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H^
fio

Annual Report
of the

Secretary of the Treasury
on the

State of the Finances
For the Fiscal Year Ended June 30, 1967

TREASURY DEPARTMENT
DOCUMENT NO. 3242
Secretary

UNITED STATES GOVERNMENT PRINTING OFFICE, WASHINGTON : 1968
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402 - Price 32.75 (paper cover)

]Ul

. ISSI

CONTENTS
Page

Statement by the Secretary of the Treasury

xvii

REVIEW OF FISCAL OPERATIONS
Financial operations
...
Administrative budget receipts and expenditures
Trust receipts and expenditures
.
Budget estimates
.
__
Corporations and other business-type activities of the Federal Government.
Account of the Treasurer of the United States
.
Government-wide financial management
Public debt management and ownership...
Financing operations.
.
Ownership of Treasury securities
.
Taxation developments..
.
.
International financial affairs
.
.

3
4
6
7
8
9
10
12
16
24
28
39

ADMINISTRATIVE REPORTS
Administrative management
_
Comptroller of the Currency, Office of the
Customs, Bureauof
.
•,
Director of Practice, Office of the
Domestic Gold and Silver Operations, Office of
Engraving and Printing, Bureau of
Fiscal service
Accounts, Bureau of
Public Debt, Bureau of the.
Treasurer of the United States, Office of the
Foreign Assets Control, Office of.
Internal Revenue Service..--._
Muit, Bureau ofthe
.
Narcotics, Bureau of
.-..
U.S. Coast Guard
..
.
U.S. Savings Bonds Division
U.S. Secret Service
.
— .

-._

.
.

57
61
65
75
76
77
82
82
87
92
98
99
112
120
126
141
144

EXHIBITS
PUBLIC DEBT OPERATIONS. REGULATIONS, AND LEGISLATION

Treasury Certificates of Indebtedness and Treasury Notes
Offered and Allotted
1. Treasury certificates of indebtedness
2. Treasury notes
.

153
155

Treasury Bills Offered and Tenders Accepted
3. Treasury bills

165

Regulations
4. First amendment, February 24, 1967, of Department Circular No. 300,
general regulations with respect to U.S. securities
...
5. Third amendment, March 3, 1967, of Department Circular No. 418,
United States of America Treasury bills
.
6. Second amendment, August 16, 1966, of Department Circular No. 530,
regulations governing U.S. savings bonds

175
175
176

CONTENTS
Page

7. Third amendment, February 24, 1967, of Department Circular No. 530,
regulations governing U.S. savings bonds
.
8. Second amendment, August 19, 1966, of Department Circular No. 653,
offering of U.S. savings bonds. Series E
.
9. Third amendment, February 23, 1967, of Departrnent Circular No. 653,
offering of U.S. savings bonds. Series E__
.
10. Second amendment, August 16, 1966, of Department Circular No. 905,
offering of U.S. savings bonds, Series H
^
11. Third amendment, August 16, 1966, of Department Circular No. 906,
U.S. savings bonds. Series J and Series K
.
12. February 22, 1967, Department Circular PubHc Debt Series No. 3-67,
offering of U.S. savings notes
13. February 24, 1967, Department Circular PubHc Debt Series No. 4-67,
regulations governing agencies for the issue of U.S. savings bonds of
Series E and U.S. savings notes
;

177
178
179
181
186
187
190

Legislation
14. An act to provide, for the period ending on June 30, 1967, a temporary
increase in the public debt limit set forth in section 21 of the Second
Liberty Bond Act
I
15. An act to increase the public debt limit set forth in section 21 of the
Second Liberty Bond Act, and for other purposes

192
193

FINANCIAL POLICY

16. Letter from Secretary Fowler to Representative Ullman, July 12, 1966,
and Representative Ullman's letter to the President, June 27, 1966, on
fiscal and monetary policies and increased interest rates
17. Letter from the Secretary of the Treasury to the chairman of the Senate
Banking and Currency Committee, August 2, 1966, concerning the
administration's position on pending legislatiori relative to interest
rates of financial institutions
.
18. Statement, by Secretary Fowler, September 21, 1966, before the
National Industrial Conference Board, New York City, on financial
and economic policy
l
19. White House press release, October 16, 1966, on memorandum to the
President from Secretary Fowler, on the current status of the
economy
.
20. Remarks by Secretary Fowler, November 18, 1966, before the U.S.
Savings and Loan League, New York City, on financial and economic
policy
.......
21. Statement by Secretary Fowler, February 6, 1967, before the Joint
Economic Committee, on economic and financial policies and
programs
22. Other Treasury testimony published in hearings before congressional
committees, July 1, 1966-June 30, 1967

193

196
197
201
203
210
225

PUBLIC DEBT AND FINANCIAL MANAGEMENT

23. Press release, September 10, 1966, concerning Federal agency financing and participation sales
24. Report by Secretary Fowler to the Congress, November 24, 1966,
on the feasibility, advantages, and disadvantages of direct loan
programs compared to guaranteed or insured loan programs
25. Statement by Secretary Fowler, before the Senate Finance Committee, February 15, 1967, on the public debt limit
26. Supplementary statement by Secretary Fowler, May 15, 1967, before
the House Ways and Means Committee, on the coverage of the
public debt limit
27. Statement by Secretary Fowler, June 23, 1967, before the Senate
Finance Committee, on the public debt limit
..
28. Remarks by Under Secretary Barr, October 6, 1966, before the Third
Annual Corporate Pension Conference, New York City, on the
financial management of Federal credit programs in the Great
Society
.

225
229
247
251
253

260

CONTENTS

V
Page

29. Excerpts from remarks by Under Secretary Barr, February 4, 1967,
before the American Institute of Banking, New York, N.Y., on
financing a college education
30. Excerpts from remarks by Under Secretary Barr, June 18, 1967,
before the International Conference for Credit Union Executives,
Miami Beach, Fla., on the problems and perspectives, in the financing of a higher education
31. Remarks by Deputy Under Secretary for Monetary Affairs Sternlight, November 18, 1966, before the annual convention of the
U.S. Savings and Loan League, New York City, on the changing
mix of Federal debt management
32. Other Treasury testimony published in hearings before congressional
committees, July 1, 1966-June 30, 1967
.
...

265

269

273
278

TAXATION DEVELOPMENTS

33. Statement by Secretary Fowler, September 12, 1966, before the
House Committee on Ways and Means, on H.R. 17607, a bill to
suspend the investment credit and accelerated depreciation
34. Statement by Secretary Fowler, March 20, 1967, before the Senate
Finance Committee on H.R. 6950, a bill to reinstate the 7 percent
investment credit and accelerated depreciation
35. Letter from Secretary Fowler to Senator Smathers, March 21, 1967,
on the restoration of the investment credit and accelerated depreciation
.
36. Letter from Secretary Fowler to Senator Long, April 4, 1967, on
proposals to repeal the Presidential Election Campaign Fund Act
of 1966
37. Remarks by Secretary Fowler, April 10, 1967, at the annual meeting
of the Kentucky Chamber of Commerce, Louisville, on the uses of
tax policy
38. Statement by Assistant Secretary Surrey, March 1, 1967, before the
House Committee on Ways and Means, on title V of H.R. 5710,
relating to the tax treatment of the elderly
39. Remarks by Assistant Secretary Surrey, March 9, 1967, before the
Tax Executives Institute Midyear Conference, Washington, D . C ,
on current developments in the U.S. treatment of international
tax matters
40. Remarks by Assistant Secretary Surrey, April 29, 1967, before the
Federal Tax Institute of New England, Boston, on current developments in tax policy
41. Other testimony by Treasury officials published in hearings before
congressional committees, July 1, 1966-June 30, 1967

279
286
290
291
291
.
299

304
307
313

INTERNATIONAL FINANCIAL AND MONETARY DEVELOPMENTS

42. Statement by Secretary Fowler, August 1, 1966, at a news conference
on The Hague meeting of the Group of Ten countries
43. Communique of the Ministerial Meeting of the Group of Ten in The
Hague, July 25-26, 1966
44. Remarks by Secretary Fowler as Governor for the United States,
September 28, 1966, at the annual meeting of the International
Monetary Fund, on steps toward a more rational world economic
order
45. Statement for the press, September 29, 1966, by Secretary Fowler on
the 1966 annual meeting of the International Monetary Fund and
the International Bank for Reconstruction and Development
46. Remarks by Secretary Fowler, as Governor for the United States,
. November 25, 1966, at the inaugural meeting of the Asian Development Bank, Tokyo, Japan
47. Statement by Secretary Fowler, December 13, 1966, on the balanceof-payments program for 1967
48. Remarks by Secretary Fowler, March 17, 1967, at the 14th Annual
Monetary Conference of the American Bankers Association, on a
world monetary system for a Greater Society of Nations

313
315

316
323
323
326
327

CONTENTS
Page

49. Remarks by Secretary Fowler as Governor for the United States and
Chairman of the Board of Governors, April 24, 1967, at the inaugural
session of the eighth annual meeting of the Inter-American Development Bank
50.. Statement by Secretary Fowler, May 3, 1967, before the Subcommittee
on International Finance of the House Committee on Banking and
Currency, on increasing the resources of the Fund for Special Operations of the Inter-Ameri can Development Bank
51. Remarks by Under Secretary Barr, August 16, 1966, at ceremonies
marking deposit of the U.S. Instrument of; Ratification of the
Asian Development Bank
..
52. Remarks by Under Secretary Barr, April 20, 1967, before the Contemporary Club, Indianapolis, Ind_.
'
53. Excerpts from remarks by Under Secretary for Monetary Affairs
Deming, July 14, 1966, at the Third International Investment
Symposium, on economic growth and international liquidity.
54. Remarks by Under Secretary for Monetary Affairs Deming, October
31, 1966, at the International Finance Session of the 53d National
Foreign Trade Convention, on the international monetary and
payments system
:
55. Excerpts from remarks by Under Secretary for Monetary Affairs
Deming, December 8, 1966, before the Economic Club of Chicago,
on the U.S. balance of payments and international liquidity
56. Remarks by Assistant Secretary Davis, March 1, 1967, before the
Zurich Economic Society, Zurich, Switzerland, on the opportunities
and risks of financing world progress.
..
57. Remarks by Assistant Secretary Knowlton, May 2, 1967, before the
World Affairs Council, on the U.S. balance-of-payments problem:
a long-range strategy
.
......
58. Treasury and Federal Reserve foreign exchange operations, FebruarySeptember 1966
L
59. Treasury and Federal Reserve foreign exchange operations, September
1966-March 1967
60. Press release, August 18, 1966, announcing a U.S. drawing from the
International Monetary Fund. .:
L
61. Press release, September 15, 1966, announcing a., $70.8 million debt
prepayment by France
...
62. Press release, September 16, 1966, announcing publication of the
results of a survey of export
financing
l
.
63. Press release, September 29, 1966, announcing purchase by Italy of
$145 million in debt from the United States...:
64. Press release, November 17, 1966, on settlement of 1929 loan to
Greece
.1:
65. Press release, December 30, 1966, announcing a technical drawing by
the United States from the International MoneWy Fund
66. Press release, January 25, 1967, announcing that Treasury is recommending an extension and increase in maximum rate of the interest
equalization tax and Presidential authority to yary rates
.
67. Joint release. May 2, 1967, of the Treasury Department and Federal
Reserve Board on exchange of letters on German reserve policy
68. Press release. May 2, 1967, announcing the sighing of an exchange
agreement by the United States and Argentinai -.
69. Press release, June 26, 1967, announcing an increase in the amount of
the exchange stabilization agreement between the United States
and Mexico
^
70. Other Treasury testimony published in,hearings before congressional
committees, July 1, 1966-June 30, 1967
_.
SILVER LEGISLATION

337

340
343
344
350

353
360
364
368
374
383
391
392
392
393
393
394
394
396
398
398
399

)

71. An act to authorize adjustments in the amount of outstanding silver
certificates and for other purposes
.
.

400

ORGANIZATION AND PROCEDURE

72. Treasury Department orders relating to organization and procedure..

400

/
CONTENTS

VII

ADVISORY COMMITTEES
Page

73. Advisory committees utilized by the Treasury Department under
Executive Order 11007
.
.
.
TABLES

Bases of tables..

410
435

SUMMARY OF FISCAL OPERATIONS

1. Summary of fiscal operations, fiscal years 1940-67 and monthly 1967. .

438

RECEIPTS AND EXPENDITURES

2. Receipts and expenditures, fiscal years 1789-1967..
3. Refunds of receipts and transfers to trust funds, fiscal years 1931-67..
4. Administrative budget receipts and expenditures, fiscal years 1965,
1966, and 1967
.
.
...
5. Trust receipts and expenditures, fiscal years 1965, 1966, and 1967
6. Investments in public debt and agency securities (net) fiscal years
1965, 1966, and 1967
.
7. Purchases of participation certificates by trust accounts (net), fiscal
year 1967
..
.
.
8. Sales and redemptions of Government agency securities in market
(net), fiscal years 1965, 1966, and 1967
-_-..
9. Interfund transactions excluded from both net budget receipts and
budget expenditures, fiscal years 1964-67
10. Interfund transactions excluded from both net trust account receipts
and net trust account expenditures fiscal years 1964-67
11. Public enterprise (revolving) funds, receipts and expenditures for
: fiscal year 1967 and net for 1966 and 1967
12. Trust enterprise (revolving) funds, receipts and expenditures for
fiscal year 1967 and net for 1966 and 1967
13. Administrative budget receipts and expenditures monthly and total
for fiscal year 1967
14. Trust receipts and expenditures monthly and totalfor fiscalyear 1967.
15. Trust receipts by sources and expenditures by major functions, fiscal
years 1959-67..,
._
\ Administrative budget receipts by sources and expenditures by major
A functions, fiscal years 1959-67..
..^
....
\r l'7.^rust and other transactions by major classifications, fiscal years
^ , > ^ 1957-67
.
.^....
18. Receipts from and payments to the public/fiscal years 1957-67
19. Internal revenue collections by tax sources, fiscal years 1936-67
20. Internal revenue collections and refunds by States, fiscal year 1967..
21. Deposits of earnings by the Federal Reserve banks, fiscal years
1947-67
22. Customs collections and payments by regions and districts, fiscal year
1967.—
_.._.._.
.
23. Summary of customs collections and expenditures, fiscal years 1966
and 1967.
.
.....
.
24. Postal receipts and expenditures, fiscal years 1926-67
;
25. Increment resulting from reduction in weight of the gold dollar, as
of June 30, 1967
26. Seigniorage on coin and silver bullion, January 1, 1935-June 30, 1967.

440
448
450
462
467
468
468
469
470
471
474
475
478
480
481
485
488
490
496
497
498
500
501
502
502

PUBLIC DEBT, GUARANTEED DEBT, ETC.

I.—Outstanding
27.
28.
29.
30.

Principal of the public debt, fiscal years 1790-1967Public debt and guaranteed debt outstanding, June 30, 1934-67 :_
Public debt outstanding by classification, June 30, 1957-67
Guaranteed securities issued by Government corporations and other
business-type activities and held outside the Treasury, June 30,
1957-67
31. Interest-bearing securities outstanding issued by Federal agencies
but not guaranteed by the U.S. Government, fiscal years 1957-67-

503
505
506
510
511

VIII

CONTENTS
Page

32. Maturity distribution and average length of marketable interestbearing public debt, June 30, 1946-67
-.
..
33. Summary of public debt and guaranteed debt by classification,
June 30, 1967
.
34. Description of public debt issues outstanding, June 30, 1967
35. Description of guaranteed debt held outside the Treasury, June 30,
1967
36. Postal savings systems' deposits and Federal Reserve notes outstanding, June 30, 1946-67
.
37. Statutory limitation on the public debt and guaranteed debt, June 30,
1967
.
38. Debt limitation under the Second Liberty Bond Act, as amended,
1917-67
.

512
513
515
544
546
547
548

II.—Operations
39. Public debt receipts and expenditures by classes, monthly for fiscal
year 1967 and totals for 1966 and 1967
.
40. Public disbt increases and decreases, and balances in the account of
the Treasurer of the United States, fiscal years 1916-67
41. Changes in public debt issues, fiscal year 1967
42. Issues, maturities, and redemptions of interest-bearing public debt
securities, excluding special issues, July 1966-June 1967
43. Allotments by investor classes on subscriptions for public marketable
securities, fiscal year 1967
44. Statutory debt retirements, fiscal years 1918-67
45. Cumulative sinking fund, fiscal years 1921-67.

550
565
566
594
628
630
631

III.—U.S. savings bonds
46. Sales and redemptions of Series E through K savings bonds by series,
fiscal years 1941-67 and monthly 1967
.
47. Sales and redemptions of Series E and H savings bonds by denominations, fiscal years 1941-67 and monthly 1967
48. Sales of Series E and H savings bonds by States, fiscal years 1966,
1967, and cumulative
L

632
637
639

IV.—Interest
49. Amount of interest-bearing public debt outstanding, the computed
annual interest charge, and the computed rate of interest, June 30,
1939-67, and at the end of each month during 1967
50. Computed annual interest rate and computed annual interest charge
on the public debt by classes, June 30, 1946-67. .
51. Interest on the public debt by classes, fiscal years 1963-67

640
641
643

V.—Prices and yields of securities
52. Average yields of taxable long-term Treasury bonds by months,
October 1941-June 1967
_.
53. Prices and yields of taxable public debt marketable issues June 30,
1966, and June 30, 1967, and price range since first traded

644
645

VI.—Ownership of governmental securities
54. Estirhated ownership of interest-bearing governmental securities
outstanding June 30, 1957-67, by type of issuer
55. Summary of Treasury survey of ownership of interest-bearing public
debt and guaranteed securities, June 30, 1966 and 1967

647
648

ACCOUNT OF THE TREASURER OF THE UNITED STATES

56. Assets and liabihties in the account of the Treasurer of the United
States, June 30, 1966 and 1967
.
.
57. Analysis of changes in tax and loan account balances, fiscal years
1957-67
.

650
651

CONTENTS

STOCK AND CIRCULATION OF MONEY IN THE UNITED STATES
Page

58. Currency and coin outstanding, in the Treasury, in the Federal
Reserve banks, and in circulation, by kinds, June 30, 1967
59. Stock of money by kinds, selected years, June 30, 1930-67.'
.
60. Money in circulation by kinds, selected 3^ears, June 30, 1930-67
61. Location of gold and silver bullion, coin, and coinage metal held by
the Treasury on June 30, 1967
62. Paper currency issued and redeemed during the fiscal year 1967 and
outstanding June 30, 1967, by classes and denominations
...

652
654
656
657
658

TRUST AND OTHER FUNDS

63. Holdings of public debt and agency securities by Government agencies
and accounts, June 30, 1963-67.
64. Civil service retirement and disability fund, June 30, 1967
.
65. District of Columbia teachers' retirement and annuity fund, June 30,
1967
66. Employees health benefits fund. Civil Service Commission, June 30,
1967
..
67. Retired employees health benefits fund. Civil Service Commission,
June 30, 1967...
.
..
68. Employees' life insurance fund. Civil Service Commission, June 30,
1967
69. Federal disability insurance trust fund, June 30, 1967
70. Federal hospital insurance trust fund, June 30, 1967
71. Federal supplementary medical insurance trust fund, June 30, 1967.
72. Federal old-age and survivors insurance trust fund, June 30, 1967
73. Foreign service retirement and disability fund, June 30, 1967
74. Highway trust fund, June 30, 1967.
...
75. Judicial survivors annuity fund, June 30, 1967
76. Library of Congress trust funds, June 30, 1967
77. National service life insurance fund, June 30, 1967
78. Pershing Hall Memorial fund, June 30, 1967
._
79. Philippine Government pre-1934 bond account, June 30, 1967
80. Raihoad retirement account, June 30, 1967
81. Railroad retirement holding account, June 30, 1967. .
82. Railroad retirement supplemental account, June 30, 1967
83. Unemployment trust fund, June 30, 1967
84. U.S. Government life insurance fund, June 30, 1967

659
662
665
666
667
668
669
671
673
674
676
677'
678
679
680
682
683
684
686
687
688
695

FEDERAL AID TO STATES

85. Federal grants in aid to State and local governments and to individuals and private institutions within the States, fiscal year 1967

696

CUSTOMS OPERATIONS

86. Merchandise entries, fiscal years 1966 and 1967
87. Principal commodities on which drawback was paid, fiscal years 1966
and 1967
88. Carriers and persons arriving in the United States, fiscal years 1966
and 1967.
89. Aircraft and aircraft passengers entering the United States, fiscal
years 1966 and 1967
90. Seizures for violations of customs laws, fiscalyears 1966 and 1967
91. Investigative activities, fiscal years 1966 and 1967

728
729
730
731
732
733

ENGRAVING AND PRINTING PRODUCTION

92. New postage stamp issues delivered, fiscal year 1967
93. Deliveries of finished work by the Bureau of Engraving and Printing,
fiscal years 1966 and 1967

734
735

INTERNATIONAL CLAIMS

94. Status of class III awards of the Mixed Claims Commission, United
States and Germany, and Private Law 509 as of June 30, 1967
95. Status of claims of American nationals against certain foreign governments as of June 30, 1967

736
737

CONTENTS
INTERNATIONAL FINANCIAL TRANSACTIONS
Page

96. U.S. net monetary gold transactions with foreign countries and international institutions, fiscal years 1945-67. _^
97. U.S. reserve assets: Gold stock, holdings of convertible foreign currencies, and reserve position in the International Monetary Fund,
fiscal years 1958-67-_-.
.
98. U.S. liquid liabilities to foreigners, fiscal years 1958-67
99. International investment position of the United States, total 1950;
by area, 1965-66.
L
100. U.S. balance of payments, calendar years 1964-66 and JanuaryJune 1967
101. Assets and liabilities of the Exchange Stabilization Fund as of June
30, 1966, and June 30, 1967
.--_
102. Summary of receipts, withdrawals, and balances of foreign currencies
acquired by the United States without purchase with dollars, fiscal
year 1967--_......-.
103. Balances of foreign currencies acquired by the United States without
purchase with dollars, June 30, 1967

738
740
741
743
745
747
750
752

INDEBTEDNESS OF FOREIGN GOVERNMENTS

104. Status of indebtedness of foreign governments to the United States
arising from World War I as of June 30, 1967
105. Status of German World War I indebtedness as of June 30, 1967
106. Outstanding indebtedness of foreign countries on U.S. Government
credits (exclusive of indebtedness arising from World War I) as of
June 30, 1967, by area, cbuntry, and major program
107. Status of accounts under lend-lease and surplus property agreements
(World War II) as of June 30, 1967
._..

754
755
756
760

CORPORATION AND OTHER BUSINESS-TYPE ACTIVITIES OF THE
U.S. GOVERNMENT

108. Comparative statement of securities of Government corporations
and other business-type activities held by the Treasury June 30,
1957-67
....
...
109. Capital stock, notes, bonds, and other securities of Government
agencies held by the Treasury or other Government agencies,
June 30, 1966 and 1967, and changes during 1967
110. Borrowing authority and outstanding issues of Government corporations and other business-type activities whose securities are issued
to the Secretary of the Treasury, June 30, 1967
...
111. Description of securities of Government corporations and other business-type actiyities held by the Treasury, June 30, 1967
112. Summary statements of financial condition of Government corporations and other business-type activities, June 30, 1967
.
113. Statement of loans outstanding of Governnient corporations and
other business-type activities, June 30, 1967^
.
114. Dividends, interest, and similar earnings received by the Treasury
from Government corporations and other business-type activities,
fiscal years 1966 and 1967__.
115. Participation certificates: Sales, retirements, and outstanding, fiscal
years 1962-67 and monthly 1967-.
..

762
763
768
769
773
775
779
781

GOVERNMENT LOSSES IN S H I P M E N T

116. Government losses in shipment revolving fund, June 30, 1967

783

PERSONNEL

117. Number of employees in the departmental and field services of the
Treasury Department quarterly from June 30, 1966, to June 30,
1967
.-

784

INDEX.-

785

-— .

-_-_- — -

SECRETARIES, UNDER SECRETARIES, GENERAL COUNSELS, ASSISTANT SECRETARIES, SPECIAL ASSISTANTS TO THE SECRETARY (FOR
ENFORCEMENT), AND DEPUTY UNDER SECRETARIES FOR MONETARY AFFAIRS, SERVING IN THE TREASURY DEPARTMENT FROM
JANUARY 20, 1965, THROUGH DECEMBER 31, 1967 i
Term of service

Official
To

From

Secretaries of the Treasury
Jan. 21, 1961
Apr. 1, 1965

Apr.

1, 1965

Douglas Dillon, New Jersey.
Henry H. Fowler, Virginia.
Under Secretary
Joseph W. Barr, Indiana.

Apr. 29, 1965

Under Secretary of the Treasury for
Monetary Affairs
Feb.

Frederick L. Deming, Minnesota.

1, 1965

General Counsels
Nov. 16, 1962
Apr. 12,1966

Jan. 31, 1965

G. d'Andelot Belin, Massachusetts.
Fred B. Smith, Maryland.
Assistant Secretaries

Apr.
Dec.
Sept.
Apr.
Sept.
Aug.

24, 1961
20, 1961
18, 1963
29,1965
14, 1965
2,1966

Sept. 1, 1965
June 10, 1966

Stanley S. Surrey, Massachusetts.
James A. Reed, Massachusetts.
Robert A. Wallace, Illinois.
Merlyn N. Trued, New Jersey.
W. True Davis, Jr., Missouri.
Winthrop Knowlton, New York.
Special Assistants to the Secretary
{for Enforcement)

Sept. 16, 1965
Apr. 4, 1967

Feb. 10, 1967

David C. Acheson, District of Columbia.
James P. Hendrick, District of Colurhbia.
Deputy Under Secretaries of the Treasury
for Monetary Affairs

Dec. 3, 1963
Nov. 24, 1965

Nov. 23, 1965
Nov. 11, 1967

Paul A, Volcker, New Jersey.
Peter D. SternUght, New York.
Fiscal Assistant Secretary

June 15, 1962

John K. Carlock, Arizona.
Assistant Secretary for Administration

Sept. 14, 1959

A. E. Weatherbee, Maine.

I For officials from Sept. 11,1789, to Jan. 20, 1965, see the 1965 annual report exhibit 69, pp. 449-457.

PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS OF THE TREASURY
DEPARTMENT AS OF DECEMBER 31, 1967
Secretary of the Treasury
Henry H. Fowler
Special Assistant to the Secretary
Douglass Hunt
Under Secretary of the Treasury
Joseph W. Barr
Special Assistant to the Under Secretary
Mark A. Weiss
Under Secretary for Monetary Affairs
_'
Frederick L. Deming
Deputy Under Secretary for Monetary Affairs.__ Vacancy
Director, Office of Domestic Gold and Silver
Operations
Thomas W. Wolfe
Director, Office of Financial Analysis
John H. Auten
Director, Office of Debt Analysis
Edward P. Snyder
Assistant to the Secretary (Debt Management)__ R. Duane Saunders
General Counsel
Fred B. Smith
Deputy General Counsel
Roy T. Englert
Assistant General Counsel
Charlotte Tuttle Lloyd
Assistant General Counsel
Milan C. Miskovsky
Assistant General Counsel
Hugo A. Ranta
Assistant General Counsel
Donald L. E. Ritger
Chief Counsel, Foreign Assets Control
Stanley L. Sommerfield
Director of Practice
: William H. Sager
Assistant Secretary
Stanley S. Surrey
Deputy Assistant Secretary
Melvin I. White
Director, Office of Tax Analysis
Gerard M. Brannon
Tax Legislative Counsel
Jerome Kurtz
Special Assistant for International Tax Affairs... Joseph H. Guttentag
Assistant Secretary.
Robert A. Wallace
Special Assistant to Assistant Secretary.
William N. Griggs
Director, Employment Policy Program..
Mrs. Mary F. Nolan
Assistant Secretary
W. True Davis, Jr.
Deputy to the Assistant Secretary
Matthew J. Marks
Assistant Secretary
Winthrop Knowlton
Deputy Assistant Secretary
John R. Petty
Deputy to Assistant Secretary for International
Monetary Affairs
George H. Willis
Deputy to Assistant Secretary for International
Financial and Economic Affairs
Ralph Hirschtritt
Special Assistant to the Secretary (for Enforcement). . James P. Hendrick
Executive Assistant
; Charles C. Humpstone
Fiscal Assistant Secretary
John K. Carlock
Deputy Fiscal Assistant Secretary
' George F. Stickney
Assistant Fiscal Assistant Secretary
Hampton A. Rabon, Jr.
Assistant to Fiscal Assistant Secretary
Boyd A. Evans
Assistant to Fiscal Assistant Secretary
Sidney Cox
Assistant Secretary for Administration
A. E. Weatherbee
Deputy Assistant Secretary for Administration
and Director, Office of Budget and Finance.. Ernest C. Betts, Jr.
Director, Office of Planning and Program Evaluation
Benjamin Caplan
Director, Office of Personnel
Amos N. Latham, Jr.
Director, Office of Managemerit and Organization
J. Elton Greenlee
Director, Office of Administrative Services
Paul McDonald
Director, Office of Security
Thomas M. Hughes
Assistant to the Secretary (Congressional Relations). Joseph M. Bowman, Jr.
Deputy Assistant to the Secretary (Congressional
Relations)
: Joseph L. Spilman, Jr.
Deputy Assistant to the Secretary (Congressional
Relations).
:•
Samuel M. Jones
XII

PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS

XIII

Assistant to the Secretary (Public Affairs)
James F. King
Deputy Assistant to the Secretary (Public Affairs)
John F. Kane
Assistant to the Secretary (National Security Affairs). Raymond J. Albright
Deputy Assistant to the Secretary (National Security Affairs)
Howard E. Hensleigh.
National Security Affairs Adviser
Robert G. Efteland
National Security Affairs Adviser
Clyde C. Cross white
Financial Adviser
Robert W. Bean
Director, Office of Foreign Assets Control
Mrs. Margaret W..
Schwartz
Senior Consultant
Seymour E. Harris
Director, Executive Secretariat
Nicholas A. Rey
B U R E A U OF ACCOUNTS

Commissioner of Accounts
Assistant Commissioner
Comptroller
Chief Disbursing Officer
Deputy Commissioner for Central Accounts and Repoi-ts
,
.
Deputy Commissioner for Deposits and Investments^

Sidney S. Sokol
L. D. Mosso
Steve L. Comings
Lester W. Plumly
Howard A. Turner
Sebastian Fama •

B U R E A U OF CUSTOMS

Commissioner of Customs
Deputy Commissioner of Customs
Assistant Commissioner, Office of Administration
Assistant Commissioner, Office of Investigations
Assistant Commissioner, Office of Operations
Assistant Commissioner, Office of Regulations and
Rulings
.
Chief Counsel

Lester D.
Edwin F.
Glenn R.
Lawrence
David C.

Johnson
Rains
Dickerson •
Fleishman
Ellis

Robert V. Mclntyre
Alfred H. Golden

B U R E A U OF ENGRAVING AND P R I N T I N G

Director, Bureau of Engraving and Printing
.
Deputy Director, Bureau of Engraving and Printing.

James A. Conlon
Vacancy

B U R E A U OF T H E MINT

Director of the Mint
Assistant Director of the Mint

Miss Eva Adams
Frederick W. Tate

B U R E A U OF NARCOTICS

Commissioner of Narcotics
Deputy Commissioner of Narcotics
Assistant Commissioner (Enforcement)
Assistant Commissioner (Permissive)
Assistant Commissioner (Administration)

Henry L. Giordano
George H. Gaffney
John R. Enright
William J. Durkin
Ernest M. Gentry

BUREAU OF THE PUBLIC DEBT

Commissioner of the Public Debt
Assistant Commissioner
Deputy Commissioner in Charge, Chicago Office

Donald M. Merritt
H. J. Hintgen
Michael E.
McGeoghegan

I N T E R N A L REVENUE SERVICE

Commissioner of Internal Revenue
Deputy Commissioner
Assistant Commissioner (Administration)
Assistant Commissioner (Inspection)
Assistant Commissioner (Compliance)
Assistant Commissioner (Data Processing)
Assistant Commissioner (Planning and Research)
Assistant Commissioner (Technical)
Chief Counsel

Sheldon S. Cohen
William H. Smith
Edward F. Preston
Vernon D. Acree
Donald W. Bacon
Robert L. Jack
Albert W. Brisbin
Harold T. Swartz
Lester R. Uretz

XIV

PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS
OFFICE OF T H E COMPTROLLER OF T H E C U R R E N C Y

Comptroller of the Currency
First Deputy Comptroller
Administrative Assistant to the Comptroller.
Deputy Comptroller
Deputy Comptroller
Deputy Comptroller
.
Chief National Bank Examiner
Deputy Comptroller (Mergers and Branches)
Deputy Comptroher (Trusts)
.
Deputy Comptroller (FDIC Affairs)
.
Chief Counsel
.

William B. Camp
. Justin T. Watson
Wayne G. Wickman
John D. Gwin
Thomas G. DeShazo
I David C. Motter
; F. H. Ellis
R. J. Blanchard
Dean E. MiUer
Albert J. Faulstich
; Robert Bloom

OFFICE OF T H E T R E A S U R E R OF T H E U N I T E D STATES

Treasurer of the United States
Deputy Treasurer
Assistant Deputy Treasurer.:

Vacancy
William T. Howell
i William E. Scott

..,

U N I T E D STATES SAVINGS BONDS DIVISION

National Director
Assistant National Director

.
.

..
.

Glen R. Johnson
; Elmer L. Rustad

U N I T E D STATES S E C R E T SERVICE

Director
Deputy Director
Assistant Director
Assistant Director
Assistant Director
Assistant Director

.
(Administration)
(Investigations)
(Protective Forces)
(Protective Intelligence)

I
I
:
!

James J. Rowley
Rufus W. Youngblood
Phil W. Jordan
Burrill A. Peterson
Thomas L. Johns
Thomas J. Kelley

COMIMITTEES AND BOARDS

Chairman, Treasury Management Committee...
Chairman, Treasury Awards Committee
.
Chairman, Treasury Wage Board
Employment Policy Officer
Principal Compliance Officer

.;
;
..;
I
-

A. E. Weatherbee
Amos N. Latham, Jr.
Amos N. Latham, Jr.
Robert A. Wallace
Robert A. Wallace

December 1.1967

•ORGANIZATION OF THE DEPARTMENT OF THE TREASURY-

j ASST TO THE SECRETi

l l
^

ASST TO THE SECRE
(Public Adoirs)

! Office
\
\ ofthe
}
I Secretary;

-f

DEPUTY UNDER
SECfiETARY FOR

'lAonctol Anctytis

loificeof PcfsoAuli
W x t ot OirtctM

aerating \
Bureau of
Accounts

Bureau of
the Mint

Office of the
Treosurer
of the U.S.

Bureau of the
Public Debt

Internol
Revenue
Service

Office of the
Comptroller of
the Currency

Bureau of
Narcotics

assayings
Bonds Division

CHART

US Secret
Service

Bureau of
Customs

Bureau of
Engravirig and
Printing

ANNUAL REPORT ON THE FINANCES
TREASURY DEPARTMENT,

Washington, May 15, 1968.
: I have the honor to report to you on the finances of the Federal
Government for the fiscal year 1967. The main text of this report consists of a detailed revievi^ of Treasury fiscal operations and administrative reports of the offices under my supervision during the fiscal
year 1967, along with supporting exhibits and statistical material.
This brief general introduction reviews the major fiscal and financial
developments that have taken place since the time of my last report
in early 1967.
SIRS

Overall Review
During the calendar year 1967, the economy successfully weathered
a sizable inventory adjustment and resumed its rapid rate of advance.
By early 1968, the economy was entering its eighth successive year of
expansion—the longest in our history. There was every indication
that this unparalleled advance could be sustained. However, it was
increasingly clear that an additional degree of fiscal and financial
restraint would be required in order to insure the continued strength
of the dollar at home and abroad. A major objective of policy would
be to reverse decisively the trend toward larger deficits in our internal
budget and in our international balance of payments.
Delay in enacting the President's tax program threatened to
swell the Federal budget deficit to inappropriately high levels. In
terms of the new unified budget concept, the fiscal 1968 deficit was
estimated in January 1968 at $22.8 billion in the absence of tax
action. I t was further estimated that the fiscal 1969 deficit would
decline only slightly to $20.8 biUion if no tax action were taken.
With the economy at a high level of employment and showing strong
inflationary tendencies, it was clear that back-to-back budget deficits
in excess of $20 billion could exert a seriously destabilizing influence.
Therefore, the January 1968 budget included legislative proposals
to raise an additional $16 billion in revenue during fiscal 1968 and
fiscal 1969. This would reduce the fiscal 1968 deficit to $19.8 billion
and the fiscal 1969 deficit to $8 billion.
The other deficit requiring corrective action is in our international
balance of payments. During 1965 and 1966 the payments deficit
was held below $1.5 billion despite the drains occasioned by our
expanded commitment to the defense of freedom in Southeast Asia.
xvu
277-468—68

XVIII

1 9 6 7 REPORT OF T H E SECRETARY OF T H E

TREASURY

In 1967, the deficit widened, particularly in the fourth quarter, and
reached $3.6 biUion for the calendar year on the liquidity basis.
Prompt action was needed—and is being taken—to shrink the deficit.
The action program announced by President Johnson on January 1,
1968, was designed to achieve balance-of-payments savings of up
to $3 biUion.
DomesticaUy, there was a marked contrast in the pace of economic
advance between the first and second half of calendar year 1967.
I n the first half of the year, inventory investment fell from an annual
rate of $183^ biUion to nearly zero, but final sales rose strongly and
prevented the inventory adjustment from causing a downturn. In
the second half of the year, with the inventory adjustment completed
and housing continuing its recovery, the economy moved ahead
briskly. Growth in production was interrupted only temporarUy by
work stoppages.
This pattern of a relatively slow first half year followed by a much
stronger second half had been anticipated ; and plans were made
accordingly. In the first half of calendar year 1967, a policy of monetary ease, instituted late in 1966, was complemented by a degree
of fiscal support. The moderate tax increase proposed by the President in January 1967 was not to be effective;at once but only after
the first half of 1967. As the pace of the economy slowed in the first
half of 1967, the Federal budget swung into a deeper deficit position.
This stimulative effect of a larger deficit was temporarily desirable
in view of the sharply declining pace of the economic advance. Rising
levels of Federal expenditure bolstered final sales whUe the steep
inventory adjustment downward was running its course.
Ideally, there would have been a sizable swing back toward fiscal
restraint in the second haK of the calendar year as the economy began
to move ahead more rapidly. Tax action was recommended by the
President early in August 1967, with the increases to be effective from
midyear, but there was no congressional action on the President's
proposals. Late in the year, expenditure cuts in specific programs
totaling $4.3 biUion were achieved, as a result of joint congressional
and executive action. But, in the absence of congressional action to
raise taxes, the budget continued to run in heavy deficit in the second
haK of 1967 and early 1968, at a time when the economy was not in
need of fiscal stimulus but would have benefited greatly from a shift
toward restraint.
i.
The resumption of strong growth in the second haK of 1967 was
accompanied by a sharp advance iii prices. For example, the comprehensive GNP price deflator rose at a 3.8 percent annual rate in the second
haK of the calendar year, in contrast to about 2^ percent in the first
haK. The rise in the consumer price index foUpwed a simUar pattern.

ANNUAL REPORT ON T H E FINANCES

XIX

On a year-to-year basis, the price record appeared more favorable,
with consumer prices actuaUy rising sUghtly less in 1967 than in 1966.
However, the faster rise in prices during the second haK of 1967, which
continued in early 1968, was definitely cause for concern. It threatened
to disrupt the domestic expansion and to impair our international
competitive position. In his February 1968 Economic Report, President
Johnson emphasized the need to make a decisive turn back toward
price stabUity and stated:
''Therefore, in addition to urging prompt action by the Congress on
my tax proposals, I must again urge—^in the strongest terms I know—
that unions and business firms exercise the most rigorous restraint in
their wage and price.determinations in 1968.''
Both cost and demand pressures were contributing to the faster
advance in prices in late 1967 and early 1968. The strengthening of
demand in the second half of 1967 was clearly mirrored in an upward
movement of prices. From the cost side, strong pressures were being
exerted by a faster pace of advance in hourly compensation than in
productivity. In turn, this reflected the earlier upsurge of demand
in late 1965 and 1966 which upset the balance of the expansion.
From 1961 to 1965 the rise in average hourly compensation in the
total private economy only slightly exceeded the gain in output per
manhour and unit labor costs were relatively stable. In manufacturing there was actually a downward drift in unit labor costs as
productivity gains exceeded the rise in employee compensation.
This pattern was broken after 1965. During 1966, when total demand
pressed heavUy against the economy's short-run productive capacity,
there was a sharp rise in hourly compensation of nearly 7 percent.
In 1967, the average rise fell back slightly to about 6 percent but
productivity gains slowed abruptly to around IK percent. As a consequence, between 1966 and 1967 there was a rise in unit labor costs
of roughly 4^ percent for the total private economy and of about 5
percent for the manufacturing sector.
' In the presence of these cost increases, it would be particularly
important during 1968 and beyond to iasure that the situation was
not further aggravated by an excessively strong rise ia demand.
Another burst of demand could further prejudice the prospects for
an early return to relatively stable prices and seriously impede
progress toward balance-of-payments equUibrium. As it was, an
earlier pattern of cost-price stability had been temporarUy disrupted
and the potential for further inflationary developments had been
increased.
The U.S. balance-of-payments position and the continued stabUity
of the international financial system were becoming increasiagly
important factors in the determination of U.S. fiscal and financial

196 7 REPORT OF THE SECRETARY OF THE TREASURY

policy. Both our international and domestic financial positions would
be strengthened through the application of an extra degree of fiscal
restraint. There was no conflict between the policy prescription for
the domestic economy and the balance of payments. In each case,
the situation caUed for higher taxes and further deferment and reduction of lower priority Federal expenditures.
Tax Policy
The major tax developments since the time of my last report
have been the restoration of the investment tax credit and a continuing effort to obtain legislative approval of k temporary increase in
income taxes. Fuller detaUs on these and other developments in tax
policy during the fiscal year 1967 are provided on pages 28-39 of the
accompanying report.
Temporary suspension of the investment tax credit was a key
element in the President's anti-inflationary program presented in a
special message to the Congress on Septeniber 8, 1966. Rapid expansion of plant and equipment programs had led to growing order
backlogs and heavy pressure on the financial markets. The September
8 program included the following steps: Reduction in lower priority
Federal expenditures; a proposed temporary suspension of the 7percent investment tax credit and accelerated depreciation; and
special efforts to lower interest rates and to ease the inequitable
burden of tight money. The announcement of this program and
prompt action by the Congress and the financial regulatory agencies
led to a much better financial environment. The special investment
iacentives were temporarily suspended under the terms of Public
Law 89-800, effective as of October 10, 1966.
While temporary suspension of these investment incentives was
essential under the special circumstances of late 1966, it was made
clear at the time of their suspension that they continued to be regarded as a valuable permanent structural component of the tax
system and would be restored as soon as possible. On March 9, 1967,
President Johnson did request the restoration of the investment tax
credit and the use of accelerated depreciation for buUdings, pointing
out that in the previous 6 months the temporary suspension had done
the j ob it was designed to do.
'
Legislation restoring the investment incentives was passed by the
House of Representatives on March 14. There was protracted debate
on the Senate floor, not on restoration of the investment incentives,
but on proposed amendments to the Presidential Election Campaign
Fund Act of 1966. The bill was finally passed by the Senate on May 9
and signed by the President on June 13, 1967, with restoration of the

iANNUAL REPORT ON T H E FINANCES

XXI

credit effective as of March 10, 1967. Details of the legislation are
discussed on pages 29-31 in the main text of this report.
The initial proposal for a general increase in income taxes was
made by President Johnson in his state of the Union message of
January 10, 1967. He called for a surcharge of 6 percent on both
individual and corporate income taxes to last for 2 years or so long
as the unusual expenditures associated with our efforts in Vietnam
continue. The temporary surcharge was to be effective from July 1,
1967.
As revised estimates of revenues and expenditures made it clear
that the budget deficit would be much larger than had been anticipated in early 1967, President Johnson requested on August 3, 1967,
that the surcharge be raised from 6 percent to 10 percent. Aside from
the recommendation for a 10 percent surcharge, the President repeated
his January 1967 recommendations for a further speedup of corporate
tax collections and a postponement of scheduled reductions in excise
taxes. In addition, the President urged the Congress to exercise the
utmost restraint and responsibUity in the appropriations process
and to make every effort not to exceed the January budget estimates.
For its part, the executive branch promised to take every proper
action within its power to reduce expenditures in the January budget.
The House Ways and Means Committee held hearings on the tax
proposals in August and September but voted to table immediate
consideration. Difficulty in arriving at procedures to implement
expenditure reductions was apparently a major factor in the Ways
and Means decision to defer action. After the devaluation of sterling
in November, the Ways and Means hearings were reopened. At that
time the administration presented a two-part plan: The tax proposals and a specific statutory plan for expenditure reduction in
fiscal 1968 from the levels then in prospect. WhUe the Ways and
Means Committee did not take favorable action on the proposals,
the expenditure reduction part of the plan was implemented by joint
congressional and executive action late in calendar 1967. On December 18, 1967, President Johnson signed Public Law 90-218,
which, together with previous congressional actions, provided that
''Federal obligations and expenditures in controllable programs for
the fiscal year 1968 should be reduced by no less than $9 billion and
$4 billion, respectively, below the President's budget requests."
On January 22, 1968, the House. Ways and Means Committee
resumed its hearings on the President's tax proposals. The committee
took favorable action on the corporate tax acceleration and excise
tax components of the tax package, but not on the proposed 10percent surcharge on individual and corporate income tax liabUities.
The corporate tax acceleration and the postponement of scheduled

XXII 1967 REPORT OF THE SECRETARY OF THE TREASURY
excise tax reductions were passed by the House of Representatives on
February 29, 1968.
The scene then shKted to the Senate. The Senate Finance Committee approved action on excise taxes and the corporate tax acceleration but decided, by a 9-8 vote,, against the proposed 10-percent surcharge. On the floor of the Senate, however, the 10-percent surcharge
and a ceiling on Federal expenditures, along, with a number of other
amendments, were added to the excise tax and corporate acceleration
legislation. The exact pattern that legislative developments might
foUow from that point was uncertain, but the prospects for action on a
program of fiscal restraint appeared to have improved.
Financial Policies and Debt Management
In the domestic financial area, the past year has been one of strong
demand pressures in our money and capital markets. Longer-term
interest rates dipped only temporarily in early 1967 when the pace of
economic expansion slowed and long-term rates then rose duriag the
balance of the year. In the first half of calendar year 1967, short-term
interest rates did decline from the peaks that had been'reached in the
late summer and early fall of 1966. After midyear, however, money
market rates moved up rather steadUy. Monetary ease, which had
commenced in late 1966, continued through most of 1967 but interest
rates rose in response to heavy financial demands.
At the close of 1967, short-term rates remained below the peaks
of August-September 1966, but longer term rates had, in some cases,
pushed weU beyond the earlier highs. Three-month Treasury bUls
were yielding a shade more than 5 percent at the end of 1967, stiU
about one-half of one percent below the peak yields in 1966. Longer
bUls and short- to intermediate-term coupon issues also remained
below their 1966 peaks. Longer-term governments and new issues
of corporate and municipal bonds had moved beyond the earlier highs
by the end of the calendar year 1967, while mortgage rates were
just about at the earlier levels. Between the end of 1966 and 1967,
rates on new Aa-rated corporate bonds rose by almost a full percentage
point and neared 7 percent whUe rates on new tax-exempt securities
rose by more than five-eights of one percent. These very sizable
increases in corporate and municipal rates reflected the particularly
heavy volume of financing in those areas.
Despite the slackening in the pace of economic activity in early
1967, private financial demands were heavy throughout the entire
year. As an aftermath of the credit squeeze of 1966, efforts were
made throughout the private sector to rebuUd liquidity and in some
cases to make advance provision for possible future credit needs.
Furthermore, there was general beUef ta the business and financial

ANNUAL REPORT ON THE FINANCES

XXIII

community that the slowdown in the economy was likely to be
temporary in duration and would be followed by a period of more
rapid expansion. As the year progressed, an upturn in planned business
plant and equipment expenditures and a rise in inventory investment
were, indeed, adding to corporate financial requirements. In addition
to normal requirements, municipal financing was swollen by issues
postponed from 1966 and by an abnormally large volume of industrial
revenue bonds, since the future of the tax-exempt status for new
issues of industrial revenue bonds appeared increasingly uncertain.
For the year as a whole, corporate long-term security offerings and
placements (including refundings) totaled $24.6 bUlion, about 40
percent more than in 1966. State and local issues reached $14.5 bUlion,
up from $11.3 bUlion a year earlier. Net additions to mortgage debt
of $22 billion were only slightly above the 1966 total but were rising
throughout the year as savings inflows to mortgage lenders continued
in large volume. With private credit demands strong throughout the
entire year, the major change occurred in the Federal sector where
there was a marked change between the flrst and second half of
calendar 1967.
In the flrst half of 1967, the Federal sector exerted a relatively small
impact on the credit markets. Indeed, there was actually a larger net
repayment of debt than that which had taken place in the first halves
of 1965 and 1966. In the second half of 1967, however, the Federal
sector made a sizable net credit demand, sharply above the levels of
earlier years. This combination of heavy private and Government
demands for credit exerted strong upward pressure on interest rates
during the second half of 1967. Despite these upward rate pressures,
there was no serious disruption of the flow of funds to various sectors
and credit was readily available, although expensive by historical
standards.
The outlook for flnancial markets in 1968 and beyond depends
very much on the outcome of the President's fiscal proposals. In the
absence of tax and expenditure action, the Federal sector would be
making a sizable contraseasonal credit demand in the first half of
calendar 1968, and the fiscal 1969 deficit on the new unffied budget
basis would exceed $20 bUlion. This would require roughly that amount
of new borrowing. (There would be some additional requirements of
those agencies—chiefly the Federal home loan banks and the Federal
land banks—^not included in the new budget's concept of net borrowing
requirements.) Borrowing of this magnitude at a time when the
economy was advancing rapidly could seriously overstrain the capacity
of the financial markets, divert credit flows, and threaten to drive
interest rates still higher. Therefore, the prompt application of fiscal

XXIV

196 7 REPORT OF THE SECRETARY OF THE TREASURY

restraint, so necessary on other grounds as well is viewed as essential
from the standpoint of the domestic financial markets.
Debt management activities have been conducted successfuUy
during the past year despite the relatively difficult financial environment. An intensive savings bond campaign has played a major part
by encouraging additional savings and reducing the amount of market
financing otherwise required. (A detaUed review of public debt
management and o^^mership developments during fiscal 1967 is
provided on pages 12-28 of the accompanying report.)
In the first half of calendar 1967, after a refunding operation in
February that received a very favorable reception, the balance of
Treasury cash needs were met in March by an additional $2.7 biUion
of June 1967 tax anticipation biUs. In the second half of the year,
the Treasury did a bit more than $16 billion of new money borrowing
through the issuance of marketable securities, i
The bulk of the financing in the second half of the year was done
in the bill area through additions to the regular auctions and through
the use of tax anticipation bills. Outside of the bill area, there were
several major financings. Following a $9.9 billion refunding operation,
$2K billion in cash was raised in August through the issuance of a
3K-year Treasury note priced to yield 5.40 percent. In November,
a little over $2 billion in additional new cash was raised in conjunction
with the refunding of $10.2 billion of November maturities. In this
operation, the Treasury made initial use of the authority granted
by Congress earher in the year to issue Treasury notes of up to 7-year
maturity. Nonetheless, there was a substantial shortening of the
average maturity of the marketable interest-bearing public debt
during the course of calendar year 1967. By the end of the year, the
average maturity was 4 years and 1 month in contrast to 4 years
and 7 months at the end of calendar year 1966.
There were two sizable Treasury financing operations in early 1968,
both of which were well received. At the end of January, the Treasury
announced an exchange offeriag of 7-year, 5% percent notes for notes
maturing February 15, 1968, and for notes and bonds due August 15
and November 15, 1968. The successful completion of this operation
led to a modest degree of debt lengthening and a useful reduction in
the sizable financing task that would have to be faced in the second
half of the year. In a separate operation during February, there was
a $4 bUlion cash offering of 15-month, 5% percent Treasury notes.
International Financial Aflfairs
A summary of a wide range of developments in international
financial affairs through fiscal 1967 will be found in the text of this
report (pages 39-53). Attention will be confined here to major develop-

ANNUAL REPORT ON T H E FINANCES

XXV

ments during the year in the U.S. balance of payments and the progress
made toward improved intemational financial arrangements.
Balance of Payments
During calendar year 1967, and particularly in the fourth quarter,
the U.S. balance-of-payments deficit widened appreciably, only
partly because of special factors. The widening of the deficit made it
necessary to take prompt corrective action. A new balance-of-payments action program was announced at the beginning of 1968
designed to shrink the deficit by as much as $3 billion. The worsening
of the payments position in 1967 had come after 2 years in which the
deficit had been held to relatively low levels, considering the direct
and indirect balance-of-payments drains associated with the Vietnam
effort.
In calendar year 1966, the U.S. balance-of-payments deficit on
the liquidity basis was $1.4 biUion, about the same as in 1965, and
about one-half the size of the deficits in 1963 and 1964. On the official
reserve transactions basis, there was a 1966 surplus of $200 million,
compared to a deficit of $1.3 billion in 1965, and deficits of $1.5
billion and $2 billion in 1964 and 1963, respectively. (The liquidity
balance is measured by changes in U.S. reserve assets and in liquid
liabilities to aU foreign residents and international organizations.
The official reserve transactions balance differs from the liquidity
balance by excludiag changes in certain of our nonliquid liabilities to
foreign official institutions which are not part of the liquidity deficit.)
In 1967, the deficit on the Hquidity basis reached $3.6 billion and
returned near the deficit levels of 1959 and 1960. On the official
reserve transactions basis, the deficit for calendar 1967 was $3.4 bilUon.
U.S. gold losses in 1967 rose to $1,170 bilhon, about double the $571
milhon loss in 1966. Much of the deterioration occurred in the final
quarter of the year when the Uquidity deficit reached an estimated
$1.85 billion on a seasonaUy adjusted basis and gold losses exceeded
$1 billion. The heavy pressure in gold markets continued in early 1968
until it was checked by international agreement on new arrangements
with respect to private gold markets.
Some part of the large fourth-quarter balance-of-payments deficit
was due to temporary factors. The weakness of sterling, which finally
led to its devaluation in November, caused the United Eangdom to
hquidate its portfoho of U.S. corporate securities and U.S. Government agency bonds, with adverse effect on the liquidity balance. On
trade account, U.S. imports were boosted by a copper strike and the
prospect of a steel strike in 1968. Even after allowance for these and
other special factors, however, it was clear that there had been a
significant worsening of the deficit during 1967 and that a tightening

XXVI

1967 REPORT OF THE SECRETARY OF THE TREASURY

of the balance-of-payments program was essential under the
circumstances.
President Johnson announced the detaUs of the new balance-ofpayments program in a special message on January 1, 1968. The
program was designed to bring the balance of payments to, or close to,
equUibrium. President Johnson emphasized the close relationship
between the domestic economy and the balance of payments. In his
January 1, 1968, message he stated:
''The &"st liae of defense of the dollar is the strength of the Airierican
economy.
"No business before the returning Congress wUl be more urgent than
this: To enact the anti-inflation tax which I have sought for almost a
year. Coupled with our expenditure controls and appropriate monetary
policy, this wil help to stem the inflationary pressures which now
threaten our economic prosperity and our trade surplus."
The new balance-of-payments program embodied a comprehensive
approach to the problem with savings sought in all major areas of the
balance of payments. It was evolutionary in the sense of buUding
upon the experience gained from previous balance-of-payments
programs, but also included new techniques designed to achieve
effective control of direct investment and the expenditures of U.S.
tourists. The main elements of the new program were the following:
—a mandatory program, administered by the Department of
Commerce, to restrain direct investment abroad. By Executive
order and regulations issued under the Banking Law a limit would
be placed upon direct investment by U.S., companies in foreign
affihates. Key features of the direct investment program are a temporary moratorium on any new capital outflow from the United States
to the highly developed countries, principally in continental Western
Europe, and special regulations governing the repatriation by U.S.
companies of foreign earnings and permissible levels of short-term
financial assets held abroad. (In March, Canada was exempted from
the balance-of-payments measures affecting capital flows that are
admiaistered by the Department of Commerce and the Federal
Reserve Board. An exchange of letters between the United States and
Canadian Governments described the steps that would be taken to
insure that the U.S. balance-of-payments position would not be
impaired as a consequence.)
—^re^dsed guidelines by the Board of Goverriors of the Federal
Reserve System to reduce foreign credits from U.S. banks and other
financial institutions. The new guidelines, which are substantially
more restrictive than those issued ia November 1967, are designed to
achieve a net inflow of at least $500 million in 1968. The Board pointed
out that the guidelines have been designed to focus the major effect of

ANNUAL REPORT ON T H E FINANCES

XXVII

the reduction on the developed countries of continental Western
Europe without adverse effects on credits necessary to finance U.S.
exports or on credits to developing countries.
—encouragement of foreign travel in the United States and temporary measures to restrain the volume of U.S, travel expenditures
outside of the Western Hemisphere. In view of the increase in the U.S.
t r a v d deficit to an estimated $2 billion ia 1968, some action in this
area was obligatory. The permanent and long-run part of the program
is an effort to increase the number of foreign travelers in this country.
In addition, the administration proposed customs and temporary tax
measures, including a graduated tax on expenditures incurred in connection with trips outside the Western Hemisphere, to reduce U.S.
tourist expenditures with the least possible reduction in the number of
U.S. travelers.
—further reductions in the balance-of-pa3niients impact of Government expenditures overseas.
—a long-term export expansion program, including intensified
promotional efforts and enlarged facUities for export insurance,
guarantees,.and financing.
—consultation with foreign countries to minimize the disadvantages
to our trade which arise from differences among national tax systems.
—further efforts to attract greater foreign investment in U.S.
corporate securities, carrying out the principles of the Foreign Investors Tax Act of 1966.
The fuU effect of the recommended measures would not be felt
immediately. Some elements of the program, e.g., the graduated tax
on U.S. tourist expenditures, required congressional approval which
might not be forthcoming. Short-run improvement of the trade
balance would depend upon a moderation of the very rapid pace of
the domestic economic advance as well as upon business conditions
abroad. There were some uncertainties as to the immediate impact of
other features of the program. But, even so, there was every prospect
that the new balance-of-payments program would be promptly
successful in reversing the trend toward larger deficits that had
reappeared in 1967.
International Finance
There have been two major developments in the international
financial area since the time of my last report. The first was the devaluation of sterliag in November 1967 and the heavy speculative
activity in private gold markets that foUowed. In March 1968, agreement was reached among the central banks cooperating in the gold
pool on new arrangements. This restored a calmer atmosphere to gold
and exchange markets. The second major development was the further

XXVIII

1 9 6 7 REPORT OF T H E SECRETARY OF T H E

TREASURY

progress made toward implementation of the plan for creation of
special drawing rights in the International Monetary Fund.
During early 1967, there was an improving trend in international
financial markets. Sterling seemed to be makirig a successful recovery
and there was relatively little speculative activity in gold markets.
With the outbreak of the crisis in the Middle East in June, this better
atmosphere evaporated quickly. Gold and foreign exchange markets
were subjected to temporarily heavy pressures. While these pressures
abated somewhat durmg the summer, the position of sterling remained
precarious. After a continuing defense of the; existing parity during
the early fall, the decision to devalue the pound by 14.3 percent to
$2.40 was announced on Saturday, November 18, 1967. International
cooperation confined the exchange rate adjustment to sterling and a
few closely related currencies.
In the aftermath of sterling devaluation, there was a heavy run on
gold in private markets abroad. A statement by the gold pool contributors which was made in Frankfurt the weekend after devaluation calmed the market for a time. Rumors again flooded the market,
but a further statement in December by me as Secretary of the
Treasury and by the Chairman of the Federal Reserve Board (made
with the support of the other gold pool menibers) again restored
comparative calm. The announcement on January 1,1968, by President
Johnson of the new U.S. balance-of-paymeufts program further improved the situation. Although the speculative activity in private
gold markets more directly reflected uncertainty over the price of
gold in terms of all currencies, rather than the strength of the dollar
and the short-term U.S. balance-of-payments ^position, the announcement of the new balance-of-payments measures was helpful. After a
period of relative quiet, there was a renewed surge of speculation in
foreign gold markets beginning in late February and early March.
Effective action was taken to cope with the threat to international
financial stabUity. The U.S. Congress completed action on legislation
removing the 25-percent gold backing requirement for Federal
Reserve note liabUities, thus showing renewed determination to defend
the value of the dollar. The representatives of the central banks
that were cooperating in the gold pool arrangements met in Washington over the weekend of March 16 and 17, 1968. The Governors of
the Central Banks of Belgium, Germany, Italy, the Netherlands,
Switzerland, the United Kingdom, and the United States announced
after their meeting that:
". . . henceforth officially-held gold should be used only to effect
transfers among monetary authorities and, therefore, they decided
no longer to supply gold to the London gold market or any other gold
market. Moreover, as the existiag stock of monetary gold is sufficient

ANNUAL REPORT ON T H E FINANCES

XXIX

in view of the prospective establishment of the facility for Special
Drawing Rights, they no longer feel it necessary to buy gold from
the market. FinaUy, they agreed that henceforth they will not sell
gold to monetary authorities to replace gold sold in private markets."
The effect of these steps was a separation of the private and official
markets for gold. In official transactions among monetary authorities,
gold would continue to be bought and sold at the existing $35 an ounce
price. But, the abstention of the cooperating monetary authorities
from dealings iri gold in private markets would mean that the price
of gold in private markets could diverge from the monetary valuation
of $35 an ounce. The drain from monetary gold stocks into private
holdings was halted by this action and the prospects for international
financial stability were greatly improved. With the removal of the
threat to international financial stabUity that had been posed by the
gold situation, the world's monetary authorities could proceed with
their plans to provide for an assured and orderly growth in international reserves.
A milestone in international monetary cooperation was passed in
September 1967 with the unanimous endorsement of the outline plan
for international monetary reform at the annual meeting of the I M F
in Rio de Janeiro. Under the plan, the problem of inadequate growth
of international monetary reserves would be met by creating Special
Drawiag Rights (SDR's) in the International Monetary Fund. At a
Ministerial Meetmg of the Group of Ten, March 29-30, 1968, ui
Stockholm, general agreement was reached—^with the French delegation abstaining on some points—on the Amendment to the Articles of
the International Monetary Fund necessary to carry the SDR plan
into operation. Subsequently the Executive Board of the International
Monetary Fund drafted the necessary technical language and submitted it to the Fund's Board of Governors for their approval. The
next step would be actual ratification of the plan by the member
governments.
The agreements reached at Rio de Janeiro and Stockholm were the
culmination of years of intensive study and negotiation. Acting in
concert, the world's leading nations had taken a long step toward the
provision of an international monetary system in which reserve needs
would be met through conscious and deliberate action. As President
Johnson indicated, the Rio agreement constituted the greatest forward
step in the improvement of the international monetary system
since the creation of the International Monetary Fund itself.
HENRY H .

FOWLER,

Secretary oj the Treasury.
To
To

THE
THE

PRESIDENT OF THE SENATE.
SPEAKER OF THE H O U S E OF REPRESENTATIVES.

REVIEW OF FISCAL

OPERATIONS

Financial Operations
Basis

Actual budget receipt and expenditure data in this section, applicable
to the Jiscal years 1967 and 1966, are on the basis of the budget concepts
then prevailing. A summary table showing actual and estimated data on
the basis of the budget concepts adopted pursuant to the recommendations
ofthe Presidents Commission on Budget Concepts appears on pages 7-8.
Summary

The administrative budget deficit for fiscal 1967 was $9.9 bUlion
(compared with $2.3 bUlion for 1966 and $3.4 bUlion for 1965). Net
administrative budget receipts for fiscal 1967 amounted to $115.8
bUlion ($11.1 bUlion over 1966). Net administrative budget expenditures for the year totaled $125.7 bUlion ($18.7 billion over 1966).
Net trust receipts exceeded net trust expenditures by $10.1 bUlion
in fiscal 1967. Net trust receipts for the year amounted to $44.6
bUlion ($9.8 bUlion above 1966), while net trust expenditures amounted
to $34.5 bUlion ($.4 bUlion less than 1966).
On a consolidated cash basis, total receipts from the public for 1967
were $153.6 bUlion, and total payments to the public were $155.1
bUlion—an excess of payments to the public of $1.5 bUlion.
Gross public debt outstanding was $326.2 billion at June 30, 1967,
an increase of $6.3 bUlion from June 30, 1966. The Government's
fiscal operations in fiscal years 1966-67, and their effect on the public
debt are summarized as foUows:
In billions of dollars
1966
Administrative budget receipts and expenditures:
Netreceipts ( - )
Net expenditures

...

Administrative budget deficit
Trust receipts and expenditures:
Netreceipts ( - )
Net expenditures
Excess of trust receipts (—), or expenditures...
Net investments in public debt and agency securities
Net sales (—) of Goverimient agency securities in the market.
Increase (—), or decrease in checks outstanding, deposits in transit (net),
etc
Increase (—), or decrease in publicdebt interest accrued.
Change in cash balances, increase, or decrease (—):
Treasurer's account
Held outside Treasury
Net decrease in cash balances
Increase in public debt

1967

-104.7
107.0

-115.8
125.7
2.3

-34.9
34.9

9.9
-44.6
34.6

(*)
3.6
—4.1

—10.1
10.9
—.4

.9
.1

.6
(*)

—.2
.1

—4.6
.1
—.1

—4.5

2.6

6.3

*Less than $50 million.

3
277-46S—68

1967 REPORT OF THE SECRETARY OF THE TREASURY

Administrative Budget Receipts and Expenditures
CHART 2

The Administrative Budget

Expefidifures\^^

80^-

^ .
Surplus

gg^ . . ^

803
y'-i

70 e / ' ..•''*'
I.6I ^
"

Receipts

The increase of $11.1 bUlion in net administrative budget receipts
during fiscal 1967 brought the total to $115.8 bUlion, thus marking the
sixth successive year in which new peaks have been established. The
overall rise occurred despite the delayed impact of reduced income
tax rates under the Revenue Act of 1964 and reduced excises under
the Excise Tax Reduction Act of 1965. The bulk of the income tax
reduction went into effect early in the calendar year 1964 and the
remainder on January 1, 1965. Excise tax repeals on a broad scale
went into effect on June 22, 1965, and January 1, 1966. On the other
hand, receipts were bolstered in both fiscal years 1966 and 1967 by
the revenue raising provisions of the Tax Adjustment Act of 1966.
Economic activity continued to expand throughout the fiscal year
1967 and tax receipts accompanied this general rise.
A comparison of net administrative budget receipts by major
sources for the fiscal years 1966 and 1967 is shown below.
1966

1967.

Source

Increase, or
decrease ( - )

In millions of dollars
Internal revenue:
Individual income taxes.
Corporation income taxes
Excise taxes
Estate and gift taxes
Total internal revenue
Customs duties
MisceUaneous receipts
Net administrative budget receipts

66,446
30,073
9,145
3,066

61, 526
33,971
9,278
2,978

6,080
3,898
133
-88

97, 730
1 767
5,231

107, 753
1,901
6,195

10, 023
134
964

104,727

116,849

11,122

REVIEW OF FISCAL OPERATIONS

Individual income taxes.—Receipts from individual income taxes
amounted to $61.5 bUlion in fiscal 1967, accounting for 53 percent of
total budget revenues and 55 percent of the year's increase. The net
gain of $6.1 billion reflected generaUy rising incomes. Receipts were
bolstered in 1966 and 1967 by the graduated withholding system which
went into effect on May 1, 1966. A change in the method of depositing
withheld taxes beginning in June 1966 increased receipts for the
transition year 1966.
Corporation income taxes.—Corporation income tax receipts rose to
$34.0 billion in fiscal 1967, $3.9 bUlion above the previous year.
Collections from corporation income taxes depend primarUy on the
amount of corporation profits earned during the calendar year which
ends within thefiscalyear. However, with the acceleration of corporate
payments required by the Revenue Act of 1964 and the further
acceleration imposed by the Tax Adjustment Act of 1966, profits in
the current year have become increasingly important. Corporation
profits rose $7.2 bUlion on a national account basis from calendar year
1965 to 1966. Tax receipts in fiscal 1967 were further bolstered by the
speedups in estimated payments required under the two acts. Accelerated payments add to Government receipts in the fiscal years
involved but do not affect the tax liabUities computed under the
present rates.
Excise ^aaies.—Receipts from excise taxes are shown in the foUowing
table.
1966

1967

Source

Increase, or
decrease (—)

In millions of doUars
Alcohol taxes
Tobacco taxes
Taxes on documents, other instruments, and playing cards
Manufacturersexcisetax.es
.-.
Retailers excise taxes
.....
MisceUaneous excise taxes
Undistributed depositary receipts and unapplied collections...
Gross excise taxes
Less:
Refunds of receipts
:
Transfers to highway trust fund...
Net excise taxes

3,814
2,074
146
5,614
108
1, 603
38

4,076
2,080

676

129
638

13,398

14,114

716

337
3,917

395
4,441

58
524

9,145

9,278

133.

68
5,478

4
1,732

262
6
-78
-136
-104

Excise tax receipts rose from $9,145 mUlion in fiscal 1966 to $9,278
mUhon in fiscal 1967. The full-year effect in 1967 of the Excise Tax
Reduction Act of 1965 as compared with the part-year effect in 1966
decreased receipts but a speedup in collections of most of the manufacturers and miscellaneous excise taxes augmented revenues.
Estate and gift taxes.—^Estate tax collections advanced for the eighth
consecutive year reaching $2.7 bUlion in fiscal 1967, $82 mUlion larger

1967 REPORT OF THE SECRETARY OF THE TREASURY

than fiscal 1966. This was more than offset by a decline in gift tax
collections in fiscal 1967. Receipts from this source are very erratic.
Customs.—Customs duties increased $134 mUlion during 1967 reaching a total of $1.9 bUlion. This rise reflected a substantial increase in
taxable imports accompanying the general rise in economic activity.
Miscellaneous receipts.—Miscellaneous receipts are the total of receipts by the Government of varied forms of income other than taxes.
The total of $6.2 bUlion received in the fiscal year 1967 was $1.0
bUlion or 18 percent larger than in 1966. The net overall rise is a
composite of divergent movements in the various forms of nontax
receipts.
Rent on Outer Continental Shelf lands, realization upon loans and
investments, and seigniorage showed strong advances. Other increases
in interest receipts, dividends and other earnings, and recoveries and
refunds were offset by declines in receipts from royalties and sales
of Government property and products.
Expenditures

Net administrative budget expenditures for fiscal 1967, by major
functions, are compared to 1966 in the following table. For more
detaUed information see table 16.
[DoUar amounts in miUions]

Function

National defense
Interest
Health, labor, and welfare
Space research and technology
Veterans'benefits and services
International affairs and finance
Agriculture and agricultural resources
Natural resources
Education 1
Commerce and transportation
Others
1
Less interfund transactions
Total

1966

1967

Amount Percent Amount Percent
of total
of total

Increase, or
decrease (—)

$57,718
12,132
7,574
6,933
5,023
4,191
3,307
3,120
2,834
2,969
'2,811
635

54.0
11.3
7.1
5.5
4.7
3.9
3.1
2.9
2.6
2.8
'2.6
.6

$70,783
13,524
10,288
5,426
6,187
3,401
3,393
3,322
3,360
3,305
3,411
682

56.3
10.8
8.2
4.3
4.9
2.7
2.7
2.6
2.7
2.6
2.7
.5

$13,065
1,392
2,714
—507
1,164
—790
86
202
526
336
600
47

106,978

100.0

126,718

100.0

18,740

' Revised.
» Previously included in "other."
2 Includes housing and community development and general government.

Trust Receipts and Expenditures
Receipts

Trust receipts rose $9.8 billion over 19,66 to $44.6 billion in fiscal
1967, due primarily to increased employment tax receipts. Net trust
receipts for 1967, by certain major sources, are compared with 1966
in the following table. For more details see table 5.

REVIEW OF FISCAL OPERATIONS
Increase, or
decrease (—)
In millions of doUars

Source

Employment taxes
Unemployment tax deposits by States...
Excise taxes
Interest on trustfunds
other 1
Less interfund transactions
Net trust receipts

1966

1967

20,022
3,067
3,917
1,908
6,707
770

26, 670
2,917
4,441
2,287
9,567
1,242

34,853

44,640

6,648
-150

624
379
2,860

472
9,787

»Includes Federal employee and agency payments to retirement funds, veterans' life insurance premiums,
and other misceUaneous trust receipts.

Expenditures

Net trust expenditures, including $0.9 biUion net purchases of
participation certificates by trust accounts, were $34.5 bUlion in
fiscal 1967, $0.4 billion less than 1966. There foUows a summary of
trust expenditures, by major functions, comparing 1967 and 1966.
For details see table 5.
[DoUar amounts in miUions]

Function

Health, labor, and welfare
Commerce and transportation
Housing and community development
Agriculture and agricultural resources
National defense
Veterans'benefits and services
Other 1
Less interfund transactions
Net trust expenditures

1966
1967
Increaise, or
Amount Percent Amount Percent decrease (—)
of total
of total
$26,384
3,751
3,202
1,151
760
565
-177
770

75.7
10.8
9.2
3.3
2.2
L6
-.6
2.2

$31,078
3,728
-2,269
1,148
1,091
815
161
1,242

90.1
10.8
-6.6
3.3
3.2
2.4
.6
3.6

$4,694
-23
-5,471
—3
331
260
338
472

34,864

100.0

34,510

100.0

-354

»Includes functions relating to natural resources, international affairs and finance, education, and general
governinent; also includes net transactions in deposit funds; 1967 includes participation certificate transactions.

Budget Estimates
There follows a summary of estimates for the fiscal years 1968 and
1969, as they appeared in the President's budget for 1969, along with
actual amounts for 1967. These estimates are on the basis of the
budget concepts adopted pursuant to the recommendations of the
President's Commission on Budget Concepts. They are not comparable with actual data appearing throughout this report on the basis
of budget concepts prevaUing during fiscal 1967. An explanation of
the new concepts as weU as detaUs of actual receipts and expenditures
on the new basis wiU appear in the annual report for the fiscal year
1968.

1967 REPORT OF THE SECRETARY OF THE TREASURY
Summary of receipts, expenditures, arid lending
[In miUions of doUars]
1967
actual

Receipt-expenditure account:
Receipts.
Expenditures (excluding net lending)
Expenditure account deficit ( - )
Plus loan account:
Loan disbursements
Loan repayments
Netlending
Equals budget:
Receipts.
Expenditures and net lending
Budget deficit ( - )

1968
estimate

1969
estimate

149,591
153,238
-3,437

155,830
169,856
-14,026

178,108
182, 797
-4,689

17,787
12,611
6,176

20,869
15,091
6,779

20,372
17,106
3,265

149,691
158,414
-8,823

155,830
176,635
-19,805

178,108
. 186,062
-7,954

SOURCE.—1969 budget document released Jan. 29,1968.

Corporations and Othier Business-Type Activities of the Federal
Government
The business-type programs which Government corporations and
agencies administer are financed by various ineans: appropriations,
sales of capital stock, borrowings from either the U.S. Treasury or
the public, or by revenues derived from their own operations.
Corporations or agencies having legislative authority to borrow
from the Treasury issue their formal securities to the Secretary of
the Treasury. Amounts borrowed are reported in the periodic financial
statements of the Government corporations and agencies as part of
the Government's net investment in the enterprise. In fiscal 1967,
borrowings from the Treasury, exclusive of refinancing transactions,
totaled $9,390 mUlion, repayments were $11,743 mUlion, and outstanding loans on June 30, 1967, totaled $24,611 million.
Those agencies having legislative authority to borrow from the
public must either consult with the Secretary of the Treasury regarding the proposed offering, or have the terms ot the securities to be
offered approved by the Secretary.
During fiscal 1967, Congress granted new authority to borrow
from the Treasury in the total amount of $1,094 mUlion, and reduced
existing authority by $215 mUlion, resulting^ in a net increase of
$879 miUion. The status of borrowing authority and the amount of
corporation and agency securities outstanding as of June 30, 1967, are
shown in table 110.
!

REVIEW OF FISCAL OPERATIONS

Unless otherwise specifically fixed by law, the Treasury each month
determines interest rates on its loans to agencies by considering the
Government's cost for its borrowings in the current market, as
reflected by prevaUing market yields on Government securities which
have maturities equal to the Treasury loans to the agencies. A description of the Federal agencies' securities held by the Treasury on
June 30, 1967, is shown in table 111.
During fiscal 1967, the Treasury received from agencies a total of
$915 million in interest, dividends, and simUar payments. (See table
114.)
Quarterly statements of financial condition, income and expense,
and source and application of funds are submitted to the Treasury by
Government corporations and agencies. Annual statements of commitments and contingencies are also submitted. These statements
serve as the basis for the combined financial statements compUed by
the Treasury which, together with the individual statements, are
published periodicaUy in the ^Treasury Bulletin." Summary statements of the financial condition of Goyernment corporations and
other business-type activities, as of June 30, 1967, are shown in
table 112.
Account of the Treasurer of the United States
The three major categories of the account of the Treasurer of the
United States are gold, sUver, and the general account. On June 30,
1967, gold held was valued at $13,110 million, held principally at the
Fort Knox Depository, with lesser amounts at mints and assay offices.
Gold liabilities totaled $12,998 million, covering gold certificates
issued (series 1934), the reservation for the gold certificate fund of the
Federal Reserve System, International Monetary Fund gold deposits,
and reserves against Federal Reserve notes and U.S. notes, leaving a
gold balance of $112 million.
Assets of the sUver account, consisting of silver bullion and sUver
doUars, had a value of $572 million as of June 30, 1967. LiabUities
against the sUver account (currency issued against sUver assets)
amounted to $398 million, leaving a silver balance totaling $175 million.
The assets of the general account of the Treasurer at yearend
included the gold and sUver balances, cash in the form of currency and
coin, unclassified collections, and funds on deposit with Federal
Reserve banks and other depositaries. During the year the balance in

1967 REPORT OF THE SECRETARY OF THE TREASURY

the general account decreased by $4, 648 million. The net change is
accounted for as follows:
Transactions affecting ihe account of the Treasurer of the United States, fiscal 1967
[In miUions of doUars]

Balance June 30, 1966
Excess of deposits, or witlidrawals (—), budget, trust, and
other accounts:
Deposits
Witlidrawals ( - )
.

12, 407
163,036
164,591

Excess of deposits, or withdrawals (—), public debt accounts:
Increase in gross public debt
Deduct:
Excess of Government agencies' investments in public debt issues. _
8,589
Accrual of discount on savings bonds
and bills (included in increase in
gross public debt above)
4, 706
Less certain public debt redemptions
(included above in withdrawals,
budget, trust, and other accounts).
5, 020
Net deductions

6, 314

8,275

-1,961

Excess of redemptions of Government agencies' securities in the marlcet.
Net transactions in clearing accounts (documents not received or classified by the Oflice of the Treasurer)
^

— 1, 787

Balance June 30, 1967

-1,555

654
7, 759

Government-wide Financial Management
On March 23, 1967, the Under Secretary met with the Comptroller
General, the Director of the Bureau of the Budget, and the Chairman
of the Civil Service Commission to review progress under the Joint
Financial Management Improvement Program and to plan further
improvement efforts. Revised Terms of Reference for the Joint
Program were issued during the year outlining the responsibUities of
members, organization of the program, andi methods of operation.
The revised Terms provide for:
i
.
—Participation by the Chairman of the CivU Service Commission
as a Joint Program Principal to assist in the personnel administration
aspects of financial management.
—Rotation of the Steering Committee chairmanship on an annual
basis.
-—Regular meetings of the Joint Program Principals with the Steering Committee and annual submission of long- and short-range plans
by the Committee.
As part of the broad effort set in motion last year to accelerate the
pace of the Joint Financial Management Improvement Program, a
policy paper was approved by the heads of the Joint Program. I t
contains seven recommendations designed to provide a policy frame

REVIEW OF FISCAL OPERATIONS

work for long-range development efforts in Go vernment-wide financial
reporting, geared largely to concurrent developments in agency
accounting systems.
In addition to the Treasury Department's participatiori in Government-wide financial management matters through the Joint Program,
the Department made considerable progress in fiscal management
areas for which it has responsibihty and which have an impact on the
total Federal Government fiscal operations. A revision of Department
Circular No. 1075 was issued on February 13, 1967. This circular
covers disbursement practices for all advances under Federal grant
and other programs whether by letter of credit or Treasury check.
Instructions implementing the revised circular have been published
in the Treasury Fiscal Requirements Manual for agency use. Under
revised regulations, the use of letters of credit is now limited to
advances aggregating $250,000 or more to a single recipient in 1 year.
This policy has helped eliminate manual processing of letters of
credit and payment vouchers for relatively small amounts. Internal
agency regulations submitted to Treasury for approval are being
reviewed by the Bureau of Accounts on behalf of the Fiscal Assistant
Secretary. Procedural changes were also made strengthening fiscal
controls and improving the timeliness of expenditure reports submitted
to Treasury by program agencies. Disbursements are reported based
on payment vouchers received from grantees and such reports are
reconciled monthly with withdrawals from the account of the Treasurer of the United States.
During fiscal 1967 the Secretary of the Treasury approved a plan to
modify and extend the depositary receipt system used for collection of
withheld Federal income and FICA taxes, railroad retirement taxes,
and certain Federal excise taxes. The plan, a joint effort of the Fiscal
Service and the Internal Revenue Service, is aimed at increasing the
availability of cash in the Treasury and further reducing the cost of
coUecting such taxes. The modified system (now referred to as the
Federal Tax Deposit System) was used this year to collect 1967
corporate income taxes. When fully operative in 1968, employers'
withholding, railroad retirement, and certain excise taxes (presently
collected through use of depositary receipts) TOU also be collected
under the new procedures.
The new Federal Tax Deposit System will substantiaUy reduce
present costs. Briefly, deposit forms will no longer be validated by
Federal Reserve banks and tax returns will no longer have validated
receipts attached. Credits for Federal tax deposits processed by the
Federal Reserve banks will be recorded in the taxpayer accounts of
the Internal Revenue Service and such accounts will be the basis for
audit of the tax returns claiming the credits. In addition, postage costs

19 67 REPORT OF THE SECRETARY OF THE TREASURY

will be reduced substantiaUy by a large reduction in mail workload
since quarterly supphes of Federal Tax Deposit forms will be mailed
instead of individual blank forms with each vahdated depositary
receipt formerly required. The new system involves an integrated
utihzation of Treasury-wide computer resources, including (1) the
Bureau of Accounts, in preparing and mailing the Federal Tax Deposit
forms; (2) the Federal Reserve banks, in processing the deposits made;
(3) the Office of the Treasurer of the United States, in assembling the
systemwide deposits and developing magnetic tape input for the
Internal Revenue Service; and (4) the Internal Revenue Service, in
maintaining the individual taxpayer accounts.!
Instructions on other Go vernment-wide matters were also released
during the year as part of the Treasury Fiscal Requirements Manual,
including (1) withholding of Federal income itax from allowances or
reimbursements to new and transferred employees; (2) allotments for
purchase of U.S. savings notes in combination with U.S. savings
bonds; and (3) increased withholding of State of Maryland income
tax in accordance with the 1967 amended Maryland income tax law.
The manual is intended ultimately to cover all;Treasury regulations on
central accounting, reporting, disbursing, and other fiscal matters,
including certain procedures and forms to be ehminated from the
^^General Accounting Ofl&ce Policy and Procedures Manual."
Public Debt Management and Ownership
The primary function of public debt management is to raise the
funds needed to meet expenditures not covered by revenues and to
refund maturing debt obligations. This primary function needs to be
carried out in a manner contributing to noninflationary growth in the
domestic economy and achievement of balance in our international
accounts. Secondary objectives are establishing and maintaining a wellbalanced debt structure, providing debt instruments commensurate
with the needs and requirements of an orderly Government securities
market, coordinating the growing volume of Government agency debt
operations with Treasury debt policy, and minimizing the interest
cost of Treasury and Federal agency borrowing.
Early in fiscal 1967 the domestic economy was experiencing an
almost unparaUeled tightness in money markets. Contributing factors
were excessive demands for credit from elements of the private sector,
increases in the demands for goods and services by the Federal Government as a result of the expansion of the U.S. commitment in
Vietnam, and growing State and local government capital needs.
Interest rates had again been rising in the fourth quarter of fiscal 1966
and there was a prospect for substantial Treasury financing in the
first half of fiscal 1967. With market interest rates having remained

REVIEW OF FISCAL OPERATIONS

above the 4^ percent statutory interest rate ceUing for Government
securities with maturities exceeding 5 years, Treasury financing in the
previous year had been confined entirely to short and intermediate
term issues. Consequently, whUe the marketable debt had increased
by only about a half a bUlion doUars in fiscal 1966, the under 5-year
debt had grown by $6K billion and the average maturity of the marketable public debt had shortened from 5 years 4 months to 4 years 11
months. In fiscal 1967 the Treasury faced the same impediments to
maintaining a balanced debt structure. During the year, however,
the Treasury was able to offer securities of the maximum 5-year length
in three out of four of the major quarterly financings for a total
issuance of $9 billion. In spite of these debt lengthening steps, however,
the passage of time and the need for new cash borrowing in the shortterm area resulted in a shortening of the average maturity of the
marketable Treasury debt by 4 months to 4 years 7 months on
June 30, 1967.
CHART 3

Market Yields At Constant Maturities 1961 -'67

1 Estimated yields of U.S. Government securities at 1, 5, and 20 years; bank discount rates on bills
monthly averages of end of week figures.

Near the end of the fiscal year, in conjunction with a request for
an increase in the debt limit, the Treasury asked for two modifications
ia the 4}^ percent statutory interest ceUing—^first, that the maximum
maturity on Treasury notes, to which the rate ceiling does not apply,
be extended from 5 years to 10 years and, second, that authority be
given to seU up to $2 biUion of longer bonds without regard to the
4% percent ceUing. In his statement before the House Ways and Means

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Committee on May 15, 1967,^ Secretary Fowler commented as follows:
''This shortening tendency is unwelcome. I t presents a problem that
should be dealt with in an orderly and systematic way, so that we
do not face an excessive pUeup of maturing debt. Such a pUeup, if it
came at a time of tight money and high rates, would mean that the
Treasury had to compete for investment funds on most unfavorable
terms—bidding against itself and against other borrowers for the
favor of investors. I t is this kind of frantic competition that could
send short-term rates up sharply and push long-term rates much
higher, too, with disruptive effects throughout the capital markets."
The Congress granted an extension in the maturity of Treasury
notes from 5 years to 7 years which would make avaUable moderate
means of debt extension beginning with the financings of fiscal 1968.
In another step to improve the debt structure the Treasury launched
the largest savings bond campaign since World War II. To encourage
additional savings and reduce the amount of marketable debt financing
required, a new U.S. Savings Note ^ known as a ''Freedom Share"
was announced on February 21 and placed on sale on May 1, 1967.
The new savings note, which must be held for 1 year before it can be
cashed, earns approximately 4.74 percent when held to maturity of
4}^ years. I t is avaUable for purchase by individuals and only with the
simultaneous purchase of series E bonds under the payroll savings or
bond-a-month plans.
In fiscal 1967, the Treasury relied mainly on additional sales of
Treasury biUs to meet its new cash needs. About one-fourth of the
new cash was raised through sales of the new monthend 9-month bUl
cycle which began in September 1966. Most of the remainder was
provided by the sale of $10.0 biUion of tax anticipation bUls.
Federal credit agency financing in fiscal 1967 was even more closely
coordinated with Treasury borrowing in order to minimize the impact
of Federal debt operations on financial markets. During the last half
of fiscal 1966 there had been a particularly heavy concentration of
agency debt and participation certificates issued and the outlook was
for continuation of this trend in fiscal 1967. On September 8, 1966,
the President annoimced a program designed to ease the developing
inflationary pressures and imbalances within the economy and to
ease existing pressures in the financial markets.: This was foUowed by
an announcement by the Secretary of the Treasury ^ postponing the
sale of participation certLficates for the remainder of the calendar year
or imtU market conditions unproved and limiting Federal agency
security sales in the market to amounts required to replace maturing
I See exhibit 26.
«See exhibit 12.
8 See exhibit 23.

REVIEW OF FISCAL

OPERATIONS

issues. Any new money needed would be raised by sales of agency
securities to the Government investment accounts.
CHART 4

Public Holdings of Marketable Treasury and Federal
Agency Obligations
$Bil.

$Bil.

Treasury Securities

Federal Agency Obligations

^CCC Export-Import and FNMA participations.

The result of these steps was to reduce Federal credit demands on
the private sector (net of purchases by the Government investment
accounts and the Federal Reserve System) by $5.8 bUlion. This
decline in public holdings of Treasury and Federal agency securities
consisted of a $2.7 bUlion increase in holdings of participation certificates which was more than offset by declines of $7.3 billion in direct
Treasury issues and $1.3 bUhon in Federal agency issues. By contrast
in fiscal 1966 Federal credit demands on the private sector had increased $2.8 bUlion.
The $7.3 biUion decline in private holdings of direct Treasury
securities in fiscal 1967 was the largest such reduction since 1951 as
Federal Reserve banks and Government hivestment accounts acquned
$13.6 bUlion of governments. The total Treasury debt outstanding
increased by $6.4 bUlion.
As Ulustrated by chart 5, commercial bank holdings of Government
securities registered a net increase duriag the fiscal year. This was
the first increase since 1962 and represented a rebuUding of liquidity
after the particularly sharp drop in the previous year. Corporations,
on the other hand, stepped up their liquidation of governments in
fiscal 1967, with holdings reaching a postwar low of $11.1 bUlion on
June 30. Other private nonbank investors liquidated a net $4.8

1967 REPORT OF THE SECRETARY OF THE TREASURY

biUion Government securities in fiscal 1967 contrasted with increases
of $0.6 billion the previous year and $4.4 bUlion in fiscal 1965.
CHART 5

Changes in Public Debt Holdings by Investor Classes
$Bil.

Fiscal Year
1966
+5^

*9.l

iiiii

fl
'

Fiscal Year
1967
+.6

10^

m
-3.5J

-3.2
-4.8

-5^

FINANCING OPERATIONS

The Treasury began fiscal 1967 with an operating cash balance of
$10.9 bUlion, an amount sufficient to meet seasonal budget deficits
untU late in August when the first tax anticipation bUls of the year
were issued for cash. However, estimates of total cash needs for the
July-December period were rapidly adjusted upward as defense
expenditures increased and the Treasury absorbed a portion of agency
financing. The new cash needed during this period totaled about
$10K billion, and the raising of this amount brought the debt very
near its statutory limit, even though operating cash balances were
reduced to extremely low levels in December. Maturing securities
totaling $34.2 bUlion were to be refunded during the fiscal year.
Although the amount held by private investors—$16.8 biUion—was
$2 bUlion to $6 biUion larger than in the past 2 years, it was well
within manageable proportions.
I
Two prerefundings were offered during the year—the first in
August to lighten the concentration of privately held November
maturities and the second in May 1967, when there was an opportunity to reach out for the August 1967 maturities.
The first major borrowing operation of the fiscal year was announced late in July: to refund $9.1 biUion Treasury securities maturing in mid-August and to prerefund $5.8 bilhon! of November maturities. Holders of the two maturing August issues were offered both a

REVIEW OF FISCAL OPERATIONS

1 year 6)4 percent certificate and a 4^{ year 5K percent note. The
holders of the three November maturities were offered only the longer
5K percent note. Private investors held $3.1 bUlion of the maturing
August securities and exchanged nearly 80 percent of their holdings
into the two new issues. In the prerefundhig, 34 percent of the $4.9
biUion privately held November maturities were exchanged for the
5K percent notes. Although the attrition on the August maturities was
slightly higher than normal, the amount of the prerefunding exceeded
expectations and reduced the November maturities to a routine level.
During August yields on Treasury notes and bonds rose steadily
to their highest levels since the twenties. Yields on corporate and
tax-exempt bonds reached 30-year highs. Treasury bUl market rates
continued to climb and reached their peaks in the third week of
September.
On August 11 the Treasury announced an auction of $3 billion of tax
anticipation bUls as its first cash borrowing of the fiscal year: $2 bUlion
to mature in March 1967 and $1 biUion in April 1967. Although bidding
was effectively confined to commercial banks by permitting full
payment through credits to Treasury tax and loan accounts, the banks
anticipated some difficulty in distributing the tax bUls in the secondary market and were cautious in their bidding. The average issue rate
of 5.34 percent for the March bUl and 5.43 percent for the AprU
maturity were historic highs for such securities.
The market atmosphere remained cautious into early September, but
improved foUowing the announcement of the Administration's program to deal with the problems of inflation and credit stringency.
On September 21, 1966, the Treasury announced a program to
auction 9-month bUls in conjunction \vith the regular 12-month bUl
auction, to raise needed new cash and to enhance the marketabUity
of the 12-month bUls. The 9-month bUls were to be reopenings of the
outstanding 12-month bUls and were to be issued in amounts of $500
mUlion. At the same time newly issued 12-month biUs were reduced
from $1 biUion to $900 mUlion, resulting in net new cash of $400
mUlion in each of the coming months. In November a $1.2 bUlion
strip of Treasury bUls consisting of an additional $400 mUlion each
of the outstanding 12-month bUls naaturing March 31, AprU 30, and
May 31, 1967, was auctioned to raise additional new cash. The sale
of these bUls had the effect of integrating the March, AprU, and May
monthend bUl issues more speedUy into the new cycle of monthly
sales of 12-month and 9-month Treasury bUls. The net effect of the
new 9-inonth cycle was to raise $2.8 biUion of new cash in the JulyDecember half of the flscal year and $0.8 bUlion in the January-June
half.

1967 REPORT OF THE SECRETARY OF THE TREASURY

The second offering of tax anticipation bUls was made on October 5
when the Treasury announced a $1.5 billion addition to the April 21,
1967, tax bills (originally issued in the amount of $1.0 bUlion in
August 1966) and $2.0 bUlion of a new June 22, 1967, issue. The
announcement was favorably received in a market that had been
showing consistent improvement since the third week in September.
Commercial banks were allowed to make full payment for the new
bUls by crediting their Treasury tax and loan accounts, consequently
the auction bidding was generally confined to the banks. Average
issue rates were 5.48 percent for the April maturity and 5.59 percent
for the June maturity.
In the November financing the total of the three maturing issues
outstanding was $4.1 biUion, reduced from $5.8 bUlion at the beginning
of the fiscal year as a result of the August prerefunding. Four-fifths or
$3.2 billion was held by private investors with commercial banks
holding about 50 percent of the total. To provide for this financing
the Treasury announced on October 27 that it would issue for cash
$2.5 billion of 5% percent, 15-month Treasury notes to mature on
February 15, 1968, and $1.6 bUlion of 5% percent 5-year notes to
mature on November 15, 1971. The announcement provided for full
allotments to State, political subdivisions, public pension and retirement and other public funds, international organizations in which the
United States holds membership, foreign central banks and foreign
states, Govemment investment accounts and the Federal Reserve
banks. All other investors were assured of full allotments on subscriptions up to $100,000. The Treasury announcement was well
received in the market and prices on coupon issues, which had been
moving lower, quickly improved. Both issues were heavily oversubscribed and the Treasury announced allotment rates of 30 percent on
the 5% percent 15-month note and 10 percent on the 5^^ percent 5-year
note. The cash offering not only avoided attrition on the November
maturities but enabled the Treasury to raise $298 miUion of new cash
through a moderate overallotment.
The final step in the July-December cash bprrowing program was
announced on November 30 with an offering of $0.8 bUlion additional
June 1967 tax anticipation bUls. After declining sharply in the last
half of November, Treasury biU rates had leveled off in early December
but on balance market participants remained fairly optimistic and

REVIEW OF FISCAL OPERATIONS

bidding for the new tax biUs was quite aggressive. The average issue
rate established by the auction was 5.25 percent.
As the second half of the fiscal year began Treasury coupon issues
continued the rising price trend that had prevaUed in December and
there was a feeling among market participants that with a relaxation
of monetary policy the outlook for lower rates would continue to
improve. Other influences on the Treasury flnancing outlook were a
relatively low operating cash balance of $4.6 bUlion on December 31, a
debt subject to limit of $329.5 bUlion (about one-half bUlion below the
statutory limit of $330 biUion), and an estimated budget surplus in
the second half of the fiscal year of about $5.0 bUlion. The estimated
new cash need under these conditions, assuming normal attrition in
the February and May financings, was a little under $4 bUhon, a
portion of which would be provided by the already instituted 9-month
bill cycle.
The two maturing issues in the February financing totaled $7.5
bUlion of which $3.9 bUlion was held by private investors. The ownership of the privately held debt was about evenly divided between
commercial banks and nonbank investors and the bank holdings
were normaUy distributed between the large and small banks. Under
these circumstances, to avoid the attrition of a rights exchange, a
cash offering of $5.5 biUion of 15-month notes and $2 biUion 5-year
notes was announced on January 25, 1967. Both issues carried 4%
percent coupons with the 15-month issue priced to yield 4.85 percent
and the 5-year issue priced to yield 4.84 percent. The market responded
enthusiasticaUy to the cash offeruig and was further buoyed by a cut
in the British central bank rate and the reduction in the prime lending
rate by most of the commercial banks in the United States. Total
public subscriptions totaled $20 billion for the 15-month note and
$22 bUlion for the 5-year note. Subscriptions up to $100,000 for the
shorter note were allotted in fuU with larger subscriptions allotted on
a 10-percent basis.
For the longer note subscriptions up to $50,000 were allotted in
full with larger subscriptions aUotted on a 7-percent basis. Subscriptions from official and other governmental accounts were aUotted in
full. Debt limit restrictions prevented the raising of substantial
additional cash at this time, even though the heavy subscriptions
would indicate market wUlingness to accept a normal overallotment.
The amount allotted, therefore, was only sufficient to cover the maturing issues and provide a little less than $100 miUion of new cash.

277-468—68-

1967 REPORT OF THE SECRETARY OF THE TREASURY

On March 2 legislation was enacted ^ temporarUy increasiag the
debt lunit to $336 bUlion through June 30, 1967. On March 1 the
Treasury had announced that it would auction an additional $2.7
bUhon of the June 1967 tax anticipation bUls. This was to furnish the
balance of the new cash needs for the fiscal year. The auction was set
for March 7 and the commercial banks were aUowed to pay up to
50 percent of the amount of their accepted tenders by credit to
Treasury tax and loan accounts. The bidding was aggressive and the
average auction rate was set at 4.30 percent.
In the May financing the Treasury again took an opportunity to
extend the debt and also lighten the heavy August 1967 maturities by
offering a prerefunding package containing a 5-year note. Holders of
the maturing $9.7 bUlion May note and the $1.4 bUlion June 15,
2K percent bond were offered a 15-month 4}^ percent note and a 5year 4% percent note at par. The holders of the three August maturities totaling $11.0 bUlion were offered only the 5-year note. Private
investors exchanged 82 percent of their $4.2 bUlion holdings of the
May and June maturities and in the prerefunding more than 26 percent of their $4.8 biUion holdings of August maturities. Including
exchanges by official accounts, total exchanges for the two new issues
came to $6.4 bUlion for the 4K percent note and $5.3 bUlion for the
5-year note.
The two accompanying tables summarize the Treasury's major
financing operations during the fiscal year and table 43 provides data
on allotments by investor classes. The exhibits on public debt operations provide further information on public offerings and allotments
by issues in tables and representative circulars. For detaUs on participation certificate sales, retirements, and those outstanding see
table 115.

1 See exhibit 14.

REVIEW OF FISCAL OPERATIONS

Public offerings of marketable Treasury securities excluding refinancing of regular
bills, fiscal year 1967
[In millions of dollars]
Cash offerings
'Date

Description

Exchange offerings

For new For reinoney funding

For
maturing

In advance
refunding

Total

CERTIFICATES AND NOTES

Apr. 1
Aug. 15
Aug. 15
Oct. 1
Nov. 15
Nov. 15
1967
Feb. 15
Feb. 15
May 15
May 15

1J^% exchange note—Apr. 1,19711
53^% certificate—Aug. 16,1967. _5J4% note—May 15,1971
1H% exchange note—Oct. 1,1971»
5 ^ % note-Feb. 15,1968 at 99.88 3.._..
5H% note—Nov. 15,1971 at 99.62 3

2 21
6,919
2,578
35
4,071 [

21
5,919
4,266
36
2,635
1,734

7,508 {--'"4"6,'444
4 3,952

1,358

6,587
2,006
6,444
5,310

3,045

33, 956

4M% note—May 15,1968 3
4 ^ % note—Feb. 15,1972 3
4i/i% note—Aug. 15,1968 at 99.95
4 ^ % note—May 15,1972

\
./

.QQ
^^^

\
../

g«^

Total certtficates and notes.

383

11,579

18,949

1,687
......

BILLS « (MATURITY VALUE)

1966
1967

Increase in outstanding 1-year bill offerings:
July through September
October through December
January through March
April through June

Totalincrease
1966 Other bill offerings:
Aug. 26
5.338% 208-day (tax anticipation)
1967-...
Aug. 26
5.433% 238-day (tax anticipation)
1967
Oct. 16
5.483% 185-day (tax anticipation)
1967. additional
Oct. 16
5.586% 247-day (tax anticipation)
1967...
Dec. 12
5.245% 192-day (tax anticipation)
1967, additional.
1967
Mar. 13
4.295% 101-day (tax anticipation)
1967, additional
Total biUs
Total public offerings

400
2,400
800

3,600

Mar. 22,
Apr. 21,
Apr. 21,
June 22,
June 22,

2,006

2,006
1,003

1,003
1,507

......

1,507

2,007

......

2,007
801

801

June 22,
2,707
13,631
14,014

2,707

11, 579

18, 949

......
3,045

13,631
47,587

1 Issued only on demand in exchange for 2% percent Treasury bonds. Investment Series B-1975-80.
2 Issued subsequent to June 30,1966.
3 A cash offering (aU subscriptions subject to allotment) was made for the purpose of paying off the matured
securities in cash. Holders of the maturing securities were permitted to present them in payment in lieu
of cash to the extent subscriptions were allotted. For further detail see exhibit 2.
4 The 2]/^ percent June 1962-67 bonds are included in the May 1967 refunding.
5 Treasury bills are sold on a discount basis with competitive bids for each issue. The average price for
auctioned issues gives an approximate yield on a bank discount basis as indicated for each series.

196 7 REPORT OF THE SECRETARY OF THE TREASURY

Disposition of marketable Treasury securities excluding regular bills, fiscal year 1967
[In millions of dollars]

Date of
refunding br retirement

Redeemed
for cash
or carried to
maIssue date tured
debt

Securities

Description and maturity date

Exchanged for
new issue
At maturity

In
advance
refunding

Total

BONDS, NOTES, AND CERTIFICATES

Aug.
Aug.
Aug.
Aug.
Aug.
Oct.
Nov.
Nov.
Nov.

15
15
15
15
15
1
15
15
15

4% note—Aug. 16,1966
3% bond—Aug. 15, 1966
4M% certificate—Nov. 16, 1966
4% note—Nov. 15, 1966
3H7o bond—Nov. 15,1966
1H% exchange note-Oct. 1,1966
3H% bond-Nov. 16, 1966
4% note—Nov. 15, 1966
4M% certificate-Nov. 16, 1966

Feb.
Feb.
Jan.
Feb.
Mar.
Oct.
Mar.
Feb.
Jan.

15,1962
28,1958
19,1966
16,1965
16,1961
1,1961
15,1961
16,1965
19,1966

1967
Feb. 15
Feb. 15
Apr.. 1
May 15
May 15
May 15
May 16
May 15

3 ^ % note—Feb. 15,1967
4% note—Feb. 15, 1967
1H% exohange note—Apr. 1,1967
4K% note—May 15,1967
2}4% boAd—June 15, 1967 2
534% certificate—Aug. 15,1967
3 ^ % note—Aug. 15, 1967
4 ^ % note—Aug. 15, 1967

Mar.
Aug.
Apr.
Nov.
May
Aug.
Sept.
Feb.

15,1963
13,1965
1,1962
15,1966
5,1942
15,1966
15,1962
15,1966

Totalbonds and notes
1967
Mar. 22
Apr. 21
Apr. 21
June 22
June 22
June 22

601
138

7,936
• 662

357
966
1,035
1,071

»298
1637
163

1,907
1,737
270
438
344

8,764

517
684
586

2,368
5,161
270

1460
1 3,414

9,748

9,310
1,086

23,756

8,436
700
617
584
586
357
1,264
1,672
1.135

308
837
213

1,429
308
837
213

3,045

36,665

BILLS

6.338% (tax anticipation)
6.433% (tax anticipation)
6.483% (tax anticipation)
5.586% (tax anticipation)
5.245% (tax anticipation)
4.295% (tax anticipation)

Aug.
Aug.
Aug.
Aug.
Aug.
Aug.

2,006
1,003
1,607
2,007
801
2,707

26,1966 ' 3 2,006
26,1966
3 1, 003
26,1966 1 3 1,607
26,1966 ' 3 2,007
26,1966
3 801
3 2, 707
26,1966

Total bills

10,031

Total securities.

18, 795

10,031
23, 756

3,045

46,696

1 Accepted in payment in lieu of cash.
2 Included in the May 1967 refunding.
3 Including tax anticipation issues retui-ned for taxes.

Public debt changes

Outstanding public and guaranteed debt increased $6.4 bUlion in
fiscal 1967 from $320.4 bUlion on June 30, 1966, to $326.7 bUlion on
June 30, 1967. In the marketable sector the Treasury issued $47.6
bUlion of new securities during the fiscal year; exclusive of regular bUl
rollovers. Securities issued for new cash totaled $14.0 billion, including
$10.0 bUlion of tax anticipation bUls issued and redeemed within
the fiscal year. Maturities and cash redemptions, including the tax
anticipation bUls and Treasury bonds redeemed for estate tax purposes,
were $46.1 bUlion. The marketable public debt outstanding increased
by $1.5 biUion. Marketable debt maturing within 1 year rose $0.5
bUlion in fiscal 1967, whUe debt maturing in 1 to 5 years increased
by $10.5 bUlion and debt maturing beyond 5 years declined by $9.5
bUlion. The increase in intermediate term debt and the drop in

REVIEW OF FISCAL OPERATIONS

longer maturities reflected the continued inabUity of the Treasury to
offer bonds, because of the statutory 4}^ percent interest ceUing.
Public nonmarketable debt increased $0.3 bUlion in fiscal year
1967. Outstanding series E and H savings bonds increased by $1.1
bUlion. Kedemptions of other savings bonds, investment series
bonds, and securities issued directly to foreign official agencies
declined $0.8 bUlion. The series E and H bond sales during the fiscal
year were the highest since fiscal 1956, totaling nearly $5.0 bUlion,
an increase of $0.3 bUlion over fiscal 1966. Sales of series E bonds
alone amounted to $4.6 billion, the best since fiscal 1946. Kedemptions
of series E and H bonds totaled $5.4 bUlion. Monthly detaU of savings
bond activity in fiscal year 1967 is shown in tables 46 and 47.
June 30, June 30, Increase, or
1966
1967 decrease ( - )

Class of debt

In billions of dollars
Public debt:
Marketable public issues, maturing:
Withinlyear
lto5years
6to20years
Over20years
Total marketable issues
Nonmarketable public issues:
Savings bonds:
SeriesE a n d H
Othorseries
Investment series bonds
Foreign series securities.
Foreign currency securities
Other nonmarketable debt

89.1
60.9
42.0
17.0

:...

Total nonmarketable issues
Special issues to Government investment accounts
Noninterest-bearing debt
Total public debt
Guaranteed debt not owned by Treasury....
Total gross public debt and guaranteed debt

_._

89.6
71.4
32.8
16.8 .

0.5
10.5
-9.2
-.2

209.1

210.7

1.5

49.7
.9
2.7
.8
1.0
.2

60.8
.4
2.6
.6
.9
.2

1.1
—.6
—.1
—.2
—.1
(*)

56.2
51.1
4.5

55.5
56.2
3.9

.3
5.0
—.5

319.9
.5

326.2
.5

6.3
.1

320.4

326. 7

6.4

*Less than $50 million.

Special securities issued directly to Government trust funds and
accounts rose $5.0 bUlion during fiscal year 1967 to $56.2 bUlion on
June 30, 1967. A surplus in the accounts of the Federal old age and
survivors insurance trust fund and the unemployment trust fund was
largely responsible for the rise in trust fund holdings of special issues.
The fiscal year 1967 income, expenditure, and investment activities
of the major trust funds and the accounts are shown in tables 64-84
and discussed on page 28.
Guaranteed debt not owned by Treasury consists of $20 mUlion
District of Columbia stadium bonds and $492 mUlion Federal Housing
Administration debentures issued under the Housing Act of 1934.
The $0.1 billion increase in this category during the fiscal year 1967

1967 REPORT OF THE SECRETARY OP THE TREASURY

was the result of additions during the year to FHA debentures
outstanding.
'^.
OWNERSHIP OF TREASURY SECURITIES

Of the $326.7 biUion of gross public and guaranteed debt outstandiag at the end of fiscal year 1967, $122.5 bUlion, slightly over onethird, was held by Government investment accounts and Federal
Keserve banks. Just over one-sixth, $55.5 bUlion, was held by commercial banks. Private nonbank investors held the remaining $148.7
biUion, or just under half of the total. This latter group of investors
comprises individuals (including partnerships and personal trust
accounts), insurance companies, mutual savings banks, savuigs and
loan associations, nonfinancial corporations, pension funds, foreign
and intemational accounts. State and local governments, nonbank
dealers, and nonprofit associations. The ownership distribution is
shown graphicaUy in chart 6.
Major changes.—Although the total Federal debt increased by $6.4
bUlion during the fiscal year, Federal Keserve banks and Government
investment accounts absorbed $13.6 bUlion, leaving a net liquidation
of Federal securities of $7.2 biUion by private investors. WhUe commercial banks increased their holdings by about $0.7 biUion, corporations continued their pattern of hquidation and reduced holdings by
$3.2 bUhon. Holdings of individuals declined by $2.2 biUion and
holdings of aU other investors as a group were down by nearly $2.6
bUlion. Ownership by investor categories on selected dates and changes
in ownership during the fiscal year 1967 are shown in the accompanying table. Data on ownership of interest-bearing governmental securities are shown in table 54.

REVIEW OF FISCAL OPERATIONS
Ownership of Federal securities ^ on selected dates, 1957-67
[Dollar amounts in billions]

June 30, June 30, June 30, June 30,
1957
1965
1966
1967

Estimated ownership by:
Private nonbank investors:
Individuals: 2
Series E and H savings bonds
Other securities
Total individualsInsurance companies
Mutual savings banks
Savings and loan associations
State and local governments
Foreign and international
Corporations
Miscellaneous investors 3

$41.5
24.8

$48.3
'22.6

$49.2
'23.9

$50.4
20.5

$1.1
-3.3

66.3
12.7
7.9
3.1
7.6
16.1
6.4

r70.9
10.6
5.8
7.2
24.1
15.7
'15.3
7.6

'73.1
9.7
5.1
7.3
24.5
16.4
'14.2
'7.2

70.9
8.7
4.2
8.0
25.0
14.7
11.1
6.1

-2.2
-1.0
-.9
.6
.5
-.7
-3.2
-1.1

136. 9
66.2
23.0
65.6

167.1
68,3
39.1
63.4

' 166. 7
'54.8
42.2
66.7

148.7
55.5
46.7
75.8

-8.0
.7
4.5
9.1

270.6

317.9

320. 4

326.7

6.4

ia8

Total private nonbank investors
Commercial banks
Federal Reserve banks
Federal Government investment accounts..
Total gross debt outstanding

Change
during
fiscal
year
1967

Percent
Percent owned by:
Individuals
Other private nonbank investors
Commercial banks
Federal Reserve banks
Federal Government mvestment accountsTotal gross debt outstanding

24
25
21
9
21

r22
r28
18
12
20

23
26
17
13
21

22
24
17
14
23

100

' Revised.
1 Gross public debt and guaranteed obligations held outside the Treasury.
2 Includes partnerships and personal trust accounts.
3 Includes nonprofit institutions, corporate pension trust funds, and nonbank Government security
dealers.
CHART 6

Ownership of the Federal Debt, June 30,1967
$Bil.
300-

200-

Total

iiiiiii ]

Ooy'l Invest
^ Accounts
Federal
* Reserve
ComI Banks ^

Private
Nonbank Investors

13267

100-

1
fl

^Individuals

Savings Instil. ^ ^ K ^

Corps

1967 REPORT OF THE SECRETARY OF THE TREASURY

Individuals.—During fiscal 1967, for the first time since 1961,
Government security holdings of individuals declined. This group,
which holds more of the Federal debt than any of the other private
investor categories, reduced its holdings by $2.2 bUlion from $73.1
bUlion on June 30, 1966, to $70.9 biUion on June 30, 1967. Individuals
increased their holdings of series E and H savings bonds by $1.1
bUlion, but this was more than offset by a reduction of $0.4 bUlion in
the older series savings bonds, which are no longer issued, and $2.9
billion of other Federal securities, primarily marketable issues. Holdings by individuals of agency securities decreased by $0.7 bUlion during
the year.
Insurance companies.—Holdings of Government securities by insurance companies declined $1.0 billion during fiscal 1967. Life companies
reduced their holdings $0.3 bUlion to a postwar low of $4.4 bUlion.
Fire, casualty and marine companies liquidated $0.7 billion to reduce
their portfolios to $4.4 bUlion. Life insurance companies continued to
hold a large proportion of their portfolios in long-term securities, but
the average maturity of their marketable governments declined by
7 months from the previous June to 19 years 4 months. The average
maturity of the marketable governments held by fire, casualty and
marine companies showed little change from the year before, falling
slightly from 7 years 1 month at the beginning of the year to 7 years
on June 30, 1967. Holdings of agency securities by insurance companies
increased by $0.2 bUlion during the year.
Mutual savings banks.—Mutual savings banks continued to liquidate
their Government securities, disposing of $0.9 billion during the fiscal
year. The structure of the mutual savings bank portfolio of Government securities remained relatively stable during the year with only
a 2-month drop in average length to 9 years 11 months. Mutual
savings bank holdings of Federal agency securities increased by $0.2
billion and holdings of corporate securities increased by $1.9 billion.
Savings and loan associations.—Government security holdings of
savings and loan associations have increased during each of the past 13
fiscal years from a level of less than $2 billion on June 30, 1954, to $8.0
billion at the end of fiscal 1967. Unlike last year, when the industry
experienced a pronounced slackening in deposit growth and the increase in Federal security holdings dropped to $0.1 billion, fiscal 1967
was a year of improved deposit growth and investment in Federal
securities increased by $0.6 bUlion. Savings and loan associations
generally purchase short to intermediate-term maturities. Approximately 80 percent of their Government portfolio matures within 10
years with the heaviest concentration of holdings in bonds with from
5 to 10 years to maturity. The average length of the marketable
Federal security holdings of these institutions is 7 years 1 month.

REVIEV;^ OF FISCAL OPERATIONS

State and local governments.—On June 30, 1967, State and municipal
governments held $25.0 billion of Federal securities—$0.5 billion more
than at the end of fiscal year 1966. Holdings of State and municipal
employee pension funds increased $0.1 billion during the fiscal year,
whUe nonretirement funds increased their holdings by $0.3 billion.
The bulk of pension fund investment in governments is long-term, as
evidenced by the 19 year 9 month average maturity of their holdings.
The general purpose funds of States and municipalities are invested in
governments for relatively short periods of time, with Treasury bills
in especially heavy demand for this purpose. In fiscal 1967 State and
local governments liquidated $0.1 billion Federal agency securities.
Foreign and international.—Foreign holdings of U.S. Government
securities totaling $10.1 billion were little changed during the year
whUe holdings by international and regional institutions decreased
$0.7 billion—to a yearend level of $4.6 bUlion.
Special nonmarketable securities issued directly to foreign monetary
authorities declined $0.3 billion but this was offset by an increase in
their holdings of marketable securities. Major changes during the year
in total holdings by individual country were liquidations of $0.4
billion by Canada and $0.3 billion by France. German holdings
iacreased by $0.5 billion.
The decline in holdings by international and regional institutions
reflected a $0.2 billion drop in marketable securities held mainly by
the International Bank for Eeconstruction and Development and a
$0.5 billion decrease in special noninterest-bearing notes issued to the
International Monetary Fund, the International Development Association, and the Inter-American Development Bank. The reduction
in I M F holdings reflected a change in the accounting for U.S. contributions which have not yet been caUed. On June 30, 1967, international and regional accounts held $3.3 billion noninterest-bearing
special notes and $1.3 billion marketable issues.
In fiscal 1967 the foreign and international investor group continued
to acquire Federal agency securities and increased their holdings of
these securities by $0.3 billion.
Nonfinancial corporations.—^Liquidation of U.S. Government securities by nonfinancial corporations continued during the fiscal year, but
at a much faster pace than in fiscal 1966—$3.2 billion in fiscal 1967
compared to $1.0 billion in fiscal 1966. This reduced corporate holdings
of governments to $11.1 bilhon at the end of fiscal 1967, the lowest
level of the postwar period. In fiscal 1967 corporate holdings of negotiable certificates of deposits fell $1.0 biUion and holdings of Federal
agency securities also dechned $1.0 bUhon.
Other private nonbank investors.—Nonprofit institutions, nonbank
dealers, corporate pension funds, and miscellaneous smaller institu

19 67 REPORT OF THE SECRETARY OF THE TREASURY

tions reduced their holdings of Government securities by $1.1 bilhon in
fiscal 1967 compared to $0.3 bilhon in fiscal 1966. Corporate pension
fund holdings dropped $0.3 billion, while dealers and nonprofit and
other smaller institutions' holdings of Federal securities fell $0.8 billion.
Commercial banks.—In fiscal year 1967 commercial banks were net
purchasers of $0.7 bilhon Federal securities after reducing their holdings in the 4 previous fiscal years.
In the first haff of the fiscal year commercial banks acquired $2.7
billion but during the last hah of the year holdings declined $2.0 billion. Government securities held by the larger reserve city banks increased $0.8 bilhon while smaller banks on balance hquidated $0.1
bilhon. The year-to-year increase in bank holdings of State and local
gbvernment securities was up sharply—$5.3 billion in fiscal 1967 compared to $3.7 billion in fiscal 1966^and holdings of Federal agency
securities increased $0.2 billion.
Federal Reserve System.—The Federal Reserve System acquired a
net $4.5 bilhon of Government securities during fiscal 1967 as the System continued to provide for growth in member bank reserves and to
offset reserve drains caused by sales of gold. The growth was $1.5 bilhon greater than in fiscal 1966. Treasury bills accounted for $3.7 billion of the increase and coupon securities accounted for $0.9 biUion.
As of June 30, 1967, the System Open Market Account held $46.7 billion of Federal securities with an average maturity of 17 months.
Government investment accounts.—The holdings of Government investment accounts rose $9.1 bUlion in fiscal year 1967—$5.7 biUion
more than ui fiscal 1966. Special issues accounted for $5.0 bUlion of
the increase whUe the remaining $4.1 billion was in marketable securities. The major increases occurred in the accounts of the Federal
old age and survivors insurance trust fund-—$3.4 biUion; the civU
service retirement fund—$0.7 biUion; and the unemployment trust
fund—$0.8 biUion.
At the end of fiscal 1967 the Government investment accounts
held $75.8 bilhon of Federal securities. Nearly three-fourths or $56.2
bUlion of the total was in the form of special issues held only by these
accounts. The remaining one-fourth included $2.1 biUion of nonmarketable investment series B bonds and $17.5 bUlion of other
issues, mostly intermediate and longer term marketable securities.
Taxation Developments
The most significant taxation developments in fiscal 1967 dealt
with legislation to influence the short-term performance of the economy. These included measures to suspend and restore the investment

REVIEVi^ OF FISCAL OPERATIONS

tax credit and proposals for an income tax surcharge and other revenue increasing measures.
Suspension and restoration of the inyestment credit and the allowance of accelerated depreciation on certain real property

Public Law 89-800, approved by President Johnson on November 8, 1966, suspended the investment credit and the allowance of
accelerated depreciation on certain real property with respect to property ordered or acquired between October 10, 1966, and December 31,
1967, and provided as weU for some relaxation on the limitations on
the investment credit, to take effect in 1968. Public Law 90-26,
approved June 13, 1967, provided that the investment credit and
accelerated depreciation be restored as of March 10, 1967.
On September 8, 1966, the President sent a message to the Congress
dealing with the problem of inflation and tight money. The message
noted fiscal actions taken in the early part of 1966 to take excess
purchasing power out of the economy. He Uidicated that there were
nevertheless ^'signs of developing imbalance in the economy,'' including price increases and "an exaggerated boom in business investment." He recommended a four-point program, which included, as
well as the suspension recommendations, reduction in Federal expenditure and cooperative action between the President, the Congress, and
the Federal Reserve Board "to lower interest rates and to ease the
inequitable burden of tight money."
The President recommended that the investment credit not apply
to orders placed on or after September 1, 1966, and before January 1,
1968, regardless of the date of delivery. He drew particular attention
to the fact that for the past 3 years business investment in plant and
equipment had been growing more than twice as fast as GNP, that
backlogs of orders for machinery and equipment were growing, and
that capital markets were clogged with excessive demand for funds to
finance investment.
With regard to accelerated depreciation the President recommended
that the Congress suspend until January 1, 1968, the use of accelerated
depreciation on all buUdings and structures started or transferred on or
after September 1, 1966. He emphasized the recent rapid growth of
commercial and industrial buUdiag and the consequent pressure on
buUding costs and interest rates.
The Ways and Means Committee held hearings on the President's
recommendations on September 12-16, 1966.^ A biU substantially
carrying out the President's program was passed by the House on
September 30. Public hearings were held by the Senate Finance Committee on October 3, 5, and 6, 1966. The bUl with the amendments
was passed by the Senate on October 14. The report of the Senate1 See exhibit 33.

1967 REPORT OF THE SECRETARY OF THE TREASURY

House Conference was filed on October 18 and accepted by the House
on October 20 and by the Senate on October 21. The bill (Public Law
89-800) was signed on November 8, 1966.
The suspension legislation contained several amendments to the
President's recornmendation. The suspension was made effective
October 10, 1966, rather than September 1. Two small business
exceptions were provided. The suspension of the investment credit
did not apply to $20,000 of investment by each taxpayer during the
suspension period. The suspension of accelerated depreciation did not
apply to $50,000 of construction begun during the suspension period
by each taxpayer, but the suspension applied to aU construction which
cost $50,000 or more. The suspension of accelerated depreciation on
buUdings as recommended by the President would have required a
cutback to straight line, but the legislation required only a cutback
to 150 percent declining balance. The suspensions were made inapplicable to certain facUities for water and air pollution control.
Public Law 89-800 also contained a number of rifles clarifying and
somewhat extending the President's recommendation that the suspension not apply! to assets acquired under a binding contract entered
into prior to the suspension date. For example, the suspension was also
made inapplicable to acquisitions in completion of facilities over 50
percent of which; were on order on the suspension date. Analogous
rules were written for certain facUities acquired under lease and for
construction of plant facUities and equipped buildings.
The final legislation contained two amendments to the basic investment credit proyision that were to take effect after December 31,
1967, the termination of the suspension period. The limitation on the
amount of the investment credit which may be claimed in any taxable
year was raised to the amount of the tax liabUity up to $25,000 plus
50 percent (rather than 25 percent) of the remaining liability. The
period for which unused credits may be carried over was extended
from 5 years to 7 years.
The legislation contained two provisions not related to the investment credit. One authorized the issuance of a new type of retirement
and savings bonds. The other dealt with professional football
leagues.
!
On March 9, 1967, the President addressed a message to the
Congress indicating his belief that the objectives of the suspension
legislation had been accomplished. He recommended "immediate and
prompt reinstaternent of the investment tax credit and accelerated
depreciation." Hearings were held by the Ways and Means Committee on March 14 and the legislation was passed by the House on
March 16. Hearings were held by the Senate Finance Committee on

REVIEW OF FISCAL OPERATIONS

March 20 and 21.^ The bUl was reported with amendments by the
Finance Committee on March 23. Although the bUl was debated at
great length in the Senate, the debate related almost entirely to proposed amendments to the Presidential Election Campaign Fund Act
of 1966. Final passage in the Senate took place on May 9. The President signed the legislation. Public Law 90-26, on June 13, 1967.
The legislation differed from the President's recommendation in
that it provided that where orders were placed during the suspension
period (between October 10, 1966, and March 9, 1967) the credit, or
accelerated depreciation, would apply to property acquired after
M a y 23, 1967, and it would apply to the portion of construction,
reconstruction, or erection which occurs after May 23, 1967. The
final biU also made the new 50 percent of tax provision in the investment credit limitation effective March 10, 1967, rather than December 31, 1967.
The act also extended the investment credit to aircraft used outside
of the United States but under contract with the United States. The
act also delayed the tax checkoff and distribution of funds under
the Presidential Election Campaign Fund Act until after the adoption
by law of guidelines governing the distribution of those funds.
The act is expected to reduce receipts as follows:
Fiscal year

1967
1968-1969
1970

Decrease in
receipts (—)
(millions)

-$320
-820
-475
-95
Total

-1,710

Income tax surcharges, speedup of corporate tax payments, and delay in reduction
of certain excise taxes

A temporary 6-percent surcharge on individual and corporate income
tax was recommended by the President in his state of the Union
message of January 10, 1967, in response to continuing and rising
Vietnam obligations and to increasing domestic needs. As revised
budget estimates showed a larger deficit to be likely, the President,
in his message of August 3, 1967, on the state of the budget and the
economy, asked that the tax surcharge be increased to 10 percent. The
temporary tax on corporations was to become effective July 1, 1967,
and on individuals October 1, 1967. I t was also recommended that the
pending reduction of automobUe and telephone excise taxes be postponed beyond the dates specified in the Tax Adjustment Act of 1966
(Public Law 89-368). Definitive action on these measures was not
taken until well into the fiscal year 1968. DetaUs wUl be contained in
the 1968 aimual report.
1 See exhibit 34.

1967 REPORT OF THE SECRETARY OF THE TREASURY

Tax treatment of the aged

The President, in his Aid for the Aged Message to Congress on
January 23, 1967, recommended in addition to social security amendments and other changes that the "tax structure for senior citizens
be completely overhauled, simplified, and made fairer," and the
"existing tax discrimination against the older Americans who are
wUling and able to work be eliminated." These objectives were
motivated by three weaknesses in present law: I t grants more relief
to those with retirement income than to those who continue working
past the age of 65; it is of more value to the elderly with higher
incomes; and it is exceedingly complex.
The detaUs of the recommendations were presented on March 1,
1967, to the Ways and Means Committee by Assistant Secretary of
the Treasury Surrey.V The proposed tax changes were included in
title V of H.R. 5710 which was introduced on March 1, 1967.
Under the provisions of H.R. 5710, the exclusion of social security
and railroad retirement benefits from income subject to tax, the
retirement income credit against income tax liabUity, and the extra
$600 aged exemption would have been eliminated and replaced by a
special exemption of $2,300 for single taxpayers over 65 and one of
$4,000 for married couples. The $2,300 special exemption was designed
to be the numerical equivalent of the maximum primary social
security benefit (before subsequent legislation, $1,600 rounded) and
the extra $600 personal exemption and its related $100 minimum
standard deduction. To arrive at the $4,000 married couple's exemption there was added $800 representing the wife's social security benefit
and $700 representing her extra $600 personal exemption and related
$100 minimum standard deduction, with the total rounded to $4,000.
The special exemptions would have been reduced doUar-for-dollar for
the amount of income, including social security and raUroad retirement benefits, received during the taxable year in excess of $5,600
in the case of a single individual and in excess of $11,200 in the case
of a married couple. To reflect contributions to retirement the amount
of the exemption would in no case have been reduced below one-third
of the amount of these benefits included for income tax purposes.
Other particulars of the proposal were the following: (1) Disability
benefits, lump-sum death benefits, and children's benefits would
remain excludable from income; (2) the provision which, under certain
conditions, permits a taxpayer to claim an exemption for an elderly
parent he is supporting would have been revised to allow the parent
to receive up to $1,200—rather than the present $600—of gross income
before the exemption was disallowed. This change would reflect the
fact that social security and railroad retirement benefits would have
»See exhibit 38.

REVIEW OF FISCAL OPERATIONS

then been included in applying the income test; (3) the minimum
income hmits for filing a return in the case of individuals over 65
would have been raised from $1,200 to $2,800. For married couples,
the $2,800 would have been in terms of their combined income in
recognition that their joint income was considered in applying the
phase-out rules for the new special exemption.
The President's proposal, including an increase in social security
benefits, was a balanced revenue program on which action was
pending at the fiscal yearend.
Social security amendments

In his Aid for the Aged Message of January 23, 1967, the President
stressed the inadequacy of present social security benefits—2K
milhon individuals receiving benefits of the minimum $44 a month;
an average monthly benefit of $84; more than 5 milhon still hving in
poverty.
The President recommended an increase in social security payments
(embodied in H.R. 5710, Social Security Amendments of 1967,
introduced on February 20, 1967).
The President also recommended ehmination of certain inequities in
relation to farmworkers. Federal employees, and severely disabled
widows. Certain actuarial adjustments in social security financing
were also recommended.
The maximum amount of earnings taxable and creditable toward
social security benefits was to have been increased under H.R. 5710
from $6,600 to $7,800 for the years 1968 through 1970, to $9,000 for
1971 through 1973, and to $10,800 after 1973. The amount an individual would have been permitted to earn without suffering a deduction in his social security benefits was increased from $1,500 to $1,680,
and the amount a beneficiary could earn in a month and still get his
benefit for that month, regardless of his annual earnings, was increased
from $125 to $140.
Under H.R. 5710 the tax rate schedule was to have been revised to
provide: (1) the tax rate for the self-employed for 1969 to 1972
would be 6.8 percent (instead of 6.6 percent); (2) the employeeemployer rate would be 9 percent in 1969 to 1972 (instead of 8.8
percent) and 10 percent (instead of 9.7 percent) after 1972.
The social security provisions of H.R. 5710 were reformulated in
H.R. 12080, Social Security Amendments of 1967, which was reported
out by the Ways and Means Cominittee on August 7, 1967. Final
action on these measures was not taken untU later in fiscal 1968.
Excise taxes

Transportation user charges.—President Johnson in his January 1967
budget message repeated his recommendation of 1966 for new and

1967 REPORT OF THE SECRETARY OF THE TREASURY

revised user charges related to Federal aid to highways and Federal
expenditures for the waterways and ahways systems. The recommended
rates and coverage for highway and waterways user charges were the
same as those proposed by the President in 1966. In the case of airways user charges, the detailed proposals were the same as the amended recommendations of August 1966. For detaUs, see 1966 annual
report, pages 43-44.
The President also recommended in his budget message the transfer
from the general fund of the Treasury of revenues equal to 2 percentage points of the excise tax on passenger automobUes to a new
highway beauty-safety trust fund. A draft of proposed legislation was
sent to the President of the Senate and the Speaker of the House of
Representatives on February 23,1967, by the Secretary of Transportation.
No Congressional action was taken in fiscal 1967 on the President's
1967 transportation user charge recommendations.
Time of payment of excises.—Payment of most major excise taxes,
other than those on alcoholjic beverages and tobacco products, was
changed by regulations from a monthly basis to a semimonthly basis
for liabUity beginning with the first half of February 1967. Payment
of taxes on alcoholic beverages and tobacco products was already on a
semimonthly basis. Under prior procedure, amounts due for any month
(if in excess of $100) had to be deposited by the end of the following
month. The revised rule, applicable to taxpayers whose liability for
any month in the preceding calendar quarter exceeded $2,000, requires
liabilities for each semimonthly period to be deposited by the end of
the next semimonthly period. Special provisions are applicable to the
transportation and communications taxes because liability for the
taxes is on the customers and not the firms furnishing the services.
The change in the payment system was estimated to increase administrative budget receipts in the fiscal year 1967 by $275 mUlion.
Excise legislation.—Public Law 89-523, approved August 1, 1966,
provided that manufacturers or importers of tires and tubes shall be
liable for excise taxes at the time of delivery to their retaU stores of
tires and tubes produced or imported by them.
Public Law 89-809, approved November 13, 1966, included a provision making manufacturers sales of ambulances, hearses, or combination ambulance-hearses subject to the 7-percent excise tax on passenger
automobUes. Previously, by administrative interpretation, ambulances
were classified as passenger automobiles for excise tax purposes, whUe
hearses and combination ambulance-hearses were classified as trucks
and subject to a 10-percent rate of tax.
Public Law 90-73, approved August 27, 1967, provided that wine
can be withdrawn free of tax when rendered unfit for beverage use.

REVIEW OF FISCAL OPERATIONS

Other legislation enacted

Changes in tax treatment covering a variety of Code provisions
were contained in the Foreign Investors Tax Act, Public Law 89-809,
signed by the President on November 13, 1966:
(1) Certain special limitations with respect to the deductibUity
of contributions to pension plans by self-^employed individuals were
removed. First, the limitation of the deduction to 50 percent of the
contribution was elimiaated, but the provision restricting the contribution to the lesser of 10 percent of earned income or $2,500 was
retained. Second, it allowed a self-employed individual to iaclude
in earned income aU of his net profits when his income is earned from
a business in which both the performance of personal services and
^ capital are material iacome-producing factors.
(2) Present law relating to the retirement plans of authors, inventors, and others was altered so that gain on the sale of property
created by their own effort could be included in the earned income
base for the purpose of computing deductions for contributions to
such plans.
(3) The taxation of straddles was modified to treat any gain on
the lapse of an option, granted to the taxpayer as part of the straddle,
as short-term capital gain (iastead of ordinary income). This permits
it to be netted against any capital loss which may result from the
exercise of the other option granted in the straddle, whUe retaining
ordiaary income treatment for any excess of net short-term capital
gain over net long-term capital loss.
(4) To obtain public support of Presidential election campaign
financing each individual was aUowed to designate $1 of his income
tax liabUity to be paid into the Presidential Election Campaign Fund.
(The operation of this provision was suspended in subsequent legislation, Public Law 90-26, discussed earlier.)
(5) The percentage depletion aUowance for certain extractive
products was liberalized.
(6) Tax-free exchanges of securities by means of swap funds were
restricted to plans filed with the Securities Exchange Commission
by January 1, 1967, and completed before July 1, 1967.
(7) The 7-percent investment credit is extended to property located
in U.S. possessions which is placed in service after December 31,
1965, so long as the property is owned by a U.S. taxpayer subject
to Federal income tax on income from the possession and such property
would otherwise be qualified for the investment credit.
(8) Changes were made in treatment of basis of property received
on liquidation of a subsidiary corporation.
(9) For purposes of the personal holding company tax, rents received from the leasing of tangible personal property manufactured
277-468—68

196 7 REPORT OF THE SECRETARY OF THE TREASURY

by a taxpayer wUl be treated as active income, rather than personal
holding company income, if the taxpaj^er during the year engaged in
substantial manufacturing of the same type of property.
(10) The provision relating to the taxation of cooperatives and their
patrons was changed to provide tax treatment with respect to per unit
retain certificates which parallels, in general, the tax treatment
applicable to patronage dividends.
Public Law 89-496, approved July 5, 1966, amended the Bankruptcy Act with respect to the priority and dischargeability of taxes
in bankruptcy. Generally, Federal, State, and local tax liabUities
which became legally due and owing more than 3 years preceding
bankruptcy are discharged, and the priority accorded tax claims is
also generally denied to such liabUities.
Public Law 89-570, approved September 12, 1966, added section 617
to the Internal Revenue Code. Under section 617, a taxpayer may
elect to deduct an unlimited amount of mineral exploration expenditures. Under prior law, which remains in effect for taxpayers who do
not elect the benefits of section 617, the total amount deducted as
exploration expenditures may not exceed $400,000. The amount deducted under section 617 is recaptured when a mine reaches the
producing stage. At that time, the taxpayer may iaclude in income
his prior exploration deductions or may forgo depletion from the mine
untU the depletion deductions forgone equal the exploration expenditures previously deducted. Prior exploration deduction provisions do
not contain any recapture requirements. New section 617 applies to
mines but not to oU or gas wells.
Public Law 89-713, approved November 2, 1966, amended the
Internal Revenue Code of 1954 in relation to the place for filing
returns to promote savings under the Internal Revenue Service's
automatic data processiag system.
Public Law 89-721, approved November 2, 1966, stipulates that no
iaterest is due on income tax refunds made within 45 days after the
filing of the tax return.
Public Law 89-719, approved November 2, 1966, conforms the tax
lien provisions in the Code to present commercial practices and makes
a number of modifications that clarify existing technical problems.
The legislation constitutes the first comprehensive revision and
modernization of Code provisions concerned with the Federal tax lien
and its priority over the interests of other creditors of a delinquent
taxpayer.
Public Law 89-722, approved November 2, 1966, amended the Code
to allow a deduction for additions to a reserve for certain guaranteed
debt obligations.

REVIEW OF FISCAL OPERATIONS

Pubhc Law 89-739, approved November 2, 1966, amended the Code
to increase from $200 to $500 the monthly combat pay exclusion for
commissioned officers serving in combat zones.
Public Law 90-78, approved August 31, 1967, amended the Code to
provide rules relating to the deduction for personal exemptions for
children of parents who are divorced or separated.
Administration, interpretation, and clarification of tax laws

During the fiscal year 1967, the Treasury Department issued 28
final regulations, three temporary regulations, five Executive orders,
and 22 notices of proposed rulemaking, relating to matters other than
alcohol and tobacco taxes. In addition, the Department issued five
final regulations and one notice of proposed rulemaking on alcohol
and tobacco tax matters.
Treasury decisions pubhshed during the fiscal year included those
relating to the semimonthly deposit of certain excise and employment
taxes and the filing of certain excise and employment tax returns
directly with service centers, the deposit of corporation income and
estimated income tax with Government depositaries, the filing of
consolidated returns by affiliated corporations, and the deductibility
of educational expenses.
Among the subjects dealt with in notices of proposed rulemaking
published during the fiscal year and still pending at the end of the year
were the allocation of income and deductions among related businesses,
the treatment of income from unrelated trade or business activity of
exempt organizations, the percentage depletion rate for certain clays
and the treatment processes considered as mining for computing percentage depletion in the case of minerals and ores, and the allocation
of Federal income tax liabihty among members of an affiliated group
filing a consolidated return, for the purpose of determining their
respective earnings and profits.
International tax matters

The Foreign Investors Tax Act (Public Law 89-809) was signed by
the President on November 13, 1966.^ The act, which represents the
first comprehensive revision of the U.S. tax treatment of nonresident
aliens and foreign corporations, is based on the recommendations of
the "Report of the Fowler Task Force" of 1964. The act facihtates
foreign investment in the United States by reducing the U.S. estate
tax burden on estates of nonresidents and by differentiating between
investment income and business income of nonresidents and applying
ordinary progressive rates only to the business income.
In addition, the act changed several provisions relating to ta^
treatraent of U.S. investment abroad;
1 See X966 annualIreport,?p. 49;

1967 REPORT OF THE SECRETARY OF THE TREASURY

(1) The exclusion from the interest equalization tax for certain
loans to insure raw material sources is extended where the U.S.
person who acquires the obligation does not do so with an intent to
sell it to other U.S. persons.
(2) The exclusion from the interest equalization tax for reserve
asset pools of U.S. insurance companies is extended to allow establishment of reserve asset pools where a U.S. insurance company commences
activities in a developed country or where a less-developed country is
designated as a developed country.
(3) The President is given authority to exempt from the interest
equalization tax, U.S. dollar loans of more than 1 year made by foreign
branches of U.S. banks.
The Interest Equalization Tax Extension Act of 1967 (Public Law
90-59) was signed into law on July 31,1967. The new act empowers the
President to vary the rate from zero to 22.5 percent for long maturities
(100 percent of the maximum rate under the original law). The
President raised the rates in August 1967 under Executive Order
11368. The new act also includes new measures to reduce the possibUity
of evasion.
Proposed regulations were issued in August 1966, under sections 482
(allocation of income between related companies) and 861 (source
rules) of the Internal Revenue Code. Taxpayer comments on these
proposed regulations were being reviewed at the end of the fiscal year
in preparing the final regulations. Proposed amendments to the
regulations under section 954(e), dealing with service income of
foreign base companies, were issued in February 1967. Final regulations were issued under three sections concerning the Foreign Investors
Tax Act, sections 1441, 1442, and 1461, regulating the coUection of
U.S. withholding taxes on nonresident aliens and foreign corporations.
Conventions to avoid double taxation of income were signed with
Brazil, Canada, and Trinidad and Tobago and submitted to the
Senate for ratification. The convention with BrazU is a new and fullscale agreement extending the 7-percent investment credit to investment in BrazU, and if ratified, wUl be the first such U.S. convention
with a developing country. The agreement with Canada is a supplementary convention further modifying the convention of 1942; it
deals with a particular aspect of that treaty which was conducive
to tax evasion. The convention with Trinidad and Tobago is also
limited in scope. The United Kingdom treaty applied to Trinidad
and Tobago on its independence, that treaty has been terminated by
Trinidad and Tobago as no longer suitable and the treaty with the
United States, signed in December 1966, is an interim agreement
untU a complete new treaty can be negotiated.

REVIEW OF FISCAL OPERATIONS

In accordance mth the terms provided in the treaty between
Honduras and the United States, ^Honduras gave notice of its intention to terminate the treaty which consequently ceased to have effect
as of December 31, 1966. SimUar notice was given by Cyprus in June
1967 that that treaty wUl be terminated effective in 1968.
Treaty negotiations were initiated during the year with Jamaica,
Korea, and Singapore and preliminary discussions were held with
Argentina. Discussions with Portugal were continued duriag the year
as were discussions with France which resulted in the signing of a
convention with France shortly after the close of the fiscal year.
Treasury representatives participated in the work of the Fiscal
Committee of the Organization for Economic Cooperation and Development. Among the topics considered were border tax adjustments
(adjustments of indirect taxes on goods crossing international borders), a review of bUateral treaties concluded since adoption of the
OECD Draft Double Taxation Convention in terms of how closely
they conform to that model, and continued discussions of the provisions of the draft convention with a view to revising it in the future.
International Financial Affairs
The U.S. balance of payments

The overall balance.—After remaiaing unchanged during the calendar
year 1966 at the previous year's level of about $1,350 mUlion, the
payments deficit on the liquidity basis increased again duriag the
first half of 1967—to a half-year total of $1,050 miUion, seasonally
adjusted.
The balance measured on the official reserve transactions basis^
swung from a calendar year 1965 deficit almost identical with that
on the liquidity basis to a surplus in 1966, as doUar holdings of foreign
central banks fell substantially and high interest rates attracted increased private doUar holdiags. In the January-June half of 1967,
this deficit again increased substantially.
A statistical presentation of U.S. balance-of-payments transactions
on these two bases for the calendar years 1964-66 and January-June
1967 is contained in table 100.^
Major developments.—During the first half of 1967 the balance-ofpayments deficit was higher (at a seasonally adjusted annual rate)
than in 1965-66.
The trade surplus increased only slightly from its depressed level of
1966. Imports leveled off with the slackening in aggregate demand in
> The official settlements balance counts changes in dollar claims of foreign official monetary authorities—
but not private holdings—in addition to reserve losses of the U.S. The liquidity balance counts changes
in the liquid dollar holdings of all foreigners—private and public—as well as losses in reserves.
2 Beginning with this annual report, the section on foreign holdings of gold and dollars and the table on
which it was based (1966 annual report, table 96) are discontinued. The presentation of world reserves in
the "International Liquidity" section of the International Monetary Fund publication. International
Financial Statistics, now meets the need to which the Treasury table was originally directed.

1967 REPORT OF THE SECRETARY OF THE TREASURY

the U.S. economy in the first half of the year. However, exports also
leveled off after the first quarter, partly because economic activity in
Western Europe was not expanding much.
There was a further increase in U.S. military expenditures in
Vietnam; and a sizable increase in outflows of U.S. private capital
other than for direct investment, particularly through bank lending
abroad and through purchases of foreign and international securities
exempt from the interest equalization tax. The larger capital outflow
was in part a normal reflection of easier monetary conditions in the
United States as compared with 1966. The improved liquidity of
commercial banks helps to explain not only the increase in bank
loans to foreign borrowers but also the repayment during this half
year of debt of head offices of U.S. banks to their branches abroad.
The result of this reflow shows up in the very large deflcit on the
official settlements basis in the first half of the year.
Balance-of-payments program.—During fiscal 1967 the administration's program to improve the balance of payments was further
strengthened and, particularly during the latter part of the period, the
Cabinet Committee on the Balance of Payments, of which the Secretary of the Treasury is chairman, conducted a further intensive
review of the program.^
The voluntary : cooperation program to restrain capital outflows,
administered by the Commerce Department for business corporations
and by the Federal Reserve Board for financial institutions, was
continued, and suggested targets for calendar year 1967 were
tightened.
The Congress, acting on the recommendation of the President,
voted to extend the life of the interest equalization tax for 2 years
(to July 31, 1969) and, in addition, changed the law so as to make it a
more flexible policy instrument.^
This change gave the President discretionary authority to vary the
rate of tax so as to make the extra cost to a foreigner of borrowing in
the United States equivalent to between zero and one and one-half
percent per annum. After being raised temporarUy to the IK percent
level during the period of congressional consideration, the tax was
reduced on August 30, 1967, to IJ^ percent.
This lowering of the tax rate by Presidential Executive Order
reemphasized the fact that the purpose of the interest equalization
tax is to equalize the interest cost of borrowing between U.S. and
foreign capital markets.
1 On Jan. 1,1968, the President announced a balance-of-payments action program designed to bring
about a decisive improvement in the balance of payments during calendar 1968. The 1968 program includes
mandatory limitations on direct investment, abroad, tighter restraints on foreign lending by financial institutions, measures to improve the travel deficit and reduce Government expenditures overseas, and longterm measures to improve our trade position and increase foreign investment and travel in the United States.
2 PubUc Law 90-69, July 31.1967.

REVIEW OF FISCAL OPERATIONS

The interest equalization tax is not designed to halt completely the
outflow of portfolio capital from the United States, but rather, by
equalizing borrowing costs, to moderate the rate of outflow to a level
which is dependent upon factors other than substantial basic interest
rate differentials. The new flexibUity to vary the rate of the tax will
assure that as the U.S. balance-of-payments position improves, it will
be possible to reduce restrainiag policies gradually without fear that
excessive outflows of capital will suddenly arise.
In addition to changing the rate of the tax, the Congress also
strengthened the procedure for establishing American ownership of a
foreign security in order to permit tax-free transactions among
American owners. I t is now necessary for an American seller of a
foreign security to show by means of a validation certificate either
that he paid the tax when the shares were originally acquired or that
these shares were exempt from the tax.
Treasury and Federal Reserve exchange operations ^

Pressure on the pound sterling was the dominant feature of foreign
exchange markets during the fiscal year 1967. To counteract this
pressure the Bank of England increased its discount rate and doubled
the deposit requirements of the commercial banks. In July 1966
additional measures to reduce domestic demand and strengthen the
British external position were put into effect.
The Federal Reserve System increased its swap line with the Bank
of England to support sterling. To deal with dollar flows to various
countries the Federal Reserve increased the total of swap lines from
$2.8 billion to $4.8 billion at the fiscal yearend. The movement of
funds was also related to the Middle East conflict in June 1967.
Because of the unsettled nature of foreign exchange markets and
the associated transfers of funds but also because of seasonal patterns
in certain important instances, there was a tendency for some national
monetary authorities to find their dollar resources rising to higher
than customary levels. In these circumstances, the United States
again used the Federal Reserve swap lines. Although the aggregate
amount outstanding during the year was fairly substantial (due in
part to activations on behalf of the United Kingdom), by the early
spring these positions had either been reversed in the markets or
repaid through longer term financing, e.g., a U.S. drawing on the
International Monetary Fund.
Transactions under these swap arrangements during the fiscal year
are shown in the accompanying tables.
1 These operations are fully reported in the "Treasury and Federal Reserve Foreign Exchange Operations." See exhibits 58 and 59.

1967 REPORT OF THE SECRETARY OF THE TREASURY

Drawings and repayments hy Federal Reserve System under reciprocal currency
arrangements, July 1, 1966—June SO, 1967
[In millions of doUars]
Drawings

Bank
National Bank of BelgiumL
German Federal B a n k . . . . .
Bank of Italy
Netherlands Bank
Swiss National Bank
Bank for International Settlements
Total aU banks

Repayments Outstanding

67.5
140.0
325.0
65.0
260.0
260.0

40.0
140.0
325.0
65.0
103.0
75.0

27.5

157.0
185.0

1,117.5

748.0

369.5

Drawings and repayments by foreign central hanks under reciprocal currency
arrangements, July 1, 1966—June 30, 1967
[In millions of dollars]
Bank
Bank of Canada.
Bank of EnglandBank for International Settlements
TotalaU banks

Drawings

Repayments

Outstanding

17.6
675.0
510.0

17.6
625.0
367.0

225.0
143.0

1,202.6

1,009.6

368.0

During the fiscal year the Treasury issued securities to some foreign
central banks to liquidate currency swaps, and retired other issues at
maturity. On June 30, 1967, Treasury obligations denominated in
foreign currencies stood at $890.4 million equivalent, in comparison
with $957.2 on June 30, 1966.
During the fiscal year gold sales by the United States to foreign
countries totaled $232 mUlion compared with sales of $378 mUlion in
fiscal year 1966. (See table 96.) The substantial further reduction in
the volume of gold sales continued the improved trend noted in the
1966 annual report. France was again the principal buyer, purchasing
$277 million, during the first fiscal quarter. The main offsets to this
loss were receipts of gold from the United Kingdom and Canada
totaling $175 mUlion.
Treasury exchange and stabilization agreements

During the fiscal year 1967 exchange agreements were in effect
with Argentina, Colombia, Mexico, and Venezuela. The 1-year
$12.5 million exchange agreement mth Colombia expired on March 31,
1967. On May 2, 1967, the Treasury entered into a 1-year $75 milhon
exchange agreement with Argentina. The 2-year $75 miUion exchange
agreement entered into with Mexico on December 30, 1965, was
amended on June 24, 1967, to increase the amount to $100 mUlion.
(See exhibits 68 and 69 and table 101.)
International monetary negotiations

The negotiations on an agreement for strengthening the international monetary system, through the creation of a new asset as

REVIEW OF FISCAL OPERATIONS

and when needed to supplement existing reserves, were broadened
and advanced significantly during the fiscal year. This work was
carried out by the Group of Ten industrial countries (Belgium,
Canada, France, Germany, Italy, Japan, the Netherlands, Sweden,
the United Kingdom, and the United States), in the International
Monetary Fund, and for the first time, in joint meetings between
the Executive Directors of the Fund and the Deputies of the Group
of Ten. The Ten, meeting at Ministerial level in the Hague in JiUy
1966, reached agreement on basic principles, as developed over the
preceding months by their Deputies, and, with the exception of one
delegation, recommended the joint meetings in order to provide a
wider framework in which to consider the questions that affect the
world economy as a whole. The U.S. delegation at the Hague meeting
was headed by the Secretary of the Treasury. In September, the
Governors of the International Monetary Fund, in their remarks at
the Fund's Annual Meeting, indicated a clear desire to proceed with
the Joint Meetings. This position was strongly recommended by the
Secretary of the Treasury as U.S. Governor.^
Four Joint Meetings were held, at the International Monetary Fund
in Washington, in November 1966 and April 1967, in London in
January 1967, and in Paris in June 1967.^
The First Joint Meeting successfully established a firm foundation
for the productive negotiations of the major problems of meeting the
world's future needs for reserves by collective action. These needs were
discussed, as were technical problems relating to the nature and form of
a deliberately created reserve asset, its distribution and provisions for
its holding and use. The Second Joint Meeting pursued these matters
and such questions as the conditions under which the asset might
initially be created and procedures for taking the necessary decisions
to create the new reserves. While stiU at an exploratory stage, progress
was made toward estabhshing the basis for eventual agreement.
Progress was also made toward the goal of completing the outline of a
concrete plan for presentation at the September annual meeting of
the I M F . The Third Joint Meeting dealt with subjects introduced
earlier, especially criteria for assessing the need for additional reserves
and its urgency, and consideration was begun of specific plans for the
creation of reserve assets. The Fourth Joint Meeting resulted in a draft
outline for a new facUity within the framework of the International
Monetary Fund, incorporating the general principles and elements
i See exhibit 44.
2 At each Joint Meeting, the United States was represented by Under Secretary of the Treasury for Monetary Aflairs Frederick L. Deming and Federal Reserve Board Governor J. Dewey Daane, as U.S. Deputies
of the Group of Ten, and by the U.S. Executive Director and Alternate Executive Director of the IMF,
William B. Dale and John S. Hooker, respectively. The meetings were also attended by Mr. George H. WiUis,
Deputy to the Assistant Secretary of the Treasury for International Monetary Affairs, and Mr. Robert
Solomon, Adviser to the Board of Governors of the Federal Reserve System.

196 7 REPQRT OF THE SECRETARY OF THE TREASURY

upon which agreement had been reached and setting forth various
alternative suggestions for dealing with the remaining open questions.
Recognizing that the principal questions which could not be resolved
in the Joint Meetings would require resolution at Ministerial level, it
was agreed that the various alternatives would be considered by the
Ministers and Governors of the Ten, at their London meeting in July
1967. The most important of these involved the manner in which
decisions would be taken after the plan was in effect, regarding the
timing and the ainounts of the new asset to be created, and certain
provisions with respect to the holding and transfer of the asset and
the reconstitution of holdings of the new asset after use. With the
resolution of these questions i t would then be possible to reach agreement on the outline of a comprehensive plan for consideration by the
Governors of the International Monetary Fund.
In addition to participating in the Joint Meetings, the Executive
Directors of the Fund and the Deputies of the Group of Ten met
independently at frequent intervals to discuss aU aspects of the
negotiations. In coordinating and guiding the U.S. negotiating position
throughout the year, strong reliance was placed on the Secretary's
Advisory Committee on International Monetary Arrangements ^ and
on an Inter-Departmental Group chaired by Under Secretary for
Monetary Affairs: Deming. Members of the Congress especially
interested in this subject were kept informed of the course of the
negotiations, in particular members of the Subcommittee on International Exchange and Payments of the Joint Economic Committee.
This committee at an early stage had made significant contributions
to understanding the urgency and dimensions of the problem of
meeting world liquidity needs.
The basis of the U.S. negotiating position was that the uncertainties
surrounding future world reserve growth were so great that unless
agreement were soon reached on a plan for the creation of a supplementary reserve asset, the growth of the world economy, affecting all
countries, could be seriously impaired. The stability of the international monetary system could be threatened unless there were assurance
that the world's growing needs for reserves would be adequately met.
Moreover, through collective action to create a new asset as and
when needed to supplement existing reserve forms—primarUy gold
and doUars—the international monetary system could be strengthened
for the years ahead. The Secretary discussed the need for sharing
the common responsibUity for an effective world monetary system
in a public statement on March 17, 1967.^
»See exhibit 73.
2 See exhibit 48;

REVIEW OF FISCAL OPERATIONS

International Monetary Fund i

The need for greater international liquidity through the creation of
a new reserve asset to supplement gold and doUars in the reserves of
the member countries was the principal topic of discussion at the 1966
meeting of the Board of Governors. Secretary Fowler,^ after commenting on the world balance-of-payments situation, noted that the
United States was taking measures to move toward equUibrium as
fast as the unusual exchange drain resulting from the Vietnam conflict
would permit. Cooperation among surplus and deficit countries is
essential for world equUibrium and he hoped that a specific plan for
reserve creation that would be internationaUy acceptable could be
prepared for action at the 1967 meeting.
In concluding the discussions the Managing Director of the Fund,
Mr. Schweitzer, noted that there was general agreement that action
to improve the international monetary system was needed, that the
Fund should play the central role in any arrangements that might be
adopted, and that the plan should be for the benefit of all Fund members. He noted the progress being made in the discussions between the
Fund Executive Board and the Deputies of the Group of Ten and
looked forward to the formulation of an acceptable program.^
During the fiscal year the Fund's currency sales (drawings) aggregated the equivalent of $1.1 biUion, of which $139.5 mUlion was in
doUars. Repurchases during the year aggregated $759.6 mUlion aU in
currencies other than the doUar. From the beginning of operations to
June 30, 1967, total drawings have aggregated the equivalent of $13.4
biUion, of which $5.1 bUlion was in doUars. Cumulative repurchases to
June 30, 1967, were equivalent to $7.1 biUion, of which $3.6 biUion was
in doUars. The principal other currencies used in both purchase and
repurchase were those of Canada and the continental European
countries.
During the fiscal year the United States purchased with doUars the
equivalent of $460 miUion, to bring the total of gross drawings to
$1,640 mUlion. As the result of purchases of doUars by other countries
the net drawing on the Fund by the United States was $851.4 million
at the fiscal yearend. The largest number of U.S. drawings have been
made to facUitate repurchases by other countries (technical drawings
whereby the United States drew currencies from the Fund to enable
tliird countries to purchase with doUars amounts needed in other currencies in repurchase transactions). In 1967, however, the United
1 Fuller discussions of the activities of the IMF and other international financial organizations are given
in the National Advisory CouncU's Annual Report for the fiscal year 1967 (90th Cong., 2d sess. H. Doc. 200).
2 See exhibit 44. The U.S. delegation included Under Secretary of State Ball (Alternate Governor), Treasury Under Secretary Barr, Under Secretary for Monetary Affairs Deming, Assistant Secretary Knowlton,
U.S. Executive Director of the Bank Merchant, and U.S. Executive Director of the Fund Dale as Temporary Alternate Governors. The members of the NAC and congressional committee members served as
advisors.
3 These joint meetings resulted in a proposal for the creation of special drawing rights in the Fund, which
was approved in principle by th^ Governors at their meeting in September 1967.

196 7 REPORT OF THE SECRETARY OF THE TREASURY

States drew Itahan lire in the equivalent of $250 miUion to purchase
doUars which Italy had acquired as the result of its payments surplus.
Since the Fund's holdings of Ike were low, it borrowed the amount
required from Itd.ly.
Further progress was made during the year in the liberalization of
exchange restrictions, reduction of bilateral agreements, and the acceptance of the convertibUity obligations of the Fund agreement. The
Fund continued its valuable consultations with both article XIV
(inconvertible currency) and article VIII (convertible currency) countries and intensified its technical assistance activities, particularly in
the area of taxation and public finance policies.
International financing of economic development ^

The Intemational Bank group.—The International Bank for Reconstruction and Development and its affihates (International Development Association (IDA) and International Finance Corporation
(IFC)) committed $1.3 billion during the fiscal year for financing
various economic development projects in the member countries.
The World Baiik made new loans of $876.8 miUion, principaUy for
electric power, roads, and railways. Aside from a few small loans to
European countries with low incomes, the loans went to less-developed
countries in Asia, Latin America, and, in smaUer amount, to Africa.
The Bank also committed $100 mUlion to the I F C , as permitted by
amendments to the Articles of Agreement adopted in 1965. IDA credits
of $353.5 mUlion financed industrial import programs in India and
Pakistan ($240 miUion combined) and work in education, agriculture,
roads, and minor projects.
The I F C investments, which are not guaranteed by governments,
were made in private companies on a loan and equity basis for fertUizer
plants, a private public utility, a paper and pulpmUl, and some smaller
items.
The loan operations of the World Bank are financed by capital
subscriptions, borrowing on financial markets, sales of participations
in loans, repayments of loans, and earnings on loans and investments.
Durmg the year the Bank issued $390.2 million in new bonds, refunded
maturing issues and delivered bonds on issues previously sold on a
delayed delivery basis. New borrowings consisted of an issue of
$250 million in the U.S. market (of which $159.9 miUion was for
delayed delivery), $100 miUion in U.S. doUar 2-year bonds sold
abroad, and smaUer issues of Canadian dollar and Swiss franc securities. The Bank has invested the proceeds of the U.S. market issues
in longer term Treasury obligations pending disbursement to reduce
any adverse effects on the balance of payments. The Bank has continued its efforts to finance its work by issues in other markets.
' The activities of the year in this field have been more fuUy reported In the NAC report noted above.

REVIEW OF FISCAL OPERATIONS

At the close of the fiscal year the International Bank's funded debt
stood at $3,075 mUhon, of which $2,308 miUion was doUar denominated, and the balance in Canadian doUars, Deutsche marks, Swiss
francs, lire, guUders, sterling, and Belgian francs. I t is estimated
that more than half of the Bank's securities is held abroad.
IDA credits are funded by member subscriptions and contributions, grants from the net earnings of the World Bank, repayments
of credits, and earnings. Of IDA's usable resources, cumulative to the
end of the fiscal year, a total of $1,781 miUion, the Part I (developed)
countries have contributed $1,524 million; I B R D grants, $200
miUion; and earnings and contributions of Part I I countries, the
balance. At the fiscal yearend only $86.8 miUion was not committed,
though the entire amount had been earmarked for projects and
programs.
President Johnson has indicated the wiUingness of the United
States, subject to congressional approval, to participate with other
countries in providing additional resources to IDA. In March 1967,
Secretary Fowler was authorized to support an IDA replenishment
at an increased level, provided that consideration was given to the
balance-of-payments problems of deficit donor countries when IDA's
new resources would be made avaUable. Replenishment measures
were under discussion at the end of the fiscal year.
The Convention for the Settlement of Investment Disputes between
States and Nationals of Other States, proposed by the Bank, became
effective on October 14, 1966, with the deposit of the requisite accessions. The Convention establishes procedures for voluntary ConcUiation and arbitration of disputes between investors and national
governments. The Convention is to be administered by the International Centre for Settlement of Investment Disputes, affiliated
with the World Bank. The Administrative Council of the Centre held
an inaugural meeting in February 1967 and adopted provisional rules
of procedure. I t elected the first Secretary-General (Mr. Aron Broches,
General Counsel of the Bank) and took other organizational steps.
No cases had been brought to the Centre's attention by the end of
the fiscal year.
Inter-American Development Bank.—The Eighth Annual Meeting
of the Board of Governors of the Inter-American Development Bank ^
was held in Washington, D . C , from AprU 24-28, 1967.^ At this meeting the Board of Governors agreed to recommend to their governments a $1.2 biUion equivalent increase in the resources of the Bank's
1 For background on the establishment and operations of the Inter-American Development Bank, see
1965 annual report, pp. 58-60.
2 The U.S. Governor of the Bank, Secretary Fowler, headed the U.S. delegation to the meeting. The delegation also included Under Secretary of the Treasury Joseph W. Barr and Assistant Secretary of the Treasury
Winthrop Knowlton (both of whom acted as temporary alternate governors) together with members of the
Congress and representatives of the U.S. Government agencies constituting the National Advisory Council
on International Monetary and Financial Policies.

1967 REPORT OF THE SECRETARY OF THE TREASURY

Fund for Special Operations (of which the U.S. share would be $900
mUlion) and a $110 bUhon increase in the Bank's Ordinary Capital
caUable stock (of which the U.S. share would be $411.8 miUion). The
Governors also requested the Board of Executive Directors to study
and make recommendations with respect to the mobUization of
additional resources from nonmember capital exporting countries of
Western Europe and other areas.^
To obtain resources for Ordinary Capital lending the IDB increased
its short- and long-term borrowings by $69.4 miUion during the fiscal
year, comprising an $11.4 miUion equivalent Swiss franc issue in
August 1966, a $50 miUion issue in the United States in January 1967,
and a $30 mUlion short-term dollar bond issue (of which $25 mUlion
replaced maturing short-term bonds of 1966) placed outside the
United States in AprU 1967. In addition, the Bank utihzed $3.0
miUion equivalent of the 1966 direct borrowing of Japanese yen. As
of June 30, 1967, the Bank's cumulative total borrowings amounted
to $442.9 miUion equivalent, of which $275 million had been raised
in the U.S. market and the balance in foreign capital markets.
The subscribed resources of the Bank's Fund for Special Operations
totaled $1,119.5 mUlion as of June 30, 1967. In December 1966, the
United States made its third and final $250 million payment to the
Bank pursuant to the increase in the resources of the Bank's Fund for
Special Operations approved in fiscal year 1965 of which the U.S.
contributing share was $750 miUion, payable in three equal installments.
As of June 30, 1967, the Inter-American Development Bank had
authorized 405 loans amounting to the equivalent of $2,088.4 miUion,
comprising: 144 loans amounting to $831.1 miUion equivalent from
its ordinary capital resources; 144 loans amounting to $756.1 miUion
from the resources of the Fund for Special Operations; and 117 loans
from the Social Progress Trust Fund amounting to $501.2 mUlion. In
addition, the Bank had authorized 9 loans amounting to $15.6 miUion
equivalent from the Canadian Fund which it administers on behalf of
the Government of Canada.^ Cumulative total disbursements from
aU sources of the Bank's funds amounted to $916.6 mUlion as of
June 30, 1967.
During August 1966, the Subcommittee on International Finance
of the Committee on Banking and Currency of the House of Repre1 In October 1967, consequent to this request by the Board of Governors, the Bank adopted measures to
condition procurement financed with Bank loans in economically advanced nonmember countries on an
appropriate contribution of resources to the Bank by the respective country by way of bond sales, funds
entrusted to the Bank for administration, participation in Bank loans, and parallel financing operations.
2 This Canadian Fund was, through two agreements with the Bank, expanded by Canadian$20 million
during fiscal year 1967 to a total of Canadian$30 miUion.
In December 1966, the Bank and the Government of Sweden also agreed to establish a Swedish Development Fund-for Latin America with an initial Swedish contribution of $5 miUion. Loans from this Fund
are to be used jointly with loans from the Bank's Ordinary Capital resources and will generally be on the
same terms as the Swedish Government applies to development credits.

REVIEW OF FISCAL OPERATIONS

sentatives held hearings on the role of the Inter-American Development Bank in Latin Ajnerican agricultural development. In a letter
dated September 9, 1966, to Representative Henry S. Reuss, Chairman of this Subcommittee, Secretary Fowler observed that while the
Bank was already playing an important role in this area, it should
assume a still more important role in the future.
The Asian Development Bank.—The Asian Development Bank came
into existence on August 22, 1966, upon the ratification of its Articles
of Agreement by the United States ^ and 14 other countries. The
Board of Governors of the Bank held its inaugural meeting in Tokyo
November 24-26, 1966, at which Takeshi Watanabe of Japan was
elected the Bank's first President. At that meeting the Governors
increased the authorized capital from $1 billion to $1.1 biUion. The
meeting was attended by Secretary of the Treasury Fowler and
AID Administrator WUliam S. Gaud, U.S. Governor and Alternate
Governor, respectively. The Bank's first board of directors was also
elected at that meeting. Mr. Bernard Zagorin, who had previously
been appointed by the President after Senate confirmation, was elected
a Director of the Bank by the vote of the U.S. Governor. In December
1966, the Directors held their first formal meeting and declared
the Bank open for business.
The Bank, which has its headquarters in ManUa, now has a membership of 31 countries, 19 of which are regional countries, and 12
of wliich, including the United States, are developed nonregional
countries. Of the Bank's $1.1 biUion authorized capital, $965 miUion
has been subscribed by the present membership, $615 mUlion by the
regional members, including $200 mUlion by Japan, and $350 miUion
by the nonregional members, including $200 mUlion by the United
States. One-half of each member country's subscription consists of
paid-in capital, payable in five equal annual installments. The remaining half is caUable capital to provide backing for future borrowiags of
the Bank. The first of the United States' five $20 miUion installments
of paid-in capital was paid in August 1966,^ and consisted of $10
mUlion in cash and $10 mUlion in the form of a noninterest-bearing
letter of credit which may be drawn on in future years when required
by the Bank for disbursement.
In addition to its normal operations in development financing on
conventional terms along the hues of the International Bank for
Reconstruction and Development, the Asian Development Bank is
authorized to accept the administration of special funds designed to
serve purposes consistent with those of the Bank. In April 1967 the
Asian Development Bank agreed in principle to manage a multilateral
1 On Aug. 16,1966, the United States deposited its instrument of ratification of the Asian Development
Bank at the United Nations.
2 The second installment was paid in August 1967.

19 67 REPORT OF THE SECRETARY OF THE TREASURY

special fund for agricultural development proposed by the Ministerial
Conference on Southeast Asian Development. In July 1967, the Bank
commissioned an Asian agricultural survey to be conducted by an
international team of experts in preparation for the operation of the
proposed special fund for agricultural development.
In his state of the Union message in January 1967, President
Johnson announced his intention to seek authorization of $200 miUion
to be appropriated over a period of years as the U.S. share of multilateral special funds to be administered by the Asian Development
Bank.^
Organization for Economic Cooperation and Development

The sixth Ministerial CouncU meeting of the Organization for
Economic Cooperation and Development (OECD) met in Paris on
November 24-25, 1966. Deputy Assistant Secretary John Petty
served as a member of the U.S. delegation. The Council of Ministers
found growth prospects for the remainder of the 1960-70 decade
favorable but cautioned member countries to contain inflationary
tendencies and insure increase of productive resources while making
optimum use of available manpower. The Ministers agreed to continue the Organization's efforts to improve the functioning of capital
market mechanisms for mobihzing savings and financing investments
as well as to continue enquiry into the economic consequences of
differences in scientific and technological levels among countries. The
Council also stressed the need for increased assistance to the developing countries and improvement in its terms and conditions with a
greater emphasis on agricultural assistance. I t was agreed that
consideration should be given to the possibihties of widening the
area of East-West economic relations.
The Economic Pohcy Committee (EPC) of the OECD met three
times during the year to discuss the overall economic situation of
member countries in the course of which attention was drawn to the
slowdown in growth of demand and output in the OECD area as a
whole. Under Secretary of the Treasury for Monetary Affairs Deming
was a member of the U.S. delegation.
The EPC's Working Party on Policies for Promotion of Better
Payments EquUibrium (Working Party 3) met six times during the
year with Under Secretary Deming as chairman of the U.S. delegation. Following the publication of its major report ''Balance of Payments Adjustmentj Process," in August 1966 the group continued its
efforts to apply the principles delineated in the report with a view to
achieving better adjustment of payments imbalances. Treasury
1 In a special message to the Congress on Sept. 26,1967, the President proposed that the Congress authorize
the appropriation of a U.S. contribution of $200 miUion to multilateral special funds of the Asian Development Bank. S. 2479 was introduced on Sept. 27, 1967.

REVIEW OF FISCAL OPERATIONS

continued to participate in Working Party 2, whose report on economic
growth in the sixties was released in 1966. Treasury also participated
in the work of a group which periodically examines short-term
economic prospects.
The Committee for Invisible Transactions neared completion of
the major study of members' capital markets it had undertaken at
the request of the Ministerial CouncU in December 1964. (Part of this
study was published in September 1967.) The study identffies problems
in the functioning of capital markets and points to ways to improve
their operations.
The Group on Export Credit and Credit Guarantees, with Treasury
Assistant Secretary Winthrop Knowlton leading the U.S. delegation,
continued its discussions of mutual problems in the area of export
credit and guarantees.
In February 1967, the CouncU of the OECD established on a
2-year experimental basis a notffication and consultation procedure
on trade and payments effects of changes in border tax adjustments.
Such changes may occur when a country alters its indirect tax system—for example, shifting from a cascade turnover tax system to a
value added tax system.^
The Development Assistance Committee (DAC) met at the
Ministerial level in JiUy 1967 to review trends in assistance to developing countries. Disappointment was expressed that after two years of
substantial expansion, the net flow of resources, public and private,
from DAC Members to developing countries declined in 1966. Assistant Secretary Knowlton served as a member of the U.S. delegation.
The Economic Development and Review Committee of the OECD
which reviews the economies of member countries and publishes a
public report, met at regular intervals throughout the year. The
Treasury participated in the Committee's formal examination of the
United States in November 1966.
A Treasury observer regularly attended the meetings of the Managing Board of the European Monetary Agreement. Treasury representatives also continued to participate actively in the work of the
Fiscal Committee.^
The General Agreement on Tariffs and Trade

The sixth round of trade negotiations, generally known as the
Kennedy Round, was successfully concluded in Geneva on June 30,
1967. In terms of the number of participating nations, the amount of
trade involved, and the scope and depth of trade liberalization, the
Kennedy Round was the most substantial achievement in the series
1 In October and November 1967 an ad hoc committee met to consider the trade and payments effects of
border tax changes associated with Germany's Jan. 1, 1968, shift to a tax on value added.
2 For a description of the activities of the Fiscal Committee, see page 39.
277-468—68
6

1967 REPORT OF THE SECRETARY OF THE TREASURY

of negotiations in the 20-year history of the General Agreement on
Tariffs and Trade (GATT). In addition to a broad range of tariff
concessions to be placed in effect on a most-favored-nation basis, a
major accomplishment in the field of nontariff barriers was the
conclusion of an antidumping code which supplements provisions of
article VI of the GATT with rules of procedure to be followed in
antidumping actions.
The Treasury Department actively participated in the development
of trade policy for the Kennedy Round negotiations through its
membership on the Trade Expansion Advisory Committee, the
Trade Executive Committee, the Trade Staff Committee, and the
Trade Information Committee.
A Treasury representative was also a member of U.S. delegations
to various GATT committees and working parties.
Report of foreign loans and credits of the United States

The Treasury Department, under the general direction of the
National Advisory Council on International Monetary and Financial
Policies (of which the Secretary of the Treasury is Chairman), has
organized a comprehensive system for reporting by the agencies of the
U.S. Government of all loans and credits extended, and certain loans
guaranteed by them, in accordance with their respective powers and
policies.
The Congress ih 1966 amended the Foreign Assistance Act of 1961,
as previously amended, by adding section 634(f), which provides:
^The Secretary of the Treasury shall transmit to the Speaker of the
House of Representatives and to the Committee on Foreign Relations
of the Senate semiannual reports showing as of June 30 and December
31 of each year the repayment status of each loan theretofore made
under authority of this Act any part of the principal or interest of
which remains unpaid on the date of the report."
The International Bank for Reconstruction and Development and
the Organization for Economic Cooperation and Development have
also established a joint plan for the reporting of loan and credit
transactions by the 17 principal creditor countries.
The Council has agreed to cooperate with the two international
bodies and, with the concurrence of the Budget Bureau, has authorized the Treasury to coUect and compile the information.
The procedures for reporting by the Government agencies wiU
combine in one set of reports data which have been supplied previously under various arrangements. As part of its work on the balance
of payments, the Office of Business Economics of the Department of
Commerce has regularly collected data on grants, loans and credits
made by U.S. agencies and since 1965 has issued a detaUed report.

REVIEW OF FISCAL OPERATIONS

''Foreign Credits" in response to a request by the Senate Foreign
Relations Committee. The Treasury Report to Congress wiU replace
this Department of Commerce publication. The data submitted to
the Treasury Department will also be used by the Office of Business
Economics in its balance-of-payments work relating to governmental
transactions, so that duplication of effort wUl be avoided.
The OECD, through its Development Assistance Committee, has
also been receiving on a transactions basis information on individual
loans, credits, and grants extended by public institutions of its member countries, whUe the International Bank for some years has been
collecting data on the amount of public credits outstanding, though
on a more limited basis, by voluntary arrangements with some of its
member countries.
The coUection of data by the Treasury Department wUl serve these
various needs through a single comprehensive set of reports. It is
anticipated that the international agencies wUl collate the information received from the participating countries and make avaUable to
participating governments summaries and analyses of the combined
data.
A summary of the U.S. data for June 30, 1967, is given in table 106.
Treasury foreign exchange reporting system

Automatic data processing of the Treasury foreign exchange reports
covering capital movements between the United States and foreign
countries was instituted during the year. Preparations were also
underway for automatic processing of the data for analytical use.
As part of the program for improving the reporting system, staff
members visited several of the Federal Reserve banks, which act as
agents of the Treasury in collecting the reports, to discuss reporting
problems. The reporting system was improved during the year by
enlarging the coverage of reporting by mutual funds of securities
transactions with foreigners; clarifying the treatment of certain types
of acceptance financing; reclassifying overseas mUitary banking facUities from foreign to domestic for reporting purposes; and conducting
a study of the distribution of foreign-currency liabUities by type of
foreign creditor.
The ''International Financial Statistics" section of the monthly
"Treasury BuUetin" was revised to provide more meaningful data on
U.S. reserve assets and liabUities and other statistics related to the
U.S. balance of payments and international financial position.

ADMINISTRATIVE

REPORTS

Administrative Management
Management improvement program

Actions taken during fiscal year 1967 to improve management or
reduce costs had a computed value of $145.6 million; $80 million
resulted from changes in fiscal operations, while $65.6 mUlion and
2,600 man-years of the total stemmed from increased economies in
internal Treasury operations. This computed value is more than triple
the previous record savings of $44.5 million achieved in fiscal 1966.
The larger portion resulted from a policy decision to accelerate the
payment and deposit of revenue due the Government. These accelerations, the graduated withholding of income taxes, and the semimonthly deposit of certain tax liabUities by business firms, made $2.46
billion available earlier than would have been the case under previous
regulations. This earlier avaUability of funds had a computed annual
value of about $80 mUlion. The remainder of the savings were the
result of improvements made in performing the regular operating
functions of the Department. The more significant of these improvements are highlighted in the administrative reports of the individual
offices and bureaus which follow. For the most part, savings realized in
one area were used to absorb increased pay costs or to meet unbudgeted
workloads in other areas.
Special studies and projects

A number of studies were performed during the year to evaluate the
effectiveness of operations and to develop recommendations for promoting greater efficiency and economy within the Department. At
the request of the Bureau of the Budget, a study was completed on
the implementation of recommendations made in several studies of
the U.S. Secret Service following the Warren Commission Report.
A study of the feasibility of merging the Bureau of Engraving and
Printing and Bureau of the Mint was also completed. Staff assistance
was provided the Bureau of Narcotics in formulating and implementing
a plan for the reorganization of its headquarters. In coordination with
representatives from the bureaus, a study of the overall cost reduction/
management improvement program was completed and recommendations developed for strengthening the program.
There was a modest increase in the volume and scope of Treasury
participation in the foreign technical cooperation programs of the
Agency for International Development during fiscal 1967. The number
of participants from developing nations receiving instruction and
training in Treasury operating methods continued to increase. The
number of countries to which Treasury rendered assistance leading
toward self-help in developing better ways and means of organizing,
operating, and regulating their financial institutions also increased.
The geographic areas in which Treasury representation is greatest
continued to be Latin American countries under the Alliance for
Progress and a number of Asian nations including India, Vietnam,
Thailand, and the PhUippines.

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Emergency preparedness

The emergency readiness of the Department was improved by both
technical and administrative measures. Intensive study of Federal
credit programs and emergency tax proposals resulted in the development of additional information useful in emergency planning. Briefing
seminars were held in some field locations to train Treasury officials
who are members of the emergency regional organization. Revised
directives for participation in the emergency preparedness program
were issued. Twenty-six persons were trained for assignments as emergency communicaltions operators.
Planning and program evaluation

Planning and program evaluation aids in improving the allocation
of the Department's resources by developing the relative costs and
benefits of alternative courses of action and by providing staff leadership, coordination, and direction of the Department's planningprograming-budgeting system.
The principal activities in this area during fiscal 1967 were: (1)
preparing, in cooperation with the bureaus, the second Treasury
program and financial plan and supporting program memoranda;
(2) initiating and cooperating in developing improved output and
related cost data systems in the Bureau of Customs, Secret Service,
and Bureau of Narcotics; (3) organizing with the bureaus the development of special studies relating to improvements in resource use; and
(4) carrying out special studies for the Secretary on the supply and
requirements for coinage.
Financial management ^

Budgeting. —A working capital fund was sought for certain common
services functions performed by the Office of the Secretary for Treasury bureaus, and congressional approval w^as pending at the fiscal
yearend. An operating fund to finance the activities of the Bureau of
the Mint was recommended to improve flexibUity to meet changes in
coin demand and to present a more complete financial picture of Mint
operations, but the appropriations committees of the Congress rejected
this plan. The 1969 budget preview was prepared for the second year
in program category terms "cross-walked" to funds requirements
stated in appropriation terms. Controls were exercised over expenditures, number of, personnel employed, size of motor vehicle fleets,
overtime pay costs, travel costs, and numbers of personnel in upperlevel positions. Uniformity and clarity of budget presentations were
enhanced by issuance of new instructions. Supplemental appropriation
needs were reduced by interbureau transfers of unobligated balances
between appropriations.
Automated payroll operations.—The payrolls for Coast Guard district
offices not previously converted to the I R S computer system were
converted during the year. Assistance was provided the I R S D a t a
Center, Detroit, Mich., to improve procedures to shorten the delivery
time of documents regarding employee separations to the CivU Service
Commission. The Department undertook a complete review of
Treasury payrolling.
'
1 See detailed statement in the "Annual Report to the Secretary of the Treasury on Improvements in
Financial Management."

ADMINISTRATIVE REPORTS

Accounting systems.—The Bureau of Customs was assisted in developing procedures manuals in connection with the revision of its
accounting system and conversion to ADP equipment. The coding
structures used in certain bureaus were refined to improve reporting.
The Internal Revenue Service and the Secret Service were assisted in
developing the principles and standards portion of their administrative accounting manuals.
Management of automatic data processing.-—Significant benefits
obtained through the use and management of the Department's 52
computers and other A D P equipment were reported to the President,
including, for the period March 1965-June 1967, $80 mUlion in net
additional revenue, $1 million in one-time savings, and $4 mUlion and
435 man-years in annual recurring savings. The Department has saved
by purchasing rather than leasing 90 percent of its computers and by
integrating data processing systems. I t has actively fostered the
sharing of A D P equipment and related resources.
Internal auditing.-—Under a decentralized system of internal
auditing, a departmental internal audit staff periodically reviews and
appraises auditing activities conducted by the various Treasury
bureaus and offices. The accomplishment of the internal audit review
in the Bureau of Customs during fiscal 1967 marked the completion
of the initial review of all such audit activities throughout the Department. The departmental staff also audited payroll and related
activities in the Office of the Secretary.
Personnel management

In the fiscal year 1967 emphasis was continued on improving all
areas of personnel management, with particular attention to special
programs of interest to the President.
Positive actions to broaden equal opportunity during the year
included conferences of key personnel in 18 major cities, a nationwide
seminar program for supervisors, and issuance of revised comprehensive policy and program guidelines.
The Department exceeded by some 50 percent the President's goals
for summer employment of youth. Department leadership continued
in employment of the handicapped. In cooperation with H E W and
I R S , a new breakthrough was made ui employment of the blind as
taxpayer assistors in four I R S districts. Plans were made to employ
the bliad in a variety of other positions, including personnel technicians, programers, and typists.
Excellent cooperation continued with the Civil Service Commission
in its inspection activities, and action on their recommendations was
systematicaUy coordinated. At the fiscal yearend the Commission
assessed Treasury personnel management as effective, and noted
commendable progress.
Controls were applied over wage schedule adjustments to contain
increases within the wage-price guidelines. Wage board employees of
the Mint institutions in Philadelphia, Denver, and New York were
converted to a new wage-fixing system more in line with other Treasury systems and the prevailing; market.
Employee training increased substantially. Man-hours of classroom
training rose to approximately 3 mUlion man-hours, an increase of
about 14 percent from fiscal 1966. The Treasury Law Enforcement

19 67 REPORT OF THE SECRETARY OF THE TREASURT

School was revamped, a permanent director and basic faculty were
appointed, and steps were taken to upgrade and modernize the training
and curriculum.
Estimated first-year benefits from employee suggestions rose 25
percent. Performance awards increased 32 percent, with total estimated first-year benefits of $1,515,000. Forty-three percent more
high quality pay increases were granted in fiscal 1967 than in fiscal
1966.
The orderly transfer of functions and personnel of the Coast
Guard to the Department of Transportation was accomplished on
AprU 1, 1967,^ pursuant to Public Law 89-670, approved October 15,
1966.
Administrative services

Personal property.—During the fiscal year Treasury declared as
excess to its needs property having an original acquisition cost of
$8,855,000, whUe excess property valued at $469,000 was reassigned
within the Department. Personal property transferred to other
Federal agencies totaled about $3,409,000. In turn. Treasury received
about $3,945,000 of excess personal property from other Federal
agencies without reimbursement. Personal property valued at
$5,337,000 was determined surplus. Property worth $1,685,000 was
released for donation through GSA and D H E W clearances. Proceeds
from sales of surplus, including scrap, amounting to $94,700 were
deposited to the general fund of the Treasury.
Beal property,—Dunng the fiscal year 1967 Treasury activities in
20 locations in 9 cities were consolidated in single locations in each
city.
Treasury relocated from leased to Government-owned buildings in
37 locations. This resulted in Treasury curtailing reimbursable rents
to GSA. In addition, the Treasury closed 68 offices accommodated in
leased and Government-owned space which resulted in rental curtailments of approximately $75,000.
Treasury reviewed and transmitted to GSA title and descriptive
data on 22 excess Coast Guard properties, involving 407 acres of land
with improvements, valued at a total acquisition cost of $8,320,000.
Safety.—Treasury's disabling injury frequency rate for calendar
year 1966 showed significant improvement over the previous year,
and remakied weU below the rate for all Federal departments and
agencies. This is the most commonly accepted criterion for measuring
safety program effectiveness.
Security activities

During fiscal year 1967, physical security inspections were conducted
in the offices of the Office of the Secretary, bureau headquarters
offices, and 45 Treasury bureau field offices.
Under the revised security program, requiring reinvestigations
every 5 years of incumbents of critical-sensitive positions, which
became effective late in fiscal 1966,1,152 cases were reviewed, resulting
in 788 reinvestigations and 364 cases in which no reinvestigation was
necessary.
1 See also administrative report of U.S. Coast Guard.

ADMINISTRATIVE REPORTS

Office of the Comptroller of the Currency
The ComptroUer of the Currency, as the Administrator of the
National Banking System, is charged with the responsibility of
maintaining the public's confidence in the System by sustaining the
banks' solvency and liquidity. An equally important public objective
is to fashion the controls over banking so that banks may have the
discretionary power to adapt their operations sensitively and efficiently
to the needs of a growing economy.
Office operations

During the fiscal year three Deputy ComptroUers and the Chief
National Bank Examiner were each assigned the personal supervision
of three or four national bank regions. This reorganization yields
more immediate communication with regional adrninistrators and
provides the Washington Office with more detaUed knowledge on the
actual status of banking in aU regions. Four assistant chief national
bank examiners were appointed to assist these officials in the review
of examination reports and other banking data.
During fiscal 1967 a policy of increased emphasis on the bank
examining function was announced. A strong theme of all Office
operations is the modernization and general improvement of bank
examination procedures and policies so as to make the examination
more significant and efficient. Bank examination procedures were
augmented by the inauguration of a direct verification program,
under which national bank examiners may, in certain circumstances,
directly verify the balances of depositors and borrowers.
A stepped-up program of active cooperation with other Federal
bank regulatory agencies was also announced. A study by a committee
composed of staff members of the three banking agencies developed
an improved liquidity formula. This new formula allows regulators
to form a more precise idea of the status of each bank and of the
banking industry generally. The three agencies also succeeded in
developing a single report of condition form which meets the particular
needs of each agency. This unified report form reduces the reporting
burden on banks and also makes possible the gathering of more
significant information.
Personnel

Recently established personnel programs gathered momentum
during the fiscal year. This Office maintains strong programs for
recruitment, employee development, and employee participation in
the management function.
The recruitment program was more firmly established in each of
the 14 national bank regions. Improved procedures were adopted to
keep Washington informed of the status of each region's program.
Regional recruitment coordinators were brought to Washington for
two conferences to exchange ideas and to confer with top level headquarters personnel on recruitment procedures and the national equal
employment program.
Training procedures for all new personnel were improved under the
employee development program. In addition, the Intemational
Operations Division conducted a seminar for its international bank
examiners and the Trust Division conducted its annual 2-week school

19 67 REPORT OF THE SECRETARY OF THE TREASURY

for trust examiners. Selected regional management personnel were
brought to Washington to participate in the second advanced training
program. Certaini experienced personnel were enrolled in the Office's
advanced education program whereby they are encouraged to seek
a master's degree in banking or financial fields.
During the year the incentive awards program was revived. The
interest demonstrated on the part of field personnel is encouraging
and has resulted in worthwhUe modifications of procedures.
Fiscal management

As a result of a top level review of expenditure practices early in
the fiscal year, many changes were introduced to reduce the total
cost per product unit. Toward the end of the year initial steps were
taken to establish a stronger fiscal management program including
new staff appointments and the reorganization of one division.
Information services program

The purpose of this program is to make the policies and procedures
of the Office of the Comptroller of the Currency better known and to
facUitate communications within it and between the Office and the
banking industry. Four basic manuals are avaUable to employees,
banks, and other interested parties: "ComptroUer's Manual for
National Banks," "Comptroller's Manual for Representatives in
Trusts," "ComptroUer's Policy Guidelines for National Bank Directors," and "Instructions, Procedures, Forms for National Bank
Examiners." The booklet "Duties and LiabUities of Directors of
National Banks" maintained its position as one of the most popular
issuances of this Office. The "Annual Report of the Comptroller of
the Currency" continued in the format begun with the 1963 report.
I t continues to contain a general statement of policy, descriptions of
the state of the National Banking System, of Office operations, and
reprints of selected Office documents relating to crucial public issues
in banking.
Status of national banks

At the end of fiscal 1967, there wxre 4,780 operating national banks,
compared with 4,811 a year earlier. Of these, 1,436 were operathig
9,710 branches, making a total of 14,490 offices. This was an increase
of 605 offices during the year. Twenty-two national bank charters
were issued for newly organized banks, while 13 charters were issued
for the conversion of State banks to national banks. During fiscal
1967, 691 branches opened for business as national bank branches,
including 550 de novo branches and 141 branches of either converted
banks or banks acquired through merger. During the same period,
53 branches were discontinued or consolidated, for a net increase of
638 branches.
Total assets of national banks grew to $242.0 biUion at the end of
fiscal 1967. This increase of $16.6 billion, or 7.4 percent, included a
$6.9 biUion increase in loans. Holdings of securities advanced from
$56.8 bUlion to $62.6 bUlion during the same period. The proportion
of loans and discounts to total assets dropped from 54.6 percent to

ADMINISTRATIVE

REPORTS

53.7 percent during the fiscal year; in contrast the ratio of securities
to total assets increased from 25.2 percent to 25.9 percent. Net aftertax income of national banks increased from $1.4 bUlion for calendar
year 1965 to $1.6 billion in 1966, a 14.1 percent increase. Total cash
dividends declared increased from $683 mUlion to $738 mUlion, and
net income after dividends increased 20 percent, from $704 million
to $845 mUlion.
Number of national banks and banking ofiices, by States, J u n e SO, 1967
National banks
Total

United States
Alabaina
Alaska
Arizona
Arkansas
California
Colorado.
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Mimiesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Bhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Virgin Islands
District of Columbia—all i.

Unit

4,780

3.344

87
5
4
67
86
118
30
5
9
200
60

54
0
1
37
39
118
8
3
1
200
34

2 .-.

9
423
123
102
171
80
47
21
48
90
98
195
36
98
49
127
3
52
146
34
186
24
42
224
220
12
343
4
26
34
77
546
13
27
114
28
80
114
40
1
14

3
421
56
67
146
39
15
6
18
23
31
193
7
79
49
108
1
32
42
15
86
5
34
91
193
6
187
0
5
25
21
546
9
14
41
13
80
102
40
0
1

With
branches

Number
of
branches

33
5
3
30
47
0

145
41
184
65

232
46
188
132

1,853

1,939

134
41
101
1
274
38
25
121
147
73
203
364
477
6
105
19
0
19
36
27
484
58

118
214
9
63
200
194
43
110
424
397
140
196
201
194
94
251
454
575
201
141
117
49
146
39
79
630
92

1,049

1,235

281
9
582
27
220
865
55
198
44
234
0
55
37
383
361
0
24
0
3
90

305
51
806
247
232

22
2
8

184
4
54

0 ..

26
2
6
2
67
35
25
41
32
15
30
67
67
2
29
19
0
19
2
20
104
19
100
19
8
133
27
6
156
4
21
9
56
0
4
13
73
15
0
12
0
1
13

Number
of
oflices

1,208

59
224
78
311
546
68
64
497
389
80
138
40
4
1C4

1 Includes national and nonnational banks in the District of Columbia, all of which are supervised by
the Comptroller of the Currency.

19 67 REPORT OF THE SECRETARY OF THE TREASURY
Report of condition of all national banks, selected dates
[In millions of dollars]
June 30,1966
(4,811 banks)

Item

Dec. 31,1966
(4,799 banks)

June 30, 1967
(4,780 banks)

ASSETS

Cash, balances with other banks, and cash items in process
of collection
U.S. Government securities, direct and guaranteed
Obligations of States and political subdivisions
Securities of Federal agencies and corporations not guaranteed by the United States
Otherbonds, notes, and debentures
Total securities

Federal funds sold and securities purchased under agreements to resell
J.
,
Direct lease financing
Loans and discounts, n e t . . .
Fixed assets.
.
Customers' liabihty on acceptances outstanding
Other assets
Total assets

36,769

41,690

39,462

28,891
23,975

30,355
23,778

29,544
27,660

3,473
478

3,026
509

4,037
1,372

56,817

57,668

62, 613

r1,530
293
123,192
3,298
1,013
' 2,529

2,301
331
126,881 ^
3,451
1,077
2,597

2,643
360
130,082
3,644
1,181
2,054

225,441

235,996

242,039

LIABILITIES

Demand deposits of individuals, partnerships, and corporations
Time and savings deposits of individuals, partnerships,
and corporations
•
Deposits of U.S. Government
Deposits of States and political subdivisions
Deposits of foreign governments and official institutions,
central banks, and interhational institutions
D eposits of commercial banks
Certified and officers' checks, etc.
Total deposits
Demand deposits
.i.
Time and savings deposits:.
Federal funds purchased and liabihties for securities sold
under agreements to repurchase. _
Liabilities for borrowed money
Acceptances executed by or for account of reporting banks
and outstanding '.
Otherliabilities
Total liabilities

76,460

84,434

81,161
6,939
16,413

83,025
3,212
16,839

90,488
3,367
18,466

2,855
10,690
3,274

2,944
12,595
3,407

3,344
11,470
3,755

197,792

206,456

211,098

105,990
91,802

112,37
94,079

107,595
103,503

r 2,183
180

2,802
174

3,140
279

1,031
' 6,234

1,105
7,000

1,206
7,218

207,420

217,537

222,941

1,167
29
5,062
8,119
3.128
516

1,161
29
5,109
8,246
3,350
564

1,227
30
5,252
8,465
3,539
585

CAPITAL ACCOUNTS

Capital notes and debentures
Preferred stock
Commonstock..
Surplus
-.
Undivided profits
Reserves.
-.-.
Total capital accounts.
Total habilities and capital accounts

18,021

18,459

19,098

225,441

235,996

242,039

' Kevised.

Resume

The Office of the Comptroller of the Currency continues to change
and grow with the national economy and the banking industry.
Internal operations and administration are undergoing constant
refinement and improvement in order to serve the public better.

ADMINISTRATIVE REPORTS

Bureau of Customs
The responsibility of the Bureau of Customs is to administer the
tariff and related laws affecting international trade and traffic. I t
collects import duties and taxes; regulates carriers, persons, and
merchandise entering or departing the country; detects and prevents
smugghng and frauds on the revenue; and regulates vessels in the
coastwise and fishing trades. The Service also conducts a widespread
program to inform and encourage voluntary compliance by the exportimport public with the laws, regulations, and controls established by
Customs and numerous other Federal agencies.
Management improvement program
During fiscal 1967 the cost reduction-management improvement
program resulted in the highest annual savings realized in over a
decade, approximately $1,782,000. This included $152,000 under the
incentive awards program; $40,000 from the annual records disposal
program; $150,000 cost avoidance through the elimination of paperwork and the customs forms projects. Additional savings of $158,000 in
simplification of vessel documentation and admeasurement procedures
were achieved prior to February 1967 when these functions were
transferred to the U.S. Coast Guard by Treasury Department Order
No. 167-81, dated January 30, 1967.V
Most of these savings were utilized within the Customs Service to
assist in the absorption of an overall workload increase in excess of 10
percent, without a substantial increase in staff or expenditures.
Reduction of paperwork.-—Great strides were made in curtailing and
eliminating Customs paperwork, which has simplified the movement
of the nation's imports and exports. A total of 536 Customs forms were
analyzed; 89 of these were eliminated and recommendations for the
discontinuance of an additional 167 forms were accepted. I t is expected
that the continuing paperwork reduction or forms consolidation
program will result in an estimated recurring cost avoidance of
around $441,000 for Customs, with an additional $138,000 for importers and exporters.
A servicewide forms elimination and consolidation contest produced
estimated savings of $198,000, the result of 44 suggestions submitted
by 33 employees.
Automatic data processing.—^The D a t a Processing Center at SUver
Spring, Md., became operative during fiscal 1967. Approximately 1.7
million maU entry collection transactions were processed by the
Customs computer, replacing the former manual accounting system.
Furthermore, the computer processed these as a small part of its
workload at the rate of 400 a minute. Man-hours previously required
for collection and accounting for mail entries were reduced at more
than 50 ports. The Post Office also benefited by the Bureau's simplification of its maU system from all ports of entry to two locations—the
D a t a Center and the New York collection center for mail.
At the fiscal yearend the ADP Center was completing the installation of the revenue and appropriations accounting systems, designed
to control the growing number of customs transactions confronting
the Bureau each year. The Baltimore, Boston, and Miami regions
I See exhibit 72;

19 67 REPORT OF THE SECRETARY OF THE TREASURY

began conversion to the A D P accounting system during the fiscal
year.
Accounting procedure manuals were prepared at headquarters to
guide field personnel in the use of peripheral computer equipment and
the new forms required by the A D P system. In addition, a series of
talks was given in leading east coast ports to explain the automated
system to carriers, importers, brokers, and members of the importingexporting public. A 3-day training session for regional financial management officers also was conducted.
Mail operations.—The initial phase of the mail examination consolidation program was completed. Studies were conducted on the
volume, type, and direction of flow of foreign maU arriving in several
mail divisions, keeping in mind Customs goal of processing all foreign
mail at the port of first arrival. As a result, it was possible to phase out
20 small Customs mail examination units and to improve the efficiency
of the 25 remaining units.
Organizational changes.—The Office of Planning and Research was
established in Aj!)ril 1967 to provide Customs with a research and
long-range planning cap abUity and to direct Customs participation
in the planning-programing-budgeting system.
Plans have been completed for a Customs-wide information system,
which when installed will provide workload statistics, cost and manhour data for abotit 40 Customs functions on a monthly basis. This information will enable Customs to implement its Treasury-approved
program structure and will be the basis for the planning-programingbudgeting system,
Among the studies underway are a special one to determine the best
way of systematicaUy sampling formal entries at various stages of
handling, a study of the feasibUity of automating the formal entry
process, and a study to determine the optimum level of Customs mail
examination.
A new division, was established in the Office of Administration to
manage the Bureau portion of the Customs-Immigration border construction prograni; to direct and advise on the procurement of furniture and equipment; and to administer Customs space requirements
and utilization programs in all Customs-occupied buUdings.
Customs Information Exchange.—A survey to improve the Customs
Information Exchange function resulted in the transfer of the printing
and forms distribution responsibility from Bureau headquarters to the
New York regional office.
Bureau operations

Collections.—Revenue coUected by Customs during fiscal 1967
reached an alltime high of $2.7 billion, an 8.5 percent rise over 1966.
This included customs duty collections, excise taxes on imported
merchandise collected for the Internal Revenue Service, and certain
miscellaneous collections. Collections and payments by customs regions and districts are shown in table 22. The major classes of all
collections made by the Customs Bureau are shown in table 23. The
cost of collecting each $100 was $3.27, compared with $3.55 in fiscal
1966.
Carriers and persons entering.—More than 202 mUlion persons were
subject to customs inspection during fiscal 1967, a 5.2 percent increase

ADMINISTRATIVE REPORTS

in persons arriving and a 5.4 percent increase in carriers over fiscal
1966, as shown in tables 88 and 89.
Entries of merchandise.—Both the volume and value of imports
continued to climb, with the value reaching $26.5 bUlion in fiscal
1967 compared with $23.3 bUlion last year, an increase of 13.3 percent. The volume and type of entries handled during the last 2 fiscal
years are shown in table 86.
A total of 37.8 percent of all imports entering the United States
during the year were duty free and included commodities imported
free for Government stockpUe purposes or authorized for free entry
by special acts of Congress. The remaining 62.2 percent were subject to duty.
Invoices.—The number of invoices filed totaled 3,580,159, an increase of 10.5 percent over the previous year. The backlog of unappraised invoices on hand with the commodity teams of around 318,000
on June 30, 1967, represented a decrease of 27.8 percent from the
end of fiscal 1966.
Audits.—Under the internal audit program covering the 50 States,
the Virgin Islands, and Puerto Rico, 107 internal reports, 44 wool
company audits, and 257 reports covering customhouse brokers were
made. Thirty-six statistical reports on verification of formal entry
liquidations were made avaUable to regional commissioners each
quarter.
Liquidations.—The backlog of unliquidated entries, including those
awaiting reliquidation, was reduced from 1,380,950 to 981,876 during
fiscal 1967. The largest reductions occurred in Regions I (Boston),
I I (New York), I I I (Baltimore), and I X (Chicago).
Protests.—Protests filed by importers against the rate and amount
of duty assessed and appeals for reappraisement filed by importers
who did not agree with the customs officers on the value of merchandise are shown in the foUowing table.

Protests and appeals

Protests:
Filed with coUectors by importers (formal)
Filed with collectors by importers (informal)._.
Appeals for reappraisement filed with collectors

1966

55,500
69,070
28,908

1967

68,260
78,189
23,907

Percentage
increase, or
decrease (—)

23.0
13.2
—17.3

Drawback.—The total drawback allowance paid during fiscal 1967
amounted to $42,626,641, as reflected in table 87. Drawback allowance
on the exportation of merchandise manufactured from imported materials amounts to 99 percent of the customs duties paid at the time
goods are entered.
On the basis of a study made during the year action was taken to
expedite the administration of drawback claims. Drastic improve-^
ments are expected in the Customs paperwork due to the elimination
of 16 forms and the combining of 13 forms into four.
Export controL—The following table compares export control during
the last 2 years.
277-468—68

19 67 REPORT OF THE SECRETARY OF THE TREASURY
Activity

1966

Export declarations authenticated
Shipments examined......
Number of seizures
Value of seizures
Export control employees.

5,555,312
417,254
339
$747,644
223

1967

5,247,490
386,477
230
$192,703
226

Percentage
increase, or
decrease (—)
—5. 6
-7.4
-32.2
-74.2
1.3

Entry, clearance, and use of vessels.—The foUowing table compares
entrances and clearances of vessels for fiscal years 1966 and 1967.
Vessel movements

1966

Entrances:
Direct from foreign ports
Via other domestic ports
Total

Clearances:
Direct to foreign ports
Via other domestic ports..
Total

1967

Percentage
increase

50,159
40,797

51,189
42,880

2.1
6.1

90,956

94,069

3.4

47,734
36,796

49,737
43,476

4.2
18.2

84,529

93,213

10.3

Wool m^or^5.—Supervision of wool arrivals was continued with
9,620 reports of wool importations reviewed to assure uniformity in
the identification, grade, condition, and yield of the wool. An additional 685 samples of wool wastes, man-made fibers and wastes, and
cotton wastes also were examined.
Quotas.—^Last year 102 absolute and tariff-rate quotas on 20 different commodities were imposed under specific Presidential proclamations and legislation, plus 5 quotas imposed under the PhUippine
Trade Agreement Revision Act of 1955.
A total of 227 import quotas on cotton textUes and cotton textUe
products manufactured or produced in various countries also were
administered.
Coffee imported from nonmember countries of the International
Coffee Agreement became subject to quota on November 15, 1966.
This required the administration of 7 absolute quotas, as the quotas
were allocated to 6 specffic nonmember countries, plus a '^basket"
quota.
Penalties.—Decisions were made on 1,105 penalty cases in 1967. A
total of $99,036 was paid to 55 informers for a recovery of more than
$903,000 to the Government.
The amount of penalties assessed for violations of customs and
related laws more than doubled the 1966 figure.
Penalty cases, fiscal year 1967
Type of case

Penalty and forfeiture
Liquidated damages
Total

Number

Full
statutory
habihty of
violators

942
163

$67,443,445
3,683,015

1,105

71,126,460

ADMINISTRATIVE REPORTS

Net liability imposed by penalty decisions, 1966 and 1967
Type of case
Penalty and forfeiture cases. .
Liquidated damages.
Total

1966
$1,482,140
90,618
1,572,758

1967
$3,800,798
201,349
4,002,147

Prohibited and restricted importations.—A total of 239 trademarks,
trade names, copyrights, and assignments Avere recorded and 21
patent surveys were initiated or renewed. Approximately 260,000
pieces of screened mail contained lottery tickets, while 65,000 mail
parcels were detained as obscene.
There were several judicial developments during the year on the
obscenity statute. There were successful prosecutions at the district
level for a variety of picture magazines involving nudity. However,
a number of U.S. Supreme Court decisions reversed previous convictions in sex-oriented paperbacks, ^'stag" type films, and magazines
featuring nudity.
Dumping and countervailing duty cases.—Nine dumping cases were
received and 13 closed. A total of 17 cases remained on hand at the
end of the year. One finding of dumping was issued.
A countervaUing duty order was issued covering transmission
towers from Italy.
T a r i f classification.—Over 8,700 written replies to inquiries on
tariff classffication of merchandise were made. Of these, 775 were of
sufficient importance to be published as summaries of Bureau riflings
in the ^'Customs Bulletin." The time recjuired to process and issue
classification rulings Avas shortened during the year. Regulations
also were issued covering the free entry of educational, scientific,
and cultural materials under Public Law 89-651, approved October
14, 1966, which implemented the Florence Agreement. Applications
for free entry of 159 scientific instruments and apparatus were
processed.
Marine.—The functions pertaining to the admeasurement of vessels,
documentation of vessels, publication of master vessel registers,
registration of stack insignia, and shoreside port security were transferred from the Commissioner of Customs to the Commandant, U.S.
Coast Guard, effective February 24, 1967, by Treasury Department
Order No. 167-81. ^
Algeria, Rumania, Singapore, and Syria were added to the list of
countries whose vessels are exempt from the payment of special
tonnage taxes and light money.
Foreign Customs assistance.—Eight customs employees began intensive training as Foreign Customs Reservists for placement overseas
as Customs advisors. During fiscal 1967 one Customs advisor was
assigned to Panama, six were stationed in Colombia, and a three-man
team was in Chile. Four men Avere assigned to Argentina, two to
Costa Rica, three to Liberia, and two to Afghanistan. The largest
concentration was in Vietnam where 25 men were stationed.
1 See exhibit 72.

19 67 REPORT OF THE SECRETARY OF THE TREASURY

In addition, general customs surveys were conducted in Ethiopia,
the Philippines, Korea, El Salvador, and Vietnam. Customs laboratory surA^eys Avere completed in Panama and in five Central American
countries. A total of 104 participants from 29 countries observed U.S.
Customs operations and participated in orientation programs at
Bureau headquarters and various ports of entry throughout the
country.
Laboratory.—Chemists of the Division of Technical Services
analyzed 143,577 samples during 1967. Although most of the laboratory AVork coAT^ered import samples, 11,125 samples Avere tested from
customs seizures, mostly narcotic drugs. Claims for drawback of duty
on exported goods required comparisons or verffication in 150 instances; and 1,163 testings were made of preshipment items to develop
facts on Avhich to base tariff classification of ncAV goods intended for
shipment to this country. A total of 7,854 items Avere tested for other
Government agencies.
During the year chemists spent 2,318 man-hours in court as Avitnesses in narcotic and tariff classification cases of an exacting and
complex nature.
NCAV Orleans handled an increase of 7,500 samples over last year
and lowered their average cost per sample from $5.43 in 1966 to
$4.54. An alltime record of 5,059 samples Avere received in June. Ores
and minerals samples processed at New Orleans increased by 2,600.
The tests established that many thousands of tons of fluorspar Avere
dutiable at the rate of $8.40 per ton instead of $2.10 per ton.
The reassignment of Avork for the El Paso and New Mexico ports
from the Los Angeles laboratory to the one in NCAV Orleans helped
eliminate the ore-sampling backlog in the California laboratory.
Work was underway at the fiscal yearend on a method to analyze
multicomponent blends of textUe fibers, a rapidly developing problem
in the classffication of textUe materials. Another task in progress is
the rewriting and modernizing of customs laboratory methods of
analyses in light of new commodity breakdoAvns contained in the
Tariff Schedules of the United States.
Several ncAv techniques were developed in Baltimore for analyzing
imports Avith specffic problems, such as chrome ore, zinc concentrates,
and the field testing of marihuana. A new improved field test kit for
LSD was to be ready for inspectors during the faU of 1967.
Laboratory personnel participated in training courses, LSD seminars, and an infrared spectroscopy com-se arranged by a U.S. corporation. An article prepared in Baltimore on the analysis of LSD, the
controversial hallucinogenic agent, Avas accepted for publication in
the Bulletin on Narcotics, United Nations, AT^OI. X I X , No. 3, J u l y September 1967.
Construction projects.—The joint Customs and Immigration border
construction program for the year included the completion of nine
residences and three stations, Avith an additional seven residences
under construction. Contracts were awarded for two border stations,
three residences, and one underground storage tank.
Cooperative projects between Customs and the General SerAdces
Administration included the completion of the Los Angeles-Long
Beach customhouse and the Grand Portage, Minn., border station.

ADMINISTRATIVE REPORTS

Three Texas border stations Avere about half completed at the fiscal
yearend.
Personnel.—Regional personnel offices became fully operative during the year as they acquired experienced position classffiers and
training officers. Specific program objectives were established and
personnel management actions are being systematically reviewed
during regional surv:eys.
The headquarters personnel staff was strengthened to permit
development of better recruiting techniques needed to fulfillfieldneeds.
Progress was made throughout the Service in revising a majority of
the position descriptions to accommodate reorganizational changes.
The import specialist occupation was approved by civU service to
replace the former entry officer, liquidator, and examiner positions.
There was an increase in requests for recognition by unions. Several
elections were administered and the Bureau's first basic and supplemental contract providing for exclusive recognition was negotiated.
Incentive awards.—The ServiccAAdde program reflected increased
participation by Customs employees everywhere. There were 1,968
suggestions submitted, 398 of which were adopted, representing an
increase of 192 percent in adopted suggestions over fiscal 1966. Two
Customs employees were nominated as ^'Economy Champions" by
the CivU Service Commission for their combined suggestion Avhich
resulted in savings totaling $63,780.
Egual employment opportunity.—The Bureau continued its efforts
to provide equal opportunity for women, minority groups, and the
handicapped, as opportunities arose from the reorganization and
program innovations. A centralized information reporting and
evaluation system was organized throughout the country. The
establishment of more community relationships by field offices down
to the port level also promoted the program.
Training.—The training program was given increased emphasis
both at headquarters and in the field. The Bureau's executive training
plan was approved. A special on-the-job-training course for inspectors
of imported merchandise was developed and furnished to regional
offices.
Four classroom courses were completed for customs port investigators and 60 employees finished courses for import specialists.
The management intern program made six interns avaUable for
positions in the Service; special training was given many employees on
the planning-programing-budgeting system; and the Youth Opportunity Corps was expanded for the summer.
The foUowing training guides Avere developed cooperatively between
the Training and Career Development Section of the Bureau and
regional field offices: 'fundamentals of Duty Assessment," exploring
all aspects of import specialization; ^'Instructors Guide," using the
''Fundamentals of Duty Assessment" as a basis, was developed; and
the "Instruction Guide for Examination," prepared in Houston as an
aid in the examination of merchandise, was adopted on a natiouAvide
basis.
Improved services to brokers, importers, and carriers.—The fiscal year
1967, the first full year of reorganized operations, brought improved
service to the public. The faster clearance of merchandise and the
speedier processing of customs paperwork were outstanding benefits.

19 67 REPC)RT OF THE SECRETARY OF THE TREASURY

The prerevicAv of entries by the commodity teams has made it
possible for many ports to process over 80 percent of their entries
without further change. Differences of opinion between customs and
the importer can be resolved quickly, and the number of refunds or
increases in duties has dropped.
The "immediate delivery" procedure has been established Avherever
possible throughout the country and has speeded the release of cargo
from docks and airports.
The transfer of responsibility for physical examination of merchandise from commodity teams to inspectors and samplers resulted
in a decline in the cartage of examination packages to the public
stores. Importers noAv receive faster delivery of their cargo and the
Government benefits from the simplffied procedures.
Express lines for vessel passengers AA^ere created in NCAV York to
expedite service to passengers able to carry their OAVU luggage to the
customs area.
Special committees were organized in each Customs region to create
better understanding and closer cooperation between importers,
brokers, carriers, and others engaged in the import-export business.
Frequent meetings proved beneficial in the sohdng of mutual problems.
An ambitious program AV as launched in the Chicago region to
improA^e the quality of entries presented. Training material for
brokers and leading importers AA^as based upon a careful analysis of
problem areas. A kit containing the folloAving pamphlets Avas assembled and distributed: "Guidelines for NeAv Employees of Customs
Brokers;" "Glossary of Terms for Foreign Trade and U.S. Customs;"
"Frequent Causes of Change Entries;" " 'Rejected' Entries Cost
You Money;" and "HOAV Customs Automatic JData Processing Will
Affect You."
Public information and publications.—NeAv guidelines AA^ere prepared
for regional, district, and port information officers AAdth suggestions
for reaching larger audiences Ada exhibits, press releases, and special
projects.
A major project Avas the concentrated program to inform U.S.
residents planning to attend Expo 67 of their customs privileges and
restrictions. A special 4-page leaflet of questions and ansAvers was
distributed by both Canadian and United States customs officers
along the northern border; around 1,000 radio and TV spot announcements Avith color slides, plus local ncAvspaper items, received Avide
coverage and encouraged travelers to "know before they go" by
making use of our publications to speed their return through Customs.
Four new and seven revised pamphlets Avere issued to meet the
sharp rise in travel and international trade. Six of these Avere printed
in foreign languages. A "do's and don'ts" poster Avas reissued for use
by airlines, steamship companies, and travel agencies.
Private aviators received assistance in making entry and clearance
of their planes through Customs from a booklet "Customs Guide for
Private Flyers," published by the operations staff.
The output of ncAvs releases, magazine articles, TV and radio
interviews, idea sheets, and speeches shoAved a marked increase
throughout the country to help the public understand the Customs
mission.

ADMINISTRATIVE REPORTS

Investigative activities

The Customs Agency Service is the primary enforcement arm of
the Bureau. During the year, offices of resident agents were opened
in Atlanta, Ga., and Corpus Christi, Tex. The office at Port Arthur
was transferred to Beaumont, with a resident agent instead of a
customs agent in charge. The offices at Pembina, N. Dak., and Great
Falls, Mont., also were changed to resident agents. An additional
agent was stationed in Mexico City and two agents Avere added at
Rouses Point, N.Y.
Major improvements were made in the agency system of radio
communications. Mobile units several years old Avere replaced Avith
current models, whUe more powerful units Avere secured for NCAV York
and Miami. The utilization of the Federal Telecommunications System
made it possible to do away with the former teletype operation in
regional offices. The system for submitting and distributing suspect
and violator index cards also Avas streamlined and improved.
Investigations completed.—The number and types of cases investigated under customs, navigation, and related laAvs enforced
by Customs increased 9.7 percent over fiscal year 1966, as shown in
table 91.
Enforcement regions.—The regions along the Mexican border
continued to generate a large number of criminal cases. In the Houston
region AA'^hich includes Texas and New Mexico, there were 872 arrests
and 320 convictions. There Avere 1,994 arrests and 717 convictions in
the Los Angeles region Avhich covers Arizona and California.
Arrests.-—The following table shoAvs the number of arrests and
dispositions during the last 2 fiscal years.
Activity

Fiscal years
1967

1966

Persons under or awaiting indictment at beginning of year..
Arrests
Turned over to other agencies
Prosecutions declined
Not indicted
Convictions
Dismissals and acquittals
NoUe prossed
Persons under or awaiting indictment at end of year

1,109
2,522
639
348
17
1,094
126

25
1,382

1,382
3,374
1,009
464
12
1,137
179
78
1,877

Percentage
increase, or
decrease (—)
24.6
33.8
67.9
33.3
-29.4
3.9
42.1
212.0
35.8

Seizures, general.—A total of 5,638 seizures, aside from narcotics
and marihuana, were made during the year.
Seizures, narcotic and marihuana.—Opium was encountered in no
more than token quantities throughout the year. However, cocaine
in lots of 1 ounce to 6 ounces appeared along the California border
more frequently than heretofore. Three large seizures also were made
from travelers arriving in Miami by air.
The Mexican border provided numerous moderate-size seizures of
heroin and NCAV York several large ones. With the exception of a
17.8-ounce lot seized at Andrade, Calif., in an undercover case, all
the substantial lots of heroin along the southern border Avere encountered in Texas, apparently coming from suppliers across the border
from Eaoie Pass and Roma.

19 67 REPORT OF THE SECRETARY OF THE TREASURY

The largest individual seizure oi the year was made by Customs
port investigators on plainclothes motor patrol on the Brooklyn waterfront where 21 pounds, 12 ounces of 97.9 percent pure heroin were
taken from a seaman on a French vessel and his partner, another
French seaman, who had just arrived in NCAV York by air. Part of
the contraband was found on their persons, part on the vessel, and
part in a car rented by the seaman Avho arrived by air. One was
sentenced to 15 years and the other 7 years. Two weeks later, when an
English professional criminal arrived from Paris by air carrying a
false British passport, a customs inspector found a hidden compartment in his suitcase containing eight packages of 97.9 percent pure
heroin, weighing ,11 pounds and packed in the same manner as that
seized from the two French seamen. He pleaded guilty and received
a 15-year sentence.
The most striking development in the customs enforcement field
during the year was the increase in seizures of marihuana from 10,411
pounds in 1966 to 26,313 pounds in 1967. Not long ago a 100-pound
seizure of marihuana was regarded as an event of major signfficance.
In fiscal 1967 there were 87 seizures totaling 19,229 pounds, or an
average of 211 pounds each. Seven seizures, totaling 1,657 pounds,
Avere made in Texas, including seizures of marihuana followed from
there to other places; three totaling 543 pounds in Arizona; and 27
totaling 17,029 pounds in California. Thirty-one seizures totaling
6,526 pounds were made as the result of information received; 56
totaling 12,703 pounds Avere made without previous information.
The foUoAving table compares narcotic and drug seizures during
1966 and 1967.
Seizures

Narcotic drugs (weight in grams):
Heroin..
Number of seizures..
Raw opium
Number of seizures
Smoking opium
.
Number of seizures-Others
Number of seizures....Marihuana:
Bulk (grams)
Number of seizuresCigarettes (number)
Number of seizures..

Fiscalyears
1966

Percentage
increase, or
decrease ( - )

1967

7,959
182
2,494
7
34,936
5
20,299
313

35,323

i 4,722,481
699
904
191

11,935,431
1,081
1,829

225
2,036

9
2,400

7
18,304

291

334

343.8
23.6
-18.4
28.6
-93.1
40.0
-9.8
-7.0
152.7
54.6
102.3
74.9

» Revised.

Seizures, merchandise.—Customs seizures of merchandise throughout the country for violations of laAvs enforced by the Customs Agency
Service increased 20.2 percent in the number of seizures and 72.4
percent in the appraised value, compared with fiscal year 1966.
Details of these seizures by number and value are shown in table 90.
Foreign trade zones

Customs duties and internal revenue taxes collected during fiscal
1967 in the nine zones in operation amounted to $10,303,304. Although
a grant establishiiQg a new zone, No. 10, at Bay County, Mich., Avas
issued on September 12, 1966, there was no activity in that zone

ADMINISTRATIVE

REPORTS

during the year. Zone No. 9, at Honolulu, completed its first full
year of business.
Although the number of entries received in the nine zones decreased
by 6.2 percent, Avith seven areas showing decreases, there Avere substantial increases in other zone business bo offset this.
The folloAving table summarizes foreign trade zone operations
during fiscal 1967.
Number
of entries

Trade zone

NewYork
NewOrleans
SanFrancisco.San Francisco (subzone)...
Seattle
Mayaguez.
Penuelas (subzone)
Toledo.Honolulu

4,819
3,249
8,311
661
566
322
17
155
793

Received in zone
Long
tons
19,057
39,480
3,646
184
702
348
393,383
20,546
1,236,406

Value
$41,851,064
21,410,765
6,050,598
1,101, 238
1, 689,143
798, 633
6,529,448
7,624,822
1,743,251

Delivered from zone
Long
tons
21,059
27,080
3,024
123
607
412
231,059
25,306
952,329

Value
$41,302,606
19,883,212
4,467,254
757,012
1,497,742
1,773.284
11,079,804
8,946,878
1,362,501

Duties and
revenue
taxes
collected
$6,618,095
525,836
418,397
226,748
172,960
63,734
215,589
1,966, 680
95,265

Cost of administration

Customs operating expenses amounted to $91,646,829, including
export control expenses and the cost of additional inspection reimbursed by the Department of Agriculture.
The foUowing table shows man-year emj)loyment data in the fiscal
years 1966 and 1967.
Operation
Regular customs operations:
Nomeimbursable
Reimbursable ^

Man-years
1966

Man-years
1967

Percentage
increase

8,091
401

Total regular customs employment Export control
Additional inspection for Department of Agriculture...
Total employment

8,492
223
251
8,966

8,501
226
262

.1
1.3
4.4
.3

1 Salaries reimbursed to the Government by the private firms who received the exclusive services of these
employees.

OflSce of Director of Practice
The Office of Director of Practice is a part of the Office of the Secretary of the Treasury and is under the immediate supervision of the
General Counsel. The Director of Practice institutes and provides
for the conduct of disciplinary proceedings against attorneys, certified
public accountants, and enroUed agents Avho are alleged to have
engaged in disreputable conduct or who are alleged to have violated
the rules and regulations regarding practice before the Internal
Revenue Service.
Pursuant to revisions to Treasury Department Circular No. 230
(31 CFR, Pt. 10), effective Septernber 13, 1966, the function of
receiving and acting upon applications for enroUment to practice
before the Internal Revenue Service as taxpayers' agents was trans-

19 67 REPORT OF THE SECRETARY OF THE TREASURY

ferred from the Office of Director of Practice to the Commissioner
of Internal Revenue. Prior to such transfer, during the period July 1,
1966, through September 12, 1966, the Director of Practice denied one
application for enrollment. Fourteen applications aAvaiting review
were transferred to the Commissioner of Internal Revenue in accordance with Treasury Department Order No. 175-4.^
On July 1, 1966, there were 164 cases under evaluation in the Office
of Director of Practice, which involved derogatory information related
to practice before the Internal Revenue Service by attorneys, certified
public accountants, and enrolled agents. During the fiscal year, 109
new derogatory information cases were received. Disciplinary action
was taken in 48 cases, either by this Office or by order of a hearing
examiner. These 48 actions affected 17 attorneys, 22 certified public
accountants, and nine enrolled agents. During the fiscal year, five
proceedings for disbarment or suspension were initiated before a
hearing examiner. Decisions were rendered in four of these cases. In
addition, tAvo cases were carried over on the examiner's docket from
the previous fiscal year. In two cases involving attorneys, the examiner
issued an initial order for disbarment. In two other cases, an order of
suspension was imposed upon a certffied public accountant and an
enrolled agent. One case which had been heard by the examiner and
which was awaiting decision at the end of fiscal 1966 was dismissed
by the examiner. As of June 30, 1967, two cases were awaiting presentation before a hearing examiner and 76 were pending whUe under active
review and evaluation.
Prior to the revision of Treasury Department Circular 230, the
Director of Practice, pursuant to Revenue Procedure 64-47, exercised
an appellate jurisdiction over determinations by district directors
denying to unenrolled preparers of returns the privUege of limited
practice before the Service. As of July 1, 1966, four such appeals were
awaiting final decision. These were resolved prior to September 13,
1966.
OflSce of Domestic Gold and Silver Operations
The Office of Domestic Gold and SUver Operations, in the Officeof
the Under Secretary for Monetary Affairs, assists the Under Secretary
in the formulation, execution, and coordination of policies and programs relating to gold and silver in both their monetary and commercial aspects. The Office administers the Treasury Department
gold regulations relating to the purchase, sale, and control of industrial
gold, gold coin, and gold certfficates; issues licenses and other authorizations for the use, import and export of gold, and for the importation
and exportation of gold coin; receives and examines reports of operations; investigates: and supervises the activities of users of gold; and
administers the sUver coin regulations relating to the melting, treating,
and export of sUver coins of the United States. Investigations into
possible violations of the gold regulations and the sUver coin regulations are coordinated Avith the U.S. Secret Service, the Bureau of
Customs, and other enforcement agencies.
1 See exhibit 72;

ADMINISTRATIVE REPORTS

Gold

Purchases of gold for industrial use from the Treasury.—The gross
sales of gold for industrial use by the Treasury increased in the
calendar year 1966 to 5,584,512 fine troy ounces, as compared with
4,691,485 fine troy ounces in calendar year 1965, 3,665,245 ounces
in calendar 1964, and 3,068,345 ounces in 1963.
Gold coin licensing.—The volume of requests for the importation of
gold coins and the cases involving coins acquired abroad Avithout
license by uninformed tourists, continued to be large.
End uses of gold.—End-use certificates Avith detaUed inform.ation
concerning the end-use of gold Avere in effect through the calendar
year 1966. The estimated allocation by use for 1966 is shoAvn in the
table below.
Estimated allocation of gold by use for the calendar year 1966
Fine troy
ounces.

JewehT and arts
DentaL..
Industrial, electrical, and electronics, including space and
defense
Other industrial, including space and defense-Total

Dollars,
based on $35
per ounce

Percent

3,758,502
424,347

131,547,570
14,852,145

62
7

1,636,767
242,484

57,286,845
8,486,940

27
4

6,062,100

212,173,500

100

Silver

Commencing in 1963 when the market price of silver reached the
U.S. monetary value of silver, $1.29+ per fine troy ounce, the Treasury
made sUver avaUable to the market at $1.29-f- per ounce through
redemptions of silver certificates and sales of free silver. On May 18,
1967, such sales of silver to buyers other than domestic industrial
users were discontinued.^ Also, under the authority of the Coinage
Act of 1965 prohibitions Avere invoked on the melting, treating, and
export of sUver coins.
On June 30, 1967, $150 mUlion in silver certificates Avere Avritten off
pursuant to Public LaAV 90-29, approved June 24, 1967,^ and approximately 116 million ounces of sih^er formerly held as reserves against
such silver certificates Avere transferred to the Treasury balances
of free silver.
Bureau of Engraving and Printing
The Bureau of Engraving and Printing is responsible for manufacturing U.S. paper currency, various public debt instruments, and
most other evidences of a financial character issued by the Government, such as postage and internal revenue stam.ps, food coupons,
and military payment certificates. In addition, the Bureau prints
comm.issions, certificates of awards, permits, and a Avide variety of
other miscellaneous items. The Bureau also executes certain printings
for various territories^ administered by the United States.
1 On July 14,1967, sales of silver at the $1.29+ price were discontinued and since that time sales of Treasury
free silver have been conducted by the General Services Administration as agent.for the Treasury at going
market prices on a cpjiapetitive sealed bid basis.
2 Se© exhibit 71, "

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Management attainments

The Bureau has continued to expand its program of converting
the prmting of currency to the dry intaglio process, 32 notes to the
sheet. During fiscal 1967, the four sheet-fed rotary presses acquired in
1965 Avere refined, with resultant increased productivity and reduced
spoilage. The average cost of producing currency decreased from $8.42
per thousand notes in fiscal 1966 to $8.14 in 1967. The number of
currency notes converted to printing on the high-speed 32-subject
presses Avas increased by 78,592,000 notes, Avhich contributed to this
decrease in the unit cost. This conversion represented additional
annual recurring savings of $273,500 in fiscal 1967. Complete conversion to the high-speed dry process of printing currency is anticipated
by the close of fiscal 1968. The actual cost of $8.14 for fiscal 1967
represents the loAvest unit cost rate for the production of currency
since 1951, the year in Avhich neAV impetus Avas giA^en to the Bureau's
modernization program.
During fiscal 1967 the Bureau realized the additional annual saAdngs
of $10,330 anticipated last year from conversion in the method of
printing Puerto Rican bottle strip stamps from sheet-fed flatbed
presses to high-speed rotary AA/:eb-fed presses initiated in fiscal 1966.
Additional annual savings of $18,000 accrued to the Bureau from
utilization of its ncAv tour facility Avhich was opened for visitors in
fiscal 1966.
During fiscal 19.67 the Bureau completed its program for conversion
of the printing of Treasury bUls from the Avet to the dry method on
high-speed press equipment. Treasury bills are the largest single item
requisitioned by the Bureau of the Public Debt. Recurring annual
savings of $208,000 Avere realized in 1967 from this changeoA^er.
The procedure for manufacturing the green ink used in printing
currency backs Avas recently changed. The new procedure involves
processing much • larger quantities, using an ink pum.p to transfer
the ink to the mills, and milling once instead of three times. Annual
recurring savings of $10,000 are estimated to accrue from this action
beginning Avith fiscal 1967.
The craft training opportunities program initiated in the 1966 fiscal
year was intensifieci and extended to cover additional crafts in the
printing, binding, and maintenance trades and crafts categories. The
success of this program resulted in the advancement of the equal
emplo^^ment opportunity program and an atmosphere of cooperation
and acceptance by all persons concerned.
During the year, the Bureau has been actively engaged in overprinting an invisible phosphor coating on postage stamps to activate
the sensing mechanism of Post. Office equipment designed to speed
the sorting and distribution of mail. Complete conversion has been
accomplished for the denominations and types of stamps designated
by the Post Office Department. Much research Avork has gone into
developing suitable phosphor ink for the postage stamps and proper
press equipment for monitoring the application of this ink.
In the interest of maintaining efficient and economical operations,
the Bureau has carried on intensive research, engineering, and devel-

ADMINISTRATIVE REPORTS

opment activities and a continuing program of production and
quality control studies.
Fiscal, administrative, and production areas have been audited
by the Bureau's internal auditors. There were 32 audit recommendations outstanding at the beginning of fiscal 1967. Seventy-two reports
of audit, containing 61 recommendations for consideration by various
levels of management, were released. During the year 56 recommendations were cleared, leaving 37 under consideration at the fiscal
yearend.
Through its excess property program, the Bureau received $5,078
from the sale of obsolete equipment and excess material. Equipment
and furniture valued at $32,507 were obtained at no charge, through
the Federal excess property utUization program.
Efforts were continued to encourage employee participation and
to maintain supervisors' enthusiasm in the employee suggestion
program. The Bureau's overall rate for suggestions adopted in fiscal
1967 was 36.4 percent (as compared with the national average of
24.4 percent for the calendar year 1966), with 15.78 suggestions received
for each 100 employees. Estimated annual recurring savings of $39,009
and one-time savings of $300 A\dll accrue to the Bureau as a result of
suggestions adopted in fiscal 1967. Performance awards increased in
the administrative areas with three of the Bureau's top officials being
granted Treasury's Meritorious Service Awards in recognition of the
sustained excellence of their work. Also, one-time savings of $46,672
were realized through the sustained superior performance of employees.
During the year, 1,260 Bureau employees participated in 69
in-Bureau training programs; 35 employees attended two programs
at the Department; 120 employees completed 29 interagency courses;
two employees attended a conference conducted by other Government agencies; and 58 employees attended conferences, seminars,
and training classes sponsored by non-Government organizations.
Through its continued special expenditure reduction efforts, in
implementation of the President's memorandum to Heads of Departments and Agencies, dated April 29, 1966, the Bureau realized annual
recurring savings of $21,539 and one-time savings of $88,642 in
fiscal 1967. ^
Total estimated savings from management improvement efforts
during fiscal 1967 approximate $580,378 on a recurring annual basis
and $135,614 on a one-time basis. All savings realized are applied
against the cost of products produced and are reflected in downward
adjustments in products costs and passed on to customer agencies.
New issues of postage stamps and deliveries of finished work

New issues of postage stamps delivered by the Bureau in fiscal
1967 are shown in table 92. A comparative statement of deliveries of
finished work for the fiscal years 1966 and 1967 appears in table 93.
Finances

Bureau operations are financed by reimbursements to the Bureau
of Engraving and Printing fund, as authorized by law. Comparative
financial statements follow.

19 67 REPORT OF T H E SECRETARY OF T H E

TREASURY

Statement of financial condition J u n e SO, 1966 and 1967
Assets

June 30,1966 June 30,1967

Current assets:
Cash:
Onhand
With the Treasury.
Accounts receivable I..Inventories: 2
:
Finished goods
Work in p r o c e s s - . . . . - . . Raw materials
Stores
Prepaid expenses.

$100
6,586,623
1,855,730

$5,540,167
2,042,903

1,240,979
3,554,609
931,956
1,120,413
95,731

2,108,080
3,813,874
1,260,832
1,215,127
157,317

Total current assets...

16,386,041

16,138,300

24,370,486
156,742
266,420
501,705
3,955,961
3,519,764
145,343

22,400,970
160,744
276,905
459,933
3,956,961
3,399,562
41,472

32,916,420
16,558,350
16,358,070

30,695,547
15,923,659
14,771,888

Fixed assets: 3
Plant machinery and equipment
Motor vehicles
Officemachines
!
Furniture and
Dies, rolls, and plates.....
Building appurtenances.—Fixed assets under construction

fixtures....
-....

Total
,--..
Less accumulated depreciation.
Total
Excess fixed assets (written down to 20 percent and 30 percent of book
value, 1966 and 1967, respectively)
Total fixed assets....Deferred charges
Totalassets

•.
,

6,451

4,343

16,364,521

14,776,231

114,417

85,523

31,864,979

31,000,054

$2,061,671

$1,816,017

1,684,881
1,864,408
140,432
935,334
2,259

931,610
1,861,391
160,748
1,155,462
343

6,688,886

6,925,471

Liabihties and investment of the United States
Liabihties:
Accounts payable 4
Accrued liabihties:
PayroU...
Accrued leave
Other
Trust and deposit liabihtiesOther habilities
Total liabihties «

..-

Investment of the U.S. Government:
Appropriation from U.S. Treasury
3,250,000
3,250,000
Donated assets, net
^
22,000,930
22,000,930
Total
25,250,930
25,250,930
Accumulated earnings, or deficit ( - ) e
-74,836
-176,347
Total investment of the U.S. Government..
25,176,094
25,074,583
Total liabihties and investment of the U.S. Government.
31,864,979
31,000,054
1 Accounts receivable at June 30,1966, included $134,242 representing the value of finished goods and work
in-process inventories destroyed as a result of a fire as well as miscellaneous expenses incurred in connection
thereto. The claim against the surety on the performance bond and the contractor engaged in the construction job involved in the fire was settled in full for $61,000 in June 1967.
2 Finished goods and work-in-process inventories are valued at cost, including administrative and service
overhead. Except for the distinctive paper which is valued at the acquisition cost, raw materials and stores
inventories are valued at the average cost of the niaterials and supplies on hand.
3 Plant machinery and equipment, furniture and fixtures, office machines, and motor vehicles acquired
on or before June 30, 1950, are stated at appraised values. Additions since June 30, 1950, and all building
appurtenances are valued at acquisition cost. The act of August 4,1950 (31 U.S.C. 181a), which established
the Bureau of Engraving and Printing fund specifically excluded land and buildings valued at about
$9,000,000 from the assets of the fund. Also excluded are appropriated funds of about $6,784,000 expended or
transferred to GSA for extraordinary expenses in connection with uncapitahzed building repairs and air
conditioning. As of June 30, 1967, fixed assets included $4,953,954 of fully depreciated items, principally
plant machinery and equipment and building appurtenances. Dies, rolls, and plates were capitahzed at
July 1, 1951, on the basis of average unit costs of manufacture, reduced to recognize their estimated useful
hfe.- Since July 1,1951, all costs of dies, rolls, and plates have been charged to operations in the year acquired.
4 Accounts payable at June 30, 1967, include $1,211,000 representing payments withheld from contractors
pending satisfactory performance of press equipment purchases.
6 In addition, outstanding commitments with suppliers for unperformed contracts and undehvered
purchase orders totaled $6,330,312 as of June 30, 1967, as compared with $5,555,669 at June 30, 1966.
8 The act of August 4,1950, provided that customer agencies make payment to the Bureau at prices deemed
adequate to recover all costs incidental to performing work pr services requisitioned. Any surplus accruing
to the fund in any fiscal year is to be paid into the general fund of the Treasury as miscellaneous receipts
except that any surplus is applied first to restore any impairment of capital by reason of variations between
prices charged and actual costs.

ADMINISTRATIVE REPORTS

Statement of income and expense, fiscal years 1966 and 1967
Income and expense
Operating revenue: Sales of engraving and printing.

1966

1967

$33,012,991

$33,540, 752

Operating costs:
Cost of sales:
Direct labor
Direct materials used

13,385,424
6,452,800

13,919,731
6,601,621

Prime cost

18,838,224

19,621,352

9,062,530
1,291,091
321, 614
1,548,016
546,858
342,999
1,905,349
34,306

9,263,233
1,428,698
316, 609
1,666,056
579,145
455,147
1,853, 268
229,384
73,242
103,050

Overhead costs:
Salaries and indirect labor
Factory supplies
Repair parts and supplies
Employer's share personnel benefits
Rents, communications, and utilities
Other services
Depreciation and amortization...
Gains (—), or losses on disposal or retirement of flxed assets
Fire loss..
Sundry expense (net)
Total overhead
Total costs 1

Less:
Nonproduction costs:
Shop costs capitalized
Cost of misceUaneous services rendered other agencies.
Total
Cost of production
Net increase (—), or decrease in finished goods and work in process
inventories from operations.

54,615
16,107,378

15,967,722

33,945,602

36,489,074

437,965
678,633

150,381
570,064

1,016,698

720,445

32,929,004

34,768,629

—143,806

—1,126,366

32,785,198

33,642,263

Operating profit, or loss ( - )

227,793

-101,511

Nonoperating revenue:
Operation and maintenance of incinerator and space utUized by other
agencies
-.»
0 ther direct charges for miscellaneous services
-.

487,433
91,200

496,105
73,959

678,633

670,064

578,633
227,793

570,064
-101,511

Costofsales

Total
Nonoperating costs:
Cost of miscellaneous services rendered other agencies
Netprofit, orloss ( - ) , for theyears

1 No amounts are included in the accounts of the fund for (1) interest on the investment of the Government in the Bm-eau of Engraving and Printing fund, (2) depreciation on the Bureau's buUdings excluded
from the assets of the fund by the Act of August 4,1950, and (3) certain costs of services performed by other
agencies on behalf of the Bureau.
2 See preceding table, footnote 6.

Statement of source and application of funds, fiscal years 1966 and 1967
Funds provided and apphed

1966

Funds provided:
Sales of engraving and printing
Operation and maintenance of incinerator and space utUized by other
Other direct charges for misceUaneous services
-

$33,012,991
487,433
91,200

$33,640,762
496,105
73,959

Total
,.
33,591,624
Less cost of sales and services (excluding depreciation and other charges not .
requiring expenditure of funds: Fiscal year 1967, $2,082,642; fiscal year
1966, $1,939,655
,
—
31,424,176

34,110,816

Total
Sale of surplus equipment
Decrease in working capital
Total funds providedFunds apphed:
Acquisition of fbced assets
Acquisition of experimental equipment; and plant repairs and alterations
to be charged to future operations
Increasein working capital
Total funds apphed
-

1967

32,129,685

2,167,448
15,891
884,115
3,067,454

1,990,63"9

3,036,264

394,916

31,190

80,049
1,615,674
1,990,639

3,067,464

1,981,131
9,508

19 67 REPORT OF THE SECRETARY OF THE TREASURY
Fiscal Service
BUREAU OF ACCOUNTS

The Bureau's functions are GovernmentAAdde in scope and include
central accounting and financial reporting; disbursing for virtually all
civilian agencies; supervising the Government's depositary system;
determining qualifications of insurance companies to do surety business with Government agencies; a variety of fiscal activities such as
investment of trust funds, agency borrowings from the Treasury, and
international claims and indebtedness; and Treasury staff representation in the joint financial management improvement program.
Management improvement

Savings of $766,585 were realized during fiscal 1967 under the cost
reduction and management improvement program, attributable to
further improvenaents in technology and systems, realinement of
organization and staffing, and the benefits of continuing programs for
developing people in management and other skills.
Personnel

More than 65 percent of the Bureau's field organizations Avere
covered by surveys to evaluate personnel management goals and
practices, Avith emphasis on achievements under the position managem.ent system. Operation M U S T (Maximum UtUization SkUls and
Training) and the equal employment opportunity programs. These
were key matters on the agenda of a conference with regional managers
in the spring of 1967. With employee motivation as the conference
keynote, personnel topics were presented through a variety of media
including professional lecturers, case studies, workshops, and lectures
by personnel specialists.
Central accounting and reporting

In fiscal 1967 computer printout was used for the first time as camera
copy for the ''Combined Statement of Receipts, Expenditures and
Balances of the United States Government." Considerable progress
has been made toward the ultimate goal of computer printout of
camera copy for Government-wide financial reports.
Other financial reporting improvements during the year, to more
fully disclose the operations of the Federal Government, include:
tables on sales of financial assets in the ''Treasury Bulletin" and
"Monthly Statement of Receipts and Expenditures of the United
States Government;" also, a new table on receipts from and payments
to the public, seasonally adjusted and unadjusted, in the "Treasury
BuUetin."
The manual for "Central Accounting for Foreign Currency Operations of the Federal Government" was submitted to the General Accounting Office for approval.
Internal auditing

During fiscal 1967 the audit staff conducted 14 financial audits.
Comprehensive management surveys were also performed in three
regional offices.
The regular annual audit was made on financial condition of surety
companies holding Treasury Certfficates of Authority as acceptable

ADMINISTRATIVE REPORTS

sureties (6 U.S.C. 8). Certfficates are renewable each June 1 and a list
of approved companies (Department Circular 570, rev.) is published
annually in the "Federal Register." As of June 30, 1967, a total of
250 companies held certificates.
General coordination and staff assistance were furnished for the
annual audit of the Exchange StabUization Fund. Other audits made
of departmental activities included the Office of the Comptroller of the
Currency and unissued stocks of Federal Reserve notes.
Disbursing operations

During fiscal 1967 the 11 disbursing offices in the Division of Disbursement handled a combined workload of 422.4 million checks and
savings bonds and serviced over 1,300 administrative agency offices.
Total production for 1966 was 404.9 mUlion items (including 17.3
mUlion one-time retroactive social security checks). A number of
foreign service posts in the Caribbean and Far East were serAdced by
the Washington and ManUa offices, respectively. The Washington Disbursing Center also processed a large volume of payments in Canadian
dollars.
Installation of ncAV equipment and procedures and continuous
nianagement improvements increased employee productivity by 10.7
percent and reduced the average unit cost to 2.80 cents this year
(compared to 2.87 cents in fiscal 1966). Major improvements included
the following:
(1) Reorganization of field offices resulted in reduced strata of
supervision and staffing requirements without sacrfficing quantity or
quality of production.
(2) Installation of a new computer system in one of the field
offices and redistribution of the two replaced systems permitted the
absorption of increased workloads and discontinuance of some EAM
equipment.
(3) Further machine refinement and improved operating techniques made possible more saAdngs for the Masterfax (a heat transfer
process) machines Avhich were installed in eight field offices 2 years ago.
(4) The purchase of ncAv inserting and sealing machines Avith
faster speeds enabled tAvo offices to absorb increased workloads.
A number of agencies Avere provided special services, including
mailing attendance certffication cards with some 2.5 million Veterans'
Educational Assistance checks; punching, printing, and maUing 1.8
million interest-earnings statements for the Bureau of the Public
Debt; printing and mailing 700,000 card notices for the Railroad
Retirement Board; and issuing nearly 934,000 Series E savings bonds
for the Bureau of the Public Debt to General Electric Co. employees.
A computer payroll system is now in operation in all five of the
computerized disbursing offices involved. Payroll services for the
Denver and New York regional disbursing offices are performed by
the Kansas City and Philadelphia disbursing centers, respectively.
Payroll accounting service is being provided for the Bureau of the
Public Debt in Chicago and for three installations of the Bureau of
Prisons, Department of Justice.
A highlight of the year Avas the release of a majority of the periodic
social security, public debt interest, VA educational assistance, and
tax refund checks to the post offices in ZIP Code presorted groups.
277-468—68

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Some 290 million checks a year are UOAV in the presort system; this is
75 percent of the total potential. The Post Office Department estimates savings which equate to $13 for every $1 additional expense
incurred in the disbursing operations to produce the presorted groups.
The folloAving table shoAvs a comparison of workloads for fiscal
years 1966 and 1967.
Volume

Classification
1966
Operations financed by appropriated funds:
Checks:
Social security benefits
Veterans' benefits..
Income tax refunds
Veterans' national service life insurance dividends
Other
1
Savings bonds
Adjustments and transfers
Total workload financed by appropriated funds
Operations financed by reimbursements:
Railroad Retirement Board
Bureau of the Public Debt (General Electric Co. bond program)
Total workload—rehnbursable items
Total w o r k l o a d . . . . . . . .

1967

1228,398,709
68,647,928
46,311,179
2,664,406
41,156,683
5,588,643
197,362

234,210,686
64,764,251
48,991,354
6,793,488
48,656,410
6,623,058
234,886

391,864,910

409,274,133

12,163,384
887,192

12,152,696
933,775

13,050,576

13,086,371

404,915,486

422,360,504

1 Includes 17.3 miUion one-time retroactive payments.

Deposits, investments, and related activities

Federal depositary system.—The types of depositary services provided and the number of depositaries for each of the authorized
services as of June 30, 1966 and 1967, are shoAAm in the folloAving table:
Type of service provided by depositaries
Receive deposits from taxpayers and purchasers of pubhc debt securities,
for credit in Treasury tax and loan accounts
Receive deposits from Government officers for credit in Treasurer's general
accounts
Maintain official checking accounts of Go vernment oflicers
Furnish bank drafts to Goverimient oflicers in exchange for coUections
Maintain State unemployment compensation benefit payments and clearing
accounts
Operate limited banking facilities:
In the United States and its outlying areas
In foreign areas
.1

1966

1967

12,464

12,362

1,101
6,101
1,400

1,373
6,863
1,100

265
164

248
227

Investments.-—Government trust funds are invested in special issues
of U.S. securities, marketable U.S. securities, participation certfficates, and Government agency securities.
During the year investments Avere begun for the Federal supplementary medical insurance trust fund pursuant to Public LaAv 89-97,
approved July 30, 1965, and for the railroad retirement supplemental
account pursuant to Public LaAv 89-699, approved October 30, 1966.
Table 63 shoAvs the holdings of public debt and agency securities
by Government agencies and accounts.
Loans by the Treasury.—The Bureau administers loan agreements
Avith those GoA^ernment corporations and agencies that have au-

ADMINISTRATIVE REPORTS

thority to borroAv from the Treasury. Tables 109, 110, and 111 shoAv
the status of such loans as of June 30, 1967.
Surety bonds.—Executive agencies are required by laAV (6 U.S.C.
14) to obtain, at their OAvn expense, blanket, position schedule, or
other types of surety bonds coAT^ering employees required to be
bonded. The legislative and judicial branches are permitted by law
to follow the same procedure. A summary of this bonding activity
of Government agencies follows:
Number of officers and employees covered on June 30, 1967
Aggregate penal sums of bonds procured
Total premiums paid by the Government in fiscal 1967
Administrative expenses in fiscal 1967
Foreign indebtedness

996, 785
$3, 614, 733, 300
$244, 621
$60, 750

World War I.—Legislation relating to the agreement of May 28,
1964, betAveen the United States and Greece concerning the refinancing of a portion of the Greek debt Avas approved November 5, 1966
(Public LaAV 89-766). For status of World War I indebtedness to
the United States see tables 104 and 105.
Credit to the United Kingdom.—The Government of the United
Kingdom made a principal payment of $59.7 million and an interest
payment of $68.2 mUlion on December 31, 1966, under the Financial
Aid Agreement of December 6, 1945, as amended March 6, 1957.
The interest payment included $8.6 million representing interest on
principal and interest installments previously deferred. Through June
30, 1967, cumulative payments totaled $1,523.7 million, of Avhich
$863.1 million was interest. An unmatured principal balance of
$3,089.4 million remains; interest installments of $262.6 million AA^hich
have been deferred by agreement also were outstanding at yearend.
Japan, postwar economic assistance.—The Government of Japan
made payments of $34.8 mUlion princiiDal and $9.1 million interest
on its indebtedness arising from postAvar economic assistance. Cumulative payments through June 30, 1967, totaled $149.8 million principal and $47.7 million interest, leaving an unpaid principal balance
of $340.1 million.
Germany, postwar economic assistance.—The Federal Republic of
Germany made principal payments of $199.5 million and interest
payments of $4.9 million which were the final payments on its indebtedness arising from post-World War I I economic assistance.
CumulatiA^e payments through June 30, 1967, totaled $1,000.0 million principal and $223.4 million interest.
Payments of claims against foreign governments

The seventh installment of $2 million Avas received from the Polish
Government under the agreement of July 16, 1960, and a pro rata
payment of 4.297 percent on the unpaid balance of each award was
authorized.
The Foreign Claims Settlement Commission completed its adjudications under the War Claims Act of 1948, as amended. The Treasury
received an additional $5,750,000 from the proceeds of the U.S. sale
of seized assets of German and Japanese nationals, including sums
realized from the sale of General Aniline & Film Corp. stock. Payments
in full on aAvards due to death and personal injury and losses of
''small business" concerns were continued in fiscal 1967. Payments

1967 REPORT OF THE SECRETARY OF THE TREASURY

up to $10,000 on all other awards were authorized and made during
the year.
Additional distributions were authorized from the Hungarian and
Rumanian claims funds amounting to approximately 1.0367 percent
and 0.28 percent, respectively, on the unpaid balance of aAvards.
These funds were received from the Justice Department and were
derived from the liquidation of certain Hungarian and Rumanian
assets which were blocked and vested under the Trading with the
Enemy Act, as amended.
A pro rata distribution of approximately 20.27 percent on the unpaid balances of aAvards made under the Yugoslav claims program
was also authorized during the year. The funds for this distribution
had been held in the Yugoslav claims fund pending the results of
litigation involving certain awards previously made under the program. See table 95.
Defense lending

Defense Production ^c^.—Loans outstanding were reduced from
$14.9 miUion to $11.7 milhon during fiscal 1967. Further transfers
of $3.5 miUion were made to the account of the General Services
Administration, from the net earnings accumulated since inception
of the program, bringing the total of these transfers to $22.1 miUion.
Federal Civil Defense Act.—Outstanding loans were reduced from
$475,645 to $429,706 during fiscal 1967.
Liguidation of Reconstruction Finance Corporation assets.—The
Secretary of the Treasury's responsibihties in the hquidation of
R F C assets relate to completing the hquidation of business loans
and securities with individual balances of $250,000 or more as of
June 30, 1957, and securities of and loans to railroads and financial
institutions. Net income and proceeds of hquidation amounting to
$54.2 million have been paid into the Treasury as miscellaneous
receipts since July 1, 1957. Total unhquidated assets as of June 30,
1967, had a gross book value of $5.2 million.
Depositary receipts

The following table shows the volume of depositary receipts for the
fiscal years 1960-67. The data for 1967 include the volume of Federal
tax deposit forms used in the coUection of corporate income taxes. A
description of the depositary receipt procedure is contained on page
141 of the 1962 annual report; a general description of the modified
system (now referred to as the Federal tax deposit system) is found
on pages 11-12 of this report.
Individual
incorae and
social security taxes

Fiscal year

I960
1961
1962 .
1963
1964...
1965
1966
1967

9,469,057
9,908,068
10,477,119
11,161.897
11,729,243
12.012,385
12,518,436
15,007,304

Railroad
retirement
taxes

10,625
10, 724
10,262
9,937
9,911
9,859
9,986
10,551

Federal
excise
taxes

698,881
618,971
610,026
619,519
633,437
644,753
259,952
236,538

Corporate
income
taxes

22,783

NOTE.—Comparable data for 1944-69 will be foimd in the 1962 annual report, page 141.

Total

10,078,563
10,537,763
11,097,407
11,791,353
12,372,591
12,666,997
12, 788,374
15,277,176

ADMINISTRATIVE REPORTS

Government losses in shipment

Claims totaling $58,352 were paid from the revolving fund estabhshed by the Government Losses in Shipment Act, as amended.
Details of operations under this act are shown in table 116.
Other operations

Donations and contributions.—Dming the year the Bureau of
Accounts received ^^conscience fund'' contributions totahng $18,178.40
and other unconditional donations totaling $154,170.54. Other Government agencies received conscience fund contributions and unconditional donations amounting to $6,955.43 and $73,329.94, respectively.
Conditional gifts to further the defense effort amounted to $822.46.
Gifts of money and the proceeds of real or personal property donated
in fiscal 1967 for the purpose of reducing the pubhc debt amounted
to $130,995.61, of which $130,667.33 was used to redeem public debt
securities.
BUREAU OF THE PUBLIC DEBT
The Bureau of the Pubhc Debt, in support of the management of
the pubhc debt, has responsibihty for the preparation of Treasury
Department circulars offering pubhc debt securities, the direction of
the handhng of subscriptions and making of allotments, the formulation of instructions and regulations pertaining to each security issue,
the issuance of the securities, and the conduct or direction of transactions in those outstanding. The Bureau is responsible for the final
audit and custody of retired securities, the maintenance of the control
accounts covering all pubhc debt issues, the keeping of indiAddual
accounts Avith owners of registered securities and authorizing the issue
of checks in payment of interest thereon, and the handhng of claims
on account of lost, stolen, destroyed, or mutilated securities.
The Bureau's principal office and headquarters is in Washington,
D.C. Offices also are maintained in Chicago, IU., and Parkersburg,
W. Va., where most Bureau operations related to U.S. savings bonds
and U.S. savings notes are handled. Under Bureau supervision many
transactions in pubhc debt securities are conducted by the Federal
Reserve banks and their branches as fiscal agents of the United
States. Selected post offices, private financial institutions, industrial
organizations, and others (approximately 19,000 in all) cooperate in
the issuance of saAdngs bonds and saAdngs notes, and approximately
16,300 financial institutions act as paying agents for savings bonds.
Management improvement

A computer system for use in converting current income savings
bonds operations to an electronic data processing system was acquired
from the Federal Reserve Board and instaUed in the Chicago Ofl&ce.
The system became operational in January 1967 and the conversion
is expected to be completed before the end of calendar year 1967.
Activities are being converted on a phase basis in conjunction Avith
parallel processing systems, and include the audit and classification of
transactions; establishment and maintenance of accounts of owners;
and preparation of tapes to furnish data to the regional disbursing
ofl&ce for use in issuing interest checks and to the Internal Revenue
Service in connection with interest paid.

1967 REPORT OF THE SECRETARY OF THE TREASURY

Significant progress has been made in the Bureau's continuing
efforts to extend the system of having agents submit microfilm and
magnetic tape, in lieu of registration stubs, to report issues of Series
E savings bonds. The Birmingham Regional Disbursing Ofl&ce and the
Federal Reserve Bank of ClcA^eland converted to the sj^^stem in fiscal
1967. Preliminary steps are underway to bring the Postal Data
Centers, tAvo additional Federal Reserve banks and another regional
disbursing office under the system.
I t was determined that substantial benefits could be realized in the
Washington Ofl&ce by the couA^ersion of certain operations noAV
performed manually and on conventional machine equipment to an
electronic data processing system. These operations include public
debt accounting, i Proposals were solicited from vendors in March
1967 and the four proposals received Avere being evaluated at the
fiscal yearend.
The Bureau AA^orks closely Avith the Bureau of Engraving and
Printing to keep; informed of technological ad Alances which reduce
printing costs of securities. This cooperation led to a decision to
utilize the dry intaglio process method for the printing of Treasury
bills. The result of this Avas that the cost of printing such securities
averaged considerably less during fiscal year 1967 than in prior years.
The Bureau and the Federal Reserve Bank of NCAV York explored
the desirabUity of the latter's using clearing accounts in settling on a
net daUy basis Avilh those NCAV York City banks Avhich have a heavy
volume of certain wire transfers of Government securities. This
proAT^ed feasible and the original objective was extended to include the
settlement of transfers to complete the delivery of securities issued on
sale, and to provide for a local clearing arrangement for the intracity
transfer of Government securities. The system AVUI be adopted in
August 1967. There A\dll be savings to the Bureau in reimbursable
Federal ReserAT^e Bank costs as the result of the reduction in the number
of transfers and serAdce to security holders Avill be improved through the
expedited completion of transfers.
A study Avith the Federal Reserve banks Avas underAvay at the end
of fiscal 1967 on the feasibility of applying ^^book entry" principles,
in lieu of the issue of definitive transferable Treasury securities held
in such banks for certain safekeeping and collateral accounts. I t is
anticipated that initial benefits A\dll accrue primarily to the banks in
nonreimbursable areas, but the Bureau should realize economies over
a period of time in the cost of printing and distributing securities
and in auditing related coupons, Avith some offsetting costs in accounting procedures. Plans call for this procedure to be adopted in fiscal
1968.
A study Avas completed Avhich disclosed that it Avould be advantageous for the Federal Reserve banks to issue registered Treasury
securities. The plan, which is expected to be put into effect by the end
of calendar year 1967, AVUI improve service to the public through
accelerated delivery. The change AVUI require some expansion in
security accounts to reflect accountability of the banks for stock and
transactions on a decentralized basis.
A number of minor accomplishments contributed to cost reduction
and management improvement. These included refinements in automatic data processing, updating of equipment, and simphfication of

ADMINISTRATIVE REPORTS

AvorkffoAA^s. In the Parkersburg ofl&ce, for example, the reporting of
credit data on retired savings bond authorities has been simplified
through more effectiA^e use of forms; as a related benefit, a reconcUiation previously performed manually is noAv electronically processed
Avith other retirement transactions. There Avere also noteworthy
achievements in continuing management control programs. In the
area of procurement, supply, and property management, appreciable
saAdngs Avere realized through participation in the Treasury's consolidated purchase plan. Full utilization Avas made of the excess
property program to fulfiU procurement needs and upgrade equipment.
Bureau operations

The extent of the change in the composition of the public debt
is one measure of the Bureau's work. The debt falls into two broad
categories: public issues and special issues. Public issues consist
of marketable Treasury bills, certificates of indebtedness, notes, and
bonds; and nonmarketable securities, chiefiy U.S. savings bonds,
U.S. savings notes, U.S. retirement plan bonds, and Treasury bonds
of the investment series. Special issues of certificates, notes, and
bonds are made by the Treasury directly to various Government
trust and certain other accounts and are payable only for these
accounts.
During the year, 24,232 individual accounts covering publicly
held registered securities other than savings bonds, savings notes,
and retirement plan bonds Avere opened and 22,519 were closed. This
increased the number of open accounts to 214,893 covering registered
securities in the principal amount of $11,402 million. There Avere
418,593 interest checks with a value of $394,358,193 issued during
the year.
Redeemed and canceled securities other than savings bonds, savings
notes, and retirement plan bonds received for audit included 6,493,534
bearer securities and 199,262 registered securities. Coupons totaling
17,045,582 Avere received.
During the year 15,899 registration stubs of retirement plan bonds,
34,598 registration stubs of U.S. savings notes, and 5,713 retired
retirement plan bonds were received for audit.
A summary of public debt operations handled by the Bureau
appears on pages 12-24 of this report and in tables 27-53.
U.S. savings bonds.—The issuance and redemption of savings bonds
results in a heavy administrative burden for the Bureau of the Public
Debt, involving: maintenance of alphabetical and numerical OAvnership records for the 2.9 billion bonds issued since 1935; adjudication
of claims for lost, stolen, and destroyed bonds (which totaled 2.2
million pieces on June 30, 1967); and the handling and recording
of retired bonds.
Detailed information on sales, accrued discount, and redemptions
of savings bonds Avill be found in tables 46 to 48, inclusive.
There Avere 117.0 million stubs or records on magnetic tape and
microfilm representing the issuance of series E bonds received for
registration, making a grand total of 2,880 million, including reissues,
received through June 30, 1967.
AU registration stubs of series E savings bonds and all retired series
E savings bonds are microfilmed, audited, and destroyed, after

19 67 REPORT OF THE SECRETARY OF THE TREASURY

requu-ed permanent record data are prepared by an EDP system in
the Parkersburg ofl&ce. Prior to the establishment of that ofl&ce
these savings bond operations Avere performed in several Bureau
ofl&ces manually and on tabulating equipment. The following table
shoAvs the status of processing operations for savings bonds in the
Parkersburg office.

Fiscal year

Received

Micro
filmed

Key
punched

Converted
to
magnetic
tape

Balance
Audited
and
classified

Destroyed
Unfilmed

N o t key
punched

N o t conv e r t e d to
magnetic
tape

Unaudited

S t u b s of issued card t y p e series E savings b o n d s (in millions of pieces)
413.9
94.3
100.1
98.4
101. 2
104.2

411.6
93.9
,98.2
100.7
101.2
103.9

408.5
95.0
97.6
101.1
100.2
104.5

408.5
95.0
97.6
101.1
99.8
104.9

407.0
93.0
98.4
101.7
100.3
102.8

366.8
69.6
96.2
123.7
100.3
102.9

T o t a l . . 1 912.1

909.5

906.9

903.2

859.5

1958-62
1963
1964
1965
1966
1967

2.3
2.7
4.6
2.3
2.3
2.6

5.4
4.7
7.2
4.5
5.5
5.2

5.4
4.7
7.2
4.5
5.9
5.2

6.9
8.2
9.9
6.6
7.5
8.9

3.2
3.8
5.0
3.5
5.0
5.5

4.4
5.8
6.8
5.2
6.5
8.3

.1
1.1
1.4
.9
1.0
.8

.1
2.0
2.1
1.3
1.3
1.4

R e t i r e d card t y p e series E savings b o n d s (in millions of pieces)
1958-62.
1963
1964
.
1965
1966
1967

Total-.

240.0
64.9
70.1
75.3
81.5
87.4

238.4
64.3
70.0
75.9
81.0
87.6

237.0
64.1
68.9
77.1
79.7
87.5

236.8
64.3
68.9
76.8
80.0
86.9

235.6
63.5
69.1
76.9
80.2
85.6

208.6
48.3
83.4
59.8
91.6.
84.8

619.2

617.2

614.3

613.7

610.9 .

576.5

1.6
2.2
2.3
1.7
2.2
2.0

3.0
3.8
5.0
3.2
5.0
4.9

R e t i r e d p a p e r t y p e series E savings b o n d s (in miUions of pieces)
1962
1963
1964
1965
1966
1967
Total-.

.8
21.8
22.4
20.4
19.3
16.8

, .8
'21.2
22.4
20.5
19.4
, 16.8

.7
20.8
22.1
21.0
19.1
17.0

.7
20.8
. 22.1
20.9
19.2
17.0

.7
19.9
22.3
21.2
19.3
16.7

5.1
23.4
11.0
33.9
16.0

101.6

101.1

100.7

100.1

89.4

.6
.6
.5
.4
.4

.1
1.1
1.4
.8
1.0
.8

I Excludes records received on magnetic tape and microfilm; 5.3 million in 1965, 6.4 million in 1966, and
12.8 million in 1967.
'

Of the 100.0 million series A—E savings bonds redeemed and
charged to the Bureau during the year 97.5 million (97.5 percent) Avere
redeemed by authorized paying agents. For these redemptions these
agents were reimbursed quarterly at the rate of 15 cents each for the
first 1,000 bonds paid and 10 cents eaeh for all over the first 1,000 for a
total of $12,597,568 and an average of 12.91 cents per bond.
The foUoAving table shoAvs the number of savings bonds outstanding
as of June 30, 1967, by series and denomination.

ADMINISTRATIVE

REPORTS

D e n o m i n a t i o n (in t h o u s a n d s of pieces)
Series »

Total
$10

E.
H-.
A
B
C
D
FG.
J
K.

491,422
7,019
2
3
7
37
36
78
180
138
T o t a l . . . . 498,922

$26

$50

$75

$100

$200

$500

$1,000 $5,000 $10,000 $100,000

629 260,836 113,341 2,841 80,671 8,551 12,047 12,456
2,708 3.887 " 3 2 5 '
(*)
1
1
(*)
(*)
(*)
1
1
1
(*)
(*)
2
3
1
1
2
11
14
7
3
2
11
1
17
5
15
40
1
22
19
69
37
5
42
40
78
11
629 260,909 113,350 2,841 J80,806 ,8,551 14,833 16,494

48
99

... .

(*)
(*)

8
9

(*)
(*)
2

164

343

*Less than 500 pieces.
1 Currently only bonds of series E and H are on sale.

The following table shoAvs the number of issuing and paying agents
for series A—E savings bonds by classes.
J u n e 3C

Post
offices 1

Banks

Building
a n d savings
a n d loan
associations

Credit
unions

Companies
operating
payroll
plans

Total 2

All
others

Issuing agents
1945-.
1960
1955
I960..
1963.
1964
1965....
1966
1967

24,038
25,060
2,476
1,093
1,011
9'77
943
934
901

15,232
15,225
15, 692
16,436
13, 644
13,908
14,095
14,114
14,181

3,477 •
1,557
1,555
1,851
1,679
1,702
1,702
1,710
1,717

2,081
522
428
320
269
252
246
241
231

3 9, 605
3,052
2,942
2,352
1,857
1,783
1, 695
1,621
1,541

(3)

550
588
643
560
528
510
482
460

54,433
45, 966
23, 681
22, 695
19, 020
19,150
19,191
19,102
19,031

57
56
60
15
15
15
15
14

13,466
16, 691
17,652
19,153
15, 735
15, 991
16,178
16, 283
16, 327

P a y i n g agents
1945-.
1950
1955.
1960
1963.
1964
1965
1966....
1967

13,466
15,623
16,269
17,127
13,826
14,039
14,190
14,247
14,264

874
1,188
1,797
1,739
1,779
1,816
1,857
1,884

137
139
169
155
158
157
164
165

1 Estimated by the Post Oflice Department for 1955 and thereafter. Sale of series E savings bonds was
discontinued at post oflices at the close of business on Dec. 31,1953, except in those localities where no other
public facilities for their sale were available.
2 Effective Dec. 31, 1960, a substantial reduction was made due to reclassification by Federal Reserve
banks to include only the actual number of entities currently qualified. Does not include branches active
in the savings bond program.
3 "All others" included with companies operating payroll plans.

Interest checks issued on current income-type savings bonds
(series H and K) during the year totaled 4,917,258 Avith a value of
$319,848,353. NCAV accounts established for series H bonds, the only
current income-type savings bond presently on sale, totaled 140,297,
while accounts closed for series H bonds totaled 144,330, a decrease
of 4,033 accounts.
Applications received during the year for the issue of duplicates
of savings bonds lost, stolen, or destroyed after receipt by the registered
OAvner or his agent totaled 41,424. In 20,553 of these cases the issuance
of duplicate bonds Avas authorized. In addition, 18,358 applications
for relief were received in cases Avhere the original bonds Avere reported
as not being received after having been mailed to the registered owner
or his agent.

19 67 REPORT OF THE SECRETARY OF THE TREASURY
OFFICE OF THE TREASURER OF THE UNITED STATES

The Treasurer of the United States is responsible for the receipt,
custody, and disbursement, upon proper order, of the public moneys
and for maintaining records of the source, location, and disposition
of these funds. These include the verification and destruction of
U.S. paper currency; the redemption of public debt securities; the
keeping of cash accounts in the name of the Treasurer; the acceptance
of deposits made by Government ofl&cers for credit; and the custody
of bonds held to secure public deposits in commercial banks. In
addition. Federal Reserve banks, as depositaries and fiscal agents of
the United States, perform many similar functions for the Treasurer.
Commercial banks qualifying as depositaries provide banking
facilities for the Government in the United States and in foreign
countries. D a t a on the transactions handled for the Treasurer by
Federal Reserve banks and commercial banks are reported daily to
the Treasurer and are entered in the Treasurer's general accounts.
The Treasurer naaintains current summary accounts of all receipts
and expenditures; pa3^s the principal and interest on the public debt;
provides checking account facilities for Government disbursing
officers, corporations, and agencies; pays checks draAvn on the Treasurer of the United States and reconciles the checking accounts of the
disbursing officers; procures, stores, issues, and redeems U.S. currency;
audits redeemed Federal Reserve currency; examines and determines
the value of mutUated currency; and acts as special agent for the
payment of principal and interest on certain securities of U.S.
Government corporations.
The Office of the Treasurer maintains facihties at the Treasury t o :
Accept deposits of pubhc moneys by Government officers; cash U.S.
savings bonds ancf checks draAvn on the Treasurer; receive excess and
unfit currency and coins from banks in the Washington, D . C , area;
and conduct transactions in both marketable and nonmarketable
public debt securities. The Office also prepares the ^'Daily Statement
of the United States Treasury" and the nionthly ^'Statement of
United States Currency and Coin."
Under the authority delegated by the Comptroller General of the
United States, the Ti'easurer processes claims arising from forged
endorsements and other irregularities involving checks paid by the
Treasurer and passes upon claims for substitute checks to replace
lost or destroyed unpaid checks.
The Treasurer of the United States is custodian of bonds held to
secure pubhc deposits in commercial banks and miscellaneous securities held for other agencies.
Management improvements

Federal Reserve notes.—Effective December 1, 1966, authority was
delegated to the Federal Reserve banks to verify and destroy $5 and
$10 Federal Reserve notes which had become unfit for further circulation. The Board of Governors of the Federal Reserve System also
directed the banks to discontinue the sorting of these denominations
by bank of issue and authorized the use of a formula in heu thereof
to apportion credit among the issuing banks for the unfit notes
redeemed.

ADMINISTRATIVE REPORTS

These actions taken under the provisions of Public LaAv 89-427, approved May 20, 1966, are expected to save the Federal Reserve
banks about $675,000 annually. These savings wiU be reflected as
increased miscellaneous receipts to the general fund of the Treasury
and are in addition to other savings arising from the handling of
unfit $1 Federal Reserve notes in much the same manner, as approved
in fiscal 1966.^
A D P management.—Dming the fiscal year, the Treasurer's Office
provided other Government agencies A D P personnel serAdces valued
at $129,000 and equipment services valued at $157,000, of Avhich
$119,000 Avas deposited to miscellaneous receipts of the general fund
of the Treasury since it covered usage of purchased equipment.
The number of employees served by the Treasurer's computerized
payroll system Avas increased by 700 Avith the addition of the Bureau
of the Pubhc Debt employees at Parkersburg, W. Va. At the
fiscal yearend about 4,000 employees were being paid under the
system, and it was anticipated that more would be added during
fiscal 1968.
A significant improvement in the computerized payroll system
initiated dming the fiscal year was the reporting of annual Federal
income tax data to tbe Internal Revenue Service on magnetic tape.
The tape replaced individual paper copies of forms W-2 for the 1966
tax year and permitted direct introduction of the data into the IRS
computer system.
Assets and liabilities in the Treasurer's account

A summary of the assets and habihties in the Treasurer's account
at the close of the fiscal years 1966 and 1967 is shoAvn in table 56.
The assets of the Treasurer consist of gold and silver buUion, coin
and paper currency, deposits in Federal Reserve banks, and deposits
in commercial banks designated as Government depositaries.
Gold.—-The Treasurer's gold assets dechned during fiscal 1967 for
the 10th consecutive year. The reduction of $323.8 miUion, daily
Treasury statement basis, shoAvn in table 56, represents disbursements
of $836.0 million, less $512.3 milhon, Avhich consisted of gold deposited
by the International Monetary Fund, purchases of domestically mined
gold, and of other receipts from miscellaneous sources.
Silver.—During the year the Department continued to supply
silver to meet commercial needs by exchanging it for silver certificates
or selhng it at the monetary value of $1.29^- per ounce. This Avas
done to keep the mstrket price of silver doAvn until the point could
be reached in new coin production at Avhich the supply of the older
silver coins would not be a critical factor in maintaining orderly
commercial transactions.
In May 1967 the Department began to confine sales at the monetary
value to domestic users of silver, and iuAT^oked its legal authority to
prohibit the melting, treatment, or export of sUver coins.
Public LaAV 90-29, approved June 24, 1967,^ provides that (a)
sUver certificates shall no longer be redeemable in sUver bullion
after June 24, 1968, (6) a stockpUe of 165 mUlion fine troy ounces
of sUver shall be established, and (c) the Secretary may reduce out* See 1966 annual report, p. 113.
2 See exhibit 71.

19 67 REPORT OF THE SECRETARY OF THE TREASURY

standing silver certificates on Treasury books by such amounts, not
exceeding $200 mUlion, as, in his judgment, AVUI never be presented
for redemption because of having been destroyed or irretrievably lost
or being held in collections. The Secretary invoked the latter provision
to Avriteoff $150 million in outstanding sUver certificates on June 30,
1967.
The following table on the daily Treasury statement basis, summarizes transactions in silver bullion of all types during fiscal 1967.
Silver buUion (in millions)
Fiscal year 1967

Onhand July 1,1966
Received (+), or disbursed (—), net
Revalued
,
Exchanged for silver certificates
Released for coinage
Used in coinage or in coinage metal
On hand June 30,1967

Held to secure
certificates,
monetary
value
$864.1
-44.7
+1.2
-198.4
-70.5
551.7

Held for coinage, etc.
Monetary
value
$23.9
-.6
+70.'6
-76.3
17.5

Cost
value
$0.1
+1.1
-1.1

Uncurrent
coin value
$0.3

+.5
-.5

(*)

•Less than $50,000.

Balances with depositaries.—The folloAving table shows the number
of each class of depositaries and balances on Jxme 30, 1967.
Number of
accounts
with
depositaries'
Federal Reserve banks and branches.
Other domestic depositaries reporting directly to the Treasurer.
Depositaries reporting through Federal Reserve banks:
G eneral depositaries, etc
Special depositaries, Treasury tax and loan accounts
Foreign depositaries 3
i
_
:
Total....

Deposits to
the credit of
the Treasurer
of the United
States,
June 30,1967

36 2 $1,888,253,346
48
39,292,230
2,213
12,356
63

210,783,808
4,271,576,373
16,121,457

14,716

6,426,027,213

1 Includes only depositaries having balances with the Treasurer of the United States on June 30, 1967.
Excludes depositaries designated to furnish official checking account facilities or other services to Government ofRcers, but which are not authorized to maintain accounts with the Treasurer. Banking institutions
designated as general depositaries are frequently also designated as special depositaries, hence the total
number of accounts exceeds the number of institutions involved.
2 Includes checks for $576,765,178 in process of coUection.
3 Principally branches of U.S. banks and of the American Express Co., Inc.

Bureau operations

Receiving and disbursing public moneys.^—Government officers
deposit moneys Avhich they have coUected to the credit of the Treasurer
of the United States. Such deposits may be made with the Treasurer
at Washington, or at Federal Reserve banks, or at designated Government depositaries, domestic or foreign. Certain taxes are also deposited
directly by the employers or manufacturers who withhold or pa}^
them. All payments are Avithdrawn from the Treasurer's account.
Moneys deposited and withdrawn in the fiscal years 1966 and 1967.

ADMINISTRATIVE REPORTS

exclusive of certain intragovernmental transactions, are shoAvn in
the folloAving table on the daUy Treasury statement basis:
Deposits, withdrawals, and balances in the Treasurer's account
Balance at beginning of fiscal year.

1966
$12,610,264,635

Cash deposits:
Internal revenue, customs, trust fund, and other coUections
141,094,572,593
Public debt receipts 1
251,078,144,599
Less:
Accruals on savings and retirement plan bonds and
Treasury biUs
-4,178,784,247
Purchases by Government agencies.
-58,216,585,080
Sales of securities of Govermnent agencies in market.
16,056,371,956
Total deposits...Cash withdrawals:
Budget and trust accounts, etc
Public debt redemptions 1
Less:
Redemptions included in budget and trust accounts
Redemptions by Government agencies
Redemptions of secmities of Government agencies in market
Total withdrawals
Change in clearing accounts (c;hecks outstanding, deposits in transit,
unclassified transactions, etc.), net deposits, or withdrawals (—)..
Balance at close of fiscal year

1967
$12,407,377,210
163,036,203,399
280,893,225,792
-4,705,989,274
-82,729,779,799
14,481,607,776

345,833,719,820

370,975,267,894

142,190,039,055
248,444,955,787

164,591,006,692
274,579,375,793

—3,648,303,300
-55,133,946,660
13,108,739,075

—5,020,054,314
-74,141,110,873
16,268,217,025

344,961,483,956

376,277,434,323

—1,075,123,290

653,783,744

12,407,377,210

7,758,994,525

1 For details see table 39.

Issuing and redeeming paper currency.—By laAV the Treasurer is the
agent for the issue and redemption of U.S. paper currency. The
Office did not issue any gold or silver certificates during fiscal 1967.
U.S. notes Avere issued in amounts equal to those redeemed as required
b y l a w (31 U.S.C. 404).
The Federal Reserve banks and branches, as agents of the Treasurer,
redeem and destroy the major portion of U.S. currency as it becomes
unfit for circulation. A small amount is handled directly by the
Treasurer's Office.
Federal Reserve notes now constitute over 98 percent of the paper
currency in circulation. When printed by the Bureau of Engraving
and Printing these notes are delivered to the Office of the Comptroller
of the Currency Avho holds them in joint custody with the Treasurer's
Office. Shipments are made as needed to Federal Reserve agents and
their representatives at Federal Reserve banks and branches. Federal
Reserve banks then obtain notes for issuance to commercial banking
systems by depositing equivalent amounts of collateral Avith their
respective agents.
As the notes become unfit for further circulation they are redeemed
under a detaUed procedure prescribed by the Fiscal Assistant Secretary
Avithin the framcAvork of the regulations issued by the Secretary of
the Treasury, pursuant to the act of May 20, 1966 (Public LaAv 89427). Notes of the $1, $5, and $10 denominations are canceled, verified,
and destroyed at the Federal Reserve banks and at the Treasurer's
Currency Redemption Division in Washington Avithout being sorted

19 67 REPORT OF THE SECRETARY OF THB TREASURY

by bank of issue. The Federal Reserve Board of Governors then
apportions the redemption of such notes among the banks of issue on
a formula basis. Notes of larger denominations are presently being
sorted by bank of issue, cut in half and the lower halves forAvarded to
Washington, Currency Redemption Division, the banks retaining the
upper halves and adjusting and destroying them after the Treasurer's
verification is completed. The extent to which the formula sort AVUI be
extended to larger denominations and the function of verffication and
destruction further decentralized is under continuing revicAv.
The Treasurer's Office accounts for Federal Reserve notes from the
time they are delivered by the Bureau of Engraving and Printing
until finally redeemed and destroyed. The accounts show the amounts
for each bank of issue and each denomination of notes held in the
reserve vault, held by each Federal Reserve agent, or issued and
outstanding.
In addition to verifying the loAver halves of the larger denomination
Federal ReserA^e notes, the Currency Redemption DiAision redeems
unfit paper currency of all types received locally in Washington and
from Government officers abroad, as well as burned or mutilated
currency from any source. During fiscal 1967 the Division examined
and identified burned and mutilated currency for approximately 49,000
claimants and made payments therefor totaling $12,516,913.
A comparison of the paper currency of all classes, including Federal
Reserve notes, issued, redeemed, and outstanding during the fiscal
years 1966 and 1967 foUoAVS.
Fiscal year 1966
Pieces
Outstanding July 1
Issues during year
Redemptions during year..
Outstanding June 30
.

4,541,995,359
1,926,288,150
1,203,521,508
5,264,762,001

Amount
$38,664,777,668
10,895,558,303
7,592,982,674
41,967,353,297

Fiscal year 1967
Pieces
5,264,762,001 $41,967,353,297
1,990,312,012 11,899,289,572
2,624,640,593 11,371,465,770
4,630,433,420 42,495,177,099

Table 62 shows by class and denomination the value of paper
currency issued and redeemed during the fiscal year 1967 and the
amounts outstanding at the end of the year. Tables 58, 59, 60, and 61
give further detaUs on the stock and circulation of money in the
United States.
Paying grants through letters of credit.—Treasury Department
Circular No. 1075 dated May 28, 1964, established a procedure ^^to
preclude withdraAvals from the Treasury any sooner than necessary"
in cases Avhere Federal progTams are financed by grants or other
payments to State or local governments or to educational or other
institutions. Under this procedure Government departments and
agencies issue letters of credit AA^hich permit grantees to make Avithdrawals from the account of the Treasurer of the United States as
they need funds to accomplish the object for Avhich a grant has been
aAvarded.

ADMINISTRATIVE REPORTS

B y the close of .fiscal 1967, 39 Government agency accounting
stations were making disbm-sements through letters of credit. A total
of 57,007 withdraAval transactions, aggregating $13,955.6 mUlion,
were processed during the year, compared with 29,392 transactions,
totaling $7,718.3 mUlion for the preceding year.
Checking accounts of disbursing officers and agencies.—As of June 30,
1967, the Treasurer maintained 2,104 checking accounts, compared
with 2,119 the year before. The number of checks paid by categories
of disbursing officers during fiscal 1966 and 1967 follow.
rdisbursing officers

Number of checks paid
1966

Treasury..
Army
Navy
Air Force.....
Other

TotaL......

1967

393,844,454
30,765,634
34,777,416
33,997,508
25,164,620

412,134,281
36,629,305
38,776,501
36,415,052
26,822,415

518,639,432

549,776,554

Settling check claims.—During the fiscal year the Treasurer processed 533,331 requests for stop payment on Government checks and
138,097 requests for removal of stoppage of payments.
The Treasurer acted upon 269,474 paid check claims during the
year, including those referred to the U.S. Secret Service for investigation Avhich involved the forgery, alteration, counterfeiting, or fraudulent issuance and negotiation of Government checks. Reclamation
was requested from those having liabUity to the United States on
36,949 claims, and $3,951,772.93 was recovered. Settlements and
adjustments were made on 24,917 forgery cases totaling $3,820,416.71.
Disbursements from the check forgery insurance fund, established to
enable the Treasurer to expedite settlement of check claims, totaled
$753,525.12. As recoveries are made, these moneys are restored to
the fund. Settlements totaling $5,926,468.28 have been made from
the Treasurer's check forgery insurance fund since it was established
on November 21, 1941.
Claims by payees and others involving 124,891 outstanding checks
were acted upon. Of these, 105,264 were certffied for issuance of
substitute checks valued at $41,081,727.02 to replace checks that
were not received or were lost, stolen, or destroyed.
The Treasurer treated as canceled and transferred to accounts of
agencies concerned for adjustment purposes the proceeds of 16,207
unavaUable outstanding checks, totaling more than $5,020,632.47.
Collecting checks deposited.—^Government officers deposited more
than 9,440,000 commercial checks, drafts, money orders, etc., Avith
the Treasurer's Cash Division in Washington for collection during
the year.

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Custody of securities.—The face A^alue of securities held in the
custody of the Treasurer as of June 30, 1966, and June 30, 1967, is
shoAvn beloAV.
June 30

Purpose for which held
1966
As collateral:
To secure deposits of public moneys in depositary banks
To secure postalsavings funds i
In lieu of sureties
In custody for Government officers and others:
For the Secretary of the Treasury 2 . . .
For Board of Trustees, Postal Savings System 1
Forthe ComptroUer of the Currency.
For the Federal Deposit Insurance Corporation
For the Rural Electrification Administration
For the District of Columbia
For the Commissioner of Indian Affans
Foreign ObUgations 3 . . .
Other 4
For Government security transactions: Unissued bearer securities
Total

1967

$56,804,100
18,227,000
3,268,750

$69,514,600

34,191,682,823
188,890,000
17,039,500
813,870,000
141,326,779
164,416,863
66,500,400
12,047,451,530
63,462,931
1,877,421,500

33,086,328,515
17,964,500
842,062,000
139,661,506
182,667,476
37,728,250
12,046,086,451
52,660,356
1,737,334,000

49,650,362,176

48,205,236,604

4,227,850

1 Postal Savings System was discontinued on Apr. 27, 1966, pursuant to legislation approved Mar. 28,
1966 (39 U.S.C. 5226-5229).
2 Includes those secmities listed in table 109 as in custody of the Treasury.
3 Issued by foreign governments to the United States for indebtedness arising from World War I.
4 Includes U.S. savings bonds in safekeeping for individuals.

Servicing securities for Government corporations and Federal agencies.—^In accordance Avith agreements betAveen the Secretary of the
Treasury and various Government corporations and agencies, the
Treasurer of the United States acts as special agent for the payment
of principal of and interest on their securities. The amounts of these
payments during the fiscal year 1967, on the daUy Treasury statement
basis, were as follows:
Payment made for

Banks for cooperatives.-...
District of Columbia Armory Board
Federal home loan banks-.
Federal Housing Administration
Federal intermediate credit banks
Federal land banks
Federal National Mortgage Association
Others
Total

Principal

Interest
paid with
principal

Registered
interest i

Coupon
interest

$1,783,705,000

$60,203,178

5,565,395,000
106,644,750
3,756,645,000
1,082,109,800
891,289,000
139,475

175,582,706
744,859
146,476,292
13,797,446

$22,742,118
13,916,586

156,226,274
120,254,871
45,607

13,185,928,025

386,804,482

36,658,704

442,849,645

$781,641
165,541,253

1 On the basis of checks issued.

Office of Foreign Assets Control
The Office of Foreign Assets Control is responsible for administering
the Treasury Department's freezing controls. During fiscal 1967,
the controls under the Foreign Assets Control Regulations and the
Cuban Assets Control Regulations Avith respect to trade and financial
transactions with, and assets in the United States of. Communist
China, North Korea, North Vietnam, Cuba, and then- nationals and
the prohibitions relating to the purchase abroad and importation of

ADMINISTRATIVE REPORTS

Communist Chinese, North Korean, North Vietnamese, and Cuban
merchandise were continued.
The Office of Foreign Assets Control also administered without
change during fiscal 1967 the Transaction Control Regulations which
supplement the export controls exercised by the Department of
Commerce over direct exports from the United States to Eastern
Europe and the U.S.S.R. These prohibit, unless licensed, any person
within the United States from purchasing or selling or arranging the
purchase or sale of internationaUy controUed strategic commodities
located outside the United States for ultimate delivery to the Soviet
Bloc. As in the case of both the Foreign Assets and Cuban Assets
Control Regulations, the prohibitions apply not only to domestic
American companies but also to foreign firms owned or controlled by
persons Avithin the United States.
The administration of assets remaining blocked under the World
War I I Foreign Funds Control Regulations which was transferred
to the Office of Foreign Assets ContrcU from the Department of Justice
in fiscal 1966, was also continued. These regulations apply to assets
blocked under Executive Order 8389 of Hungary, Czechoslovakia,
Estonia, Latvia, Lithuania, East Germany, and nationals thereof
who were on January 1, 1945, in Hungary or on December 7, 1945,
in Czechoslovakia, Estonia, Latvia, or Lithuania or on December 31,
1946, in East Germany.
A new set of controls was imposed during fiscal 1967. The Rhodesian
Transaction Regulations were issued on March 1, 1967, under Executive Order No. 11322 of January 5, 1967, implementing the United
Nations Security CouncU's resolution No. 232 of December 16, 1966,
which imposed selective mandatory economic sanctions against
Southern Rhodesia. The Rhodesian regulations prohibit unlicensed
importation of the foUowing Rhodesian products named in the
United Nations resolution: asbestos, hides, skins and leather, meat
and meat products, chromium, copper, iron ore, pig iron, sugar,
tobacco, and certain manufactures thereof, wherever made and
unlicensed dealings abroad in such products by Americans and by
Rhodesian subsidiaries of U.S. firms. The regulations also prohibit
the unlicensed participation by Americans in the sale or shipment to
Southern Rhodesia from abroad of non-U.S. origin arms, ammunition,
aircraft and vehicles and materials for their manufacture or maintenance and transfers abroad involving the manufacture or assembly
of aircraft or motor vehicles in Southern Rhodesia. They also embargo
participation by Americans in transactions involving the exportation
from abroad to Southern Rhodesia of non-U.S.-origin oU or oU products.
Internal Revenue Service ^
The Internal Revenue Service administers the internal revenue
laws embodied in the Internal Revenue Code (title 26 U.S.C.) and
certain other statutes, including the Federal Alcohol Administration
Act (27 U.S.C. 201-212), the Liquor Enforcement Act of 1936 (18
U.S.C. 1261, 1262, 3615), and the Federal Firearms Act (15 U.S.C.
901-909). I t is the mission of the Service to encourage and achieve
1 Additional Information will be found in the separate "Annual Report of the Coinmissioner of Internal
Revenue."
277-468—68
9

100

19 67 REPORT OF THE SECRETARY OF THB TREASURY

the highest possible degree of voluntary compliance with the tax
laAvs and regulations and to maintain the highest degree of public
confidence in the integrity and efficiency of the Service.
Major management improvements

The Service continued to make significant progress in cost reduction
and management improvement. During fiscal 1967 record savings of
$16.5 mUlion were reported by managers and supervisors throughout
the Service. This was an increase of 14 percent over fiscal 1966
savings and exceeded by $2 mUlion the savings goal for fiscal 1967
which was established a year ago.
Major systems and procedural changes.—The savings achieved in
fiscal 1967 were the result of a large number of individual actions,
ranging from changes affecting a single operation or location to Servicewide projects involAing the efforts of many people. Among these
were the following: (1) Many refund checks mailed to taxpayers are
undeliverable because the taxpayer moved and did not notify the
Post Office or the Internal Revenue Service of his change of address.
These checks are returned to the Service. Prior to fiscal 1967, undeliverable checks Avere redeposited to the taxpayer's account pending receipt of a change of address. In March 1967 a ncAV procedure
was begun which delays the redeposit of undelivered checks. This
results in savings for the Government by avoiding the costly process
of reissuing checks and improves service to the taxpayers by making
checks immediately avaUable for issuance upon receipt of a change of
address. (2) A new method was initiated for processing the estimated
tax payments of corporations which eliminated several operations in
the service centers. Under this system the taxpayer is provided with
preaddressed punchcards which he completes and submits with payments to a Federal Reserve bank, or to a Federal bank depositary
which then forwards it to a Federal Reserve bank. The Federal
Reserve bank deposits remittances to the Treasurer's account, and
forwards the punchcards to the Office of the Treasurer. The data on
the card is converted to tape, which is sent to the Service's National
Computer Center Avhere the taxpayer's deposits are reconcUed Avith
the amounts claimed on returns submitted. (3) The tAVo-part **piggyback" maUing label, used in two regions for the tax year 1965, was
extended to three additional regions for the 1966 tax year. Use of
the preaddressed label helps prevent errors, speeds up processing,
and contributes ma;terially to keypunch savings. (4) Before the Service authorizes a refund for an overpayment of tax, the taxpayer's
account is searched, by computer, for any unpaid liabilities. If any
are found, the overpayment is appropriately applied and any remainder refunded; This capabUity, which could not be applied
economically under manual methods, has permitted the Service to
amend some of its procedures for coUecting past-due accounts. The
minimum dollar value of a past-due account which is required before
manpoAver is assigned to its collection has accordingly been raised,
reducing the number of smaU accounts which require expensive
collection action. I t should be noted that past-due accounts wUl be
accumulated from year to year, and once the minimum doUar value
is exceeded, manpower AviU be assigned to the collection of taxes
and interest owed. (5) Pursuant to Public Law 89-713, enacted

ADMINISTRATIVE REPORTS

101

November 2, 1966, the Service was given authority to require taxpayers to file tax returns directly Avith service centers. Direct filing
of individual returns claiming a refund was first tried by the Service
in one region in fiscal 1965 and extended to a second in fiscal 1966.
In fiscal 1967 optional direct filing of refund returns was extended
natiouAvide except for the North Atlantic and Midwest Regions and
the State of California. The filing of selected business returns with
the service center was made mandatory in the Southeast Region late
in fiscal 1967. Direct filing offers significant savings in processing
costs, and the system wiU gradually be extended to cover additional
types of returns. Regions wiU be phased in on an orderly basis.
Informing and assisting taxpayers

The Commissioner of Internal Revenue received, on behalf of the
Internal Revenue Service, the commendation from the Secretary of
the Treasury for excellence in improving communications and services
to the public for fiscal 1967. These functions are probably the most
important the Service performs, keeping the public informed of
matters essential to fulfilling its tax obligations. The Service has
thoroughly equipped itself to carry out its public information role
and is constantly striving to respond more effectively to taxpayer
inquiries and to improve dissemination of information.
Public information program.—Since it Avas clear that an expanded
information program would be required for the 1967 filing period,
planning teams began on it during the summer of 1966. By September, work was underAvay on much of the scheduled program, Avhich
included technical and general news releases adaptable for timely use
in district offices, feature articles and photographs, TV and radio
scripts, films, and tapes. The quantities involved Avere generally above
those of any previous year. More than 90 percent of all TV broadcasting stations and 78 percent of all radio stations used spot messages
provided by the Service.
During the 1967 filing period the weekly series of question-andanswer columns was regularly published by more than 800 daily and
1,300 weekly newspapers. For the first time, the question-and-answer
technique AA^as extended to meet the special needs of Americans living
abroad. Five columns of such information were provided 70 newspapers and magazines circulated among these taxpayers.
Taxpayer assistance program.—As part of the program to improve
Government service to the public, the Service promoted a series of
trial installations in taxpayer assistance areas of district office buildings. The tests, conducted in nine cities, have proven successful in
reducing waiting time, long lines, and confusion during the filing
season rush. Design and layout standards developed from these tests
Avill begin to receive ServiccAAide application during fiscal 1968.
Over 26 mUlion taxpayers voluntarily sought and received assistance
from the Service during fiscal 1967. More than 17 million of these
were assisted over the telephone, a satisfying response to the Service's
efforts to encourage taxpayers to telephone for assistance in preference
to making an office visit.
A natiouAvide program to sample the nature and frequency of taxpayer inquiries was instituted in fiscal 1967. Information obtained
through this sampling provided new insight into the problems of tax-

102

19 67 REPORT OF THE SECRETARY OF THE TREASURY

payers in filing Federal tax returns, highlighted information gaps in
forms and public-use documents, and provided a basis for improving
training programs for personnel detailed or assigned to the assistance
program. The 25 most frequently asked questions are summarized
monthly and disseminated to Service activities concerned. Another
ncAv program proArides for the rapid dissemination of urgent need-toknoAV-noAV tax information to Service employees dealing with the
public. Providing immediate information to employees on such items
as forthcoming technical information releases and taxpayer error
data enables them to assist the public more effectively.
Tax rulings.—The National Office interprets the tax laAv and issues
letter rulings on specffic sets of facts in response to inquiries from taxpayers or their representatives. I t also provides technical advice to
district directors on technical or procedural questions Avhich develop
during the examination of returns or claims for refund or credit Avhen
the question cannot be resolved on the basis of law, regulations, or
other definitive information. During the year, 25,393 requests for
letter rulings and 3,175 requests for technical advice Avere processed.
Regulations program.—TAventy-eight final regulations, three temporary regulations, and 22 notices of proposed rulemaking relating to
matters other than alcohol and tobacco taxes Avere published in the
^Tederal Register" during the year. Ten public hearings attended by
a total of approximately 335 persons were held on proposed regulations.
Five Treasury Decisions were issued in connection Avith the administration of alcohol, tobacco, and firearms regulations.
Personnel

Recruitment and personnel development continued as major chal"
lenges during this period of expansion of Internal Revenue Service
functions and services. The Service's aim is to adequately staff its
organization without compromising the primary objective of providing high quality assistance to the Nation and its taxpayers.
Recruitment.—Recruitment brochures, a direct-mailing campaign,
on-campus recruiting, and participation in college career days Avere
again used extensively to obtain qualified employees for the Service.
Brochures concerning employment opportunities Avere mailed to
12,000 high school guidance counselors and 5,900 college and university guidance counselors. In addition, 20,000 copies of one brochure
Avere distributed to the Accounting Career CouncU for inclusion in
their career guidance packages. The program of hiring undergraduate
accounting students as trainees for positions as internal revenue
agents and internal auditors, during its first fuU year of operation,
included 152 students and the negotiation of work-study agreements
with 74 colleges and universities. The Service continued to employ
young people Avho qualify under the Youth Opportunity Corps program. As of May 1967, the programs had 1,054 enrollees, a 51-percent
increase over last year's total of 696.
Planned personnel redeployment.—The program to retrain or find
other positions for district office personnel affected by the relocation
of their work to service centers continued during fiscal 1967. Of the
over 9,000 personnel who have been redeployed since the program
began, 1,368 were accounted for this year. Sustained success was
experienced in identifying either service center or other I R S jobs for

ADMINISTRATIVE REPORTS

103

which many of these individuals are qualffied or could be retrained.
Some employees left voluntarUy to go to other agencies, private
industry, or into retirement.
Training

Major increases in technical training have been required by expanded recruitment., changes in the tax law, and teclmological developments which have increased the complexity of Service work. Since
1965, the number of employees trained has increased by more than 100
percent.
The National Training Center continued to develop and update its
technical training miaterials for field use. I t also continued to experiment with methods to make training more efficient and effective, including automated teaching systems for certain service center courses,
and closed-circuit television training programs to enable employees
who have extensive contact with the public to observe their own performance.
Emphasis continues on the systematic selection and development of
supervisory personnel. Many of the concepts originally associated with
the executive selection and development program have been extended
to supervisory and managerial jobs throughout the Service.
Internal revenue collections and refunds

Gross collections.—Internal revenue collections in fiscal 1967 were
$148.4 biUion, the largest amount collected and the greatest annual
increase in the history of the Internal Revenue Service. The increase
of $19.5 billion over fiscal 1966 is larger than total internal revenue
collections in 1942, when $13 biUion was collected.
The tax on individual income continues to be the largest single
source of Federal revenue, representing about 47 percent of all collections. Individual income tax payments (including both amounts withheld by employers and amounts paid by individuals with their returns)
increased to $69.4 bUlion. Part of the $8.1 bUlion increase from 1966
reflected the rise in withholding rates which became effective in May
1966.
The second major source of revenue is the corporation income tax,
which increased to $34.9 bUhon in fiscal 1967. Some of the gain was due
to the acceleration of estimated payments, which affected certain
corporate estimated tax payments in the last quarter of fiscal 1967.
CoUections of employment taxes totaled $27 biUion in fiscal 1967.
These taxes represent funds which are set aside for the payment of
insurance and retirement benefits. Increases in the rate and in the
amount of wages subject to the tax, as weU as increased employment,
contributed to the rise in these collections.
Excise taxes continued to represent a substantial part of total internal revenue coUections in spite of the numerous revisions under the
Excise Tax Reduction Act of 1965. Total excise tax collections in fiscal
1967 were $14.1 bUlion, only 5 percent below the amount collected in
fiscal 1965 when a record $14.8 biUion was collected.
Gross collections by principal types of tax are compared for fiscal
years 1966 and 1967 in the accompanying chart. See table 19 for collections from 1936-67 by detaUed categories.

104

19 67 REPORT OF THE SECRETARY OF THE TREASURY

COLLECTIONS CONTINUED TO RISE
EXCEPT ESTATE AND GIFT TAXES

69.4

61.31

TOTALS

1966

1967
1966
CHANGE

148.4
128.9
+15.1 %

34.9
30.81
27.0
20.3

13.4

1 1 . . 3.0
Corporation
income
taxes

Individual
income
taxes

Employment
taxes

Estate and
gift taxes

Excise taxes

CHANGE FROM 1966
4-33.1

Refunds.—There Avas a sharp rise in both number of refunds made
and amount refunded in fiscal 1967. The number increased by 3.9
million to reach 49.0 million, while the amount refunded (including
both principal and interest) increased by $2.3 billion to a record $9.6
bUlion. The largest increase in both number (5.1 million) and amount
($2.0 billion) occurred in individual income taxes. A contributing factor
Avas the higher rate of withholding from wages, beginning in May 1966,
under the Tax Adjustment Act of 1966.

ADMINISTRATIVE REPORTS

105

Receipt and processing of returns

Number of returns fled.—yioTe than 105.4 million tax returns of all
types were filed in fiscal 1967, an increase of 1.4 million. This growth
occurred primarily in the individual income tax area, Avith forms 1040
increasing 2.0 million and forms 1040A increasing 0.5 million. Excise
tax returns filed decreased 0.6 million.
Automatic data processing.-—On January 1, 1967, individual master
file coverage was made natiouAAide by the inclusion of the tAvo regions
and three districts previously omitted from coverage. Business master
file coverage had become nationwide on January 1, 1965. The objectives of the master file plan Avere essentially complete by the fiscal
yearend, with only the Office of International Operations remaining to
be brought under the system. With natiouAvide A D P processing, the
former area service center programs for processing tax returns, begun
in 1954, were closed.
Enforcement activities

The Service's enforcement activities are directed primarUy toward
insuring that each taxpayer's tax liability is correctly established and
that all taxes due are paid. The confidence of the American citizen in
the Federal tax structure and his acceptance of its self-assessment system is largely dependent on the Service's ability to achieve this objective. In recognition of this important relationship, the Service's enforcement programs strive to promote maximum voluntary compliance
through fair and impartial administration of the tax laws and regulations.
Examination of returns.—In response to changing demands on tax
administration, audit program activity was expanded on larger and
more complex returns. Continued high-quality audits plus shifts in
audit concentration to larger cases resulted in additional tax recommendations of $3.3 billion in fiscal 1967. This exceeded the previous
high of $3.1 billion recommended in 1966.
Additional tax recommended as the result of examination of corporation and exempt organization returns increased to $1,632 mUlion-—
4.0 percent higher than 1966. There was also an upward movement in
estate and gift tax recommendations, from $416 million in fiscal 1966
to $565 million in 1967, a 35.8-percent increase. Recommendations
decreased in the individual and fiduciary area, from $1,050 mUlion
last year to $1,026 mUlion in fiscal 1967.
The primary responsibility of the audit program is to determine
correct tax liability. While the bulk of examinations result in recommendations for the assessment of additional tax, equivalent effort is
made to insure that the taxpayer has not overassessed himself. In
fiscal 1967, Service examinations disclosed overassessments of $190.6
million, exclusive of claims for refund initiated by taxpayers.
The inventory of individual and corporation older year returns
awaiting field audit examination have been reduced by 22 percent
during the past 2 years. This more current inventory helps reduce the
number of requests to extend the statute of limitations, enables taxpayers to know the status of their Federal tax accounts earlier, and
reduces the accunmlation of interest due on both assessments of
additional taxes and on refunds of overassessments.

106

19 67 REPORT OF THE SECRETARY OF THE TREASURY

The application of team audit techniques has helped reduce the
backlog of older returns in the large corporate tax return area. In
view of the tremendous growth in the size, number, and complexity of
large corporations since World War I I the assignment of one man per
case was no longer realistic. The new large case audit program applies
the concept of a carefully planned, highly coordinated audit usiag a
team approach, Avith each agent given specific assignments according
to a formal overaU examination plan. Since its inception in July 1966,
this program has been successful in improving the quality of large case
audits, obtaining better uniformity of issues raised as Avell as their
resolution, and shortening the time span of examinations.
Mathematical verification.-—The mathematical verffication of returns
is one of the procedures used by the Service to help insure that each
taxpayer will pay the proper amount of tax. Slightly over 65 million
income tax returns of individuals filed on form 1040 or form 1040A
were mathematically verified during the year, an increase of 7.6 percent
over the preceding year.
The correction of mathematical errors resulted in $207.6 million in
increased taxes and $94.3 million in decreased taxes, for a net yield
of $113.3 million.
Delinquent returns.—The Service secured 766,000 delinquent returns
representing $262.7 million in unreported tax, interest, and penalties
during fiscal 1967. Although fewer returns were secured than last year,
there Avas an increase of $16.0 mUlion in the amount assessed.
Summary of additional taxes from direct enforcement.-—A detaUed
comparison of additional tax assessments resulting from direct
enforcement during the last 2 fiscal years is presented below.
Sources

In thousands of dollars
1966

Additional tax, interest, and penalties resulting from examination _ _
Increases in individual income tax resulting from mathematical verification...
National identity file »
Tax, interest, and penalties on delinquent returns
Total additional tax, interest, and penalties
Claims disallowed

1967

2,427,329
186,244
2,648
246,696

2,256,933
207,506
2,271
262,665

2,862,817

2,729,375

401,122

392,199

1 An interim computer procedure established in regions processing individual income tax returns to identify taxpayers filing more than one return. When the individual master file is operative nationwide this
procedure will no longer be necessary.

Tax fraud investigations, indictments, and convictions.—During the
year 3,193 full-scale investigations Avere completed Avith prosecution
recommended in 2,015 cases. These totals included 836 organized
crime drive investigations, Avith prosecution recommended in 700
cases. Preliminary investigations totaling 10,663 were made during
theyear.
Indictments were returned against 1,342 defendants in tax fraud
cases in fiscal 1967. Pleas of guilty or nolo contendere were entered for
928 defendants in cases reaching the courts, 145 defendants were
convicted after trial, 50 were acquitted, Avhile cases against 233
defendants were nol-prossed or dismissed.

107

ADMINISTRATrVE REPORTS

Collection of past-due accounts.—Past due accounts established
during fiscal 1967 totaled 2.8 million, Avith $2,132 million of tax involved, a $117 mUlion increase, due in part to several unusually large
accounts. The $2,066 miUion of accounts closed was $112 million
higher than last year. The yearend inventory of 748,000 accounts
was valued at $1,325 mUlion, 16,000 accounts loAver and $112 million
higher than a year earlier.
Future enforcement of past-due accounts wiU be facihtated by the
A D P system which is now in effect natiouAvide. Programs initiated
during the year were having significant results by the fiscal yearend.
For example, in 1967 for the first time on a natiouAvide basis, names of
indiAdduals OAving income taxes or business taxes for periods before
A D P were fed into the system. The computer program apphed to
refunds provided that any prior habihty would be deducted from
any refunds due the taxpayer. By the end of fiscal 1967 this program
had automaticaUy collected almost $12 milhon on prior habilities.
EquaUy important, the program freed enforcement personnel for
work in other areas where personal contact was required.
Alcohol and tobacco tax administration.—The concentrated hquor
laAV enforcement effort in the Southeastern States was continued in
fiscal 1967. Reports on the program, knoAvn as Operation Dry-Up, ^
disclosed a decrease in both the number of violations and the scope of
illegal operations in the States affected.
In fiscal 1967, 84 percent of the illegal distiUeries and 93 percent
of all mash seized were in the Southeast Region. The foUoAving table
proAddes information on natiouAAide seizures and arrests during the
last 6 fiscal years.
Fiscal year
1962..
1963..
1964..
1966..
1966..
1967..

Number of
stills seized

Gallons of
mash seized

6.886
6,213
6,837
7,432
7,685
6,608

3,424, 500
3,092,600
3,123,800
3,637,900
3,664,900
3,125,400

Arrests for
liquor law
violations
8,726
8,153
7,897
7,171
6,629
6,148

The alcohol and tobacco tax laboratory of the National Office is
concentrating on advanced instrumentation studies so that improved
techniques can be apphed to the analysis and examination of specimens. Advanced analytical capabihty is important to the Service in
its normal surveillance over products containing alcohol, as well as
in other fields, including the broad area of scientific crime detection.
In a criminal case during fiscal 1967 the Service estabhshed precedent
by the successful introduction of physical evidence analyzed by
atomic absorption spectrophotometry, a technique for the determination of chemical elements which is particularly useful in conjunction
with neutron activation analysis. Since 1964, when neutron activation
analysis was first accepted by the courts, groAving interest in its use
has been shoAvn by the SerAdce, the Bureau of Narcotics, and other
Federal and State offices. Neutron activation analysis was used in
1 See 1966 annual report, page 128.

108

19 67 REPORT OF THE SECRETARY OF THE TREASURY

the examination of 1,765 samples in fiscal 1967, compared to 1,006
in fiscal 1966. Field office laboratories also analysed 6,450 samples
in connection Avith alcohol and tobacco tax enforcement work and
5,197 samples for the Bureau of Narcotics.
Tax determinations on spirits AAithdraAAm for botthng is a prime
workload factor. These determinations reached an aUtime high of 221.2
million tax gallons in fiscal 1967. Plants requiring on-premises supervision produced 873.0 miUion tax gaUons of distilled spirits during
the year.
Firearms law enforcement.—Investigations of violations of National
and Federal firearms statutes led to 720 criminal cases and the seizure
of 3,787 firearms in fiscal 1967, compared to 466 cases and 839 seizures
in fiscal 1966. In addition, 36,050 firearms records inspections were
made at the premises of dealers, compared to 13,783 inspections last
year.
Appeals and civil litigation.—Total cases received in regional appellate diAdsions in fiscal 1967 decreased by 56 from fiscal 1966 to 36,664.
Total case disposals, however, increased by over 3,000 cases to 37,755
in 1967. A reduction of 1,091 in the yearend inventory was achieved
by June 30, 1967.
Revised procedures were initiated in fiscal 1966 for reporting
refunds or credits of over $100,000 in income, estate, or gift taxes
to the Joint Committee on Internal Revenue Taxation.^ These
procedures reduced the average processing time from 12 months to
5K months, resulting in better pubhc relations through earher refunds
or credits, and savings in interest and operating expenses. In fiscal
1967, 757 cases involving overassessments of $499.8 miUion were
reported to the Joint Committee.
Civil cases in the trial courts were won or partially won by the
Government during fiscal 1967 as follows: in the Tax Court, 82 percent; in the Court of Claims, 55 percent; and in the U.S. district
courts, 73 percent. The Government Avon, in whole or in part, 339
of the 413 civil tax cases decided by courts of appeal (exclusive of
collection htigation and alcohol and tobacco tax legal matters).
The Supreme Court rendered two decisions in Tax Court cases and
two decisions in refund suits during the year. The Government's
position was sustained in both Tax Court cases and in one of the
two refund suits.
International activities

Overseas operations of the SerAdce fall into three broad areas:
(1) Administration of the tax laws as they apply to U.S. citizens
liAdng abroad, nonresident ahens, and foreign corporations; (2) negotiation and administration of tax conventions AAdth foreign countries,
estabhshed to prevent double taxation of individuals and corporations
which are subject to taxation by tAvo or more countries; and (3) providing assistance requested by developing countries in improving
their tax administration system.
International operations.—The Service maintains offices in Bonn,
London, Manila, Mexico City, Ottawa, Paris, Rome, Sao Paulo, and
Tokyo. Representatives at these offices perform functions for all
branches of the Service, maintain liaison with tax authorities of
See 1966 annual report, page 130.

ADMINISTRATIVE REPORTS

109

foreign governments on the administration of tax treaties and on
other matters of mutual interest, and assist U.S. citizens overseas
in complying with their U.S. tax responsibilities. To further assist
U.S. taxpayers abroad, during the 1967 filing period Service employees
visited 51 countries plus Guam, Okinawa, and the Canal Zone, and
14 1-week tax schools were conducted for military personnel.
Tax conventions.—Negotiations were held Avith seven countries
concerning bUateral income tax conventions. Income tax conventions
were signed during fiscal 1967 with Brazil and Avith Trinidad and
Tobago, and the proposed conventions were transmitted to the
Senate. A supplemientary income tax convention with Canada was
also signed and transmitted to the Senate. The Senate ratffied a
protocol to the United States-United Kingdom income tax convention
and the instruments of ratffication were exchanged on September 9,
1966. Instruments of ratffication of an income tax convention between
the United States and the Netherlands were exchanged on July 8,
1966.
Foreign tax assistance.—One of the most signfficant developments
this year was the creation of the Inter-American Center of Tax
Administrators. The Center was established in May, at a meeting
held in Panama City, Panama. Its purpose is to provide a permanent
forum for the exchange of ideas, concepts, and experiences for the
improvement of all phases of tax administration among Western
Hemisphere tax officials. The Commissioner of Internal Revenue
was elected President of the Center's Executive CouncU and as such
is the chief executive of the Center, The other members of the executive councU are from Guatemala, Ecuador, Venezuela, and Brazil.
At the fiscal yearend the Center had 39 members from 19 countries.
New long-term tax advisory teams Avere assigned in fiscal 1967 to
Turkey and to South Vietnam. The team previously assigned to
Ecuador Avas withdrawn for the time being. At the close of the fiscal
year teams were located in Argentina, Bolivia, Brazil, Chile, Colombia,
Costa Rica, the Dominican Republic, El Salvador, Guatemala,
Honduras, India, Nicaragua, Panama, Paraguay, Peru, the Philippines, South Korea, South Vietnam, Turkey, Uruguay, and the
Agency for International Development's Regional Office for Central
America and Panama.
Planning activities

Service planning activities concentrate on developing a balanced
program for the most beneficial use of limited manpower and dollar
resources. The comprehensive, multiyear Program and Financial
Plan, developed as a result of intensive research, systems development, and extensive planning reflects the Service's objectives and
resource requirements. This plan forms the short- and long-range
basis for integrating into unified programs the variety of separate
Service functional activities.
Long-range planning.—The Service is now in its second year under
the planning-programing-budgeting system (PPB). Special studies, an essential part of the P P B system, provide management
Avith the analytical basis for choosing from among alternative courses
of action. Task forces started work in 1967 on several special studies
to assist management in making program choices. Systematic quanti-

110

1967 REPORT OF THE SECRETARY OF THE TREASURY''

tative analysis, as well as traditional qualitative analysis, are used to
develop objectives and alternative means of meeting them. Quantitative analysis assists in evaluating the practicality of alternatives by
providing calculations and comparisons of the relative costs and
benefits. The results of these analyses AVUI be presented to Service,
Treasury, and Budget Bureau executives for review and decision.
Long-range planning and estimates of future Service workloads
rely on projections of the number of tax returns to be filed in future
years. The steady upward trend in the volume of returns filed in
recent years continued during calendar year 1966, and the expected
growth in the Nation's population, economy, and labor force indicates
additional increases. In calendar year 1966 the total number of returns
filed exceeded 103 mffiion, an increase of more than 12 mUlion during
the last 10 years. Recent projections forecast a total of 114.5 mUlion
returns by 1970 and further gains to 126.1 mUlion returns by 1975.
Current research program.—Projects touching on many aspects of
tax administration, especially the improvement of taxpayer compliance
were continued. The research program was also designed to foster
cooperation between the Service and other governmental bodies,
and countries with which the United States has tax treaties.
Several research projects were conducted concerning the reporting
of wages, dividends, and iaterest payments. Included were studies
on the uses made of information returns, possibUities of obtaining
information returns in some areas not presently covered, and the
expanded use of magnetic tape rather than paper information returns.
As a result of a cost-benefit study a policy was adopted for retaining
master file data. Under this new policy: (1) Tax settlement data wiU
be retained for 27 months beyond the posting date of the transaction
that brings the tax account to a zero balance or releases it from any
prior hold placed on the account, and (2) tax base data wUl be removed from master files annuaUy after completion of scheduled
computer runs for Service programs.
Other projects of the year included: (1) Developing a program for
the Service and the States to exchange tax information data by means
of magnetic tape; (2) planning a system for accelerating the remittance of taxes A\dthheld from nonresident aliens and foreign corporations; (3) cooperating with the U.S. Civil Service Commission in the
development of instructions to assist annuitants in determining the
taxable portion of their annuities; and (4) coordinating implementation of new rules for individuals authorized to represent taxpayers
in tax matters before the Service.
Systems development.—To further reduce the time and money spent
in preparing information for entry into the Service's ADP system,
the tAVO projects involving the use of optical scanning equipment
were continued. The testing of a relatively inexpensive single-font
scanner was begun in the Southeast Service Center late in 1966.
Under actual operating conditions, this machine, designed to handle
bills and other notices typed or printed on Service equipment using
a special American Standards Association approved type font, has
successfully met the Service's acceptance criteria for reading typeAvritten documents; however, acceptance tests of documents prepared on the Service's high-speed printers had not been completed
by the fiscal yearend. The second study concerned a more sophisti

ADMLNISTRATIVE REPORTS

111

cated scanner capable of converting data from information returns
(forms W-2, 1099, and 1087) directly to magnetic tape. Although
three manufacturers responded to an invitation to bid on this multifont scanner, it was decided that none of the proposals offered sufficient economic advantages.
Design of a new A D P system to replace the present master file
system early in the 1970's is well into the first study phase, definition
of information requirements. As the study progresses, continuing
cost/benefit review of the overall design will be conducted.
Major benefits anticipated in the future system include: (1) Faster
entry of ncAV information into master files, (2) direct access to information on file by technicians in the Service, (3) inclusion of more
comprehensive data on file in terms of both historical and current
information, (4) rapid, selective, and properly formated retrieval of
information, and (5) better management through improved allocation
of resources.
Inspection activities

A protective and constructive service is furnished the Commissioner
and all other levels of Service management through comprehensive
internal audit and internal security programs. The internal audit
program permits management to appraise the degree of compliance
Avith established policies, procedures, and controls, and also provides
a basis for appraising the effectiveness of these systems. Internal
security investigations are regularly conducted on various matters,
particularly character background investigations of ncAV appointees
to positions of trust and investigations of complaints of employee
misconduct. Investigations are also made of reports by employees
concerning actual or suspected bribery or other imethical attempts
to influence Service action.
Internal audit-—During fiscal 1967, over 85 percent of direct internal audit staff time was spent on data processing, collection,
audit, intelligence, and alcohol and tobacco tax functions. Results of
actions taken to correct systemic errors, improve programs and procedures, or strengthen internal controls are conservatively estimated
at $37 million. Included are such items as management's actions on
specffic cases; the assessment of tax, penalties, and interest not previously properly assessed; the recoupment of erroneous refunds; the
securing of delinquent returns; and the acceleration of collection
action on past-due accounts.
Internal security.—During fiscal 1967, a total of 12,373 internal
security investigations of all types were completed, a 25-percent
increase over last year. In addition, police record checks were made
on 4,491 employees considered for short-term temporary appointments.
Indications of breaches in integrity involving frauds on the revenue,
committed by employees, or through collusion betAveen employees
and non-Service people, are investigated by teams of auditors and
investigators. One such joint investigation disclosed that a district
office employee had been paid by taxpayers for preparing approximately 100 tax returns, 32 of which were fraudulent. In another
instance, investigation of aUegations that cases could be Affixed"
disclosed coUusion between an office auditor and a tax practitioner.
Appropriate disciplinary or court action is taken on cases where

112

19 67 REPORT OF THE SECRETARY OF THE TREASURY

merited. In the two foregoing cases, both employees were brought to
trial and found guilty. Investigation also revealed that false charges
had been brought against employees in a number of instances.
The large amounts of money involved in many Service transactions
make bribery by outsiders an ever-present hazard. In fiscal 1967, a
record number of bribery attempts were reported by employees.
At the end of the year, prosecutions were pending on 32 defendants
for this crime, and 68 cases were still under investigation.
Bureau of the Mint ^
The major operations of the Bureau of the Mint are the manufacture
and distribution of all coins of the United States, and the receipt,
processing, disbursement, and physical custody of gold and silver for
the Treasury. Departmental headquarters of the Director of the Mint
is in Washington, D.C. The six field installations of the Bureau are
two mints located in PhUadelphia, Pa., and Denver, Colo.; two assay
offices, in San Francisco, Calif., and NCAV York, N.Y.; and two bullion
depositories, one at West Point, N.Y. which operates as an adjunct
of the NCAV York Assay Office, and the other, located at Fort Knox,
Three plants manufacture coins, the Philadelphia and Denver
mints and the San; Francisco Assay Office. They also distribute the
newly minted coins for general circulation through the facUities of
the Federal Reserve and the Treasury in Washington. These facilities
also return to the mints coins which are uncurrent, that is, after they
have been withdraAvn by the commercial banks of the country when
too Avorn to continue in active circulation.
The U.S. Mint also manufactures foreign coins. I t is noted that
many countries have no government mints of their own. Others which
have mints may at times be unable to meet their current requirements.
Such countries, therefore, obtain their coinage from another government. In recognition of these circumstances, the Congress of the
United States enacted legislation in 1874 which permits the coinage
facilities of the U.S. Government to be made available, on a reimbursable basis, for the manufacture of the national coins of foreign governments (31 U.S.C. 367). Many countries, located in North, Central,
and South America, Europe, Afiica, Asia, and Oceania, have avaUed
themselves of U.S. facilities and technical services.
The Engraving Division in Philadelphia makes all master dies,
working dies, hubs,' etc. required for the production of coins at all
operating plants. Mint engravers also design and make medals hi
gold, silver, and bronze. Included are medals authorized by Congress
in commemoration of historic events and distinguished achievements;
and other special medals, decorations, and aAvards. Many bronze
medals are sold to the public by the PhUadelphia Mint. Among the
most popular is the Presidential series initiated during the term of
George Washington.
Bullion containing gold and silver is received by the mints and assay
offices in unrefined and refined forms from both domestic and foreign
sources. The depositors include: individuals; private companies; U.S.
»Additional information is cpntained in the separate "Annual Report of the Director of the Mint."

ADMINISTRATIVE REPORTS

113

Government agencies; the U.S. Exchange Stabilization Fund; foreign
monetary authorities, including central banks and treasuries; and
international monetary agencies such as the International Monetary
Fund and the Bank for International Settlements. After assay, the
gold and silver are paid for either in U.S. funds or in fine U.S. Mint
bars, based on these assays. The bullion is processed by melting, parting, refining, and then manufactured into various sized gold bars and
silver bars in ''good delivery" form, that is, suitable for use in the
settlement of international balances and the world markets, or storage
in the various mint field installations. The New York Assay Office
operates an electrolytic refinery for refining gold^and silver; platinum
group metals are a byproduct of these operations.
The gold, silver, coinage metals, coins in various stages of production, and the inventory of finished coins are valued at many billions
of dollars. The diversified operations, physical custody, and movement
of values betAveen the mints, assay offices, and bullion depositories
require continuous safeguarding for which sophisticated security
systems are maintained.
In order to meet the added responsibUities of the Director of the
Mint, the laboratory in Washington was enlarged and modernized
during the last several years. Some of the functions of the laboratory,
where the overall scientffic work of the Bureau is performed, encompass
the following:
(1) Forensic—determination of the status and condition of questioned coins, by nondestructive means.
(2) Applied research and development—investigation of ncAv materials for use in coinage; investigation of new methods for achieving
quality control.
(3) Maintenance of quality control—through surveUlance, provides
for the maintenance of standard methods, procedures, and equipment
in the several mint laboratories for analytical and other quality
control activities.
(4) Quality assurance-—by means of the routine testing of issued
coins and samples of other mint products, including analytical, mechanical, metallographic, and metrological tests, assures the conformity Avith coinage statutes and mint regulations of all mint products.
Modern instrumentation to best meet volume production and new
types of coins was required by the mint laboratory. The installation
of the folloAving equipment to accomplish this was completed during
fiscal 1967.
A. A Microprobe X-ray Analyzer.—This permits the nondestructive
analysis of questioned coins necessary for the preparation of evidence
in cases involving counterfeit and altered coins.
B. An X-ray Fluorescence Spectrometer.—This affords the highspeed quantitative determination of the average composition of clad
metal coins, using dissolved samples of the composites. I t also provides
for the nondestructive analysis of the separate components in clad
metal coins.
C. An Atomic Absorption-Flame Emission Unit.—This provides for
the quantitative determination of minor or trace element constituents
of coinage metals.
The coinage institutions are also equipped Avith X-ray fluorescence
spectrometers and atomic absorption-flame emission units.

114

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Standard mint fire assay and wet chemical methods continue to
be used for the quantitative determination of gold and sUver. It is
expected that the new equipment and procedures AVUI entirely supplant
standard electrolytic and wet chemical methods used for quantitative
determination of nonprecious coinage metals.
Production of U.S. coins

With the coinage output exceeding 9 biUion pieces in fiscal 1967,
the mint set a ncAV production record for the seventh consecutive
fiscal year. The three coinage plants processed approximately 36,500
short tons avoirdupois of metals into the finished coins, thus increasing the Nation's supply of fractional money more than $962
miUion. The distribution of denominations reflected current requirements of the economy. However, the 1-cent coins, as for many years,
were the most largely produced and accounted for 40 percent of the
total number of pieces minted. Dimes accounted for 34 percent;
quarter doUars, 20 percent; half doUars, 4 percent; and 5-cent pieces,
2 percent. This contrasted somewhat from the distribution of the
8.7 bUlion pieces struck in 1966, which ranked as foUows: 1-cent
pieces, 32 percent; dimes, 29 percent; quarter dollars, 25 percent;
5-cent pieces, 12 percent; and half doUars, 2 percent.
All subsidiary coins made were the composite type authorized by
the Coinage Act of 1965 (31 U.S.C. 391).^ Details of coins produced
during the year foUow:
Production of U.S. coins, fiscal year 1967^
Denomination

1-cent pieces
5-cent pieces
Dunes
Quarter dollars
Half dollars

standard
weight
Orams
3.11
6
2.268
6.67
11.6

Diameter

Inches
0.750
.835
.705
.955
1.205

Total

Thickness

Metallic composition

Percent
Inches
0.062 95 copper, 5 zinc
.078 76 copper, 26 nickel
.053 Outer cladding 75 copper,
25 nickel; inner core
pure copper.
.067 -.--do
- .086 Outer cladding 80 silver,
20 copper; inner core
approximately 20 silver,
80 copper. 2

Coins
produced

Face
value

In milh[0715
3,619.8
$36.2
10.3
205.7
309.4
3,094.0
1,818.3
303.4

454.6
161.7

3 9,041.2

962.2

1 Includes 2,968,734 special mint sets (14,843,670 individual coins with face value of $2,701,547.94).
2 Average silver content of the clad half-dollar is 40 percent.
8 Gross weight of coinage 36,489 short tons.

Issue and stock of U.S. coins

Special congressional hearings relative to the natiouAvide shortage
of coins were first held in 1964.^ In the interim 3-year period the
1 Composite coins are described in the 1965 annual report on pages 131 and 316.
2 PubUc hearings were held by the Legal and Monetary Affairs Subcommittee of the Committee on
Government Operations, House of Representatives, on June 30, July 1 and 2, 1964, Feb. 16 and 17, 1966,
and Feb. 8,1966.

ADMINISTRATH^E REPORTS

115

PhUadelphia and Denver Mints and the San Francisco Assay Office
have shipped over 20 biUion fractional coins into circulation channels.
The distribution by denomination and fiscal year is set forth in the
accompanying table.
Issue of U.S. fractional coins i
N umber of pieces (in millions)

Denomination

. ..

1-centpieces
5-cent pieces
Dimes
Quarter dollars
Half dollars
Total

Total
pieces

Total face
value (in
millions)

Fiscal year
1966

Fiscal year
1967

3,717.2
1,578.0
1,036.2
715.8
194.6

2,786.5
829.1
1,708.7
1,836.3
196.8

3,629.3
245.7
896.4
707.2
302.4

10,133.0
2,652.8
3,641.3
3,259.3
693.8

$101.3
132.7
364.1
814.8
346.9

7,241.8

7,357.4

6,781.0

20,380.2

1,759.8

Fiscal year
1965

1 The initial distribution of clad coins authorized by Public Law 89-81, July 23,1965, was as follows: November 1965, quarter dollars; Ma-rch 1966, half dollars and dimes.

The total stock of U.S. coins, estimated by the Office of the Director
of the Mint, is updated at the close of each month to reflect the addition of coins manufactured during the month, the reduction of uncurrent (worn) coins returned to the mints, and allowance for general disappearance, etc. The net increase in the stock on selected dates over
the past 10fiscalyears is shoAvn below.
Face value (in inillions)
stock on June 30

1957.
19601965.
1966
1967-

standard
silver
dollars»

- .
Netincrease or decrease (—).

...-

Fractional
coins

Total stock
of coins

$488
488
485
485
485

$1,867
2,111
3,229
4,191
6,148

$2,35^^
2,599
3,713
4,675
6,633

-4

3,281

3,277

I No silver dollars have been manufactured since September 1935.

A total of 45.6 bUlion new subsidiary and minor coins have been
added to the national stock of coins during the last 10fiscalyears. The
yearly growth in newly minted fractional coins is shown in the accompanying chart.

277-468—68

RELATIVE GROWTH IN NEWLY MINTED FRACTIONAL COINS
IN THE UNITED STATES

ot)

PIECES
Billions

S3
Ki
O

>
K|

1958

'59

'60

'61

'62

'63

'64

'65

'66

'67

117

ADMINISTRATIVE REPORTS
Foreign coinage

The U.S. Assay Office at San Francisco manufactured 2,176,206
foreign coins for the Republics of Panama and the PhUippines during
the fiscal year 1967. Siix denominations Avere made for the Government
of Panama, including the balboa and five fractional coins. The fractional coins correspond exactly in size, weight, and composition to
coins of the United States made in 1967, which are described in the
U.S. production table. The balboa coin corresponds to the present
U.S. standard sUver doUar. I t is composed of an alloy of 900 parts of
silver and 100 parts of copper, and has a gross weight of 412.5 grains or
26.73 grams. The number of Panamanian coins produced was as folloAvs.
Panamanian coins

1 balboa
J^ balboa
^balboa
Mo balboa...
5 centestmos-1 centesimo_..
Total

Numberof
pieces

12,701
1,012,701
12,701
1,012,701
12,701
12,701

MetaUic composition

Silver alloy, 90% fineness.
Silver clad, average 40% fineness.
Cupronickel clad on copper.
Do.
75% copper, 25% nickel.
95% copper, 6% zinc.

2,076,206

One hundred thousand sUver coins in the 1 peso denomination
Avere made for the PhUippines. The weight of the peso is 412.5 grains
or 26.73 grams and the composition, an alloy of 900 parts of silver and
100 parts of copper. These specffications also correspond to the
standard sUver dollar coin of the United States.
Gold and silver operations at the Mint institutions

Over 8,100 buUion deposits containing gold and sUver were made at
the mints and assay offices during the fiscal year 1967. These transactions required approximately 81,000 assay determinations.
The gold content of the deposits amounted to 2.7 miUion fine troy
ounces Avith a value of $94.5 mUlion. The sources were newly mined
domestic production, scrap gold from domestic depositors, and bullion
of foreign origin; the latter consisted of imports received directly from
abroad and also gold released by foreign governments from their
accounts in New York.
Withdrawals of gold for authorized purposes totaled 14.6 miUion fine
ounces valued at $512.6 mUlion. Included were gold bars containing
5.4 mUlion ounces A^alued at $190.3 mUlion issued for domestic,
industrial, professional, and artistic use; and 9.2 mUlion ounces valued
at $322.3 mUlion issued for monetary purposes, of Avhich $300 mUlion
AA^ere for the special gold accounts of the Secretary of the Treasury and
the Treasurer of the United States. In addition to the usual transfers
of gold between mints and assay offices, 14.5 million ounces valued at
$507 mUlion were moved from the Fort Knox Depository to the New
York Assay Office.
A total of 3.4 mUli(m fine troy ounces of sUver bullion was received
by the mints and assay offices in 1967. The deposits included sUver
contained in newly mined domestic gold, imported gold, scrap gold,
sUver scrap from domiestic sources, and silver in uncurrent (wornout)
U.S. sUver coins AvithdraAAm by the commercial banks of the Uniteci
States and returned through Federal Reserve facilities.

118

1967 REPORT OF THE SECRETARY OF THE TREASURY

The withdrawal of sUver bullion in fiscal 1967 amounted to 235.4
mUlion fine ounces, of which 44.8 miUion ounces were processed by
Denver and Sah Francisco into 303.4 mUlion sUver clad U.S. half
dollars. The issues of 190.4 mUlion ounces included 2 miUion ounces
exchanged for deposits of unrefined sUver; 158.1 mUlion ounces
exchanged at New York and San Francisco Assay Offices for sUver
certificates; and 30.3 mUlion ounces Avhich represented miscellaneous
sales, operative wastage, etc.
The following table summarizes the net withdrawals of gold and
sUver buUion from the mints and assay offices and the total quantity
held at the beginning and close of the fiscal year 1967.
Gold
Monetary bullion (excluding intermint transfers)

Fine ounces

Silver
Value

Fine ounces

Value

In milhons
Holdings on June 30, 19661
Receipts in fiscal 1967
Issues in fiscal 1967.
Holdings on June 30,1967.

Net c h a n g e . . _ - . . - .

366.6
2.7
14.6
354.6

$12,830.2
94.5
512. 6
12,412.2

633.7
3.4
235. 4
401.7

$819.3
4.5
304.5
519.4

-11.9

-418.1

-232.0

-299.9

Revenue deposited into the general fund of the Treasury

Dm-ing the fiscal year 1967, mint revenues deposited into the general
fund of the Treasury totaled $845 mUlion. This was 29 percent more
than last year, or an increase of $189.5 mUlion. The revenue items for
fiscal years 1966 and 1967 are included in the foUoAving table.
Revenue deposited into the general fund of the Treasury

In millions of dollars
1966

Seigniorage:
Minor coinage (U, H)--Subsidiary 0.900 fine silver coinage (10j6, 250, 500)
Cupronickel-clad coinage (100,250)
Silver-clad coinage (50^)
Silver
...Total seigniorage 1Handhng charges on gold bullion
Other bullion charges
Sales of special Mint sets, etc...
Allother
Total deposited.---.

..-

62.8
19,0
546.0
15.2
6.5

1967

(*)

34.0
-..
717.8
82.3

649.5
.6
.7
4.7
(*)

834.1
.6
1.0
9.2
.1

655.5

845.0

*Less than $0.1 million.:
1 Seigniorage accruing from 8,686.5 million coins manufactured in fiscal 1966 and 9,041.2 milhon coins in
fiscal 1967.
i

Monetary assets and liabilities

Total monetary assets of the mints, assay offices, and bullion
depositories amounted to $14 billion on June 30, 1966, and $13.7

ADMESnSTRATIVE REPORTS

119

billion on June 30, 1967. The composition of assets and liabilities for
each date is set forth in the statement beloAv.
In millions of dollars

Item

June 30,1966 June 30,1967

ASSETS

Goldbullion
Silver bullion-Subsidiary coin
Minor coin.
Coinage metal other than silver
other rniscellaneous
Total assets .

12,830.3
'•819..S
158.0
11.1
'146.1

(*)

12,412.2
519.4
652.1
8.8
133.7
,1

'13,964.8

13,726. 2

r 13,803.6
159.0
2.2

13,558.8
164.4
2.9

'13,964.8

13,726.2

LIABILITIES

Bullion fund
Coinage metal fund *
Other miscellaneous

Totaliiabilities
' Revised.
*Less than $0.1. million.
1 Authorized by the Coinage Act of July 23,1965 (31 U.S.C. 340).

Gold and silver production and consumption in the United States

The Government and a number of private companies in the United
States operate plants for the metallurgical recovery of fine gold and
silver from unrefined bullion and ores. The combined output of these
plants is the total U.S. refinery production and it represents the U.S.
contribution of gold and silver Avhich actually becomes avaUable for
monetary and nonmonetary purposes. A considerable period may
elapse from the time the various kinds of crude ores containing gold
and sUver are mined, milled, and smelted until the refined precious
rnetals are finally available.
The Office of the Director of the Mint conducts an overall survey
of refining operations in the United States for the purpose of determining the combined output of gold and silver which is ultimately
recovered. Refinery production data are also distributed according
to source. Governmental and private plants receive and process
materials from both domestic and foreign sources. In addition to the
primary metals, secondary materials also are received, including gold
and sUver bearing scrap returned from artistic, professional, and
industrial users. The accounts and records of all processors are correlated and the final product classffied according to the different
sources. A further refinement of ncAvly mined domestic production
data is the distribution according to the various States of origin.
Once each year, on a calendar year basis, the Office of the Director
of the Mint issues a statistical report shoAving the States of origin
and amounts of ncAvly mined domestic gold and silver produced by
refineries in the United States.
During the calendar year 1966, the refinery production of newly
mined gold for the United States totaled 1,801,600 fine ounces, a
7.5-percent gain over 1965. Output of the 16 producing States ranged
from 3 ounces for the smaUest to 633,900 ounces for South Dakota,
the leading State of production for many years. As in the previous
year, Utah and Nevada ranked second and third, accounting for 23

120

19 67 REPORT OF THE SECRETARY OF THE TREASURY

and 20 percent of the total, respectively. The combined output of
these three States amounted to 1,408,900 fine ounces, or 78 percent
of the U.S. total.
The refinery production of newly mined domestic silver in 1966
amounted to 42,500,000 fine ounces, an increase of 9 percent over
1965, There was a wide variation among the 22 States, ranging in
the recovery of a fractional ounce for the loAvest producing State to
18,950,000 ounces for Idaho, the largest. Three States, as for gold,
accounted for 78 percent (33,206,400 ounces) of the U.S. total silver
output. They Avere Idaho, 45 percent, Utah, 18 percent, and Arizona,
15 percent.
The following table compares the refinery production of gold and
silver for 1965 and 1966.
U.S. gold production
Calendar year

Number of
producing
States

Fine
ounces

U.S. silver production

Value at
$35 per
ounce

Fine
ounces

Number of
producing
States

In millions
16
15

19661965-

1.8
1.7

Increase or decrease (—)

Value at
$1.29429
per ounce i

In millions
$63.0
68.6

22
24

4.4

42.5
39.0

$55.0
50.5

3.5

4.5

1 The market quotation, $1,293 per ounce 999/1,000 fine, is equivalent to $1.29429 per fine ounce.

The mints, assay offices, and private refiners which process gold and
sUver are also the primary suppliers of these metals for industrial, professional, and artistic uses in the United States. The Office of the
Director of the Mint compiles this information annuaUy. Data for
1965 and 1966 are shown in the foUowing table.
Gold
Industrial consumption in the United States

1965

Silver
1966

1965

1966

Fine ounces in milhons
Total bullion issued by mints, assay offices, and private refiners-..
Scrap materials received by the above 2
Net issues (industrial consumption)

6.6
1.3

7.8
1.7

» 198.0
61.0

J 210.0
60.0

5.3

6.1

137.0

150.0

i Does not include silver used in coinage.
2 Consists of old jewelry, art objects, dental materials, silverware, scrap film, and other secondary materials
returned from domestic industrial uses. Scrap is either sold to governmental and private processors, or deposited in exchange forfiniegold and silver. Silver in coinage scrap resulting from the Government's coinage
operations is not included in the figures.

Bureau of Narcotics
The Bureau, of Narcotics administers Federal laws controlling
narcotic drugs and marihuana, and carries out the responsibilities of
the Government under the international conventions and protocols
relating to these drugs.
Bureau responsibUity for regulating the legitimate supplies of narcotic drugs for medical and scientffic purposes involves supervision of
U.S. imports and exports of these drugs, and control of the manufacturing and domestic trade in them to prevent diversion into illicit
channels. Enforcement duties include apprehension of interstate and
iaternational violators of narcotic and marihuana laAvs and coopera

ADMINISTRATIVE REPORTS

121

tion Avith State and local laAv enforcement agencies. At the request of
foreign police authorities. Bureau agents assist in mutuaUy beneficial
investigations of international traffickers. Further acceleration of the
expanded program in cooperation Avith foreign countries notably
affected smuggling of narcotic drugs into the United States during the
fiscal year 1967.
Cost reduction and management improvement

During fiscal 1967, the Bureau was able to save $35,000 from the
current program by delaying the filling of an increasing number of
personnel vacancies; by drasticaUy reducing attendance at conferences;
by eliminating unnecessary travel; and by eliminating some desirable,
but nonessential procurement.
Training

Emphasis on the interagency program of training continued Avith 33
persons participating in various programs including technical, managerial, and supervisory instruction. Bureau officials attending the
planning, programing, and budgeting seminars broadened their insight
concerning current developments in administrative matters. Participation in this program is continuing.
The Bureau of Narcotics Training School conducted nine sessions in
fiscal 1967. Seven sessions were held in Washington, D . C , and one
each in Long Beach, Calif., and New York City. A total of 470 local
and State law enforceraent officers were trained in narcotic controls at
these sessions.
Bureau agents conducted a special 2-week course during fiscal 1967
on narcotic control, dealing specifically with the abuse of cocaine,
heroin, and marihuana. The course, held in cooperation with the
International Police Academy of the Agency for International Development, Avas taught in Spanish as part of the Bureau's intensive
program of cooperation AAdth the Latin American countries.
During fiscal 1967, the Bureau of Narcotics continued to participate
in special workshops and seminars on narcotic training and education.
Speciar semiaars attended by 697 local and State laAv enforcement
officers were conducted in Newark, N.J., Union County, N.J., Buffalo,
N.Y., Norman, Okla., and Hershey, Pa.
The school staff lectured regularly before the U.S. Air Force Office
of Special Investigations, the Federal Bureau of Investigation's National Academy, the E[arvard School of Legal Medicine, the Bureau of
Drug Abuse Control, the International Police Academy, and A I D .
During the fiscal year. Bureau officials addressed 621 groups
consisting of approximately 46,750 persons.
An exhibit relating to Bureau responsibilities was presented to the
annual convention of the American Pharmaceutical Association in
Las Vegas, Nev., which was attended by more than 5,000 persons.
Bureau agents were available to discuss registrants' responsibilities
and distribute literature. In addition, smaller exhibits were displayed
at various State and local conventions and meetings.
The demand for information about narcotic drugs and marihuana
increased during fiscal 1967. The Bureau supplied over 66,874 publications as a public serAdce to students, teachers, parents, libraries,
individuals, and agencies, compared to 45,306 in the previous year.

122

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Enforcement activities

Investigations by Bureau agents of the international narcotic traffic
which affects the United States continued on an intensive basis in
cooperation with' police authorities of many countries. Examples of
exceptionally significant cases are reported beloAV.
Narcotic and customs agents working jointly arrested a woman who
was attemping to smuggle 10 kUograms of cocaine into the United
States on her arrival at New York from ChUe. Later, seven additional
defendants were implicated and convicted of conspiracy. FoUowing
leads from the case, a U.S. narcotic agent, Avith the cooperation of
Chilean police, began an undercover approach to the source of supply
in Chile. As a result, ChUean authorities arrested three persons when
they delivered 5 kUograms of cocaine to the narcotic agent. Additional
investigation led ChUean police to discover and seize a large clandestine
laboratory.
A narcotic agent in La Paz, BoliATia, assisted authorities in the
arrest of two defendants and seizure of 1 kUogram of cocaine. Continuing the investigation, the agent and BoliArian police later seized 4
more kUograms of cocaine and arrested two additional defendants
who led them to a clandestine laboratory. The chemist and his two
assistants were arrested at the laboratory in La Paz where 20 grams of
cocaine were seized. Three additional defendants were arrested the
same day at a second Ulicit laboratory where Bolivian officers uncovered
approximately 1 ton of coca leaf residue.
A narcotic agent and the French Police Judiciaire concluded an
investigation late in 1965 by arresting three members of an important
smuggling organization and seizing 7 kUograms of heroin. Authorities
in Paris and MarseiUe continued to investigate the operation, and
learned of plans to ship narcotics to the United States Ada a seaman
courier aboard the French vessel Charles Tellier. On the day of the
ship's departure French authorities at Le Havre arrested the seaman
and French Customs seized 5 kilograms of heroin concealed aboard
the ship.
Turkish pohce and narcotic agents worked together and Avithin 1
month seized a total of 1,464 kilograms of opium (approximately \)i
metric tons) and arrested 27 defendants.
A narcotic agent in Istanbul, Turkey, developed information about
a smuggling operation between Istanbul and MarseUle, France. The
MarseiUe Narcotic Group of the Surete Nationale moved to control
the movements of the suspects in MarseiUe, Cannes, and Nice. French
Customs in St. Julien, a French frontier point on the route to Geneva,
were alerted to watch for a truckload of watermelons. French authorities and the U.S. narcotic agent searched the truck carrying 6 tons of
watermelons and luncovered 500 kUograms of opium and 50 kUograms
of morphine base hidden in a secret compartment.
Turkish police: and a narcotic agent discovered a clandestine
morphine base laboratory in a farmhouse near Manisia and seized
17 kUograms, 420 grams of morphine base, and 83 kUograms of opium.
The chemist and two assistants were arrested after one attempted
to resist with an automatic pistol, but was disarmed before he could
use his weapon. ;
Investigation conducted by narcotic agents and the ThaUand
Central Bureau of Narcotics was concluded in Bangkok, Thailand,

ADMINISTRATIVE REPORTS

123

with the arrest of one defendant and the seizure of more than 25
kUograms of '^999" morphine base.
A narcotic agent, assisting the Syrian police, helped to arrest three
brothers as they delivered approximately 20 kilograms of morphine
base to an undercover agent. Information developed from this case
led to the arrest of another part OAvner of the morphine base.
Using information supplied by a U.S. narcotic agent in Paris,
the Royal Canadian Mounted Police and narcotic agents arrested
three defendants possessing a total of 6 kUograms of heroin as they
arrived at the Montreal International Airport from Paris. Another
defendant in the same case was apprehended later at the Montreal
airport.
Narcotic agents assisted Turkish police to arrest two Turkish citizens
and seize 466 kUograms of opium at Osmanoglu Village, Amaysa
Province, in April 1967.
French police and narcotic agents combined forces to seize 56
kilograms of morphine base and arrest two defendants at Marseille,
France, as they transferred the contraband from the Turkish passenger
vessel S/S Karadeniz. In searching the ship these authorities found an
additional 30 kUograms of morphine base concealed in the kitchen
and 93 kUograms of opium hidden in the crew's quarters. Four
additional suspects were arrested.
Narcotic agents a.nd French police began the investigation of a
smuggling organization in May 1966. In March 1967 6 kilograms of
heroin ready for shipment to the United States Avere seized in Paris.
Another 6 kUograms of heroin were transported to the United States
in the company of a French police officer. Upon arrival in the United
States the next day a narcotic agent delivered dummy packages to
the collaborator Avho was immediately arrested. Six additional
defendants were arrested for their roles in this case.
An outstanding example of international cooperation involved
1 year of intensive investigation and cooperation by five different
national law enforcement agencies. From leads supplied by U.S.
narcotic agents, Australian Commonwealth Police in Sydney uncovered information about a ring of three Australians who smuggled
heroin from Hong Kong into the United States using false travel
documents and various aliases, in almost continuous travel. Police
in Sydney, Hong Kong, and London, as well as the British customs
and narcotic agents traced the suspects' movements to Honolulu
Avhere they closed in, seizing 2 pounds of pure heroin and arresting
one of the trio. Seven other suspects were quickly arrested in NCAV York
and Miami, Fla., and 10 additional collaborators in the conspiracy
were arrested by the Australian CommouAvealth Police.
During fiscal 1967, Bureau of Narcotics agents assisted foreign
authorities in the seizure of: 3,599.064 kilograms of narcotic drugs
and 771.5 kilograms of marihuana. Narcotic agents in the United
States seized a total of 80.313 kilograms of narcotic drugs and 2,782.13
kUograms of marihuana from the illicit traffic Avithin the country
during the same fiscal year.
The foUoAAdng table shows the number of violations of the narcotic
laws reported by Federal narcotic enforcement officers.

124

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Number of violators of ihe narcotic, and marihuana laws prosecuted during ihe fiscal
year 1967, with their dispositions and penalties
Narcotic laws
Registered persons

Convicted
Acquitted..
Total..-

i
..

F i n e s iraposed

Average fine p e r
conviction:
1967
1966..

660
27

"rt

State
court

Federal
court

3,435

444

"rt
o

i.
6
5

986

"rt
o '

1
7

$195
5

i
3

$45
86

7
9

3
4

$53
130

236

1
$13,371

$13, 658

.rt
'rt

"rt

>^ 1

6 • 506

$12,995

.rt •

172
5

260
7

288
18

S
3

•

N o m e g i s t e r e d persons

993

$129,003

3
10

J
-.-

s
A v e r a g e sentence of
imprisonment:
1967
1966

State
court

Federal
court

Sentences imposed

Nonregistered persons

State
court

Federal
court

M a r i h u a n a laws

•7

3
3

.2
2

$78
159

Control of manufacture and medical distribution

The Bureau issues permits for imports of the crude materials, for
exports of finished drugs, and for the intransit movement of narcotic
drugs and preparations passing through the United States from one
foreign country to another. I t supervises the manufacture and distribution of narcotic medicines AAdthin the United States and has
authority to license the groAving of opium poppies to meet the medicinal needs of the country if and Avhen their production might become
necessary in the public interest.
The operational authority of the Bureau derives from the following
statutes: 5 U.S.C. 258a, 282-282c; 18 U.S.C. 1401-1407; 21 U.S.C.
171-184a, 188-188n, 197-199, 501-517; 26 U.S.C. 4701-4762, 47714774, 7237, and 7607; and 49 U.S.C. 781-788.
During fiscal 1967 the Bureau of Narcotics issued 44 permits to
import crude opium and coca leaves. To meet the medical requirements for opium derivatives and cocaine and to supply nonnarcotic
coca flavoring extracts, 161,285 kilograms of raAv opium Avere imported
from India and Turkey, and 209,945 kilograms of coca leaves from
Peru.
,
A total of 849 authorizations were issued for the export of manufactured narcotics to other countries. Narcotic drugs exported during

ADMINISTRATIVE REPORTS

125

fiscal 1967 increased to 1,759 kilograms 322 grams, from 1,411 kilograms 485 grams exported during the previous year.
There were 2,365 thefts of narcotic drugs, amounting to 145,206
grams, reported during fiscal 1967 from persons authorized to handle
the drugs, compared Avith 2,453 thefts of 122,643 grams in 1966.
During fiscal year 1967, 394,283 persons were registered to engage
in lawful narcotic and marihuana activities.
International control and cooperation

The United States is a party to the following conventions, treaties,
and protocols relating to the international control over narcotic
drugs and marihuana: The Opium Conventions of 1912 and 1931;
the International Protocols of December 11, 1946, November 19,
1948, and June 23, 1953; and the Single Convention on Narcotic
Drugs in 1961. Additionally, the United States adheres to all of the
provisions, so far as possible, of several other international regimes
of control even though Ave are not signatories.
On May 25, 1967, the Single Convention on Narcotic Drugs, 1961,
was approved by the U.S. Government. An instrument of accession
was deposited at the United Nations, May 25, 1967, and became
effective for the United States on June 24, 1967.
Essentially the Single Convention will: incorporate the salient
features of the existing nine international treaties; simplify the
international control machinery; and extend control to the cultivation of plants from which the natural drugs are obtained, namely
opium, cannabis, and coca leaves.
The convention will continue controls on production of opium,
but has added controls on harvesting cannabis, cannabis resin, and
coca leaves. Countries are still obligated to use express government
authorizations in exporting and importing narcotic drugs; report on
the Avorking of the treaty; and exchange laws and regulations passed
to implement the treaty through the U.N. Secretary-General.
Under the provisions of the Single Convention, the United States
is obligated to take special measures for control of particularly
dangerous drugs (such as heroin, ketobemidone, and marihuana) and
to designate, with constitutional limitations, that all intentional
violations of the treaty's control provisions regarding cultivation,
production, manufacture, trade, distribution, possession, etc., of narcotic drugs and marihuana be punishable offenses.
The Bureau of Narcotics continued its participation in international meetings during the fiscal year. Representatives attended the
Interpol 35th General Assembly at Berne, SAVItzeriand, August 31 to
September 7, 1966, to discuss various aspects of the struggle against
the illicit traffic. A Bureau of Narcotics representative served as
consultant at the U.N. Seminar on Narcotics Control for enforcement officers in East Africa at Addis Ababa, April 4-12, 1967. The
Regional Meeting of Interpol Representatives in Madrid, Spain,
May 22-24, 1967, on problems of illicit narcotic traffic in that area,
also included a BuresLU representative.
Cooperation with States, counties, and local authorities

Excellent cooperation among Federal, State, and local narcotic laAv
enforcement agencies continued in free exchange of information, in

126

19 67 REPORT OF THE SECRETARY OF THE TREASURY

coordinating the investigation and prosecution of minor violations,
and routine inspections by State and local authorities. The Bureau's
special seminars Avere held in cooperation with the local, county, and
State agencies as a continuing effort in the program of '*training"
and providing assistance to these agencies.
Drug addiction

The total number of active addicts recorded by the Bureau as of
June 30, 1967, as reported by Federal, State, local, and private
agencies Avas 60,697.
United States Coast Guard
The Coast Guard is responsible for enforcing or assisting in the
enforcement of Federal laAVS on the high seas and waters subject to
the jurisdiction of the United States. These laAVs govern navigation,
shipping, and other maritime operations, and the related protection
of life and property. The service also coordinates and provides maritime search and rescue facilities for marine and air commerce and
the Armed Forces. Other functions include promoting the safety of
merchant vessels, conducting oceanographic research, furnishing icebreaking services, and developing, installing, maintaining, and operating aids to maritime navigation. The Coast Guard has a further
responsibUity for maintaining a state of readiness to function as a
specialized service of the Navy in time of Avar or national emergency.
Effective February 24, 1967, the vessel documentation and admeasurement functions previously carried out by the Bureau of Customs Avere transferred to the Coast Guard by Treasury Department
Order No. 167-81.^
On April 1,1967, pursuant to Public LaAv 89-670, approved October
15, 1966, the Coast Guard joined the newly formed Department of
Transportation after having been a part of the Treasury Department
since the inception of this service in 1790. For reasons of administrative
simplicity where it AA^as not possible to obtain 9-month data, this
report covers all of fiscal 1967.
Management improvement

The Coast Guard reported $37,955,000 in recurrent and one-time
savings during fiscal year 1967—more than double that of the previous
year—via the President's cost reduction/management improvement
program. Some of the major actions are summarized beloAv.
Foremost among the projects was a major reorganization of Coast
Guard Search and Rescue facUities along the east and gulf coasts,
Avhich resulted in savings estimated at $14,617,000 stemming from a
number of interrelated actions. By acquiring surplus Bates Field in
Alabama from the Air Force, the Coast Guard obtained needed additional training and operational facilities which made possible the cancellation of plans for buUding at least one more air station along the
gulf coast as well as nullified the planned expansion of existing air
units.
The decision made in fiscal 1966 to close the Coast Guard air stations
in Bermuda and at Argentia, Newfoundland, Avith the search and
1 See exhibit 72.

ADMINISTRATIVE REPORTS

127

rescue and ice patrol functions of these units being taken over by the
air station at Elizabeth City, N . C , was accomplished in fiscari967.^
During fiscal 1967 the Coast Guard rehabilitated two more of its
icebreakers, the CGC Edisto and the CGC Southwind, extending
their serAdce life an estimated ten more years, thus eliminating the
need for construction of replacement vessels. A cost avoidance of
$3,360,000 annually is estimated, based on the relative amortized
costs of the two renovated icebreakers and equivalent new vessels.
Improvement in supply management contributed substantially to
the cost reduction effort, Avith $9,218,000 in one-time cost avoidance
savings expected from procurement reductions, elimination of ''gold
plating" from procurement specffications, trimming down the number
of items in inventory, and redistribution of stocks to avoid procurement. A sizable portion of the supply savings came about through the
screening of Federal surplus material listings, making possible the
acquisition of tools, machinery, electronic supplies, etc., AA^hich AA^^ere
used to fill immediate needs or to replenish inventories.
^
A substantial manpower gain was reahzed in fiscal 1967 by reallocating some 318 military and civihan billets throughout the service
to higher priority actiAdties where additional personnel were urgently
needed to cope Avith an increasing workload resulting from the Nation's
expanding population and economy. This Avas achieved through redistribution of workload and more effective manpower utihzation.
Important to the management improvement effort were some 1,400
mihtary and ciAdhan suggestions received during the fiscal year which
together with benefits reahzed from civihan superior performance
brought supplemental saAdngs estimated at $631,000.
Coast Guard operations in Vietnam

During fiscal year 1967, 26 Coast Guard 82-foot patrol boats continued to assist the U.S. Navy ''Operation Market Time" in countering
Communist infiltration by sea of men, weapons, and supphes to enemy
forces operating in South Vietnam.
During nearly 2 full years of operations, this patrol squadron has
cruised more than 2 million miles while inspecting or boarding about
235,000 junks, sampans, and indigenous and foreign vessels. Some
4,000 Viet Cong suspects Avere taken into custody, Avith approximately 100 of them confirmed to be Communist combatants or cadre.
The patrol squadron carried out more than 150 naval gunfire missions
in support of friendly forces, destroying Viet Cong watercraft and
structures of every description. For example, in March 1967 a North
Vietnamese trawler was thwarted in an attempt to land supphes in
Quang Ngai ProAdnce by "Market Time" forces which included two
Coast Guard cutters. The vessel was completely destroyed after its
interception and the ensuing naval gun duel. The Coast Guard
suffered its first two fatahties of the confiict in August 1966 when a
patrol boat was attacked by friendly aircraft.
Also assigned to Vietnam are Coast Guard personnel involved in
aids to navigation, port security, explosive-loading supervision, and
merchant marine safety operations.
1 See 1966 annual report, p. 157.

128

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Search and rescue

The international coverage of the Coast Guard's automated merchant vessel report system (AMVER) was expanded in the Atlantic
and Pacific during fiscal 1967 Avith the addition of participating
radio stations by the Governments of Canada, the Fiji Islands, and
Spain. AMVER now has a measure of international support never
before achieved. This support, coupled AAdth the fact that the ships
of almost aU nations participate by making AMVER reports voluntarily, makes this truly an international safety system. The AMVER
computer is now plotting approximately 1,000 ships in the Atlantic
and 800 in the Pacific each day. During fiscal year 1967 AMVER
provided a total of 867 surface pictures (lists of ship positions) for
emergency use in the Atlantic and 1,381 for Pacific positions.
The Coast Guard Search and Rescue School, located at Governors
Island, N.Y., held the ffi^st of its continuing 4-week classes in October
1966. This school provides uniform training in the operations, procedures," techniques, and equipment employed in saAdng hves and
property, thus quahfying graduates to perform as rescue coordination
center controllers, search and rescue mission coordinators, on-scene
commanders, or search and rescue mission participants.
Some typical examples of Coast Guard assistance rendered during
fiscal year 1967 are summarized below.
Helicopter evacuations from inaccessible areas.—^On July 31, 1966,
the Coast Guard Air Station at Port Angeles, Wash., was requested
by an Olympic National Park ranger to eA^-acuate a 14-year-old girl
who was suffering from a 103° temperature and internal pains. The
girl was located at Elk Lake in the park at an elevation of 2,500 feet.
A hehcopter from Port Angeles proceeded to the scene, making a
successful water landing and evacuation. A siniilar call was received
after dark the same day from another Olympic Park ranger. Evacuation was requested for two youths who were injured in a fall at Lake
Constance, elevation 4,780 feet. A hehcopter from Port Angeles
proceeded early on the morning of August first and made a water
landing and evacuation. Both cases occurred in areas inaccessible by
other means.
Ten search and rescue cases handled concurrently.—-The season's
first "Blue Norther," a cold front pushing into the Gulf of Mexico,
caused 10 distress cases during the night of October 14, 1966. Winds
gusting to 70 knots and seas of 20 feet to 30 feet resulted in five fishing
vessels being reported as sinking. Responding to these emergencies
were 8th Coast Guard District aircraft, which flew six sorties, dropped
four pumps, and located flve of the 10 vessels so that surface units
could assist them. Coast Guard vessels and small boats towed six
of the flshing vessels to safe moorings, and the four others obtained
their OAvn assistance. All persons on board the distressed vessels reached
port safely.
Marina fire fought by Coast Guard small boats.—-On July 30, 1966,
the Coast Guard Station at Belle Isle, Mich., received a report of a
cabin cruiser aflre' at a boat dock. Patrol boats, dispatched by radio.

ADMINISTRATIVE REPORTS

129

were alongside the burning vessel within minutes and began playing
water on the flre. The gas tanks had already blown up, spreading the
fire throughout the boat. To minimize damage to nearby facUities, the
burning craft was towed out of the marina. Receiving word from
ashore that a woman was stiU onboard, two Coastguardsmen boarded
the burning boat and checked the cabin, but found no one. She had,
it developed, jumped overboard and made shore safely. The fire was
brought under control after expending many gallons of foam.
AMVER coordinates rescue.—On November 12, 1966, the SS Omega
reported that she was taking on water through a fracture in her hull
and requested information concerning vessels in her area. A 500-mUe
AMVER plot produced one vessel, the SS Okada Maru, 390 mUes
away. Due to the extreme range from land, 2,000 mUes from Honolulu,
1,700 mUes from San Diego, and 1,800 mUes from Tahiti, the position
of the Omega Avas beyond the capabUities of long-range aircraft. Thus,
upon request by the Coast Guard, the Okada Maru attempted to
establish communications with the Omega and proceeded to assist.
In the interim, a report was received that the crew of the Omega had
abandoned ship in two life boats and one liferaft. The Okada Maru,
advised of the situation, arrived in time to rescue all 29 creAAonembers
in good condition, and then proceeded to ChUe.
CGC Cape Providence rescues survivors of capsized vessel.—On November 26, 1966, Polynesian Airlines Flight 5WFAA, en route from
Apia, Western Samoa, to Pago Pago International Airport, sighted
the wreckage of an overturned vessel and reported it to the Federal
Aviation Agency Flight Service Station at Tafuna, American Samoa.
The CGC Cape Providence, moored at Pago Pago on search and rescue
standby, Avas notffied of the sighting. With the aid of the Polynesian
airliner (5WFAA), the Cape Providence located the disabled vessel
(F/Y Main Sun No. 2) and found 17 survivors clinging to the overturned hull. In spite of rough seas breaking over the hull, the Cape
Providence rescued 13 of the surAdvors. The F/V Chie Hong No. 10,
which arrived on scene to assist, retrieved the remaining four persons
from the water, but two of the 19-man crew, trapped in the engine
room of the capsized A^essel, perished.
Coast Guard C-130 provides illumination for night ditching.—On
March 6, 1967, a Beechcraft 18, lost on a flight from Honolulu,
Hawaii, to Palmyra Island with two persons onboard, radioed an
SOS. The radio direction-flnder net was alerted and a C-130 Hercules
was dispatched from Coast Guard Air Station at Barbers Point,
Hawaii, to locate and assist the lost aircraft. Shortly after its distress
signal the Beechcraft reported sighting a flshing vessel, the Miyago
Maru, and began orbiting it. At 10:52 p.m. the Coast Guard C-130
arrived on scene. After briefing the pilot of the Beechcraft on ditching
procedures, the C-130 began Uluminating the area Avith parachute
flares. At 11:14 p.m. the Beechcraft ditched and both occupants
escaped, boarding a liferaft. The C-130 vectored the Miyago Maru
whUe it recovered both surAdvors who were in good condition.

130

1967 REPORT OF THE SECRETARY OF THE TREASURY

A summary of the Coast Guard's search and rescue workload for
fiscal year 1967 follows:
Response b y Operations

Aviation
units

Ships

Shore
units

Total

ASSISTANCE CALLS RESPONDED TO FOR

Private vessels
Commercial fishing vessels'^
Other commercial vessels
Government and public vessels
-Foreign vessels

Total vessels

2,133
469
251
39
82

2,111
1,054
518
68
151

22,380
2,481
2,271
215
234

26,624
4,004
3,040
322
467

2,974

3,902

27,581

34,457

294
76
355
4
11

48
11
64
0
9

153
32
101
1
15

495
119
520
6
35

Private aurcraft
Commercial aircraft
Military aircraft
.-O ther Government and public aircraft
Foreign aircraft
.'.
Total aircraft
Personnel only

-.
-

740

132

302

1,174

1,072

435

2,803

4,310

Miscellaneous
Total

451

301

1,532

2,284

5,237

4,770

32,218

42,225

1,008
26
236
299
24
557
873
1,679
535

313
152
2,157
220
155
246
314
872
341

1,223
2,228
16,690
1,213
287
1,548
1,992
5,598
1,439

2,544
2,406
19,083
1,732
466
2,351
3,179
8,149
2,315

5,237

4,770

32,218

42,225

MAJOR T Y P E OF ASSISTANCE RENDERED

Located
Refloated or dewatered...L
Towed
Escorted
Fueled or repaired
Medical
-----Assistance to persons in position of peril
Searches and attempts to assist
Other assistance
Total
PERSONS INVOLVED IN ASSISTANCE CASES

Lives saved
Otherwise assisted.

..-

Total assisted

438

862

1,728

3,028

12,581

17,877

93,310

123,768

13,019

18,739

95,038

126,796

VALUE OF PROPERTY, INCLUDING CARGO

Vessels
Aircraft
Miscellaneous
Total

$1,696,577,000
850,936,000
312,185,000
2,859,698,000

Marine inspection and allied safety measures

Based on Federal marine laws dating back to the 1840's, the Coast
Guard carries out an effective preventative safety program A^dth
respect to commercial vessels of the United States. Coast Guard
merchant marine technical personnel review the design plans of all
commercial vessels covered by Government regulations, after which
they are subject to Coast Guard inspection and certffication. Once
certffied, they are, at prescribed intervals, reinspected and recertffied
for their entire commercial lifespan or until they are no longer subject
to U.S. law. Should a U.S. vessel undergo major alteration, the plans
for those alterations require Coast Guard approval and the process
starts once again.

ADMINISTRATIVE REPORTS

131

Merchant marine technical inspection.—The Coast Guard has
issued regulations (based on Public Law 89-777, approved November
6, 1966) which require the operators of American and foreign passenger
vessels to disclose information to prospective customers as to the
safety standards with which their ships do or do not comply. These
regulations, incorporating many recommendations from American
and foreign shipping interests, travel agents, and Government
agencies concerned, are expected to impose no hardship upon established steamship lines operating fairly modern vessels.
During fiscal year 1967 the Coast Guard gave increasing attention
to the safety aspects of shipboard containerized cargo and the design
and operation of nonmUitary submersibles. Shipping cargo in specially
designed containers is gaining in popularity and most major carriers
anticipate that eventually there will be complete interchangeabUity
between land, sea, and even air transportation modes. The Coast
Guard cooperates with other groups to develop adequate construction
and inspection standards to keep abreast of this increased usage of
containers.
The Coast Guard is also concerned with the design and operation
of civU submersibles of aU sizes. The Coast Guard has requested legal
authority to regulate these vessels in order that adequate safety
standards may be established without inhibiting development of a
quickly changing technology.
To obtain information on the operation of automated ship's propulsion machinery, a survey was conducted by the Coast Guard of
aU steam vessels certfficated to operate with a reduced number of
engineroom watchstanders. The response was exceUent, leading to
the development of a "Guide for Automatic Control Systems for
Main and AuxUiary Machiaery" by the Coast Guard.
Tabulated below are certain of the marine safety functions of the
Coast Guard, comparing the workloads for fiscal years 1966 and 1967.
Gross tonnage
Marine safetj^ activities

1966

1967

Vessel inspections:
Inspected for certification
11,519,942 13,181,329
Reinspected
-11,409,521 10,106,585
Dry dock examinations
-14,779,717 14,159,272
Foreign vessels
14,887,164 14,522,764
Miscellaneous
-.Technical services:
U.S. vessel plan approvals
-Foreign vessel hazardous cargo plan approvals
-.-..
Number of vessels certificated...
Number of vessels under document
Investigations of casualties:
To personnel on commercial vessels not resulting from a vessel casualty.. To commercial vessels
Recreational motorboat dealihs
Investigations of personal misconduct, incompetence, and negligence:
Hearings
Others, including warnings
.--Merchant marine personnel transactions:
Licenses issued, original
Seamen certificates issued...,
.--Shipment of seamen
1 Calendar year 1965 figure.
2 Calendar year 1966 figure.

277-468—68

Number
1966

1967

4,734
5,633
6,955
1,544
27,199

5,785
4,632
6,698
1,380
30,094

37,685
861
8,962
61,949

34,062
3,214
9,259
64,865

2,202
2,408
^850

2,461
2,353
2755

1,233
3,049

1,738
3,156

6,342
43,289
449,796

7,800
50,138
607,156

132

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Investigations and recommendations.—An important part of the
Coast Guard merchant marine safety program is the investigation
of marine casualties to determine their causes and develop preventative measures when necessary. Several marine casualties involAdng
commercial vessels Avere investigated by the Coast Guard during
fiscal 1967, five pf which were considered major and investigated by
marine boards of investigation. These cases are summarized below.
The most signfficant casualty investigated was the structural faUure
and foundering of the Great Lakes freighter SS Daniel J . Morrell
on November 29, 1966, costing the lives of 29 crcAvmembers. The
vessel, in baUast and northbound in Lake Huron during the height
of a severe storm, was broken into two sections. Only one person
survived.
The second significant casualty insofar as fire protection of foreign
passenger ships is concerned was the fire onboard the German passenger vessel SS Hanseatic whUe moored in New York Harbor on
September 7, 1966. The fire started in the engineroom and rapidly
spread through the seven decks above. Fortunately there was no loss
of life or personal injury. A detailed comparison was made of structural and equipment conditions of this vessel and the corresponding
standards applicable to large oceangoing passenger vessels of the
United States. I n this respect, the Coast Guard has, within the
international maritime community, been successful in advocating
amendments to the fire protection provisions of the International
Convention for the Safety of Life at Sea (SOLAS), 1960, for existing
and future passenger vessels.
On October 24, 1966, the tank vessel SS Gulfstag, while underway
in the Gulf of Mexico, suffered a series of explosions, caught fire,
and subsequently capsized with the loss of eight lives.
The tug MV Southern Cities, in the Gulf of Mexico toAving a barge,
foundered on November 1, 1966, AAdth six persons on board. Although
the barge was found drifting, the Southern Cities Avas never located.
Meetings and conferences.—During fiscal 1967, the Merchant Marine CouncU held four regular meetings and three public hearings,
supplemented by numerous meetings and discussions Avith interested
parties, to consider proposed regulations amending present requirements. The Coast Guard participated in 30 of the 31 international
meetings held in; London by the Intergovernmental Maritime Consultative Organization (IMCO), a special agency of the United
Nations, during the year. The major problems confronting IMCO
centered on the upgrading of fire protection on existing passenger
vessels as weU as how to better protect future vessels from fire. The
Coast Guard had urged that the subject of fire protection be given
the highest priority. A special IMCO session also dealt Avith the problems of oU poUution, a matter requiring immediate attention because
of the contamination of British shores resulting from the wreck of
the oil tanker Torrey Canyon.
Merchant vessel documentation and admeasurement.—The merchant
vessel documentation and admeasurement functions formerly a
responsibUity of the Bureau of Customs were transferred to the
Coast Guard on February 24, 1967, pursuant to Treasury Department Order No. 167-81.^ On June 30, 1967, there were 64,865 vessels
1 See exhibit 72.

ADMINISTRATIVE REPORTS

133

in the documented fleet. Of this total, 15,814 were yachts and some
49,051 were commercial vessels. Public Law 89-476, approved June
29, 1966, permits yachtowners to take the measurements of their
oAAm vessels, enabling Government admeasurement officials to obtain
gross and net tonnages by simply applying a coefficient to these
figures. This ncAV system eliminates much of the physical measuring
of such vessels previously required.
Merchant marine personnel.—The Coast Guard and National Archives and Records Service are conducting a joint study to develop
recommendations intended to improve the method for shipment and
discharge of seamen aboard U.S.-fiag vessels. This study could
eventually have a far-reaching affect on the shipping industry and
for the Coast Guard in terms of improved service and time-saving.
The licensing and certificating of merchant marine personnel included the issuance of 105,901 documents during fiscal year 1967, an
increase of 29,561 from the number granted the year before. This
added Avorkload was a direct result of the Vietnam buildup. Coast
Guard shipping commissioners supervised the completion of 9,647
sets of sign-on or sign-off shipping articles during the year, and discharge certificates representing 507,156 individual discharge transactions were filed in the jackets of seamen at Coast Guard Headquarters. The locator service at Headquarters ansAvered 5,320 inquiries
concerning individual seamen.
Merchant marine iuA^estigating sections in major U.S. ports and
merchant marine detaUs in certain foreign ports investigated 19,572
cases involving police checks, casualties, negligence, incompetence,
and misconduct. Charges were preferred and hearings held on 1,738 of
these cases by civilian examiners. Security checks were made of 37,831
persons desiring employment onboard merchant vessels.
Recreational boating

Forty-seven States and the Virgin Islands now have Coast Guardapproved numbering systems under the Federal Boating Act of 1958.
On December 31, 1966, there were an estimated 4,067,371 numbered
craft on the waters of the United States. During calendar year 1966,
5,567 vessels were reported as being involved in 4,350 boating accidents, Avhich resulted in 1,318 fatalities, 958 personal injuries, and
property damage estimated at $7,334,500. Capsizing continued to
cause the greatest number of deaths, while collisions accounted for
the largest percentage of injuries. Accidents caused by fire or explosion
of fuel Avere the leading contributors to boating property damage, as
has been the case for the past 6 years.
Fewer pleasure craft are being examined under the safety patrol
concept which began in fiscal 1965, but the broader coverage of the
patrols has enabled a greater percentage of unsafe boating operations
to be detected and acted upon. The Boarding Officer Instructor Indoctrination Courses sponsored by the Coast Guard at YorktoAvn, Va.,
and Alameda, Calif., were attended by representatives from 16 States,
and a large number of State and local enforcement officers received
training as boarding officers in the field through programs offered by
Coast Guard districts. The Coast Guard pamphlet "VentUation Systems for SmaU Craft" continued in high demand with 2 miUion copies
distributed since June 1966. "Pleasure Craft," a publication dis-

134

19 67 REPORT OF THE SECRETARY OF THE TREASURY

tributed free to the public, was rcAdsed during the fiscal year to reflect
changes in lighting, flre extinguisher, and ventilation requirements.
Law enforcement

The Coast Guard continued to operate G.Ye laAV enforcement patrols,
consisting of surface and air units, to enforce laAvs relating to flshing
conservation, neutrality, navigation, and territorial sovereignty.
Public Law 89-658, approved October 14, 1966, extended the
flsheries jurisdiction of the United States to 12 nautical miles. In
addition, agreements Avere signed in early 1967 Avith the Soviet Union
and Japan which permit flshing in certain areas of the contiguous
flsheries zone, as Avell as provide for avoiding flshing gear conflicts on
certain high seas areas off Alaska. Three foreign vessels were seized
during the year for illegal flshing activities in U.S. Avaters, and the
masters of the vessels involved received flnes ranging from $5,000 to
$10,000. The Coast Guard's Alaska Patrol—augmented recently b}^
the permanent assignment of the CGC Confidence-—continued to
require the temporary assignment of four high endurance cutters and
one HC-130 aircraft to cope Avith the increasing A^^^olume of flshing
activity in that area. Three instances of flshing violations involving
seven vessels off the Oregon and Washington coasts were reported,
leading to diplomatic protests to the Soviet Government.
During flscal year 1967, the Coast Guard continued to enforce
Federal laws prohibiting the pollution of navigable and coastal waters
of the United States, investigating 361 reports of oil pollution. Several
organizations are participating Avith the Coast Guard in determining
hoAv to prevent major oil releases from ships as Avell as how to deal with
such contamination when it occurs.
Port safety.'—The continuing groAvth of waterborne commerce and
constantly changing methods of operations and types of cargoes
shipped contribute to an increase in the accident rate. Deaths, injuries, and property damage from cargo handling accidents, for example, have shown a marked increase. Vessels of novel design, both
foreign and domestic, continued to ply American waterways, and
cargoes such as refrigerated or pressurized liquid propane, butane, and
anhydrous ammonia move Avith increasing frequency. Amendments to
regulations were under consideration during flscal 1967 to improve
the safety of transporting and handling such cargo. TAVO Coast Guard
explosives loading teams and a staff advisory detail are assigned to
Vietnam to provide technical advice and assistance in port security
matters at Saigon and Cam Ranh Bay. Also related to Vietnam
operations is the Avork of the Coast Guard's port Security Station at
Concord, Calif., Avhich supervises the handling of military explosives
at the Naval Ammunition Depot, Port Chicago. Other Coast Guard
port safety forces are similarly occupied at mUitary installations
throughout the Nation.
The following table illustrates the workload in the major enforcement areas for fiscal year 1967.

ADMINISTRATIVE REPORTS

135
1967
Number

Motorboats boarded
..Waterfront facilities inspected
Anchorage patrols (hours spent)
Reported violations of:
Motorboat Act
Port security regulations
Oil Pollution Act
--..
Other l a w s . .
--.Explosives:
Loading permits issued (conanercial)
Number of tons of commercial explosives
Loading permits issued (miliitary)
Number of tons of military explosives

71,263
37,993
5,932

..-

-.-.-

53,247
3,405
1,130
1,195
391
25,957
541
2,012,198

Military readiness

Thirty-seven Coast Guard ships participated in Navy refresher
training and two others completed shakedown training during fiscal
year 1967. The installation of torpedo tubes was completed on all
Coast Guard high-endurance cutters, and a prototype of the mk. 56
gun fire control system, adapted to perform the secondary function of
tracking meteorology balloons, was installed aboard the CGC Chincoteague for evaluation.
Coast Guard vessels participated in a number of joint mUitary
exercises for training during the fiscal year, and extensive use was
made of shore based facilities for individual, team, and unit training.
A Coast Guard contingencies capability plan was developed and
distributed to cognizant Coast Guard and Navy commands to provide
a listing of Coast Guard capabilities which can be used in meeting
contingency situations.
Aids to navigation

The manned light structure at Diamond Shoals, N . C , was placed
in operation in November 1966. Seven manned light stations were
converted to automatic operation during the fiscal year. Eight harbors
and rivers in South Vietnam have been marked with aids to navigation
for the Armed Forces, and a number of mooring buoys were positioned
there for tankers waiting to discharge fuel oU.
The Southeast Asia loran C chain went into operation in October
1966 with the commissioning of stations at Sattahip, Lampang, and
Udorn in ThaUand and Con Son in South Vietnam. The loran C chahi
on the east coast of the United States was increased in coverage by
the addition of a transmitting station at Dana, Ind., in January 1967.
A Coast Guard study concerning the utUization of buoy tenders
led to the decommissioning without replacement of the buoy tenders
Hickory and Arbutus. One buoy tender, the Cactus, was relieved of
aids to navigation duties and assigned to tending oceanographic
buoys.

136

19 67 REPORT OF THE SECRETARY OF THE TREASURY

A tabulation of the aids to naAdgation maintained by the Coast
Guard as of March 31, 1967, follows.
'.
Loran transmitters
J
Radio beacons
Lights (including lightships)
Buoys:
Lighted (including sound) Unlighted sound
Unlighted
River t y p e . - Fog signals (except sound buoys)
Daybeacons
Total

Navigational aids
-..

.--

1967

-.-

61
199
11,287
3,730
330
10,969
9,623
584
7,135
43,918

Ocean stations

The Coast Guard continued its operation of four ocean stations in
the North Atlantic and two in the North Pacffic. These vessels, spending 75,370 operating hours on patrol, provided meteorological, navigational, communications, and rescue services for air and marine commerce and collected various scientific data.
Oceanography

By the fiscal yearend the Coast Guard had some 40 vessels, including
those assigned to ocean stations, equipped for oceanographic and
marine science activity. These vessels were engaged in a diversity of
Coast Guard and cooperative oceanographic programs. The icebreaker
C G C Edisto was utUized for an oceanographic study of Baffin Bay
during July and August 1966 and the Coast Guard took part in a
number of cooperative projects. Included were studies of the western
and eastern tropical Atlantic; a study of the eastern tropical Pacific;
a study of the Kuroshio; and water mass studies in conjunction with
I C N A F . During the fiscal year the Coast Guard awarded a contract
for the design of a modern oceanographic vessel to study subpolar
regions and to provide general support for the national oceanographic
program. The first of seven Coast Guard SWORD Systems to coUect
hydrographic data from offshore light structures began operation.
International ice patrol

The Coast Guard began the 53d season of International Ice Patrol
service in the North Atlantic Ocean on March 10, 1967. The patrol,
utUizing SC-130 aircraft and an oceanographic vessel, observes and
studies the iceberg conditions and recommends action to be taken
by shipping to avoid danger. Gathering scientffic data concerning
the oceanography of the area and the life cycle of icebergs is another
function of the patrol. The 1967 season was notable in that icebergs
stUl persisted at the close of the fiscal year, extending the season
beyond normal because the icebergs were not deteriorating as quickly
as expected—possibly due to unusually cold surface water.
Icebreaking

Having taken over the large icebreakers formerly operated by the
Navy, the Coast Guard became responsible for the national icebreaking effort. Eight polar icebreakers, one lake icebreaker, and one
auxiliary icebreaker are the major units employed for this mission.
During the year, four icebreakers supported the Antarctic national

137

ADMINISTRATIVE REPORTS

program, two conducted scientific and mUitary missions in the
western Arctic, and three furnished ice escort for shipping and
scientffic missions in the eastern Arctic. A ncAV class of icebreaker is
being designed to replace the overage "Wind" class vessels.
Operational facilities

The following table shows the distribution of operating hours for
the major Coast Guard functions during fiscal year 1967.
Workload distribution
Activity

Law enforcement
Search and rescue
Aids to navigation
Reserve training
Icebreaking
Oceanography
Military readiness (includes Viet;nam operations).
Cooperation with other agencies
,
Port security
Training of cadets and officer candidates
Ocean stations
Nonmission movement
Proficiency training 2
Ferry 2
Tests 2
Administrative 2
Total

Vessels
(operating
hours)
53,102
93,299
284,096
15,164
24,045
14,539
179,425
18,870
15,172
9,385
72,301
51,148

Aviation
units
(fhght
hours)
6,402
58,505
8,692
125
604
360
13
2,215
465

eio

Shore
units
(operating
hours) 1
65,231
98,218
104,067
2,471
245
36
4,380
8,973
44, 676
486
26,930

2,528
1,943
7,215
830, 546

89,677

355,713

1 Includes small boats.
2 Applies to aircraft only.

Cutters.—At the close of the fiscal year, the Coast Guard had 346
cutters in service. Continuing its program to replace overage and
obsolete cutters, two more 210-foot medium-endurance cutters were
completed and the first of the new class 378-foot high-endurance
cutters, the CGC Hamilton, was placed in service. The Hamilton is
equipped with the most modern electronics and engineering systems
avaUable, while providing its crew with a high level of habitability.
It also has a heliciopter deck and is fully equipped for oceanographic
missions. Also placed in service in fiscal year 1967 Avere 22 new 82-foot
patrol craft as replacements for simUar vessels deployed to Southeast
Asia in fiscal year 1966. Two overage 64-foot harbor tugs were replaced by new 65-foot vessels.
Small boats and stations.—Obsolete and worn out smaU boats were
replaced by 117 new boats, while 21 40-foot utUity boats underwent
major rehabUitation to extend their service life by at least 5 years.
Disposal action was completed on 107 excess boats.
Aviation and aircraft.—The Coast Guard was operating 168 aircraft including 73 helicopters at the end of fiscal year 1967. The last
of the service's piston-powered helicopters was retired Avith the
assignment of turbine-powered amphibious helicopters to the air
station at Traverse City, Mich., and the ah* unit at San Juan, P.R.,
was augmented with two of the same type aircraft.
Communications.—Coast Guard Headquarters, area offices, and all
district offices, air stations, radio stations, supply centers, and selected
group offices in the contiaental United States (CONUS) were served

138

1967 REPORT OF THE SECRETARY OF THE TREASURY

by at least one line in the Defense Communication Agency's (DCA)
Automatic Voice Network (AUTOVON). The 14th and 17th district
offices have access to AUTOVON through DOD sources in Honolulu
and Anchorage, respectively. Thirty-five of these lines were added
during the last 12 months.
DCA's Automatic Digital Network (AUTODIN) replaced the
Navy's common-user teletypewriter system (NTX-82B1) on December 15, 1966. The Coast Guard secured Mode V (teletypcAvriter only)
drops at each major CONUS facility as well as at some smaller units.
Coast Guard Intelligence

During fiscal 1967, 2,586 internal security and criminal investigations were made by Coast Guard inteUigence personnel as were 11,714
national agency checks. In addition, 43,984 prospective merchant
mariners and 9,442 applicants for port security cards were screened
for suitability. The Coast Guard Intelligence Staff also made 11,250
record checks for internal purposes as well as an additional 14,551
for other agencies.
Engineering developments

Civil engineering.—During fiscal 1967 the Coast Guard began the
construction of a 300-man cadet barracks at the Coast Guard Academy
and new stations at Marathon, Fla., and Rappahannock River, Va.,
the latter already completed.
Electronics engineering.—The Coast Guard is procuring single
sideband transceivers to replace outdated amplitude-modulated,
double sideband equipment with the aim of improving the communications capabilities of vessels, small boats, and shore stations. A contract has also been let for a new generation of solid state, modular
V H F - F M transceivers to replace obsolescent equipment.
To further the operational capabUities of Coast Guard patrol
boats in Vietnam, 32 depthsounders were furnished for installation
to replace obsolete equipment Avhich had become a maintenance
support problem. Nineteen ncAv surface search radars were also
supplied to replace difficult-to-maintain, obsolete equipment aboard
these patrol craft.
Four of the Cpast Guard's eight polar icebreakers received major
improvement in their radio communications facUities. The newly
installed equipment AVUI enable these ships to meet the diversffied
requirements of their polar missions.
After a 3-year trial period the Coast Guard has adopted the "Symbolic Integrated Maintenance Manual," which should facUitate the
maintenance of increasingly complex electronics equipment by
technicians Avith a relatively low level of experience. The manuals
have been prepared for several types of Coast Guard electronics
equipment.
In October 1966 the Coast Guard placed in operation the Southeast
Asia loran C chain, constructed to meet Department of Defense
requirements. This loran chain, consisting of four stations, was the
first to provide major coverage over land rather than the sea. During
the year a new Coast Guard-designed loran C transmitting antenna
system, consisting of four guyed vertical towers supporting an umbreUa-type antenna, was successfully tested. This antenna, designated

ADMINISTRATIVE REPORTS

139

TIP (Toploaded Inverted Pyramidic), offers increased stabUity and
coverage for loran C systems coupled AAdth a signfficant reduction
in hi-power antenna costs.
Naval engineering.—Duriag the fiscal year 1967, one 378-foot
high-endurance cutter and two 210-foot medium-endurance cutters
were accepted from the buUders and placed in service, as were 26
smaUer vessels, including 22 82-foot patrol boats. Fourteen 44-foot
motor lifeboats and 39 25-foot-8-inch self-baUing surfboats were also
manufactured for Coast Guard use, as well as a number of smaller
boats. Major alterations—including structural renovations, habitabUity improvements, and other modernization of facUities—were
completed on several high-endurance cutters and icebreakers to
further their mission effectiveness. Five 311-foot high-endurance
cutters were outfitted and deployed to Southeast Asia for duty with
naval forces.
Testing and development.—The Coast Guard accepted delivery of a
prototype large buoy equipped to furnish the services of a lightship
for installation at the entrance to New York Harbor. Flash tube light
sources, used experunentally on buoys in New York Harbor, have
been found to distinctly improve the mariners' abUity to identify
aids to navigation against a background of city lights.
An experimental scAvage treatment plant for Coast Guard vessels
was successfully tested, and an operational prototype AAdU be procured.
Tests conducted on a fuU-scale model of a design concept for a highspeed rescue boat indicate that the construction of an operational
prototype would be desirable. The potential use of infrared, light
amplffication, and various types of sophisticated radar for search and
rescue purposes is also under iavestigation.
Coast Guard Reserve

At the close of the fiscal year, there were 4,348 officers and 26,185
enlisted men in the Ready Reserve of the Coast Guard, whUe the
Organized Reserve consisted of 1,897 officers and 14,683 enlisted. The
Port Security training mission was the subject of an in-depth study
during the fiscal year. SimUar studies in the future AAdU concern other
phases of the Reserve program. The construction of an engineman
school at the Reserve Training Center, YorktoAAm, Va., was begun in
fiscal 1967 as the first step in a program to replace old wooden temporary buUdiags.
During fiscal 1967 membership in the Organized Reserve reached
the highest point in its 17-year history, and attendance at drills also
set a ncAv record. Equally impressive, 72 percent of the reservists
taking the servicewide examinations for advancement passed, compared AAdth only 40 percent 5 years ago.
Personnel

As of March 31, 1967, the Coast Guard consisted of 5,733 civUian
and 35,545 mUitary personnel.
Recruiting.—Fifty-nine main recruiting offices and approximately
50 suboffices were manned by 257 recruiters. During the fiscal year,
there were 14,449 applicants for enlistment ia the Regular Coast
Guard and 5,895 Avere enlisted. The Reserve received 8,381 applications and enlisted 3,464.

140

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Training for foreign visitors.—Some 86 visitors from 25 foreign
countries, under the sponsorship of other Government agencies, were
extended the use of Coast Guard facilities for training in such activities as aids toj navigation, merchant marine safety, and law
enforcement.
Coast Guard education program.—The education and training programs sponsored by and participated in by the service are summarized for fiscal years 1966 and 1967 below.
Education and training programs
Coast Guard Academy:
Applications
Applications approved
Appointments accepted
Cadets
Graduates (bachelor of science degree)
Officer training completed:
Officer candidate school graduates...
Postgraduate...
Flight training
:
Helicopter training..._
C-130 aircraft training.
Short-term specialized courses
Enlisted training completed:
Recruit training:
I
Regular
-.
Reserve
Coast Guard basic petty officer.
Navy basic petty officer
Advanced petty officer schools (Navy and Coast Guard)
Specialized training courses (service and civilian)
Correspondence courses coinpleted:
Coast Guard Institute
U.S. Armed Forces Institute
U.S. Naval Correspondence Course Center.

1966

1967

3,076
2,417
277
668
113

3,969
3,022
307
704
98

342
61
55
20
12
790

421
67
80
12
12
926

6,131
3,083
1,792
379
160
2,616

5,159
3,033
2,595
612
139
2,416

8,820
325
4,750

11,776
247
4,263

Public Health Service support.—On June 30, 1967, there were 116
Public Health Service personnel on duty AAdth the Coast Guard
serving at 21 shore stations, with motorized dental detachments, and
aboard ships assigned to ocean stations and Arctic and Antarctic
operations.
Coast Guard Auxiliary

The Coast Guard AuxUiary is a volunteer, nonmUitary organization
established to assist the Service in its rescue operations, as well as to
promote safety, efficiency, and better compliance Avith laws governing
the operations of motorboats and yachts. The AuxUiary, which operates in about 700 communities in the United States, Puerto Rico,
and the Virgin Islands, is composed of experienced boatmen, radio
operators, and aircraft pUots, each fuUy trained in his specialty, who
further their competence by participation in advanced membership
training programs.
Fiscal and supply management

During fiscal year 1967, further progress Avas made toward centralizing the payrolling of Coast Guard mUitary and civUian personnel.
Except for the Coast Guard Yard, the payrolling of all Coast Guard
civilian personnel is centralized at the Internal Revenue Service
Center, Detroit, Mich. The initial developmental work was begun
on a computerized program for centralizing at Headquarters the
payrolling of approximately 35,000 active duty mUitary personnel.
This system wUl be completely integrated with the existing Coast
Guard personnel accounting and financial management systems.

ADMINISTRATIVE REPORTS

141

The negotiation of a contract for the construction of one additional
high-endurance cutter under the multiyear procurement contract for
three cutters awarded in fiscal year 1966 achieved savings of approximately $966,000 in fiscal year 1967. In compliance with the President's
special program for achieving cost reductions in procurement, supply,
and property management, special attention to these areas resulted
in a cost avoidance estimated at $9,218,000 for the fiscal year.
U.S. Savings Bonds Division
The U.S. Savings Bonds Division promotes the sale and retention
of U.S. savings bonds and the sale of savings stamps. During the
fiscal year 1967, promotion of a ncAV U.S. savings note, "The Freedom
Share," Avas added to the Division's responsibilities. The systematic
buying and continued holding of these savings securities makes an
important contribution to the Government's efforts to finance our
national debt in a noninflationary manner and broadens the ownership of the Federal debt.
The program is carried out by a relatively small Government staff
assisted by a large corps of sales promotion volunteers. Liaison is
maintained Avith all types of flnancial, business, labor, agricultural,
and educational institutions, and with community groups of all
kinds. Their volunteer services are enlisted to sell savings bonds
through banks, savings and loan associations, credit unions, certain
post offices, and thousands of business establishments and other
employers operating the payroll savings plan.
Sales of series E and H bonds during flscal 1967 totaled $5.0 bUlion,
an 11-year record and a gain of 7 percent over 1966. Series E bonds
sales alone amounted to $4.6 bUlion, 8 percent above the previous
flscal year and the largest amount purchased in any flscal year since
1946.
Promotional activities

The Share in Freedom plan set the pace for the DiAdsion's promotional activities in flscal year 1967. The theme of the campaign
Avas " T h e Star Spangled Freedom Plan-Savings Bonds and Freedom
Shares," interspersed AAdth the slogan "Buy Bonds Where You Work.
They Do."—referring to mihtary purchases, especially by servicemen
in Vietnam. The campaign was launched by President Johnson on
February 21, 1967, on a closed-circuit telecast to meetings of some
10,000 savings bond volunteers throughout the Nation. The President
announced that a new U.S. savings note, to be knoAvn as the Freedom
Share would be placed on sale on May 1, 1967, as a companion product
to the popular series E savings bond to help finance the Vietnam Avar.
By June 30, 1967, well over haK a million Americans had signed up
for regular purchases of the bond-note combination through payroll
deductions.
During the fiscal year, record progress was made in promoting the
payroll savings plan in industry, the military services, and the Federal
Government. Over 2 ^ mUlion persons were enroUed in payroll savings
plans, bringing total payroll savers to over 9K miUion on June 30. After
taking account of turnover, retirements, etc., this resulted in a net
increase of 1 million during the year. The promotional efforts produced

142

19 67 REPORT OF THE SECRETARY OF THE TREASURY

20-year records in the small denomination series E bond sales, bought
chiefly by payroll savers.
The 1967 payroll saviags effort in industry was carried out under
the chairmanship of Daniel J. Haughton, president of the Lockheed
Aircraft Corp., with top executives of major market areas and key
industries. Intensive campaigns were conducted in 23 of the largest
industrial centers by members of the committee. Similar campaigns
took place in 135 urban centers, each under the chairmanship of a
top local business executive. In addition to their appearances on the
national kickoff telecast in February, Secretary FoAvler and other
Treasury officials addressed many of the local campaign kickoff meetings of businessmen and other community leaders.
The largest direct mail payroll savings campaign in the Division's
history, consisting of personalized letters to 180,000 companies, was
conducted in February and March 1967. I t resulted in an unprecedently large and favorable response. These replies Avere followed up
and serviced locally Avith the assistance of a volunteer task force of
over 400 junior executives loaned by industry, who were directed by
the Division's fleW staff.
Staff members and volunteers followed up the meetings, letters, and
other actiAdties with personal assistance to companies in organizing
campaigns. During the flscal year, some 11,000 campaigns were completed in companies pf aU sizes AAdth the enrollment of 1 ji million new
payroll savers.
Many special events helped to promote the 1967 campaign, including the President's signing up as the Nation's No. 1 purchaser of
savings bonds and freedom shares through payroll savings. There
were similar events involving State Governors, mayors, and other
officials. Decorated Vietnam veterans representing all services went
on tour for savings bonds, appearing at meetings and broadcasts
AA^hich covered leading cities in 27 States.
Organized labor gave its full cooperation to payroll saviags campaigns in industry. Through the National Labor AdAdsory Committee
for Savings Bonds the sales program was successfully promoted by
national unions among their members.
In the Federal Government, highly successful campaigns Avere conducted among civilian and military personnel under the direction of
the Interdepartmental Committee Chairman, Postmaster General
LaAvrence F . O'Brien, Avith strong personal support from the President.
During flscal 1967, 402,000 additional civilians and 648,000 additional
members of the Armed Forces signed bond allotments, bringing total
enrollments to over 3,600,000, the highest siace World War I I and
a net increase of half a million savers from a year earlier. Both civilian
and inilitary participation rates were at new peaks, Avith a combined
rate estimated at 66 percent of all Federal military and civilian
personnel. Their total bond purchases in fiscal 1967 amounted to
$995 miUion, a 23-percent increase over 1966.
Sales of saAdngs stamps, primarily through the Nation's schools,
increased 2 percent during fiscal year 1967. The Avomen's organizations of the Nation act as volunteer leaders in the promotion of savings
stamps. A new wallet card, iatroduced by President Johnson in September 1966, bore' his picture and his message saluting the boys and
girls who buy stamps and bonds through the school savings program.

ADMINISTRATIVE REPORTS

143

Banks and other financial institutions contributed substantially to
the success of the savings bonds-freedom shares program. Over 18,000
sales-issuing outlets had become eligible to issue the ncAv savings
notes by June 30. Also, during 1967, over 6,000 banks sent more
than 20 mUlion letters to their customers promoting savings bonds
and freedom shares.
At a meeting at the White House on August 16, 1966, representatives of the Advertising CouncU, the task force advertising agencies,
and all major advertising media heard a personal appeal from the
President for increased support. Reflecting the President's special
interest in the bond program, the CouncU made savings bonds the
top priority campaign in the public service fleld. There was an immediate response, particularly on the part of the telcAdsion networks,
to step up bond adArertising, and this conthiued throughout the 1967
Share in Freedom Campaign.
The entertainment industry also supported the program. The
motion picture industry contributed two films—a 10-minute featurette, 'HoUywood Star-Spangled RcArue," and a 3-minute traUer
featuring the President. These were produced at no cost to the Treasury and circulated to theaters throughout the country for showing
at regular performances. In addition, many stars of stage, screen,
and television contributed their talents to the making of short film
trailers for shoAvings in theaters and on television.
Support in all advertising media—newspapers, magazines, radio,
television, outdoor, and car-cards—Avas at a high level. Daily newspapers, for example, carried over 17,000 savings bonds advertisements
during the fiscal year.
The interest of the entire advertising industry Avas stimulated by
the appointment of James S. Fish, vice president for advertisiag and
marketing of General MUls, as a volunteer Consultant to the Secretary of the Treasury for savings bonds promotion.
Management improvement

The Savings Bonds Division, consisting of two principal branches,
Sales Operations and Advertising and Promotion, has seven regional
offices and offices in the 50 States and the District of Columbia,
through which sales materials are disseminated.
During fiscal 1967, four State offices transferred their addressograph operations to the Chicago Distribution Center and were able
to declare their addressograph machines surplus. By the fiscal yearend
29 State offices had transferred their addressograph operations to
the Distribution Center.
For the Share-in-Freedom campaign, the DiAdsion recruited local
volunteers from corporations, banks, organizations, and other similar
sources on a loan basis for several weeks or more. Some 400 of these
volunteers, after a short briefing course on Savings Bonds and Freedom Shares, called on small businesses to install and promote payroll
savings. This effort freed the time of paid promotional staff to call
on larger accounts and enabled the Division to reach companies
that would not otherwise have been solicited.
Upon the advice of the Advertising CouncU, the number of volunteer task force advertising agencies serAdng the Division was reduced
from seven to three. Through this consolidation. Division staff mem-

144

19 67 REPORT OF THE SECRETARY OF THE TREASURY

bers will be able to maintaia closer contact with the agencies, and
it AvUl be easier to coordinate the creative efforts of all concerned.
U.S. Secret Service
The major responsibUities of the U.S. Secret Service defined by
section 3056, title 18, United States Code, are the protection of the
President of the United States, the members of his immediate family,
the President-elect, the Vice President or other officer next in the order
of succession to the office of President, and the Vice-President-elect;
protect a former President and his wife during his lifetime and the
person of a widow and minor children of a former President for a
period of 4 years after he leaves or dies in office, unless such protection is declined; the detection and arrest of persons committing any
offenses against the laws of the United States relating to obhgations
and securities of the United States and of foreign governments;
and the detection and arrest of persons violating certain laws relating to the Federal Deposit Insurance Corporation, Federal land
banks, and Federal land bank associations.
Management improvement

During fiscal 1967 the more significant management improvements
were concentrated in areas of investigations and admiaistration.
The Check Forgery Study conducted in cooperation AAdth the Office
of the Special Assistant to the Secretary (for Enforcement) was
completed in June 1967.
A feasibUity study was initiated for converting statistical reports
into an A D P system. The conversion is expected to provide more
accurate statistical data for use in Service operations.
Expansion of the financial management program cost centers
from eight to 13, which includes five general support areas iastead
of one, provides more meaningful analyses of general support financial management. The Service initiated an emergency operating
arrangement for its E D P system AAdth a private contract, negathig
the need for a previous agreement with the National Bureau of Standards. This plan is expected to provide total savings in equipment
rentals for the fiscal years 1967 and 1968 of $30,000.
Personnel

During fiscal 1967 the personnel office of the Service was reorganized by functional area.
During fiscal year 1967 the Secret Service appointed approximately
100 ncAv special agents, technicians, specialists, and support personnel.
Training

The Secret Service Training Division, established October 18, 1966,
provides the staffing, resources, and facUities required to furnish a
full range of training for personnel of the Secret Service, the White
House Police, and the Treasury Guard Force.
The training program which includes the Secret Service Internal
Training Programs, Civil Service Commission Inter-agency Training
Programs, and non-Government Training Institutions was continued.
In addition to this formal training, the Secret Service pursued its
on-the-job training programs for personnel regularly engaged in
investigative and protective assignments.

ADMINISTRATIVE REPORTS

145

Inspection and audit program

Additional refinements were made in the inspection and audit
program during fiscal 1967 to improve efficiency and increase its
value to management. New positions were created to assist in standardizing inspection techniques, accelerate inspections, and to provide
an executive development program for incumbents.
Protective responsibilities

The protection of the First Family, Vice President, former Presidents, their wives, and the Avidow and minor children of the late
President Kennedy continued to be the primary responsibility of
the Service.
Investigative responsibilities

Investigations required to meet the Service's protective responsibilities continued to receive priority attention.
During fiscal 1967 the Secret Service arrested 1,072 persons for
violating the counterfeiting statutes and recovered over $10 million in
counterfeit currency, an alltime high in both categories. The Service
seized 84 percent of all known counterfeits before they were placed
in circulation. The loss to the public amounted to $1,600,000, a 76percent increase over the previous fiscal year.
Twenty-tAvo plants for the manufacture of counterfeit money
were seized. These plants had produced 112 varieties of counterfeit
notes with a valueof over $6.1 million; four of them had produced
67 kinds of counterfeits valued at $4.8 million.
Counterfeiting is an enforcement problem of increasing magnitude,
which may be attributed to the current trend in criminal activity,
the ease and speed with which large quantities of counterfeit currency
can be produced on modern printing equipment, and the ease of rapid
transportation enabling criminals to disburse these products over a
wide area.
The following summaries are indicative of the type and scope of
counterfeiting activities during the fiscal year 1967.
In June 1966 a new counterfeit $10 note appeared in Los Angeles.
Subsequently, 19 different varieties of this note appeared throughout
California and Secret Service agents arrested two men for passing
and possessing more than $65,000 in these counterfeits. The agents
obtained information leading to the source of the notes.
An undercover agent was introduced to the suspects and shortly
thereafter the plant where the notes were manufactured and over
$2,300,000 in new counterfeit $20 notes were seized.
I t was later determined that a brother-in-law of one of the principals
in this case had stolen over $700,000 of the notes and taken them to
his New Jersey home. As soon as he arrived in New Jersey he began
seUing the notes to underworld contacts. Although he developed only
three or four outlets, small amounts of the notes were traced to numerous disassociated passers. The suspect was arrested in Baltimore in
September 1966 and the remaining notes, totaling over $440,000,
were seized.
This small group produced over $3 million in counterfeit notes and
134 persons were arrested for criminal offenses in connection with the
case.

146

19 67 REPORT OF THE SECRETARY OF THE TREASURY

In October 1966 the married assistant manager of a printing firm in
a Southeastern city became the central figure in another case, after
he began keeping another woman. The subject decided to meet his
increased expenses by printing counterfeit money, although he lacked
the nerve to pass it. A friend introduced him to several local hoodlums who agreed to buy his notes. He convinced his employer that he
had to use the print shop at night to complete a special job. Instead,
he used the time to manufacture $1 mUlion in counterfeit $20 notes
and turned them over to his contacts.
Secret Service informants soon learned of the operation and through
them an undercover agent was introduced to the group as a prospective
buyer.
The sale Avas successful and the entire $1 miUion was confiscated
before any of the notes were placed in circulation. All five men involved in the operation were arrested.
During September 1966 new counterfeit $20, $50, and $100 notes
appeared in New York City. Little was learned about the source of
these notes until the routine arrest of a passer 6 months later. The
suspect provided information which led to the apprehension of a New
Jersey printer and the seizure of plates for $10, $20, $50, and $100
counterfeit notes, plates for counterfeit foreign currency, and related
paraphernalia. The printer led agents to a $400,000 cache of notes
hidden in a New York City apartment, and to another $127,000 he
had placed in a bus station locker.
The printer revealed that the note passer was the instigator of the
counterfeiting operation and a main distributor of the notes. The
printer aUeged that he had been hired by the passer and an associate
to produce counterfeit identffication cards at $150 per week. The
backers, he said, had supplied the funds to purchase the necessary
printing equipment. When he later agreed to manufacture the counterfeit notes, his salary was raised to $200 per week.
Two months after being released on bond in connection with the
original charge, this informant and two other individuals were
identffied passing these notes in Florida. He was subsequently arrested
by New Jersey police as a suspect in a bank holdup. When the police
searched him they found he was carrying $1,200 in these counterfeit
notes. He then led agents to a cache of $80,000 in a bank safe deposit
box and later identified an individual to Avhom he had allegedly sold
$100,000 in the notes. The investigation was continuing and prosecution of the individuals involved was pending at the fiscal yearend.
In October 1966 a California motel manager received a long distance
caU from two men who had checked out earlier in the day. They asked
that if their rooin had not been rented it be reserved for them, since
they were returning to pick up "some articles" they had forgotten.
They had left twc) counterfeit $20 notes, which had been found when
the room was cleaned. Local police had been alerted and the men
were arrested when they returned the next morning. Their car contained $106,000 in counterfeit $20 notes which was seized.
The men, printers by trade, had been approached 2 weeks before
their arrest by a person who wanted to hire a good pressman to produce
counterfeit notes.'The printers were taken to a remote cabin in the
California hUls where they were introduced to their new "employer."
The plates for the counterfeit currency had already been produced, but

ADMINISTRATIVE REPORTS

147

the printing press was in disrepair. A new press was purchased and
the notes printed.
Their employer was later arrested and agents found most of the
notes together with the plates, press, and other paraphernalia in
the cabin. A total of $387,000 in counterfeit notes was seized in
connection with this operation.
The counterfeiting of U.S. coins decreased from approximately
$29,000 in fiscal 1966 to about $15,000 in 1967.
The counterfeiting of U.S. currency in foreign countries continued
to be of concern, although only $704,926 was reported during fiscal
year 1967. A great deal of foreign counterfeiting activity does not
come to the attention of the Secret Service despite increased Secret
Service liaison overseas. Administrative procedures of many foreign
police departments do not require the reporting to the United States
of the U.S. counterfeits they receive.
Liaison with nations in the Far East is handled through the Secret
Service Office in Hawaii and the Paris Office conducts liaison with
countries in Europe, the Middle East, and Africa.
Secret Service responsibUity also includes the counterfeiting in
the United States of currency of other countries. During fiscal 1967
the Secret SerAdce seized 13,548 pieces of counterfeit foreign currency.
The foUoAAdng table summarizes receipts of counterfeit money
during the fiscal years 1966 and 1967.
Counterfeit money received, fiscal years 1966 and 1967
Receipts of counterfeit notes and coins

1966

Counterfeit money received in the United States:
Loss to the p u b l i c .
.Seized before cu-culation
Total-

$962,060.99 $1,658,100.75

..:

1967

8,098,417.35

Counterfeit U.S. currency received in foreign countries

8,587,845.49

9,060,478.34 10,245,946.24
---

$642,256.00

$704,926.00

Pieces of counterfeit currency of other nations received in the United States-.

19,670

13,548

The Secret Service investigated 43,055 forged Government check
cases involving over $4.5 million during the fiscal year. A total of
2,431 persons were arrested for Government check violations.
The Service investigated 6,413 cases involving the forgery and
fraudulent negotiation of U.S. savings bonds having a maturity value
of over $700,000 and in this connection arrested 113 persons.
Representative cases involving the forgery of Government checks
and bonds during fiscal 1967 follow.
A search warrant was served on the home of one of the principal
offenders in a Government check cashing gang in Miami, Fla. In the
home a stolen U.S. Treasury check in the sum of $4,334, a complete
set of postal carrier keys (lost in 1959) which fit certain maUboxes,
and a maUman's uniform were found.
The gang had operated on a wide scale in a metropolitan area
stealing and forging U.S. Treasury checks, mostly social security
checks. Nineteen persons have been arrested and convicted in this
case, many of whom are narcotic addicts. The forgery of 500 U.S.
277-468—68

148

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Treasury checks totaling approximately $52,000 was traced to this
gang.
TAVO forger fugitives traveling in five States stole, forged, and
cashed 73 U.S. Treasury checks totaling $6,174 and subsisted for
about 1 year on the proceeds. They were apprehended when a policeman in Oklahoma City stopped their car for a traffic violation and
noticed one of the men tearing up a Treasury check. A further search
by the officer disclosed several more stolen checks in their possession.
A former check forger operated in four States for 11 months stealing,
forging, and cashing 92 U.S. Treasury checks worth $6,465. Eightynine of these were social security checks stolen from rural maU boxes.
A bartender in a large city attempted to sell $12,000 worth of
stolen U.S. savings bonds. A Secret Service undercover agent made
contact with him and subsequent negotiations resulted in the recovery
of 72 bonds totaling $11,700 and the arrest of three persons.
A 19-year-old AWOL serviceman made connections in New York
City to obtain stolen savings bonds and during a 4-month period
before he was arrested, forged and negotiated 548 bonds totaling
$22,675.
The Secret Service investigated 140 Gold Reserve Act violations
during fiscal 1967. These cases are for the most part complex and time
consuming.
The Secret Serv^ice has a representative on the Organized Crime
Committee and participates in investigative activity related to this
program.
To help protect the Government interest in fiscal activities handled
by the Federal Reserve System, the Secret Service provides requested
assistance to the System, by conducting security surveys of all
Federal Reserve banks and recommending improvements.
In accordance with the requirements of Executive Order 10450 and
Treasury Department Order No. 82, Revised, March 9, 1966,^ for updating employee security investigations every 5 years, 28 cases from
the Office of the Secretary and 176 cases on Secret Service employees
have been initiated.
The following tables show the number of.criminal and noncriminal
investigations completed and arrests made by the Secret Service in
fiscal years 1966 and 1967.
Criminal and noncriminal cases investigated, fiscal years 1966 and 1967
Cases investigated
Counterfeiting
Forged Goverrunent checks
Forged Government bonds.
Miscellaneous criminal
Miscellaneous noncriminal
Total.....

1 See 1966 annual report, p. 609.

1966
-

24,708
42,645
7,361
9,237
10,127
93,978

1967
24,911
43,055
6,413
16,671
2,434
93,484

ADMINISTRATIVE REPORTS

149

Number of arrests, fiscal years 1966 and 1967
Offenses
Counterfeiting.Forged Government checks
Forged or stolen bonds
Miscellaneous
Total

1966

-..
-

1967

866
2,618
73
489

1,072
2,431
113
501

4,046

4,117

Offenses investigated by the Secret Service resulted in the conviction of 3,292 persons—97.2 percent of the cases brought to trial
during the fiscal year.
The incidence of crime over which the Secret Service has investigative jurisdiction remains generally consistent with the natiouAvide
crime trend.
Cooperation

The Secret Service continues to receive exceUent assistance from
local. State, and other Federal law enforcement agencies in its protective and investigative responsibUities. Interested citizens have
also aided greatly by furnishing the Service with information important to its effective operation.

EXHIBITS

Publie Debit Operations, Kegulations, and Legislation
Treasury Certificates of Indebtedness and Treasury Notes Oiffered and Allotted
Exhibit 1.^—Treasury certificates of indebtedness
During the fiscal year 1967 there was one offering of certificates of indebtedness.
The Treasury circular for the offering is reproduced in this exhibit. Following
the circular is a table showing final allotments of the certificates by Federal
Reserve districts.
DEPARTMENT CIRCULAR NO. 5-66.

PUBLIC DEBT

TREASURY

DEPARTMENT,

Washington, July 28, 1966.
I. OFFERING OF CERTIFICATES

1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, as amended, offers certificates of indebtedness of the United
States, designated 5}i percent Treasury Certificates of Indebtedness of Series
A-1967, at par, in exchange for the following securities maturing August 15,
1966, singly or in combinations aggregating $1,000 or multiples thereof:
4 percent Treasury Notes of Series A-1966; or
3 percent Treasury Bonds of 1966.
The amount of this offering will be limited to the amount of eligible securities
tendered in exchange. The books will be open only on August 1 through August 3,
1966, for the receipt of subscriptions.
2. In addition, holders of the maturing securities are offered the privilege of
exchanging all or any part of them for 5}i percent Treasury Notes of Series A1971, which offering is set forth in Department Circular, Public Debt Series—
No. 6-66, issued simultaneously with this circular.
II. DESCRIPTION OF CERTIFICATES

1. The certificates will be dated August 15, 1966, and will bear interest from
that date at the rate of 5>^ percent per annum, payable semiannually on February 15 and August 15, 1967. They will mature August 15, 1967, and will not
be subject to call for redemption prior to maturity.
2. The income derived from the certificates is subject to all taxes imposed
under the Internal Revenue Code of 1954. The certificates are subject to estate,
inheritance, gift or other excise taxes, whether Federal or State, but are exempt
from all taxation now or hereafter imposed on the principal or interest thereof
by any State, or any of the possessions of the United States, or by any local
taxing authority.
3. The certificates will be acceptable to secure deposits of public moneys.
They will not be acceptable in payment of taxes.
4. Bearer certificates with interest coupons attached will be issued in denominations of $1,000, $5,000, $10,000, $100,000, $1,000,000, $100,000,000 and
$500,000,000. The certificates will not be issued in registered form.
5. The certificates will be subject to the general regulations of the Treasury
Department, now or hereafter prescribed, governing U.S. certificates.
III. SUBSCRIPTION AND ALLOTMENT

1. Subscriptions accepting the offer made by this circular will be received at
the Federal Reserve banks and branches and at the OflBice of the Treasurer of
the United States, Washington, D.C. 20220. Banking institutions generally
may submit subscriptions for account of customers, but only the Federal Reserve
banks and the Treasury Department are authorized to act as oflScial agencies.
2. Under the Second Liberty Bond Act, as amended, the Secretary of the
Treasury has the authority to reject or reduce any subscription, and to allot
less than the amount of certificates applied for when he deems it to be in the
public interest; and any action he may take in these respects shall be final. Subject
to the exercise of that authority, all subscriptions will be allotted in full.
153

154

19 67 REPORT OF THE SECRETARY OF THE TREASURY
IV. PAYMENT

1. Payment for the face amount of certificates allotted hereunder must be
made on or before August 15, 1966, or on later allotment, and may be made
only in a like face amount of securities of the two issues enumerated in paragraph
1 of section I hereof, which should accompany the subscription. When payment
is made with securities in bearer form, coupons dated August 15, 1966, should
be detached and cashed when due. When payment is made with registered securities, the final interest due on August 15, 1966, will be paid by issue of interest
checks in regular course to holders of record on July 15, 1966, the date the transfer
books closed.
i
v . ASSIGNMENT OF REGISTERED SECURITIES

1. Treasury securities in registered form tendered in payment for certificates
offered hereunder should be assigned by the registered payees or assignees thereof
to ''The Secretary of the Treasury for exchange for 5J4 percent Treasury Certificates of Indebtedness of Series A-1967 to be delivered to
," in accordance with the general regulations of the Treasury Department
governing assignments for transfer or exchange, and thereafter should be surrendered with the subscription to a Federal Reserve bank or branch or to the
Oflace of the Treasurer of the United States, Washington, D.C. 20220. The
maturing securities must be delivered at the expense and risk of the holder.
VI. GENERAL PROVISIONS

1. As fiscal agents of the United States, Federal Reserve banks are authorized
and requested to receive subscriptions, to make such allotments as may be prescribed by the Secretary of the Treasury, to issue such notices as may be necessary, to receive payment for and make delivery of certificates on full-paid subscriptions allotted, and they may issue interim receipts pending delivery of the
definitive certificates.
2. The Secretary of the Treasury may at any time, or from time to time, prescribe supplemental or amendatory rules and regulations governing the offering,
which will be communicated promptly to the Federal Reserve banks.
JOSEPH W . BARR,

Acting Secretary of the Treasury.
Allotments of Treasury certificates of indebtedness issued during the fiscal year 1967
[In thousandsl
byi percent Series A-1967 certificates of
indebtedness issued in exchange for—i
Federal Reserve district
;
Boston-...
NewYork
Philadelphia
Cleveland
Richmond..
Atlanta
Chicago
St.-Louis
Mumeapolis
KansasCity...'
DaUas
SanFrancisco
Treasury

--.

.....

—.

• Total certificate allotments
Securities eligible for exchange:
Exchanged in concurrent offering
Total exchanged.
•.
Not.submitted for exchange
Total securities ehgible for exchange

4 percent
Series A-1966
Treasury
notes
maturing
Aug. 15, 1966

3 percent
Treasury
bonds of 1966
maturing
Aug. 15,1966

$45,961
4,915,091
24,718
77,289
57,951
54,355
164,884
89,113
41,249
59,392
52,729
48,698
6,888

$2,086
153,558
3,492
3,487
2,807
7,317
13,500
6,288
2,653
4,991
9,645
79,935
1,306

Total issued

$48,047
5,068,649
28,210
80,776
60,758
61,672
168,384
95,401
43,902
64,383
62,374
128,633
8,193

5,628,318

291,064

5,919,382

2,307,025

.270, 671

2, 577,696

7,936,343
500,637
8,435,880

561,735
138,437
700,172

8,497,078
638,974
9, 236, 052

; 1 AU subscriptions were aUotted in fuU. 5 ^ percent Treasury notes of Series A-1971 were also offered in
exchange for the securities maturing Aug. 16,1966.

EXHIBITS

155

Exhibit 2.—Treasury notes
Two Treasury circulars, one containing an exchange offering and the other
containing a cash offering, are reproduced in this exhibit. Circulars pertaining
to the other note offerings during the fiscal year 1967 are similar in form and
therefore are not reproduced in this report. However, essential details for each
offering are summarized in the first table following the circulars and the final
allotments of the new notes are shown in the second table.
DEPARTMENT CIRCULAR NO. 2-67.

PUBLIC DEBT

TREASURY

DEPARTMENT

Washington, January 26, 1967.
I. OFFERING OF NOTES

1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, as amended, offers $2,000,000,000, or thereabouts, of notes
of the United States, designated 4% percent Treasury Notes of Series A-1972,
at 99.625 percent of their face value and accrued interest. The following notes,
maturing February 15, 1967, will be accepted at par in payment or exchange,
in whole or in part, to the extent subscriptions are allotted by the Treasury:
3% percent Treasury Notes of Series B-1967; or
4 percent Treasury Notes of Series C-1967.
The books will be open only on January 30, 1967, for the receipt of subscriptions.
I I . DESCRIPTION OF NOTES

1. The notes will be dated February 15, 1967, and will bear interest from that
date at the rate of 4 ^ percent per annum, payable semiannually on August 15,
1967, and thereafter on February 15 and August 15 in each year until the principal
amount becomes payable. They will mature February 15, 1972, and will not
be subject to call for redemption prior to maturity.
2. The income derived from the notes is subject to all taxes imposed under
the Internal Revenue Code of 1954. The notes are subject to estate, inheritance,
gift or other excise taxes, whether Federal or State, but are exempt from all
taxation now or hereafter imposed on the principal or interest thereof by any
State, or any of the possessions of the United States, or by any local taxing
authority.
3. The notes wUl be acceptable to secure deposits of public moneys. They
will not be acceptable in payment of taxes.
4. Bearer notes with interest coupons attached, and notes registered as to
principal and interest, will be issued in denominations of $1,000, $5,000, $10,000,
$100,000, $1,000,000, $100,000,000 and $500,000,000. Provision will be made
for the interchange of notes of different denominations and bf coupon and registered notes, and for the transfer of registered notes, under rules and regulations
prescribed by the Secretary of the Treasury.
5. The notes will be subject to the general regulations of the Treasury Department, now or hereafter prescribed, governing U.S. notes.
III. SUBSCRIPTION AND ALLOTMENT

1. Subscriptions accepting the offer made by this circular will be received at
the Federal Reserve banks and branches and at the Oflfice of the Treasurer of
the United States, Washington, D.C. 20220. Only the Federal Reserve banks
and the Treasury Department are authorized to act as official agencies. Commer^
cial banks, which for this purpose are defined as banks accepting demand deposits,
may submit subscriptions for account of customers provided the names of the
customers are set forth in such subscriptions. Others than commercial banks
will not be permitted to enter subscriptions except for their own account.
Subscriptions from commercial banks for their own account wUl be restricted
in each case to an amount not exceeding 50 percent of the combined capital
(not including capital notes or debentures), surplus and undivided profits of
the subscribing bank. Subscriptions will be received without deposit from banking
institutions for their own account, federally insured savings and loan associations,
States, political subdivisions or instrumentalities thereof, public pension and

156

19 67 REPORT OF THE SECRETARY OF THE TREASURY

retirement and other public funds, international organizations in which the
United States holds membership, foreign central banks and foreign States,
dealers who make primary markets in Government securities and report daily
to the Federal Reserve Bank of New York their positions with respect to Government securities and borrowings thereon. Federal Reserve banks and Government
investment accounts. Subscriptions from all others must be accompanied by
payment (in cash or in notes of the two issues enumerated in paragraph 1 of
section I hereof, which will be accepted at par) of 2 percent of the amount of notes
applied for, not subject to withdrawal until after allotment. Registered securities
submitted as deposits should be assigned as provided in section V hereof. Following
allotment, any portion of the 2 percent payment in excess of 2 percent of the
amount of notes allotted may be released upon the request of the subscribers
2. All subscribers are required to agree not to purchase or to sell, or to make
any agreements with respect to the purchase or sale or other disposition of any
notes of this issue at a specific rate or price, until after midnight January 30, 1967.
3. Commercial banks in submitting subscriptions will be required to certify
that they have no beneficiar interest in any of the subscriptions they enter for
the account of their customers, and that their customers have no beneficial
interest in the banks' subscriptions for their own account.
4. Under the Second Liberty Bond Act, as amended, the Secretary of the
Treasury has the authority to reject or reduce any subscription, to allot less
than the amount of notes applied for, and to make different percentage allotments
to various classes of subscribers when he deems it to be in the public interest;
and any action he may take in these respects shall be final. Subject to the exercise
of that authority, subscriptions will be allotted:
(1) in full if the subscription is for a State, political subdivision or instrumentality thereof, public pension and retirement and other public
fund, international organization in which the United States holds
membership, foreign central bank and foreign State, Federal Reserve
bank, or Government investment account and such subscriber certifies
in writing that at 4 p.m., eastern standard time, January 25, 1967, it
owned or had contracted to purchase for value notes of the two issues
enumerated in paragraph 1 of section I hereof, in an aggregate amount
equal to or greater than the amount of such subscription (any such
subscriber may enter an additional subscription subject to a percentage
allotment); and
(2) on a percentage basis, to be publicly announced.
Allotment notices will be sent out promptly upon allotment.
IV. PAYMENT

1. Payment at 99.625 percent of their face value and accrued interest, if any,
for notes allotted hereunder must be made or completed on or before February 15,
1967, or on later allotment. Payment will not be deemed to have been completed
where registered notes are requested if the appropriate identifying number as
required on tax returns and other documents submitted to the Internal Revenue
Service (an individual's social security number or an employer identification
number) is not furnished. In every case where full payment is not completed, the
payment with application up to 2 percent of the amount of notes allotted shall,
upon declaration made by the Secretary of the Treasury in his discretion, be
forfeited to the United States. Payment may be made for any notes allotted
hereunder in cash or by exchange of notes of the two issues enumerated in paragraph 1 of section I hereof, which will be accepted at par. A cash adjustment will
be made for the difference ($3.75 per $1,000) between the par value of maturing
notes accepted in exchange and the issue price of the new notes. The payment
will be made by check or by credit in any account maintained by a banking
institution with the Federal Reserve bank of its district, following acceptance of
the maturing notes. In the case of registered notes, the payment will be made in
accordance with the assignments on the notes surrendered. When payment is
made with notes in bearer form, coupons dated February 15, 1967, should be
detached and cashed when due. When payment is made with registered notes, the
final interest due on February 15, 1967, will be paid by issue of interest checks in
regular course to holders of record on January 13, 1967, the date the transfer
books closed.

EXHIBITS

157

V. ASSIGNMENT OF REGISTERED NOTES

1. Treasury notes in registered form tendered as deposits and in payment for
notes allotted hereunder should be assigned by the registered payees or assignees
thereof, in accordance with the general regulations of the Treasury Department,
in one of the forms hereafter set forth. Notes tendered in payment should be
surrendered to a Federal Reserve bank or branch or to the OflBce of the Treasurer
of the United States, Washington, D.C. 20220. The maturing notes must be
delivered at the expense and risk of the holder. If the new notes are desired
registered in the same name as the notes surrendered, the assignment should
be to "The Secretary of the Treasury for 4% percent Treasury Notes of Series
A-1972;" if the new notes are desired registered in another name, the assignment
should be to ''The Secretary of the Treasury for 4% percent Treasury Notes of
Series A-1972 in the name of
;" if new notes in coupon
form are desired, the assignment should be to ''The Secretary of the Treasury for
4% percent Treasury Notes of Series A-1972 in coupon form to be delivered to
VI. GENERAL PROVISIONS

1. As fiscal agents of the United States, Federal Reserve banks are authorized
and requested to receive subscriptions, to make such allotments as may be prescribed by the Secretary of the Treasury, to issue such notices as may be necessary,
to receive payment for and make delivery of notes on full-paid subscriptions
allotted, and they may issue interim receipts pending delivery of the definitive
notes.
2. The Secretary of the Treasury may at any time, or from time to time,
prescribe supplemental or amendatory rules and regulations governing the
offering which will be communicated promptly to the Federal Reserve banks.
HENRY H . FOWLER,

Secretary of the Treasury.

DEPARTMENT CIRCULAR NO. 6-67.

PUBLIC DEBT

TREASURY

DEPARTMENT,

Washington, April 27, 1967.
I. OFFERING OF NOTES

1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, as amended, offers notes of the United States, designated
4% percent Treasury Notes of Series B-1972 at par:
(1) in exchange for 4>i percent Treasury Notes of Series D-1967, dated
November 15, 1965, due May 15, 1967;
(2) with a cash payment of $1.00 per $1,000 to the United States in exchange
for 23^ percent Treasury Bonds of 1962-67, dated May 5, 1942, due
June 15, 1967, in amounts of $1,000 or multiples thereof;
(3) with a cash payment of $3.00 per $1,000 to the subscriber in exchange
for b\i percent Treasury Certificates of Indebtedness of Series A-1967,
dated August 15, 1966, due August 15, 1967;
(4) with a cash payment of $1.50 per $1,000 to the United States in exchange for 3% percent Treasury Notes of Series A-1967, dated September 15, 1962, due August 15, 1967; or
(5) with a cash payment of $2.00 per $1,000 to the subscriber in exchange
for 4% percent Treasury Notes of Series E-1967, dated February 15,
1966, due August 15, 1967.
Interest will be adjusted as of May 15, 1967, in the case of the securities due
June 15 and August 15, 1967. Net payments on account of accrued interest
due subscribers and cash adjustments due to and from subscribers will be made
as set forth in section IV hereof. The amount of this offering will be limited to
the amount of eligible securities tendered in exchange. The books will be open
only on May 1 through May 3, 1967, for the receipt of subscriptions.

158

19 67 REPORT OF THE SECRETARY OF THE TREASURY

2. In addition, holders of the 4}{ percent notes of Series D-1967, and the 2)^
percent bonds of 1962-67 are offered the privilege of exchanging all or any part
of such securities for 4}i percent Treasury Notes of Series C-1968, which offering
is set forth in Department Circular, Public Debt Series—No. 5-67, issued simultaneously with this circular.
I

II. DESCRIPTION OF NOTES

1. The notes will be dated May 15, 1967, and will bear interest from that date
at the rate of 4% percent per annum, payable semiannually on November 15,
1967, and thereafter on May 15 and November 15 in each year until the principal amount becomes payable. They will mature May 15, 1972, and will not
be subject to call for redemption prior to maturity.
2. The income derived from the notes is subject to all taxes imposed under
the Internal Revenue Code of 1954. The notes are subject to estate, inheritance,
gift or other excise taxes, whether Federal or State, but are exempt from all
taxation now or hereafter imposed on the principal or interest thereof by any
State, or any of the possessions of the United States, or by any local taxing
authority.
3. The notes will be acceptable to secure deposits of public moneys. They will
not be acceptable in payment of taxes.
4. Bearer notes with interest coupons attached, and notes registered as to
principal and interest, will be issued ia denominations of $1,000, $5,000, $10,000,
$100,000, $1,000,000, $100,000,000 and $500,000,000. Provision will be made
for the interchange of notes of different denominations and of coupon and registered notes, and for the transfer of registered notes, under rules and regulations
prescribed by the Secretary of the Treasury.
5. The notes will be subject to the general regulations of the Treasury Department, now or hereafter prescribed, governing U.S. notes.
III.

SUBSCRIPTION AND ALLOTMENT

1. Subscriptions accepting the offer made by this circular wUl be received a t
the Federal Reserve banks and branches and at the OflBice of the Treasurer of
the United States, Washington, D.C. 20220. Banking institutions generally
may submit subscriptions for account of customers, but only the Federal Reserve
banks and the Treasury Department are authorized to act as official agencies.
2. Under the Second Liberty Bond Act, as amended, the Secretary of the
Treasury has the authority to reject or reduce any subscription, and to allot
less than the amount of notes applied for when he deems it to be in the public
interest; and any action he may take in these respects shall be final. Subject to
the exercise of that authority, all subscriptions will be allotted in full.
IV. PAYMENT

1. Payment for the face amount of notes allotted hereunder must be made on
or before May 15, 1967, or on later allotment, and may be made only in a like
face amount of securities of the five issues enumerated in paragraph 1 of section I
hereof, which should accompany the subscription. Payment will not be deemed to
have been completed where registered notes are requested if the appropriate identifying number as required on tax returns and other documents submitted to the
Internal Revenue Service (an individual's social security number or an employer
identification number) is not furnished. Cash payments due to subscribers will
be made by check or by credit in any account maintained by a banking institution with the Federal Reserve bank of its district following acceptance of the
securities surrendered. In the case of registered securities, the payment will be
made in accordance with the assignments thereon.
2. 4}i percent notes of Series D-1967.—Coupons dated May 15, 1967, should
be detached and cashed when due.^
3. 2y2 percent bonds of 1962-67.—Coupons dated June 15, 1967, must be attached
to bonds in bearer form when surrendered. Accrued interest from December 15,
1966, to May 15, 1967 ($10.37088 per $1,000), will be credited, the payment
($1.00 per $1,000) due the United States will be charged and the difference
($9.37088 per $1,000) will be paid to subscribers.
.1 Interest due on May 15, 1967, on registered securities will be paid by issue of interest checks in regular
course to holders of record on Apr. 14,1967, the date the transfer books closed.

EXHIBITS

159

4. 5}i percent certificates of Series A-1967.—Coupons dated August 15, 1967,
must be attached to the certificates when surrendered. Accrued interest from
February 15 to May 15, 1967 ($12.90746 per $1,000), plus the cash payment of
$3.00 per $1,000 will be paid to subscribers.
5. Sy^ percent notes of Series A-1967.—Coupons dated August 15, 1967, must
be attached to the notes in bearer form when surrendered. Accrued interest from
February 15 to May 15, 1967 ($9.21961 per $1,000), will be credited, the payment ($1.50 per $1,000) due the United States will be charged and the difference
($7.71961 per $1,000) will be paid to subscribers.
6. ^Vs percent notes of Series E-1967.—Coupons dated August 15, 1967, must
be attached to the notes in bearer form when surrendered. Accrued interest from
February 15 to May 15, 1967 ($11.98550 per $1,000), plus the cash payment of
$2.00 per $1,000 will be paid to subscribers.
v . ASSIGNMENT OF REGISTERED SECURITIES

1. Treasury securities in registered form tendered in payment for notes offered
hereunder should be assigned by the registered payees or assignees thereof, in
accordance with the general regulations of the Treasury Department governing
assignments for transfer or e.xchange, in one of the forms hereafter set forth,
and thereafter should be surrendered with the subscription to a Federal Reserve
bank or branch or to the Oflfice of the Treasurer of the United States, Washington,
D.C. 20220. The securities must be delivered at the expense and risk of the
holder. If the new notes are desired registered in the same name as the securities
surrendered, the assignment should be to "The Secretary of the Treasury for
exchange for 4% percent Treasury Notes of Series B-1972"; if the new notes
are desired registered in another name, the assignment should be to "The Secretary of the Treasur}^ for exchange for 4% percent Treasury Notes of Series B-1972
in the name of
"; if new notes in coupon form are desired,
the assignment should be to "The Secretary of the Treasury for exchange for 4%
percent Treasury Notes of Series B-1972 in coupon form to be delivered to
VI. GENERAL PROVISIONS

1. As fiscal agents of the United States, Federal Reserve banks,are authorized
and requested to receive subscriptions, to make such allotments as may be prescribed by the Secretary of the Treasury, to issue such notices as may be necessary, to receive payment for and make delivery of notes on full-paid subscriptions
allotted, and they may issue interim receipts pending delivery of the definitive
notes.
2. The Secretary of the Treasury may at any time, or from time to time, prescribe supplemental or amendatory rules and regulations governing the offering,
which will be communicated promptly to the Federal Reserve banks.

HENRY H .

FOWLER,

Secretary of the Treasury.

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Summary of information pertaining to Treasury notes issued during the fiscal year 1967
Date of
preliminary
announcement

Department
circular

No.

Date

Concurrent
offering
circular No.

AUotDate
ment
sub- payment
Date of Date of
scrip- date on
issue maturity
tion or before
(or on
books
later
closed
aUotment)

Treasury notes issued for exchange or for cash

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1966
July 27

1966
6-66 July 28

Oct. 27

7-66 Oct. 28

5-66 5J^ percent Series A-1971 issued at prices indicated below in exchange for—
4 percent Series A-1966 notes maturing Aug. 15,1966 (100);
3 percent bonds of 1966 maturing Aug. 15, 1966 (100);
i H percent Series A-1966 certificates of indebtedness maturing Nov. 15,1966 (100.10);
4 percent Series E-1966 notes maturing Nov. 15,1966 (100.35);
3 ^ percent bonds of 1966 maturing Nov. 15,1966 (100.65).

1966
1971
1966
1966
Aug. 15 May 15 Aug. 3 i Aug. 15

5 ^ percent Series A-1968 issued at par for cash 2

1968
Nov.15 Feb. 15 Nov. 1

Nov. 15
1967
Feb. 16

Oct. 27

8-66 Oct. 28

5% percent Series B-1971 issued at par for cash 2

1971
Nov. 15 Nov. 15 Nov. 1

1967
Jan. 25

1967
1-67 Jan. 26

i K percent Series B-1968 issued at 99.876 for cash 3

1967
1968
1967
Feb. 16 May 16 Jan. 30

Jan. 25

2-67 Jan. 26

4 ^ percent Series A-1972 issued at 99.625 for cash 8

.
.

Feb. 16 Feb. 16 Jan. 30

Nov.15

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Feb. 15

Apr. 26

6-67 Apr. 27

Apr. 26

6-67 Apr. 27

1968
6-67 4M percent Series C-1968 issued at 99.96 in exchange for—
May 15 Aug. 15 May
434 percent Series D-1967 notes maturing May 16, 1967;
2H percent bonds of 1962-67 maturing June 16,1967, with a payment of I ).10 per $100 by
the subscriber.
1972
5-67 4M percent Series B-1972 issued at par in exchange for—
May 15 May 15 May
434 percent Series D-1967 notes maturing May 15,1967;
214 percent bonds of 1962-67 maturing June 16, 1967, with a pajonent of $0.10 per $100 by
the subscriber;
534 percent Series A-1967 certificates of indebtedness maturing Aug. 15,1967, with a payment of $0.30 per $100 to the subscriber;
3M percent Series A-1967 notes maturing Aug. 15,1967, with a payment of $0.15 per $100
by the subscriber;
il/s percent Series E-1967 notes maturing Aug. 15,1967, with a payment of $0.20 per $100
to the subscriber.

1 Coupons dated Aug. 15, 1966, were detached from bearer notes and bonds due
on that date and cashed when due. Coupons dated Nov. 15,1966, were required to be
attached to bearer securities due on that date. Subscribers tendering securities due
Nov. 15,1966, in exchange were credited with accrued interest from May 15 to Aug. 15,
1966 ($1.8750 per $100 on the certificates, $1.00000 per $100 on the notes, and $0.84375
per $100 on the bonds), and were charged the amount due the United States on account
of the issue price of the 5 ^ percent notes and the net amount (per $100) was paid to
subscribers as foUows: $1.08760 for the certiflcates, $0.66000 for the notes, and $0.29375
for the bonds.
2 Holders of ZH percent Treasury bonds of 1966, 4 percent Treasury Notes of Series
E-1966, and 4M percent Treasury certificates of uidebtedness of Series A-1966 were not
offered preemptive rights to exchange their holdings for the new notes. Payment for
cash subscriptions aUotted could be made in whole or in part by exchange at par of such
securities. Coupons dated Nov. 15, 1966, were detached from such securities in bearer
form and cashed when due.

3 ^May 15

3 sMay 15

3 Holders of ZH percent Treasury Notes of Series B-1967 and 4 percent Treasury
Notes of Series C-1967 were not offered preemptive rights to exchange their holdings
for the new notes. Payment for cash subscriptions aUotted could be made in whole
or in part by exchange at par of such notes with a cash payment to the subscriber on
account of the issue price of the new note. Coupons dated Feb. 15,1967, were detached
from the notes in bearer form and cashed when due.
< Coupons dated May 15, 1967, were detached from the notes of Series D-1967 and
cashed when due. A cash payment of $0.05 per $100 was made to subscribers exchanging
notes. Coupons dated June 15,1967, were required to be attached to the bonds in bearer
form. Accrued interest on the bonds from Dec. 15, 1966, to May 15, 1967 ($1.037088
per $100), plus the payment on account of the issue price of thenotes ($0.050000 per
$100) was credited and the payment of $0.100000 per $100 due the United States was
charged and the difference ($0.987088 per $100) was paid to subscribers exchanging
bonds.
* See Department Circular No. &-67 in this exhibit for provisions for subscription
and payment.

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Allotments of Treasury notes issued during the fiscal year 1967, hy Federal Reserve districts
[In thousands]

O
634 percent Series A-1971 notes issued in exchange for »—

Federal Reserve district

Boston
NewYork
PhUadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Mmneapolis
KansasCity
DaUas
SanFrancisco
Treasury

4 percent
i H percent
4 percent
Series E-1966
Treasury
3 percent
Series A-1966
Treasury
certificates
Treasury
Treasiu-y
notes
notes
bonds of 1966 of indebtedness
maturing
series A-1966
maturing
maturing
Nov. 15, 1966
maturing
Aug. 15, 1966 2 Aug. 15,1966 2
Nov. 15,1966

Z% percent
Treasury
bonds of 1966
maturing
Nov. 15, 1966

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Total issued

5^^ percent
Series A-1968
notes 3

5H percent
Series B-1971
notes 3

$26,886
1,929,152
8,832
66,131
8,365
.43;460
84,986
40,793
16,207
36,804
.
11,585
43,766
2,058

$9,824
187,016
2,144
8,403
1,176
3,667
15,902
6,869
3,670
9,969
2,782
20,297
63

$40,269
151,259
37,232
45,991
25,358
24,300
94,333
28,289
14,539
24,354
. 14,202
16,664
662

$28,385
191,425
27,106
43,875
11,745
27,623
141,466
33,244
13,357
17,468
15,013
27,129
6,106

$16,654
122,909
26,964
46,505
31,573
34,267
131,608
42,840
26,381
43,547
29,666
28,146
6,101

$122,018
2,681,760
102,268
200,905
78,217
133,207
468,295
161,035
73,054
131,132
73,248
136,002
13,890

$69,328
1,491,405
58,802
94,184
71,235
83,504
251,983
97,434
45,841
78,761
76,842
204,586
11,936

$70,045
739,273
41,823
93,791
43,138
67,709
239,326
62,633
47,324
89,665
42,703
202, 611
4,286

Total note aUotments
Securities eligible for exchange:
Exchanged in concurrent offerings

2,307,026

270,671

517,352

583,842

586,141

4,265,031

2,634,829

1,734,117

6,628,318

291,064

Total exchanged..-.
Not submitted for exchange
Total securities eUgible for exchange

7,935,343
500,637
8,435,880

561,735
138,437
700,172

Footnotes at end of table;

5,919,382
517,362
1,134,842

683,842
1,669,979

586,141
1,266,267

1,652,194

2,253,821

1,861,408

10,184,413
4,709,062
14,893,475

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Allotments of Treasury notes issued during ihe fiscal year 1967, hy Federal Reserve districts—Continued
[In thousands]
434 percent Series C-1968 notes issued in
exchange for 1—
23^ p e r c e n t
434 p e r c e n t
Series D-1967
Treasury
Treasury
b o n d s of 1962-67
notes m a t u r i n g
maturing
M a y 15, 1967 s J u n e 15, 1967 s

434 p e r c e n t
Series B-1968
notes 3

i K percent
Series A-1972
notes <

Boston.
New York
Philadelphia.
Cleveland
Richmond
Atlanta
Chicago
St. Louis..
Minneapolis
Kansas City
Dallas
San Francisco.
Treasury

$79,789
4,349,148
61,185
123,617
79,810
96,299
246,430
71,817
46, 265
64,602
125,917
236,061
8,002

$56,206
1,014,586
39,658
107,083
46, 673
83,672
203,686
65,116
36, 295
86,391
43,634
232,197
2,635

$39,465
4,976,386
43,305
104,259
64,653
73,373
207,082
80,189
35,769
57,165
27, 601
81,924
13,773

$2,314
373,295
20,864
8,098
9,014
16,821
42,419
16,473
1,846
9,049
1,003
132,098
6,576

Total note aUotments
Securities eligible for exchange:
Exchanged in concurrent offerings.....

6,586,842

2,006,629

6,803,844

639,868

6,443,712

3,506,342

445,706

3,952,048

9,310,186
438,030

1,085,574
343,544

10,396,760
781,674

9,748,216

1,429,118

11,177,334

Federal Reserve district

Total exchanged
Not submitted for exchange
Total securities eligible for exchange..

T o t a l issued

$41,779
5,348,681
64,169
112,367
73,667
90,194
249,501
96,662
37, 614
66, 214
28,504
214,022
20,348

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Footnotes at end of table.

Alloimenis of Treasury"notes issued during the fiscal year 1967, by Federal Reserve districts—Continued
[In thousands]
4M percent Series B-1972 notes issued in exchange for i

534 percent
434 percent
2}/^ percent
Treasury
Z% percent
i H percent
Series D-1967 Treasury bonds certificates
Series A-1967 Series E-1967
Treasury notes
of 1962-67
of indebtedness Treasm'y notes Treasury notes Totalissued
maturing
maturing
series A-1967
maturing
maturing
May 15, 1967 6 June 16, 1967 6
maturing
Aug. 15, 1967 Aug. 15, 1967 .
../
Aug. 15, 1967'

Federal Reserve district.

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Boston
New York
PhUadelphia..
Cleveland
Richmond
Atlanta...
Chicago
St. Louis..
Minneapolis...
Kansas C i t y . . .
DaUas
San Francisco
Treasury

...:

...

Total note aUotments.
Securities eligible for exchange:
Exchanged in concurrent offerings
Total exchanged.
Not submitted for exchange
Total securities eligible for exchange

1 All subscriptions were allotted in full.
2 534 percent Treasury certificates of indebtedness of Series A-1967 were also offered
in exchange for this security.
3 Subscriptions from States, political subdivisions or instrumentalities thereof, pubUc
pension and retirement and other public funds, international organizations in which
the United States holds membership„foreign central banks and foreign States, Government investment accounts, and the Federal Reserve banks were allotted in full up to
the amount that the subscriber certified that it owned a like amount of securities that
could be used in payment for the notes. For each issue all other subscriptions in amounts
up to $100,000 were aUotted in full; amounts over $100,000 were allotted 30 percent for
the notes of Series A-1968 and 10 percent for the notes of Series B-1971 and the notes of
Series B-1968, but not less than $100,000 to any one subscriber.

$34,144
2,897,697
27,823
61,648
19,621
59,747
153,697
73,747
33,585
57,236
37,893
48,949
655

$24,017
240,383
8,345
10,571
6,366
10,950
40,146
9,702
12,676
7,146
4,114
66,248
5,042

$2,188
214,100
4,557
12,038
2,470
6,175
27,017
6,828
3,797
7,990
4,411
15,597
1,065

$13,990
319,533
13,418
66,645
14,169
38,249
175,938
37,367
18,842
41, 288
41, 203
62,197
3,759

$3,661
LOO, 119
1,700
19,400
6,325
10, 660
42,312
8,826
2, 527
6,141
5,275
6,163

126

$77,900
3,771,832
55,843
170,302
48,951
125,781
439,010
136,470
71,427
119,801
92,896
189,154
10,647

3,506,342

446, 706

308,233

836.598

213,135

5,310,014
6,443,712

5,803,844

639,868

9,310,186
438,030
9,748,216

1,085, 574
343,544

308,233
6,611,149

836,598
2,092,762

213,135
1,904, 231

11,753, 726
10,389,716

1,429,118

6,919,382

2,929,360

2,117,:

22,143,442

4 Subscriptions from States, political subdivisions or instnimentalities thereof,
public pension and retirement and other public funds, international organizations in
which the United States holds membership, foreign central banks and foreign States,
Government investment accounts, and the Federal Reserve banks were allotted in
full up to the amount that the subscriber certified that it owned a like amount of securities that could be used in payment for the notes. All other subscriptions in amounts
up to $60,000 were aUotted in fuU; amounts over $60,000 were aUotted 7 percent, but
not less than $50,000 to any one subscriber.
5 i K percent Treasury notes of Series B-1972 were also offered in exchange for this
security.
6 434 percent Treasury notes of Series C-1968 were also offered in exchange for this
security.

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EXHIBITS

165

Treasury Bills Offered and Tenders Accepted
Exhibit 3.—Treasury bills
During the fiscal year there were 52 weekly issues each of 13-week and 26week bills (the 13-week bills represent additional issues of bills with an original
maturity of 26 weeks), twelve 1-year issues, ten 9-month issues (representing
additional issues of bills with an original maturity of 1 year), one strip of additional amounts of three outstanding 1-year issues, and six issues of tax anticipation series. In September the Treasury adopted the policy of issuing monthly
a 1-year issue and a 9-month issue. Three press releases inviting tenders, which
are representative of all types of bill issues, are reproduced in this exhibit as
follows: strip of issues, November 10, 1966; tax anticipation series, March 1, 1967;
and weekly and monthly issues, May 17, 1967. Also reproduced is the press release
of May 24, 1967, which is representative of the releases announcing the acceptance of tenders for all types of issues. Following the press releases is a table of
data for each issue issued during the fiscal year.
PRESS RELEASE OF NOVEMBER 10, 1966
The Treasury Department, by this public notice, invites tenders for additional
amounts of three series of Treasury bills to an aggregate amount of $1,200,000,000, or thereabouts, for cash and in exchange for Treasury bills maturing November 25, 1966. The additional bills will be issued November 25, 1966, will be in the
amounts, and will be in addition to the bills originally issued and maturing,
as follows:
Amount of
additional
issue

Original Maturity Days from
Amount
issue
dates Nov. 25,1966 currently
dates
1967
to niaturity outstandin?
1966
(in miUions)

$400,000,000
400,000,000
400,000,000

Mar. 31 Mar. 31
Apr. 30 Apr. 30
May 31 May 31

126
156
187

$1,000
1,001
1,001

1,200,000,000

The additional and original bills will be freely interchangeable.
Each tender submitted must be in the amount of $3,000, or an even multiple
thereof, and one-third of the amount tendered will be applied to each of the
above series of bills.
The bills offered hereunder will be issued on a discount basis under competitive
and noncompetitive bidding as hereinafter provided, and at maturity their
face amount will be payable without interest. They will be issued in bearer form
only, and in denominations of $1,000, $5,000, $10,000, $50,000, $100,000, $500,000
and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve banks and branches up to the
closing hour, 1:30 p.m., eastern standard time, Thursday, November 17, 1966.
Tenders will not be received at the Treasury Department, Washington. In the
case of competitive tenders the price offered must be expressed on the basis
of 100, with not more than three decimals; e.g., 99.925. Fractions may not be
used. A single price must be submitted for each unit of $3,000, or even multiple
thereof. A unit represents $1,000 face amount of each issue of bills offered hereunder, as previously described. It is urged that tenders be made on the printed
forms and forwarded in the special envelopes which will be supplied by Federal
Reserve banks and branches on application therefor.
Banking institutions generally may submit tenders for account of customers
provided the names of the customers are set forth in such tenders. Others than
banking institutions will not be permitted to submit tenders except for their
own account. Tenders will be received without deposit from incorporated banks
and trust companies and from responsible and recognized dealers in investment
securities. Tenders from others must be accompanied by payment of 2 percent of
the face amount of Treasury bills applied for, unless the tenders are accompanied
by an express guaranty of payment by an incorporated bank or trust company.

166

19 67 REPORT OF THE SECRETARY OF THB TREASURY

All bidders are required to agree not to purchase or to sell, or to make any
agreements with respect to the purchase or sale or other disposition of any bills
of these additional issues at a specific rate or price until after 1:30 p.m., eastern
standard time, Thursday, November 17, 1966.
Immediately after the closing hour, tenders will be opened at the Federal
Reserve banks and branches, following which public announcement will be made
by the Treasury Dejpartment of the amount and price range of accepted bids.
Those submitting tenders will be advised of the acceptance or rejection thereof.
The Secretary of the Treasury expressly reserves the right to accept or reject any
or all tenders, in whole or in part, and his action in any such respect shall be
final. Noncompetitive tenders for $120,000 or less (in even multiples of $3,000)
without stated price from any one bidder will be accepted in full at the average
price (in three decimals) of accepted competitive bids. Settlement for accepted
tenders in accordance with the bids must be made or completed at the Federal
Reserve bank on November 25, 1966, in cash or other immediately available
funds or in a like face amount of Treasury bills maturing November 25, 1966,
provided, however, any qualified depositary will be permitted to make payment
by credit in its Treasury tax and loan account for Treasury bills allotted to it
for 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. Cash and exchange tenders will receive equal treatment. Cash adjustments will be made for differences between the par value of maturing bills accepted
in exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or gain from the
sale or other disposition of the bills, does not have any exemption, as such, and
loss from the sale or other disposition of Treasury bills does not have any special
treatment, as such, under the Internal Revenue Code of 1954. The bills are
subject to estate, inheritance, gift or other excise taxes, whether Federal or State,
but are exempt from all taxation now or hereafter imposed on the principal or
interest thereof by any State, or any of the possessions of the United States,
or by any local taxing authority. For purposes of taxation the amount of discount
at which Treasury bills are originally sold by the United States is considered to
be interest.
Under sections 454(b) and 1221(5) of the Internal Revenue Code of 1954
the amount of discount at which bills issued hereunder are sold is not considered
to accrue until such bills are sold, redeemed or otherwise disposed of, and such
bills are excluded from consideration as capital assets. Accordingly, the owner
of Treasury bills (other than life insurance companies) issued hereunder need
include in his incomp tax return only the difference between the price paid for
such bills, whether on original issue or on subsequent purchase, and the amount
actually received either upon sale or redemption at maturity during the taxable
year for which the return is made, as ordinary gain or loss. Purchasers of a
strip of the bills offered hereunder should, for tax purposes, take such bills on
to their books on the basis of their purchase price prorated to each of the three
outstanding issues using as a basis for proration the closing market prices for
each of the issues on November 25, 1966. (Federal Reserve banks will have
available a list of these market prices, based on the mean between the bid and
asked quotations furnished by the Federal Reserve Bank of New York.)
Treasury Department Circular No. 418, revised, and this notice, prescribe the
terms of the Treasury bills and govern the conditions of their issue. Copies of the
circular may be obtained from any Federal Reserve bank or branch.
PRESS RELEASE OF MARCH 1, 1967
The Treasury Department, by this public notice, invites tenders for $2,700,000,000, or thereabouts, of 101-day Treasury bills (to maturity date), to be issued
March 13, 1967, on a discount basis under competitive and noncompetitive
bidding as hereinafter provided. The bills of this series will be designated tax
anticipation series and represent an additional amount of bills dated October 18,
1966, to mature June 22, 1967, originally issued in the amount of $2,006,632,000
(an additional $800,885,000 was issued December 12, 1966). The additional and
original bills will be freely interchangeable. They will be accepted at face value
in payment of income taxes due on June 15, 1967, and to the extent they are not
presented for this purpose the face amount of these bills will be paj^able without
interest at maturity. Taxpayers desiring to apply these bills in payment of June 15,

EXHIBITS

167

1967, income taxes have the privilege of surrendering them to any Federal Reserve
bank or branch or to the Office of the Treasurer of the United States, Washington,
not more than 15 days before June 15, 1967, and receiving receipts therefor
showing the face amount of the bills so surrendered. These receipts may be submitted in lieu of the bills on or before June 15, 1967, to the district director of
Internal Revenue for the district in which such taxes are payable. The bills will
be issued in bearer form only, and in denominations of $1,000, $5,000, $10,000,
$50,000, $100,000, $500,000, and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve banks and branches up to the
closing hour, 1:30 p.m., eastern standard time, Tuesday, March 7, 1967. Tenders
will not be received at the Treasury Department, Washington. Each tender
must be for an even multiple of $1,000, and in the case of competitive tenders
the price offered must be expressed on the basis of 100, with not more than three
decimals; e.g., 99.925. Fractions may not be used. It is urged that tenders be
made on the printed forms and forwarded in the special envelopes which will
be supplied by Federal Reserve banks or branches on application therefor.
Banking institutions generally may submit tenders for account of customers
provided the names of the customers are set forth in such tenders. Others than
banking institutions will not be permitted to submit tenders except for,their own
account. Tenders will be received without deposit from incorporated banks and
trust companies and from responsible and recognized dealers in investment securities. Tenders from others must be accompanied by payment of 2 percent of the
face amount of Treasury bills applied for, unless the tenders are accompanied by
an express guaranty of payment by an incorporated bank or trust company.
All bidders are required to agree not to purchase or to sell, or to make any
agreements with respect to the purchase or sale or other disposition of any bills
of this issue at a specific rate or price, until after 1:30 p.m., eastern standard
time, Tuesday, March 7, 1967.
Immediately after the closing hour, tenders will be opened at the Federal
Reserve banks and branches, following which public announcement will be made
by the Treasury Department of the amount and price range of accepted bids.
Those submitting tenders will be advised of the acceptance or rejection thereof.
The Secretary of the Treasury expressly reserves the right to accept or reject
any or all tenders, in whole or in part, and his action in any such respect shall
be final. Subject to these reservations, noncompetitive tenders for $400,000 or
less without stated price from any one bidder will be accepted in full at the
average price (in three decimals) of accepted competitive bids. Payment of
accepted tenders at the prices offered must be made or completed at the Federal
Reserve bank in cash or other immediately available funds on March 13, 1967,
provided, however, any qualified depositary will be permitted to make payment
by credit in its Treasury tax and loan account for not more than 50 percent of
the amount of Treasury bills allotted to it for 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.
The income derived from Treasury bills, whether interest or gain from the
sale or other disposition of the bills, does not have any exemption, as such, and
loss from the sale or other disposition of Treasury bills does not have any special
treatment, as such, under the Internal Revenue Code of 1954. The bills are
subject to estate, inheritance, gift or other excise taxes, whether Federal or^ State,
but are exempt from all taxation now or hereafter imposed on the principal or
interest thereof by any State, or any of the possessions of the United States, or
by any local taxing authority. For purposes of taxation the amount of discount
at which Treasufy bills are originally sold by the United States is considered
to be interest. Under sections 454(b) and 1221(5) of the Internal Revenue Code
of 1954 the amount of discount at which bills issued hereunder are sold is not
considered to accrue until such bills are sold, redeemed or otherwise disposed of,
and such bills are excluded from consideration as capital assets. Accordingly,
the owner of Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between the price paid
for such bills, whether on original issue or on subsequent purchase, and the
amount actually received either upon sale or redemption at maturity during the
taxable year for which the return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this notice
prescribe the terms of the Treasury bills and govern the conditions of their issue.
Copies of the circular may be obtained from any Federal Reserve bank or branch.

168

19 67 REPORT OF THE SECRETARY OF THE TREASURY
PRESS RELEASE OF MAY 17, 1967

The Treasury Department, by this public notice, invites tenders for two series
of Treasury bills to the aggregate amount of $1,400,000,000, or thereabouts, for
cash and in exchange! for Treasury bills maturing May 31, 1967, in the amount of
$1,401,990,000, as follows:
274-day bills (to maturity date) to be issued May 31, 1967, in the amount of
$500,000,000, or thereabouts, representing an additional amount of bills dated
February 28, 1967, and to mature February 29, 1968, originally issued in the
amount of $901,029,000, the additional and original bills to be freely interchangeable.
366-day bills, for $900,000,000, or thereabouts, to be dated May 31, 1967, and
to mature May 31, ,1968.
The bills of both series will be issued on a discount basis under competitive
and noncompetitive bidding as hereinafter provided, and at maturity their face
amount will be payable without interest. They will be issued in bearer form only,
and in denominations of $1,000, $5,000, $10,000, $50,000, $100,000, $500,000, and
$1,000,000 (maturity value).
Tenders will be received at Federal Reserve banks and branches up to the
closing hour, 1:30 p.m., eastern daylight saving time, Wednesday, May 24, 1967.
Tenders will not be received at the Treasury Department, Washington. Each
tender must be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100, with not more than
three decimals; e.g.,; 99.925. Fractions may not be used. (Notwithstanding the
fact that the 1-year bills will run for 366 days, the discount rate will be computed
on a bank discount basis of 360 days, as is currently the practice on all issues of
Treasury bills.) It is urged that tenders be made on the printed forms and forwarded in the special envelopes which will be supplied by Federal Reserve banks
or branches on appli(3ation therefor.
Banking institutions generally may submit tenders for account of customers
provided the names of the customers are set forth in such tenders. Others than
banking institutions will not be permitted to submit tenders except for their own
account. Tenders will be received without deposit from incorporated banks and
trust companies and from responsible and recognized dealers in investment
securities. Tenders from others must be accompanied by payment of 2 percent
of the face amount of Treasury bills applied for, unless the tenders are accompanied
by an express guaranty of payment by an incorporated bank or trust company.
Immediately after; the closing hour, tenders will be opened at the Federal
Reserve banks and branches, following which public announcement will be
made by the Treasury Department of the amount and price range of accepted
bids. Those submitting tenders will be advised of the acceptance or rejection
thereof. The Secretary of the Treasury expressly reserves the right to accept or
reject any or all tenciers, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders for each
issue for $200,000 or less without stated price from any one bidder will be accepted
in full at the average price (in three decimals) of accepted competitive bids for.
the respective issues. Settlement for accepted tenders in accordance with the
bids must be made or completed at the Federal Reserve bank on May 31, 1967,
in cash or other immediately available funds or in a like face amount of Treasury
bills maturing May 31, 1967. Cash and exchange tenders will receive equal
treatment. Cash adjustments will be made for differences between the par value
of maturing bills accepted in exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or gain from the
sale or other disposition of the bills, does not have any exemption, as such, and
loss from the sale or other disposition of Treasury bills does not have any special
treatment, as such, under the internal Revenue Code of 1954. The bills are subject to estate, inheritance, gift or other excise taxes, whether Federal or State,
but are exempt from all taxation now or hereafter imposed on the principal or
interest thereof by any State, or any of the possessions of the United States, or by
any local taxing authority. For purposes of taxation the amount of discount at
which Treasury bills; are originally sold by the United States is considered to be
interest. Under sections 454(b) and 1221(5) of the Internal Revenue Code of
1954 the amount of discount at which bills issued hereunder are sold is not considered to accrue until such bills are sold, redeemed or otherwise disposed of, and
such bills are excluded from consideration as capital assets. Accordingly, the

169

EXHIBITS

owner of Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between the price paid
for such bills, whether on original issue or on subsequent purchase, and the amount
actually received either upon sale or redemption at maturity during the taxable
year for which the return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this notice
prescribe the terms of the Treasury bills and govern the conditions of their issue.
Copies of the circular may be obtained from any Federal Reserve bank or branch.

PRESS RELEASE OF MAY 24, 1967
The Treasury Department announced that the tenders for two series of Treasury
bills, one series to be an additional issue of the bills dated February 28, 1967,
and the other series to be dated May 31, 1967, which were offered on May 17,
1967, were opened at the Federal Reserve banks today. Tenders were invited
for $500,000,000, or thereabouts, of the 274-day bills and for $900,000,000,or
thereabouts, of 366-day bills. The details of the two series are as follows:
274-day Treasury bills
maturing Feb. 29, 1968
Range of accepted competive bids

High
Low
Average

Price

97. 028
196.971
96. 998

Approximate
equivalent
annual
rate
Percent
3.905
3.980
3 3. 944

366-day Treasury bills
maturing May 31, 1968
Price

Approximate
equivalent
annual
rate
Percent
3.905

96. 030
2 95. 966
96. 001

3.968
3 3. 933

'38 percent of the araount of 274-day bills bid for at the low price was accepted.
21 percent of the amount of 366-day bills bid for at the low price was accepted.
3 These rates are on a bank discount basis. The equivalent coupon issue yields are 4.11 percent for the
274-day biUs, and 4.12 percent for the 366-day biUs.

Total tenders applied for and accepied by Federal Reserve districts
AppUed for

District
Boston
NewYork
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas..SanFrancisco
Total.-.-

Accepted

Applied for

$10, 000
869, 526, 000
4,877, 000
5, 510, 000
312, 000
5,325,000
203,129, 000
1,381,000
600, 000
3,372,000
11,440,000
27,158, 000

$10, 000
$25, 025, 000
420, 926, 000 1, 004, 830, 000
877, 000
8, 702, 000
5, 510, 000
11, 313, 000
312, 000
7,134, 000
2, 325, 000
9,846, 000
38,129, 000
254,339, 000
1, 381, 000
6,148, 000
600, 000
1, 226, 000
3, 372, 000
6, 252, 000
9,440, 000
12, 253, 000
17,158, 000
51, 424, 000

$5, 025, 000
702, 580, 000
702, 000
11, 313, 000
7,134, 000
5, 846, 000
114, 339, 000
4,148, 000
1, 226, 000
6, 252, 000
10, 253, 000
31, 424, 000

1,132, 640, 000

1 500, 040, 000 1, 398, 492, 000

2 900, 242, 000

1 Includes $14,583,000 noncompetitive tenders accepted at the average price of 96.998.
2 Includes $26,008,000 noncompetitive tenders accepted at the average price of 96.001.

Accepted

o
Summary of information pertaining to Treasury hills issued during the fiscal year 1967
[Dollar amounts in thousands]
Maturity value

Prices a n d r a t e s
SI
Total bids
accepted

T e n d e r s accepted
D a t e of
issue

D a t e of
maturity

Days
to
maturity I

Total
appUed
for

Total
accepted

On
competitive
basis

O n noncompetitive
basis

For
cash

In
exchange

EquivA v e r a g e alent
price
average
per
rate
hun(perdred
cent)

C o m p e t i t i v e b i d s accepted
High
Price
per
hun. dred

Low

Equivalent
rate
(percent)

Price
per
hundred

Equivalent
rate
(percent)

Amount
maturing
on
issue
d a t e of
new
offering

•T3

•=1

REGULAR WEEKL-S
1966
July
7
7
14
14
21
21
28
28
Aug.
4
4
11
11
18
18
25
25
Sept.
1
1
8
8
15
16
22
22
29
FRASER
29

Oct.
Jan.
Oct.
Jan.
Oct.
Jan.
Oct.
Jan.
Nov.
Feb.
Nov.
Feb.
Nov.
Feb.
Nov.
Feb.
Dec.
Mar.
Dec.
Mar.
Dec.
Mar.
Dec.
Mar.
Dec.
Mar.

6,1966
6,1967
13,1966
12,1967
20,1966
19,1967
27,1966
26,1967
3,1966
2,1967
10,1966
9,1967
17,1966
16,1967
26,1966
23,1967
1,1966
2,1967
8,1966
9,1967
15,1966
16,1967
22,1966
23,1967
29,1966
30,1967

Digitized for

91 $1,886,142 $1,302,292 $1,078,949
182
1,639, 606 1,001,231
897,708
91 2,110,461
1,302,411
988,171
182
1,821,193
1,000,993
852,608
91 2,328, 734
1,300,113
1, 037,811
182 2, 664, 644 1, 001, 376
871,713
91 2,469,341
1,300, 648
1, 048, 666
182 1,909,746
1,001,781
875,924
91 2,303,378
1,300, 044
1, 052,139
182 2, 055, 541 1, 000, 684
885, 767
91 2,166, 596
1,301, 454
1,038,755
182
1, 669, 650
999,830
877, 015
91 2, 065,743 1,301,313 1, 033,143
182 1,706, 644
1, 001,304
877,140
92 2, 018,176
1,300,195
1, 064, 431
182 2,158,852
1, 002, 620
884, 600
91 2, 034, 514 1,300,144
1, 046, 063
182
1,809,104
1, 000,184
877,926
91
1,981,192
1,302,427
1,063,193
182 2,179, 072 1, 003, 682
883,859
91 2, 059, 603 1, 299,963 1, 017,737
182 2,619, 662 1, 000,366
824,430
91 2,120, 262 1,300, 220
1, 022,936
182 2,456,160
1, 000,482
821,887
91 2,989, 903 1,302,967
1, 044,376
182 2, 361,163 1, 000, 700
794, 012

$223,343
103, 523
314, 240
148,386
262,302
129, 663
251,992
125,867
247, 905
114,917
262, 699
122,816
268,170
124,164
236, 764
117,920
254, 081
122, 258
239,234
119,823
282, 226
175,926
277, 284"
178,695
258, 591
206, 688

$1,101,129 $201,163
848,302
152,929
1,174,149
128, 262
896, 323 104, 670
1, 042, 580 257, 533
822,711
178, 666
1, 065,326 245,322
827,688
174, 093
1, 001, 016 299, 029
822,153
178, 531
1,111,313
190,141
877, 592 122, 238
1, 017, 564 283,749
817, 957
183,347
1, 041,954
258, 241
811, 263 191, 257
921, 696 378,448
847, 631 152, 653
1,008,258
294,169
870, 035 133, 647
1,101, 568
198,396
944, 681
55, 675
1, 009,303 290,917
794, 297 206,185
1, 018, 281 284,686
847,366
153,344

98.804
97.615
98.768
97. 473
98.737
97. 424
98. 782
97. 613
98. 778
97.488
98. 780
97.447
98.724
97.313
98. 717
97. 265
98. 714
97.186
98. 697
97.140
98.623
97.004
98. 588
96.947
98. 609
97. 066

4.731
4.915
4,876
4.999
4.998
6.096
4.819
4.919
4.833
4.969
4.825
6.050
5.048
5.315
5.022
5.410
5.087
6.567
5.166
5.657
5.447
6.927
6.586
6.040
5.502
6.803

2 98.822
2 97. 642
2 98.793
97. 606
98.743
97.431
98.790
97.528
2 98.782
2 97.494
2 98.791
2 97. 462
2 98.737
2 97.340
98. 725
2 97. 276
2 98. 726
97. 208
98. 710
2 97.148
2 98. 667
2 97. 016
98. 609
2 96.968
98. 615
97. 078

4.660
4.862
4.775
4.933
4.973
5.092
4.787
4.890
4.818
4.957
4.783
6.020
4.996
6.262
4.989
5.390
5.040
5.623
5.103
5.641
5.313
5.902
6.503
6.997
6.479
5.780

98.778 "
97.488
98.746
97.447
98.731
97. 422
98.779
97.508
98. 776
97.482
98.776
97. 425
98.710
97.286
98.708
97. 262
98.704
97.164
98. 684
97.133
98. 610
96.992
98. 581
96.941
98. 606
97. 057

4.834
4.969
4.961
5.060
5.020
6.099
4.830'
4.929
4.846
4.981
4.846
5.093
6.103
5.368
5.056
5.416
6.127
6.629
6.206
5.671
5.499
6.950
6.614
6.051
5.519
5. 821

$1,301,496
1,003,154
1,300,431
1, 000,387
1,300,744
1, 001,138
1, 301, 048
1, 000, 239
1, 300,318
999, 669
1, 301,447
1, 001,108
1, 300,411
1, 000,846
1,301, 606
1,000,854
1,300,342
1, 001,471
1,300, 227
1, 000, 305
1,300, 239
1, 002,243
1,300,876
1, 000, 273
1, 300,176
999,921

O
SI
H
K3

>
SJ
Kl
O

»^
!^
W
H
H9

H
^n
CQ

Oct.

6
6
13
13
20
20
27
27
Nov.
3
3
10
10
17
17
25
25
Dec.
1
1
8
8
15
15
22
22
29
29
1967
Jan.
6
5
12
12
19
19
26
26
Feb.
2
2
9
9
16
16
23
23
Mar.
2
2
9
9
16
16
23

1967
Jan.
Apr.
Jan.
Apr.
Jan.
Apr.
Jan.
Apr.
Feb.
May
Feb.
May
Feb.
May
Feb.
May
Mar.
June
Mar.
June
Mar.
June
Mar.
June
Mar.
June

5
6
12
13
19
20
26
27
2
4
9
11
16
18
23
26
2
1
9
8
16
15
23
22
30
29

91
182
91
182
91
182
91
182
91
182
91
182
91
182
90
181
91
182
91
182
91
182
91
182
91
182

1,814,461
1,453,870
2,278,640
2,085,218
2,439,417
1,897,277
2,206,421
2,376,734
2,206,826
2,254,379
2,008,716
2,188,556
2, 222,834
2,499,688
2,258,893
2,231,843
2,433,123
2,904,889
2,869,681
2, 245,428
2,336,789
2,545,066
2, 289,579
1,898,268
2,235,220
1,837,291

1,300,137
1,000,258
1,300,565
999,944
1,301,917
1,000,709
1,300,219
1,000,479
1,300,569
1,000,791
1,300,628
1,000,136
1,300,585
1,000,017
1,300,671
999,619
1,300,885
1,004,494
1,301,347
1,000,599
1,303,664
1,000,868
1,305,477
1,006,055
1,304,071
1,001,292

1,023,716
799,848
970,594
795,802
1,017,410
810,079
1,037,293
843,351
1,046,858
852,271
1,033,069
833,745
1,031,390
816,366
1,050,747
846,985
1,050,711
862,102
1,040,843
868,024
1,019,203
853,500
1,073,943
883,827
1,061,847
870,592

276,421
200,410
329,971
204,142
284,507
190,630
262,926
157,128
253,701
148,520
267,659
166,390
269,195
183,651
249,924
152,634
250,174
142,392
260,504
142,575
284,361
147,368
231,634
122,228
242,224
130,700

1,093,425
866,912
1,289,916
995,486
1,048,230
820,992
1,050,192
807,886
980,477
818,576
1,035,624
807,326
1,165,891
920,863
1,075,659
836,283
869,743
821,150
1,121,160
856,923
1,161,957
922,900
983,396
833,585
1,070,273
856,202

206,712
133,346
10,649
4,458
253,687
179,717
250,027
192,593
320,082
182,216
265,004
192,809
134,694
79,154
225,112
163,336
431,142
183,344
180,187
143,676
141,607
77,968
322,082
172,470
233,798
145,090

98.633
97.132
98.617
97.093
98.629
97.143
98.674
97.201
98.677
97.213
98.627
97.116
98. 620
97.121
98. 687
97.234
98.685
97.302
98. 686
97.330
98.724
97. 407
98.776
97. 603
98.800
97. 545

5.408
6.673
5.470
5.750
5.423
5.652
5.247
6.536
5.235
6.513
5.432
5.705
5.458
5.695
5.252
6.502
5.202
6.337
6.197
6.281
6.047
5.130
4.844
4.940
4.747
4.856

98.647
2 97.148
2 98.630
97.102
98.635
97.162
98.680
97.209
98.685
97.220
2 98. 638
2 97.127
2 98.629
97.123
98.692
97.241
98.692
97.315
98.693
97.338
98.731
97.410
98.789
97.628
98.809
97. 668

6.363
5.641
5.420
5.732
6.400
6.633
6.222
5.521
5.202
5.499
6.388
6.683
6.424
6.691
6.232
6.488
6.175
6.311
6.171
5.265
5.020
5.123
4.791
4.890
4.712
4.811

98. 618
97.112
98. 608
97.084
98.626
97.137
98.669
97.198
98. 673
97.210
98.619
97.110
98. 616
97.118
98.681
97.230
98.680
97.300
98. 685
97.326
98.722
97.404
98.772
97.498
98. 796
97.537

6.467
6.713
5.507
5.768
5.436
6.663
5.265
6.542
5.250
5.519
6.463
6.716
5.475
6.701
5.276
5.509
5.222
6.341
5.202
6.289
6.056
6.135
4.858
4.949
4.767
4.872

1,302, 292
1,001,791
1,302,411
1,000,253
1,300,113
1,001,924
1,300,648
1,000,395
1,300,044
990,009
1,301,454
1,001,478
1,301,313 .
1,000,601
1,300,195
1,000,484
1,300,144
1,001,308
1,302,427
1,000,617
.1,299,963
1,001,671
1,300,220
1,000,375
1,302,967
999,904

Apr.
July
Apr.
July
Apr.
July
Apr.
July
May
Aug.
May
Aug.
May
Aug.
May
Aug.
June
Aug.
June
Sept.
June
Sept.
June

6
6
13
13
20
20
27
27
4
3
11
10
18
17
25
24
1
31
8
7
15
14
22

91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91

2,040,665
2,132,812
1,966,959
1,991,086
2,994,374
2,593,837
2,490,122
2,341,879
2,490,413
2,227,873
2, 202,154
2,091,950
2,444,536
2,163,218
2, 072,707
2,196,301
2,711,279.
2,284,339
2,087,769
1,801,388
2,452,358
2, 670,711
2,494,972

1,300,169
1,001,157
1,302,959
1,000.206
1,301,728
1,000,906
1,303,324
999,932
1,302,036
1,002,103
1,299,895
1,000,116
1,302,303
1,001,414
1,300,251
1,000,119
1,304,681
1, 004,485
1,300,093
1,000,488
1,301,552
1,001,657
1,300,223

1,049,129
885,471
964,660
834, 297
1,024, 562
866, 663
1,034,296
882,547
1,054,308
900,756
1,031,912
894,340
1,051,725
911,340
1,051,486
899,556
1,041,258
895,994
1,039,613
891,858
1,014,403
884,513
1,007,368

251,040
116,686
338,299
165,908
277,166
134, 243
269,028
117,385
247,728
101,347
267,983
105,776
250,578
90,074
248,765
100,564
263,423
108,491
260,480
108,630
287,149
117,044
292,855

1,059,672
858,600
1,293,858
996,681
1,132,366
879,109
1,069,363
807,634
931,541
780,282
1,034,948
788,113
1,169,355
918,834
1,011,997
817,228
1,077,552
874,092
1,167,316
923,050
1,037,770
874,515
963,456

240,497
142,657
9,101
3,524
169,362
121,797
233,961
192,398
370,495
221,821
264,947
212,003
132,948
82,580
288,254
182,891
227,129
130,393
132,777
77,438
263,782
127,042
336,767

98.781
97. 617
98.782
97.528
98.808
97.631
98.817
97.643
98.866
97.745
98.855
97.713
98.843
97.684
98.832
97.627
98.853
97. 708
98.902
97.806
98.911
97.844
98.963

4.821
4.912
4.817
4.889
4.716
4.687
4.679
4.663
4.485
4.460
4.531
4.524
4.676
4.581
4.622
4.694
4.538
4.634
4.343
4.340
4.308
4.264
4.103

98.792
97.528
2 98.794
2 97. 534
98.816
97. 637
98.822
97. 649
98.875
97.762
98.868
97.734
98.857
97.694
98.841
2 97. 630
98.8.58
97.715
98.915
97.830
98.920
97.856
98.971

4.779
98.776
4.890
97. 512
4.771
98.774
4.878
97.523
4.684
98.806
4.674
97. 627
4.660
98.814
4.650
97.638
4.451
98.864
4.427
97. 743
4.478
98.849
4.482
97.705
4.522
98.840
4.561
97.678
4.585
98.826
4.688 . 97.619
4.518
98.852
4.520
97.706
4.292
98.892
4.292
97.792
4.273
98.908
4.241
97.841
4.071
98.959

4.842
4.921
4.850
4.900
4.727
4.694
4.692
4.672
4.494
4.464
4.553
4.540
4.589
4.593
4.644
4.710
4.542
4.538
4.383
4.367
4.320
4. 271
4.118

1,300,137
1,001,231
1,300,665
1,000,993
1, 301,917
1,001,376
1,300, 219
1,001,781
1,300,559
1, 000,684
1,300,628
999,830
1,300,586
1,001,304
1,300,671
1,002,520
1,300,885
1,000,184
1,301,347
1.003,682
1,303,564
1,000,356
1,305,477

M
X
hi
K
Cd

Footnotes at end of table.

S
m

h-A

fcO

Summary of information pertaining to Treasury bills issued during the fiscal year 1967-—Continued

[Dollar a m o u n t s i n t h o u s a n d s ]
Maturity value
T e n d e r s accepted

D a t e of
issue

D a t e of
maturity

Days
to
maturity 1

. Total
applied
for

Total
accepted

On
competitive
basis

O n noncompetitive
basis

REGULAR

Si
H
O

Prices a n d rates
Total bids
accepted

For
cash

In
exchange

EquivAverage alent
price
average
per
rate
hun(perdred
cent)

C o m p e t i t i v e b i d s accepted
High
Price
per
hundred

Low

Equivalent
rate
(percent)

Price
per
hundred

Equivalent
rate
(percent)

Amount
maturing
on
issue
d a t e of
new
offering

"^
h^

W
H
Xfl

o
S5

w EEKLY—continued

S)
1967
M a r . 23
30
30
Apr. 6
6
13
13
20
20
27
27
May 4
4
11
11
18
18
25'
25'

1967
Sept.
June
Sept.
July
Oct.
July
Oct.
July
Oct.
July
Oct.
Aug.
Nov.
Aug.
Nov.
Aug.
Nov.
Aug.
Nov.

21
29
28
6
6
13
13
20
19
27
26
3
2
10 . 9
17
16
24
24

182
91
182
91
182
91
183
91
182
91
182
91
182
91
182
91
182.
91
183

2,208,100
•2,525, 556
•1,796,190
2,253,398
1,863,928
•2,534,749
2,002,628
2,510,808
2,174,701
2,363,879
1,865,807
2,103,206
1,812,330
2, 224, 594
1, 786,951
2,141, 561
2,169, 612
2, 080, 619
1,664,829

1,000,191
1,300,354
1, 000,402
1,301,040
1,000,743
1,301,306
1,000,657
1,300, 505
1,000,713
1,300,868
1,000, 257
1,300,949
1,000,332
1,301,014
1,000,103
1,300,565
1,000,647
1, 299,969
1,000,329

887,415
1,026,787
905,217
1,010, 502
903,829
990,280
892,888
1,027,253
892,969
1,041,516
904,202
1,066,380
909,995
1,045,349
895,731
1,040,061
887,129
1,069,855
909,130

112,776
273,567
95,185
290,538
96,914
311,026
107,769
273,252
107, 744
259,352
96,055
234,569
90,337
255,665
104,372
260,504
113,518
230,114
• 91,199

• 798,351
1,046,276
798,703
1,024,265
818,018
1,292,204
' 875,761
955,757
797,714
1,047,830
778,819
981,721
797,706
1,097,259
897,676
1,057,377
859,354
1,019,317
• 847,890

201,840
254,078
201, 699
276,775
182,725
9,102
124,896
344,748
202,999
253,038
221,438
319,228
202,626
203,755
102,427
243,188
141, 293
280,652
152,439

97.975
98.951
97.941
98.995
97.979
99. 037
98. 040
99. 013
98.003.
99. 061
98. 093
99.047
98. 025
99. 072
98. 063
99. 083
98.078
99.117
98.123

4.006
4.151
4.073
3.975
3.997
3.811
3.856
3.903
3.950
3.715
3.772
3.770
3.906
3.672
3.831
3.628
3.803
3.493
3.692

97.988
98.955
97.957
99.002
2 97.988
99. 047
2 98.050
2 99.016
98. 009
2 99. 067
98.106
99. 060
2 98. 038
99. 079
98.069
99.089
98.082
99.126
98.138

3.980
4.134
4.041
3.948
3.980
3.770
3.836
3.893
3.938
3.691
3.746
3.719
3.881
3.644
3.820
3.604
3.794
3.458
3.663

97.968
98.947
97.930
98.990
97.967
99.033
98. 034
99.009
97.998
99. 058
98. 086
99.043
98.016
99.069
98. 056
99.080
98. 075
99.110
98.108

4.019
4.166
4.095
3.996
4. 021
3.825
3.868
3.920
3.960
3. 727
3.786
3.786
3.924
3.683
3.845
3.640
3. 803
3. 521
3. 722

1,000,482
1,304,071
1,000,700
1,300,169
1,000,258
1,302,959 .
999,944
1,301,728
1,000,709
1,303,324
1,000,479
1,302,036
1,000,791
1, 299,895
1,000,135
1,302,303
1,000,017
1, 300,251
999,619

o
^
H

S3
H

>
Ul

June

1
1
8
8
15
15
22
22
29
29

Aug.
Nov.
Sept.
Dec.
Sept.
Dec.
Sept.
Dec.
Sept.
Dec.

31
30
7
7
14
14
21
21
28
28

91
182
91
182
91
182
91
182
91
182

2,404,962
1,972,994
2,052,883
2,107,299
2,107,047
1,978, 734
2,388,742
1,957, 621
1,912, 486
1,622, 689

1,300,390
1,000,993
1,300,021
1,000,625
1,300,002
1,000,134
1,299,958
1,000,050
1,300, 206
1,000,439

1,071,835
902,954
1,075,766
897,775
1,053,872
889,220
1,006, 200
849,673
1,068,924
890,608

228,555
98,039
224, 255
102,850
246,130
110,914
293,758
150,377
231, 282
109,831

959,164
818,966
998,814
778,040
950,817
795,087
967,426
763,309
989,389
766,169

341,226
182,027
301,207 222,585
349,185
205,047
332,532
236, 741
310,817
234, 270

1,304, 681
1,004,494
1,300,093
1,000, 599
1,301,552
1,000,868
1,300,223
1,006,055
1,300, 354
1,001,292

99.121
98.113
99.144
98.100
99.114
98. 081
99. 097
98. 058
99.125
98. 003

3.478
3.733
3.385
3.758
3.506
3.795
3. 572
3.841
3.463
3.950

99.133
98.124
99.150
98.106
99.123
98.089
99.105
98. 069
99.140
98.038

3.430
3.711
3.363
3.746
3.469
3.780
3. 541
3.820
3.402
3.881

99.118
98.105
99.139
98.091
99.105
98. 074
99. 094
98. 054
99.100
97. 982

3.489
3.748
3.406
3.776
3.541
3.810
3.584
3.849
3.560
3.992

96.916
96. 408
, 97.182
96.167
97. 202

5.338
5.433
5.483
5.586
5.245

2 97. 013
2 96. 542
2 97. 203
96. 206
97. 209

5.170
6.231
5.443
5.530
5.233

96.875
96.364
97.169
96.130
97.192

5.409
5.500
5.509
5.640
5.265

.
.
.
.
.

98. 795

4.295

98. 841

4.131

98.788

4.320

TAX ANTICIPATION

1966
A u g . 26
26
O c t . 18
18
D e c . 12
196?7
M a r . 13

1967
Mar. 22
A p r . 21
A p r . 21
J u n e 22
J u n e 22

208 $2,950,186 $2,006,066 $1, 699,330
1, 489,945 1,003, 265
238
844,890
185 2, 279, 448 1, 506,853 1, 268,505
274
2,456, 636 2, 006, 632 1,783,146
192
1, 661,885
800,885
787,850

J u n e 22

101

3,928,004

2,706,765

2,477,961

$306, 736 $2,006,066
158,375
1,003, 265
238,348
1, 506,853
223,486
2,006, 632
13,035
800,885
228,804

2, 706, 765

trj

REGULAR MONTHLY

td
1967
J u l y 31 .
A u g . 31
J u n e 30
S e p t . 30
J u l y 31
O c t . 31
Mar. 31
254 <Apr. 30
M a y 31
30 A u g . 31
30 N o v . 30

1966?
13
Aug.
31
S e p t . 30
30
Oct. 31
31
Nov.

365 $1,868,947
365 2, 236,801
273
984, 688
365
1, 472,833
273
1,076,070
365
2, 272,085
126 1
156 ^ 2,986, 767
187
274
1,183,337
365
2,163,672

$994,844
1,000,051
500, 058
900,113
500,370
904, 640

$959,973
966,983
471,802
833,839
484,960
862, 224

$34,871
33,068
28,256
66, 274
15,410
42,416

1, 202,346

1, 081,188

121,158

1, 202, 296

500, 717
900,493

486,830
861.458

13,887
39. 035

430,637
738.897

$749,370 $245,474
770,814
229,237
449,627
50,431
732,008
168,105
410,306
90,064
835, 691
68,949
50
70,080
161.596 .

94.967
94. 075
95. 596
94.113
95. 778
94.379

4.964
5.844
5.808
5.806
5.567
5.544

2 94. 991
2 94.110
2 95. 629
2 94.156
95. 799
2 94.385

4.940
6.809
5.764
5.764
5.540
5.538

97. 691

5.318

2 97. 731

6.226

97.679

5.346

95. 774
94. 404

5.552
5.519

95. 787
94. 419

5.535
5. 505

95. 760
94. 402

5. 571 \
5.521 [

94. 943
94. 056
95. 564
94.074
95. 764
94. 374

4.988
5.863
5.850
5. 845
5. 586
5.549

$1,000, 247
1,000,277
\ 1. 000,499
/
\
999,948
/

.
1,000,580

Footnotes at end of table.

Summary of information pertaining to Treasury hills issued during the fiscal year i^ ^7—-Continued
[DoUar amounts in thousands]
Prices a n d rates

Maturity value
Total bids
accepted

T e n d e r s accepted
D a t e of
issue

D a t e of
niaturity

Days
to
maturity I

Total
appUed
for

Total
accepted

On
competitive
basis

O n noncompetitive
basis

For
cash

In
exchange

EquivAverage alent
price
average
per
rate
hun(percent)
dred

»-*
CO

C o m p e t i t i v e b i d s accepted

Price
per
hundred

Amount
maturing
<)n
issue
d a t e of
Equivnew
alent offering
rate
(percent)

Low

High
Equivalent
rate
(percent)

Price
per
hundred

1967
S e p t . 30
3 3 D e c . 31
O c t . 31
31
31 J a n . 31,1968
F e b . 28 N o v . 30,1967
F e b . 29,1968
28
Mar. 31 D e c . 31,1967
1968
Mar. 31
31
M a y 1 J a n . 31
1 3 A p r . 30
F e b . 29
31
31 M a y 31
J u n e 30 Mar. 31
30 J u n e 30

270
366
273
365
276
366
276

1,093,326
1,665,397
1,316,060
1,608,347
1,306,714
2,395,774
1,299,443

500,050
901,030
501,100
900,967
500,394
900,591
600,091

487,935
853,508
484,490
861,150
485,130
863,337
481,955

12,115
47,522
16,610
39,817
15,264
37,254
18,136

499,962
702,030
363,835
779,006
408,895
749, 545
409,853

88
199,000
137,265
121,961
91,499
151,046
90,238

96.310
95.113
96.469
95.360
96.396
95.226
96.885

4.920
4.820
4.656
4.577
4.718
4.696
4.077

96.367
95.160
96. 488
95. 407
96.406
95.234
96.899

4.844
4.774
4.631
4.530
4.705
4.688
4.059

96.284
95.083
96.458
96.316
96.387
95.222
96.872

4.956
4.850
4.671
4.620
4.730
4.700
4.095

366
276
366
274
366
276
366

1,669,177
1,265,570
1,637,141
1,132,640
1,398,396
1,182,829
1,770,897

900,047
500,445
902, 021
500,040
900,146
500,329
1,000, 647

859,875
485,161
867,316
485,457
875,234
482,200
962,341

40,172
15,284
34,705
14,583
24,912
18,129
38,206

748,276
370,330
709,768
388,184
679,426
400,023
776,800

151,771
130,115
192,253
111,856
220,720
100,306
224,747

95.858
97.065
96.104
96.998
96.001
96.392
95.189

4.074
3.843
3.833
3.945
3.934
4.723
4.732

95.870
97.089
2 96.122
97.028
96.030
2 96.448
95.298

4.062
3.811
3.814
3.905
3.905
4.650
4.625

95.839
97.044
96.066
96.971
95.966
96.340
95.080

3.870
3.870
3.980
3.968
4.791
4.839

\
/
\
f
\
/
1

1,001,028
1,001,391
1,000,172
6 1,000,026

1 The 13-week bUls are additional issues of bUls with an original maturity of 26 weeks,
except that when the date of maturity of either a 13rweek or 2&-week issue is on the last
day of a month the biUs are additional issues of biUs with an original maturity of 1 year.
The 9-month biUs are additional issues of bUls with an original maturity of 1 year.
2 Relatiyely smaU amoimts of bids were accepted at a price or prices somewhat above
the high shown. However, the higher price or prices are not shown in order to prevent
an appreciable discontinuity in the range (covered by the high to the low prices shown)
which would make it misrepresentatlve.
8 Issue date on biUs is last day of previous month.
4 An additional $400,782,000 each of 3 series of 1-year issues issued as a strip for cash
(see press release dated Nov. 10, 1966, in this exhibit).
« An additional $400,782,000 of the strip of bUls issued Nov. 25, 1966, matured.
NOTE.—The usual timing with respect to weekly issues of Treasury biUs is: Press
release inviting tenders, 8 days before date of issue; and closing date for the receipt of

tenders and press release announcing results of auction, 3 days before date of issue.

"Td

REGULAR MONTHLY—continued
1967
Jan.
3

S3
H

6.093 1

1 51,000,731
/
\ B 1,001,208
/
600,068
1,001,443

Figures are final and may differ from those shown in the press release announcing
preliminary results.
For each issue noncompetitive tenders (without stated price) for $200,000 or less from
any 1 bidder were accepted in fuU at the average price of accepted competitive bids,
except as foUows: $400,000 or less for the 208-day, 247-day, and 101-day tax anticipation
biUs; $300,000 or less for the 185-day tax anticipation biUs;- and $120,000 or less for the
strip of biUs issued Nov. 26, 1966.
AU equivalent rates of discount are on a bank-discount basis.
Qualified depositaries were permitted to make payment by credit in Treasury tax
and loan accoimts for 100 percent of the tax anticipation series issued Aug. 26 and Oct.
18, 1966, and for not more than 50 percent of the tax anticipation series issued Mar. 13,
1967, aUotted to them for themselves and their customers up to any amoimt for wtiich
they were qualified in excess of existuig deposits when so notified by the Federal Reserve
bank of their district.

s
H

W
0
SJ

1
S3

S3
fel

d
S3

EXHIBITS

175

Regulations
Exhibit 4.—First amendment, February 24, 1967, of Department Circular No. 300,
general regulations with respect to U.S. securities
TREASURY

DEPARTMENT,

Washington, February 24, 1967,
Section 306.0 of Department Circular No. 300, Third Revision, dated December
23, 1964 (31 CFR Part 306), is hereby amended, as follows:
SEC. 306.0 Applicability of regulations.—These regulations apply to all United
States transferable and nontransferable securities,^ other than United States
Savings Bonds and United States Savings Notes, to the extent specified in these
regulations, the offering circulars or special regulations governing such securities.
JOHN K . CARLOCK,

Fiscal Assistant Secretary.

Exhibit 5.—Third amendment, March 3, 1967, of Department Circular No. 418,
United States of America Treasury bills
TREASURY DEPARTMENT,

Washington, March 3, 1967.
Department Circular No. 418, Revised, dated February 23, 1954 (31 CFR 309),
as amended, is hereby further amended by revising section 309.5 as follows:
SEC. 309.5 Acceptance of Treasury bills for various purposes.—
(a) Acceptable as security for public deposits.—Treasury bills will be
acceptable at maturity value to secure deposits of public moneys.
(b) Acceptable in payment of taxes.—The Secretary of the Treasury,
in his discretion, when inviting tenders for Treasury bills, may provide
that Treasury bills of any series will be acceptable at maturity value,
whether at or before maturity, under such rules and regulations as he
shall prescribe or approve, in payment of income taxes payable under
the provisions of the Internal Revenue Code. Treasury bills which by
the terms of their issue are acceptable in payment of income taxes may
be surrendered to any Federal Reserve bank or branch, acting as fiscal
agent of the United States, or to the Office of the Treasurer of the
United States, Washington, D.C. 20220, fifteen days or less before the
date on which the taxes become due.
(i) In the case of payments of corporation income taxes (including
payments of estimates) for taxable years ending on or after December 31, 1967, the bills shall be accompanied by a preinscribed
Form 503, Federal Tax Deposit, Corporation Income Taxes, on
which the face amount of the bills being surrendered should be
entered in the space provided for the amount of the tax deposit.
The office receiving the bills and form 503 will acknowledge receipt
of the bills to the owner corporation and effect the tax deposit
on the date on which the taxes become due. Accordingly, in these
cases, it will no longer be necessary to submit receipts for Treasury
bills to the Internal Revenue Service with the corporation's declaration or tax return.
(ii) In the case of payments of all other income taxes the office
receiving the bills will issue receipts (in duplicate) to the owners.
The original of the receipt shall be submitted, by the owner, in
lieu of the bills, together with the tax return, to the District Director,
Internal Revenue Service.
(c) Discounting by Federal Reserve banks of notes secured by Treasury
hills.—Notes secured by 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.
' See 1965 annual report p. 208, footnote 2.

176

19 67 REPORT OF THE SECRETARY OF THB TREASURY
(d) Acceptable in connection wiih foreign obligations held by United
States.—Treasury bills will be acceptable a t m a t u r i t y , b u t n o t before,
in p a y m e n t of interest or of principal on account of obligations of
foreign governments held by t h e United States.
J O H N K . CARLOCK,

Fiscal Assistant Secretary ofthe Treasury.

Exhibit 6.—Second a m e n d m e n t , August 16, 1966, of Department Circular N o . 530,
regulations governing U.S. savings bonds
TREASURY DEPARTMENT,

} •
. Washington, August 16, 1966.
D e p a r t m e n t Circular No. 530, N i n t h Revision (31 C F R P a r t 315), d a t e d
December 23, 1964, as amended, is hereby further revised and amended as follows:
SEC. 315.35 Payment or redemption.
(a) GeneraU—Payment of a savings bond will be m a d e t o t h e person or persons
entitled thereto under the provisions of these regulations upon presentation
a n d surrender of tlie bond with an appropriate request for p a y m e n t , except
t h a t checks in p a y m e n t will n o t be delivered t o addresses in areas with respect
to which t h e Treasury D e p a r t m e n t restricts or regulates the delivery of checks
drawn against funds of the United States or any agency or instrumentality
thereof.^ P a y m e n t will be m a d e without regard to a n y notice of adverse claims
to a bond and no stoppage or caveat against p a y m e n t in accordance with t h e
registration will be entered. P u r s u a n t to its terms, a savings bond m a y n o t be
called for redemption b y t h e Secretary of t h e Treasury prior to t h e m a t u r i t y
date, or the extended m a t u r i t y date for bonds having an optional extension
period, b u t m a y b e ' r e d e e m e d in whole or in p a r t a t t h e option of t h e owner
prior to t h e m a t u r i t y date or t h e extended m a t u r i t y date, under the terms and .
conditions set forth in t h e offering circular for each series and in accordance
with t h e provisions of these regulations, following presentation a n d surrender
as provided in this s u b p a r t (H). At or after m a t u r i t y , or extended m a t u r i t y for
bonds having an optional extension period, the bond will be paid at t h e mat u r i t y value or t h e extended m a t u r i t y value fixed b y t h e terms of t h e circular
and i n no greater aniount.
(b) Series E.—A Series E bond will be redeemed a t any time after two m o n t h s
from issue date a t t h e appropriate redemption value shown in t h e revision of
D e p a r t m e n t Circular No. 653 current a t t h e time of redemption.
(c) Series H.—A Series H bond will be redeemed a t par after six m o n t h s from
issue date. However, a bond received for redemption during the calendar m o n t h
preceding an interest p a y m e n t date will not be redeemed until t h a t date. At or after
m a t u r i t y , or extended m a t u r i t y for bonds having an optional extension period, a
bond presented for redemption will be paid a t par.
(d) Series J.^—Prior to m a t u r i t y , a Series J bond will be redeemed a t the a p propriate redemption value shown in D e p a r t m e n t Circular No. 906 (31 C F R
P a r t 333). At or after m a t u r i t y , t h e bond will be paid a t its face a m o u n t as provided for in t h a t circular.
(e) Series K.
'
(1) General.—Prior to m a t u r i t y , a Series K bond will be redeemed a t the appropriate redemption value shown in D e p a r t m e n t Circular No. 906 (31 C F R
P a r t 333). However,, a bond received for redemption or p a y m e n t during t h e
calendar m o n t h preceding an interest p a y m e n t date will n o t be redeemed or
paid until t h a t date. At or after m a t u r i t y , t h e bond will.be paid a t par, a n d
final interest, in t h e a m o u n t provided for in t h a t circular, will be paid with the
principal.
(2) Redemption at par.
(i) A bond of Series K issued in exchange for m a t u r e d bonds of Series E under
the provisions of D e p a r t m e n t Circular No. 906 is payable a t par.
(ii) A bond of Series K registered in t h e n a m e of a n a t u r a l person or persons
in their own right will be paid a t par upon t h e request of t h e person entitled to
t h e bond upon the d e a t h of t h e owner or either co-owner.
1 See footnote 9 of Department Circular No. 530, Ninth Revision (31 CFR Part 315).
2 See footnote 3 of Departnient Circular No. 530, Nmth Revision (31 CFR Part 316).

EXHIBITS

177

(iii) A bond of Series K held by a trustee, life tenant, or other fiduciary (exclusive of trustees of a pension, retirement, investment, insurance, a n n u i t y or
similar fund, or employees' savings plan) will be paid a t p a r upon appropriate
request upon t h e termination, in whole or in p a r t , of a trust, life tenancy, or
other fiduciary estate by reason of the death of a n a t u r a l person, b u t in the case
of partial termination, redemption a t par will be made t o the extent of not more
'than the pro r a t a portion of the t r u s t or fiduciary estate so terminated. Bonds of
Series K held b y a financial institution in its n a m e as trustee of its common
t r u s t fund will be paid a t p a r upon t h e request of the fiduciary upon t h e termination, in whole or in p a r t , of a participating t r u s t b y reason of t h e death of a
n a t u r a l person, to t h e extent of not more t h a n the pro r a t a portion of the common
t r u s t fund so terminated.
T h e option t o receive p a y m e n t a t p a r under subparagraph (e) (ii) and (iii)
of this section m a y be exercised b y a signed request for p a y m e n t or by express
written notice, in either case specifying t h a t redemption a t par is desired. P a y ment m a y be postponed to t h e second interest pa3^ment date following the date
of death, if so requested; otherwise, p a y m e n t will be made in regular course.
A death certificate or other acceptable evidence of death m u s t be submitted.
I n no case of redemption at p a r before maturity^ under subparagraph {e) {ii) and
{Hi) will interest be payable beyond the second interest payment date following the
date of death.
S E C . 315.36 Withdrawal of request for redemption.—An owner or a coowner
who has presented a n d surrendered a bond t o t h e Treasury D e p a r t m e n t or a
Federal Reserve bank or branch or to an authorized paying agent, with an appropriate request for payment, m a y withdraw such request if notice of intent to
withdraw is given to a n d received by t h e same agency to which the bond was
jDresented for p a y m e n t prior to t h e issuance of a check in paj^-ment or prior to
p a y m e n t by t h e authorized paying agent. Such request m a y be withdrawn under
the same conditions by t h e executor or administrator of t h e estate of a deceased
owner or b y t h e person or persons who would have been entitled to t h e bond
under s u b p a r t 0 , or by the legal representative of the estate of a person under
legal disability, unless presentation and surrender of the bond have cut off rights
of survivorship under the provisions of s u b p a r t M or N .
S E C . 315.37. [Reserved]
G E O R G E F . STICKNEY,

Deputy Fiscal Assistant Secretary of ihe Treasury.
Footnotes 1 and 6 (printed in t h e 1965 annual report as footnote 1, page 237
a n d footnote 1, page 246, respectively) are revised and amended as follows:
1 All series E bonds have a 10-year optional extension period. Those bearing issue dates of May 1, 1941,
through May 1,1949, have a second 10-year optional extension period. Series H bonds bearing issue dates of
June 1, 1952, through May 1, 1959, have a 10-year optional extension period. Other bonds do not have this
feature.
6 The final interest on Series H bonds bearing issue dates of June 1, 1952, through Jan. 1, 1957, covers a
period of 2 months, from 9>'^ years to 9 years 8 months. The final interest for bonds bearing issue dates of
Feb. 1, 1957, through May 1,1959, covers a period of 6 months, from ^\^ years to 10 years. Bonds so dated
will continue to earn interest for a 10-year optional extension period during which time interest will accrue
and be paid beginning 6 months from the original maturity date, in accordance with the provisions of
Department Circular No. 905, current revision. Since May 1, 1957, the only current income bonds on sale
are those of Series H. See Department Circular No. 906, as amended, for Series K.

Exhibit 7.—Third a m e n d m e n t , F e b r u a r y 24, 1967, of Department Circular No. 530,
regulations governing U.S. savings bonds
TREASURY DEPARTMENT,

Washington, February 24, 1967.
Sections 315.0, 315.2(a), and 315.16 of D e p a r t m e n t Circular N o . 530, N i n t h
Revision (31 C F R P a r t 315), dated December 23, 1964, as amended, are hereby
revised a n d amended, as follows:
S E C . 315.0. Applicability of regulations. These regulations apply to all United
States Savings Bonds of whatever series designation, bearing any issue dates
whatever, to t h e extent specified herein a n d in t h e offering circulars governing
such bonds. T h e provisions of these regulations with respect to bonds registered
in t h e names of certain classes of individuals, fiduciaries, and organizations are
equally applicable t o bonds to which such individuals, fiduciaries, and organiza-

178

19 67 REPORT OF THE SECRETARY OF THE. TREASURY

tions are otherwise shown to be entitled under these regulations. United States
Savings Notes, issued under authority of sections 18 and 20 of the Second
Liberty Bond Act, as amended (31 U.S.C. 753 and 754b), and offered in Department Circular, Public Debt Series No. 3-67 (31 CFR Part 342), are also governed
by these regulations) subject to the provisions of the offering circular.^ The term
"savings bonds" or "bonds," as used in these regulations, refers to United States
Savings Bonds and, as applicable, to United States Savings Notes. The provisions
of Department Circular No. 300, current revision (31 CFR Part 306), have no
application to the securities governed by these regulations.
SEC. 315.2(a), "Authorized issuing agent" means an incorporated bank, trust
company, savings bank, savings and loan association, other organization, or
agency of the United States qualified as an issuing agent under the provisions of
Department Circular, Public Debt Series No. 4-67 (31 CFR Part 317).2
SEC. 315.16 Pledge under Department Circulars No. 154 ciTid Puhlic Debt Series
No. 4-67.'—A bond may be pledged by the registered owner in lieu of surety
under the provisions of Department Circular No. 154, current revision (31 CFR
Part 225), if the bond approving officer is the Secretary of the Treasury, in which
case an irrevocable power of attorney shall be executed authorizing the Secretary
of the Treasury to request payment. A bond may also be deposited as security
with a Federal Reserve bank under the provisions of Department Circular,
Public Debt Series No. 4-67 (31 CFR Part 317).2
JOHN K . CARLOCK,

Fiscal Assistant Secretary,

Exhibit 8.—Second amendment, August 19, 1966, of Department Circular No.
653, offering of U.S. savings bonds, series E
TREASURY

DEPARTMENT,

Washington, August 19, 1966.
Section 316.6, subsection (a), of Department Circular No. 653, Seventh Revision, dated March 18, 1966, as amended (31 CFR Part 316), is hereby amended by
renumbering subparagraph (2) as (3), and insertion of the following:
Sec. 316.6(a) Over-the-counter for cash, * * *
(2) Bonds registered in names of trustees of employees^ savings plans. At such
incorporated bank, trust company, or other agency, duly qualified as an issuing
agent, provided the agent is trustee of an approved employees' savings plan
eligible for the special limitation in section 316.5(c) and prior approval to issue
the bonds is obtained from the Federal Reserve bank of the agent's district.
GEORGE F .

STICKNEY,

Deputy Fiscal Assistant Secretary of the Treasury.

1 See exhibit 12.
2 See exhibit 13.

EXHIBITS

179

Exhibit 9.—Third amendment, February 23, 1967, of Department Circular No.
653, offering of U.S. savings bonds, series E
TREASURY DEPARTMENT,

Washington, February 23, 1967.
Section 316.8 of Department Circular No. 653, Seventh Revision, dated March
18, 1966, as amended (31 CFR Part 316), is hereby further amended and revised,
as follows:
SEC. 316.8 Extended terms and improved yields for outstanding bonds.—(a)
Optional extension privileges. * * *
(4) Bonds with issue dates June 1, 1959, or thereafter.—Owners of Series E
bonds with issue dates of June 1, 1959, or thereafter, have the option of retaining
their bonds for an extended maturity period of 10 years.^
(b) Improved yields."^ * * *
(5) Bonds with issue dates June 1, 1959, through Novemher 1, 1959.—The investment yield on all outstanding Series E bonds with issue dates of June 1, 1959,
through November 1, 1959, for the remaining period to the maturity date, was
increased by ^o of 1 percent per annum if held to original maturity and by lesser
amounts if redeemed earlier. The investment yield for the extended maturity period
will be approximately 4.15 percent per annum compounded semiannually for each
half-year period. See table below for redemption values and investment yields.
(6) Bonds with issue dates December 1, 1959, or thereafter.—The investment
yield on all outstanding Series E bonds with issue dates of December 1, 1959,
through November 1, 1965, for the remaining period to the maturity date, was
increased by Mo of 1 percent per annum if held to original maturity and by lesser
amounts if redeemed earlier. The investment 3aeld for the extended maturity
period for bonds bearing issue dates of December 1, 1959, or thereafter, will be
approximately 4.15 percent per annum compounded semiannually for each
half-year period: Provided, however, That the Secretary of the Treasury may at
any time prior to their maturity prescribe a different yield for such bonds for
which no tables of redemption values and investment yields for the extended
maturity period have been previously published. Tables of redemption values
and investment yields, which are a part of this circular, will be published periodically for the extended maturity period for bonds bearing issue dates of December 1,
1959, or thereafter.
JOHN K .

CARLOCK,

Fiscal Assistant Secretary.

» See footnote 8, Department Circular No. 653, Seventh Revision (31 C F R Part 316).
2 See footnote 2, Department Circular No. 653, Seventh Revision (31 CFR Part 316).
277^68—68
14

180

19 67 REPORT OF T H E SECRETARY OF T H E

TREASURY

B O N D S B E A R I N G I S S U E D A T E S F R O M J U N E 1 T H R O U G H N O V E M B E R 1, 1959
Issueprice...
Original maturity
value-_

$18.75: $37.50

$150.00

$375.00

$750.00

$7,500

100.00

200.00

500.00

1,000.00

10,000

A p p r o x i m a t e investm e n t jdeld

25.00

50.00

(1) R e d e m p t i o n values d u r i n g each half-year period i
(values increase on first d a y of period shown)

Period after issue
date

First H y e a r
3/^ to l y e a r
1 to I H years
I H t o 2 years
2 to 2 H years
2 H to 3 years
3 to 3 H years
3 H to 4 years
4 to 4 H years
4 H to 5 years
5 to 5H years
5H to 6 years
6 to 6 H years
6 H to 7 years

$75.00

$18.75
18.91
19.19
19.51:
19.90.
20.28
20.66:
21.07
21.50
21.95,
22.40
22.86;
23.32
23.79>

$37.50
37.82
38.38
39.02
39.80
40.56
41.32
42.14
43.00
43.90
44.80
45.72
46.64
47.58

$75.00 $150.00 $375.00
75.64
151.28 378.20
76.76
153.52
383.80
78.04
156.08 390.20
79.60
159.20
398.00
81.12
162.24
405.60
82.64
165.28
413.20
84.28
168.56
421.40
86.00
172.00
430.00
87.80
175.60
439.00
89.60
179.20
448.00
91.44
182.88
457.20
93.28
186.56
466.40
95.16
190.32
475.80

$750.00
756.40
767.60
780.40
796.00
811.20
826.40
842.80
860.00
878.00
896.00
914.40
932.80
951.60

$7,500
7,564
7,676
7,804
7,960
8,112
8,264
8,428
8,600
8,780
8,960
9,144
9,328
9,516

(2) O n
(3) O n
purchase
current
price
redempfrom
tion v a l u e
issue d a t e
from beto beginginning
ning of
of each
each halfhalf-year
year
period i to
period ^
maturity
Percent
0.00
1.71
2.33
2.67
3.00
3.16
3.26
3.36
3.45
3.53
3.59
3.64
3.67
3.70

Percent
*3.75
*3.89
*3.96
*4.01
*4.01
*4.03
*4.05
*4.06
*4.06
*4.04
*4.03
*4.02
*4.01
t4.43

R e d e m p t i o n values a n d i n v e s t m e n t yields to m a t u r i t y on basis of D e c e m b e r 1, 1965, revision

7 to 7H years
$24. 29 $48. 58
7H years to 7 years
and 9 months.-. 24.83 ' 49.66
MATURITY
VALUE
(7 years and 9
months from
issue date)
25.13 50.26
Period after
maturity date

$97.16 $194. 32 $485. 80

$971. 60

$9,716

3.73

4.58

99.32

198. 64

496. 60

993. 20

9,932

3.78

4.86

100.52

201.04

502.60

1,005.20

10,052

EXTENDED MATURITY

3.81 . . .
(b) to extended
maturity

PERIOD

$25.13 $50. 26 $100. 52 $201. 04 $502.60 $1,005. 20
F i r s t H year
25.65
102. 60 205. 20 513.00
1,026.00
51.30
H t o 1 year.
26.18
104. 72 209. 44 523. 60 1,047.20
52.36
1 to I H years
26.73
106. 92 213. 84 534. 60 1,069. 20
53.46
I H to 2 years
27. 28 54.56
109.12 218. 24 545. 60 1,091. 20
2 to 2 H years
27. 85 55.70
111. 40 222. 80 557. 00 1,114. 00
2 H to 3 years
568. 60 1,137. 20
28.43
113. 72 227.44
56.86
3 tb 3 H years
580. 40 1,160. 80
29.02
116. 08 232.16
58.04
3 H to 4 years
29.62
118. 48 236. 96 592. 40 1,184. 80
59.24
4 t o 4 H years
30.23
120. 92 241. 84 604. 60 1, 209. 20
60.46
4 H to 5 years
617. 20 1,234.40
30. 86
123. 44 246.88
61.72
5 to 5 H years
630. 00 1,260.00
31.50 : 63.00 126. 00 252.00
5H to Oyears
32.15
128. 60 257. 20 643.00
1, 286.00
64.30
6 to 6 H years
656.40
32.82
131. 28 262.56
1,312.80
65.64
6 H to 7 years
670. 00 1,340.00
33.50
134. 00 268.00
67.00
7 to 7 H years
34.20
136. 80 273. 60 684. 00 1,368.00
68.40
7 H to 8 years
34.91
139. 64 279. 28 698. 20 1,396. 40
69.82
S t o 8 H years
35.63 • 71.26 142. 52 285. 04 712. 60 1,425. 20
8 H to 9 years
.
36.37
72. 74 • 145. 48 290. 96 727. 40 1,454. 80
9 to 9 H years
37.12
74. 24 148. 48 296. 96 742. 40 1,484.80
9 H to 10 years
EXTENDED
MATURITY
V A L U E (10
y e a r s from
original m a t u rity d a t e 2)
37.89 75.78
151.56
303.12 757.80
1,515.60

$10,052
10, 260
10,472
10,692
10,912
11,140
11,372
11,608
11,848
12,092
12,344
12,600
12,860
13,128
13,400
13,680
13,964
14,252
14,548
14,848

3.81
3.83
3.85
3.87
3.88
3.90
3.91
3.92
3.93
3.94
3.95
3.95
3.96
3.97
3.97
3.98
3.99
3.99
3.99
4.00

15,156

4.00

4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.14
4.14
4.14
4.14
4.15

* Yield from beginning of each half-year period to m a t u r i t y at original m a t u r i t y v a l u e prior to t h e D e c e m ber 1, 1965, revision.
t Y i e l d from effective d a t e of t h e D e c e m b e r 1, 1965, revision to m a t u r i t y d a t e .
1 3 m o n t h period in t h e case of t h e 7]ri year to 7 year a n d 9 m o n t h period.
217 years a n d 9 m o n t h s from issue d a t e .

EXHIBITS

181

Exhibit 10.—Second a m e n d m e n t , August 16, 1966, of Department Circular No.
905, offering of U.S. savings bonds, series H
TREASURY DEPARTMENT,

Washington, August 16, 1966.
D e p a r t m e n t Circular N o . 905, F o u r t h Revision (31 C F R P a r t 332), dated
April 7, 1966,^ as revised and amended, is hereby further revised and amended
as follows:
SEC. 332.2 Description of bonds. * * *
(d) Term.—A Series H bond will be dated as of the first day of the m o n t h
in which p a y m e n t therefor is received by an agent authorized to issue such bonds.
This date is the issue date and the bond will m a t u r e and be payable ten years
from such issue date. The bond m a y not be called for redemption by the Secretary
of the Treasury prior to maturity, b u t m a y be redeemed A T P A R after 6 months
from issue date as provided for in section 332.10. The Treasury D e p a r t m e n t
m a y require reasonable notice of presentation of a bond for redemption prior
to m a t u r i t y or extended m a t u r i t y .
SEC. 332.8 Extended term and improved yields for outstanding bonds.
(a) Extended maturity period for bonds wiih issue dates J u n e 1, 1952, through
M a y 1, 1959.^—Owners of Series H bonds with issue dates of J u n e 1, 1952, through
J a n u a r y 1, 1957, have the option of retaining their bonds for an extended maturity period of ten years. Owners of Series H bonds with issue dates of February
1, 1957, through M a y 1, 1959, are hereby granted the option of retaining their
bonds for an extended m a t u r i t y period of ten years.
(b) Improved yields. * * *
(3) Bonds wiih issue dates February 1, 1957, through May 1, 1959.^—The investment yield on outstanding Series H bonds with issue dates of February 1,
1957, through M a y 1, 1959, for the remaining period io the maturity date was
increased by four-tenths of 1 percent per a n n u m if held to original m a t u r i t y
and by lesser a m o u n t s if redeemed earlier, ' i h e increase, on a graduated basis,
began with the first interest period starting on or after December 1, 1965. T h e
investment yield for the extended inaturity period will be approximately 4.15
percent per a n n u m for each half-year period.
(4) Bonds with issue dates J u n e 1, 1959, through Novemher 1, 1965.—The inv e s t m e n t yield on outstanding Series H bonds with issue dates of J u n e 1, 1959,
t h r o u g h November 1, 1965, was increased by four-tenths of 1 percent per a n n u m
if held to original maturity and by lesser a m o u n t s if redeemed earlier. The increase, on a graduated basis, began with the first interest period starting on or
after December 1, 1965.
SEC. 332.10 Redemption or payinent.—Prior to maturity, or extended m a t u r i t y
for bonds having an extended m a t u r i t y period, a Series H bond wili be redeemed
A T P A R a t the option of the owner, in whole or in part, in the a m o u n t of an
authorized denomination or multiple thereof, after six m o n t h s from issue date,
upon presentation and surrender of the bond with a duly executed request for
p a y m e n t to (1) a Federal Reserve bank or branch, (2) the Office of the Treasurer
of t h e United States, Securities Division, Washington, D.C. 20220, or (3) the
B u r e a u of t h e Public Debt, Division of Loans and Currency Branch, 536 South
Clark Street, Chicago, Illinois 60605. However, a bond received for redemption
or p a y m e n t by an agency during the calendar m o n t h preceding an interest
p a y m e n t date will n o t be redeemed or paid until t h a t date. At or after m a t u r i t y ,
or extended m a t u r i t y for bonds having an extended m a t u r i t y period, a bond
presented for redemption will be paid a t par.
G E O R G E F . STICKNEY,

Deputy Fiscal Assistant Secreiary of the Treasury.

1 See 1966 annual report, pages 259-79.
2 See footnote 6 of Department Circular No. 905, Fourth Revision.
3 The tables incorporated herein, arranged according to issue dates, show the current schedules of interest
payments and investment yields.

182

19 67 REPORT OF THE SECRETARY OF THE TREASURY

T A B L E S OF CJIECKA ISS'JKD AND INVESTMENT YIELDS FOR UNITED STATES SAVINGS BONDS OF S E R I E S U BEARING
ISSUE D A T E S OF FEBRUARY 1, 1957 THROUGH M A Y 1, 1959

Each tabic shows: (i) Thc amounts of interest check payinents during thc orighial maturity period and during
the 10-year extension period, on bonds bearing issue dates covered by thc table; (2) the approximate investment yield
on the face value from issue date to each interest payment date; and (3) thc approximate investment yield on thc
face value from each i nterest payment date to next maturity. Yields are expressed in terms of rate per annum, compounded semiannually.
T A B L E 13-A—BONDS BEARING ISSUE D A T E S F R O M FEBRUARY 1 T H R O U G H M A Y 1,

(

Issue price
—
Redemption > and
value
,.

maturity

Period of time bond is held after
issue date

Vz year...
1 year
1 Vl years.
2 years...
2y2 years.
3 years...
3}^ years.
4 years—.
iVi years.
5 years...
5^^ years.
6 years...
61.^ years.
7 years.-.
7}^ years.
8 years...
S^i years.
9 years...

$500

$1, 000

$5, 000

$10, 000

500

1,000

5, 000

10, 000

(1) Amounts of interest checks for each
denomination

$4.00
7.25
8.45
8.45
8.^5
8.70
8.70
8.70
8.70
8.70
9.90
9.90
9.90
9.90
9.90
10.50
10.50
10.50

$8.00
14.50
16.90
16. SO
16. SO
17.40
17.40
17.40
17.40
17.40
19.80
19.80
19.80
19.80
19.80
21.00
21.00
21.00

$40.00
72.50
84.50
84.50
84.50
87.(0
87.(0
87.(0
87. 00
87.00
99.03
99.00
99.03
99.03
99.03
105.03
.105. 00
105. 00

145
169
169
169
174
174
174
174
174
198
.198
198
198
198
210
210
210

1957

Approximate investment
yield on face valuet

(2) From
(3) From
Issue date to each interest
each interest payment date
payment date to maturity*
Percent
1.60
2.25
2.62
2.80
2.92
3.01
3.07
3.12
3.16
3.19
3.25
3.30
3.35
3.39
3.42
3.46
3.50
3.53

Percent
•3.35
•3.38
•3.38
•3.38
t3.88
t3.92
t3.95
t4.00
t4.05
t4.11
t4.13
t4.16
t4.19
t4.23
14.29
t4.31
t4.35
**4.83

Amounts of interest checks and investment yields to maturity on basis of Dec. 1,1965 revision
QVi years
10 years (maturity).
Period of time bond is held after
maturity date

Vz year...
1 year.
1]^^ years.
—
2 years
2y2 years
3 years
3\i years
--4 years
il'i years
5 years
5}^ years
6 years
6}^ years.
7 years.
7}^ years
8 years
SH years
9 years
9}-^ years
10 years (extended maturity)

$11. 55
12.60

$23.10
25.20

$115. 50
126.00

$231
252

3.58
3.64
(b) To extended maturity §

Extended maturity period

$10.37
10.37
10.37
10.37
10.37
10.37
10.37
10.37
10.37
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38

$20. 75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20. 75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75

$103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103.75
103,75

$207.50
207. 50
207. 50
207. 50
207. 50
207. 50
207.50
207.50
207.50
207. 50
207. 50
207. 50
207.50
207. 50
207. 50
207. 50
207. 50
207. 50
207.50
207. 50

3.66
3.68
3.70
3; 71
3.72
3.74
3.75
3.76
3.77
3.78
3.79
3.80
3.80
3.81
3.82
3.82
3.83
3.84
3.84
3.85

4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15 .

t Calculated on basis of $1,000 bond.
• Yields on the basis of the original schedule of interest checks prior to the June 1,1959 revision are: (1) 3.25 percent
for entire period from issuance to maturity; (2) as shown for any period from each interest payment date to raaturity.
t starting with the eflective date of the June 1, 1959 revision yields for any remaining period from each interest
payment date to maturity prior to the December 1,1965 revision.
*• Yield from the effective date of the December 1,1965 revision to maturity.
§ 4.15 percent per annura yield for the full 10-year extension period.
1 At all tiraes, except that bond was not redeeraable during first 6 months.
2 20 years from issue date.

183

EXHIBITS
T A B L E 1 4 - A — B O N D S BEARING ISSUE D A T E S F R O M J U N E 1 T H R O U G H N O V E M B E R 1,1957

[Issue priceFace value-j Redemption i and
value.

maturity

Period of time bond is held after
issue date

$500
500

$5,000
5,000

$10,000
10,000

(1) Amounts of interest checks for each
denomination

$4.00
7.25
8.45
8.45
8.70
8.70
8.70
8.70
8.70
9.75
9.75
9.75
9.75
9.75
10.45
10.45
10.45

H year...
1 year
V4 years.
2 years..2V^ years.
3 years...
3 ^ years.
4 years...
i H years.
5 years...
5M years.
6 years...
GH years.
7 years...
7>^ years.
8 years...
8M years.

$1,000
1,000

$8.00
14.50
16.90
16.90
17.40
17.40
17.40
17.40
17.40
19.50
19.50
19.50
19.50
19.50
20.90
20.90
20.90

$40.00
72.50
84.50
84.50
87.00
87.00
87.00
87.00
87.00
97.50
97.50
97.50
97.50
Si7.50
104.50
104.50
104.50

$80
145
169
169
174
174
174
174
174
195
195
195
195
195
209
209
209

Approximate investment
yield on face valuej

(2) From
(3) From
Issue date to each interest
each interest payment date
payment date to maturity*
Percent
1.60
2.25
2.62
2.80
2.94
3.02
3.08
3.13
3.17
3.24
3.29
3.34
3.38
3.41
3.45
3.49
3.53

Percent
•3.35
•3.38
•3.38
t3.88
t3.91
t3.95
t3.99
t4.03
t4.09
t4.11
t4.14
t4.17
t4.21
t4.27
t4.29
t4.3l
•*4. 76

Amounts of interest checks and investment yields to maturity on basis.of Dec. 1,1965 revision
9 years
9>^ years
10 years (maturity)
Period of time bond is held after
issue date

^year....
1 year
.—
11^ years
2 years
2>^ years
3 years
3 ^ years
4 years
i^i years
5 years
•51^ y e a r s —
6 years
61^ years
7 years
71^ years
8 years
8H years
—
9 years
.
9'/^ years
10 years (extended maturity)
' F o r f o o t n o t e s see t a b l e 1 3 - A .

$11.40
11.40
12.95

$22. 80
22.80
25.90

$114. 00
114.00
129.50

228
259

3.58
3.62
3.68

(b) To extended maturity§

Extended raaturity period

$10. 37
10.37
10.37
10.37
10.37
10.37
10.37
10.37
10.37
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38

$20. 75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20. 75
20.75
20.75

$103. 75
103. 75
103. 75
103.75
103.75
103. 75
1C3. 75
103. 75
103. 75
103. 75
103.75
103. 75
103.75
103.75
103. 75
103.75
103.75
103.75
103. 75
103. 75

4.87
5.18

$207. 50
207. 50
207.50
207. 50
207. 50
207. 50
207. 50
297.50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
297.50
207. 50
207. 50

3.70
3.72
3.73
3.75
3.76
3.77
3.78
3.79
3.80
3.81
3.82
3.82
3.83
3.84
3.84
3.85
3.86
3.86
3.87
3.87

4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15

184

19 67 REPORT OF THE SECRETARY OF THE TREASURY
T A B L E 15-A—BONDS BEARING ISSUE DATES F R O M DECEMBER 1,1957 T H R O U G H M A Y 1,1958

{

Issue p r i c e . . .
Redemption i and
value

$500

$1, 000

$5, 000

$10, 000

500

1,000

5,000

10, 000

maturity

Period of time bond is held after
issue date \

H year....
1 year
1 ]ri years..
2 years
2^2 years..
3 years
'3]ri years..
4 years
i H years..
5 years
5H years..
6 years
GH y e a r s 7 years
7H years..
8 years

(1) Amounts of interest checks for each
denomination

$4.00
7.25
8.45
8.70
8.70
8.70
8.70
8.70
9.65
9.65
9.65
9.65
9.65
10.35
10.35
10.35

$8.00
14.50
16.90
17.40
17.40
17.40
17.40
17.40
19.30
19.30
19.30
19.30
19.30
20.70
20.70
20.70

$40. 00
72.50
84.50
87.00
87.00
87.00
87.00
87.00
96.50
96.50
96.50
96.50
96.50
; 03. 50
03.50
103. 50

145
169
174
174
174
174
174
193
193
193
193
193
207
207
207

Approximate investment
yield on face valuet

(2) From
(3) From
issue date to each interest
each interest payment date
payment date to maturity*
• Percent
1.60.
2.25
2.62
2.83
2.96
3.04
3.10
3.14
3.22
3.28
3.33
3.37
3.40
3.45
3.49
3.52

Percent
•3.35
*3.38
t3.88
.t3.91
t3.94
t3.98
t4.02
t4.07
t4.10
t4.12
t4.15
t4.19
t4.25
t4.27
t4.29
••4.74

Amounts of interest checks and investment yields to maturity on basis of Dec. 1, 1965 revision
8)-^ years
9 years
9H years
10 years (raaturity)
Period of time bond is held after
maturity date

Vi year
1 year
—
I H years
...
2 years
...^..
2H years
...
3 years
3H years
•4 years
..
i H years.
-5 years
.'-.
5H years
-6 years
..--.
QH years
-.
7 years
7H y e a r s —
-8 years
8H years..
.---.
9 years
—
l9H years
-10 years (extended maturity)^.

$10.65
11.70
12.55
12.55

$21.30
23.40
25.10
25.10

$106. 50
117.00
125. 50
125. 50

$213
234
251
251

3.56
3.61
3.67
3.73

(b) To extended raaturity §

Extended maturity period

$10.37
10.37
10.37
10.37
10.37
10.37
10.37
10.37
10.37
10. 38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38

$20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75

$103.75
103. 75
103.75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75

4.90
5.02
5.02

$207. 50
207.50
207. 50
207.50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 60
207. 50
207. 50
207. 50

3.75
3.76
3.77
3.79
3.80
3.81
3.82
3.83
3.83
3.84
3.85
3.86
3.86
3.87
3.87
3.88
3.88
3.89
3.89
3.90

4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15

185

EXHIBITS
T A B L E 16-A—BONDS BEARING ISSUE D A T E S F R O M J U N E 1 THROUGH N O V E M B E R l,

{

Issue p r i c e . . .
Redemption i and
value

$500

$1,000

$5,000

$10, 000

.. 500

1,000

5,000

10,000

maturity

Period of time bond is held after
issue date

H year...
1 year
1H years.
2 years...
2H years.
3 years...
SH years.
4 years..i H years.
5 years..5H years.
6 years...
QH years.
7 years...
7H years.

(1) Amounts of interest checks for each
denomination

00
25
70
70
70
70
70
55
55
55
55
55
30
30
30

$8.00
14.50
17.40
17.40
17.40
17.40
17.40
19.10
19.10
19.10
19.10
19.10
20.60
20.60
20.60

$40.00
72.50
87.00
87.00
87.00
87.00
87.00
95.50
95.50
95.50
95.50
95.50
103.00
103.00
103.00

$80
145
174
174
174
174
174
191
191
191
191
191
206
206
206

1958

Approximate investment
yield on face valuet

(2) From
(3) Frora
issue date to each interest
each interest payment date
payment date to maturity*
Percent
•3.35
t3.88
t3.91
t3.94
t3.97
t4.01
t4.06
t4.08
t4.11
t4.14
t4.18
t4.23
t4.25
t4. 27
**4.71

Percent
1.60
2.25
2.65
2.85
2.98
3.06
3.11
3.20
3.26
3.31
3.35
3.39
3.44
3.48
3.52

Amounts of interest checks and investment yields to maturity on basis of Dec. 1, 1965 revision
8 years
8H years
9 years
OH years
10 years (maturity)
Period of time bond is held after
raaturity date

H year
1 year
I H years
2 years
..^
....
2H years
3 years..
3H years
4 years
i H years
5 years
5H y e a r s —
6 years
QH years
7 years
7H years
8 years
SH years...
.9 years
9H years
10 years (extended maturity) 2.
F o r f o o t n o t e s see t a b l e 1 3 - A .

$10.55
10.55
12.65
12.65
12.65

$21.10
21.10
25.30
25.30
25.30

$105. 50
105. 50
126.50
. 126.50
126. 50

$211

211
253
253
253

3.56
3.59
3.66
3.72
3.78

(b) T O extended maturity§

Extended raaturity period

$10.37
10.37
10.37
10.37
10.37
10.37
10.37
10.37
10.37
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38

$20. 75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20. 75
20.75
20.75
20.75
20.75
20.75
20.75

$103. 75
103. 75
103. 75
103.75
103. 75
103. 75
103. 75
103. 75
103. 75
103.75
103. 75
103. 75
103. 75
103. 75
103. 75
103.75
103.75
103. 75
103.75
103.75

4.84
5.06
5.06
5.06

$207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50.

3.79
3.80
3.82
3.83
3.84
3.85
3.85
3.86
3.87
3.88
3.88
3.89
3.89
3.90
3.90
3.91
3.91
3.92
3.92
3.93

4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15

186

19 67 REPORT OF THE SECRETARY OF THE TREASURY
T A B L E 17-A—BONDS BEARING ISSUE D A T E S F R O M D E C E M B E R 1,1958 THROUGH M A Y 1,

Issue p r i c e . . .
Redemption ' and
value

raaturity

Period of time bond is held after
issue date

i^year...
1 years...
I H years.
2 years...
2H years.
3 years...
3H years.
4 years...
i H years.
5 years...
5H years.
6 years...
QH years.
7 years...

$500

$1,000 I

$5, 000

$10, 000

500

1,000

^ 5,000

10,000

(1) Amounts of interest checks for each
dcnornination

00
50
70
70
70
70
45
45
45
45
45
25
25
25

$8.00
15. CO
17.40
17.40
17.40
17.40
18. JO
18. £0
18. £0
18. £0
18. fO
20.50
20.50
20.50

• $40.00
75. C 3
87. CO
87.00
87. CO
87. CO
94.50
94.50
94.50
94.50
94.50
102.50
102.50
102. 50

150
174
174
174
174
189
189
189
189
189
205
205
205

Approximate investment
yield on face valuet

(3) From
(2) From
issue date to each interest
each interest payment date
payment datel to maturity*
Percent
1.60
2.30
2.68
2.88
3.00
3.07
3.17
3.24
3.30
3.34
3.38
3.43
3.48
3.52

Percent
t3.85
t3,91
t3.94
t3.97
t4,01
t4.05
t4.08
t4.10
t4.14
t4.18
t4.23
14.24
t4.26
••4.70

Amounts of interest checks and investment yields to maturity on basis of Dec. 1, 1965 revision
$10. 50
10.50
10.50
13.10
13.10
13.10

7J.^ years
Syears
8J^ years
9 years
91^ years
10 years (maturity)
Period of time bond is held after
raaturity date

Vz year
1 year
—
I H years
2 years
2 J.^ years
3 years
ZH years
4 years
i H years
5 years
5H years
6 years
QH years
7 years
7H years
Syears
SH years
9 years
9H years
10 years (extended raaturity)

i..

.
:
^
:
-i
'L

$21.00
21.C0
21. CO
26.20
26.20
26.20

$105. 00
105. CO
105. CO
131. CO
131. CO
131.00

4.81
4.97
5.24
5.24
5.24

$210
210
210
262
262
262

. (b) To extended maturity §

Extended maturity period

no. 37
10.17
10. J7
10. J7
10. J7
10. i7
10. o7
10. J 7
10.27
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38
10.38.

$20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20.75
20. 75
20.75
20.75
20.75
20.75
20.75
20.75

$103.75
103.75
103.75
103. 75
103. 75
103.75
103. 75
103.75.
103.75
103. 75
103. 75
103.75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75
103. 75

$207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50
207. 50

3.84
3.85
3.86
3.87
3.88
3.89
3.89
3.90
3.91
3.91
3.92
3.92
3.93
3.93
3.94
3.94
3.94
.3.95
3.95
3.95

4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15
4.15

Exhibit H.—Third amendment, August 16, 1966, of Department Circular No. 906,
U.S. savings bonds, series J and series K
TREASURY DEPARTMENT,

Washington, August 16, 1966.
Department Circular No. 906 (31 CFR Part 333), dated AprH 29, 1952, as
amended, is hereby further amencied as follows:
SEC. 333.15 Payment or redemption.—
(a) Series J bonds.—VTIOT to maturity, a Series J bond will be redeemed, at the
option of the owner, at the appropriate redemption value, in whole or in part, in
the amount of an authorized denomination or multiple thereof, upon presentation
and surrender of the bond with a duly executed request for payment to (1) a
Federal Reserve bank or branch, (2) the Office of the Treasurer of the United
States, Securities Division, Washington, D.C. 20220, or (3) the Bureau of the
Public Debt, Division of Loans and Currency Branch, 536 South Clark Street,
Chicago, Illinois 60605. A bond presented for payment at or after maturity will
be paid at its face amount.

EXHIBITS

187

(b) Series K honds.—Prior to or at maturity, a Series K bond will be redeemed,
at the option of the owner, at the appropriate redemption value, upon presentation
and surrender of the bond with a duly executed request for payment to an agency
described in paragraph (a), above. However, a bond received by an agency during
the calendar month preceding an interest payment date will not be redeemed untfl
that date. Prior to maturity, a Series K bond may be redeemecl at par, in whole or
in part, (1) upon the death of an individual named on the bond as owner or
coowner, or (2) if held by a trustee or other fiduciary, upon the death of any
person which results in termination of the trust. Redemption at par will be made
only to the extent of the pro rata portion of a trust terminated in part, to the
next lower multiple of $500. A Series K bond issued in exchange for matured
Series E bonds may be redeemed at par, at the owner's option, at any time. A
bond presented for payment at maturity will be paid at par, and final interest
will be paid with the principal.
GEORGE F. STICKNEY,

Deputy Fiscal Assistant Secretary of the Treasury..

Exhibit 12.—February 22, 1967, Department Circular Public Debt Series No.
3-67, offering of U.S. savings notes
TREASURY

DEPARTMENT,

Washington, February 22, 1967,
AUTHORITY: Department Circular, Public Debt Series No. 3-67, dated February 22, 1967, and the table incorporated therein (31 CFR Part 342), are issued
under authority of sections 18 and 20 of the Second Liberty Bond Act, as amended
(31 U.S.C. 753 and 754b).
SEC. 342.0 Offering of notes.—The Secretary of the Treasury, under the
authority of the Second Liberty Bond Act, as amended, hereby offers for sale
United States Savings Notes which may be purchased only with the simultaneous
purchase of Series E bonds under payroll savings plans or through the bond-amonth plan. The investment yield on the notes (hereinafter generally referred to
as ^^savings notes'' or ''notes") will be approximately 4.74 percen-it per annum,
compounded semiannually, if held to maturity. This offering of notes, which shall
be effective May 1, 1967, will continue until terminated by the Secretary of the
Treasury.
SEC. 342.1 Definition of words and terms as used in this offer.—(a) "Payroll
savings plans" refer to voluntary systems maintained by employers whereby
their officers and employees authorize regular deductions from their salaries or
wages for the purchase of United States Savings Bonds of Series E, referred to
herein as "Series E bonds."
(b) "The bond-a-month plan" refers to the plan whereby depositors maintaining
accounts with financial institutions authorize regular monthly deductions from
such accounts for the purchase of Series E bonds.
(c) "Participants" refer to individuals having regular deductions made from
their salaries or wages for the purchase of Series E bonds pursuant to payroll
savings plans, or depositors having regular monthly deductions made from their
accounts for the purchase of Series E bonds under the bond-a-naonth plan.
SEC. 342.2 Description of notes.—(a) General.—Savings notes bear a facsimile
of the signature of the Secretary of the Treasury and of the Seal of the Department
of the Treasury. They are issued only in registered form and are nontransferable.
(b) Denominations and prices.—Savings notes are issued on a discount basis at
81 percent of their face amounts (maturity values). The denominations and
purchase prices are:
Denomination
(Jace amount)

Purchase
price

$25.00
-$20.25
$50.0040.50
$75.00
__-60.75
$100.00
81.00
(c) Inscription and issue.—At the time of issue the authorized issuing agent
will (1) inscribe on the face of each savings note the name and address of the
owner, and the name of the beneficiary, if any, or the names of the coowners

188

19 67 REPORT OF THE SECRETARY OF THE TREASURY

and the address of the first-named coowner,^ (2) enter the issue date in the righthand portion of thelnote in the space provided for that purpose, and (3) imprint
thereunder, by use qf the agent's validating stamp for the issue of United States
Savings Boncls, the date the note is actually inscribed. A note shall be valid
only if an authorized issuing agent receives payment therefor and duly inscribes,
dates, stamps, and delivers it.
(d) Term.—A savings note shall be dated as of the first day of the month in
which payment of the purchase price is received by an issuing agent. This date
is the issue date anci the note will mature and be payable at its maturity value
4 years and 6 months from such issue date. The note may not be called for redemption by the Secretary of the Treasury prior to maturity, and is not redeemable during the first year from issue date. Thereafter, the note may be redeemed
at fixed redemption values at the option and request of the owner.
(e) Investment yield {interest).—The investment yield on a savings note will
be approximately 4:74 percent per annum, compounded semiannually, if the
note is held to maturity, but the yield will be less if the note is redeemed prior
to maturity. The interest will be paid as part of the redemption value. The note
will increase in value 1 year after issue date, and at the beginning of each halfyear period thereafter until maturity, at which time, interest will cease. If the
note is redeemed before maturity, interest will cease at the end of the interest
period next preceding the redemption date, except that if redeemed on a date
on which the redemption value of the note increases, interest will cease on that
date. (See table.)
SEC. 342.3 Purchase—registration.—(a) Purchase.—Savings notes may be
purchased only with the simultaneous purchase of Series E bonds, as provided
in section 342.0. Employers may obtain notes for participants in payroll savings
plans from authorised issuing agents ^ or from any Federal Reserve bank or
branch, or the Office of the Treasurer of the United States, Securities Division,
Washington, D.C. 20220. Participants in the bond-a-month plan may obtain
the notes from authorized financial institutions. Payments for the notes may
be made in the same manner as payments for United States Savings Bonds.
Issuing agents will deliver the notes at the time of purchase, or by mail at the
risk and expense of the United States, but only within the United States, its
territories and possessions, the Commonwealth of Puerto Rico and the Canal
Zone. No mail deliveries elsewhere will be made.
(b) Registration.—On original issue a savings note (1) is limited to registration
in the name of a natural, person (whether adult or minor), alone or with another
natural person as coowner or beneficiary, and (2) must be identical in registration to the companion Series E bond purchased under the payroll savings plan
or the bond-a-month plan.
SEC. 342.4 Limitations.—(a) On deductions.—T>ed\xQ>i\on^ for savings notes
shall not exceed $1.08 for each $1.00 of deductions for the purchase of Series E
bonds. In addition, deductions for the notes, under a payroll savings plan, shall
not be more than $20.25 per weekly pay period, or $40.50 per biweekly or semimonthly pay period, or $81.00 per monthly pay period, and under the bond-amonth plan, shall nc)t exceed $81.00 per month. A participant, upon discontinuing his participation in a payroll savings plan or the bond-a-month plan, becomes
ineligible for further, purchases of the notes until such time as he again enrolls
in a plan.
,
(b) On holdings.—The total face amount of savings notes originally purchased
by or issued to any; one person during any one calendar year, including those
registered in the name of that person as owner and those registered in his name
with another person as coowner, that may be held by that person at any one
time is limited to $1,350.
SEC. 342.5 Taxation.—(a) General.—For the purpose of determining taxes
and tax exemptions, the increment in value represented by the difference between
the purchase price and the redemption value received for a savings note will
be considered as interest. The interest is subject to all taxes imposed under the
Internal Revenue Code of 1954. The notes are subject to estate, inheritance,
gift, or other excise taxes, whether Federal or State, but are exempt from all
taxation now or hereafter imposed on the principal and interest thereof by any
1 When placing a taxpayer identifying number (an individuars social security account number) on a
note, the issuing agent should place the number on the note in the same position as on the companion Series
E bond.

•'

2 Generally, incorporated banks, trust companies, and other agencies as have been duly qualified as
issuing agents of Series E bonds.

EXHIBITS

189

State, or any of the possessions of the United States, or by any local taxing
authority.
(b) Federal income tax on notes.—An owner of savings notes who is a cash
basis taxpayer may use either of two methods for reporting the increase in the
redemption value of the notes for Federal income tax purposes, as follows:
(1) Defer reporting of the increase until the year of maturity, actual
redemption, or other disposition, whichever is earlier, or
(2) Elect to report the increase for the year in which it accrues, in which
case the election will apply also to all Series E bonds then owned by him
and those thereafter acquired, as well as to any other similar obligations
sold on a discount basis.
If method (1) is used, the taxpayer may change to method (2) without obtaining
permission from the Internal Revenue Service. However, once the election to
use method (2) is made, the taxpayer may not change the method of reporting,
unless he obtains permission to do so from the Internal Revenue Service. Inquiries requesting further information on Federal taxes should be addressed to
the District Director, Internal Revenue Service, of the taxpayer's district, or
the Internal Revenue Service, Washington, D.C. 20224.
SEC. 342.6 Payment or redemption.—(a) General.—At any time 1 5^ear or
more after the issue date, a savings note may be redeemed upon, presentation and
surrender of the note with a duly executed request for payment to any Federal
Reserve bank or branch, or the Office of the Treasurer of the United States,
Securities Division, Washington, D.C. 20220, or to any financial institution
which has been designated as paying agent by the Secretary of the Treasur}^.
(b) Judgment creditors.—Payment of a savings note to the purchaser at a
sale under a levy or to the officer authorized to levy upon the property of the
owner under appropriate process to satisfy a money judgment will not be made
until 1 year after the issue date of the note.
SEC. 342.7 Governing regulations.—Savings notes are subject to the regulations
of the Treasury Department, now or hereafter prescribed, governing United
States Savings Bonds, contained in Department Circular No. 530, current revision (31 CFR Part 315),^ except as otherwise specifically provideci herein.
SEC. 342.8 Fiscal agents.—Federal Reserve banks and branches, as fiscal
agents of the United States, are authorized to perform such services as may be
requested of them by the Secretary of the Treasury in connection with the issue,
delivery, redemption, and payment of savings notes.
SEC. 342.9 Reservations.—(a) Issue of notes.—The Secretary of the Treasury
reserves the right to reject any application for purchase of savings notes, in
whole or in part, and to refuse to issue or permit to be issued hereunder any such
, notes in any case or any class or classes of cases if he deems such action to be in
the public interest, and his action in any such respect shall be final.
(b) Terms of offer.—The Secretary of the Treasury may at any time or from
time to time supplement or amend the terms of this offering of notes, or of
any amendments or supplements thereto.
JOSEPH W .

BARR,

Acting Secreiary of the Treasury.

1 Copies may be obtained from any Federal Reserve bank or branch, or the Bureau of the Public Debt,
Division of Loans and Currency Branch, 536 South Clark St., Chicago, 111. 60606.

190

19 67 REPORT OF THE SECRETARY OF THE TREASURY

UNITED STATES SAVINGS NOTES—REDEMPTION VALUES AND INVESTMENT YIELDS
Table shows: (1) redemption values, by denomination, during each successive half-year term of holding
after first year i following the date ofissue; (2) the approximate investment yield on the purchase price from
issue date to the beginning of each half-year period 2; and (3) the approximate investment 3deld on the
current redemption value from the beginning of each half-year period 2 to maturity. Yields are expressed
in terms of rate percent per annum compounded semiannually.

Maturity value.
Issueprice
'
Period after issue date

1 to IJ^ years
1}4 to 2 years
2 to 2 ^ years..-2H to 3 years
:
3 to ZH years
:
31^ to 4 years
4 to 43^ years
MATURITY VALUE
(4H years from issue date)

$25.00 $50.00 $75.00
20.25 40.50 60.75

$100.00
81.00

Approximate investment yield

$21.07 $42.14 $63.21
21.63 43.06 64.59
22.03 44.06 66.09
22.56 45.12 67.68
23.14 46.28 69.42
23.74 47.48 71.22
24.36 48.72 73.08

$84.28
86.12
88.12
90.24
92.56
94.96
97.44

Percent
4.01
4.13
4.26
4.37
4.50
4.60
4.67

75.00

100.00

4.74

_(2) On purchase (3) On current
price from issue redemption value
date to begin- from beginning
(1) Redemption values during
ning of each
of each half-year
each half-year period after the half-year period 2 period to mafirst year (values increase on
first
turity 2 3
day of period shown) 1

25,00

50.00

Percent
4.95
5.04
5.12
5.20
5.22
5.24
5.25

1 Savings notes are not redeemable before 1 year from issue date.
2 Except the first half-year.
3 4.74 percent for entire period from issuance to maturity.

Exhibit 13.—^February 24, 1967, Department Circular Public Debt Series No.
4-67, regulations governing agencies for the issue of U.S. savings bonds of
Series E and U.S. savings notes
TREASURY DEPARTMENT,

Washington, February 24, 1967.
Department Circular No. 657, dated April 15, 1941, as amended (31 CFR
Part 317), is hereby rescinded and replaced by Department Circular, Public
Debt Series No. 4-67, as follows:
AUTHORITY: Sections 317.0 through 317.8 issued under sections 18, 20, and
22 of the Second Liberty Bond Act, as amended (40 Stat. 1309, 48 Stat. 383
and 49 Stat. 21, all as amended; 31 U.S.C. 753, 754b, and 757c).
SEC. 317.0 Purpose.—These regulations prescribe the procedures whereby
(a) banks, trust companies, and savings institutions chartered by or incorporated
under the laws of the United States or those of any State or Territory of the
United States or the Commonwealth of Puerto Rico, (b) agencies of the United
States and of State and local governments, (c) employers operating payroll
savings plans for the purchase of United States Savings Bonds, and (d) other
entities, may qualify, and thereafter act, as agents for the sale and issue of United
States Savings Bonds of Series E and United States Savings Notes, issued pursuant to Treasury Department Circulars No. 653, current revision, and Public
Debt Series No. 3-67 (31 CFR Parts 316 and 342), respectively.
SEC. 317.1 Definitions of words and terms as used in this circular.—-(a) ''Bonds"
refer to United States Savings Bonds of Series E.
(b) ''Federal Reserve bank" refers to the Federal Reserve bank of the Federal
Reserve district in which the issuing agent, or the applicant organization, is
located, and includes branches to the extent utilized by the parent bank. In
the context of these regulations, the reference to the Federal Reserve bank is
in its capacity as fiscal agent of the United States.
(c) "Issuing agent" refers to an organization which has been issued a certificate
of qualification to sell and issue bonds and notes, or bonds only.
(d) "Notes" refers to United States Savings Notes.
(e) "Organization": refers to any entity described in section 317.0 as eligible
to qualify as an issuing agent of the bonds and notes, or bonds only.

EXHIBITS

191

SEC. 317.2 Procedure for qualifying as an issuing agent.—(a) General.—KTI
organization desiring to qualify as an issuing agent shall obtain from and file
with the Federal Reserve bank an appropriate application-agreement form.
If the organization desires to qualify as an issuing agent for bonds only, it shall
before submission, amend the form furnished so that it refers only to bonds.
Through use of the appropriate form, the person authorized to act on behalf
of the organization will certify that it is authorized by its governing body, or
other body authorized to act in the premises, to apply for and act as an, issuing
agent uncier the terms of the agreement, these regulations and the circulars
offering the bonds and notes for sale, or, if appropriate, bonds only, and that
applicable Federal or State law permits or does not prohibit the organization
from so acting. The Secretary of the Treasury, either directly or through the
Federal Reserve bank, may deny qualification to, or specify the basis of qualification of, any organization.
(b) Bases on which stock may be obtained.
(1) Trust agreement.—An organization may obtain stocks on the basis of an
application-trust agreement. Under the terms of such agreement, the stocks of
bonds and notes obtained, together with the proceeds of sale therefrom, are at
all times the property of the United States, for which the organization shall
be fully accountable.
(2) Pledge agreement.
(i) Pledge of collateral.—An organization may obtain stock on the basis of a
pledge of collateral. Under the terms of the application-pledge agreement, collateral is pledged at the cost price of the maximum amount of stocks of bonds and
notes, and the proceeds of sales therefrom, for which the organization may be
accountable at any one time.
(ii) Security.—^QcuritY which may be required under the application-pledge
agreement shall consist of either or both of the following:
(A) The amount of insurance directly available to the United States
covering the proceeds of the issuing agent's sales of bonds and notes by
reason of the agent's coverage by an acceptable Federal or State insurance
corporation or fund; for example, in the case of a member bank of the Federal Deposit Insurance Corporation, the amount of security would be $15,000
and would cover approximately $20,000 (face amount) of stocks of bonds
and notes.
(B) United States Treasury bonds or other direct obligations of the United
States, or obligations unconditionally guaranteed as to both principal and
interest by the United States, in negotiable form, which will be accepted
at face value; and United States Savings Bonds of any series registered in
the name of the issuing agent, which will be accepted at issue price. Savings
bonds must be accompanied by an irrevocable power of attorney, executed
on behalf of the issuing agent, authorizing the Secretary of the Treasury
to request payment of the bonds. All obligations deposited pursuant hereto
must be delivered to the Federal Preserve bank before stocks of bonds and
notes may be obtained.
(3) Prepayment of stock.—An organization whose primary function as an
issuing agent will relate to the issue of bonds and notes bought under its payroll
savings plan, and which is not qualified under, subparagraph (1) or (2) of this
paragraph, is required to execute an application-prepayment agreement under
the terms of which all stocks of bonds and notes obtained for its issue function
are prepaid at cost price.
(c) Issuing agents of bonds qualified under Treasury Department Circular No.
657, as amended.—Issuing agents of bonds qualified prior to the rescission of
Treasury Department Circular No. 657, as amended, who do not desire to qualify
as issuing agents for the notes, may continue to act without requalification and
by so doing shall be subject to the terms and conditions of this circular and the
agreements under which they qualified in the same manner and to the same
extent as though they had requalified hereunder.
SEC. 317.3 Certificate of qualification.—Until such time as a certificate of
qualification is issued by the Federal Reserve bank, an organization shall not
make any effort to or perform any acts as an issuing agent, or advertise in any
manner that it is authorized to perform such acts, or that it has applied for qualification as an issuing agent. Upon approval of the application-agreement, the
Federal Reserve bank will issue a certificate of cjualification to the organization.
The organization will be notified if the application-agreement is not approved.

192

19 67 REPORT OF THE SECRETARY OF THE TREASURY

or after qualification, at any such time as the certificate of qualification is modified
or terminated.
SEC. 317.4 Modification or termination of qualification.—(a) By the United
States.—The Secretary of the Treasury, or the Federal Reserve bank, may
modify or terminalie the qualification of an issuing agent at any time, upon
notice to that effect, and may require the immediate surrender of any part or
all of the stocks of; bonds and notes held by the agent for sale and not theretofore issued or sold, and any part or all of the proceeds due on account of the stocks
issued or sold. The Secretary of the Treasury, or the Federal Reserve bank,
may also regulate ihe amount of stocks of bonds and notes which may be obtained, including temporary increases over the amount of stocks obtainable by
the issuing agent regardless of the basis of qualification, and under section 317.2,
paragraph (b), subj)aragraph (2) or (3), without requiring a pledge of additional
collateral or additional prepaj^ment for stocks.
(b) By issuing agent.—An issuing agent which has fully complied with the
terms of its agreement and the regulations and instructions issued pursuant
thereto may at any time request the Federal Reserve bank to modify or terminate
its qualification.
'
SEC. 317.5 Issuance of bonds and notes.—Issuing agents must comply with
all regulations and instructions issued by the Treasury Department or the Federal
Reserve bank concerning the sale, inscription, dating, validation and issue of
the bonds and notes, and disposition of the registration stubs. No issuing agent
shall have authority to sell bonds and notes other than as provided in the offering
circulars and the governing regulations.^
SEC. 317.6 Accounting.—Issuing agents must comply with all regulations
and instructions issued by the Treasur}^ Department, governing the accounting
for stocks of bonds and notes received as issuing agent and the proceeds of sales
thereof. Each issuing agent, other than an agent qualified on the basis of prepayment of stock, shall open and maintain, or continue to maintain, for the^
Federal Reserve bank, a separate deposit account for the proceeds of all sales'"
of bonds and notes to be known, as appropriate, as the "Savings Bond and Note
Account," or the "Series E bond account." An issuing agent which is also a
depositary pursuant to Treasury Department Circular No. 92, current revision
(31 CFR Part 203)^ may make payment by credit for the proceeds of its sales
of bonds and notes up to any amount for which it shall be qualified under that
circular in excess of existing deposits when so authorized by the Federal Reserve
bank. .
"^
SEC. 317.7 Fiscal agents.—The Federal Reserve banks are authorized to perform such duties and prepare and issue, such forms and instructions as may
be necessary to fulfill the purposes and requirements ofjbhese regulations.
SEC. 317.8 Reservations.—The Secretary of the Treasury may at any time
or from time to time, revise, supplement, amend, or withdraw, in whole or in
part, the provisions of these regulations, or of any revisions, supplements, or
amendments thereto.
JOHN K .

CARLOCK,

Fiscal Assistant Secretary.
Legislation

Exhibit 14.—An act to provide, for the period ending on June 30, 1967, a temporary
increase in the public debt limit set forth in section 21 of the Second Liberty
Bond Act.
[Public Law 90-3, 90th Congress, H.R. 4573, March 2,1967]

Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled. That, during the
period beginning on the date of the enactment of this Act and ending bn June 30, 1967, the public debt limit set forth in the first
sentence of section 21 of the Second Liberty Bond Act (31 U.S.C.
757b) shall be temporarily increased to $336,000,000,000.
Approved March 2, 1967, 10:45 p.m.

Public debt
Jj^mporary increase.
so stat. 221.

1 Treasury Departraent Circulars No. 530, current revision (31 OFR Part 315), No. 653, current revision
(31 C F R Part 316), and Public Debt Series No. 3-67 (31 C F R Part 342). See exhibits 7, 9, and 12.

193

EXHIBITS

Exhibit 15.—An act to increase the public debt limit set forth in section 21 of the
Second Liberty Bond Act, and for other purposes.
[Public Law 90-39, 90th Congress, H.R. 10867, June 30, 1967]

Be it enacted by ihe Senate and House of Representatives of ihe
United States of America in Congress assembled, That, effective
July 1, 1967, the first sentence of section 21 of the Second Liberty
Bond Act (31 U.S.C. 757b) is amended by striking out
"$285,000,000,000" and inserting in lieu thereof "$358,000,000,000".
SEC. 2. The face amount of beneficial interests and participations (except those held by the issuer thereof) issued under section
302(c) of the Federal National Mortgage Association Charter
Act (12 U.S.C. 1717(c)) during the period beginning on July 1,
1967, and ending on June 30, 1968, and outstanding at any time
shall be added to the amount otherwise taken into account in
determining whether the requirements of the first sentence of
section 21 of the Second Liberty Bond Act (31 U.S.C. 757b)
are met at such time. Nothing in the preceding sentence requires
any change in the budgetary accounting for beneficial interests
and participations.
SEC. 3. Effective July 1, 1968, and each July 1 thereafter, the
public debt limit set forth in the first sentence of section 21 of the
Second Liberty Bond Act (31 U.S.C. 757b) shall be temporarily
increased by $7,000,000,000 during the period beginning on such
July 1 and ending on June 29 of the succeeding calendar year.
SEC. 4. Section 18(a) of the Second Liberty Bond Act (relating
to notes of the United States; 31 U.S.C. 753(a)) is amended by
striking out "not more than five years" anci inserting in lieu
thereof "not more than seven years."
\Approved June 30, 1967, 10:40 a.m.

Public debt
limit, increase.
73 Stat. 156;
Ante, p. 4.

78 Stat. 800;
80 Stat. 164.

Temporary annual increase.

U.S. notes.
49 Stat. 20.

Financial Policy
Exhibit 16.—Letter from Secretary Fowler to Representative Ullman, July 12,
1966, and Representative Ullman's letter to the President, June 27, 1966, on
fiscal and monetary policies and increased interest rates
Hon.

AL ULLMAN,

House of Representatives, Washington, D.C.
DEAR A L : Since in your letter to the President, made public, j^ou referred to
the extended conference Chairman Ackley and I had with you on the subject of
your subsequent letter, several comments are offered to round out the picture.
You refer to the fact that "although they were most cordial and helpful, they
did not offer any satisfactory hope that actions would be taken to bring interest
rates back into line."
You have put your finger on one of the toughest problems we face today.
There seems little question that the additional demands placed upon the
economy as an accompaniment to our expanded operations in Southeast Asia
called for a shift from a pohcy of fiscal and monetary stimulus to one of restraint,
if inflationary pressures were to be minimized.
The President has made every effort to hold down expenditures in fiscal 1966
and this together with the rising revenues reduced the budget deficit for the
fiscal year ended June 30 to quote his words "less than one-half" of what was
expected last January.
The President also made every effort to hold down the fiscal 1967 budget to
the bare minimum, but, as you know, the Congress seems to be in the process of
adding to it. Present indications are that Congress may add from $3 billion to
$4 billion to the President's budget this j^^ear. As you know, with his full backing
and support, the Director of the Budget and I have been working hard to encourage those responsible for appropriations to hold down the levels of final
appropriations to those proposed in the budget.

194

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Moreover, the Cbngress responding to recommendations from the President
has changed our tax policy sharply away from the stimulative direction of past
years of 1964 and .1965 to one of moderate restraint. You and your colleagues
on the Ways and Means Committee have helped to accomplish this change which
was the objective of hearings before the passage of the Tax Adjustment Act in
March. As a result of provisions in that act, the speedup in collection of income
and social security taxes withheld by employers by Treasury regulation, increases
in revenues over previous estimates because of rising levels of income, the impact
of social security and medicare taxes which became effective in January and a
successful savings bonds campaign, we are drawing out of the economy this
calendar year through these fiscal measures approximately $13 billion more than
was thought to be the case last December.
This brings us back to the action of the Federal Reserve Board early last
December in the field of monetary policy which is the burden of complaint in
your letter. In December 1965 the Board announced two actions designed in its
words "to dampen mounting demands on banks for still further credit extensions
that might adci to inflationary pressures." You are fully aware from the statement made by the: President thereafter and various public comments I made
in congressional hearings and other public statements before and after these
actions that the administration opposed the action taken at the time. My own
point of view publicly held and privately urged can be summarized in a public
statement made on, November 29 prior to the action. I said "it is premature and
unwise to call for further restrictive monetary action now, in order to curtail the
expansion of money and credit and raise interest rates more than the market has
already raised them. There may be room for honest differences of opinion among
well-informed and unprejudiced persons on this issue. However, it is my strong
belief that an orderly adjustment of a properly coordinated mix of fiscal and
monetary policies tb deal with the period ahead calls for that policy mix to be
determined only with full knowledge of the President's new budget."
Then on December 5, in Austin, after the Board action, the President said:
"The Federal Reserve Board is an independent agency. Its decision was an
independent decision.
" I regret, as do most Americans, any action that raises the cost of credit,
particularly for homes, schools, hospitals, and factories.
"I particularly regret that this action was taken before January when we
will have before us the full facts on next year's budget, Vietnam costs, housing
starts. State and local spending, and other elements in the economic outlook.
"The decisions to be taken within the next few weeks by the administration
will significantly affect the course of economic development.
"My view and the view of the Secretary of the Treasury and the Council of
Economic Advisers is that the decision on interest rates should be a coordinated
policy decision in January, when the nature and impact of the administration's
budgetary and Vietnam decisions are known. This view was apparently shared
by three of the seven Board members.
"The action has already been taken. Under the circumstances, I will continue
to do my best to give the American people the kind of fully coordinated, wellintegrated economic policy to which they are entitled, which has been so successful for the last 58 months, and which I hope will preserve the price stabihty so
necessary for America's continued prosperity."
Subsequent developments have confirmed the need for coordination—in the
fiscal, expenditure, monetary and debt management areas in order to arrest the
rapid escalation of interest rates which concerns me as much as it concerns you.
There are, and have been, pending before the House Banking and Currency
Committee a series of proposals designed specifically to minimize the highly
selective impact of monetary policy and increasing interest rates on the housing
industry about which you have expressed considerable misgivings.
The administration has supported the enactment of legislation to enlarge the
. borrowing authority of the Federal National Mortgage Association.
In an appearance before the House Banking and Currency Committee on
May 19, I urged the enactment of a temporary restraint on excessive competition
for consumer-type savings by banks and savings and loan organizations "both to
protect the structure of the thrift institutions and to bolster the flow of funds
to the horae building industry." I submitted specific legislation designed to
achieve that objective by authorizing the Federal Reserve Board to set differing
rate ceilings on time deposits of differing amounts.

EXHIBITS

195

In the light of intervening events it has seemed necessary and desirable to
enlarge this program to take into account the apjDarent unwillingness of the
Federal Reserve Board to exercise this power even if granted by the Congress
and the lack of authority in the Federal Home Loan Bank Board to prevent
excessive rate competition for savings among members of the Home Loan Bank
system.
Since the return of Members of the Congress from recess I and members of
my Department and others in the Administration have requested the members
of that Committee to take prompt legislative action to check the escalating
trend of interest rates for commercial bank consumer-type deposits and savings
and loan association shares. Our suggestions include: (1) a legislated temporary
ceiling at an appropriate level applying to commercial bank time deposit interest
rates and to savings and loan association dividend rates in accounts up to
$100,000; (2) discretionary authority to the Federal Reserve to differentiate
among different kinds of deposits in setting maximum interest rates for member
banks; (3) similar discretionary authority to the Federal Deposit Insurance
Corporation to cover those banks which are not members of the Federal Reserve
System; (4) authority for the Federal Home Loan Bank Board to set maximum
dividend rates for members of that system.
I would encourage you and your colleagues to get behind these and related
egislative proposals designed to deal specifically with the problem you discussed
with Chairman Ackley and me concerning the highly selective impact of monetary policy on the housing industry and the lumber industry in your district.
I can assure you of complete agreement of the Administration with your
expressed sentiment that "every medium of government should be marshaled
to restore the healthy balance of monetary and fiscal policy required for continued
prosperity."
With best regards.
Sincerely,
(S) "Joe"
HENRY H .

FOWLER.

CONGRESS OF THE UNITED STATES,
HOUSE OF REPRESENTATIVES,

Washington, D.C, June 27, 1966.
Hon.

LYNDON B . JOHNSON,

The White House,
Washington, D.C,
DEAR M R . PRESIDENT: AS a member of the Ways and Means Committee I
have strongly supported the "new economics" of your administration, and in my
public statements have been an outspoken advocate of policies to promote sustained growth in the economy. I regret very deeply that I now must strongly
differ with the administration on what I consider to be an abandonment of the
principles we have been foUowing.
In my judgment, unless corrective action is taken soon, the tight money
policies imposed by the Federal Reserve Board and supported by recent
actions of your administration will destroy the economic gains we have made.
Within the past week, I had an extended conference with Secretary Fowler and
Gardner Ackley on this matter. Although they were most cordial and helpful,
they did not offer any satisfactory hope that actions would be taken to bring
interest rates back into line. Mr. President, the near panic rush throughout the
financial community in recent months to hike interest rates has raised a warning
of impending consequences that cannot be disregarded. Only direct action by
your office can reverse this disastrous trend.
I submit, Mr. President, that this administration cannot afford either politically or economically to be swept along, compounding the initial folly of the
Federal Reserve Board, by engaging in such high interest policies as 5% percent
sales participation offerings and increased Federal loan rates. Every instrument
of Government should be marshaled to restore the healthy balance of monetary
and fiscal policy required for continued prosperity. Through the successes of the
past 5 years, we are on the verge of proving to ourselves and to the world that by
enlightened Government policies, a private enterprise economy can avoid the
boom and bust cycles anci can accelerate growth to meet the challenges of unemployment, expanding population, and economic opportunity for all. The lack
of restraint in the use of monetary policy will surely bring this successful era to an
end.
277-468—68

196

19 67 REPORT OF THE SECRETARY OF THE TREASURY

J u s t as a mixed monetarjr a n d fiscal policy has proved successful in generating
growth, t h e same mixture is essential in restraining an overheating economy.
High interest ratesi will not do t h e job. T h e y are inflationary in themselves.
T h e y have not succeeded in slowing investment in plant capacity, nor—with
the single exception of housing—have thej^ slowed t h e rising level of personal
debt. T h e y have instead contributed significantly to higher costs t h a t are certain
to be reflected in t h e consumer price index.
I n t h e area of fiscal restraints, I recognize t h a t t h e administration has made a
concerted effort to hold down expenditures a n d to reduce operating costs to a
minimum. I n addition, however, I hope t h a t consideration will be given t o other
fiscal tools t h a t will go directly to the danger points in t h e economy. Revisions
in t h e investment t a x credit m a y be in order, to m a k e its provisions applicable
only t o businesses and industries where expansion is vital to national defense or
t o encourage continued growth in other selective areas t h a t are i m p o r t a n t to
t h e national interest. Because of t h e sacrifices in lives a n d resources being made
t o fulfill our commitment in Vietnam, it m a y also be appropriate to consider
means of curbing excess profits, particularly among defense-oriented industries.
A request for s t a n d b y a u t h o r i t y in these and other areas of taxation might well
provide t h e psychological restraint necessary to bring inflationary pressures
under control w i t h o u t hindering a desirable r a t e of growth.
You, Mr. President, are t h e only one who can eff'ectively express a n d implem e n t t h e basic policies a n d programs t o meet this crisis in our economy. I urge
you to do so.
i
Sincerely,
AL

ULLMAN,

Member of Congress.

Exhibit 17.—Letter from the Secretary of the Treasury to the chairman of t h e
S e n a t e Banking a n d Currency Committee, August 2, 1966, concerning t h e
administration's position on pending legislation relative to interest r a t e s of
financial institutions
Hon.

A. W I L L I S R O B E R T S O N ,

Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.
D E A R M R . CHAIRMAN: I appreciated very m u c h your letter of J u l y 28, 1966,
advising me of your agreement to expedite action on bills relating to financial
institutions in which ithe Administration is interested. I welcome t h e opportunity
you have afforded me t o advise you of t h e administration's position on the imp o r t a n t legislation pending with regard to such institutions.
As you know, theire has been a great deal of discussion of ways and means
to insure t h a t a significant p a r t of t h e country's savings will continue to be
available for investment in home mortgages, a n d t o insure stability in t h e
interest r a t e structure within t h e financial community. I t is the view of t h e
administration, a n d I a m pleased to note t h a t it is yours also, t h a t t h e present
a u t h o r i t y of t h e Board of Governors of t h e Federal Reserve System a n d the
Federal Deposit Insurance Corporation to establish m a x i m u m interest rates
which m a y be paid on b a n k deposits should be broadened to enable those agencies
to establish different Categories of deposits for interest r a t e limitations a n d should
be m a d e discretionary. For example, t h e y should be permitted to fix different
limitations for different size deposits, an a u t h o r i t y t h a t is now lacking.
T h e recent action: of t h e Federal Reserve Board in limiting interest rates
payable on "multiple m a t u r i t y " time deposits and t h e fact it has recommended
e n a c t m e n t of S. 3627 indicates, in m y opinion, a willingness on its p a r t to take
action to limit undue r a t e competition. Therefore, I believe it is possible to ret u r n to the original idea of granting discretionary a u t h o r i t y to t h e bank regulatory
agencies, rather t h a n iinvolving Congress in legislating interest r a t e ceilings.
I t is t h e administration view also t h a t t h e Federal H o m e Loan Bank Board
should be granted s t a n d b y a u t h o r i t y t o establish m a x i m u m rates of interest
which m a y be paid on t h e share accounts of savings a n d loan associations; and
t h a t provision should be m a d e for coordination of t h e actions of t h e three agencies
in t h e exercise of discretionary powers relating to interest rates.
I n addition t o these provisions, all of which are incorporated in t h e Federal
Reserve Board bill, S. 3627, it is t h e view of t h e administration t h a t (1) t h e

EXHIBITS

197

Board of Governors of the Federal Reserve System should be authorized to raise
reserve requirements on time and savings deposits to a maximum of 10 percent
rather than the present 6 percent; and (2) the authority of the Federal Reserve
System should be broadened so that it can purchase the obligations of any agency
of the United States. This would enable it to acquire obligations of the
Home Loan Bank Board and the Federal National Mortgage Association,
among others.
I am sure that I can speak for the entire Coordinating Committee on Bank
Regulations, as well as myself, in expressing our gratification that your subcommittee will consider on August 2, 1966, the Financial Institutions Supervisory Act of 1966. As you know, we believe there is a substantial need for this
legislation and we are very hopeful that it can be enacted in satisfactory form
at this session of the Congress.
Sincerely yours,
HENRY H . FOWLER.

Exhibit 18.—Statement by Secretary Fowler, September 21, 1966, before the
National Industrial Conference Board, New York City, on financial and economic
policy
I am very pleased indeed to be with you upon so auspicious an occasion as
the 50th anniversary of this distinguished organization for economic research.
In my position as Secretary of the Treasury, I am often reminded of the many
and profound contributions the National Industrial Conference Board has made
to our understanding of how a free economy works—and how it should work.
Much that is embodied in public policy today is the result of your 50 years of
patient research and illuminating reports.
If I were asked to summarize your work in a line, I would say, and I think
that you would not disagree with me, that you have been engaged in exploring
the potentials of a partnership for economic well being between the government
and the business community of a free nation that wants to remain free.
I believe the idea that a free people can collaborate with their government
to get the most out of their economy is one of the most.important^—and, nowadays
one of the fastest spreading—political-economic concepts in the world.
Our public-private partnership has been of unparalleled benefit to this country,
and its people, as demonstrated by your chart study made for this occasion.
I hope that before this 50th anniversary meeting closes, you will resolve to
carry your work forward at least another full 50 years, for I can see no time in
the future when the contributions to knowledge such as you make will not be
needed at least as greatly as they have been in the past.
I am glad to note, in this respect, that you have dedicated this meeting to
the future. I hope that my remarks, which deal with President Johnson's antiinflation program,_ will throw a sidelight of some value upon your theme, "The
Future of Capitalism."
It is my view-—and your work indicates that it is also your view—that the
future of capitalism is a future of responsible economic behavior, by government,
by the public, by labor, by farmers, and, as the very existence of NICB suggests,
by the business community, great and small.
The President's anti-inflation program is nothing more—and nothing less—than
a call to a new level of responsible economic behavior by all segments of the
American economy.
It is a program for maintaining and continuing the unprecedented economic
gains we have made during the long climb over the past 6 years out of economic
stagnation.
It is a program for maintaining and extending those gains by preserving the
balance between our various demands for goods and services, and our capacity
to satisfy rising demand that has been the unique, and the uniquely beneficial,
aspect of our economic growth over the past 6 years.
The economy has now come under special strains that threaten that balance.
These strains arise largely, although not exclusively, from two sources: exuberant
capital expansion by business, and demands arising from our defense of freedom
in Vietnam. I do not think that any of you here today, faced with this problem
would choose to curtail the defense of freedom in order to let business plant and
equipment expansion go unchecked. Nor did President Johnson. He asked the

198

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Congress to suspend temporarily special tax incentives to business investment
during the next 16 months.
Nor did the President stop there. He committed himself to a strong program
to reduce lower priority Federal expenditures, including an estimated cut of
10 percent—or approximately $3 billion, depending upon congressional action
on remaining appropriation bills—in that limited portion of the budget under
direct Presidential control.
The President's program also pointed the way toward balance in another
important aspect of economic policy—the application of fiscal and monetary
measures in balance) whether in seeking stimulus or restraint. In this connection,
he called upon the Federal Reserve Board, in executing its policy of monetary
restraint, and our large commercial banks, to cooperate with the President and
the Congress to lower interest rates and to ease the inequitable burden of tight
money.
He called upon the whole economy, and all those responsible for it, for restraint..
The President's program is designed to:
(1) Contribute to a restraint of inflationary developments that are proving
disruptive of the financial markets and placing excessive strain on the capital
goods industries.
(2) Promote a more sustainable rate of balanced economic growth in the
next 16 months and thereafter.
(3) Suspend special fiscal stimulants to investment, and thereby support
a policy of monetary restraint without incurring the burdens and without
running the risks of excessively tight money and high interest rates.
(4) Complement other measures enacted by the Congress or pending before
it and being undertaken through administrative action to reduce upward
pressures on interest rates and minimize the discriminatory impact of tight
money and high interest rates on the housing sector of the economy.
The strains on the economy at present show up in three clearly discernible ways:
—in the money and financial markets, excessive demands for credit and
monetary restraint together have created severe tightness and a sharp rise
in interest rates, with highly selective impact on several sectors, particularly single-family housing;
—in the market for capital goods, the ever-mounting flow of new orders by
business firms coming on top of an unprecedented rate of outlays for plant
and equipment is generating rising prices, rising wage rates and shortages
of some skilled labor, and is augmenting the large demands for capital
from banks and the securities market;
—the rising rate of government expenditures. Federal, State and local,
highlighted by steadily expanding defense and public works outlays is
adding steadily to aggregate demand at a high rate.
These three sources of pressure are interrelated and reinforcing. Accelerating
business spending breeds demands for credit from banks and for financing in the
capital market. Higher Government spending also generates credit demands—by
the Government itself, and by private firms which receive Government orders
and work on borrowed funds to fill new contracts. And tight money itself causes
additional Government spending, particularly to help finance areas of important
economic activity such as homebuilding from which the supply of private capital
has been diverted. ;
The program contained in the President's message is designed to deal with all
three pressure points.
This program is primarily economic and financial in its objective and thrust.
It represents, I believe, the most carefully chosen and prudent means, consistent
with preserving stable economic growth within the framework of a free economy,
to ease the strain of the pressures described.
Let me emphasize that the President's proposal to suspend the investment tax
credit and accelerated depreciation for the next 16 months is not a tax reform
proposal—it is temporary in design and purpose.
Let me emphasize also that it is not a revenue-raising proposal in purpose or
objective; any revenue aspects are only incidental.
This proposal, and the entire program announced September 8, is basically
an anti-inflationary action designed to relieve the pressures, clearly observable
in the money markets and capital goods sector, which have produced the highest
interest rates in 40' years, and a perceptible trend toward a general condition
of economic instability.

EXHIBITS

199

Let me relate the tax aspects to the balance of the President's anti-inflation
program:
The proposed suspension of special incentives to undertake major programs
of business investment should relieve the credit market by moderating business
needs for funds.
The President directed me to review all Federal security sales and present
them to the President for approval with the objective of lessening the burden
of Federal finance on the markets. The President's memorandum to Federal
departments and agenciies of September 9, calling for careful and thorough
pruning of Federal lending and borrowing activities, should reduce aggregate
Federal credit demands on the private market.
It has already been decided to cancel the sale of FNMA participation certificates tentatively scheduled for September, and to have no FNMA participation sale in the market for the rest of 1966 unless market conditions improve.
Nor will there be any Export-Import Bank sale of participation certificates
in the market in the rest of this calendar year. Market sales of Federal agency
securities, meanwhile, will be limited in the aggregate to an amount required to
replace maturing issues, while new money, to the extent genuinely needed, will
be raised through sales of agency securities to Government investment accounts.
Another important ingredient of the President's program is the legislation,
passed last week to give the bank regulatory agencies and Federal Home Loan
Bank flexible authority to halt and hopefully reverse the harmful process of
excessive interest rate escalation in the field of consumer savings.
The announced program for reducing Federal expenditures for fiscal 1967
is yet another related measure to minimize the drain of Federal financing on the
credit market in addition to reducing aggregate demand. The President has
made clear his firm determination to hold down all lower priority expenditures
by means of deferrals, stretching out the pace of spending and otherwise reducing
contracts, new orders and commitments—a policy and program with which I
have been actively and affirmatively concerned from the initial preparation of
the January budget.
Of course, any precise description of the amount and nature of the spending
cuts must await action by the Congress on the eight major appropriation bills
still pending before it. When Congress gives us the bills, we will do the job of
expenditure control.
Let me stress that we have been exercising a vigorous control of Federal expenditures all along.
In the fiscal years 1965, 1966, and as proposed by the President in 1967,
Federal budget expenditures—including in the latter years large amounts for
Vietnam—were respectively, 14.8 percent, 15.0 percent, and 14.7 percent of
our gross national product. With the exception of 1958 and 1951, these are the
lowest percentages since 1942—a period spanning 25 years, five Presidents,
and a large growth in the responsibilities of the Federal Government.
When President Johnson took office, the budget under which he was operating,
that for fiscal 1964, called for $98.8 billion of expenditures. Three years later,
exclusive of the costs of Vietnam, his budget called for expenditures of $102.3
billion—an average increase of slightly over $1 billion per year. And this increase
in the total of Federal outlays is much smaller than the added costs over this
period of Federal pay raises and increases in the public debt alone.
In each of the fiscal years 1965 and ,1966, the Federal deficit was lower than
the prior year. The deficit in the administrative budget in fiscal 1965 was $4.8
billion lower than the year before, and $8.5 billion below the 1964 estimate
prevailing when President Johnson took office. In 1966, despite the added expenses of Vietnam, amounting to $5.8 billion, the deficit was cut another $1.1
billion below that of 1965, to $2.3 billion. In fact, on a national income and
product account budget basis, favored by many economists as the true measure
of the stimulus or restraint of Federal activities, the 1966 budget was in surplus
$1 bflhon.
The President announced on September 8 that he had directed Federal agencies
to defer, stretch out, and otherwise reduce contracts, new orders, and commitments by $1.5 billion in fiscal 1967. The total amount of the reductions which
will ultimately be required must await congressional action on the remaining
authorization and appropriation bills. But, as I indicated earlier, given our best
estimates of likely possibflities, we believe a total of at least $3 billion below
the final appropriations figures will be called for. And we are prepared to make
such reductions.

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Since his anti-inflation program was announced the President has begun implementation of his promise to seek further economies in Government by issuing to
the various departments and agencies a new six-point economy program. For
example, he has ordered a 25 percent cut in Federal overtime pay.
Now I will turn to the part of the President's anti-inflation program that calls
for temporary suspension of the- 7 percent investment tax credit for machinery
and equipment and of the option to elect accelerated depreciation on buildings,
for the period September 1,; 1966,^ through December 31, 1967.
As everyone here is probably well aware, I have been a strong exponent of the
investment credit, having worked strenuously to secure its original enactment in
the Revenue Act of 1962, along with the administrative liberalization of depreciation.
Our experience to date has Justified the faith I had in 1961-62 in the efficacy of
the investment credit, and my belief that it should become a permanent part of
our tax structure. Since then industrial production has increased three times as
fast as in the previous decade, real business fixed investment has increased nearly
four times as fast, and our economic growth generally has far surpassed its previous rate. This remarkable achievement is not due solely to the investment
credit, but I firmly believe the investment credit has contributed substantially
to it. Moreover, looking to the long-term future I am convinced that the encouragement provided to business by the credit to modernize and expand its use of
capital equipment is ;essential to maintaining full employment with stable prices,
and to keep our industry competitive with foreign goods. The President and his
administration fully share these views.
It is therefore, as I am sure you understand, only with considerable reluctance
and after very careful study that we reached the conclusion that suspension of
the investment credit is an appropriate measure at this time. I stress suspension—
and not repeal—since the credit should be regarded, as President Johnson's
message indicated, as an essential and enduring part of our tax structure.
Not only do I regard the investment credit as a permanent structual component
of our tax system but also one that should be suspended only in times of active
hostilities at least on a scale such as characterizes the present situation. Even
under such circumstances I would, as I have in the past made clear, be chary of
suspending the investment credit unless the combination of a rapidly expanding
civilian economy and increasing and special defense needs made this course
compelling. I am opposed to treating the investment credit as a countercyclical
device, to be suspended and restored with the normal ups and downs in our
economy.
The present situation is unique and was quite unforeseeable when the credit
was adopted and stress was put^—and properly so—on its permanent character.
We then contemplated a peacetime economy and thoughts of a country engaged
in hostilities on the present scale were far from our minds. But hostilities can cut
ruthlessly across many plans and procedures designed to meet problems of a
country at peace. We are deeply committed to an extensive military operation in
Southeast Asia which shows no signs of early termination. Its effects on our
economy are clearly evident. We are also confronted with a monetary situation
of almost unparalleled tightness, which is producing distortions in our economy
and the highest levels of interest rates in more than 40 years.
Early in the year when the question of suspending the credit was raised in
the Senate, we hoped that this change in the law could be avoided. In March the
President invited to the White House more than 100 chief executives of companies
which, together, are responsible for making a large portion of business plant and
equipment outlays. At that dinner the President made a strong personal appeal
to those present to ciarefully review their investment plans with the objective of
screening out and setting aside for deferral whatever projecits and expenditures
they possibly could. Many of the executives did just that and wrote letters to
the President confirraing their plans to moderate their investment outlays.
Nevertheless, the level of investment in both plant and equipment has remained
too high under present circumstances and it is taking place despite sharp increases in interest rates paid by corporate borrowers which some thought would
restrict capital expenditures. Undoubtedly the increase would have been larger
without the influence of the President's appeal for restraint. This made clear
the need for temporary suspension of special investment incentives, accelerated
depreciation as well as the investment tax credit.
It would be dangerous to let the economy proceed on its present course without
a release from these pressures that suspension of the investment credit and the

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companion measure, accelerated depreciation on buildings, will help accomplish
along with the remainder of the program set forth in the President's message.
The unforeseeable escalation of \^ietnam in mid-1965 gave a strong upward
thrust to the demand on our resources. In response, the policy of the administration has been to take fiscal steps designed to meet conditions as they unfolded.
This was exemplified in the Tax Adjustment Act of 1966 which applied the
degree of restraint that conditions and prospects at that time required. Similarly,
we are now proposing another appropriate step again responsive to prevailing
conditions. In view of the uncertainties with which we still are confronted, we
cannot offer blueprints for future programs. The only prudent course is to
maintain a flexible, step-by-step approach which will maintain the stable growtn
and prosperity of the last 5}4 years, and in the President's words, "pay for
current expenditures out of current revenues, as we are now doing."
Exhibit 19.—White House press release, October 16, 1966, on memorandum to
the President from Secretary Fowler, on the current status of the economy
Before your departure to Southeast Asia to consider regional reconstruction
and development in that area, you wanted an up-to-date report on the economic
and financial situation at home.
A review of the most recent developments leads me to conclude that the U.S.
economy is in healthy and robust condition. There are some imbalances, but
measures designed to correct them have been mounted.
The economy can absorb the reasonably foreseeable demands of the Vietnam
conflict and essential civilian needs within the framework of a free market economy—without resort to the harsh economic controls that have characterized
past wars.
As a former Director of Defense Mobilization during the Korean conflict called
in 1 year after that war was underway to help administer all the paraphernalia
of limited mobilization, I am struck by the present record. It is one of remarkable
achievement in which both Government and the private sector can take considerable satisfaction. This situation reflects the ability of our people to adapt
to shifting needs—to make effective use of the Nation's productive capacity
to meet changing and enlarged requirements. It also reflects the prudent adaptation of monetary and fiscal policies which have dampened inflationary forces
and minimized the inevitable imbalances that characterize a market economy
operating under heavy and shifting pressures. One of these adjustments—in
residential construction—has been too drastic—but both legislative and administrative measures have been taken recently to ease this special problem.
You will recall that our recent assessment of the economy led to your September 8 recommendations, to supplement our earlier anti-inflationary actions.
Congress is nearing enactment of its part of this program. The impact of the
total program has already been felt, particularly in relaxing the strain on our
mone}^ markets and maintaining confidence that the economy is moving into
less turbulent waters.
America's capacity to produce, combined with the demonstrated determination
of the administration to pursue healthy growth and reasonable price stability,
is continuing to pay off:
—The $13.7 billion rise in gross national product during the third quarter
extended the period of solid advances scored during the current, record-breaking
expansion. But it also reflected a welcome moderation from the feverish rate
of late 1965 and early 1966 that produced both imbalance and excess demand
with their accompanying price pressures. At a more sustainable pace we are
still surpassing most of the other industrial countries not onl}^ in the total value
of production and incomes but in the real rate of growth as well. Corporate
profits and personal income—both before and after taxes—continue to rise extending the most steady, sustained increase in modern times. Aftertax household
income is 7 percent higher than a year ago, generating a substantial rise in real
purchasing power.
—Unemployment rates have been at or below 4 percent every single month
this year.
—Our continued increases in capital facilities, skilled manpower and productivity have made it possible for us to shoulder the burdens of Vietnam without
giving up rising living standards or measured advances to our social goals. Our

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strong, stable rate of growth should continue during 1967, enabling us to meet
our responsibilities both at home and abroad without undue strain.
—Our recent price performance shows encouraging signs. The index of raw
materials prices, which moves far in advance of wholesale and consumer prices,
has dropped 13 percent since March. Wholesale industrial prices have held
steady since July. The rise in wholesale food prices has been reversed in recent
weeks. These developments should be favorably reflected in consumer prices
in coming months.
Despite the addedi demands of Vietnam with their psychological unsettlement,
price stability during the present expansion is superior to that of the longest
expansion of the 1950's, 1954-57, when there was no conflict or dislocation resulting from war. The average level of consumer prices during that period rose
excessively but thes^ jumps would have been still higher had it not been for
declines in farm prc)ducts and foods. During the current expansion, consumer
prices rose less, even though this time we were absorbing increases in farm and
food products.
Our record of price stabihty in the face of. the impact of active hostilities and
persistently enlarging defense needs is the envy of nations throughout the world.
Indeed, a major part of the consumer cost of living increases has not resulted
from inflation in our industrial economy but from the adjustment upward of the
income of those who have worked the land and provided services at income levels
well below those in the industrial sector.
—Even with ever higher wage incomes, rising productivity has resulted in
stable labor costs per unit of output in manufacturing during the current expansion, in sharp contrast to the 1954-57 period when these costs rose strongly.
Thus, the ability of American industry to compete in international markets,
shackled by rising production costs built in during the mid-1950's, has been
set free during the 1960's. Merchandise exports have grown every year since
1960 and are continuing to expand, while there was no net growth at all between
1957 and 1960.
\
Despite the substantially increased foreign exchange costs of our military
expenditures associated with the enlarged activity in Southeast Asia, we are
holding our balance of payments deficit to the reduced level of 1965 which was
half the average of the preceding years.
Early indications are that the balance-of-payments results in the third quarter
wiir be even more encouraging. However, this is a sector of our financial life
which will require the closest continuing attention and effort. We cannot afford
increased foreign exchange burdens and must constantly seek arrangements for
our external activities that will minimize cash outflows and enable us to regain
the equilibrium that is basic to a stable world monetary system so dependent
on the dollar.
—The decline in stock market averages appears to reflect more the conditions
of money and credit, the very attractive yields on debt securities, and uncertainties over the course of events in connection with developments relating to
Vietnam, than a pessimistic economic outlook generally.
—The overall level of interest rates, which had risen so sharply this year,
has recently eased. Longer term Treasury, corporate, and municipal bond interest
rates have declined from the high levels reached in August.
—Looking ahead, the Nation need not fear recession when Vietnam hostilities
come to an end. It can look forward to continuing overall economic growth.
Sources of increasing demand are clearly observable. In the private sector
they are derivative from increasing personal income, more jobs, and rising population in the family-forming sector, and surging plant and equipment requirements responsive to a burgeoning technology that calls for a continuing modernization as well as expansion in capacity. Moreover, a resurgence in residential
housing should follow easier monetary policy and the dip in housing. The outlook
for increased State a,nd local expenditures is clear. You are familiar with the
need to hold back and defer worthwhile Federal expenditures which can be
released after the termination of major hostilities.
Moreover, tax reductions can be employed to offset reduced military expenditures and help keep demand growing in line with our productive capacity. The
percentage of GNP devoted to Vietnam expenditures is much smaller than was the
case during World War II and Korea, assuring a much easier transition period.
Therefore, peace in Vietnam can lead to even greater progress in living standards.
I am pleased to report, therefore, that the national economy is vigorous and
thriving. But we must continue our unceasing vigilance to guard against any

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development of imbalances. We must continue to foster appropriate policies
in keeping with national economic requirements, including tax, budgetary, and
monetary policy changes if excessive inflationary or deflationary tenciencies
become evident.
Particularly, the Federal budget on the national income and product accounts
basis—our best measure of the economic impact of fiscal pohcy—should continue—as long as there are inflationary threats—as it has this year, to remain
in balance or in surplus.
In addition to avoiding excessive or deficient demand, economic stability and
continued prosperity will require the earnest efforts of those responsible for price
and wage determination to avoid the cost-push inflation that can arise not from
excessive demand, but from excessive greed and abuse of monopolistic power.
I am firmly convinced that the economy possesses the capacity and the health
necessary to continue rapid and stable growth under our free enterprise system
without resort to the rigidity of overall controls which we have successfully
avoided.
Exhibit 20.—Remarks by Secretary Fowler, November 18, 1966, before the U.S.
Savings and Loan League, New York City, on financial and economic policy
I welcome especially the opportunity to meet and talk with this group, representing so great a portion of the savings and loan industry in our country.
During the past year I have been in touch with many of you by letter, and
have met with a number of you in smaller groups, in a common effort to devise
public policies designed to deal with the special problems you have had to face
in recent months.
May I also take this occasion to thank you for the assistance and advice rendered to the Government through the Advisory Committee on Government
Securities for the Savings and Loan Industry.
In view of the special problems facing us, I have had the benefit of consultation
with your representatives not only at our regular annual meeting with this standing
committee, but on two other occasions with ad hoc advisory groups which your
leaders were good enough to organize, to give us the benefit of their knowledge
and assistance at critical points.
It is timely to look back, and to draw the lessons from the recent past, as we
are about to turn towairds the opportunities and the problems of the coming
year, and that is what I want to do here today. Let us begin, then, before we
look ahead, by looking back at the past year.
Two points need particular emphasis, I think, as we consider the months we
have just been through.
One is the unusual and temporary nature of the economic setting: we are
engaged in active hostilities against armed aggression which, in addition to the
unsettling psychological impact on markets has involved a substantial and
steadily increasing allocation of real and financial resources.
The other is the fact that, whfle the Treasury is not in a position to direct
those monetary developments that have been, and are, your central interest,
the Treasury has been—and is continuing to be—intensely interested and active
in developing especial means to minimize the effects of wartime economic tightening
of money and credit which always falls heavfly upon the mortgage market and
the housing industry.
After the most grave and searching consideration, the President decided—and
announced—in late July 1965, that the United States must expand its commitment to the cause of freedom in Vietnam.
During the eight quarters that preceded that announcement and the bufldup
that followed upon it, our economy had enjoyed a much needed expansion that
marked the final passing of the stagnant type economy of the late fifties. That
expansion had followed a smooth and steady course, averaging approximately
$11 billion a quarter. In the 20 quarters of 1961 through 1965 there had been an
average expansion of $9.7 billion a quarter, and much had been accomplished.
In the 5 years from mid-1960 through mid-1965, our economy had grown,
in real terms—that is, in actual output of goods and services, excluding price
rises—more than 23 percent. Actually, there had been little price rise to discount:
by the midcUe of 1965 wholesale prices were only about 2 percent higher than they
had been in early 1961. Meanwhile, unemployment had been driven down from

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nearly 7 percent to 4.5 percent in July 1965. Corporate profits, real personal
income, and other returns to the private sector were up sharply. Private saving,
by the way, rose 46ipercent from 1960 through 1965, by contrast with a rise of
19 percent in the preceding 5 years. Private nonfarm housing starts were some
250,000 units—or 20, percent—higher in 1965 than they were in 1960^ whereas
inthe preceding 5 years, they fell; that is, in 1960 starts were some 396,000 units
lower than in 1955. That was a decline of approximately a quarter.
Following the President's announcement that our effort in Vietnam must
increase, the expansion of our economy broke away from its smooth, steady,
sustainable upward curve. It climbed sharply to a rate of some $16 bfllion a
quarter. That is an increase of close to half. This steep climb absorbed a major
share of the country's remaining unemployed and unutilized productive capacity.
And, it brought inflationary conditions to bear in an economy that had been
making an historic rise in conditions of exceptional economic stabflity.
The situation was compounded somewhat by a very rapid spurt in the private
sector during the fourth quarter of 1965 and the first quarter of this year-—a
spurt that could only partly be explained by increased military orders.
In the meantime, monetary restraint had been applied, dramatized by an
increase in the Federal Reserve's discount rate in early December 1965, that
elevated interest rates by the summer of this year to their highest point in 40
years.
*
The Treasury, as you are probably aware, is not the monetary policymaker,
nor does it stanci at the focal point of policy toward the mortgage market itself.
The Federal Reserve Board is responsible for monetary policy, and it is an
agency answerable to the Congress from which it draws its powers directly.
The Federal Home Loan Bank Board, which is an independent agency, is principally responsible for governmental activity affecting the abflity of the savings
and loan Industry to operate in the mortgage market.
However, Presiderit Johnson authorized me to set up, under Treasury leadership, in the spring of 1965 a Coordinating Committee on Bank Regiflation including the Federal Home Loan Bank Board, the Federal Reserve Board, the
Federal Deposit Insurance Corporation and the Comptroller of the Currency.
Since last December ,the Treasury has used its good offices, through this Committee, to encourage these financial agencies to devise means to mitigate the
discriminatory effects upon the mortgage market, and the housing industry, of
the economic tightening caused by war.
The intense interest, and concern, aroused by the swift rise in interest rates
during the spring and summer of this year have obscured the extent to which
there has been a shift' from a fiscal policy of stimulation to one of restraint since
the bufldup in Southeast Asia. Fiscal measures of restraint have been affirmatively used to complement the use of monetary policies in a combined program
of restraint on the inflationary pressures which accompanied the increase in our
mflitary activities.
As the President pointed out in his September 8 message to the Congress,
the Government this year—that is, the administration and Congress working
together—acted to protect our prosperity by taking $10 billion of excess purchasing power out of the economy in calendar year 1966.
This included $6 billion through increased payroll taxes for social security
and medicare; $1 billion through restored excise taxes; $1 bfllion through graduated withholding of;income taxes; $1 bfllion through a speedup in corporate
tax payments; and $1 billion through an administrative acceleration of taxpayments.
In addition a policy of holding back nondefense expenditures beginning in the
fiscal year 1966 and carrying through until now has had real fiscal bite.
Economists regard as the best avaflable measure of fiscal policy and its impact
on the economy the !so-called national income and product accounts budget.
This includes the economic impact of money paid into or out of trust funds—•
which can have just as great an economic impact as current income taxes or
spending for defense or space programs. It also nets out the effect of accelerations
or decelerations of revenue collections by counting revenue on an accrual basis.
It leaves out of accouht Federal lending or loan repayments.
On this national income basis, there was a surplus of nearly $1 bfllion for the
fiscal year 1966 as a whole. In the January-June 1966 period alone the budget
surplus on the national income basis ran at an annual rate of about $3 billion,
which represented a sharp shift from the $1.5 billion, in the last 6 months of 1965.

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A surplus appears to have continued into the current fisca year through the
quarter just ended.
This is clear and undeniable evidence that fiscal restraint has been employed
throughout this calendar year. Let us look at the results.
This carefully developed and measured use of public policy to assist the private
economy to return to a pattern of more moderate and sustainable growth—
together with stability and balance—is bearing visible proof. The recent evidence
is reassuring, and is a good sign for the future.
The annual rates of gain in our gross national product in the two latest quarters
have been $11.1 billion and $12.3 billion. The increase in the current quarter
appears to be running closer to these rates than to the excessively rapid expansion
earlier on. This is to say that there is every reason to think that we have returned
to rates of gain that we know from experience can be sustained over the long
pull and should be relatively free from the inflation that comes from excessive
overall demand.
All Americans can take pride in the fact that we have been able to accomplish
this cooling off in our economy without a recession, and can have confidence that
the economy will continue to climb next year at a healthy rate, given reasonable
and responsible economic conduct by all concerned—Government, business, and
labor—without inflation.
There is another sense in which, I think, all of us can take real pride. This
is the fact that we are able now to manage our economic affairs, even in the
presence of large wartime demands, without the harsh and distorting economic
controls that marked our last such experience, in the Korean war.
This is especially notable to me because I was called in, a year after the Korean
war was underway, as Director of Defense Mobihzation, to help administer the
many controls that were placed upon the economy at that time. Let me just
give you an idea of what was in effect:
—a thoroughgoing system of priorities and allocation of materials and
facilities;
—wage and price and salary controls to achieve stabilization;
—consumer credit controls.
Under the above powers, on September 18, 1950, the Federal Reserve Board
issued regulations restricting installment buying. And, on October 12 the Reserve
Board fastened controls on residential real estate credit.
General wage stabilization and price cefling regulations were issued by the
Economic Stabilization Agency the following January 26.
Let me remind you of what happened under these conditions.
During 1951 and through 1953 the economy grew 16 percent at constant prices.
Meanwhfle, in the 1 year, from 1950 through 1951, private nonfarm housing
starts fell off by a quarter. They remained at the depressed 1951 level through
1953.
This happened although private savings grew by a fourth, and although interest
rate levels rose but gradually.
. The very different situation today reflects the ability of the American people—
as I noted in a memorandum on the economy to the President made public
October 16—to adapt to shifting needs, to make effective use of the Nation's
productive capacity to meet changing and enlarged requirements. And, as I
noted in this same message, it also reflects the prudent adaptation of monetary
and fiscal policies which have dampened inflationary forces and minimized the
inevitable imbalances of a wartime economy.
Nevertheless, and despite our best efforts, some serious problems have emerged
this year. There have been scarcities in some sectors of the labor market. Farm
and food prices were under upward pressures. Extraordinary business demands
for capital goods have resulted in some scarcities and have increased delays in
capital goods deliveries.
All this, together with a high rate of inventory accumulation, resulted in
tremendous demands upon financial markets from the business sector of the
economy.
,
These demands, felt together with the restrictive policy pursued by the
Federal Reserve Board, and some slackening in the rate of personal savings,
have combined to push up interest rates, as I have already mentioned, to the
highest point in four decades.
High interest rates, in turn, along with the increased competitive position of
commercial bank time deposits, have led to shifts in savings patterns. This

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brought on t h e adverse effects on thrift institutions, including savings and loan
associations, t h a t you have confronted in recent months. These shifts have
tended to divert funds away from the mortgage m a r k e t and have had a severe
adverse effect on the home building industry.
I n t h e remainder of my talk, I will focus on t h e emergence of this problem,
arid how we in the Government—in the executive branch, t h e Congress, and the
bank regulatory agencies—have a t t e m p t e d to deal with it.
Let me take up first the m a t t e r of interest rates and keen competition for funds.
There is a temptation to start with and focus solely on the December 1965
revision of regulation Q which allowed commercial banks to pay u p to 5}i percent
on time deposits. B u t t h a t would involve an oversimplification. For several
y e a r s ' b a n k s have provided increasing competition with savings and loan associations and m u t u a l savings banks for the household savings dollar. Previous revisions in regulation Q and more competitive behavior by banks, primarily
through t h e development and widespread use of m a n y kinds of certificates of
deposit, contributed to t h e fact t h a t savings inflows into savings ahd loan
associations declined absolutely in 1964 and 1965—even though household
savings were increasing. However, a t more t h a n $8 billion, the growth in savings
shares in 1965 still represented a percentage gain of more t h a n 8 percent.
Prior to t h e December 1965 revision of regulation Q, banks had narrowed the
differentials between w h a t they were paying on time deposits and w h a t savings
and' loans were paying. B u t in most areas of the country rates paid on savings
shares still exceeded rates available on bank time deposits.
\
T h e December revision, which raised the ceiling on time deposits from 4J^
percent to 5H percent, made it possible for banks to offer rates above jthose
prevailing a t savings and loan associations and above the rates sanctioned by the
Federal H o m e Loan Bank Board.
Whatever the final j u d g m e n t of history regarding t h a t action last December,
I think t h a t virtually all observers were surprised a t the speed with which time
deposit rates moved up toward the new ceiling levels. Some u p w a r d r a t e adjustm e n t s were expected, of course. As early as December 10, 1965—a m a t t e r of
days after the rise in t h e discount r a t e and in the maximum r a t e payable on
time and savings deposits—I moved to convene the Coordinating Committee
on Bank Regulation to discuss this new development in the competition for
savings. Concern was expressed a t t h a t meeting not only about the u p w a r d push
of interest rates, b u t also regarding possible repercussions on the financial institutions t h a t would have to seek higher yielding investments to cover the higher
cost of money, and about the mortgage m a r k e t which was vulnerable to a decline
in t h e availability of; funds.
Bankers were publicly urged to exercise caution in using their greater margin
of leeway u n d e r regulation Q, a n d t h e y were cautioned n o t t o bid u p t h e r a t e
on savings in a fruitless race with other sectors of t h e m a r k e t . For a time after
t h e December move it did appear t h a t a cautious approach was being taken.
Relatively few banks raised their rates in December and J a n u a r y and earlier
concern t h a t large movements of savings funds might occur in J a n u a r y , once
t h e end-of-year interest or dividends h a d been credited on savings accounts,
was n o t borne out.
A different picture began to develop by March, however, as more a n d more
banks—including some of t h e largest ones in t h e country—stepped u p their
rates on time deposit accounts more actively. Of course, this was n o t done in a
vacuum. Banks were presumably seeking t o assure themselves of a supply of
funds t o meet strong loan demands, as a b u o y a n t l y rising economy encountered
a policy of increased m o n e t a r y restraint. T h e same m a r k e t forces were evident in
t h e rise in m a r k e t interest rates on a variety of obligations—including Treasury
a n d Federal agency issues, commercial paper, a n d tax-exempt offerings of State
a n d local governments.
W i t h a new a n d aggressive a t t i t u d e t o w a r d competition for time deposits,
a n d with t h e head ropm afforded by t h e December 1965 revision of regulation Q,
banks were willing and able to compete effectively for time deposit funds t h r o u g h
t h e summer of 1966.^ As a result, banks could finance a 19 percent a n n u a l r a t e
of expansion in business loans despite restrictive efforts on t h e p a r t of m o n e t a r y
authorities. Instead of having to ration business credit, banks were able t o shift
.a considerable share of m o n e t a r y restraint t o t h e financial m a r k e t s . This cont r i b u t e d considerably to the rise in interest rates through t h e summer of this
year. I t also added to t h e burden placed upon t h e mortgage m a r k e t a n d t h e
home buflding industry b y restrictive m o n e t a r y policy.

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It was against this background that I stated to a meeting of Reserve City
Bankers last April, after urging the bankers to be more selective in making loans,
and to turn down or scale back the loan applications of lesser priority:
"I would hope, also, that there will be an accompanying disengagement from
unreasoning competition for time and savings deposits that ignores the need
for caution and the harm that kind of competition can do to our banking and
financial system."
It was one thing, in a period when monetary and fiscal policies were directed
toward stimulating the economy, to allow and indeed encourage banks to compete effectively for time deposits. This contributed importantly to financing the
economic expansion. But in a period when policy goals had shifted to restraint,
the same policy of unrestricted competition for financial assets and savings led
to some undesired consequences and excesses.
As rates on market instruments rose and as banks offered higher rates, on
consumer CD's, savings and loan associations and mutual savings banks came
under increasing pressure. Particularly heavy outflows, as you know, were encountered in April and July, foUowing the end-of-quarter interest and dividend
dates. In those two months combined, savings and loan associations sustained
an outflow of $2^4 billion. These outflows led to a sharp curtailment of mortgage
lending by the thrift institutions, which in turn dragged down new housing
starts.
Although housing starts held up well through April, permits had already begun
to decline during that month and information from mortgage lenders had, by
March, suggested that a significant decline in starts was on the way. Starts
during the summer months averaged, on a seasonally adjusted basis, 30 percent
less than during 1965 and the first 4 months of this year. This is about the same
order of magnitude of decline that was experienced after the peak housing years
of 1950 and 1955.
As 1966 progressed, the developing pressures in financial markets suggested
more and more clearly the need for a policy approach that would moderate
the impact of rising interest rates and increased rate competition on thrift institutions, the mortgage market, and home building activity.
From the beginning of the year, the Federal National Mortgage Association
helped to cushion the developing weakness in the mortgage market through its
secondary market operations. During the first half of the year Fannie May
increased its holdings of FHA-insured and VA-guaranteed mortgages by more
than $1.3 billion. In so doing, it was approaching the point at which its borrowing
authority would be exhausted.
In May, legislation was introduced in Congress to expand the borrowing and
lending authority of FNMA. This expansion received the support of the administration and in August Congress enacted a bill that enables Fannie May to
expand its borrowings, and hence its mortgage holdings by some $4.8 billion.
This has enabled Fannie May to continue its mortgage purchases on a sizable
scale in the secondary market.
To offset the outflow of funds from savings and loan associations in April
the Federal Home Loan Bank Board substantially increased its advances to
member associations. Advances outstanding increased by about $800 million,
approximately offsetting the outflow of savings shares. This enabled savings
and loan associations to maintain at least some moderate flow into the mortgage
market from loan repayments and also reduced potential liquidity problems
faced by some associations. During the next 3 months—but particularly in
July—the Federal home loan banks raised their outstanding advances to member
associations by another $800 million and stood ready to make substantially
larger advances if that turned out to be necessary. Had those substantially larger
advances been needed, the Treasury was prepared to back up the Federal home
loans banks with further sums—if necessary going beyond the $1 billion line
of credit that the home loan banks have with the Treasury. While the July
outflow of funds from savings and loan associations was large, it proved to be
less than many had forecast and no extraordinary financial assistance to the
home loan bank system was necessary.
Meanwhile it was becoming clear that a more flexible approach was needed
with respect to interest rate regulation. This had already been discussed by the
Coordinating Committee of the financial supervisory agencies as early as last
December, but the absence of significant savings losses in the opening months
of the new year had tended to lessen the sense of urgency for a time. After April,
the sense of urgency returned with full force.

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19 67 REPORT OF THE SECRETARY OF THE TREASURY

It was for this reason that in May, and thereafter, I took the firm position
that the regulatory authorities needed additional legislation, to be followed by
adequate action, to maintain the competition for savings on a sound basis, and
avoid the excesses of unrestrained competition.
After a number of days of congressional committee hearings, after some further
escalation of interest rates—particularly in late June and July, and after certain
limited actions by thel regulatory agencies within the powers then at their disposal,
a more general feeling had developed throughout the financial community and
the Government that, addi tional administrative flexibility was needed.
In this setting, the various proposals that had been under review by the Coordinating Committee provided a background for bringing much closer together
the views of the various financial supervisory agencies. And with that degree of
unanimity working for it, it was not long before an effective piece of legislation
was passed and signed^The principal provisions of H.R. 14026, which was signed
by the President on September 21, gave the Federal Reserve Board and the
FDIC temporary authority to set different maximum rates on time deposits according to their size and other criteria, and it gave the Federal Home Loan Bank
Board temporary authority to set interest ceilings on savings shares of insured
savings and loan associations.
The same day the riew legislation was signed, new rate ceilings were announced
by the Federal Reserve, the FDIC, and Federal Home Loan Bank Board. These
ceilings, which were developed with full coordination among the three agencies,
had the effect of forcing the more aggressive commercial banks to lower their
rates on consumer CD's to 5 percent while requiring practically no rollback of
rates paid by savings land loan associations and mutual savings banks.
Less than 2 months has elapsed since the enactment and implementation of
this legislation, but the initial experience suggests that on the whole it is working
well and is serving to relieve excessive pressures on thrift institutions. I say this
in full awareness that significant competitive problems do remain in some areas,
but I believe the overall effect has been quite favorable. Early reports indicate
that savings and loan associations in the aggregate suffered no outflow in October^—a much better result than anyone would have dared to predict in advance.
Enactment of PI.R. 14026 and the impleraentation of its rate ceiling provisions
has required considerable cooperation among the regulatory agencies. Our recent
experience strongly testifies to the importance and desirability of such cooperation which, hopefully, will be maintained in the future. As we move through the
period covered by the; September legislation we will all want to consider carefully
whether reason remains for retaining flexible authority of this kind before it
expires next September.
The interest rate legislation was, of course, but one part of the response that
has been developed to relieve financial market congestion. On September 8 the
President announced a program designed to ease developing inflationary pressures and imbalances* within the economy and at the same time ease existing
pressures in°financial markets. In addition to the interest rate legislation I have
already described, that program included the temporary suspension of the investment tax credit on new equipment purchases and of the use of accelerated
depreciation on new buildings and structures. The President also indicated that
he would defer and reduce Federal expenditures in lower priority Federal programs. Congress resporided quickly and favorably by enacting the administration's
tax proposals.
The President also directed in September that the Treasury review all potential
Federal agency financings to keep them at a minimum and thereby help reduce
pressures on the money market and on interest rates. In recent months there has
been a tight rein on Federal agency financings. The September sale of participation
certificates in Federal lending programs was canceled, and the Treasury stated
that a further sale of these certificates would be made in the market in 1966
only if the market returned to more normal conditions.
The President's progi^am has, in fact, brought about a somewhat better atmosphere in financial markets. Interest rates have declined from the August-September
highs; the Treasury was able to conduct a highly successful refunding of its
November 15 maturities; and the deep apprehension about financial conditions
that existed in August seems tb have largely disappeared.
This is a time of year when it is useful to look ahead, as well as back, and I
know that the prospects for 1967 and beyond are very much a matter of concern
to you, as they are to us in the Government.

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209

I wish t h a t I could lay out a neat blueprint for you t h a t would resolve all the
questions.and uncertainties t h a t now face us, b u t I know 3^ou do not expect that,
and I know t h a t I cannot deliver it. On the positive and hopeful side, we are
beginning to see signs t h a t the business sector will not swallow up funds a t the
pace witnessed earlier this year. P a r t of this is traceable to the recent impact
of monetary restraint on bank lending to business. Partly, it reflects some abatement in t h e excessive business demand for investment spending, and i n . t u r n
this is due in some degree to the temporary suspension of the investment tax
credit. Whatever t h e reason, if there is a lesser taking of money by business
borrowers, then in due course more should become available for the mortgage
m a r k e t and the financial institutions t h a t are the mainstay of t h a t market.
In the months ahead we should see the beneficial effects of the measures taken
to strengthen financial markets and assist t h e mortgage m a r k e t directly. I n
stopping the hemorrhage of savings funds from the thrift institutions t h a t occurred earlier this year an i m p o r t a n t p a r t of the cure has begun. As the flow of
funds into savings and loan associations and m u t u a l savings banks improves—and
signs of this are beginning to appear—these funds should find their way into
the mortgage market.
I n short there need be no question about the concern of the Government
for the condition of one of the Nation's major industries—housing, and one of
its major groups of financial institutions—the savings and loan associations.
T h a t is now a demonstrated concern and I can assure you t h a t it is a continuing
concern. Let me interject here just a few words about the current state of our
planning for a new savings instrument to accompany the regular Treasury savings
bond program in 1967. I can understand t h a t this is a topic of particular interest
to you, and while I cannot a t this time lay out specific details of what we will
offer I can be most emphatic about certain of our objectives.
Our program wfll be aimed—and will be aimed successfully, I believe—at
achieving additional savings and not a t diverting savings away from existing
accumulations or existing channels of flow. We are thinking not in terms of a
permanent change in w h a t is offered to the saver b u t of a temporary supplement
to our savings bond program in this current period.
Experience over the years suggests t h a t the savings industry as a whole has
a good deal to gain from the cultivation of regular savings habits among new
savers—and t h a t is a group t h a t we are particularly anxious to reach. By directing our efforts mainly a t payroll savings, and aiming a t signing up new savers—
m a n y of whom now have no savings program a t all—I believe t h a t our efforts
will be entirely consistent with t h e long t e r m interest of the savings industry.
There remains a t this time a question to be answered about the overall economic
trend in t h e year ahead. This depends significantly on the prospects for defense
and other Government outlays in the coming months.
B u t there is no question about the goals for fiscal policy in 1967. T h e y a r e ,
clearly:
First, we m u s t maintain the growth of real G N P in line with the growth of
our capacity to produce—which means a real annual r a t e of about 4 percent.
Second, we m u s t do all we can t o slow down t h e r a t e of price increase a n d
return to price stability as rapidly as possible.
Third, we m u s t do all we can to relieve t h e current distortions in our economy—
which lie principally in t h e capital goods, housing, a n d financial sectors.
Although specific measures can help achieve these results, t h e most fruitful
approach would seem to be t o shift t h e mix of policy so as to permit some easing
of m o n e t a r y policy.
T h e need for balance in t h e economy is of course a concern t h a t stretches
out over a longer time span t h a n just t h e next year or two. Taking t h a t perspective I am m u c h impressed with the size and variety of investment needs—
a n d opportunities—^that lie ahead. I n t h e housing area alone the scope is enormous. Adding to this t h e needs in t h e areas of industry, education, health, t r a n s portation, a n d recreation, t h e prospects are virtually boundless. All of this suggests to me t h a t in order to meet its long-term investment challenge our society
m u s t also develop its techniques for channeling savings in t h e most-efficient
m a n n e r possible. I n this effort all expect t h e savings and loan industry to play
a vital a n d leading role.

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19 67 REPORT OF THE SECRETARY OF THE TREASURY

Exhibit 21.—Statement by Secretary Fowler, February 6, 1967, before the
Joint Economic Committee, on economic and financial policies and programs
We meet after a year of bumpy but successful economic transition. During this
time, our fully employed economy has adjusted to the requirements of a rapicfly
expanding defense effort. From all present indications, the most difficult part of
that adjustment now lies behind us.
In the past 18 months, the economy has absorbed a $15 biflion increase in
national defense expenditures without resort to wartime controls, without disruption of the economy's overall advance, and with smaller price rises than in
earlier comparable periods. Last year's successful transition was aided by a significant shift in economic policy from stimulus in the last quarter of 1965 to
measured restraint through most of 1966. The shift in policy was instrumental in
relieving the economy of growing price pressures induced by the heavy demand
of the defense bufldup. Nevertheless, some strains and imbalances emerged
during the year, and these will require our continuing attention.
Economic achievements were impressive last year:
—Industrial production rose 9 percent;
—^Net income per farm rose more than 10 percent;
—2 million more workers found employment;
—Unemployment averaged below 4 percent;
—^Corporate profits climbed 8 percent.
And internationally:
—Our gold loss was cut more than 50 percent; the loss was due to purchases
by France—except for French purchases we would have added nearly $200 million
of gold to our stocks.
—On an "official settlements" basis our international accounts recorded a
small surplus for the first time since records were kept on this standard in 1960,
and the deficit on a licjuidity basis was up only slightly despite the increased drains
directly due to Vietnam.
But there were problems, too. On the domestic side, prices rose more than usual,
money markets became extremely tight, interest rates rose to excessive heights,
and the accustomed flow of mortgage money fell off sharply. A severe adjustment
was imposed on the housing industry, only now in process of recovery. On the
international side, our trade surplus slipped as a rapid expansion in some sectors
of the economy pressed hard on our capacity to produce.
In the last quarter of 1966, it became clear that many of the heavy pressures
on the economy had; abated. Although unemployment remained low, sales and
production increases slowed, larger inventory increases occurred, and surveys
indicated a slower growth of investment. This made possible a welcome easing of
monetary conditions and our position of fiscal restraint moved to a measured
stimulus.
With different conditions facing us this year, we aim at a different mix of monetary and fiscal policies designed to keep tJtie economy moving ahead steadfly and
safely. As noted, a inonetary easing began in late 1966. The President's fiscal
program will complement monetary easing by maintaining stimulus in the first
half of 1967. Later this year, when less stimulus is expected to be appropriate, the
fiscal program is expected to encourage a continued monetary easing by moving
toward modest fiscal restraint. This can be done by avoiding tax increases now,
but financing through tax revenues the additional expenditure of our defense
effort in.fiscal 1968. Working in tandem, monetary and fiscal policy can continue
to foster the healthy financial environment within which our economy has flourished during the past half dozen years.
Economic developments in 1966
With the President's Economic Report before you, there is no need to review
the broad sweep of economic developments during 1966 in any detail. However,
I would like to comment on major accomplishments—and unsolved problems.
In the sixth year of the current expansion, our gross national product increased
a shade more than 8)i percent in money terms and by about 5% percent after
allowance for rising prices. The enormous productive power of the economy was
bolstered by a record increase in industrial capacity, reflecting, in large part, the
successful use in past years of investment incentives.
This added capacity helped meet the strong rise in defense and civflian production in 1966. Despite the emergence of the selective pressures that required

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211

by late summer the temporary suspension of the investment tax credit and accelerated depreciation, higher production was achieved with only about a 2 percent
rise in the industrial component of the wholesale price index. Let me note, in
contrast, that industrial prices rose more than 10 percent between 1950 and 1951
under the pressure of the Korean bufldup, and by more than last year's 2 percent
in both 1956 arid 1957, when no comparable defense buildup took place.
We can take satisfaction from the fact that unemployment averaged only 3.9
percent last year. There can, however, be no complacency about the unemployment problem while much higher rates persist for teenagers, minority groups,
and the disadvantaged. Signfficant reduction of these higher rates is unquestionably a. matter of high national priority. But further reductions in unemployment
must increasingly depend upon our intensified efforts to improve training and
educational facilities, upgrade skills, and remove remaining discriminatory
barriers to job opportunities.
The economy cannot continue to grow as rapicfly now as it did earlier in the
expansion when there were relatively large amounts of unutflized industrial
capacity and unemployed labor upon which to draw. Were we to permit or encourage total spending in the economy to rise as rapidly as it did last year, the
result could only be sharply rising prices, undue strain on the balance of payments,
and likely an eventual recession with a retreat to much higher rates of
unemployment.
With the combined impact of sharply higher defense requirements, and the
business plant and equipment boom, the economy did begin to pick up too much
speed in late 1965 and early 1966. The need this posed for a shift away from fiscal
stimulus was fully recognized last year when I appeared before your committee,
and in the economic program we placed before the Congress at the outset of the
year. A program of fiscal restraint, additional to the January 1966 increase of
$6 bfllion in payroll taxes, was contained in President Johnson's budgetary recomrdendations of a year ago. Prompt congressional action on the Tax Adjustment Act
of 1966 enabled fiscal policy to move to a more restraining position early in the
year.
Monetary restraint—signaled by the December 1965 discount rate increase by
the Federal Reserve—was applied with increasing effect as the year proceeded.
By late summer, strong credit demands and monetary restraint had led to, an
intensification and concentration of pressures which called at one and the
same time for further fiscal action to restrain certain areas of excessive demand—
notably in the business borrowing sector—and also for action to relieve the excessive burden of monetary restraint that was threatening the very functioning of
our financial markets. President Johnson's anti-inflationary program of September 8 and responsive action by the Congress led to a dramatic improvement in
financial markets and a lessening of inflationary strains.
This fiscal restraint—its nature, timing, and amount—was measured with care
against the most realistic and updated picture of the Nation's economic condition
that we could obtain. Our problem during most of last year was not primarily one
of overall excess demand or insufficient total restraint. This is illustrated by the
much slower advance in gross national product beginning by the second cjuarter
of 1966, and by the flat trend in overall unemployment and industrial utilization
rates during the same period. Rather the problems were those of selective imbalance and the financial strains that can develop with a sharply increasing degree
of monetary restraint.
Some intensification of price pressures—raggravated by a rise in food prices due
primarily to special and largely temporary agricultural difficulties^—could not be
avoided under the circumstances. But by yearend, the price situation was much,
improved. Wholesale prices had fallen back from their August peak, and the rise
in consumer prices was slowing. The year-to-year increase in the consumer price
index was a little less than 3 percent, certainly more than we wished to see—but
far less than the 8.0 percent between 1950 and 1951 during early stages of the
Korean defense buildup, and even less than the 3% percent between the peacetime years 1956 and 1957.
Flexibility in fiscal policies
In summarizing last yiear's fiscal action and that planned for the year to come,
it is convenient to focus on the Federal sector in the national income accounts.
This is the best single measure of Federal fiscal stimulus or restraint. Over time,
it tracks the changing course of the Federal Government's fiscal impact, which
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19 67 REPQRT OF THE SECRETARY OF THE TREASURY

both influences, and is influenced by, the pace of private spending and taxable
income. As you know, the administrative and cash budget positions, while important from other standpoints, do not provide as meaningful information on
the Federal fiscal impact in terms of current spending on the output of the
economy.
A year ago when t appeared before your committee, I emphasized that there
was a clear need for a shift away from the stimulative fiscal policies of earlier
years. That shift took place as planned and is mirrored in the swing from stimulus
in the second half of 1965 to a restraining posture through the first half of 1966.
Last fall, with further selective fiscal action being taken in reduction of nondefense spending and' suspension of the investment tax credit, the need for overall
restraint had clearly lessened. Monetary policy was beginning a shift in the
direction of ease. And, by that time, the nationaF income .budget had arrived at
a mildly stimulating position that Was also appropriate to the general economic
situation.
Thus the general contours of fiscal stimulus and restraint over the past year
coincided closely with the requirements of the economy. Restraint was needed
early in the year, and it was there. As the need decreased, so did the restraint.
I will not argue that fiscal perfection was attained in 1966. But I do contend that
the overall pattern of fiscal action was prudent and responsible in view of the
manifold uncertainties that were present throughout much of the year.
The -President's fiscal program for this calendar year has been carefully framed
to provide maximum flexibility. It will continue to be important to apply restraint
and stimulus cautiously and at the proper time. During the first half of this
calendar year, we expect to see some acijustments taking place within the context
df a generally rising and prosperous private economy. Defense expenditures will
still be moving up, and a moderate advance should be taking place in other
components of demarid. But some moderation in the rate of growth in inventories,
in line with recent sales trends, may well occur in certain industries. During this
same period, the housing industry should be gaining momentum but will not have
reached full speed.
All told) during this first half of the year, we are likely to need to complement
a- continuation of monetary ease with a moderate degree of fiscal support while
some sectors of the economy are shifting gears. And that is what fiscal policy is
designed to provide. ; •
By the second half of 1967, the economy is expected to pick up added steam and
be in much less need of a fiscal push. An easing of monetary policy should lead to
a significant revival in housing. Assuming favorable congressional action, personal
incomes will be augmented at midyear by a rising stream of social security benefits,
with higher payroll taxes to follow in 1968. And on current estimates. Federal
expenditures for Vietnam and other defense outlays, as measured in the national
income accounts, will rise by another $5.8 billion during the fiscal year that begins
this July. " " ' ' : '
The President has recommended a 6 percent surcharge on both corporate and
individual incorae taxes to be effective at midyear and to last for 2 years or for
so long as the unusual expenditures associated with our efforts in Vietnam continue.
An exemption is provided fpr low-income taxpayers. The revenue effect of the surcharge would increase, calendar year 1967 tax liabilities by $2.8 billion—$1.9 individual and $0.9 corporate. In calendar year 1968, tax liabilities would be increased
by $5.8 billion—$3.9 individual and $1.9 corporate. In addition, legislation will be
recommended to provide a further acceleration of certain corporate tax payments
commencing in calendar 1968.
Assuming faivorable action on the President's program, the national income
budget would move into a smaller deficit position during the last half of this
calendar year than otherwise would be the case. And, on current projections, the
budget would exert an; essentially neutral influence in early 1968, reaching balance,
and possibly a surplus, by mid-1968.
As .we learned from 1966 experience, projections cannot always hit the mark. The
prudent course is to maintain a maximum degree of flexibility in order to meet
unforeseen developments. But, our best judgment now is that the moderate tax
mcrease the President has proposed will be consistent with the needs of the economy in order to prevent any resurgence of inflationary pressures. Furthermore,
that increase would meet the fiscal 1968 increase in defense costs, keep our cash
and administrative deficits within reasonable bounds, and provide extra leeway
for a continued easing of money and credit, giving some insura;nce against a
return ':o the monetary stringency of 1966.

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213

By late summer, interest rates had reached their highest levels in four decades.
With the announcement of the President's September 8 anti-inflationary program
and the benefit of subsequent steps taken by the Congress and the financial
regulatory agencies, a concerted easing of interest rates was set in motion. Since
early October, there has also been a rise in average stock market prices.
From earl}^ December 1965—just before the discount rate rise^-to the AugustSeptember peaks of last year, 3-month Treasury bills rose by nearly 1}^ percentage
points, and long-term issues also rose substantially. New issues of AA-rated
corporate bonds rose about 1>4 percentage points reaching almost 6% percent.
The commercial bank prime lending rate also rose 1}^ percent. Yields on new
municipal bonds advanced about three-fourths percent. Rates on conventional
new home mortgages as reported by FHA also rose about three-fourths percent,
and the availabflity of funds to the mortgage market was drastically reduce'd.
Not quite 6 months later, rates have fallen back impressively. Three-month
Treasury bills are lower by about 1 percent and long-term Treasury rates have
returned to the level which prevailed before the discount rate rise. I am pleased
to report that on our current successful $7.5 bfllion refunding the rates are the
lowest offered in a Treasury refunding since, November 1965.
Financial policies and debt management
Financial markets through the first two-thirds of last year were marked by
extraordinarily heavy credit demands pushing against increasing monetary restraint. Interest rates rushed higher and at times the orderly functioning of the
financial markets was threatened—especially in the late summer period. The
avoidance of severe disruption testifies to the great strength and resiliency of
our financial.system—but the test was not one that bears repetition.
The heavy credit demands of 1966 came mainly from the private sector. Business
borrowing, especially, made huge claims on the capital markets. Net debt and
equity issues of corporations came to an estimated $12)^ billion, while business
borrowing from banks rose $10 billion. State and local government debt rose $7
billion, and mortgage debt by $25 billion (but this was $5}^ billion less than in
1965). Federal credit demands on the private sector (netting out purchasesby the
Government investment accounts and the Federal Reserve) came to just, $3.
billion, as a $2 biUion decline in Treasury issues in the hands of the public partly
offset the $5 billion increase in Federal agency debt and participation certificates.
Federal agency securities and participation certfficates are also-finding .the'
markets much more receptive than a few months ago. Corporate and municipal
yields have moved down substantially from earlier peaks, and the. average cost
of new State and local borrowing is below the levels of December. 1965. Bank
lending rates have begun to recede. Rate declines have been somewhat slower to
come in the mortgage area, but there are signs that they are on their way, and there
is welcome evidence of improvement in the flow of funds to the mortgage market.
Special measures were needed—and were taken—last year to cope with an
abrupt hiatus in the normal flow of funds to thrift institutions and the mortgage
market. Aggressive competition among financial institutions for time deposits
contributed to an overall escalation of interest rates, and shunted funds away from
the mortgage market. The Coordinating Committee on Bank Regulation—which;
President Johnson directed me to set up in the spring of 1965—provided a useful
forum within which the regulatory authorities were able to hammer out an effective
program to deescalate savings rates from their highest levels and mitigate adverse
effects on the mortgage market.
. . ^,i.
A key element in that program was the legislation providing the regulatory
agencies with temporary authority—which was immediately exercised—to set
maximum rates on time and savings accounts. In addition, important offsets to
the reduced flow of money into mortgage markets were achieved through expanded
Federal Home Loan Bank and Federal National Mortgage Association operations—in the latter case with the help of congressional action to expand FNMA's
borrowing capacity.
. .
As 1966 progressed, increasingly close coordination was achieved in thefinancial"
area. It should serve us well in the future. Last year's experience does emphasize
the need to consider carefully how in the future the mortgage market might be
spared the burden of excessive restriction in the wake of monetary tightening.-

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The transition back to cost-price stability
One consequence of the pace of expansion in 1966 was the extra pressure on
costs and prices. The:result was an unwelcome lapse from the remarkable record of
stability that has prevailed throughout most of the current expansion. Against
the standards of previous defense bufldups or the investment boom of the mid1950's, last year's performance was remarkably good. But, the upward drift in
our price indexes sirice mid-1965 is cause for concern. We have acted, and wfll
continue to act, to avoid price increases that woulci endanger an enviable record
of stable economic growth and progress toward balance of international payments
equflibrium in the 1960's.
The consuraer price index increase of 2.9 percent between the full year 1965
and 1966 was about twice the size of the average increase of recent years. Between
December 1965 and December 1966, the index rose somewhat more—by 3.3
percent—but the rate of advance had slowed appreciably by late 1966. Wholesale
prices rose by 3.2 percent between the full year 1965 and 1966, but by only 1.7
percent between December 1965 and 1966, reflecting the downward trend that
developed after midyear.
While there were signs that price pressures were abating by late 1966, labor
costs per unit of output in manufacturing—and in other major sectors—were
drifting upward. This, too, marked a departure from virtual stabflity earlier in
the expansion. As yet, the increases are moderate by comparison with earlier
expansions. However, it is essential to achieve an early restoration of cost stability
in order, to avoid a further push on prices.
We expect the more moderate advance of the economy this year to relieve
selective pressures and provide the environment within which a transition to
better cost-price performance can proceed. And, the Government will continue
its other efforts to relieve cost-price pressures—through its training and employment service program, and in the areas of procurement, stockpfle disposal, and
farm programs.
But efforts of the iGovernment alone wfll not be enough. As President Johnson
has stated in his Economic Message, improvement will require the responsible
conduct of those in business and labor who have the power to make price and
wage decisions.
Before turning to a discussion of the balance of payments, I would like to take
note of the recent study by your Subcommittee on Economic Progress entitled
"U.S. Economic Growth to 1975: Potentials and Problems." Your committee
is extending its record of involvement with important economic issues. As I
indicated in my remarks at a Loeb Award luncheon last May, our rate of overall
economic growth must increasingly rest almost entirely upon the rate of growth
in quantity and quality of new capacity and new manpower. Therefore, your
study—and others—^pf our growth potential is welcome indeed.
Balance of payments!
While full information on last year's balance-of-payments results will not be
avaflable for several weeks, I can outline the general picture. Our "liquidity"
deficit last year was somewhat over $1.4 billion—roughly $100 million more than
in 1965. This minor increase must be viewed against the far greater rise in direct
foreign exchange costs associated with Vietnam—not to mention the increase in
indirect balance-of-p'ayments cost in the form of additional imports resulting
from higher defense spending at home.
Our "official settlements" balance, in contrast, actually showed a slight surplus
of about $175 million on the basis of preliminary figures—the first surplus since
1960 when we first kept figures on this basis. This surplus was attributable to
heavy borrowings from abroad by U.S. banks and the consequent accumulation
of liquid dollar clainis by foreign commercial banks, including foreign branches
of U.S. banks. It reflected the tight credit situation in the United States and the
unsettled condition of sterling during part of the year. Ordinarily many of these
dollars would have raoved into foreign official reserves and some of them would
possibly have been converted into U.S. gold. As it was, our gold loss for the
year was $571 million, in contrast to $1.4 billion in 1965, excluding the $259
million gold payment in connection with the increase in IMF quotas.
Last year our overall reserve loss—gold, convertible currencies, and IMF
gold tranche position—was $568 million. The comparable figure in 1965 was
$1.2 billion. It is worth noting that even with an official settlements surplus

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our net reserve position showed a decline—due mainly to continued heavy conversions of dollars into gold by France during the first 8 months of the year.
On trade account, our surplus declined by somewhat over $1 bfllion—from
$4.8 bfllion in 1965 to about $3.7 bfllion last year. Our exports rose by more
than 11 percent, but our imports rose by almost 19 percent because of:
—a rapid rise in gross national product,
—near-capacity operation in some sectors of the economy, and selected
shortages of skilled labor,
—a high level of military orders for specialized items, and
—certain special situations such as that arising from the elimination of
duties on automobiles produced in Canada under the recent United
States-Canadian auto agreement.
With the lessening of selective pressures in the economy and a more moderate
pace.of advance, growth in imports can be expected to taper off. In fact they
showed almost no change between the third and fourth quarters of last year.
On the export side, the U.S. competitive position was maintained. U.S. wholesale prices rose faster than in some advanced countries but slower than in others.
Unit value of U.S. exports in the second quarter of last year showed a decline
from the comparable quarter in 1965, whereas the movement was upward for
most advanced countries.
Whfle we appear to be holding our ground, competitively, we are not making
the gains we did up to mid-1965. To insure renewed progress toward a balanced
payments position, an early return to cost-price stability is essential.
In the capital sector, incomplete data point to some decline in total private
outflow for the year as a whole. We know, for example, that banks reduced their
claims on foreigners by about $300 mfllion.
The spectacular change, however, in the capital accounts last year was on the
receipts side. Long-term capital receipts included:
—investments of over $400 million by international lending institutions in
long-term CD's and in U.S. agency issues, and
—investments of over $700 million by foreign official agencies in long-term
CD's.
Some of the latter investment was made out of large dollar accruals to certain
countries from our military spending abroad. Some represented shifts out of
foreign official liquid dollar holdings in response to the high rates of return on
time certificates of deposit and Federal agency securities.
The official reserve transactions balance, but not the liquidity balance, benefited from an unusually large accumulation ($2.8 billion) of liquid dollar holdings
by private foreigners, mainly banks—and including foreign branches of U.S.
banks.
In very broad terms, last year's worsening in the trade and mflitary expenditure accounts was offset by unusually large receipts of foreign capital. In 1965
when there was also a worsening in the trade and military expenditure accounts,
the major offset was a reduction in the outflow of U.S. private capital.
We must strive for a better balance in the years ahead. The United States is
normally a large net capital exporter—and it should be. It generates substantial
savings, its capital markets are highly developed, and its business management
invests heavily abroad.
But for the time being, the United States must be prepared to hold its net
capital outflows to reasonable proportions. Our balance-of-payments program
is tailored to this end. And, if net capital export is to be large in the future, we
must achieve a strongly growing current account surplus.
In the current account area, we have:
—made the expansion of U.S. commercial exports a major activity of missions
abroad.
—established a special rediscount facility at the Export-Import Bank.
—to attract more foreign tourists, to our shores, we are establishing a special
task force of Government and business executives to make specific recommendations in this vital area. The lack of funds available to the U.S.
Travel Service has been an inhibiting factor here.
In the Government area, we have:
—taken further steps to insure that AID-financed exports are "additional"
to our normal commercial exports, and
—worked closely with the international monetary institutions to insure that
their financing in the U.S. market was consistent with our balance-ofpayment policy.

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I n the capital area, recent actions include:
— t h e request for a u t h o r i t y frc)m t h e Congress t o adjust t h e rates of t h e
interest equalization tax between zero and 2 percent, as relative interest
rate changes and our balance of p a y m e n t s warrant.
:—the meeting last m o n t h with the Finance Ministers of the United Kingdom,
West Germany, France, and I t a l y in Chequers to determine how interest
rate policies might b e better coordinated, and particularly to deescalate
interest" rates on an international scale.
—tightening of i t h e guidelines under t h e Federal Reserve aind Commerce
D e p a r t m e n t y o l u n t a r y cooperation programs.
—establishing alprogram for informing foreign investors of t h e benefits of t h e
recently enacted Foreign Investors Act. This will involve intensive effort
in the.months ahead as we establish new channels t h r o u g h which foreigners
m a y t a k e advantage of attractive investment opportunities here.
Other advanced cbuntries have an i m p o r t a n t role in achieving a viable international p a y m e n t s p a t t e r n . T h e industrialized countries of continental Western
Europe, as a group, t e n d to r u n continual a n d substantial current account surpluses
with t h e rest of the, world. I n the period since 1957, t h e y have imported more
capital t h a n . t h e y have exported. T h e y have preferred to accumulate gold and
other officiar reserve assets in p a y m e n t for their currerit account surpluses rather
t h a n offset t h e m with medium- a n d long-term capital outflows.
T h e United States has played t h e opposite role. I t has supplied large a m o u n t s
of capital to t h e rest of t h e world, financing not only its own current account surplus b u t also,, indirectly, p a r t of t h e current account surplus of t h e continental
Western European countries.
A report on improving t h e adjustment process was m a d e b y Working P a r t y 3
of the O E C D in August 1966. I t emphasized t h e responsibility of b o t h surplus
and deficit countries!for proper international adjustment, a n d t h e special need for
international consultation in the field of monetary policy to avoid undesirable
levels of interest rates. Recently you have seen the efforts t h a t have been m a d e to
develop ;and carry further this aspect of international cooperation.
As'you will recafl, t h e Treasury was asked some time ago by your committee
to comment on a proposal t h a t wider exchange r a t e margins around parity might
be. useful in facilitating short-term adjustment. I hope shortly,to submit our reply
to, this request, b u t I can say in general t h a t this proposal does not seem to be a
very promising one.
Better international financial arrangements
• In the Economic Message, the President called attention t o t h e significant progress
made during t h e past 3^ear toward strengthening t h e international monetary
system. I n t h a t year t h e F u n d quotas were increased bj^ 25 percent, t h e General
Arrangements To Borrow were renewed for another 4 years, and t h e network of
bilateral, swap arrangements between monetary authorities of t h e United States
and other leading countries was enlarged from a total of $2.8 billion to $4.5
biflion. These actions t a k e n together have effectively broadened a n d strengthened
t h e credit facilities t h a t m a y be called upon to meet p a y m e n t s imbalances.
• T h e President has placed major emphasis on the importance of reaching full
agreement on a constructive contingency plan in t h e coming year. T w o major
forward steps were t a k e n in 1966.
• T h e first was to reach a wide consensus on basic principles for creating reserves,
among t h e Group of Ten, as set forth in the Report of t h e Deputies in July 1966
a n d t h e Ministerial Communique of J u l y 26, 1966.
T h e second was t h e broadening of t h e negotiations to include all members of
the I M F through joint meetings between representatives of t h e Group of Ten
and, the. Executive Directors of t h e I M F . T h e first joint meeting was held in
Washington a t the end of November, a n d t h e second took place in London on
J a n u a r y 25 a n d 26; :i967.
' T w o major remairiing problems concern t h e provisions regarding t h e acceptability a n d the holding and use of new reserve assets, and t h e procedures u n d e r
which decisions are to be taken. These m a t t e r s will be the subject of intensive
negotiations during t h e spring of this year, and I believe there are already some
signs t h a t opinions are converging.
T h e outlines of a jcontingency plan are beginning to emerge, a n d I hope t h a t
t h e major .elements will become sufficiently clarified for t h e m to be presented t o
the annual meeting of t h e Board of Governors in Rio de Janeiro in S e p t e m b e r .

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217

I t is i m p o r t a n t t o understand both what we can expect from a contingency
plan for reserve creation, a n d w h a t we cannot expect from such a plan. Over
time, t h e new reserve assets, like any other reserves, will provide substantial
resources t h a t countries m a y on occasion use to meet short- and medium-term
exigencies arising out of fluctuations in their international accounts. B u t they
should not be regarded as a ineans for flnancing persistent deficits.
Nor should we regard reserve creation as a form of international assistance to
developing areas. This, I believe, is fully recognized by t h e representatives of
these developing countries. There is no doubt, however, t h a t these countries
need reserves a n d t h a t an adequate growth in their reserves is one of their legitim a t e concerns. One of t h e major benefits which these countries m a y expect to
derive from an adequate system of reserve creation is t h e indirect effect of a
more liberal t r a d i n g a n d investing p a t t e r n on t h e p a r t of industrial countries,
t h e r e b y enlarging t h e scope of their own t r a d e a n d their capital availabilities.
These considerations have a bearing on a second aspect of t h e question of
reserve creation—its urgency. This committee and its members have made
timely a n d imaginative suggestions in t h e field of international economic a n d
financial cooperation, and t h e y have recently called attention to t h e urgency of
t h e problem. We are in full agreement t h a t t h e events of t h e past year underline
t h e desirability of establishing a contingency plan as early as possible. There is a
growing recognition of this need in international circles.
Conclusion
As we enter t h e seventh year of t h e current expansion, t h e economy remains
strong a n d further progress has been made toward better internatioriai financial
arrangements. Domestically, last year's shift from fiscal stimulus to. restraint
helped place t h e economy on a more sustainable p a t h of advance. Now, we m u s t
m a i n t a i n t h e forward m o m e n t u m of t h e economy while restoring relative stability in costs a n d prices.
N e w challenges m a y be ahead. As in t h e past, these will require our best efforts.
I a m confident t h a t flexible and sensible a d a p t a t i o n of our economic and firiaricial
policies will enable us t o meet our responsibilities—at home a n d abroad.
S U P P L E M E N T A R Y S T A T E M E N T O F T H E S E C R E T A R Y Oi: T H E
TREASURY BEFORE
THE JOINT ECONOMIC
COMMITTEE,
F E B R U A R Y 6, 1967
I t has n o t been m y practice in t h e p a s t to spend time a n d energy answering
M o n d a y morning quarterbacks particularly when subsequent events have proven
that, t h e play t h e y would have h a d called in t h e game would-'have lost rather
t h a n gained yardage.
' • •
Nor have I m a d e it a practice t o answer partisan criticism. My-firm belief is
t h a t economic and financial policies a n d programs are good or bad on their merits
a n d n o t because t h e y happen t o bear a Republican label or a Democratic label.
However, two circumstances cause me t o depart from this past practice. First,
because t h e reasoning a n d analysis as applied to a past event, i.e., t h e absence
of an increase in income tax rates in 1966, seems to be designed to prejudice a
key element of w h a t I believe to be t h e right economic a n d financial program for
1967—the levying of surtaxes on individual a n d corporate income taxes beginning
next J u l y 1 for t h e next 2 fiscal years. Second, these hearings before t h e Joint
Economic Committee of the Congress were opened by a s t a t e m e n t from Senator
J a v i t s "on behalf of t h e minority on t h e committee."
I believe it i m p o r t a n t to correct t h e record t h a t Senator J a v i t s purports to m a k e
on behalf of t h e minority when he characterizes t h e year 1966 in t h e followingt e r m s : " W i t h restraint lacking on t h e fiscal side, without some genuine spending
cuts or a modest tax increase early in t h e year, monetary policy necessarily was
drawn in to fill a v a c u u m . "
This s t a t e m e n t is full of error in all of its aspects: T h e primary fact is t h a t there
was restraint on t h e fiscal side. All facts, figures, and subsequent events make this
.clear. T h e corripelling proof is t h a t t h e N I A budget shifted from a stimulative
deficit in t h e latter p a r t of calendar 1965 to a restraining surplus in t h e first half
of calendar 1966.
Senator J a v i t s is also in error in purporting to speak for t h e minority because,
as I will demonstrate from t h e record, his espousal of income tax increases in t h e
spring of 1966 found him in t h e not unaccustomed posture of being completely

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and unanimously overruled by his own party. The Republican Coordinating
Committee, the Republican House leader, and the Plouse Republican conference
in March and April announced their opposition to any further tax increase than
the one some of them had supported in the Tax Adjustment Act signed March 16,
1966. This position was reaffirmed formaUy in the report of the Republican
members of the House Ways and Mearis Committee on the debt ceiling extension
in June.
As I commented last week to the House Ways and Means Committee, the
administration, including the Secretary of the Treasury, was in accord with the
repeatedly stated policy of the official Republican spokesmen on tax and fiscal
matters in refraining from requesting any income tax increases in calendar 1966,
while urging that we hold down increases in appropriations and expenditures ia
fiscal 1967 as wefl as 1966.
The President espbused that same position in 1966 on many public and private
occasions. During the spring and summer he met a number of times with the
leaders of the Senate and House from both parties on holding down nondefense
appropriations to the overall totals in his budget and whether or not an income
tax increase proposal would gain congressional approval. He was told an equal
number of times that there was little support for an income tax increase and that
a recommendation would be defeated by an overwhelming margin.
Therefore, I find inyself in the unusual position of having to defend the elements
of fiscal policy followed and espoused by the Republican and Democratic leadership and a Democratic administration from the attack of one who purports to
speak for the minority party which was in fact a minority of one.
Finally, Senator Javits is in grave error in asserting that "monetary policy
necessarily was drawn in to fill a vacuum" that existed early in the year.
The fact is, as everybody knows, that the country had been committed initially
to a monetary policiy of restraint involving tight money and higher interest
rates by action of the Federal Reserve System early in December 1965. As I
stated before this committee last year, it became the role of fiscal policy to shift
to a course of moderate restraint following the steps already taken by the monetary authority, without risking economic overkill.
Looking ahead to the debate this spring on the President's surtax proposals,
let me note that there is a great deal of economic difference in advocating increased
income taxes tp pay, the increased costs of war when monetary policy is on the
path toward ease than when monetary policy was moving in the direction of
clear, positive, and increasing restraint. There is a fundamental consistency in
the position of those concerned with maintaining full employment and growth in
refusing to advocate income tax increases when monetary policy is highly restrained and increasing income taxes to pay for increased costs of war when
monetary policy is moving towards ease.
So I welcome this opportunity to comment on the current folklore that the
U.S. Government "made a mistake" in not raising taxes early in 1966.
This is no more true than is the usual easy explanation of a complicated course
of events. But I do not want to be understood by this as saying that this allegation
is even partly correct.
It is not.
;
It is wrong, as I shall show you here.
It is wrong first of all because it begins by ignoring the fact that we did raise
taxes by legislative action early in 1966—to the tune of $6 bfllion.
I t i s wrong in the second place because this criticism means that it was a mistake
not to impose a brc)ad, blunt, general income tax increase on individuals and
corporations at that time. In this respect let me just point out:
—few of our critics, if any, were themselves convinced a year ago that a general
income tax was needed, or, if they were convinced of it, they were not saying so in
public, and
—the condition of the economy early last year—as indeed the condition of the
economy throughout the year—was a condition of selective excesses—together
with selective softnesses— calling for the careful use of selective constraints. That
is exactly what we used, in the Tax Adjustment Act in the winter, and under the
President's Anti-Inflation Message in September, including a specific new program
for additional cuts in Federal expenditures in this fiscal year.
Third and most important of all, the assertion that it was a mistake on the administration's part not to propose a general tax depressant early last year is
clearly and evidently wrong—as I shall be demonstrating—for the reason that
some softnesses were already apparent in the economy at that time. These soft

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219

spots suggested to us—as they should have suggested to our critics, especially
to some of the prominent economic analy sts. who took issue with us—that a
general tax increase a year ago would very likely have resulted in a private
economy that was softer in late 1966 and early 1967 than the current one which is
now a concern to many of these same analysts.
This is now getting belated recognition. It was acknowledged in an article on
January 17, 1967, in the Wall Street Journal—a paper that often disagrees with
the Government's economic policies. This stated, among other things:
"A question raised by many commentators after President Johnson proposed a
6-percent income-tax surcharge was whether such a levy might not bring on a
recession in business.
"Actually, the time to ask this question—as few then did—was early last year,
when tax-increase proposals were already being made by analysts outside the
Government.
"At that time * * * signs that the rate of business activity might turn down
were not lacking, although they were being given little attention.
"The two clearest signs were declines in bond prices and in stock prices * * *,
Such joint action is typical of the tops of booms.
"Thus, it could be argued, as few analysts did, that if a tax increase were
imposed it might aggravate a business downturn which, although not yet present,
already seemed possible if not probable. The correctness of this analysis has since
been confirmed, at least to the extent that a recession has occurred in much
of the private sector even without a tax increase."
The author went on to point to declines, all but one of them as early as last
spring, in automobile production, housing, commercial and industrial construction,
appliance manufacturing, and steelmaking. He concluded from this that "a
recession in private industry has been underway for months * * *'' and he wound
up his analysis:
"Private business may well be dragging bottom or even turning up before the
Johnson 6 percent surcharge is passed or takes effect. If so, the tax may merely
slow the recovery and keep prices from climbing, rather than aggravating a new
downtrend as so many now fear."
The key word in that last sentence is "'now' * * * as so many now fear."
It suggests the central difficulty, that critics of the Government's economic policy
are suffering from an analytical lag, that has them currently applying their .
economic calipers to the conditions of a year ago, just as they were then applying
them to conditions of unmitigated boom that was already receding perceptibly
in the second quarter of 1966.
I want to go a little further into the economic record in support of the policy
mix we used in 1966 to show you in somewhat more detail the real—as distinguished from the imaginary—conditions to which we tried to minister. Before I
do, however, let me turn to a very recent article in the Journal of Commerce
that puts the same kind of cautionary light upon the folklore concerning inflation
in 1966 that the analysis I have just quoted thrust upon the herd-thinking that
took place last year with respect to the need for tax action. Once again, I am
calling upon the researches and conclusions of a newspaper not noted for its
tender concern for governmental economic policy.
This article, on January 4, 1967, headed "Records Show 'Inflation' Last Year
Was More Imaginary Than Real" said:
"A year ago, it may be remembered, there was much clamor for a substantial
income tax increase to cool down the economy and check inflation.
"We didn't get the income tax increase. And, we didn't get much inflation.
This latter is contrary to the general impression going the rounds that the inflationary kettle all but boiled over last year.
"Actually, the records show, the heat under the general commodity price
structure was lowered quite a bit last year.
"From December 1965 to December 1966 the Bureau of Labor Statistics
wholesale commodity price index rose from 104.1 (average 1957-59 equals 100)
to 105.7 * * *.
"In the previous 12-month period, from December 1964 to December 1965
the BLS index rose from 100.7 to 104.1 * * *.
"The rise during 1966 was less than one half that during 1965. In August
last year, the BLS index worked up to a record high of 106.8 before it leveled
off and then began to ease. But, even at the August rate, the rise was less than
in 1965."

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The author went on to point out that at the retail level prices rose by 2.7
percent from December 1965 to December 1966 as compared with 1.6 percent
in the previous 12 iribnths, but he noted:
1. That much of this occurred in meats and vegetables, due to weather and
other conditions not connected with the general business picture, and
2. That the real villain in last year's price picture was the sharp rise—some
5 percent—in the cost of consumer s'ervices, heavily influenced by the adoption
of medicare.
Now, I do not go bail for either of these analyses. Thej?" are newspaper articles,
and as such can have'neither the length nor the breadth to support fully accurate
examination of the development of the entire U.S. economy over a full year,
and they are not, of course, the full nor the unmitigated truth.
I cite them, however, as illustrations of the dark side of the moon that we as
the responsible policymaking officers of the Government of this Nation knew
existed, and took into account, in our policy choices throughout the year.
Whatever they may lack in completeness, these articles point to the essential
fact about the economy in 1966—we were not on a one-way street to inflation
and bust in 1966. Rather, we were picking our way along a high and narrow
ridge, with substantial risks on either side—risks that those actually responsible
for the well being of the Nation could not ignore, however blithely they could
be ignored by those not actuall}'^ responsible.
I do not join in spirit with our critics and claim that we were always right.
My claim is much rdore modest—and it is my only wish, where our critics are
concerned, that they; would show a like modesty, perhaps by adopting the same
policy: I claim only that at all stages along the way of the terra incognita through
which our unexampled economy, growing and benefiting the Nation it serves in
unparalleled fashion and degree, passed during 1966—we were at all times prudent.
What stands out—-what I emphasize, what prudence always reminded those of
us responsible at the bar of history, is the fact that at no time during the year was
there a clear signal f;or general tax restraint, as distinct from the selective fiscal
restraints employed.'
Let us look for a moment at a few of the details of the pilgriinage of the American
economy in 1966 as it felt its way through economic uplands higher, richer and
more beneficial to more people than was ever the case before with any economy,
while at the same time it was bled and buffeted by the economic ravages of a
war conducted under conditions of uncertainty common to all wars.
It was a year in which very little was unequivocally certain—about the U.S.
economy, about the world economy, about our international payments, or the
national economy or the international payments of others, or about the economic
portent of our defense of freedom in Vietnam—except to our critics.
To our critics—academic, political, journalistic, and institutional—all was
clarity..
;
At the outset of the year it was clear to them that something needed to be
done, but—^with th^ exception of some bank letters notable for consistency if
not accuracy—^^they had nothing to recommend except the time-tested cliche of
cutting Federal spending. They put this forth without the slightest nod—much
less bow—to the fact that President Johnson had been rigorously holding down
Federal outlays, which contributed to a far smaller deficit in the administrative
budget in fiscal 1960 ending June 30 than had been previously estimated and an
actual surplus in the NIA budget. They put this forth without regard for the
fact that.the President's new budget continued to cafl for increases almost balanced
bj^ cuts and new revenues.
In the spring of the year, it suddenl}^ became clear to some outside analysts—
I say it was clear to them because they all said the same thing all at once—that
the U.S. econom}^ had to have an income tax increase to be saved. It was not clear
what kind of tax increase, and their demands were now put forward with little
regard for the fact that we had in fact had large tax increases early in 1966, beginning with payroll tax collections for medicare and other social security benefits
in January and with the effects of the Tax Adjustment Act in March, amounting
to some $10 billion in calendar 1966.
In the summer, it began to be clear to many tax increase proponents that their
previous insistence that a tax increase, and only a tax increase, could keep the
U.S. economy from' bursting the bounds of reason might have been wrong.
In the fall, it became clear to^them that whereas they previously could see
nothing but an economy puffing up to the bursting point, there had been factors
at work all along creating the conditions for a possible recession, and this—it

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221

is currently clear to some of the earlier proponents of a tax increase—makes the
idea of a tax increase clearly unacceptable.
There may be a small element of exaggeration in this thumbnail description
of economic criticism during the past year. But I indulge in it, if that is the case,
only for the sake of clarity.
Before we take a brief look at what in fact happened, let me direct attention
to the record of comments on this subject by a spokesman for the Republican
minority in Congress.
On March 21 last year Senator Javits, as reported in the New York Times,
called President Johnson's anti-inflation policies "timid" and suggested a "modest
and temporary tax increase"—which, together with Federal spending cuts,
should come to some $6 billion over and above what had already been provided
in the Tax Adjustment Act of 1966. It might be noted that this was in fact approximately the effect of the increased social security collections that had begun in
January.
Senator Javits soon found himself overruled and lonely in his own party.
On March 25, March 29, April 4, April 6, and June 6 press reports reflected
the view that the Republican Coordinating Committee, the Republican House
leader, the House Republican Conference and the Republican members of the
House Ways and Means Committee were opposed to any further tax increase
than the one some of them had supported in the Tax Adjustment Act signed
March 16.
The Republican leadership preferred—at this time—the policy that was
in fact being followed by the administration: a policy of holding down Federal
outlays to the full extent possible consistent with the increasing requirements
of Vietnam.
But, all undismayed by growing evidence of economic uncertainty, as. by his
party leadership's concurrence in this field and at this moment with administration policy. Senator Javits took lance in hand, and charged again, in August.
He offered legislation calling for depressants ta the form of deep cuts in Federal
construction and space projects (where President Johnson had already put in
force a careful economy program), a special temporary increase, across the
board, in income taxes, and a credit restraint program modeled upon the economic controls put in force during the Korean war. This last added to the growing
list of realities the Senator's policy suggestions ignored: the fact that in the
Korean war we had to use 12 to 14 percent of our gross national product for
defense purposes, compared with 8 percent in 1966, and the fact that during
the Korean war we had to reset and build up a military establishment that had
been all but dismantled, whereas we confronted the Vietnam crisis with the
finest military establishment, at the highest point of readiness, ever known.
Finally, to complete this brief summary of Republican disarray, Governor
Romney—whose silence had until then been his chief distinction on this subject—^
came upon-the scene in December entirely innocent of what had been transpiring
during the previous 11 months of the year and recommended the very policy mix
the administration had been following throughout the year: ''* * * a combination of tax increases and firm budgetary policy."
So much for positions taken last year.
Let us take a closer look, although a brief one, at some of the main developments in 1966. I would like to start with a review of expectations at the outset
of the year, for these expectations set the tone of the year.
The program of fiscal restraint proposed in the January 1966 budget was
developed against Government expectations for economic activity in 1966 that
was far more realistic than those of nearly all private forecasters.
In January 1966 the Government projected a 6.9 percent increase in 1966
GNP—a rise of $46 billion to $722 billion on the basis of the national account
levels then prevailing.
In contrast, the median private economist's forecast of 1966 GNP made during
the September 1, 1965, to January 24, 1966, period was $713 billion, according
to a survey of forecasts made by the Federal Reserve Bank bf Philadelphia.
At the end of. September, a poll of the National Association of Business Economists projected 1966 GNP at $700 billion; the Pittsburgh Conference on Business
Prospects in October projected slower 1966 growth than in 1965; Steel's Panel of
Experts projected $702 billion in October; the Michigan University econometric
model projected $712 billion in November; Prudential Insurance projected $714
biflion in November; McGraw-Hill projected $711 billion in December 1965;
Moody's Investor Service projected $710 bfllion in December; etc.

222

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Signals of slow up in 1966
A large number of developments signaling the need for caution in economic
policy emerged during the course of 1966, in contrast to the dominant pattern of
overall expansion. A chronology of those developments includes:
While first quarter 1966 GNP scored one of the largest increases since the
Korean, war:
—Standard and Poor's stock price index declined in February, initiating a descent which continued throughout 1966. Stock prices in March declined nearly 5
percent below the Jariuary peak.
—Contracts for construction included in the commercial and industrial building statistics declined 6.0 percent in March, and thereafter continued down
through most of 1966. Until late in the year, when the effects of the suspension of
the accelerated depreciation provisions for building under the President's antiinflation program were felt, this decline was chiefly felt in commercial building,
such as shopping center projects, due to tight money.
—Among so-cafled leading indicators of business activity, February or March
marked a peak for nonagricultural placements, business formations, ratio of
profits to income originating in corporate business, and industrial materials
prices.
Second quarter GNP rose only $11 billion, down from $16.8 biflion in the first
quarter, the smallest'increase since the auto strike-affected fourth quarter 1964.
Many economic projections appearing in the press began to be revised downward
in view of cutbacks in production and sales of consumer durables, the weakening
in housing starts and higher-than-anticipated income tax yields which moderated
the rise in disposable persorial income.
—Personal consumption expenditures rose only $3M bflhon in the initial
national account estimates, compared with increases of $10 billion in each of
the two preceding quarters. Consumer purchases of automobiles declined $3
billion from the first: quarter, exceeding even the large drop in auto purchases
in the strike-affected fourth quarter of 1964.
—Output of passenger cars in May and June declined 7 percent below the
January-April average, after seasonal adjustment. Announcements were made of
earlier-than-usual automobile factory shutdowns for 1967 model changeover.
—Housing starts averaged 1,368,000 units, annual rate, from 1,518,000 units
in the first quarter, iriitiating a decline whicii was to continue throughout 1966.
On a monthly basis,j starts fell 12 percent in May and 3 percent in June. The
statistics on "housing permits presaged an even sharper drop in 1966 housing
activity.
—The gain in fixed business investment was below that of previous quarters.
However, inventory investment rose by a third to a rate of $12 billion a year,
from an annual rate of $9 billion in the first quarter, with much concern generated
by the involuntary accumulation of automobiles at car dealers.
—The unemployinent rate in May and June rose to 4.0 percent, up from 3.7
percent or 3.8 percerit rates of the previous 3 months.
—Following accelerated increases in late 1965 and early 1966, wholesale prices
rose slightly in May, June, and July, as prices for the quarter averaged only
0.2 percent over the February and March level. Wholesale prices of farm products fell during each month of the quarter, and averaged 1.7 percent less than
March prices.
Among "leading indicators" which declined in the second quarter were nonagricultural placements, construction contracts, housing starts and permits,
business formations,: ratio of profit to income originating in corporate business,
stock prices, and industrial materials prices.
In the third quarter, the signals coming in from the economy changed sharply:
GNP registered a brisk rise, with personal consumption, defense, and business
fixed investment expenditures the principal constituents. Unemployment rates
turned down, capacity utilization edged up, and prices rose.
Nevertheless, some contrary signals were also registered.
—Outlays on residential and nonresidential structures declined sharply.
—Total industrial production declined in September, as the production of
nondurable goods eased together with the decline in housing and commercial
construction. Production slipped at least one month during the quarter in such
industries as primary metals, fabricated metal products, machinery, and lumber
and wood products. Steel production for the quarter averaged 6|^ percent
less than that for the second quarter.

EXHIBITS

223

—Wholesale prices of all commodities registered no change from August to
September following a rise of 0.4 percent in August. Wholesale prices of industrial commodities, exclusive of farm and foods, remained unchanged throughout
the 3 months of the quarter.
Fourth quarter GNP also rose sharply, although some evidence emerged of
strains and imbalances.
—Industrial production fell in November, largely due to declining production
of durable goods. Primary metals production continued the slide initiated in the
previous quarter and lumber and wood products remained below previous quarter levels due. to the continued sagging in construction activities.
—Retail sales declined in October largely due to reduced sales at durable goods
stores. November sales were a bit higher but December again registered a decline,
after seasonal adjustment.
—Surveys of planned plant and equipment expenditures indicated a smaller
increase than in previous quarters.
—Among production declines registered during the fourth quarter were steel
production, auto production, wholesale prices, new orders for durable goods, and
prices of industrial materials.
I do not think that anyone disposed to look with reason upon this record
would attempt to maintain that the administration's fiscal policy in 1966 was
mistaken.
I think, on the contrary that the administration's economic policy as a whole
in 1966, including our prudent use of selective fiscal tools as supplementary to
general and' severe monetary restraint, brought the economy through a trying
time of transition and uncertainties with minimum damage, and—what the
prudent man is always supposed to achieve—with minimum risk of damage at
all times.
This was no accident. We changed directions early and consciously, trying at
all times to keep the economy in balance despite radical changes in the forces
affecting it and despite uncertainties such as the always unpredictable course
and costs of war. Let me, if I may, cite some of the voluminous evidence, available
to anyone who wants to get the facts, indicating that we were in touch with
reality, and that we bent our sail quickly and selectively to winds bearing down
upon the national well being.
First: President Johnson went to the Congress with a budget, and with a
tax program at the outset of the year that shifted administration policy from
stimulus to moderate and selective economic restraint. This was at a time when
those who now say our policy was mistaken, had little or nothing to suggest.
The President continued and increased the pressure he had been exerting for
years upon Federal spending.
The Tax Adjustment Act of 1966, sent to the Congress in January and signed
into law in March, together with other measures, used the fiscal tool to take
some $10 billion out of the economy in calendar 1966.
On March 22, when he was reminded at a news conference that "a lot of economists would like you to raise taxes" and was asked what he was going to do.
President Johnson reminded reporters of the tax increases already in effect
through social security and the Tax Adjustment Act.
And he disclosed—but those who were demanding severe tax action were
apparently not listening—that there was evidence suggesting that the economy
was in an uncertain condition, calling for caution in handling it, such as declines
in retafl sales, in new orders for durable manufacturers, and in housing starts,
whfle some farm and food prices were leveling off, the growth of business loans
had slowed, and many municipal and some corporate bond issues had been postponed, thereby reducing potential new orders and other activity of many kinds,
and that unemployment was stfll above 6 percent in almost a score of major
labor markets.
He told reporters that he had just asked all departments and agencies of the
Government to take a new look at expenditures, and to forego what could be
foregone. And he concluded:
"We wfll watch very closely and see what happens in these employment markets, in retafl sales, in housing, and in the money market, and then take whatever
action is indicated.
"We don't want to act prematurely. We don't want to put on the brakes too
fast, but it is something that requires study every day, and we are doing that."
Speaking on March 23 at the National Press Club, I reminded my audience

224

19 67 REPORT OF THE SECRETARY OF THE TREASURY

that the President had warned against acting prematurely or putting on the
brakes too fast.
I said that we expected the very recently signed Tax Adjustment Act to "serve
as a growing force for economic restraint" over the coming year, together with
the restraining influences of monetary policy and the $6 billion annual rate
increase in social security and medicare taxes in effect since the beginning of
the year.
I stressed the uncertainties of Vietnam, saying that "no one can predict whether
we will need to schedule additional expenditures—expenditures beyond those
contemplated in the fiscal 1966 and 1967 budgets—to meet our commitments
in Vietnam. And Vietnam remains, therefore, an inevitable element of uncertainty
in our budgetary as in our overall economic picture."
I reminded my audience that in 1957 and 1959 overzealous use of anti-inflation
measures had turned expansions into recessions.
And I concluded that, "In our domestic economy there is stfll room for reasonable doubt as to whether additional restraints should be imposed by public action
on private demand in our economy."
That reasonable doubt persisted. By fall it was clear that we had a boom that
was threatening to run beyond the bounds of our capacities to produce in terms
of business investment and in the face of competing demands from the war in
Vietnam, while at the same time there were, as I have indicated earlier, many
persistent signs of economic weakness wrapped up and hidden away by the continued overall advance.
In the face of this very special situation, with danger on all sides, and in the
face of concomitant tightness in the money market that forced interest rates to
their highest point in four decades, we took special and carefully selective action
in the anti-inflation program announced by the President September 8. This
took pinpoint action against the business investment boom by asking the Congress
to suspend—as it did—tax incentives to business plant and equipment investment. And it took pinpoint action to relieve the money markets, by reducing the
effects of Federal borrowing through postponement of participation certificate
sales and scaling down of agency borrowing from the public, and by giving the
bank regulating agencies powers designed to correct the distorted flow of savings.
The consequence of this year of timely and prudent economic policy change
is an economy that still has great strength for new growth, that is proceeding
under its own competitive powers, free of the apparatus of economic controls
that ordinarily weighs down and distorts an economy in war times, an economy
in which productivity remains high, unemployment remains low, an economy
that gives every sign of correcting the imbalances that crept into it, and an
econom}^ in which prices and money rates are giving signs of easing.
Let me ask four questions in conclusion, and supply the answers that I believe
the record just cited makes imperative:
1. Would additional restraint, say, an income tax increase effective in mid1966 over and above other fiscal increases taken, and the strong monetary policy
measures then in being have involved the risk of a recession in 1966 or early 1967?
Yes.
2. Would you approve in retrospect adding sharp fiscal restraint to the movement to sharp morietary restraint that characterized 1966 up until October?
I think not, if you were a responsible public official.
3. What assurance would you have had that the Federal Reserve System
would have shifted its policv from increasing restraint to the direction of ease
in the spring or summer of 1966 if the President had proposed a general income
tax increase?
None, since neither the President nor the Secretary of the Treasury could
guarantee congressiorial passage of a general tax increase had one been submitted.
Therefore, there w^ould have been every prospect of any income tax increase
becoming effective when the full effect of the monetary restraint was being felt
by the private econoniy.
4. Even if that delicate arrangement had been effected through coordination
of the Federal Reserve System and the Congress, how would you have been
sure that the move toward monetary ease would have had sufficient time to
free up the private sector of the economy so that it could absorb the restraint
of an income tax iricrease without a serious risk of recession?
You could not be isure, and you would have had to conclude that imposing
an income tax rise on an economy stretched rigid by monetary policy would

EXHIBITS

225

have run a serious risk of inflicting damage much greater than any of your other
risks seriously threatened.
Happily that risk is no longer present since the Federal Reserve System had
already shifted last fall from a policy of rigid restraint to the direction of ease,
and, hopefully, the surtax proposal can be appraised this spring in the context
of an economy long removed from the monetary stringency of last year.

Exhibit 22.—Other Treasury testimony published in hearings before congressional
committees, July 1, 1966-June 30, 1967
Secretary Fowler
Statement on "The Budget for 1968," published in hearings before the Committee on Appropriations:
1. Plouse of Representatives, 90th Congress, 1st session, February 7,
1967, pages 7-26.
2. Senate, 90th Congress, 1st session, February 17, 1967, pages 2-18.
Statement on the public debt and recent fiscal and economic developments,
published in hearings before the Committee on Banking and Currency, liouse of
Representatives, 90th Congress, 1st session (meetings with department and
agency officials), March 13, 1967, pages 2-17.
Under Secretary Barr
Statement on legislation to restrain excessive competition for savings, published in "Interest Rate and Mortgage Credit" hearings before the Committee
on Banking and Currency, Senate, 89th Congress, 2d session, August 4, 1966,
pages 2-7.
Statement on regulation of maximum rates of interest paid on savings, published
in hearings before the Committee on Banking and Currency, Senate, 89th Congress, 2d session, August 13, 1966, pages 3-4.
Statement on S. 5, a bill to assist in the promotion of economic stabilization
by requiring the disclosure of firiance charges in connection with the extension
of credit (Truth in Lending, 1967), published in hearings before the Subcommittee
on Financial Institutions of the Committee on Banking and Currency, Senate,
90th Congress, 1st session, Aprfl 13, 1967, pages 83-100.

Public Debt and Financial Management
Exhibit 23.—Press Release, September 10, 1966, concerning Federal agency
financing and participation sales
Secretary of the Treasury Fowler announced today the completion of a preliminary review of all potential Federal security sales. He also announced decisions
already taken that will reduce substantially contemplated offerings of participation sales and Federal agency securities to the private market and hold those
offerings to a minimum for the remainder of the calendar year.
He said that this review and the decisions announced were taken pursuant
to the President's message of Thursday, September 8, and should help reduce
current pressures on the money market and on interest rates.
The Treasury's announced plans will affect the flow into the private market of
various Federal agency securities and participation certificates in pools of federally owned financial assets during the balance of this calendar year. A list of
the agencies covered by the new program and a list of the federally owned
financial assets projected for disposition in the fiscal year 1967 in the President's
budget message last January are attached.
The sale of participation certificates through FNMA tentatively scheduled
for September has been canceled and will not be offered at another time in this
calendar year. In addition, further sales of participation certificates through
FNMA will be made into the private market during the remainder bf 1966 only
if the market returns to more normal conditions.
Also, there will be no public offering of additional participation certificates by
the Export-Import Bank for the balance of this calendar year.
The Treasury also reported that it has had several meetings with advisers
in the financial community, and with officials of other Government agencies.

226

19 67 REPORT OF THE SECRETARY OF THE TREASURY

in order to improve the design and marketability of participation certificates,
and thus reduce their market impact and interest cost. A number of suggestions
are being scrutinized and some of these wfll be adopted on the next occasion
when participation sales are offered to the market.
With respect to Federal agency security issues, it is planned that, in the aggregate, the agencies will borrow no additional money in the private market
between now and yearend. Any offerings to the market will be confined to the
amount necessary to replace existing issues scheduled to mature. To accomplish
this result, an intensive effort will be made to reduce the overall new money needs
of the Federal credit agencies to a minimum consistent with the Nation's economic weU-being. This effort is in line with a Presidential memorandum sent on
September 9 to all Government departments and Federal credit agencies. A
copy of the memorandum appears below.
Even after applying rigid standards, there is expected to be some need for
additional financing by Federal credit agencies beyond the replacement of maturing issues. At least for the balance of this calendar year, it is planned to
raise these additional funds, in the aggregate, through the sale of Federal agency
securities to various Government investment accounts.
The interest yields available on these high quality agency securities clearly
make these securities attractive investments for the trust accounts. Furthermore,
such placement assists the objective of reducing strains on capital markets.
Around mid-1966 an increased volume of agency issues involving considerable
amounts of new money were sold, bringing rates of return in excess of their
normal relationship: with direct Treasury issues. In the months ahead, by providing the agencies' new money needs through securities purchases by the Government investment accounts, the type of pressure experienced earlier this year
should be avoided.
In August and September, it may be noted, the Government investment
accounts have already arranged to purchase a portion of the securities offered
by the Federal home loan banks, the Federal National Mortgage Association
(to support its operations in the secondary mortgage market), and the Federal
land banks. Purchases of these securities by the Government investment accounts
totaled $223 mflhon.
The President directed the Secretary of the Treasury on September 8 to ask
each Federal credit agency to present to the Secretary, for final review by the
President, all proposals for sales of securities during the rest of this year.
In several cases, the Secretary of the Treasury already has the authority to
approve the financing arrangements made by Federal crecht agencies. In those
cases where the Treasury does not have this authority, the President in the attached memorandum is asking that the Treasury and the Bureau of the Budget
be consulted in regard to the credit agencies' lending programs and financing
arrangements, and that proposed agency financing operations in the market be
approved by the President.
A table attached summarizing "Federal Agency Security Issues and Participation Sales" at 6-month intervals beginning with the fiscal year of 1965 provides
some measure of the increasing market impact of the sales of these securities which
the announced program is designed to alleviate.
This table shows that agency and participation certificate sales in the first
6 months of this year raised more than $5 billion in additional money.
In the next 4 months there wfll be no additional money raised by agency
sales in the market, and no sales of participation certificates in the market unless
market conditions improve materially.
MEMORANDUM FOR THE HEADS OP DEPARTMENTS AND FEDERAL LENDING
AGENCIES, SEPTEMBER 9, 1966

After over 5 years of uninterrupted growth tn our economy, we face the threat
that inflation will take away some of our hard won gains. To the record level of
private and public demands have been added the costs of fulfilling our commitments in Vietnam. We cannot allow these demands to thwart our objective of
continued healthy growth, and we must not buy price stabflity at the expense of
a stagnant economy.

227

EXHIBITS

Restraint in private and public demands is essential at this time or we may fall
short in our objectives. Because we cannot fail to suppl}^ the needs in Vietnam the
burden of restraint must be carried b}'^ the remainder of the public sector and by
the private sector of our economy.
I have strongly urged upon labor and management the need for self-discipline.
At the Federal level expenditures are being elirainated, reduced, or postponed on a
case by case examination of all programs and activities, as outlined in my message
to the Congress of September 8, 1966.
Federal credit programs—programs created to serve legitimate and important
credit needs of our economy which are not adequately served by the private financial markets—must also share in the difficult process of restraint. Monetary policy,
as you know, is now restrictive. Pressures on the availabflity of funds are reflected
in the highest level of interest rates in the last 45 years. A part of the enormous
demand for funds, after being denied in the private sector, is seeking accommodation from Federal credit sources. This is to be expected, and to some extent the
very purpose of the Federal credit programs is to help distribute limited resources
more equitably.
But Federal credit resources cannot be allowed simply to substitute for private
resources. To do this would undermine the whole objective of reducing total
demands on the capital markets and pressures on interest rates.
I am therefore requesting the head of each department and lending agency to
review his operations to assure that direct loans or loans insured or guaranteed
by the agency are for essential and nonpostponable needs. Each loan should be
examined in terms of whether it promotes present national objectives and not
just in terms of whether the loan is a sound loan. Heads of agencies that help
finance private credit institutions should examine policies and operations with a
view to reducing the need for the agency borrowings in the capital markets and
minimizing the need for borrowing from the Treasury. Essential credit needs will
have to be met, but the objective should be a sizable net reduction in demands
upon credit markets.
I am further requesting agency heads to present their reviews and reduced
schedule of needs to the Secretary of the Treasury and the Director of the Bureau
of the Budget to insure a coordination of the programs and a reduction in credit
demands.
LYNDON B . JOHNSON.
LIST OF DEPARTMENTS AND FEDERAL AGENCIES WITH LENDING AND BORROWING
ACTIVITIES COVERED BY NEW PROGRAM
DEPARTMENTS

Agriculture
Commerce
Defense

Health, Education, and Welfare
Plousing and Urban Development
Interior
AGENCIES

Export-Import Bank of Washington
Farm Credit Administration
Federal Deposit Insurance Corporation
Federal Home Loan Bank Board
General Services Administration
Interstate Commerce Commission
National Capital Planning Commission
Office of Economic Opportunity
Small Business Administration
Tennessee Valley Authority
Veterans' Administration

277-468—68-

-li7

Labor
State
Treasury

228

19 6.7 REPORT OF THE SECRETARY OF THE TREASURY

Federally owned financial assets projected in the President's budget message in
J a n u a r y for disposition by participation sales in the fiscal year 1967
[In miUions'of dollars]
Farmers Home Administration
HEW: Office of Education.
Federal National Mortgage Association
Federal Housing Admiriistration
Publicliousing program....
College housing loans
Public facility loans
..__
Veterans' Administration:
Direct loan revolving fund
Loan guarantee revolving fund
Export-Import Bank
.
Small Business Administration
Total

600
100
520

.
'.

820
80
154
108
975
8f0

4,205

Federal agency security issues a n d participation sales
[In millions of dollars]
Total
offerings

Maturities ^

Additional
money 2

FISCAL YEAR 1965

July to December 1964:
Agency securities..
Participation sales.
Total
January to June 1965:
Agency securities..
Participation sales.
Total

July to Deceniber 1965:
Agency securities...
Participation sales. _
Total
January to June 1966:
Agency securities..
Participation sales.
Total

4,629
750

4,539
86

261
664

5,379

4,625

925

5,461

4,456
168

1,334
-168

5,461

4,624

1,166

5,623
900

4,856
325

724
575

6,523

5,181

1,299

8,643
1,700

5,901
103

3,476
1,598

10,343

6,004

5,074

2,928

2,000

FISCAL YEAR 1967

July to August 1966:
Agency securities..
Participation sales.
TotalSeptember to Deceraber 1966:
Agency securities
Participation sales
TotaL

3 493
n.a.
n.a.

4,196
333

n.a.
n.a.

4,529

1 Includes "puts" and redemptions prior to maturity.
2 Includes short-term financing by FNMA and TVA not shown separately: on a net basis these amounted
to $172 million July-December, 1964, $329 million January-June 1965, -$44 million .July-December 1965,
$734 million January-June 1966, and —$206 million July-August 1966.
3 In addition $140 million was taken by Federal trust funds,
n.a. Not available.

EXHIBITS

229

Exhibit 24.—Report by Secretary Fowler to the Congress, November 24, 1966, on
the feasibility, advantages, and disadvantages of direct loan programs compared
to guaranteed or insured loan programs
LETTER OF TRANSMITTAL
T H E SECRETARY OF T H E T R E A S U R Y ,

Washington, November 24, 1966.
Hon.

HUBERT H . HUMPHREY,

President of the Senate, Washington, D.C.
D E A R M R . P R E S I D E N T : I a m transmitting herewith m y report to the Congress,
p u r s u a n t to section 8 of t h e Participation Sales Act of 1966 (Public Law 89-429,
M a y 24, 1966), on the feasibflity, advantages, and disadvantages of direct loan
programs compared to guaranteed or insured loan programs.
Federal credit programs have rapidly increased in size, complexity, and scope
in t h e two decades since the end of World War I I , b u t most of this growth has
been in guaranteed or insured loans rather t h a n in direct loans. I n the first decade
immediately after World W a r I I , the expansion of Federal credit programs was
especially m a r k e d in relation to the general expansion of the economy. Since
1956, however, their growth has roughly paralleled t h e growth of the economy
and the increase in the use of credit in all economic sectors. This growth has
been accompanied by an increase in the number and variety of financial institutions and t h e development of more sophisticated financing techniques.
Outstanding direct Federal loans, which are largely financed through the
Treasury, now total about $33 billion, compared to $5 billion a t the end of 1946.
Outstanding guaranteed a n d insured loans, which add to the contingent liabilities
of the Government b u t do not require direct Treasury financing, have increased
from a b o u t $8 billion to around $100 billion in t h e same period. On J u n e 30,
1965, a b o u t 10.4 percent of the outstanding gross private domestic debt represented direct Federal loans or private loans guaranteed or insured by Federal
credit agencies; this figure was below t h e 12 percent figure for J u n e 30, 1955. On
the other hand, in the same period the share of State and local government borrowings directly or indirectly financed by Federal credit agencies increased from
6.8 percent to 8.3 percent.
While there has been relatively less reliance on direct Treasury financing of
Federal credit programs in recent years, the continuing growth of these programs
n o t only has consequences for Treasury debt management b u t also affects t h e
general performance of the financial markets a n d the economy a t large. Because
of the D e p a r t m e n t ' s financial responsibilities to the President, to the Congress,
and to the public, there m u s t be a continuing Treasury interest in the policies
governing these programs and in their administration.
I n recent years there have been three major studies of Federal credit programs.
I n 1961 a general analysis of Federal credit programs from the standpoint of
overall m o n e t a r y and financial policy was included in the report of the private
Commission on Money and Credit, on which I was privileged to serve untfl m y
a p p o i n t m e n t as Under Secretary of the Treasury. T h e Commission's report was
t h e subject of hearings by t h e J o i n t Economic Committee of the Congress in
August of 1961.
I n 1962, as an outgrowth of the Commission's report, an interagency Committee
on Federal Credit Programs, ajopointed by President Kennedy and chaired by
Secretary Dillon, made an intensive review of the policies and principles applicable
to Federal credit programs. As one of its major assignments, the Committee
considered a t length the broad criteria governing the appropriate choice between
direct a n d guaranteed or insured lending programs, b u t because of the wide
scope of its review, the committee did not a t t e m p t a full exploration of this
question, nor did it investigate the administration of each program in great
detail.

230

19 6.7 REPORT OF THE SECRETARY OF THE TREASURY

In 1963 a staff study was conducted by the Subcommittee on Domestic Finance
of the House Banking and Currency Committee. This study in two volumes
contains much valuable information on a program-by-program basis for all
Federal credit programs active at that time.
Whether a Federal credit program is more appropriately conducted as a direct
lending program or on a guaranteed or insured loan basis raises a number of
difficult questions which are complicated by the variety of purposes for which
these programs have been established. The basic principles and guidelines applicable to Federal credit programs, which were set down by the Committee on
Federal Credit Programs in its 1962 report, were endorsed by President Kennedy
as a statement of administration policies. President Johnson also affirmed his
support of these policies in approving the issuance of Bureau of the Budget
Circular No. A-70, February 1, 1965, setting out certain guidelines for Federal
credit program legislation.
Experience gained in the past 4 years in implementing these credit program
policies has demonstrated their validity and importance. We have also found,
however, that the application of these general principles to specific credit programs must be carefully considered to assure that there is no interference with
vital program objectives. At times, implementation of the general policies has
been handicapped by special statutory provisions. Many of these problems have
been given added urgency at this time as we have attempted to harmonize credit
program activities with overall fiscal and financial policy and the program of
restraint in Federal lending activities which was instituted by the President on
September 8, 1966.
in this report I have not attempted to repeat all of the relevant observations
of the Committee on Federal Credit Programs. Instead, I have focused on a
limited number of specific questions most directly relating to the feasibflity,
advantages, and disadvantages of direct loan programs compared to guaranteed
or insured loan programs. I have also attempted to draw upon actual program
experience so that my findings may be most helpful to the Congress.
References in my report to specific programs should not be construed as critical
of any agency or program. Current Federal credit programs were established
during different periods of war and peace, prosperity and depression. They were
established for various purposes which have evolved over time. The present
structure of Federal credit programs, therefore, understandably contains some
inconsistent elements. In this context, the problem is to learn what changes may
be needed to deal flexibly with changing program needs or varying economic
and financial conditions, to offer appropriate incentives for maximum private
participation, and to assure the most effective congressional and executive review
and control.
As required by the act, various questions relating to the feasibflity, advantages,
and disadvantages of direct loan programs compared to guaranteed or insured
loan programs were discussed with the Federal credit agencies. The Bureau of
the Budget and the Council of Economic Advisers have reviewed this report.
Sincerely yours,
HENRY H . FOWLER.

REPORT ON THE FEASIBILITY, ADVANTAGES, AND DISADVANTAGES
OF DIRECT LOAN PROGRAMS COMPARED TO GUARANTEED OR
INSURED LOAN PROGRAMS
SECTION I. INTRODUCTION

A. Statutory reporting requirements
This report has been prepared pursuant to section 8 of the Participation Sales
Act of 1966 (PubHc Law 89-429, May 24, 1966):
Section 8. The Secretary of the Treasury, in consultation with heads of agencies
of the United States carrying on direct loan programs, shall conduct a study, in
such manner as he shall determine, on the feasibflity, advantages, and disadvantages of direct loan progi'ams compared to guaranteed or insured loan programs
and shall report his findings together with specific legislative proposals to the
Congress not later than 6 months after the effective date of this act. There are
authorized to be appropriated such sums as necessary for the purpose of this
section.

EXHIBITS

231

B. Current credit program activity
The total volume of federally assisted credit outstanding is expanding at a
rate of roughly 6 percent annually. (See appendix A, special analysis E—Federal
credit programs.^) Outstanding direct and guaranteed and insured loans Avere
estimated in the January 1966 budget to increase from $124.5 billion on June 30,
1965, to approximately $131.7 biflion on June 30, 1966, and $139.3 biflion on
June 30, 1967. Final figures for fiscal year 1966 and new estimates for fiscal years
1967 and 1968 wfll be contained in the January 1967 budget.
The detailed Treasury Department report also attached (appendix B 0 hsts
all direct, guaranteed, and insured loan programs, including a number of small
and liquidating programs, as of June 30, 1965. Part I of the report shows the
amounts outstanding, the means of financing, and the terms for each of the
separate programs administered by wholly owned Government enterprises. Part
II of the report provides similar information for Government-sponsored enterprises and other credit activities. A simflar report as of June 30, 1966, will be
avaflable shortly after the 90th Congress convenes.
C. Prior studies
A substantial body of data and analysis of Federal credit programs has been
assembled over the past two decades:
Several major credit programs were among the business-type activities extensively reviewed by the Congress in 1945 prior to the enactment of the Government Corporation Control Act of 1945. This act deals primarily with the financial
control of Government corporations and contains a requirement for the preparation of business-type budgets by all wholly owned Government corporations
(which has been extended to most other credit programs). It has contributed to
more effective congressional and executive control of these programs. Other
requirements in the act have helped to improve coordination of agency security
issues with Treasury debt management policies.
The organizational aspects of credit programs were reviewed by both the First
and Second Hoover Commissions, established by the Congress in 1947 and 1953.
Since January 1951, credit programs have been the subject of special analyses
in or accompanying the President's annual budgets.
In 1961 a broad analysis of Federal credit programs from the standpoint of
overall monetary and financial policy was included in the report of the Commission on Money and Credit sponsored by the Committee for Economic Development. Two volumes of supporting studies dealing with Federal credit agencies and
programs were also published.
The Joint Economic Committee of the Congress held hearings in August 1961
on the Report of the Commission on Money and Credit.
An intensive investigation of credit program policies and principles was conducted in 1962 by the Interagency Committee on Federal Credit Programs
appointed by President Kennedy and chaired by the Secretary of the Treasury.
In 1963 a staff study was conducted by the Subcommittee on Domestic Finance
of the House Banking and Currency Committee. The study contains much
valuable information on a program-by-program basis for all Federal credit programs active at that time.
The financing of Federal credit programs was also given consideration in the
congressional hearings and public debate preceding the enactment of the Participation Sales Act of 1966.
D. Scope of report
This report outlines and discusses the major considerations which underlie the
choice between providing Federal credit assistance through direct loans and providing it by guarantees or insurance of private loans.
While the Committee on Federal Credit Programs investigated the broad
criteria governing the appropriate choice between direct and guaranteed or insured
lending programs, it did not attempt a full exploration of the problems involved
in applying these criteria nor did it investigate in detail the administration of
each program.
The Report of the Committee on Federal Credit Programs (supplemented by
the related Bureau of the Budget Circular No. A-70, Feb. 1, 1965) provides a
basic statement of the credit program policies of this administration (appendix CO1 Omitted from this exhibit; lor document reference see note at end of this exhibit.

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19 67 REPORT OF THE SECRETARY OF THE TREASURY

The principal focus of this report is on a limited number of specffic questions
most directly related to the feasibility, advantages, and disadvantages of direct
loan programs compared to guaranteed or insured loan programs. The report
does not discuss all of the issues considered by the Committee on Federal Credit
Programs, nor does the report attempt a full or systematic discussion of the variety
of broad purposes for which specific Federal credit programs have been adopted;
i.e., (1) to overcome market imperfections and the lack of access to credit markets
by particular borrowers, (2) to serve as a buffer for particular groups against
tight credit, (3) to subsidize particular types of activities or borrowers, (4) to
minimize needs ofi certain groups of borrowers for equity financing, and (5) to
facilitate management to technical assistance. Full consideration of these issues
is essential, however, for developing the necessary perspective for choosing between
the direct or the guaranteed or insured approach in specific programs.
SECTION II.

CONCLUSIONS

1. Federal credit programs should generally be conducted as guaranteed
or insured loan programs whenever private lenders are willing to originate and
service loans on a reasonable basis.
2. Federal credit assistance extended to public bodies, wherever feasible,
should be in the form of direct loans to avoid Federal guarantees of tax-exempt
obligations. Such guarantees result in excessive Federal revenue losses without
achieving comparable cost savings for the borrowing units.
(a) Loans at a formula interest rate, taking into account the value of the
tax-exemption privilege, could be authorized without increasing the net cost to
the Federal Government of the credit assistance provided.
(6) Additional subsidies, if required, could take the form of capital or debt
service grants. The latter may be particularly useful when continuing close
Federal supervision of a project is desirable.
3. Direct loans to private borrowers also may be most appropriate when (i)
the services of private lenders are not avaflable on reasonable terms, (ii) extraordinary supervision br management assistance is required and can be provided
effectively and economically by the Federal agency only if the agency also provides the credit directly, or (iii) private lenders are not wflling to make credit
avaflable even with Federal guarantees or insurance.
4. To encourage private participation in Federal credit programs, interest
rate ceflings on guaranteed and insured loans should be determined on the basis of
competitive market rates to the greatest extent possible. Direct loans should
not be made available on more favorable terms than the prevailing terms on
simflar guaranteed or insured loans.
5. Subsidies, when appropriate, can be provided in either direct or guaranteed
or insured loan programs.
(a) Subsidies can be provided without discouraging immediate private participation in a guaranteed or insured loan program by (i) waiver of insurance
premiums, (ii) absorption by the Government of the administrative costs of the
program agency, or (iii) direct Federal payment of part of the interest or principal.
(6) A degree of private participation in subsidy interest rate programs can
be accomplished through the sale of participations in such loans.
6. Credit program activities and related administrative expenses (including
the cost of extraordinary supervision) should be reported in a business-type
budget and accounted for on a revolving fund basis to identify the relevant
costs incurred by the Government.
(a) Interest should be payable to the Treasury on the Federal investment
as a business expense. The rate of such interest should be calculated on the basis
of the current cost to the Federal Government for new borrowing for periods
comparable to the average maturity of the loans made under the program.
(6) However provided, the amount of any subsidies in a program, such as
below market interest rates, interest forgiveness, et cetera, should be identified
on the books of the agency and included in the cost of the program to the Federal
Government.
7. The effectiveness of loan guarantee and insurance programs could be increased by various technical changes in these programs.
(a) Program effectiveness could be enhanced by (i) more flexible authority
to establish cefling interest rates for guaranteed or insured loans, (ii) discretion
to establish guarantee and insurance fee schedules which will encourage private
lenders to assume a part of the loan risk, and (in) authority to alter the terms

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233

of guarantee or insurance agreements and down payment and repayment requirements within statutory limitations in accordance with program needs and
changing credit conditions.
(6) Advance provision of new obligational authority to meet contingencies
arising from actual defaults would enhance the market acceptability of Federal
agency guarantees and insurance. Such additional authority could be limited
to avoid unintended provisions of additional loan funds.
8. The use of participation certificates to help finance additional types of
Federal credit activities should be explored. The possible establishment of a
Federal credit management corporation, to bufld on the experience of participation sales through the Federal National Mortgage Association and further
coordinate Federal credit activities, should also be studied.
SECTION III.

GENERAL FINDINGS

1. The three essential functions performed in any lending operation, public or
private, are: {i) Loan origination and servicing, {ii) financing, and {Hi) risk bearing.
For the great bulk of the credit operations of our economic system all three
of these functions are performed by private institutions. Frequently, however,
the origination and servicing function is performed by one private institution,
such as a mortgage banker, while the financing and risk bearing is provided by
another, such as a life insurance company.
Almost 90 percent of the estimated gross private domestic debt of $935 billion
outstanding on June 30, 1965, represented loans from private lenders without
benefit of Federal guarantees or insurance. Direct Government loans and guarantees of private loans to domestic private borrowers accounted for about 10
percent. Federal assistance to domestic borrowers was concentrated primarfly
in the fields of housing credit and agricultural credit.
2. In most Federal direct loan programs, all three lending functions are performed,
ai least initially, by a Government agency.
For example, the Rural Electrification Administration provides the necessary
administrative services involved in loan origination and servicing, including
appraisals, inspections, supervision of the borrower, and collections; it obtains
loan funds from the Treasury; and it assumes the loan risk.
3. In ihe major guaranteed and insured loan programs, the Federal Government
performs only one of the lending functions, namely, the assumption of all or part
of the loan risk.
Thus, in the regular FHA loan insurance and VA loan guarantee programs,
the Government assumes almost all of the risk, but the loan funds are provided
by private lending institutions and the origination and servicing function is also
largely performed by private institutions (although both FHA and VA conduct
inspections and appraisals).
4. The sharp distinction between the role of the Federal Government in direct loans
and its role in guaranteed or insured loan programs has been disappearing over the
past decade or so, as many new techniques have modified the types of participation by
the Federal Government and by private lenders.
Three major examples illustrate these developments:
(a) In certain FHA-insured loan programs supported by the special assistance
functions of FNMA, when loans are made with immediate Government purchase
commitments, private lenders often only temporarily provide the loan funds.
In these cases, the Government both assumes the risk and provides the loan
funds. The private lender, in effect, serves only as the loan originating and servicing agent for the Federal agency.
{b) Most of the insured loans of the Farmers Home Administration are, in
fact, originated and serviced by the Federal agency, rather than by a private
lender. Moreover, much of the financing for these loans has been provided by
large urban financial institutions having no direct contact with the rural borrowers.
In effect, therefore, the Farmers Home Administration has conducted its insured
loan programs mainly as direct loan programs financed by reselling loans in
packages to large investors. It originates and services the loans, agrees to repurchase them after a specified holding period, and guarantees the private investor
against any loss arising from loan defaults.
(c) As one of several examples, the college housing loans, although made and
serviced directly by the Department of Housing and Urban Development, can
now be sold to private lenders on a guaranteed basis through issuance of participation certificates by the Federal National Mortgage Association as trustee.

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19 67 REPORT OF THE SECRETARY OF THE TREASURY

The loan origination and servicing function performed by the Farmers Home
Administration in its insured loan programs and by the Department of Housing
and Urban Development in the direct college housing loan program may thus be
essentially the same, and similar to that performed by a private mortgage banker.
5. While several guaranteed or insured loan programs have significant elements of
coinsurance, the Federal Government bears the full credit risk in many programs.
Three types of situations can be identified:
(a) Most insurance programs of the Federal Housing Administration—
including all property improvement insurance and mortgage insurance for the
basic single family and multifamily mortgages—involve significant risk of loss
to the lender, although the risk is only a small fraction of the risk entailed in an
uninsured loan. Similarly, guarantees and insurance by the Veterans' Administration, the Export-Import Bank, the Small Business Administration and various
smaller programs involve some coinsurance.
(b) Loans insured by the Farmers Home Administration or guaranteed by the
Commodity Credit Corporation and loans backed by pledges of public housing
contributions or urban renewal refinancing entail no risk whatever for the private
lender.
(c) In at least three programs—ship mortgage insurance, AID guarantees of
Latin American housing loans, and certain newer insurance programs of the Federal
Housing Administration—the degree of risk-sharing has been reduced or removed
as the programs have developed primarily because private lenders proved unwilling to assume a portion of the loan risk on terms acceptable to the Federal
Government. Also, the Federal Housing Administration has in recent years been
authorized in some of its programs to absorb foreclosure costs, to permit insured
lenders to assign defaulted mortgages to FHA rather than carry out default
proceedings, to make paj^ments on defaulted mortgages in cash rather than in
the low interest FHA debentures, a;nd to accept debentures issued under certain
FHA programs for payment of insurance premiums under other FHA programs.
6. There is no essential difference between the Governments exposure to loss in
a fully guaranteed or insured loan program and its risk in a direct loan program.
When the Government fully guarantees or insures a loan, the Government
lends its credit standing to a borrower so that he can borrow directly from a private
lender. In a direct loan program the Government itself may borrow from private
lenders by issuing Treasury securities to finance loans to private borrowers. In
either case, the ultimate security is provided by the Federal Government and is
based on the taxing power. In considering the security of funds, the investor in
fully guaranteed or insured loans is likely to concern himself more with the
procedure, timing, and other mechanics of the Federal guarantee or insurance
than with the purpose of the loan or the credit worthiness of the private borrower
being assisted.
7. When subsidies are necessary, they can be provided either for direct loans or
insured loans, or both.
There are two prime examples of such subsidies long made available in conjunction with both direct loans and guaranteed loans:
(a) Under long-term contracts made with local public housing authorities,
the Federal Government provides annual contributions up to the amount of the
debt service on either direct or guaranteed loans made to finance low-rent public
housing projects.
(6) Capital grants provided for local urban renewal authorities up to twothirds or three-fourths of the net project cost are to help defray costs of projects
financed with either direct or guaranteed loans.
In the past the provision of subsidies through submarket interest rates has
been confined largely to direct loan programs. However, the authority provided
in 1965 for payment by the Office of Education of a substantial portion of the
interest charged by private lenders on guaranteed student loans has demonstrated
that this type'of subsidy also can be provided for both direct loans and guaranteed
or insured loans. Moreover, under the Participation Sales Act of 1966, direct
loans bearing subsidy rates of interest can be sold to private lenders by offering
guaranteed certfficates of participation in such loans supported by supplemental
appropriations sufficient to provide £ market rate of return to the investor.
In each of these cases the Federal Government assumes most or all of the loan
risk, as well as providing substantial subsidies, but the financing is either immediately or ultimately provided by private lenders.
8. A secondary market operation, such as that of the Federal National Mortgage
Association {and to some extent the Farmers Home Administration and the Export

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235

Import Bank), may enhance liquidity or improve the geographical mobility of investment funds, loilh the originating lender continuing io service ihe loan and perhaps
retaining pari of the loan.
Experience with secondary m a r k e t operations m a y demonstrate the further
feasibflity of involving private lenders, both as sources of funds and as loan
servicing agents, in loans which have hitherto been financed and serviced by the
Federal Government. F N M A has also gained considerable experience in special
assistance financing of subsidized loans originated and serviced by private lenders
and may develop improved marketing techniques through its management and
liquidating functions under the Participation Sales Act of 1966.
9. Close contact iviih the borrower and surveillance over his operations, including
his use of the borrowed funds, may be required under either direct or guaranteed loan
programs.
Some of the Farmers PI ome Administration programs involve detafled and
intensive Federal technical assistance to the borrower, such as farm management
advice, which is intended to make the borrower better able to manage his own
affairs. Simflar technical assistance may be provided by the Small Business
Administration, the Office of Economic Opportunity, and the Economic Development Administration, particularly to very small and inexperienced business
borrowers.
The need to provide management assistance m a y initially require use of direct
loans. However, if t h e need for extraordinary surveillance, including management
assistance, is temporary, there may be advantages in involving a private lender
at an early point—especially if the borrower will be required to refinance privately
when his circumstances have improved, as under the stated policy for Farmers
l i o m e Administration loans. Moreover, t h e provision of technical assistance by
the Federal agency is often possible even when the loan is privately originated
and serviced.
10. I n some instances there may be need to improve the market acceptability of
Federal loan guarantees and insurance.
In some programs cumbersome guarantee procedures tend to discourage private
participation. The possibility t h a t funds wfll not be avaflable without further
congressional action to make guarantee or insurance p a y m e n t s in t h e event of
default can also handicap t h e acceptability of the program. The m a r k e t m a y be
unfavorable for a guarantee t h a t rests, in the investor's eyes, upon the maintenance
of adequate reserves in the particular program.
T h e Attorney General has ruled in several instances t h a t in the absence of
s t a t u t o r y provisions to the contrary, a guarantee by a Federal agency contracted
p u r s u a n t to a congressional grant of authority is an obligation fully binding on
the United States, whether or not a source of funds for fulfillment of the guarantee
obligation has been specified. The advance provision of new obligational authority
to assure the ability of a guaranteeing or insuring agency to make timely p a y m e n t s
would, therefore, not necessarfly enlarge the ultimate liability of the Federal
Government. The provision of such authority would increase the acceptabflity
of Federal loan guarantees and insurance and reduce the cost oi carrying the
program forward. Such authority, if accompanied by rescission of funds now
reserved to meet guarantee liabilities, would not lead to an unintended release of
funds n o t previously avaflable for lending purposes.
11. I n the past 2 years fixed or relatively infiexible statutory interest rates have
been established in a number of direct loan programs. These include loans for urban
rehabilitation, hoasing for the elderly and handicapped, multifamily housing for
moderate income families, college housing, academic facilities, and small reclamation
projects. I n all cases the rates are well below market rates of interest.
Such fixed statutory interest rates insulate the programs from m a r k e t influences.
I n addition, they limit t h e possibflity of converting such direct loans to an insured
or guaranteed basis to periods when m a r k e t rates are unusually low, or to the
sale of guaranteed certificates of participations in a pool of loans which the
Government subsidizes and continues to service. Thus, the full participation of
private lenders in credit programs is frustrated. I n t h e case of college housing
loans, for example, enactment of a 3-percent cefling has greatly increased t h e
d e m a n d for direct loans, especially by public institutions which formerly could
borrow through tax-exempt issues at rates below the Federal lending rate, b u t
more recently have found it advantageous to use the Government program a t
the 3-percent r a t e . This has limited private participation and adversely affected
t h e total supply of credit for college housing.

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19 67 REPORT OF THE SECRETARY OF THE TREASURY

12. Unrealistically low interest ceilings on guaranteed and insured loan programs
likewise can lead to pressure for unnecessary direct Federal lending because of the
unavailability of guaranteed or insured loans.
One of the principal obstacles to the conversion of a direct loan program to a
guaranteed or insured basis can be a rate of interest for direct loans below prevafling m a r k e t rates of interest for comparable private loans. I n addition, unrealistic ceiling rates of interest have reduced the availability of private credit
in some guaranteed or insured loan programs so t h a t these programs have been,
in effect, converted to a direct loan basis. Examples are loans of t h e Farmers
H o m e Administration and F N M A special assistance programs.
This problem can be avoided if equivalent terms are provided in guaranteed
or insured loan programs, and in any matching direct loan programs. T h e purpose
of the direct loan prpgram would be to meet t h e problems of an unavaflability
of private financing because of credit restraints, lack of origination and servicing
facilities, or other reasons and providing credit assistance to public bodies in a
m a n n e r which would not result in Federal guarantees of tax-exempt obligations.
13. Federal guarantees of tax-exempt obligations are inefficient and costly as
means of providing financial assistance to State and local public bodies.
Federal guarantees encourage t h e issuance of tax-exempt obligations and t h u s
add to the total volume of such issues. The tax revenue lost by the Federal
Government as a result of the tax exemption of interest on State and municipal
obligations is only partly reflected in lower borrowing costs for t h e State and
local governments. Much of t h e benefit from tax exemption, which was intended
to assist local public bodies, accrues to the private investors—especially highincome investors—resulting in unnecessary increases in program costs t o t h e
Federal and local governments.
14. When the accounting for a program fails to disclose the full Federal costs of
the program, congressional and Executive appraisals and decisions on program levels
may he handicapped.
M a n y direct loan programs—examples would be R E A a n d college housing—
involve substantial costs t h a t are not explicitly identified and disclosed, since
funds are m a d e available t o t h e lending agencies from T r e a s u r y a t a r a t e of
interest substantially below the Treasury's own borrowing costs. On t h e other
hand, t h e Participation Sales Act of 1966 provides for full disclosure of costs
b y requiring t h e appropriation of supplementary amounts.
15. The choice between the direct and guaranteed or insured loan techniques is
most appropriately determined by whether one technique better serves the particular
program objectives and beiter meets overall budgetary and financial objectives—
that is, by benefit-cost comparisons, rather than exclusively hy the willingness of
private lenders to assume a part of the loan risk.
If private lending institutions can perform a useful function on terms advantageous t o t h e borrower or t h e Federal Government, m a x i m u m private
lender involvement is desit'able in programs requiring Federal assistance. Moreover, since private credit institutions are an integral p a r t of the private enterprise economy and account for t h e bulk of credit extensions, there should be
a presumption in favor of guaranteed or insured loan programs compared t o
direct loan programs.
16. Reduction in budget expenditures and other savings in Federal costs may
result from wider use of loan guarantees and insurance in preference to direct Federa I
lending.
T h e relevant costs in each situation require detailed examination. Unless
proper accounting records are maintained, total b u d g e t a r y costs m a y be difficult
t o identify. Direct lending programs m a y require a higher level of Federal enSployment per dollar of credit provided t h a n guaranteed or insured loan programs.
Other costs m a y include a dilution of effective executive management, demands
on t h e Federal Government t h a t could be m e t through t h e private m a r k e t ,
and failures t o accomplish improvements in t h e private m a r k e t t h a t would
reduce t h e need for Federal involvement. On t h e other hand, guaranteed or
insured loan programs m a y involve duphcation of Federal a n d private efforts
a n d lead t o greater overall costs for t h e economy.
17. The extent and methods of control over the level of guaranteed and insured
loan programs need further review.
B u d g e t a r y control over nonsubsidized guaranteed a n d insured loan programs
m a y n o t always be appropriate. T h e real control problem in such cases is more
largely one of allocating resources. If Federal credit assistance is effective, it
tends t o shift resources t o t h e favored uses. Moreover, excessive reliance on

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237

insurance or guarantees of private loans could, in the long run, have adverse
effects on the viability of private financing institutions.
18. / / it is desirable or essential io retain a high degree of Federal control over
the making of individual loans, or if the services of private lenders are not available
or likely io become available on reasonable terms in certain areas or for certain types
of loans, it would seem more appropriate for the Federal Government to make and
service the loans directly and to obtain the funds in the most economic manner.
In at least some foreign-aid programs, foreign pohcy considerations, the cost
of securing American investor participation, and the inadequacy of servicing
facilities indicate that the loans should be made and serviced by the Federal
Government and financed by borrowing from the Treasury. In certain other
programs that are now on a direct basis—for example, college housing, academic
facilities, and Farmers Home Administration loans—it may be more appropriate
to seek the participation of private lenders as agents to perform the loan origination and servicing function and as sources of loan funds. In stfll other instances,
if private lenders are not currently willing to originate and service loans, it may
be most appropriate to refinance direct loans through participation sales.
SECTION IV.

CHARACTERISTICS OF DIRECT, GUARANTEED, AND INSURED LOAN
PROGRAMS

In a direct loan program, a Federal credit agency (1) originates and services
the loans, (2) provides the financing (at least initially), and (3) assumes the
entire risk of loss. In a guaranteed or insured loan program, in contrast, a private
lender performs the first two of these functions and, depending upon the specific
loan guarantee or insurance agreement, may also assume a part of the loan risk
(coinsurance).
Federal loan guarantee and insurance programs vary considerably in risk
coverage and in arrangements for financing guarantee or insurance payments
to the private lender in the event of default. Whenever the guarantee or insurance
agreement does not protect the private lender fully against loss of principal
and interest, whenever the private lender is not fully compensated for any costs
incurred in the course of securing payinent, or whenever he is not certain to receive timely payment by the Federal agency, an element of coinsurance is present
in the program.
The labels on the programs do not always accurately describe their characteristics. For example, while certain programs of the Farmers Home Administration are defined in the law as insured loan programs, they are in fact more nearly
direct loan programs, since the Federal agency directly performs the loan
origination and servicing functions, provides the initial financing, and bears
all losses.
The wholly owned special assistance functions of the Federal National Mortgage Association offer take-out commitments to private lenders who originate
and service insured loans under certain Federal Housing Administration programs. Since private lenders would not make some of these loans without the
prior take-out commitment, such loans could reasonably be classified as direct
loans in which private lenders act as agents for FNMA-SA in performing the
loan origination and servicing functions.
On the other hand, most of the loans insured by the Federal Housing Administration belong unequivocally in the "insured" category, since they are normally
originated, serviced, and held by private lenders.
Guaranteed versus insured programs
The words "guaranteed" and "insured" are often used interchangeably in
describing Federal credit programs. The characteristics of these two types of
programs, however, differ.
Loan insurance programs are generally intended to be self-supporting. The
role of the Federal Government is ordinarily simflar to that of a private insurer
who charges an insurance premium or fee intended over the long run to cover
expenses and losses arising from defaults. For example, the insurance claims
and expenses under the regular 1-4 famfly insurance program of the Federal
Housing Administration are financed through receipts from insurance premiums
of one-half of 1 percent per year paid by the borrowers and deposited in the
Mutual Mortgage Insurance Fund. The Mutual Mortgage Insurance Fund
accumulates reserves against losses; should such reserves prove inadequate,
it may also borrow from the Treasury to pay insurance claims. Any residual

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19 67 REPORT OF THE SECRETARY OF THE TREASURY

surplus in the Fund not required for general reserves will ultimately be redistributed to the mortgagors who have paid the premiums, and such distributions
have been made periodically.
On the other hand, in some "insured" loan programs of the Farmers Home
Administration, when market interest rates rose the initial statutory requirement that one-half: of 1 percent of the interest charged the borrower be retained
in the Agricultural Credit Insurance Fund was repealed in lieu of increasing the
interest rate ceiling on the loans.
A private insurer is motivated by the opportunity to realize a profit through his
operations and will usually, to avoid or limit the risk of bankrupting losses, make
provision for unusual losses by setting aside substantial amounts of income into a
loss reserve. The possibility of setting premiums on Federal insurance programs
for the deliberate purpose of realizing profit has not been examined, and the
danger of bankruptcy from excessive losses is likewise not as serious for Federal
agencies as for private insurers.
In guaranteed loan programs there may or may not be charges, such as appraisal
charges or guarantee fees, to the borrower or lender, and such charges, if any,
are not necessarily expected to be sufficient to cover losses and other expenses.
For example, as a matter of deliberate public policy, no guarantee fees are charged
in the Veterans' Administration guaranteed loan program, and the program is
operated on a basis that does not fully cover costs. On the other hand, guarantee
fees, which may or! may not cover total administrative expenses and losses, are
found in the AID Latin American housing guarantee program and in the Federal
ship mortgage insurance program.
In the AID housing loan guarantee program, the fee is set arbitrarily: there is
no reasonable way to assess the political risks, and experience under the program
has been inadequate, to establish the business risks. This program is intended to
demonstrate better methods of mortgage financing. Determining the guarantee
fee by the difference between yields on comparable guaranteed obligations in the
United States and prevailing competitive rates of interest in the local countries
might encourage local lender participation. Guarantee fees could also be scaled to
discourage excessive reliance on a Federal program.
In the public housing program, a full Federal guarantee is provided the private
lender through contracts pledging annual debt service contributions; no guarantee
fee is charged. Since the Federal contributions have risen to exceed 90 percent of
interest and principal due on local public housing authority bonds, however, this
program is predominantly a subsidy program carried out by means of debt service
grants.
In the "insured" student loan program, no premium or fee is charged, and
Federal pajT^ments cover a large share of the interest nominally payable by the
student.
Forms of coinsurance
The usual type of coinsurance in Federal loan guarantee and insurance programs comes from providing only partial coverage of loan principal, accrued
interest, and costs incurred by a private lender. Usually the guarantee or insurance
runs to each loan, but in a few programs it also extends to specified percentages
of the investor's loan portfolio; e.g., the FHA title I property improvement loan
insurance program.
In some instances, as in the VA program in which the guarantee runs to the top
60 percent or $7,500 of the unpaid balance, the coverage for most loans in effect
is total coverage. In other instances, as in certain AID guarantees, the initial
coverage may be partial, but, as the loan is reduced, the nonguaranteed portion
is paid off first by the borrower and the cov^erage becomes total. In other AID
cases the guaranteed and nonguaranteed portions of a loan may be separable;
one lender obtains a full guarantee on his share of the loan, while the other holds
the nonguaranteed portion. In such cases, the guarantee coverage may run directly
from the Federal agency to the guaranteed "lender or through a private intermediary.
Guarantees against loss of interest income on a loan also vary. In some cases
there is a statutory prohibition against the guarantee of interest income, but the
investor may stfll have his return guaranteed by the Federal Government up
until the time of loan default, since the nonpayment of interest is generally regarded as an occasion for default proceedings. Even when the Federal Government
expressly guarantees the payment of interest, there may be a loss of interest
income to the investor arising from the mechanics of the default proceedings or a

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delay in the actual payment by the Federal Government. Thus, the lender may
be required to wait for a specific period, say 30 days or 3 months, before presenting
his claim or he may be required to institute time-consuming default proceedings,
rather than simply assigning the defauli;ed note to the Federal agency.
Administrative expenses are another form of risk which may be borne by either
tlie Federal Government or the lender. Such expenses can be substantial in default
and foreclosure proceedings.
Uncertainty of timely payment
Ai^art from explicitly intended coinsurance arrangements, a degree of uncertainty is assumed by private lenders in programs in which there may be a question
as to the immediate availability of funds to discharge a Federal agency's guarantee
or insurance liability. This element of uncertainty is lacking when the insuring or
guaranteeing agency has prior appropriations covering its entire potential liability,
broad authority to borrow from the Treasury, or authority to borrow from the
Treasury for insurance purposes.
Some uncertainty as to the timely availability of funds may exist when the
agency supports its loan insurance or guarantee program with a loss reserve,
as does SBA. In established programs, in which a substantial amount of loss experience has been developed, private lenders may be wflling to accept the remaining residual uncertainty involved in the potential inadequacy of the loss
reserve as a backstop for the insurance or guarantees. Even so, a serious deterioration in the general economic situation could raise questions about the adequacy
of the loss reserve and reduce the acceptability of the Federal guarantee or insurance at a time when a stimulus to activity under the program is most desirable.
In new programs in which the risks are untested, moreover, the adequacy of a
loss reserve may be more uncertain.
Uncertainty as to timely payments is greatest when the insuring or guaranteeing agency pays its claims from annual appropriations or other limited sources.
For example, for a temporary period in 1965 the VA was unable to make payments
on its guarantees because it had exhausted its spending authorization. This
incident did not noticeably affect the general acceptabflity of the VA guarantee,
possibly because of an underlying confidence in the program generated over many
years of experience. Nonetheless, faflure to make timely payments in a new
program coifld have a strongly adverse influence on the willingness of private
lenders to accept the guarantee or insurance offered at its full value.
Unless a conscious decision is made to introduce coinsurance by providing
for other than a cash payment, adequate provision should be made to assure the
abflity of the insuring or guaranteeing agency to make timely cash payments.
Providing new obligational authority in advance to cover the Federal insurance
or guarantee liability would not increase the ultimate liability of the Government but would assure greater market acceptability of the guarantee or insurance.
This is particularly important if the program is subsidized since in subsidized
programs much or all of the risk premium charged by private lenders may be
paid ultimately by the Federal Government.
It also appears that in subsidized programs the Federal insurance or guarantee
liabflity should be absolute except for fraud and not contingent upon any specffic
performance. The services of insured lenders related to acquisition of title of the
collateral could be obtained on a reimbursable basis rather than as a condition
of the guarantee.
Lender liquidity
In most Federal guarantee or insurance programs the insured lender has no
recourse to the Federal Government except in the event of default. However,
repurchase options, or "puts," are offered regularly under the Farmers Home
Administration insured loan program and the Export-Import Bank program of
guaranteed participation certificates. In the latter case a "call" option is used
to protect the agency's interests. In the Farmers Home Administration program
the rise in interest rates has substantially reduced the attractiveness of automatic
extension as a hedge for the purchaser, since the automatic extension would be
at rates below presently prevailing market rates of interest. Obligations with
"puts" have, therefore, become essentially short-term obligations. Liquidity
guarantees have also in the past been offered in various forms by the Small
Business Administration and by the defense production loan guarantee program.
With the foregoing exceptions Federal credit programs have generally avoided
offering "puts." The problems encountered during the past year indicate the
wisdom of avoiding this type of guarantee.

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Income guarantees
Under some programs the insured lender is provided a partial guarantee of
continued investment income; that is, he may be protected against some types
of early prepayment which might be regarded as undesirable, particularly in a
period of declining interest rates, either because of institutional reasons or
because of the need' to reinvest at frequent intervals, or short notice, or in small
amounts. Complete assurance of continued investment income is provided under
the participation sales program through substitution of collateral and other
arrangements, including advance appropriations, to provide for the regular
payment of interest and repayment of principal regardless of defaults or inadequate income from the underlying loans in the pool.
Insurance or guarantee fees
The Committee on Federal Credit Programs suggested that private lenders
should be encouraged to assume a larger share of the loan risk by providing a
sliding scale of insurance or guarantee fees. Considerable success has been achieved
in the defense production loan guarantee program in which a sharply graduated
schedule of guarantee fees is provided. Efforts along these lines in various SBA
programs have thus far been less successful.
Lack of success in encouraging a larger private assumption of risk can result
from unrealistically low ceflings on guarantee or insurance fees, since they cannot
be varied enough to provide an adequate incentive to the lender for taking more
risk. If fees are low in terms of the prevafling market assessment of the risks in
similar but uninsured or nonguaranteed loans, borrowers able to secure insured
or guaranteed loans;—even in programs designed primarily to close a credit gap
in which there is little or no intended element of subsidy—secure a subsidized
interest rate, although not necessarily at an out-of-pocket cost to the Federal
Government. Thus, if the governing statute limits the guarantee or insurance
fee, the administering Federal agency may be faced with a serious dilemma in
encouraging private participation. In addition, a subsidized fee or rate will tend
to cause borrowers to prefer insured or guaranteed loans, even if credit is elsewhere available on reasonable terms. The result is an unnecessary expansion of
Federal intervention in the credit markets.
In part, inadequate guarantee or insurance fees may reflect rejection by the
Congress and the credit agencies of the market's judgment of credit r i s k s ^
either on objective grounds or because of "just price" views as to proper levels
of guarantee fees. The problem may be compounded, moreover, because a Federal
agency may not have adequate data on the cost of originating and servicing loans.
Private lenders sometimes tend to exaggerate loan risks, particularly for new
or unusual types of credit. Moreover, Federal credit programs, by and large,
deal with borrowers whom private lenders consider only marginally eligible for
credit. In addition, particularly in programs in which loan risks are relatively
high because of a high default rate—or in which costs are high because of the size
of individual loans^private lenders in attempting to limit or avoid the risk of
capital impairment can reasonably charge a higher risk premium than the Federal
Government would require, since the Government can spread its risks over many
more loans and cah fall back on its taxing power. Lenders with limited capital
have to be concerned with short-run patterns of losses; the Federal Government,
in contrast, does not have to take into account the time distribution of losses but
can afford to base its operations on long-run loss expectations.
An inadequate loss premium in a direct loan program, in conjunction with a
failure to allow private lenders a competitive return in insured or guaranteed
loan programs also :has the perverse effect of encouraging borrowers to rely on
direct loans rather than either insured or guaranteed or private financing without
either a Federal guarantee or insurance.
In contrast, the maximum rate of interest that may be charged by the private
lender on V-loans under the Defense Production Loan Guarantee program was
raised on September 29, 1966, to 7}^ percent to bring the net return to financing
institutions more in line with current lending and money market rates and thus
to help assure financing from commercial sources for contractors and subcontractors 'engaged in defense work. The fee schedule in this program runs from 3
percent for fully guaranteed loans to 1 percent of the guaranteed percentage for
75 percent guaranteed loans. Thus, the maximum rate of return to the lender
rises from 4>^ percent on a fully guaranteed loan to 6% percent on a 75 percent
guaranteed loan. A consequence of the sharply graduated fee schedule has been
to induce private lenders, on the average, to assume 20 percent of the loan risk.

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When the goals of a program involve a sufficient public interest to warrant a
subsidy to the borrower, there is generally no immedia:te advantage to the Federal
Government in charging insurance or guarantee fees or by introducing uncertainty
into the timeliness of guarantee or insurance payments. The advantage in conducting the program as an insured or guaranteed loan program, therefore, is to
be found primarily in the cost savings and other advantages that may arise from
private loan origination, servicing, and financing.
In the programs in which the public interest is less or in which the provision
of a subsidy is less important to the achievement of program objectives, unnecessary reliance on the Federal Government can be avoided if (i) the cost of
the loan to the borrower is determined on the basis of prevafling interest rates for
generally similar types of nonguaranteed or uninsured loans, (ii) the rate of
return to the lender is determined on the basis of his assumption of risk, the
liquidity of his investment, and the services he performs; that is, as a competitive rate of return; and (iii) the insurance or guarantee fee charged is determined
as the difference between (i) and (ii) rather than solely on the basis of the estimated
risk assumed by the Federal Government.
Successful conversion of a direct loan program to an insured or guaranteed
basis is likely to be dependent on the extent of the guarantee or insurance offered,
the nature of the financing provided for the payment of guarantee or insurance
claims, and may require that lenders be allowed to earn a rate of return which could
appear relatively high based on an objective analysis of costs and risks. Other
public policy objectives, however, may warrant this approach, particularly in
programs in which a subsidy is not essential to the achievement of program
objectives. In subsidized programs, the additional subsidy cost can be balanced
against other savings to determine whether a program should be conducted as a
direct loan program or as a guaranteed or insured loan program.
Insured loan programs by definition are likely to be most feasible when no
subsidy elements are involved in the program and when the type of credit is
standardized and is not otherwise unusual.
Guaranteed loan programs are usually more appropriate when any subsidy
involved can be provided through absorption of the guarantee fee.
Either guaranteed loans or direct loans may be appropriate when larger subsidies or lower carrying charges are needed to bring the loan within the borrower's
capacity to pay.
Direct loans may be most appropriate when the type of credit is unusual, or
special management supervision of borrowers is essential.
Even when substantial subsidies are required to achieve program objectives,
private lenders can be utflized for loan origination and servicing and, through
special arrangements for payment of the subsidies, also for the financing. In such
instances, the program can nominallj^ be placed on a guaranteed basis. Experience
with certain Federal Housing Administration insured loan programs appears to
indicate that Federal agencies can provide management assistance in guaranteed
or insured loan programs as well as in direct loan programs.
SECTION V. INTEREST RATES AND SUBSIDIES

One of the principal obstacles to the conversion of a direct loan program to a
guaranteed or insured basis may be a rate of interest for direct loans below prevailing market rates of interest for comparable private loans. In some instances,
unrealistic ceiling rates of interest have so adversely affected the availability
of private credit in guaranteed or insured loan programs that these programs have
been, in effect, converted to a direct loan basis; for example, various programs
of the Farmers Home Administration and those types of FHA-insured mortgages
supported by FNMA special assistance programs.
Return to the lender
Unless the net yield to a private lender on a guaranteed or insured loan is
approximately equal to (or greater than) competitive yields on nonguaranteed
loans, private lender participation in a Federal guaranteed or insured loan program is likely to be limited. From the viewpoint of a Federal agency, however,
a competitive rate of return may appear to be unreasonable in terms of lender
costs and the protection against risk afforded by the Federal guarantee or insurance. Moreover, if the rate of return allowed in a guaranteed or insured loan
program is, in fact, excessive compared to yields on competitive investments,
the result may be to foster unwarranted use of the Federal program and to cause
an uneconomic diversion of resources to the favored area of activity.

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19 67 REPORT OF THE SECRETARY OF THE TREASURY

The Commission on Money and Credit recommended that interest rate ceilings
or limitations on VA and FHA mortgages and in agricultural credit should be
eliminated. The Commission said that such ceilings are not effective in protecting
the borrower and interfere with and distort the adjustment mechanism. In
particular, the Commission argued that if rates allowed on guaranteed or insured
loans are not attractive in relation to yields on alternative investments, access
to private funds under the program is denied and the intended beneficiaries are
forced to higher cost sources if they are to be accommodated.
The Committee on Federal Credit Programs, on the other hand, recommended
that Federal agencies continue to exercise administrative control over maximum
interest rates in guaranteed or insured loan programs, with flexible ceilings which
could be adjusted in accordance with changes in market rates of interest.
The only fully objective test of whether participation in the Federal program
is relatively attractive is the extent to which private lenders actually participate.
Some judgment on reasonable rates of return, however, can be reached by conducting cost analyses and by comparing rates with other rates in the market
either for Federal guaranteed obligations or for nonguaranteed forms of credit.
Current data are available, for example, on rates of interest charged prime borrowers by large commercial banks. Further data classified by size of loan, region,
and maturity are provided quarterly through the Federal Reserve Board's
survey of interest rates on business loans. In addition, there are abundant statistics
on market rates of interest for various private obligations, as well as Government
securities and other loan rate data, such as conventional mortgage rates collected
by the Federal Honie Loan Banks.
A Federal agency can make a direct loan at a rate below prevailing market
rates without entailing an out-of-pocket cost to the Federal Government, because
the cost of money for the Federal Government is lower than for private lenders
and the Federal Government does not have to be concerned with short-run adverse
experience. Thus, if substantial immediate private participation in a credit program is to be achieved, the ceiling rate on competitive direct loans will need to
exceed the formula rate based on the current cost of money to the Treasury plus
an allowance covering administrative expenses of the Federal agency and probable
losses.
If each guaranteed or insured loan program were backed up by a direct loan
program under which loans were available at an interest rate which was not more
favorable than the rate at which private lenders were generally making guaranteed
or insured loans, this would provide a better mechanism for enforcing a ceiling
rate on insured or guaranteed loans than is afforded through regulations intended
to control the loan agreements. Such a direct loan backstop, in conjunction with
secondary market operations or participation sales, would also provide a means
for channeling funds to capital shortage areas. As a byproduct a substantial rise
or fall in the proportion of loans made directly would provide a signal for the
possible adjustment of the ceiling rate. Direct loans at interest rates substantially
in excess of prevailmg guaranteed rates might, however, be inequitable in cases
where imperfections in the private market prevent borrowers from obtaining
guaranteed loans.
An objection to providing a backup direct loan program is that it would provide
a mechanism which could encourage unnecessary credit subsidies. However,
proper budgetary and accounting procedures at least clearly identify and publicize
the costs of such programs.
Cost to the borrower ,
In some instances, very low interest rates have been provided in direct loan
programs as the result of a deliberate decision by the Congress to give an interest
rate subsidy to borrowers under the program. Prime examples are provided by
the disaster loan programs, such as those administered by the Small Business
Administration, in which loans are made at a 3-percent rate with generous'^maturities and repayment terms, and the 2-percent loans for family needs of lowincome families provided under the Economic Opportunity Act Amendments
of 19G6. Such programs, however, do not provide for tailoring the relief oft'ered
to the relative needs of the victims; that is, the administering agencies have discretion with regard, to the amount of the loan provided but not with regard to the
terms on which it is offered.
Interest rates below market rates are also provided in the economic development loan programs administered by OEO, EDA, SBA, and the Farmers Home
Administration in the expectation that favorable financing terms willlinduce

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economic activity which otherwise would not be undertaken or would be undertaken in another location. Again, however, the administering agencies are limited
in their discretionary authority and may consequently, in some instances, provide
a greater incentive than necessary while, in other instances, they may be unable
to offer a sufficient inducement to a private entrepreneur to identify himself with
a well conceived economic development program.
Thus, while subsidies are clearly a legitimate means for achieving program
objectives, certain types of subsidies—e.g., an interest rate subsidy fixed by
statute—do not necessarily accomplish the program objectives as efficiently and
economically as variable subsidies tailored to the borrowers' needs and ability
to pay. Subsidies provided by statutory interest rate formulas vvhich vary with
market rates can be more efficient than fixed submarket rates. Moreover, if interest
rates and other terms in Federal credit programs were varied in line with variations
in private markets, when such variations did not conflict with recognized program
objectives or introduce inefficiencies, this would help not only to reduce excessive
demands upon Federal lending agencies during inflationary periods but would
also reduce the inequities resulting from variations in the amounts of interest
rate subsidies provided borrowers under each program at different stages of the
cycle. Neither type of interest rate subsidy, however, provides sufficient flexibility
to adjust to variations in the needs of individual borrowers under a program.
In addition to programs in which subsidy interest rates have deliberately been
provided, submarket rates of interest are also offered, in effect, in a number of
other programs. For example, direct and insured loans are made in various
Farmers Home Administration programs at an interest rate of 5 percent, which
had been reasonably in line with rates generally available to farmers and rural
residents from cooperative and private lenders until the recent rise in interest
rates. Nonetheless, the rapid growth in these programs suggest that even a
moderate subsidy attracted borrowers who could have obtained sufficient credit
at competitive rates and terms, either with or without Federal guarantees, from
other lenders such as banks, insurance companies, mortgage companies, and
cooperative farm credit institutions. In addition, in order to keep the insured
loan program operative there have been direct supplementary payments by
Farmers Home to insured lenders. In these marginal cases, it becomes especially
important to have effective procedures to assure that Federal credit assistance
is not provided to borrowers who could have financed privately at interest rates
they could afford to pay.
Perhaps the largest interest rate subsidy in current domestic credit programs
is provided through the 2-percent REA loans to rural electric and telephone
cooperatives. The 2-percent rate in this program was adopted in 1944 to reduce
the previous formula rate to a level more in line with then current Treasury
borrowing costs. With the subsequent general rise in interest rates, however, a
very substantial subsidy has developed in this program.
The programs of those lending agencies intended to be self-supporting generally
tailor their lending rates to market rates of interest, but because of relatively
high administrative expenses, losses, or an inappropriate formula for the payment
of interest to the Treasury on the Federal investment, they may not fully cover
Federal costs.
Experience indicates that any agency will have great difficulty in limiting its
program to its intended role of a supplement to other sources of credit if it offers
direct loans on a subsidized basis, even if the subsidy is moderate and not of overwhelming economic importance to the borrower. A subsidy will attract borrowers
to the program despite statutory or administrative measures taken to assure that
like credit is not available from other sources. In turn, this demand has the effect
of creating an apparent credit shortage, since the direct loan program is subject
to budgetary limitations.
From the viewpoint of the Federal Government, a clear determination regarding
the essentiality of a subsidy in a loan program is a matter of great importance.
If the program objectives can be achieved without a subsidy. Federal budgetary
resources can be released for other important purposes. In addition, the program
can be administered so as to increase the total availabflity of credit in the particular
area of economic activity without a commensurate increase in Federal cost. In
an}'- event, however, program objectives are more likely to be realized if the
administering agency has rateflexilDilityand its lending rate is not fixed by statute.
The question of the need for a subsidy, moreover, has two general implications
for the conversion of direct loan programs to an insured or guaranteed basis.
Clearly if direct loans are made at a rate below prevailing market rates, private
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19 67 REPORT OF THE SECRETARY OF THE TREASURY

lenders are not likely to be interested in making such loans—even with a Federal
guarantee—unless special subsidy arrangements, such as debt service grants,
are used to provide an appropriate rate of return to the lender while limiting the
cost of the loan to the borrower.
On a broader view, the availability of direct Federal loans may tend to discourage private lenders from entering a field of credit activity, even though there
is a volume of loan demand which is unsatisfied by the Federal program. The
direct Federal lending activity may subtract a sufficient amount from potential
private activity, particularly in limited geographical areas, to make it unprofitable—because of overhead costs—for private lenders to enter or remain in the
lending field. That is, private lenders may be discouraged by the Federal
competition.
Economies of scale may also suggest that it is desirable to use private lenders
in loan origination and servicing, even when narrow considerations of cost might
support a direct lending program. As a corollary benefit, in some programs
particularly in the business area, early involvement of a private lender will help
to establish a continuing financial relationship which can be of great value to the
borrower when he graduates from the need for Federal credit assistance.
Variable grants
Variable grants, including payments of part or all of the interest on a loan,
potentially offer substantial advantages not provided by fixed subsidy interest
rates or lump-sum grants. In comparison to fixed subsidy interest rates, such
grants may be tailored to the relative needs of the borrowers, currently and in
later years, and can be increased or decreased to stimulate or depress demand or to
allocate available funds. In some cases, adjusting the grants to the needs of the
borrower could involve onerous means tests, although it must be recognized that a
means test is already involved in the limitations on eligibility for Federal credit
assistance. In certain Farmers Home Administration programs, for example, if
the borrower loses his eligibflity for a subsidized loan as a result of an improvement in his circumstances, he is required to refinance. In addition, variable grants
can be adjusted for changes in a borrower's economic status, a possibility which
is not allowed if a lump-sum grant is made.
If any necessary subsidies can be provided with either direct or guaranteed
loans, then the other factors listed by the Committee on Federal Credit Programs
become more significant in choosing between the two approaches. These include
the availabflity of private origination and servicing facilities, the provision of
management assistance, and the question whether the Federal interest is such
that the decision with regard to each loan must be made by the Federal
Government.
SECTION VL, CREDIT AIDS TO STATES AND LOCAL GOVERNMENTS

Conversion of a direct loan program to an insured basis involves serious public
policy problems when the borrower is a State or local government and the insured
lender is subject to Federal income taxation. These tax and debt management
policy and cost problems are likely to become more significant in the future.
Demands for State and local government services, which require construction of
new facilities usually financed through borrowing, are continuing to rise without
any apparent limit beyond the ability of the jurisdictions to meet their current
operating costs and debt service charges. This trend reflects not only the rise in
population and increased urbanization of the Nation, but also demands for higher
standards of public services in both urban and rural areas. Moreover, it is apparent
that many Federal programs with matching requirements will provide further
incentives for State and local government borrowing. In turn, this will tend to
increase demands for Federal credit assistance.
Impact of tax exemption
The obligations of State and local governments differ from other debt in the
United States primarily in the exemption from Federal income taxation of interest
income from these obligations. Because of this exemption. States and locahties
benefit from lower borrowing costs in the capital markets and their securities
are most attractive to investors subject to high marginal tax rates.
The tax revenue lost by the Federal Government, however, is only partly
reflected in lower borrowing costs for these governmental units. On the basis of
the new issue rates on municipals and corporate securities of similar quality,
the point of investor indifference is presently at a marginal tax bracket in the 25

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to 30 percent range. The marginal tax rate applying to commercial banks and
other corporate investors is 48 percent. These institutions and upper tax bracket
individuals; i.e., those with marginal rates well above 25 to 30 percent, are large
purchasers of tax-exempt obligations. As a result, the lower borrowing costs are
achieved by means of a tax subsidy to upper bracket taxpayers which costs the
Federal Government substantially more than the benefit secured by the borrowing jurisdictions. As with any income tax exemption, the tax subsidy produces
larger benefits the higher the bracket of the taxpayer.
The volume of tax-exempt obligations outstanding has risen tremendously
since the end of World War II, from $16>^ biflion as of December 31, 1946, to $102
billion as of December 31, 1965. This growth has required tax-exempt securities
to be placed with a wider and wider range of investors for many of whom the
tax-exemption privflege has lower values. As a result, the savings in borrowing
costs realized by State and local governments from tax exemption have declined.
At the same time, the cost to the Federal Government in terms of foregone tax
revenues has risen.
In addition to the general downward trend in the value of the tax exemption
to State and local governments, the value of the tax exemption at any particular
point in time is influenced by many market factors unrelated to the financing
needs of these jurisdictions. Commercial bank demand for tax-exempt securities,
including those guaranteed by the Federal Government, has fluctuated widely
from year to year, rising during periods of recession when monetary policy has
been expansionary and loan demand has been slack and declining in periods of
economic expansion. During the periods in which commercial bank demand for
State and local government obligations has been weaker, yields have had to rise
substantially in order to attract funds from nonbank institutional investors, who
have less tax incentive for these purchases, and individuals with lower marginal
tax rates. Consequently, yields on State and local government obligations have
tended to fluctuate more widely than yields on taxable securities. These erratic
fluctuations in State and local borrowing costs impede planning and add to the
costs of Federal assistance programs, including programs such as public housing
and urban renewal, which involve substantial Federal outlays and Federal
guarantees of local government obligations.
Federal guarantees apparently have not reduced the erratic fluctuations in
State and local borrowing costs; nor have such guarantees eliminated the significant differences in the borrowing costs of local public bodies.
The value of the tax exemption is also influenced by the volume of tax-exempt
securities coming to the market at any time and by changes in Federal tax rates.
In addition, because of the selective appeal of tax exemption to particular
investor groups, secondary markets are quite limited.
State and local government borrowing is carried out not only by general taxing
authorities but also by a wide variety of numerous separate authorities, special
districts, and other governmental entities which finance largely through obligations which are not backed by the general taxing authority but payable solely
from pledged earnings of specific activities or facflities or from specific nonproperty taxes. This development has arisen, in part, from the creation of
business-type activities to which State and local governments have not extended
their basic full faith and general credit. In part, it has also arisen from efforts
to avoid the legal restrictions that in many instances limit the activities of basic
State and local governmental units. To some extent. Federal programs have also
encouraged the creation of new special districts.
Whfle any State or local governmental unit which maintains a strong Credit
position can probably borrow readfly at a relatively favorable rate at any time,
all units are subject to the erratic fluctuations in borrowing costs and the generally declining value of the tax-exemption feature. Moreover, the least favored
jurisdictions can be those both with the most pressing needs and with the least
abflity to meet debt service charges. Jurisdictions undergoing rapid growth may
also secure less benefit, since the market tends to look at the current relationships
between their indebtedness and fiscal capacity rather than their future growth
prospects.
Federal guarantees of tax exempts
Federal guarantees of tax-exempt obligations raise a number of issues which
led the President's Committee on Federal Credit Programs to recommend
strongly that such guarantees be avoided in future programs. The Committee
suggested that Federal credit assistance to public bodies should be limited to

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direct loans and to capital grants to reduce their borrowing and debt service
requirements. Only if the tax-exempt privilege were waived by the public body,
Avould a Federal guaraiitee of its obligations be appropriate.
In this connection, the Committee observed that:
"* * * From time to time, guarantees of * * * municipal obligations are
proposed. This raises the question of whether the Federal Government should
guarantee tax-exempt obligations, especially since under the Public Debt Act of
1941, it cannot issue direct obligations exempt from Federal income taxation.
"(2) State and local governments now receive substantial indirect benefits
from the Federal income tax exemption on income from municipal obligations.
As a result, these governments can usually sell their obligations on a much lower
yield basis than other issues of comparable quality. The tax exemption makes
such obligations very attractive to institutions and individuals in relatively high
income brackets. As a result, a sizable loss in Federal revenues occurs, which is
greater than the saving in the cost of State and local financing.
"(3) Guarantees of tax-exempt obligations tend to expand the volume of such
securities issued. The Committee, therefore, recommends that no program in the
future be authorized which involves guarantee of tax-exempt obligations because
(a) the cost in tax revenues to the Federal Government would generally exceed
the benefits of tax exemption received by borrowers, (b) such federafly guaranteed
tax-exempt securities would be superior to direct Federal obligations themselves,
and their increasing volume would adversely affect Treasury financing, and (c)
the availability of increasing amounts of high-grade, tax-exempt issues would
tend to attract funds from investors that should appropriately seek risk-bearing
opportunities.
"(4) In addition to the substantial advantages from the tax exemption privileges
available for State and local borrowing, two additional types of aid which do not
involve guarantee of tax-exempt obligations could provide any additional
necessary credit assistance:
"(a) Any local community waiving its tax exemption privflege might be
authorized to borrow for specific high-priority needs with the aid of a Federal
guarantee; and
"(6) Local communities might be authorized to receive capital grants
sufficient to permit borrowing the remainder in the market on reasonable
terms."
Existing guarantee programs
Several existing Federal programs involve the guarantee of obligations of
local public bodies. The largest of these are the public housing and urban renewal
programs administered by the Department of Housing and Urban Development.
In addition, obligations of public bodies may be guaranteed in the soil and water
program administered by the Farmers Home Administration and in several
other programs.
The interest rates on local public housing authority bonds—despite the pledge
of the Federal Government to meet annual principal and interest payments—
vary with the rates on nonguaranteed State and local issues. Moreover, the public
housing issues do not always sell on as favorable a basis as high-grade State and
local government obligations with no Federal guarantee. The reason for this
is not obvious although it may reflect the large volume of public housing offerings
in the postwar period^ Also, the market distinguishes in rate among the issues
of the different local housing authorities even though they bear the same Federal guarantee. Despite the Federal guarantee, recent public housing temporary
notes and bonds have sold in the market at yields which are clearly excessive
in view of the tax exemption. The competition of these issues has also tended
to raise the cost of other State and local government borrowing.
Waiver of tax exemption
Removal or modifications of the tax-exemption feature have sometimes been
proposed, either generally or with respect to particular types of obligations,
such as industrial revenue bonds. Any step as broad as complete removal of the
tax exemption has, of course, been strongly opposed by State and local governments. It may be possible, however, without compromising the general principle,
to arrange a waiver of tax exemption as a condition for obtaining a Federal
guarantee, at the option of the borrowing jurisdiction.

EXHIBITS

247

Capital grants
The use of capital grants increases the "equity investment" of the public
body and thus reduces its borrowing requirements. Such Federal grants, however,
tend to encourage tax-exempt borrowing, and the total Federal cost, including
revenue loss, is generally substantially greater than if the project were financed
by taxable borrowing. Thus, considerable joint savings could be realized by the
Federal and local governments through the use of taxable borrowing supported,
if necessary, by larger initial Federal grants.
Direct Federal loans
The avaflability of partial Federal grants does not necessarily assure that
the necessary loan funds will be available from private lenders. In the case of
college housing, the availability problem had been met in the earlier years of
the Federal program through the use of backup bids by the Federal agency.
The agency acquired obligations of the borrowingl nstitution which could not
be sold at acceptable rates to private investors. Prior to the enactment of the
Housing and Urban Development Act of 1965, the Community Facilities Administration generally acquired the longer maturities, particularly of the obligations of private institutions, in this fashion. This had the effect of providing
an indirect partial guarantee for the shorter issues taken by the private market,
especially since CFA stood ready to renegotiate the terms of a loan to protect
its own interest or further its general program.
The Housing and Urban Development Act of 1965, however, reduced the
interest rate on direct college housing loans to 3 percent and has had the practical
effect of eliminating private investor participation in the program. Under
present market conditions the Federal backup bid at 3 percent is significantly
below the market, even for tax exempts, so that the Department of Housing
and Urban Development has become the only bidder. Thus, there has been a
substantial increase in the demand for Federal loans which the Department
is unable to meet under its current loan authorization. At the same time the
total funds available for college housing have been reduced since public borrowers—who would otherwise have issued their obligations in the market and
drawn in private funds at very little additional cost—have now been required,
because of State laws, to go to the most favorable lender, the Department of
Housing and Urban Development, in competition with private institutions
which can borrow in the private market only at substantially higher interest
rates.
Direct Federal loans to tax-exempt public bodies avoid the guarantee problem,
but at the cost of creating an initial budget expenditure. Through the participation sales technique, however, the budget expenditure may be offset in the
same or a succeeding fiscal year by selling the loans through a FNMA-administered trust without a pass-through of the tax exemption. Thus, the tax loss to
the Federal Government can be avoided, andfsubstantial savings can be realized
by both the Federal Government and the local public body. Further refinements
may make possible additional reductions in^Federal costs and broaden the support
of State and local^borrowing.
NOTE.—The appendixes omitted from this exhibit are contained in "Federal
Credit Programs," a report by the Secretary of the Treasury to the Congress
as required by the Participation Sales Act of 1966, published by the Committee
on Banking and Currency, U.S. Senate, January 21, 1967.

Exhibit 25.—Statement by Secretary Fowler, before the Senate Finance Committee, February 15, 1967, on the public debt limit
I appreciate this opportunity to appear before this committee and press our
request for prompt action to raise the limit on the public debt. This request is
for a $6 billion increase in the temporary debt ceiling, to raise that ceiling level
to $336 billion for the balance of fiscal year 1967.
Let no one mistake the realities, and the urgency of our present situation. If
congressional authority permitting additional cash borrowing is not provided
before the end of February—less than 2 weeks from today—the Treasury wfll
be in the untenable position of having to reduce sharplyfthe outpayments for

248

19 67 REPORT OF THE SECRETARY OF THE TREASURY

goods and services approved by the Congress and vital to the Nation's well-being.
For the first half of March we will be able to pay only about one-half of the total
amount of the anticipated bills.
The potential harm to this Nation's economy and to our position in the world
economy which would result from a failure to honor our legal and contractual
obligations is self-evident. Unless the debt limit is increased by the end of February at which time our outstanding obligations will exceed that which we could
legally borrow, the possibility of an economic and monetary derangement could
be a grim reality.
Because of the shorttime available we are asking at this time only for a revision
of the debt limit applicable to the remaining months of fiscal year 1967. I would
prefer, of course, to have sufficient leeway to cover these months and the ensuing
fiscal year 1968 but I do not believe I should burden the present request with
anything that could delay speedy and favorable action on the immediate need
for a higher ceiling.
For this reason, as well as the other reasons referred to, I believe I am justified
in urging that the Congress in committee or in fioor action not burden the present
request with anything that could delay necessary action by introducing highly
controversial amendments or proposals.
I am aware that there are some aspects of the present state of law and Government practice relating to the debt limit and budgetary accounting that many
Members would like to see the subject of legislative proposals, hearings, and
possible changes ia law or practice,-. Many of these proposals are highly controversial. To handle them adequately and with full legislative process would take
much time both here and in the other body.
For example, there have been Members in both Houses who have urged from
time to time that the practice of periodic extension of the temporary debt limit
be abandoned and that the permanent limit at its present figure of $285 billion
should be modified.
It is clear from examination of the record of sessions of this committee that
this is a subject which, if it is to be handled, should not be disposed of in haste
and without searching appraisal.
We are all aware that there is, and continues to be a good deal of contention
about the way in which the budget is presented. Statements continue to be made
about so-called budget gimmickry. A good deal of this attaches to the running
dispute about participation certificates and the sale of assets—how they should
be treated in the budget presentation. They are now, under standard procedures
followed by administrations for the last 12 years, treated as reductions in expenditures. Some would propose that they be included under the debt limit.
Let me suggest the proper approach to this problem. On page 36 of the Budget
Message presented on January 24, 1967, the President said:
"For many years—under many administrations—particular aspects of the
overall budget presentation, or the treatment of individual accounts, have been
questioned on one ground or another.
"In the light of these facts, I believe a thorough and objective review of budgetary concepts is warranted. I therefore intend to seek advice on this subject
from a bipartisan group of informed individuals with a background in budgetary
matters. It is my hope that this group can undertake a thorough review of the
budget and recommend an approach to budgetary presentation which will assist
both public and congressional understanding of this vital document."
This Commission has been proposed by the President partly in response to the
concern of Members of Congress regarding budgetary practice, and partly because
it is desirable in any event to seek improvement in our governmental operations
from a bipartisan or nonpartisan point of view. Its establishment, and a study of
the results of its efforts, offer a clearly preferable alternative to any attempt to
reform the budget in connection with this debt limit extension, where timing is a
vital factor.

EXHIBITS

249

This is equally true of efforts to include the participation certificates under the
debt limit, of proposals to change the permanent debt ceiling, and of suggestions
to modify the 4}^ percent ceiling on issues of Treasury bonds—much as I sympathize with the need to take some steps soon on this latter point.
Now let me move to the question of why we are here today asking for an
increase in the debt limit when the Congress acted last June, presumably to
take care of this matter for this fiscal j^ear.
Last May, the administration requested a $4 billion increase in the existing
$328 billion temporary debt ceiling to a level of $332 billion, to carry through
fiscal 1967. Congress reduced that request by $2 billion, voting the current limit
of $330 bfllion. We pointed out that this reduction cut severely into our margin
for contingencies and that, as a result, it might be necessary to return to the
Congress for an increase in the debt limit applicable to this fiscal year.
Indeed, my specific comment on the $330 billion ceiling, when I appeared
before this committee last June was as follows:
"Our estimates show that this will give us a very tight squeeze in early 1967—
and as I said earlier the current uncertainties are more than normal at this time
of year—but I believe we may be able to operate within this more circumscribed
limit. I must tell you, however, that if this should not appear to be working
out, because of one or another of the various uncertainties that I have mentioned,
we would have to come back before the end of fiscal 1967 for a revision of this
limit." (Senate Finance Committee, Hearing on the Public Debt Limit, June
13, 1966, p. 7.)
The likelihood that this provision would not be adequate was also faced squarely
by this committee. The report of the committee carefully reviewed the debt
projections presented by the Treasury last June and concluded that the $330
bfllion ceiling would be "tight" but would allow the flexibflity which is required
in the management of the debt. The report recognized that on three dates projected ahead—December 15, 1966, and March 15 and Aprfl 15, 1967—the $330
billion cefling would not be sufficient to provide both a $3 billion contingency
allowance and the normal $4 billion cash balance, but it was anticipated that
the cash balance could prudently be drawn down on dates just before large taxpayments were due to flow in. The committee report went on to say:
"Should the somewhat higher receipt estimates of the staff of the Joint Committee on Internal Revenue Taxation be realized, there will, of course, be further
leewaj'" in the ceiling of $330 biUion. Should this cefling prove to be too low,
because of various contingencies which may arise, it will, of course, be possible
to reconsider the debt ceiling at a later time." (Report of Senate Finance Committee on Public Debt Limit, June 15, 1966, pp. 8 and 9.)
The request last May for a debt ceiling of $332 billion was based on a projected
budget deficit in fiscal year 1967 of $1.8 billion. Mainly because of the greater
costs of Vietnam, and despite a much larger inflow of tax revenues than was
projected earlier, we now expect a budget deficit in this fiscal year of $9.7 billion.
Revenues are now expected to reach $117 billion in this fiscal year, compared
with a projected level of $111 billion.
Our expenditures projections, however, now point to a total administrative
budget outlay of $126.7 billion compared with the initial estimate of $112.8
bilhon. Of the $13.9 bfllion difference, $9.6 billion is a direct result of larger
defense expenditures, $9.1 billion of it directly due to Vietnam. Three billion
dollars reflects the impact of tight money markets which have raised our interest
costs, impeded the sale of financial assets, and placed a heavier burden on Federal
credit programs.
There can be no question as to the urgency of the present request. The debt
subject to limit has remained very close to the statutory ceiling since late November 1966, hovering between $329 billion and a peak level—reached on January
18—just $75 million short of the $330 biflion limit. At the same time our cash
balance has been on the low side, ranging at times down to less than $1 billion—
compared with the $4 billion level generally regarded as a normal working balance
in figuring our debt limit needs. And a working balance of $4 billion, I might
mention, is less than half a month's expenditures.

250

19 67 REPORT OF THE SECRETARY OF THE TREASURY

For comparison with the debt projections made last May and June, let me
direct your attention to the table attached to this statement. At the end of
December 1966 the debt was $329.5 billion, while the operating cash balance
was $4.5 billion—up temporarily because of corporate tax receipts after December
15. With the normal cash balance of $4 billion the debt would have been $329.0
billion.
As the same table shows, the projection presented to this committee last
June was for a debt at the end of calendar year 1966 of $323 billion, with the
normal $4 billion cash balance. The actual level was thus $6 billion above the
projection, on the basis of which the Congress provided a ceiling of $330 billion.
The $4.5 billion cash balance we enjoyed at the end of 1966 did not stay with
us for long. By January 15 it was $2.6 billion, with the debt, also on January 15,
at $329.8 billion. If we had held a $4 billion cash balance on that day, the debt
subject to limit would have been $331.2 billion—$1.2 billion over the ceiling.
On January 18, the debt subject to limit reached a peak level of $329,925
million, just $75 million short of the limit. Our operating balance that day was
$2.5 billion. With a $4 billion cash balance the debt would have been $331.4
billion.
There was another temporary improvement at the end of January. Our cash
level was back to $4.5 billion and the debt was $4.5 bfllion above the level projected last June—based on the constant $4 bfllion cash balance. The cash level
drops sharply during; February, however, and by the end of the month, without
additional borrowing above the curreat level, our usable cash will be exhausted.
If we did borrow up to a hair's breadth of the limit—which I prefer not to
do—our cash at the end of February is projected to be an inadequate $1.5 billion.
And net outpayments in the first few days of March would more than exhaust
that meager supply. Quite clearly, in order to pay our bifls and manage our
cash properly, we must be able to borrow additional funds by the end of February.
Using the normal method for projecting minimum debt limit leeway for the
balance of this fiscal year—including the usual $4 bfllion cash balance and $3
billion contingency allowance—we would request a debt cefling of $339 bfllion
for the current fiscal year. With the period of peak need only a month or two
away, however, rather than a year away as it is when we normally make these
requests, it is possible to plan much more closely and to anticipate that we can
get through without the same contingency allowance that would be needed
otherwise.
Accordingly we requested a cefling of orfly $337 bfllion in our presentation
to the House Ways and Means Committee. I characterized that cefling as "adequate but scarcely comfortable or roomy." Since that committee approved
an increase of only $6 billion, I can only conclude that their estimate of our
skfll and luck is more generous than our own.
I want to emphasize that this $336 billion ceiling is just as tight as it can be—
without risking a fair likelihood that we would have to make still another appearance on this matter.
You wfll note that the projected level of debt for March 15, with a $4 billion
cash balance, is $336;3 billion. That is without any allowance for contingencies.
I believe we can reasonably plan for a low cash balance on March 15, since taxes
wfll flow in immediately afterward, but the lack of a contingency aUowance
means that this is drawn down tight.
A delay in approving this minimum necessary increase would be very damaging. The Government's credit must be maintained by prompt payment of outstanding financial obligations, the trust funds in its charge must be administered
properly, and the bills incurred in providing the goods and services for Government programs operating with appropriated funds must be paid promptly. I
urge that favorable action on our request be taken without delay.

251

EXHIBITS

TABLE I.—Comparison of debt projections of June 13, 1966, wiih actual results
[In biUionsl
Projections of June 13,1966

Fiscal year 1967

Operating
cash balance (excluding
free gold)
(1)

Debt
subject
to
limitation
(2)

Actual
Operating
cash balance (excluding
free gold)
(3)

(4)

1966
June 30
July 15
July 31
August 15
_.
August 31
September 15...
September 30-_October 15
October 31
November 15--.
November30-..
December 15
December 31

$4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0

$313.3
316.6
316.8
318.4
320.3
323.4
318.1
321.9
322.2
324.4
324.6
327.8
323.0

$10.8
7.2
6.4
3.6
5.6
2.1
7.2
2.3
5.0
2.3
3.3
.9
4.5

1967
January 15
January 31.-—-.

4.0
4.0

325.3
324.1

2.6
4.5

February 15
February 28
March 15
March 31
April 15
April 30
May 15
May 31
June 15
June 30

4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0

325.2
324.7
328.7
323.5
327.5
318.6
319.8
320.4
324.7
314.9

Debt
subject
to
limitation

DifferDebt subence
ject to
column (5)
limitation
after adjusting compared
cash balance
with
to $4.01
column
(2)
(5)

$313.3
315.8
317.1
319.6
323.0
326.6
32L8
325.5
326.1
328.8
330.3
333.0
329.0

-$0.8
+.3
+L2
-F2.7
+3.2
+3.7
+3.6
+3.9
+4.4
+5.7
+5.2
+6.0

329.8
331. 2
329.1
328. 6
Estimated

+5.9
+4.5

330.9
332.5
336.3
331.7
334.8
327.8
330.3
330.3
333.6
323.5

+5.7
+7.8
+7.6
+8.2
+7.3
+9.2
+10.5
+9.9
+8.9
+8.6

$320.1
319.0
319.5
319.2
324.6
324.7
325.0
323.8
327.1
327.1
329.6
329.9
329.5

1 Adjustment to $4.0 billion cash balance places data on basis comparable to estimates given on June 13,
1966, as shown in column (2).

Exhibit 26.—Supplementary statement by Secretary Fowler, May 15, 1967, before
the House Ways and Means Committee, on the coverage of the public debt
limit
This statement provides additional comment on the coverage of the public
debt limit. It supplements the point made in my main statement—that our
definite preference and recommendation is that the coverage of the debt limit not
be changed.
One recurring point in the discussions of debt limit coverage is that the current
debt limit concept is not as clean-cut as one might wish. The limit covers not
only the debt obligations issued by the U.S. Treasury, under the Second Liberty
Bond Act, but also a modest amount of other debt which, by statute, is guaranteed
as to principal and interest by the United States.
The main items under the limit in addition to Treasury debt at the end of
Aprfl 1967 were $19.8 million of District of Columbia Armory Board Stadium
Bonds, and about $485 miflion of Federal Housing Administration debentures.
These are contingent liabflities. They are payable in the first instance out of, in
one case, the net revenues of the District of Columbia Stadium and, in the other,
various FHA insurance funds. In contrast, what stands behind U.S. Treasury
obligations is the taxing power of the U.S. Government.

252

19 67 REPORT OF THE SECRETARY OF THE TREASURY

Another cleanup would deal with certain minor items of direct Treasury debt
now excluded from the statutory limit. The limit excludes debt issued under
statutes other than the Second Liberty Bond Act and old currency items for which
the Treasury has assumed responsibility. These totaled $266 million on April 30,
1967. Their inclusion and the exclusion of the contingent items mentioned earlier
would put the debt subject to limit and the gross public debt on the same basis.
Before turning to the question of contingent liabflities not now under the limit,
some other variations of debt limit coverage might be considered. One possibility
would be to remove from the debt limit the Treasury obligations held by the
trust funds. Federal agencies and the Federal Reserve System. That would take
away roughly $115 bfllion from the current coverage. The rationale might be
that the limit need cover only debt sold to the private market, not to official
accounts.
Another variant might be to deduct from the debt limit federally held direct
loans outstanding. This "net debt" concept would reduce the debt subject to
limit by about $34 bfllion. A feature of this concept is that the sale of participation
certificates would not reduce the debt subject to limit because the financial assets
to be put into the pool would have been deducted from the debt subject to limit
already.
If we ask whether some other obligations or liabilities, not now under a debt
limit should appropriately be placed under one, there is a major difficulty in
distinguishing among obligations that might or toight not merit inclusion.
The earlier discussion of this matter focused particularly on participation
certificates in pools of federally owned financial assets. Presumably the rationale
for considering inclusion of the participation certificates under a debt limit
would be that an underlying Federal liabflity remains, whether the Government's
holdings of financial assets are financed with U.S. Treasury obligations or with
the sale of participation certificates. It is significant to me, however, that the .
holder of the participation certificate looks first to the pool of private credit
instruments, and only on a contingent basis to the financial resources of the
Federal Government. It is otherwise with a holder of Treasury bills, notes, or
bonds.
Moreover, the Federal Government's contingent liability in connection with
participation certificates of FNMA or the Export-Import Bank is just the same
as with—
Federal Housing Administration insured loans.
Veterans' Administration guaranteed housing loans.
Commodity Credit Corporation certificates of interest.
Farmers Plome Administration insured mortgages.
Economic Development Administration guaranteed loans.
Maritime Administration insured loans.
Guaranteed military assistance credits,
Federally insured student loans,
Loans guaranteed by the Public Health Service,
Public housing and urban renewal guaranteed loans.
Loans guaranteed by the Agency for International Development,
Export-Import Bank guaranteed loans (in addition to Eximbank participation
certificates), and
Small Business Administration guaranteed loans.
Taken together these contingent obligations would total an estimated $105
billion at the end of fiscal year 1967 and $116 billion at the end of fiscal 1968.
In addition, one might add to a list of contingent liabilities of the Federal
Government the direct debt of certain Federal agencies such as:
Federal home loan banks,
Tennessee Valley Authority,
Federal National Mortgage Association (for secondary market operations).
Federal land banks.
Banks for cooperatives, and
Federal intermediate credit banks.
These obligations do not carry specific language providing a U.S. Government
guarantee, but it is generally understood that the Government stands in back of
these issues. These agency obligations would amount to an estimated $21.5
billion at the end of June 1967, and $23.3 biflion at the end of June 1968.

EXHIBITS

253

Such an all-inclusive list, however, would not be workable. The attempt to
make it work would require a most unwelcome and complex network of controls
over private credit market activities. I wonder, for example, if we would want to
be in the position of having to hold back the Federal Housing Administration's
insurance program, the VA mortgage guarantee program, or the CCC price
support program, because of running up toward a debt limit. Yet the contingent
liability here is the same as in the case of participation certificates.
At first glance, there is an attraction to a limit on contingent debt and direct
agency debt, in that it offers a way to focus attention on an important element in
our financial picture. Federal credit programs have grown rapidly and their
role is not always fully appreciated. But certainly there is a difference between a
policy of keeping careful track of a set of diverse programs, and a policy of applying a dollar ceiling that would tend either to be so ample and permissive as to
constitute no ceiling at all, or so tight as to risk infringing on essentially private
credit market activity.
However, should the Congress still wish to consider a limit on these contingencies, I am strongly of the opinion that it should be separate and apart from the
limit on direct Treasury obligations. For this second debt limitation a workable
group could probably be selected from the lists of contingent liabilities and direct,
agency debt given above. It might include contingent liabilities such as participation certificates. Farmers Home insured paper, public housing and urban
renewal—and other programs where there is effective budgetary program control.
It might also include the direct debt of agencies that are either owned at least
partially by the Federal Government or that have a statutory call on the Federal
Government for financial support. This grouping could include, for examiDle,
TVA securities, FNMA secondary market obligations, some of the farm credit
obligations and Federal home loan bank issues. Treasury and Budget staffs have
developed one such list of contingent obligations which we are prepared to submit
for the record.
There is still a question about the logic of this arrangement, for it would seem
to set another control over what is already controlled, but leave untouched such
programs as Federal Housing Administration insurance where the contingent
liability is just as great but there is no close program level control.
Thus, I am not convinced that placing contingent liabilities or direct agency
debt under a ceiling would serve a useful purpose, and accordingly I recommend
that no change be made in the present coverage of the debt limit. There would be
an improvement in the consistency of the existing coverage if the District of
Columbia Stadium Bonds and FHA debentures were taken out of the present
debt limit, and some minor Treasury debt items added, but this is not a high
priority matter.
Exhibit 27.—Statement by Secretary Fowler, June 23, 1967, before the Senate
Finance Committee, on the public debt limit
I am here today to talk about financing a war. It is a costly war and it must
be financed consistently with the preservation of soundly balanced, and fruitful,
economic growth at home while we are fighting to maintain freedom in a far-off
corner of the world.
Fiscal responsibility means differing things in differing circumstances.
In a wartime context it must include the courage and willingness to vote to
raise the money that is as necessary as the guns, planes, and materiel needs of
our forces in Southeast Asia. Those who support our national effort to defend
freedom from Communist aggression in Vietnam do not hesitate to vote overwhelmingly for appropriations to support our forces there. They will equally
support legislation needed to facilitate the financing of those appropriations.
Fiscal responsibility means, in contemporary circumstances, that in financing
the war we should obtain as much as possible from current tax revenues as the
economic outlook permits.
It means that expenditures in excess of revenues have to be financed with
debt, and that we must have the ability to borrow the needed amounts of money
in the market. We do not intend to be in the position of "squeezing a buck"
where it can cost the lives of our soldiers or the freedom of a democratic people.
Finally, fiscal responsibility means that we must have flexibility in our borrowing to manage the public debt as a constructive force in the economy.

254

19 67 REPORT OF TPIE SECRETARY OF THE TREASURY

The present temporary ceiling of $336 billion extends only through June 30
of this year. On July 1, the limit reverts to the permanent level of $285 biflion.
We expect the actual debt to be about $327 billion on June 30, and to rise considerably above that level in coming months, so it is obvious that prompt action
is needed.
Let me underscore at this point that it was not a part of our plans to present
this important matter to this body at so late a date. I am very conscious of the
fact that we were urged to present our recommendations early, so as to permit
ample time for study and review.
' We did in fact have our initial hearing before the House Ways and Means
Committee on May 15—an earlier starting date than usual. The time consumed
between then and now has resulted, in good part, because we requested action
on two matters that have long been of interest to the Senate Finance Committee
and that had been, for too long, deferred on the grounds that the speediest possible
action was needed on the debt ceiling. I refer to the matters of revising the permanent debt ceiling and modifying the 4)1 percent interest rate ceiling on Treasury
issues maturing in over 5 years. Because of the time taken on these matters
by the other body, I am able to urge your prompt approval of a bill which goes
some worthwhile distance in directions long urged by distinguished members of
this committee.
There should be no misapprehension about the nature of our debt limit need
nor about the impact of Vietnam on our economy and our budget. Let me cite the
recent record:
In fiscal year 1966, the special cost of Vietnam was $6.1 bfllion. Absent this
cost, and absent also the $1.2 bfllion of extra revenue from the Tax Adjustment
Act of 1966, which was enacted because of Vietnam, the administrative budget
would have been in surplus by $2.6 billion instead of in deficit by $2.3 billion.
And the actual deficit, incidentally, was the smallest since fiscal year 1960.
In fiscal year 1967 the special cost of Vietnam wfll be a little over $20 billion.
Eliminating that cost along with the $4.6 bfllion of revenues from the Tax Adjustment Act of 1966, there would be a budget surplus this year of some $5
billion—instead of the deficit of roughly $11 bfllion that now appears to be in
the making.
For fiscal year 1968, it was estimated last January that the special cost of
Vietnam would be $22.4 bfllion. Without that Vietnam cost, and also without
the added tax measures proposed in January, the 1968 budget was estimated
to yield a surplus of $8.8 bfllion rather than a deficit of $8.1 billion.
On a revised reading for fiscal year 1968, we would place Vietnam costs and
other expenditures a little higher and total receipts somewhat lower. In testimony before the House Ways and Means Committee on May 15, I indicated
that the prospective deficit in fiscal year 1968 was, in round numbers, $11 billion.
But the point stfll stands that, absent Vietnam and absent the special tax measures proposed in January we would be looking at a budget surplus rather than
a sizable deficit.
In short, except for Vietnam, we would now be facing potential Federal surpluses, and trying to decide how best to employ those surpluses among tax reduction, debt reduction, and expenditures for needed domestic programs to raise
the quality of life in America.
But reality would have it otherwise and instead of the welcome task of distributing fiscal dividends we have the difficult, yet necessary, task of financing
a war that, however distant geographically, is very close in its meaning to our
lives and ideals.
A number of steps have been taken already to insure that the special demands
of Vietnam are financed soundly, in a balanced economy without the panoply
of cumbersome direct controls that have been employed in past periods of heavy
mflitary expenditure. This approach has been accompanied by a record of upward price movement far below those that characterized World War II or the
Korean war, and even below that in the major peacetime expansion of the midfifties.
In early 1966 the Tax Adjustment Act, passed promptly by the Congress,
deferred declines in certain excise taxes and put corporations and individuals
on a more current footing in their payment of income taxes.
Administrative measures were taken in the spring of 1966 to speed the payment
of corporate income taxes, and steps were taken within the past several months
to put certain excise taxes on a more current basis.

EXHIBITS

255

The investment tax credit was suspended in October 1966, not as a revenue
measure but as a selective measure to help slow down an area of spending that
was putting the economy and the financial markets under excessive pressure;
as soon as it was clear that the special reasons for suspending the credit no longer
existed, the President recommended lifting the suspension and the Congress
has now acted.
As part of our sound financing program, we have launched the largest U.S.
savings bonds campaign since World War II. Holdings of savings bonds, which are
the most stable and noninflationary form of debt financing that can be devised,
have increased from $48.8 bfllion at the end of June 1965 to $50.7 billion in May
1967. Over $1.1 billion has been added to public holdings of these bonds just in
the past year.
This year we are supplementing the sale of regular savings bonds with a new
Freedom Share savings note. It carries a higher interest rate than series E savings
bonds and must be held at least a year before redemption. It is designed to produce additional saving, while not diverting savings from thrift institutions, so
we do not look to the Freedom Share to bring in multiple biflions of dollars—but
we do expect it to make a significant contribution to sound financing of the deficit.
Civilian expenditure programs have been held down to a minimum consistent
with meeting basic national objectives in the many areas that we cannot afford
simply to neglect because we are fighting a costly war.
We have also proposed a 6 percent tax surcharge to defray additional military
expenditures and keep the overall Federal deficit within bounds that the economy
and the financial markets can handle. We need to pay for the increased cost of
the war projected for the next fiscal year. We certainly do not want to risk resumption of the monetary strains and excessively high interest rates that occurred
last year, and that means the Government's own demands on the credit markets
must be held down.
I am not here today to talk about the tax surcharge, however. That will be
taken up in due course. Let me make a brief comment about the need for the
increase. It will be needed and the economic evidence generated in the months
since it was proposed has strengthened my conviction on this score. The economy
neither needs nor can tolerate the kind of stimulus it would receive in the second
half of this year from a Federal deficit of the size that would emerge without the
proposed tax surcharge, given the other changes in the situation that have been
and are occurring.
With or without the tax surcharge, however, we must have flexibility to finance
the war and manage the Nation's fiscal affairs prudently. That means having
adequate room under the debt limit to cover the wide range of contingencies
present at this time, and having greater flexibflity to borrow outside the shortterm area, in the interest of sound debt management.
A year ago, I asked the Congress to approve a temporary rise in the debt limit
to $332 billion, to extend through fiscal year 1967. I pointed out then that the
budget figures were uncertain, and I reemphasized this point when the Ways and
Means Committee provided an increase only to $330 billion. I noted then that it
might be necessary to return before the end of fiscal 1967 to provide additional
leeway for the debt.
It was indeed necessary to return for an interim increase. The debt ran higher
by the middle of fiscal 1967 largely because of the bigger than expected rise in
expenditures for Vietnam, and the impact of tight money markets in impeding
financial asset sales, raising interest costs, and adding to loan disbursements in
areas particularly hurt by tight money markets.
The Congress responded promptly, early this year, in raising the temporary
debt ceiling to $336 billion. This provided sufficient leeway to resume policies of
careful and prudent cash management—after a period of some weeks when we
operated hand-to-mouth in our cash management.
The higher limit, while it provided elbow room, was not taken as a license to
spend or incur debt freely. Indeed, the highest point of debt actually reached
after the limit was raised was $333,227 million on March 14—well within the $336
billion ceiling. By June 30, 1967, we project that the debt will be down to about
$327 bilhon.
Our latest estimate of the administrative budget for fiscal year 1967, as I have
already noted, yields a deficit of around $11 billion. This is up $1.3 billion from
the estimates submitted last January. Receipts are estimated to be down $0.5
billion, reflecting a number of minor revisions, including the early restoration

256

19 67 REPORT OF THE SECRETARY OF THE TREASURY

of the investment tax credit. Expenditures are working out to be approximately
$500 million to $750 million higher than estimated in January.
The budget submitted last January for fiscal year 1968 estimated expenditures
of $135 billion, and revenues of $126.9 billion, yielding an administrative budget
deficit of $8.1 billion. We do not yet have a firm basis for making a thoroughgoing revision of these estimates. A rough interim revision, which as I indicated
earlier was provided to the Ways and Means Committee last month, placed
the deficit about $3 billion higher—or around $11 billion. The $3 billion difference
reflected, about equally, higher spending and lower revenue.
The $11 billion deficit figure for fiscal year 1968 remains our planning base
in projecting debt figures ahead, although I must say that there are a number
of uncertainties and contingencies bearing on this figure and tending if anything to raise rather, than to lower it. These uncertainties and contingencies
are of a scope that calls for a far different approach to the debt limit than has
been followed in recent years.
On the revenue side, one element of uncertainty is the tax surcharge which
the President recommended early this year. The deficit figure of $11 bfllion
assumes a July 1 effective date for the recommended surcharge. Enactment by
that particular date is no longer feasible. Let me underscore again, however,
that there is no wavering in the Administration's intentions about the surcharge.
It has been, and still is, a definite part of the fiscal program. But since it has
yet to be enacted, I must consider it as a contingent item.
Also on the revenue side, I must regard the expected yield of existing tax
rates as uncertain in some degree. The report of the Ways and Means Committee
refers to revenue estimates for fiscal year 1968 by the staff of the Joint Committee on Internal Revenue Taxation. Those estimates, after allowing for the
effect of proposed legislation, are about $4 billion below the January budget
estimates, and also about $2}^ billion under the rough interim estimate that
we presented to the Ways and Means Committee in mid-May. Based on our
latest information on individual income tax revenues and corporate revenues,
while much uncertainty remains, I think it would be fair to say that the Joint
Committee staff estimates could very well approach the revenue picture for fiscal year 1968 more closely than did our prior estimates. Consequently, the total
receipts figures they use for the forthcoming fiscal year may be regarded for the
purposes of these hearings as a reasonable quantification of our revenue prospects.
On the spending side, I can only repeat that wars are by their very nature
uncertain, and so are the expenditures needed to carry them out. Our estimates
of Vietnam spending are not subject to the particular source of underestimate
that occurred this current fiscal year, when the initial estimates rested on the
assumption that the conflict would end by June 30, 1967. Still I must say that a
margin of underestimate, or overestimate—but more likely the first—is always a
possibility. These are contingencies that must be given due regard.
In the hearings before the other body, a further area of contingency was also
brought out—namely, the possibility that not all of the projected participation
sales of financial assets would be carried out, leading to a larger deficit in the
administrative budget and larger rise in Treasury debt than would otherwise be
the case.
The practice in recent years, in estimating debt limit needs, has been to project a level of debt for the year ahead on the basis of a constant $4 billion cash
balance, and then to request a $3 billion allowance for contingencies. I believe
this practice is not suited to present circumstances for two reasons:
First, the contingencies just outlined are of a number and scope that render the
$3 billion allowance inadequate. It is worth noting that quite apart from the
special uncertainties affecting fiscal 1968, the standard $3 billion allowance dates
back to 1958, when the Federal budget and the national economy were only a
little over half the size in prospect for the year just ahead.
Second, I think it is timely to change the permanent debt ceiling, which has
remained at $285 billion since 1959—and if that is done the ceiling should be
revised to a level that stands a reasonably good chance of lasting for longer than
the one year interval that has t3rpified changes in the temporary ceiling.
As I need not remind members of this committee, in light of your initial action
on the debt limit bill last February, the present $285 billion permanent cefling
hangs as "sword of Damocles" over the Congress—and over the Secretary of the
Treasury—requiring legislative action on the debt ceiling by June 30 each year
lest the limit drop down to an obviously unrealistic level. Thus it makes good sense

EXHIBITS

257

to revise this ceiling. But in so doing there would seem to be little gained in moving
to a ceiling that did not offer some reasonably good prospect for durabflity.
Accordingly, rather than ask for another rise in the temporary ceiling that
would last only through fiscal year 1968, I recommend a significant increase in the
permanent deJDt ceiling—to a level that, hopefully, will provide ample margin for
federal debt operations and cash management at least through fiscal year 1969.
There is ample precedent, from the World War II period, for providing large
debt limit increases that made sure the limit would not be a constraint on necessary wartime finance. From 1941 to 1945, annual increases in the debt limit
ranged from $40 billion to $85 billion. At the end of the war there was a substantial margin of extra leeway and the debt limit was cut back b}^ $25 billion.
Based on that experience, I believe it would have been entirely appropriate to
increase the permanent cefling to $375 bfllion. At the same time, I can well
understand a desire on the part of Congress to set a limit that, whfle not inhibiting the financing needed for Vietnam, stayed closer to near-term foreseeable
contingencies than would a $375 bfllion permanent ceiling at this time.
It is as a result of considering these more or less foreseeable contingencies that
the permanent debt limit figure of $358 bfllion emerged from the deliberations of
the other body. That is the level of the permanent debt limit incorporated in
H.R. 10867.
Let me review with you the background for that determination. The starting
point is the table of projected debt levels appended to this statement, based on a
prospective budget deficit of $11 bfllion in fiscal year 1968, and a constant cash
balance of $4 biflion. The highest point of debt projected in that table is $345.2
bfllion, reached on March 15, 1968. But that is without any allowance at all for
contingencies. Now add the following for contingencies:
[In biUions]

1. Normal contingency aUowance
2. Possible delay in effective date of tax surcharge
3. Possible shortfall in revenues at current tax rates, based on estimates of
Joint Committee staff (cumulative effect by Mar. 15, 1968)
4. Possible shortfall in sales of participation certificates—or, alternatively,
provision for including participation certificates issued in fiscal year
1968 under the debt limit (cumulative effect by Mar. 15, 1968)
5. Hypothetical addition to defense costs
;
Total contingencies

$3. 0
2.2
1. 1
3. 5
3. 0
12. 8

Adding the $12.8 billion allowance for contingencies to the projected peak
debt of $345.2 billion, one arrives at $358 billion as an appropriate debt limit
level for fiscal year 1968. Let me stress that these are contingencies, not certainties.
To guess what the impact might be of a delay in the proposed tax surcharge is
the sheerest speculation. So is the figure plugged in for hypothetical additional
defense costs.
Looking beyond fiscal year 1968—as we should if we are seeking to set a revised permanent debt ceiling that will have some qualities of durabflity^the
uncertainties and contingencies cover an even wider range than those that are
dimly foreseeable for the next year. Based on past experience, however, a major
determinant of the debt limit need applicable in fiscal year 1969 wifl be the
seasonal rise in debt from the start of the fiscal year to the high point reached in
the late winter or spring months. That is the basis of the rough rule-of-thumb
which relates next year's debt limit need to this year's peak debt level plus this
year's deficit.
It is this seasonal need that has been incorporated into H. R. 10867 and applied
to the fiscal years 1969 and beyond. We do not know the basic budget position
that may apply in fiscal year 1969, but we can estimate that whether that position
is one of surplus, deficit or balance, there will be a seasonal upswing in debt
during the first 8 or 9 months of the year which will be a major factor in determining the peak debt for the period.
The experience of recent years suggests that the seasonal upswing in debt
would be about $7 billion, and that is the figure provided in H.R. 10867. The
seasonal variation arises because of the uneven pattern of tax receipts over the
year, with a more than proportionate share concentrated in the last 3}^ months
of the fiscal year. That means that in the first 8% months, with receipts running
seasonally light, there must be some extra borrowing until the heavy tax months
roll around.

258

19 67 REPORT OF THE SECRETARY OF THE TREASURY

The seasonal nature of the $7 billion addition to the debt limit provided in H.R.
10867 is unmistakably clear. The addition applies to the period from July 1
through June 29 of each fiscal year, beginning July 1, 1968, but each June 30
the debt limit drops back to the permanent level bf $358 billion. We believe
this arrangement provides reasonable operating flexibility while maintaining
the principle that the permanent debt ceiling should be held in reasonably close
check.
Coverage of the debt limit
A further provision of PI.R. 10867 is that participation certificates in pools of
federally owned financial assets issued by the Federal National Mortgage Association during fiscal year 1968 shall be counted under the debt limit for as long as
those participation certificates remain outstanding. We did not seek the inclusion
of this provision. It reduces our leeway under any given ceiling, and it takes
a step—even though it is a temporary step—along a path, the end of which we
cannot clearly foresee. However, we can live with the provision embodied in
H.R. 10867, and we recommend that in the interest of speedy passage of this
vital legislation the entire bill be approved.
Our own preference, as I informed the Ways and Means Committee, would
have been to make no change in the coverage of the debt limit at this time.
This was our conclusion after devoting some considerable staff study to this
question following the debt limit hearings at the beginning of this year. This
was not because we regarded the existing arrangements as incapable of improvement, but because the proposals that have been advanced did not appear to us
to offer the prospect of significant improvement.
A particular reason for delay is that further light on this whole question of
debt limit coverage may emerge from the studies of the President's Commission
on Budget Concepts. While the Ways and Means Committee took note of the
Commission's possible contribution in this area, they nevertheless chose to incorporate the provision described for including participation certificates under the
debt cefling. But, asjl have noted, in light of the present time factor, the provisions of H.R. 10867 on this matter are workable and acceptable to us, even if
not especially welcome.
The 4Vi percent ceiling
Let me turn now to the 4}{ percent interest rate cefling and the modification
of that cefling provided in PI.R. 10867. Because of the 4>4 percent interest rate
cefling on Treasury bonds, the Treasury has been unable to sell marketable
debt issues maturing in over 5 years since May 1965—just before events in Vietnam
led to an escalation not just in our mflitary effort but also in our economy, credit
demands, and interest rates.
As I mentioned earlier, the intensified savings bonds campaign has made a
contribution to an improved debt structure, and it wfll continue to do so with the
introduction of the Freedom Share this year. But savings bonds and Freedom
Shares cannot do the whole job. Good maturity balance must be achieved and
maintained in the marketable debt, too.
In the early 1960's, with long-term interest rates holding relatively steady, the
Treasury made big strides in improving the maturity structure of the marketable
debt—relieving the under-5-year area of heavy maturities and issuing instead a
large volume of intermediate and longer term debt.
Chiefly through the use of advance refundings—inducing holders of relatively
short-term issues to exchange into relatively long term issues—the average
maturity of the marketable debt was raised from 4 years 2 months in September
1960 to 5 years 5 months in January 1965. The proportion of the marketable
debt maturing within 5 years was reduced from 78 percent in September 1960 to
67 percent in January 1965.
The wisdom of these efforts to lengthen the debt was demonstrated last year,
when very high rates had to be paid on refundings. Fortunately, the magnitude of
the refunding job had been substantially reduced because of previous advance
refundings.
Since early 1965, the trend has been toward a shorter average maturity and
a heavier concentration of debt within the 5-year area. From an average maturity
of 5 years 5 months in January 1965, the marketable debt shortened to 4 years
6 months at the end of May 1967. The proportion of the marketable debt maturing
within 5 years has grown from 67 percent to 77 percent over this period. At the

EXHIBITS

259

end of June 1967 the average maturity of the marketable debt will still be about
4 years 6 months, or 5 months shorter than a year earlier.
What might happen to the debt structure over, say, the next year and a half,
if the Treasmy issued no debt maturing in over 5 years? Assuming that new
borrowings and refundings are handled about in line with patterns during the
past 2 years, we woifld estimate the average maturity of the marketable debt by
the end of December 1968 at 3 years 8 months—well under the 1960 low point.
Some 85 percent of the marketable debt would mature within 5 years, including
nearly 50 percent maturing within 1 year.
This shortening tendency is unwelcome. It presents a problem that should be
dealt with in an orderly and systematic way, so that we do not face an excessive
pile up of maturing debt. Such a pfle up, if it came at a time of tight money and
high rates, would mean that the Treasury had to compete for investment funds
on most unfavorable terms—bidding against itself and against other borrowers
for the favor of investors. This kind of frantic competition could send shortterm rates up sharply and push long-term rates higher, too, with disruptive
effects throughout the capital markets.
Further, the heavy pfle up of relatively short debt could make it more difficult
for economic stabflization policies to operate smoothly in the economy. Pleavy
amounts of short-term debt represent potentially excessive liquidity in the hands
of the holders. This could mean that the monetary authorities would have to
take more drastic restraining action than otherwise—in terms of interest rate
effects—in order to restrain total demand.
These are not imminent dangers, but they are potential problems that can
be avoided or minimized if we would make a careful, orderly effort to stretch
out some short-term debt into a longer area.
Certainly I would much prefer to be able to accomplish the needed improvements in the debt structure at low rates of interest—low enough to come within
the present 4:% percent statutory ceiling. But whfle rates have come down since
last summer's high point they are not at a level that would permit long-term
financing under the 4j4 percent cefling, and I would like to be able to take some
steps—even if they are small-sized steps—on the debt structure problem whfle
aiming toward further progress in reducing the overall level of interest rates.
In appearing before the Ways and Means Committee several weeks ago, I
requested two modifications of the 4 ^ percent ceiling: first, that the maximum
maturity on Treasury notes—to which no rate ceiling applies—be extended
from the present 5 years to 10 years, and, second, that the Treasury have authority to sell up to $2 bfllion of longer bonds without being subject to the 4}^
percent cefling.
I did not ask for repeal of the 4}i percent ceiling, just as I did not ask for repeal
of the debt limit. Both of these are useful concepts and worth preserving, provided they are not so rigidly bound as to interfere with sound debt and cash
management.
The House committee went only part way in meeting my request on the 4}i
percent cefling. They rejected the request for authority to sell $2 billion of bonds
outside of the ceiling, but they agreed to extend the maximum maturity of Treasury notes to 7 years. That provision is incorporated in H.R. 10867.
We believe that this modification will be helpful, although it is less than we
asked for. It does at least demonstrate a concern with the problem of debt structure, and that is an important step forward. Through a widened flexibflity in
this area it should be possible to mitigate the shortening tendency of the debt
observable in recent years.
I have no hesitation whatever in recommending strongly that you give approval
to this feature of H.R. 10867. Even if we did not face an urgent timing problem,
requiring the completion of congressional action on the debt ceiling within the
next few days, I do not believe there would be anything to be gained by pressing
at this time for stfll greater flexibility in our debt management.
Conclusion
I believe that H.R. 10867 provides for a responsible approach to the problems
of providing adequate flexibility for needed Government borrowing, and sound
debt and cash management. It revises the unrealistic $285 bfllion permanent
debt cefling, and puts the debt cefling legislation on a basis that should remove
the "Hairsbreadth Harry" scenario that has been enacted in the closing days
of June in each of the past several years. It also makes some worthwhfle headway
277-468—68

260

19 67 REPORT OF THE SECRETARY OF THE TREASURY

on the matter of modifying the 434 percent interest rate ceiling, to permit greater
flexibflity of debt management.
I urge most strongly, therefore, that you approve H.R. 10867 without further
modification, and clear the way for speedy passage of this urgentl}?" needed legislation. As I need not remind you again, it is imperative that the Congress act
by the end of June because the debt cefling drops on July 1 to $285 billion—a
level that would be 'some $42 billion under the actual level of debt now expected
on that date. At that point the Treasury would be able to issue no new debt,
including debt needed to refund maturing issues and including the U.S. savings
bonds now being purchased by over 9 million persons on payroll savings plans
and by other buyers over the counter. Without new borrowing, we expect to
have cash on hand at the end of June sufficient to last only through about July
12. After that, our leash would be inadequate either to redeem maturing debt
issues or meet current bflls.
Our national commitments must be met in the financial area, as they are being
met on the battlefield. It is not conceivable that the Congress would shirk its
responsibilities by leaving the Government financially unable to carry out the
programs authorized and approved by the Congress, particularly in wartime,
and when the financing of the war effort is the occasion for a larger call on the
private market.
TABLE I.—Estimated public debt subject to limitation in fiscal year 1968, assuming
budget deficit of $11 billion, and no allowance for contingencies
[In billions. Based on constant minimum operating cash balance of $4.0 billion]

Period

1967
June30
July 15
July 31
August 15
August 31 _ _ _ _
September 15
September 30-._
October 15
October 31
. _
November 15
November 30
December 15
December 31

Operating
Public
cash
debt
balance subject to
(excluding limitation
: free gold)

$4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0

$324.3
326.4
327.2
329.7
331.8
335.0
330.9
334.7
334.8
337.3
338.3
341.9
337.2

Operating
Public
cash
debt
balance subject to
(excluding limitation
free gold)

Period

1968
January 15
January 31
February 15 _
Febniary 29
March 15.
March 31
April 15
AprilSO
May 15
May 31
June 15
June 30

___

._.._-

.__._-

$4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0

$339.3
338.5
339.4
341.1
345.2
342.9
344.9
337.3
337.4
340.2
342.7
335.3

Exhibit 28.—Remarks by Under Secretary Barr, October 6,1966, before the Third
Annual Corporate Pension Conference, New York City, on the financial management of Federal credit programs in the Great Society
As pension officers you have a lively interest in the way the Federal Government manages its financial activities. You represent the fastest growing group of
major financial institutions in the Nation. You are fully aware of the impact of
the Federal Government's activities on the broad financial market of the United
States. Your funds are invested in that market, and you will return to. the market
again and again to seeki future investment opportunities.
Narrowing our focus on your interest somewhat, the security, convenience,
and steady earning power of U.S. Treasury securities surely hold a substantial
part of your attention in the market. And if you do not hold obligations issued or
guaranteed by Government lending agencies, you will have at least considered
them. So a discussion centering on Federal credit programs can be neither strange
nor uninteresting ground for you.
We in the Treasury, of course, also have a keen interest in all the Government's
financial activities, although we observe from a different point of view. We have
the responsibility of maintaining the quality of the Government-backed obligations you hold and those you have yet to buy. That responsibility exists within
the context of our broader obligation to maintain and enhance the well-being of
all Americans.

EXHIBITS

261

To see Federal credit programs in proper perspective, we should look briefly
at the purposes for which they were created before we consider the problems of
their financial management. Since the modest beginnings with the Farm Credit
Program in the first World War era, Federal credit programs have grown tremendously. More important, their scope has broadened vastly, reflecting an
expansion in our scale of priorities from the farm sector of the economy and our
society to include many other sectors and fields of activit}^
Federal credit aids now help to achieve the objectives of Government programs
in six major areas. Varying among direct loans, loan insurance, and loan guarantees, they are:
—improvement of private housing and encouragement of home ownership;
—development of agricultural and other natural resources;
—promotion of economic development abroad;
—assistance to business, including small business generally, transportation,
and commercial fisheries;
—encouragement of community development and public housing; and
—improvement of education, including college facilities and student loans.
Apart from programs generated to provide temporary assistance after a natural
catastrophe or other emergency, continuing Federal credit programs have been
established to meet two kinds of situations. In the first of these. Government has
intervened to remedy what are—or appear to be—imperfections in the functioning
of the private credit system. For whatever reason, potential borrowers are unable
to command adequate credit even though they are able.to pay a competitive price
for it. So-called "credit gaps" occur, and programs are designed to close them—to
achieve more nearly the credit allocation that might be expected to result if the
market operated more perfectly.
In the second kind of situation, the Government seeks to achieve social, economic, or other policy objectives which would not otherwise be attained even
if the market functioned perfectly. The Government intervenes to divert resources
to particular activities from which public and private benefits are believed to flow
in a degree justifying the costs involved.
It is often hard to tell whether it is imperfection in the market or the desire
to achieve specific objectives which led to developing and sustaining a particular
credit program. Farm credit has been justified both in terms of food production
and of the social significance of life on the family farm. Do we lend money for
education more because of the unquestioned value of education or because many
educational institutions and their students cannot afford to compete for credit?
Our Nation has come a long way since the inauguration of the first Federal
credit program. Much of this nation's progress over the years has been due,
directly or indirectly, to timely extension of credit to men and women who
otherwise would not have been eligible for it or could not have afforded it. I might
stress the element of timeliness here. There are some who would argue that the
market would, in time, provide financing for any worthwhile purpose.
It matters little to a man who needs credit for his farm or business or financing
to provide a home for his family, or to youth who need a school to go to, or to the
sick who need a hospital, that funds will be avaflable "sometime." A central
part of the magnificent achievement of our credit programs is that they have
provided funds when the funds were needed.
The funds which these programs have put into the hands of the public for
purposes recognized and written into law by the Congress add to impressive
totals. The budget which the President sent to the Congress last January estimated that direct loans outstanding would total $33.1 bfllion at the close of the
Government's fiscal year 1966. Guaranteed and insured loans outstanding were
estimated at $98.5 billion. Final figures for the year are not yet available.
The President's budget for fiscal year 1967—the current 3^ear—cafled for
almost $8 bilhon in new commitments in direct loans. Half the total was budgeted
for loans to foreign borrowers by the Export-Import Bank and the Agency for
International Development—an essential part of our economic and trade development effort abroad. The remainder was to be divided among 18 other rnajor
credit programs. New commitments for guarantees and insurance of private
loans were forecast at almost $28.4 billion. Over half that total was for housing
loans insured by the Federal liousing Administration, now part of the Department of Plousing and Urban Development.
Those are substantial figures. But it is well to keep the situation in perspective,
particularl}^ as it respects demands on our money markets. The tremendous

262

19 67 REPORT OF THE SECRETARY OF THE TREASURY

growth of our economy during the last 5}^ j^ears, our savings potential, and the
rising credit demands of other sectors, coupled with reductions in Federal
deficits and a decline in the Treasury financing placed in the private market,
have resulted in a shrinking in the demands of Government finance, relative tp
other demands. Large as it is in absolute terms. Federal financing is a small
IDroportion of our financial markets.
But consider the size of the Government's portfolio of direct loans under the
various credit programs: more than $33 billion of the taxpayers' money—taken
from their current accounts over the years—immobilized in loans of various
maturities, often long-term. The total has been growing rapidly, too—it was just
over $25 billion 5 years ago.
Federal credit programs have been designed to accomplish things the private
market could not or would not accomplish. Our lending activities have always
been supplemental to the private market, never aimed at taking its place.
Over the years successive administrations have devised means to use the
great resources of the private market to accomplish the necessary and highly
desirable social purposes which we originally set out to accomplish through direct
Government lending. When private capital takes up part or all of the burden
of a lending program, the resources of the public sector are freed to turn to other
worthwhile purposes. This is advantageous for several reasons:
—the capital resources of the private market are far greater than those of
the Government;
—we could not increase the Federal budget and, indeed, few if any of us
would want to increase the Federal budget to the degree required to provide all the necessary funds through direct Government loans; and,
—while Government assistance is required to get programs underway,
we often need the flexibility and ingenuity of the private market to carry
them out successfully.
The public gains another advantage, too. Federal credit programs, working
through the private market, help to make the market stronger, more competitive,
and better able to serve the economy's needs over the long term.
The most striking long-term effect of the mobilization of private financing for
Federal credit programs can be seen in the growth of guaranteed and insured
loans. Today, $3 of every $4 lent under our programs are private funds lent
under Government guarantee or insurance.
The substitution of private for public credit has received great impetus since
the mid-1950's under the asset sales program. This has consisted of selling loans—
selling the loan paper, actually, which is generated under various direct Federal
lending programs.
The idea of asset sales was endorsed by the distinguished private Commission
on Money and Credit, of which Secretary of the Treasury Fowler was a member
and which issued its authoritative report in 1961, and President Kennedy's Committee on Federal Credit Programs, of which former Secretary of the Treasury
Dillon was chairman. The program was also given high priority repeatedly in
President Eisenhower's budgets.
But despite major efforts to draw on private credit, the portfolio of direct
Federal loans outstanding has increased in recent years. This has had direct
consequences on the Federal budget. Money for direct lending programs must
be budgeted. This means that it must be raised from tax revenue or additional
public debt—or else that it must take the place of some other program, which
then must be postponed or dropped. The money appropriated to a direct lending
program is tied up, regardless whether private funds have meanwhfle become
avaflable which could take its place.
These conditions led originally to the program of direct sales of federally
held assets, which had the objective of reducing the portfolio of direct loans
held by the Government. But problems developed with the direct asset sales
program.
This program, in effect, sent Federal lending agencies into the private market
to raise money. We have had at various times half a dozen or so agencies sefling
their loan paper, some of it with appeal to a very limited market. Further, the
agencies went about! this task with varying degrees of expertise.
From the Treasury's standpoint, the main problem presented by the myriad
Federal agency credit programs has been one of coordination. This is not to say
that there has been any lack of genuine cooperation. The various agencies are
aU concerned with doinglthe best job possible, and there is a spirit of give and

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take among the agencies and with the Treasury and its debt management problems. Moreover, with respect to any specific financing, the Treasury must, by
law, be consulted in most cases, whfle, in other cases, we have been in close touch
as a matter of practice.
Rather, the coordination problem has reflected the multiplicity of agencies
dealing directly with the market, each with its own scheduling problems and
each with fairly specific financing objectives or requirements, all of which have
had to be fitted within an overall schedule. Obviously, this has required detafled
planning, careful consideration of alternatives, and hard appraisals of amounts,
maturities, and pricing.
All the agencies have had some degree of flexibility in their financial operations,
but there have also been constraints imposed by law, market acceptabflity, or
considerations of prudent financial management. Patterns of cash flow posed
constraints, too. Certainly, long-term borrowing was more appropriate for some
agencies, particularly where it was fairly clear that a portion of the agency's
need was of a truly long-term nature. At the same time, we at the Treasury
knew that long-term agency borrowing could compete directly with opportunities
for the Treasury itself to tap the intermediate or longer term markets.
The best technique we had at hand to cope with those problems consisted of
grouping assets, consisting of loans, into pools and selling shares or "participations" in the pools. The Export-Import Bank had been using the technique since
1962 and had sold about $1.7 billion of its direct loans which otherwise might not
have been marketable. The Federal National Mortgage Association—Fannie
May, as we all call it—acting under the provisions of the Housing Acts of 1964
and 1965, sold $1.6 bfllion of participation certfficates in its own mortgage holdings and those of the Veterans' Administration.
Last January President Johnson proposed a bold step forward in mobilizing
the resources of the private market to accomplish the purposes of the Federal
lending programs. His proposal became the Participation Sales Act of 1966.
Its basic provisions came directly from the Housing Acts of 1964 and 1965. The
earlier act authorized Fannie May to act as trustee for the sale of participations
in pools of first mortgages. The 1965 act extended that authority.
The Participation Sales Act enlarged the use of the pooling technique by extending it to certain other Federal agencies which hold financial assets. Further, it
capitalized on the experience and expertise of Fannie May by giving responsibflity for managing and coordinating the pooling and sales of assets to that
agency, serving as trustee for the other agencies.
In authorizing the creation of participation certificates for sale in the market,
the act brought into being a security which cannot fafl as its use develops to command a broad market at yields close in line with Treasury securities. Finally, the
act provided for congressional review of the pooling of assets, so that the Congress
retains its traditional influence and control over the scope and administration
of the lending programs.
The act extended the use of the participation sales technique to include assets
of the Farmers Home Administration, the Office of Education's academic facflities loan program, the college housing loan program and the public facilities
loan program of the Department of Housing and Urban Development, and the
Small Business Administration. Under this legislation, we proposed this year to
reverse the upward trend in the total of direct Federal loans outstanding.
Since then, of course, our attention has been drawn away from the size of the
direct loan portfolio and the problems of asset sales coordination to the escalation
of interest rates and a more general inflationary threat.
The President, speaking to the Nation in his message to the Congress on September 8, outlined his program to avert inflation. He said, and I quote:
"No nation has ever enjoyed such prosperity * * * .
"The new problems of prosperity are much to be preferred to the old problems
of recession and depression."
But, he continued:
"* * * the great satisfaction that accompanies the solution of old problems
must be tempered by full recognition of the new problems these solutions bring."
As you know, the President asked the Congress to suspend two tax incentives,
the 7 percent investment credit and accelerated depreciation, for 16 months to
reduce pressures in certain sectors of the economy. I am pleased that the House
of Representatives has already passed a bill embodying those requests of the
President, and the bill is before the Senate Finance Committee this week.

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Citing tight money conditions and high interest rates that impose a special
hardship on homebuyers and small businessmen. President Johnson announced in
his message that he had asked Secretary Fowler to review all potential Federal
security sales and to keep them at the minimum. Mr. Fowler announced 2 days
later that there would be no further sale of participations during this calendar
year, unless the market returned to more normal conditions. Federal agency
offerings to the market, he said, wfll be limited to amounts necessary to refinance
maturing issues. It is planned to raise any needed additional funds through sale
of agency securities to various Government trust fund accounts.
These necessary measures, adopted to protect the unprecedented and hard-won
economic gains of the last 5% years, have unfortunately obscured temporarily
the great significance of the Participation Sales Act.
It is really a tremendous breakthrough in the financial management of our
credit programs.
I have described in some detail our concern over a market entered by individual
agencies in search of buyers for their assets. This problem, of course, is now vastly
reduced in scale.
There is another iarea, of equal importance, where the effect of this milestone
legislation will be felt in future years. This is in our budget treatment of lending
programs.
A Government loan—to an individual, or a business, or an institution—is a
liability, an obligation to pay, on the part of the borrower. It is an asset for the
Government. The bbrrower is obligated to pay back every cent he borrows from
the Government, plus interest. Yet money lent under our Federal credit programs
is treated as an expenditure. We say the administration has "spent" the money.
Consequently, we generally call the repayment of a loan a net reduction in
expenditure—a negative expenditure. We could just as well call it revenue. The
net impact on the budget is the same whether we call a loan repayment a receipt
or a negative expenditure.
The pooling of loans and the sale of participations, when these techniques are
in full use after the current inflationary threat passes, cannot fail to underscore
the differences among Federal funds spent, say, for an Army rifle, which is expendable and has a strong tendency toward obsolescence; funds spent for a national
park, which will be an asset to be enjoyed by our grandchfldren; and funds lent
to credit-worthy borrowers who will pay back every cent, with interest. This
will have an important effect on the budgeting process.
Competition for the avaflable Federal budget dollar is keen—particularly
when the whole range of great unsatisfied needs of our society is considered. The
Great Society means, in part, meeting the greatest of those needs.
It is only necessary to name a few areas—health and education, poverty, the
rebuflding of blighted urban areas, water pollution, air pollution, transportation—to see that future national needs wfll create great future demands for capital.
We gain some perspective in the area of future capital needs from the recent
National Planning Association study, "Goals, Priorities and Dollars," a study
of the cost of achieving our national goals for 1975. The study estimates that, by
1975, our annual exipenditure level for urban development should reach nearly
$130 billion, in 1962 prices.
In transportation, the study concludes our 1975 expenditure level should be
almost $75 biflion, and in housing, $62 billion. All these are double the actual
1962 expenditures.
The study further estimates that, in 1975, annual investment in private plant
and equipment should reach alinost $152 bfllion—triple the actual 1962 level.
Gross private domestic investment as a sector of hypothetical gross national
product in 1975 is projected at $205 billion, more than two and one-half times the
actual 1962 level.
Another National Planning Association study estimated the cost of transforming the Nation's metropolitan centers into what the study considered to be
viable communities lOver a period of 20 years. Their estimate was $2.1 trfllion,
in both public and private expenditures. These figures give us some idea of the
order of magnitude bf the need for capital which we will face in less than a decade.
The Participation Sales Act did not authorize any new programs or any additional loan funds for existing programs. But its passage was of vital importance
in assuring local communities, educational institutions, and individuals that
loan programs authorized by the Congress would be adequately funded. Further,
it provides assurance to many others—individuals, communities, and institu-

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tions—that future programs to alleviate their most severe problems will be
financially feasible.
Things in Government seldom remain fixed and static for long. We took a
long step forward with the Participation Sales Act. But I would not be surprised
if, in a matter of a few years, that step led to stfll more comprehensive progress
in the future financing of Federal lending programs.
Perhaps the next step might be the establishment of a new central Federal
lending corporation which would obtain funds for programs economically and
efficiently by issuing its own obligations in the private market. Such obligations
would have to be backed in some fashion by the Treasury and subject to the
Secretary's approval. Conceivably, such a Government lending corporation
could be justffied in terms of real savings, still greater coordination of agency
financing, and more effective and equitable allocation of credit resources.
Such a step may be regarded in the future as the logical extension of progress
we have already made. Perhaps it is to such a Federal credit corporation that we
should look for the kind of stability and continuity in program financing which is
essential both to orderly and economic planning at the local and individual
scale and overall financial program planning on a national scale.

Exhibit 29.—Excerpts from remarks by Under Secretary Barr, February 4, 1967,
before the American Institute of Banking, New York, N.Y., on financing a
college education
Most Treasury officials, when they come to New York, address their remarks
to the subjects of balance of payments, the econornic outlook, taxation, or monetary policy. Tonight, it is my intention to abandon these lofty themes and address
myself to a very simple fact of life which is of concern to millions of Americans—
how to finance a college education for their children.
The grand subjects of the U.S. posture in its balance of payments, its economic
outlook, its system of taxation, and its monetary policy are inextricably tied up
with our level of education. If you compare the United States with the rest of
the world, our most significant advantage probably lies in the educational level
of the vast majority of our people—the so-called technological and management
gap which so disturbs our competitors around the world.
Our education is closely allied with our economic outlook. As the Council of
Economic Advisers pointed out in its recent annual report, some studies suggest
that over 20 percent of our economic growth over the past three or four decades
can be directly attributed to education, and perhaps another 20 percent can be
attributed to the general advance of knowledge.
Education unquestionably will have an impact on the sort of tax policy that
we devise in the years ahead. If education lifts us all to a higher level of real
income, some of the most basic assumptions of tax policy may have to be reexamined.
Finally, a highly affluent society with a high level of education is surely a
society that will use to the fullest the credit resources that are available in this
Nation.
So tonight, when I speak on a subject that may seem a bit prosaic by the
usual Treasury standards, perhaps I am speaking to a really basic issue involving
our current and our potential economic power as a Nation.
I also am speaking about a subject that directly involves my current responsibilities and yours. As I will explain, we recently have initiated a program of
Government-backed private loans to college students, and I am chairing a special
committee to review this program. Our goal is a big one: by 1972 we are aiming
to have some $6.5 bfllion in loans outstanding to over 2 million student borrowers.
We in the Government are prepared to recommend to the President that we
take whatever steps are necessary to reach this goal. The loans themselves,
however, must be made by the banks and other lending institutions of this country,
so in a very basic sense it will be up to you whether this program succeeds. .
The need we face
Our whole history as a nation, from the Northwest Ordinance of 1787 down
to the Higher Education Act of 1965, has reflected our continuing determination
to educate our children the best way we know how. But the time span from

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the end of the Second World War to date has marked a dramatic change in our
attitudes toward higher education.
Just a few figures will illustrate the remarkable change in recent years. In
1930, total expenditures on a higher education in this country were about $630
million. A few years after the Second World War, the figure was more than four
times greater—about $2.7 billion. In the current year, 1967, the expenditures
are expected to reach a level of approximately $16.8 billion—almost 30 times
the 1930 level.
In the decade from 1955 to 1965, the enrollment in our institutions of higher
education increased by about 2,800,000 students. In the next decade we are
anticipating an even larger increase—3,600,000 students—and this is probably
on the conservative side.
This is the problem, and the hard issues that confront us all are starkly simple.
First: How do we, as individual parents, raise the money to meet the expenses
of college—expenses that have risen steeply in the recent past and show little or
no sign of leveling off in the future?
Second: How do we, as citizens, allocate our resources to pay the professors and
to build the classrooms and laboratories and housing needed to accommodate this
surge of young Americans into the coUeges and universities?
Tonight I will address myself merely to the first question, but with a clear
understanding that the two questions cannot be easily divided. The need to
finance the required igrowth of the institutions will almost inevitably be reflected
in higher costs to the students and their families. I do not intend by this comment
to take sides in the argument over free state tuition; as a financial official I merely
regard it as prudent to assume that at least a portion of the cost of enlarging and
improving our colleges will be borne by tbe current crop of students. I might add
that if we are to preserve our private institutions of higher learning—and I am
sure all of us want to—this trend toward higher costs then surely becomes a
problem we inevitably must confront.
If we are faced with the problem of ever higher costs when American families
currently are groaning under what they consider to be an extremely heavy burden
then what is the answer? There are several alternative courses of action—one
of which is currently on our statute books. Let me list for you some of the proposals that are circulating in the public domain, with my own personal comments on their utility. Then I should like to explain to you the potentials of the
legislation that we have recently enacted.
The tax credit proposal
Possibly one of the most politically attractive proposals that is currently being
discussed is a plan to give a tax credit to those families who are incurring the
costs of higher education.
My imaginative and highly experienced friend, the Senator from Connecticut,
Mr. Ribicoff, has advocated just such a proposal. I have noticed that a good
friend on the other side of the aisle. Congressman Gerald Ford, has also thrown
his support behind this approach.
I must say that most people, when they first look at the idea of taking a tax
credit for the expenses of their children in college, become wildly enthusiastic.
But let's take a closer look at just what these proposals amount to.
Senator Ribicoff's proposal would allow the parents of a college student a
maximum of $325 each year as a credit against taxes. The credit would be less if
the student's tuition and books totaled less than $1,500. And of course if the
family had so little income that they owed no tax, they would get no benefit
at all from the credit.
This plan would cost the Nation roughly $1.1 billion the first year (according
to Treasury estimates) and up to $1.5 billion a year within 3 years. You can see
that we are not dealing with small sums of money. But laying aside the parochial
Treasury concern about spending such large sums. Senator Ribicoff's proposal
seems to have two basic defects:
First, it operates as a sort of "reverse" scholarship—that is, it gives the highest
reward to the families with the highest incomes sending their children to the most
expensive schools. I know of no college which would hand out its aid funds in
such an upside-down fashion.
Second, in spile of the substantial cost to the Federal Government, even the
maximum amount that the proposal would provide—$325 per student—is not
nearly enough to meet the current and the prospective burden that faces so many
American families.

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Senator Ribicoff argues that his plan is designed to provide money for the
institutions, through higher tuition, as well as to ease the burden on families.
In this dual objective he has my sympathy and my concurrence. However,
increased tuition may merely widen the educational opportunity gap between
families of moderate means and famflies of ample means. On balance, I think
there are better means of using our Federal resources in the area of financing
higher education.
The "common stock" approach
One of the more ingenious plans that I have encountered in recent months
was briefly mentioned in the President's Economic Message. Under this proposal, a college student could borrow the funds he needs from a Government
education bank. He would repay this loan by adding a certain specified percentage to his Federal income tax rate during his productive years (say, to age
55). This plan has the novel "common stock" approach of making all of us partners through our Federal tax system in the economic career of any student who
is educated through this device. If he is extremely successful, he would much
more than repay the loan. However, if he entered one of the lower paying walks
of life, or if the fates worked against him, he would probably not repay the loan
principal and interest during his productive years.
This proposal certainly needs a good deal of careful study. The plan might
have to be modffied to provide a "buy out" for any extraordinarily successful person. In other words, if you were well on ^yourjway to becoming chairman of the
board of a bank, you might be given the option of buying out your debt to the
Government at some appropriate price.
This plan may sound bizarre on first reading, but it should not be dismissed
out of hand. It is a serious attempt to meet an important problem, and it certainly is no more fanciful than the far-sighted action of our forefathers in setting
aside portions of the howling wflderness to be used to finance our early educational
system.
The loan guarantee plan
Lastly, we come to a program which, to my mind, currently offers the United
States the greatest "bang for a buck" in this particular area—the guaranteed
student loan program enacted into law in the Higher Education Act of 1965.
The program is relatively new; it is not widely known; it admittedly has many
bugs that must still be worked out; but in my opinion it offers great promise
to mfllions of American famflies.
This program starts from a premise that we have been very slow to accept
in this Nation—that an investment in education is as sound a financial investment, if not sounder, than an investment in a house or in a car. It now is an
accepted fact that, unlike a car or a house, a college education is an incomeproducing asset. For that reason, our traditional reluctance to go into debt to
finance an education seems a bit peculiar and unreasonable. However, as the
costs of education continue to spiral, the American people, in their predictably
pragmatic way, are finding for themselves that perhaps it does make sense to
borrow to finance the education of their children. Perhaps they have begun to
borrow for education simply because they have found it impossible to meet
these costs out of current income or current savings; but whatever the reason,
it is my personal opinion that it is an eminently sensible decision.
How does the guaranteed loan program work? It really is quite simple. It
merely extends into this area the concept of a Government guarantee to back
up a loan made by a private financial institution.
There is nothing new in this concept. It revolutionized the whole approach
to financing housing in the days of the Federal Housing Act of 1934. The concept has proved spectacularly successful in the housing field—so successful that
most home financing today does not need to rely on a Federal guarantee. I believe
that the potential in the area of education is equally promising.
Let me trace through the steps: Any American boy or girl who can get admitted
to a college can go to his local commercial bank, savings and loan association,
mutual savings bank, or credit union to submit a loan application. The bank
processes his application and, after referring it to the State student loan guarantee agency, advances the student up to $1,000 per year (or in some States
up to $1,500 per year) while he is in school.
Repayment of the loan begins up to 9 months after the student leaves coUege
or graduate school. If his family's "adjusted family income" is $15,000 or less, the

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19 67 REPORT OF THE SECRETARY OF THE TREASURY

loan is interest-free to the student while he is in school—the Government pays
this interest. When repayment begins, the interest rate to the student runs at
3 percent if his family's income is below the specified level, with the Government
paying another 3 percent. If the family income is above that level, the student
pays the full 6 percent. Repayment can be made over as long as a 10-year period.
I can only admit that this program has had a rough beginning. After it was
enacted into law in the fafl of 1965, it took the Office of Education about 6 months
to really get started. I might say at this juncture that we have had the complete
and enthusiastic cooperation of the American Bankers Association, the two
savings and loan association leagues, the Association of Mutual Savings Banks,
and the credit unions' association (CUNA International).
Our troubles largely can be traced back to the phenomenon known as "tight
money," which began to be evident in April of last year. Tight money made life
extremely difficult for the savings and loans and the mutual savings banks, and,
to a lesser degree, for; the credit unions and the commercial banks. It made most
financial institutions think twice about committing themselves to new and
untried loan programs.
The banks also discovered, somewhat to their dismay, that the costs of getting
these loans on the books were more than they had anticipated. When these costs
were added to the high cost of money, they seemed to be facing a losing rather
than a break-even proposition.
Paperwork was ariother comphcating factor—almost inevitable in any new
Government program.
Lastly, State legislatures did not rush to appropriate their share of the guarantee
funds with the enthusiasm that we might have expected.
All of these difficulties, with the exception of tight money, are almost inevitable
with any new program. Despite them, we still succeeded in the fall semester of
1966 in getting out loans totaling $160 miUion to 190,000 students. For the fufl
1966-67 year, our original target was loans to 963,000 students, totaling $700
million. At the moment, we are guessing that we will actually hit a level of 480,000
loans totaling $400 million. All in all, this is not a bad beginning for a first year
effort under adverse conditions.
But it is not good enough. The need is now. Consequently, I have, with the
approval of Secretary Gardner and Secretary Fowler, put together a task force
composed of the Treasury, the U.S. Office of Education, and the Bureau of the
Budget to examine with the commercial bankers, the mutual savings bankers,
and the savings and loan association and credit union representatives what we
can do to move this program ahead.
We are going to look at the whole question of administrative costs, paperwork,
pooling of resources within a region, the possible creation of a secondary market
to relieve institutions that are overloaded, and the question of improving FederalState relationships in this area. It is our intention to reportsto the President
through Secretary Gardner and Secretary Fowler in the next 30 days.
Let me set out the reasons this program is so attractive to me.
(1) Perhaps this is a natural reaction for a Treasury official, but this program
unquestionably gives us the greatest leverage in the use of the financial resources
of the United States. I have mentioned that a tax credit plan providing a maximum
benefit of $325 per family would cost us a billion and a half dollars by the third
year. This loan program, if it expands on the trend that we think it will follow,
could make 6^ million loans totahng $6.7 billion at an annual interest cost to the
Federal Government that will reach only about $328 miUion in 1972, after 5
years.
(2) At $1,000 to $1,500 a student, this program offers some meaningful financial assistance. In fact, if it gets underway as I think it will, and if college costs
increase as I predict, these limits may have to be raised.
(3) The program is: intimately involved with all sectors of the financial community, the academic community, and State government. To many, this spells
chaos, cumbersome operations, and endless argumentation. I do not look at it
that way. I will admit that there is a lot of arguing and negotiation ahead before
we hammer out a completely viable program, but this is precisely the sort of
"creative federalism"' that President Johnson has continually emphasized.
Sometimes it is difficult to start, but in the long run the broad-based support
that is generated is well worth the effort.
If history is any indicator, the problem of financing the costs of higher education, both the costs to students and the costs to the institutions, will be met—no
matter what the costs may be, and no matter what part^^ controls our political

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destiny. I would recommend to you the study of the alternatives. I would hope
that you would agree with me that the guaranteed loan program provides the
most promising solution currently available to the problem of financial assistance
to the student.
I believe that we are getting much closer to our goal of being able to say to
every American boy and girl, "If you can get admitted to a college, the financial
resources that you need will be available." Implementation of this program
should make this promise a realit}^. It should make the financial burden of education a tolerable burden for American families. It should provide at least part of the
financial basis that American colleges and universities now need and will need.
And, finally, it should enable us to reach into the ghettos and the pockets of
rural poverty, to draw out and to educate those disadvantaged Americans to
whom a higher education a few years ago was literally unthinkable.
This is a town of financial genius and imagination. I ask that you use some of
that imagination and some of that creativity in helping us solve a problem that
involves one of the fundamental aspirations of millions of American families.

Exhibit 30.—Excerpts from remarks by Under Secretary Barr, June 18, 1967,
before the International Conference for Credit Union Executives, Miami
Beach, Fla., on the problems and perspectives in the financing of a higher
education
The subject I should like to pursue today is the financing of higher education.
Plere is a topic that both private financial officials and Treasury officials do not,
at first blush, consider part of their direct responsibflity. Yet I would suggest
that for several reasons this is a subject that should be of concern to us.
First, we are involved with finance, and higher education poses an important
and growing financing problem in this country. To illustrate: In 1930, total expenditures on higher education in the United States were about $630 million.
In 1950 the figure had multiplied more than four times over—to about $2.7
billion. In the current year, 1967, these expenditures are expected to reach a level
of approximately $.16.8 billion, or over 25 times the 1930 level. Financing of this
magnitude should not be ignored by those whose job it is to concern themselves
with the Nation's financial needs.
Second, precisely because the financing of education has received relatively
little attention from the financial community, there is a distinct possibility that
we may have fresh ideas to contribute. The talent and ingenuity that characterize
the financial institutions of this country—and our credit unions, which are one
of the fastest growing segments of the financial community—surely should be
brought to bear upon this, one of the most basic problems facing the United
States.
Finally, and most personally, the problem of college costs is one that will affect
most of us individually. With costs continually rising, the vast majority of American families are finding it a burden to bear the college expenses of their sons and
daughters.
I therefore propose to subject you to a few observations on this topic. I shall
first review with you a recently enacted program that serves as a good example
of the potential benefits of a cooperative public and private effort in meeting
this problem. Then I should like to set before you some of the broader questions
that all of us will have to consider.
Let me start from first principles. I believe that perhaps the most significant
and unique characteristic of this country is our historical commitment to equality
of opportunity. This is a nation built on the talents and energies of its people.
It has derived its unprecedented strength from a commitment to give every
young man and woman the opportunity fully to realize his or her potential.
In the United States of 1967, this commitment requires us to provide an increasing number of our young people with the higher education that is so vital
in a sophisticated economy. At the same time, with rising college costs, higher
education is an ever-increasing financial burden to American families.
In this important sense, then, financial aid for higher education is a critical
national problem. It is these circumstances that necessitated a renewed commitment to the goal that no young American who is admitted to college shall be
deprived of an education for lack of the necessary financial resources.
We have accepted that goal. The issue is, How do we achieve it?

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19 6.7 REPORT OF THE SECRETARY OF THE TREASURY

I. The guaranteed student loan program
In the Higher Education Act of 1965, the Congress established a new approach
to the problem of assisting students to meet college costs. Basically the program
contains no radical departures from sound practices in other areas of finance.
Rather it involves the application of experience gained in other areas to this vital
problem. The program works as follows:
A college student applies to borrow up to $1,500 per year from his local
credit union, bank, savings and loan association, or other lending institution.
The terms of the loan provide for 6 percent interest, with no repayment of
principal while the student is in school, and up to 10 years thereafter to
repay. These are the sort of terms that students really need, and the basic
concept here is that the acquisition of a college education is at least as sound
a reason to borrow money as the acquisition of a house, an automobile, or a
television set. >
Although the loan and its terms may be just what the student needs, the
credit union or other lender normally would not be able to extend such
liberal credit to a student. To make the transaction feasible for the lender,
the program provides for the loan to be guaranteed by a State or private
nonprofit student loan guarantee agency. During the current academic
year—the first year that this program has been in operation—the Federal
Government advanced $17.5 mfllion in "seed money" to these guarantee
agencies across the country, to provide the initial reserves that they would
need to back up their guarantees. If the student should default on the loan,
the guarantee agency promptly makes good to the lender.
For many students, even the loan terms that I have described would not
be favorable enough. Accordingly, under this program the Federal Government provides an interest subsidy for students from families with income
below about $20,000 (the precise level varying with the size of the family).
In these cases, the Government pays all of the interest whfle the student is in
school and one-half of the interest after he leaves school.
As you can see, this is a cooperative effort in which the Federal Government,
the State governments, and the private financial community all play a part.
The lending community, with its vast resources, supplies the actual
funds.
The State governments, with their familarity with local conditions, administer the guarantee arrangements.
The Federal Government, with the best credit rating in the world, stands
ready to supply the ultimate backing and subsidizes part of the borrowing
costs for lower and middle income families.
This is an example of what President Johnson refers to as "creative federalism."
Any new program requires a little time before it can be functioning smoothly—
and particularly where a cooperative effort such as this is involved. To make sure
that this loan program would progress satisfactorily, the President directed us a
few months ago to study its operations and recommend any appropriate improvements. I was assigned the responsibility for coordinating the interagency study.
We reviewed all of the data available. We consulted not only with experts
within the Government, but also with representatives of the credit unions, the
banks, the savings ahd loan associations, the colleges, and the State and private
guarantee agencies, among others.
Our basic conclusion was that the program was well-conceived and had gotten
off to a promising start, with an expected total by June 30,1967, of $400 miUion in
loans to 480,000 students.
There were, however, some problems that required resolution. These problems
did not lie in the area of student demand for loans. There seems little doubt that,
as the program, becomes known to students, they are finding it sufficiently attractive and useful.
'
The problems seem to relate to the other two parties to the arrangement—the
lender and the guarantor.
With a fixed 6 percent interest rate, it appeared that the program was a loss
operation for a great many lenders. The combination of high interest rates and
tight money last year, plus the administrative costs involved in this program,
discouraged many lenders.
The long-term nature of these loans also presents a potential problem. Smaller
lenders, such as some of the credit unions, and in the long run larger lenders as
well, could face liquidity problems if too much of their funds became tied up in
these loans.

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Guarantee capacity generally has been adequate up to now, but we could see
clearly that it would not continue to be adequate in a number of States for the
coming year. The reserves of some of the State and private agencies had consisted
solely of the Federal "seed money" advances that I have mentioned. With these
funds exhausted, the States would have to supplement the guarantee reserves,
or the Federal Government would have to provide additional support in some
fashion.
We are convinced that these problems can be dealt with successfully, and we
are moving to deal with them. Here are the steps that are in progress.
1. Since we cannot expect the private financial community to support a major
loan program on a loss basis, we have proposed an amendment to the law that
would authorize the Federal Government to pay loan placement and conversion
fees in amounts up to $35. The amount of the fees would be adjusted from time
to time, to take account of var3dng costs of money and administrative costs.
Basically, however, the fee authority would assure lenders that they should not
have to take a loss on these loans.
2. The paperwork involved in the program also can and should be reduced to
cut costs. We are substantially simplifying the application forms and procedures,
and we have proposed a statutory amendment that would provide, at the lenders
option, a simplified method of collecting the interest subsidies due from the
Federal Government. Along the same lines, we have proposed to reduce administrative expenses by combining the two separate loan programs for vocational and
college students.
3. The interest rate and credit situation generally in the economy have eased
significantly. Although of course, we have many other reasons to encourage that
trend, we are hopeful that it will facilitate increased lender participation in this
student loan program.
4. These changes should encourage substantially increased participation in
the program by all types of lending institutions. This will, we expect, spread the
student loan business aroUnd quite a bit. However, to assist smaller lenders and
in anticipation of a substantially increased volume of loans, we are exploring the
feasibiUty of establishing arrangements for pooling lending resources, and the
possibility of creating a secondary market in these education loans. We intend
to find out, for example, whether some of the insurance companies might provide
a secondary market for student loans made by credit unions.
5. On the guarantee side, we plan to move administratively, with maximum
cooperation with the States, to assure the guarantee capacitj^ that will be needed.
A number of States are taking care of their own needs in this area most admirably.
We have been in touch with each of the Governors, and have been pleased with
the widespread support for this program. But where necessary, we can extend
direct Federal guarantees—preferably to be administered by the existing State
loan guarantee agencies—to make certain that students are not denied loans for
lack of guarantees to back them up.
As you can see, this involves some fairly technical matters. There is, however, a
fairly simple observation that I hope you will bear in mind: A cooperative effort
of this type obviously cannot succeed without full cooperation. The colleges and
students are ready and willing. The State and private guarantee agencies are
generally performing quite admirably. And the Federal Government is doing its
very best to play its proper role in the endeavor. The program cannot function,
however, without the support of the private lending community.
I do not mean to imply that the support of our private financial institutions
has been lacking. Despite some initial problems, the loan program got off to a
promising start. I am also very much aware of the limitations that arose from the
extraordinary credit conditions that prevailed last year. But now that the problems are being eliminated, I hope that we can look forward to substantially increased support from all quarters.
I particularly hope that this program will commend itself to the Nation's
credit unions. We have appreciated CUN A's support, advice, and encouragement
in developing this program and resolving some of the problems it has presented.
We know that you have historically been committed to serving the needs of your
members—and that by doing so, you have become one of the fastest-growing
elements on the financial scene. I believe that this program provides an opportunity for increased service to j^our members in an area in which they are, and increasingly will be, in need of assistance. I am confident that you will rise to that
task.

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IL Some broader perspectives
I have taken your time to review the status of the guaranteed loan program
because it is the program that is currently on the books, and because it illustrates
several of the more basic issues in this area.
As I have mentioned, this program attempts to proceed through the extension
of assistance directly to students. And it attempts to do this through a public and
private, State and Federal effort. I believe that there is widespread agreement
that this program is a sensible and practical approach to the problem. The assumptions upon which the program proceeds, however, have implications that
warrant examination.
Much has been said about the fantastic increase in recent years in the size of
our college population; but this has been only the beginning. In 1965, full-time
enrollment in our colleges stood at 5.5 million students. By 1975, we expect the
total to reach nearly 9 million students.
I think we niust assume that the need for financing higher education in this
country is going to grow at least as rapidly as college enrollment. I think we must
also accept the fact that this need is going to be met, one way or another.
We are then discussing just what is the best way of moving financial resources
to this particular area of need. This is the subject that deserves some attention
from all of us.
The loan program aims at assisting students—not colleges—to carry the
costs of higher education. In the long run, is this the right road to travel? In
our elementary and secondary schools, we basically assume that the cost of education should be borne by the taxpaying public at large, and the education
should be provided !free of cost to the student. Our system of higher education
has been and still is something of a hybrid in this respect, since we have public
universities at which some of the expenses are covered by tuition fees; and private
colleges which depend largely on tuition and alumni support for their financing,
but for which Government assistance has become increasingly significant in
recent years.
There are some who believe that we should move in the direction of extending
the public education concept to virtually all of our colleges and universities.
This view is grounded in large part upon principle, and upon the contribution
that education makes to the national well-being. Although the primary benefits
of higher education accrue to the student, there also are important benefits to
the economy and the Nation as a whole. The public education concept also finds
support in the concern that many feel about the ability of young people to assume
heavy debt responsibihty, and the social and economic effects of such debts,
in terms of other uses of credit and the formation of families, for example.
At the same time, it can be argued that the logical basis for tax-supported
public education must be the near universal availability and use of the educational system. The overwhelming majority of our young people do go to elementary and secondary schools, but a great many do not go on to college. It may
be unfair to tax thern and their families to support the expansion of public higher
education.
It also has been pointed out that the tax-support arrangement is inefficient
and inequitable in the sense that it requires all of us to pay for the college education of students who can well afford to pay their own way. This viewpoint
obviously has not been allowed to stand in the way of public elementary and
secondary education, but some feel that it has greater force in the context of
higher education.
As you can see, these financing questions bring us unavoidably to some of the
most basic issues iri the field of higher education. Indeed, the choice between
putting the burden upon the student—in effect, a user method of financing—
and putting the burden upon the taxpayers generally, is an issue with vast social,
economic, and politieal implications, and one to which there is no easy answer.
The guaranteed loan program proceeds on the assumption that the major
resources to be utilized in financing the expanded needs of higher education
will be, at least in this instance, supplied by the private financial community.
In the context of this particular program, this is, I believe, quite clearly a sensible and constructive approach. It does lead us, however, to more fundamental
questions as to the method of moving resources in this area. I, for one, believe
that methods can be devised for increasing the involvement of the private financial, sector. This, of course, depends upon the ingenuity of the decisionmakers
as well as the willingness of the financial institutions of this country to explore

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new financing possibflities. The obvious alternative is for government—Federal,
State, and local—to tax the resources out of the private sector and direct them
where they are needed, either in assistance to students or assistance to colleges.
Finally, the student loan program pursues policies of "creative federalism."
It relies upon a division of responsibility between the States and the Federal
Government. This is a basic approach which President Johnson has committed
himself to follow, whenever possible. And in this instance, it appears that it
can and will do the job in an effective manner.
The broader implications here again are obvious. As I have indicated, the
needs of higher education in this country are going to be met. I believe that
much of the responsibility should be assumed by State and local government,
but whether this can and will be done depends upon the interest and energy of
State, local, and community leaders—such as yourselves—in grasping the problems and devising methods to cope with them. We must recognize that, whether
we like it or not, if the job is not done at the State and local level, there wfll be
irresistible pressure to try to do it from Washington.
III. Conclusion
You no doubt have noticed that I am much better at posing tough questions
than at providing easy answers. That is the nature of this problem.
I have tried to put two tasks before you. In reverse order, they are, first, to
apply your own talent and experience to some of these vital problems in the
area of financing higher education; and second, to give support, if you can, to
one immediate effort that is underway to meet these needs^the guaranteed
student loan program.
The history of this Nation proves again and again how much can be accomplished by the effort of our people. I hope that you share with me the conviction
that no endeavor is more worthy of our effort than the education of our children.

Exhibit 31.—Remarks by Deputy Under Secretary for Monetary Aflfairs Sternlight, November 18, 1966, before the annual convention of the U.S. Savings &
Loan League, New York City, on the changing mix of Federal debt management
Just a year ago, upon joining the Treasury and looking over the monetary
problems that I would have to contend with, an initial impression was that the
management of the Treasury's own debt operations was not too complex a task.
The Federal debt was growing only slightly and we had two very good, steady
customers for our securities in the Federal Reserve System and the Government
investment accounts. Their takings alone far more than offset the current pace
of increase in Treasury debt, and we seemed to be in the enviable position of
marketing an increasingly scarce product.
At the same time I was equally impressed with the formidable job of seeking
to coordinate the financings of Federal agencies with one another and with the
Treasury's own debt operations. These agency financings were increasing in
number, size, and complexity, and this at a time when greater demands were
pressing on the credit markets from private borrowers of all types.
As a matter of long precedent, it has been the standard practice—at least when
viewed from the Treasury's eyes—for the money needs of the Treasury to take
precedence over those of the Federal agencies. On grounds of sheer size alone,
the Treasury's debt operations occupied the commanding position. It is not
that the agencies were given short shrift, but when it came to a question of
whose borrowing program would be adjusted for whom, it was the Treasury that
stood fast and the agencies that accommodated.
The tables haven't turned round completely on this, but there is certaiifly a
much greater weight now given to the agencies' needs. And indeed, to some degree
the timing and size of Treasury financing operations have been altered in recent
months because of the financing needs of the Federal agencies. It may be significant, too, that those of us who are most closely involved with debt management
at the Treasury tend to spend more time with agency financing than on the
Treasury's own debt management. The important point, of course, is that the
different and varied types of borrowing must be very carefully coordinated. And
this refers not just to timing, but also to the particular kind of borrowing—the

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amounts, the maturities offered, the type of investor who is being appealed to, and
the type of distributive machinery employed.
A few figures on the relative size and growth of agency and Treasury debt may
be in order here. At the end of September 1966, to take a convenient recent date,
Treasury debt outstanding was about $325 billion. Looking back over about a
5 or 6 year span, to the end of 1960, the comparable figure for Treasury debt was
about $290 billion—an increase of some $35 billion. That 12 percent rise in debt is
not insignificant, although it looks rather pale beside the 48 percent rise in GNP
over this period. It is pale, too, beside the increase of about 50 percent in total
private and public debt over roughly the same period.
Besides, the portion of Treasury debt held in the private market barely grew at
all in this interval—$208 billion at the end of 1960 and $213 bfllion in September
1966. That provides a rise of only about 2 percent. In fact, in the past 2 years, the
volume of Treasury debt held in the private market has undergone some absolute
decline, never mind the ratio to GNP or the comparison with total debt.
During the same time interval—the end of 1960 through September 30, 1966—
outstanding Federal agency obligations and certificates of participation in credits
held by the Federal Government increased from $8 billion to $22 billion. As of
September 30, 1966, all but about $0.5 bfllion of that $22 bfllion was held by
private investors, although as wfll be discussed later, a program is now underway
that calls for some increasing amounts to be taken by Government investment
accounts.
It may be asked why, if Federal agency borrowings have been on a growth
path for the past half dozen years, this area of the market suddenly became so
particularly congested during 1966, calling for particular remedial measures.
The situation arose from two reinforcing causes. First, there was a marked ac. celeration in the growth of agency debt just during the past year. And second,
this growth occurred at a time of generally tightening financial markets, when
a great many major borrowers besides the Federal agencies were seeking to tap
the Nation's financial markets for larger amounts.
Looking first at the acceleration factor, agency debt and participation certificates outstanding rose by $8 billion in the 5 years ended last December—a
fairly steady growth rate of just over $ 1 ^ billion per year. In the first three
quarters of 1966, hdwever, there was a jump of more than $5}^ billion, with a
particularly heavy concentration in the first half of the year.
Why the sudden step-up? One reason, which accounted for $1}^ billion of
the rise in the first three quarters of this year was the sharply increased need of
the Federal home loan banks to provide funds to member savings and loan
associations that had sustained net withdrawals in the hot war for savings. In
that 9-month period, the supply of Federal home loan bank issues was boosted
by some 30 percent.
A closely related agency borrower was the Federal National Mortgage Association, which borrowed in support of its secondary market acquisitions of
mortgages. In the first 9 months of 1966, FNMA issued a net of $1>{ billion of
debentures and short-term discount notes to raise the funds needed to support
its recordbreaking pace of mortgage buying.
In a sense both the home loan and the FNMA issues can be regarded as channels
for recouping some of the funds lost to the mortgage market and homebuilding
as a result of generally tight money. It is not that these market issues made
money easier. Rather they were a means for redistributing and evening up the
flow of credit which, left to the forces of unfettered competition, was pufling
away from the mortgage market and cutting very sharply into new homebuilding
activity.
Another chunk of sizable agency borrowing—some $1.3 billion in the first
three quarters of 1966—was on behalf of the Farm Credit Administration with
its three component parts: the Federal land banks, the banks for cooperatives,
and the Federal intermediate credit banks. To some extent, the generally tight
money market enlarged their needs, as farmers were not able to get credit quite
as readily as had been the case earlier from other channels. The drying up of
funds was not nearly so marked in this farm credit area as in the case of home
mortgage money, but there was a noticeable unsatisfied demand, particularly
as modern farming is increasingly dependent on heavy capital investment in
land, equipment and "goods in process."
In addition to these agency borrowings, there were also some participation
sales during the first half of 1966. In part, these were conducted by the ExportImport Bank enabling them to replenish their funds and continue to provide

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credit support for U.S. exports, which are so vital to our balance of payments.
Another portion of the participation sales permitted the market financing of
mortgages accumulated earlier by the VA and by the FNMA.
And stfll a further sale of participation certificates, conducted on behalf of
the Small Business Administration, enabled that agency to rebuild its depleted
lending funds and get back into the program for which it was established by
the Congress. Plere, too, in the small business area, was an instance of agency
issue sales being used to redirect some flows of funds back to those groups of
borrowers that tend to be most adversely affected bj^ monetary stringency.
So much for the special needs for agenc}^ borrowing in the first half of 1966.
The other factor mentioned earlier as contributing to particular congestion
in the market for agency issues was the heavy competing demands of other
borrowers. Business borrowing, in particular, surged upward at an extraordinary
and unsustainable rate. Business borrowing from banks rose at a 19 percent
annual rate in the first half of this year. While this rate was actually a shade less
than in the first half of 1965, which had also been an unusually heavy period
for business borrowing from banks, there was a big difference between the 2
years in that business borrowing in the capital markets was also extraordinarily
large in 1966. For nonfinancial businesses alone, net borrowing in the securities
markets was at a seasonally adjusted annual rate of around $11 billion in the
first half of this year, approximately double the 1965 total.
With Federal agency issues entering the market in relatively large volume,
encountering such powerful competing demands from business borrowers, and
also encountering a more restrictive monetary policy, it is small wonder that the
going was a bit rough for agency securities.
The pressure showed up most dramatically in interest rate movements. We all
know that the entire spectrum of interest rates was rising during this period,
but it is less widely appreciated that there were some significant differences in the
extent of the rise for different types of securities. The supply factors referred to
earlier had a good deal to do with this. Toward the end of 1965, for example,
just before the discount rate was raised in early December, 1-year Treasury
securities carried a yield of around 4.40 percent—which in our innocence we
thought was pretty high at the time. A 1-year Federal agency issue carried a
market yield then of around 4.60 percent. The difference, 0.2 percent or 20 basis
points in the parlance of the bond market, was in the historic range of variation
that had prevafled in recent years between Treasury and agency issues—roughly
15 to 30 basis points.
By the end of February this year, with changes in the wake of a tighter
monetary policy and a stronger set of credit demands working their way through
the fabric of market interest rates, the 1-year Treasury rate had risen to around 5
percent and the agency rate to about 5.30 percent. The two were stfll.moving in
reasonably parallel fashion. Over the next few months, however, leading up to
June 1966, Treasury rates moved in a narrow range, showing little net change,
whfle agency borrowing rates shot upward very sharply. In June the difference
between 1-year agency issues and Treasury securities reached a high ^ percent
or 75 basis points.
Since June, the spread has narrowed again, although unfortunately much of
this narrowing reflected a sharp jump in Treasury rates in July and August,
rather than the sought-for decline in agency rates. Indeed, during July and
August rates on agency issues continued to edge somewhat higher. Since early
September, however, all sectors have done better, and I think there is a genuine
basis for confidence that the worst is now behind us.
The improvement of the last few months was no mere matter of chance. Nor
wfll I join those who say "things could not get any worse, so they had to get
better." Rather, as I view it, there was a series of coordinated actions by the
administration, the Congress, and the financial supervisory authorities that made
a material difference in the outcome that has developed. Since these were interconnected and coordinated efforts I wfll not try to cite them in order of importance. Their importance and impact were mutually reinforcing. Nor can they be
given in clear-cut chronological sequence, because there too the interplay of
coordinated actions and effects would make any time sequence hard to follow.
Let me start, then, with administration fiscal policy, which moved toward
somewhat greater restraint early this year, and then took a further important
step in September with the President's request for temporary suspension of the
7 percent investment tax credit, and suspension of certain accelerated depreciation options. These recommendations, now enacted by the Congress and signed
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into law, are designed to moderate the unsustainable growth in business investment
Outlays—which has been one of the main sources of inflationary pressure—and
closely related to this to moderate the extraordinary business demands for credit
which I referred to earlier.
A further important point in the President's September program has been to
reduce the market impact of Federal financing operations. This has had two
aspects. The first is to hold back wherever possible, consistent with national
objectives, the exterision of credits under Federal programs. For the financing
of such credit programs places some strain on the money markets no matter what
form that financing takes. This program of lending restraint, I should interject,
is paralleled by a vigorous effort to restrain Federal spending on less essential
programs as well.
Second, there has been a concerted program to finance Federal lending programs in a way that exerts minimum impact on the money markets. In part this
has taken the form of suspending the sales of participation certificates that would
have been conducted at this time. The participation sale through FNMA that
had been scheduled fpr September was canceled, although the door was purposely
left open for a possible sale later in the year if market conditions permitted.
A further aspect of the effort to minimize the money market impact of Federal
credit programs is the sale of some agency issues to Government investment
funds such as the social security trust fund, civil service retirement fund, unemployment trust fund and others. As outlined on September 10, the objective was
to have the agencies, in the aggregate, raise no net additional money in the private
market through the end of 1966. Where new money is needed it is being raised by
selling the agency securities to the Government trust funds. This is not done
issue by issue, but in the aggregate. Thus in some instances maturing issues are
not fully replaced in the private market whfle in others the sale to the private
market will raise some net additional money. As it looks now, we should wind up
the September-December period with a net decline of perhaps a few hundred
mfllion dollars in private market holdings of Federal agency issues.
There can be little, doubt, it seems to me, that the market for Federal agency
issues has benefited from this slowdown in the injection of new supplies of
securities. That market has been a growing one over the years, and there is every
reason to expect further growth in the future as new customers are developed and
secondary market trading expands further, but any kind of market faces digestive
problems in the short run if supplies mushroom at a pace very much faster than
new demand outlets can be developed.
These arrangements have proved beneficial not only to the market in agency
issues, and to the financial markets generally, but also to the trust accounts.
These accounts, which are managed by the Treasury in the general public interest,
are able in this way to obtain a slightly better rate of return than on the Treasury
issues which have been their historical form of investment up to now. The Federal
agency issues are just as safe and sound an investment as Treasury securities,
and they pay a slightly higher rate only because they do not enjoy quite the same
degree of liquidity as direct Treasury obligations. Yet there is no reason why our
major trust accounts must have all their assets in the absolutely most liquid
form, when a modest degree of diversification can provide equal safety and no
loss in effective liquidity in relation to any imaginable set of contingencies.
Looking to the future, I would venture to guess that the trust accounts will
continue to be buyers' of Federal agency issues though perhaps not necessarfly
on the same scale as in the last few months. When FNMA participations are
placed in the market again, it is likely that the trust funds will alsio be among the
investors in these obligations. We have found in the past marketings of FNMA
participations that private pension funds or State and local pension funds are
among the main buyers. On this basis there is much to be said for extending to
public investment trust funds the same kind of opportunity to finance federally
aided credit programs that is avaflable to private institutional investors.
Turning now to another part of the coordinated program to relieve the pressures
in the financial and credit markets, we need to recognize the role played by monetary policy in the recent period. Looking back over the past year of greater
Federal Reserve restraint it seems to me that the period can be divided roughly
in two parts. One coifld quibble about the precise point of division, depending on
which economic or financial series we focus on, but the general distinction seems
clear enough. From late 1965 through about the middle of 1966 the policy of
monetary restraint produced a sharp rise in interest rates but no significant
letup in bank credit growth. Except for mortgage credit, substantial credit

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flows continued and in some sectors even increased. As I need not remind you,
the slowdown of savings growth, or even net outflows of funds, from savings and
loan associations was one of the main channels through which funds were diverted
from the mortgage market.
After the middle of 1966, bank credit growth slowed, and the monetary authorities made a particular effort to slow the expansion of business loans, which had
been leading the growth parade earlier in the year. In this way, they sought to
restrain the flow of credit to businesses and not have the bank credit slowdown entirely at the expense, say, of investments in various kinds of securities.
In addition to reserve restriction, and probably of even greater force in holding
back bank credit expansion, is the fact that by last summer the banks had pretty
much bumped into a wall on regulation Q and could no longer obtain funds just
by bidding rates up for them. Through early August, the banks were at least
able to replace maturing certificates of deposit and make small net additions to
the total outstanding, but by the end of August and on into September and
October the further rise in market rates caused a steady erosion in large denomination certificates. The net decline in money market certificates of deposit has
by now—through October—accumulated to more than $2}i biUion. By late
September, following passage of the administration-supported legislation to restrain interest rate competition for savings, the downward revision of regulation
Q in regard to smaller sized bank time deposits exerted a further restraint on
bank credit growth.
The process of restricting bankjcredit'growth does not in itself, of course,
immediately improve the financial market atmosphere. In fact the initial market impact can involve greater market tensions. But rather than get just the
tensions and the rate increases without the broad-based restraint—which was
the case earlier this year—what we are getting now is some biting restraint on
the supply of credit that is causing some demands other than just those in the
mortgage market to go unsatisfied. The end result is to cool off the underlying
demands for credit which have been generated because of unsustainably rapid
economic growth. And as this occurs, the tensions in financial markets can ease.
The cure is not painless, though, and some voices are inevitably raised to ask
whether other types of restraint are not to be preferred.
It is hardly necessary to say that in the current period of market pressures
and rearrangements of marketings of Federal agency debt issues, there has been
much closer contact and coordination than heretofore between the different
credit agencies and the Treasury. Previously there had been a coordination of
timing of offerings and discussion of the maturities and rates to be offered, but
in the recent period there has been much more of a mutual working out of objectives in regard to the size and timing of credit needs as well as the immediate
techniques for financing those needs. It seems to me that this process has worked
out remarkably well—basically, I think, because there has been a mutuality of
understanding and realization of the paramount need for overall adjustment
of programs to fit within the capabilities of the credit markets.
During the current period of market stress, it seems to me, there was no choice
but to adopt this approach of extremely close liaison. Just as obviously, we are
anxious to see an end to the unusual market conditions that have necessitated
this type of exercise and the limitations that have come with it. But as improved
market conditions return, we should not readily discard the better basis of coordination that has developed over the past several months. Indeed, whatever
the market conditions of the moment, the mutuality of interest remains. We
are all looking to the same credit market to finance important needs, whether
it is money to be channeled into the home mortgage market, into small business,
into supplementary farm credit, or into the general range of Federal expenditures that may not be covered by tax revenues.
This is not a prescription for centralized planning of precisely how much
credit should be channeled to each use in the economy. I suspect that such a
system would take on all the rigidities and inefficiencies that are fortunately
minimized in our market-oriented economy. But it is a suggestion that over
the long run we need more conscious realization of where our allocative procedures are leading us, and we should be in a position at least to set some broad
guidance over the allocation, even if not to pinpoint the end result.
Lest this idea seem at all novel, I assure you it is not any more so than the
whole philosophy under which special institutions or devices have been set up
to aid the flow of funds into the home mortgage market, into college housing,
farm credit, or small business. If after setting up these institutions or devices

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we find market forces working in a way that is tending to put much more or
much less credit than had been anticipated into the particular area, then there
should be some way to take another look.
One final item that I would like to touch on briefly is the question of differentiating direct Treasury issues from Federal agency issues. Both are equally
safe and secure obligations, it has been pointed out many times, and hence it
is natural to ask why there should be any rate differential at all between the
two. Nor is it a wholly satisfactory answer to say that the rate difference represents a difference ih liquidity. One could go round and round a circle pointing
out that the lesser liquidity reflects the less developed secondary market, which
in turn occurs because there is not as broad a range of buyers for the agency
issues, which in turn reflects relative unf amiliarity and limited liquidity in the
market. The circle can be broken, however, and in fact is in continuous process
of being breached as the markets gain more and more familiarity with agency
securities.
In the silver lining department one can even find some good that came of the
superhigh interest rates that prevailed for a time on agency issues in this past
year, and of the unusually large differential that prevailed as compared with
Treasury securities. Investors who could shrug off a difference of one-fourth
percent found they had better sit up and take notice when an equally secure
obligation could be found to yield one-half percent or more above comparable
Treasury issues. Certainly a number of foreign buyers became interested in U.S.
agency issues over the past year, at no small benefit to our balance of payments.
Other new buyers were found in the ranks of corporations, private trust funds.
State and local government funds, and others whose growing financial sophistication led them to reappraise these high-quality securities.
The fact that Treasury trust accounts began to invest in agency issues probably
has worked as a plus| factor, too, not only in relieving excessive supplies in the
private market but also in enhancing the prestige of the agency securities involved.
And the fact that the: Federal Reserve is now empowered to purchase all agency
securities, under the temporary interest rate restraint bill passed and signed last
September, should also serve to raise the market standing of agency issues.
By no means least important, it is significant that dealers in securities have
carried larger inventories in agency issues this year than previously, and they
have been more willing to make close markets in them. This, in fact, is the very
essence of the increased liquidity that is sought for, and is needed to bring the
yields on these issues closer together with those on Treasury securities.
Whether the time will come when there is no difference at all in the liquidity
and interest rate on agency and Treasury issues is hard to say, but certainly there
is room for a further narrowing than has been seen to date.
Another way to erase the differential, of course, is to finance all the agencies'
credit programs with direct Treasury issues. I would be most reluctant to recommend this, however. It would mean changing the entire institutional structure
under which special credit programs are set up, and would force under one budget
roof all the spending and lending programs in which the Federal Government and
its agencies are involved. Whatever the pure logical appeal of such an arrangement,
it seems preferable to separate out the credit market activities of the Government
and its agencies. This keeps them operating on a business-type basis, and subject
to the disciplines thereof, while still gaining the advantage of the Government's
superlative credit rating. This is not to rule out some better grouping and pooling
among the various credit agencies, but only questions the total immersion of the
credit agencies into the Federal Government's budget.
Exhibit 32.—Other Treasury testimony published in hearings before congressional committees, July 1, 1966-June 30, 1967
Secretary Fowler
Statement requesting temporary increase in debt ceiling to $336 billion for
fiscal year 1967, published in hearings before the Committee on Ways and Means,
House of Representatives, 90th Congress, 1st session, January 30, 1967, pages 2-8.
Statement requesting permanent debt ceiling of $365 biflion, modify the 4 ^
percent inte] est ceiling by making maximum maturity on the notes 10 years,
and give the Treasury authority to sell up to $2 billion of longer term bonds not

EXHIBITS

279

subject to the 43^ percent ceiling, published in hearings before the Committee on
Ways and Means, House of Representatives, 90th Congress, 1st session. May 15,
1967, pages 2-14.

Taxation Developments
Exhibit 33.—Statement by Secretary Fowler, September 12, 1966, before the
House Committee on Ways and Means, on H.R. 17607, a bfll to suspend the
investment credit and accelerated depreciation
I appreciate this opportunity to discuss the program presented in the President's
message of September 8, 1966, and to present the Treasury's views on the bill
before you, PI.R. 17607. I wish also to thank the committee for its promptness
in holding these hearings. The situation calls for action, however inconvenient
the timing.
I favor the prompt enactment of H.R. 17607 suspending some of the existing
special tax incentives to investment during the next 16 months because:
(1) It will contribute to a restraint of inflationary developments that are
proving disruptive of the financial markets and placing excessive strain on the
capital goods industries.
(2) It will promote a more sustainable rate of balanced economic growth in
the next 16 months and thereafter.
(3) It will suspend special fiscal stimulants to investment, and thereby support
a policy of monetary restraint without incurring the burdens and without running
the risks of excessively tight money and high interest rates.
(4) It will complement other measures enacted by the Congress or pending
before it and being undertaken through administrative action to reduce upward
pressures on interest rates and minimize discriminatory impact of tight money
and high interest rates on the housing sector of the economy.
I. The legislative proposal in the perspective of the overall program
Our economy and the financial sj^stem that services it, increasingly strained
b}^ the requirements of war and a rapidly expanding private sector, are subject
today to at least three clearly discernible demand pressures:
—in the money and financial markets, excessive demands for credit and
monetary restraint together have created severe tightness and a sharp
rise in interest rates, with highly selective impact on several sectors
particularly single family housing;
—in the market for capital goods, the ever mounting flow of new orders by
business firms coming on top of an unprecedented rate of outlays for plant
and equipment is generating rising prices, rising wage rates and shortages
of some skilled labor, and is augmenting the large demands for capital from
banks and the securities market;
—the rising rate of government expenditures—Federal, State, and local—
highlighted by steadily expanding defense and public works outlays is
adding steadily to aggregate demand at a high rate.
These three sources of pressure are interrelated and reinforcing. Accelerating
business spending breeds demands for credit from banks and for financing in the
capital market. Higher Government spending also generates credit demands—
by the Government itself, and by private firms which received Government orders
and work on borrowed funds to fill new contracts. And tight money itself causes
additional Government spending, particularly to help finance areas of important
economic activity such as homebuilding from which the supply of private capital
has been diverted.
The program contained in the President's message is designed to deal with all
three pressure points.
This program is primarfly economic and financial in its objective and thrust.
It represents, I believe, the most carefully chosen and prudent means, consistent
with preserving stable economic growth within the framework of a free economy,
to ease the strain of the pressures described.
The spokesmen for the admiaistration are here today to request your action
on one legislative proposal recommended in the program outlined in the President's message, which is interrelated with the other elements of that program,

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This proposal is not a tax reform proposal—it is temporary in design and
purpose.
It is not a revenue-raising proposal in purpose or objective; any revenue aspects
are only incidental. So we do not come here today with any new estimates of
revenues or expenditures for fiscal 1967.
The proposal is basically an anti-inflationary measure designed to relieve the
pressures, clearly observable in the money markets and capital goods sector, which
are producing unusual strains, the highest interest rates in 40 years and a perceptible trend toward a general condition of economic instability.
Before commenting on the details of this legislative proposal, let me relate it
to the balance of the program.
As regards action to affect the credit market, the proposed suspension of
special incentives to undertake major programs of busiaess investment should
serve to moderate business needs for financing.
In addition, the President's directive to me to review all Federal security sales
and present them to the President for approval will result ia lessening the burden
of Federal finance on the markets. The President's memorandum to Federal
departments and agencies of September 9, calling for careful and thorough pruning
of Federal lending and borrowing activities, should reduce aggregate Federal
credit demands on the private market.
It has already been decided to cancel the sale of FNMA participation certificates tentatively scheduled for September, and to have no FNMA participation
sale in the market for the rest of 1966 unless market conditions improve. Nor will
there be any Export-Import Bank sale of participation certificates in the market
in the rest of this calendar year. Market sales of Federal agency securities, meanwhile, will be limited in the aggregate to an amount required to replace maturing
issues, whfle new money, to the extent genuinely needed, will be raised through
sales of agency securities to Government investment accounts.
I am submitting for the record a copy of a press release ^ issued Saturday,
September 10, announcing these decisions pursuant to that portion of the President's message.
Another important ingredient of the President's program is the passage of
legislation to give the bank regulatory agencies and Federal home loan bank
flexible authority to halt and hopefully reverse the harmful process of excessive
interest rate escalation in the field of consumer savings. The favorable House
action last Thursday on H.R. 17255 is an important step in this direction.
The announced prpgram for reducing Federal expenditures for fiscal 1967 is
yet another related measure to minimize the drain of Federal financing on the
credit market in addition to reducing, aggregate demand. Since the Director of
the Budget will deal w'ith this subject in detail, I will only observe that the President made clear his firm determination to hold down all lower priority expenditures by means of deferrals, stretching out the pace of spending, and otherwise
reducing contracts, new orders and commitments—a policy and program with
which I have been actively and affirma|;ively concerned from the initial preparation of the January Budget.
I would like to relate this policy and program of the President to hold down
Federal expenditures to the legislation before you.
I am mindful of the fact that many members of this committee, both majority
and minority, have expressed their disinclination to consider any tax measure for
the purpose of increasing revenues unless there have been firm efforts to hold
down expenditures.
In my view, the program presented to you today is consistent with that position. First, it incorporates very specifically in point (1) of the President's message
the expenditure reductions Director Schultze will discuss. Of course, any final
precise description of the amount and nature of the spending cuts, beyond the
recitals in. the President's message and the Director's statement here today,
must await action by the Congress on the eight major appropriation bills pending
before it.
Since the time it became readily apparent to all that the appropriation process
of the Congress was likely to result in appropriations substantially in excess of the
President's budget, itjhas not been possible to develop and execute in complete
detail an expenditure control program for the fiscal year 1967 until final action
on the major monej'' bills is complete. Give us the bflls and we will do the job.
1 See exhibit 23.

EXHIBITS

281

Second, there is no inconsistency between the President's legislative proposal
and the members' position that I have referred to, because H.R. 17607 is not
offered as a revenue or tax increase measure. Its purpose is clearly and simply
to suspend a stimulant to forces that are proving inflationary in the current
economic situation.
I come now to the specifics of the President's legislative recommendation, as
reflected in H.R. 17607, which would suspend temporarily the 7 percent investment tax credit for machinery and equipment and the option to elect accelerated
depreciation on buildings, for the period September 1, 1966, through December 31,
1967.
As members of this committee are well aware, I have always been a strong
exponent of the investment credit. When I appeared before this committee last
January in connection with the Tax Adjustment Act of 1966, I was specffically
questioned as to whether consideration had been given to repealing the 7 percent
investment credit in developing the President's 1966 tax program. I then answered
as follows:
"The first observation I would want to make is that one of the great advantages
that we have now, and we will have in the period ahead, is the continued expansion
3f this Nation's productive capacity and a continued modernization of existing
capacity and capacity that may be added. Therefore, I think we want to be very
chary of restraining or holding back the enlargement of this productive capacity
to meet growing requirements, whether they be for defense or for civflian use."
When asked whether I thought the investment credit should be a fixed part of
the tax law, I further commented:
"I think that in addition to the stimulation effect, which was one of the considerations, there was another, and perhaps a more basic consideration, that
attaches to the investment credit. From a long-term structural standpoint,
wholly apart from cyclical considerations, it was desirable to have a feature of
our tax law which encouraged additions to productive capacity and continuing
modernization of industrial capacity in view of the problems of international
competition and in view of the fact that the existing setup had been marked by a
rather, you might say, stalled industrial capacity. Plant and equipment expenditures had been pretty well stalled at a given level for a number of years. It was
felt that this was a structural condition and that something ought to be done of a
permanent and enduring nature that would encourage the results that I think we
have achieved."
Mr. Chairman, our experience to date has justified the faith I had in 1962 in
the efficacy of the investment credit, and my belief that it should become a
permanent part of our tax structure. Since then industrial production has increased three times as fast as in the previous decade, real business fixed investment has increased nearly four times as fast, and our economic growth generally
has far surpassed its previous rate. This remarkable achievement is not due solely
to the investment credit, but I firmly believe the investment credit has contributed
substantially to it. Moreover, looking to the long-term future I am convinced
that the encouragement provided to business by the credit to modernize and
expand its use of capital equipment is essential to maintaining full employment
with stable prices, and to keep our industry competitive with foreign goods. The
President and his administration fully share these views.
It is therefore, as I am sure you understand, only with considerable reluctance
and after very careful study that we have reached the conclusion that suspension
of the investment credit is an appropriate measure at this time. I stress suspension
and not repeal since the credit should be regarded, as President Johnson's message
indicated, as an essential and enduring part of our tax structure.
Not only do I regard the investment credit as a permanent structural component
of our tax system but also one that should be suspended only in times of active
hostilities at least on a scale such as characterizes the present situation. Even
under such circumstances I would, as past attitudes have made clear, be chary of
suspending the investment credit unless the combination of a rapidly expanding
civilian economy and increasing and special defense needs made this course
compelling. I would be opposed to treating the investment credit as one of many
countercyclical devices to be suspended and restored with the normal ups and downs
in our economy.
The present situation is unique and was quite unforeseeable when the credit
was adopted and stress was put—and properly so—on its permanent character.
We then contemplated a peacetime economy and thoughts of a country engaged

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in hostilities on the present scale were far from our minds. But hostilities can cut
ruthlessly across many plans and procedures designed to meet problems of a
country at peace. We are deeply committed to an extensive military operation ia
Southeast Asia which shows no signs of early termination. Its effects on our
economy are clearly evident. We are also confronted with a monetary situation
of almost unparalleled tightness, which is producing distortions in our econorny
and the highest levels of interest rates in more than 40 years.
Early in the year when the question of suspending the credit was raised in the
Senate, we hoped