer member, countries.
I should note at this point that we remain very interested in the Bank's continued
study of the lending formula. While we believe the current formula is sound, we are
prepared to consider an improved version. I might add that the United States supports
the use ofthe lending rate formula, not only in the World Bank, but in the regional banks
as well. The Inter-American Development Bank recently approved a similar mechanism, and the Asian Development Bank has taken an interim step leading toward a final
decision early next year.
I would like to turn now to the question of the future of the Bank, which I believe
quite properly is now on the international agenda. In thinking about the future of the
Bank as a development institution, the continued strength of the Bank as a financial
institution must be given paramount importance. The Bank is now entering a new
financial era as its disbursed loans outstanding have begun to reflect the rapid growth
in commitments since 1969. The financial consequences of an expansion of annual loan
commitments from less than $ 1 billion in 1968 to this year's $5.8 billion are substantial.
Even holding that commitment level constant indefinitely, loans disbursed and
outstanding will grow from $13.6 billion on July 1 of this year to some $26 billion in
1980 and to over $40 billion by 1985. To finance this expanded portfolio, the funded
debt ofthe Bank must grow accordingly. This is the financial challenge the Bank faces.
I know how demanding this challenge will prove as the Bank continues its preeminent
position in the world's capital markets.
The Bank has in the past made an invaluable contribution to qualitative improvements in the development efforts of its borrowers. Key development p r o b l e m s restraining population growth, improving the efficiency and equity of domestic tax
collections, bringing small farms more fully into the growth process, and others—
remain unsolved in many countries. The success of the Bank in encouraging policy
improvements in such areas will have a substantial impact on the productivity of Bank
lending. The Bank needs to monitor its own policy and practices to make sure that its
effectiveness in this objective is maintained.
The current situation also presents an excellent opportunity for the Bank to expand
its role in generating complementary financing for its projects. In the future the Bank
might well play a role of decisive importance by helping to mobilize substantially
increased long-term development credits from the private sector. I see untapped
potential for the Bank in this direction, and I would urge that intensified work on this
issue be promptly initiated.
The United States in no sense envisages a static role for the Bank, which we believe
can and should remain the leading development institution in the world. We are
prepared to take an active and constructive part in a frank dialog on the future role
ofthe Bank. I would urge that in considering the Bank's place in a world that is changing
rapidly, our intellectual net be cast wide enough to capture significant new directions
of Bank activity. In this process, we are committed to doing everything we can to assure
that the Bank meets the challenges of today and tomorrow. I am confident that by
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addressing the important questions forthrightly, the Bank can assure itself for many
years to come of a continuation of the leading role in the international cooperative
effort to promote growth and progress in developing nations.
Also, the future of the International Development Association is of critical
importance. Now that our Congress has acted favorably on our fiscal 1977 appropriation request for IDA, the United States is in a position to participate actively in
negotiating an ID A-V agreement. I am confident that with good will and understanding
these negotiations can be successfully concluded during this next year, and I am fully
confident that my Govemment will be a generous participant in any arrangements
agreed upon.
We recognize the urgency of the IDA problem, and our commitment to IDA can't
be called into question. Certainly the replenishment of IDA funds, which support the
poorest nations, remains a priority concem of my Government. Of special concern to
us is the fact that IDA's commitment authority will end after June 30, 1977.
While progress has been made in international discussions, we have not reached an
agreement on an IDA-V package, including magnitude, shares, voting rights, and
signup procedures. Reaching such intemational agreement will take time. Moreover,
the United States is not alone in having legislative procedures for subsequently ratifying
such intemational agreements that will also take time.
While it is important to push forward on these negotiations of IDA-V—and we intend
to intensify our negotiating efforts—we must recognize that the completion of these
negotiations and the necessary legislative action in all our countries by July 1, 1977,
cannot be assured. Therefore, in order to avoid a gap in IDA's commitment authority
next year, and to inject some momentum into the IDA negotiations, I would propose
that not later than January we negotiate a bridge agreement which may be considered
a precommitment to IDA-V, and I would hope that prospective new members of IDA
will voluntarily make contributions to this bridge agreement. In my view, this should
be a primary subject of discussion at the Kyoto meeting of IDA deputies next week so
that IDA does not run out of money next June.
Conclusion
In meetings such as this we naturally and inevitably concentrate our attention on
intemational issues of great significance—providing for a reformed international
monetary system, or determining future policies of important institutions such as the
IMF and the World Bank. In the final analysis, however, what really counts for each
of our countries and for the world economy is how efficiently we all manage our own
domestic affairs. Intemational cooperation provides a framework of opportunity;
individual countries in various ways and to varying degrees seize that opportunity. In
all countries—developed and developing, industrial and agricultural, oil rich and
resource poor—economic policymakers are confronted with many similar kinds of
issues and dilemmas. A country's performance is not predetermined by its level of
income or stage of development alone. Just as pertinent is how the tough issues of
economic policy that we all face are resolved.
Unfortunately, good economics is not always perceived to be good politics. My
experience has been that politics is an art with a high rate of discount. And while the
payoff to good economics is real, it takes time. This lag, as the economists call it, is a
politician's nightmare. Fortunately, I think that more and more people now understand
that this is the case—and I sense growing suspicion of the proposed instant solution,
the quick fix. In a world of unlimited demands and limited resources. Finance Ministers
not only are inevitably unpopular, but indeed cannot afford to be popular. We are
frequently required to be the bearers of bad tidings to our political masters—to reiterate
the unpleasant but inescapable fact that resources are scarce while wants are limitless.
It is our lot, whatever our country's economic system and whatever its circumstances,
to speak out for financial responsibility—to call for prudence in an age of fiscal
adventure.
Announcement of dramatic new programs is greeted with great fanfare; the
management of sustained, stable growth is a bit like watching the grass grow. Yet, in
the end, it is sustained, stable growth that does the most good.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
To be sure, for a time an increased inflow of real resources from abroad may enable
a country to postpone the hard choices among competing domestic claims, in the
process running down assets and/or accumulating debts abroad. But sooner or later,
the bills come due—the adjustment I have spoken of earlier has to be made. There
simply is no substitute for the hard decisions and the careful husbanding of resources
that finance ministries traditionally espouse.
As we meet today we can point to tangible evidence that we have been more than
nay-sayers over this past year and more. In the monetary area, through our collective
efforts, we have put into place a new structure for the international monetary system,
one with the flexibility to accommodate rather than impede the efficient working ofthe
international economy so that trade and capital can serve their full role as engines of
economic growth and progress. In trade we have made progress in the multilateral trade
negotiations to reduce barriers and ensure fair and orderly rules for the international
trading system. In energy, the industrial countries have joined together to coordinate
efforts to reduce our dependence on imported oil. We have also established a
framework of cooperation with the oil-producing countries. In the relations between
developed and developing countries, we are fashioning positive cooperation that will
further strengthen the world economy. Finally, we have all avoided restrictions on the
free flow of capital at a time when pressures existed to create impediments.
In my stay at Treasury, I have seen the world economy pass through some extremely
rough weather. Our management, though imperfect, has enabled us to survive—and a
bit more.
We survived in the sense that our economies did not collapse, markets continued to
function, and we avoided a wave of restrictions on flows of goods and capital among
nations. This achievement in itself was considerable. But beyond that, the foundation
we have laid can lead to a great deal more—if we do the right things from here on.
We all know that the present situation has both risk and opportunity. We should not
fear the risk and we must not fail to grasp the opportunity. Much has been
accomplished—much remains to be accomplished. With determination, we can now
strengthen the foundation of individual economic stability. With courage, we can
eliminate restrictions on trade and investment, in recognition of our interdependence.
With patience, we can work together and find the proper balance of opportunity and
responsibility for rich and poor alike that is essential in today's world.
J^et us commit ourselves here in Manila to this effort. As we do, I believe we can all
look to the future—a future of shared prosperity for all—with confidence.
Exhibit 43.—Statement by Under Secretary for Monetary Affairs Yeo, October 18,
1976, before the Subcommittee on International Economics of the Joint Economic
Committee, on international monetary reform—the operational phase
In calling these hearings, you have drawn attention to the need to move to the next
phase of international monetary reform—the operational phase. For several years the
world was engaged in the complex task of designing a monetary system. Now we must
make the system work. As nations move toward ratification of the amended IMF
Articles, we must translate the philosophy of that charter into practice, and develop
the operating procedures for putting the new system into force. If the job of applying
the new system seems intellectually less exhilarating than the job of creating it, certainly
the present task is of no less importance for the world economy. Nor do I think it will
be less difficult. I am grateful to the subcommittee for an opportunity to comment on
this important work though my comments will, at this early stage, of necessity be
tentative and general.
The subject of these hearings is "Guidelines for Exchange Market Intervention." But
that subject should be seen in a larger context. Under the Jamaica agreements, we and
other nations aim at assuring orderly exchange arrangements and promoting a stable
system of exchange rates. That objective, of course, cannot be attained solely, or even
most importantly, by exchange market intervention. Rather it will be attained by the
continuing development of orderly underlying economic and financial conditions in the
member countries. The new system recognizes—as events in recent years have proved
in many countries—that without such stable underlying conditions, no amount of
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exchange market intervention will assure stability, but that with stable conditions and
limited intervention, orderliness and gradual change will characterize the exchange
markets. The focus of the new system is thus much broader than exchange market
intervention.
The IMF is specifically charged under the amended Articles with surveillance of
members' exchange rate policies. The new article IV, section 3(b), says that the IMF,
"shall exercise firm surveillance over the exchange rate policies of members, and shall
adopt specific principles for the guidance of all members with respect to those pohcies."
This is a central feature of the operation of the new system. The purpose of this
surveillance is to enable the IMF to fulfill its functions of overseeing the international
monetary system to ensure its effective operation, and of overseeing the compliance
ofeach member with its obligations. Thus IMF surveillance of exchange rate policies—
and principles which may be adopted as a framework for that surveillance—should, in
my view, not be limited to questions of exchange market intervention but should have
a wider focus, if we are to assure that nations do not manipulate exchange rates to the
disadvantage of others, and if we are to assure that members' exchange rate policies
facilitate rather than counter effective balance of payments adjustment.
How, then, do we work out the techniques of surveillance, and develop the needed
principles so essential to the successful functioning of the system? I must tell you that
there are differing views on this question.
Some have argued that precise guidelines for IMF surveillance of members' exchange
rate policies should have been delineated in the amended Articles. I disagree on two
counts—first, that there should be detailed rules, and second, that any such rules should
be incorporated in the Articles.
\
On the second point, the Articles should not, in my view, impose detailed operating
rules and procedures on the intemational monetary system. The Articles, after all, are
meant to serve as the Fund's constitution, not a detailed contract. Even if we were all
agreed on precise guidelines that should be adopted for assessing members' exchange
rate policies, it would be wrong to incorporate them in the Articles. We learned from
Bretton Woods the difficulties of having a charter filled with detailed rules which can
too soon become obsolete or inapplicable—indeed, a major advantage ofthe Jamaica
agreement is that we are moving to a charter which avoids so many detailed rules and
contains appropriate elasticity to allow the system to adapt to changing conditions.
But more importantly, irrespective of where they might be embodied, I do not agree
that the IMF should delineate hard and detailed rules by which each member's
performance with respect to exchange policies would be judged. It is, in my view,
neither appropriate nor possible that this important Fund surveillance work through the
application of detailed rules and precise formulas. We do not have the capability, the
experience, or the knowledge, to develop such a set of rules to be applied across a broad
spectrum of individual national situations. It is particularly difficult to apply rigid
formulas equitably to economies that differ as profoundly as in the IMF membership
where the gross national product ofthe largest member is 60,000 times as large as that
of the smallest member; where some members have no capital markets while others
have highly developed and sophisticated markets; where economic structure and
elasticities of price and income can vary widely; and where the relative importance of
international transactions to domestic economies differs greatly. Rigid rules and
formulas simply won't work in such situations.
Nor would I agree with those who would call on the Fund to attempt to determine
a set of "target" exchange rates toward which each nation's policies should be directed.
There are those who believe that a comparison of statistical data on prices or costs in
individual countries can reveal appropriate exchange rates. That approach is subject
to insurmountable difficulties, both theoretical and practical. While it may indicate that
some rates are inappropriate, it cannot be depended on to indicate what rates are
proper. It is tantamount to continuous renegotiation of a par value system based on
statistics which are of necessity both partial in coverage and backward looking in
approach. In practice, it may prove to be nothing more than a veiled approach to a
return to fixed rates.
How, then, should the Fund proceed in its surveillance of members' exchange rate
policies? In my view, we should proceed by a careful and evolutionary approach. We
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1977 REPORT OF THE SECRETARY OF THE TREASURY
should cultivate more fully the IMF's consultative processes and refine its procedures
for monitoring member countries' economic and financial policies. Rather than
adopting a sweeping preconceived, rigid economic code, we need to construct, through
a case-by-case approach, a common law based on case history. If we proceed in this
manner, we will be able to delineate on the basis of experience broad principles of
behavior with regard to what constitutes appropriate adjustment policies, and what
constitutes manipulation of exchange rates. The development—and the acceptance—
of these principles cannot be forced. But over time workable codes can be expected
to emerge, through consultation with members and through the monitoring of their
activities.
I hope the Fund will proceed cautiously in this work. The world faces a new situation,
in some ways a dramatically different situation from the past, and history may not
provide the best guide for the future. Our experience is drawn from a past that may not
be fully relevant, and our attempts to distill this experience into detailed blueprints for
the future may be more harmful than helpful.
Mr. Chairman, in addition to commenting on the general question of developing
principles and guidelines for IMF surveillance, you have also asked me to speak to the
question of whether, since Rambouillet and Jamaica, other industrial countries have
been persistently intervening in exchange markets to maintain their currencies
overvalued or undervalued relative to the dollar.
The short answer, in my judgment, is no. I do not think we have a basis for objecting
that large or persistent intervention has been conducted to over or under value other
currencies at the expense of the dollar. There has been a substantial amount of
exchange market intervention in the 11 months since Rambouillet, much of it related
to operations within the EC snake,, and I would certainly not want to defend each and
every action. But I do think I detect some progress over that period. I think there is
increased recognition ofthe doubtful value of efforts to "defend" by exchange market
intervention a particular exchange rate which is fundamentally at odds with underlying
conditions and market judgments. Also (this is the other -Me of that same coin) I think
there is greater understanding ofthe need for both surplvv and deficit countries to allow
exchange rates to play their appropriate role in facilitating balance of payments
adjustment. There may in fact be an emerging consensus on future intervention policy.
But I would like to comment briefly on other points implicit in your question before
outlining that consensus.
My first point relates to the meaning of what was agreed to at Rambouillet and
Jamaica. These meetings resulted in understandings in five important areas: (1)
Development of a shared analysis of the causes of instability in the international
economy; (2) recojgnition that achievement of monetary stability requires achievement
of stability in underlying international economic and financial conditions; (3)
recognition that countries should intervene to counter disorderly exchange market
conditions, with the judgment about whether to intervene to be left to the individual
country concerned; (4) recognition of the need to strengthen consultative procedures
among finance ministries and central banks of the major countries; and (5)
development of a specific text of amended article IV of the IMF Articles of Agreement
to be proposed to other IMF members.
It is important to recognize that neither the Rambouillet understandings, nor the text
of new article IV agreed upon at Jamaica, prohibits exchange market intervention per
se—even intervention that may persist for a time. Indeed, the text of amended article
IV will specifically permit members to maintain pegged rates for their currencies,
"common margins" arrangements such as those presently maintained by several
European countries, or other arrangements of their choice. The fundamental obligation
regarding exchange rates laid out in amended article IV is to "avoid manipulating
exchange rates or the intemational monetary system in order to prevent effective
balance of payments adjustment or to gain an unfair competitive advantage over other
members." That obligation does not relate exclusively or even necessarily to exchange
market intervention.
My second point is that, while the amended Articles clearly express the will of the
IMF membership regarding the framework for future international monetary arrangements, those amended Articles do not yet have legal effect. The first task is to secure
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ratification ofthe amended Articles, a process that has received major impetus from
passage of our own legislation by the Congress a few weeks ago. But we must be very
wary about anticipating obligations that are not yet legally binding and about reaching
Judgments regarding member countries' current policies based on obligations that will
not exist for at least some months to come.
But despite the problems, the uncertainties, my own judgment is that there has been
an increasing and healthy coalescence of views on appropriate exchange market
behavior and intervention policy since Rambouillet and Jamaica. All agree that
exchange market intervention may be useful to counter disorderly market conditions.
More importantly, more and more countries appear to be coming to the view—in some
cases, after repeated hard and costly lessons—that intervention that attempts to do
more may be counterproductive and disruptive. And most recently, the Interim
Committee has enunciated several general principles for operation of the system that
we think are extremely important in today's circumstances of widespread payments
imbalance. These are essentially that—
Countries in structural deficit must stabilize their intemal economies;
Industrial countries in stronger positions should pursue expansionary—but not
infiationary—domestic policies and maintain unrestricted access to their
markets; and
All countries, deficit and surplus, should permit appropriate changes in their
exchange rates to facilitate needed balance of payments adjustment.
These principles are indeed broad, but if they are applied—and that is our objective—
they are a prescription for needed adjustment and achievement of international
monetary stability. This is the main task before us.
Exhibit 44.—Remarks by Deputy Assistant Secretary Widman, December 3, 1976,
before the Northwest Mining Association, Spokane, Wash., entitled>'Role of Gold
in the International Monetary System"
I am pleased to have the opportunity to participate in your examination ofthe market
outlook for precious metals. Yours is a group with a practical, perhaps personal, interest
in the prospects for prices and sales of these commodities. I must make clear at the
outset, however, that my contribution must be limited basically to an explanation of
the role ofgold in the international monetary system and the current policies ofthe U.S.
Govemment with respect to gold, policies which have had broad, bipartisan support.
The governments and international institutions ofthe world hold stockpiles ofgold
equivalent to 29 times the annual world gold production. Thus it is clear that
govemmental views and policies of gold inevitably have a major impact on the gold
market. What I would like to do is to review the actions that have been taken in the
past year with respect to the role of gold in the intemational monetary system and the
relationship of governmental gold transactions to the gold market.
The judgment that gold does not and cannot serve as a sound or stable basis for a
monetary system is almost universally accepted by govemments throughout the world.
The force of events and practicality have over the years led to a reduction of the role
of gold in domestic monetary systems around the world to the point that it no longer
serves an important monetary role in virtually any nation.
The amount ofgold held does not effectively limit the money supply; it does not serve
as a restraint on inflation. Similarly in the intemational sphere, the size ofgold reserves
is not a limiting factor on a country's ability to purchase foreign goods or financial
assets. In practice, gold's role in the monetary system has been sharply diminished and
the recent international negotiations on gold have centered more on how to reflect this
reality in the legal framework of the Intemational Monetary Fund Articles of
Agreement than on what the role should actually be.
The international monetary system established in 1944 envisaged a central role for
gold: As the unit of value for the system and for the International Monetary Fund; as
a principal means of payment to be used by governments in transactions with the IMF;
as the main element of countries' international reserve holdings; and as the link for
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1977 REPORT OF THE SECRETARY OF THE TREASURY
holding together the system of fixed exchange rates or par values for national
currencies.
But, in fact, gold never fully performed thiese functions, and over time it became
increasingly apparent that it never could. Gold was not used for monetary purposes
alone. It was a commodity with many industrial and commercial uses, and industrial
demand grew dramatically in the postwar years as the world's economies expanded and
personal income grew. But new gold production was strictly limited by natural factors
and could not respond readily to the increased demand. Thus the amount of new gold
production which became available for monetary uses dechned rapidly. Moreover, the
amount of new gold becoming available for monetary purposes each year was totally
unrelated to the needs of an expanding world economy for liquidity. As a result, price
differences inevitably emerged between the controlled official market and the highly
volatile private market, leading to official efforts to alleviate or suppress the pressures
by sales ofgold on private markets—further reducing official monetary stocks—and to
widespread pressures and speculation for changes in the official price. But since gold
was supposed to be the center ofthe system—the measuring rod against which the value
of national currencies was to be determined—any change in the official price of gold
would have had a capricious and destabilizing effect on the entire monetary system.
Actually as the exchange rate system had developed in practice, most countries
maintained par values for their currencies by governmental intervention in the
exchange markets to maintain exchange rates for their currencies at specified levels visa-vis the dollar. Only the United States met its par value obligations by undertaking
freely to buy and sell gold at the official price ofgold—the dollar's par value. The United
States was, in effect, at the center of the system, with an obligation to convert other
countries' holdings of dollars into gold at a specified price of U.S. $35 per ounce. But
since monetary gold stocks were simply not adequate to permit countries to acquire
an adequate amount of reserves in the form of gold, they built up their reserves in the
form of U.S. dollars, thus forcing the United States to run balance of payments deficits.
The result was that gold convertibility of the dollar became less and less credible and
in 1971 was suspended altogether.
• The special drawing right (SDR), the present currency "basket," has replaced
gold as the unit of account for IMF operations and transactions.
• Countries have virtually ceased to use gold for payments to the IMF.
• Monetary authorities have stopped using gold in transactions with other
monetary authorities, and gold has declined as a proportion of world official
reserves—from 70 percent in 1950 to 17 percent today.
• Finally, the system of par values based on the dollar tied to gold convertibility
has been replaced de facto by a generalized system of floating exchange rates.
All of these changes have taken place as a matter of practical necessity. They add
up to a major reduction of the international monetary role of gold that is widely
accepted as inevitable and indeed desirable. The negotiations on gold over the past few
years have to a large extent concentrated on how to reflect these changes in new
Articles for the IMF—that is, on how to codify and further promote the phasing out
of gold's international monetary role. The only problem—and the only real reason for
retaining any monetary role for gold—arises out of the fact that a portion of the
international financial reserves of most countries—a very high proportion for s o m e consists ofgold and no practical way has been found to dispose of that gold in the short
run.
First, gold's legal position is changed. Under the amended IMF Articles of
Agreement, gold will no longer have an official price. It will no longer be the legal basis
in the Articles for expressing the value of currencies, for determining the value of the
SDR, or for calculating nations' rights and obligations in the Fund.
Second, all legal obligations for use ofgold in the IMF will be eliminated; for example,
in the quota subscriptions and payment of charges. In fact, the IMF will be prohibited
from accepting gold except by specific decision, by an 85-percent majority vote.
Third, the IMF will be empowered to dispose of its remaining gold holdings in a
variety of ways and by an 85-percent majority vote in each case.
Agreement was also reached to dispose of a portion ofthe gold presently held by the
IMF. Some 25 million ounces, or one-sixth ofthe IMF's holdings, will be sold at public
EXHIBITS
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auction over a 4-year period. The profits from this sale—the difference between the
original IMF purchase price and the proceeds of the sale—will be used to extend
medium-term loans to developing countries. An identical amount, 25 million ounces,
will be "restituted" to IMF members—i.e., sold to IMF member countries in proportion
to their IMF quotas as the present official price.
The IMF's gold auction program was actually initiated on June 2, and it is expected
that restitution of one-quarter (or 6 1/4 million ounces) of the total to be sold to
members will take place in the next few weeks. It should be emphasized that the purpose
of the IMF's auctions is to mobilize this IMF gold for the benefit of the developing
countries. The objective is not to obtain a predetermined sum or to influence the gold
price one way or the other. In fact, great care has been taken to sell the gold in an
orderly, nondisruptive way that will have the minimal possible impact on the gold
market. For the most part, this has involved removing, to the extent possible, all
uncertainties regarding the sales, by announcing the time period and schedule over
which these sales would be made and sticking to it. The market sales of 25 million
ounces are to be made over a 4-year period, on a regularly scheduled pro-rated basis.
In many respects, this is similar to a new gold mine coming into production which can
be expected to operate for 4 years at a production level of 6 1/4 million ounces a year.
Initial market reaction to the announcement of the IMF sales program was one of
concern as to whether demand levels would be sufficient to absorb this amount ofgold
without seriously depressing the price. Actually, bids at each ofthe 4 auctions—at each
of which 780,000 ounces were sold—totaled between 2.1 and 4.2 million ounces,
sufficient to absorb the amount offered at close to the prevailing market price. The
market price did decline over the period of the first three auctions—for a variety of
reasons including a decline in inflation in some countries, a reduction in commodity
prices, and other factors. The market price declined to $ 111 per ounce at the time of
the third auction, and it was suggested by some that the IMF vary its sales program to
ease the pressure on the market. The Fund reaffirmed its intent to proceed with the
planned sales program. In mid-October the price started an upward climb which
actually accelerated following the fourth IMF auction at the end of October. Gold is
now trading at around $ 130 per ounce with another auction scheduled for December 8.
There are undoubtedly many reasons for this turnaround—as there seem inevitably
to be for every movement in the gold price. I would only note that the reaffirmation
of the IMF's intention to adhere to the agreement on sales of its gold removed one
uncertainty. We may confidently expect the IMF to continue with its auction program
on a regular basis. Auctions of smaller amounts might be held more frequently, but the
principles of the IMF's approach, and the volume tp be sold in any 6- or 8-week period,
are not at issue, and this fact should be a force for greater stability in the market.
I noted earlier that the official price of gold in the IMF will be eliminated by
amendment of the IMF Articles. We have long viewed this as an important symbolic
step, a step that is central to demonetization. While elimination ofthe official gold price
will eliminate what has been an effective impediment to official purchases of gold,
whether we will actually see a significant volume of transactions in gold between central
banks is, in my judgment, extremely doubtful. The system as a whole has evolved too
far. The risks of dealing in gold have become too great to make such official transactions
likely. A central bank acquiring gold has no assurance that it can be sold at any
particular or specified price. This is a risk which central banks may not wish to run with
the monetary reserves of their nation.
It is more likely, in my view, that we will see a gradual movement ofgold out of official
reserves altogether, as countries choose to realize the capital gains on their gold
holdings through sales to the market. There will almost surely come a time when
governments conclude that it is not fair to their taxpayers to continue to hold gold—
an asset which yields no interest—when its sale could reduce the national debt and the
continuing interest burden. I would stress, however, that I would expect the disposal
ofgovernment stockpiles ofgold to be a gradual process, in large part because holders
realize that large portions of the 1 billion ounces still held in official reserves cannot
be sold without significantly affecting the market. Gold sales may take place as
individual countries experience an immediate need to sell gold to obtain the foreign
exchange with which to pay for essential imports.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Despite the judgment that these agreements are not likely to lead to dramatic changes
in official attitudes with respect to gold holdings, important transitional arrangements
have been agreed upon by the Group of Ten—the major gold-holding nations—to
assure that gold does not reemerge as an important monetary instrument while these
changes are taking effect. These arrangements provide that participating nations: (1)
will not act to peg the price of gold; (2) will agree not to increase the total stock of
monetary gold held by their authorities and the IMF; (3) will respect any further
conditions goveming gold trading to which their central banks may agree; and (4) will
report regularly on their gold sales and purchases. The arrangement took effect
February I, 1976, and will be reviewed after 2 years, and then continued, modified,
or terminated. While we need to watch developments carefully, I would hope that such
arrangements will not be needed for an extended period.
U.S. gold policy and the market
I would like to tum briefly to the question of how U.S. gold policy relates to the
functioning of the gold market.
You will recall that all restrictions on private ownership ofgold by U.S. citizens were
removed at the end of 1974. Secretary Simon supported the repeal of these restrictions
as a "practical step toward our objective of ending the official monetary role of gold
so that it may ultimately be treated in all respects like any other commodity." I should
stress that moving gold towards a pure commodity status should have advantages for
both producers and consumers by allowing the free market to work in the absence of
stifling regulations on gold transactions. As the monetary role of gold fades, more
countries may follow the U.S. lead in removing restrictions.
The U.S. action has, I submit, contributed to a more efficient and broader world gold
commodity market. The U.S. market centered in New York has made possible a world
time chain for gold transactions, running from Europe to the United States to the Far
East. This has made gold pricing easier and facilitated transactions. The development
of an active futures market for gold on the organized commodity exchanges of New
York and Chicago has been particularly significant. In an era of fluctuating prices,
futures markets serve the valuable function of allowing both producers and users ofgold
to hedge their operations.
Since the lifting of restrictions on gold holdings by U.S. citizens, the Treasury has
auctioned a total of 1.3 million ounces of gold in 2 separate auctions, one on January
6, 1975, and the other on June 30, 1975. These sales were designed to reduce the need
for imports. No further auctions have been held and none is currently scheduled.
Thus far this year U.S. demand for gold for industrial and artistic purposes has been
running at an annual rate of about 4 1/2 million ounces. Demand, of course, tends to
increase as the economy grows. Domestic production is running at approximately 1.1
million ounces a year, and scrap recovery is about 800,000 ounces a year. There is a
substantial gap between this supply and industrial consumption. Except to the extent
that the Treasury sells from its holdings, this gap, together with any demand for
speculative or investment purposes, must be met by imports. In the first 10 months of
1976 we have imported 3.4 millionouncesof gold bullion including gold which has been
sold out of foreign official accounts at the Federal Reserve Bank of New York.
Treasury policy toward sales is perhaps best expressed in the answer which Secretary
Simon gave on February 3, 1976, to a question from Congressman Henry S. Reuss,
chairman ofthe House Subcommittee on International Economics. The Secretary said:
Sales of U.S. gold by the Treasury to date have been related to helping meet net
import demand for gold from abroad, and are consistent with our view that the
international monetary role of gold should continue to diminish. We have not
attempted to enunciate a long-term sales policy, but would expect to continue to
conduct sales from time to time to help meet import demand. We will in no way
conduct sales in a manner that would **peg" the market price of gold or that could
be construed to have that objective.
In sum, the Treasury favors the increase in gold's status as a commodity, favors the
development of a free gold market, and supports official sales of gold in the manner
least disruptive to the market. We have no price objective, and we strongly oppose the
use of official sales for the purpose of controlling the gold price.
EXHIBITS
417
Exhibit 45.—Press release, February 11, 1977, announcing agreement on $300
million credit between the United States and Portugal
The Treasury Department and the Bank of Portugal today formally approved the
provisional agreement reached December 31, 1976, for the extension of up to $300
million in short-term credit from the U.S. Treasury Exchange Stabilization Fund to the
Bank of Portugal. The ESF arrangement is envisaged as the first phase of a prograni
of assistance—involving this short-term credit, possible drawings from the IMF by
Portugal, and a proposed medium-term multilateral credit facility—designed to achieve
financial stability and recovery of the Portuguese economy.
Exhibit 46.—Statement by Assistant Secretary Bergsten, April 5, 1977, before the
Subcommittee on Financial Institutions Supervision, Regulation and Insurance of
the House Committee on Banking, Finance and Urban Affairs, on various issues
raised by the foreign lending activities of U.S. commercial banks
The setting
It is a great pleasure to appear before this subcommittee to discuss the various issues
raised by the foreign lending activities of U.S. commercial banks. I will first address the
dramatic changes in the world economy which have led to the sizable increase in
intemational lending by U.S. banks, and then turn to the role played by the banks and
the effects of their activities on the U.S. and world economies.
Since the massive increase in the world price of oil in late 1973, the OPEC countries
as a group have been running surpluses in their current account positions—their trade
in goods and services—of $40-$65 billion annually. Only two fundamental remedies
to this situation are possible: Cutbacks in total energy consumption by importing
countries, and increased use of alternative energy sources. President Carter's energy
program, to be announced later this month, will pursue both objectives for the United
States, and we will be urging other countries to take similar steps. Implementation of
such programs will take time, however. Hence the OPEC financial surpluses—which
are now concentrated heavily in Saudi Arabia, Kuwait, and the United Arab Emirates,
whose own imports will increase only slowly—will probably continue, with a gradual
decline for several more years.
The needed response
Two issues are thus raised for the rest of the world: How to share out its OPECinduced current account deficit, and how to finance that deficit in the most stable
possible manner. The recent expansion of intemational activity by U.S. banks relates
directly to both.
Many commentators have focused on the sharing out of the OPEC-induced deficit
between (a) industrialized countries and (b) developing countries. I do not believe that
this is a useful distinction. A number of industrialized countries have in recent years
experienced extremely weak balance of payments positions, exacerbated by—but going
well beyond—the problems caused by higher oil prices. At the same time, a number
of developing countries have adjusted effectively and rapidly to the new situation and
have maintained strong extemal positions. Attention needs to be focused on the
positions of individual countries, whether industrialized or developing, to see whether
they are playing their proper role in sharing out the OPEC-induced current account
deficit of the rest of the world.
For example, some of the strongest national economies—notably Germany,
Switzerland, the Netherlands, and Japan—have continued to run sizable current
account surpluses. They thus intensify the pressure on other countries, which is already
formidable because of the OPEC surpluses, by perhaps another $12 billion this year.
If these stronger countries are unwilling to help share out the OPEC-induced deficits,
the problems of adjusting and financing the international payments balance are
rendered much more difficult.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
It is thus the policy of the United States to urge these countries to take measures
which will have the effect of reducing their surpluses and, indeed, to bring them into
current account deficit. The United States itself has already taken such measures. We
are encouraged that some of these countries have recently taken steps in the proper
direction; further action by them will help assure a stable international payment picture.
On the other side ofthe ledger, countries with excessive current account deficits must
also adjust. Some countries, in both the industrialized and developing world, developed
sizable deficits because they chose to ride out the world recession of 1974-75 —
maintaining their planned rates of economic growth, and borrowing abroad to cover
the external deficits which resulted from the weakening of the largest industrialized
markets for their exports of both commodities and manufactured goods. Hence they
have had to adjust in 1976-77, when other countries (such as the United States) were
recovering from the recession. To some extent, this pattern has produced an image of
economic weakness for some countries which is, rather, a simple matter of the timing
of their adjustment to the massive change in world economic conditions since 1973.
Nevertheless, it is essential that such adjustments take place. The United States has
urged individual countries to do so. We have strongly supported the efforts of the
International Monetary Fund to help both industrialized and developing countries find
sustainable adjustment paths, and indeed believe that the Fund should play a central
role in supporting the evolution of a sustainable international payments picture. Private
bank lending to an individual country is, of course, rendered much more likely, and
much more likely to achieve its purposes, when that country has adopted effective
adjustment measures—especially when those measures have received the imprimatur
of the International Monetary Fund.
Financing the imbalances
A central premise, however, is that the non-OPEC world is going to continue to run
a sizable current account deficit for several more years. Hence there will continue to
be a need for sizable international financing of surpluses and deficits, in two directions:
(a) Between OPEC and the rest of the world and (b) to a lesser extent, among the nonOPEC countries themselves.
We know that the OPEC countries, and other surplus countries, will export sufficient
capital to provide the needed financing. There is simply no other way for them to invest
the proceeds of their current account surpluses. But two key questions arise: Will this
financing be distributed to the specific countries which need it to finance their deficits?
What will be the channels through which such financing takes place, and who will
thereby take the risks associated with this (as any other) type of lending?
The role of the private banks
Private banks, in the United States and throughout the world, have played a major
role in the response to both questions. They have accepted deposits from the OPEC
(and other) surplus countries, and then relent to the deficit countries which needed
capital inflows to balance their positions; they and others in the private financial
markets have provided about 75 percent ofthe total funds raised from external sources
during 1974-76. Financial intermediation between lenders and borrowers, which has
become a familiar phenomenon within the United States (and some other countries)
and had already reached sizable international dimensions before 1973, has now become
a central element in the world economy as well.
Some observers have raised concern over this evolution of events. They have
suggested that foreign loans may be inherently riskier than domestic loans, with
consequent risk to the stability of our own—or even the world's—banking system.
There has been talk of an "overexposure" of U.S. banks in foreign markets.
We believe that these concerns are greatly exaggerated. Alarms have been raised
about international banking from the very creation of the Eurocurrency market in the
early 1960's. Fears were voiced, primarily by individuals unfamiliar with the operations
ofthe international economy, after the sharp increase in oil prices in late 1973. These
fears have proven to be largely unfounded, and we believe that they continue to be
greatly exaggerated.
EXHIBITS
419
Losses on foreign loans have been small. In fact, loss experience has been better on
foreign loans than on domestic loans. Governor Wallich, in his testimony before this
subcommittee on March 23, noted that during 1971-75 the loss ratios on international
loans ofthe seven largest U.S. banks were about one-third of their total loss ratios. John
Early of the FDIC concluded, in his testimony before this subcommittee, "that recent
commitments to LDC's pose no real danger to the overall stability ofthe U.S. banking
system."
In fact, there are only two major differences between domestic and international
lending. First, it may be more difficult for American lenders to acquire adequate data
and other information on foreign than domestic borrowers. Our own Federal Reserve
System is working with the central banks of other countries to improve this situation,
as indicated recently by both Chairman Bums and Governor Wallich. In addition, there
may be a greater role for the International Monetary Fund to play in reducing any
knowledge gap that may exist—a matter which we are now considering with some care.
Second, lending to another country entails judgment about the credit position ofthe
entire country as well as of the specific borrower. An individual borrower, no matter
how creditworthy, might be unable to repay as scheduled if its government was forced
to adopt restrictions on such payments because of problems in its overall external
accounts.
We believe that the remedy to this potential problem is fourfold. First, as just noted,
more information is needed. Second, surplus countries—both in OPEC and elsewhere—must reduce their surpluses to reduce the burden on deficit countries. Third,
deficit countries, which even begin to approach having a debt service problem, must
undertake decisive adjustment programs of their own, with the assistance ofthe IMF
where appropriate. Fourth, there should be adequate official financing available for
deficit countries so as to (a) minimize the need for private lenders to assume undue
risks and (b) induce deficit countries, as a quid pro quo for obtaining access to such
finance, to adopt the needed adjustment measures.
With regard to the latter point, we believe that prudence dictates consideration of
a further increase in the financial resources available to the Intemational Monetary
Fund, the central official component ofthe intemational monetary system. There are
a variety of means by which such an increase could be achieved, and several alternatives
are now under consideration. At the same time, there has been discussion of
augmenting the availability of official funding through other intemational bodies such
as the proposed Financial Support Fund at the Organization for Economic Cooperation
and Development (OECD). We are exploring all of these possibilities with other
countries, and believe that it will prove possible to move over the next few months
toward assuring the continued availability of sufficient official financing to meet the
needs of the system.
Some specific issues
Individual countries can, of course, find themselves at times in situations where their
external debt burden is too great to be met without policies which are unduly restrictive,
from a domestic or international point of view. Such situations have occurred
occasionally, and there have been about 30 instances in the postwar years in which
multilateral negotiations with creditor countries were needed to reschedule existing
debts to official lenders. Remarkably, the pace of such reschedulings has actually
declined in recent years despite the massive shocks to the world economy from higher
oil prices and world recession.
When such cases do arise, there are well-developed international mechanisms for
arranging the needed reschedulings. Any such steps are of course linked to adjustment
measures which will ensure that the fundamental problem ofthe countries involved will
be resolved in an orderly fashion. Hence no systematic problem would result even if
individual country problems were to emerge occasionally, as they have in fact already
done throughout the postwar period.
Concern has also been expressed in some quarters that domestic demand for bank
credit will at some point dangerously reduce the amount of credit available to other
countries—or, conversely, that "excessive" loans to foreigners will drain needed funds
away from our own economy. Neither outcome is at all likely.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
The danger that our domestic economy would suffer from inadequate funds as a
result of excessive capital exports is minimal. If capital in the United States becomes
scarce, interest rates will tend to rise; U.S. funds will be employed at home, and indeed
funds will fiow in from abroad.
If our economy is expanding more rapidly than that of other countries, or if we are
approaching capacity utilization of our resources, our current account deficit is likely
to grow and the net inflow of funds to the United States will increase. At the same time,
such an increase in the current account deficit will mean that there is a strong U.S.
market for the exports of other countries—strengthening their current account position
and reducing the need for them to borrow in the first place. There might be less
borrowing, but there would be less need for such borrowing.
At this time, in fact, there is a net inflow of foreign capital to the United States. Except
for 1975, when special circumstances dictated, the U.S. current account has been in
deficit since the increase in oil prices. Hence we have imported capital to balance our
international accounts. The risk to our domestic economy of inadequate funds is
minimal.
Exhibit 47.—Remarks by Assistant Secretary Bergsten, April 22, 1977, before the
Chicago Council on Foreign Relations, Chicago, III., entitled *'The International
Economic Policy of the Carter Administration"
The setting
When the Carter administration came into office 3 months ago, it faced a difficult
and complex set of economic problems both at home and abroad.
Unemployment was far too high. Over 7 million Americans were out of work.
Another 7 or 8 million workers were unemployed in the other industrialized countries.
Countless millions more were unemployed and underemployed in the developing
world.
At the same time, inflation remained a major threat. The rate of price increase in the
United States had dropped sharply, to 5 or 6 percent, but was still far too high. A few
countries, including Switzerland, Germany, India, and Taiwan, had done better than
we. But many others had not, and some still faced price rises in the double-digit range.
In some, inflation was still rising or had begun to rise once more.
The energy problem remained unresolved. High and still rising oil prices intensified
both infiation and unemployment. We in the United States had not made sufficient
efforts to cut back on our own profligate consumption of energy. The continuing
current account surplus of several OPEC countries forced a sizable deficit upon the rest
of the world, which had to be distributed and financed in ways which would support
international economic and financial stability. The sharp increase in international
lending activities of private banks in both the United States and Europe, which was
occasioned by the necessity of financing these large imbalances, raised questions in the
minds of some observers.
Threats to an open international trading system were widespread. Several important
industries here in the United States sought the imposition of significant impediments
to imports. Pressures to adopt such impediments were widespread in other countries,
in both the industriahzed and developing world, and some had already taken steps in
response to those pressures.
The overall relationship between industrialized and developing countries was at an
impasse. There was major discord on commodity issues. The ministerial meeting which
was to have concluded the North-South dialog—the Conference on International
Economic Cooperation (CIEC)—had been postponed due to its lack of progress. Both
developing and industrialized countries awaited the arrival of the new administration
with keen interest.
Finally, and encompassing all of these issues, was the widespread expectation that
a new summit meeting was needed to discuss the whole range of international economic
issues of concem to the major countries. The advent of a new administration in the
United States added to the interest of other countries in holding such a session at the
level of heads of governments.
EXHIBITS
421
A full menu of issues thus confronted President Carter and all of his economic
officials. We have begun to respond to each of them in these first 3 months. Before
tuming to the specific topics, however, I would like to first discuss a much more
fundamental issue—the basic attitude and approach of this administration toward the
world economy.
The fundamental philosophy
The basic philosophy of the administration is that domestic and international
economic issues are inextricably linked. Our own high energy consumption strengthens
the ability of OPEC countries to raise world oil prices, which in tum creates balance
of payments difficulties for other countries. Our maintenance of an open trading market
provides essential support for jobs abroad and jobs here, both directly and through its
resultant effects on the trade policies of others. A well-functioning monetary system,
reasonably stable commodity prices, and healthy intemational competition are
essential components of our fight against infiation and unemployment. Indeed, each
issue to which I have referred has critical dimensions both here and abroad.
There is a similarly intense relationship between intemal and external economic
concems in other countries as well. Moreover, the actions of many of these countries,
like the actions of the United States, can have major effects on their trading partners,
including the United States—and, indeed, on the entire world economy. Hence, it is
essential that we and they work ever more closely together. At a minimum, this requires
that each of our countries resist the perennial temptation to export its internal
problems—the result of which can only be emulation and retaliation by others, with
consequent costs for all. This is a second fundamental principle underlying the
approach of the Carter administration to intemational economic policy.
But such collaboration must go beyond the avoidance of beggar-thy-neighbor
measures. The world's major economic powers must, in a positive sense, exercise
collective responsibility for the stability and progress ofthe world economy. They must
consult constantiy on their individual goals, and on the means to carry out those goals.
They must monitor each other's performances in achieving agreed goals. They must
take explicit account of conditions and policies elsewhere in formulating their own
national policies. The search for effective exercise of collective intemational economic
responsibility is a third fundamental element of the philosophy of the Carter
administration.
The United States is fully prepared to participate in such an exercise of collective
economic responsibility because the economy of the United States has become
inextricably intertwined with the world economy of which it is a part:
• One out of every six manufacturing jobs in this country produces for the export
market.
• One out of every three acres of American farmland produces for the export
market.
• Almost one out of every three dollars of U.S. corporate profits now derives
from the international activities of the firms, including their foreign
investments as well as their exports.
• It was extemal forces (oil price rises, crop failures, and the exchange rate
adjustment to previous levels of domestic infiation) which propelled our rate
of infiation into double digits in 1973-74.
• We depend on imports for more than one-fourth of our consumption of 12
of the 15 key industrial raw materials.
• The share of trade in our gross national product has doubled over the last
decade or so; when investment is included, our engagement in the world
economy is probably at least as great as that of Japan or of the European
Common Market, taken as a group.
It is thus immediately clear that the economic interests of the United States can be
served only through effective integration of our domestic and international economic
policies. Our foreign policy also requires such integration because of the central
importance of economic issues to overall relations between the United States and other
countries.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
The first basic steps
Internationial economic policy, like all foreign policy, begins at home. Hence our first
steps were to create the domestic base for an effective international economic policy.
Even before the administration took office, President Carter was hard at work
developing what became his economic stimulus program to accelerate the reduction
of unemployment—a program which, even without the tax rebate, exceeds $20 billion
in 1977-78. As that program developed, during the month of December, international
considerations camie to loom large in the final decision.
High unemployment in Europe and Canada threatened the political stability which
was a crucial underpinning of NATO and the entire Atlantic alliance. Yet some key
countries in Europe needed to restrain domestic consumption because of continuing
high inflation and large balance of payments deficits. They clearly needed an
opportunity for export-led growth—which could only be provided by the stronger
economies. Such an expansion of trade would also reduce the payments imbalances
between the stronger and weaker countries, thereby enhancing international monetary
stability. Hence more vigorous expansion was needed in the United States, both for its
direct effects on other countries and because leadership by the United States could help
bring about a commitment by other strong countries to pursue similar policies
strengthening the prospects for a sustained worldwide recovery.
More rapidly growing markets in the industrial countries were also a matter of central
importance to the developing countries. Many of these countries, particularly our
neighbors in Latin America, rely heavily on our market and had experienced large
extemal deficits due to higher oil prices and the world recession of 1974-75. Successful
pursuit of their longrun development strategies depended in large part on their being
able to maintain a rapid growth of their exports. Indeed, there was no policy step which
the United States could take which was of greater importance to the developing
countries than achieving more vigorous and sustained expansion of our own economy.
In addition, the threats to an open world trading system were magnified by continuing
high rates of unemployment. More rapid progress in expanding job opportunities in
both America and in other major trading countries was necessary to enable
govemments everywhere to maintain policies which would continue to bring the
advantages of freer international trade to their societies.
At the same time, reasonable price stability in the United States remained of central
importance to the world economy. The onset of rapid inflation in the United States in
the late 1960's was a major cause of the breakdown of the old intemational economic
order in the early 1970's. In an interdependent world in which the United States remains
the largest single economy and trading nation, and whose monetary system still relies
heavily on the dollar, price stability in America promotes price stability in the rest of
the world as well.
Hence U.S. economic policy had to achieve more vigorous growth, while retaining
reasonably stable prices, for a series of key international reasons as well as for domestic
reasons. These considerations played a central role in the development of what emerged
as the administration's first approach to economic policy. They reveal both the
importance of international considerations to U.S. economic policy, and the recognition of that importance by the Carter administration.
A second step followed logically. When President Carter asked Vice President
Mondale to visit Europe and Japan within the first hours of his administration, he
instructed the Vice President to place economic issues at the very top of the agenda.
There was no crisis which compelled such action. We were not forced to accord such
priority to these issues. We chose to do so because of their importance—to the U.S.
economy, and to the overall international relations of the United States. Building on
the measures already proposed by the administration at home, the Vice President thus
urged the economically stronger countries which we visited to expand more rapidly;
the weaker countries to maintain their stabilization efforts; and all countries to avoid
steps which would impair our mutual gains from an open international trading system.
Beyond these substantive policies. President Carter took a series of institutional steps
in an effort to implement effectively the heavy emphasis which his administration would
place on intemational economic issues. In recent years, international economic policy
had been hampered by major institutional problems: Rancor, and often open hostility.
EXHIBITS
423
between the key departments of Government with responsibilities in this area (notably.
State and Treasury); mistrust and noncooperation between the administration and
Congress; a general failure to effectively integrate domestic and international economic
policy.
The administration took three immediate steps to avoid such difficulties. In choosing
his top officials, at both the Cabinet and sub-Cabinet levels. President Carter did not
follow the traditional approach of staffing each agency vertically. Instead he chose
"clusters" of officials in the several related agencies who would be working closely
together on particular issues such as defense or international economics. As a result,
when asked by a member of the Commission of the European Community during the
Mondale trip what we had accomplished in our first 2 days in office, I was able to reply:
"Total detente between the State and Treasury Departments." That detente, and
indeed the closest possible working relationship among the many agencies involved in
these issues, has held up for 3 months. We believe that it will continue to produce a
cohesive and effective approach to intemational economic policy throughout the
administration.
In addition, we went to work immediately to repair relations with Congress. The
Priesident has personally led the way, and irisisted that all of us consult actively and
consistently with the committees and Members who bear responsibility for issues in our
respective areas of responsibility.
Because of the budget and general legislative cycle, foreign assistance was the first
international economic issue to require congressional action. Hence an immediate and
intensive round of formal hearings, and informal discussions, was begun in that area.
These consultations have been exceptionally productive. For example, we have
adopted a number of new policies toward the international development lending
institutions (the World Bank, Intemational Development Association, Inter-American
Development Bank, Asian Development Bank, African Development Fund) which
were originally proposed by the Congress.
When I led the U.S. delegation to conclude the negotiations for a fifth replenishment
of the International Development Associsttion in Vienna in mid-March, I was
accompanied by two key Members ofthe House of Representatives. We have indicated
that we will invite Members to join us at all such sessions in the future, to emulate a
practice which has been carried out in the trade field for many years. We hope through
such steps to forge a strong working partnership between the administration and the
Congress, so that our policy efforts abroad will be fully sustainable at home.
Finally on the institutional front, the President created a single decisionmaking body
for all economic issues, domestic and international—the Economic Policy Group
(EPG). He decided to abolish the old Council on International Economic Policy, on
the grounds that international economic policy was too important to be fashioned
separately. Rather, it must be integrally related to all economic policy—^just as all
domestic economic policy steps must take into account their international ramificactions. Hence the Department of State sits as a full member of the EPG in its
consideration of all issues, and the domestic agencies are engaged in the discussion of
all international economic issues. The results to date, in terms of assuring a unified
administration position that takes the whole range of domestic and international factors
into account, have been heartening.
Specific policies
Principles, priorities, and institutional arrangements are of great importance. They
are particularly important during the early days of an administration, when basic
attitudes and perceptions—both inside and outside the administration—are being
shaped. Ultimately, however, they are only as important as the policies which they
produce.
Some of these policies are still in the process of formulation. Yet some have already
emerged clearly, in response to the series of issues which I have outlined. I would like
to close by summarizing briefly the steps we have already taken, and the results as we
see them to date.
To promote more rapid expansion of the world economy, we have proposed a
stimulus program and our economy is moving briskly ahead. The underlying growth rate
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1977 REPORT OF THE SECRETARY OF THE TREASURY
is at least 6 percent, our target for the year. Indeed, the economy is moving so briskly
that the President felt that the income tax rebate was no longer needed. This expansion,
by enhancing the opportunity for other countries to expand their exports, has
contributed to a sizable shift in the U.S. current account position—which, in turn,
makes for a better balance in the world payments pattern and reduces strains on the
intemational monetary system. President Carter has also adopted a multipronged antiinflation program for this country, which includes a number of specific international
measures as well as aggregate fiscal restraint and rationalization of numerous
Govemment programs.
The other strongest economies, notably Japan and Germany, have strengthened their
economic programs in the past few months. Perhaps, more importantly, they have
committed themselves to assure that their growth projections actually materialize.
Japan has also recently contributed greatly toward improved balance in the world
economy by permitting, and indeed welcoming, a sizable appreciation of the yen.
These steps help the weaker countries to reap the benefits of the stabilization
programs which they have now implemented. Britain, Italy, and Mexico have reached
standby agreements with the International Monetary Fund on the basis of such
programs. The Barre plan in France is achieving marked success. These steps, by both
stronger and currently weaker countries, represent essential contributions to an
effective exercise of the collective responsibility for a healthy world economy which
rests on the shoulders of the major countries, without which a resumption of sustained
worldwide economic growth will not be possible.
Several steps are underway to reinforce international monetary stability. In reducing
U.S. (and world) dependence on imported oil, the President's energy program will, over
time, cut the OPEC surpluses which lie at the heart ofthe present monetary imbalance.
The macroeconomic and exchange-rate policies of other key countries, already
mentioned, should provide a better balance outside OPEC by trimming both excessive
surpluses and excessive deficits. To assure that there are adequate official funds to
finance the imbalances which will unavoidably remain, in a way that will promote
needed adjustment, we support the initiative of the Intemational Monetary Fund in
seeking to borrow directly from surplus OPEC countries and from the stronger
industrial countries to augment the resources available to the Fund over the next few
years.
In the trade area. President Carter has taken actions which will avoid disruption of
the international trading system and preserve the benefits of trade to American
consumers, while providing effective help to those at home who have been hard hit in
particular industries:
• In the shoe case, he has directed the development of a major new program
of direct assistance to the industry and, to provide a bridge until that prograni
can take effect, the negotiation of "orderly marketing agreements" with the
two countries whose increased exports equaled the entire increase in U.S.
imports from 1974 through 1976.
• In color television, we are negotiating an orderly marketing agreement with
the country which accounts for 80 percent of U.S. imports and whose sales
grew by 150 percent in 1976 alone; at the same time, the administration is
appealing the Customs Court ruling in the Zenith case which, if sustained,
would disrupt billions of dollars of intemational trade.
® In sugar, negotiations have begun on an intemational agreement whose
objective is to avoid the massive price fluctuations of recent years, which have
brought heavy costs to producers and consumers alike.
• On automobiles, the President's energy proposals seek to reduce the U.S.
addiction to "gas guzzlers," and hence serve the objective of all oil-importing
countries, with minimum disruption to international trade.
• And we have indicated our intentions, now that Ambassador Robert Strauss
has been confirmed as the President's Special Representative for Trade
Negotiations, to push hard for a major substantive outcome to the multilateral
trade negotiations with as much progress as possible in 1977, to enhance
further to all countries the benefits of an open trading system.
EXHIBITS
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In North-South affairs, we have taken several major steps. As already noted, the brisk
expansion of our own economy is expanding the world's biggest market for the
commodities and manufactured exports of the developing countries. The accelerated
expansion of other countries reinforces that effort. Our determination to avoid
widespread import restrictions has been of great value to the poorer countries. Our
support for an expansion of the lending facilities of the International Monetary Fund
helps the prospects of making more balance of payments finance available to these
countries, under proper conditions.
We have also undertaken a number of steps which relate more directly to the
developing countries. As President Carter indicated in his anti-inflation message of
April 15, intemational commodity agreements undertaken for purposes of price
stabilization around market trends can promote U.S. economic objectives. This can
occur for two reasons: The price ceilings of effective commodity agreements will
restrain sharp runups in commodity prices, as occurred particularly in 1973-74, and
their price floors will encourage continued flows of new investment so that temporary
declines in retums will not deter the creation of capacity needed to meet demand when
stronger markets retum.
Such agreements have long been sought by the developing countries. There remain
some differences in our specific approaches, but we foresee a series of cooperative
endeavors in that area. As far as funding goes, we are openminded conceming U.S.
contributions to the buffer stocks of such agreements, and to the possibility of pooling
the financial resources of each in some sort of common funding mechanism for those
commodity agreements that can be negotiated.
Another primary area of the North-South relationship is foreign assistance. We
believe that direct assistance is far superior to indirect types of resource transfer which
are often proposed such as generalized debt relief or efforts to prop commodity prices
beyond levels which reflect market forces because it can focus directly on those
countries which most need help and can best assure effective use of the resources
transferred. Indeed, our support of economically sensible policies such as adequate
levels of foreign assistance and price-stabilizing commodity agreements is necessary in
enabling us to resist proposals for such less desirable approaches.
A particular focus ofthe new administration is on contributions to the international
development lending institutions, where the need to fulfill a backlog of past pledges
leads us to seek over $5 billion of congressional authorizations and $2.6 billion in
appropriations in fiscal year 1978. In this area, every $1 contributed by the United
States is matched by $3 from other donor countries. Our average share in the current
replenishment of these institutions is only 25 percent, although our share of the total
gross national product of all donor countries is about 38 percent. The House of
Representatives and the Senate Foreign Relations Committee have already voted to
support the full authorization request, and both Budget Committees have supported
virtually our full request for appropriations. In addition, in the supplemental
appropriations for fiscal year 1977, both Houses voted to make good in full on past U.S.
pledges to the Intemational Development Association and the Asian Development
Fund, as well as the bulk of our past pledges in the Inter-American Development Bank.
It is our hope, and belief, that these steps by the United States—in partnership with
the other industrialized countries—will promote greater progress in the developing
world and an era of close cooperation between North and South. In that relationship,
we would look to the developing countries to exercise economic responsibilities as well
as to enjoy economic rights. We will seek to help develop a framework in which they
all find it in their interests to do so.
All of these issues will be discussed in the forthcoming seven-nation summit;
President Carter is eager to attend that meeting, so that the heads of government can
provide a powerful political impulse to actions that can then be taken in other forums—
to concert domestic policies, expand international financing, move ahead with the
multilateral trade negotiations, reduce energy consumption, and help meet the needs
of the developing countries.
The objective in all these areas is to strengthen the intemational procedures and
institutions through which the problems ofthe industrialized and developing countries,
alike, must be addressed. We are confident that the summit will represent a further.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
important step toward forging the sense of collective responsibility for the world
economy which must lie at the heart of our own policies, and those of all other countries,
in the months and years ahead.
Exhibit 48.—Communique of the Interim Committee of the Board of Governors of the
International Monetary Fund on the International Monetary System, April 2S-29,
1977, issued after its eighth meeting in Washington, D.C.
1. The Interim Committee of the Board of Governors of the Intemational Monetary
Fund held its eighth meeting in Washington, D.C. on April 28-29, 1977 under the
chairmanship of Mr. Willy De Clercq, Minister of Finance of Belgium. Mr. H. Johannes
Witteveen, Managing Director ofthe Fund, participated in the meeting. The following
observers attended during the Committee's discussions: Mr. G. D. Arsenis, Director,
New York Office, UNCTAD; Mr. Mahjoob A. Hassanain, Chief, Economics Department, OPEC; Mr. Pierre Languetin, General Manager, National Bank of Switzerland;
Mr. Rene Larre, General Manager, BIS; Mr. Emile van Lennep, Secretary-General,
OECD; Mr. Olivier Long, Director General, GATT; Mr. Robert S. McNamara,
President, IBRD; Mr. Francois-Xavier Ortoli, Vice-President, CEC; and Mr. Cesar
E. A. Virata, Chairman, Development Committee.
2. The Committee discussed the world economic outlook and the functioning of the
intemational adjustment process.
The Committee noted the expansion of activity that has taken place in the world
economy over the past year and welcomed the improvement in economic outlook
during recent months following cessation ofthe "pause" in the industrial countries. The
Committee expressed concem, however, about the persistence of high levels of
unemployment, especially among young people, and high levels of inflation in many
countries.
I. On the broad question of the economic policy options and priorities of member
countries, the Committee agreed on the following conclusions:
(a) Policies of demand management in most countries must emphasize the need
to deal with problems of inflation and the balance of payments. These policies are
being guided by the conviction that measures to combat inflation and, where
necessary, to strengthen the external position are not only necessary in present
circumstances but also will make for a better record over time in terms of economic
growth and employment.
(b) At the same time, special efforts should be made to improve market access
for the exports of the developing countries and to increase the flow of official
development assistance. Any tendencies toward protectionist trade policies cannot
be considered acceptable from an international point of view and should be strongly
resisted; indeed, increased attention should be paid to the need to reduce the existing
restrictions on trade. Success in the current negotiations in Geneva would make an
important contribution to this end.
II. The Committee drew the following conclusions from its review of the
international adjustment process:
(a) The needs for adjustment remain large and, as experience shows, delays in
dealing with them can be very costly. It will take international cooperation, and
determined action by surplus as well as deficit countries, to make continuing progress
with respect to adjustment. An encouraging development is that a number of
countries, both large and small, developed and developing, have adopted programs
to strengthen their external positions, often in the context of stand-by arrangements
approved by the Fund.
(b) Strategies of adjustment must include emphasis on conservation of energy,
on elimination of domestic sources of inflation particularly in the deficit countries,
and on improvement in cost-price relationships among countries. It is important that
industrial countries in relatively strong payments positions should ensure continued
adequate expansion of domestic demand, within prudent limits. Moreover, these
countries, as well as other countries in strong payments positions, should promote
increased flows of long-term capital exports.
EXHIBITS
427
(c) Given the persistence of large payments imbalances, important demands for
the Fund's resources can be expected to materialize. The Committee found good
grounds for believing that expansion of the Fund's role as a financial intermediary
could contribute significantly to promotion of intemational adjustment and to
maintenance of confidence in the continued expansion of the world economy and
in the effective functioning of the international financial system.
3. The Committee reviewed the developments in international liquidity and in the
financial activities and resources ofthe Fund. In this connection, it had the benefit of
a report of the Managing Director summarizing the discussions that the Executive
Directors have had to date on these subjects.
As a result of this review, the Committee reached the following conclusions:
The Committee recognized that there was an urgent need for a supplementary
arrangement of a temporary nature that would enable the Fund to expand its financial
assistance to those of its members that in the next several years will face payments
imbalances that are large in relation to their economies.
The Commfttee agreed that some of the main features of this supplementary
arrangement would be as follows:
(i) The Fund would establish substantial lines of credit in order to be able to
assist members to meet their needs for supplementary assistance,
(ii) Access to assistance under the supplementary arrangement should be
available to all members and should be subject to adequate conditionality,
and such assistance should normally be provided on the basis of a stand-by
arrangement covering a period longer than one year,
(iii) The Fund should pay interest on amounts borrowed under the lines of credit
at market-related interest rates, and charges by the Fund for the use by
members of resources borrowed by it under these lines of credit should be
based on these rates. The possibility of a subsidy related to the rates of charge
that would be payable by low-income countries should be explored,
(iv) The claims of lenders under the supplementary arrangement should be
appropriately liquid.
The Committee welcomed the willingness of a number of countries in a position
to lend to the Fund to collaborate with it on arrangements for supplementary credit
and urged the Managing Director to complete, as soon as possible, his discussions
with potential lenders on terms and conditions and amounts. It further requested the
Executive Directors to take the necessary steps for making such an arrangement
operative as soon as possible.
4. The Committee considered the main issues relating to the Seventh General
Review of Quotas. It was agreed that, in view ofthe expansion of members' international
transactions and the need for the Fund to be able to give balance of payments assistance
to members on a larger scale than would be available on the basis of quotas under the
Sixth General Review, there should be an adequate increase in the total of quotas
pursuant to the Seventh General Review. On the question of distribution of quotas, one
view was that in order to conclude the Seventh Review at an early date, increases should
be equiproportional to the quotas that will result from the Sixth General Review.
Another view, however, was that a few special adjustments should be made for those
members whose quotas are seriously out of line with their relative positions in the world
economy, and in this connection some emphasis should be placed on increases that
would strengthen the Fund's liquidity. The Committee urged the Executive Directors
to pursue their work and to prepare a report, together with draft recommendations to
the Board of Governors, on increases in the quotas of members under the Seventh
General Review for consideration by the Committee at its next meeting.
5. The Committee also considered the question whether a further allocation of
SDRs would be advisable at the present time. The Committee noted that the Executive
Directors have been discussing this question and agreed to request them to give further
consideration to all aspects of this matter and to report to the Committee at its first
meeting in 1978.
The Committee also agreed to request the Executive Directors to review the
characteristics and uses ofthe SDR so as to promote the purposes ofthe Fund, including
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1977 REPORT OF THE SECRETARY OF THE TREASURY
the objective of making the SDR the principal reserve asset in the international
monetary system.
6. Although the Committee discussed the proposals for supplementary credit, the
Seventh Quota Review and any allocation of SDRs separately as indicated above,
members ofthe Committee attached importance to the interrelationships among them
and particularly to the overall effect of the decisions as a whole.
7. The Committee noted with satisfaction the work of the Executive Directors on
the implementation of Article IV of the Proposed Amendment of the Articles of
Agreement, and welcomed the consensus reached by them on the principles and
procedures for the guidance of members and for the exercise of surveillance by the
Fund over the exchange rate policies of members in the period after the Second
Amendment has become effective. The Committee endorsed these principles and
procedures, and agreed that they will make an important contribution to the effective
functioning ofthe international monetary system in the future.
8. The Committee noted that so far no more than twenty-four members of the Fund
having about 32 percent of the total voting power have notified the Fund of their
acceptances ofthe proposed Second Amendment ofthe Fund's Articles and that very
few members have given their formal consents to increases in their quotas under the
Sixth General Review of Quotas. The Committee expressed its concern at this delay
and urged all members that have not yet accepted the proposed Second Amendment
to complete as soon as possible the arrangements that would enable them to take this
action and to increase their quotas under the Sixth General Review.
9. The Committee agreed to hold its ninth meeting in Washington on September
24, 1977.
Exhibit 49.—Text of communique and appendix, issued following the meeting of the
heads of state or government of Canada, France, Federal Republic of Germany,
Italy, Japan, the United Kingdom of Great Britain and Northern Ireland, and the
United States of America, May 7-8, 1977, in London, England
In two days of intensive discussions at Downing Street we have agreed on how we
can best help to promote the well-being both of our own countries and of others.
The world economy has to be seen as a whole: it involves not only cooperation among
national governments but also strengthening appropriate intemational organizations.
We were reinforced in our awareness ofthe interrelationship of all the issues before
us as well as our own interdependence. We are determined to respond collectively to
take the challenges of the future.
Our most urgent task is to create more jobs while continuing to reduce infiation.
Infiation does not reduce unemployment. On the contrary, it is one of its major causes.
Problem of unemployment
We are particularly concerned about the problem of unemployment among young
people. We have agreed that there will be an exchange of experience and ideas on
providing the young with job opportunities.
We commit our governments to stated economic growth targets or to stabilization
policies which, taken as a whole, should provide a basis for sustained noninflationary
growth in our own countries and worldwide and for reduction of imbalances in
international payments.
Improved financing facilities are needed. The International Monetary Fund must play
a prominent role.
We commit ourselves to seek additional resources for the IMF and support the
linkage of its lending practices to the adoption of appropriate stabilization policies.
We will provide strong political leadership to expand opportunities for trade to
strengthen the open international trading system, which will increase job opportunities.
We reject protectionism—it would foster unemployment, increase inflation and
undermine the welfare of our peoples.
EXHIBITS
429
Impetus for trade talks
We will give a new impetus to the Tokyo round of multilateral trade negotiations.
Our objective is to make substantive progress in key areas in 1977. In this field,
structural changes in the world economy must be taken into consideration.
We will further conserve energy and increase and diversify energy production so that
we reduce our dependence on oil.
We agree on the need to increase nuclear energy to help meet the world's energy
requirements.
We commit ourselves to do this while reducing the risks of nuclear proliferation. We
are launching an urgent study to determine how best to fulfill these purposes.
The world economy can only grow on a sustained and equitable basis if developing
countries share in that growth.
We are agreed to do all in our power to achieve a successful conclusion ofthe CIEC
(Conference on Intemational Economic Cooperation) and we commit ourselves to a
continued constructive dialogue with developing countries.
We aim to increase the flow of aid and other real resources to those countries. We
invite the COMECON countries to do the same.
Support for institutions
We support multilateral institutions such as the World Bank, whose general resources
should be increased sufficiently to permit its lending to rise in real terms.
We stress the importance of secure private investments to foster world economic
progress.
To carry out these tasks we need the assistance and cooperation of others.
We will seek that cooperation in appropriate intemational institutions, such as the
United Nations, the World Bank, the IMF, the GATT and OECD.
Those among us whose countries are members of the European Economic
Community intend to make their efforts within its framework.
In our discussions we have reached substantial agreements.
Our firm purpose is now to put that agreement into action.
We shall review progress on all the measures we have discussed here at Downing
Street in order to maintain the momentum of recovery.
The message of the Downing Street summit is thus one of confidence: in the
continuing strength of our societies and the proven democratic principles that give them
vitality: that we are undertaking the measures needed to overcome problems and
achieve a more prosperous future.
APPENDIX TO COMMUNIQUE
World economic prospects
Since 1975 the world economic situation has been improving gradually. Serious
problems, however, still persist in all of our countries. Our most urgent task is to create
jobs while continuing to reduce infiation. Inflation is not a remedy to unemployment
but one of its major causes. Progress in the fight against infiation has been uneven. The
needs for adjustment between surplus and deficit countries remain large. The world has
not yet fully adjusted to the depressive effects of the 1974 oil price rise.
We commit our govemments to targets for growth and stabilization which vary from
country to country but which, taken as a whole, should provide a basis for sustained
noninfiationary growth worldwide.
Some of our countries have adopted reasonably expansionist growth targets for 1977.
The govemments of these countries will keep their policies under review, and commit
themselves to adopt further policies, if needed to achieve their stated target rates and
to contribute to the adjustment of payments imbalances. Others are pursuing
stabilization policies designed to provide a basis for sustained growth without increasing
inflationary expectations. The governments of these countries will continue to pursue
those goals.
These two sets of policies are interrelated. Those ofthe first group of countries should
help to create an environment conducive to expansion in the others without adding to
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1977 REPORT OF THE SECRETARY OF THE TREASURY
inflation. Only if growth rates can be maintained in the first group and increased in the
second, and iriflation tackled successfully in both, can unemployment be reduced.
We are particularly concerned about the problem of unemployment among young
people. Therefore we shall promote the training of young people in order to build a
skilled and flexible labor force so that they can be ready to take advantage ofthe upturn
in economic activity as it develops. All of our governments, individually or collectively,
are taking appropriate measures to this end. We must leam as much as possible from
each other and agree to exchange experiences and ideas.
Success in managing our domestic economies will not only strengthen world
economic growth but also contribute to success in four other main economic fields to
which we now turn—balance of payments financing, trade, energy and North-South
relations. Progress in these fields will in turn contribute to world economic recovery.
Balance of payments financing
For some years to come oil-importing nations, as a group, will be facing substantial
payments deficits and importing capital from OPEC nations to finance them. The deficit
for the current year could run as high as $45 billion. Only through a reduction in our
dependence on imported oil and a rise in the capacity of oil-producing nations to import
can that deficit be reduced.
This deficit needs to be distributed among the oil-consuming nations in a pattem
compatible with their ability to attract capital on a continuing basis. The need for
adjustment to this pattern remains large, and it will take much international
cooperation, and determined action by surplus as well as deficit countries, if continuing
progress is to be made. Strategies of adjustment in the deficit countries must include
emphasis on elimination of domestic sources of inflation and improvement in
international cost-price relationships. It is important that industrial countries in
relatively strong payments positions should ensure continued adequate expansion of
domestic demand, within prudent limits. Moreover, these countries, as well as other
countries in strong payments positions, should promote increased flows of long-term
capital exports.
The Interriational Monetary Fund must play a prominent role in balance of payments
financing and adjustment. We therefore strongly endorse the recent agreement ofthe
Interim Conimittee of the IMF to seek additional resources for that organization and
to link IMF lending to the adoption of appropriate stabilization policies. These added
resources will strengthen the ability of the IMF to encourage and assist member
countries in adopting policies which will limit payments deficits and warrant their
financing through the private markets. These resources should be used with the
conditionality and flexibility required to encourage an appropriate pace of adjustment.
This IMF proposal should facilitate the maintenance of reasonable levels of economic
activity and reduce the danger of resort to trade and payments restrictions. It
demonstrates cooperation between oil-exporting nations, industrial nations in stronger
financial positions, and the IMF. It will contribute materially to the health and progress
of the world economy. In pursuit of this objective, we also reaffirm our intention to
strive to increase monetary stability.
We agree that the international monetary and financial system, in its new and agreed
legal framework, should be strengthened by the early implementation of the increase
in quotas. We will work toward an early agreement within the IMF on another increase
in the quotas of that organization.
Trade
We are committed to providing strong political leadership for the global effort to
expand opportunities for trade and to strengthen the open international trading system.
Achievement of these goals is central to world economic prosperity and the effective
resolution of economic problems faced by both developed and developing countries
throughout the world.
Policies on protectionism foster unemployment, increase inflation and undermine
the welfare of our peoples. We are therefore agreed on the need to maintain our
political commitment to an open and nondiscriminatory world trading system. We will
EXHIBITS
431
seek both nationally and through the appropriate intemational institutions to promote
solutions that create new jobs and consumer benefits through expanded trade and to
avoid approaches which restrict trade.
The Tokyo round of multilateral trade negotiations must be pursued vigorously. The
continued economic difficulties make it even more essential to achieve the objectives
of the Tokyo declaration and to negotiate a comprehensive set of agreements to the
maximum benefit of all. Toward this end, we will seek this year to achieve substantive
progress in such key areas as—
(1) A tariff reduction plan of broadest possible application designed to achieve a
substantial cut and harmonization and in certain cases the elimination of tariffs;
(2) Codes, agreements and other measures that will facilitate a significant
reduction of nontariff barriers to trade and the avoidance of new barriers in the future
and that will take into account the structural changes which have taken place in the
world economy;
(3) A mutually acceptable approach to agriculture that will achieve increased
expansion and stabilization of trade, and greater assurance of world food supplies.
Such progress should not remove the right of individual countries under existing
intemational agreements to avoid significant market disruption. While seeking to
conclude comprehensive and balanced agreements on the basis of reciprocity among
all industrial countries we are determined, in accordance with the aims of the Tokyo
declaration, to insure that the agreements provide special benefits to developing
countries.
We welcome the action taken by governments to reduce counterproductive
competition in officially supported export credits and propose that substantial further
efforts be made this year to improve and extend the present consensus in this area.
We consider that irregular practices and improper conduct should be eliminated
from international trade, banking and commerce, and we welcome the work being done
toward international agreements prohibiting illicit payments.
Energy
We welcome the measures taken by a number of governments to increase energy
conservation. The increase in demand for energy and oil imports continues at a rate
which places excessive pressure on the world's depleting hydrocarbon resources. We
agree therefore on the need to do everything possible to strengthen our efforts still
further.
We are committed to national and joint efforts to limit energy demand and to increase
and diversify supplies. There will need to be greater exchanges of technology and joint
research and development aimed at more efficient energy use, improved recovery and
use of coal and other conventional resources, and the development of new energy
sources.
Increasing reliance will have to be placed on nuclear energy to satisfy growing energy
requirements and to help diversify sources of energy. This should be done with the
utmost precaution with respect to the generation and dissemination of material that can
be used for nuclear weapons. Our objective is to meet the world's energy needs and
to make peaceful use of nuclear energy widely available while avoiding the danger of
the spread of nuclear weapons.
We are also agreed that, in order to be effective, nonproliferation policies should as
far as possible be acceptable to both industrialized and developing countries alike. To
this end, we are undertaking a preliminary analysis to be completed within two months
of the best means of advancing these objectives, including the study of terms of
reference for international fuel cycle evaluation.
The oil-importing developing countries have special problems both in securing and
in paying for the energy supplies needed to sustain their economic development
programs. They require additional help in expanding their domestic energy production
and to this end we hope the World Bank, as its resources grow, will give special emphasis
to projects that serve this purpose.
We intend to do our utmost to ensure, during this transitional period, that the energy
market functions harmoniously, in particular through strict conservation measures and
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1977 REPORT OF THE SECRETARY OF THE TREASURY
the development of all our energy resources. We hope very much that the oil-producing
countries will take these efforts into account and will make their contribution as well.
We believe that these activities are essential to enable all countries to have continuing
energy supplies now and for the future at reasonable prices consistent with sustained
noninflationary economic growth, and we intend through all useful channels to concert
our policies in continued consultation and cooperation with each other and with other
countries.
The world economy can only grow on a sustained and equitable basis if developing
countries share in that growth. Progress has been made. The industrial countries have
maintained an open market system despite a deep recession. They have increased aid
flows, especially to poorer nations. Some $8 billion will be available from the IDA for
these nations over the next three years as we join others in fulfilling pledges to its fifth
replenishment. The IMF has made available to developing countries, under its
compensatory financing facility, nearly an additional $2 billion last year. An
intemational fund for agricultural development has been created, based on common
efforts by the developed OPEC, and other developing nations.
The progress and the spirit of cooperation that have emerged can serve as an
excellent base for further steps. The next step will be the successful conclusion of the
Conference on International Economic Cooperation and we agreed to do all in our
power to achieve this.
We shall work—
(1) To increase the fiow of aid and other real resources from the industrial to
developing countries, particularly to the 800 million people who now live in absolute
poverty; and to improve the effectiveness of aid;
(2) To facilitate developing countries' access to sources of international finance;
(3) To support such multilateral lending institutions as the World Bank, whose
lending capacity we believe will have to be increased in the years ahead to permit its
lending to increase in real terms and widen in scope;
(4) To promote the secure investment needed to foster world economic development;
(5) To secure productive results from negotiations about the stabilization of
commodity prices and the creation of a common fund for individual buffer stock
agreements and to consider problems of the stabilization of export eamings and
developing countries; arid
(6) To continue to improve access in a nondisruptive way to the markets of
industrial countries for the products of developing nations.
It is desirable that these actions by developed and developing countries be assessed
and concerted in relation to each other and to the larger goals that our countries share.
We hope that the World Bank, together with the IMF, will consult with other developed
and developing countries in exploring how this could best be done.
The well-being of the developed and developing nations are bound up together. The
developing countries' growing prosperity benefits industrial countries, as the latter's
growth benefits developing nations. Both developed and developing nations have a
mutual interest in maintaining a climate conducive to stable growth worldwide.
Exhibit 50.—Remarks by Secretary Blumenthal, May 25, 1977, at the International
Monetary Conference, Tokyo, Japan, entitled ''Toward International Equilibrium:
A Strategy for the Longer Pull"
As we come to the closing session of this International Monetary Conference, I can
well understand how your meetings have become an annual highlight for the world
financial community. For me it has been a valuable opportunity to share thoughts on
current international problems with this informed assembly. I am particularly honored
that you have invited me to offer some ideas on how I think we should deal with these
issues.
One encounters, these days, a good many uncertainties, doubts, even fears about our
international financial prospects, and about our collective ability to resolve successfully
the formidable difficulties that appear to lie ahead.
Central to these doubts is an apprehension over the capacity of our monetary system
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to finance—for an extended period—the world's future oil requirements. Can our
system continue to handle successfully the financial consequences of massive OPEC
surpluses, surpluses which cumulated to about $150 billion during 1974 through 1976,
which may amount to $45 billion this year and continue to be substantial for a good
many years?
Is the international commercial banking system becoming dangerously exposed as a
result of the recent sharp expansion in balance of payments lending? Are debt burdens
becoming unbearable? Can we be sure that official lending resources will be adequate
to the need? Are nations in danger of drifting into protectionism, losing confidence in
their ability to correct maladjustments promptly by more acceptable means?
We are right to acknowledge these doubts and to face them squarely. Nevertheless,
the U.S. administration has full confidence that the intemational community, working
together, can and will assure a stable financial environment and a smoothly functioning
intemational payments system. I can assure you that the United States will do its part.
To begin with, we must acknowledge that large OPEC surpluses are not, as some
thought, a short-term problem. They will exist for an extended period, and we must
develop a strategy for the longer pull.
Such a strategy must have three facets. First, we must assure that our national
govemments follow the right policies. Second, we must assure that our international
institutions have both the resources and the authority to fulfill their important
responsibilities. Third, we must assure that our private financial markets are in a
position to carry out their essential intermediary role safely and effectively. I would like
today to examine with you what must and can be done in terms of each of these three
groups: governments, international organizations, and private financial markets.
Responsibilities of govemments
Governments' policies are of key importance. There are several imperatives. For one
thing, each nation must pursue a sound energy policy. There can be no permanent
solution to the problem of OPEC financial surpluses until oil-importing nations adopt
more effective programs for conserving the use of oil and developing alternative
supplies. The United States has had no comprehensive energy policy. Our fuel import
bill has grown explosively—from $5 billion in 1972 to $37 billion last year. This year
it may reach $43 billion. Without corrective action, our oil imports would rise from less
than 8 million barrels per day last year to 12 to 16 million barrels per day in 1985. The
President has now put forth a national energy plan designed to reduce those imports
to 6 million barrels per day by 1985. This reduction, supplemented by appropriate
policies in other major nations, will materially assist in achieving a desirable world
energy balance. OPEC, meanwhile, must recognize that a healthy world economy is in
its own longrun interest and must display responsible restraint on its pricing policy.
Sound energy policies will reduce the collective current account deficit of the nonOPEC states. A second imperative, however, is that govemments collaborate to assure
that the deficits which remain are distributed among countries in a pattem compatible
with their ability to attract capital on a continuing basis. The present pattem does not
achieve that balance. Substantial redistribution is required. That requires basic
macroeconomic policies and exchange rates for each nation appropriate to its own
situation.
Countries in a weaker position, with major deficits, must pursue stabilization policies
which will provide a basis for sustained domestic growth while reducing inflationary
pressures and expectations. A number of countries have adopted such policies. Several
others should.
Countries that are in current account surplus or that can readily attract capital must
follow policies designed to insure maximum sustainable domestic growth consistent
with a gradual reduction of inflation.
These policies, of course, must focus on domestic market demand rather than on
exported growth which further adds to current account surpluses. The United States
is following such a policy. Similarly, Germany and Japan have adopted expansionary
growth targets for 1977, and we are all committed to adopt further pohcies if needed
to achieve stated targets and to contribute to the adjustment of payments imbalances.
Flexibility in exchange rates is essential for both surplus and deficit countries. The
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1977 REPORT OF THE SECRETARY OF THE TREASURY
United States, Germany, and Japan have made clear that they will not resist market
pressures for appreciation. Countries which need to strengthen their competitive
positions to reduce their deficits must be equally ready to accept depreciation.
Most importantly, all major countries are committed to reject protectionism and to
pursue opportunities for expanding trade. Stronger countries should also increase their
development aid. Finally, each nation—industrial as well as developing—should adopt
policies to expand domestic investment. If borrowed funds are used for investment that
expands productive capacity, the ability to service debt will grow as the debt increases.
The steps that have been taken are, in general, correct steps. Whether they are
sufficient in all cases remains to be seen.
The current account position of the United States has already shifted dramatically,
from a surplus of $ 11 billion in the recession year 1975 to a deficit this year of perhaps
$10 to $12 billion. That shift is making a major contribution to the stability of the
intemational monetary system.
We accept that shift. We can sustain it—although we would not expect the deficit
to continue at this level indefinitely. We receive substantial inflows of capital from
OPEC and elsewhere and our overall position remains satisfyingly strong. The dollar
exchange rate has not declined despite the very large current account deficit.
What is now required is a similar shift in the position of surplus countries such as
Japan, Germany, Switzerland, and the Netherlands.
The contribution of international institutions
An important part of our strategy depends on the activities of international
institutions—most importantly the International Monetary Fund. The United States
supports the view that the IMF's financing capability and its responsibilities for
overseeing the monetary system must be strengthened. We believe that the Fund's role
in preserving a sourid international environment will be of great importance in the years
ahead.
As a temporary arrangement, the Managing Director has proposed that lines of credit
be negotiated. These would be available as needed to provide additional conditional
financing for particular countries whose needs are very large relative to quotas. The
IMF's Interim Committee recently recognized the need for such a supplementary credit
arrangement, and the seven nations at the summit have endorsed that concept.
Exploratory talks are in progress. For the United States, I have told Mr. Witteveen that
I would strongly favor U.S. participation, provided a well-designed plan can be agreed,
with an appropriate balance between credits from OPEC countries and the industrial
world. I am confident that Congress would also support such a plan.
After work is completed on the establishment of this supplementary credit, we must
tum our full attention to a more permanent reinforcement of the IMF's conditional
lending resources through another increase in IMF quotas.
An equally important task for the IMF is to determine in individual cases the form
and degree of policy conditionality to go along with the financing. The IMF must work
out specific adjustment programs and corrective measures to be adopted by particular
borrowing countries. Conditionality must be applied in an appropriate manner—
neither too harsh nor too soft, enough to assure adequate adjustment but no more.
Mr. Witteveen*s proposal explicitly recognizes the implications of the present
situation for the pace of adjustment in calling for programs spanning a period longer
than the I year involved in traditional standby arrangements. The IMF's past record
in negotiating programs of adjustment is an excellent one, and I am confident that the
organization will continue to perform this duty with equity, objectivity, and good sense.
Quite apart from its financing activities, the IMF will take up, under the amended
IMF Articles, a major responsibility for surveillance of member countries' exchange
rate policies. The Fund is approaching this task, wisely in my view, in a careful and
cautious way, avoiding grandiose theoretical concepts. It is not trying to delineate
detailed or rigid principles, but rather seeking to develop, on a case-by-case basis, a
body of common law based on experience. We must all support and encourage the Fund
in the development of this important tool for assuring that no nation will manipulate
its exchange rate to prevent payments adjustment or to gain unfair competitive
advantage over its partners.
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Responsibilities of the private markets
The role of private capital has been enormously increased by the OPEC surpluses.
Since OPEC's geographic placement of its surplus funds does not correspond to the
distribution of current account deficits, intermediation is required. Over the past 3
years, about three-quarters of the deficits have been financed through the world's
money and capital markets.
Concern has been expressed that the private market will not be able to continue this
intermediation because of decline in the creditworthiness of borrowers and in some
cases limits imposed by the banks' own capital. Although some banks are in fact
approaching their legal limits on loans to a few govemments, it does not appear likely
that this limitation will present a major problem in the continued growth of aggregate
bank loans either to foreign corporate customers or to foreign governments.
This issue is frequently posed as an "LDC debt problem." This is a misconception.
The pressures on the private markets arise from the difficulties of a very few countries—
many of which are npt normally regarded as LDC's. For some developing countries,
financing continues to be largely a question of the level of available funds from foreign
assistance sources. For the rest of the world—developing, developed, and middleincome countries—there is no alternative to a continued central and predominant role
for the private capital markets.
Only the private markets have the resources, expertise, and institutions in place to
handle the large-scale, highly complex intermediation function smoothly and efficiently; legislatures are not prepared to vote the massive amounts of official funds, or
guarantees, required for a basic shift from reliance on private financing to reliance on
official financing.
Clearly it is in the interests of all concemed—the oil-exporting countries which are
the ultimate creditors, the money and capital markets which are intermediaries, and
the borrowing countries—that the flow of private capital continue. Countries which
expect to borrow must therefore make sure that they retain their creditworthiness.
Some have asked whether proposals for increasing IMF lending resources were not
mechanisms for bailing out the commercial banks, or taking over risky loans
injudiciously contracted by the banks. But this is neither the intent nor the likely result.
Uniquely, IMF lending is associated with policy conditions and adjustment programs
tailored in each case to correct the problems which caused the need for financing. Thus
IMF lending can, in a very meaningful way, enhance the creditworthiness of the
borrower as viewed by commercial lenders. Bankers have long recognized this fact in
their operations—sometimes by directly requiring a nation to enter into an IMF
program as a prior condition to further bank credit.
The amount of credit provided through the IMF is small relative to private credit and
will remain so. In the 3 years since oil prices increased, the IMF has financed only about
6 percent of the aggregate payments deficits, even though Fund lending has been at
historic peaks. While the balance may shift toward a somewhat higher ratio of IMF to
private financing, there will be no "takeover" of intemational lending by the IMF. The
significance of IMF credit, and the value of expanding the IMF's lending capacity, is
largely that it strengthens creditworthiness and reinforces the system.
I see no evidence that the system as a whole is overloaded. The problems—and there
are problems—are found in a few individual nations which are approaching or have
reached the boundaries of prudence.
The concem of private markets about increasing their exposure in particular
countries is a matter of perceived risk—of the degree to which particular borrowers,
and their particular economies, appear to have the capacity to service debt. It is on this
risk that private lenders—and the bank regulators looking over their shoulders—are
quite properly focusing.
Basic to risk evaluation is information, and borrowers will find they are facing
increasing demands for information about the "vital signs" of their economies. Lenders
should be in a position to weigh on a reasonably current basis a country's relative
performance in such areas as inflation rates, wage rates, and productivity measures, the
shares of investment and consumption in GDP trends, public sector deficits, and trends
of monetary aggregates. Chairman Burns has made the very sensible suggestion that the
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1977 REPORT OF THE SECRETARY OF THE TREASURY
central banks agree on the kind of information which a borrowing country would
normally be expected to supply.
For some borrowers, meeting these requirements will simply mean revealing
information now held confidential. For others, it will require expansion and upgrading
of their collection and processing effort so as to obtain more comprehensive, accurate,
and timely data. In some cases, this effort will require fundamental changes in the way
govemments view this aspect of their economic management. But the ability and
willingness of countries to provide such data and analyses will increasingly constitute
the price of admission to private capital markets—because of the lenders' insistence
in their own prudent self-interest, quite apart from any suggestions of the regulatory
agencies.
Lenders, by the same token, will need to develop the capability of extracting the
maximum benefit from this additional information. This will require that they refine
their capability for country analyses. There is in process a change in the type of
borrowers coming to market. Formerly, the bulk of international lending was to private,
largely corporate borrowers. In many cases, such lending was for short-term trade
financing or related to a specific project; and there was a balance sheet, a management
with a known track record, a product and a market whose prospects could be analyzed
according to reasonably well developed criteria.
Increasingly, however, the prospective borrowers are governments or quasi-public
entities. Their purpose in entering the market is likely to be much less clearly
commercial than, for example, when a firm borrows to expand to service a new market.
In some cases, loans are for general balance of payments support, and it is not
immediately evident whether they will finance consumption or increase productive
capacity.
In such situations, we enter the realm of what used to be called political economy,
a term that could well bear revival. In assessing the riskiness of a balance of payments
loan—or assessing the creditworthiness of a country—a major question becomes the
willingness and the ability ofthe govemment ofthe prospective borrower to implement
the policies which will permit the service of the debt. A lender's assessment of the
prospects may require an assessment of the possible changes in the political climate,
as well as in the underlying economic situation.
It seems to me important, therefore, to give careful study to the possibilities of
developing a closer interaction, a smoother transition, between financing through the
private market and official financing through the IMF. There is a view that the private
markets and the IMF may in some cases be working at cross-purposes—with private
lenders increasing their exposure with growing unease and reluctance, while the IMF
watches from the sidelines with increasing frustration while the underlying situation
deteriorates. Countries in such cases may avoid recourse to the IMF and adoption of
needed adjustment policies as long as access to private financing is more or less readily
available. When the situation deteriorates to a critical point, it becomes evident to all,
and there is sudden, discontinuous change. The question is whether there is legal and
practical scope for earlier involvement by the IMF.
The resolution of this question may be the next needed step in the evolution of the
framework of international monetary cooperation. We do not know, at this stage,
whether there is a need for formal mechanisms, informal arrangements, or neither.
Certainly we must recognize the limitations on the IMF's freedom of action. There
would be great reluctance, for example, to have the IMF enter the field of credit rating,
not least because such action could undermine the confidential basis on which
iriformation is given to the Fund. Nevertheless, there may be ways in which closer
private-official cooperation could be fashioned without puttirig the IMF in the creditrating business. To invite discussion, I will list several theoretical possibilities without
endorsing any; and I want to stress again that I dp not feel we are yet in a position to
make decisions in this area.
Perhaps the least dramatic step could involve IMF willingness to provide staff reports
and country assessments to prospective lenders, on the basis of formal requests by the
countries in question.
The IMF might publish reports based on its annual consultations with countries, again
subject to the approval of the countries in question. There is precedent for this in the
OECD's publication of annual reviews of member countries' economic situations.
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A more overt IMF role might involve IMF staff participation in the development of
policy conditions to be associated with private or largely private lending. Thus the Fund
might make available its services to help design stabilization programs, if requested by
both prospective borrowers and lenders. As a variant on this approach, the banks might
insist, as part of a negotiated loan package, that a country establish eligibility for
borrowing from the Fund.
Among other suggestions, it has been proposed that the IMF might participate in the
development of mixed financing packages, featuring a blend of official and private
funds. Depending on the circumstances, the initiative might come from private lenders,
the borrowers, or even the Fund itself. Arrangements in some cases might involve a
"stretchout" of debts to correct excessive "lumpiness" in the earlier maturities.
All of these proposals raise basic questions of how the IMF should operate and how
it should relate both to its sovereign members and to the private sector. I do not suggest
that the intemational community will in the end necessarily decide that it is wise to
make such changes. But I do think that we should be willing to reexamine old premises,
review old practices, and consider innovations. Only in that way can we assure that our
institutions grow and adapt to current conditions, and are used with the maximum
effectiveness that the future will require.
Conclusion
To conclude, I am confident that the strategy I have outlined—a strategy based on
application of sensible government policies, reinforcement of our international
institutions, and strengthening of private market mechanisms—will be adequate to the
test for the longer pull. My confidence is fortified by two facts:
First, the record of the past 32 years is, on the whole, an excellent one. Iri the
intemational monetary sphere, the world community has, time and again, faced new
problems, new strains. On each occasion, it has found a cooperative and responsible
solution. I am sure we can do so again.
Second, we have the advantage of a new, realistic, and flexible monetary system as
a framework for our policies. That system is itself a product of international cooperation
and will facilitate our progress.
This effort will require the best from all of us. The skill and determination which you
in the international banking community, as well as we in national govemments, apply
in adapting to the situation we confront will largely determine our success.
Exhibit 51.—Remarks by Secretary Blumenthal, June 24,1977, at the OECD ministerial
meeting in Paris, entitled ''Prospects and Policies for Sustaining Expansion In the
OECD Area''
Last month the heads ofgovernment of seven ofthe countries here agreed on several
basic objectives:
To create more jobs while continuing to reduce inflation;
To achieve stated growth targets or to pursue appropriate stabilization policies;
To support IMF efforts to obtain additional resources and to link IMF lending to
the adoption of appropriate stabilization policies;
To pursue both national and joint efforts to limit energy demand and to increase
and diversify energy supply;
To reject protectionism and give a new impetus to the Tokyo Round of multilateral
trade negotiations; and
To provide the developing countries with greater opportunities to share in the
growth of the world economy.
This meeting provides an opportunity for other nations to join in those commitments.
I urge each one to do so.
It provides an opportunity to establish procedures which will improve our
understanding of the implications of each nation's policies and enable us to monitor
our progress. I propose that we do so.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
And it is an occasion of a considering together of our prospects for sustained
economic growth in the OECD area.
In virtually every country represented here unemployment is at a totally unacceptable level. In most of our countries inflation is too high. Many of our natibns are
experiencing external payments deficits which cannot be long sustained.
We face interrelated problems in an interdependent world. We cannot solve one
problem at the expense of the others. Nor can any nation expect to be an island of
prosperity in a sea of economic troubles. Our problems must be solved together and
cooperatively. The survival of our political institutions and our open trade and financial
system depends on our success.
We can meet this challenge; we can succeed in achieving sustained noninflationary
growth—
If every member country in a position to do so pursues the domestic macroeconomic policies which will induce the maximum rate of domestic growth
consistent with avoiding a resurgence of inflation;
If every country which does not yet have inflationary pressures under control
pursues forceful and effective stabilization policies;
If we go beyond traditional demand management measures to attack the
underlying structural causes of unemployment and inflation;
If both surplus and deficit countries allow exchange rates to play their appropriate
role in the adjustment process.
Because some countries have made more progress than others in controlling inflation
and some are under external financial strains while others are not, the policies required
will differ from country to country.
In the financially strong countries this situation calls for economic expansion at the
maximum rate consistent with control and reduction of inflationary pressures. In the
United States, we are already well on our way toward achievement this year of roughly
6'^percent growth, yearend to yearend. First-quarter economic activity grew at an
annual rate of 6.9 percent. We expect a similar performance in the currerit quarter,
followed by a 5- to 5 1/2-percent growth rate in the second half of the year.
Unemployment has been pushed below 7 percent for the first time in almost 3 years
while employment has risen by over 2 million in 6 months.
At the same time, despite temporary setbacks because of bad weather, the U.S.
underlying inflation rate has remained stable, although still too high.
We are naturally concerned by the Secretariat's forecasts which suggest that current
policies may not enable either Germany or Japan to reach its stated growth target and
that too much ofthe growth of output, in Japan particularly, is going into exports. But
we have faith in the assurances of Chancellor Schmidt and Prime Minister Fukuda that
they will take further measures, as needed, to achieve their growth goals and to reduce
their current account surpluses.
Reduction of the current account surpluses is essential because some of the weaker
countries are approaching prudent limits to the accumulation of debt—whether to
private lenders or official institutions. In these circumstances the availability of ample
lendable funds from persistent surplus countries is not a complete answer.
Stronger domestic growth and exchange rate appreciations in the stronger countries
will tend to eliminate their surpluses. But supplementary steps are also in Order. This
is the time for surplus countries to eliminate practices which favor exports pver output
for domestic consumption or impede imports or interfere with exchange markets. It is
a time for strong countries to dismantle monetary and capital controls that might
depress exchange rates and for seeing that foreign exchange acquired outside the
market, such as interest accruals on existing reserves, is resold on the market.
Among the responsibilities of the stronger countries, I count the obligation of the
United States to reduce its excessive imports of^^oil. The flow of oil from Alaska will
provide an immediate reduction of our import demand. But for the longer run, we must
achieve a strong energy program based on conservation and the substitution of
domestic for imported fuels. President Carter has made that goal his top priority despite
the difficulty of achieving the economic and social changes it entails.
Countries in weak external financial positions have an equal responsibility to put their
EXHIBITS
439
own houses in order, to stabilize their economies and improve their international
competitiveness. They have alright to the cooperation of the stronger countries, but
they cannot expect others to solve their problems for them. They should not
overborrow. They should permit sufficient depreciation of their currencies to improve
their competitive positions. And they should back up their declining exchange rates
with domestic policies that retain their competitive gain. The benefits of depreciation
may not come quickly but if exchange rates are not allowed to respond to differences
in inflation rates, payments imbalance can only grow worse. It is hard to see how any
country can improve its intemational position unless its policies allow its producers
export profit margins that are essential to an adequate export performance as well as
to improved import competitiveness. Manufacturers must have the proper incentives
to invest in facilities for both the export and home markets.
Obviously the domestic economic policies needed to restore domestic price stability
and external creditworthiness are not easy for governments. They involve national belttightening. Yet delay will only lead to the necessity for more severe and more painful
action. At the first sign of difficulty in attracting capital on normal terms, stabilization
programs should be developed, with the cooperation of the IMF if necessary. Such
cooperation will not only bring official financing but will aliso help to sustain financing
from private sources.
Many countries have, of course, been following this growth or stabilization strategy
for some time. We are now beginning to see results. The world payments pattern is
shifting significantly in the right direction.
Economic expansion is beginning to exert its impact, notably in the United States.
We expect a current account deficit of $ 10 to $ 12 billion this year compared to a deficit
of $600 million in 1976 and a surplus of $11 1/2 billion in 1975. As the strength of the
dollar indicates, the United States can sustain this deficit for a time because we attract
the capital required to finance it.
General economic recovery is clearly improving the earnings of many developing
countries. Exports of the nonoil developing countries were one-third higher in the
fourth quarter of 1976 than a year earlier. And while some individual developing
countries face difficulties, there is no general LDC debt problem. In fact, reserves of
nonoil developing countries rose by $ 11 billion last year.
Stabilization programs are beginning to show results. The United Kingdom's balance
of payments appears to be edging into surplus while Italy, Mexico, and Brazil have
sharply reduced their deficits.
But despite these signs of progress, we have a considerable distance to go toward
appropriate payments balance.
We need significant shifts—into deficit—in the current account positions of such
surplus countries as Japan, Germany, Switzerland, and the Netherlands.
We need to see stabilization policies adopted in a number of smaller countries
represented at this table.
And in the countries which have already adopted stabilization measures we need
perseverance until inflation is brought down and the fears of its resurgence
allayed.
I recognize that such changes cannot occur overnight. They require time and careful,
gradual policies. Countries in a weak external position will need adequate official
financing, conditioned on the adoption of suitable stabilization policies. I am confident
that the current efforts to expand the IMF's resources will ensure the adequacy of
official financing to meet this need for the near term, apart from the unique case of
Portugal. For the longer term, I trust that all OECD members will also be prepared to
support an adequate increase in the quotas of the IMF.
But while adjustments and structural changes in our economies take time, the longer
the initiation of this process is delayed, the greater the danger of domestic turmoil or
of trade restrictions and debt defaults. We have been preoccupied with concerns about
the sustainability of the financial system. But the penalty for failure to solve our
financial problems may not be financial collapse. Instead, the result may be trade
restrictions and a slide back into the inefficiencies of economic nationalism.
Unilateral trade restraints must be rejected as an unacceptable response to payments
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1977 REPORT OF THE SECRETARY OF THE TREASURY
deficits or to problems of domestic economic adjustment. Such measures clearly risk
fostering further unemployment and increasing inflation, both at home and abroad.
While we cannot ignore the reality of trade-related difficulties in certain sectors
which cannot be fully resolved overnight, our objective should remain meaningful
adjustment to structural change within our own economies without shifting those
problems to our trading partners. Our record has not been perfect on this score, but
overall the OECD members have resisted the pressures of protectionism.
Renewal ofthe trade pledge of 1974 provides us the opportunity jointly to reaffirm
our determination to avoid trade restrictions or other restrictive current account
measures and the artificial stimulation of exports. The United States strongly supports
its renewal and urges your support as well.
We must also seek to liberalize trade by granting new impetus to the multilateral trade
negotiations in Geneva by seeking substantial progress in key areas this year.
This means that we must agree on what the critical issues are, on what rules we will
adopt to deal with them, and within what time period each of these steps is to be taken.
We urgently need agreement on—
A formula for tariff reductions and rules for negotiating the lowering of nontariff
barriers;
A practical and effective means of breaking the deadlock on agricultural trade;
Steps to help the developing countries benefit from expanding world trade; and
A new intemational code on subsidies and countervailing duties.
We need better mutual understanding of what constitutes fair and unfair trade and
host governments may justly respond to unfair trade practices to counter a major
irritant in our trading relations.
We need, in short, not rhetoric, but real progress in addressing the difficult problem
of trade liberalization.
I would like to stress the importance of further progress toward an arrangement which
broadens and strengthens the present international consensus on export credits.
Achieving the domestic and international adjustments I have outlined will require
skilled and responsible economic management and a willingness to plan ahead. As the
Secretariat points out, our countries must give more attention to the medium term. In
the United States, President Carter has set a goal of reducing both the rate of inflation
and the rate of unemployment and balancing the Federal budget in a high-employment
economy by 1981. We are viewing economic and budgetary decisions and developing
economic goals in that context.
Growth targets and stabilization policies must, of course, remain the ultimate
responsibility of sovereign nations. Each country will be assisted in arriving at its growth
goals and stabilization policies, however, if it has a clear understanding of the plans of
other nations and of the global implications of its own objectives.
I believe it would be useful, therefore, to strengthen the procedure for multilateral
examination and subsequent monitoring ofthe economic policies of member countries.
We need to be realistic, however. The members as a whole—although not all member
countries—probably should be aiming at a somewhat faster rate of expansion in 1977.
Nevertheless, we are not in a position at this meeting to set a quantitative target for the
growth rate for the area as a whole in 1978. Any such target must be the outgrowth
of national decisions not yet made.
I support the suggestion that each country be asked to submit preliminary objectives
for the growth of domestic demand and for stabilization policies for 1978 to the
Organization early in the fall. We should also expect countries to indicate the desired
direction of change in prices and current account positions, although specific targets
for these indicators would be impractical. These submissions would form the basis for
study and comment by the Economic Policy Committee. Because this proposal blends
directly into the ongoing work ofthe Organization, I would not expect it to require the
impetus of a special riieeting of the Ministerial Council.
Finally, let me say that we must conduct our economic policies with the recognition
that some of our tools of economic management no longer work as they once did. In
the United States and other countries, the tradeoff between economic activity and
inflation has changed. We see that neither high unemployment nor low utilization of
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capacity leads automatically to a rapid drop in inflation. Factors other than excess
demand are increasingly important determinants of inflation.
So we must seek new programs and policies to supplement demand management in
our efforts to reduce unemployment and inflation. Many ofthe measures we must adopt
should focus on specific structural problems in our economies—the need to change
employment pattems and develop new labor skills, the need for new measures to
provide employment for our youth, the need to foster competition and to remove
regulations that are outdated or fail to meet a cost-benefit test.
I support the proposal for a high-level conference to exchange experience and
develop policy directions on measures for alleviating youth unemployment. This
problem is universal among our countries. Because many of us are embarked on specific
programs to combat it, we can benefit from sharing our ideas and our experiences. I
also welcome the useful and timely discussion in the report of the McCracken group
on techniques for combating inflation. As part of President Carter's comprehensive
anti-inflation program, the United States is already reviewing Government regulations
with the intent of reducing unnecessary costs imposed on the private sector and
enlarging the scope for the free market. At the same time, we are working with labor
and management to develop voluntary, cooperative measures to avoid wage-price
spirals.
When all is said and done, the success of our economic policy depends fundamentally
on our ability to engender confidence that we will achieve sustained growth with lower
unemployment and price stability and that we will maintain a strong and open monetary
and trading system. In a cost-benefit calculus, the dangers of pushing ahead too far and
too fast have increased because our economies seem less responsive to attempts to
correct overstimulation. We should recognize this reality, as the United States did in
withdrawing the proposed tax rebate. Our policy should be cautious yet committed,
providing a firm basis for rebuilding the confidence that we need to call forth increased
investment in productive capacity. After their experiences of the recent past,
businessmen in all countries are wary—and understandably so. But investment is vitally
needed to create jobs, avoid supply problems, and speed up productivity growth.
Our words alone will not win this confidence. But if we take actions which
demonstrate the determination and ability to adhere to the approach being proposed
here today, we will gain the confidence that will undam the vital flow of investment.
Unemployment will be brought down; inflation will be reduced; and a sustainable
pattem of extemal payments will evolve.
Exhibit 52.—Statement by Under Secretary for Monetary Affairs Solomon, July 13,
1977, before the Subcommittee on Financial Institutions Supervision, Regulation
and Insurance of the House Committee on Banking, Finance and Urban Affairs, on
the International Banking Act of 1977 (H.R. 7325)
It is a pleasure to appear before this subcommittee to present the position of the
administration on this proposed legislation. We generally support this legislation with
certain modifications that I would suggest.
Growth of intemational banking
Intemational banking operations have been growing in recent years, although they
are still small in relation to our domestic banking industry. Specifically, while total
assets of foreign banks held in the United States have tripled during the past 4 years,
rising to $76 billion at the end of 1976, this amount still represented only about 7
percent of the total assets of all domestic banks. In comparison, the total assets held
abroad in foreign branches of U.S. banks were almost three times that amount, $220
billion.
Growth in international banking is the financial counterpart of healthy increases in
international trade and also refiects desirable reductions in international obstacles to
investment. The United States, like our major trading partners, recognizes the
importance of this growth to an efficient world economy. In particular, foreign banking
operations in the United States have increased competition in the financial services
industry here.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
We expect international banking operations to expand further in the future.
Accordingly, this is an appropriate time for the United States to consider a national
policy toward foreign bank operations here.
In determining a national policy, we must keep in mind that our regulation of foreign
banks may affect foreign government treatment of U.S. banks and other financial
institutions operating overseas.
Competitive equality
U.S. policy toward foreign direct investment in America reflects the principle that
foreign companies, in general, should be accorded the same opportunities and be
subject to the same restrictions as domestic businesses. This policy, known as national
treatment, seeks neither to promote nor to discourage foreign investment, but to insure
regulatory equality. Moreover, it is consistent with U.S. treaty obligations governing
foreign trade and investment. Accordingly, the basic objective of H.R. 7325, which we
support, is to treat foreign banks operating here equally vis-a-vis domestic banks.
Some argue that our policy should reflect reciprocity rather than competitive
equality. In this case, reciprocity would permit foreign banks operating here to engage
in whatever activities U.S. banks are permitted in selected countries abroad. While
reciprocity has a superficial appeal, it would not be desirable for us to adopt it. Such
a policy could reduce permissible international banking activities to the lowest common
denominator, as countries tighten regulations to achieve strict reciprocity. Furthermore, it could be an administrative nightmare to enforce different sets of rules for
different foreign banks operating in this country.
It should be made clear, Mr. Chairman, that the application to foreign banks of
restrictions governing domestic banks does not mean that the administration is
reaffirming the desirability of any or all of these restrictions. As I am sure this
subcommittee is aware, many issues addressed in the foreign bank bill are currently
being reviewed by the Congress, the administration, and independent regulators.
Indeed, in the areas of this bill dealing with the securities activities of commercial banks,
we would prefer that decisions await these reviews. At the very least, my testimony is
not meant to prejudge any of this work. In supporting H.R. 7325, we have simply sought
to extend the existing regulatory framework, as we find it, to foreign banking.
Existing law and elimination of disparities therein
Our existing laws and regulations covering foreign banks are not balanced. On the
one hand, they deny foreign banks certain banking opportunities here. For example,
foreign banks are deterred from establishing national banks. In addition, our laws
encourage foreign banks to operate branches or agencies, but these operations are
unable to obtain Federal deposit insurance.
On the other hand, there is no Federal regulation or supervision of foreign bank
branches and agencies, even though almost all domestic banks come under the
regulation of either the Federal Reserve, the Comptroller of the Currency, or the
Federal Deposit Insurance Corporation.
Mr. Chairman, we support the objective of reducing these disparities of treatment
between foreign and domestic banking operations in the United States. We are pleased
that the bill will provide foreign banks with new Federal chartering opportunities to
establish national banks, and Federal branches and agencies.
At the same time, it also is sensible that H.R. 7325 would subject branches and
agencies of foreign banks to Federal regulation comparable to that of domestic banks.
In certain respects, the bill recognizes that branches of foreign banks require treatment
as a special category of banking institution. For example, since State branching laws
are not applicable to interstate branching by foreign banks, the bill employs Federal
law to fill the gap.
Proposed changes In the bill
While offering our general support for H.R. 7325, Mr. Chairman, we recommend
several modifications to achieve a greater degree of regulatory equality.
I. Nonbank affiliates of foreign banks .—Seciion 8(a) of the bill applies the Bank
Holding Company Act to foreign banks which maintain U.S. branches and agencies.
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443
Section 8 also grandfathers nonbanking activities in existence as of December 3, 1974.
We recommend moving forward the cutoff date to July 1, 1977. Also, we recommend
exempting from the prohibitions of the Bank Holding Company Act those nonbank
acquisitions by foreign banks which do not significantly affect the United States. As
suggested in Federal Reserve testimony last August, the proposed amendment would—
* * * make clear that the nonbanking prohibitions of the Bank Holding Company
Act are not meant to prevent foreign banks principally engaged in banking abroad
from retaining or acquiring interests in foreign-chartered nonbanking companies
that are also principally engaged in business outside the United States. * * *
However, * * * as a corollary * * *^ a domestic office of a foreign bank should be
required to deal with the domestic operations of a foreign company in which it may
have an equity interest on a strictly arm's-length basis so as not to give the firm
or bank involved an advantage over their respective U.S. competitors.
Generally, the administration believes that the Federal Reserve's proposed amendment would provide ^greater certainty to foreign banks concerning their nonbank
affiliates and is desirable in light of the different regulatory frameworks abroad which
permit closer ties between banking and industry.
This amendment is not designed to change the Bank Holding Company Act as
currently implemented by regulations of the Federal Reserve Board. It simply gives
foreign banks greater certainty about the act's application.
It is desirable to amend the Bank Holding Company Act in this way for two specific
reasons. First, the existing administrative process for exemptions under the act would
create considerable uncertainty for foreign banks concerning which foreign nonbanking activities or acquisitions are permissible when they also affect U.S. commerce.
Second, the present version of section 8(a) could be seen as applying the Bank Holding
Company Act extraterritorially to prohibit foreign banks located abroad from acquiring
or providing assistance to nonbank enterprises abroad.
2. Grandfathering of securities operations.—A second provision of section 8—the
proposed treatment of the U.S. securities operations of foreign banks—also concerns
us, Mr. Chairman. Specifically, H.R. 7325 proposes that foreign banks now lawfully
engaged in securities activities here must terminate these activities by December 3 1,
1985. However, foreign banks would be permitted beyond 1985 to engage in
underwriting securities so long as the securities are sold outside the United States. We
recommend that this provision be amended to provide permanent grandfathering for
the existing securities operations of foreign banks.
This issue of grandfathering existing securities operations is a difficult one. A
responsible argument certainly can be made that, when applying to foreign banks here
the principle of separating commercial from investment banking, it produces more
uniform treatment to apply the principle both to prospective entrants and to existing
firms. However, we believe other considerations outweigh the advantage of such
proposed uniformity.
First, divestiture would obviously cause a hardship to the foreign banks involved, and
would eliminate a small foreign presence which now may have a procompetitive effect
on our large domestic securities industry.
Second, we believe that divestiture would be inequitable to the foreign banks who
established themselves here under the rules of the game prevailing at the time. We
should also take account of the history of permanent grandfathering that has been
applied for domestic banks under the Bank Holding Company Act and also under the
McFadden Act. It might be argued that securities activities of domestic banks were not
grandfathered in 1933. However, a lack of grandfathering in that case is not a good
precedent for the treatment of foreign banks today, because divestiture then was based
upon widespread abuses whereas we have no evidence of foreign banks abusing their
position now.
Third, we feel that our relations with other countries might be damaged as a result
of forced divestiture of existing operations of their banks.
These are the disadvantages involved in divestiture. In our judgment, they outweigh
the advantages gained from uniformity.
In any case, as you know, Mr. Chairman, the Congress and a number of agencies are
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1977 REPORT OF THE SECRETARY OF THE TREASURY
in the process of an intensive study of the participation of banks in various aspects in
the securities industry. If, as a result of its review of this area. Congress determines that
bank securities activities are not in the national interest. Congress of course would not
be precluded if it so wished from extending those prohibitions to presently existing
securities activities at that time.
3. Special Federal review of foreign bank applications.—I would now like to address,
Mr. Chairman, a third basic area in which we favor modification of this bill. Section
9 would introduce special Federal screening of applications by foreign banks desiring
to establish operations within the United States. Specifically, this section would require:
(1) the Secretary of the Treasury to issue guidelines containing general criteria for the
admission of foreign banks; (2) Federal and State bank supervisory authorities to solicit
the views of the Secretary of State, the Secretary of the Treasury, and the Federal
Reserve Board before acting on the applications; and (3) Federal and State banking
authorities to disapprove applications unless foreign banks specifically state that they
will comply with U.S. antidiscrimination laws which apply to domestically chartered
banks.
We strongly recommend the elimination of section 9 because it would deviate
unnecessarily from our overall Federal policy of national treatment. Section 9 would
apply to foreign-owned banks only and would establish for these banks new criteria
beyond that normally applied to both foreign and domestic banks. In this sense,
establishing special guidelines and review procedures for foreign banks operating here
would conflict with our traditional policy of neither promoting nor discouraging foreign
investment and could set an unfortunate precedent for the establishrnent of similar
procedures for foreign investment in other sectors of our economy. It also could induce
other countries to introduce or expand restrictions on American financial activities and
investments abroad.
This provision also appears to contradict certain national treatment provisions of
treaties of friendship, commerce, and navigation which we have with most ofthe major
banking nations because it would apply to establishing international banking operations
which do not involve depository or fiduciary functions. With regard to the antidiscrimination provision, we understand that foreign bank operations in the United States
already are covered by existing antidiscrimination laws applicable to domestic banks.
Thus, it would be inappropriate to incorporate this provision into a new banking law
since such action could imply that foreign bank operations were not subject to the law
in the past. Moreover, we have no evidence of nonadherence to U.S. antidiscrimination
laws.
Furthermore, we also advise against the second part of the antidiscrimination
provision that would require only foreign banks to take an antidiscrimination oath as
a condition of obtaining charters. This proposal singling out foreign banks is
discriminatory. As a final point, section 9 as a whole simply seems unnecessary because
it would provide no additional protection to U.S. depositors or to national interests.
There already are adequate safeguards in existing law, administrative procedures, and
in the proposed legislation.
4. Special deposit insurance.—Another important provision of H.R. 7325, Mr.
Chairman, is section 6, which would require U.S. branches of foreign banks to maintain
with the FDIC a surety bond or pledge of assets. We recommend that this section be
amended to provide more equal treatment vis-a-vis domestic banks. Specifically, we
believe the section should be changed ( I ) to make insurance optional for those Statelicensed branches which operate in those very few States that do not require FDIC
insurance for State nonmember banks and (2) to offer U.S. branches of foreign banks
regular FDIC deposit insurance.
These changes are designed to take care of two concerns. First, while we firmly
believe that deposit insurance is highly desirable, we again feel that it should be
provided while avoiding unequal treatment between foreign and domestic banks in this
area. In particular, we want to avoid departing from the national treatment policy and
raising questions about U.S. obligations under our treaties of friendship, commerce, and
navigation.
Second, we are concerned that the special insurance program currently contained in
the bill would be unduly burdensome. It would not offer foreign-owned branches access
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445
to the Federal deposit insurance fund but instead would require branches to pledge
assets or a surety bond against their deposits, with the FDIC as custodian ofthe assets.
In the absence of an insurance fund to pool risks, the pledge of assets might prove
inadequate to protect depositors.
Last year, the FDIC worked with Treasury to develop a proposed modification of
section 6 to increase the attractiveness of the deposit insurance program for foreign
banks. Under this proposal, foreign-owned branches in the United States would apply
for regular FDIC insurance coverage and would pay the standard insurance premium
of domestic member institutions. In addition, the branch would pledge some assets or
a surety bond to the FDIC to cover any additional risk.
The administration supports the FDIC's proposed modification. However, we believe
that deposit insurance should be mandatory for U.S. branches of foreign banks, except,
as noted above, in those States where State-chartered, nonmember domestic banks are
not required to obtain it. With these changes, deposit insurance should be viable for
U.S. branches of foreign banks.
5. Interstate branching.—Let me tum finally, Mr. Chairman, to the issue of
interstate branching by foreign banks. In section 5 of the bill, interstate branching by
foreign banks would be prohibited unless national banks are accorded the same
privilege. However, foreign bank branch, agency, and commercial lending operations
underway prior to May 1, 1976, would be permanently grandfathered. We support the
grandfathering of these operations so as to minimize the disruption of ongoing banking
services, and we also favor changing the effective grandfather date to exempt
operations underway on July 1, 1977. Currently, foreign banks may es'tablish branches
in more than one State where the law of each State permits, although domestic banks
have no ability to branch outside their home State. This occurs because foreign bank
branches are not chartered by States and, therefore. State laws restricting branches
chartered by other States are not applicable. Since we favor equal regulatory treatment
of foreign and domestic banks, we support a prohibition on interstate branching by
foreign banks unless and until U.S. banks are accorded the same privilege. However,
we do not favor the language of section 5, for it would subject both State and nationally
licensed foreign branches to the restrictions applying only to domestic national banks.
While the basic prohibitions on branching imposed by State law are adopted by Federal
law, the latter contains additional, somewhat more onerous requirements (e.g., higher
capital requirements). We suggest that the subcommittee could attain its intent by
having section 5 phrased to apply the branching law for domestic national banks to
nationally licensed foreign branches, and for domestic State banks to State-licensed
foreign branches.
Exhibit 53.—Statement by Under Secretary for Monetary Affairs Solomon, September
20, 1977, before the Subcommittee on International Trade, Investment, and
Monetary Policy of the House Committee on Banking, Finance and Urban Affairs,
on legislation to authorize U.S. participation in the IMF Supplementary Financing
Facility
I welcome these hearings, and this opportunity to testify for the administration in
support of legislation to authorize U.S. participation in the Supplementary Financing
Facility of the International Monetary Fund.
This new facility is needed, and needed urgently, to strengthen the International
Monetary Fund, and to enable us through the Fund to deal with certain potentially
serious problems in the intemational monetary system today. The establishment ofthe
facility will help to make sure that our international monetary system continues to
function smoothly, and will foster our objectives of an open and liberal system of
international trade and payments. U.S. participation is a prerequisite to the facility's
establishment. I urge, on behalf of the administration, that the Congress act promptly
to authorize that participation. I cannot exaggerate the importance, for international
financial stability, of this facility, and this legislation.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
The need for the Supplementary Financing Facility arises from the drastic changes
that have occurred in the pattern of international payments since 1973. As this
subcommittee knows, the quintupling of oil prices, the most severe world recession
since the 1930's, and world inflation, unprecedented in pervasiveness and obstinacy,
have all combined to bring radical changes to many aspects of the international
payments situation. Thus, in recent years, the pattern of international payments has
dramatically changed, with certain oil-exporting countries accumulating immense
current account surpluses, while the rest of the world accustomed itself to very large
deficits; the attitude toward imbalances has changed, with recognition that the
aggregate oil deficit cannot be eliminated in the short run; and the magnitude of
worldwide financing requirements has thus increased by a quantum step to multiples
of the levels of earlier years.
The increase in balance of payments financing has indeed been striking. In the 3 years
1971 through 1973, the aggregate deficit of all nations running current account deficits
averaged about $15 billion per year. In the 3 years 1974 through 1976, the aggregate
deficit averaged about $75 billion per year, or five times as much. Understandably;*an
increase of this magnitude in financing requirements has caused strains in the
international monetary system.
This large amount of balance of payments financing, about $225 billion over the last
3 years, was largely matched by an increase in debt. The rapid growth in financing and
debt came as no surprise. Soon after the shock of the increase in oil prices, it was
recognized that with such price levels and the absorptive capacity constraints of oil
producers, the resulting OPEC payments surpluses—and counterpart deficits ofthe oilimporting countries—could not be eliminated in the short run. The oil-importing
nations acknowledged that they could all harm each other if each tried to shift its oil
deficit to other countries by external restrictions and excessive domestic retrenchment.
The IMF membership agreed formally in January 1974 in the Rome Communique to
avoid such self-defeating actions. In the circumstances, it was appropriate that nations
were urged to "accept" the oil deficit, at least temporarily, and finance it. Efforts were
concentrated on assuring that recycling of OPEC surpluses occurred smoothly and that
adequate financing would be available to all countries to meet the higher costs of oil
imports. As part of this stress on financing rather than adjustment, the IMF established
a temporary oil facility, which channeled $8 billion to member nations, allocated largely
in relation to the increase in oil import costs, and with much less than the usual emphasis
on the IMF's usual requirement that its financing be linked to carefully negotiated
adjustment programs or corrective measures on the part of the borrowers.
Nations thus borrowed very heavily in the years 1974 through 1976 to finance their
large balance of payments deficits. The borrowing took many forms. While official
financing through the IMF during this period was far above historic levels, it was the
private markets that handled the bulk of the financing, accounting for about threequarters of the total.
Such data as are available—admittedly incomplete—show a pattern of world
payments in the period 1974 through 1976 roughly as follows:
• The cumulative current account deficits financed equaled about $225 billion
or so (after the receipt of grand aid), representing the counterpart of the
lendable 'surpluses of OPEC plus those of certain industrial countries
registering surpluses during the period.
• About $ 15 billion of these deficits, or 7 percent of the total, was financed
through the IMF, the bulk of it through the temporary oil facility and the
compensatory financing facility, both ofwhich provided financing largely on
the basis of "need" with relatively little emphasis on "conditionahty" or the
adoption of corrective adjustment measures by the borrower.
• About $40 billion of the deficits, or 18 percent of the total; was financed
through a variety of other official sources—development lending by industrial
countries and OPEC, by the IBRD and regional development banks, and other
sources.
• The remaining current account deficits, some $170 billion, plus about $40
billion of debt repayments, were financed largely through market-oriented
borrowing. Most of these funds were obtained through banks and securities
EXHIBITS
447
markets. Some came from governments seeking investment outlets for their
surpluses or as export financing.
Given the private market orientation of the world economy, it was natural that the
bulk of this financing be handled by private rather than official channels. The private
institutions were in a position to expand the level of their activity. Huge surpluses, by
OPEC and other countries, of course, brought large deposits and placements to the
banks and other financial intermediaries, and greatly expanded the loanable funds of
those institutions. In addition, the period was one of rapid institutional expansion in the
international banking system. Many institutions were competing eagerly for new
customers, as they sought to establish themselves in new activities and new geographic
areas, and endeavored to broaden their scope of operations so as to spread risks and
diversify portfolios at a time when domestic loan demand was less buoyant than in
immediately preceding years.
The question has been raised as to whether this rapid and unprecedented
enlargement of lending activity and debt has reached a danger point for the monetary
system—either in the sense that large numbers of countries have borrowed beyond their
capacity to service debt, or in the sense that our banks and other institutions are
overextended.
It is our considered judgment that the system as a whole is not in any such position
of imminent danger, either as a result of excessive borrowing by large numbers of debtor
nations or as a result of our financial institutions being overstretched.
But the fact that the system as a whole has performed well thus far is no cause for
comfort or complacency. Success in the past is no guarantee that we are adequately
armed for the future. Much remains to be done. Structural changes, domestic and
extemal, must take place in many countries, often involving major alterations of
traditional pattems of production and consumption. Such changes will not come easily
and must take place over a number of years if satisfactory levels of growth and
employment—and an open system of trade and payments—are to be maintained.
Substantial financing will continue to be needed by countries in deficit. And, in some
countries, adjustment measures need to be introduced. The Supplementary Financing
Facility will help to assure that the financing is available and that the adjustment
measures are adopted.
Clearly there are countries—certainly not a large number but a significant number—
that have already reached or are approaching the limits of their ability to borrow or
their prudence in doing so. These are countries that are beset by internal economic
imbalances, that still face large payments deficits, where the need for corrective
measures and intemal and extemal adjustment is compelling.
Such countries, and others which may in the future face similar difficulties, must be
encouraged, and permitted, to adjust their economies in ways that are compatible with
our liberal trade and payments objectives, in ways that avoid discrimination against
others and disruption ofthe world economy. Our monetary system must foster sound
adjustment, internationally responsible adjustment, with programs that develop
underlying economic and financial stability in the countries undertaking adjustment
measures, while avoiding recourse to trade and payments restrictions that are
destructive of international prosperity. This economic and financial stability is a
prerequisite to sustainable expansion and high employment. A major function of the
IMF is to induce such adjustment.
Our international monetary system is at present strong and functioning effectively.
But we must eliminate its vulnerabilities and put in place the machinery needed to
insure that it will continue to operate effectively in the future. Looking ahead, we can
make two fairly safe predictions:
First, that large payments imbalances will continue for the next several years. The
OPEC surplus, the largest part ofthe imbalance, will diminish only gradually, as OPEC
spending grows and as effective energy conservation and production programs are
implemented in the United States and elsewhere.
Second, that there will be a need for greater emphasis on adjustment of imbalances,
rather than simply financing the imbalances, especially by those countries facing
relatively large payments deficits. With the passage of time, the need for countries to
adapt to higher energy costs and other economic developments has become stronger
and is increasingly recognized. Indeed, at the Manila IMF meeting last fall, a basic
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Strategy of adjustment was agreed, which, among other things, called upon deficit
countries to shift resources to the external sector and bring current account positions
into line with sustainable capital inflows.
Given these expectations, it is essential that the resources of the IMF be adequate
both to enable it to foster responsible adjustment policies by members facing severe
payments difficulties, and also to provide confidence to the world community that it
can cope with any potential problems that may arise. That, fundamentally, is why the
Supplementary Financing Facility is needed.
Without the additional funds of the new facility, the IMF's resources may not be
adequate to meet demands placed on it over the next several years. With relatively large
use in the past 3 years, the IMF's usable resources are at present extremely low at about
$5 billion. These usable resources will be increased by about $6 or $7 billion with the
coming into effect of the sixth quota review approved in 1976 and now being ratified,
and about $3 billion remains available under certain conditions through the General
Arrangements to Borrow. Even with those additioris, and the repayments which may
be expected, the IMF's resources look sparse in a world in which total imports are
running at an annual level of nearly a trillion dollars, and in which OPEC surpluses are
likely to decline only gradually from the current $40 billion annual level.
Against this background, the decision was taken to seek to establish the Supplementary Financing Facility, with financing of about $10 billion to be provided initially by
seven industrial nations and seven OPEC countries. The industrial countries would
provide $5.2 billion, ofwhich the U.S. share—subject to congressional authorization—
would be SDR 1.45 billion (about $1.7 billion) approximately 17 percent ofthe total.
The OPEC members would provide about $4.8 billion, or nearly half the total, with
Saudi Arabia the largest single participant of either group at $2.5 billion.
The terms relating to the provision of this financing to the IMF by the participants
are presented in detail in the National Advisory Council "Special Report on the
Supplementary Financing Facility," presented to the Congress with the legislation.
Under the agreed terms, participation in the facility is advantageous to the United States
and others providing the financing. In addition to furthering our interest in assuring a
strong and smoothly functioning international monetary system, U.S. participation in
the facility provides us with a strong, liquid, and interest-eaming monetary asset. Under
the facility, the United States and other participants agree to provide currency to the
IMF in exchange for a liquid claim on the IMF of equivalent value. These claims on
the IMF, which can be drawn down any time there is a balance of payments need to
do so, form part of our intemational reserve assets. The United States also can sell or
transfer these assets to others by mutual agreement. Since, in exchange for any dollars
we provide, we receive a fully liquid claim which^can be drawn down any time we have
a need to do so, there is no U.S. budget expenditure involved, but rather an exchange
of one asset for another. This treatment is in keeping with the budget and accounting
practices followed with respect to all U.S. transactions with the IMF.
The interest rate we receive from the IMF is linked to U.S. Treasury issues of
comparable maturity, so that there is no net cost to the Treasury from our participation
in the facility. As the drawings are repaid by the borrower, the IMF returns the dollars
to the United States, U.S. drawing rights on the IMF correspondingly are reduced, and
the transaction is reversed.
This $10 billion facility would be available to the IMF for a temporary period.
Countries could apply within the next 2 to 3 years, and could draw down funds over
a period of 2 to 3 years, though the total period of disbursements could not exceed 5
years. It would be available for use by IMF members only under clearly defined criteria.
Specifically, a member drawing under the facility—
Must have a balance of payments financing need that is large in relation to its IMF
quota and exceeds the amount available to it under the IMF's regular policies.
Requires a period of adjustment that is longer than that provided for under regular
IMF policies.
Must enter into a standby agreement with the IMF in which it undertakes to adopt
corrective economic policy measures adequate to deal with its balance of
payments problem.
The facility, in short, is designed to encourage those countries with particularly
severe payments
problems to adopt internationally responsible adjustment programs—
EXHIBITS
449
and to avoid the unwelcome alternatives of resort to the controls, trade restrictions, and
beggar-thy-neighbor policies which can be so harmful to world prosperity and so
disruptive to our liberal trade and payments order. It will, in addition, by fostering a
smoother, more effective process of intemational balance of payments adjustment,
reinforce confidence in the international monetary system, and thus facilitate the flow
of financing throughout the system. It is not a device for augmenting development
assistance—the IMF provides only short- to medium-term balance of payments support.
The member drawing on the facility receives more financing than is otherwise available
from the IMF; a longer period of adjustment (a 2- to 3-year program, as compared with
the 1 year normally applicable in the IMF); and a longer period of repayment (3- to
7-year maturity, as compared with the IMF's normal 3- to 5-year maturity). Since
interest on the financing provided to the Fund is market related, the borrowing country
would also pay a somewhat higher charge than for normal IMF drawings.
The facility is a cooperative venture, with the surplus countries of OPEC and the
stronger industrial countries joining together to assure that the needed financing will
be available. The agreement requires that before the facility can begin operations
participants must formally commit $9 billion ofthe full $10 billion, and the six largest
participants must all formally commit themselves to participate. Thus action by the
United States, and the Congress, is necessary before the facility can become a reality.
Let me assure you that the Supplementary Financing Facility is not proposed or
represented as a solution to all the world intemational financial problems. For one
thing, it will not meet the problems of nations whose real need is for permanent transfers
of resources or long-term development aid. Most importantly, it cannot eliminate the
large imbalance between the OPEC surplus countries and the oil-importing world. We
must work toward the elimination of that imbalance. But that will come about only
through, on the one hand, effective programs by the United States and others to
conserve energy and develop altemative energy supplies and, on the other, continued
growth in the capacity of oil-exporting nations to absorb goods and services produced
in the oil-importing world.
What the Supplementary Financing Facility will do is help redistribute, as well as
reduce, the collective current account deficits so that the necessary borrowing is
undertaken by those countries whose creditworthiness and economic strength are
adequate to sustain the additional debt. By encouraging responsible adjustment
measures in those countries experiencing severe domestic economic distortion, large
payments deficits and serious financing problems, such deficits are reduced and shifted
to a more sustainable worldwide pattern.
With the establishment of the Supplementary Financing Facility there will continue
to be a large amount of borrowing—private as well as public. Concern has been
expressed that continued borrowing in such large amounts, irrespective of who is
borrowing or how the credit is used, constitutes a serious danger for the monetary
system. I do not share that view. If the borrowed funds are properly used to support
productive investment, and strengthen the borrower's current account position, the
debt need not constitute a serious future burden, as shown by the experience of the
United States in the last century and other countries at present. Excess savings in surplus
OPEC countries can, in effect, finance investment in the oil-importing countries by
supplementing domestic savings. But the borrowed funds should be productively
invested in order to avoid servicing problems in the future.
This, then, is the broad strategy within which the Supplementary Financing Facility
fits: We aim for a sustainable pattern of payments in which the borrowing is undertaken
by countries commensurate with their creditworthiness; we seek to assure that the
borrowed funds are used to support sound and effective programs of stabilization and
adjustment; and, meanwhile, we work toward elimination ofthe oil imbalance through
energy programs and OPEC development.
Let me address three questions which have been asked with respect to this new
facility.
First, how can we be sure that the $ 10 billion contemplated for the facility is adequate
to do the job but not more than is needed?
Obviously it is a matter of judgment and no one can be absolutely sure. We cannot
predict with certainty just which countries will have the particularly large needs for
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1977 REPORT OF THE SECRETARY OF THE TREASURY
credit that make them eligible for this facility, along with the willingness to adopt the
kind of adjustment programs associated with it. It is our judgment that this facility plus
the amounts available to the IMF from other sources will enable it to provide financing
over the next 2 or 3 years up to, say, a total of $25 billion. This is above the levels of
IMF financing of recent years which were already relatively high. To assure confidence
in the monetary system, it is vital that the IMF always be known to have adequate
resources in reserve to meet whatever urgent problems may arise, even if it turns out
that less than the full amount is actually drawn. Since no cash transaction occurs until
a member country actually draws from the IMF, there is no interest or other cost
whatever—to the IMF, or to the United States and other participants—for any portion
of the facility not actually utilized for drawings.
A second question is, will the facility serve to "bail out" private banks which have
lent unwisely or excessively?
The answer is " n o . " The facility is not so designed and will not be so used. It will not
bail out either countries or banks. It will encourage countries to initiate needed
adjustment mezisures before their debts become too large to handle or credit is no
longer available, and it will provide transitional financing while the measures take
effect. It will help redistribute deficits to a more sustainable pattern, and improve
nations' creditworthiness and confidence in the monetary system.
It is not a substitute for bank credit and will not take over the banks' regular lending
activities. While IMF financing may in the period ahead account for a share of total
balance of payments financing larger than the 7 percent it provided in 1974-76, it will
remain small in comparison with the share channeled through private markets. In fact,
the facility is expected to encourage banks to continue to expand their foreign lending
rather than cut back, by promoting sound economic policies on the part of borrowers—
and experience indicates that in fact the banks normally lend more to a country after
it has entered into a standby agreement with the IMF. The banks will benefit from the
new facility, but only indirectly—through the improved international environment,
stronger monetary system, and high levels of trade that will benefit all elements ofthe
American economy.
A third question is, why was the Supplementary Financing Facility established rather
than the alternative of a permanent change in IMF quotas?
The answer is that this method was chosen for reasons of timing and practicality. A
review of IMF quotas is underway, but with the complications of negotiation and
ratification, it may not lead to actual quota increase for, say, 2 years or more. Hopefully
the new facility can be put into operation at an early date, and cover the particular needs
until a quota revision occurs. The facility is also more fiexible than a quota increase,
since it is not subject to the same quota constraints and can be used more selectively
to meet the problems of countries with particularly large needs.
Mr. Chairman, the IMF is a valuable institution, in which all members contribute,
financially and otherwise, to an effective international monetary system. It has a good
record. The proposal for a Supplementary Financing Facility is a sensible and realistic
way to strengthen it to meet present problems. The facility is equitable to all parties.
It is needed, and needed soon. The administration urges that the committee report the
proposed legislation favorably, and that the Congress enact it promptly.
Exhibit 54.—Communique of the Interim Committee of the Board of Governors of the
International Monetary Fund on the International Monetary System, September 24,
1977, issued after its ninth meeting in Washington, D.C.
1. The Interim Committee of the Board of Governors of the International Monetary
Fund held its ninth meeting in Washington, D . C , on September 24, 1977, under the
chairmanship of Mr. Denis Healey, Chancellor of the Exchequer of the United
Kingdom, who was selected by the Committee to succeed Mr. Willy De Clercq of
Belgium as Chairman. Mr. H. Johannes Witteveen, Managing Director of the
International Monetary Fund, participated in the meeting. The following observers
attended during the Committee's discussions: Mr. G.D. Arsenis, Director, Division for
Money, Finance and Development, UNCTAD; Mr. Rene Larre, General Manager, BIS;
EXHIBITS
451
Mr. Emile van Lennep, Secretary General, OECD; Mr, F. Leutwiler, President,
National Bank of Switzerland; Mr. Olivier Long, Director General, GATT; Mr. Robert
S. McNamara, President, IBRD; Mr. Francois-Xavier Ortoli, Vice-President, CEC; Mr.
Cyrus Sassanpour, Market Research Analyst, OPEC; and Mr. Cesar E. A. Virata,
Chairman, Development Committee.
2. The Committee discussed the world economic outlook and the policies
appropriate in the current situation.
While welcoming progress made in many countries in achieving stabilization and
growth objectives, the Committee expressed concern about the faltering of economic
activity during recent months in a number of industrial countries. Sluggishness in
private investment demand, the Committee stated, continued to be a major feature of
the current economic situation.
The Committee noted that the slower expansion of the economic activity had been
accompanied by a deceleration in the growth of world trade. The impact of this on the
export eamings of developing countries was a matter of concern to the Committee,
which noted that these eamings had also been adversely affected by the marked
declines in primary commodity prices during recent months.
The Committee paid considerable attention to the special problems that affect the
economies of the developing countries. It was particularly concemed to ensure that
adjustment measures by developed countries should not reduce the transfer of real
resources to the developing world.
The Committee expressed concern about the persistence of high unemployment,
noting that the overall rate of unemployment for the industrial countries as a group
remained close to the recession peak reached in the latter part of 1975.
Although progress has been made in many countries in countering inflation, the
Committee remained concemed about current rates of inflation, noting that in almost
all countries these were still much too high to be considered acceptable.
The Committee reaffirmed its view that tendencies toward protectionist trade
policies are unacceptable from an intemational point of view and should be strongly
resisted. In this connection, it stressed the importance it attached to the successful
outcome of the current Multilateral Trade Negotiations in Geneva, and to the early
conclusion of agreements that would benefit all countries, in particular developing
countries.
With respect to national economic policies, the Committee agreed on the following
conclusions:
(a) All countries in relatively strong external positions should make every effort to
ensure adequate growth of domestic demand compatible with containing inflation; this
would not only be in the interest of those countries themselves, but also would help to
ensure achievement of a satisfactory rate of growth in world trade, supporting and
facilitating external adjustment efforts by deficit countries. The Committee expressed
regret that growth of domestic demand in some of the larger industrial countries had
lagged behind the targets and expectations of their authorities, and it welcomed the
expansionary measures recently announced by several governments. Also, the
Committee expressed the belief that, as the results of adjustment action become
progressively more evident, an increasing number of countries will be able to bring their
inflation and balance of payments problems under control and thus will be strong
enough to make their contribution to growth of the world economy.
(b) Demand policies in countries with relatively high inflation or seriously weak
external positions should place primary emphasis on combating inflation and improving
the balance of payments. The Committee reaffirmed its belief that for these countries
this was not only necessary in present circumstances but over time would yield the best
results for growth and employment.
(c) The Committee noted the importance of structural problems in the economic
situation of many countries and the need to develop appropriate energy policies.
(d) Policies in all countries should be directed as a minimum to avoiding a
resurgence of inflation and in many countries to reducing inflation rates which are
clearly excessive.
3. An important requirement of the international adjustment process relates to the
provision of official financing to deficit countries. Such finance should be provided in
452
1977 REPORT OF THE SECRETARY OF THE TREASURY
sufficiently large amounts, and under appropriate conditions which take account ofthe
specific problems ofthe borrowing countries, and permits adequate time for necessary
adjustment.
The Committee welcomed the completion by the Executive Directors of their work
on the establishment of a supplementary financing facility that will enable the Fund to
expand substantially the resources it can make available to members facing payments
difficulties that are large in relation to their quotas, and the adoption of the decisions
of August 29,1977 on the facility and related arrangements. The Committee noted that
a number of members and official institutions have expressed their willingness to make
available to the Fund resources for the financing ofthe facility ofabout SDR 8,6 billion,
equivalent to approximately $ 10 billion, but that the facility will not become operative
until agreements have been entered into for a total amount of financing of not less than
SDR 7.75 billion, including at least six agreements each of which provides for an
amount not less than SDR 500 million. The Committee welcomed the prospect that
some of the initial amounts made available might be increased and noted that it would
be possible for other members in strong positions to make resources available to the
facility. In view of the need of some members for prompt financial assistance on the
scale envisaged under the new facility, the Committee urged all potential participants
in the financing of the facility to complete as soon as possible the necessary action that
will bring the facility into operation at the earliest date possible. At the same time, the
Committee agreed to request the Executive Directors to pursue their consideration of
the possibility of a subsidy, perhaps through voluntary contributions, that would be
related to the charges payable by members determined by the Fund to be in difficult
circumstances.
4. The Committee noted the report of the Executive Directors on the Seventh
General Review of Quotas and their intention to give priority to this matter in their work
after the Annual Meeting. It asked the Executive Directors to submit appropriate
proposals to the Committee for its consideration, at its next meeting, together with draft
recommendations to the Board of Governors.
5. The Committee reaffirmed its request to the Executive Directors to report on
the question whether a further allocation of SDRs would be advisable at the present
time and to report to the Committee at its first meeting in 1978.
The Committee also reaffirmed its request to the Executive Directors to review the
characteristics and uses ofthe SDR so as to promote the purposes ofthe Fund, including
the objective of making the SDR the principal reserve asset in the international
monetary system.
6. The Committee expressed concern at the delay in the entry into force of the
Proposed Second Amendment ofthe Fund's Articles of Agreement and in the increases
in quotas under the Sixth General Review of Quotas. In this connection the Committee
noted that it has been eighteen months since the Board of Governors completed its
action on both these matters and that, although progress had been made in recent
months, acceptances and consents from many more members will be needed to attain
the required majorities. In view of the importance for members and the international
monetary system ofthe entry into force of the Amendment and the increases in quotas,
the Committee once again urged all members that have not yet accepted the
Amendment or consented to the increases in their quotas, to do so at the earliest
possible date.
7. The Committee agreed to hold its next meeting in Mexico on March 21, 1978.
Exhibit 55.—Statement by Secretary Blumenthal as Governor for the United States,
September 27,1977, at the Joint annual meetings of the Boards of Governors of the
International Bank for Reconstruction and Development and its affiliates and the
International Monetary Fund, Washington, D.C.
We meet at a time of doubt about the world's economic future. The legacy of the
oil shocks of 1974, inflation, and the deep recession of 1974 and 1975 poses questions
of whether our system of international economic cooperation can endure.
The main points I want to make are these:
EXHIBITS
453
The world economy has begun.to recover from staggering blows;
We have in place a strategy for sustained recovery, and that strategy is working; and
We will succeed—though success takes time—if we continue to act together and
do not lose our nerve.
The effective functioning of the institutions that bring us together today—the Bank
and the Fund—is a critical part of that cooperative effort.
The U.S. economy
I will first report to you on the condition of the U.S. economy,
I am pleased that we are continuing to make solid progress. We have recorded
economic growth of 7.5 percent for the first quarter and 6.2 percent for the second.
We expect to meet our target for real growth during 1977 of over 5 1 /2 percent, and
we expect continued strong growth in 1978.
We have reduced our unemployment rate by about 1 percentage point and so far this
year have created more than 2 million new jobs.
Inflationary pressures are diminishing, despite the adverse effects of an unusually
harsh winter. Consumer prices rose at the rate of more than 8 percent in the first half
of the year. We expect the rate to decline to less than 5 percent in the second half.
We also have problems—serious ones.
• Unemployment is much too high. Creating new jobs to bring it down is a top
priority.
• Despite our progress, infiation also remains too high. We know well how
difficult it is to break the inflationary cycle.
• Business investment, though increasing, is weaker than it should be.
• Energy consumption and oil imports are excessive.
• Our current account deficit is likely to be in the range of U.S.$ 16-$20 billion.
In part, the shift in our current account position since 1975 has been caused by our
heavy consumption of oil. But it is also a consequence of the comparatively high rate
of economic growth in the United States and more restrained expansion in many other
countries.
We are determined to correct our problems.
• The expansionary effects of new programs for public works and public service
jobs will show up strongly in coming months.
• We have undertaken a series of measures to keep inflation under control and
to bring it down.
• President Carter will soon present tax proposals that will include important
new incentives to stimulate business and encourage higher productivity.
• We are urging Congress to complete action on legislation which will
encourage energy,conservation and increase domestic energy production.
That program will be an important first step. But more will have to be done
to limit demand and, especially, to develop new domestic energy supplies.
• We look to countries with payments surpluses to expand their economies to
the maximum extent consistent with the need to combat inflation. Such moves
are essential to a smoothly functioning international economic system. We are
encouraged by expansionary measures decided on or implemented in recent
weeks.
The strategy of cooperation
The international economic system is under stress because of the need to adjust to
wide variations in national economic performance, high energy costs, and large
imbalances in international payments positions.
A broad strategy to facilitate these adjustments has been agreed in international
discussions. The guiding principle of that strategy is cooperation.
It calls for symmetrical action by both surplus and deficit countries to ehminate
payments imbalances.
It calls on countries in strong payments positions to achieve adequate demand
consistent with the control of inflation.
454
1977 REPORT OF THE SECRETARY OF THE TREASURY
It calls on countries in payments difficulties to deploy resources more effectively
so as to bring current accounts into line with sustainable financing.
u^<One point is clear. If this strategy is to succeed, the oil-exporting countries will have
to show restraint in their pricing. This is an essential element of international
cooperation and is in the interest of the oil-exporting and oil-importing nations alike.
We also need to resist protectionist pressures. Most importantly, we must work for
the successful completion of the Tokyo Round of the General Agreement on Tariffs
and Trade negotiations.
^
The IMF, with its key role at the center ofthe international economic system, must
be in a position to help countries carry out the agreed strategy.
This requires first of all that the Fund have adequate resources.
The United States has formally consented to the increase in its quota agreed to in
the sixth quota review. We urge others to act promptly so that the increased quotas can
be put into effect without further delay.
We welcome the new Supplementary Financing Facility to provide an additional
U.S.$10 billion for nations whose financing needs are especially large. We intend to
press for prompt legislative authorization of U.S. participation.
A permanent expansion of IMF resources for the longer term is also needed. We will
work for agreement on an adequate increase in Fund quotas during the seventh quota
review.
The second requirement is that the Fund use these resources to foster necessary
adjustment. As the Supplementary Financing Facility recognizes, serious imbalances
cannot be financed indefinitely. Current account positions must be brought into line
with sustainable capital fiows. The facility retains the central principle that IMF
financing should support programs that will correct the payments problems of
borrowers, not postpone their resolution.
In today's circumstances, that process will in some cases require a longer period of
time. Consequently, the United States supports the provisions in the new facility that
introduce flexibility in determining the pace of adjustment.
In large measure, this comes down to a question of balance and judgment in the
Fund's operations. The Fund cannot avoid its responsibilities to press for needed
changes, nor, on the other hand, can it be rigid and inflexible in requiring adjustments.
The course it must steer is often narrow and difficult.
I believe that, on the whole, the Fund has carried out this responsibility with skill and
sensitivity. I am confident it will continue to condition the use of its resources in a
reasonable and equitable manner, taking into account the needs and circumstances of
individual countries as well as the particular conditions in the world economy today.
It is not a matter of whether the Fund attaches conditions, but what kind. In individual
cases, there will be a need to adjust the emphasis between deflationary measures and
policies for the redirection of resources to productive investment and improvement of
external accounts.
Third, we must bear in mind the influence of the actions of the Fund on the flow of
private capital. It is inevitable and right that the private capital market will continue
to play the dominant role in financing imbalances.
At the same time, banks, in their lending policies, are increasingly looking to the
existence of standby arrangements with the Fund. These arrangements, with their
stipulations about domestic economic and external adjustment policies, can considerably strengthen nations' creditworthiness.
A greater availability of information may also prove useful and feasible. The
Executive Board is currently examining the question of how the system might be
strengthened by greater private access to factual information produced by the Fund,
on a basis that respects the confidential relationships between the Fund and its
members.
I believe that in general it is important to explore possible methods to make sure that
private and public flows of capital are compatible with each other. This, too, is a way
of strengthening the international financial system.
The responsibility of the Fund goes beyond its operations in support of countries in
payments difficulty.
The amended Articles give the Fund an important, explicit role in overseeing the
EXHIBITS
455
operations of the system as a whole and in exercising surveillance over the exchange
rate policies of its member governments.
The principles to guide the Fund in carrying out these responsibilities reflect widely
held views, and a consensus has also been reached on the procedures to be used. It is
underlying economic and financial factors that should determine exchange rates. That
is recognized.
I believe we all acknowledge that in carrying out these new provisions the Fund will
have to approach its task cautiously. These are uncharted waters. History is by no means
an adequate guide to the future. Only by experience will it be possible to test the
principles we have established and to modify them where it is proven necessary. It is
evident that the Fund's effectiveness in this area will depend on the genuine support
of its members for the principles it develops.
I believe the Fund is in an excellent position to undertake this new role. It is now time
for the member countries of the IMF to act by approving the amended Articles and
bringing these provisions into effect.
Problems of development
Establishing conditions for sustained growth and strengthening the financial
adjustment processes are the most pressing intermediate-term issues facing the world
economy. The critical long-term problem, however, is to assure economic growth with
equity in the developing world.
President Carter spoke yesterday of the strong commitment of the United States to
help in the effort to meet the basic human needs of the world's poor. President
McNamara gave us a picture of the magnitude of the task.
Action is required by both industrial and developing countries.
The most important contribution the industrial countries can make is to achieve
adequate, sustained economic growth in the context of an open intemational economic
system. In the past year the oil-importing developing countries have improved their
trade position by U.S.$8 billion as a result ofthe export opportunities arising from the
growth in the U.S. economy. An acceleration in the economic expansion of other
industrial countries would provide comparable benefits. For such benefits to be realized
in the future, markets must be open and protectionism resisted.
Healthy economic conditions in the industrial world will also facilitate the flow of
capital to meet productive needs in the developing countries. In this connection, we
must review our efforts to assure adequate access to private capital markets.
In addition, specific actions must be taken to facilitate the growth of developing
countries.
A substantial increase in the transfer of official capital to developing countries is
necessary. The United States will do its share. The Congress has authorized over U.S.$5
billion in contributions to the intemational development banks and has supported a
sizable increase in bilateral assistance. We are prepared to begin formal negotiations
in the Board of Directors of the World Bank leading to a general increase in its capital.
We must work together to strengthen arrangements for stabilizing earnings from raw
material exports.
We must also approach the management of intemational indebtedness, not as a crisis,
but as a short- and medium-term balance of payments problem. We can draw
encouragement from the fact that the aggregate current account deficit of the oilimporting developing countries declined in 1976 as the world economy began to
recover. Where individual countries face severe balance of payments problems, the new
Supplementary Financing Facility will help to facilitate adjustment.
Actions by the industrial countries are only part of the story. The real payoff lies in
the policies adopted by the developing countries. This is not surprising. Four-fifths of
the investment capital of developing countries is mobilized from domestic savings.
Domestic policies will determine not only how much savings can be mobilized in the
future but also how efficiently resources are used and how effectively the developing
countries can take advantage of an expanding international economic environment.
The development partnership requires not only healthy global economic conditions
that will enable the developing economies to grow, but also efforts by the developing
countries to assure that the benefits of growth are enjoyed by their poorest citizens.
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1977 REPORT OF THE SECRETARY OF THE TREASURY
In this connection, my Government strongly supports the new directions charted by
the World Bank in financing social and economic development. The Bank has
pioneered in designing new approaches to alleviate urban poverty and stimulate rural
development. I believe the continued expansion of the activities of the World Bank
group, more than any other single action, will contribute to constructive relations
between industrial and developing countries.
In supporting this expansion, the United States will urge—
• More emphasis on food production, expanding employment opportunities,
and other measures to improve the lot of the world's poorest people;
• Increased lending to expand energy resources in developing countries;
• Using the Bank's resources to facilitate the adoption of sound economic
policies in the developing countries.
I am convinced that foreign assistance will not have the support of the American
people unless they perceive that it is making a real contribution to improving the lives
of the poor.
My Government also believes that the goals and purposes of development encompass
human rights as well as freedom from economic privation and want. The U.S. Congress
has instructed the administration to seek international agreement on standards for
human rights. We will pursue this mandate.
Looking ahead, the Bank and the Fund have a vital and expanding role to play in the
international economic system. Their record entitles them to strong support and they
shall have it from the United States.
I must point to a problem, however, that concems both the Bank and the Fund. My
Government's continued ability to support these two institutions will depend on their
efficient administration. Most importantly, we must resolve the issue of proper
compensation policies for their staffs and Executive Directors.
On salaries there is need for restraint. More generally, it is essential to overhaul the
entire compensation system of these institutions—as well as the systems of other
international organizations—to meet today's realities. We hope that the Joint
Committee set up to review the situation will enable us to move to such a new system.
We must not permit this issue to threaten these great institutions.
As I conclude my comments, it is a matter of deep regret to the United States and
to me personally that as the Fund crosses a threshold into a new era of operations, it
will lose the valued services of its Managing Director, our trusted friend, Johannes
Witteveen. He has guided the Fund with firmness, fairness, imagination, and good
sense.
He deserves a large portion ofthe credit for the great progress the Fund has recorded
in recent years, and he leaves the institution strong and fully capable of meeting its new
and challenging responsibilities. I join other Governors in expressing our thanks.
We have a formidable agenda before us and one that we should approach with a sense
of hope and resolve. The necessary actions are difficult but the potential gains are
immense. Pursuit of sound economic policies domestically and adherence to open and
cooperative policies internationally will see us into a new period of economic progress
and equity worldwide.
Developing Nations
Exhibit 56.—Communique of the Joint Ministerial Committee of the Boards of
Governors of the International Bank for Reconstruction and Development and the
International Monetary Fund on the Transfer of Real Resources to Developing
Countries (the Development Committee), October 3,1976, issued at the close of its
sixth meeting in Manila, Philippines
I. The Development Committee (the Joint Ministerial Committee of the Boards of
Governors of the Fund and the Bank on the Transfer of Real Resources to Developing
Countries) held its sixth meeting in Manila on October 3,1976, under the chairmanship
of Mr. Henri Konan Bedie, Minister of Economy and Finance for the Ivory Coast. Mr.
Robert S. McNamara, President of the World Bank, Mr. H. Johannes Witteveen,
EXHIBITS
457
Managing Director ofthe Intemational Monetary Fund, and Mr. M. M. Ahmad, Acting
Executive Secretary, took part in the meeting which was also attended by representatives from a number of intemational and regional organizations and Switzerland as
observers.
2. The Committee approved for presentation to the Boards of Governors of the
Fund and the World Bank its second annual report covering the period July 1975 to
June 1976.
3. The Committee considered the program of its future work in the light of the
situation and prospects of developing countries. The analyses presented to it by the
staffs of the IMF and the World Bank showed that the current account deficit of nonoil developing countries had declined somewhat but was still expected to be running
at a high annual rate ofabout US $32-33 billion in 1976 and the first half of 1977. These
estimates did not suggest that a significant relief from current difficulties would be
forthcoming in the early part of 1977. Many developing countries, especially the
middle-income countries, borrowed heavily to maintain the fiow of imports and to avoid
undue interruption of their development programs, leading to an increase in their
extemal debt and debt service payments. The low-income countries have had little or
no growth in per capita income since 1970 and their level of imports fell by some 20
percent below those of the late 1960's. Official aid to them has been inadequate. To
assist the developing countries in their adjustment process and to help them achieve
a higher rate of growth, the low-income countries would require additional concessional assistance and the middle-income countries would need increased flows from both
official and private sources. To be effective, these in turn would require a greater
emphasis upon domestic policies attuned toward the necessary internal adjustment
processes and toward employment creation.
4. The Committee reaffirmed its strong support for the timely and satisfactory
completion of the Fifth Replenishment of IDA so as to permit a substantial increase
in IDA resources which, in the opinion of many members, should be in real terms, and
to maintain continuity of its operations beyond June 1977. The Committee also agreed
that it was important that the lending programs ofthe intemational lending institutions
remain adequate to help meet the capital requirements of the developing countries.
They asked the Boards of these institutions to review the adequacy of their capital
resources for this purpose and, where such capital is inadequate, to review the issues
prerequisite to consideration of augmenting such capital.
5. The Committee, with due regard to the functions ofthe Boards ofthe IMF, the
World Bank, and other intemational institutions, desired to focus attention on the
resources situation of the international development finance institutions, on the
volume, terms and distribution of official flows, and on the role of adjustment in the
development process. The Committee agreed to establish a Working Group which
would, initially, consider the study of the Intemational Resources Bank requested of
the World Bank. In addition, the group could be assigned other specific matters,
including the volume, terms and distribution of official fiows. The Working Group will
present its conclusions and recommendations for the consideration of the Committee.
6. The Committee received a further interim report from the Working Group on
Access to Capital Markets. It was agreed that capital market countries would endeavor,
as far as their balance of payments situation permitted, to move progressively toward
greater liberalization of capital movements, in particular capital outflows. In the
meanwhile, when regulations goveming capital outflows are maintained for unavoidable reasons,
• governments of capital market countries would afford favorable treatment, as
among foreign borrowers, to developing country borrowers with regard to
permissions to make an issue or place in the issue calendar;
• those capital market countries which currently maintain quantititive limits on
the amount of foreign issues in their markets would endeavor to keep
developing country borrowers outside these limits, at least up to specified
amounts;
• since the Eurobond market presents potential opportunities for developing
countries to raise finance, countries whose currencies are in strong demand,
and which maintain restrictions on international issues denominated in their
458
1977 REPORT OF THE SECRETARY OF THE TREASURY
currencies, would endeavor to give favorable treatment, as among foreign
borrowers, to developing country borrowers.
The Committee noted a number of recommendations in the report that consideration
be given to the removal of legal and administrative barriers so far as is consistent with
investors' protection and urged capital market countries to give them earnest
consideration.
7. The Committee recognized the need to reinforce and expand technical
assistance activities in the field of access to capital markets, noted the bilateral
programs already in the field, recognized the need to coordinate the implementation
of present and future available services, and recommended that attention be given by
the Board of IFC to the possibility of IFC expanding its activities.
8. The Committee stressed the importance of co-financing by intemational and
regional development banks as a means of augmenting private capital flows to some
developing countries, noted the progress being made in this regard and urged that these
arrangements be further expanded.
9. The Committee noted with satisfaction that the Working Group had considered
the subject of multilateral guarantees and the proposal for an international investment
trust and asked that it continue its studies on these subjects. The Committee also agreed
that the Working Group should present to the Committee at its next meeting concrete
recommendations for improving the various reporting systems on international
financial stocks and flows.
10. The Committee agreed to meet again on October 6 in Manila and also
tentatively to meet on April 17,1977, in Washington, D . C , the time ofthe next meeting*
of the Interim Committee.
11. The Committee expressed its deep appreciation to the Government of the
Republic of the Philippines for its warm hospitality and for the excellent facilities
provided to the Committee for the conduct of its meetings.
Exhibit 57.—Excerpt from statement by Assistant Secretary Bergsten, February 16,
1977, before the Subcommittee on Foreign Operations of the House Appropriations
Committee, on the U.S. foreign assistance program for 1977 and 1978
It is an honor to appear before you today to begin the testimony of the Carter
administration on the U.S. foreign assistance program for 1977 and 1978. Because
these are the initial hearings on our overall proposals for the international development
lending institutions, which this administration strongly supports, and because we are
seeking substantial sums for the current and coming fiscal years, I believe that—before
tuming to the specifics of our appropriation requests—it would be desirable to spell out
in some detail the basic philosophy and policy approach of the administration.
Before doing so, however, I wish to stress, as I did before the Senate Subcommittee
on Foreign Operations last week, the total commitment of this administration to: the
closest possible cooperation with the Congress in this policy area. The President has
already been actively fulfilling that commitment across a wide range of issues, both
domestic and international. It is an honor for me to be able to intensify it today,
concerning U.S. policy toward the international development lending institutions.
In preliminary conversations with yourself and others in the Congress, and with
committee staffs from both House and Senate, I believe that progress has already been
made toward resolving some of the major issues which have been outstanding in the
recent past.
First, we fully accept your view that U.S. contributions to the international
development lending institutions be pledged "subject to appropriations." I have so
informed the management of the World Bank, which is already at work on the
adjustments that may therefore be required in its previous operating procedures. I will
convey this position clearly to all other donor countries, at a special meeting to be held
shortly for that purpose.
Second, we will initiate a full review of the lending policies and practices, and the
internal administration, of all international development lending institutions of which
EXHIBITS
459
the United States is a member. As President Carter has indicated on several occasions,
and as Secretary Blumenthal affirmed ir^ his confirmation hearings before the Senate
Finance Committee, this administraticr' strongly supports the extension of foreign
assistance through international development lending institutions. But, in keeping with
the priority which the administration attaches to efficiency in management and
minimization of administrative costs, we will look carefully at all aspects ofthe banks'
operations and report our findings to you as soon as our analyses can be completed.
The Treasury Department will attach very high priority to this review. And we will
appoint U.S. Executive Directors to each of these institutions who will forcefully convey
U.S. policy to them.
Third, we accept the proposal in your letter of February 2 to Secretary Blumenthal,
cosigned by Chairman Daniel Inouye ofthe Senate Subcommittee, that the fiscal year
1978 budget submission should seek appropriation of all callable capital for the
international financial institutions. We have informed the Office of Management and
Budget of our desire to thereby revert to the traditional approach to this issue.
Fourth, we particularly welcome the opportunity to discuss in these hearings a
pending U.S. internatiorial financial contribution. Mr. Chairman, we recognize the
problems created in the past by international pledges made by administration officials
prior to the conclusion of adequate consultations with the Congress. As a result,
relationships between the administration and Congress have been uneasy, and there has
been a growing uncertainty on the part of other govemments—both donors to the
intemational development lending institutions, and recipients of the funds in planning
their development program—about the followthrough ofthe United States in fulfilling
its pledges. This administration is committed to eradicating those problems, by ensuring
that full consultation with the Congress precedes every pledge of U.S. funds to an
intemational development lending institution.
It would probably be impractical to hold formal hearings, in all cases, to achieve this
purpose. In some instances, it would seem that extensive informal consultations could
do so. In launching this new spirit of consultation, however, we are delighted that the
opportunity has arisen for formal discussion—both in these hearings before your
committee, and before the Senate Committee in early March—ofthe U.S. contribution
to the fifth replenishment of the International Development Association (IDA V)
before we meet with the other donor countries, in Vienna on March 14-15, to try to
complete that arrangement.
^
The objective of this administration, across the entire range of international
economic issues, is to develop sustainable policies. We will avoid making pledges, or
proposals, in intemational forums which are unlikely to command support with our own
Congress and our pubhc. We believe that such an approach will strengthen the
credibility, and hence the capacity for influence and leadership, of the United States
in international affairs.
With the several steps which have already been taken, we believe that we are moving
toward a firm partnership with the Congress in this important policy area. In that vein,
we note with pleasure the comment in your letter of February 2 to Secretary
Blumenthal, Mr. Chairman, that "congressional support for the development finance
proposals of the executive branch will be enhanced" by commitments such as we have
just made.
We are also heartened that the Budget Committees of both the House and Senate,
after contemplating cuts in the supplemental appropriations for fiscal year 1977 under
consideration today, have decided to include the full amounts in their Third Concurrent
Resolution. We sincerely hope that these several expressions of support for the program
do indeed presage a new period of the closest cooperation between us, beginning with
the supplementary appropriations for fiscal 1977 and the regular appropriations for
fiscal 1978.
President Carter has personally and publicly indicated his strong support for the
legislation before you today. Speaking to a news conference in Plains, after a half-day
session on the whole range of international economic issues last August 18, he stressed
his firm belief that the United States should make its full contribution to the ongoing
activities ofthe Inter-American Development Bank, the Asian Development Bank, and
460
1977 REPORT OF THE SECRETARY OF THE TREASURY
the World Bank family—the appropriations which we seek today. President Ford also
indicated his full support for these appropriations by including all of them, except those
reflecting our decision to seek appropriation of the callable capital needed in fiscal
1978, in his final budget proposals.
The 1977 supplemental
The most urgent business before us is the supplemental appropriation for fiscal 1977.
It is urgent because, without these appropriations, the Inter-American Development
Bank and the Asian Development Fund would shortly have to suspend making
commitments to the neediest borrowers, and because U.S. support for IDA—and hence
our position in the upcoming IDA V negotiation—would be thrown into serious doubt.
There are three avenues through which the IDB obtains capital to finance borrowing
countries in Latin America. It uses the paid-in capital of its donor members to extend
"hard" loans. It uses the callable capital subscribed by donor members as backing for
borrowings in the private capital markets, the proceeds of which are loaned out. And
it channels contributions to its Fund for Special Operations to the poorest countries in
the region on concessional terms.
But the Bank has in fact exhausted its hard currency resources available for ordinary
loan commitments. No further capital subscriptions by other countries can become
effective under the replenishment until the United States makes the subscriptions for
which we are seeking appropriations. This situation results from arrangements
necessary to prevent the U.S. vote from falling below 34.5 percent, thereby causing the
United States to lose its veto in the Fund for Special Operations. In the Fund for Special
Operations, resources are available for anticipated operations only through April. All
other member countries have contributed to the first installment of the current
replenishment, but the U.S. contribution is essential to make the replenishment
effective since it requires no less than 75 percent of the total contribution before the
installment can be committed.
The FY 1977 supplemental bill also contains $25 million to complete the $150
million U.S. contribution to the initial resource mobilization ofthe concessional Asian
Development Fund. As of today, that fund has only $ 17 million available for new loan
commitments to its poorest Asian members—the equivalent of less than 2 weeks'
commitments. Most other donors have completed their contributionis to the 1973-75
resource mobilization of the fund, and most have made their first contributions to the
1976-78 ADF replenishment. But further contributions from these donors will; under
the current replenishment resolution, not become available to the fund until the United
States makes the contribution requested in the FY 1978 appropriations bill. Since this
would not occur until after October 1, the $25 million being requested for the ADF
in the FY 1977 supplemental bill is likely to be its only new source of funds over the
next 6 months.
The final item in the supplemental request is $55 million for IDA IV, which is closely
related to the forthcoming negotiation on IDA V which I mentioned at the outset of
this testimony. As I indicated then, the administration fully accepts the decision of the
Congress that the U.S. pledge to that replenishment be made "subject to appropriation." We believe that this approach is fiscally prudent, as well as a necessary element
in the new structure of cooperation between Congress and the administration which
we seek to forge.
In all candor, however, I must report that this decision has caused some uneasiness
on the part of other major donor countries. Indeed, I have agreed to their request to
attend a special meeting with them in Paris, tentatively scheduled for February 25, to
explain and defend our new approach prior to the scheduled negotiating session in
Vienna on Mareh 14-15. It is my firm belief that this concern is indicative of a deep
concern on the part of both donor and recipient countries over the willingness of the
United States to play its fair share in IDA, and perhaps more broadly. Indeed, this
concern is a major element underlying the decision of this administration, through
EXHIBITS
461
working more closely with the Congress, to henceforth make proposals internationally
only when we have reasonable assurance that those policies are sustainable domestically.
At the same time, the confidence of other countries in the sustainability of our
policies would be enormously enhanced by early action on the IDA IV (and other)
supplemental requests. Positive action would provide tangible evidence of a new
working relationship within the U.S. Government. Coupled with the extensive
discussions between Congress and the administration which will have gone into
determining the U.S. negotiating position on IDA V, it would make a major contribution
to early progress for several of the basic thrusts of President Carter's foreign policy.
In addition, it would prove of great value in supporting a constructive and sensible U.S.
position when the North-South dialog resumes in the next few weeks.
Hence there would be major political benefits for the United States from early
congressional action on the FY 1977 supplemental appropriations. But the fundamental reason why we urge their support is that the money is needed badly by the poor
people in developing countries for which it would be spent. We urge you to approve
the proposed contributions of $540 million, of which $340 million would produce
budget outlays and $200 million represent callable capital. All of these sums have, of
course, been authorized by the Congress, included in the budget proposals of both
President Carter and President Ford, and included in the Third Concurrent Resolution
by the Budget Committees of both the House and Senate.
The supplemental also requests an appropriation of $30 million in Israeli pounds for
the U.S. contribution to the endowment of the Israel-U.S. Binational Industrial
Research and Development Foundation. The Foundation's endowment will be created
by contributions of $30 million in Israeli pounds from each govemment. The U.S. share
will be derived from simultaneous prepayment by Israel of a portion of its Public Law
480 local currency debt to us. There will be no dollar outlay. An appropriation is
necessary for the United States to participate, however, because Israel is no longer an
excess currency country.
Appropriation requests for FY 1978
I would like to turn now to the issue of U.S. funding for the continued operations of
the development banks. We are requesting appropriations of $2,616.2 million for them
in FY 1978. Of this total, $ 1,602.3 million would require Treasury outlays and $ 1,013.9
million is in the form of callable capital. Callable capital will allow the banks to raise
funds in intemational capital markets, but in all likelihood never will result in actual
expenditures from the U.S. Treasury. The requests consist of:
World Bank group
•
•
•
•
$523 million for the first of three U.S. installments for a selective capital
increase for the Intemational Bank for Reconstmction and Development
($52.3 million of paid-in capital and $470.7 million of callable capital);
$44.6 million as the first U.S. installment to the first replenishment of the
Intemational Finance Corporation since its establishment in 1956;
$375 million for the third U.S. installment of the fourth replenishment of the
Intemational Development Association;
$800 million as the first U.S. installment of the proposed fifth replenishment
ofthe Intemational Development Association, if after discussion with you and
others in the Congress we decide to proceed with IDA V on that basis.
Inter-American Development Bank
•
•
$400 million for the third installment ofthe present replenishment ofthe InterAmerican Development Bank's capital ($40 million of paid-in interregional
capital, $160 million of callable interregional capital, and $200 million of
ordinary callable capital);
$200 million for the second installment of the replenishment of the resources
462
1977 REPORT OF THE SECRETARY OF THE TREASURY
of Inter-American Development Bank's soft-loan window, the Fund for
Special Operations.
Asian Development Bank
•
•
$203.6 million for the first of four U.S. installments to the second replenishment of the Ordinary Capital resources of the Asian Development Bank
($20.4 million of paid-in capital and $183.2 million of callable capital);
$60 million as the first of three U.S. installments to the first replenishment of
the resources of the Asian Development Bank's soft-loan window, the Asian
Development Fund;
African Development Fund
•
$10 million to the resources of the African Development Fund.
Detailed discussions of these appropriations requests are contained in the statements
of the individual institutions that will be presented to the committee in the course of
the next 2 days. Each represents the U.S. share of a multinatiOrfal funding effort in which
our contributions have been shrinking steadily as a percentage of the whole, as I
indicated earlier.
In closing this statement, I would like to discuss directly the magnitude of our request
for FY 1978, which represents a sizable increase over past years. There are essentially
five reasons for the jump:
a. Rapid rates of infiation require large increases in nominal contributions simply
to keep the real value of assistance from declining. For example, the IDA V package
would have had to total at least $6.5 billion simply to maintain the real value of the
IDA IV total of $4.5 billion.
b. Our decision to revert to the traditional procedure of appropriating all callable
capital, in response to your proposal, increases the magnitude which must^^©
included in the budget.
c. A bunching of U.S. contributions, caused mainly by previous decisions to (i)
begin the U.S. contribution to IDA IV a year later than other donor countries, and
(ii) stretch that contribution over 4 years instead of the usual 3. As a result,
appropriations are needed for both IDA IV and IDA V in FY 1978 (and again in FY
1979).
d. The growing importance of the North-South dialog, and the concomitant need
for the United States to take positions in that forum which are both constructive and
supportive of overall U.S. interests. As I indicated earlier, increased assistance is far
superior to such other proposals, being made in this context, as generalized debt relief
and indexation of commodity prices.
e. Most important, the increased needs of the poorer countries due to (i) the
world recession and (ii) higher oil prices. These cyclical factors have superimposed
heavy new burdens on those countries, whose structural needs are already immense.
To an important extent, they stem from our own economic mismanagement—as well
as OPEC's increase of the price of oil. Hence the need for development finance has
risen sharply for the years immediately ahead, and our proposals for FY 1978 seek
to respond prudently to them.
Mr. Chairman and members of the committee, the Carter administration strongly
supports these proposed contributions to the international lending institutions. We
believe that development of the poorer countries is of utmost importance to U.S.
humanitarian, security, political, and economic interests. We believe that foreign
assistance can play a vital role in promoting development. We believe that the
international development lending institutions are an extraordinarily valuable instrument for channeling such assistance. The President will be addressing these issues
personally, on a number of occasions, over the coming months. We urge you to support
the funding requests which are under discussion today, and we look forward to the
continuing opportunity to discuss with you, in depth, the whole array of underlying
issues.
EXHIBITS
463
Exhibit 58.—Statement by Secretary Blumenthal, March 9, 1977, before the Subcommittee on Foreign Assistance and Economic Policy of the Senate Foreign Relations
Committee, on proposed replenishment of the International Bank for Reconstruction and Development, the International Development Association, the International
Finance Corporation, the Asian Development Bank, and the Asian Development
Fund
Mr. Chairman and members of the subcommittee, I am delighted to appear before
you today to testify on the Carter administration's request for your support for measures
to continue, strengthen, and expand multilateral assistance for economic and social
development in the borrowing member countries of the World Bank group and the
Asian Development Bank and Fund.
Because we are seeking substantial sums—over $5 billion in authorizing authority—
under the proposed resource replenishments, I believe that, before tuming to the
specifics, it would be appropriate to spell out in some detail the basic philosophy and
policy approach of this administration.
First, close consultation with the Congress will be central to the approach of this
administration on all of its foreign assistance programs, including contributions to the
development banks. I am very happy with the timing of this hearing because it allows
us, Mr. Chairman, to discuss formally with your committee a pending U.S. international
financial contribution—our proposed share in the fifth replenishment of the International Development Association (IDA V)—prior to determining and indicating at
Vienna next week our position on the terms ofthe U.S. contribution to that operation.
During an informal meeting in late February with the other IDA donor countries, we
informed them that we were following this procedure before deciding on our pledge.
As you know, Mr. Chairman, I have invited Members of the Congress to accompany
our delegation to the Vienna meeting as a further step toward intensifying our process
of consultation and collaboration.
Treasury has also decided to undertake a thorough review ofthe lending policies and
practices, and the internal administration, of all intemational lending institutions of
which the United States is a member. I have already discussed some of these latter
questions with the institutions. We will be discussing with you and your colleagues in
the Congress the subjects to be considered in that review. We look forward to working
with you on this, as well as on all aspects of current U.S. policy toward the institutions.
The objective of this administration, across the entire range of international
economic issues, is to develop sustainable policies. We will avoid making pledges, or
proposals, in intemational forums which are unlikely to command support with our own
Congress and our public. We believe that such an approach is essential to strengthen
the credibility, and hence the capacity for influence and leadership, ofthe United States
in intemational affairs.
U.S. support for development
This administration strongly supports the proposed replenishments of the resources
of the international development lending institutions before you today because we
firmly believe that they support fundamental U.S. humanitarian, security, political, and
economic objectives.
Poverty and misery remain endemic in many parts of the world. Our very spirit as
a Nation requires that we do our part toward alleviating those conditions. When World
Bank loans bring drinkable water to urban slums in Lima and Lahore for the first time,
our humanitarian purposes are advanced. So are they when an Asian Development
Bank loan brings water, health, and education facilities to rural Bangladesh, and when
an IDA loan brings primary education to rural Malawi. We simply cannot tum our backs
on the basic human needs which now go unmet for millions of families around the world,
needs which demonstrably can be met effectively through the international development lending institutions.
At the same time, our most urgent security concerns relate closely to effective
development of the poorer countries. Intemational instability in such countries can
often be fostered—or even produced—by lack of economic progress.'This can, in turn,
create international tension and conflict, which can draw the United States into
dangerous situations. The efforts of this administration to curb both nuclear
464
1977 REPORT OF THE SECRETARY OF THE TREASURY
proliferation and massive transfers of conventional arms can be significantly promoted
by effective U.S. leadership of the international development process. And there is a
close, albeit sometimes indirect, relationship between the process of development and
the ability and willingness ofthe developing countries to provide us (and our allies) with
oil and other vital resources on terms which are consistent with our own security
requirements.
These security concems blend into even more far-reachingpo/irica/ relationships. We
are at this moment at a historic movement in relations among the industrialized and
developing countries—now taking place through the North-South dialog. In that
discussion, the developing countries are seeking wide-ranging accommodation by the
industrialized countries to their many needs. The administration is reviewing
extensively that whole range of issues, with the goal of developing a comprehensive set
of proposals which would meet those needs in ways consistent with our own national
interests and ability to contribute.
One conclusion is already clear, however: Direct resource transfers must play a
central role in our response. Such transfers, particularly those channeled through the
international development lending institutions, can be focused on those who need them
most. They can be linked to projects and programs which assure that they will be used
effectively. The costs of providing the transfers can be shared equitably among the
donor countries, thereby avoiding frictions with our traditional allies as well as ensuring
fairness in meeting the needs ofthe poor. Such results cannot be assured through some
of the other devices proposed by the developing countries such as widespread debt
reliefand artificial increases of commodity prices. Hence we believe that a constructive
U.S. program of foreign assistance, and particularly a program of strong support for the
intemational development lending institutions, is of consummate political importance
to the United States across the entire range of North-South issues.
Finally, and once more closely related, U.S. support for development serves some
of our most important economic objectives. The developing countries now represent a
major market for U.S. exports, and in recent years have been one of our fastest growing
markets. Similarly, they host a sizable share of U.S. foreign investments—a share which,
in recent years, has been growing for our manufacturing companies. As already noted,
these countries provide a large share of a large number of the growing list of industrial
raw materials for which the United States depends heavily on imports.
In short, U.S. support for development in the poorer countries is inextricably linked
to a wide range of fundamental U.S. interests. These interests relate both to our own
economy and to our overall foreign policy. They require our commitment to a
constructive program of intemational economic assistance.
Traditionally, "development" has been defined as rapid expansion of gross national
products and other aggregate economic indicators. On these criteria, the postwar
record has been one of stunning success. During the 1960's, the developing world
exceeded the ambitious growth targets ofthe first Development Decade. Since the mid1960's, the exports of manufactured goods of these countries—excluding OPEC—have
grown by about 25 percent annually, raising their share of world manufacturing output
from 3 percent to over 7 percent. Many countries have "graduated" from the rolls of
aid recipients to where they can now rely on the private markets for capital, and some
have even begun to extend assistance themselves. The postwar record of development
is indeed unprecedented in human history. It enables us to reject fully the despair which
all too often creeps into disciissions of the outlook for the developing world.
Our concept of development has now broadened, however, to encompass much more
specific objectives: satisfaction of basic human needs, reduced rates of unemployment,
better distribution of income, and greater agricultural productivity. Even on these
criteria, there are numerous success stories. But it is clear that these goals can be met
more effectively, and more quickly, when they are the explicit targets of development
lending.
One key area is increased production of food, and rural development more broadly.
The progress of the international development lending institutions here has been
impressive:
• Agriculture accounted for the largest share of IBRD loans to any sector in
fiscal 1976 (24 percent). It has received twice as much support, in real terms
on an annual basis, in fiscal years 1974-76 as in the previous 5 years. FiftyDigitized for five percent of this program in the last 3 years has focused on the rural poor.
FRASER
EXHIBITS
465
•
Since its inception, IDA has lent more funds to agriculture than to any other
sector (29 percent).
• Twenty-six percent of ADB lending in 1976 went to agriculture.
Specific projects reveal the contribution of these programs to meeting the needs of
the rural poor far better than the aggregate statistics. A $57 million IDA loan to India
is bringing rural electrification to 55,000 small farmers, providing power for irrigation
pumping, small industries, and residential and street lighting in over 6,000 villages. A
$22 million IDA loan to Bangladesh helped finance an 18,600 hectare irrigation
project, which will boost rice production by more than 50 percent in 6 years and raise
annual per capita incomes of 20,000 farm families from $90 to $120. An IBRD loan
to Egypt is helping to create 10 to 15,000 jobs in fruit and vegetable production. An
ADB loan of $ 14 million to Afghanistan will increase wheat production by 323,000 tons
and seed cotton production by 32,500 tons, raising income ofabout 200,000 farmers
by $17 to $80 per hectare. The development banks are thus actively, and successfully,
pursuing programs to bring major help to the rural poor and to farm production
throughout the developing world.
The role of the international development lending institutions
There are three major reasons why the administration believes that the international
development lending institutions are particularly effective instruments for promoting
development in the poorer countries.
First, the intemational development lending institutions can—and do—insist on
sound projects and programs in the recipient countries themselves. They can do so with
particular effectiveness because of their political independence and collective
representation of donor interests. Hence they are a good bet to carry out programs
which will effectively implement our wide-ranging interests in the development process.
Second, and closely related, use of the intemational banks to channel development
assistance lessens the political risks which are inherent in any donor-client relationship.
Insertion of an independent intermediary between lenders and borrowers significantly
depoliticizes the process and enhances the likely developmental impact.
Third, use of the intemational development lending institutions assures burdensharing between the United States and other donors. The U.S. share ofthe lending levels
of each of the banks is dechning—
In the World Bank, from an original 41 percent to about 19 percent in the current
selective capital increase before you today.
In IDA, from an original 43 percent to about 31 percent in the currently proposed
replenishment.
In the Intemational Finance Corporation (IFC), from an original 33 percent to 23
percent of the currently proposed replenishment.
In the Asian Development Bank, from an original 20 percent to 16 percent in the
current replenishment.
In the Asian Development Fund, from 28 percent to 22 percent.
It will be the pohcy of this administration to encourage other countries to continue
to increase their share of the financing of these institutions. We will seek involvement
by new donors, notably OPEC countries, but other rapidly developing countries as well.
We believe that the international development lending institutions are an ideal means
through which underlying changes in the relative economic strength of nations can be
transLrcd into actual contributions to the development process.
Indeed, we view the individual development banks as components of an international
network which stands increasingly at the center ofthe development process. Their loan
disbursements now amount to over 20 percent of all official development assistance
flows, but their commitments represent a share almost twice as high. For the reasons
already indicated, they are extremely effective instruments for supplying development.
The IBRD, IDA, and the IFC operate globally and emphasize different problems—the
more advanced developing countries in the case of the IBRD, the poorest in the case
of IDA, and the role of the private sector in the IFC. The Asian Development Bank,
along with the other regional banks, attends to the particular problems of its region.
As the banks mature and cooperate with each other further, we can look to them to
Digitized play a growing role in the entire development process.
for FRASER
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1977 REPORT OF THE SECRETARY OF THE TREASURY
Summary of authorization requests
I would like now to summarize the Carter administration's requests for authorizing
legislation for the international development banks that are being considered today.
Specifically, congressional approval is requested to authorize the following:
International Bank for Reconstruction and Development (IBRD).—A vote by the U.S.
Govemor for an increase of 70,000 shares ($8.4 billion) in the authorized capital stock
ofthe IBRD and, if such an increase becomes effective, a U.S. subscription to 13,005
of those shares ($1,568.9 million).
International Finance Corporation (IFC).—A vote by the U.S. Governor for an
increase of 540,000 shares ($540 million) in the authorized capital stock of the
Corporation and, if such an increase becomes effective, a U.S. subscription to 111,493
of those shares ($111,493,000).
International Development Association (IDA).—A U.S. contribution of $2.4 billion as
the U.S. share of the fifth replenishment of IDA, which will total $7.5-$8 billion.
Asian Development Bank (ADB).—A U.S. subscription to 67,500 shares of ADB
capital stock ($814.3 million) as the U.S. share of the $5 billion capital increase.
Asian Development Fund (ADF).—A U.S. contribution of $180 million as the U.S.
share of the $809 million first replenishment of the Asian Development Fund, the
ADB's soft-loan window.
Let me turn now to the situation in each of these banks which necessitates these
authorization requests.
World Bank group
The World Bank was founded over 30 years ago as part of the Bretton Woods
agreement with 44 nations participating in the initial subscription. It was established
to help restore the economies disrupted or destroyed by war, to encourage the
development of productive facilities and resources in less developed countries, and to
promote the long-range balanced growth of international trade. Since the recoristruction of Europe, Bank operations have centered almost entirely on the developing world,
and Bank membership has nearly tripled to 128 members with the emergence of the
nations of the Third World.
In recent years, the IBRD has broadened the scope of its lending programs. Its
commitments have increased from $2 billion in fiscal 1972 to an estimated $5.8 billion
in fiscal 1977. Although traditional investments in infrastructure, especially transportation and electric power, still comprise a significant portion of Bank lending, the Bank
has begun to focus, with the emergence of poorer countries of Africa and Asia, on other
resources such as food and human skills. Also, in order to improve the living standards
and productivity of those inhabiting the less developed countries, the Bank has
expanded its efforts in the areas of education, water supply, health, and population. In
addition, the Bank has sought to expand its lending for rural development so as to
expand the share of the rural poor in the benefits of economic growth. This latter
activity is aimed at increasing agricultural output through a comprehensive, crosssectoral approach.
As a consequence. Bank lending to the poorer countries of Africa and Asia,
particularly for agricultural development, has expanded substantially. Agricultural
projects accounted for an average of 26 percent of total commitments in fiscal 1975
and fiscal 1976, compared to an average of 22 percent in the previous 2 fiscal years.
In contrast, lending in the Bank's traditional sectors—power, transportation, and
telecommunications—decreased from 46 percent of total commitments in fiscal 1973
and fiscal 1974 to 35 percent in fiscal 1975 and fiscal 1976. The share of Bank lending
to Africa and Asia, as a percentage ofthe total lending, has increased from 34 percent
of the total fiscal 1974 and 45 percent in fiscal 1976.
Under the original capitalization ofthe IBRD, the authorized stock ofthe Bank was
valued at $ 10 billion of the weight and fineness of the U.S. dollar in effect on July 1,
1944. A total of $7,670 million of the authorized capital was subscribed by June 30,
1946, ofwhich the U.S. subscription was $3,175 million. In 1959, the authorized capital
ofthe Bank wasincreased by $11 billion. Subsequent increases in 1963,1965, and 1971
have brought the Bank's authorized capital to $27 billion in 1944 dollars, or $32.4
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billion in current dollars. The U.S. subscription has been increased to $6,473 million
in 1944 dollars, or $7,808 million in current dollars, representing a gradual reduction
of our relative share to 25 percent of total Bank capital.
Ofthe IBRD's capital, 10 percent is in the form of paid-in capital. The remaining 90
percent of subscribed capital is in the form of callable capital and is not available for
lending. It is subject to call if required to meet obligations on Bank borrowings. This
callable portion of member countries' subscriptions, amounting to $27.8 billion in
current dollars, guarantees the servicing by the Bank of its obligations, and distributes
the risk in accordance with the economic strength ofeach member. The Bank, however,
has never had a default on any of its loans, and it has never had to call on this guarantee
authority. In the remote chance of loan defaults by its borrowers, the Bank would first
have recourse to its ample reserves before making calls on guarantee capital subscribed
by its members.
The IBRD derives funds for lending programs from five sources: capital subscriptions, borrowings, loan sales, retained earnings, and loan repayments. With the
expansion of Bank lending commitments during the late 1960's and early 1970's,
borrowings and loan repayments have become the principal source of funds for the
Bank. Between fiscal years 1970 and 1976 net borrowings accounted for 68 percent
of Bank resources, and loan repayments provided an additional 20 percent. Retained
eamings, loan sales, and capital subscriptions fumished 7, 3, and 2 percent of total
resources, respectively.
In order to continue to play a major role in the development process and promote
sound economic policies among its borrowing members, the Bank needs additional
capital. Without a capital replenishment, the Bank will be unable to sustain its annual
loan commitments at their present level or expand lending activity into new areas to
benefit poorer borrowers. Under its Articles of Agreement, the volume of loans which
may be disbursed and outstanding must not exceed its total unimpaired subscribed
capital, surplus, and reserves. Based on projected disbursements, the proposed special
capital increase of $8.4 billion would allow the Bank to sustain its present level of
commitments without reaching the limitation in the Articles and without any further
capital increases.
The U.S. share ofthe proposed increase would be $1,569 million. This represents
19 percent of the total capital replenishment, as compared to the 25 percent of the
Bank's subscribed capital that the United States currently holds. With this reduction,
the U.S. voting strength in the Bank would drop from 22.60 percent to 21.86 percent.
This reduction would allow the capital surplus countries to play a larger role in financing
the Bank, while not significantly affecting our voting strength. However, failure ofthe
United States to take part in the special increase would mean that our voting strength
would fall to 18.91 percent. Since it takes 80 percent of total voting power to amend
the Bank's Articles of Agreement or expand its Board of Directors, the United States
would lose its veto power with regard to such changes if it did not participate in the
capital increase.
In the case of the International Development Association, we are dealing with a
different kind of problem. In our view, the most important objective of foreign aid is
to meet the minimum human needs of people in the developing countries. This is
precisely what IDA is trying to do. Its clients are the poorest nations in the world.
The living conditions of the poorest people of these nations, earning under $100
annually per capita, are tragic. Their mortality rates, life expectancy, adult literacy
rates, and nutritional levels are far below the standards we have in the developed world.
The need for IDA to address these human problems has increased in recent years.
The lowest income nations have been the most seriously affected by recent
international economic events. They lack the resources, particularly the capital, with
which^to rebound. Their terms of trade have deteriorated. Many have simply been
unable to attract sufficient capital from extemal sources to sustain their growth or even
to maintain their import volumes. As a result, countries with per capita incomes below
$200 have had little or no growth in per capita income since 1970; in the previous
decade, they had grown at 2 percent per capita per year.
IDA'S task is clearly of a long-term nature. Its borrowers must be helped both with
money and technical assistance to diversify agriculture, improve literacy levels, dampen
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1977 REPORT OF THE SECRETARY OF THE TREASURY
population growth, and adopt economic policy measures aimed at stable growth. But
immediate conditions have sharply deepened the difficulties of IDA borrowers, and call
for increases in its lending capacity.
The IDA formally came into existence as an affiliate ofthe World Bank in September
1960, commenced operations shortly thereafter, and made its first loan in mid-1961.
As an affiliate of the World Bank, IDA benefits from the same high-caliber
management as the Bank itself and has the same Board of Governors and Board of
Executive Directors as the Bank. The World Bank's President serves as Chairman of
the IDA Executive Directors and as President of the Association. IDA has no staff
separate from that of the Bank; its operations are carried out entirely by the Bank's
regular staff.
IDA is the world's largest single source of multilateral development finance for
lending on concessionary repayment terms. IDA's credits are made for sound economic
projects that measure up to the rigorous standards for loans offered by the World Bank
itself. IDA, however, makes its loan funds available on unique terms that take into
account the severely limited external debt servicing capacity of the poorer developing
countries.
IDA'S standardized credit terms involve a 50-year maturity period, including a 10year grace period. All credits are repayable in convertible currency.
During its first 16 years of operations, through fiscal 1976, IDA has authorized a total
of 624 development credits aggregating $10.1 billion in 68 member countries.
The main sources of funds for IDA are (a) its initial capital subscriptions, (b)
replenishment and special contributions, and (c) transfers from the World Bank. Other
sources such as net eamings and repayments are of minor importance at this time.
Let me discuss briefiy the situation with regard to IDA V. Since November 1975, five
IDA V negotiating sessions have been held—the last in Kuwait in January, plus an
informal meeting in Paris on February 25. The World Bank originally proposed a $9
billion replenishment, with $3 billion to be contributed by the United States.
Having reviewed the situation in detail, the administration would now propose the
following package on the major IDA issues for consideration by the Congress:
• $7.2 billion from IDA's traditional donors, including $2.4 billion from the
United States (the same 33 1/3-percent share for the United States as under
IDA IV), payable in three equal annual installments;
• Maximum possible contributions from the nontraditional IDA donors, mainly
in OPEC (which would now appear to total at least $500 million, reducing the
U.S. share further to about 31 percent);
• A voluntary advance contribution procedure to enable IDA to avoid a hiatus
in new lending after July 1,1977 (which the United States will accept, but not
participate in).
There are other IDA V issues outstanding which we hope to resolve soon. The most
significant is the need for a thorough review ofthe country allocation of IDA loans. No
such review has been made since 1973, despite the dramatic changes which have
occurred since that time in the world economy and the situation of many individual
nations. Management and other donor countries agree that such a review is needed,
and it will be completed before any IDA V funds are committed.
As I said earlier, we seek your views on this proposal prior to the pledging session
scheduled for Vienna next week. We seek to take a sustainable package into that
pledging session, and need your support to enable us to do so.
The administration regards the expansion of the International Finance Corporation
as a major element in our program for aiding the developing countries. The United
States has always stressed that the development process involves a cooperative effort
between the public and private sectors—domestic and foreign. But we have not
provided sufficient support for private sector development, which is the purpose of the
IFC. IFC has never had a substantial capital increase and continues to operate
essentially with its original $100 million base. As a consequence, its contribution to
development is declining relative to other sources. It is time to reestablish the balance
in support for the private sector that was contemplated when IFC was founded.
The IFC was established in 1956 to further economic development by promoting
private investment in its developing member countries. It is unique among multilateral
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development institutions to which the United States belongs in that it operates without
a govemment guarantee on its loans and purchases equity participations.
The Corporation functions like a private investment bank with respect to such
matters as lending terms, purchases and sales of stock, and relationships with private
investors. It also has the advantage, however, of being able to borrow from the IBRD.
In fiscal year 1976, the Corporation made $245 million in new investment commitments. The largest source of funds the Corporation utilized in fiscal year 1976 was sales
of loans and equity investments with borrowings from the IBRD constituting the second
principal source. Loan repayments and net income provided the bulk ofthe remaining
funds. Cumulative gross investment commitments of the Corporation as of June 30,
1976, amounted to $1.5 billion.
The Corporation's principal function is to stimulate the flow of private capital into
productive investments by bringing together investment opportunities, domestic and
foreign private capital, and experienced management. The Corporation makes an
investment only in the event that sufficient private capital cannot be obtained by the
private enterprise on reasonable terms and the investment would make a useful
contribution to the development of the economy of the member country in which it is
made. The investment must also have good prospects of being profitable.
The participation of the Corporation in an investment has been, in many cases, a
determining factor in the decision of foreign investors to participate in projects in
developing countries. The Corporation has had a significant multiplier effect,
generating $4 of private investment for every $1 of its own in the projects in which it
has participated. Since its inception, the Corporation has been associated with about
$7.8 billion of investments and has assisted in financing some 271 enterprises in 61
developing countries. Most of these enterprises have been medium-size firms, which
are locally controlled and locally managed.
The Corporation has a record of prudent, effective, and imaginative management.
Its current diversified portfolio includes investments in 52 countries. Its investment
losses have been less than 1 percent of its total cumulative commitments for its own
account. In fiscal year 1976, the average annual rate of retum on loan and equity
investments held by the Corporation was about 9 percent.
The suggested U.S. share ofthe total replenishment is $111.5 million, or approximately 23 percent of the $480 million of the proposed increase, and that will be
immediately taken up by present IFC members. The remaining $60 million of
authorized capital will be reserved for further subscriptions by present members or for
new members. The U.S. share compares with the roughly 33 percent of issued capital
that the United States currently holds. When the replenishment is completed, the U.S.
share would be reduced to about 25 percent and U.S. voting power would drop from
about 26.5 percent to 24 percent.
The share of subscriptions of other developed countries and OPEC members will rise
from 45 percent to 51 percent. Among the countries which are expected to increase
their relative shares in IFC are Germany, Canada, Japan, Iran, Saudi Arabia, and
Venezuela.
Asian Development Bank and Fund
Mr. Chairman, I would like now to turn to our request for legislation authorizing a
U.S. subscription of $814.3 million to the Asian Development Bank's capital stock and
a U.S. contribution of $180 million to the ADB's concessional window, the Asian
Development Fund.
Today more than ever the continent of Asia has become an important element in the
economic strength and progress of our own country. Several East Asian countries have
become major trading partners ofthe United States. U.S. investment in the region has
grown rapidly in the past decade and has potential of increasing much further. Asia is
also an important and stable supplier of raw materials, providing, for example, nearly
all of our natural rubber, tin, and coconut oil. It has become a stable alternative source
of a portion of our petroleum imports.
In order to maintain our political and economic interests in this important part ofthe
world, a fundamental U.S. foreign policy objective over the years has been to prevent
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1977 REPORT OF THE SECRETARY OF THE TREASURY
any major potentially hostile power or grouping of powers from establishing its
hegemony in Asia.
However, an appropriate equilibrium cannot be maintained in Asia solely through
military force or political maneuver. The traditional division between Communist and
non-Communist nations is no longer the only axis in intemational affairs.
The intensifying dialog between developed and developing nations has complicated
any simple view of U.S. foreign objectives and policies. The interrelationship between
this North-South dialog and more traditional East-West tensions is dynamic, complex,
and often confusing. However, it would appear that, over time, continuing poverty and
a lack of economic progress is conducive to political instability and the establishment
of governments hostile to Western political and economic systems. Therefore, the
growth of outwardlooking Asian economies open to foreign investment and international trade is a major U.S. foreign economic policy objective.
The Asian Development Bank fosters these U.S. goals of political stabihty and
market-oriented economic growth at a relatively modest cost to the United States. The
Bank lends to Asian rim countries—Korea, the Philippines, Thailand, Malaysia,
Indonesia—countries whose independence is necessary to Asian political stability. It is
effective in promoting appropriate kinds of national economic policies and regional
cooperative efforts. Also, the Bank, particularly through its soft-loan window, seeks to
aid the poorest segments of society. U.S. participation in the Bank visibly demonstrates
our concern for the aspirations of the poor for economic improvement.
Clearly U.S. participation in the ADB, or any ofthe international development banks,
will not, of itself, assure a stable, progressive world. However, world interdependence
is no longer an idealistic aspiration, but rather, an occasionally painful reality. Given
our inability to feed or finance all of Asia or, on the other hand, ignore its festering
problems, U.S. participation in the Asian Development Bank, for its cost, is a wise
investrnent in a constructive future.
The Asian Development Bank was created in 1966 to foster economic growth and
cooperation in the poorer countries of Asia and the Pacific. The Bank, which is
headquartered in Manila, has 28 regional members which provide 63 percent of its
capital, and 14 nonregional members—including, the United States, Canada, and 12
West European countries—which provide 37 percent of its capital. The aggregate
voting power of the developed member countries, which includes all the nonregional
members plus Japan, Australia, and New Zealand, represents 58 percent of the total.
The United States participated actively in the establishment of the Bank, and its
subscription to the Bank's capital currently amounts to $603.2 million, or 16.4 percent
of the total. The U.S. contribution of $ 125 million to the Fund equals 13.5 percent of
total ADF resources.
Aftesr 10 years of operations, the Asian Development Bank has become a major
source of capital and, as a regional organization, plays an important role in mobilizing
self-help resources and bringing local knowledge to bear on Asian development
problems.
As of December 31, 1976, total loan funds committed by the Bank amounted to
$3,355 million for 264 individual projects. Of these projects, 171 totaling $2,465
million are being financed from Ordinary Capital resources at near-market rates of
interest and maturities of from 10 to 25 years. The remaining $890 million represents
117 concessional loans financed from Asian Development Fund resources. These loans
carry an interest rate of 1 percent and have maturities of 40 years. In calendar year
1976, the Board of Directors approved Ordinary Capital and concessional loans
totaling $776 million.
In terms of geography, the Bank has made loans to 23 of its developing member
countries from Afghanistan to Western Samoa. Much of this activity has taken place
in countries which are important to the political and economic foreign policy interests
ofthe United States. For example, by the end of 1976, $548 million of Ordinary Capital
resources has been lent to Korea, $449 million to the Philippines, $305 million to
Thailand, and $291 million to Malaysia. Major borrowers from the Asian Development
Fund include Bangladesh ($179 million), Pakistan ($133 million), and Nepal ($100
million). These and other countries whose economic and social progress is significant
EXHIBITS
471
to Stability in Asia have benefited from the Bank's resources at small cost to the United
States.
!- At the end of December 1976, the total estimated cost of projects for which the Bank
has approved direct financing reached $6,159 million, ofwhich Bank loans accounted
for 45 percent. In addition, the Bank had provided indirect financing through
intermediate credit institutions for projects with an estimated total cost ofabout $ 1,751
million, ofwhich the Bank's portion amounted to 22 percent. The difference between
the Bank's cumulative lending level and the total cost of Bank-related projects is
primarily attributable to the self-help efforts of individual recipient countries who are
mobilizing their own domestic resources for Bank-assisted development projects. The
ADB also joins with other multilateral, bilateral, and private sector sources to cofinance
development projects.
The ADB pays close attention to the social impact of its operations. Of particular
concem to the Bank are efforts to create employment opportunities and reach lower
income groups. During the past few years, lending for agriculture and agro-industry has
increased significantly.
The Bank's Ordinary Capital lending is financed primarily from (1) the paid-in
capital subscriptions of members and (2) proceeds of borrowings in international
capital markets. Members' callable capital subscriptions are used exclusively to
guarantee these borrowings and thus would represent a budgetai-y outlay only in the
highly unhkely event that the Bank could not meet its obligations to bondholders.
As of December 31, 1976, the Bank's subscribed capital stock amounted to $3,688
million, consisting of 32 percent paid-in capital and 68 percent callable capital. This
stock is the sum of the Bank's original capitalization, the first general capital increase
agreed to in 1971, and special capital increases subscribed by various member
governments in 1973-76. The U.S. subscription of $603.2 million is the largest (with
the Japanese) and amounts to 16.4 percent of the total.
The Bank's first general increase in capital, ofwhich the United States provided $362
million, or 18.2 percent, has financed lending from 1973 to the present. However, the
ADB's currently subscribed capital will be insufficient to finance lending after 1977.
Given this impending exhaustion of commitment authority, the Bank's Board of
Directors undertook a study, in late 1975, of the institution's resource position. The
study examined the needs of the recipient countries for extemal financing and the
capability of the Bank to process various levels of development project proposals. In
light of higher energy prices, world recession, and the increasing requirements for
external capital to finance expanding economies, an increase in annual lending from
$625 million in 1977 to $925 million in 1981 was decided upon. This implied a rise in
-the Bank's Ordinary Capital lending of $75 million per year, or an increase in real terms
of about 5 percent annually. Achievement of this lending program over the 1977-81
period would result in an overall replenishment figure ofabout $5 billion, or an increase
of 135 percent in the existing capital stock.
On October 29, 1976, the Board of Govemors adopted a resolution to increase the
authorized capital stock of the Bank by $5,003.9 million. Under the agreed
arrangements, 10 percent ofthe increase is to be paid-in shares and the remaining 90
percent is in the form of callable capital.
The United States would subscribe to $814.3 million or 16.3 percent ofthe total in
four equal annual tranches, beginning in fiscal 1978. Ninety percent, or $732.9 million,
would be callable capital. Appropriation of $203.6 million ($ 183.2 million callable and
$20.4 million paid-in) is being sought for fiscal 1978. Of the U.S. paid-in portion, 40
percent would be in cash and 60 percent in non-interest-bearing letters of credit to be
drawn down as needed to meet disbursement needs of the Bank. The callable capital
portion does not increase Treasury outlays. It does, however, give financial analysts and
the bond market greater confidence in the Bank's bond issues. Thus, with no real cost
to the U.S. Govemment, the ADB will be able to borrow at better rates and longer terms
than otherwise.
When the Bank was established it was recognized that it should provide financing on
concessional terms to meet the needs of its poorest developing member countries. Prior
to 1973 the Bank's soft-loan special funds were contributed on an unscheduled basis
through bilateral arrangements between donor countries and the Bank. In 1973, the
Bank's Board of Governors, with U.S. support, adopted a resolution creating a new
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1977 REPORT OF THE SECRETARY OF THE TREASURY
multilateral special fund, the Asian Development Fund, to which all contributions
would be made and used on the same terms and conditions. Subsequently, agreement
was reached among the Bank's developed country members on an initial resource
mobilization of $525 million. The U.S. share authorized by the Congress was $150
million, of which $125 million has been appropriated.
This original resource mobilization of the Fund was designed to finance concessional
lending through the end of 1975. Given the impending exhaustion of commitment
authority, the Board of Directors presented a report at the Bank's 1975 annual meeting
urging attention to the pressing need for a resource replenishment to permit
concessional lending to continue after 1975. Fund borrowers—the Bank's least
developed members—were now faced with increased economic difficulties and
worsening balance of payments situations growing out of the 1973 oil price increase
and the ensuing world recession. While any member country with a 1972 per capita
income of less than $300 is theoretically eligible for ADB loans, most borrowers are
countries with per capita incomes below $200.
Following the 1975 annual meeting, multilateral negotiations were held and
agreement ultimately reached on an $809 million replenishment to the Asian
Development Fund. The U.S. share of this total is $ 180 million, or 22.2 percent, down
from the 28.5-percent U.S. share of the original resource mobilization. The largest
share of the replenishment, 33.7 percent, is being contributed by Japan.
Early congressional action on the authorizing legislation for the U.S. $180 million
contribution is necessary to assure the success of the ADF replenishment. Under the
terms of the replenishment resolution, the three annual installments of donors'
contributions become available to the ADF only when certain trigger levels are
reached. This assures that there is in fact an equitable burden-sharing among fund
donors. The first trigger level of $475 million in commitments to contribute was reached
in June 1976. However, the second and third triggers cannot be attained in the absence
of U.S. action.
Because the U.S. contribution would make nearly $200 million in contributions from
other countries available to the fund, the United States has become the financial and
political linchpin of the replenishment. As of today the fund has only $10.7 million
available for new loans to the poorest Asian nations. ADF lending may cease in mid1977 pending receipt of the first U.S. installment of this replenishment. Therefore,
timely action on this ADF authorizing legislation would both demonstrate to Asians that
the United States supports their development and reassure other donor countries that
we will provide our fair share of the replenishment.
Conclusion
Mr. Chairman and members of the committee, the Carter administration strongly
supports the proposed replenishments before you today. We believe that development
ofthe poorer countries is of utmost importance to U.S. humanitarian, security, political,
and economic interests. We believe that foreign assistance can play a vital role in
promoting development. We believe that the international development lending
institutions are an extraordinarily valuable instrument for channeling such assistance.
The President has personally and publicly expressed this view. We urge you to support
the authorizing requests which are under discussion today.
Exhibit 59.—Statement by Under Secretary for Monetary Affairs Solomon, June 16,
1977, before the Subcommittee on Foreign Economic Policy of the Senate
Committee on Foreign Relations, on the results of the Conference on International
Economic Cooperation (CIEC)
It is my pleasure to appear before you today to report on the results ofthe Conference
on International Economic Cooperation (CIEC), in which the United States has
participated during the past 18 months. At the outset of my remarks, I want to make
clear that I view the CIEC as part of the ongoing, evolving dialog between the
industrialized and developing countries. Because of this, it would not only be difficult,
but also probably not very useful to strike a balance on CIEC alone. North-South issues
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have been discussed in numerous fora over the past few years and significant results
have been achieved to the benefit of developed and developing countries alike. In
addition to the outcome of CIEC, I am thinking, for example, of the liberalization of
the compensatory financing facility o f t h e International Monetary Fund (IMF), the
establishment of a trust fund for the benefit of the poorest nations, also in the IMF, the
replenishment of the capital resources of the International Development Association
now before the Congress, and the participation of the United States in negotiations on
individual commodity agreements that aim at stabilization of commodity prices around
their long-term trend. To what extent these results might have been different in the
absence of CIEC is hard to say. I believe that, at a minimum, the Conference was useful
in setting out the problems facing developed and developing countries, in increasing
mutual understanding, at least in regard to some issues, and in creating an atmosphere
in which cooperative action and policy recommendations could be fashioned.
It may be useful to remember how the Conference came about. It first was conceived
by the developed countries as a forum in which consultations between oil-importing and
oil-exporting countries could go forward in the aftermath of the OPEC price increases
of 1973/74. But the successful cartel action of OPEC brought about a greater sense of
political impetus and cohesion, not only among the oil-exporting countries, but also
among the developing countries generally. This development led to the formulation of
a far-reaching set of economic demands that has become known as the new
intemational economic order (NIEO) and to the view that energy issues should be
discussed only within the context of the wider range of North-South economic
problems. As a consequence, CIEC was charged with conducting substantive
discussions covering all major areas of North-South issues. The 19 participants from
LDC's (the G-19) in CIEC thus derived their mandate from the Group of 77 which had
shaped the NIEO and they, consequently, had very little negotiating fiexibility. This was
an important element in the dynamics ofthe Conference and it also meant that anything
short of a full endorsement of all elements of the NIEO by the Conference could not
be considered a success by the G-19. In addition, the fact that Conference decisions
were taken by consensus meant that a lone participant could block a decision. While
we saw this as a procedural safeguard, it did have the effect of narrowing the area of
possible agreement. Nevertheless, beneath all the rhetoric that inevitably accompanies
international conferences, a considerable amount was in fact accomplished. This is
reflected in the Conference communique, which—as such documents go—is a very
workmanlike document. In outlining clearly the basic areas of agreement and
disagreement in the North-South dialog, it shows that a major contribution of CIEC was
to help delineate the realistic limits to demands and commitments ofthe developed and
developing countries.
The industrialized countries participating in CIEC showed a willingness to back their
rhetoric on global interdependence and the value they put upon a cooperative approach
to North-South issues with concrete and meaningful action. The actuality of
interdependence was underscored by the fact, brought out in the discussions, that LDC
demand for the exports of developed countries was a significant sustaining element
during the recession and, conversely, that recovery in the industrialized world benefited
first commodity producers and then other LDC's materially. Thus, the commitments
made to seek congressional approval to increase the volume and effectiveness of aid
fiows, to assure adequate availability of official intemational financial resources, and
to strengthen the international trading system, in particular by reaffirming the pledge
made at the outset of the current multilateral trade negotiations to provide LDC's
access to the markets of industrial countries, reflected both the self-interests of
developed countries and a growing recognition of the needs of developing countries.
Similarly, we see our agreement to negotiate a common fund, which would pool
financial resources of various buffer stock organizations, as an integral part of our
overall goal to stabilize commodity prices around their long-term trend and thereby
reduce the risk of infiationary pressures for consumers and producers alike.
The oil-producing countries recognized during the course of the Conference that in
shaping their supply policies they bear a particular responsibihty for economic stability
worldwide. And, the nonoil LDC's recognized the importance of private investment
flows to their development plans. Thus, despite the continued rhetoric reflecting their
love/hate relationship with multinational corporations, there emerged a considerable
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1977 REPORT OF THE SECRETARY OF THE TREASURY
amount of pragmatic recognition regarding the elements that constitute a favorable
investment climate.
On a large number of basic issues, however, no agreement could be reached.
Throughout the Conference, the industrialized countries insisted that the dialog must
seek to achieve improvements within rather than a basic restructuring of the existing
economic framework. In addition, the industrialized countries sought to demonstrate
that indirect ways of transferring resources from developed to developing countries,
e.g., by granting generalized debt relief or by indexation of developing countries' export
prices, would start us down roads the endings of which, at best, were unclear and in
most cases disadvantageous to us all. The developing countries, on their part, insisted
that a reordering of the economic system, giving the LDC's inter alia more automatic
access to intemational financial resources and a greater voice in decisionmaking, was
essential. No agreement could be reached on issues that involved the view of LDC's
ofthe exercise of their sovereign rights such as determination ofthe export price of oil
and the settlement of private investment disputes. Even in the areas of fundamental
disagreement, however, the educational process involved will probably prove helpful
in future North-South discussions.
The Conference proceeded in two stages: The first 6 months were devoted to an
exhaustive analytical examination of North-South economic issues followed by a
second stage during which the actual proposals and conclusions ofthe Conference were
being negotiated. Most of the proposals and conclusions, except perhaps in the energy
area, were not substantively new, but were articulated more sharply than in earlier
discussions. In some cases, nuances in policy views were highlighted by large amounts
of time devoted to drafting changes that to outside negotiating circles would have little
meaning and would appear to be struggles over semantics only. The work proceeded
in four separate commissions dealing with (1) energy, (2) raw materials, (3)
development, and (4) financial affairs.
On energy, the general objective of the industrialized countries was to broaden the
base of international understanding of the interrelationship of energy prices and the
performance of the world economy. The G-8 never attempted, nor did they think it
appropriate to try, to obtain agreements regarding the actual setting of oil prices or the
avoidance of embargoes. Progress was made on the basic G-8 energy objectives, except
for obtaining a CIEC recommendation for an ongoing energy dialog. The CIEC
participants agreed to a general set of guidelines that (1) recognize the essentiality of
adequate and stable energy supplies to global growth and the responsibilities of all
nations, including the oil-exporting countries, to ensure that such supplies are available;
(2) call for intensified national and international cooperative efforts to expand energy
conservation and accelerate the development of conventional and nonconventional
energy supplies during the energy transition period and beyond; (3) affirm that special
efforts should be made to help alleviate the energy burdens of oil-importing LDC's; (4)
recommend that the IBRD, in the context of a general capital increase, expand its
activities so as to increase capital flows into the development of indigenous energy
resources, particularly in energy-importing developing countries; (5) call for new
international efforts to facilitate the transfer of energy technology to LDC's wishing to
acquire such technologies; (6) endorse enhanced international cooperation in energy
R. & D., which will probably lead to participation by some oil-exporting and other
developing countries in some R. & D. work in the International Energy Agency (lEA);
and (7) recognize the desirability and inevitability ofthe integration ofthe downstream
processing industries ofthe oil-exporting countries into the expanding world industrial
structure as rapidly as practicable.
Under the general subject of raw materials, the Conference dealt with a full range
of issues concerning international trade in commodities, practically all ofwhich are the
subject of discussions elsewhere and many of which were covered in UNCTAD
Resolution 93 (IV), an Integrated Programme for Commodities, which was agreed on
at the UNCTAD meeting in Nairobi in May 1976, but against certain parts of which
the United States and some other G-8 countries registered reservations.
The issues we reserved against involved indexation ofthe export prices of commodity
producers and measures to harmonize the production of synthetics with that of natural
products. And these matters contiriiied to meet with fundamental disagreement in CIEC
EXHIBITS
475
as did G-19 proposals in the areas of transportation, marketing, and distribution. With
regard to compensatory financing to cover shortfalls in LDC earnings from exports of
primary products, the G-8 proposed that the IMF/IBRD Development Committee
study this issue, but this proposal foundered over G-19 insistence on UNCTAD
participation and on defining terms of reference that effectively would have prejudged
the outcome of the study.
In the wake ofthe decision of participants in the London economic summit that there
should be a "common fund" and that CIEC should seek to give impetus to resumed
negotiations on this issue in November, CIEC participants reached agreement in
principle on the "establishment of a common fund with purposes, objectives and other
constituent elements to be further negotiated in UNCTAD." Throughout the
Conference we have made it clear that we cannot agree to negotiate on the UNCTAD
version of the common fund, which would finance not only buffer stocks, but also a
whole range of other activities included in the Nairobi Resolution. The type of common
fund we have in mind is limited to a financial pooling arrangement for buffer stocks
where they are part of individual negotiated agreements. Such an arrangement would
result in efficiencies that would reduce the overall commitment of financial resources
needed to back up the individual buffer stock organizations; it would not finance any
measure or measures which would go beyond commodity price stabilization.
In the development area, there was intensive and prolonged discussion on some of
the most important issues facing the Conference. The participants were able to reach
agreement on the need for progressively and substantially increasing the flows of official
development assistance, the desirability of a substantial increase in the general capital
of the World Bank, the provision of assistance to infrastructure development, with
particular reference to transportation and communications development in Africa, and
assistance to food and agricultural production in developing countries. We did make
clear, however, that we could not commit to any fixed target ratio of official
development assistance to GNP.
I believe the lengthy discussions in the Conference resulted in an increased
understanding by all of the necessity, not only of increasing aid volumes, but also, and
of equal importance, of increasing the effectiveness with which these funds are used
to enhance the development process. We stressed the responsibilities of the recipient
developing countries in this regard and I think the message was understood.
The Conference took particular account of the pressing economic and financial
difficulties of the poorest of the developing nations. The G-8 agreed to provide a $ 1
billion Special Action program for low-income countries with the most acute financial
needs; as our contribution to that program. Secretary Vance indicated that President
Carter will seek congressional approval in FY-79 for $375 million over current levels
in U.S. bilateral aid to the poorest.
We were not, however, able to resolve several difficult issues in the development
area. The industrialized countries insisted that debt service problems of developing
countries should be addressed on a fiexible, case-by-case basis and could not agree to
G-19 proposals for generalized debt relief, for consohdation of commercial debts, and
other objectives of debt reorganization. There was also disagreement on the issue of
unrestricted access to industrial countries' markets for manufactured goods from
developing countries and on G-19 proposals relating to the responsibilities of
multiriational corporations.
In the financial area, agreement was largely reached on the following issues: private
foreign direct investment, developing country access to capital markets, other financial
flows (monetary issues), and cooperation among developing countries.
On private direct foreign investment, considerable progress was made in identifying
the essential elements that constitute a favorable investment climate. But those issues
that touched upon the sovereignty of the host countries could not be resolved.
Regarding access to capital markets, the final results support the work ofthe IMF/IBRD
Development Committee and urge the speedy implementation of its recommendations.
These primarily involve technical assistance of various sorts.
With respect to monetary issues, the participants noted with satisfaction that the
work program laid out for the IMF by the Interim Committee reflected largely the
concerns expressed during the Conference. Strong support was expressed for the
476
1977 REPORT OF THE SECRETARY OF THE TREASURY
initiative taken to establish a supplementary credit facility in the IMF. A number of
G-19 participants advanced specific proposals for structural changes in the international monetary system and for easier access to international financial resources. The
G-8 resisted inclusion of such proposals as these are matters for discussion in the IMF
and not within the competence of the CIEC, The G-19, preferring to have monetary
issues remain on the table, withdrew their specific proposals in order to reach an agreed
text on these issues, noting, however, that the consensus reached did not cover all areas
of interest to them. The paper on cooperation among developing countries largely
reflected text agreed earlier in various U,N. fora and deals with ways and means by
which bilateral and multilateral financial assistance could help promote economic and
financial cooperation among developing countries.
Disagreement on the text on measures against inflation reflected divergent views on
the sources of inflation. The G-19 insisted that the only matter of concem was inflation
imported from industrialized countries and that the appropriate measure against such
inflation is indexation of export prices of commodities. The G-8 maintained that
inflation is largely homegrown, and requires appropriate domestic demand management measures. However, the G-8 noted that those countries whose actions have
worldwide repercussions—i.e., large industrial countries and countries with important
exports such as oil and some other commodities—have a particular responsibility to
combat inflation. On financial assets of oil-exporting developing countries, participants
agreed that some oil-exporting developing countries, in order to accommodate world
energy requirements and thereby contribute to world economic growth and stability,
have been maintaining production levels that, at current prices, yield extemal resources
in excess of their current requirements. However, the G-8 could not agree that,
therefore, such assets should receive preferential treatment. Although it appeared
possible to come to an agreed text on this issue that would reflect both OPEC and G-8
concerns, agreement fell apart at the last minute and participants returned to their
original positions.
As I noted earlier, a full assessment of results of CIEC is difficult to make. The
Conference started in an atmosphere of near confrontation, and discussions in the
closing meetings were difficult; but it did result in a consensus communique which
stated that CIEC had contributed to a broader understanding of the international
economic situation and had been useful to all participants. In fact, while it would be
difficult to prove, it is possible that this increased understanding, if not directly serving
to moderate OPEC oil price increases, may have enabled those producers who
supported moderate pricing decisions to do so more forcefully. Thus, my overall
assessment is a positive one. This does not mean, as the dialog proceeds in other fora,
that the developing countries will drop any of their demands. However, to the extent
that the discussions in CIEC have produced an increased sense of realism among the
participants, the Conference will ease future negotiations and should be judged on that
basis.
Exhibit 60.—Statement by Under Secretary for Monetary Affairs Solomon, September
30, 1977, before the Senate Foreign Relations Committee, regarding the economic
aspects of the Panama Canal Treaty and the economic arrangements
I am pleased to be here to discuss the economic aspects of the Panama Canal Treaty
and the economic arrangements.
You have already heard testimony on the annuity and royalty payments Panama will
receive according to the new treaty. My understanding is that these payments represent
Panama's share of the benefits from operation of the canal: They will be paid out of
canal revenues, and not out of U.S. tax revenues. These payments provisions will also
serve U.S. interests by enlarging Panama's stake in the secure and efficient operation
ofthe canal.
In addition to the payments provisions of the treaty, we have extended to Panama,
as Under Secretary Cooper has noted, an offer of economic cooperation involving as
much as $295 million in U.S. loans, guarantees, and insurance, which I will presently
discuss in detail.
The benefits to
Panama from the financial provisions of the treaty and the economic
EXHIBITS
477
cooperation arrangements will be significant and timely. In the decade prior to 1974,
Panama's GDP increased at an annual average rate of 7,3 percent. In 1974, however,
economic growth abruptly slowed to 2.6 percent, and last year there was no growth.
A major cause of Panama's economic slowdown was uncertainty over the future of the
canal, resulting in a marked decrease in private investment (which increased only
slightly in 1974 and 1975 and fell by 25 percent in 1976). In addition, worldwide
recession, the increase in the price of oil, and the recent decrease in sugar prices also
contributed to Panama's large current account deficits.
The Government of Panama attempted to maintain overall investment levels by
increasing public investment to offset the dechne in private investment. As a result, the
central government budget deficit increased from $69 million in 1973 to $122 million
in 1976. This, combined with borrowings to finance Panama's current account deficits,
caused total public sector debt to rise from $0.6 billion in 1973 to $ 1.4 billion in 1976.
There is reason, however, for some optimism about the future of Panama's economy.
Panama has negotiated two stabilization agreements with the IMF (one last year and
one in March 1977), and has taken steps to reduce the govemment deficit and limit
public sector debt. World economic recovery will help to narrow Panama's current
account deficit. Above all, the single most important factor in bringing returned vigor
to the Panamanian economy will be settlement of the canal issue, and the resulting
restoration of a favorable investment climate in Panama. We expect that, as a
consequence, foreign and domestic private investment will rise appreciably, leading to
increases in employment, reduced budgetary pressure on the Panamanian Govemment,
and improvements in its extemal accounts.
Panama's new economic program and settlement of the canal issue are the
fundamental requirements for returning Panama to its former path of economic growth.
The payments provisions ofthe new treaty and the economic cooperation arrangements
are ancillary to these developments, but we believe they will provide the extra boost
to contribute to Panama's long-term economic development.
This is of importance to the United States, in the sense that economic stability and
an improved standard of living in Panama will strengthen the ability of Panama to act
as our partner in the canal enterprise, bearing its share ofthe responsibilities. We have
designed arrangements for economic cooperation with this goal in mind, selecting
financial assistance programs which are nonconcessional, befitting Panama's stage of
development, and directed at meeting Panama's present economic needs for lowincome housing and a revived private sector. The United States will benefit additionally
from these economic arrangements, through participation by U.S. investors and
business in the Export-Import Bank, Overseas Private Investment Corporation (OPIC),
and housing investment guarantee programs the arrangements entail.
I would now like to tum to the two aspects ofthe treaty effort in which I had a direct
role. Treasury did not directly participate in the treaty negotiations. My contribution
was to recommend economic cooperation arrangements, and to provide advice on the
financing arrangements for the new Panama Canal Commission.
1. Economic cooperation arrangements
The proposed economic cooperation arrangements consist of: (1) An offer by OPIC
to guarantee up to $20 million in borrowings in the U.S. capital market by the
Panamanian development bank, (2) an offer by the Eximbank to provide up to $200
million in loans, loan guarantees, and insurance for individual U.S. export sales over
a 5-year period, and (3) a pledge by the administration to consider providing up to $75
million in housing investment guarantees over a 5-year period. In addition, we will
provide up to $50 million in guarantees over a 10-year period under our foreign military
sales program.
These particular arrangements were selected not only for the benefits they are
expected to bring to both the United States and Panama, but also for the reasonable
level of risk they present and their compatibility with the financial assistance programs
involved. All of these offers are subject to comphance with legal and managerial
requirements, and, as necessary, availability of funds.
The housing guarantee aspect of the economic cooperation arrangements and the
FMS offer have been addressed by Under Secretary Cooper.
As for the
offer by Eximbank to provide up to $200 million in loans, guarantees, and
478
1977 REPORT OF THE SECRETARY OF THE TREASURY
insurance, I wo.uld like to point out that the portfolio risk to Eximbank as a result of
its offer will be small. With an additional $200 million to Panama over 5 years, exposure
in Panama will amount to less than 1.37 percent of Eximbank's total existing portfolio.
Project risk will be controlled in the usual manner, since each transaction will be subject
to normal Eximbank financial, legal, and engineering criteria—including Eximbank's
statutory requirement to find a reasonable assurance of repayment.
Once the canal issue is settled and investment in Panama accelerates, Panama will
become an expanding market for U.S. exports. This projected market expansion is
expected to give rise to more applications for Eximbank support, and Eximbank has
indicated that its business in Panama could well amount to $200 million over the next
5 years.
A guarantee by OPIC of $20 million in borrowings by the Panamanian development
bank would raise ,OPIC's exposure in Panama to only 8.5 percent of its total existing
portfolio, a reasonable level of portfolio risk. The risk to OPIC will be further reduced
by a Government of Panama guarantee. OPIC has also stipulated that its offer to
Panama depends on terms being negotiated which are acceptable to the OPIC Board.
This will be the first time OPIC has participated in financing the exparision of a
government-owned development bank, although OPIC is permitted to do so by
longstanding OPIC Board policy guidelines. The Panamanian development bank,
COFINA, is engaged in supporting the development of private enterprises in Panama
through project lending. This function is both wholly compatible with OPIC's mission
and in accord with our view that it should help strengthen the private sector of Panama's
economy.
2.
Future financing of the Panama Canal Commission
Turning now to the financial aspects of the canal operations, an essential point in
negotiating the treaty was that any new entity established to operate the canal must be
self-financing over the life of the treaty. Our negotiators made it clear to the
Panamanians that any arrangements which did not conform to this principle would not
be acceptable to the United States. I assure you that we will continue to be guided by
that principle. The administration will make every possible effort to see that costs of
the canal operation are contained and that revenues are sufficient to cover liabilities.
However, as a normal provision for management flexibility, I feel it is appropriate for
the Panama Canal Commission to have the authority to borrow, as does its predecessor
agency, the Panama Canal Company. Thus, the administration will request a
continuation of this authority in the implementing legislation.
I believe the following guidelines should be followed by the Commission in its
borrowings. First, any borrowing by the Panama Canal Commission should be strictly
limited to an amount sufficient to support the Commission's operations. The
Commission should not have the authority to borrow for any other purpose such as the
general economic development of Panama. Second, all borrowing should be at a rate
of interest equal to the cost of money to the U.S. Treasury for the period of time under
consideration. Third, the repayment schedule should be tailored so that all borrowings
will be fully repaid before the expiration date of the treaties.
TESTIMONY ON INTERNATIONAL MATTERS
Exhibit 61.—Other Treasury testimony in hearings before congressional committees
Secretary Blumenthal
Statement published in hearings before the Subcommittee on Foreign Operations of
the Committee on Appropriations, U.S. Senate, 95th Congress, first session, on the
administration's request for U.S. funding for the international development banks for
fiscal 1978, March 2, 1977, pp. 207-24.
Under Secretary for Monetary Affairs Solomon
Statement before the Subcommittee on Foreign Economic Policy of the Committee
on Foreign Relations, U.S. Senate, on legislation to authorize U.S. participation in the
International Monetary Fund Supplementary Financing Facility, September 21, 1977.
EXHIBITS
479
Assistant Secretary Parsky
Statement published in hearings before the Committee on Banking, Housing, and
Urban Affairs, U.S. Senate, 95th Congress, first session, entitled "Implications of Oil
Price Decisions," January 6, 1977, pp. 81-107.
Assistant Secretary Bergsten
Statement published in hearings before the Subcommittee on Foreign Operations of
the Committee on Appropriations, U.S. Senate, 95th Congress, first session, regarding
the administration's foreign assistance policy, February 10, 1977, pp. 4 - 1 1 .
Statement published in hearings before the Subcommittee on Foreign Operations of
the Committee on Appropriations, House of Representatives, 95th Congress, first
session, in support of a fiscal 1978 and a fiscal 1977 supplementary appropriation
request for the Asian Development Bank and the Asian Development Fund, February
16, 1977, pp. 271-83.
Statement published in hearings before the Subcommittee on Foreign Operations of
the Committee on Appropriations, House of Representatives, 95th Congress, first
session, regarding a fiscal 1978 appropriation request for the African Development
Fund, February 16, 1977, pp. 462-64.
Statement published in hearings before the Subcommittee on Foreign Operations of
the Committee on Appropriations, House of Representatives, 95th Congress, first
session, regarding a fiscal 1978 and a fiscal 1977 supplementary appropriation request
for the Inter-American Development Bank, February 16, 1977, pp. 493-97.
Statement pubhshed in hearings before the Subcommittee on Foreign Operations of
the Committee on Appropriations, House of Representatives, 95th Congress, first
session, regarding the administration's fiscal 1978 appropriation request for the
Intemational Bank for Reconstruction and Development, February 17, 1977, pp.
371-76.
Statement published in hearings before the Subcommittee on Foreign Operations of
the Committee on Appropriations, House of Representatives, 95th Congress, first
session, regarding a fiscal 1978 appropriation request for the International Finance
Corporation, February 17, 1977, pp. 213-14.
Statement published in hearings before the Subcommittee on Foreign Operations of
the Committee on Appropriations, House of Representatives, 95th Congress, first
session, regarding a fiscal 1978 and a fiscal 1977 supplementary appropriation request
for the International Development Association, February 17, 1977, pp. 427-31.
Statement published in hearings before the Task Force on National Security and
International Affairs ofthe Committee on the Budget, House of Representatives, 95 th
\ Congress, first session, on U.S. funding for the international development banks for
fiscal 1978, March 11, 1977, pp. 81-7.
Statement published in hearings before the Subcommittee on International Development Institutions and Finance of the Committee on Banking, Finance and Urban
Affairs, House of Representatives, 95th Congress, first session, on proposed replenishment ofthe Iriternational Bank for Reconstruction and Development, the International
Development Association, the Intemational Finance Corporation, the Asian Development Bank and the Asian Development Fund, March 22, 1977, pp. 16-49.
Supplemental statement published in a hearing before the Subcommittee on African
Affairs and the Subcommittee on Foreign Assistance of the Committee on Foreign
Relations, U.S. Senate, 95th Congress, first session, on increasing the U.S. contribution
to the African Development Fund, April 18, 1977, pp. 16-18. (Full statement in
committee files.)
Statement published in a hearing before the Subcommittee on Economic Stabilization of the Committee on Banking, Finance and Urban Affairs, House of Representatives, 95th Congress, first session, entitled "The Policy of the United States Toward
Intemational Commodity Agreements," June 8, 1977, pp. 8-22.
Statement before the Subcommittee on International Economic Policy and Trade of
the Committee on International Relations, House of Representatives, entitled
"Administration Policy Toward the Overseas Private Investment Corporation
(OPIC)," June 23, 1977.
Statement before the Committee on Banking, Housing and Urban Affairs, U.S.
Senate, regarding the rapid growth of international debt, August 29, 1977.
Organization and Procedure
00
Exhibit 62.—Secretaries, Deputy Secretaries, U n d e r Secretaries, G e n e r a l Counsels, Assistant Secretaries, Deputy U n d e r Secretaries, a n d
T r e a s u r e r s of the United States serving in the D e p a r t m e n t of t h e T r e a s u r y from September 1 1 , 1 7 8 9 , to J a n u a r y 2 0 , 1 9 7 7 , a n d the
Presidents u n d e r w h o m they served
Term of service
O
Served under—
Official
From—
Sept. 11, 1789
Feb. 3, 1795
Jan. 1,1801
May 14,1801
Feb. 9. 1814
Oct. 6,1814
Oct. 22,1816
Mar. 7,1825
Mar. 6, 1829
Aug. 8, 1831
May 29, 1833
Sept.23, 1833
July 1,1834
Mar. 6, 1841
Sept.l3, 1841
Mar. 8, 1843
July 4, 1844
Mar. 8, 1845
Mar. 8. 1849
July 23, 1850
Mar. 7,1853
Mar. 7,1857
Dec. 12,1860
Jan. 15, 1861
Mar. 7, 1861
To—
Jan. 31, 1795
Dec. 31, 1800
May 13,1801
Feb. 9,1814
Oct. 5, 1814
Oct. 21,1816
Mar. 6,1825
Mar. 5,1829
June 20, 1831
May 28, 1833
Sept.22, 1833
June 25, 1834
Mar. 3,1841
S e p t . l l , 1841
Mar. 1, 1843
May 2, 1844
Mar. 7, 1845
Mar. 5, 1849
July 22, 1850
Mar. 6, 1853
Mar. 6.1857
Dec. 8,1860
Jan. 14,1861
Mar. 6, 1861
June 30, 1864
Footnotes at end of table.
Secretary of the
Treasury
Secretaries of the Treasury
Alexander Hamilton, New York
Oliver Wolcott, Connecticut
Samuel Dexter, Massachusetts
Albert Gallatin, Pennsylvania i
George W. Campbell, Tennessee
Alexander J. Dallas, Pennsylvania
Wm. H. Crawford, Georgia
Richard Rush, Pennsylvania 2
Samuel D. Ingham, Pennsylvania 3
Louis McLane, Delaware
Wm. J. Duane, Pennsylvania
Roger B. Taney, Maryland
Levi Woodbury, New Hampshire
Thomas Ewing, Ohio
Walter Forward, Pennsylvania
John C. Spencer. New York^
Geo. M. Bibb. Kentucky
Robt. J. Walker. Mississippi
Wm. M. Meredith, Pennsylvania
Thos. Corwin, Ohio
James Guthrie. Kentucky
Howell Cobb, Georgia
Philip F. Thomas, Maryland
John A. Dix, New York
Salmon P. Chase, Ohio
President
X
Washington.
Washington, Adams.
Adams, Jefferson.
Jefferson, Madison.
Madison.
Madison.
Madison, Monroe.
Adams, J. Q.
Jackson.
Jackson.
Jackson.
Jackson.
Jackson, Van Buren.
Harrison, Tyler.
Tyler.
Tyler.
Tyler, Polk.
Polk.
Taylor, FiUmore.
Fillmore.
Pierce.
Buchanan.
Buchanan.
Buchanan.
Lincoln.
m
"0
O
73
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H
X
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C/5
tfl
O
P8
tfl
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73
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tfl
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July 5 , 1864
Mar. 9 ,1865
Mar. 12 1869
Mar. 17 1873
June 4 1874
July 7 1876
Mar. 10 1877
Mar. 8 1881
Nov. 14 1881
Sept. 25 1884
Oct. 31,
1884
Mar. 8, 1885
Apr. 1, 1887
Mar. 7, 1889
Feb. 25,1891
Mar. 7, 1893
Mar. 6, 1897
Feb. 1, 1902
Mar. 4, 1907
Mar. 8, 1909
Mar. 6, 1913
Dec. 16,1918
Feb. 2, 1920
Mar. 4, 1921
Mar. 3 ,1865 Wm. P. Fessenden, Maine
Mar. 3 1869 Hugh McCulloch, Indiana 5
Mar. 16 1873 Geo. S. Boutwell, Massachusetts
June 3 1874 Wm. A. Richardson. Massachusetts
June 20 1876 Benj. H. Bristow. Kentucky
Mar. 9 1877 Lot M. Morrill. Maine
Mar. 3 1881 John Sherman, Ohio
Nov. 13 1881 Wm. Windom, Minnesota 6
Sept. 4 1884 Chas. J. Folger, New York
Oct. 30 1884 Walter Q. Gresham, Indiana
Mar. 7 1885 Hugh McCulloch, Indiana 5
Mar.31 1887 Daniel Manning, New York
Mar. 6 1889 Chas. S. Faircldld, New York
1891 Wm. Windom, Minnesota «
Jan. 29,
Mar. 6, 1893 Chas. Foster, Ohio
Mar. 5 1897 John G. CarUsle. Kentucky
Jan. 31,
1902 Lyman J. Gage, Illinois
Mar. 3, 1907 L. M. Shaw, Iowa
Mar. 7 1909 George B. Cortelyou, New York
Mar. 5, 1913 Franklin MacVeagh, lUinois
Dec. 15,1918 W. G. McAdoo, New York
Feb. 1 1920 Carter Glass. Virginia
Mar. 3, 1921 David F. Houston. Missouri
Feb. 12 1932 Andrew W. MeUon. Pennsylvania
Feb. 13,1932 Mar. 3 1933
Mar. 4, 1933 Dec.31 1933
Jan. 1, 1934 July 22 1945
July 23. 1945 June 23 1946
June 25, 1946 Jan. 20 1953
Jan. 21,
1953 July 28 1957
July 29, 1957 Jan. 20 1%1
Jan. 21,
1961 Apr. 1 1965
Apr. 1 1965 Dec. 20 1968
Dec. 21,1968 Jan. 20 1969
Jan. 22.
1969 Feb.10 1971
Feb. 11 1971 June 12 1972
June 12 1972 M a y 8 1974
M a y 8 1974 Jan. 20 1977
Footnotes at end of table.
Ogden L. MiUs. New York
WiUiam H. Woodin. New York
Henry Morgenthau. Jr.. New York
Fred M. Vinson. Kentucky
John W. Snyder. Missouri
George M. Humphrey. Ohio
Robert B. Anderson. Connecticut
Douglas DiUon. New Jersey
Henry H. Fowler. Virginia
Joseph W. Barr. Indiana
David M. Kennedy"; Utah
John B. ConnaUy. Texas
George P. Shultz. niinois
WilUam E. Simon. New Jersey
Lincoln.
Lincoln. Johnson.
Grant.
Grant.
Grant.
Grant. Hayes.
Hayes.
Garfield, Arthur.
Arthur.
Arthur.
Arthur, Cleveland.
Cleveland.
Cleveland, Harrison.
Harrison.
Harrison. Cleveland.
Cleveland. McKinley.
McKinley, Roosevelt.
Roosevelt.
Roosevelt.
Taft.
WUson.
WUson.
WUson.
Harding. CooUdge.
Hoover.
Hoover.
Roosevelt.
Roosevelt. Truman.
Truman.
Truman.
Eisenhower.
Eisenhower.
Kennedy. Johnson.
Johnson.
Johnson.
Nixon.
Nixon.
Nixon.
Nixon, Ford.
tfl
X
X
H
00
From—
June
Jan.
July
Mar.
12, 1972
22, 1973
31, 1974
3, 1976
00
Served Under-
Term of service
Official
To-
Jan. 17, 1973
May 8, 1974
Feb. 13,1976
Secretary of the
Treasury
Deputy Secretaries 7
Charls E. WaUcer, Texas
WilUam E. Simon, New Jersey s.
Stephen S. Gardner, Pennsylvania
George H. Dixon, Minnesota
Shultz
Shultz
Simon
Simon
to
President
Nixon.
Nixon.
Nixon, Ford.
Ford.
O
Uruier Secretaries '
July 1,
Nov.20,
Mar. 4,
Feb. 13,
May 19,
Nov. 17,
May 2,
Jan. 29,
Nov. 1,
Jan. 18,
Mar. 4,
Jan. 23,
July 15,
Jan. 28,
Aug. 3,
Aug. 9,
Feb. 3,
Apr. 29,
Jan. 27,
1921
1923
1927
1932
1933
1933
1934
1937
1938
1940
1946
1947
1948
1953
1955
1957
1%1
1965
1969
Nov. 17,
Feb. 1,
Feb. 12,
May 15,
Nov. 16,
Dec.31,
Feb. 15,
Sept.15,
Dec.31,
Dec.31,
Jan. 14,
July 14,
Jan. 20,
July 31,
Jan. 3 1 ,
Jan. 20,
Apr. 10,
Dec. 20,
June 12,
1923
1927
1932
1933
1933
1933
1936
1938
1939
1945
1947
1948
1953
1955
1956
1961
1964
1968
1972
S. Parker GUbert, Jr., New Jersey
Garrard B. Winston, lUinois
Ogden L. MiUs, New York »
Arthur A. BaUantine, New York
Dean G. Acheson, Maryland
Henry Morgenthau, Jr., New York 8
Thomas Jefferson CooUdge, Massachusetts
RosweU MagiU, New York
J o h n W . Hanes, North CaroUna
Daniel W. BeU, IlUnois
O. Max Gardner, North CaroUna
A. L. M. Wiggins, South Carolina
Edward H. Foley, New York
Marion B. Folsom, New York
H. Chapman Rose, Ohio
Fred C. Scribner, Jr., Maine
Henry H. Fowler, Virginia*
Joseph W. Barr, Indiana «
Charls E. Walker, Texas w
MeUon
MeUon
MeUon
MiUs, Woodin
Woodin
Woodin
Morgenthau
Morgenthau
Morgenthau
Morgenthau, Vinson
Vinson, Snyder
Snyder
Snyder
Humphrey
Humphrey
Anderson
DiUon
Fowler
Kennedy, ConnaUy
Harding, CooUdge.
CooUdge.
CooUdge, Hoover.
Hoover, Roosevelt.
Roosevelt."
Roosevelt.
Roosevelt.
Roosevelt.
Roosevelt.
Roosevelt, Truman.
Truman.
Truman.
Truman.
Eisenhower.
Eisenhower.
Eisenhower.
Kennedy, Johnson.
Johnson.
Nixon.
Uruier Secretaries for Monetary Aff curs ii
Aug. 3, 1954
Sept.30, 1957
Sept. 25, 1957
Jan. 20, 1961
Footnotes at end of table.
W. Randolph Burgess, Maryland
JuUan B. Baird, Minnesota
73
tfl
Humphrey, Anderson
Anderson..
73
H
O
•fl
H
X
tfl
Vi
tfl
n
73
tfl
H
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73
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O
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tfl
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73
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c
73
Eisenhower.
Eisenhower.
Jan. 31,1961
Feb. 1,1965
Jan. 27, 1969
Dec. 31, 1964
Jan. 20,1969
July 8,1974
Robert V. Roosa, New York
Frederick L. Deming, Minnesota
Paul A. Volcker, New Jersey
Jack F. Bennett, Connecticut
Edwin H. Yeo III, Pennsylvania
DUlon
Fowler, Barr
Kennedy, ConnaUy,
Shultz, Simon
Simon
Simon
July 9,1974
Aug. 5,1975
June 30, 1975
Jan. 20, 1977
June
Mar.
July
Apr.
12,
15,
9,
14,
1972
1974
1974
1976
Mar.
July
Oct.
Jan.
June
May
Aug.
May
20, 1934
19, 1939
7,1942
10, 1944
Jan.
July
Mar.
Aug.
Nixon.
Nixon, Ford.
Ford.
17, 1973
8,1974
28, 1975
20,1977
Under Secretaries (Counselors) »
2
Edwin S. Cohen, Virginia
Jack F. Bennett, Connecticut
Edward C. Schmults, New York
Jerry Thomas, Florida
Shultz
Shultz, Simon
Simon
Simon
Nixon.
Nixon.
Nixon, Ford.
Ford.
11,1939
24, 1942
22, 1944
11, 1947
General Counsels i3
Herman OUphant, Maryland
Edward H. Foley, Jr., New York M
Randolph E. Paul, New York
Joseph J. O'ConneU, Jr., New York
Morgenthau
Morgenthau
Morgenthau
Morgenthau, Vinson,
Snyder
Snyder
Humphrey
Humphrey
Humphrey
Anderson
Anderson
DUlon
DiUon
Fowler, Barr
Kennedy
Kennedy, ConnaUy,
Shultz
Shultz, Simon
Simon
Roosevelt.
Roosevelt.
Roosevelt.
Nixon.
Nixon.
Nixon, Ford.
Meredith
Meredith, Corwm
Corwin, Guthrie
Taylor.
Taylor, FUlmore.
FUlmore, Pierce.
June 10, 1948
Jan. 30,1953
Jan. 26,1955
Sept.22, 1955
Jan. 28, 1958
Oct. 2,1959
Apr. 5,1961
Nov. 16, 1962
Apr. 12, 1966
Apr. 1, 1969
July 1, 1970
Jan. 20, 1953
Sept. 1,1954
Aug. 2,1955
Apr. 17,1957
Oct. 1,1959
Jan. 20, 1961
Oct. 6,1962
Jan. 31, 1%5
Jan. 20, 1969
Mar. 20, 1^70
June 1, 1973
Thomas J. Lynch, Ohio
Elbert P. Tuttle, Georgia
David W. KendaU, Michigan »5
Fred C. Scribner, Jr., Maine u
Nelson P. Rose, Ohio
David A. Lindsay, New York
Robert H. Knight, Virginia
G. d'Andelot BeUn, Massachusetts
Fred B. Smith, Maryland
Paul W. Eggers, Texas
Samuel R. Pierce, Jr., New York
June 2,1973
Aug. 1,1974
July 8,1974
Dec. 2,1976
Edward C. Schmults, New York i6.
Richard R. Albrecht, Washington
Mar. 12, 1849
Oct. 10, 1849
Nov. 16, 1850
Oct. 9,1849
Nov. 15, 1850
Mar. 13, 1953
Assistant Secretaries »
7
Charles B. Penrose, Pennsylvania
AUen A. HaU, Pennsylvania
WUUam L. Hodge, Tennessee
:
at end of table.
Footnotes
Kennedy, Johnson.
Johnson.
Roosevelt, Truman.
Truman.
Eisenhower.
Eisenhower.
Eisenhower.
Eisenhower.
Eisenhower.
Kennedy.
Kennedy, Johnson.
Johnson.
Nixon.
tn
X
5
S
2
^
^
00
i^
00
4i^
Term of service
Served under—
Official
From-
To—
Mar. 14, 1853
Mar. 13, 1857
Mar. 13,1861
Mar. 12, 1857
Jan. 16, 1861
July 11, 1865
Mar. 18, 1864
June 15, 1865
Jan. 5,1865
July 11, 1865
Nov.30, 1867
May 4, 1875
Dec.
Mar.
Mar.
July
Mar.
Aug.
May
Mar.
June
Apr.
June
Mar.
Apr.
Dec.
Apr.
Feb.
Apr.
2, 1867
20, 1869
8,1873
1,1874
4, 1875
12, 1876
3, 1877
9,1877
10, 1880
28, 1882
17, 1884
Mar. 14, 1885
Nov. 10, 1885
July 12, 1886
Apr. 6,1887
Apr. 1, 1889
31, 1868
17, 1873
11, 1874
3,1877
30, 1876
9, 1885
Dec. 8,
Mar. 31,
Dec. 31,
Apr. 16,
Nov. 10,
1877
1880
1881
1884
1885
Apr. 1,1887
June 30, 1886
Mar. 12, 1889
Mar. 11, 1889
July 20, 1890
Footnotes at end of table.
Secretary of the
Treasury
Assistant Secretaries—Continued
Guthrie, Cobb
Peter G. Washington, District of Columbia
Cobb, Thomas, Dix
PhiUp Clayton, Georgia
Chase, Fessenden,
George Harrington, District of Columbia ^8
McCuUoch
MaunseU B. Field, New York
Chase, Fessenden,
McCuUoch
WilUam E. Chandler, New Hampshire
Fessenden, McCuUoch
McCuUoch, BoutweU,
John F. Hartley, Maine
Richardson, Bristow
Edmund Cooper, Tennessee
McCuUoch
WilUam A. Richardson, Massachusetts
BoutweU
Frederick A. Sawyer, South Carolina
Richardson, Bristow
Bristow, Morrill, Sherman..
Charles F. Conant, New Hampshire
Bristow
Curtis F. Bumam, Kentucky
MorriU, Sherman,
Henry F. French, Massachusetts
Windom, Folger,
Gresham, McCulloch,
Manning
Richard C. McCormick, Arizona
Sherman
Sherman
John B. Hawley, IlUnois
Sherman, Windom, Folger..
J. Kendrick Upton, New Hampshire
Folger
John C. New, Indiana
Folger, Gresham,
Charles E. Coon, New York
McCuUoch, Manning..:
Charles S. FairchUd, New York 8
Manning
WUUam E. Smith, New York
Manning
Manning, FairchUd,
Hugh S. Thompson, South Carolina
Windom
FairchUd, Windom
Isaac N. Maynard, New York
Windom
George H. Tiehner, IlUnois
President
Pierce, Buchanan.
Buchanan.
Lincoln, Johnson.
Lincoln, Johnson.
Lincoln, Johnson.
Johnson, Grant,
Johnson.
Grant.
Grant.
Grant, Hayes.
Grant.
73
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O
73
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o
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H
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m
(fi
tfl
n
73
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Grant, Hayes, Garfield,
Arthur, Cleveland.
Hayes.
Hayes.
Hayes, Garfield, Arthur.
ArUiur.
Arthur, Cleveland.
Cleveland.
Cleveland.
73
o
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DC
tfl
H
73
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c
73
Cleveland, Harrison.
Cleveland, Harrison.
Harrison.
Apr. 1 1889
July 22 1890
July 23, 1890
1891
Apr. 27,
Nov. 22,1892
Dec. 23,1892
1893
Apr. 12,
1893
Apr. 13,
July 1, 1893
Apr. 7, 1897
Apr. 7, 1897
June 1, 1897
1899
Mar. 13,
Mar. 6. 1901
Mar. 5. 1903
May 27, 1903
Mar. 6, 1905
July 1, 1906
1907
Jan. 22,
1907
Apr. 23,
Mar. 17,1908
Apr. 5, 1909
1909
Apr. 19,
Nov. 27,1909
June 8, 1910
Apr. 4, 1911
July 20, 1912
Mar. 24,1913
Aug. 1, 1913
Oct. 1, 1913
Mar. 24,1914
1914
Aug. 17,
1917
Apr. 17,
June 22,1917
Oct. 5, 1917
1890
Oct. 31,
Dec. 1, 1892
June 30,1893
1892
Oct. 31,
Mar. 3, 1893
Apr. 3, 1893
Apr. 7, 1897
Mar.31, 1897
May 4, 1897
Mar. 10,1899
Mar. 4. 1903
Mar. 5. 1901
June 3. 1906
Apr. 15.
1903
Mar. 5. 1905
1907
Jan. 21.
Nov. 1. 1909
Mar. 15.1908
1907
Feb. 28.
Mar. 6. 1909
1909
Apr. 10.
June 8. 1910
Apr. 3. 1911
July 31. 1913
July 3. 1912
Mar. 3. 1913
Sept.30. 1913
Feb. 2. 1914
Aug. 9. 1914
Sept.30. 1917
Jan. 26.
1917
Mar. 15.1917
Aug. 28.1918
Nov.20, 1919
Aug. 26,1921
Digitized forFootnotes at end of table.
FRASER
George T. Batchelder, New York i9
A. B. Nettleton, Minnesota
OUver L. Spaulding, Michigan
Lorenzo Crounse, Nebraska
John H. Gear, Iowa
Genio M. Lambertson, Nebraska
Charles S. HamUn, Massachusetts
WUUam E. Curtis, New York
Scott WUce, lUinois
WilUam B. HoweU, New Jersey
OUver L. Spaulding, Michigan
Frank A. VanderUp, Illinois
Horace A. Taylor, Wisconsin
MUton E. Ailes, Ohio
Robert B. Armstrong, Iowa
Charles H. Keep, New York
James B. Reynolds, Massachusetts
John H. Edwards, Ohio
Arthur F. Statter, Oregon
Beekman Winthrop, New York
Louis A. CooUdge, Massachusetts
Charles D. Norton, Illinois
Charles D. HUles. New York
James F. Curtis, Massachusetts
A. Piatt Andrews, Massachusetts
Robert O. BaUey, Illinois
Sherman P. AUen, Vermont
John Skelton WilUams, Virginia
Charles S. Hamlin, Massachusetts
Byron R. Newton, New York
WilUam P. Malbum, Colorado
Andrew J. Peters, Massachusetts
Oscar T. Crosby, Virginia
Leo S. Rowe, Pennsylvania
James H. Moyle, Utah
Windom
Windom, Foster
Windom, Foster, CarUsle.
Foster
Foster
Foster, CarUsle
CarUsle, Gage
CarUsle, Gage
CarUsle, Gage
Gage
Gage, Shaw
Gage
Gage, Shaw
Gage, Shaw
Shaw
Shaw
Shaw, Cortelyou,
MacVeagh
Shaw, Cortelyou
Shaw
Cortelyou
Cortelyou, MacVeagh
MacVeagh
MacVeagh
MacVeagh, McAdoo
MacVeagh
MacVeagh
MacVeagh, McAdoo
McAdoo
^cAdoo
McAdoo
McAdoo
McAdoo
McAdoo
McAdoo, Glass
McAdoo, Glass, Houston,
MeUon
Harrison.
Harrison.
Harrison, Cleveland.
Harrison.
Harrison.
Harrison, Cleveland.
Cleveland , McKinley.
Cleveland., McKinley.
Cleveland,, McKinley.
McKinley
McKinley Roosevelt.
McKinley
McKinley . Roosevelt.
McKinley Roosevelt.
Roosevelt.
Roosevelt.
Roosevelt. Taft.
Roosevelt.
Roosevelt.
Roosevelt.
RooseveU, Taft.
Taft.
Taft.
Taft. WUson.
Taft.
Taft.
Taft, WUson.
WUson.
WUson.
WUson.
WUson.
WUson.
WUson.
WUson.
tfl
X
X
H
Vi
WUson, Harding.
00
Ul
00
OS
Served under—
Term ol" service
From —
To--
1917
Oct. 30,
1917
Dec. 15,
Sept. 4, 1918
Mar. 5, 1919
Nov. 21,1919
June 15,1920
July 6, 1920
Dec. 4, 1920
Dec. 4, 1920
1921
Mar. 16,
May 4, 1921
1921
Dec. 23,
Mar. 3, 1923
July 9, 1923
July 1, 1924
Apr. 1, 1925
1926
Dec. 28,
Aug. 1, 1927
Nov. 7. 1927
June 26,1929
Nov. 21.1929
Mar. 16,
1931
Mar. 9, 1932
1933
Apr. 18,
June 6, 1933
June 12,1933
Dec. I, 1934
1936
Feb. 19,
July 1, 1938
July 5, 1920
Jan. 31, 1919
June 30, 1920
Nov. 15, 1920
June 14, 1920
Apr. 14,1921
June 30, 1921
May 31. 1921
Mar. 4, 1921
Mar. 31,1925
July 9, 1923
July 25. 1922
June 13,1926
Nov. 19,1923
Nov. 5, 1927
July 31, 1927
June 25,1929
Mar. 15,1933
Sept. 1, 1929
Apr. 17,
1933
Mar. 15,1931
Feb. 12,
1932
June ll.1933
Feb. 15,
1936
Sept.30, 1939
Dec. 12,
1933
Nov. I, 1937
Feb. 28,
1939
Oct. 31,
1938
Footnotes at end of table.
Official .
Assistant Secretaries—Continued
RusseU C. Leffingwell, New York 20
Thomas B. Love, Texas
Albert Rathbone, New York
Jouett Shouse, Kansas
Norman H. Davis, Tennessee
Nicholas Kelley, New York.....
S. Parker GUbert, Jr., New Jersey >
«
Ewing Laporte, Missouri
Angus W. McLean, North CaroUna
EUot Wadsworth, Massachusetts..'
Edward Clifford, IlUnois
Elmer Dover, Washington
McKenzie Moss, Kentucky..;
Garrard B. Winston, IlUnois i6
Charles S. Dewey, IlUnois
Lincoln C.° Andrews, New York
Carl T. Schuneman, Minnesota
Seymour Lowman, New York
Henry Herrick Bond, Massachusetts
Ferry K. Heath, Michigan
Walter Ewing Hope, New York
Arthur A. BaUantine, New York i6
James H. Douglas, Jr., IlUnois
Lawrence W. Robert, Jr., Georgia
Stephen B. Gibbons, New York
Thomas Hewes, Connecticut
Josephine Roche, Colorado
Wayne C. Taylor, IlUnois
John W. Hanes, North CaroUna »
6
Secretary of the
Treasury
President
McAdoo, Glass, Houston ... WUson.
McAdoo, Glass....
WUson.
McAdoo, Glass, Houston ... WUson.
Glass, Houston
WUson.
Glass, Houston
WUson.
Houston, MeUon
WUson, Harding.
Houston, MeUon
WUson, Harding.
Houston, MeUon
WUson, Harding.
Houston..
WUson.
MeUon
Harding, CooUdge.
MeUon..
Harding.
MeUon
Harding.
MeUon
Harding, CooUdge.
MeUon
Harding, CooUdge.
MeUon
CooUdge.
MeUon
CooUdge.
MeUon
CooUdge, Hoover.
MeUon
CooUdge, Hoover.
MeUon
CooUdge, .Hoover.
MeUon
Hoover.
MeUon
Hoover.
MeUon
Hoover.
MiUs
Hoover.
Woodin, Morgenthau .'.
Roosevelt.
Woodin, Morgenthau
Roosevelt.
Woodin
Roosevelt.
Morgenthau
Roosevelt.
Morgenthau
Roosevelt.
Morgenthau
Roosevelt.
73
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73
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tfl
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73
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73
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<
June 23 1939
Jan. 18 1940
Jan. 24, 1945
Apr. 15, 1946
July 16, 1948
Feb. 8, 1949
Jan. 24, 1952
Jan. 28, 1953
Sept. 20,1954
Aug. 3, 1955
Apr. 18,1957
Dec. 4, 1957
Dec. 16,1957
Dec. 17,1958
Dec. 20,1960
Apr. 5, 1961
Apr. 24,1961
Dec. 20,1961
Dec. 18,1962
Sept. 18,1963
Apr. 29,1965
Sept. 14,1965
Aug. 2, 1966
Mar. 19,1968
M a y 15, 1968
Dec. 2, 1945
Nov. 30,1944
May 1, 1946
July 14, 1948
1953
Jan. 20,
Mar.31, 1951
Feb. 28,
1957
Aug. 2, 1955
1961
Jan. 20,
1957
Dec. 15.
Aug. 8. 1957
1958
Dec. 15.
Dec. 19,
1961
Dec. 18,
1960
Jan. 20,
1961
Oct. 31,
1962
1969
Jan. 20,
Sept. 1, 1965
1964
Oct. 15,
Jan. 20,
1969
June 10,1966
Jan. 15, 1968
1968
Jan. 31,
Jan. 20,
1969
Feb. 25,
1972
Herbert E. Gaston, New York
John L. SuUivan, New Hampshire
Harry D. White, Maryland
Edward H. Foley, New York H
John S. Graham, North CaroUna
WilUam McChesney Martin, Jr., New York
Andrew N. Overby, District of Columbia
H. Chapman Rose, Ohio »6.
Laurence B. Robbins, IlUnois 21
David W. KendaU, Michigan
Fred C. Scribner, Jr., Maine 14
Tom B. Coughran, California
A. GUmore Flues, Ohio
T. Graydon Upton, Pennsylvania
John P. Weitzel, Rhode Island
John M. Leddy, Virginia
Stanley S. Surrey, Massachusetts
James A. Reed, Massachusetts
J o h n C . BulUtt, NewJersey
Robert A. WaUace, Illinois 22
Merlyn N. Trued, New Jersey
W. True Davis, Jr., Missouri
Winthrop Knowlton, New York
.Joseph M. Bowman, Georgia
John R. Petty, New York
Mar. 11,1969
Apr. 1, 1969
June 12,1972
Jan. 21,
1973
Edwin S. Cohen, Virginia i6
Eugene T. Rossides, New York
June 23, 1969
Dec. 12,1971
June 12, 1972
Aug. 18,1972
Jan. 22, 1973
Aug. 14,1971
July 16, 1975
July I, 1974
Sept. 2, 1975
Feb. 1, 1974
Murray L. Weidenbaum, Missouri
Edgar R. Fiedler, New York...
John M. Hennessy, Massachusetts
Frederic W. Hickman, IlUnois
Edward L. Morgan, Arizona
David R. Macdonald, IlUnois
Charles A. Cooper, Florida
Sidney L. Jones, Michigan
Charles M. Walker, Califomia
Robert A. Gerard, District of Columbia
May 8, 1974 Sept. 14,1976
Aug. I, 1974 Nov. 15, 1975
July 17, 1975 Jan. 20, 1977
Sept. 3, 1975 Jan. 20, 1977
Apr. 14,
1976 Jan. 20, 1977
Digitized forFootnotes at end of table.
FRASER
Morgenthau, Vinson
Morgenthau
Morgenthau, Vinson
Vinson, Snyder
Snyder
Snyder
Snyder, Humphrey
Humphrey
Humphrey, Anderson
Humphrey, Anderson
Humphrey, Anderson
Anderson
Anderson, DiUon
Anderson
Anderson
DiUon
DiUon, Fowler, Barr
DiUon, Fowler
DiUon
DiUon, Fowler, Barr
Fowler
Fowler
Fowler
Fowler, Barr
Fowler, Barr, Kennedy,
ConnaUy
Kennedy, ConnaUy
Kennedy, ConnaUy,
Shultz
Kennedy, ConnaUy
ConnaUy, Shultz, Simon.
Shultz, Simon
Shultz, Simon
Shultz
Simon
Simon
Simon
Simon
Simon
Roosevelt, Truman.
Roosevelt.
Roosevelt, Truman.
Truman.
Truman.
Truman.
Truman, Eisenhower.
Eisenhower.
Eisenhower.
Eisenhower.
Eisenhower.
Eisenhower.
Eisenhower, Kennedy.
Eisenhower.
Eisenhower.
Kennedy.
Kennedy, Johnson.
Kennedy. Johnson.
Kennedy. Johnson.
Kennedy. Johnson.
Johnson.
Johnson.
Johnson.
Johnson.
tfl
X
X
H
(/i
Johnson. Nixon.
Nixon.
Nixon.
Nixon.
Nixon,
Nixon.
Nixon,
Nixon.
Nixon,
Nixon,
Ford.
Ford.
Ford.
Ford.
Ford.
Ford.
Ford.
00
From—
Dec. 21, 1%1
Dec. 3, 1963
Nov. 24, 1965
Feb. 12,1968
Apr. 1,1969
Sept.23, 1971
Aug. 18,
Aug. 22,
Aug. 3,
May 28,
June 24,
Nov. 6,
1972
1972
1973
1974
1974
1975
Official
To-
Nov. 28,
Nov. 23,
Nov. 11,
Mar.31,
June 30,
Aug. 17,
Mar. 14,
July 4,
Apr. 13,
Sept. 1,
Jan. 20,
Jan. 20,
4i^
00
00
Served under—
Term of service
Secretary of the
Treasury
1963
1965
1967
1969
1971
1972
Deputy Under Secretaries for Monetary Affairs
J. Dewey Daane, District of Columbia
DiUon
Paul A. Volcker, New Jersey
DiUon, Fowler
Peter D. StemUght, New York
Fowler
Frank W. Schiff, New York
Fowler, Barr, Kennedy.
Bruce K. MacLaury, New York
Kennedy, ConnaUy
Jack F. Bennett, Connecticut 23
ConnaUy, Shultz
1974
1973
1974
1975
1977
1977
Deputy Uruier Secretaries 24
Jack F. Bennett, Connecticut
James E. Smith, Virginia
WUUam L. Gifford, New York
Frederick L. Webber, Virginia 25
Gerald L. Parsky, District of Columbia 25
Harold F. Eberle, California 25
President
Kennedy, Johnson.
Johnson.
Johnson.
Johnson, Nixon.
Nixon.
Nixon.
73
H
June 17, 1955
Edward F. Bartelt, Illinois..
June 19, 1955
Mar. 31, 1962
WilUam T. Heffelfinger, District of Columbia
June 15, 1962
July 28, 1975
John K. Carlock, Arizona
July 29, 1975
David Mosso, Virginia
Aug. 2,1950
Aug.31, 1959
Sept. 14, 1959
Oct. 25, 1970
Footnotes at end of table.
0
•fl
Shultz
Shultz
Shultz
Simon
Simon
Simon
Nixon.
Nixon.
Nixon.
Nixon, Ford.
Nixon, Ford.
Ford.
Morgenthau, Vinson,
Snyder, Humphrey
Humphrey, Anderson,
DUlon
DiUon, Fowler, Barr,
Kennedy, ConnaUy,
Shultz, Simon
Simon
Roosevelt, Truman,
Eisenhower.
>
73
*
<
0
Eisenhower, Kennedy.
•fl
H
Kennedy, Johnson,
Nixon, Ford.
Ford.
tfl
H
73
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C/5
Fiscal Assistant Secretaries 26
Mar. 16, 1945
73
5
0
Assistant Secretaries for Administration 27
WilUam W. Parsons, California
Snyder, Humphrey,
Anderson
A. E. Weatherbee, Maine
,
Anderson, DiUon, Fowler,
Barr, Kennedy
Truman, Eisenhower.
Eisenhower, Kennedy.
Johnson, Nixon.
H
X
tfl
c/3
tfl
O
73
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Oct. 25. 1970
Apr. 11. 1972
Jan.
7.1972
Dec. 17. 1971
June 21, 1974
Feb. 14. 1974
Jan. 19,1977
Ernest C. Betts. Jr.. Wisconsin
Warren F. Brecht. Connecticut
Treasurers of the United States 28
Romana Acosta Banuelos. California
Francine I. Neff, New Mexico
1 WhUe holding the office of Secretary of the Treasury, Mr. GaUatin
was commissioned envoy extraordinary and minister plenipotentiary
Apr. 17, 1813, with John Quincy Adams and James A. Bayard, to
negotiate peace with Great Britain. On Feb. 9, 1814, his seat as
Secretary of the Treasury was declared vacant because of his absence
in Europe. WiUiam Jones, of Pennsylvania (Secretary of the Navy),
acted as ad interim Secretary of the Treasury from Apr. 21, 1813, to
Feb. 9, 1814.
2 Rush was nominated Mar. 5, 1825, confirmed and commissioned
Mar. 7, 1825, but did not enter on duty untO Aug. 1, 1825. Samuel L.
Southard, of New Jersey (Secretary of the Navy), served as ad interim
Secretary of the Treasury from Mar. 7 to July 31, 1825.
3 Asbury Dickens (Chief Clerk), ad interim Secretary of the
Treasury from June 21 to Aug. 7, 1831.
4 Spencer resigned as Secretary of the Treasury May 2, 1844;
McCnintock Young (Chief Clerk) was ad interim Secretary of the
Treasury from May 2 to July 3, 1844.
s McCuUoch was Secretary from Mar. 9, 1865, to Mar. 3,1869, and
from Oct. 31, 1884, to Mar. 7, 1885.
6Windom was Secretary from Mar. 8, 1881, to Nov. 13, 1881, and
also from Mar. 7, 1889, to Jan. 29, 1891.
70ffice established by act of May 18, 1972; appointed by the
President.
8Later became Secretary.
90ffice established by act of June 16, 1921; appointed by the
President.
10Later became Deputy Secretary.
n Office established by act of July 22, 1954; appointed by the
President.
t2Act of May 18, 1972, which established the Deputy Secretary
position, permitted the Under Secretary position to be used as a
counselor to the Secretary and so designated by the President as
desired.
i30ffice estabUshed by act of May 10, 1934 (31 U.S.C. 1009);
appointed by the President.
14 Later became Assistant Secretary and subsequenUy Under
Secretary.
Kennedy. ConnaUy
ConnaUy. Shultz. Simon...
Nixon.
Nixon. Ford.
ConnaUy, Shultz
Simon
Nixon.
Nixon. Ford.
15 Later became Assistant Secretary.
16Later became Under Secretary.
nOffice established by act of Mar. 3, 1849; appointed by the
Secretary. Act of Mar. 3,1857, made the office subject to Presidential
appointment.
18Act of Mar. 14, 1864, provided for an additional Assistant
Secretary.
19Act of July 11, 1890, provided for an additional Assistant
Secretary.
20Act of Oct. 6, 1917, provided for two additional Assistant
Secretaries for the duration of war and 6 months thereafter.
21 Act of July 22, 1954, provided for an additional Assistant
Secretary.
22Act of July 8, 1963, provided for a fourth Assistant Secretary.
23 L a t e r b e c a m e D e p u t y U n d e r S e c r e t a r y a n d s u b s e q u e n U y U n d e r
Secretary a n d U n d e r Secretary for M o n e t a r y Affairs.
24 A c t of M a y 1 8 , 1 9 7 2 , p r o v i d e d f o r t w o D e p u t y U n d e r S e c r e t a r i e s ,
to be designated Assistant Secretaries by the President as desired.
tfl
X
X
2
H
c/3
25 Designated by the President an Assistant Secretary.
26Office established by Reorganization Plan No. 3 of 1940.
27Office established by Reorganization Plan No. 26, of 1950. Titie
changed from "Administrative Assistant Secretary" to "Assistant
Secretary for Administration" by PubUc Law 88-426, approved Aug.
14,1964; appointed by the Secretary with the approval of the President.
Act of May 18, 1972, provided for appointment by the President.
28Treasury Department Order 229, Jan. 14,1974, raised the position
of Treasurer of the United States from the operating level of the
Department t o the Office of the Secretary.
NOTE.—Robert Morris, the first financial officer of the Government, was Superintendent of Finance from 1781 to 1784. Upon the
resignation of Morris, the powers conferred upon him were transferred
to the "Board of the Treasury." Those who finaUy accepted positions
on this Board were John Lewis Gervais, Samuel Osgood, and Walter
Livingston. The Board served untU Alexander HamUton assumed
office in 1789.
00
490
1977 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 63.—Treasury Department orders relating to organization and procedure
No. 150-85, NOVEMBER 5, 1976.—ESTABLISHMENT
OF NEW OFFICE
By virtue of the authority vested in me by Reorganization Plan No. 26 of 1950:
(1) There shall be in the National Office of the Internal Revenue Service the
office of Assistant Commissioner (Data Services).
(2) Approval is given to the transfer of such personnel, records, equipment, and
funds as are determined by the Commissioner of Internal Revenue and the
Assistant Secretary for Administration to be appropriate in connection
therewith.
This Order shall become effective upon such date as the Commissioner of Internal
Revenue may determine.
WILLIAM E . SIMON,
Secretary of the Treasury.
No. 250, MAY 3, 1977.—DISESTABLISHMENT OF THE POSITION AND OFFICE OF
ASSISTANT SECRETARY (ENFORCEMENT, OPERATIONS, AND TARIFF AFFAIRS)
By virtue of the authority vested in me as Secretary of the Treasury, including the
authority vested in me by Reorganization Plan No, 26 of 1950, the following
organizational changes are ordered.
1. The position and the Office of Assistant Secretary (Enforcement, Operations,
and Tariff Affairs) are hereby disestablished. The functions, responsibilities,
and personnel formerly assigned to the Assistant Secretary (Enforcement,
Operations and Tariff Affairs) are hereby temporarily transferred to the Under
Secretary, pending review and further disposition of these functions and
responsibilities.
2. Additional changes in organization, and reassignments of functions, responsibilities, and personnel necessitated by this order will be finalized as soon as
possible.
3. Treasury Department Orders No. 128 (Revision 5), No. 147 (Revision 3), No.
191-3, No. 217 (Revision 1), and No. 220 are hereby amended.
This order is effective immediately.
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury.
No. 251, MAY 3, 1977.—ESTABLISHMENT OF THE OFFICE OF THE ASSISTANT
SECRETARY (PUBLIC AFFAIRS)
By virtue of the authority vested in me as Secretary of the Treasury, including the
authority vested in me by Reorganization Plan No. 26 of 1950, it is ordered that:
1. The position of the Assistant Secretary (Public Affairs) is hereby established.
The incumbent wiU report to the Secretary, and will be responsible for:
a. Establishing general operating policies and guidelines, and providing
leadership, direction and management strategy for administering
public affairs programs and activities in all Treasury offices and
bureaus;
b. Formulating and executing public information policies and program s
which will increase the public's knowledge and understanding of
Treasury's activities and services;
491
EXHIBITS
c.
Providing continuing public information support to the Office of t h e
Secretary; and
d. Serving as the principal advisor to the Secretary, the D e p u t y
Secretary, and senior officials t h r o u g h o u t the Treasury D e p a r t m e n t
on m a t t e r s affecting the public's understanding of Treasury policies
and p r o g r a m s .
2. T h e Office of the Assistant Secretary (Public Affairs) is hereby established.
U n d e r the supervision of t h e Assistant Secretary (Public Affairs) this Office
performs the following functions:
a. Developing materials to inform the public of the D e p a r t m e n t ' s
policies, p r o g r a m s , activities, and services;
b . Serving the day-to-day needs of the print and electronic m e d i a ,
including t h e writers w h o specialize in (economic reporting a n d
analysis, and the m e d i a who base their daily operations in t h e
Treasury h e a d q u a r t e r s ;
c. Serving the specialized needs of specific Treasury officials for
releasing public information;
d. Providing editorial s u p p o r t services such as p r e p a r a t i o n of C o n g r e s sional a n d public s t a t e m e n t s , and research, c o r r e s p o n d e n c e , clipping
service a n d files;
e. C o o r d i n a t i n g public affairs policies t h r o u g h o u t t h e D e p a r t m e n t .
3. All of the functions, positions, p e r s o n n e l , r e c o r d s and p r o p e r t y assigned to t h e
Office o f t h e Special Assistant to the Secretary (Public Affairs) are transferred
t o .the Office of t h e Assistant Secretary (Public Affairs).
4. Responsibility for maintaining t h e Secretary's c u r r e n t issues briefing b o o k a n d
for answering c o r r e s p o n d e n c e , and the positions, personnel, records, a n d
p r o p e r t y associated with these responsibUities are transferred to the Office of
t h e Assistant Secretary (Public Affairs) from the immediate office of t h e
Secretary.
5. T h e Assistant Secretary (Public Affairs) is authorized to define the organizational structure a n d the specific responsibilities o f t h e positions and personnel
assigned to the Office of the Assistant Secretary (Public Affairs).
This O r d e r is effective immediately.
Treasury D e p a r t m e n t O r d e r N o . 99 is hereby rescinded.
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury.
No.
249,
M A Y 17, 1 9 7 7 . — E S T A B L I S H M E N T
SUPPORT
O F THE O F F I C E O F INTELLIGENCE
By virtue of the authority vested in m e as Secretary of the Treasury including t h e
authority of Reorganization Plan N o . 26 of 1950, the following organizational c h a n g e s
are o r d e r e d .
1. T h e Office of InteUigence S u p p o r t (OIS) is hereby established within t h e
Office of the Secretary, and is placed u n d e r the supervision of the Special
Assistant to the Secretary (National Security). T h e Office of National Security
( O N S ) is hereby disestablished. AU functions, positions, personnel, r e c o r d s ,
p r o p e r t y , a n d funds previously assigned to O N S are transferred to OIS, e x c e p t
for the following:
a. F u n c t i o n s involving national security issues, including security
assistance and foreign military sales programs, all substantive work
with the National Security Council, and o t h e r defense related
m a t t e r s a n d the related positions, personnel, records, property, a n d
funds a r e transferred to the Office of the Assistant Secretary
(International Affairs).
492
1977 REPORT OF THE SECRETARY OF THE TREASURY
b.
2.
3.
4.
5.
Functions described below and related positions, personnel, records,
property, and funds are transferred to the Executive Secretariat:
(1) Screen and distribute to appropriate Treasury officials
sensitive State Department telegrams;
(2) Prepare daily cable summaries on international items of
interest to Treasury officials;
(3) Regarding Treasury's role in the work of the National
Security Council, distribute papers, assign actions, prepare status reports, and assist Treasury offices in the
preparation of papers.
The Special Assistant to the Secretary (National Security) wUl report to the
Secretary through the Executive Secretary.
The Office of Intelligence Support will provide day-to-day intelligence support
to the Secretary and other Treasury officials by performing the following
functions previously performed by the Office of National Security:
a. Represent Treasury on intelligence community committees, e.g. the
National Foreign Intelligence Board, and maintain continuous
liaison with elements of the community.
b. Screen and distribute intelligence reports and publications to
appropriate Treasury officials. Contribute to the daily summary
prepared by the Executive Secretariat.
c. Provide intelligence support to the Secretary and designated
Treasury officials, as appropriate.
d. Review all proposals for support, or other arrangements of a
continuing nature, between any Treasury office or bureau and the
Central Intelligence Agency or other intelligence agencies (except
for the Federal Bur^'au of Investigation), in accordance with the
provisions of Treasury-^Department Order No. 240, dat^d September
27, 1975.
-^
Treasury Department Order No. 207 is hereby rescinded, and Treasury
Department Orders No. 240 and 246 are amended accordingly.
This Order is effective immediately.
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury.
No. 242 (REVISION 1), MAY 17, 1977.—ASSISTANT SECRETARY (CAPITAL MARKETS
AND DEBT MANAGEMENT) IS RETITLED ASSISTANT SECRETARY (DOMESTIC FINANCE)
By virtue of the authority vested in me as Secretary of the Treasury, including the
authority of Reorganization Plan No. 26 of 1950, it is ordered that:
1. The position of Assistant Secretary (Capital Markets and Debt Management)
is hereby retitled Assistant Secretary (Domestic Finance). The Assistant
Secretary (Domestic Finance) shall serve as principal advisor to the Secretary,
Deputy Secretary, and Under Secretary for Monetary Affairs on debt
management, federal financing affairs, the financing of non-federal sectors of
the economy, general capital markets policy and state/local financial affairs,
and shall exercise policy direction and control over:
• Treasury operations related to, and the relationship between.
Treasury and the Federal Financing Bank;
• Treasury staff work on the substance of proposed legislation relating
to the regulation of, and the lending, investment, and deposit powers
of, private financial institutions as well as the operations of other
private financial intermediaries;
• development of legislative and administrative principles and standards for federal credit programs, working closely with federal credit
agencies in the design of new credit programs and legislation;
493
EXHIBITS
•
determination of interest rates for various federal borrowing,
lending, and investment purposes under pertinent statutes;
• determination of interest rates for the sale of special Treasury issues
to foreign central banks;
• Treasury operations under the New York City Seasonal Financing
Act of 1975 (P.L. 94-143);
• development of policy relating to monitoring of municipal markets
and assessment of needs of urban areas for federal financial
assistance; and
• Treasury operations relating to the Treasury Department Office of
Revenue Sharing.
2. The Office of the Deputy Assistant Secretary for Urban Finance is hereby
established under the supervision of the Assistant Secretary (Domestic
Finance).
a. Supervision of the Office of Municipal Finance is hereby transferred
from the Deputy Assistant Secretary for Capital Markets Policy to
the Deputy Assistant Secretary for Urban Finance.
b. The Office of the Deputy to the Assistant Secretary for New York
Finance is hereby retitled the Office of New York City Finance under
the supervision ofthe Deputy Assistant Secretary for Urban Finance.
c. The Office of Urban Economics is hereby established, to conduct
research and analysis regarding the degree of need of urban areas for
federal financial assistance, and is placed under the supervision of
the Deputy Assistant Secretary for Urban Finance.
3. The Office of the Deputy Assistant Secretary (Debt FinaYicing) is hereby
retitled the Office of the Deputy Assistant Secretary for Debt Financing.
a. The functions, duties and responsibilities of the Deputy Assistant
Secretary for Debt Financing will be assumed by the Special
Assistant to the Secretary (Debt Management).
b. Supervision of the Senior Advisor (Debt Research) is hereby
assigned to the Special Assistant to the Secretary (Debt Management).
4. Supervision of the Office of Revenue Sharing is reassigned from the Under
Secretary to the Assistant Secretary (Domestic Finance).
This Order supersedes Treasury Department Order No. 242 (dated March 27,1976),
and amends Treasury Order No. 224 (dated January 26,1973) and Treasury Order No.
170-14 (June 11, 1973).
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury.
No. 190 (REVISION 13), MAY 17, 1977.—SUPERVISION OF BUREAUS AND OFFICES,
DELEGATION OF CERTAIN AUTHORITY, AND ORDER OF SUCCESSION IN THE TREASURY
DEPARTMENT
1. The Deputy Secretary shall be under the direct supervision of the Secretary.
2. The following officials shall be under the supervision ofthe Secretary, and shall
repdrt to him through the Deputy Secretary:
Under Secretary for Monetary Affairs
Under Secretary
General Counsel
Assistant Secretary (Tax Policy)
Commissioner, Internal Revenue Service
Comptroller of the Currency
Assistant Secretary (Legislative Affairs)
Assistant Secretary (Economic Policy)
Assistant Secretary (Domestic Finance)
Assistant Secretary (Public Affairs)
Executive Secretary
494
1977 REPORT OF THE SECRETARY OF THE TREASURY
3.
The following officials shall be under the supervision of the Under Secretary
for Monetary Affairs, and shall exercise supervision over those officers and
organizational entities indicated thereunder:
Assistant Secretary (International Affairs)
Deputy Assistant Secretary for Trade and Investment Policy
Deputy Assistant Secretary for Commodities and Raw Materials
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 International
Monetary Group
Inspector General for International Finance
(The Assistant Secretary (Domestic Finance) reports through the Under
Secretary for Monetary Affairs for debt management purposes.)
Fiscal Assistant Secretary
4. The following officials shall be under the supervision of the Under Secretary,
and shall exercise supervision over those officers and organizational entities
indicated thereunder:
Assistant Secretary (Administration)
Deputy Assistant Secretary
Office of Administrative Programs
Office of Audit
Office of Budget and Program Analysis
Office of Computer Science
Office of Equal Opportunity Program
Office of Management and Organization
Office of Personnel
Chief Deputy to the Under Secretary (Enforcement and Operations)
United States Secret Service
Bureau of Alcohol, Tobacco and Firearms
Federal Law Enforcement Training Center
United States Customs Service
Bureau of Engraving and Printing
Office of Foreign Assets Control
Treasurer of the United States
United States Savings Bond Division
Bureau of the Mint
5. The following officials shall exercise supervision over those officers and
organizational entities indicated thereunder:
General Counsel
Deputy General Counsel
Legal Division
Office of Director of Practice
Office of Tariff Affairs
Assistant Secretary (Tax Policy)
Deputy Assistant Secretary for Tax Legislation
Deputy Assistant Secretary for Tax Policy Economics
Office of Tax Analysis
Office of Tax Legislative Counsel (also part of Legal Division)
Office of International Tax Counsel (also part of Legal Division)
Office of Industrial Economics
Assistant Secretary (Legislative Affairs)
Deputy Assistant Secretary (Legislative Affairs)
Office of Legislative Affairs
Assistant Secretary (Economic Policy)
Deputy Assistant Secretary for Domestic Economic Analysis
Office of Financial Analysis
495
EXHIBITS
6.
7.
8.
Deputy Assistant Secretary for International E c o n o m i c Analysis
Assistant Secretary ( D o m e s t i c F i n a n c e ) (Also reports to U n d e r Secretary
for M o n e t a r y Affairs for d e b t m a n a g e m e n t purposes.)
Deputy Assistant Secretary for Capital M a r k e t s Policy
Office of Securities M a r k e t Policies
Office of Capital M a r k e t s Legislation
Deputy Assistant Secretary for U r b a n Finance
Office of Municipal Finance
Office of New Y o r k City F i n a n c e
Office of U r b a n E c o n o m i c s
D e p u t y Assistant Secretary for D e b t Financing
Senior Adviser ( D e b t R e s e a r c h )
Office of G o v e r n m e n t Financing
Office of Agency F i n a n c e a n d M a r k e t Policies
Office of R e v e n u e Sharing
Assistant Secretary (Public Affairs)
D e p u t y Assistant Secretary (Public Affairs)
Office of Public Affairs
Fiscal Assistant Secretary
Deputy Fiscal Assistant Secretary
B u r e a u of G o v e r n m e n t Financial O p e r a t i o n s
B u r e a u of the Public D e b t
Commissioner of Internal R e v e n u e
Deputy Commissioner
Internal R e v e n u e Service
C o m p t r o l l e r of the C u r r e n c y
First D e p u t y C o m p t r o l l e r
Office of the C o m p t r o l l e r of the C u r r e n c y
T h e Deputy Secretary, the U n d e r Secretary for M o n e t a r y Affairs, the U n d e r
Secretary, the G e n e r a l Counsel, and the Assistant Secretaries are authorized
to perform any functions t h e Secretary is authorized to perform. E a c h of these
officials shall perform functions u n d e r this authority in his own capacity a n d
u n d e r his own title and shall be responsible for referring to t h e Secretary any
m a t t e r on which actions should appropriately b e t a k e n by the Secretary. E a c h
of these officials will ordinarily perform u n d e r this authority only functions
which arise o u t of, relate t o , or c o n c e r n the activities or functions of or t h e
laws administered by or relating to the b u r e a u s , offices, or o t h e r organizational
units over which h e has supervision. Any action heretofore taken by any of
these officials in his own capacity and u n d e r his own title is hereby affirmed
a n d ratified as the action of t h e Secretary.
T h e following officers shall, in the o r d e r of succession indicated, act as
Secretary o f t h e Treasury in case o f t h e d e a t h , resignation, a b s e n c e , or sickness
of the Secretary and o t h e r officers succeeding him, until a successor is
a p p o i n t e d , or until the a b s e n c e or sickness shall cease:
A. Deputy Secretary
B. U n d e r Secretary for M o n e t a r y Affairs
C. U n d e r Secretary
D. G e n e r a l Counsel
E. Assistant Secretaries, or Deputy U n d e r Secretaries, appointed by t h e
President with Senate confirmation, in the o r d e r in which they t o o k
the o a t h of office as Assistant Secretary, or Deputy U n d e r Secretary.
Treasury D e p a r t m e n t O r d e r N o . 190 (Revision 12) is rescinded, effective this
date.
W. M I C H A E L B L U M E N T H A L ,
Secretary of the Treasury.
496
1977 REPORT OF THE SECRETARY OF THE TREASURY
N o . 2 0 2 - 3 , M A Y 17, 1 9 7 7 . — T R A N S F E R O F P O S I T I O N S A N D F U N C T I O N S F R O M THE
O F F I C E O F T H E A S S I S T A N T SECRETARY ( I N T E R N A T I O N A L A F F A I R S ) T O T H E O F F I C E O F
THE A S S I S T A N T SECRETARY ( E C O N O M I C P O L I C Y )
By virtue of t h e authority vested in m e as Secretary of t h e T r e a s u r y , including t h e
authority vested in m e by Reorganization Plan N o . 2 6 of 1 9 5 0 , it is o r d e r e d that:
1. T h e position of D e p u t y Assistant Secretary ( R e s e a r c h a n d Planning) a n d all
functions, positions, r e c o r d s , office e q u i p m e n t , o t h e r p r o p e r t y , a n d funds,
heretofore assigned t o t h e Office o f t h e D e p u t y Assistant Secretary ( R e s e a r c h
a n d Planning) in t h e Office of Assistant Secretary (International Affairs), a r e
transferred t o t h e supervision of t h e Assistant Secretary ( E c o n o m i c Policy).
E x c h a n g e Stabilization F u n d i n g of all positions will c o n t i n u e .
2. T h e position of D e p u t y Assistant Secretary ( R e s e a r c h a n d Planning) is retitled
D e p u t y Assistant Secretary for I n t e m a t i o n a l E c o n o m i c Analysis.
3. T h a t portion of T r e a s u r y D e p a r t m e n t O r d e r N o . 2 0 2 (Revision 2 ) which refers
t o t h e D e p u t y Assistant Secretary ( R e s e a r c h a n d Planning) is superseded.
4 . This O r d e r is effective immediately.
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury.
N o . 2 5 0 - 1 , J U N E 16, 1 9 7 7 . — A D M I N I S T R A T I O N O F T H E C O U N T E R V A I L I N G D U T Y L A W
AND A N T I D U M P I N G A C T
By virtue of t h e authority vested in m e as Secretary of t h e T r e a s u r y , including t h e
authority of Reorganization Plan N o . 2 6 of 1950, a n d p u r s u a n t t o Treasury O r d e r N o .
190, (Revision 1 3 ) , M a y 17, 1 9 7 7 , responsibility for t h e administration of t h e
countervailing duty law a n d t h e A n t i d u m p i n g A c t , 1 9 2 1 , as a m e n d e d , ( b u t n o t t h e
administration of t h e C u s t o m s Service), a n d Section 2 3 2 of t h e T r a d e Expansion A c t
of 1 9 6 2 , as well as for representing Treasury with regard t o such m a t t e r s , h a s b e e n
transferred from t h e U n d e r Secretary t o t h e G e n e r a l Counsel. T h e Commissioner of
C u s t o m s will receive direction from t h e G e n e r a l Counsel o n m a t t e r s relating t o
administration of t h e countervailing duty a n d antidumping laws.
T h e position of D e p u t y Assistant Secretary (Tariff Affairs) a n d t h e Office of Tariff
Affairs, a n d such positions, personnel, r e c o r d s , a n d e q u i p m e n t which a r e d e t e r m i n e d
by t h e Assistant Secretary ( A d m i n i s t r a t i o n ) in consultation with t h e G e n e r a l Counsel
and t h e U n d e r Secretary t o b e necessary t o carry o u t t h e responsibilities transferred
by this o r d e r , shall b e transferred from t h e U n d e r Secretary t o t h e G e n e r a l Counsel.
T h e G e n e r a l C o u n s e l is authorized t o define t h e organizational structure a n d t h e
specific responsibilities of t h e positions a n d personnel transferred by authority of this
order.
Treasury D e p a r t m e n t O r d e r N o . 2 5 0 , M a y 3 , 1977, a n d N o . 2 2 0 , April 2 3 , 1971 a r e
hereby a m e n d e d accordingly.
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury.
N O . 2 5 0 - 2 , J U N E 2 0 , 1 9 7 7 . — E S T A B L I S H M E N T O F T H E O F F I C E O F T A R I F F A F F A I R S IN
THE O F F I C E O F T H E G E N E R A L C O U N S E L A N D T H E D E L E G A T I O N O F A U T H O R I T Y T O T H E
D E P U T Y T O T H E G E N E R A L C O U N S E L FOR T A R I F F A F F A I R S
U n d e r authority of T r e a s u r y D e p a r t m e n t O r d e r N o . 190 ( R e v i s e d ) , t h e Office of
Tariff Affairs is established within t h e Office of t h e G e n e r a l Counsel. Pursuant t o t h e
authority delegated t o m e by P a r a g r a p h 6 of that o r d e r , I hereby delegate t o t h e D e p u t y
to t h e G e n e r a l Counsel for Tariff Affairs t h e following authority, subject t o t h e
limitations prescribed herein:
1. T o supervise t h e Office of Tariff Affairs a n d t o m a k e r e c o m m e n d a t i o n s
relative t o t h e e m p l o y m e n t , p r o m o t i o n a n d evaluation of personnel therein.
497
EXHIBITS
2.
To review all antidumping and countervailing duty cases investigated by the
United States Customs Service and to recommend their disposition to the
General Counsel.
3. To represent the General Counsel on Departmental, interdepartmental and
international meetings or committees concerned with tariff matters within the
jurisdiction of the General Counsel's office.
4. To handle all other matters falling within the responsibility of the Office of
Tariff Affairs, or as further assigned by me.
5. In the absence of both the General Counsel and the Deputy General Counsel,
the Deputy to the General Counsel for Tariff Affairs will sign antidumping and
countervailing duty notices and determinations in his own name and under his
own title.
6. In other respects the Office of Tariff Affairs will conform to the orders and
directives issued for the administration of the Legal Division.
HENRY C . STOCKELL, JR.,
Acting General Counsel.
No. 190 (REVISION 13, AMENDMENT 1), JUNE 22, 1977.—SUPERVISION OF BUREAUS
AND OFFICES, DELEGATION OF CERTAIN AUTHORITY, AND ORDER OF SUCCESSION IN
THE T R E A S U R Y D E P A R T M E N T
1.
2.
The Deputy Secretary shall be under the direct supervision of the Secretary.
The following officials shall be under the supervision ofthe Secretary, and shall
report to him through the Deputy Secretary:
Under Secretary for Monetary Affairs
Under Secretary
General Counsel
Assistant Secretary (Tax Policy)
Commissioner, Internal Revenue Service
Comptroller of the Currency
Assistant Secretary (Legislative Affairs)
Assistant Secretary (Economic Policy)
Assistant Secretary (Domestic Finance)
Assistant Secretary (Public Affairs)
Executive Secretary
3. The following officials shall be under the supervision of the Under Secretary
for Monetary Affairs, and shall exercise supervision over those officers and
organizational entities indicated thereunder:
Assistant Secretary (International Affairs)
Deputy Assistant Secretary for Trade and Investment Policy
Deputy Assistant Secretary for Commodities and Natural Resources
Deputy Assistant Secretary for Intemational 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 International
Monetary Group
Inspector General for International Finance
(The Assistant Secretary (Domestic Finance) reports through the Under
Secretary for Monetary Affairs for debt management purposes.)
Fiscal Assistant Secretary
4. The following officials shall be under the supervision of the Under Secretary,
and shall exercise supervision over those o n c e r s and organizational entities
indicated thereunder:
Assistant Secretary (Administration)
Deputy Assistant Secretary
Office of Administrative Programs
Office of Audit
498
5.
1977 REPORT OF THE SECRETARY OF THE TREASURY
Office of Budget and Program Analysis
Office of C o m p u t e r Science
Office of Equal O p p o r t u n i t y Program
Office of M a n a g e m e n t and Organization
Office of Personnel
Chief D e p u t y to the U n d e r Secretary ( E n f o r c e m e n t and O p e r a t i o n s )
Office of E n f o r c e m e n t
Office of O p e r a t i o n s
United States Secret Service
Bureau of Alcohol, T o b a c c o and Firearms
Federal Law E n f o r c e m e n t Training C e n t e r
United States C u s t o m s Service
Bureau of Engraving and Printing
Office of Foreign Assets C o n t r o l
T r e a s u r e r of t h e United States
United States Savings Bonds Division
Bureau of the Mint
T h e following officials shall exercise supervision over those officers a n d
organizational entities indicated t h e r e u n d e r :
G e n e r a l Counsel
Deputy G e n e r a l C o u n s e l
Legal Division
Office of Director of Practice
Office of Tariff Affairs
Assistant Secretary ( T a x Policy)
Deputy Assistant Secretary for Tax Legislation
Deputy Assistant Secretary for Tax Policy E c o n o m i c s
Office of Tax Analysis
Office of Tax Legislative Counsel (also part of Legal Division)
Office of International Tax Counsel (also part of Legal Division)
Office of Industrial E c o n o m i c s
Assistant Secretary (Legislative Affairs)
Deputy Assistant Secretary (Legislative Affairs)
Office of Legislative Affairs
Assistant Secretary ( E c o n o m i c Policy)
Deputy Assistant Secretary for Domestic E c o n o m i c Analysis
Office of Financial Analysis
Deputy Assistant Secretary for International E c o n o m i c Analysis
Assistant Secretary ( D o m e s t i c F i n a n c e ) (Also reports to U n d e r Secretary
for M o n e t a r y Affairs for d e b t m a n a g e m e n t purposes.)
Deputy Assistant Secretary for Capital Markets Policy
Office of Securities M a r k e t Policies
Office of Capital M a r k e t s Legislation
Deputy Assistant Secretary for State and Local Finance
Office of Municipal Finance
Office of the D e p u t y to the Assistant Secretary for New Y o r k
City Finance
Office of U r b a n E c o n o m i c s
Deputy Assistant Secretary for D e b t M a n a g e m e n t
Senior Adviser ( D e b t R e s e a r c h )
Office of G o v e r n m e n t Financing
Office of Agency Finance and M a r k e t Policies
Office of R e v e n u e Sharing
Assistant Secretary (Public Affairs)
Deputy Assistant Secretary (Public Affairs)
Office of Public Affairs
Fiscal Assistant Secretary
Deputy Fiscal Assistant Secretary
499
EXHIBITS
Bureau of Government Financial Operations
Bureau of the Public Debt
Commissioner of Internal Revenue
Deputy Commissioner
Internal Revenue Service
Comptroller of the Currency
First Deputy Comptroller
Office of the Comptroller of the Currency
6. The Deputy Secretary, the Under Secretary for Monetary Affairs, the Under
Secretary, the General Counsel, and the Assistant Secretaries are authorized
to perform any functions the Secretary is authorized to perform. Each of these
officials shall perform functions under this authority in his own capacity and
under his own title and shall be responsible for referring to the Secretary any
matter on which actions should appropriately be taken by the Secretary. Each
of these officials will ordinarily perform under this authority only functions
which arise out of, relate to, or concern the activities or functions of, or the
laws administered by or relating to the bureaus, offices, or other organizational
units over which he has supervision. Any action heretofore taken by any of
these officials in his own capacity and under his own title is hereby affirmed
and ratified as the action of the Secretary.
7. The following officers shall, in the order of succession indicated, act as
Secretary ofthe Treasury in case ofthe death, resignation, absence, or sickness
of the Secretary and other officers succeeding him, until a successor is
appointed, or until the absence or sickness shall cease:
A. Deputy Secretary
B. Under Secretary for Monetary Affairs
C. Under Secretary
D. General Counsel
E. Assistant Secretaries, or Deputy Under Secretaries, appointed by the
President with Senate confirmation, in the order in which they took
the oath of office as Assistant Secretary, or Deputy Under Secretary.
8. Treasury Department Order No. 190 (Revision 13) is amended by two types
of changes. The Offices of Enforcement and Operations are added to the
organizations supervised by the Chief Deputy to the Under Secretary
(Enforcement and Operations). Changes are made in the titles of certain
officials in the Offices of the Assistant Secretary (Intemational Affairs) and
the Assistant Secretary (Domestic Finance).
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury.
No. 200 (AMENDMENT 8), JUNE 22, 1977.—TRANSFER OF PERSONNEL FUNCTIONS
By virtue of the authority vested in me as Secretary of the Treasury, including the
authority vested in me by Reorganization Plan No. 26 of 1950, it is ordered that:
1. The Office of the Secretary Personnel Division (OSPD) is hereby abolished
and all functions and responsibilities currently assigned to OSPD are hereby
transferred from the Office of Management and Organization to the Office of
Personnel. Such positions, personnel, records, and other property which are
determined by the Assistant Secretary (Administration) to be necessary to
perform these functions and responsibilities shall likewise be transferred and
placed under the supervision of the Director of Personnel.
2. The Administration and Personnel Staff, Office of the Assistant Secretary
(International Affairs) (OASIA) is hereby abolished and all personnel
functions and responsibilities currently assigned to this staff are hereby
transferred from OASIA to the Office of Personnel. Such positions, personnel.
500
1977 REPORT OF THE SECRETARY OF THE TREASURY
records, and other property which are determined by the Assistant Secretaries
(Administration) and (International Affairs) to be necessary to perform these
functions and responsibilities shall likewise be transferred and placed under
the supervision of the Director of Personnel.
Existing delegations of personnel authority with respect to the operations of the
OSPD and the OASIA Administration and Personnel Staff are hereby cancelled and
revert to the Director of Personnel.
This Order amends Treasury Order No. 200 (Amendment 6), March 8, 1976, and
Treasury Order No. 202 (Revision 2), December 20, 1976.
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury.
No. 202-4, JUNE 29, 1977.—REORGANIZATION OF ENERGY FUNCTIONS
By virtue of the authority vested in me as Secretary of the Treasury, including the
authority vested in me by Reorganization Plan No. 26 of 1950, it is ordered that:
1. Certain energy functions currently assigned to the Assistant Secretary
(Intemational Affairs) are reassigned as follows:
a. The Assistant Secretary (Domestic Finance) is t o b e responsible for
those energy finance functions involving the analysis of and
development and coordination of policies relative to the role of
private capital markets in financing energy investments and the
effects of government policies and regulations on capital formation
in the energy sector.
b. The Assistant Secretary (Economic Policy) is to be responsible for:
(1) economic analysis of the consequences of international
and domestic energy proposals and policies; and
(2) monitoring energy-related regulations and legislation and
developing recommended Treasury positions on these
matters.
2. The Assistant Secretary (International Affairs) is responsible for formulating
and implementing Treasury Department policy and positions on questions
relating to international energy policy and for Treasury participation on
international energy matters in international fora, such as the International
Energy Agency, the United Nations Conference on Trade and Development,
the international financial institutions, the Organization for Economic
Cooperation and Development, and in bilateral relationships with foreign
countries.
3. The Assistant Secretaries (Administration), (Domestic Finance), (Economic
Policy), and (International Affairs) will determine which positions, personnel,
records, and property, currently assigned to the Assistant Secretary (International Affairs), are necessary to support the energy responsibilities reassigned
by the Order and reassign the personnel and other resources accordingly.
4. The Assistant Secretaries affected by this Order are authorized to define the
organizational structure and the specific responsibilities of the positions and
personnel assigned to them.
5. Treasury iDepartment Orders No. 202 dated December 20, 1976, No. 242
(Revision^!) dated May 17, 1977, and No. 242-1, May 11, 1976, are hereby
amended;
6. This Order is effective immediately.
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury.
EXHIBITS
501
No. 190 (REVISION 14), JULY 1, 1977.—SUPERVISION OF BUREAUS AND OFFICES,
DELEGATION OF CERTAIN AUTHORITY, AND ORDER OF SUCCESSION IN THE TREASURY
DEPARTMENT
1. The Deputy Secretary shall be under the direct supervision of the Secretary.
2. The following officials shall be under the supervision ofthe Secretary, and shall
report to him through the Deputy Secretary:
Under Secretary for Monetary Affairs
Under Secretary
General Counsel
Assistant Secretary (Tax Policy)
Commissioner, Intemal Revenue Service
Comptroller of the Currency
Assistant Secretary (Legislative Affairs)
Assistant Secretary (Economic Policy)
Assistant Secretary (Domestic Finance)
Assistant Secretary (Public Affairs)
Executive Secretary
3. The following officials shall be under the supervision of the Under Secretary
for Monetary Affairs, and shall exercise supervision over those officers and
organizational entities indicated thereunder:
Assistant Secretary (International 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 International
Monetary Group
Inspector General for Intemational Finance
(The Assistant Secretary (Domestic Finance) reports through the Under
Secretary for Monetary Affairs for debt management purposes.)
Fiscal Assistant Secretary
4. The following officials shall be under the supervision of the Under Secretary,
and shall exercise supervision over those officers and organizational entities
indicated thereunder:
Assistant Secretary (Administration)
Deputy Assistant Secretary
Office of Administrative Programs
Office of Audit
Office of Budget and Program Analysis
Office of Computer Science
Office of Equal Opportunity Program
Office of Management and Organization
Office of Personnel
Chief Deputy to the Under Secretary (Enforcement and Operations)
Office of Enforcement
Office of Operations
United States Secret Service
Bureau of Alcohol, Tobacco and Firearms
Federal Law Enforcement Training Center
United States Customs Service
Office of Foreign Assets Control
Treasurer of the United States
United States Savings Bonds Division
Director of the Mint
Bureau of the Mint
502
5.
6.
1977 REPORT OF THE SECRETARY OF THE TREASURY
Director, Bureau of Engraving and Printing
Bureau of Engraving a n d Printing
T h e following officials shall exercise supervision over those officers a n d
organizational entities indicated t h e r e u n d e r :
G e n e r a l Counsel
Deputy G e n e r a l Counsel
Legal Division
Office of Director of Practice
Office of Tariff Affairs
Assistant Secretary (Tax Policy)
Deputy Assistant Secretary for Tax Legislation
Deputy Assistant Secretary for Tax Policy E c o n o m i c s
Office of Tax Analysis
Office of Tax Legislative Counsel (also part of Legal Division)
Office of International Tax Counsel (also p a r t of Legal Division)
Office of Industrial E c o n o m i c s
Assistant Secretary (Legislative Affairs)
D e p u t y Assistant Secretary (Legislative Affairs)
Office of Legislative Affairs
Assistant Secretary ( E c o n o m i c Policy)
Deputy Assistant Secretary for Domestic E c o n o m i c Analysis
Office of Financial Analysis
Deputy Assistant Secretary for International E c o n o m i c Analysis
Assistant Secretary ( D o m e s t i c F i n a n c e ) (Also reports to U n d e r Secretary
for M o n e t a r y Affairs for d e b t m a n a g e m e n t purposes.)
Deputy Assistant Secretary for Capital M a r k e t s Policy
Office of Securities M a r k e t Policies
Office of Capital M a r k e t s Legislation
Deputy Assistant Secretary for State and Local F i n a n c e
Office of Municipal Finance
Office of the D e p u t y to the Assistant Secretary for New Y o r k
City Finance
Office of U r b a n E c o n o m i c s
Deputy Assistant Secretary for D e b t M a n a g e m e n t
Senior Adviser ( D e b t R e s e a r c h )
Office of G o v e r n m e n t Financing
Office of Agency Finance and M a r k e t Policies
Office of R e v e n u e Sharing
Assistant Secretary (Public Affairs)
Deputy Assistant Secretary (Public Affairs)
Office of Public Affairs
Fiscal Assistant Secretary
Deputy Fiscal Assistant Secretary
B u r e a u of G o v e r n m e n t Financial O p e r a t i o n s
Bureau of the Public D e b t
Commissioner of Internal R e v e n u e
Deputy Commissioner
Internal R e v e n u e Service
Comptroller of the C u r r e n c y
First D e p u t y C o m p t r o l l e r
Office of the C o m p t r o l l e r of the C u r r e n c y
T h e Deputy Secretary, the U n d e r Secretary for Monetary Affairs, the U n d e r
Secretary, the G e n e r a l Counsel, and the Assistant Secretaries are authorized
to perform any functions the Secretary is authorized to perform. Each of these
officials shall perform functions u n d e r this authority in his own capacity a n d
u n d e r his own title and shall be responsible for referring to t h e Secretary any
m a t t e r on which actions should appropriately be t a k e n by the Secretary. E a c h
of these officials will ordinarily perform u n d e r this authority only functions
which arise out of, relate t o , or c o n c e r n the activities or functions of, or t h e
503
EXHIBITS
7.
8.
laws administered by or relating to the bureaus, offices, or other organizational
units over which he has supervision. Any action heretofore taken by any of
these officials in his own capacity and under his own title is hereby affirmed
and ratified as the action of the Secretary.
The following officers shall, in the order of succession indicated, act as
Secretary ofthe Treasury in case ofthe death, resignation, absence, or sickness
of the Secretary and other officers succeeding him, until a successor is
appointed, or until the absence or sickness shall cease:
A. Deputy Secretary
B. Under Secretary for Monetary Affairs
C. Under Secretary
D. General Counsel
E. Assistant Secretaries, or Deputy Under Secretaries, appointed by the
President with Senate confirmation, in the order in which they took
the oath of office as Assistant Secretary, or Deputy Under Secretary.
Treasury Department Orders No. 190 (Revision 13) and No. 190 (Revision
13—Amendment 1) are rescinded effective this date.
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury.
No. 202 (REVISION 3), AUGUST 25, 1977.—ORGANIZATION AND RESPONSIBILITIES
OF THE O F F I C E O F T H E A S S I S T A N T SECRETARY (INTERNATIONAL A F F A I R S )
By virtue of the authority vested in the Secretary of the Treasury, including the
authority vested in me by Reorganization Plan No. 26 of 1950, it is ordered that:
1. The Assistant Secretary (International Affairs) is the principal advisor to the
Secretary of the Treasury and the Under Secretary (Monetary Affairs) in
exercising policy direction and control over Treasury Department positions in
areas dealing with intemational financial, economic, monetary, trade, and
cominercial matters as well as energy policies and programs.
2. Within the Office ofthe Assistant Secretary (Intemational Affairs) (OASIA),
there are four Deputy Assistant Secretaries: Developing Nations, International
Monetary Affairs, Trade and Investment Policy, and Commodities and Natural
Resources. The functions and responsibilities of the Deputy Assistant
Secretaries are defined by the Assistant Secretary and the Deputy Assistant
Secretaries serve under the policy guidance of the Assistant Secretary. Each
Deputy Assistant Secretary supervises a number of offices managed by
Directors. The functions and responsibilities of the Deputy Assistant Secretaries shall include, but not be limited to, the following:
a. Deputy Assistant Secretary (Developing Nations)
(1) The Office serves as the principal policy advisor to the
Assistant Secretary in formulating and implementing
Treasury Department positions on U.S. economic and
financial programs with respect to developing nations. The
Office helps initiate, review, and oversee U.S. policies
toward the less developed nations on such issues as debt
owed to private and public sector entities, foreign assistance, food, population and financial policies, and evaluate
the development and financial impact on the less developed nations of U.S. policies on trade, investment and
commodities. Staff support is provided to senior Treasury
officials in the formulation of U.S. policies on developed/
developing nations relations generally, especially in connection with multilateral fora such as the UN General
Assembly, UN Conference on Trade and Development
(UNCTAD) and the IBRD/IMF Development Committee
and its subordinate bodies. The Office maintains represen
504
1977 REPORT OF THE SECRETARY OF THE TREASURY
b.
tatives in key developing nations who are responsible for
analyzing local economic conditions and recommending
appropriate policies. It also maintains liaison with and
reviews policies of other USG agencies on development
issues.
(2) The Office provides comprehensive analyses and forecasts
of the economic, financial and political situation in
developing countries for use in formulating Treasury
policy on financial assistance, debt rescheduling, and
other matters. The Office collects and maintains data on
all LDCs including the OPEC countries, giving particular
attention to balance of payments, official and private
capital flows, debt and IMF credit. The Office also has the
responsibility for providing support to the Secretary of
Treasury in his capacity as a member of the joint economic
commissions which have been established with individual
developing countries, other than Saudi Arabia.
(3) The Office formulates, reviews, and oversees Treasury
Department positions on policies, operations, and activities of the international lending institutions and the
activities of the Intemational Monetary Fund related to
developing nations. The Office maintains liaison with and
reviews policies of international. United States, and
interagency development finance and policy formulating
bodies, such as the Development Assistance Committee of
the OECD and the Development Loan Staff Committee.
The Office administers the Secretariat of the Natibnal
Advisory Council on International Monetary and Financial pohcies (NAC). The NAC operates under the authority of Executive Order No. 11269.
Deputy Assistant Secretary (Intemational Monetary Affairs)
(1) The Office serves as the principal policy advisor to the
Assistant Secretary in formulating and implementing
Treasury Department policies concerned with (a) the
maintenance and operation of a smoothly-functioning
intemational monetary system, including the role of the
private money and capital markets; (b) coordination of
economic policy among industrial nations; (c) the development and conduct of U.S. financial relations with the
market economy industrial nations; (d) monetary relationships with the U.S. Govemment sought by other
nations; (e) foreign exchange operations and management
of U.S. reserve assets; (f ) internatiorial borrowing, portfolio investment and insurance. In carrying out these
functions the Office provides support for U.S. participation in multilateral financial institutions, principally the
International Monetary Fund and the OECD, as well as in
other fora related to its functional areas of responsibility.
(2) The Office provides analyses and forecasts of economic
developments in and policies of the major industrial
nations, both domestic and external. It maintains Treasury
Department representatives in key industrial countries
and in the OECD. It also analyzes and forecasts regional
and global payments patterns and their implications for
the functioning of the monetary system.
(3) With guidance furnished by senior Treasury Department
officials, direction is given to the Federal Reserve Bank of
New York concerning ESF operations and liaison is
maintained to assure that foreign operations of the Federal
EXHIBITS
505
Reserve System are coordinated. In this regard, foreign
exchange markets are intensively monitored. Continuing
oversight ofgold markets and related developments is also
maintained.
(4) The Office provides analyses and assembles information
relevant to international banking, portfolio investment
and insurance matters and the international practices of
U.S. and foreign banks, their regulatory authorities and
the impact of their activities on the operation of the
intemational monetary system.
c. Deputy Assistant Secretary (Trade and Investment Pohcy)
The Office serves as the principal policy advisor to the Assistant
Secretary in the areas of trade policy, trade with nonmarket
economy countries, and intemational investment.
(1) The Office formulates and implements Treasury Department positions on: (a) U.S. trade and commercial pohcy
in general; (b) multilateral and bilateral trade negotiations; (c) trade finance matters; (d) U.S. military sales
abroad; (e) U.S. economic relationships with the U.S.S.R.,
Eastem Europe, China, and such other nonmarket economy countries as may be designated, including support for
operations of-the East-West Foreign Trade Board and its
Working Group; (f ) programs in relation to the Secretary's responsibilities for trade relations with other countries; (g) direct investment issues, including matters
pertaining to multinational corporations; expropriation
and the Overseas Private Investment Corporation, and (h)
serves as Secretariat for the interagency Committee on
Foreign Investment in the United States established by
Executive Order No. 11858.
d. Deputy Assistant Secretary (Commodities and Natural Resources)
(1) The Office serves as the principal policy advisor to the
Assistant Secretary iri formulating and implementing
Treasury Department policy and positions on questions
relating to (a) intemational energy policy, with special
emphasis on the economic, financial and investment
aspects of such policy, (b) other basic natural resources,
particularly non-fuel minerals and agricultural commodities, (c) U.S. commodity policy, and (d) oceans policy
matters, including "Law of the Sea" negotiations.
(2) In carrying out these functions, the Office (a) assembles
information and provides analyses relevant to the formulation of commodity and international energy policies; (b)
advises the Assistant Secretary and senior Treasury
officials on economic and financial implications of natural
resource and intemational energy issues which may be
considered at inter-agency or international levels; (c)
develops and implements Treasury Department policy
with respect to natural resource issues arising in international fora, such as the Intemational Energy Agency, the
United Nations Conference on Trade and Development,
the Development Committee of the International Monetary Fund and the International Bank for Reconstruction
and Development (IMF/IBRD) and various committees of
the Organization for Economic Cooperation and Development (OECD).
Within the Office ofthe Assistant Secretary (International Affairs), there also
are the Office of the Deputy to the Assistant Secretary (Saudi Arabian
Affairs), the Deputy to the Assistaiit Secretary and the Secretary of the
506
4.
5.
1977 REPORT OF THE SECRETARY OF TKE TREASURY
International M o n e t a r y G r o u p , the Office of the Inspector G e n e r a l , t h e
Administrative and Personnel Staff, and the OASIA Secretariat. T h e functions
and responsibilities of these offices, which are defined by the Assistant
Secretary, are:
a. T h e Office of the D e p u t y to the Assistant Secretary (Saudi Arabian
Affairs) is c o m p o s e d of an Office of Saudi Arabii>n Affairs in
Washington and an Office of the U.S. Representation io the Joint
Commission in Riyadh, Saudi Arabia, and serves as the principal
policy advisor to t h e Assistant Secretary in formulatii"\g a n d
implementing t h e projects and p r o g r a m s u n d e r t a k e n by the U.S.Saudi A r a b i a n Joint Commission o n E c o n o m i c C o o p e r a t i o n established on J u n e 8, 1974, and chaired by the Secretary o f t h e Treasui'y.
T h e Office is also responsible for t h e d e v e l o p m e n t of Treasury
D e p a r t m e n t policy with respect to U.S. e c o n o m i c relations with
Saudi Arabia.
b. T h e D e p u t y t o t h e Assistant Secretary and Secretary of t h e
International M o n e t a r y G r o u p serves as a policy advisor to t h e
Assistant Secretary in the formulation and implementation of
policies relating to t h e international m o n e t a r y system. In this
c o n n e c t i o n he serves as Executive Secretary of t h e International
M o n e t a r y G r o u p , an interagency body chaired by the U n d e r
Secretary for M o n e t a r y Affairs, which consults with the U n d e r
Secretary o n substantive m a t t e r s and o n negotiatirig positions; in this
capacity he provides d o c u m e n t a t i o n to t h e G r o u p for both briefing
and c u r r e n t updating purposes.
c. T h e Office of the Inspector G e n e r a l provides the Assistant Secretary
and o t h e r senior level Treasury D e p a r t m e n t officials with a reliable
and i n d e p e n d e n t internal appraisal of selected international financial
activities and p r o g r a m s for which O A S I A has primary operational
responsibility. T h e Inspector G e n e r a l also performs such reviews as
r e q u e s t e d . Major areas of c o n c e r n include the efficiency and
e c o n o m y of the use of U.S. investments in t h e International
M o n e t a r y F u n d , the International Bank for Reconstruction a n d
D e v e l o p m e n t , and regional multilateral banks, as well as p r o c e d u r e s
governing the use of t h e ESF.
d. T h e Administrative Staff and O A S I A Secretariat perform administrative and other s u p p o r t operations for the Assistant Secretary.
W i t h the exception of t h e Office of the Inspector G e n e r a l , the Assistant
Secretary may reassign p r o g r a m s , functions, and associated positions a n d
r e s o u r c e s a m o n g the s u b o r d i n a t e offices established above as d e e m e d
necessary, consistent with the policies and p r o c e d u r e s governing the E S F .
This O r d e r supersedes Treasury O r d e r N o . 2 0 2 (Rev. 2 ) , D e c e m b e r 20, 1976.
Treasury O r d e r s N o . 9 4 , N o . 109 and N o . 186-1 are rescinded.
ROBERT CARSWELL,
Acting Secretary of the Treasury.
N o . 2 5 0 - 2 ( R E V I S I O N 1)^ S E P T E M B E R 2 3 , 1 9 7 7 . — E S T A B L I S H M E N T O F THE O F F I C E O F
T A R I F F A F F A I R S IN THE O F F I C E O F THE G E N E R A L C O U N S E L AND THE D E L E G A T I O N O F
A U T H O R I T Y T O T H E D E P U T Y A S S I S T A N T SECRETARY ( T A R I F F A F F A I R S )
U n d e r authority of T r e a s u r y D e p a r t m e n t O r d e r s Nos. 190 (Revised) and 2 5 0 - 1 , t h e
Office of Tariff Affairs is established within the Office of the G e n e r a l Counsel. P u r s u a n t
t o the authority delegated to m e by those o r d e r s , I hereby delegate to the D e p u t y
Assistant Secretary (Tariff Affairs) the following authority, subject to the limitations
prescribed herein:
1. T o supervise t h e Office of Tariff Affairs and to m a k e r e c o m m e n d a t i o n s
relative to the e m p l o y m e n t , p r o m o t i o n and evaluation of personnel therein.
507
EXHIBITS
2.
3.
4.
5.
6.
To review all antidumping and countervailing duty cases investigated by the
United States Customs Service and to recommend their disposition to the
General Counsel.
To represent the General Counsel on Departmental, interdepartmental and
international meetings or committees concerned with tariff matters within the
jurisdiction of the General Counsel's office.
To handle all other matters falling within the responsibility of the Office of
Tariff Affairs, or as further assigned by me.
In the absence of both the General Counsel and the Deputy General Counsel,
the Deputy Assistant Secretary (Tariff Affairs) will sign antidumping and
countervailing duty notices and determinations in his own name and under his
own title.
In other respects the Office of Tariff Affairs will conform to the orders and
directives issued for the administration of the Legal Division.
ROBERT H. MUNDHEIM,
General Counsel.
INDEX
Page
Accounting and reporting
156-8
Account of the U.S. Treasury
6, 158-9
Administrative management
111-25
Advisory committees
112, 142, 156-7, 189
African Development Bank/Fund
89, 96-7, 462-72
Agency for Intemational Development
103, 112, 185
Agreements, commodity
62-6, 107, 207, 382-8
Alaskan natural gas transportation
66
Alcohol, Tobacco and Firearms, Bureau of, administrative report
125-36
Antidumping
40, 205, 211, 216-17
Antinarcotics program
45
Antirecession fiscal assistance
41, 115-16, 140, 199-204
Articles of Agreement, IMF
83-4
Asian Development Bank
89, 95-6, 462-72
Automated merchandise processing system
215-16
B
Balance of payments
Banking and cash management
Bank Secrecy Act
Bicentennial observances
Bills, Treasury:
Operations
..,
Press releases
Bonds, Treasury:
Operations
Summary, issues
Bonds, U.S. Savings:
Forgery
Issuance and redemption
Promotional activities
Regulations, revised and amended
Bribery
Buffer stock facility
Byrd Amendment, repeal of
38-40, 72-3, 430
160-2
43-5, 302-9
194, 223
15-33
249-53
,
244-8
248
229-30
166-9
223-7
267-8
190,348-52
63-5, 85-6, 382-8
42, 170
Capital investment
286-91, 328-31
Capital markets policy
36, 286-301, 314
Cargo theft prevention
208-9
Cash and monetary assets
3, 6
Charts:
Budget 1967-77
4
Market yields at constant maturities, 1972-77
9
Organization of the Department of the Treasury
XVII
Ownership of Federal securities, September 30, 1977\
14
Private holdings of marketable Federal securities, fiscal years 1972-77
11
Checks, Treasury:
Claims
156, 160
Forgery
,
229
509
510
INDEX
Page
Issued
155
Unit cost
155
Circulars, Department
239-70
Claims against foreign govemments, payment of
164
Claims modemization project
156
Coffee agreement
64-5, 207
Coins, production of
195-7
Commodities and natural resources policy
62-72, 375-97
Conunon fund
62-3, 382-8
Compensatory financing facility
85-6
Comptroller ofthe Currency, Office ofthe, administrative report
136-9
Conaputer Science, Office of, administrative report
139-41
Conference on Intemational Economic Cooperation
63, 67-9, 472-6
Conscience fund
164
Consumer protection
130, 137-8
Corporation income taxes. See Taxation: Income and profits taxes.
Coiporations and other business-type activities of the Federal Govemment,
review
:
6-7
Counterfeiting
228-9
Countervaihng duty
40, 205, 216-17
Criminal enforcement
126-9
Criminal investigator training
:
152
Currency:
Issuing and redeeming
159-60
Production
143, 144
Currency and Foreign Transactions Reporting Act
44-5, 212, 301-2
Customs (see also Enforcement and operations, review):
Intemational activities
216-19
Modemization
215-16, 309-12
Receipts
4-5
U.S. Customs Service, administrative report
205-23
D
Debt management. See Federal debt: Management.
Deep seabed mining
69-71, 379-82, 388-97
Deficit, budget
3
Depositary services
158, 161
Deposits, withdrawals, and balances in U.S. Treasury account
159
Developing nations
89-107, 456-79
Development Conmiittee
62, 99-101, 456-8
Director of Practice, Office of, administrative report
141-2
Disbursing operations
154-5
Domestic finance, review
8-37
Domestic interaational sales corporation
52, 188
Drug seizures
206, 214, 215, 218
East-West trade
56
Economic policy, review
.
^
37-42, 286-301
Electronic funds transfer
i
36, 116, 154-5, 162, 201, 229
Emergency preparedness ^
113-14
Employee plans
177
Employee Retirement Income Security Act of 1974
174, 177, 188
Energy pohcy
66, 67-8, 124, 221, 319-27, 335-48, 431-2
Enforcement activities:
Alcohol, Tobacco and Firearms, Bureau of
126-32
Foreign Assets Control, Office of
169-70
INDEX
511
Page
Internal Revenue Service
U.S. Customs Service
Enforcement and operations, review
Engraving and Printing, Bureau of, administrative report
Environmental programs
Equal Opportunity Program:
Office of, administrative report
Other reports
Estate and gift taxes. See Taxation.
Explosives control program
Export-Import Bank of the United States
Extended Fund Facility
178-80, 182-3
209-15
42-5
143-7
123-4
147-50
134-5, 136, 193, 227
128, 130, 131, 134
56-7, 352-3
81, 86
Federal debt (see also Public debt):
Changes in Federal securities
11-12
Disposition of marketable Treasury securities
32
Financing operations
15-33
Government-sponsored agency debt
10
Management, review
8-33
Offerings of marketable Treasury securities
17
Ownership ofpublic debt securities
12-14
Policy
274-81
Federal Financing Bank
7, 33-5, 163, 271-4
Federal Law Enforcement Training Center, administrative report
150-3
Federal tax deposit system
161, 162
Financial operations, review
3-8, 278-81
Financial recordkeeping and reporting
43-5, 102
Firearms control program
126-8, 130, 131, 133, 135
Food coupon production
143
Foreign Assets (Control, Office of, administrative report
169-70
Foreign currency management and reporting
102, 160-1
Foreign exchange developments and operations
;
74-9
Foreign indebtedness
101-2, 164
Foreign portfoho investment
58
Fraud investigation
182, 210-11, 217-18
Freedom of information
136, 183, 227, 233
General Agreement on Tariffs and Trade (GATT)
429
General Counsel, Office ofthe, review
40-2
Gold
84,86-7, 158, 162-3, 195, 197, 198,413-16
Govemment corporations. See Corporations and other business-type activities
of the Federal Government.
Govemment Financial Operations, Bureau of, administrative report
154-66
Govemment losses in shipment
163
Govemment-wide financial management
7-8
H
Historical Association, Treasury
)
I
Illicit liquor
Income taxes. See Taxation.
Indebtedness of foreien govemments to the United States
Inter-American Development Bank
Intergovemmental Antirecession Assistance Act of 1977
125
:.
129
101-2, 164
93-5, 461-2
41, 199, 200, 202, 204
512
INDEX
Page
Interim Committee
80-2, 86, 397-9, 426-8, 450-2
Internal revenue, collections and refunds
171
Intemal Revenue Service (see also Director of Practice):
Administrative report
170-94
Advisory panel
189
Taxpayer service
172-3, 186-7
International affairs, review
53-107, 348-479
Interaational Bank for Reconstruction and Development
80, 399-410, 456-8
Interaational Banking Act of 1977
88, 441-5
Interaational Development Association
89, 409
Interaational Energy Agency
69
Interaational Finance Corporation
89, 101
Interaational investment
57-8, 88
Interaational Investment Survey Act of 1976
57
Interaational Monetary Fund
7-8, 80-7, 99-100, 397-407, 410-16, 426-8, 434-41,
450-6
Interaational Resources Bank
99, 101
Interaational Seabed Authority
70, 379-82, 388-97
Interaational tax matters
53, 183-5
Interpol
43
Introduction
XIX-XXXIV
Investigative activities:
Alcohol, Tobacco and Firearms, Bureau of
128, 135-6
Interaal Revenue Service
178-80, 182, 189-91
U.S. Customs Service
210-11, 220
U.S. Secret Service
228-30
Joint Financial Management Improvement Program
Joint U.S.-U.S.S.R. Commercial (Commission
Law ofthe Sea
Letters of credit
Loan guarantee programs
London economic summit
8, 163
367-8
69-71, 379-82, 388-97
161, 162
271-4, 281-6
54-5, 80, 428-32
M
Management by objectives
Merchandise processing
Metrication
Middle East policy
Mint, Bureau of the, administrative report
Multilateral trade negotiations
112, 191
206-7
130-1
105-6
194-9
54-6
N
Narcotics trafficker program
New York City. See State and local fmance, review.
Notes, U.S. Government (see also Currency):
Operations
;
Summary, issues
,.
Numismajtic services
45, 182, 214
239-43
243
198-9
O
Officers, administrative and staff of the Department of the Treasury ... XI-XVI, 480-9
Oil facility, IMF
84, 87
Operation Concentrated Urban Enforcement (CUE)
116, 126-7, 131
INDEX
513
Orderly marketing agreement
.._.!;.!; o 207
Orders, Department ofthe Treasury
>.<^.....
'. ....................;;;»... 490-507
Organization chart of the Department qf-ttie Treasury
....!;;...... ...L.^i^!.,.. XVII
Organization for Economic Cooperation a n d Development ........... 53, 55, 6 0 - 1 , 7 1 , 87,
^••c~-^..- .,
irr
--^r u^
)-j-. - 437-41
Organization of Petroleum Exporting Countries
66, S8, 104-5, 4i7-20, 433-4
Outlays:/
1967-77 budget (chart)
.......;.........
4
By major agency
...!i.!..i
;.
5
Overseas Private Investment Corporation
il...
58-9, 62, 370-4
Panama C!anal Treaty
Paperwork management program
Pension plans
..:..
Police training
Postage stamp production
Postal Savings System, liquidation
Privacy Act of 1974
Protectionism
Protective operations
PubHc Law 480
Pubhc debt (see also Federal debt):
Bureau of the, administrative report
Donations toward*^^reduction of
Regulations, amended and revised
Statutory hmit
476^8
122-3, 135, 191-2,221
,
175, 177, 188
152-3
143, 144-5
163
123, 136, 140, 183, 227, 233
55
,
231-2
103-4
"
^
166-9
164
239-70
274-7, 286
'..
Receipts:
1967-77 budget (chart)
Budget
;
:
Customs
Interaal Revenue
Reconstruction Finance Corporation
Regulatory enforcement
Revenue Sharing, Office of, admiiiistrative report
,
Safety program
Significant Criminal Enforcement Project
State and local finance, review
State and Local Fiscal Assistance Amendments of 1976
Strike force program
Sugar agreement
:
Supplemental security income program
Supplementary Financing Facility
Tariff Aifairs, Office:of, administrative report
Taxation (see also Interaal Revenue Service):
Employment taxes, receipts
Energy tax proposals
Estate and gift taxes, receipts
Excise taxes, receipts
Federal tax deposits
;
4
3-5
5
4-5, 171
163
129-32
199-204
124, 147, 152
127
36-7
41, 200, 202-3
128-9, 182, 231
64
154-229
80-2, 445-50
\
1
205
\
4-5
48-50, 319-27, 335-48
4-5
4-5
...161, 162
514
INDEX
^
" ,
Page
Income and profits taxes:
Corporation, receipts
.,
4-5
Individual, receipts
..^...
4
Interaational activities
...:
53, 183-5
Pohcy, review
45-53, 312-48, 393-7
Proposal for basic tax reform
50, 52, 316-17, 331-5
Tax Reduction Act of 1975
46, 176
Tax Reduction and Simplification Act of 1977
46-8, 157, 171, 174, 184, 187
Tax Reform Act of 1976 ......... 46, 131, 157, 171, 174, 175-6, 180, 183, 184, 187-8
Tax treaties
..53, 184
Tin agreement
65, 384
Trade Act of 1974
54, 56, 59-60, 216, 368-70
Trade and investment policy
53-62, 348-74, 430-1
Treasury enforcement communications system
135, 208, 209-10, 212-13
Treasury payroll/personnel information system
112, 114, 134, 139, 198,233,235
Troika
38
Trust fiind, IMF
86-7
'
;
;
,
•
:
'
" . ;
.
•
:
u
•
.
\ : • ^ • . ' , • • • ; . ; . • • • •
United Nations Conference on Trade and Development ........... 61, 63, 65-6, 68, 474-6
United States-Saudi Arabian Joint Commission on Economic Cooperation ..... 57, 122,
353-7
Upward mobility program
146, 165, 193, 227
u!s. Customs Service, administrative report
205^3
U.S. savings bonds. See Bonds, U.S. Savings.
U.S. Savings Bonds Division, administrative report
223-7
U.S. Secret Service, administrative report
......;..:
228-36
U.S.-U.S.S.R; Trade and Economic Council
...........;...
56
W
Wheat ,.
World Bank group
World economic and financial developments
64-5
89-93, 100-1, 407-10, 461, 466-9
71-9, 361-7
Z.;
Zero-base budgeting .,...
Ill, 112, 116, 149, 198
@FedFRASER